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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

 

 

o

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

 

 

Syratech Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

13-3354944

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

175 McClellan Highway
East Boston, Massachusetts

 

02128-9114

(Address of  principal executive office)

 

(Zip Code)

 

 

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  o  NO  ý

 

Number of Shares of Common Stock, Par Value $0.01 per share, outstanding at June 30, 2002 - 3,784,018

 



 

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

 Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001

 

 

 

 

 

 

 

Condensed Consolidated Income Statements for the three and six month periods ended June 30, 2002 and 2001

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002 and 2001

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

 

 

 

Signature

 

 

 

 

 

 

 



 

PART 1 - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)

 

 

 

June 30,
2002

 

December 31,
2001

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

1,206

 

$

5,242

 

Accounts receivable, net

 

30,183

 

57,530

 

Inventories

 

94,479

 

74,949

 

Deferred income taxes

 

22,436

 

17,848

 

Prepaid expenses and other

 

4,357

 

2,665

 

Total current assets

 

152,661

 

158,234

 

 

 

 

 

 

 

Property, plant and equipment, net

 

65,863

 

68,195

 

Purchase price in excess of net assets acquired, net

 

 

6,225

 

Other assets, net

 

4,344

 

4,717

 

Total

 

$

222,868

 

$

237,371

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Revolving loan facilities and notes payable

 

$

28,345

 

$

16,995

 

Accounts payable

 

12,449

 

10,976

 

Accrued expenses

 

6,366

 

8,079

 

Accrued interest

 

3,495

 

4,359

 

Accrued compensation

 

1,881

 

4,181

 

Accrued advertising

 

2,548

 

3,263

 

Income taxes payable

 

411

 

129

 

Total current liabilities

 

55,495

 

47,982

 

 

 

 

 

 

 

Long - term debt

 

155,052

 

157,634

 

Deferred income taxes

 

18,818

 

18,818

 

Pension liability

 

2,320

 

2,809

 

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 $14,574 and $12,731 in 2002 and 2001, respectively) 

 

32,574

 

30,731

 

Common stock, $.01 par value, 20,000,000 shares authorized; 3,784,018  shares issued and outstanding

 

38

 

38

 

Deficit

 

(40,183

)

(19,092

)

Accumulated other comprehensive loss

 

(1,246

)

(1,549

)

Total stockholders’ equity

 

(8,817

)

10,128

 

Total

 

$

222,868

 

$

237,371

 

 

See notes to consolidated financial statements.

 

1



 

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

Net sales

 

$

40,761

 

$

40,570

 

$

80,702

 

$

82,277

 

Cost of sales

 

29,186

 

28,322

 

57,934

 

60,216

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

11,575

 

12,248

 

22,768

 

22,061

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses 

 

15,607

 

15,565

 

31,017

 

31,816

 

Other operating income

 

 

332

 

 

776

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(4,032

)

(2,985

)

(8,249

)

(8,979

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,028

)

(5,372

)

(10,086

)

(10,718

)

Interest income

 

 

2

 

 

6

 

 

 

 

 

 

 

 

 

 

 

Loss before benefit for income taxes, extraordinary gain and cumulative effect of a change in accounting principle

 

(9,060

)

(8,355

)

(18,335

)

(19,691

)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(2,265

)

(2,089

)

(4,584

)

(4,923

)

 

 

 

 

 

 

 

 

 

 

Loss before extraordinary gain and cumulative effect of a change in accounting principle

 

(6,795

)

(6,266

)

(13,751

)

(14,768

)

 

 

 

 

 

 

 

 

 

 

Extraordinary gain on early extinguishment of debt, net of income taxes of $507

 

 

 

729

 

 

Cumulative effect of change in accounting principle

 

 

 

(6,225

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(6,795

)

(6,266

)

(19,247

)

(14,768

)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued

 

923

 

823

 

1,844

 

1,646

 

Net loss applicable to common stockholders 

 

$

(7,718

)

$

(7,089

)

$

(21,091

)

$

(16,414

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

 

 

 

 

 

 

 

 

 

Loss before extraordinary gain and cumulative effect of change in accounting principle

 

$

(1.80

)

$

(1.65

)

$

(3.62

)

$

(3.91

)

Extraordinary gain on early extinguishment of debt

 

 

 

0.19

 

 

Cumulative effect of change in accounting principle

 

 

 

(1.65

)

 

Preferred stock dividends accrued

 

(0.24

)

(0.22

)

(0.49

)

(0.43

)

Net income (loss) per common share

 

$

(2.04

)

$

(1.87

)

$

(5.57

)

$

(4.34

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

3,784

 

3,784

 

3,784

 

3,784

 

 

See notes to consolidated financial statements.

 

2



 

 

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

 

 

Six Months Ended June 30,

 

 

 

2002

 

2001

 

Cash flows from operating activities

 

 

 

 

 

Net  loss

 

$

(19,247

)

$

(14,768

)

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

Depreciation and amortization

 

4,782

 

4,860

 

Deferred income taxes

 

(4,588

)

(5,484

)

Gain on extinguishment of debt before income taxes

 

(1,236

)

 

Loss (gain) on disposal of assets

 

8

 

55

 

Pension liability

 

(489

)

(163

)

Cumulative effect of change in accounting principle

 

6,225

 

 

Increase (decrease) in assets and liabilities

 

 

 

 

 

Accounts receivable

 

27,347

 

65,410

 

Inventories

 

(19,530

)

(21,495

)

Prepaid expenses and other

 

(1,692

)

(822

)

Accounts payable and accrued expenses

 

(4,119

)

(7,130

)

Income taxes payable

 

282

 

182

 

Net cash from operating activities

 

(12,257

)

20,645

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(1,494

)

(2,850

)

Proceeds from disposal of assets

 

 

191

 

Other

 

5

 

(26

)

Net cash from investing activities

 

(1,489

)

(2,685

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Change in revolving loan facilities

 

11,350

 

(28,644

)

Retirement of outstanding senior notes

 

(1,203

)

 

Proceeds from long-term debt

 

 

10,000

 

Repayments of long-term debt

 

(82

)

(9

)

Other

 

(355

)

(1,194

)

Net cash from financing activities

 

9,710

 

(19,847

)

Net increase (decrease) in cash and equivalents

 

(4,036

)

(1,887

)

Cash and equivalents, beginning of period

 

5,242

 

3,442

 

Cash and equivalents, end of period

 

$

1,206

 

$

1,555

 

 

See notes to 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 accounting principles generally accepted in the United States of America have been condensed or omitted.  Certain prior year amounts have been reclassified to conform to the 2002 presentation. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2001 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

 

 

 

Six Months Ended June 30,

 

 

 

2002

 

2001

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$10,041

 

$9,954

 

Income taxes

 

$1,155

 

$780

 

 

 

 

 

 

 

Supplemental schedule of non-cash financing activities:

 

 

 

 

 

Accrued cumulative redeemable preferred stock dividends

 

$1,844

 

$1,646

 

 

3. INVENTORIES

 

Inventories consisted of the following:

 

 

 

June 30,
2002

 

December 31,
2001

 

Raw materials

 

$

9,524

 

$

7,543

 

Work-in-process

 

9,469

 

4,398

 

Finished goods

 

75,486

 

63,008

 

 

 

 

 

 

 

Total

 

$

94,479

 

$

74,949

 

 

 

4



 

4. INCOME TAXES

The benefit for income taxes for the six month periods ended June 30, 2002 and 2001 have been computed using the estimated effective full year tax rate of 25%. 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. REVOLVING LOAN FACILITIES AND NOTES PAYABLE

The Company has a Senior Revolving Credit Facility (the “Facility”) dated April 16, 1997 (amended effective as of July 31, 1997, December 31, 1997, March 30, 1998, December 31, 1998,  March 26, 2001, August 13, 2001 and March 22, 2002) which provides for $110 million of borrowings, including a $30 million sub-limit for the issuance of standby and commercial letters of credit. On March 22, 2002, the term of the Facility was extended for an additional year and the facility now expires on April 15, 2003. The obligations of the Company under the 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. Borrowings made under the Revolving Credit Facility bear interest at a rate equal to, at the Company’s option, the Eurodollar Rate plus 375 basis points or the Prime Rate plus 100 basis points. The Revolving Credit Facility, as amended, contains customary covenants of the Company and the subsidiary borrowers, including but not limited to requiring minimum earnings before income taxes, depreciation, amortization, and certain adjustments (“EBITDA”), as defined, and limits on capital spending. The Company must maintain minimum availability requirements of $25,000 during February and March of each year and minimum availability varying between $13,300 and $10,000 for the months from April through January ($12,450 at June 30, 2002). The Company is in compliance with the covenants, as amended, as of June 30, 2002. Availability under the Revolving Credit Facility, net of outstanding letters of credit, was $27,060 at June 30, 2002, resulting in additional borrowing capacity of $14,610, net of the $12,450 minimum excess availability requirement noted above.

 

During January 2002, the Company, purchased $2,500 of its outstanding 11% Senior Notes on the open market, resulting in an extraordinary gain of $729 net of $507 in income taxes.

On April 30, 2002, the Company renewed its Wallace International de Puerto Rico, Inc. $1,000 credit facility.  The renewed facility expires on March 15, 2003 and its terms require that the facility be paid down to zero for one 15 consecutive day period prior to that date. Borrowings under the facility bear interest at a rate equal to the Prime Rate plus 100 basis points. Availability under the facility was $250 at June 30, 2002.

On April 15, 2002, the Company’s C. J. Vander Ltd. subsidiary renewed its £250 overdraft facility.  The renewed facility expires on  October 30, 2002. Borrowings made under the overdraft facility bear interest at the bank’s base rate plus 1%. Availability under the overdraft facility was £82 at June 30, 2002.

 

5



 

6. COMPREHENSIVE LOSS

Comprehensive loss consists of the following:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

Net loss applicable to common stockholders

 

$

(7,718

)

$

(7,089

)

$

(21,091

)

$

(16,414

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustments

 

109

 

(98

)

219

 

(197

)

Foreign currency translation adjustments

 

277

 

(430

)

84

 

(560

)

Comprehensive loss

 

$

(7,332

)

$

(7,617

)

$

(20,788

)

$

(17,171

)

 

7.  GOODWILL

The Company adopted Financial Accounting Standard No. 142 - 66 “Goodwill and Other Intangible  Assets” (“SFAS 142”) as required in fiscal 2002. SFAS 142 provides a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. To the extent that an indication of impairment exists, the Company must perform a second test to measure the amount of the impairment. The implementation of SFAS 142 resulted in the Company recording a one-time, non-cash, goodwill impairment charge of $6,225 as of January 1, 2002. The impairment results from a change in the criteria for the measurement of impairments from an undiscounted to a discounted cash flow method. This charge reflects the cumulative effect of adopting the accounting change in the statement of operations, but had no impact on cash flows. The impaired goodwill was not deductible for taxes, and as a result, no tax benefit was recorded in relation to the charge. The Company recorded approximately $341 of goodwill amortization in 2001. Under SFAS 142 goodwill amortization was not recorded during 2002. The Company has not recorded any other specifically identified intangible assets for its intellectual property which includes copyrights and trademarks.

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

Reported loss before extraordinary gain and cumulative effect of a change in accounting principle

 

$

(6,795

)

$

(6,266

)

$

(13,751

)

$

(14,768

)

Add back: goodwill amortization

 

 

 

86

 

 

 

171

 

Adjusted loss before extraordinary gain and cumulative effect of a change in accounting principle

 

$

(6,795

)

$

(6,180

)

$

(13,751

)

$

(14,597

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

Reported loss before extraordinary gain and cumulative effect of a change in accounting principle

 

$

(1.80

)

$

(1.65

)

$

(3.62

)

$

(3.91

)

Add back: goodwill amortization

 

 

0.02

 

 

0.05

 

Adjusted loss before extraordinary gain and cumulative effect of a change in accounting principle

 

$

(1.80

)

$

(1.63

)

$

(3.62

)

$

(3.86

)

 

 

6



 

8. ACCOUNTING PRONOUNCEMENTS

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” for fiscal years starting after June 15, 2002.  This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  The Company does not believe that the adoption of SFAS No. 143 will have a significant impact on its financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”)”. SFAS No. 144 supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. SFAS 144 will be effective for fiscal years beginning after December 15, 2001.  The Company adopted SFAS 144, as required, in the first quarter of 2002. The adoption of SFAS 144 did not have a significant impact on financial position or the results of operations.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections.” One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, the Company will follow APB 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The Company is currently evaluating the impact that adoption of SFAS No. 145 may have on its financial statement presentation.

 

In June 2002, the FASB issued SFAS 146, “Accounting for Cost Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94–3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” . SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on its financial statements.

 

9.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 June 30,

 

Six Months Ended June 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Tabletop and Giftware

 

$

35,519

 

$

33,912

 

$

71,305

 

$

74,119

 

Seasonal

 

5,242

 

6,658

 

9,397

 

8,158

 

Total

 

$

40,761

 

$

40,570

 

$

80,702

 

$

82,277

 

 

 

7



 

10. EMPLOYEE BENEFIT PLANS

At June 30, 2002, the Company had employment agreements with certain officers and employees for terms ranging from one to three years. These agreements provide for minimum annual salaries aggregating $2,910 and certain other benefits. In April 2002 the agreement with an officer was amended to extend the executive’s term of full time employment an additional year until April 16, 2003. In May 2002, the Company and the Chairman of the Board, agreed that the maximum annual compensation would be $640 for his continued service to the Company. In June 2002 the agreement with another officer was amended to increase the retirement benefit by changing the computation of the annual benefit to equal 2% of his respective average total compensation (i.e., base salary and bonus compensation) in the three years preceding attainment by the executive of age sixty-five or termination of such executive’s full time employment, whichever occurs later, multiplied by the number of years of such executive’s employment by the Company. Prior to the amendment, which is effective as of Jaunary 1, 2002, the benefit computation had been based on ½% of total compensation. The amendment also adds a survivors benefit for his surviving spouse. The change in the retirement benefit did not have a material impact on the financial statements.

 

11. STOCKHOLDERS’ EQUITY

In June 2002 the stockholders approved the 2002 Stock Incentive Plan (2002 Plan). Under the 2002 Plan, qualified or non-qualified options to purchase up to a maximum of 1,500,000 shares of common stock may be granted to certain employees, directors, officers, and consultants of the Company. Stock Options are granted at the discretion of the Board of Directors at exercise prices not less than 50% of the fair market value at the date of grant. Options shall vest in accordance with terms to be established by the Board of Directors at the time of each individual grant and shall expire not later than 10 years from the date of grant.  At June 30, 2002 no options had been granted under the 2002 Plan.

 

12. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS

The following supplemental consolidating financial statements as of  June 30, 2002 and December 31, 2001, and for each of the three month and six month periods ended June 30, 2002 and 2001, present separate financial information for the Issuer/Guarantor Parent, the Guarantor Subsidiaries, and the Non-Guarantor Subsidiaries. Certain prior year amounts have been reclassified to conform with the 2002 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.

 

8



 

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS

June 30, 2002

 

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

 

 

$

267

 

$

939

 

$

 

 

$

1,206

 

Accounts receivable, net

 

 

 

24,362

 

5,821

 

 

30,183

 

Inventories

 

 

 

90,480

 

3,958

 

41

 

94,479

 

Deferred income taxes

 

7,569

 

14,867

 

 

 

 

 

22,436

 

Prepaid expenses and other

 

113

 

3,689

 

555

 

 

 

4,357

 

Total current assets

 

7,682

 

133,665

 

11,273

 

41

 

152,661

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

63,322

 

2,588

 

(47

)

65,863

 

Purchase price in excess of net assets acquired

 

 

 

 

 

 

 

 

Other assets, net

 

4,462

 

455

 

 

 

(573

)

4,344

 

Investment

 

49,665

 

11,222

 

 

(60,887

)

 

Total

 

$

61,809

 

$

208,664

 

$

13,861

 

$

(61,466

)

$

222,868

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Revolving loan facilities and notes payable

 

$

 

 

$

28,345

 

$

 

 

$

 

 

$

28,345

 

Accounts payable

 

 

 

5,491

 

6,958

 

 

 

12,449

 

Accrued expenses

 

40

 

5,480

 

846

 

 

 

6,366

 

Accrued interest

 

3,832

 

113

 

 

 

(450

)

3,495

 

Accrued compensation

 

 

 

1,667

 

214

 

 

 

1,881

 

Accrued advertising

 

 

 

2,548

 

 

 

 

 

2,548

 

Income taxes payable

 

(13,194

)

9,893

 

484

 

3,228

 

411

 

Total current liabilities

 

(9,322

)

53,537

 

8,502

 

2,778

 

55,495

 

Long-term debt

 

165,000

 

9,706

 

 

 

(19,654

)

155,052

 

Deferred income taxes 

 

9,672

 

9,146

 

 

 

 

 

18,818

 

Pension liability and other long-term liabilities

 

 

 

2,320

 

 

 

 

 

2,320

 

Intercompany (receivable) payable 

 

10,038

 

21,000

 

(32,880

)

1,842

 

 

 

Stockholders’ equity (deficit)

 

(113,579

)

112,955

 

38,239

 

(46,432

)

(8,817

)

Total

 

$

61,809

 

$

208,664

 

$

13,861

 

$

(61,466

)

$

222,868

 

 

9



 

 

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2001

 

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

 

 

$

3,249

 

$

1,993

 

$

 

 

$

5,242

 

Accounts receivable, net

 

 

 

52,465

 

5,065

 

 

 

57,530

 

Inventories

 

 

 

71,977

 

3,431

 

(459

)

74,949

 

Deferred income taxes

 

5,857

 

11,991

 

 

 

 

 

17,848

 

Prepaid expenses and other

 

113

 

2,296

 

256

 

 

 

2,665

 

Total current assets

 

5,970

 

141,978

 

10,745

 

(459

)

158,234

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

65,563

 

2,679

 

(47

)

68,195

 

Purchase price in excess of net assets acquired

 

 

 

5,825

 

 

 

400

 

6,225

 

Other assets, net

 

4,720

 

509

 

 

 

(512

)

4,717

 

Investment

 

49,665

 

10,020

 

 

 

(59,685

)

 

Total

 

$

60,355

 

$

223,895

 

$

13,424

 

$

(60,303

)

$

237,371

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Revolving loan facilities and notes payable

 

$

 

 

$

16,995

 

$

 

 

$

 

 

$

16,995

 

Accounts payable

 

 

 

6,089

 

4,887

 

 

 

10,976

 

Accrued expenses

 

39

 

7,486

 

554

 

 

 

8,079

 

Accrued interest

 

3,832

 

527

 

 

 

 

 

4,359

 

Accrued compensation

 

 

 

3,821

 

360

 

 

 

4,181

 

Accrued advertising

 

 

 

3,263

 

 

 

 

 

3,263

 

Income taxes payable

 

(12,687

)

9,627

 

480

 

2,709

 

129

 

Total current liabilities

 

(8,816

)

47,808

 

6,281

 

2,709

 

47,982

 

Long-term debt

 

165,000

 

9,788

 

 

 

(17,154

)

157,634

 

Deferred income taxes

 

9,672

 

9,146

 

 

 

 

 

18,818

 

Pension liability

 

 

 

2,809

 

 

 

 

 

2,809

 

Intercompany (receivable) payable

 

(144

)

30,920

 

(29,384

)

(1,392

)

 

Stockholders’ equity (deficit)

 

(105,357

)

123,424

 

36,527

 

(44,466

)

10,128

 

Total

 

$

60,355

 

$

223,895

 

$

13,424

 

$

(60,303

)

$

237,371

 

 

10



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

31,059

 

$

22,346

 

$

(12,644

)

$

40,761

 

Cost of sales

 

 

 

23,175

 

18,655

 

(12,644

)

29,186

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

7,884

 

3,691

 

 

 

11,575

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

112

 

12,891

 

2,604

 

 

 

15,607

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(112

)

(5,007

)

1,087

 

 

 

(4,032

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,029

)

4

 

(3

)

 

 

(5,028

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision (benefit) for income taxes

 

(5,141

)

(5,003

)

1,084

 

 

 

(9,060

)

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(1,062

)

(1,365

)

162

 

 

 

(2,265

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(4,079

)

(3,638

)

922

 

 

(6,795

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued

 

923

 

 

 

 

 

 

 

923

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(5,002

)

$

(3,638

)

$

922

 

$

 

$

(7,718

)

 

 

11



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

31,382

 

$

21,741

 

$

(12,553

)

$

40,570

 

Cost of sales

 

 

 

23,629

 

17,246

 

(12,553

)

28,322

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

7,753

 

4,495

 

 

12,248

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

112

 

12,456

 

2,972

 

25

 

15,565

 

Other operating income

 

 

 

332

 

 

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(112

)

(4,371

)

1,523

 

(25

)

(2,985

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,123

)

(247

)

(2

)

 

 

(5,372

)

Interest income

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision (benefit) for income taxes

 

(5,235

)

(4,618

)

1,523

 

(25

)

(8,355

)

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(1,102

)

(1,215

)

228

 

 

 

(2,089

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(4,133

)

(3,403

)

1,295

 

(25

)

(6,266

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued

 

823

 

 

 

 

 

 

 

823

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(4,956

)

$

(3,403

)

$

1,295

 

$

(25

)

$

(7,089

)

 

 

12



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2002

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

62,443

 

$

42,244

 

$

(23,985

)

$

80,702

 

Cost of sales

 

 

 

46,594

 

35,325

 

(23,985

)

57,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

15,849

 

6,919

 

 

22,768

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses 

 

225

 

25,809

 

4,983

 

 

 

31,017

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(225

)

(9,960

)

1,936

 

 

 

(8,249

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(10,215

)

135

 

(6

)

 

 

(10,086

)

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before benefit for income taxes, extraordinary item and cumulative effect of a change in accounting principle

 

(10,440

)

(9,825

)

1,930

 

 

(18,335

)

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(2,219

)

(2,666

)

301

 

 

 

(4,584

)

 

 

 

 

 

 

 

 

 

 

 

 

Loss before extraordinary gain and cumulative effect of a change in accounting principle

 

(8,221

)

(7,159

)

1,629

 

 

(13,751

)

 

 

 

 

 

 

 

 

 

 

 

 

Extraordinary gain on early extinguishment of debt, net of income taxes of $507

 

729

 

 

 

 

 

 

 

729

 

Cumulative effect of change in accounting principle

 

 

 

(5,825

)

(400

)

 

 

(6,225

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(7,492

)

(12,984

)

1,229

 

 

(19,247

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued

 

1,844

 

 

 

 

 

 

 

1,844

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(9,336

)

$

(12,984

)

$

1,229

 

$

 

$

(21,091

)

 

 

13



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2001

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

63,760

 

$

45,227

 

$

(26,710

)

$

82,277

 

Cost of sales

 

 

 

50,171

 

36,755

 

(26,710

)

60,216

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

13,589

 

8,472

 

 

22,061

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

225

 

25,600

 

5,941

 

50

 

31,816

 

Other operating income

 

 

 

776

 

 

 

 

 

776

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(225

)

(11,235

)

2,531

 

(50

)

(8,979

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(10,193

)

(519

)

(6

)

 

 

(10,718

)

Interest income

 

 

 

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision (benefit) for income taxes

 

(10,418

)

(11,754

)

2,531

 

(50

)

(19,691

)

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(2,190

)

(3,134

)

401

 

 

 

(4,923

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(8,228

)

(8,620

)

2,130

 

(50

)

(14,768

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued

 

1,646

 

 

 

 

 

 

 

1,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(9,874

)

$

(8,620

)

$

2,130

 

$

(50

)

$

(16,414

)

 

 

14



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2002

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(7,492

)

$

(12,984

)

$

1,229

 

 

 

$

(19,247

)

Adjustments to reconcile net income to net cash provided by (used in) operations:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

891

 

3,731

 

160

 

 

 

4,782

 

Deferred income taxes

 

(1,712

)

(2,876

)

 

 

 

 

(4,588

)

Gain on extinguishment of debt before income taxes

 

(1,236

)

 

 

 

 

 

 

(1,236

)

Loss (gain) on disposal of assets

 

 

8

 

 

 

 

 

8

 

Pension liability

 

 

 

(489

)

 

 

 

 

(489

)

Cumulative effect of change in accounting principle

 

 

 

5,825

 

400

 

 

 

6,225

 

Increase (decrease) in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

28,103

 

(756

)

 

 

27,347

 

Inventories

 

 

 

(19,003

)

(527

)

 

 

(19,530

)

Prepaid expenses and other

 

 

(1,393

)

(299

)

 

 

(1,692

)

Accounts payable and accrued expenses

 

 

(6,336

)

2,217

 

 

 

(4,119

)

Income taxes payable

 

 

278

 

4

 

 

 

282

 

Intercompany account

 

10,182

 

(6,686

)

(3,496

)

 

 

 

 

Net cash provided by (used in) operating activities

 

633

 

(11,822

)

(1,068

)

 

(12,257

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(1,449

)

(45

)

 

 

(1,494

)

Proceeds from disposal of assets

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

5

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(1,444

)

(45

)

 

(1,489

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Change in revolving loan facilities

 

 

 

11,350

 

 

 

 

11,350

 

Retirement of outstanding senior notes

 

 

 

(1,203

)

 

 

 

 

(1,203

)

Proceeds from long-term debt

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

 

(82

)

 

 

 

 

(82

)

Other

 

(633

)

219

 

59

 

 

 

(355

)

Net cash provided by (used in) financing activities

 

(633

)

10,284

 

59

 

 

9,710

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

 

(2,982

)

(1,054

)

 

(4,036

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, beginning of the period

 

 

3,249

 

1,993

 

 

5,242

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, end of the period

 

$

 

$

267

 

$

939

 

$

 

$

1,206

 

 

 

15



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2001

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(8,228

)

$

(8,620

)

$

2,130

 

$

(50

)

$

(14,768

)

Adjustments to reconcile net income (loss) to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

755

 

3,763

 

292

 

50

 

4,860

 

Deferred income taxes

 

(2,189

)

(3,295

)

 

 

 

 

(5,484

)

Gain on extinguishment of debt before income taxes

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of assets

 

 

 

55

 

 

 

 

 

55

 

Pension liability

 

 

 

(163

)

 

 

 

 

(163

)

Increase (decrease) in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

68,851

 

(3,441

)

 

 

65,410

 

Inventories

 

 

 

(22,567

)

1,072

 

 

 

(21,495

)

Prepaid expenses and other

 

 

(822

)

 

 

 

(822

)

Accounts payable and accrued expenses 

 

(1

)

(9,494

)

2,365

 

 

 

(7,130

)

Income taxes payable

 

 

57

 

125

 

 

 

182

 

Intercompany account

 

10,053

 

(6,780

)

(3,273

)

 

 

 

 

Net cash from operating activities

 

390

 

20,985

 

(730

)

 

20,645

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(2,773

)

(77

)

 

 

(2,850

)

Proceeds from disposal of assets

 

 

 

191

 

 

 

 

191

 

Other

 

 

 

(26

)

 

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

(2,608

)

(77

)

 

(2,685

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Change in revolving loan facilities

 

 

 

(28,644

)

 

 

 

 

(28,644

)

Retirement of outstanding senior notes

 

 

 

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 

10,000

 

 

 

 

 

10,000

 

Repayments of long-term debt

 

 

 

(9

)

 

 

 

 

(9

)

Other

 

(390

)

(414

)

(390

)

 

 

(1,194

Net cash from financing activities

 

(390

)

(19,067

)

(390

)

 

 

(19,847

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

 

 

(690

)

(1,197

)

 

 

(1,887

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, beginning of the period

 

 

 

968

 

2,474

 

 

 

3,442

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, end of the period

 

$

 

$

278

 

$

1,277

 

$

 

$

1,555

 

 

 

16



 

ITEM 2.  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 June 30, 2002 compared to three months ended June 30, 2001

Net sales were $40.8 million for the three months ended June 30, 2002, slightly higher than the net sales of $40.6 million reported for the three months ended June 30, 2001. Higher sales of tabletop and giftware products were largely offset by lower sales of seasonal products. Changes in normal product prices did not materially impact net sales.

Gross profit was $11.6 million for the three months ended June 30, 2002 compared to $12.2 million for the three months ended June 30, 2001.  Gross profit as a percentage of sales was 28.4% for the 2002 second quarter compared to 30.2% for the comparable 2001 period.  The 1.8 point gross profit percentage decrease is primarily due to the mix of products sold during the quarter and to higher provisions for sales allowances compared with the prior period.

Selling, general and administrative expenses were $15.6 million for both the three months ended June 30, 2002 and for the comparable period ended June 30, 2001. Reductions in administrative costs were offset by increased royalty expenses.

Included in operating income for 2001 was $0.3 million related to Farberware licensing fees which did not occur in 2002 due to the sale of all of the Company’s interest in the Farberware intellectual property as of December 31, 2001. Loss from operations was $4.0 million and $3.0 million for the second quarter of 2002 and 2001, respectively.

Interest expense was $5.0 million for the three months ended June 30, 2002 compared to $5.4 million in the same period of 2001. The decrease reflects the decline in the bank’s prime lending rate, the reduced amount of 11% Senior Notes outstanding, and decreased borrowings under the Company’s revolving credit facility.

The benefit for income taxes was $2.3 million for the three months ended June 30, 2002, an increase of $.2 million from the three months ended June 30, 2001 due to the increase in the net loss before income tax benefit. The effective income tax rate was 25% for both periods.

Net loss applicable to common stockholders was $7.7 million and $7.1 million for the three months ended June 30, 2002 and 2001, respectively, or $2.04 and $1.87 diluted per share respectively, on adjusted weighted average shares of 3,784,018 in both periods.

 

 

17



 

Six months ended June 30, 2002 compared to six months ended June 30, 2001

Net sales were $80.7 million for the six months ended June 30, 2002, a decrease from net sales of $82.3 million for the six months ended June 30, 2001. The $1.6 million sales decrease reflects reduced sales of certain fountain and candle product categories, partially offset by increased sales of seasonal products. Changes in normal product prices did not materially impact net sales.

Gross profit increased to $22.8 million for the six months ended June 30, 2002 from $22.1 million for the six months ended June 30, 2001. Gross profit as a percentage of sales was 28.2% for the six months ended June 30, 2002 compared to 26.8% for the comparable 2001 period. The 1.4 point gross profit percentage increase is primarily due to a favorable mix of products sold during the period.

Selling, general and administrative expenses decreased $0.8 million to $31.0 million for the six months ended June 30, 2002, as compared with $31.8 million for the comparable period ended June 30, 2001. The decrease is primarily due to reduced expenses related to the lower sales volume.

Included in operating income for the six months ended June 30, 2001was $0.8 million related to Farberware licensing fees which did not occur in 2002 due to the sale of all of the Company’s interest in the Farberware intellectual property as of December 31, 2001. Loss from operations was $8.2 million and $9.0 million for the first half of 2002 and 2001, respectively.

Interest expense was $10.1 million for the six months ended June 30, 2002 compared to $10.7 million in the same period of 2001. The decrease reflects the decline in the bank’s prime lending rate, the reduced amount of 11% Senior Notes outstanding, and decreased borrowings under the Company’s revolving credit facility.

The benefit for income taxes was $4.6 million for the six months ended June 30, 2002 compared to $4.9 million for the six months ended June 30, 2001. The effective income tax rate was 25% for both periods.

In January, 2002, the Company, through a wholly-owned subsidiary, purchased an aggregate of $2.5 million of its outstanding Notes on the open market, resulting in an extraordinary gain on early debt extinguishment, net of applicable taxes, of approximately $0.7 million.

As of January 1, 2002, the Company recorded a non-cash charge of $6.2 million or $1.65 per share for goodwill in accordance with SFAS 142. This charge is reflected as a cumulative effect of a change in accounting principle. See Note 7 to the condensed consolidated financial statements.

Net loss applicable to common stockholders for the six month periods ended in June 30, 2002 and 2001 was $21.1 million and $16.4 million, respectively, or $5.57 and $4.34, respectively, per basic and diluted share, on adjusted weighted average shares of 3,784,018 in both periods.

 

Liquidity and Capital Resources

Net cash used in operating activities for the six months ended June 30, 2002 was $12.3 million.  The major use of cash was the seasonal increase in inventories partially offset by the seasonal collection of accounts receivable.

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 $1.5 million for the six months ended June 30, 2002 and the Company expects to spend approximately $3.0 million during the remainder of 2002.  These expenditures relate primarily to investment in information technology, relocation of certain Rauch Christmas ball manufacturing activities from the Company’s Chester, SC facility to its primary manufacturing location in Gastonia, NC, and machinery, equipment and tools and dies for the Company’s manufacturing and distribution facilities.

The Company has a Senior Revolving Credit Facility (the “Facility”) dated April 16, 1997 (amended effective as of July 31, 1997, December 31, 1997, March 30, 1998, December 31, 1998,  March 26, 2001, August 13,

 

 

18



 

2001 and March 22, 2002) which provides for $110 million of borrowings, including a $30 million sub-limit for the issuance of standby and commercial letters of credit. On March 22, 2002, the term of the Facility was extended for an additional year and the facility now expires on April 15, 2003. The obligations of the Company under the 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. Borrowings made under the Revolving Credit Facility bear interest at a rate equal to, at the Company’s option, the Eurodollar Rate plus 375 basis points or the Prime Rate plus 100 basis points. The Revolving Credit Facility, as amended, contains customary covenants of the Company and the subsidiary borrowers, including but not limited to requiring minimum earnings before income taxes, depreciation, amortization, and certain adjustments (“EBITDA”), as defined, and limits on capital spending. The Company must maintain minimum availability requirements of $25 million during February and March of each year and minimum availability varying between $13.3 million and $10 million for the months from April through January ($12.5 million at June 30, 2002). The Company is in compliance with the covenants, as amended, as of June 30, 2002. Availability under the Revolving Credit Facility, net of outstanding letters of credit, was $27.1 million at June 30, 2002, resulting in additional borrowing capacity of $14.6 million net of the $12.5 million minimum excess availability requirement noted above.

The Company has a $10 million promissory note secured by certain real property and building improvements located in Mira Loma, California.  The note bears interest at a rate of 7.42% and is to be repaid in monthly installments until May, 2011 when a final payment of $8.1 million is due. At June 30, 2002 the balance outstanding was $9.8 million.

On April 30, 2002, the Company renewed its Wallace International de Puerto Rico, Inc. $1.0 million credit facility.  The renewed facility expires on March 15, 2003 and its terms require that the facility be paid down to zero for one 15 consecutive day period prior to that date. Borrowings under the facility bear interest at a rate equal to the Prime Rate plus 100 basis points. Availability under the facility was $0.3 million at June 30, 2002.

 

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 £250,000.  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 April 15, 2002 is due on demand and expires on October 30, 2002. Availability under the Overdraft Facility was £81,729 at June 30, 2002.

At June 30, 2002, the Company also had debt financing of $145.3 million of 11% Senior Notes (the “Notes”) which are due April 15, 2007 and require interest payments to be made semi-annually on April 15 and October 15. The Notes are redeemable in whole or in part, at the Company’s option, after April 15, 2002. In January, 2002, the Company, through a wholly-owned subsidiary, purchased an aggregate of $2.5 million of its outstanding Notes on the open market, resulting in an extraordinary gain, net of applicable taxes, of approximately $0.7 million. The Company may from time to time in the future purchase additional Notes on the open market as may be allowed under the terms of its Revolving Credit Facility and the terms of its Senior Notes Indenture.

The Company’s ability to pay dividends is restricted by the terms of the Revolving Credit Facility and the Note Indenture.

The Company’s level of indebtedness has several 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 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 Facility will be sufficient to finance the Company’s working capital requirements, provide for all known obligations of the

 

 

19



 

Company (including the obligations of the Company under the $145.3 million Notes outstanding and under its operating leases) and fund planned capital expenditures through December 31, 2002.

 

Significant Accounting Policies

 

The Company’s management is required to make estimates and assumptions in order to prepare financial statements in conformity with accounting principles generally accepted in the United States of America.  While actual results could differ from these estimates and assumptions, the Company does not believe that such differences would have a material effect on its results of operations or financial position. The Company’s significant accounting policies are included in Note 1 of the Notes to the consolidated financial statements contained in Form 10-K for the year ended December 31, 2001. The most significant accounting policies or estimates that underlie the preparation of the consolidated financial statements are the revenue recognition and depreciation policies, in addition to the judgments used to review long-lived assets, including goodwill and other intangible assets, for impairment. Additionally, the Company’s depreciation policy reflects judgments on the estimated useful life of assets.

 

Accounting Pronouncements

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” for fiscal years starting after June 15, 2002.  This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  The Company does not believe that the adoption of SFAS No. 143 will have a significant impact on its financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. SFAS 144 will be effective for fiscal years beginning after December 15, 2001.  The Company adopted SFAS 144 as required in the first quarter of 2002.  The adoption of SFAS 144 did not have a significant impact on financial position or the results of operations.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections.” One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, the Company will follow APB 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The Company is currently evaluating the impact that adoption of SFAS No. 145 may have on its financial statement presentation.

 

In June 2002, the FASB issued SFAS 146, “Accounting for Cost Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94–3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” . SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on its financial statements.

 

 

20



 

ITEM 3.  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 $145.3 million of 11% Senior Notes due April 15, 2007 that had a current market value of $81.4 million at June 30, 2002 based upon recent private market trades.  There is inherent roll-over risk as these borrowings 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, 2001, 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.

 

 

21



 

PART II-OTHER INFORMATION

 

ITEM 6. Exhibits And Reports On Form 8-K

(a)       Exhibits:

 

EX-10.1          Amendment No. 3 dated as of January 1, 2002 to Employment Agreement dated as of August 16, 1991, between Alan R. Kanter and the Company

 

EX-10.2          Syratech Corporation 2002 Stock Incentive Plan

 

(b)                     Reports on Form 8-K:

There were no reports filed on Form 8-K during the six months ended June 30, 2002.

 

 

22



 

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:  August 14, 2002

 

 

 

 

/s/ Gregory W. Hunt

 

 

Gregory W. Hunt

 

 

Senior Vice President, Chief Financial Officer and Treasurer

 

 

 

CERTIFICATION

 

Each of the undersigned hereby certifies in his capacity as an officer of Syratech Corporation. (the “Company”) that the Quarterly Report of the Company on Form 10-Q for the periods ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such periods and the results of operations of the Company for such periods.

 

 

Dated:  August 14, 2002

 

 

 

 

 

 

 

 

 

 

/s/ Robert Meers

 

 

Robert Meers

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

/s/ Gregory W. Hunt

 

 

Gregory W. Hunt

 

 

Senior Vice President, Chief Financial Officer and Treasurer

 

 

23