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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 March 31, 2003

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)    YES   o   NO   ý

 

Number of Shares of Common Stock, Par Value $0.01 per share, outstanding at March 31, 2003 - 3,784,018

 

 


 


 

INDEX

 

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002

 

 

 

Condensed Consolidated Income Statements of Operations for the three month periods ended March 31, 2003 and 2002

 

 

 

Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2003 and 2002

 

 

 

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

 

 

Item 4.

Controls and Procedures

 

 

PART II - OTHER INFORMATION

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

Signature

 



 

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

March 31,
2003

 

December 31,
2002

 

ASSETS

 

(Unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents 

 

$

853

 

$

1,399

 

Accounts receivable, net

 

26,274

 

51,582

 

Inventories 

 

60,213

 

58,198

 

Deferred income taxes.

 

13,167

 

20,649

 

Prepaid expenses and other

 

3,056

 

2,627

 

Assets held for sale 

 

 

3,395

 

Total current assets

 

103,563

 

137,850

 

 

 

 

 

 

 

Property, plant and equipment, net

 

38,492

 

59,742

 

Other assets, net

 

3,893

 

5,154

 

Total

 

$

145,948

 

$

202,746

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Revolving loan facilities and notes payable 

 

$

3,945

 

$

23,383

 

Accounts payable

 

8,099

 

8,107

 

Accrued expenses

 

8,993

 

11,887

 

Accrued interest

 

6,148

 

3,586

 

Accrued compensation

 

2,242

 

3,529

 

Accrued advertising

 

2,967

 

3,945

 

Deferred gain

 

1,546

 

 

Income taxes payable

 

234

 

32

 

Liabilities held for sale 

 

 

645

 

Total current liabilities 

 

34,174

 

55,114

 

 

 

 

 

 

 

Long - term debt 

 

119,500

 

153,584

 

Deferred income taxes 

 

8,434

 

15,434

 

Pension liability 

 

2,743

 

2,674

 

Long-term deferred gain

 

4,121

 

 

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 $17,451 and $16,419 in 2003 and 2002, respectively)

 

35,451

 

34,419

 

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

 

38

 

38

 

Deficit

 

(58,200

)

(58,392

)

Accumulated other comprehensive loss

 

(313

)

(125

)

Total stockholders’ equity 

 

(23,024

)

(24,060

)

Total

 

$

145,948

 

$

202,746

 

 

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 March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Net sales

 

$

40,673

 

$

38,251

 

Cost of sales

 

29,808

 

27,340

 

 

 

 

 

 

 

Gross profit

 

10,865

 

10,911

 

 

 

 

 

 

 

Selling, general and administrative expenses 

 

13,510

 

15,146

 

 

 

 

 

 

 

Operating income (loss) from continuing operations 

 

(2,645

(4,235

)

 

 

 

 

 

 

Interest expense 

 

(4,239

)

(4,911

)

 

 

 

 

 

 

Gain on extinguishment of debt

 

9,040

 

1,236

 

 

 

 

 

 

 

Interest income 

 

1

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes 

 

2,157

 

(7,910

)

 

 

 

 

 

 

Provision (benefit) for income taxes 

 

880

 

(1,812

)

 

 

 

 

 

 

Income (loss) from continuing operations before cumulative effect of a change in accounting principle

 

1,277

 

(6,098

)

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

Loss from operations of discontinued subsidiaries

 

(53

)

(129

)

 

 

 

 

 

 

Income (loss) before cumulative effect of a change in accounting principle

 

1,224

 

(6,227

)

 

 

 

 

 

 

Cumulative effect of a change in accounting principle

 

 

(6,225

)

 

 

 

 

 

 

Net income (loss)

 

1,224

 

(12,452

)

 

 

 

 

 

 

Preferred stock dividends accrued 

 

1,032

 

921

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

192

 

$

(13,373

)

 

 

 

 

 

 

Basic and diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before cumulative effect of a change in accounting principle 

 

$

0.34

 

$

(1.61

)

 

 

 

 

 

 

 

 

Loss from operations of discontinued subsidiaries 

 

(0.01

)

(0.03

)

 

 

 

 

 

 

Cumulative effect of change in accounting principle 

 

 

(1.65

)

 

 

 

 

 

 

Preferred stock dividends accrued

 

(0.28

)

(0.24

)

Net income (loss) per common share

 

$

0.05

 

$

(3.53

)

 

 

 

 

 

 

Weighted average number of shares outstanding

 

3,784

 

3,784

 

 

See notes to consolidated financial statements.

 

2



 

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

1,224

 

$

(12,452

)

Net  loss from discontinued operations 

 

53

 

129

 

Cumulative effect of accounting change

 

 

 

6,225

 

Income (loss) from continuing operations

 

1,277

 

(6,098

)

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization 

 

2,442

 

2,406

 

Deferred income taxes 

 

482

 

(2,036

)

Gain on extinguishment of debt

 

(9,040

)

(1,236

)

Amortization of gain on disposal of assets 

 

(418

)

 

Pension liability 

 

69

 

(578

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable 

 

25,308

 

24,775

 

Inventories 

 

(2,015

)

(7,538

)

Prepaid expenses and other 

 

(475

)

(811

)

Accounts payable and accrued expenses 

 

(2,605

)

(2,662

)

Income taxes payable 

 

202

 

146

 

Net cash provided by (used in)operating activities from continuing operations  

 

15,227

 

6,368

 

Net cash provided by (used in) operating activities from discontinued operations 

 

(53

)

(254

)

Net cash provided by (used in) operating activities

 

15,174

 

6,114

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment 

 

(683

)

(681

)

Proceeds from disposal of assets

 

16,628

 

 

Other 

 

(13

)

(2

)

Net cash provided by (used in) investing activities from continuing operations 

 

15,932

 

(683

)

Net cash provided by (used in) investing activities from discontinued operations 

 

2,750

 

(6

)

Net cash provided by (used in) investing activities 

 

18,682

 

(689

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Change in revolving loan facilities and notes payable 

 

(19,289

)

(7,415

)

Change in outstanding senior notes & loan

 

(14,925

)

(1,203

)

Repayments of promissory note

 

 

(37

)

Deferred financing costs and other

 

 

(550

)

Net cash provided by  (used in) financing activities

 

(34,214

)

(9,205

)

 

 

 

 

 

 

Effect of exchange rate changes

 

(188

)

(20

)

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents 

 

(546

)

(3,800

)

Cash and equivalents, beginning of period

 

1,399

 

4,602

 

Cash and equivalents, end of period

 

$

853

 

$

802

 

 

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 2003 presentation. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2002 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. DISCONTINUED OPERATION

 

In December 2002 the Company formalized its decision to offer for sale its indirect wholly owned subsidiary, C.J. Vander Ltd. and its subsidiaries.  The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”)” as of January 1, 2002. Accordingly, results of this operation have been classified as discontinued and prior periods have been restated. On March 21, 2003 the Company through an indirect wholly-owned subsidiary sold C. J. Vander Ltd. and its subsidiaries to HLW 179 Limited, a company led by the existing management of C. J. Vander Ltd. Proceeds of the sale net of expected selling costs were approximately $2,750. In connection with the sale, two subsidiaries of the Company entered into agreements to supply certain products to the new company and one of its subsidiaries. The Company recognized a one-time charge of $5,305 to reduce this business to fair value less costs to sell which was recorded in December 2002. During the three months ended March 31, 2003 net loss from discontinued operations was $53.

 

Net sales and net loss from discontinued operations are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Net sales

 

$

1,675

 

$

1,690

 

Net loss from discontinued operations

 

$

(53

)

$

(129

)

 

4



 

3. ASSET SALE

 

On January 15, 2003, the Company through an indirect wholly-owned subsidiary sold its warehouse property in Mira Loma CA (“the Property”) to Industrial Developments International, Inc. (“Buyer”). The purchase price of $26,750 was partially paid by the Buyer’s assumption of $9,787 of the Company’s indebtedness related to the Property and the remainder was paid in cash. Simultaneously with the sale of the Property, the Buyer leased the Property back to the Company. The lease agreement provides for gradual reductions in the square footage leased by the Company during its 66 month term. A gain of $6,085 related to the sale of the Property will be recognized over the term of the lease. In the three months ended March 31, 2003, $418 of the gain was recognized, and $5,667 has been deferred to future periods, of which $4,121 is classified as long term.

 

4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

Three Months Ended March 31,

 

 

 

2003

 

2002

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

1,188

 

$

1,340

 

Income taxes

 

$

374

 

$

1,063

 

 

 

 

 

 

 

Supplemental schedule of non-cash financing activities:

 

 

 

 

 

Accrued cumulative redeemable preferred stock dividends

 

$

1,032

 

$

921

 

 

5. INVENTORIES

 

Inventories consisted of the following:

 

 

 

March 31,
2003

 

December 31,
2002

 

 

 

 

 

 

 

Raw materials

 

$

8,537

 

$

7,993

 

Work-in-process

 

5,573

 

2,219

 

Finished goods

 

46,103

 

47,986

 

 

 

 

 

 

 

Total

 

$

60,213

 

$

58,198

 

 

 

5



 

6. INCOME TAXES

 

The provision for income taxes for the three month period ended March 31, 2003 has been computed using the estimated effective full year tax rate of 40.8%. The tax rate used for the three month period ending March 31, 2002 was 22.9%. The rate increase is due to taxable gains on the extinguishment of debt and the sale of the Company’s Mira Loma, California facility recorded during the period, which changed the mix of foreign and domestic taxable income.

 

7. REVOLVING LOAN FACILITIES AND NOTES PAYABLE

 

The Company has a Senior Revolving Credit Facility (the “Revolving Credit 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, March 22, 2002, November 12, 2002, December 18, 2002 and March 20, 2003). The obligations of the Company under the  Revolving Credit 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 its foreign subsidiary’s outstanding capital stock. The Revolving Credit Facility as amended, provides for borrowings of up to $86,364 with borrowing capacity related to inventory limited to a maximum of $55,000. The Revolving Credit Facility expires on April 15, 2004. The December 18, 2002 amendment provides for repurchases of the Company’s 11% Senior Notes due 2007 (the “Senior Notes”) subject to approval of each transaction by the administrative agent for the lenders. The Company must maintain minimum EBITDA (i) for the period of one Fiscal Quarter ending March 31, 2003, of negative $5,565, (ii) for the period of two consecutive Fiscal Quarters ending June 30, 2003, of negative $9,938, (iii) for the period of three consecutive Fiscal Quarters ending September 30, 2003, of $5,000, and (iv) for the period of four consecutive Fiscal Quarters ending December 31, 2003 and on the last day of each Fiscal Quarter thereafter of $15,000. Borrowings made under the Revolving Credit Facility, other than for repurchases of Senior Notes, 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. Borrowings made under the  Revolving Credit Facility for the repurchase of Senior Notes bear interest at a rate equal to, at the Company’s option, the Eurodollar Rate plus 500 basis points or the Prime Rate plus 225 basis points. As amended, the Company must maintain minimum borrowing availability of $10,000 until October 15, 2003, $11,250 on October 16, 2003 increasing gradually to $20,000 for the period from December 3, 2003 through January 2004, $25,000 during February and March of 2004 and $10,000 thereafter.

 

On March 20, 2003 the Revolving Credit Facility was amended to consent to the sale of C. J. Vander Ltd. and its subsidiaries (Note 2). At March 31, 2003, there was $3,945 outstanding under the Revolving Credit Facility and of these borrowings, $3,945 were at the Prime Rate plus 100 basis points. The Company is in compliance with the covenants, as amended, as of March 31, 2003. Availability under the Revolving Credit Facility, net of outstanding letters of credit and minimum availability requirements, was $24,471 at March 31, 2003.

 

6



 

At March 31, 2003, the Company also had debt financing with third parties of $119,500 of 11% Senior Notes which are due April 15, 2007 and require interest payments to be made semi-annually on April 15 and October 15. The Senior Notes are general unsecured obligations of the Company and rank pari passu in right of payment with all current and future unsubordinated indebtedness of the Company, including borrowings under the Revolving Credit Facility. However, all borrowings under the Revolving Credit Facility are secured by a first priority lien on the accounts receivable and inventory of the Company and its domestic subsidiaries (“Guarantor Subsidiaries”) but not of its foreign subsidiaries (See Note 12). Consequently, the obligations of the Company under the Senior Notes are effectively subordinated to its obligations under the Revolving Credit Facility to the extent of such assets. The Senior Notes became redeemable, in whole or in part, at the Company’s option after April 15, 2002.

 

During the three months ended March 31, 2003 the Company, purchased $24,446 of its outstanding Senior Notes on the open market, resulting in a pre-tax gain of approximately $9,040.

 

Subsequent to March 31, 2003, the Company, purchased an additional $1,229 of its outstanding Senior Notes on the open market, resulting in a pre-tax gain of approximately $406 which will be recorded in the second quarter of 2003.

 

In May 2003, the Company renewed its Wallace International de Puerto Rico, Inc. credit facility. The renewed facility has been reduced from $1,000 to $500 and expires on January 30, 2004. 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 200 basis points.

 

8. COMPREHENSIVE INCOME/(LOSS)

 

Comprehensive income (loss) is comprised of net income, foreign currency translation adjustments, and pension adjustments related to recording the minimum pension liability and maximum intangible asset. Accumulated other comprehensive income by component is as follows:

 

 

 

March 31,
2003

 

December 31,
2002

 

 

 

 

 

 

 

Translation adjustment

 

$

(269

)

$

(81

)

 

 

 

 

 

 

Minimum pension adjustment

 

(44

)

(44

)

Total accumulated other comprehensive income

 

$

(313

)

$

(125

)

 

7



 

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 March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Tabletop and Giftware

 

$

34,618

 

$

34,096

 

Seasonal

 

6,055

 

4,155

 

Total

 

$

40,673

 

$

38,251

 

 

10. EMPLOYEE BENEFIT PLANS

 

At March 31, 2003, 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 $2,624 and certain other benefits.

 

11. SUBSEQUENT EVENT

 

On April 16, 2003, the Company entered into a licensing agreement with V.E.W. LTD to produce a line of branded sterling silver, silverplate and stainless steel flatware and sterling silver giftware in association with designer Vera Wang. The agreement provides for minimum guaranteed royalties of $250 in 2003 and an aggregate of $1,925 for the 5 year period ending December 31, 2008. The Company is also committed to advertising expenditures of $113 in 2003 and an aggregate of $5,000 for the 5 year period ending December 31, 2008.

 

12. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS

 

The following supplemental consolidating financial statements as of  March 31, 2003 and December 31, 2002, and for each of the three month periods ended March  31, 2003 and 2002, 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 2003 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

March 31, 2003

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents 

 

$

 

 

$

143

 

$

710

 

$

 

 

$

853

 

Accounts receivable, net 

 

 

 

22,994

 

3,280

 

 

 

26,274

 

Inventories 

 

 

 

60,079

 

93

 

41

 

60,213

 

Deferred income taxes 

 

(2,302

)

15,469

 

 

 

 

 

13,167

 

Prepaid expenses and other 

 

113

 

2,760

 

183

 

 

 

3,056

 

Total current assets 

 

(2,189

)

101,445

 

4,266

 

41

 

103,563

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net 

 

 

 

38,410

 

129

 

(47

)

38,492

 

Other assets, net 

 

4,166

 

809

 

 

 

(1,082

)

3,893

 

Investment

 

49,665

 

26,903

 

 

(76,568

)

 

Total

 

$

51,642

 

$

167,567

 

$

4,395

 

$

(77,656

)

$

145,948

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Revolving loan facilities and notes payable 

 

$

 

 

$

3,945

 

$

 

 

$

 

 

$

3,945

 

Accounts payable

 

 

 

4,080

 

4,019

 

 

 

8,099

 

Accrued expenses

 

40

 

6,434

 

70

 

2,449

 

8,993

 

Accrued interest

 

8,369

 

(2,221

)

 

 

 

6,148

 

Accrued compensation

 

 

 

1,943

 

299

 

 

 

2,242

 

Accrued advertising

 

 

 

2,967

 

 

 

 

 

2,967

 

Deferred gain

 

 

 

1,546

 

 

 

 

 

1,546

 

Income taxes payable

 

(6,083

)

6,359

 

(302

)

260

 

234

 

Total current liabilities 

 

2,326

 

25,053

 

4,086

 

2,709

 

34,174

 

Long-term debt

 

165,000

 

 

 

 

(45,500

)

119,500

 

Deferred income taxes 

 

5,515

 

2,919

 

 

 

 

 

8,434

 

Pension liability and other long-term liabilities

 

 

 

2,743

 

 

 

 

 

2,743

 

Deferred Gain

 

 

 

4,121

 

 

 

 

 

4,121

 

Intercompany (receivable) payable 

 

13,796

 

25,354

 

(38,121

)

(1,029

)

 

 

Stockholders’ equity (deficit)

 

(134,995

)

107,377

 

38,430

 

(33,836

)

(23,024

)

Total 

 

$

51,642

 

$

167,567

 

$

4,395

 

$

(77,656

)

$

145,948

 

 

9



 

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2002

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents 

 

$

 

 

$

331

 

$

1,068

 

$

 

 

$

1,399

 

Accounts receivable, net 

 

 

 

49,167

 

2,415

 

 

 

51,582

 

Inventories 

 

 

 

57,729

 

428

 

41

 

58,198

 

Deferred income taxes 

 

5,829

 

14,820

 

 

 

 

 

20,649

 

Prepaid expenses and other 

 

113

 

2,235

 

279

 

 

 

2,627

 

Assets held for sale 

 

 

 

 

3,395

 

 

 

3,395

 

Total current assets 

 

5,942

 

124,282

 

7,585

 

41

 

137,850

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net 

 

 

 

59,653

 

140

 

(51

)

59,742

 

Other assets, net 

 

4,737

 

1,018

 

 

 

(601

)

5,154

 

Investment 

 

49,665

 

11,978

 

 

 

(61,643

)

 

Total 

 

$

60,344

 

$

196,931

 

$

7,725

 

$

(62,254

)

$

202,746

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Revolving loan facilities and notes payable 

 

$

 

 

$

23,383

 

$

 

 

$

 

 

$

23,383

 

Accounts payable

 

 

 

5,211

 

2,896

 

 

 

8,107

 

Accrued expenses

 

40

 

10,746

 

1,101

 

 

 

11,887

 

Accrued interest

 

3,832

 

(246

)

 

 

 

3,586

 

Accrued compensation

 

 

 

2,774

 

755

 

 

 

3,529

 

Accrued advertising

 

 

 

3,945

 

 

 

 

 

3,945

 

Income taxes payable

 

(6,083

)

3,496

 

(90

)

2,709

 

32

 

Liabilities held for sale 

 

 

 

 

 

645

 

 

 

645

 

Total current liabilities 

 

(2,211

)

49,309

 

5,307

 

2,709

 

55,114

 

Long-term debt 

 

165,000

 

9,638

 

 

 

(21,054

)

153,584

 

Deferred income taxes 

 

5,515

 

9,919

 

 

 

 

 

15,434

 

Pension liability

 

 

 

2,674

 

 

 

 

 

2,674

 

Intercompany (receivable) payable 

 

13,570

 

22,406

 

(34,584

)

(1,392

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

(121,530

)

102,985

 

37,002

 

(42,517

)

(24,060

)

Total 

 

$

60,344

 

$

196,931

 

$

7,725

 

$

(62,254

)

$

202,746

 

 

10



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

42,175

 

$

8,329

 

$

(9,831

)

$

40,673

 

Cost of sales

 

 

 

34,271

 

5,368

 

(9,831

) 

29,808

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

7,904

 

2,961

 

 

 

10,865

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses 

 

113

 

11,333

 

2,064

 

 

 

13,510

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations 

 

(113

(3,429

)

897

 

 

 

(2,645

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,221

)

900

 

82

 

 

 

(4,239

)

Gain on extinguishment of debt

 

9,040

 

 

 

 

 

 

 

9,040

 

Interest income

 

 

 

1

 

0

 

 

 

1

 

Income (loss) from continuing operations before provision (benefit) for income taxes 

 

3,706

 

(2,528

)

979

 

 

 

2,157

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes 

 

8,131

 

(7,377

)

126

 

 

 

880

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(4,425

)

4,849

 

853

 

 

1,277

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations: Loss from operations of discontinued subsidiaries

 

 

 

(21

)

(32

)

 

 

(53

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(4,425

)

4,828

 

821

 

 

 

1,224

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued 

 

1,032

 

 

 

 

1,032

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(5,457

)

$

4,828

 

$

821

 

$

 

$

192

 

 

11



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2002

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

31,384

 

$

18,208

 

$

(11,341

)

$

38,251

 

Cost of sales

 

 

 

23,419

 

15,262

 

(11,341

)

27,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

7,965

 

2,946

 

 

10,911

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses 

 

113

 

12,918

 

2,115

 

 

 

15,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations

 

(113

)

(4,953

)

831

 

 

 

(4,235

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,186

)

131

 

144

 

 

 

(4,911

)

Gain on extinguishment of debt

 

1,236

 

 

 

 

 

 

 

1,236

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes 

 

(4,063

)

(4,822

)

975

 

 

(7,910

)

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(650

)

(1,301

)

139

 

 

 

(1,812

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before cumulative effect of a change in accounting principle

 

(3,413

)

(3,521

)

836

 

 

(6,098

)

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

Loss from operations of discontinued subsidiaries

 

 

 

 

 

(129

)

 

 

(129

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) before cumulative effect of a change in accounting principle

 

(3,413

)

(3,521

)

707

 

 

(6,227

)

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle

 

 

 

(6,225

)

 

 

 

 

(6,225

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(3,413

)

(9,746

)

707

 

 

(12,452

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued 

 

921

 

 

 

 

 

 

 

921

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(4,334

)

$

(9,746

)

$

707

 

$

 

$

(13,373

)

 

12



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2003

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,425

)

$

4,828

 

$

821

 

$

 

$

1,224

 

Net  loss from discontinued operations 

 

 

21

 

32

 

 

53

 

Income (loss) from continuing operations

 

(4,425

)

4,849

 

853

 

 

1,277

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

571

 

1,844

 

27

 

 

 

2,442

 

Deferred income taxes

 

8,131

 

(7,649

)

 

 

 

 

482

 

Gain on disposal of assets

 

 

 

(418

)

 

 

 

(418

)

Gain on extinguishment of debt before income taxes

 

(9,040

)

 

 

 

 

 

 

(9,040

)

Pension liability 

 

 

 

69

 

 

 

 

 

69

 

Increase (decrease) in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

26,173

 

(865

)

 

 

25,308

 

Inventories

 

 

 

(2,350

)

335

 

 

 

(2,015

)

Prepaid expenses and other

 

 

(571

)

96

 

 

 

(475

)

Accounts payable and accrued expenses

 

4,537

 

(6,778

)

(364

)

 

 

(2,605

)

Income taxes payable

 

 

414

 

(212

)

 

 

202

 

Intercompany account

 

226

 

3,311

 

(3,537

)

 

 

 

Net cash provided by (used in) operating activities from continuing operations 

 

 

18,894

 

(3,667

)

 

15,227

 

Net cash provided by (used in) operating activities from discontinued operations 

 

 

 

(3,566

)

3,513

 

 

 

(53

)

Net cash provided by (used in) operating activities

 

 

15,328

 

(154

)

 

 

15,174

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(667

)

(16

)

 

 

(683

)

Proceeds from disposal of assets

 

 

 

16,628

 

 

 

 

 

16,628

 

Other

 

 

 

(13

)

 

 

 

 

(13

)

Net cash provided by (used in) investing activities from continuing operations 

 

 

15,948

 

(16

)

 

15,932

 

Net cash provided by (used in) investing activities from discontinued operations

 

 

 

2,750

 

 

 

 

 

2,750

 

Net cash provided by (used in) investing activities

 

 

18,698

 

(16

)

 

18,682

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Change in revolving loan facilities

 

 

 

(19,289

)

 

 

 

(19,289

)

Change in outstanding Senior Notes & Loan

 

 

 

(14,925

)

 

 

 

 

(14,925

)

Repayments of Promissory Note

 

 

 

 

 

 

 

 

Deferred financing costs and other

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities from continuing operations 

 

 

(34,214

)

 

 

(34,214

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss & exchange rate changes

 

 

 

 

 

(188

)

 

 

(188

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

 

(188

)

(358

)

 

(546

)

Cash and equivalents, beginning of the period

 

 

331

 

1,068

 

 

1,399

 

Cash and equivalents, end of the period 

 

$

 

$

143

 

$

710

 

$

 

$

853

 

 

13



 

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2002

 

 

 

Issuer/
Guarantor
Parent

 

Guarantor
Subsidiaries

 

Non
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,413

)

$

(9,746

)

$

707

 

$

 

$

(12,452

)

Net  loss from discontinued operations 

 

 

 

 

 

129

 

 

 

129

 

Cumulative effect of accounting change

 

 

 

6,225

 

 

 

 

 

6,225

 

Income (loss) from continuing operations

 

(3,413

)

(3,521

)

836

 

 

(6,098

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization 

 

525

 

1,830

 

51

 

 

 

2,406

 

Deferred income taxes 

 

(650

)

(1,386

)

 

 

 

 

(2,036

)

Gain on extinguishment of debt before income taxes

 

(1,236

)

 

 

 

 

 

 

(1,236

)

Pension liability 

 

 

 

(578

)

 

 

 

 

(578

)

Increase (decrease) in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable 

 

 

 

23,521

 

1,254

 

 

 

24,775

 

Inventories 

 

 

 

(7,547

)

9

 

 

 

(7,538

)

Prepaid expenses and other 

 

 

(713

)

(98

)

 

 

(811

)

Accounts payable and accrued expenses 

 

4,537

 

(6,406

)

(793

)

 

 

(2,662

)

Income taxes payable

 

 

303

 

(157

)

 

 

146

 

Intercompany account

 

787

 

376

 

(1,163

)

 

 

 

 

Net cash provided by (used in) operating activities from continuing operations 

 

550

 

5,879

 

(61

)

 

 

6,368

 

Net cash provided by (used in) operating activities from discontinued operations 

 

 

 

 

 

(254

)

 

 

(254

)

Net cash provided by (used in) operating activities

 

550

 

5,879

 

(315

)

 

 

6,114

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment 

 

 

 

(674

)

(7

)

 

 

(681

)

Other 

 

 

 

(2

)

 

 

 

 

(2

)

Net cash provided by (used in) investing activities from continuing operations 

 

 

(676

)

(7

)

 

(683

)

Net cash used in investing activities from discontinued operations 

 

 

 

 

 

(6

)

 

 

(6

)

Net cash provided by (used in) investing activities

 

 

(676

)

(13

)

 

 

(689

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Change in revolving loan facilities and notes payable 

 

 

 

(7,415

)

 

 

 

 

(7,415

)

Change in outstanding Senior Notes & Loan

 

 

 

(1,203

)

 

 

 

 

(1,203

)

Repayments of Promissory Note

 

 

 

(37

)

 

 

 

 

(37

)

Deferred financing costs and other

 

(550

)

110

 

(110

)

 

 

(550

)

Net cash provided by  (used in) financing activities from continuing operations 

 

(550

)

(8,545

)

(110

)

 

 

(9,205

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes

 

 

 

 

 

(20

)

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents 

 

 

 

(3,342

)

(458

)

 

 

(3,800

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, beginning of the period

 

 

 

3,249

 

1,353

 

 

 

4,602

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, end of the period

 

$

 

$

(93

)

$

895

 

$

 

$

802

 

 

14



 

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, 2003 compared to three months ended March 31, 2002

 

Net sales were $40.7 million for the three months ended March 31, 2003, an increase of 6.3% from net sales of $38.3 million for the three months ended March 31, 2002. The $2.4 million increase is primarily due to closeout sales of certain seasonal and giftware products.  Changes in normal product prices did not materially impact net sales.

 

Gross profit was $10.9 million for the three months ended March 31, 2003 and also for the three months ended March 31, 2002. Gross profit as a percentage of sales was 26.7% for the 2003 first quarter compared to 28.5% for the comparable 2002 period. The 1.8 point gross profit percentage decrease is primarily due to increased sales of closeout inventory at lower margins during the period. The Company is continuing its program to reduce its warehousing space requirements by closing out excess inventory. Gross profit for the three months ended March 31, 2003 also included $.4 million related to the gain on the sale of the Company's Mira Loma, California warehouse facility on January 15, 2003. See Note 3 to the condensed consolidated financial statements.

 

Selling, general and administrative expenses (“S, G & A expenses”) decreased $1.6 million to $13.5 million for the three months ended March 31, 2003, as compared with $15.1 million for the comparable period ended March 31, 2002. The improvement reflects reductions in personnel, showroom and sourcing facility expenses related to restructuring and cost improvement programs initiated in 2002.

 

A $9.0 million gain on extinguishment of debt for the three months ended March 31, 2003 is related to the Company’s purchase of $24.4 million of its Senior Notes on the open market. The Company purchased $2.5 million of its Senior Notes and recorded a gain of $1.2 million during the three months ended March 31, 2002.

 

15



 

Interest expense was $4.2 million for the three months ended March 31, 2003 compared to $4.9 million in the same period of 2002. This decrease reflects the decline in the bank’s prime lending rate, the reduced amount of 11% Senior Notes outstanding, partially offset by increased borrowings under the Company’s revolving credit facility.

 

The provision for income taxes was $.9 million for the three months ended March 31, 2003 versus a benefit from income taxes of $1.8 million recorded for the three months ended March 31, 2002. The gain on debt extinguishment and the gain on the sale of the Company’s Mira Loma, California warehouse property noted above created taxable income during the 1st quarter of 2003 compared with a loss for the 1st quarter of 2002. The provision for income taxes for the three month period ended March 31, 2003 has been computed using the estimated effective full year tax rate of 40.8%. The tax rate used for the three month period ending March 31, 2002 was 22.9%. The rate increase is due to the 2003 taxable gains noted above which changed the mix of foreign and domestic taxable income.

 

The Company recorded a loss from discontinued operations of $.1 million in both the first quarter of 2003 and the first quarter of 2002 related to the sale of its C.J. Vander Ltd. subsidiary. See Note 2 to the condensed consolidated financial statements. In the first quarter of 2002, the Company recorded a non-cash charge of $6.2 million or $1.65 per share related to the impairment of goodwill.  This charge was reflected as a cumulative effect of a change in accounting principle.

 

Net income applicable to common stockholders was $.2 million or $.05 per share for the three months ended March 31, 2003 compared with a loss of $13.4 million or $3.53 per share for the comparable 2002 period, on adjusted weighted average shares of 3,784,018 in both periods.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities for the three months ended March 31, 2003 was $15.2 million. The major source of cash was the seasonal collection of accounts receivable offset partially by the seasonal increase in inventories. Approximately $2.7 million was provided by the sale of the Company’s C.J. Vander Ltd. subsidiary noted above. During the 1st quarter of 2003, the Company also received cash proceeds of approximately $16.6 million related to the sale of its Mira Loma, California warehouse property.

 

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 $0.7 million for the three months ended March 31, 2003 and the Company expects to spend approximately $4.3 million during the remainder of 2003.  These expenditures relate primarily to investment in information technology, and machinery, equipment and tools and dies for the Company’s manufacturing and distribution facilities.

 

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The Company has a Senior Revolving Credit Facility (the “Revolving Credit 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, March 22, 2002, November 12, 2002, December 18, 2002 and March 20, 2003). The obligations of the Company under the  Revolving Credit 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 its foreign subsidiary’s outstanding capital stock. The Revolving Credit Facility as amended, provides for borrowings of up to $86.4 million with borrowing capacity related to inventory limited to a maximum of $55 million. The Revolving Credit Facility expires on April 15, 2004. The December 18, 2002 amendment provides for repurchases of the Company’s 11% Senior Notes due 2007 (the “Senior Notes”) subject to approval of each transaction by the administrative agent for the lenders. The Company must maintain minimum EBITDA (i) for the period of one Fiscal Quarter ending March 31, 2003, of negative $5.6 million, (ii) for the period of two consecutive Fiscal Quarters ending June 30, 2003, of negative $9.9 million, (iii) for the period of three consecutive Fiscal Quarters ending September 30, 2003, of $5 million, and (iv) for the period of four consecutive Fiscal Quarters ending December 31, 2003 and on the last day of each Fiscal Quarter thereafter of $15 million. Borrowings made under the  Revolving Credit Facility, other than for repurchases of Senior Notes, 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. Borrowings made under the  Revolving Credit Facility for the repurchase of Senior Notes bear interest at a rate equal to, at the Company’s option, the Eurodollar Rate plus 500 basis points or the Prime Rate plus 225 basis points. As amended, the Company must maintain minimum borrowing availability of $10 million until October 15, 2003, $11.3 million on October 16, 2003 increasing gradually to $20 million for the period from December 3, 2003 through January 2004, $25 million during February and March of 2004 and $10 million thereafter.

 

On March 20, 2003 the  Revolving Credit Facility was amended to consent to the sale of C. J. Vander Ltd. and its subsidiaries. At March 31, 2003, there was $3.9 million outstanding under the Revolving Credit Facility and of these borrowings, $3.9 million were at the Prime Rate plus 100 basis points. The Company is in compliance with the covenants, as amended, as of March 31, 2003. Availability under the Revolving Credit Facility, net of outstanding letters of credit and minimum availability requirements, was $24.5 million at March 31, 2003.

 

At March 31, 2003, the Company also had debt financing with third parties of $119.5 million of 11% Senior Notes which are due April 15, 2007 and require interest payments to be made semi-annually on April 15 and October 15. The Senior Notes are general unsecured obligations of the Company and rank pari passu in right of payment with all current and future unsubordinated indebtedness of the Company, including borrowings under the Revolving Credit Facility. However, all borrowings under the Revolving Credit Facility are secured by a first priority lien on the accounts receivable and inventory of the Company and its domestic subsidiaries (“Guarantor Subsidiaries”) but not of its foreign subsidiaries.  Consequently, the obligations of the Company under the Senior Notes are effectively subordinated to its obligations under the Revolving Credit Facility to the extent of such assets. The Senior Notes became redeemable, in whole or in part, at the Company’s option after April 15, 2002.

 

During the three months ended March 31, 2003 the Company, purchased $24.4 million of its outstanding Senior Notes on the open market, resulting in a pre-tax gain of approximately $9.0 million.

 

Subsequent to March 31, 2003, the Company, purchased an additional $1.2 million of its outstanding Senior Notes on the open market, resulting in a pre-tax gain of approximately $.4 million which will be recorded in the second quarter of 2003. The Company may from time to time in the future purchase material amounts of additional Senior Notes on the open market or in privately negotiated transactions. Such purchases would be subject to obtaining prior approval from the Company’s lenders.

 

17



 

In May 2003, the Company renewed its Wallace International de Puerto Rico, Inc. credit facility. The renewed facility has been reduced from $1 million to $.5 million and expires on January 30, 2004. 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 200 basis points.

 

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 Company (including the obligations of the Company under the $119.5 million Notes outstanding and under its operating leases) and fund planned capital expenditures through December 31, 2003.

 

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, 2002. 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.

 

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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 had fixed debt financing of $119.5 million of 11% Senior Notes due April 15, 2007 that had a current market value of $77.7 million at March 31, 2003 based upon recent private market trades.  There is inherent roll-over risk for these borrowings upon maturity 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, 2002, 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.

 

ITEM 4.  Controls and Procedures

 

(a) Disclosure controls and procedures. Within 90 days before filing this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are the controls and other procedures designed to ensure that the Company records, processes, summarizes and reports in a timely manner the information required in reports filed with or submitted to the SEC. Robert Meers, our President and Chief Executive Officer, and Gregory W. Hunt, our Treasurer and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Meers and Hunt concluded that, as of the date of their evaluation, the Company’s disclosure controls were effective.

 

(b) Internal controls. Since the date of the evaluation described above, there have not been any significant changes in the Company’s internal accounting controls or in other factors that could significantly affect those controls.

 

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PART II-OTHER INFORMATION

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)                      Exhibits:

 

EX-10.1                   Letter Agreement between Banco Popular and Wallace International de Puerto Rico, Inc. dated May 14, 2003

 

EX-10.2                   License Agreement dated as of April 16, 2003 by and between V.E.W. LTD and Syratech Corporation

 

Ex-99.1                       Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Ex-99.2                       Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)                     Reports on Form 8-K:

 

The Company filed a Current Report on Form 8K on January 16, 2003, with the Securities and Exchange Commission which reported the sale of the Company’s property in Mira Loma, California.

 

 

20



 

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 15, 2003

 

 

 

 

/s/ Gregory W. Hunt

 

 

Gregory W. Hunt

 

Senior Vice President, Chief Financial Officer and

 

Treasurer

 

21



 

SYRATECH CORPORATION

CERTIFICATIONS PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

CERTIFICATION

I, Robert Meers, President and Chief Executive Officer of Syratech Corporation, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Syratech Corporation;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a) and 15(d)) for the registrant and have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation  as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 15, 2003

 

 

/s/ Robert Meers

 

 

Robert Meers, President and

 

Chief Executive Officer

 

22



 

CERTIFICATION

I, Gregory W. Hunt, Senior Vice President, Chief Financial Officer and Treasurer of Syratech Corporation, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Syratech Corporation;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a) and 15(d)) for the registrant and have:

 

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation  as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 15, 2003

 

 

/s/ Gregory W. Hunt

 

 

Gregory W. Hunt

 

Senior Vice President, Chief Financial Officer and

 

Treasurer