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 MARCH 31, 1999
/_/ TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 1-12624
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SYRATECH CORPORATION
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - 617-561-2200
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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 NO X
----- -----
NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, OUTSTANDING AT
MARCH 31, 1999- 3,784,018
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
---------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 1
Condensed Consolidated Income Statements for the three
month periods ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
PART I - FINANCIAL INFORMATION
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)
March 31, December 31,
1999 1998
---------- ------------
ASSETS
Current assets:
Cash and equivalents .......................................... $ 769 $ 9,009
Accounts receivable, net ...................................... 46,425 70,128
Inventories ................................................... 103,757 86,955
Deferred income taxes ......................................... 18,306 15,866
Prepaid expenses and other .................................... 2,616 1,673
Properties held for sale ...................................... 2,194 2,292
--------- ---------
Total current assets .................................... 174,067 185,923
Property, plant and equipment, net ............................. 83,828 83,611
Purchase price in excess of net assets acquired, net ........... 6,489 6,549
Other assets, net .............................................. 8,239 8,634
--------- ---------
Total ................................................... $ 272,623 $ 284,717
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable ................... $ 35,824 $ 46,201
Accounts payable .............................................. 14,204 13,883
Accrued expenses .............................................. 10,759 10,802
Accrued interest .............................................. 8,464 4,108
Accrued compensation .......................................... 3,294 2,844
Accrued advertising ........................................... 2,780 3,053
Income taxes payable .......................................... 482 418
--------- ---------
Total current liabilities ............................... 75,807 81,309
Long - term debt ............................................... 165,000 165,000
Deferred income taxes .......................................... 19,409 19,409
Pension liability .............................................. 3,146 2,964
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
$4,530 and $3,874 in 1999 and 1998, respectively ............. 22,530 21,874
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,784,018 shares issued and outstanding.......... 38 38
Retained deficit .............................................. (13,530) (6,376)
Accumulated other comprehensive income ........................ 223 499
--------- ---------
Total stockholders' equity .............................. 9,261 16,035
--------- ---------
Total ................................................... $ 272,623 $ 284,717
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
1
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
Net sales.............................................$ 42,726 $ 37,758
Cost of sales......................................... 29,887 26,743
-------- --------
Gross profit......................................... 12,839 11,015
Selling, general and administrative expenses.......... 16,526 15,663
Other operating income................................ 697 532
-------- --------
Loss from operations................................. (2,990) (4,116)
Interest expense...................................... (5,713) (4,986)
Interest income....................................... 40 5
-------- --------
Loss before benefit for income taxes................. (8,663) (9,097)
Benefit for income taxes.............................. (2,165) (2,547)
-------- --------
Net loss............................................. (6,498) (6,550)
Preferred stock dividends accrued..................... 656 586
-------- --------
Net loss applicable to common stockholders...........$ (7,154) $ (7,136)
-------- --------
-------- --------
Basic and diluted loss per share:
Net loss per common share ...........................$ (1.89) $ (1.89)
-------- --------
-------- --------
Weighted average number of shares outstanding....... 3,784 3,784
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
2
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net loss ................................................ $ (6,498) $(6,550)
Adjustments to reconcile net loss to net cash provided
by (used in) operations:
Depreciation and amortization .......................... 2,058 1,734
Deferred income taxes .................................. (2,441) (2,622)
Other .................................................. 266 --
Increase (decrease) in cash:
Accounts receivable ................................... 23,703 20,217
Inventories ........................................... (16,802) (9,615)
Prepaid expenses and other ............................ (943) (456)
Accounts payable and accrued expenses ................. 4,813 (2,938)
Income taxes payable .................................. 64 --
--------- --------
Net cash provided by (used in) operations ............... 4,220 (230)
--------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (2,107) (4,004)
Proceeds from sale of assets ............................. 75 --
Other ................................................... 225 --
--------- --------
Net cash used in investing activities ................... (1,807) (4,004)
--------- --------
Cash flows from financing activities:
Change in revolving loan facilities .................... (10,377) 2,824
Other .................................................. (276) (611)
--------- --------
Net cash provided by (used in) financing activities ...... (10,653) 2,213
--------- --------
Net decrease in cash and equivalents .................... (8,240) (2,021)
Cash and equivalents, beginning of period ............... 9,009 2,981
--------- --------
Cash and equivalents, end of period ...................... $ 769 $ 960
--------- --------
--------- --------
See notes to condensed consolidated financial statements.
3
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 1998 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
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Cash paid during the period for:
Interest................................................... $991 $616
---- ----
---- ----
Income taxes............................................... $ 62 $376
---- ----
---- ----
Supplemental schedule of non-cash financing activities:
Accrued cumulative redeemable
preferred stock dividends ................................. $656 $586
---- ----
---- ----
3. INVENTORIES
Inventories consisted of the following:
March 31, December 31,
1999 1998
--------- ------------
Raw materials ................................ $ 13,576 $12,953
Work-in-process .............................. 8,675 6,484
Finished goods ............................... 81,506 67,518
--------- ------------
Total....................................... $103,757 $86,955
--------- ------------
4
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
The benefit for income taxes for the three month periods ended March 31, 1999
and 1998 have been computed using the estimated effective full year tax rates.
Realization of the income tax benefit is dependent upon generating sufficient
future taxable income. 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.
5. COMPREHENSIVE LOSS
Comprehensive loss consists of the following:
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
Net loss applicable to common stockholders............................ $(7,154) $(7,136)
Other comprehensive income:
Foreign currency translation adjustments ............................ (276) (338)
-------- --------
Comprehensive loss.................................................... $(7,430) $(7,474)
-------- --------
-------- --------
Accumulated other comprehensive income reported in the Condensed Consolidated
Balance Sheets consists only of foreign currency translation adjustments.
6. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted the provisions of Statement of
Opinion No. 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use," which requires certain expenditures made for
internal use software to be capitalized. The provisions of this opinion did not
have a material effect on the Company's condensed consolidated financial
statements upon adoption.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
whether there will be any impact of SFAS No. 133 on the Company's consolidated
financial statements upon adoption, which is required in the first quarter of
2000.
5
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SEGMENT DISCLOSURES
The Company has identified only one distinct and reportable segment: Home
Entertainment and Decorative Products, which generates revenue from two types of
product offerings: Tabletop and Giftware, and Seasonal. The following table
presents the Company's net sales in these product categories for the periods
presented:
Three Months Ended March 31,
----------------------------
1999 1998
------- -------
Tabletop and Giftware ........................... $40,678 $35,262
Seasonal ........................................ 2,048 2,496
------- -------
Total ........................................... $42,726 $37,758
------- -------
------- -------
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following supplemental condensed consolidating financial statements as of
March 31, 1999 and 1998 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 1999 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
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 1999
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents........................... $ $ 155 $ 614 $ $ 769
Accounts receivable, net....................... 43,250 3,175 46,425
Inventories.................................... 98,534 5,182 41 103,757
Deferred income taxes.......................... 10,099 8,207 18,306
Prepaid expenses and other..................... 112 2,056 448 2,616
Properties held for sale....................... 1,761 433 2,194
--------- -------- -------- --------- --------
Total current assets......................... 10,211 153,963 9,852 41 174,067
Property, plant and equipment, net.............. 80,116 3,762 (50) 83,828
Purchase price in excess of net
assets acquired, net........................... 6,489 6,489
Other assets, net............................... 8,102 137 8,239
Investment...................................... 180,192 (180,192) --
--------- -------- -------- --------- --------
Total........................................ $198,505 $240,705 $ 13,614 $(180,201) $272,623
--------- -------- -------- --------- --------
--------- -------- -------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable.... $ $ 35,821 $ 3 $ $ 35,824
Accounts payable............................... 11,635 2,569 14,204
Accrued expenses............................... 235 10,090 434 10,759
Accrued interest............................... 8,369 95 8,464
Accrued compensation........................... 3,102 192 3,294
Accrued advertising............................ 2,780 -- 2,780
Income taxes payable........................... 6 482 (6) 482
--------- -------- -------- --------- --------
Total current liabilities..................... 8,604 63,529 3,680 (6) 75,807
Long-term debt.................................. 165,000 165,000
Deferred income taxes........................... 6,157 13,252 19,409
Pension liability............................... 3,146 3,146
Intercompany (receivable) payable............... (29,725) 45,123 (14,031) (1,367) --
Stockholders' equity............................ 48,469 115,655 23,965 (178,828) 9,261
--------- -------- -------- --------- --------
Total......................................... $198,505 $240,705 $ 13,614 $(180,201) $272,623
--------- -------- -------- --------- --------
--------- -------- -------- --------- --------
7
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents................................... $ $ 7,496 $ 1,513 $ $ 9,009
Accounts receivable, net............................... 65,260 4,868 70,128
Inventories............................................ 81,680 5,234 41 86,955
Deferred income taxes.................................. 9,009 6,857 15,866
Prepaid expenses and other............................. 113 1,089 471 1,673
Properties held for sale............................... 1,838 454 2,292
-------- -------- -------- --------- --------
Total current assets................................. 9,122 164,220 12,540 41 185,923
Property, plant and equipment, net...................... 79,908 3,753 (50) 83,611
Purchase price in excess of net assets acquired, net.... 6,549 6,549
Other assets, net....................................... 8,457 177 8,634
Investment in subsidiaries.............................. 179,442 (179,442)
-------- -------- -------- --------- --------
Total................................................ $197,021 $250,854 $ 16,293 $(179,451) $284,717
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable............ $ $ 45,837 $ 358 $ 6 $ 46,201
Accounts payable....................................... 11,509 2,374 13,883
Accrued expenses....................................... 38 10,288 476 10,802
Accrued interest....................................... 3,832 276 4,108
Accrued compensation................................... 2,502 342 2,844
Accrued advertising.................................... 3,053 3,053
Income taxes payable................................... 198 (198) 418 418
-------- -------- -------- --------- --------
Total current liabilities............................ 4,068 73,267 3,968 6 81,309
Long-term debt.......................................... 165,000 165,000
Deferred income taxes................................... 6,157 13,252 19,409
Pension liability....................................... 2,964 2,964
Intercompany (receivable) payable....................... (30,589) 43,224 (11,274) (1,361)
Stockholders' equity.................................... 52,385 118,147 23,599 (178,096) 16,035
-------- -------- -------- --------- --------
Total................................................ $197,021 $250,854 $ 16,293 $(179,451) $284,717
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
8
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net sales............................................ $ $35,249 $15,309 $(7,832) $42,726
Cost of sales........................................ 25,804 11,915 (7,832) 29,887
------- -------- ------- -------- -------
Gross profit........................................ 9,445 3,394 12,839
Selling, general and administrative expenses......... 113 13,846 2,573 (6) 16,526
Other operating income............................... 697 697
------- -------- ------- -------- -------
Income (loss) from operations....................... (113) (3,704) 821 6 (2,990)
Interest expense..................................... (4,893) (810) (10) (5,713)
Interest income...................................... 1 36 3 40
------- -------- ------- -------- -------
Income (loss) before provision (benefit)
for income taxes................................... (5,005) (4,478) 814 6 (8,663)
Provision (benefit) for income taxes................. (1,090) (1,248) 173 (2,165)
------- -------- ------- -------- -------
Net income (loss)................................... (3,915) (3,230) 641 6 (6,498)
Preferred stock dividends accrued.................... 656 656
------- -------- ------- -------- -------
Net income (loss) applicable to common
stockholders....................................... $(4,571) $(3,230) $ 641 $ 6 $(7,154)
------- -------- ------- -------- -------
------- -------- ------- -------- -------
9
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------- ------------
Net sales........................................................ $ $32,503 $11,107 $(5,852) $37,758
Cost of sales..................................................... 24,263 8,332 (5,852) 26,743
------- ------- ------- -------- -------
Gross profit...................................................... 8,240 2,775 11,015
Selling, general and administrative expenses........................ 113 12,918 2,658 (26) 15,663
Other operating income.............................................. 532 532
------- ------- ------- -------- -------
Income (loss) from operations...................................... (113) (4,146) 117 26 (4,116)
Interest expense.................................................... (4,890) (93) (3) (4,986)
Interest income..................................................... -- 5 5
------- ------- ------- -------- -------
Income (loss) before provision (benefit) for income taxes.......... (5,003) (4,239) 119 26 (9,097)
Provision (benefit) for income taxes................................ (1,326) (1,274) 53 (2,547)
------- ------- ------- -------- -------
Net income (loss).................................................. (3,677) (2,965) 66 26 (6,550)
Preferred stock dividends accrued................................... 586 -- 586
------- ------- ------- -------- -------
Net income (loss) applicable to common stockholders................ $(4,263) $(2,965) $ 66 $ 26 $(7,136)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
10
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss).................................... $(3,915) $ (3,230) $ 641 $ 6 $ (6,498)
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Depreciation and amortization....................... 354 1,558 146 -- 2,058
Deferred income taxes............................... (1,090) (1,351) (2,441)
Other............................................... 266 266
Increase (decrease) in cash:
Accounts receivable................................ 22,010 1,693 23,703
Inventories........................................ (16,854) 52 (16,802)
Prepaid expenses and other......................... 1 (967) 23 (943)
Accounts payable and accrued expenses.............. 4,734 76 3 4,813
Income taxes payable............................... (198) 204 64 (6) 64
Intercompany account............................... 114 2,632 (2,746) --
------- -------- ------- ---- ---------
Net cash (used in) provided by operations............ -- 4,344 (124) 4,220
------- -------- ------- ---- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment.......... (1,851) (256) (2,107)
Proceeds from dispoal of assets..................... 75 75
Other............................................... 113 112 225
------- -------- ------- ---- ---------
Net cash used in investing activities................ (1,663) (144) (1,807)
------- -------- ------- ---- ---------
Cash flows from financing activities:
Change in revolving loan facilities................. (10,022) (355) (10,377)
Other............................................... (276) (276)
------- -------- ------- ---- ---------
Net cash provided by (used in) financing activities.. -- (10,022) (631) (10,653)
------- -------- ------- ---- ---------
Net increase (decrease) in cash and equivalents...... -- (7,341) (899) (8,240)
Cash and equivalents, beginning of period............ 7,496 1,513 9,009
------- -------- ------- ---- ---------
Cash and equivalents, end of period.................. $ -- $ 155 $ 614 $ -- $ 769
------- -------- ------- ---- ---------
------- -------- ------- ---- ---------
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
Issuer/ Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss).............................................. $(3,677) $ (2,965) $ 66 $ 26 $(6,550)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operations:
Depreciation and amortization................................. 352 1,276 106 1,734
Deferred income taxes......................................... (1,326) (1,296) (2,622)
Other......................................................... --
Increase (decrease) in cash:
Accounts receivable.......................................... 21,325 (1,108) 20,217
Inventories.................................................. (10,249) 634 (9,615)
Prepaid expenses and other assets............................ (113) (263) (80) (456)
Accounts payable and accrued expenses........................ 4,673 (7,858) 247 (2,938)
Income taxes payable......................................... 262 (262)
Intercompany account......................................... 365 1,148 (1,487) (26)
------- -------- -------- ------ --------
Net cash provided by (used in) operations...................... 274 1,380 (1,884) (230)
------- -------- -------- ------ --------
Cash flows from investing activities:
Purchases of property, plant and equipment.................... (3,873) (131) (4,004)
Other......................................................... --
------- -------- -------- ------ --------
Net cash used in investing activities.......................... (3,873) (131) (4,004)
------- -------- -------- ------ --------
Cash flows from financing activities:
Change in revolving loan facilities........................... 2,644 180 2,824
Other......................................................... (273) -- (338) (611)
------- -------- -------- ------ --------
Net cash provided by (used in) financing activities............ (273) 2,644 (158) 2,213
------- -------- -------- ------ --------
Net increase (decrease) in cash and equivalents................ 1 151 (2,173) (2,021)
Cash and equivalents, beginning of period...................... 18 91 2,872 2,981
------- -------- -------- ------ --------
Cash and equivalents, end of period............................ $ 19 $ 242 $ 699 $ -- $ 960
------- -------- -------- ------ --------
------- -------- -------- ------ --------
12
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. 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales increased 13.2% to $42.7 million for the three months ended March 31,
1999 from $37.8 million for the three months ended March 31, 1998. This increase
is primarily due to increased sales of a new line of licensed giftware products
to specialty retailers. Changes in normal product prices did not materially
impact net sales.
Gross profit increased 16.6% to $12.8 million for the three months ended March
31, 1999 from $11.0 million for the three months ended March 31, 1998. Gross
profit as a percentage of sales was 30.0% for the 1999 first quarter compared to
29.2% for the comparable 1998 period. The 0.8 point gross profit percentage
increase reflects the higher margin carried by the new line of licensed giftware
which was partially offset by the increased royalty expense related to this
line. 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 $16.5
million improved to 38.7% as a percentage of net sales for the three months
ended March 31, 1999 from 41.5% or $15.7 million for the comparable 1998
period. The 2.8 percentage point decrease in S,G & A expenses to sales for
the three months ended March 31, 1999 reflects the growth in sales volume, a
decrease in personnel and related costs due to consolidation activities
accomplished in 1998, and the higher royalty expense noted above.
Loss from operations was $3.0 million and $4.1 million for the first quarter of
1999 and 1998, respectively, and included other operating income of $0.7 million
and $0.5 million in 1999 and 1998, respectively. The increase in other operating
income is due to increased Farberware license revenue.
Interest expense was $5.7 million for the three months ended March 31, 1999
compared to $5.0 million in the same period of 1998. This increase results from
increased borrowings for working capital purposes.
The benefit for income taxes was $2.2 million for the three months ended March
31, 1999 compared to $2.5 million for the three months ended March 31, 1998.
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Net loss applicable to common stockholders was $7.2 million and $7.1 million in
March 31, 1999 and 1998, respectively or $1.89 diluted per share in both
periods, on adjusted weighted average shares of 3,784,018.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended March 31,
1999 was $4.2 million. The major source of cash was the seasonal collection of
accounts receivable. Partially offsetting this was the customary first quarter
increase in inventory in preparation for the fall selling season.
The Company's working capital requirements are seasonal and tend to be highest
in the period from September through November due to the Christmas selling
season. Accounts receivable tend to decline during December and the first
quarter 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 $2.1 million for the three months ended
March 31, 1999 and the Company expects to spend approximately $5.4 million
during the remainder of 1999. These expenditures relate to computer equipment
and systems for the warehouse and distribution facility in Mira Loma, CA,
computer equipment and systems for the Company's East Boston office facility,
and machinery, equipment and tools and dies for the Company's manufacturing
facilities.
The Company's Revolving Credit Facility, dated April 16, 1997, amended effective
as of July 31, 1997, December 31, 1997, March 30, 1998 and December 31, 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 as amended, the Company is
required during February and March of each year to maintain excess availability
of at least $25.0 million. 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 capital expenditures, and
minimum consolidated net worth on or after December 31, 1997 of at least $1.00
(not in thousands). In addition, the Revolving Credit Facility, as amended as of
December 31, 1998, includes covenants requiring a minimum ratio of earnings
before interest, income taxes, depreciation, amortization, and certain
adjustments ("EBITDA"), as defined, including funded debt to EBITDA and fixed
charge coverage ratios, as defined. The Company is in compliance with the
covenants, as amended, as of March 31, 1999 and for the quarter then ended.
Availability under the Revolving Credit Facility, net of outstanding letters of
credit, was $36.6 million at March 31, 1999.
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
$0.1 million at March 31, 1999.
The Company's C.J. Vander Ltd. subsidiary has an overdraft facility entered into
on March 16, 1998 ("Overdraft Facility") which provides for borrowings of
L500. 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 as renewed on September 18, 1998 and March 19, 1999 is
due on demand and expires on June 19, 1999. Availability under the Overdraft
Facility was L466 at March 31, 1999.
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
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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.
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 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, 1999.
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 modified key systems to comply with Year 2000 requirements
and is in the process of modifying and testing certain other systems that are
not Year 2000 compliant. The modification of critical systems is on schedule and
was 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,
15
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 completed the modification
and testing of its Electronic Data Interchange ("EDI") systems used to process
orders and communicate with certain customers. The Company is able to process 6
digit dates for customer's using older versions of the American National
Standards Institute ("ANSI") and Voluntary Inter-industry Communications
Standard ("VICS") 3070 specification and is listed as a compliant vendor on the
web site of the National Retail Federation. In addition, the Company is
currently processing 8-digit dates (which are inherently Year 2000 compliant) in
accordance with the ANSI and VICS 4010 specification with those customers who
are able to accept and transmit this version. 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
Effective January 1, 1999, the Company adopted the provisions of Statement of
Opinion No. 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use," which requires certain expenditures made for
internal use software to be capitalized. The provisions of this opinion did not
have a material effect on the Company's condensed consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
whether there will be any impact of SFAS No. 133 on the Company's consolidated
financial statements upon adoption, which is required in the first quarter of
2000.
16
SYRATECH CORPORATION AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities. The Company's short-term borrowings are substantially all
denominated in U.S. dollars and bear interest at variable rates primarily
based on either a prime rate or the London Interbank Offering Rate ("LIBOR").
The effect of a 10% change in the prime or LIBOR rate would not have a
material impact on the Company's financial results. The Company also has
fixed debt financing of $165,000 of 11% Senior Notes due April 15, 2007 that
had a fair value of $115,500 as of March 31, 1999 based upon recent private
market trades. There is inherent roll-over risk for these borrowings as they
mature and are renewed at current market rates. The extent of this risk is
not quantifiable or predictable because of the variability of future interest
rates and the Company's future financing requirements. Currently, the Company
does not enter into financial instruments transactions for trading or other
speculative purposes or to manage interest rate exposure and does not have
investments in debt or equity securities.
The Company transacts sales and purchases primarily in U.S. Dollars and
maintains minimum cash balances denominated in foreign currencies.. The Company
does not enter into foreign currency hedge transactions. Through December 31,
1998, foreign currency fluctuations have not had a material impact on the
Company's consolidated financial position or results of operations or cash flows
in any one year and the Company does not believe that its exposure to foreign
currency rate fluctuations is material.
17
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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
March 31, 1999.
18
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: May 14, 1999
/s/ Ami A. Trauber
----------------------------------------
Ami A. Trauber
Executive Vice President, Chief Financial
Officer, Treasurer (Principal Financial
and Accounting Officer)
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INDEX TO EXHIBITS
FILED WITH SYRATECH CORPORATION
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1999
EXHIBIT NO.
-----------
EX-11 Computation of Net Income per Common Share
EX-27 Financial Data Schedule