UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ___________________
Commission File Number: 1-12624
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Syratech Corporation
--------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3354944
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
175 McClellan Highway
East Boston, Massachusetts 02128-9114
-------------------------- ----------
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code - 617-561-2200
------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Number of Shares of Common Stock, Par Value $0.01 per share, outstanding at
September 30, 1998 - 3,784,018
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 1
Condensed Consolidated Income Statements for the three and
nine month periods ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the three
and nine month periods ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents .................................... $ 2,664 $ 2,981
Accounts receivable, net ................................ 85,955 63,893
Inventories ............................................. 113,847 84,295
Deferred income taxes ................................... 14,977 11,337
Prepaid expenses and other .............................. 2,235 2,392
Properties held for sale ................................ 1,754 1,836
--------- --------
Total current assets ............................... 221,432 166,734
Property, plant and equipment, net .......................... 88,648 82,404
Purchase price in excess of net assets acquired, net ........ 6,609 6,790
Other assets, net ........................................... 9,082 10,072
--------- --------
Total ................................................... $ 325,771 $266,000
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable ............. $ 76,285 $ 18,900
Accounts payable ........................................ 21,445 14,234
Accrued expenses ........................................ 7,488 8,662
Accrued interest ........................................ 8,533 4,115
Accrued compensation .................................... 3,338 3,390
Accrued advertising ..................................... 3,168 3,576
Income taxes payable .................................... 584 --
--------- --------
Total current liabilities .......................... 120,841 52,877
Long - term debt ............................................ 165,000 165,000
Deferred income taxes ....................................... 20,089 20,083
Pension liability ........................................... 2,717 3,136
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized;
(25,000 designated as cumulative redeemable preferred
stock, 18,000 shares issued and outstanding, liquidation
value of $18,000, and includes accrued and unpaid
dividends of $3,288 in 1998 .............................. 21,287 19,530
Common stock, $.01 par value, 20,000,000 shares authorized;
3,784,018 shares issued and outstanding .............. 38 38
Retained earnings (deficit) ............................... (4,700) 4,567
Accumulated other comprehensive income .................... 499 769
--------- --------
Total stockholders' equity .............................. 17,124 24,904
--------- --------
Total ................................................... $ 325,771 $266,000
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ................................................ $ 104,617 $ 109,044 $ 184,623 $ 194,098
Cost of sales ............................................ 75,409 76,861 132,318 137,939
--------- --------- --------- ---------
Gross profit ......................................... 29,208 32,183 52,305 56,159
Selling, general and administrative expenses ............. 17,432 18,855 47,802 51,596
Other operating income ................................... 1,393 162 2,505 1,998
--------- --------- --------- ---------
Income from operations ............................... 13,169 13,490 7,008 6,561
Interest expense ......................................... (6,354) (5,849) (17,084) (10,160)
Interest income .......................................... 16 13 22 215
Other income ............................................. 2,184
--------- --------- --------- ---------
Income (loss) before benefit for income taxes ........ 6,831 7,654 (10,054) (1,200)
Provision (benefit) for income taxes ..................... 1,909 5,180 (2,818) 1,860
--------- --------- --------- ---------
Net income (loss) .................................... 4,922 2,474 (7,236) (3,060)
Preferred stock dividends accrued ........................ 586 540 1,758 990
--------- --------- --------- ---------
Net income (loss) applicable to common stockholders $ 4,336 $ 1,934 $ (8,994) $ (4,050)
========= ========= ========= =========
Basic income (loss) per share:
Net income (loss) per common share ..................... $ 1.15 $ 0.51 $ (2.38) $ (0.71)
========= ========= ========= =========
Weighted average number of shares outstanding ........ 3,784 3,784 3,784 5,693
========= ========= ========= =========
Diluted income (loss) per share:
Net income (loss) per common share ..................... $ 1.15 $ 0.51 $ (2.38) $ (0.71)
========= ========= ========= =========
Adjusted weighted average number of
shares outstanding .................................. 3,784 3,784 3,784 5,693
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (7,236) $ (3,060)
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization ................... 5,648 4,457
Deferred income taxes ........................... (3,634) 2,028
Compensation related to stock options ........... 209
Other ........................................... (372) 358
Increase (decrease):
Accounts receivable ......................... (22,062) (40,898)
Inventories ................................. (29,552) (28,337)
Prepaid expenses and other .................. 157 (10,471)
Accounts payable and accrued expenses ....... 9,995 12,189
Income taxes payable ....................... 584 (930)
------- -------
Net cash used in operations ........................ (46,472) (64,455)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment ........ (10,637) (12,971)
Other ............................................ 18 86
------- -------
Net cash used in investing activities .............. (10,619) (12,885)
------- -------
Cash flows from financing activities:
Change in revolving loan facilities .............. 57,385 50,632
Proceeds from borrowings ......................... 165,000
Proceeds from sale of preferred stock ............ 18,000
Proceeds from sale of common stock ............... 75,993
Purchase of common stock for retirement
(including related costs) ..................... (235,228)
Exercise of stock options ........................ 112
Other ............................................ (611) (276)
------- -------
Net cash provided by financing activities .......... 56,774 74,233
------- -------
Net decrease in cash and equivalents ............... (317) (3,107)
Cash and equivalents, beginning of period .......... 2,981 3,605
------- -------
Cash and equivalents, end of period ................ $ 2,664 $ 498
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except share and per share data)
1. FINANCIAL INFORMATION
The accompanying unaudited interim condensed consolidated financial
statements of Syratech Corporation and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes included in the Company's 1997 Annual Report on
Form 10-K.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments, which consist only of normal and recurring
adjustments, necessary for a fair presentation of the interim periods. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
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<S> <C> <C>
Cash paid during the period for:
Interest ......................................... $11,960 $1,271
======= ======
Income Taxes ..................................... $ 842 $ 797
======= ======
Supplemental schedule of non-cash financing activities:
Accrued cumulative redeemable
preferred stock dividends ...................... $ 1,758 $ 990
======= ======
</TABLE>
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1997
------------ -------------
<S> <C> <C>
Raw material ...................... $ 15,681 $10,169
Work-in-process ................... 5,463 4,917
Finished goods .................... 92,703 69,209
-------- -------
Total ........................ $113,847 $84,295
======== =======
</TABLE>
4. INCOME TAXES
The benefit for income taxes for the nine month period ended September 30,
1998 has been computed using the estimated effective full year tax rate.
Realization of the income tax benefit is dependent upon generating sufficient
future taxable income due to carry-back limitations imposed by the Internal
Revenue Code. Although realization is not assured, management believes
it is more likely than not that the income tax benefit will be realized through
future taxable earnings.
4
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. REVOLVING LOAN FACILITIES AND NOTES PAYABLE
On May 28, 1998, the Company renewed its Wallace International de Puerto
Rico, Inc. $1,000 credit facility. The renewed facility expires on May 30, 1999.
The Company's C.J. Vander Ltd. subsidiary renewed its overdraft facility on
September 18, 1998 ("Overdraft Facility") which provides for borrowings of
(pound)500. Borrowings made under the Overdraft Facility bear interest at the
bank's base rate plus 1%. The Overdraft Facility contains customary covenants,
and borrowings are secured by substantially all of the assets of C.J.Vander Ltd.
The Overdraft Facility is due on demand and expires on March 11, 1999.
Availability under the Overdraft Facility was (pound)340 at September 30, 1998.
6. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
following is presented in accordance with this statement:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Net loss applicable to common stockholders ........... $(8,994) $(4,050)
Other comprehensive income, net of tax:
Foreign currency translation adjustments .......... (270) (369)
------- -------
Comprehensive loss .................................. $(9,264) $(4,419)
======= =======
</TABLE>
Accumulated other comprehensive income reported in the Condensed Consolidated
balance sheets consists only of foreign currency translation adjustments.
7. OFFICERS RETIREMENT PLAN
In connection with the April 16, 1997 merger of the Company with THL
Transaction I Corp, a corporation controlled by affiliates of Thomas H. Lee
Company (the "Merger"), the Company amended its Employment Agreement with
Leonard Florence. This Amended and Restated Employment Agreement (i) provided
for a change in his term of full-time employment from a rolling five-year term
to a fixed five-year term, (ii) provided for a minimum base compensation of
$1.15 million per annum, (iii) established $1.15 million as the minimum amount
upon which his retirement benefit (and survivors benefit of his surviving
spouse) will be computed and (iv) created contractual rights with respect to
certain perquisites that were accorded to him informally under his prior
arrangement with the Company. On July 29, 1998, the Company entered into
Amendment No. 1 to Mr. Florence's Amended and Restated Employment Agreement
which provides, among other things, for the modification of the computation and
timing of payments in respect of the retirement benefit. The terms of the
Amendment provide for the acceleration of payments (the first of which was made
upon execution of the Amendment) related to the retirement benefit provided that
such payments are allowed under the terms of the Company's credit agreements, as
amended. The amended terms did not have a material impact on the condensed
consolidated financial statements for the quarter ended September 30, 1998.
5
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company will be required
to adopt the provisions of this statement in its annual financial statements for
fiscal 1998. SFAS 131 establishes new standards for reporting information about
operating segments. The Company believes the segment information required to be
disclosed under SFAS 131 will be more comprehensive than previously provided,
including expanded disclosure of statement of operations and balance sheet items
for each reportable operating segment. The Company has not yet completed its
analysis of the operating segments on which it will report.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 standardizes the
disclosure requirement for pensions and other postretirement benefits to the
extent practicable. It does not change the measurement or recognition of those
plans. The Company will be required to adopt the provisions of this statement in
its annual financial statements for fiscal 1998. The adoption of these
provisions will not have a material impact upon the Company's consolidated
financial statements.
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following supplemental condensed consolidating financial statements as of
September 30, 1998 and 1997 present separate financial information for the
Company ("Issuer/Guarantor Parent"), the Guarantor Subsidiaries, and the
Non-Guarantor Subsidiaries. Certain prior year amounts have been reclassified to
conform with the 1998 presentation. Separate financial statements of each
guarantor are not presented because management believes that such statements
would not be materially different from the information presented herein.
6
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 1998
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................... $ -- $ 129 $ 2,535 $ $ 2,664
Accounts receivable, net ................... 71,218 14,737 85,955
Inventories ................................ 108,767 5,039 41 113,847
Deferred income taxes ...................... 8,916 6,061 -- 14,977
Prepaid expenses and other ................. 113 1,685 437 2,235
Properties held for sale ................... 1,069 685 1,754
--------- --------- --------- --------- --------
Total current assets ................... 9,029 188,929 23,433 41 221,432
Property, plant and equipment, net ............ 84,908 3,791 (51) 88,648
Purchase price in excess of net assets acquired 6,609 6,609
Other assets, net ............................. 8,813 269 9,082
Investment .................................... 179,442 -- (179,442)
--------- --------- --------- --------- --------
Total .................................. $ 197,284 $ 280,715 $ 27,224 $(179,452) $325,771
========= ========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable $ $ 75,904 $ 375 $ 6 $ 76,285
Accounts payable ........................... 14,563 6,882 21,445
Accrued expenses ........................... 39 7,093 356 7,488
Accrued interest ........................... 8,369 164 8,533
Accrued compensation ....................... 3,081 257 3,338
Accrued advertising ........................ 3,168 -- 3,168
Income taxes payable ....................... 15,932 (15,701) 353 584
--------- --------- --------- --------- --------
Total current liabilities .............. 24,340 88,272 8,223 6 120,841
Long-term debt ................................ 165,000 165,000
Deferred income taxes ......................... 4,044 16,045 20,089
Pension liability ............................. 2,717 2,717
Intercompany (receivable) payable ............. (52,529) 58,223 (4,369) (1,325)
Commitments and contingencies
Stockholders' equity .......................... 56,429 115,458 23,370 (178,133) 17,124
--------- --------- --------- --------- --------
Total .................................. $ 197,284 $ 280,715 $ 27,224 $(179,452) $325,771
========= ========= ========= ========= ========
</TABLE>
7
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 1997
<TABLE>
<CAPTION>
Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................... $ 18 $ 91 $ 2,872 $ $ 2,981
Accounts receivable, net ................... 61,367 2,526 63,893
Inventories ................................ 79,500 4,754 41 84,295
Deferred income taxes ...................... 5,027 6,310 11,337
Prepaid expenses and other ................. 2,075 317 2,392
Properties held for sale ................... 1,151 685 1,836
--------- --------- -------- ---------- ---------
Total current assets ................... 5,045 150,494 11,154 41 166,734
Property, plant and equipment, net ............ 78,406 3,947 51 82,404
Purchase price in excess of net assets acquired 6,790 6,790
Other assets, net ............................. 9,794 278 10,072
Investment in subsidiaries .................... 179,442 (179,442)
--------- --------- -------- ---------- ---------
Total .................................. $ 194,281 $ 235,968 $ 15,101 $ (179,350) $ 266,000
========= ========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable $ $ 18,900 $ $ $ 18,900
Accounts payable ........................... 12,703 1,531 14,234
Accrued expenses ........................... 684 7,446 532 8,662
Accrued interest ........................... 3,831 284 4,115
Accrued compensation ....................... 3,020 370 3,390
Accrued advertising ........................ 3,576 3,576
Income taxes payable ....................... 15,933 (15,861) (78) 6
--------- --------- -------- ---------- ---------
Total current liabilities .............. 20,448 30,068 2,355 6 52,877
Long-term debt ................................ 165,000 165,000
Deferred income taxes ......................... 4,044 16,039 20,083
Pension liability ............................. 3,136 3,136
Intercompany (receivable) payable ............. (63,038) 64,997 (7,677) 5,718
Commitments and contingencies
Stockholders' equity .......................... 67,827 121,728 20,423 (185,074) 24,904
--------- --------- -------- ---------- ---------
Total .................................. $ 194,281 $ 235,968 $ 15,101 $ (179,350) $ 266,000
========= ========= ======== ========== =========
</TABLE>
8
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................................. $ $ 138,876 $ 71,365 $(25,618) $ 184,623
Cost of sales ............................................. 102,328 55,608 (25,618) 132,318
-------- --------- -------- -------- ---------
Gross profit ......................................... 36,548 15,757 52,305
Selling, general and administrative expenses .............. 338 35,797 11,774 (107) 47,802
Other operating income .................................... 2,505 2,505
-------- --------- -------- -------- ---------
Income (loss) from operations ........................ (338) 3,256 3,983 107 7,008
Interest expense .......................................... (14,676) (2,369) (39) (17,084)
Interest income ........................................... 1 -- 21 22
Other income ..............................................
-------- --------- -------- -------- ---------
Income (loss) before provision (benefit)
for income taxes (15,013) 887 3,965 107 (10,054)
Provision (benefit) for income taxes ...................... (3,889) 325 746 (2,818)
-------- --------- -------- -------- ---------
Net income (loss) .................................... (11,124) 562 3,219 107 (7,236)
Preferred stock dividends accrued ......................... 1,758 1,758
-------- --------- -------- -------- ---------
Net income (loss) applicable to common stockholders .. $(12,882) $ 562 $ 3,219 $ 107 $ (8,994)
======== ========= ======== ======== =========
</TABLE>
9
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ........................................... $ $ 141,709 $ 75,994 $ (23,605) $ 194,098
Cost of sales ....................................... 101,300 60,244 (23,605) 137,939
-------- --------- -------- --------- ---------
Gross profit ................................... 40,409 15,750 56,159
Selling, general and administrative expenses ........ 3,604 37,457 10,700 (165) 51,596
Other operating income .............................. 1,998 1,998
-------- --------- -------- --------- ---------
Income (loss) from operations .................. (3,604) 4,950 5,050 165 6,561
Interest expense .................................... (8,971) (1,180) (9) (10,160)
Interest income ..................................... 1 192 22 215
Other income ........................................ 2,184 2,184
-------- --------- -------- --------- ---------
Income (loss) before provision (benefit)
for income taxes ............................. (12,574) 6,146 5,063 165 (1,200)
Provision for income taxes .......................... 481 1,379 1,860
-------- --------- -------- --------- ---------
Net income (loss) .............................. (12,574) 5,665 3,684 165 (3,060)
Preferred stock dividends accrued ................... 990 -- 990
-------- --------- -------- --------- ---------
Net income (loss) applicable to
common stockholders .......................... $(13,564) $ 5,665 $ 3,684 $ 165 $ (4,050)
======== ========= ======== ========= =========
</TABLE>
10
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .............................................. $ $ 72,320 $ 44,260 $ (11,963) $ 104,617
Cost of sales .......................................... 52,750 34,622 (11,963) 75,409
-------- -------- -------- --------- ---------
Gross profit ...................................... 19,570 9,638 29,208
Selling, general and administrative expenses ........... 113 11,444 5,918 (43) 17,432
Other operating income ................................. 1,393 1,393
-------- -------- -------- --------- ---------
Income (loss) from operations ..................... (113) 9,519 3,720 43 13,169
Interest expense ....................................... (4,893) (1,433) (28) (6,354)
Interest income ........................................ 1 (1) 16 16
Other income ...........................................
-------- -------- -------- --------- ---------
Income (loss) before provision (benefit)
for income taxes ................................ (5,005) 8,085 3,708 43 6,831
Provision (benefit) for income taxes ................... (1,172) 2,458 623 1,909
-------- -------- -------- --------- ---------
Net income (loss) ................................. (3,833) 5,627 3,085 43 4,922
Preferred stock dividends accrued ...................... 586 586
-------- -------- -------- --------- ---------
Net income (loss) applicable to
common stockholders ............................ $ (4,419) $ 5,627 $ 3,085 $ 43 $ 4,336
======== ======== ======== ========= =========
</TABLE>
11
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .................................................. $ $ 74,401 $ 45,548 $(10,905) $ 109,044
Cost of sales .............................................. 51,880 35,886 (10,905) 76,861
-------- -------- -------- -------- ---------
Gross profit .......................................... 22,521 9,662 32,183
Selling, general and administrative expenses ............... 106 14,035 4,756 (42) 18,855
Other operating income ..................................... 162 162
-------- -------- -------- -------- ---------
Income (loss) from operations ......................... (106) 8,648 4,906 42 13,490
Interest expense ........................................... (4,895) (947) (7) (5,849)
Interest income ............................................ 1 12 13
Other income ...............................................
-------- -------- -------- -------- ---------
Income (loss) before provision (benefit)
for income taxes ................................... (5,000) 7,701 4,911 42 7,654
Provision for income taxes ................................. 3,094 1,116 970 5,180
-------- -------- -------- -------- ---------
Net income (loss) ..................................... (8,094) 6,585 3,941 42 2,474
Preferred stock dividends accrued .......................... 540 540
-------- -------- -------- -------- ---------
Net income (loss) applicable to common stockholders ... $ (8,634) $ 6,585 $ 3,941 $ 42 $ 1,934
======== ======== ======== ======== =========
</TABLE>
12
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $(11,124) $ 562 $ 3,219 $ 107 $ (7,236)
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Depreciation and amortization .................. 1,063 4,217 368 5,648
Deferred income taxes .......................... (3,889) 255 (3,634)
Other .......................................... (372) (372)
Increase (decrease) in assets and liabilities:
Accounts receivable ........................ (9,851) (12,211) (22,062)
Inventories ................................ (29,267) (285) (29,552)
Prepaid expenses and other ................. (113) 390 (120) 157
Accounts payable and accrued expenses ...... 3,893 1,040 5,062 9,995
Income taxes payable ....................... (1) 154 431 584
Intercompany account ....................... 10,509 (13,710) 3,308 (107)
-------- -------- -------- ------ --------
Net cash (used in) provided by operations ......... 338 (46,582) (228) (46,472)
-------- -------- -------- ------ --------
Cash flows from investing activities:
Purchases of property, plant and equipment ...... (10,425) (212) (10,637)
Other ........................................... 20 (2) 18
-------- -------- -------- ------ --------
Net cash used in investing activities ............. (10,405) (214) (10,619)
-------- -------- -------- ------ --------
Cash flows from financing activities:
Change in revolving loan facilities ............. 57,010 375 57,385
Other ........................................... (356) 15 (270) (611)
-------- -------- -------- ------ --------
Net cash provided by (used in) financing
activities ..................................... (356) 57,025 105 56,774
-------- -------- -------- ------ --------
Net increase (decrease) in cash and equivalents ... (18) 38 (337) (317)
Cash and equivalents, beginning of period ......... 18 91 2,872 2,981
-------- -------- -------- ------ --------
Cash and equivalents, end of period ............... $ -- $ 129 $ 2,535 $ -- $ 2,664
======== ======== ======== ====== ========
</TABLE>
13
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................... $ (12,574) $ 5,665 $ 3,684 $ 165 $ (3,060)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operations:
Depreciation and amortization ................ 653 3,405 399 4,457
Deferred income taxes ........................ 2,028 2,028
Other ........................................ 209 358 567
Increase (decrease) in assets and liabilities,
net of effect of businesses acquired:
Accounts receivable ...................... (25,010) (15,888) (40,898)
Inventories .............................. (29,126) 789 (28,337)
Prepaid expenses and other assets ........ (10,802) 658 (327) (10,471)
Accounts payable and accrued expenses .... 7,708 1,987 2,494 12,189
Income taxes payable ..................... (2,071) 1,141 (930)
Intercompany account ..................... (9,070) 1,644 7,591 (165)
--------- -------- -------- ------ ---------
Net cash (used in) provided by operations ....... (23,876) (40,462) (117) (64,455)
--------- -------- -------- ------ ---------
Cash flows from investing activities:
Purchases of property, plant and equipment .... (11,026) (1,945) (12,971)
Other ......................................... (1) 87 86
--------- -------- -------- ------ ---------
Net cash used in investing activities ........... (1) (10,939) (1,945) (12,885)
--------- -------- -------- ------ ---------
Cash flows from financing activities:
Change in revolving loan facilities ........... 50,664 (32) 50,632
Proceeds from borrowings ...................... 165,000 -- 165,000
Proceeds from sale of preferred stock ......... 18,000 -- 18,000
Proceeds from sale of common stock ............ 75,993 -- 75,993
Purchase of common stock for retirement
(including related costs) .................. (235,228) -- (235,228)
Exercise of stock options ..................... 112 -- 112
Other ......................................... (2) (274) (276)
--------- -------- -------- ------ ---------
Net cash provided by (used in)
financing activities .......................... 23,877 50,662 (306) 74,233
--------- -------- -------- ------ ---------
Net increase (decrease) in cash and equivalents.. (739) (2,368) (3,107)
Cash and equivalents, beginning of period ....... 18 146 3,441 3,605
--------- -------- -------- ------ ---------
Cash and equivalents, end of period ............. $ 18 $ (593) $ 1,073 $ -- $ 498
========= ======== ======== ====== =========
</TABLE>
14
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Except for the historical information contained
in this Quarterly Report on Form 10-Q, the matters discussed are forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, general
economic and business conditions; industry capacity; industry trends; overseas
expansion; the loss of major customers; changes in demand for the Company's
products; the timing of orders received from customers; cost and availability of
raw materials; dependence on foreign sources of supply; changes in business
strategy or development plans; availability and quality of management;
availability, terms and deployment of capital; and the seasonal nature of the
business. SPECIAL ATTENTION SHOULD BE PAID TO SUCH FORWARD - LOOKING STATEMENTS
INCLUDING BUT NOT LIMITED TO, (i) STATEMENTS RELATING TO THE COMPANY'S ABILITY
TO EXECUTE ITS GROWTH STRATEGIES AND TO REALIZE ITS GROWTH OBJECTIVES, (ii) THE
COMPANY'S PLANNED EXPANSION OF ITS PRODUCT OFFERINGS, (iii) THE COMPANY'S
ABILITY TO GENERATE SUFFICIENT RESOURCES TO FINANCE ITS WORKING CAPITAL AND
CAPITAL EXPENDITURE NEEDS AND PROVIDE FOR ITS KNOWN OBLIGATIONS, AND (iv) THE
CONTINUATION OF, AND THE COMPANY'S ABILITY TO BENEFIT FROM, THE VENDOR
CONSOLIDATION TREND IN THE RETAIL INDUSTRY.
For additional information concerning these and other important factors that
may cause the Company's actual results to differ materially from expectations
and underlying assumptions, please refer to the reports filed by the Company
with the Securities and Exchange Commission.
Results of Operations
Three months ended September 30, 1998 compared to three months ended
September 30, 1997
Net sales decreased 4.1% to $104.6 million for the three months ended
September 30, 1998 from $109.0 million for the three months ended September 30,
1997. This change is primarily due to decreased sales of Silvestri Christmas
products due to lower demand, and to delayed receipt of Christmas lighting
related to a change in Underwriters Laboratories (UL) lighting standards. In
addition, Silvestri experienced late vendor shipments due to freight container
shortages. Changes in normal product prices did not materially impact net sales.
Gross profit decreased 9.2% to $29.2 million for the three months ended
September 30, 1998 from $32.2 million for the three months ended September 30,
1997. Gross profit as a percentage of sales was 27.9% for the 1998 third quarter
compared to 29.5% for the comparable 1997 period. The 1.6 percentage point
decrease in gross profit percentage was primarily a result of the decreased
Silvestri shipments which carry relatively high margins. The change in gross
profit as a percentage of sales was not materially impacted by change in product
pricing.
Selling, general and administrative expenses ("S, G & A expenses") of $17.4
million improved to 16.7% as a percentage of net sales for the three months
ended September 30, 1998 from 17.3% or $18.9 million for the three months ended
September 30, 1997. The improved cost performance primarily results from
consolidation of the formerly Dallas-based Silvestri administration and sales
activities into the Company's Corporate headquarters in Boston, MA.
15
<PAGE>
Income from operations was $13.2 million and $13.5 million for the third
quarter of 1998 and 1997, respectively, and included other operating income of
$1.4 million and $0.2 million in 1998 and 1997, respectively. The increase in
other operating income is primarily due to increased Farberware license revenue
and collection of accounts receivable related to 1997 sales of Farberware
inventory which had previously been reserved as doubtful.
Interest expense was $6.4 million for the three months ended September 30,
1998 compared to $5.8 million in the same period of 1997. This increase results
from increased borrowings for capital expenditures and working capital purposes.
The provision for income taxes was $1.9 million for the three months ended
September 30, 1998 compared to $5.2 million for the three months ended September
30, 1997. The tax provision for the quarter ended September 30, 1997 reflected
an adjustment which offset the tax benefit recorded for the quarter ended June
30, 1997. In the subsequent quarter ended December 31, 1997, management
identified tax strategies which led to the recognition of a deferred tax asset.
Net income applicable to common stockholders was $4.3 million or $1.15
diluted per share and $1.9 million or $0.51 diluted per share, for the third
quarter of 1998 and 1997, respectively, on adjusted weighted average shares of
3,784,018.
Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997
Net sales decreased 4.9% to $184.6 million for the nine months ended
September 30, 1998 from $194.1 million for the nine months ended September 30,
1997. This decrease is primarily due to lower Silvestri regular and liquidation
sales. Silvestri liquidation sales were unusually high in the first quarter of
1997 as the Company closed out inventory acquired in the 1996 acquisition of the
Silvestri product line. Other giftware product line sales were also lower due to
shipment timing. Changes in normal product prices did not materially impact net
sales.
Gross profit decreased 6.9% to $52.3 million for the nine months ended
September 30, 1998 from $56.2 million for the nine months ended September 30,
1997. Gross profit as a percentage of sales was 28.3% for the 1998 nine months
compared to 28.9% for the comparable 1997 period. The 0.6 percentage point
decrease in gross profit percentage reflects the unfavorable sales mix resulting
from the reduced sales of Silvestri Christmas items. The decrease in gross
profit as a percentage of sales was not materially impacted by change in normal
product pricing.
Selling, general and administrative expenses ("S, G & A expenses") decreased
to 25.9% as a percentage of net sales or $47.8 million for the nine months ended
September 30, 1998 from 26.6% or $51.6 million for the nine months ended
September 30, 1997. Excluding the one-time charge of $3.9 million for stock
option compensation expense, S, G & A expenses were 24.6% as a percentage of net
sales or $47.7 million for the nine months ended September 30, 1997. The 1.3
percentage point increase in 1998 reflects higher severance related to the
consolidation of operations, and increased management personnel and travel
costs. In addition, 1997 included a one-time favorable legal settlement and
non-recurring favorable adjustments to accruals related to discontinued
operations.
Income from operations was $7.0 million and $6.6 million for the nine months
ended September 30, 1998 and 1997, respectively, and included other operating
income of $2.5 million and $2.0 million in 1998 and 1997, respectively. The 1998
and 1997 other operating income was primarily from Farberware license revenue
and income related to the 1997 sale of Farberware inventory including the
collection in 1998 of previously reserved accounts receivable.
Interest expense was $17.1 million for the nine months ended September 30,
1998 compared to $10.2 million for the same period of 1997. This change results
primarily from the interest expense related to debt incurred in connection with
the Merger.
16
<PAGE>
The benefit from income taxes was $2.8 million for the nine months ended
September 30, 1998 compared to an income tax provision of $1.9 million for the
nine months ended September 30, 1997. The tax provision for the nine months
ended September 30, 1997 did not reflect the benefit of carry-forward losses.
Realization of the income tax benefit for the nine months ended September 30,
1998 is dependent upon generating sufficient future taxable income due to
carry-back limitations imposed by the Internal Revenue Code. Although
realization is not assured, management believes it is more likely than not that
the income tax benefit will be realized through future taxable earnings.
Net loss applicable to common stockholders for the nine months ended
September 30, 1998 was $9.0 million or $2.38 diluted per share, on adjusted
weighted average shares of 3,784,018, compared to net loss applicable to common
stockholders for the nine months ended September 30, 1997 of $4.1 million or
$0.71 diluted per share, on adjusted weighted average shares of 5,692,709.
Liquidity and Capital Resources
Net cash used in operating activities for the nine months ended September 30,
1998 was $46.5 million. The major uses of cash were for interest expense as a
result of debt incurred in connection with the Merger, and the normal seasonal
increase in accounts receivable and inventories.
The Company's working capital requirements are seasonal and tend to be
highest in the period from September through December due to the Christmas
selling season. Accounts receivable tend to decline during the first and second
quarters as receivables generated during the third and fourth quarters are
collected and remain lower until the next peak season beginning in September.
Capital expenditures were approximately $10.6 million for the nine months
ended September 30, 1998 and the Company expects to expend approximately $3.4
million during the remainder of 1998. These expenditures relate to completing
construction of the warehouse and distribution facility in Mira Loma, CA,
computer equipment and systems, and machinery, equipment and tools and dies for
the Company's manufacturing facilities.
The Company's Revolving Credit Facility as amended on July 31, 1997, December
31, 1997 and March 30, 1998 provides for $130.0 million of borrowings including
a $30.0 million sublimit for the issuance of standby and commercial letters of
credit. Borrowings made under the Revolving Credit Facility bear interest at a
rate equal to, at the Company's option, the Eurodollar Rate plus 225 basis
points or the Prime Rate plus 50 basis points. The Revolving Credit Facility
expires on April 16, 2002. Pursuant to the terms of the Revolving Credit
Facility, the Company was required during February and March of 1998 to maintain
excess availability of at least $30.0 million, and is required to maintain
excess availability of at least $45.0 million during February and March of
subsequent years. The obligations of the Company under the Revolving Facility
are secured by inventory and accounts receivable of the Company and its domestic
subsidiaries and by a pledge of 100% of the domestic subsidiaries' and at least
65% of the foreign subsidiaries' outstanding capital stock. The Revolving Credit
Facility contains customary covenants for the Company and the subsidiary
borrowers, including but not limited to funded debt to earnings before income
taxes, depreciation, amortization, and certain adjustments ("EBITDA") as defined
in the Revolving Credit Facility, fixed charge ratios, capital expenditure
covenants, and minimum consolidated net worth on or after December 31, 1997 of
at least $1.00 (not in thousands). The Company is in compliance with the
covenants, as amended, as of September 30, 1998 and for the quarter then ended.
Availability under the Revolving Credit Facility, net of outstanding letters of
credit, was $22.0 million at September 30, 1998.
One of the Company's Puerto Rican subsidiaries has a $1.0 million facility
(the "Facility"), expiring on May 30, 1999. The Facility bears interest at a
rate equal to, at the Company's option, the Eurodollar Rate plus 175 basis
points or the bank's Prime Rate less 25 basis points. Availability under the
Facility was $0.3 million at September 30, 1998.
See Note 5 to the Condensed Consolidated Financial Statements.
17
<PAGE>
The Notes due April 15, 2007, issued in connection with the Merger, require
interest payments to be made semi-annually on April 15 and October 15. The Notes
are general unsecured obligations of the Company and rank pari passu in right of
payment with all current and future unsubordinated indebtedness of the Company,
including borrowings under the Revolving Credit Facility. However, all
borrowings under the Revolving Credit Facility are secured by a first priority
lien on the accounts receivable and inventory of the Company and its domestic
subsidiaries. Consequently, the obligations of the Company under the Notes are
effectively subordinated to its obligations under the Revolving Credit Facility
to the extent of such assets. The Notes are redeemable in whole or in part, at
the Company's option, after April 15, 2002.
In connection with the Merger, the Company amended its Employment Agreement
with Leonard Florence. The Amended and Restated Employment Agreement dated as of
April 16, 1997 (i) provided for a change in his term of full-time employment
from a rolling five-year term to a fixed five-year term (ii) provided for a
minimum base compensation of $1.15 million per annum, (iii) established $1.15
million as the minimum amount upon which his retirement benefit (and survivors
benefit of his surviving spouse) will be computed and (iv) created contractual
rights with respect to certain perquisites that were accorded to him informally
under his prior arrangement with the Company. On July 29, 1998, the Company
entered into Amendment No. 1 to Mr. Florence's Amended and Restated Employment
Agreement which provides, among other things, for the modification of the
computation and timing of payments in respect of the retirement benefit. The
terms of the Amendment provide for the acceleration of payments (the first of
which was made upon execution of the Amendment) related to the retirement
benefit provided that such payments are allowed under the terms of the Company's
credit agreements, as amended. The amended terms did not have a material impact
on the condensed financial statements for the quarter ended September 30, 1998.
The Company's ability to pay dividends is restricted by the terms of the
Revolving Credit Facility and the Note Indenture.
The liquidation preference of the Company's Cumulative Redeemable Preferred
Stock is $1,000 per share plus accrued but unpaid dividends. Holders of the
Cumulative Redeemable Preferred Stock are entitled, subject to the rights of
creditors, in the event of any voluntary or involuntary liquidation of the
Company, to an amount in cash equal to $1,000 for each share outstanding plus
all accrued and unpaid dividends. The rights of holders of the Cumulative
Redeemable Preferred Stock upon liquidation of the Company rank prior to those
of the holders of Syratech Common Stock.
Dividends on shares of Cumulative Redeemable Preferred Stock are cumulative
from the date of issue and are payable when and as may be declared from time to
time by the Board of Directors of the Company. Such dividends accrue on a daily
basis (whether or not declared) from the original date of issue at an annual
rate per share equal to 12% of the original purchase price per share, with such
amount to be compounded annually on each December 31 so that if the dividend is
not paid for any year the unpaid amount will be added to the original purchase
price of the Cumulative Redeemable Preferred Stock for the purpose of
calculating succeeding years' dividends.
The Cumulative Redeemable Preferred Stock is redeemable at any time at the
option of the Company, in whole or in part, at $1,000 per share plus all
accumulated and unpaid dividends, if any, at the date of redemption. Subject to
the Company's existing debt agreements, the Company must redeem all outstanding
Cumulative Redeemable Preferred Stock in the event of a public offering of
equity, a change of control or certain sales of assets.
The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Revolving Credit Facility and the indenture governing the Note
will require the Company to meet certain financial tests, and other restrictions
may limit its ability to borrow funds or to dispose of assets and may affect the
Company's flexibility in planning for, and reacting to, changes in its business
including possible
18
<PAGE>
acquisition activities, and (iii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired.
The Company believes that funds generated from operations and borrowings
available under the Revolving Credit Facility will be sufficient to finance the
Company's working capital requirements, provide for all known obligations of the
Company (including the obligations of the Company under the $165.0 million Notes
issued in connection with the Merger and under its operating leases) and fund
planned capital expenditures through December 31, 1998.
Year 2000 Conversion
The Company has substantially completed its assessment of Year 2000
compliance and determined the critical systems it will be required to evaluate,
modify and test. The Company has already modified certain key systems to comply
with Year 2000 requirements and is in the process of modifying and testing the
critical systems that are not Year 2000 compliant. The process is targeted to be
largely completed by December 31, 1998. Testing and certification of these
systems are targeted for completion by mid-1999. The Company currently believes
it will be able to modify, replace, or mitigate its affected systems in time to
avoid any material detrimental impact on its operations. If the Company
determines that it may be unable to remediate and properly test affected systems
on a timely basis, the Company intends to develop appropriate contingency plans
for any critical systems at the time such determination is made. While the
Company is not presently aware of any significant exposure that its systems will
not be properly remediated on a timely basis, there can be no assurances that
all Year 2000 remediation processes will be completed and properly tested before
the Year 2000, or that contingency plans will sufficiently mitigate the risk of
a Year 2000 readiness problem.
The Company has initiated communications with its significant suppliers,
customers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own Year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces,
as the Year 2000 approaches. The Company will develop appropriate contingency
plans in the event that a significant exposure is identified relative to the
dependencies on third-party systems. While the Company is not presently aware of
any such significant exposure, there can be no guarantee that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that a failure to properly convert by another company would not have a
material adverse effect on the Company. Potential sources of risk include (a)
the inability of principal suppliers to be Year 2000 ready, which could result
in delays in product deliveries from such suppliers, and (b) disruption of the
distribution channel, including ports, transportation vendors, and the Company's
own distribution centers as a result of a general failure of systems and
necessary infrastructure such as electricity supply. The Company believes that
its actions with suppliers will minimize these risks. An interruption of the
Company's ability to conduct its business due to a Year 2000 readiness problem
could have a material adverse effect on the Company.
The Company currently believes that the expenditures necessary to be Year
2000 compliant will not be material to its financial condition or results of
operations in any given year. The costs of compliance and estimated completion
dates for the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, and the
ability to locate and correct all relevant computer codes, replace embedded
computer chips in affected systems or equipment; and the actions of governmental
agencies or other third parties with respect to Year 2000 problems.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standard No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company will be required
to adopt the provisions of this statement in its annual financial statements for
fiscal 1998. SFAS 131 establishes new standards for reporting information about
operating segments. The Company believes the segment information required to be
disclosed under SFAS 131 will be more comprehensive than previously provided,
including expanded disclosure of statement of operations and balance sheet items
for each reportable operating segment. The Company has not yet completed its
analysis of the operating segments on which it will report.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures
About Pensions and Other Postretirement Benefits" SFAS 132 standardizes the
disclosure requirement for pensions and other postretirement benefits to the
extent practicable. It does not change the measurement or recognition of those
plans. The Company will be required to adopt the provisions of this statement in
its annual financial statements for fiscal 1998. The adoption of these
provisions will not have a material impact upon the Company's consolidated
financial statements.
19
<PAGE>
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- - ----------------------------------------
(a) Exhibits:
EX-10 Advice of Borrowing Terms between C.J. Vander Ltd. and NatWest
Bank P.L.C., dated September 18, 1998
EX-11 Computation of Net Income per Common Share
EX-27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the three months ended
September 30, 1998.
20
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Syratech Corporation
Dated: November 16, 1998
/s/ Ami A. Trauber
-----------------------------------
Ami A. Trauber
Executive Vice President,
Chief Financial Officer,
Treasurer (Principal Financial
and Accounting Officer)
21
<PAGE>
INDEX TO EXHIBITS
-----------------
Filed with Syratech Corporation
Report on Form 10-Q for the Quarter Ended
September 30, 1998
Exhibit No.
-----------
EX-10 Advice of Borrowing Terms between C.J. Vander Ltd. and NatWest
Bank P.L.C., dated September 18, 1998
EX-11 Computation of Net Income per Common Share
EX-27 Financial Data Schedule
22
EX-10
Advice of Borrowing Terms
<TABLE>
<S> <C> <C>
Relationship Office: South Yorkshire Corporate Business Date: 18th September 1998
Centre
Borrower(s) Registered Number:
C J Vander limited 763852
</TABLE>
We intend that the facilities listed in Part 1 of the attached Facility Schedule
(the "on-demand facilities") should remain available to the borrower(s) until
11th March 1999 and all facilities should be reviewed on or before that date.
The facilities are, however, subject to the following:
o the terms and conditions below,
o the specific conditions applicable to an individual facility as detailed in
the Facility Schedule,
o the Security detailed in the attached Security Schedule, and
o the attached General Terms.
All amounts outstanding are repayable on demand which may be made by us at our
discretion at any time and the facilities may be withdrawn, reduced, made
subject to further conditions or otherwise varied by us giving notice in
writing.
Conditions:
o The following conditions must be satisfied at all times while the facilities
are outstanding, but this will not affect our right to demand repayment at
any time:
o Monthly management accounts to be provided to us within 21 days of the end of
the month to which they relate; to include Profit & Loss, Balance Sheet and
Aged Debtor/Creditor listings.
o Audited accounts to be provided to us within 180 days of the financial year
end to which they relate.
o Production of the Parent company trading out-turns as soon as they become
publicly available.
o Provision of the 'Metal Exchange' account statement, plus prevailing
'balance', on a monthly basis
o The top-slice (pound)250,000 to the overdraft facility remains available upon
your prior request and for the specific purpose of sterling silver purchases,
which you indicated may be necessary from time to time either to fulfil
short-lead orders or to advantage from commodity price movements. We would
welcome a copy of the related purchase agreement in such instances.
o Lombard Natwest Commercial Services have been instructed to make contact with
a view to an updated assessment of the company's credit management processes,
and in particular the Aged Debtor book, given the significant work you have
undertaken in recent months in 'cleaning' the overall profile.
o Facilities remain available subject to our agreed lending formula calculated
on the following basis:
[Debtors (less than) 3 months + Stock] x 40% to cover utilized facilities in
a ratio (greater than) /= 2:1
As before, depending on the outcome of the revised debtor assessment, we may
be able to increase the flexibility in this respect.
o It is acknowledged that Syratech Inc., the ultimate US parent to CJ Vander
Ltd., is legally restricted in its ability to provide any parental guarantee,
letter of comfort or postponement to its substantial loan interest in
<PAGE>
the balance sheet of C J Vander Ltd. It is further acknowledged that the
current trading fortunes of C J Vander Ltd are strongly supported by the
parent undertaking in the way of tangible cash input, and roll up of accruing
'loan' interest into the capital amount outstanding to the parent with the C
J Vander Ltd balance sheet. Given the current lack lustre trading of C J
Vander Ltd and insolvent balance sheet footings (i.e. treating the parental
support as a long term liability), whilst we are comfortable to continue to
extend existing levels of support on the basis of the clear integrity of the
parent undertaking, we must reserve our rights to an increase in the interest
rate margin charged to 2% above the Banks Base Rate from time to time
(currently 7.5%) in the event that the 'quasi' net worth of the C J Vander
Ltd balance sheet is seen to diminish - i.e. AFTER taking due note of the
level of parental loan support.
/s/ J Sparling
Corporate Manager
For and on behalf of
National Westminster Bank Plc
Acceptance:
To signify your agreement to the terms and conditions outlined above please sign
and return the enclosed copy of this Advice of Borrowing Terms within 28 days.
<PAGE>
FORM OF ACCEPTANCE
I accept the facility/facilities on the above terms and conditions and confirm
that I have been authorized by the Board(s) of Directors of the Borrower(s) to
sign this Form of Acceptance on behalf of the Borrower(s).
By (name and title): /s/ Mike Whitaker, Financial Controller Date 20/9/98
For and on behalf of: C J Vander Limited
<PAGE>
Facility Schedule
Part 1 - Facilities repayable on Demand:
<TABLE>
<CAPTION>
Overdraft - Base rate
- - --------------------------------------------------------------------------------
<S> <C>
Account Number: 00328928; sort code 56 00 20
Name of Borrower C J Vander Limited
Limit (pound)500,000
Purpose: To finance working capital/periodic
sterling silver purchases
Repayment: Fully fluctuating
1st Debit Interest Rate: 1% above the Bank's Base rate
2nd Debit Interest Rate: 4% above the Bank's Base rate/the
Bank's unarranged borrowing rate
[delete as appropriate] on borrowing
over (pound)500,000 or in
excess of agreed facilities
Interest Payable: Quarterly
Arrangement Fee: (pound)2,500 will be debited on 6/10/98,
for the full year period to 6/10/99
Excess Fees: We will be entitled to charge an excess fee
at the Bank's published rate for each day any
agreed limit is exceeded (see our "Services &
Charges for Business Customers" brochure for
details).
- - --------------------------------------------------------------------------------
<CAPTION>
Cheques Negotiations
- - --------------------------------------------------------------------------------
<S> <C>
Name of Borrower: C J Vander Limited
Limit: (pound)10,000
Purpose: Negotiation of Foreign Cheques with Recourse
Fees: Subject to separate tariff, calculated on
sterling value of cheque. Information available
upon request or at the time the service
is provided
- - --------------------------------------------------------------------------------
<CAPTION>
Settlement Risk
- - --------------------------------------------------------------------------------
<S> <C>
Name of Borrower: C J Vander Limited
Limit/Frequency: (pound)200,000 per month
Type and Purpose: Payroll and creditor payments via BACs
- - --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Security Schedule
We rely on the security detailed below [and require additional security where
specified] to repay, on demand, all your current and future liabilities [both
actual and contingent] to us. These liabilities include, without limitation,
those incurred by you under the facility(ies) specified in the Facility
Schedule.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------
Date Executed/New: Security Given/to be given by:
- - -------------------------------------------------------------------------------------
<S> <C> <C>
27/09/89 Cross Guarantee Structure between C J Vander Ltd Roberts
& Belk Ltd, John Biggin Ltd, Modern
Silverware Products Ltd,
Vander Properties Ltd and C J
Vander (Antiques) Ltd.
13/01/74 Mortgage Debenture Fixed and Floating charge over all
company assets given by C J Vander
Ltd
11/11/85 Supplemental Charge Specific charge over book debts of
C J Vander Ltd
30/01/74 Mortgage Debenture Fixed & Floating charge over all
company assets given by Roberts &
Belk Ltd.
04/09/91 Supplemental Charge Specific charge over book debts of
Roberts & Belk Ltd.
26/04/78 Mortgage Debenture Fixed & Floating charge over all
company assets given by John Biggin
Ltd.
12/03/92 Mortgage Debenture Fixed & Floating charge over all
company assets given by Modern
Silverware Products Ltd.
27/09/89 Mortgage Debenture Fixed & Floating charge over all
company assets given by C J Vander
(Antiques) Ltd.
- - -------------------------------------------------------------------------------------
</TABLE>
EX-11
SYRATECH CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ....................... $1.15 $0.51 $(2.38) $(0.71)
===== ===== ======= =======
Weighted average number of shares outstanding ............ 3,784 3,784 3,784 5,693
===== ===== ======= =======
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ....................... $1.15 $0.51 $(2.38) $(0.71)
===== ===== ======= =======
Adjusted weighted average number of shares outstanding ... 3,784 3,784 3,784 5,693
===== ===== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY INFORMATION EXTRACTED FROM THE SYRATECH
CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AS FILED AS PART OF THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,664
<SECURITIES> 0
<RECEIVABLES> 92,457
<ALLOWANCES> 6,502
<INVENTORY> 113,847
<CURRENT-ASSETS> 221,432
<PP&E> 130,118
<DEPRECIATION> 41,470
<TOTAL-ASSETS> 325,771
<CURRENT-LIABILITIES> 120,841
<BONDS> 165,000
0
21,287
<COMMON> 38
<OTHER-SE> (4,700)
<TOTAL-LIABILITY-AND-EQUITY> 325,771
<SALES> 184,623
<TOTAL-REVENUES> 184,643
<CGS> 132,318
<TOTAL-COSTS> 47,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,084
<INCOME-PRETAX> (10,054)
<INCOME-TAX> (2,818)
<INCOME-CONTINUING> (8,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,994)
<EPS-PRIMARY> (2.38)
<EPS-DILUTED> (2.38)
</TABLE>
