ITEM 1. BUSINESS
Overview
Syratech Corporation (the "Company") designs, manufactures, imports and markets a diverse portfolio of tabletop, giftware and seasonal products. The Company is one of the leading domestic manufacturers and marketers of sterling silver flatware, sterling silver and silver-plated hollowware. The Company also offers a number of other complementary tabletop and giftware items, including stainless steel flatware, brass hollowware, picture frames and photo albums, glassware, woodenware and ceramics. Tabletop and giftware products generated approximately 67% of net sales for the year ended December 31, 1997. The Company is also a leading domestic manufacturer and marketer of seasonal products including Christmas ornaments, as well as a distributor of Christmas trim, lighting and tree skirts. Seasonal products generated approximately 33% of net sales for the year ended December 31, 1997.
The Company has positioned itself as a single-source supplier to retailers by offering a wide assortment of products across multiple prices points through its "good-better-best" strategy. This strategy enables the Company to sell its products through a broad array of distribution channels, including retail specialty stores, department stores, mass market merchandisers, catalogue showrooms, warehouse clubs, premium and incentive marketers, drug store chains and home centers. Such growth was achieved through recent acquisitions, the addition of new products and product categories and expanded distribution of existing products. The Company markets its products under numerous Company-owned tradenames including Towle Silversmiths, Wallace International Silversmiths and International Silver Company tradenames which are used in connection with the sale of tabletop and giftware items, and the Rauch, Silvestri and Potpourri tradenames which are used in connection with the sale of Christmas and other seasonal merchandise.
Recent Merger and Recapitalization
On April 16, 1997, THL Transaction I Corp., ("THL I"), a Delaware corporation, controlled by affiliates of Thomas H. Lee Company ("THL"), was merged with and into the Company (the "Merger") pursuant to the Restated Agreement and Plan of Merger. Pursuant to the Merger, each share of the Company's Common Stock, par value $0.01 per share ("Common Stock") issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time") (April 16, 1997) (other than (i) shares of Common Stock held by the Company or any wholly-owned subsidiary thereof, and (ii) 35,232 shares of Common Stock that were contributed to the Company by Leonard Florence (former principal shareholder) upon the Merger and which were then canceled and retired) was entitled to receive at the election of the holder thereof and as stated below, either (a) $32.00 in cash (except that Leonard Florence received $28.00 in cash) or (b) one fully paid and non-assessable share of the Company's Common Stock.
Upon the Merger, THL acquired, directly from the Company, an aggregate of 18,000 shares which represented 100% of the Company's 12% Cumulative Redeemable Preferred Stock and 2,374,793 shares in exchange for corresponding stock interests in THL I, for which THL paid an aggregate of $94 million in cash. Accordingly, THL, through its investments, controls the Company.
At the Effective Time, the Company entered into debt financing arrangements consisting of $165 million principal amount of 11% Senior Notes (the "Notes") and a Senior Revolving Credit Facility of $130 million (the "Revolving Credit Facility"). The amount invested by THL in THL I, the purchase price for the Cumulative Redeemable Preferred Stock, plus proceeds of the Notes and a portion of the proceeds available pursuant to the Revolving Credit Facility were used to finance the acquisition of the shares of the Company's outstanding Common Stock that were not retained by the Company's then existing stockholders, and to refinance the Company's outstanding indebtedness. The Revolving Credit Facility is also intended to provide for the Company's working capital requirements at the time of and following the Merger.
The transaction was accounted for as a recapitalization.
See Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Transactions and the Notes to the Consolidated Financial Statements.
Competitive Strengths
The Company's goal is to become the leading domestic, single-source supplier of tabletop, giftware and seasonal products to retailers. To achieve this goal, the Company will rely on its core competitive strengths, which are as follows:
Leading Market Positions. The Company is one of the leading domestic marketers and manufacturers of sterling silver flatware and sterling silver and silver-plated hollowware. These products are sold under the Wallace, Towle and International Silver tradenames, which are well recognized and date back to the American Colonial period. In addition, the Company is one of the leading domestic manufacturers of Christmas ornaments. These products are sold under the Rauch, Silvestri and Potpourri tradenames, which are well-established brands for Christmas and other seasonal merchandise. Historically, the Company has been able to increase sales by leveraging its leading market positions, strong presence with retailers, and strong brand identity with consumers to introduce new products and product categories.
Broad Portfolio of Products with Well-Recognized Tradenames. The Company provides a broad offering of quality products at multiple price points. These items range from exclusive prestige products, such as sterling silver flatware and hollowware, to moderately priced products, including silver-plated and stainless steel flatware, silver-plated and brass hollowware and other giftware and seasonal merchandise.
Syratech uses Company-owned and licensed tradenames as merchandising tools to assist retailers in coordinating their product offerings and differentiating their products from those of their competitors. In addition to the Wallace, Towle and International Silver, Rauch, Silvestri and Potpourri tradenames, the Company markets giftware products under numerous other tradenames, including Rochard, Holiday Workshop, Melannco and Elements. The Company believes that its strongest brands draw customers into retail stores specifically to purchase products bearing those tradenames. In addition to its own tradenames, the Company produces a variety of products under license from certain entities including Warner Bros.(R), Cuisinart(R), and the Victoria & Albert Museum(R).
The Company recently acquired certain assets, including the intellectual property, of Farberware, Inc. Following this acquisition, the Company licensed the Farberware tradename to third parties for use on cookware and bakeware, small electric and certain other commercial electric items. The Company is currently marketing certain products under the Farberware tradename and believes there are significant opportunities to develop the tradename in other product categories which have not been otherwise licensed to third parties.
The Company's diverse product lines allow it to target a wide range of customers and to respond more effectively to changes in retail distribution and consumer preferences. Furthermore, the vendor consolidation trend in the retail industry increases demand for vendors, like the Company, who can make timely deliveries of a broad range of quality products and provide advertising and other sales support.
Diversified Distribution Channels. The Company sells its products to approximately 35,000 customers in most major distribution channels, including retail specialty stores, such as jewelry, seasonal and nonseasonal giftware and collectible stores, department stores, mass market merchandisers, catalogue showrooms and warehouse clubs, premium and incentive marketers, drug store chains and home centers. The Company believes that the Rauch and Silvestri acquisitions will strengthen the Company's presence with mass-market merchandisers and department and specialty stores, respectively. In addition, the Company has a policy of not owning or operating Company outlet stores and believes that this policy further strengthens relationships with customers. The Company's broad customer base, both in terms of number of customers and channels of distribution, reduces its exposure to any single customer or channel of distribution. In 1997, no single customer accounted for 10% or more of the Company's net sales.
Innovative Product Development. The Company's design team and independent designers in conjunction with the Company's product development and marketing team design the vast majority of the Company's products, including products that are sourced from outside vendors. The Company's design and product development and marketing teams collaborate (i) to introduce innovative new products and product categories, such as the Holiday Workshop line of seasonal products, the Hostess Helpers(R) sterling accessory line and a dinnerware category that coordinates with sterling silver flatware and (ii) to develop acquired brands into substantial product lines for the Company, such as the Melannco lines of picture frames and photo albums and the Elements glassware lines.
Integrated Manufacturing and Sourcing. The Company relies both on its own domestic manufacturing capabilities and on a variety of suppliers located primarily in the Asia Pacific Rim to deliver quality products at competitive prices to its customers. The Company's decision on whether to manufacture or import is based largely on expertise, quality, availability and cost. In order to ensure quality, certain imported products are manufactured using Company-owned tools and dies. In 1997, through its import organization comprised of approximately 148 employees, both in the U.S. and overseas, the Company sourced products from overseas manufacturers, with whom in many cases it has long-standing relationships.
Business Strategy
The Company has developed and is implementing a business strategy to build upon its core operating strengths and enhance profitability.
Leverage Recent Acquisitions. The Company believes the opportunities for growth in sales and profitability exist through successfully integrating its recent acquisitions into the Company's sales and marketing organization and consolidating and rationalizing certain operations. Historically, the Company has expanded and augmented acquired product lines through leveraging internal marketing expertise and existing distribution lines.
The Company plans to expand the distribution of Rauch, Silvestri and Potpourri products by marketing them through the Company's established distribution channels and plans to add new products to their existing lines. By integrating Rauch, Silvestri and Potpourri with the Company's internally developed Holiday Workshop line of seasonal products, the Company has significantly expanded its product offerings in this product category, both in terms of types of product and retail price points, and strengthened its presence in major retail channels. In addition, the Company believes that such strengthened presence will provide the Company with substantial opportunities to cross-sell the Company's tabletop and giftware product lines through Rauch and Silvestri distribution channels.
Through the acquisition of C.J. Vander, the Company hopes to expand the distribution of Wallace and Towle sterling silver and silver-plated product lines into the European market, primarily through C.J. Vander's existing distribution channels. In addition, the Company intends to expand the distribution of C.J. Vander products in the United States, through the Company's independent representatives who sell to high-end specialty and department stores.
Expanded Distribution of Existing Product Lines. The Company believes that it has significant opportunities to expand the distribution of its existing product lines by increasing the penetration of existing retailer customers and the number of retail outlets to which it sells. Beginning in 1994, the Company implemented a program with a specialty retailer and franchisee, whereby the Company sources, markets and distributes giftware products for the customer's retail system comprised of several thousand stores. As a result, the Company has identified several growth opportunities, both in terms of expanded product offerings and additional store coverage. In addition, the Company intends to expand the distribution of several product lines introduced in the past several years,
such as Melannco and Elements product lines, which the Company believes are growth opportunities which have not yet been fully exploited.
Broaden Product Offerings. The Company expects to make a number of new product introductions each year. As a result of planned investments in tools, dies and machinery, the Company believes that it will be able to broaden significantly its offering of Christmas and other seasonal merchandise. The Company intends to capitalize on the Farberware tradename by introducing new products in categories as to which exclusive rights to the tradename have not been granted to third parties. In addition, the Company continues to expand and upgrade its line of sterling silver, silver-plated and other tabletop and giftware products.
Invest Further in Technology and Productivity to Maintain Low Cost Structure. In order to support the growth of the business, the Company, during 1997 and through the first quarter of 1998, will have invested over $20 million for a 886,000 square foot warehouse and distribution center in Mira Loma, California which will serve as its western region warehouse and distribution center. The Company intends to invest in additional application solutions to enhance its Electronic Data Interchange (EDI) and warehousing capabilities. The Company plans to add a Warehouse Management System (WMS) to each of its warehouses. These systems will enhance the Company's ability to service its customers by improving its order processing and logistics and storage utilization, minimize order cycle times, enhance inventory management, and ensure that customer orders are processed efficiently. The Company is planning to expand its manufacturing capabilities by acquiring new tools and dies and machinery. In 1996, the Company also purchased a 828,000 square foot manufacturing and distribution facility in Chester, South Carolina which will increase production capacity and reduce costs.
Make Selected Acquisitions. The Company believes that the giftware and seasonal markets and, to a lesser extent, the tabletop market are highly fragmented with a number of small manufacturers and marketers of a limited line of products. The Company believes that these industry dynamics and the continuing trend among retailers to consolidate their vendor base will generate attractive opportunities to acquire complementary brands, products, product categories and businesses that will provide operating synergies.
Limitations on Growth Strategy. The Company's ability to follow the growth plans outlined in preceding paragraphs may be constrained by the availability and cost of capital. Immediately following the Merger there was a substantial decrease in stockholders' equity (see the Company's Consolidated Financial Statements Note 2) and, as a consequence, the Company may find it necessary to curtail or abandon some or all of its growth plans.
Products
The Company designs, manufactures, imports and markets a diverse offering of quality tabletop, giftware and seasonal products. The Company defines seasonal products as Christmas tree ornaments, other Christmas decorations and a variety of other products sold for Halloween, Easter, Thanksgiving, Mother's Day and Valentine's Day. Seasonal products are marketed under a variety of the Company's tradenames. Seasonal products are included in the Tabletop and Giftware product category and are marketed under the Wallace, Towle, and International Silver tradenames. For example, the Company considers picture frames a tabletop and giftware item and also considers it seasonal just by changing the packaging slightly (e.g., a red colored box at Christmas time). Therefore, a certain number of the Company's products and/or product lines are sold as both Tabletop and Giftware and as Seasonal products.
The following table presents a breakdown of the Company's net sales by major product categories for the periods presented. For the purpose of this table, seasonal products include the Rauch (including Rochard), Silvestri and Holiday Workshop product lines. Certain seasonal products marketed under Wallace, Towle and International Silver trademarks are included in the tabletop and giftware product category. Year Ended December 31, ----------------------------------------- 1997 1996 1995 -------- -------- -------- Tabletop and Giftware....... $193,950 $171,824 $153,170 Seasonal.................... 96,912 99,107 16,530 -------- -------- -------- Total....... $290,862 $270,931 $169,520 ======== ======== ========
The majority of the Company's products are sold through the same distribution channels. Customers in each distribution channel purchase a wide range of the Company's products. Distribution costs are not tracked by product category and therefore are not
distinguishable between Tabletop and Giftware and Seasonal. In addition, selling and marketing costs, including product design, trade shows and travel, are not tracked separately and are not reasonably allocable by product category.
A significant portion of the Company's products are also sourced overseas. This function is also not performed by product or product lines and is therefore not reasonably allocable by product category.
The Company also believes that a significant change in sales of specific products will not materially impact operating results.
The Company's products include those shown below; all of which are marketed under one of the Company's many well-recognized tradenames as follows:
Tabletop and Giftware
Sterling Silver and Silver-plated Flatware and Hollowware. The Company designs, markets and distributes a variety of products in these categories, including flatware, serving pieces, cosmetic accessories and hollowware, such as candlesticks, casseroles and coffee and tea services under the tradenames Wallace Silversmiths(R), Towle Silversmiths(R), International Silver Company(R), C.J. Vander(TM) and Tuttle Sterling(R). A majority of the Company's products in this category are manufactured at the Company's plants in Puerto Rico and Massachusetts. These products are sold primarily to specialty stores, including jewelry stores and gift stores, and department stores and are generally included in bridal registries.
Stainless Steel Flatware. The Company designs, markets and distributes several lines of stainless steel flatware ranging from premium mass-produced sets to high-end flatware place settings. The Company markets these products under tradenames such as Wallace Silversmiths(R), Towle Silversmiths(R), International Silver Company(R), 1847 Rogers Bros.(R) and, under a license agreement, the tradename Cuisinart(R). The Company's products in this category are imported from the Company's third-party vendors located primarily in the Asia Pacific Rim. The primary channels of distribution include department stores, mass-market merchandisers, warehouse clubs and specialty stores and these products are also included in bridal registries.
Picture Frames and Photo Albums. The Company designs, markets and distributes several lines of picture frames and photo albums. The picture frames range from sterling silver on the high end to a variety of other frames produced in wood, resin, ceramic, metal and other mediums. The photo albums are produced in metal, fabric and resin. The Company markets these products under tradenames such as Melannco International(R), International Silver Company(R), Wallace Silversmiths(R) and Towle Silversmiths(R) and under a license agreement, the tradename, The Walt Disney Company(R). The Company's products in this category are imported from the Company's third-party vendors located primarily in the Asia Pacific Rim. The channels of distribution include department stores, including stationery departments, specialty stores and mass market merchandisers.
Glassware, Woodenware and Ceramics. The Company designs, markets and distributes several lines of glassware products, including beverageware, glass dinnerware, serveware and accessories, glass vases, candle lighting and salad sets. The Company markets these products under the tradenames International Silver Company(R), Elements(R), Farberware(R), Ambrosia(R), and under a license agreement, the tradename Cuisinart(R). The Company designs, markets and distributes a line of woodenware which includes woodenware and a line of ceramic serveware and storage. The Company markets these products under the Farberware(R) tradename. The Company's products in this category are imported from the Company's third-party vendors located primarily in the Asia Pacific Rim. The channels of distribution of the Company's glassware line include mass-market merchandisers, department stores, warehouse clubs and specialty stores.
Porcelain Boxes. The Company designs, markets and distributes a diverse range of high-end, hand-painted porcelain boxes under the Rochard(TM) tradename which are primarily manufactured by third-party vendors located primarily in France. The channels of distribution include specialty stores, including jewelry stores and department stores.
Other Tabletop and Giftware. The Company designs, markets and distributes a wide range of other tabletop and giftware products, including premium products such as picture frames and cosmetic accessories as "gift with purchase" items, stainless steel kitchen and bath accessories, brassware, napkin rings and decorative clocks. The primary channels of distribution include department stores, mass-market merchandisers, warehouse clubs and specialty stores.
Seasonal Products
Christmas Ornaments. The Company designs, markets and distributes Christmas tree ornaments made of glass, satin, ceramic and resin. The Company's products are distributed through specialty stores, department stores, jewelry stores, mass market merchandisers and warehouse clubs. These products are marketed under the tradenames Rauch(R), Silvestri(R), Holiday Workshop(R), Potpourri Press(R), and International Christmas(TM). The Company also manufactures limited edition, sterling silver Christmas ornaments that are marketed under the tradenames Wallace Silversmiths(R) and Towle Silversmiths(R).
Other Christmas Decorations. The Company designs, markets and distributes a diverse product offering of other Christmas decorations including figurines, waterglobes, collectibles, trim, lighting, tree skirts and other decorative items produced in wood, resin, metal, paper, textiles, glass and ceramic. These products are marketed under the tradenames Silvestri(R), Rauch(R), Holiday Workshop(R), Potpourri Press(R), International Christmas(TM). These products are distributed through specialty stores, department stores, mass market merchandisers and warehouse clubs.
Other Seasonal Products. The Company designs, markets and distributes a variety of other seasonal products for Halloween, Easter, Thanksgiving, Mother's Day and Valentine's Day. These products include figurines, vases, bowls, trays and other items comprised of metal, resin, wood, ceramic and glass. These products are distributed through specialty stores, department stores, mass market merchandisers and warehouse clubs.
Sales, Marketing and Distribution
During 1997, and through the first quarter of 1998, the Company will have invested over $20 million on an 886,000 square foot warehouse and distribution center in Mira Loma, California, which will serve as its western region warehouse and distribution center.
The Company sells many different types of products, with a variety of price points and target customers. Accordingly, the Company sells its products through a variety of distribution channels including department and specialty stores, mass market merchandisers, and warehouse clubs, catalogue showrooms, drugstores, supermarkets, incentive marketers and jewelry stores. The Company maintains separate sales forces for its product lines so as to provide the specialized expertise and attention necessary to service its customer base. The Company's sales and marketing staff coordinates with individual retailers to devise marketing strategies and merchandising concepts and to furnish advice on advertising and product promotion. The Company has developed several promotional programs for use in the ordinary course of business to promote sales throughout the year.
The Company's various sales and marketing efforts are supported from its principal office and showroom in East Boston, Massachusetts and, for certain of its products, from its offices and showrooms in Hong Kong and London. The Company maintains additional showrooms in New York, Los Angeles, Atlanta and Dallas. The Company's sales and marketing staff at December 31, 1997, consisted of approximately 130 employees who are salaried, paid commissions based on sales or, in some instances, paid a base salary plus commissions. The Company also distributes certain of its products through independent sales representatives who work on a commission basis only.
Retailing Customers
During 1997, 20 customers accounted for approximately 40% of the Company's net sales. No one customer represented 10% or more of the Company's net sales.
1997 Channels of Distribution % of 1997 Net Sales ----------------------------- ------------------- Mass Market Merchandises, Catalogue Showrooms, Warehouse Clubs, Drug Stores, Supermarkets.......................................... 30% Department Stores..................................................... 27% Specialty Stores, Jewelry Stores, Premium and Incentive Marketers..... 43%
In order better to service its customers, the Company has invested in equipment and software to allow its customers to transmit their orders electronically throughout the EDI system.
Manufacturing and Raw Materials
The Company produces its sterling silver flatware at its manufacturing facility in San German, Puerto Rico, where it fabricates and manufactures sterling silver into finished products for the Wallace, International, Towle and Tuttle lines, and at its facility in Sheffield, England for C.J. Vander, Ltd. and Roberts and Belk. The Company also designs, produces and maintains the tools required for manufacturing sterling silver flatware.
The Company has maintained, in the aggregate, approximately six months of inventory. The Company's silver fabrication operation in its Puerto Rico manufacturing plant became fully operational during 1994. This process reduces the need for purchasing fabricated silver from outside vendors. The Company uses fabricated silver in its manufacturing operations. Fabricated sterling silver made from fine silver purchased by the Company may be readily obtainable from outside resources as well. The Company purchases fine silver in the spot market in quantities the Company believes are adequate to meet reasonably foreseeable consumer demand for its silver products. The Company does not engage in speculative purchases of fine silver. In the five-year period ended December 31, 1997, the closing price of silver as quoted by Handy & Harman Inc. has ranged from $3.54 per troy ounce to $6.71 per troy ounce ($6.12 at March 12, 1998).
The Company manufactures silver-plated giftware and tabletop products, including hollowware, at its manufacturing and silver-plating facilities in North Dighton, Massachusetts and in Sheffield, England. These facilities have all the stamping, processing, soldering, finishing, polishing, silver-plating and packaging capabilities necessary to turn unfinished metal into finished products.
The Company's imported products originate as designs created by its internal design staff or by independent designers, in each case in conjunction with the Company's product development and marketing staffs. Products based on these designs are manufactured to the Company's specifications in various countries including Hong Kong, India, Korea, Taiwan, the People's Republic of China and Japan.
In 1997, the Company purchased an aggregate of approximately $123 million of products from approximately 800 foreign manufacturers. No vendor accounted for 10% or more of such purchases in 1997. The Company does not have information on the financial condition of its major foreign vendors, all of which are privately held, but is not aware of any unfavorable information related to their respective financial condition. Of the Company's foreign purchases in 1997, approximately 87% were from vendors located in the Far East; approximately 4% were from vendors located in India and approximately 9% in the aggregate from vendors in other locations. The Company's arrangements with its manufacturers are subject to the risks of doing business abroad, including risks associated with foreign currency and potential import restriction. The Company also is subject to risks associated with the availability of, and time required for, the transportation of products from foreign countries, including shipping losses or lost sales that may result from delays or interruptions in shipping. The Company does not believe that the loss of any single foreign supplier would have a material long-term adverse impact on the Company's source of supply, as other suppliers with whom the Company does business would be able to increase production to fulfill the Company's requirements.
The Company has invested in increasing production capacity and improving productivity related to its Rauch operations. For several of the prior selling seasons, the Company believes that Rauch had operated under capacity constraints. The Company has developed and installed new automatic machinery which was installed during the first quarter of 1997. The Company is in the process of improving the design and operation of the new machinery and anticipates that Rauch's total production capacity will have increased to 150% of its capacity prior to installation. In 1996, the Company also purchased an 828,000 square foot building in Chester, South Carolina, which is in close proximity to the existing Rauch manufacturing plant. This new facility has allowed adequate space for the new machinery is expected to reduce costs substantially. This large warehouse and distribution center has allowed the Company to consolidate its outside warehousing and manufacturing. The Company continuously looks for opportunities for new equipment to reduce production costs.
The recently acquired Rauch Christmas decoration manufacturing process uses three basic raw materials: (i) expandable polystyrene ("EPS") for unbreakable ornaments, (ii) glass ornament blanks and (iii) acetate or polyester yarn materials including boxes and packaging. To produce Christmas stockings, tree skirts and Santa Claus hats and suits, Rauch purchases non-woven and knitted pile fabric. Rauch has not experienced difficulty in obtaining raw materials or other supplies from its suppliers and does not anticipate any such difficulty in the foreseeable future. Rauch imports ornament hangers, small glass and satin balls and assorted tree and off-the-tree decorations from Taiwan, Hong Kong, Mexico and Colombia.
Competition
The tabletop, giftware and seasonal products industries in which the Company is engaged are highly competitive. Not only the large number of domestic manufacturers affects competition, but also the large volume of foreign imports. Several of the Company's competitors are larger and have greater financial resources than the Company. The Company's products compete indirectly with a broad range of household products not offered by the Company. Within the overall tabletop products industry, the production of sterling silver flatware in the United States is relatively concentrated, with five manufacturers, including the Company, accounting for substantially all of the sterling silver flatware manufactured and sold in the United States. The other principal manufacturers and marketers of sterling silver flatware are Gorham, Inc. and its affiliate The Kirk Steiff Company, Reed & Barton Corp. and Lunt Silversmiths, all of which have been in business for many years. The giftware and seasonal products industries, however, are very fragmented with numerous small manufacturers and marketers of a limited number of products. The Company is not aware of any competitor having the same product line breadth.
A number of factors affect competition in the sale of products of the type manufactured, imported and sold by the Company. Among these are brand identification, style, design, packaging, price, quality, promotion, sales staff and the level of service provided to customers. The importance of these competitive factors varies from customer to customer and from product to product and no one of these factors is dominant in all cases. The Company believes that its ability to compete effectively can be attributed to its performance in all of these areas. Certain of the Company's foreign competitors have tried to gain market share in the United States by producing low-cost items and by taking advantage of the increased purchasing power of the dollar in times when the dollar is relatively strong as compared to foreign countries. Rising labor costs in many foreign countries and the relative weakness of the dollar, as compared to the exchange rates prevailing in the mid-1980's, have reduced these advantages to some extent in recent years.
Trademarks, Copyrights and Patents
The success of the Company's various businesses depends in part on the Company's ability to exploit certain proprietary designs, trademarks and brand names on an exclusive basis in reliance upon the protections afforded by applicable copyright, patent and trademark laws and regulations. The loss of certain of the Company's rights to such designs, trademarks and brand names or the inability of the Company effectively to protect or enforce such rights could adversely affect the Company. The Company does not believe that there is a significant danger that it will lose its rights to any of its material trademarks and tradenames or be unable effectively to protect or enforce such rights. Although the loss of any right to designs, trademarks and tradenames could have negative effects, any such effects are unlikely to be material.
Seasonality
Sales are generally higher in the third and fourth quarters and are strongly influenced by the buying patterns associated with the Christmas season. The acquisitions of Rauch, Silvestri and Potpourri Press have increased the seasonality of the Company since the majority of Rauch, Silvestri and Potpourri Press products are Christmas items. The Company's needs for working capital accelerate in the second half of the year and, accordingly, total debt levels tend to peak in the third and fourth quarters, falling off again in the first quarter of the following year. The amount of the Company's sales generated during the second half of the year generally depends upon a number of factors, including general economic conditions, and other factors beyond the Company's control. The Company's results of operations would be adversely affected and disproportionately affected if the Company's sales were substantially lower than those normally expected during the second half of the year. The Company continues to introduce products appropriate to other holidays and seasons in order to increase sales during the first and second quarters.
Backlog and Warranty
The Company's backlog consists of cancelable orders and is dependent upon trends in consumer demand throughout the year. Customer order patterns vary from year to year, largely because of annual differences in consumer acceptance of product lines, product availability, marketing strategies, inventory levels of retailers and differences in overall economic and weather conditions. Orders for the Company's products are generally subject to cancellation until shipment. As a result, the Company's backlog consists of cancelable orders and is dependent upon trends in consumer demand throughout the year. Customer order patterns vary from year to year, largely because of annual differences in consumer acceptance of product lines, product availability, marketing strategies, inventory levels of retailers and differences in overall economic and weather conditions. As a result, comparison of backlog as of any
date in a given year with backlog at the same date in a prior year is not necessarily indicative of sales trends. The Company had (exclusive of Farberware) a backlog of approximately $19.7 million as of December 31, 1997, compared to approximately $24.3 million as of December 31, 1996. See "Seasonality." The Company does not believe that backlog is necessarily indicative of the Company's future results of operations or prospects.
The Company's warranty policy is to accept returns of products with defects in materials or workmanship. The Company will also accept returns of incorrectly shipped goods where the Company has been notified on a timely basis and, in certain cases, to maintain customer goodwill. In accordance with normal retail industry practice, the Company ordinarily accepts returns only from its customers and does not ordinarily accept returns directly from consumers. Certain of the products returned to the Company by its customers, however, may have been returned to those customers by consumers. The Company will routinely accept returns for imported products that are received late by the customer. The majority of the returned products are resold into the same distribution channel. During the three year period ended December 31, 1997, returns and allowances amounted to approximately 2.7% of sales.
Environmental Regulation
The Company's manufacturing operations, including silverplating, chrome plating, tool making and painting operations routinely involve the handling of waste materials that are classified as hazardous. The Company also refabricates certain materials used in its silverplating operations. The Company is subject to certain domestic federal, state and local laws and regulations concerning the containment and disposal of hazardous materials and, therefore, in the ordinary course of its business. The Company incurs compliance costs and may be required to incur clean-up costs. The Company's C.J. Vander facility is also subject to many environmental regulations related to its plating operations in the United Kingdom. Based upon currently available information, the Company does not expect that the costs of such compliance and clean-up costs will be material. Actions by federal, state and local governments concerning environmental matters could result in laws or regulations that could increase the cost of producing the products manufactured by the Company or otherwise adversely affect the demand for its products. In addition, the future costs of compliance with environmental laws and regulations and liabilities resulting from currently unknown circumstances or developments could be substantial and could have a material adverse effect on the Company. For example, certain laws and regulations could impose liability upon the Company for any historic releases of hazardous substances from facilities that it has owned or operated, or, from facilities to which its waste materials have been transported for treatment or disposal.
Properties
The following table sets forth information with respect to the Company's properties as of March 21, 1998:
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Employees
As of December 31, 1997, the Company had approximately 1,875 employees. The Company believes that its relationship with its employees is good.
The Company's employees are not represented by labor unions; however, Rauch, which merged with the Company on February 15, 1996, was a subject of efforts by UNITE (the "Union") in the fall of 1995 to organize Rauch's employees. A scheduled Union election was postponed because the Union filed unfair labor practice charges against Rauch with the National Labor Relations Board (the "NLRB"). These charges, which related to allegations of threats and promises by Rauch officials and the termination of certain employees, were settled pursuant to an agreement between Rauch and the Union. On May 2, 1996, the NLRB approved the agreement and the Union's request that the petition for an election be withdrawn with prejudice.
On March 31, 1994 an Administrative Law Judge ("ALJ") designated by the NLRB determined that the Company's subsidiaries Wallace International de P.R., Inc. and International Silver de P.R., Inc. (the "P.R. Subsidiaries") had engaged in unfair labor
practices incident to a union election (won by the P.R. Subsidiaries) held in February 1993 and ordered the P.R. Subsidiaries to refrain from certain conduct and to take certain affirmative action. The ALJ's decision was affirmed by the NLRB on September 22, 1994. Incident to a second union election (also won by the P.R. Subsidiaries) held on June 22, 1994 pursuant to stipulation, the P.R. Subsidiaries were again charged with unfair labor practices. The ALJ again found that the P.R. Subsidiaries had engaged in unfair labor practices. The Company has appealed to the NLRB, and the appeal is pending.
Legal Proceedings
The Company has been named as a defendant in several legal actions arising from its normal business activities, including routine copyright and trademark litigation, which actions are considered normal in the businesses in which the Company is engaged.
ITEM 4.
ITEM 4. Submission of Matters to A Vote of Security Holders
During the fourth quarter of 1997, no matters were submitted to a vote of the Company's shareholders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Absence of Public Market
There is no existing public market for the Notes and the Company does not intend to list the Notes on any national securities exchange. Factors such as quarterly or cyclical variations in the Company's financial condition and results of operations, variations in interest rates, future announcements concerning the Company or its competitors, government regulation, general economic and other conditions could cause the market price of the Notes to fluctuate substantially.
Syratech Common Stock, which was traded on the NYSE under the symbol "SYR", was de-listed from the NYSE upon consummation of the Merger. From the effective time of the Merger, the Company has had less than 300 stockholders. On April 14, 1997, the last trading day before the execution of the Merger Agreement, the last sales price of Syratech Common Stock as reported on the NYSE was $32.13 per share. The average of the closing prices for the 20 consecutive trading days ended October 22, 1996, the last trading day before the public announcement of the Merger Agreement, was $24.59 per share.
The following table sets forth, for the periods indicated, the high and low sales closing prices per share of Syratech Common Stock, during which time the Company's stock was actively traded. HIGH LOW ---- --- FISCAL 1996 First Quarter (ended March 31, 1996).......... $26 3/8 $20 1/2 Second Quarter (ended June 30, 1996).......... 27 5/8 22 3/8 Third Quarter (ended September 30, 1996)...... 24 1/2 22 Fourth Quarter (ended December 31, 1996)...... 31 3/4 23 3/8
FISCAL 1997 First Quarter (ended March 31, 1997).......... $32 $31 1/8 Second Quarter (through April 14, 1997)....... 32 1/8 31 7/8
Dividends Paid
The Company has never paid cash dividends on its common stock and does not expect to do so in the foreseeable future. The Company intends to retain all earnings to provide funds for the operation and expansion of its businesses.
Dividends on shares of Cumulative Redeemable Preferred Stock are cumulative from the date of issue and are payable when and as declared from time to time by the board of Directors of the Company. Such dividends accrue on a daily basis (whether or not
declared) from the original date of issue at an annual rate per share equal to 12% of the original purchase price per share, with such amount to be compounded annually on each December 31 so that if the dividend is not paid for any year the unpaid amount will be added to the original purchase price of the cumulative Redeemable Preferred Stock for the purpose of calculating succeeding years' dividends.
ITEM 6.
ITEM 6. Selected Financial Data
The following selected consolidated financial information as of December 31, 1997 through 1993 and for each of the years in the five-year period ended December 31, 1997 has been derived from the consolidated financial statements of the Company. The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, together with the notes thereto and the related report of Deloitte & Touche LLP, independent auditors, are included elsewhere herein. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Annual Report on Form 10-K.
(1) The income statement data for years prior to 1996 has been restated to reflect Syroco, Inc. as a discontinued operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Recent Transactions."
(2) Consists of income from the sale of Farberware inventory and other operating income, net of certain selling, general and administrative expenses.
(3) Consists of nonrecurring pre-tax income related to the sale of certain equipment associated with the Farberware settlement in 1997 and licensing the Farberware name on cookware and bakeware in 1996. See Note 3 to the Company's Consolidated Financial Statements.
(4) In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earning per share." As a result, all periods presented have been restated. See Note 1 to the Company's Consolidated Financial Statements.
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(5) Consists of long-term debt, notes payable and current maturities of long-term debt.
(6) Reflects temporary borrowings of $51,735 made on December 29, 1995 in connection with the purchase by the Company for retirement of 3,065 shares of Common Stock owned by affiliates of Katy Industries, Inc. (the "Katy Stock Repurchase"). These borrowings were paid on January 2, 1996.
ITEM 7.
ITEM 7. 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 or incorporated by reference in this Annual Report on Form 10-K, the matters discussed or incorporated by reference herein are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, general economic and business conditions; industry capacity; industry trends; overseas expansion; the loss of major customers; changes in demand for the Company's products; the timing of orders received from customers; cost and availability of raw materials; dependence on foreign sources of supply; changes in business strategy or development plans; availability and quality of management; availability, terms and deployment of capital; and the seasonal nature of the business. SPECIAL ATTENTION SHOULD BE PAID TO SUCH FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO, STATEMENTS RELATING TO (i) THE COMPANY'S ABILITY TO EXECUTE ITS GROWTH STRATEGIES AND TO REALIZE ITS GROWTH OBJECTIVES, (ii) THE COMPANY'S PLANNED EXPANSION OF ITS PRODUCT OFFERINGS, (iii) THE COMPANY'S ABILITY TO OBTAIN SUFFICIENT RESOURCES TO FINANCE ITS WORKING CAPITAL AND CAPITAL EXPENDITURE NEEDS AND PROVIDE FOR ITS KNOWN OBLIGATIONS, AND (iv) THE CONTINUATION OF, AND THE COMPANY'S ABILITY TO BENEFIT FROM, THE VENDOR CONSOLIDATION TREND IN THE RETAIL INDUSTRY DESCRIBED ELSEWHERE IN THE ANNUAL REPORT ON FORM 10-K.
Recent Transactions
Merger and Recapitalization
On April 16, 1997, THL Transaction I Corp. ("THL I"), a Delaware corporation, controlled by affiliates of Thomas H. Lee Company ("THL"), was merged with and into the Company (the "Merger") pursuant to the Restated Agreement and Plan of Merger, dated as of November 27, 1996, effective as of October 23, 1996, as amended on February 14, 1997, between THL I and the Company.
Pursuant to the Merger, each share of the Company's Common Stock, par value $0.01 per share ("Common Stock") issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time") (April 16, 1997) (other than (i) shares of Common Stock held by the Company or any wholly-owned subsidiary thereof, and (ii) 35,232 shares of Common Stock that were contributed to the Company by Leonard Florence (former principal shareholder) upon the Merger and which were then canceled and retired) was entitled to receive at the election of the holder thereof and as stated below, either (a) $32.00 in cash (except that Leonard Florence received $28.00 in cash) or (b) one fully paid and non-assessable share of the Company's Common Stock. Common Stock retained was limited in the case of each stockholder (other than Management Stockholders) to 34.75% of such stockholder's shares of Common Stock. Also, because no more than an aggregate of 868,250 shares of the Company's Common Stock could be retained by stockholders (other than Management Stockholders), the right to retain the Company's Common Stock was to be subject to proration. In addition, each Company Stock Option granted under the 1986 and 1993 Stock Plans that were outstanding immediately prior to the Effective Time, vested and was canceled in exchange for the excess in cash of $32.00 over the exercise price per share of the Company's Common Stock. The aggregate amount paid to optionees of $3.7 million and $.2 million related to the vesting of the stock options was charged to compensation expense.
Upon the Merger, THL acquired, directly from the Company, an aggregate of 18,000 shares which represented 100% of the Company's 12% Cumulative Redeemable Preferred Stock and 2,374,793 in exchange for corresponding stock interests in THL I, for which THL had paid an aggregate of $94 million in cash. Accordingly, the THL investment resulted in control of the Company.
At the Effective Time, the Company entered into debt financing arrangements consisting of $165 million principal amount of 11% Senior Notes (the "Notes") and a Senior Revolving Credit Facility of $130 million (the "Revolving Credit Facility"). The amount invested by THL in THL I, the purchase price for the Cumulative Redeemable Preferred Stock, plus proceeds of the Notes and a portion of the proceeds available pursuant to the Revolving Credit Facility were used to finance the acquisition of the shares of the Company's outstanding Common Stock that were not retained by the Company's then existing stockholders, and to refinance the Company's outstanding indebtedness. The Revolving Credit Facility is also intended to provide for the Company's working capital requirements at the time of and following the Merger.
In connection with the Merger, the Company entered into a management agreement with Thomas H. Lee Company for which the Company pays an annual management fee in the amount of $450,000 ($320,000 expensed for the year ended December 31, 1997).
The transaction was accounted for as a recapitalization.
See Notes to Consolidated Financial Statements.
Rauch Industries, Inc.
On February 15, 1996, the Company, through an indirect wholly owned subsidiary, acquired the outstanding shares of Rauch for approximately $49.6 million, including costs of the transaction. The acquisition was accounted for under the purchase method of accounting, and the results of operations of Rauch have been included with the results of the Company from February 15, 1996.
Farberware Inc.
On April 2, 1996, the Company, through its indirect wholly owned subsidiary, Far-B Acquisition Corp. ("Far-B"), together with Lifetime Hoan Corporation ("Lifetime"), acquired certain assets from Farberware Inc., a subsidiary of U.S. Industries, Inc. ("USI"). Lifetime and the Company are not affiliates. Farberware Inc. was a manufacturer of aluminum clad, stainless steel cookware and bakeware and small electric kitchen appliances. The aggregate consideration paid by Far-B and Lifetime was approximately $45.8
million, of which Far-B paid approximately $32.6 million. A manufacturing service agreement entered into on April 2, 1996 to provide products for a transition period was terminated in 1996 and during 1997 the Company sold or disposed of all acquired inventory and no longer manufactures or sells Farberware cookware and bakeware products or noncommercial electric products. Net sales for the year ended December 31, 1997 and 1996 exclude revenue from the sales of Farberware inventory, and $2.6 million and $3.9 million, respectively, related to these sales and to licensing income, net of certain selling, general and administrative expenses, has been recorded as other operating income.
The Company acquired Farberware Inc. assets in order to expand Farberware's licensing activities and to use the Farberware name on certain of the Company's existing and new products.
The Company and Lifetime agreed to an allocation between them of the assets acquired from Farberware Inc. and to the joint administration of certain licensing rights.
On June 27, 1996, the Company's Farberware Inc. subsidiary (formerly Far-B) ("Farberware") entered into a license agreement with Meyer Marketing Co. Ltd. ("Meyer") pursuant to which Meyer was granted certain rights for a term of 200 years. For such grant, Meyer made a one-time payment to the Company of $25.5 million, which resulted in recognition by the Company of $11.9 million of non-recurring income. Under the terms of the licensing agreement, the Company has no further obligation with respect to the amount paid by Meyer. On July 12, 1996, Farberware granted to a major retail chain the exclusive license to use and exploit the Farberware name and related intellectual property in connection with the sourcing, manufacture, marketing and sale of certain electric products for quarterly royalty payments. On October 25, 1996 Farberware granted to FCI Corp. a license to use and exploit the Farberware name in connection with the sourcing, manufacturing, marketing and sale of certain Commercial Products.
Subsequent to the acquisition of the assets from Farberware Inc., legal disputes arose amongst the parties over alleged breaches of agreements. On February 3, 1997, the Company, Farberware, and Lifetime reached an agreement (the "Settlement Agreement"), with Bruckner Manufacturing Corp. ("BMC") and U.S. Industries Inc. ("USI") to settle all previous outstanding legal disputes arising out of the Farberware Asset Purchase Agreement ("APA") and the Manufacturing Services Agreement ("MSA"). Under the terms of the Settlement Agreement, the Company received certain finished goods inventory at no cost, and paid for certain finished goods inventories purchased under the MSA. The Company also received a waiver of certain restrictions in the APA on disposing of tools, machinery, and equipment formerly used by BMC in the manufacture of Farberware products. The Company sold the majority of the tools, machinery and equipment in 1997 and retained the remainder for use in its existing businesses. The sale of the tools, machinery and equipment resulted in net proceeds to the Company of $2,184, which has been recorded as other non-operating income in 1997.
See Notes to Consolidated Financial Statements.
Silvestri
On April 16, 1996, the Company purchased finished goods inventory and intangible assets of the Silvestri division of FFSC, Inc. ("Silvestri") for approximately $8.6 million. Silvestri products include Christmas ornaments, collectibles, lighting and trim as well as other seasonal and nonseasonal giftware and decorative accessories. The acquisition was accounted for under the purchase method of accounting, and the results of operations of Silvestri have been included with the results of the Company from April 16, 1996.
C.J. Vander
On May 8, 1996, the Company, through one of its subsidiaries, acquired all of the outstanding common stock of C.J. Vander, a manufacturer of sterling silver and silver-plated flatware and hollowware in Sheffield and London, England. The purchase price was immaterial to the Company's consolidated financial statements. The acquisition was accounted for under the purchase method of accounting and the results of operations of C. J. Vander have been included with the results of the Company from May 8, 1996.
Potpourri Press
On November 26, 1996, a wholly-owned subsidiary of the Company acquired inventory, tangible property, intellectual property rights, certain key records (including customer lists, customer files, supplier information, catalogs) and certain contract rights of Potpourri Press, a North Carolina-based manufacturer and marketer of Christmas products, for a purchase price of approximately
$2.3 million plus a $0.2 million promissory note. This acquisition was accounted for under the purchase method of accounting and the results of operations of Potpourri Press have been included with the results of the Company from November 26, 1996.
Syroco
On April 11, 1995, pursuant to an agreement entered into on March 28, 1995, the Company, through its subsidiary, Syratech Holding Corporation, sold Syroco, Inc. ("Syroco"). The net proceeds received after costs of the sale and income taxes were $133.9 million. The sale resulted in the discontinuance of the Company's casual furniture and accessories business and resulted in an after-tax gain on disposal of $30.5 million which was recognized in the second quarter of 1995. The results of operations for the discontinued segment are included in discontinued operations in the Consolidated Statements and Statement of Operations and Statements of Cash Flows for the year ended December 31, 1995.
The following table sets forth certain financial data as a percentage of net sales of the Company for each of the years presented.
Percentage of Net Sales ------------------------------ Year Ended December 31, ------------------------------ 1997 1996 1995(1) ----- ----- ----- Net sales..................................... 100.0% 100.0% 100.0% Cost of sales................................. 73.4 71.6 70.7 ----- ----- ----- Gross profit............................... 26.6 28.4 29.3 Selling, general and administrative expenses.. 25.0 21.3 20.2 Other operating income (2).................... 0.8 1.4 -- ----- ----- ----- Income from operations..................... 2.4 8.5 9.1 Interest income (expense), net................ (5.4) (0.9) 2.7 Other income (3).............................. 0.8 4.4 -- ----- ----- ----- Income (loss) before income taxes.......... (2.2) 12.0 11.8 Provision (benefit) for income taxes.......... (0.6) 4.5 4.0 ----- ----- ----- Income (loss) from continuing operations... (1.6%) 7.5% 7.8% ===== ===== ===== - ------------------
(1) The income statement data for 1995 has been restated to reflect Syroco, Inc. as a discontinued operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Recent Transactions."
(2) Consists of income from the sale of Farberware inventory and other operating income, net of certain selling, general and administrative expenses.
(3) Consists of non-recurring pre-tax income related to the sale of certain equipment associated with the Farberware settlement in 1997 and licensing the Farberware name on cookware and bakeware in 1996. See Note 3 to the Company's Consolidated Financial Statements.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased 7.4% to $290.9 million for the year ended December 31, 1997 from $270.9 million for the year ended December 31, 1996. Excluding the impact of the Rauch, Silvestri, C.J. Vander and Potpourri Press acquisitions in 1996, net sales
increased 11.7%. This increase reflects higher sales volume of giftware items (primarily crystal and silver-plated items) and of stainless steel and sterling silver flatware. Sales related to the Company's 1996 acquisitions decreased 1.7% due to lower sales of Rauch Christmas ornaments. Changes in product prices did not materially impact net sales.
Gross profit was $77.5 million for the year ended December 31, 1997 compared with $76.8 million for the year ended December 31, 1996. Gross profit as a percentage of net sales was 26.6% for the year ended December 31, 1997 compared to 28.4% for the year ended December 31, 1996. The decrease in the gross profit percentage of 1.8 percentage points is related to Rauch new equipment start-up manufacturing inefficiencies, and to the impact of having a full year of warehousing expenses for the seasonal Silvestri business compared with the partial year in 1996, as well as a reduced proportion of higher margin products in the total product mix. The decrease in gross profit margin was not materially impacted by change in product prices.
Selling, general and administrative expenses ("S, G & A expenses") increased to 25.0% as a percentage of net sales or $72.7 million for the year ended December 31, 1997 from 21.3% or $57.7 million for the year ended December 31, 1996. Included in S, G & A expenses for 1997 is a one-time charge of $3.9 million for stock option compensation expense due to the Merger. Also contributing to the increase are higher personnel and related costs including costs in the Company's Pacific Rim offices to support the 1996 acquisitions and to establish an increased presence in mainland China which management believes will enable the Company to reduce expenses in its higher cost Hong Kong, Philippines, and Taiwan locations. During 1997, the Philippines office was closed, and cost reductions in Taiwan and Hong Kong are underway. In addition, during 1997, there is a full year of S, G & A expenses associated with the product lines acquired during 1996 compared with partial period in the prior year, and these expenses are running at levels higher than initially anticipated due to delays in integrating operations of these acquisitions.
Income from operations of $7.1 million and $23.1 million for the years ended December 31, 1997 and 1996, respectively included other operating income of $2.4 million and $3.9 million, respectively, resulting from the disposal of Farberware inventory and Farberware license revenue. Income from operations for 1997 includes the one-time charge of $3.9 million to compensation expense related to stock options as a result of the Merger.
Other non-operating income in 1997 represents $2.2 million of income from the sale of equipment associated with the Farberware settlement, and in 1996, represents $11.9 million of income from the one-time licensing fee received for the Farberware name on cookware and bakeware. See Note 3 to the Company's Consolidated Financial Statements.
Interest expense, net, was $15.8 million and $2.4 million for the years ended December 31, 1997 and 1996, respectively. This change results primarily from the increase in debt, including the issuance of the 11% Senior Notes, to finance the Merger.
The benefit from income taxes was $1.9 million for the year ended December 31, 1997, compared to an income tax provision of $12.2 million for the year ended December 31, 1996. The benefit from income taxes in 1997 arose from the net loss for the year.
Net loss applicable to common stockholders for the year ended December 31, 1997 was ($6.1) million or ($1.17) (diluted) per share, on adjusted weighted average shares outstanding of 5,216,000 (diluted), compared to net income available to common stockholders of $20.4 million or $2.32 (diluted) per share, on 8,799,000 adjusted weighted average shares outstanding in 1996. The reduction in adjusted weighted average shares primarily reflects the acquisition and retirement of 4.9 million shares of Company Common Stock in connection with the Merger, which was effected on April 16, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased 59.8% to $270.9 million for the year ended December 31, 1996 from $169.5 million for the year ended December 31, 1995. Excluding the impact of acquisitions of businesses and product lines completed in 1996, net sales increased 8.1%. This increase reflects increased sales volume of giftware items (including seasonal items, picture frames and silver-plated items) and of sterling silver flatware. The changes in product prices did not materially impact net sales.
Gross profit increased 54.6% to $76.8 million for the year ended December 31, 1996 from $49.7 million for the year ended December 31, 1995. Gross profit as a percentage of sales was 28.4% for the year ended December 31, 1996 compared to 29.3% for the year ended December 31, 1995. The decrease in gross profit percentage was primarily a result of the acquisition of Rauch, which gross profit margin is lower than that of certain of the Company's other product lines, and a $1.3 million nonrecurring compensation
expense charge related to the transfer of shares to one of the executive officers. See Note 11 to the Company's consolidated financial statements. Partially offsetting this decrease was the gross profit on the recently acquired higher margin Silvestri seasonal product line. Excluding the impact of acquisitions, the gross profit percentage was 30.3% for the year ended December 31, 1996. This increase in gross profit percentage, exclusive of acquisitions, was due to increased sterling flatware sales which have a higher profit margin than other tabletop and giftware items, and also to a change in product mix in the giftware lines to higher margin items including frames and certain seasonal products. The increase in gross profit margin was not materially impacted by change in product prices.
Selling, general and administrative expenses ("S, G & A expenses") increased to 21.3% as a percentage of net sales or $57.7 million for the year ended December 31, 1996 from 20.2% or $34.2 million for the year ended December 31, 1995. S, G & A expenses were $39.5 million or 21.5% as a percentage of net sales excluding S, G & A expenses incurred at Rauch, Silvestri, C.J. Vander and Potpourri. These acquired companies had $18.2 million of S, G & A expenses including the allocation of existing and continuing corporate expenses. Substantial resources were dedicated and additional expenses were incurred as a result of acquiring product lines, integrating functions (including selling and marketing, customer service and general and administrative functions) and in the case of Farberware, general and administrative costs of disposing of the product line during 1996. Allocated corporate costs incurred to sell the Farberware product line of $2.6 million are not included in the other operating income line and are included in the Company's S, G & A expenses. Also included in S, G & A expenses in 1996 was $2.6 million of nonrecurring compensation expense related to the transfer of shares to two other executive officers. See Note 11 to the Company's consolidated financial statements.
Income from operations increased 49.6% to $23.1 million in the year ended December 31, 1996. Included in income from operations for the year ended December 31, 1996 was $3.5 million, net of certain S, G & A expenses, from the disposal of Farberware inventory.
Other non-operating income in 1996 represents $11.9 million of income from the one-time licensing fee for the Farberware name on cookware and bakeware. See Note 3 to the Company's Consolidated Financial Statements.
Interest expense, net, was $2.4 million for the year ended December 31, 1996 compared to interest income, net of $4.6 million for the year ended December 31, 1995. This change results from a reduction in invested cash used to purchase and retire 3,064,751 shares of the Company's Common Stock, for recent acquisitions and for seasonal working capital needs.
The provision for income taxes was $12.2 million for the year ended December 31, 1996 compared to $6.9 million for the year ended December 31, 1995. The effective income tax rate was 37.5% for the year ended December 31, 1996 compared to 34.3% for the year ended December 31, 1995. This increase in the effective income tax rate in 1996 is due to a higher proportion of income earned in tax jurisdictions with higher income tax rates, including but not limited to the Farberware income.
Net income for the year ended December 31, 1996, all of which was income from continuing operations, was $20.4 million or $2.32 per share, on shares of 8,799,000, compared to income from continuing operations of $13.2 million, or $1.12 per share, on shares of 11,803,000, for the year ended December 31, 1995. The year ended December 31, 1996 included non-recurring pre-tax income of $11.9 million, net of costs, resulting from a license agreement. Net income for the year ended December 31, 1995 was $46.2 million or $3.91 per share. The year ended December 31, 1995 included income from discontinued operations, net of income taxes, of $2.6 million and the gain on sale of Syroco, Inc. of $30.5 million totaling $2.79 per share.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended December 31, 1997 was $12.6 million. The primary uses of cash were for financing fees related to debt incurred in connection with the Merger, and increases in operating working capital needs.
The Company's working capital requirements are seasonal and tend to be highest in the period from September through December due to the Christmas selling season. Accounts receivable tend to decline during the first quarter as receivables generated during the third and fourth quarters are collected and remain lower until the next peak season beginning in September. This seasonality has increased as a result of the acquisitions of Rauch and Silvestri product lines.
Capital expenditures were approximately $24.5 million for the year ended December 31, 1997. These expenditures were primarily for the purchase of land and construction of a warehouse and distribution facility in Mira Loma, CA, purchase of a single story manufacturing facility for C.J. Vander, improvements at the Company's East Boston facility and the purchase of machinery, tools and dies for the Rauch, Puerto Rico and C. J. Vander manufacturing facilities. Completion of the Mira Loma facility is expected to cost $4 million in the first quarter of 1998.
The Company's level of indebtedness will have several important effects on its future operation, 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 New Credit Facility and the Indenture governing the Senior Notes will require the Company to meet certain financial tests, and other restrictions may limit its ability to borrow additional funds or to dispose of assets and may affect the Company's flexibility in planning for, and reacting to, changes in its business, including possible acquisition activities, and (iii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.
The Company believes that funds generated from operations and borrowings available under the Revolving Credit Facility will be sufficient to finance the Company's working capital requirements, provide for all known obligations of the Company (including the obligations of the Company under the $165.0 million Notes issued in connection with the Merger and under its operating leases) and fund planned capital expenditures through December 31, 1998. See "Merger and Recapitalization."
See Note 2 to the accompanying Consolidated Financial Statements for a description of the terms of the Merger and Note 11 for dividend and liquidation terms of the Company's Cumulative Redeemable Preferred Stock.
See Note 7 and 16 to the accompanying Consolidated Financial Statements for the discussion on borrowings, availability, covenants and dividend restrictions of the Company under its Revolving Credit Facilities and its Notes due April 15, 2007.
Year 2000 Conversion
The Company has modified certain key systems to comply with Year 2000 requirements and initiated a program to evaluate and modify the systems that are not Year 2000 compliant. The Company will continue to evaluate the remaining systems, and where appropriate, make the necessary modifications. The Company currently believes that the expenditures necessary to be Year 2000 compliant will not be material to its financial condition or results of operations in any given year.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 130" and "SFAS 131", respectively). The Company will be required to adopt the provisions of these statements in fiscal 1998. SFAS 130 provides standards for reporting items considered to be "comprehensive income" and uses the term "other comprehensive income" to refer to revenues, expenses, gains and losses that are included in comprehensive income under generally accepted accounting principles but excluded from net income. Currently the only items presented in the Company's consolidated financial statements that would be considered other comprehensive income as defined in SFAS 130 are cumulative translation adjustments, which are recorded as components of stockholders' equity. SFAS 131 establishes new standards for reporting information about operating segments. The Company believes the segment information required to be disclosed under SFAS 131 will be more comprehensive than previously provided, including expanded disclosure of income statement and balance sheet items for each reportable operating segment. The Company has not yet completed its analysis of the operating segments it will report on. The Company believes that the provisions of SFAS 130 will not, when adopted, have a material impact on the Company's consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 standardizes the disclosure requirement for pensions and other postretirement benefits to the extent practicable. It does not change the measurement or recognition of those plans. The Company will be required to adopt the provisions of this statement in 1998. The adoption of these provisions will not have a material impact upon the Company's consolidated financial statements.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Syratech Corporation:
We have audited the accompanying consolidated balance sheets of Syratech Corporation (the "Company") and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Syratech Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company completed a merger accounted for as a recapitalization in 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts February 16, 1998 (March 30, 1998 as to Note 16)
SYRATECH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
See notes to consolidated financial statements
SYRATECH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
See notes to consolidated financial statements.
SYRATECH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995 (in thousands, except for share data)
See notes to consolidated financial statements.
SYRATECH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See notes to consolidated financial statements.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of dollars except share and per share data)
1. Business and Summary of Significant Accounting Policies
Business
Syratech Corporation designs, manufactures, imports and markets a diverse portfolio of tabletop, giftware and seasonal products, including: sterling silver, silver-plated and stainless steel flatware, sterling silver, silver-plated and brass hollowware, picture frames and photo albums, glassware, woodenware and ceramics, fine porcelain boxes, figurines, waterglobes and Christmas ornaments, trim, lighting and tree skirts.
Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Syratech Corporation and its subsidiaries (the "Company"), Syratech Holding Corporation and its subsidiaries, Syratech Security Corporation, Wallace International Silversmiths, Inc. and its subsidiaries ("Wallace"), Leonard Florence Associates, Inc. ("LFA"), Towle Manufacturing Company and its subsidiaries ("Towle"), Rauch Industries, Inc. and its subsidiaries ("Rauch"), Silvestri Inc. and subsidiaries ("Silvestri"), and Syratech (H.K.) Ltd. and its subsidiaries ("Syratech H.K."). All significant intercompany balances and transactions have been eliminated.
Recapitalization
The Company has accounted for the merger between THL I and the Company, and the related purchase of common stock for retirement, as a recapitalization (see Note 2).
Earnings Per Share
Effective in the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"), which supersedes Accounting Principles Board Opinion No. 15. Statement 128 specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. All prior periods have been restated to reflect the adoption of Statement 128.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue is recognized when products are shipped. The Company provides allowances for estimated doubtful accounts and sales returns based on historical experience and evaluation of specific accounts. Such allowances, excluding amounts related to Farberware Inc. (see Note 3), were comprised of the following:
December 31, ----------------------- 1997 1996 ------ ------ Sales returns and allowances $5,977 $3,501 Doubtful accounts 1,231 1,861 ------ ------ $7,208 $5,362 ====== ======
Customers
Substantially all customers are retailers. No base of customers in one geographic area constitutes a significant portion of sales. No single customer represented 10% or greater of consolidated net sales in 1997, 1996 or 1995.
Inventories
Inventories are stated at the lower of cost or market. Two subsidiaries determine cost on the last-in, first-out ("LIFO") method for silver and certain non-silver inventories. For all other inventories, cost is determined on the first-in, first-out ("FIFO") method.
Properties Held for Sale
Properties held for sale consist of 2.9 acres of land in Revere, Massachusetts (with a cost of $1,151) and two buildings in Sheffield, England (with a cost of $685). On January 28, 1998, the Company entered into a contract to sell the 2.9 acres of land for $1.9 million. Pursuant to the agreement, on January 28, 1998, the Company entered into an escrow agreement with the buyer. A deposit of $200 was paid to the Company by the buyer and will be held in escrow until the closing, which is scheduled to occur on November 28, 1998. At December 31, 1997, the properties held for sale are separately presented in the accompanying consolidated balance sheet and are stated at cost which is lower than the estimated net realizable values of such properties.
Property, Plant and Equipment
Purchased property, plant and equipment is recorded at cost. Leased equipment is recorded at the present value of the minimum lease payments required during the lease term. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets and over the terms, if shorter, of the related leases, as follows:
Years ------- Buildings and improvements 4 to 39 Tools and dies 3 to 50 Machinery and equipment 3 to 10 Other 3 to 10
In 1997, the Company changed the estimated useful lives of certain tools and dies from ten to fifty years. The change in useful lives did not have a material impact on the net loss of the Company for the year ended December 31, 1997.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Price in Excess of Net Assets Acquired
Purchase price in excess of net assets acquired is amortized using the straight-line method over 30 years (see Note 3). The Company evaluates the carrying value of goodwill based upon current and anticipated net income and undiscounted cash flows, and recognizes an impairment when it is probable that such estimated future net income and/or cash flows will be less than the carrying value of goodwill. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and estimated fair value.
Other Assets
Other assets consist principally of deposits, deferred fees, deferred financing costs and deferred long-term rent. Deferred financing costs are being amortized using the interest method over the terms of the related loans. Accumulated amortization aggregated approximately $1,008 and $125 at December 31, 1997 and 1996, respectively.
Advertising Costs
Advertising costs are charged to operations when incurred. These costs are recorded in selling, general and administrative expenses and totaled $4,156, $3,690 and $3,064 in the years ended December 31, 1997, 1996 and 1995, respectively.
Financial Instruments
The carrying values of cash and equivalents, accounts receivable, accounts payable and borrowings under revolving credit facilities approximate fair value due to the short-term nature of these instruments. The fair value of the Notes (Note 2) was estimated to be $151,800 as of December 31, 1997, based upon recent private market trades.
Income Taxes
The Company and its domestic subsidiaries (except for Wallace's Puerto Rican subsidiaries) file a consolidated federal income tax return. The Puerto Rican subsidiaries file separate returns in accordance with Section 936 of the Internal Revenue Code. Deferred income taxes are provided for certain income and expense items, which are accounted for differently for financial reporting and income tax purposes.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at year-end exchange rates and income and expense items are translated at the average rates of exchange prevailing during each year. The effects of foreign currency fluctuations on the foreign subsidiaries' assets and liabilities have been reflected as a separate component of stockholders' equity. Transaction gains and losses have been insignificant.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 130" and "SFAS 131", respectively). The Company will be required to adopt the provisions of these statements in fiscal 1998. SFAS 130 provides standards for reporting items considered to be "comprehensive income" and uses the term "other comprehensive income" to refer to revenues, expenses, gains and losses that are included in comprehensive income under generally accepted accounting principles but excluded from net income. Currently the only items presented in the Company's consolidated financial statements that would be considered other comprehensive income as defined in SFAS 130 are cumulative translation adjustments, which are recorded as components of stockholders' equity. SFAS 131 establishes new standards for reporting information about operating
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
segments. The Company believes the segment information required to be disclosed under SFAS 131 will be more comprehensive than previously provided, including expanded disclosure of statement of operations and balance sheet items for each reportable operating segment. The Company has not yet completed its analysis of the operating segments it will report on. The Company believes that the provisions of SFAS 130 will not, when adopted, have a material impact on the Company's consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS 132 standardizes the disclosure requirement for pensions and other postretirement benefits to the extent practicable. It does not change the measurement or recognition of those plans. The Company will be required to adopt the provisions of this statement in 1998. The adoption of these provisions will not have a material impact upon the Company's consolidated financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to the 1997 presentation.
Cash Flow Information
Supplemental cash flow information is as follows:
2. Merger and Recapitalization
On April 16, 1997, THL Transaction I Corp. ("THL I"), a Delaware corporation, controlled by affiliates of Thomas H. Lee Company ("THL"), was merged with and into the Company (the "Merger") pursuant to the Restated Agreement and Plan of Merger, dated as of November 27, 1996, effective as of October 23, 1996, as amended on February 14, 1997, between THL I and the Company.
Pursuant to the Merger, each share of the Company's Common Stock, par value $0.01 per share ("Common Stock") issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time") (April 16, 1997) (other than (i) shares of Common Stock held by the Company or any wholly-owned subsidiary thereof, and (ii) 35,232 shares of Common Stock that were contributed to the Company by Leonard Florence (former principal shareholder) upon the Merger and which were then canceled and retired) was entitled to receive at the election of the holder thereof and as stated below, either (a) $32.00 in cash (except that Leonard Florence received $28.00 in cash) or (b) one fully paid and non-assessable share of the Company's Common Stock. Common Stock retained was limited in the case of each stockholder (other than Management Stockholders) to 34.75% of such stockholder's shares of Common Stock. Also, because no more than an aggregate of 868,250 shares of the Company's Common Stock could be retained by stockholders (other than Management Stockholders), the right to retain the Company's Common Stock was to be subject to proration. In addition, each Company Stock Option granted under the 1986 and 1993 Stock Plans that was outstanding immediately prior to the Effective Time, vested and was canceled in exchange for the excess in cash of $32.00 over the exercise price per share of the Company's Common Stock. The aggregate amount paid to optionees of $3,685 and $188 related to the vesting of the options
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was charged to compensation expense.
Upon the Merger, THL acquired, directly from the Company, an aggregate of 18,000 shares which represented 100% of the Company's 12% Cumulative Redeemable Preferred Stock and 2,374,793 shares which represented 62.8% of the Company's Common Stock, in exchange for corresponding stock interests in THL I, for which THL had paid an aggregate of $93,993 in cash. Accordingly, THL acquired control of the Company.
At the Effective Time, the Company entered into debt financing arrangements consisting of $165,000 principal amount of 11% Senior Notes (the "Notes") and a Senior Revolving Credit Facility of $130,000 (the "Revolving Credit Facility"). The amount invested by THL in THL I, the purchase price for the Cumulative Redeemable Preferred Stock, plus proceeds of the Notes and a portion of the proceeds available pursuant to the Revolving Credit Facility, were used to finance the acquisition of the shares of the Company's outstanding Common Stock that were not retained by the Company's then existing stockholders, and to refinance the Company's outstanding indebtedness. The Revolving Credit Facility is also intended to provide for the Company's working capital requirements at the time of and following the Merger.
The transaction was accounted for as a recapitalization.
At the Effective Time of the Merger, the employment agreement with the Chairman of the Board and Chief Executive Officer was amended which (i) changed his term of full-time employment from a rolling five-year term to a fixed five-year term, (ii) provided for a minimum base salary of $1,150 per annum, (iii) established $1,150 as the minimum amount upon which the Chairman's retirement benefit (and the survivor's benefit of his surviving spouse) will be computed, and (iv) created contractual rights with respect to certain perquisites that he was accorded informally under present arrangements with the Company. The employment agreement with the Vice President of Purchasing was also amended to change his term of full-time employment from a rolling five-year term to a fixed five-year term.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. Acquisitions
Acquisitions of Businesses
On February 15, 1996, the Company, through an indirect wholly owned subsidiary, acquired the outstanding shares of Rauch for approximately $49,626 including costs of the transaction. The acquisition was accounted for under the purchase method of accounting, and the results of operations of Rauch have been included with the results of the Company from February 15, 1996.
The purchase price in excess of net assets acquired of $7,224 is being amortized on the straight-line basis over 30 years. Rauch is a leading domestic manufacturer and marketer of Christmas and other seasonal products, in particular glass and satin tree ornaments. During 1996, the Company received $23,771 in connection with an insurance claim relating to a 1994 fire at a Rauch facility.
The allocation of purchase price is as follows:
Cash paid to Rauch shareholders $ 48,042 Acquisition costs incurred 1,584 -------- Total purchase price $ 49,626 ======== Allocated to: Cash $ 2,084 Accounts receivable 8,461 Insurance receivable 23,771 Inventories 19,206 Deferred income taxes 2,518 Prepaid expenses and other 983 Property, plant and equipment, net 23,081 Other assets 89 Purchase price in excess of net assets required 7,224 Current liabilities (22,303) Deferred income taxes (15,488) -------- Total $ 49,626 ========
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized pro forma (unaudited) information assumes the acquisition had occurred on January 1, 1996.
-------- Net sales $271,450 ======== Income from continuing operations $ 19,657 ======== Net income $ 19,657 ======== Basic earnings per share: Continuing operations $ 2.26 ======== Net income per common share $ 2.26 ======== Weighted-average number of shares outstanding 8,695 ======== Diluted earnings per share: Continuing operations $2.23 ======== Net income per common share $2.23 ======== Weighted-average number of shares outstanding 8,695 Effect of dilutive stock options 104 -------- Adjusted weighted-average number of shares outstanding 8,799 ========
On May 8, 1996, the Company, through one of its subsidiaries, acquired all of the outstanding common stock of C.J. Vander Ltd., a manufacturer of sterling silver and silver-plated flatware and hollowware in Sheffield and London, England. The purchase price was immaterial to the Company's consolidated financial statements. The acquisition was accounted for under the purchase method of accounting, and the results of operations of C.J. Vander have been included with the results of the Company from May 8, 1996. The results of operations for 1996 would not have differed significantly had this acquisition taken place on January 1, 1996.
Acquisition of Assets
Farberware
On April 2, 1996, the Company, through its indirect wholly-owned subsidiary, Far-B Acquisition Corp. ("Far-B"), together with Lifetime Hoan Corporation ("Lifetime") acquired certain assets from Farberware Inc., a subsidiary of U.S. Industries, Inc. The Company and Lifetime are not affiliates. Farberware Inc. was a manufacturer of aluminum clad, stainless steel cookware and bakeware and small electric kitchen appliances. The aggregate consideration paid by Far-B and Lifetime was $45,771, of which Far-B paid approximately $32,611. The assets acquired by the Company included certain of the inventory, the tradename "Farberware" and the intellectual property (including the intellectual property that relates to cookware and bakeware and electric products other than major kitchen appliances) and certain tools and dies and machinery and equipment. Effective April 2, 1996, the Company, through Far-B, entered into a manufacturing services agreement with Farberware Inc. for transitional manufacturing services for certain finished goods previously produced by Farberware Inc. The Company entered into the manufacturing service agreement in part to provide continuity of product during a transition period in order to protect the strength of the Farberware name in the marketplace. The manufacturing service agreement has terminated in 1996 and during 1997, the Company sold or disposed of all acquired inventory and no longer manufactures or sells Farberware cookware and bakeware products or noncommercial electric products. Accordingly, net sales for the year ended December 31, 1997 and 1996 exclude revenue from the sales of Farberware inventory, and $2.6 million and $3.9 million, respectively, related to these sales and to licensing income, net of certain selling, general and administrative expenses, has been recorded as other operating income.
The Company acquired Farberware in order to expand Farberware's licensing activities to use the Farberware name on certain of the Company's existing and new products.
In a separate transaction, the Company and Far-B entered into an agreement with Lifetime, which provided for the allocation between them of the assets acquired from Farberware Inc., the granting of a long-term license to Lifetime for use of the Farberware name in connection with an extensive list of products, the granting to Lifetime of long-term exclusive rights to operate Farberware
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outlet stores, the reservation of certain exclusive rights to Far-B (including exclusive rights to use of the Farberware name for corporate purposes and for the marketing of cookware and bakeware products as well as electric products) and administration of certain licensing rights.
On June 27, 1996, the Company's Farberware Inc. subsidiary (formerly Far-B) ("Farberware") entered into a license agreement with Meyer Marketing Co. Ltd. ("Meyer") pursuant to which Meyer was granted for a term of 200 years (i) an exclusive worldwide license to use and exploit the Farberware name and certain related intellectual property rights in connection with the sourcing, manufacture and distribution of cookware and bakeware products for home use and commercial, industrial and institutional size pots, pans and roasters, and (ii) non-exclusive (shared) rights to use certain Farberware technology and other intellectual property. For such grant, Meyer made a one-time payment to the Company of $25,500, which resulted in recognition by the Company of $11,900 of non-recurring income. Under the terms of the licensing agreement, the Company has no further obligation with respect to the amount paid by Meyer. As such, the entire proceeds received were recognized as revenue in the second quarter of 1996. On July 12, 1996, Farberware granted to a major retail chain the exclusive license to use and exploit the Farberware name and related intellectual property in connection with the sourcing, manufacture, marketing and sale of certain electric products for quarterly royalty payments. On October 25, 1996 Farberware granted to FCI Corp. a license to use and exploit the Farberware name in connection with the sourcing, manufacturing, marketing and sale of certain commercial products (defined as six specified commercial urns and one specified commercial convection oven plus cookware, bakeware and electric products developed by the Licensee solely and exclusively for commercial, industrial or institutional use with the prior written approval of Farberware) for the payment of quarterly royalties.
Pursuant to an agreement made with Lifetime contemporaneously with the agreement for acquisition of assets of Farberware Inc., the Company and Lifetime agreed to share the rights to receive, and the obligation to pay certain commissions in respect of, royalties under specified license agreements assigned to the Company by the prior owner of the Farberware tradename. Subject to certain intellectual property rights that the Company has reserved exclusively for itself, the Company and Lifetime expect to continue to grant licenses to third parties for use of the Farberware tradename. The Company also markets specific products from time to time under the Farberware tradename. The agreement with Lifetime provides that for a period of sixty days following a change of control of either the Company or Lifetime, the other co-owner of the joint venture will have the right to require the co-owner that has experienced the change in control to set a price for a one-half interest in the venture, and thereupon the other co-owner (i.e., the one that has not experienced a change of control) can elect either to buy its co-owner's interest at the price so set or to sell its own interest at such price to the co-owner that set it.
Subsequent to the acquisition of the assets from Farberware Inc., legal disputes arose amongst the parties over alleged breaches of agreements. On February 3, 1997, the Company, Farberware, and Lifetime reached an agreement (the "Settlement Agreement") with Bruckner Manufacturing Corp. ("BMC") and U.S. Industries Inc. ("USI") to settle all previous outstanding legal disputes arising out of the Farberware Asset Purchase Agreement ("APA") and the Manufacturing Services Agreement ("MSA"). Under the terms of the Settlement Agreement, the Company received certain finished goods inventory at no cost, and paid for certain finished goods inventories purchased under the MSA. The Company also received a waiver of certain restrictions in the APA on disposing of tools, machinery, and equipment formerly used by BMC in the manufacture of Farberware products. The Company sold the majority of the tools, machinery and equipment in 1997 and retained the remainder for use in its existing businesses. The sale of the tools, machinery and equipment resulted in net proceeds to the Company of $2,184, which has been recorded as other non-operating income in 1997.
Silvestri
On April 16, 1996, the Company purchased finished goods inventory and intangible assets of the Silvestri division of FFSC, Inc. ("Silvestri") for approximately $8,600. Silvestri products include Christmas ornaments, collectibles, lighting and trim as well as other seasonal and nonseasonal giftware and decorative accessories.
During January of 1998, in connection with management's plan to reduce costs and improve operating efficiencies by integrating its recent acquisition, the Company announced plans to close certain Silvestri administrative and distribution operations and move them to its corporate headquarters.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Potpourri Press
On November 26, 1996, a wholly-owned subsidiary of the Company acquired inventory, tangible property, intellectual property rights, certain records and certain contract rights of Potpourri Press, Inc., a North Carolina-based manufacturer and marketer of Christmas products, for a purchase price of approximately $2,300 plus a $240 promissory note (Note 7).
4. Discontinued Operations
On April 11, 1995, pursuant to an agreement entered into on March 28, 1995, the Company, through its subsidiary, Syratech Holding Corporation, sold Syroco, Inc. ("Syroco"). The net proceeds received after costs of the sale and income taxes were $133,931. On September 25, 1995, the Company reached a final settlement regarding the sale of Syroco. Under the terms of the settlement, the Company reacquired certain assets and reassumed certain liabilities of Syroco which have been recorded at their estimated net fair value of $1,834 at December 31, 1995. The sale resulted in the discontinuation of the Company's casual furniture and accessories business and resulted in an after-tax gain on disposal of $30,451 which was recognized in the second quarter of 1995. The operating results (unaudited) of the discontinued segment for the three months ended March 31, 1995 includes net sales of $33,626, income before provision for income taxes of $4,217, provision for income taxes of $1,645, resulting in income from discontinued operations of $2,572.
The results of operations and cash flows for the discontinued segment are included in discontinued operations in the consolidated statement of operations and the consolidated statement of cash flows for the year ended December 31, 1995. The operating results of the discontinued segment exclude previously allocated corporate expenses. Substantially all of these assets have been sold or disposed of with no effect on the previously recognized gain on disposal.
5. Inventories December 31, ------------------------- 1997 1996 ------- ------- Inventories were comprised of the following: Raw materials $10,169 $ 9,020 Work-in-process 4,917 5,980 Finished goods 69,209 64,355 ------- ------- Total $84,295 $79,355 ======= =======
Inventories would have been approximately $1,784 and $3,430 higher at December 31, 1997 and 1996, respectively if the FIFO method had been used for all inventories. Increases in LIFO inventory quantities had the effect of decreasing consolidated net loss by $74 in 1997 and decreasing income by $59 in 1996. There were no decreases in LIFO inventory quantities in 1995.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. Property, Plant and Equipment
Property, plant and equipment was comprised of the following:
December 31, ---------------------------- 1997 1996 --------- --------
Land and improvements $ 10,345 $ 8,305 Buildings and improvements 43,092 41,838 Tools and dies 16,501 14,635 Machinery and equipment 30,911 25,388 Other 1,984 1,619 Construction in progress 16,950 4,923 -------- -------- Total 119,783 96,708 Less accumulated depreciation (37,379) (32,753) -------- -------- Net $ 82,404 $ 63,955 ======== ========
Capitalized interest is not material to the Company's consolidated financial statements in any year presented.
The Company has commitments under contracts for the construction of a warehouse and distribution facility in Mira Loma, California. Portions of such contracts not completed at December 31, 1997 are not reflected in the consolidated financial statements. These unrecorded commitments were approximately $3,947 at December 31, 1997.
7. Revolving Loan Facilities and Notes Payable
1997 Revolving Loan Facilities and Notes Payable
On the effective date of the Merger, the Company entered into a Senior Revolving Credit Facility (the "Revolving Credit Facility") and terminated its $60,000 Amended and Restated Loan and Security Agreement (the "Loan Agreement"). The Revolving Credit Facility, as amended on July 31, 1997 and December 31, 1997, provides for $130,000 of borrowings, including a $30,000 sublimit for the issuance of standby and commercial letters of credit. Borrowings made under the Revolving Credit Facility bear interest at a rate equal to, at the Company's option, Eurodollar Rate plus 225 basis points (7.97% using the 30 day Eurodollar rate at December 31, 1997) or the Prime Rate plus 50 basis points ( 9% at December 31, 1997). The weighted-average interest rate on borrowings outstanding under this facility for the year ended December 31, 1997 was 8.81%. At December 31, 1997, $6,000,000 of the outstanding borrowings were at the Eurodollar rate and the balance of the outstanding borrowings were at the Prime Rate. The Revolving Credit Facility expires on April 16, 2002. Pursuant to the terms of the Revolving Credit Facility, the Company is required during February and March of each year to maintain excess availability of at least $45,000 except February and March 1998 when minimum availability must be $30,000. The obligations of the Company under the Revolving Credit Facility are secured by inventory and accounts receivable of the Company (the "Issuer/Guarantor Parent") and its domestic subsidiaries and by a pledge of 100% of the domestic subsidiaries' and at least 65% of the foreign subsidiaries' outstanding capital stock (the "Guarantor Subsidiaries") (Note 17). The Revolving Credit Facility contains customary covenants of the Company and the subsidiary borrowers, including but not limited to minimum earnings before income taxes, depreciation, amortization, and certain adjustments ("EBITDA"), as defined, funded debt to EBITDA and fixed charge coverage ratios, as defined in the Revolving Credit Facility, and minimum consolidated net worth on or after December 31, 1997 to be at least $1.00 (not in thousands). The Company is in compliance with the covenants, as amended, as of December 31, 1997 and for the year then ended. Availability under the Revolving Credit Facility, net of outstanding letters of credit, was $61,837 at December 31, 1997.
Furthermore, in connection with the Merger, the Company entered into debt financing of $165,000 of 11% Senior Notes (the "Notes") The Notes, due April 15, 2007, require interest payments to be made semi-annually on April 15 and October 15. The Notes are general unsecured obligations of the Company and rank pari passu in right of payment with all current and future
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("Non-Guarantor Subsidiaries"). Consequently, the obligations of the Company under the Notes are effectively subordinated to its obligations under the Revolving Credit Facility to the extent of such assets. The Notes are redeemable, in whole or in part, at the Company's option after April 15, 2002.
The Company's ability to pay dividends is restricted by terms of the Revolving Credit Facility and the Notes. The Notes also include financial covenants which are less restrictive than the covenants contained in the Revolving Credit Facility. A default under the Notes will trigger a default under the Revolving Credit Facility.
1996 Revolving Loan Facilities
The 1996 Revolving Loan Facility was repaid in its entirety upon completion of the Merger. The weighted-average interest rate on borrowings outstanding under this facility for the year ended December 31, 1996 was 7.29%. At December 31, 1996, there was $5,878 outstanding under the facility and credit availability (net of letters of credit outstanding) was $83,770.
Other Debt Facilities
On the effective date of the Merger, the Company paid the outstanding borrowings of $252 under one of Wallace's Puerto Rican subsidiaries' $10,000 Amended and Restated Line of Credit Agreement (the "Credit Facility"). On May 1, 1997, the Company entered into a $1,000 facility (the "Facility"), expiring on May 31, 1998, with the same lender. The Facility bears interest at a rate equal to, at the Company's option, the Eurodollar Rate plus 175 basis points (7.47% using the 30-day Eurodollar rate at December 31, 1997) or the bank's Prime Rate less 25 basis points. (8.25% at December 31, 1997). Availability under the Facility was $49 at December 31, 1997. The weighted-average interest rate on borrowings outstanding under this facility for the year ended December 31, 1997 was 7.80%. Borrowings under the 1997 and 1996 facilities were uncollateralized; however, the pledge of assets owned by one of the subsidiaries as collateral for other loans was prohibited. Borrowings under the Credit Facility were guaranteed by the Company and cross-guaranteed by certain other subsidiaries.
The weighted average interest rate on borrowings outstanding under this Facility for the year ended December 31, 1996 was 8.08%. At December 31, 1996, $558 was outstanding under the Facility and the credit availability was $9,442.
At December 31, 1996, the Company had a note payable of $200 related to the purchase of Potpourri (Note 3).
8. Income Taxes
The provisions (benefit) for income taxes are as follows:
Year Ended December 31, ------------------------------------- 1997 1996 1995 ------- ------- ------- Current: Federal $(3,121) $11,379 $ 6,518 State 448 3,542 1,674 Foreign 825 1,307 937 ------- ------- ------- (1,848) 16,228 9,129 ------- ------- ------- Deferred Federal (4) (3,344) (1,805) State (16) (900) (383) Foreign - - - ------- ------- ------- (20) (4,244) (2,188) ------- ------- ------- Tax effect of stock options: Federal - 193 (60) State - 57 (18) ------- ------- ------- - 250 (78) ------- ------- ------- Total $(1,868) $12,234 $ 6,863 ======= ======= =======
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation between the Company's effective income tax rate and the U.S. federal statutory rate are as follows:
Year Ended December 31, --------------------------- 1997 1996 1995 ------ ------ ------
Federal statutory rate (35.0%) 35.0% 35.0% State taxes, net of federal income tax benefit 1.2 4.9 2.5 Foreign income taxes (including Puerto Rico) 2.0 (4.5) (3.6) Other 2.9 2.1 0.4 ----- ---- ---- Effective income tax rate (28.9%) 37.5% 34.3% ===== ==== ====
The components of income before provision (benefit) for income taxes were comprised of the following:
Year Ended December 31, ----------------------------------- 1997 1996 1995 --------- -------- -------- Domestic $ (10,226) $ 25,457 $ 14,480 Foreign 3,762 7,166 5,559 --------- -------- -------- Total $ (6,464) $ 32,623 $ 20,039 ========= ======== ========
Provisions have been made for taxes on the undistributed earnings of Syratech H.K. and Wallace's Puerto Rican subsidiaries, which are ultimately expected to be remitted to the parent company. The Company has permanently invested a portion of the undistributed earnings of its Puerto Rican and Syratech H.K. subsidiaries. It is not practical to estimate the amount of unrecognized deferred tax liability attributable to these undistributed foreign earnings.
Wallace's Puerto Rican subsidiaries operate under grants from the Commonwealth of Puerto Rico exempting 90% of their income from taxation until December 2003. Had the Company not been eligible for the tax exemption, the net loss in 1997 would have increased by approximately $1,685 and net income in 1996 and 1995 would have been reduced by approximately $1,211 and $1,198, respectively.
The tax effects of significant items comprising the Company's net deferred tax asset (liability) are as follows:
December 31, ------------- 1997 1996 -------- ---------
Current deferred tax assets: Accounts receivable $ 3,078 $ 4,475 Inventory 2,330 2,336 Reserves and accruals 1,596 2,266 Foreign operating loss carryforwards 5,203 175 Other 92 296 -------- -------- Total 12,299 9,548 Valuation allowance (962) (608)
-------- -------- Net current deferred tax asset $ 11,337 $ 8,940 ======== ======== Non-current deferred tax asset (liability): Property, plant and equipment $(17,252) $(17,263) Deferred compensation 1,402 1,876 Foreign earnings to be remitted (4,233) 206 Other (2,525)
-------- -------- Net non-current deferred tax liability $(20,083) $(17,706) ======== ========
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance relates primarily to the potential unusable portion of foreign tax loss carryforwards in 1997. At December 31, 1996 the valuation allowance related to the potential unusable portion of foreign tax loss carryforwards of $530 and contribution carryforwards of $1,066.
9. Commitments and Contingencies
The Company and its subsidiaries have various operating lease commitments for buildings and equipment. The lease agreements generally require the Company to pay insurance, real estate taxes, and maintenance and contain various renewal options. Future minimum rental payments for all noncancellable operating leases for each of the next five years and thereafter are as follows:
1998 $3,393 1999 3,121 2000 2,551 2001 1,602 2002 899 Subsequent to 2002 1,779
Rent expense for all operating leases was approximately $6,254, $5,209 and $1,821 in 1997, 1996 and 1995, respectively.
Certain subsidiaries were contingently obligated for outstanding letters of credit, trade acceptances and similar instruments aggregating $8,199 at December 31, 1997 (Note 7). The assets of Syratech H.K. are pledged as collateral for certain of these contingent obligations.
10. Employee Benefit Plans
401(K) Savings Plans
The Company has three 401(k) savings plans. The 401(k) savings plans cover substantially all employees of its domestic and Puerto Rican subsidiaries. The 401(k) plans are subject to certain minimum age and length of employment requirements. Under two of these plans, the Company matches 30% of participants' contributions up to 6% of compensation. Under the other plan, the Company matches 50% of the first five hundred twenty dollars contributed and 25% thereafter, of the participants' contributions up to 15% of compensation. The Company also has a savings plan, established in 1991, covering substantially all employees of the Company's Hong Kong subsidiary. Under the Hong Kong plan, the Company contributes up to 10% of the participants' compensation. The Company contributed an aggregate of $463, $597 and $256 to all of these Plans in 1997, 1996 and 1995.
Officers Retirement Plan
The Company has employment agreements with certain officers and employees for terms ranging from three to five years, which provide for minimum annual salaries aggregating $2,901 and certain other benefits.
Agreements with five of the Company's officers provide for other retirement benefit payments. Two agreements provide that the benefit payments be based upon two percent of the average total annual compensation (salary and bonus) for the three-year period preceding the executives' retirement dates multiplied by the number of years of service. In addition, one of the agreements provides for a 100% survivor benefit for the executive's spouse. Two agreements provide for benefit payments based upon the greater of (i) $75,000 or (ii) one-half of one percent of the average total annual compensation (salary and bonus) for the three-year period preceding the executives' retirement dates multiplied by the number of years of service. One agreement with an officer provides for benefit payments based upon the greater of (i) $75,000 or (ii) one percent of the average total annual compensation (salary and bonus) for the three-year period preceding the executives' retirement dates multiplied by the number of years of service.
Upon consummation of the Merger (Note 2), an employment agreement with an officer was amended so as to (i) change the officer's term of full-time employment from a rolling five-year term to a fixed five-year term, (ii) provide for a minimum base salary
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $1,150 per annum, (iii) establish $1,150 as the minimum amount upon which the officer's retirement benefit (and the survivor's benefit of his surviving spouse) will be computed and (iv) create contractual rights with respect to certain perquisites that he is accorded informally under present arrangements with the Company. Additionally, an employment agreement with another officer was amended to change the officer's term of full-time employment from a rolling five-year term to a fixed five-year term.
Pension expense is determined using assumptions at the beginning of the year. Assumptions used in determining the actuarial present value of the projected benefit obligation include: a discount rate of 6.75%, 7.5% and 8.5% in 1997, 1996 and 1995, respectively, and a rate of future increases in benefit compensation of 3%. The effect of the changes in discount rates was not material to the consolidated financial statements.
Net pension cost included the following components:
1997 1996 1995 ---- ------ ---- Service cost for benefits earned $279 $ 317 $196 Interest cost benefit obligation 195 199 123 Amortization of prior service cost (33) 620 476 Amortization of loss 4 191 - ---- ------ ---- Net periodic pension cost $445 $1,327 $795 ==== ====== ====
The following table summarizes the amounts recognized in the consolidated balance sheets as of December 31, 1997 and 1996:
1997 1996 ------ ------ Actuarial present value of obligations: Vested benefit obligation $3,261 $3,287 ====== ====== Projected benefit obligation $3,529 $3,612 Fair value of plan assets - - ------ ------ Projected benefit obligation in excess of plan assets 3,529 3,612 Unrecognized prior service cost 366 (610) Unrecognized gain/(loss) (759) (311) Additional minimum liability - 597
====== ====== Net accrued pension liability $3,136 $3,288 ====== ======
Other
The Company's C. J. Vander subsidiary also has an employee benefit plan. The Company's obligation under the plan is not material to the Company's consolidated financial position or results of operations.
11. Stockholders' Equity
Preferred Stock
The liquidation preference of the Cumulative Redeemable Preferred Stock is $1,000 per share plus accrued but unpaid dividends. Holders of the Cumulative Redeemable Preferred Stock are entitled, subject to the rights of creditors, in the event of any voluntary or involuntary liquidation of the Company, to an amount in cash equal to $1,000 for each share outstanding plus all accrued and unpaid dividends. The rights of holders of the Cumulative Redeemable Preferred Stock upon liquidation of the Company rank prior to those of the holders of Common Stock.
Dividends on shares of Cumulative Redeemable Preferred Stock are cumulative from the date of issue and are payable when and as declared from time to time by the Board of Directors of the Company. Such dividends accrue on a daily basis (whether or not declared) from the original date of issue at an annual rate per share equal to 12% of the original purchase price per share, with such amount to be compounded annually on each December 31 so that if the dividend is not paid for any year the unpaid amount will be
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
added to the original purchase price of the Cumulative Redeemable Preferred Stock for the purpose of calculating succeeding years' dividends. At December 31, 1997, $1,530 has been accrued.
The Cumulative Redeemable Preferred Stock is redeemable at any time at the option of the Company, in whole or in part, at $1,000 per share plus all accumulated and unpaid dividends, if any, to the date of redemption. Subject to the Company's existing debt agreements, the Company must redeem all outstanding Cumulative Redeemable Preferred Stock in the event of a public offering of equity, a change of control or certain sales of assets.
Key Employee Stock Option Plans
Pursuant to the Merger, each Common Stock option granted under the Company's 1986 Stock Option Plan ("1986 Plan"), the 1993 Key Employee Stock Option Plan ("1993 Plan") and the 1995 Key Employee Stock Option Plan ("1995 Plan"), that were outstanding immediately prior to the Effective Time, vested and were cancelled in exchange for the excess of $32.00 over the exercise price per share. The aggregate amount paid to optionees of $3,685 and $188 related to the vesting of the stock options was charged to compensation expense.
A summary of stock option activity under all the Company's plans is as follows:
Weighted Average Exercise Price Shares Per Share --------- ---------------
Outstanding at January 1, 1995 300,750 $10.64 Canceled (90,900) $12.91 Granted 54,500 $16.87 Exercised (44,150) $7.29 -------- Outstanding at December 31, 1995 220,200 $11.92 Canceled (102,000) $24.47 Granted 139,500 $24.68 Exercised (28,200) $7.17 -------- Outstanding at December 31, 1996 229,500 $14.68 Canceled (221,500) $14.71 Granted - Exercised (8,000) $13.90 ======== Outstanding at December 31, 1997 - ======== Exercisable at December 31, 1996 107,080 ========
The Company applies Accounting Principles Board Opinion No. 15 and related interpretations in accounting for its stock option and other employee stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based on fair value at the grant dates for awards under those plans which were granted on or after January 1, 1995 consistent with the method of SFAS No. 123, the Company's net income and earnings per share for the year ended December 31, 1996 would have been reduced to the pro forma amounts indicated below:
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 1995 ------- ------- Net income (loss): As reported $20,389 $46,199 ======= ======= Pro forma $20,036 $45,762 ======= =======
Basic earnings per share: As reported $ 2.34 $ 3.95 ======= ======= Pro forma $ 2.30 $ 3.91 ======= ======= Weighted average number of shares outstanding 8,695 11,707 ======= ======= Diluted earnings per share: As reported $ 2.32 $ 3.91 ======= ======= Pro forma $ 2.28 $ 3.88 ======= ======= Weighted average number of shares outstanding 8,695 11,707 Effect of dilutive stock options 104 96 ------- ------- Adjusted weighted average number of shares outstanding 8,799 11,803 ======= =======
The pro forma results are not necessarily indicative of results that would have been reported if all options had been measured under SFAS No. 123.
The weighted average remaining contractual life of options outstanding at December 31, 1996 was 6.99 years. The weighted average fair value of options granted during 1995 and 1996 was $8.03 and $8.94 per share, respectively. There were no options granted in 1997.
The fair value of options granted under the Company's stock option plans during 1995 and 1996 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 30.6%, risk-free interest rate of 6.0%, and expected lives of either 5.3 or 7.7 years.
Transfer of Shares
On December 31, 1996, the Company's Chief Executive Officer and principal shareholder (the "Principal Shareholder") of the Company, the Company and THL Transaction I Corp. entered into agreements with three executive officers whereby the Principal Shareholder will transfer up to 73,068 shares (the "Shares") of his Syratech common stock to the Company to effect the transfer of an equal number of newly issued shares to the executive officers. In connection with each transfer of shares of stock, the agreements also provide for each executive to receive, from the Company, as additional compensation, an annual lump sum cash payment (the "Lump Sum Payments") for the reimbursement of income taxes owed by the executive as a result of such transfer and payment. The transfer of Shares by the Principal Shareholder and the Lump Sum Payments to the executives are irrevocable and unconditional and are not based upon the executives' future employment with the Company. On December 31, 1996, 31,812 shares were transferred and Lump Sum Payments totaling $703 were made to the executives. On January 14, 1997, shares aggregating 31,884 were transferred and Lump Sum Payments totaling $705 were made to the executives. On January 14, 1998, the remaining 9,372 shares were transferred to the executives.
The estimated value of the shares has been recorded as an addition to additional paid-in capital of $2,338. Total compensation expense equal to the estimated fair value of the Shares plus an estimate of the aggregate Lump Sum Payments, or $3,953, was recorded in the fourth quarter of 1996.
Short-term compensation payable was $207 and $705 at December 31, 1997 and 1996, respectively. The long-term compensation payable at December 31, 1996 was $207.
The weighted-average fair value of the shares was $31.50. The fair value of the shares based on the provision of SFAS No. 123 was not materially different from the amounts recorded.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase of Common Stock
On December 29, 1995, the Company effected the Katy Stock Repurchase. The aggregate purchase price of $52,054 represented approximately $17 per share. The purchase was financed by the issuance of two promissory notes due January 2, 1996 to subsidiaries of Katy and the assumption of short-term bank debt, all aggregating $51,735. The two promissory notes and the short-term bank debt were paid on January 2, 1996. The Company's par and additional paid-in capital values have been decreased to reflect the purchase.
Shareholder Rights Plan
On October 26, 1992 the Company's Board of Directors adopted a Shareholder Rights Plan (the "Plan"). Under the Plan, the Company distributed a dividend of one right (a "Right") to purchase shares of preferred stock to stockholders of record on October 31, 1992 and further authorized the issuance of one Right to each share of common stock which becomes outstanding after the record date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of a new series of preferred stock ("Series A Preferred stock") at a price of $50, subject to adjustment. As amended on July 5, 1994, the Rights become exercisable only if an individual or group (an "Acquiring Person") acquires 15% or more of the outstanding common stock or commences a tender offer which would result in its ownership of 30% or more of the outstanding common stock, or in the case of a person who beneficially owned 20% or more of the outstanding common stock on October 26, 1992, such person acquires an additional 1% or more of the outstanding common stock.
As required by the Merger and Recapitalization (Note 2), effective on November 8, 1996, the Company redeemed all outstanding Rights and terminated the Shareholder Rights Plan pursuant to which the Rights were issued. The redemption price for each Right is one cent and if holders of Rights have not received payment of the redemption price prior to the Effective Time, they will have the redemption price of their Rights added to the payment of the cash price for their shares of Company Common Stock in the Merger.
12. Related-Party Transactions
In connection with the Merger, the Company entered into a Management Agreement with Thomas H. Lee Company for which the Company pays an annual management fee in the amount of $450 ($320 incurred for the year ended December 31, 1997).
In 1996 a beneficial owner of less than 1% of the Company held a significant management role in Service Merchandise Co., Inc. ("Service"). A different person is a director of the Company and is also a director of Service. The Company had net sales to Service of approximately $6,867, $12,432 and $10,706 for 1997, 1996 and 1995, respectively.
Effective July 12, 1996, the Company, through an indirect wholly-owned subsidiary, granted a license to Service to use certain trademarks, patents and copyrights relating to certain electric and other products. The agreement is subject to cancellation with six months' notice by the licensee.
In 1996, Wacker Industrial Company ("Wacker"), a major supplier, is owned by a holder of less than 1% of the Company's common stock. In 1997, 1996 and 1995, the Company had purchases from this supplier of approximately $5,806, $4,478 and $5,371, respectively. Accounts payable to this supplier approximated $41 and $93 at December 31, 1997 and 1996, respectively.
Other transactions with companies affiliated with certain directors/stockholders include net sales of approximately $903, $790 and $735 for 1997, 1996 and 1995, respectively. There were no purchases of products or services for 1997, 1996 and 1995. Accounts receivable from these companies approximated $19 and $7 as of December 31, 1997 and 1996, respectively. There were no accounts payable.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. Foreign Operations
The Company's foreign operations relate to its Hong Kong subsidiary, and as of May 8, 1996, its C.J. Vander subsidiary. The sales of the Hong Kong subsidiary are substantially to customers in the United States and the sales of its C.J. Vander subsidiary are primarily to foreign customers. Summarized financial information about the Company's operations in different geographic areas is as follows: Year Ended December 31, ---------------------------------- 1997 1996 1995 -------- -------- -------- Net sales: United States $231,152 $212,516 $122,950 Hong Kong 54,950 54,749 46,570 Other foreign 4,760 3,666 0 -------- -------- -------- Total $290,862 $270,931 $169,520 ======== ======== ======== Income (loss) from operations: United States $2,851 $15,372 $9,846 Hong Kong 4,841 8,235 5,599 Other foreign (570) (505) 0 -------- -------- -------- Total $ 7,122 $23,102 $15,445 ======== ======== ======== Identifiable assets: United States $250,899 $212,377 $213,162 Hong Kong 6,245 7,754 7,404 Other foreign 8,856 7,123 0 -------- -------- -------- Total $266,000 $227,254 $220,566 ======== ======== ========
14. Litigation
The Company has been named as a defendant in several legal actions arising from its normal business activities. The Company carries insurance against liability for certain types of risks. Although the amount of liability that could result from any litigation cannot be predicted, in the opinion of management, the Company's potential liability on all known claims would not have a material adverse effect on the consolidated financial position or results of operations of the Company.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. Quarterly Results (Unaudited)
SUPPLEMENTARY INFORMATION Quarterly Results (unaudited)
During the fourth quarter of 1997, the Company recorded an inventory adjustment of $2,800 related to shrinkage and to excess material and scrap costs related to the start-up of new manufacturing equipment.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. Subsequent Events
On March 30, 1998, the Company amended its Revolving Credit Facility to change the financial covenants of the Company and the subsidiary borrowers, including but not limited to, revising the funded debt to EBITDA, as defined, and fixed charge coverage ratios, and capital expenditure covenants. The Company expects to be in compliance with all of the covenants, as amended, during fiscal 1998.
Note 17. Supplemental Condensed Consolidating Financial Statements
The following supplemental condensed consolidating financial statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, present separate financial information for the Company ("Issuer/Guarantor Parent"), the Guarantor Subsidiaries (Note 7), the Non-Guarantor Subsidiaries (Note 7), and Discontinued Operations (Note 4). 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.
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 1997
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 1996
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 1997
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 1996
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 1995
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 1997
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 1996
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 1995
ITEM 9
ITEM 9 Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Not applicable
PART III
ITEM 10
ITEM 10 Directors And Executive Officers Of The Registrant
Leonard Florence is Chairman of the Board, Chief Executive Officer and President of the Company. He has served in the capacity of Chairman of the Board and Chief Executive Officer continuously since September 1986. He has also been President and a director of certain of its subsidiaries since their respective dates of organization. Mr. Florence previously served as President of the Company from 1986 to 1994 and resumed the position in 1995. Mr. Florence has been an executive in the tabletop and giftware products industry for more than 35 years.
E. Merle Randolph was appointed to Executive Vice President, International Manufacturing and West Coast Distribution on January 26, 1998. He had been Vice President, Chief Financial Officer and Treasurer of the Company since September 1986. He became a Director of the Company in May 1989. Mr. Randolph is also an officer of certain of the Company's subsidiaries. For 17 years prior to joining the Company, Mr. Randolph was employed in various financial positions by Rockwell International Corporation.
Michael S. Krause became Executive Vice President and Chief Operating Officer on August 11, 1997. Prior to joining the Company, Mr. Krause served as Senior Vice President Global Operations at Tambrands, Inc. in 1996, Vice President Supply Chain at The Quaker Oats Company, Executive Vice President in 1995, Supply Chain at Stella Foods, Inc. in 1994, and Senior Vice President Operations at Goody Products, Inc. from 1991 to 1993.
Ami A. Trauber was appointed Executive Vice President of Finance, Administration, Strategic Planning and Chief Financial Officer and Corporate Treasurer on January 26, 1998. Prior to joining the Company, Mr. Trauber served as acting Chief Financial Officer at Visual Edge Systems, Inc. and served as President, Chief Operating Officer, Director and Part Owner of Ed's West, Inc. He served as Corporate Vice President Finance and Control at Harcourt General, Inc. from 1978-1990.
Melvin L. Levine has been a Vice President of the Company and certain of its subsidiaries since September 1986. Mr. Levine has been an executive in the tabletop and giftware products industry for more than 35 years. He became a director of the Company in May 1989. Mr. Levine is also an officer and director of certain of the Company's subsidiaries.
Alan R. Kanter has been a Vice President of the Company and a subsidiary of the Company since September 1986. Mr. Kanter has been employed in the tabletop and giftware industry for more than 20 years.
Faye A. Florence an attorney, has been Vice President and General Counsel of the Company since June 1987 and Secretary since August 1987. Ms. Florence is also an officer of certain of the Company's subsidiaries. Ms. Florence is the daughter of Leonard Florence.
David V. Harkins is Senior Managing Director of Thomas H. Lee Company since 1991. He joined Thomas H. Lee Company in 1986. He is President and Trustee of THL Equity Trust III, the General Partner of THL Equity Advisers III Limited Partnership, which is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Harkins is Chairman of National Dentex Corporation since 1983. Mr. Harkins is a Director of Stanley Furniture Company, Inc., National Dentex Corporation, HomeSide, Inc., Freedom Securities, Inc. and First Alert, Inc.
Thomas M. Hagerty is a Managing Director of the Thomas H. Lee Company where he has been employed since 1993. He joined Thomas H. Lee Company in 1988. Mr. Hagerty is Vice President and Trustee of THL Equity Trust III, the General Partner of THL Equity Advisers III Limited Partnership, which is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Hagerty is a director of Select Beverages, Inc., Freedom Securities, Inc. and HomeSide, Inc.
Scott A. Schoen is a Managing Director of the Thomas H. Lee Company where he has been employed since 1986. Mr. Schoen joined Thomas H. Lee Company in 1986. Mr. Schoen is a Managing Director of the Thomas H. Lee Company where he has been employed since 1986. Mr. Schoen is also a Trustee of THL Equity Trust III, the General Partner of THL Equity Advisors Limited Partnership III, which is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Schoen also serves as Vice President of Thomas H. Lee Advisors I and Thomas H. Lee Advisors II. Mr. Schoen is a director of Transwestern Publishing Co., First Alert, Inc., Signature Brands USA, Inc., and Rayovac Corporation. Mr. Schoen received a BA in History from Yale University, a JD from Harvard Law School and and MBA from the Harvard Graduate School of Business Administration. Mr. Schoen is a member of the New York Bar.
Kent R. Weldon is Vice President of THL Equity Trust III, the General Partner of THL Equity Advisers III Limited Partnership, which is the General Partner of Thomas H. Lee Equity III, L.P. Mr. Weldon worked at Thomas H. Lee Company from 1991 to 1993 and rejoined in 1995. From 1989 to 1991, Mr. Weldon worked in the Mergers & Acquisitions Department of Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York. He is a Director of Fisher Scientific International, Inc. and Fitz and Floyd. From 1993 to 1995, Mr. Weldon attended the Harvard Graduate School of Business Administration.
Seth W. Lawry has worked at Thomas H. Lee Company from 1989 to 1990 and rejoined in 1994. He is Vice President of THL Equity Trust III, the General Partner of THL Equity Advisers III Limited Partnership, which is the General Partner of Thomas H. Lee Equity III, L.P. From 1990 to 1992, Mr. Lawry attended Stanford Graduate School of Business. From 1992 to 1994, Mr. Lawry worked in the Mergers & Acquisitions Department of Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York. Mr. Lawry is a director of Freedom Securities, Inc.
Meetings Of The Board Of Directors
The Board of Directors consists of Leonard Florence, E. Merle Randolph, Melvin Levine, Alan Kanter, David Harkins, Thomas M. Hagerty, Scott A. Schoen, Kent R. Weldon and Seth W. Lawry. The Chairman of the Board is Leonard Florence. The Board of Directors held a meeting on February 24, 1998 to replace those committees as constituted prior to the Merger. The reconstituted committees include an Audit Committee and a Compensation and Stock Option Committee.
The Audit Committee consists of Scott Schoen, Kent Weldon and Tom Hagerty. Scott Schoen is the Chairman of the Audit Committee. This Committee has oversight authority and responsibility for the financial statements of the Company and its subsidiaries. In conjunction with its responsibilities, the Committee invites representatives of Deloitte & Touche LLP to be present, at both of its meetings.
The Compensation and Stock Option Committee consists of David Harkins, Tom Hagerty and Seth Lawry. David Harkins is the Chairman of the Compensation and Stock Option Committee. The functions of the Compensation and Stock Option Committee include fixing the compensation and reviewing the salaries, of the Chief Executive Officer and the executive officers of the Company, including the review of incentive plans and benefits. The Committee also administers the Company's Key Employees' Stock Option Plans, to determine the terms upon which, and the identities of the persons to whom, options to purchase shares of Common Stock of the Company shall be granted.
ITEM 11.
ITEM 11. Executive Compensation
The following table sets forth the compensation awarded to, earned by or paid to the Chief Executive Officer and the four other most highly compensated executive officers during the fiscal years ended December 31, 1997, 1996 and 1995 for services rendered in all capacities to the Company and its subsidiaries. (3)
Summary Compensation Table Annual Compensation(1) --------------------------
(1) The column designated "Other Annual Compensation" by the Securities and Exchange Commission ("SEC") for the reporting of perquisites and other personal benefits has been eliminated because the amounts paid to each executive officer do not exceed the disclosure threshold established by the SEC pursuant to applicable rules and no other compensation required to be reported under that column was awarded to, earned by or paid to any of the named executive officers during the period covered by the table. In addition, the columns designated by the SEC for the reporting of certain long-term compensation, including awards of restricted stock and long-term incentive plan payouts have been eliminated as no such awards or payouts were made during the period covered by the table.
(2) The estimated dollar value benefit of insurance premiums paid by the Company with respect to life insurance for the benefit of Leonard Florence for the years ended December 31, 1997, 1996 and 1995 was $16,867, $19,551, and $20,018 respectively. Messrs. Levine, Kanter and Randolph entered into agreement with Leonard Florence, the Company, and THL Transaction I Corp., whereby they received 24,356 shares of Syratech Common Stock valued at $779,392 and lump sum cash payments totaling $538,278 for
reimbursement of income taxes pursuant to a transfer of 73,068 shares of Syratech Common Stock by Leonard Florence to the Company. See Note 11 to the Company's Consolidated Financial Statements. Stock options granted under the 1986 and 1993 Stock Plans outstanding at April 16, 1997, the date of the Merger between the Company and THL I, were cancelled pursuant to the Merger Agreement in exchange for compensation equal to the excess of $32 over the option exercise price. Messrs. Levine, Randolph, Kanter, and Ms. Florence received compensation related to such option cancellations of $148,700, $89,220, $148,700, and $287,650, respectively, during 1997. All other amounts represent contributions made by the Company to the accounts of named executive officers pursuant to the Company's 401(k) Plan.
(3) Michael S. Krause, Executive Vice President and Chief Operating Officer, joined the Company on August 11, 1997 and received total compensation of $100,529 during 1997.
Stock Option Grants
There were no grants of stock options to any of the named executive officers during the last fiscal year. The Company does not grant stock appreciation rights ("SARs") of any kind.
Option Exercises/Value Of Unexercised Options
The following table sets forth certain information concerning options to purchase Common Stock of the Company exercised during the fiscal year ending December 31, 1997 by each of the named executive officers. None of the named executive officers has any SAR's or unexercised stock options as of December 31, 1997.
Aggregated Options Exercised in Last Fiscal Year and FY-End Option Values
- ----------
(1) Based upon the closing sale price of the Company's Common Stock of $32 at the time of the Merger minus the respective option exercise price.
Compensation Of Directors
The directors of the Company are currently compensated indirectly through the management fee agreement between the Company and THL I. (See Notes to the consolidated financial statements).
Compensation And Stock Option Committee Interlocks And Insider Participation
In connection with the Merger, the Company entered into a Management Agreement with Thomas H. Lee Company for which the Company pays an annual management fee in the amount of $450. ($320 incurred in the year ended December 31, 1997.)
Compensation And Stock Option Committee Report
The Members of the Compensation and Stock Option Committee of the Board of Directors are all non-employee directors. The Committee is charged with the responsibility of fixing the annual compensation of the Chief Executive Officer of the Company, and in consultation with the Chief Executive Officer of the Company, determining the annual compensation of the other executive officers of the Company and the officers of each subsidiary of the Company, subject in each case to any employment or other contract between the Company or a subsidiary thereof and any such officer. In addition, the Committee is charged with the responsibility to determine the payment of bonuses or other supplemental compensation to the Chief Executive Officer of the Company and, in consultation with the Chief Executive Officer, to determine payment of bonuses or other supplemental compensation to any other officer of the Company or any subsidiary thereof.
Further, the Committee has the authority over the issuance of stock options or the grant of awards under any stock option, stock bonus or other stock based compensation and/or incentive plans for officers and/or employees of the Company.
The overall compensation paid to executive officers of the Company includes cash compensation consisting of a base salary plus a performance bonus, stock options for executive officers and participation in various benefit plans generally available to employees, such as health insurance and contributions made to the accounts of its employees pursuant to the Company's 401(k) Plan.
The Committee attempts to balance the compensation paid to the executive officers of the Company to the Company's performance. In its review, the Committee may consider the level of compensation paid to executive officers of companies of comparable market capitalization, however, this is somewhat difficult since industry peers, and principal competitors are often either privately held companies or divisions of large publicly held companies, and therefore, executive compensation information is not publicly available. The Committee, therefore, has generally relied upon its analysis of overall Company performance including the level of net sales and net income and the individual efforts and achievements of each executive officer during the fiscal year.
The Company was a party to employment agreements with certain of the named executive officers during fiscal year 1997. Such agreements were approved by both the Committee and the Board of Directors of the Company in August 1991 and fixed the minimum salary levels of such officers. Employment agreements with two of its officers, including the Chief Executive Officer were amended in August, 1995 reflecting changes to the annual retirement benefits to be received. Additionally, the employment agreements with Messrs. Randolph and Kanter were amended in July 1996, to provide, and during the same month Faye A. Florence and the Company entered into a Retirement Benefit Agreement that provides for certain retirement benefits to be received.
Upon consummation of the Merger (Note 2), an employment agreement with an officer was amended so as to (i) change the officer's term of full-time employment from a rolling five-year term to a fixed five-year term, (ii) provide for a minimum base salary of $1,150 per annum, (iii) establish $1,150 as the minimum amount upon which the officer's retirement benefit (and the survivor's benefit of his surviving spouse) will be computed and (iv) create contractual rights with respect to certain perquisites that he is accorded informally under present arrangements with the Company. Additionally, an employment agreement with another officer was amended to change the officer's term of full-time employment from a rolling five-year term to a fixed five-year term.
In addition, one of the officers was awarded a bonus for services rendered to the Company during the period ended December 31, 1997.
In evaluating the compensation paid to the Chief Executive Officer, Mr. Florence, the Committee evaluates many factors. The Committee following an analysis of the Company's overall performance and financial results establishes Mr. Florence's overall compensation. Additionally, Mr. Florence's performance in his position is reviewed in conjunction with his ongoing ability to provide the necessary direction for the Company's continued growth. Moreover, the Committee determined as it has in the past that Mr. Florence's compensation should also be determined in conjunction with the visibility and leadership roles which Mr. Florence continues to possess in the industries in which the Company operates.
Employment Agreements
Effective August 16, 1991, the Company entered into an employment agreement with Leonard Florence (the "Florence Employment Agreement") providing for the employment of Mr. Florence as Chief Executive Officer of the Company at an annual base salary, payable in month installments, of not less than $0.35 million as well as for certain other benefits and the reimbursement of expenses. Unless otherwise terminated by the Company as provided in the Florence Employment Agreement, Mr. Florence's term of full-time employment will continue until the earlier of (i) the fifth anniversary of receipt of a notice of termination given by either party to the other or (ii) the first anniversary of receipt of a notice of termination given by Mr. Florence to the Company on or after his 64th birthday. The Company may, at its discretion, but without any obligation, increase Mr. Florence's base salary during the term of full-time employment. Once the base salary shall have been increased, it shall not thereafter be decreased without his written consent. Mr. Florence's current base salary is $0.7 million per annum. The Florence Employment Agreement obligates Mr. Florence to provide certain advisory services to the Company during the five-year period following the term of Mr. Florence's full-time employment (the "Advisory Period") and provides for Mr. Florence to receive annual compensation during the Advisory Period in an amount equal to not less than 25% of his base salary during the final year of his full-time employment. During the period of his full-time employment and the Advisory Period, Mr. Florence is prohibited from engaging in any business that is competitive with any line of business in which the Company is engaged that contributes three percent or more of the gross revenues of the Company. The Florence Employment Agreement also provides for payment to Mr. Florence of a retirement benefit.
The Company entered into a similar employment agreement, also effective as of August 16, 1991, with Melvin L. Levine, Vice President of Purchasing of the Company, except in Mr. Levine's case the base salary was $0.225 million for the year ended December 31, 1992. Mr. Levine's current base salary is $0.350 million per annum.
As of May 1995 and July 1995, the employment agreements with Messrs. Levine and Florence were amended with respect to the computation and payment of retirement benefits to each and, in the case of Mr. Florence, to provide for payment of a survivor's benefit to his surviving spouse. Specifically, the amendments provided for annual retirement benefit payments in amounts equal to 2% of their respective average total compensation (i.e., base salary and bonus compensation) in the three years preceding attainment by the relevant 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.
The Employment Agreements with Messrs. Florence and Levine, as amended, provide for retirement benefit payments determined and payable in accordance with the agreements. The following table shows the estimated annual benefits payable to Messrs. Florence and Levine upon retirement based upon various compensation levels and years of service.
PENSION PLAN TABLE
Years of Service ---------------------------------------------- REMUNERATION 5 10 15 - ------------ - -- -- $ 400,000 $ 40,000 $ 80,000 $ 120,000 500,000 50,000 100,000 150,000 600,000 60,000 120,000 180,000 700,000 70,000 140,000 210,000 800,000 80,000 160,000 240,000 900,000 90,000 180,000 270,000 1,000,000 100,000 200,000 300,000 1,100,000 110,000 220,000 330,000 1,200,000 120,000 240,000 360,000 1,300,000 130,000 260,000 390,000 1,400,000 140,000 280,000 420,000
Messrs. Florence and Levine have each completed ten years of credited service. Retirement benefits under the employment agreements are computed on the basis of a straight-life annuity and are not reduced by the benefits received under Social Security, but would be reduced by any benefits received under any Company funded pension plan that hereafter may be adopted.
Upon the consummation of the Merger, the Employment Agreement with Leonard Florence was amended so as to (i) change his term of full-time employment from a rolling-five-year term to a fixed five-year term, (ii) provide for a minimum base compensation of $1.15 million per annum, (iii) establish $1.15 million as the minimum amount upon which his retirement benefit (and survivors benefit of his surviving spouse) will be computed and (iv) create contractual rights with respect to certain perquisites that are accorded to him informally under his present arrangement with the Company. Under Section 162(m) of the Internal Revenue Code, so much of the compensation paid to Mr. Florence as exceeds $1 million annually may not be deductible by the Company for federal income tax purposes. The Employment Agreement with Melvin L. Levine was amended, as of the Effective Time, to change his term of full-time employment from a rolling five-year term to a fixed five-year term.
The Company has also entered into employment agreements, effective as of August 16, 1991, with E. Merle Randolph, Vice President, Chief Financial Officer and Treasurer, and Alan R. Kanter, Vice President of Sales of the Company. The agreements with Messrs. Randolph and Kanter are similar to those with Messrs. Florence and Levine described above, except that (i) the term of full-time employment of each of Messrs. Randolph and Kanter will continue until the third anniversary of receipt of a notice of termination given by the Company to the executive involved or by such executive to the Company, (ii) the period during which each of Messrs. Randolph and Kanter has agreed to provide advisory services to the Company (and to be bound by a non-competition agreement) following the term of his full-time employment will be the lesser of three years or six months for each year of his full-time employment beginning with the date of the employment agreement, with such advisory period and the coextensive non-competition covenant being subject to termination at the election of the Company on six months prior notice to the executive involved, and (iii) no provision was originally made therein for a payment of a retirement benefit.
The employment agreements of Messrs. Randolph and Kanter were amended in July 1996, to provide, and during the same month Faye A. Florence and the Company entered into a Retirement Benefit Agreement that provides, inter alia, for the payment at age 65 or upon termination of such officer's employment, whichever is later, of an annual retirement benefit to each such officer equal to a percentage of his or her average annual compensation for the three fiscal years ended immediately prior to the date on which such officer ceases to be a full time employee of the Company multiplied by the number of years of such officer's service to the Company. The minimum annual retirement benefit for each such officer will be $75,000.
The Employment Agreement of Mr. Randolph was amended in January 1998, to modify the terms of his job responsibilities. Mr. Randolph, who had been Vice President, Chief Financial Officer and Treasurer of the Company, became the Company's Executive Vice President of International Manufacturing and West Coast Distribution. Mr. Randolph will perform his services subject only to the direction and control of the Board and the Chief Executive Officer, or his designee, and will report to the Chief Executive Officer or his designee, or if requested to do so, to the Board.
On December 31, 1996, the Company, THL I and Leonard Florence entered into three separate agreements, one with each of Alan R. Kanter, Melvin L. Levine and E. Merle Randolph (each an "Executive Party"). Pursuant to each of the three agreements (i) Mr. Florence agreed to contribute to the Company (a) on December 31, 1996, 10,604 shares of Syratech Common Stock, (b) on January 14, 1997, 10,628 shares of Syratech Common Stock and (c) and on January 14, 1998, 3,124shares of shares of Syratech Common Stock (ii) on each of the dates of contribution of such shares of Syratech Common Stock by Mr. Florence to the Company, such shares were canceled and the Company issued to the Executive Party, that number of shares of Syratech Common Stock that would be equal to the number of shares of Syratech Common Stock contributed to the Company on such date by Mr. Florence; (iii) on December 31, 1996 the Company paid each Executive Party the sum of $234,346; (iv) on January 14, 1997 the Company paid to each Executive Party an amount equal to the lesser of (x) the income tax benefit to the Company from the issuance of shares of Syratech Common Stock and the cash payment required to be made to him on such date or (y) the aggregate amount of federal, state and local income taxes to be owed by each Executive Party as a result of the issuance of such shares and the making of such cash payment; and (v) on January 14, 1998 the Company is required to pay to each Executive Party an amount equal to the lesser of (x) the income tax benefit to the Company from the issuance of shares of Common Stock and the cash payment to be made to each Executive Party on such date or (y) the aggregate amount of federal, state and local income taxes that will be owed by each Executive Party as a result of the issuance of shares of Common Stock and cash payment to be made to him on such date. Each agreement provides that the manner in which the payments to be made to each Executive Party for the purpose of transferring to each Executive Party the tax benefits to the Company from such transactions are to be calculated and subsequently adjusted is to be in the sole discretion of the Company.
The Company and each Executive Party also entered into an amendment to the respective Executive Party's Employment Agreement (each an "Amendment No. 2 to Employment Agreement") dated January 31, 1997, to be effective as of December 31, 1996, to clarify and ensure that the transfer of shares referenced in the above paragraph did not alter the total compensation of the relevant Executive Party for purposes of calculating the Executive Party's retirement benefit.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the beneficial ownership of Syratech Common Stock (i) by each stockholder who is known by the Company to own beneficially in excess of 5% of the outstanding Common Stock, (ii) by each director, and (iii) by all officers and directors as a group, as of January 15, 1998. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of Common Stock.
Shares Of Common Stock Beneficially Name Owned Percentage - ---- ------------ ---------- Leonard Florence (a) 362,850 9.6% E. Merle Randolph 33,999 * Melvin L. Levine 44,256 1.2% Alan R. Kanter 51,356 1.4% Faye A. Florence 3,527 * David V. Harkins (b) 2,210,788 58.4% Scott A. Schoen (b) 2,205,936 58.3% Thomas M. Hagerty (b) 2,204,316 58.3% Seth W. Lawry (b) 2,198,646 58.1% Kent R. Weldon (b) 2,197,431 58.1% Thomas H. Lee Company Affiliates (c) 2,196,216 58.0% Officers and Directors as a group (10 persons) 2,728,241 72.1% CMS Companies Inc. Affiliates (d) 255,678 6.8%
*Less then 1% of the issued and outstanding Syratech Common Stock.
(a) The business address for Leonard Florence is c/o Syratech Corporation, 175 McClellan Highway, East Boston, Massachusetts, 02128-9114.
(b) The business address of this stockholder is c/o Thomas H. Lee Company, 75 State Street, Boston, Massachusetts 02109. Includes an aggregate of 2,196,216 shares of common stock owned by Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund III, L.P. and THL Co-Investors III-A LLC which may be deemed to be beneficially owned by Messrs. Harkins, Hagerty, Schoen, Lawry and Weldon, officers of Thomas H. Lee Company. Each of such persons disclaims beneficial ownership of such shares.
(c) THL Equity Advisors III limited Partnership ("Advisors"), the general partner of Thomas H. Lee Equity Fund III, L.P. and Thomas H. Lee Foreign Fund III, L.P., THL Equity Trust III ("Equity Trust"), the general partner of Advisors, Thomas H. Lee, Messrs. Harkins, Hagerty and Schoen and other managing directors of Thomas H. Lee Company may be deemed to be beneficial owners of the shares of Syratech Common Stock held by such funds. Each of such persons maintains a principal business address at Suite 2600, 75 State Street, Boston, Massachusetts 02109. Each of such persons disclaims beneficial ownership of such shares.
(d) All such voting securities are owned by CMS Business Spectrum Fund L.P., CMS Co-Investment Subpartners, CMS Mid-Atlantic Business Opportunity Partners, L.P., and CMS diversified Partners Each of such persons maintains a principal business address c/o CMS Companies, Inc. 1926 Arch Street, Philadelphia, PA 19103-1484.
ITEM 13.
ITEM 13. Certain Relationships And Related Transactions
In connection with the Merger, the Company entered into a Management Fee with the Thomas H. Lee Company for which the Company pays an annual management fee in the amount of $450.
Lifetime Hoan Corporation ("Lifetime") purchased from the Company merchandise in the amount of approximately $45 during the year ended December 31, 1997. In April 1996, the Company and Lifetime, acting together, acquired certain assets of Farberware, including the rights to share in certain royalties under certain license agreements entered into and assigned to the Company by the prior owner of the Farberware tradename. In addition, the Company expects to continue to grant licenses with respect to the Farberware tradename in conjunction with Lifetime.
The Company believes that the transactions described or referred to above were effected on terms no less favorable to the Company than those that could have been obtained from unaffiliated third parties.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) Exhibits
2.1 Restated Agreement and Plan of Merger dated November 27, 1996, effective as of October 23, 1996 between Syratech and THL Transaction I Corp. and the Amendment, dated February 14, 1997 to the Restated Agreement and Plan of Merger. Incorporated by reference from Exhibit 2.1 to Form S-4 Registration Statement No. 333-16917. 3.1 Restated Certificate of Incorporation of Syratech. Incorporated by reference from Exhibit 3.1 to Form S-1 Registration Statement No. 33-41619. 3.2 Syratech Corporation Certificate of Designations in respect of Series A Preferred Stock dated October 26, 1992. Incorporated by reference from Exhibit 3.2 to Form S-4 Registration Statement No. 333-16917. 3.3 Bylaws of Syratech. Incorporated by reference from Exhibit 3.2 to Form S-1 Registration Statement No. 33-41619. 3.4 Amendment to Section 2.9 of the Bylaws of Syratech, effective August 15, 1991. Incorporated by reference from Exhibit 3.3 to Form S-1 Registration Statement No. 33-41619. 3.5 Certificate of Ownership and Merger of WSC Liquidating, Inc. by and into Syratech Corporation dated May 9, 1996. Incorporated by reference from Exhibit 3.5 to Form S-4 Registration Statement No. 333-16917. 3.6 Specimen Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Form 10-K of Syratech for the year ended December 31, 1993. 10.1 Form of Amended and Restated Employment Agreement dated as of April 16, 1997 between Leonard Florence and the Company. Incorporated by reference from Exhibit 10.1 to Form S-4 Registration Statement No. 333-16917. 10.2 Employment Agreement dated August 16, 1991 between E. Merle Randolph and the Company. Incorporated by reference from Exhibit 10.17 to Form S-1 Registration Statement No. 33-41619. 10.3 Employment Agreement dated August 16, 1991, between Melvin L. Levine and the 10.4 Company. Incorporated by reference from Exhibit 10.18 to Form S-1 Registration Statement No. 33-41619.
10.4 Employment Agreement dated August 16, 1991 between Alan R. Kanter and the Company. Incorporated by reference from Exhibit 10.19 to Form S-1 Registration Statement No. 33-41619. 10.5 Amendment No. 1 dated as of July 27, 1996 to Employment Agreement dated as of August 16, 1991 between E. Merle Randolph and the Company. Incorporated by reference from Exhibit 10.5 to Form S-4 Registration Statement No. 333-16917. 10.6 Amendment No. 1 dated as of May 11, 1995 to Employment Agreement dated as of August 16, 1991 between Melvin L. Levine and the Company. Incorporated by reference from Exhibit 10.8 to Form 10-K for Syratech for the year ended December 31, 1995. 10.7 Amendment No. 1 dated as of July 27, 1996 to Employment Agreement dated as of August 16, 1991 between Alan R. Kanter and the Company. Incorporated by reference from Exhibit 10.7 to Form S-4 Registration Statement No. 333-16917. 10.8 Retirement Benefit Agreement dated as of July 27, 1996 between Faye A. Florence and the Company. Incorporated by reference from Exhibit 10.8 to Form S-4 Registration Statement No. 333-16917. 10.9 Amendment No. 2, dated as of January 31, 1997, effective as of December 31, 1996, to Employment Agreement dated as of August 16, 1991 between E. Merle Randolph and the Company. Incorporated by reference from Exhibit 10.9 to Form S-4 Registration Statement No. 333-16917. 10.10 Amendment No. 2, dated as of January 31, 1997, effective as of December 31, 1996, to Employment Agreement dated as of August 16, 1991 between Melvin L. Levine and the Company. Incorporated by reference from Exhibit 10.10 to Form S-4 Registration Statement No. 333-16917. 10.11 Amendment No. 2 dated January 31, 1997 effective as of December 31, 1996, to Employment Agreement dated as of August 16, 1991 between Alan R. Kanter and the Company. Incorporated by reference from Exhibit 10.11 to Form S-4 Registration Statement No. 333-16917. 10.12 Agreement dated December 31, 1996 by and between the Company, THL I Transaction Corp., Leonard Florence and Melvin L. Levine. Incorporated by reference from Exhibit 10.12 to Form S-4 Registration Statement No. 333-16917. 10.13 Agreement dated December 31, 1996 by and between the Company, THL I Transaction Corp., Leonard Florence and E. Merle Randolph. Incorporated by reference from Exhibit 10.13 to Form S-4 Registration Statement No. 333-16917. 10.14 Agreement dated December 31, 1996 by and between the Company, THL I Transaction Corp., Leonard Florence and Alan R. Kanter. Incorporated by reference from Exhibit 10.14 to Form S-4 Registration Statement No. 333-16917. 10.15 Asset Purchase Agreement dated February 2, 1996 by and between Farberware Inc., the Company, Lifetime Hoan Corporation and Far-B Acquisition Corp., Inc. Incorporated by reference from Exhibit 1 to Form 8-K dated April 16, 1996. 10.16 Settlement Agreement dated February 3, 1997 by and among Bruckner Manufacturing Corp. (formerly Farberware Inc.), U.S. Industries, Inc., Farberware Inc. (formerly Far-B Acquisition Corp.) and Lifetime Hoan Corporation. Incorporated by reference from Exhibit 10.16 to Form S-4 Registration Statement No. 333-16917. 10.17 Agreement dated as of December 7, 1995 among the Company, SYR Acquisition Inc. and Rauch Industries, Inc. Incorporated by reference from Exhibit 1 to Form 8-K of the Company dated December 7, 1995. Incorporated by reference from Exhibit 10.17 to Form S-4 Registration Statement No. 333-16917. 10.18 Amended and Restated Line of Credit Agreement among Wallace International de Puerto Rico, Inc., International Silver de Puerto Rico, Inc. and Banco Popular de Puerto Rico dated October 15, 1996. Incorporated by reference from Exhibit 10.18 to Form S-4 Registration Statement No. 333-16917.
10.19 Agreement, dated as of February 2, 1996, by and among the Company, Lifetime Hoan Corporation and Far-B Acquisition Corp. Incorporated by reference from Exhibit 10.19 to Form S-4 Registration Statement No. 333-16917. 10.20 Agreement, dated as of May 3, 1996, by and among the Company, Farberware Inc. and Meyer Manufacturing Co. Ltd. Incorporated by reference from Exhibit 10.20 to Form S-4 Registration Statement No. 333-16917. 10.21 License Agreement, dated as of July 12, 1996, by and between Farberware Inc. and Service Merchandise Company, Inc. (redacted to omit certain royalty information). Incorporated by reference from Exhibit 10.21 to Form S-4 Registration Statement No. 333-16917. 10.22 Agreement, dated as of October 16, 1996, among Farberware Inc., Service Merchandise Company, Inc. and Windmere-Durable Holdings, Inc. (amending Item 10.21). Incorporated by reference from Exhibit 10.22 to Form S-4 Registration Statement No. 333-16917. 10.23 Commitment Letter between Banco Popular de Puerto Rico and Wallace International de PR, Inc. dated May 1, 1997. Incorporated by reference from Exhibit 10-1 to Form 10-Q dated August 13, 1997. 10.24 Letter Agreement between Banco Popular de Puerto Rico and Wallace International de PR, Inc. dated May 12, 1997. Incorporated by reference from Exhibit 10-2 to Form 10-Q dated August 13, 1997. 10.25 Amendment No. 1, dated as of July 31, 1997, to Loan and Security Agreement, dated as of April 16, 1997. Incorporated by reference from Exhibit 10-1 to Form 10-Q dated November 12, 1997. 10.26 Amendment No. 2, dated as of December 31, 1997, to Loan and Security Agreement, dated as of April 16, 1997. 10.27 Amendment No. 3 dated as of January 26, 1998 to Employment Agreement dated as of August 16, 1991 between E. Merle Randolph and the Company. 10.28 Purchase and Sale Agreement dated as of January 28, 1998 by and among The Claremont Company, Inc. and Fay A. Florence, Leonard Florence and E. Merle Randolph, Trustees of 175 Amlegion Realty Trust. 10.29 Escrow Agreement dated January 28, 1998 by and among Faye A. Florence, Leonard Florence and E. Merle Randolph, Trustees of 175 Amlegion Realty Trust and The Claremont Company and Hutchins, Wheeler & Dittmar, A Professional Corporation. 10.30 Agreement between Rauch Industries, Inc. and Guy Yocom Construction, Inc., dated July 31, 1997. 10.31 Agreement between Rauch Industries, Inc. and C.A.S. Construction Inc., dated August 25, 1997. 10.32 Varco-Pruden Purchase Order dated June 16, 1997. 10.33 Amendment No. 3, dated as of March 30, 1998, to Loan and Security Agreement, dated as of April 16, 1997. 11 Statement re: computation of per share earnings. 22 List of Subsidiaries. Incorporated by reference from Exhibit 22 to Form S-4 Registration Statement No. 333-16917. 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule
(b) Financial Statement Schedule:
Schedule II: Valuation and Qualifying Accounts
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, State of Massachusetts, on the 31st day of March, 1998.
SYRATECH CORPORATION
By: /s/ LEONARD FLORENCE --------------------- Leonard Florence Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated below.
SIGNATURE TITLE DATE --------- ----- ----
/s/ Leonard Florence Chairman of the Board of March 31, 1998 - ------------------------- Directors, Chief Executive Leonard Florence Officer and President (Principal Executive Officer)
/s/ Ami A. Trauber Executive Vice President, Chief March 31, 1998 - ------------------------- Financial Officer, Treasurer and Ami A. Trauber Director (Principal Financial and Accounting Officer)
/s/ Thomas M. Hagerty Director March 31, 1998 - ------------------------- Thomas M. Hagerty
/s/ David V. Harkins Director March 31, 1998 - ------------------------- David V. Harkins
/s/ Alan R. Kanter Director March 31, 1998 - ------------------------- Alan R. Kanter
/s/ Seth W. Lawry Director March 31, 1998 - ------------------------- Seth W. Lawry
/s/ Melvin L. Levine Director March 31, 1998 - ------------------------- Melvin L. Levine
/s/ E. Merle Randolph Director March 31, 1998 - ------------------------- E. Merle Randolph
/s/ Scott A. Schoen Director March 31, 1998 - ------------------------- Scott A. Schoen
/s/ Kent R. Weldon Director March 31, 1998 - ------------------------- Kent R. Weldon
SCHEDULE II
SYRATECH CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
- -------- (a) Doubtful accounts written off
(b) Sales returns and other
INDEX TO EXHIBITS
2.1 Restated Agreement and Plan of Merger dated November 27, 1996, effective as of October 23, 1996 between Syratech and THL Transaction I Corp. and the Amendment, dated February 14, 1997 to the Restated Agreement and Plan of Merger. Incorporated by reference from Exhibit 2.1 to Form S-4 Registration Statement No. 333-16917. 3.1 Restated Certificate of Incorporation of Syratech. Incorporated by reference from Exhibit 3.1 to Form S-1 Registration Statement No. 33-41619. 3.2 Syratech Corporation Certificate of Designations in respect of Series A Preferred Stock dated October 26, 1992. Incorporated by reference from Exhibit 3.2 to Form S-4 Registration Statement No. 333-16917. 3.3 Bylaws of Syratech. Incorporated by reference from Exhibit 3.2 to Form S-1 Registration Statement No. 33-41619. 3.4 Amendment to Section 2.9 of the Bylaws of Syratech, effective August 15, 1991. Incorporated by reference from Exhibit 3.3 to Form S-1 Registration Statement No. 33-41619. 3.5 Certificate of Ownership and Merger of WSC Liquidating, Inc. by and into Syratech Corporation dated May 9, 1996. Incorporated by reference from Exhibit 3.5 to Form S-4 Registration Statement No. 333-16917. 3.6 Specimen Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Form 10-K of Syratech for the year ended December 31, 1993. 10.1 Form of Amended and Restated Employment Agreement dated as of April 16, 1997 between Leonard Florence and the Company. Incorporated by reference from Exhibit 10.1 to Form S-4 Registration Statement No. 333-16917. 10.2 Employment Agreement dated August 16, 1991 between E. Merle Randolph and the Company. Incorporated by reference from Exhibit 10.17 to Form S-1 Registration Statement No. 33-41619. 10.3 Employment Agreement dated August 16, 1991, between Melvin L. Levine and the 10.4 Company. Incorporated by reference from Exhibit 10.18 to Form S-1 Registration Statement No. 33-41619. 10.4 Employment Agreement dated August 16, 1991 between Alan R. Kanter and the Company. Incorporated by reference from Exhibit 10.19 to Form S-1 Registration Statement No. 33-41619. 10.5 Amendment No. 1 dated as of July 27, 1996 to Employment Agreement dated as of August 16, 1991 between E. Merle Randolph and the Company. Incorporated by reference from Exhibit 10.5 to Form S-4 Registration Statement No. 333-16917. 10.6 Amendment No. 1 dated as of May 11, 1995 to Employment Agreement dated as of August 16, 1991 between Melvin L. Levine and the Company. Incorporated by reference from Exhibit 10.8 to Form 10-K for Syratech for the year ended December 31, 1995. 10.7 Amendment No. 1 dated as of July 27, 1996 to Employment Agreement dated as of August 16, 1991 between Alan R. Kanter and the Company. Incorporated by reference from Exhibit 10.7 to Form S-4 Registration Statement No. 333-16917. 10.8 Retirement Benefit Agreement dated as of July 27, 1996 between Faye A. Florence and the Company. Incorporated by reference from Exhibit 10.8 to Form S-4 Registration Statement No. 333-16917. 10.9 Amendment No. 2, dated as of January 31, 1997, effective as of December 31, 1996, to Employment Agreement dated as of August 16, 1991 between E. Merle Randolph and the Company. Incorporated by reference from Exhibit 10.9 to Form S-4 Registration Statement No. 333-16917. 10.10 Amendment No. 2, dated as of January 31, 1997, effective as of December 31, 1996, to Employment Agreement dated as of August 16, 1991 between Melvin L. Levine and the Company. Incorporated by reference from Exhibit 10.10 to Form S-4 Registration Statement No. 333-16917.
10.11 Amendment No. 2 dated January 31, 1997 effective as of December 31, 1996, to Employment Agreement dated as of August 16, 1991 between Alan R. Kanter and the Company. Incorporated by reference from Exhibit 10.11 to Form S-4 Registration Statement No. 333-16917. 10.12 Agreement dated December 31, 1996 by and between the Company, THL I Transaction Corp., Leonard Florence and Melvin L. Levine. Incorporated by reference from Exhibit 10.12 to Form S-4 Registration Statement No. 333-16917. 10.13 Agreement dated December 31, 1996 by and between the Company, THL I Transaction Corp., Leonard Florence and E. Merle Randolph. Incorporated by reference from Exhibit 10.13 to Form S-4 Registration Statement No. 333-16917. 10.14 Agreement dated December 31, 1996 by and between the Company, THL I Transaction Corp., Leonard Florence and Alan R. Kanter. Incorporated by reference from Exhibit 10.14 to Form S-4 Registration Statement No. 333-16917. 10.15 Asset Purchase Agreement dated February 2, 1996 by and between Farberware Inc., the Company, Lifetime Hoan Corporation and Far-B Acquisition Corp., Inc. Incorporated by reference from Exhibit 1 to Form 8-K dated April 16, 1996. 10.16 Settlement Agreement dated February 3, 1997 by and among Bruckner Manufacturing Corp. (formerly Farberware Inc.), U.S. Industries, Inc., Farberware Inc. (formerly Far-B Acquisition Corp.) and Lifetime Hoan Corporation. Incorporated by reference from Exhibit 10.16 to Form S-4 Registration Statement No. 333-16917. 10.17 Agreement dated as of December 7, 1995 among the Company, SYR Acquisition Inc. and Rauch Industries, Inc. Incorporated by reference from Exhibit 1 to Form 8-K of the Company dated December 7, 1995. Incorporated by reference from Exhibit 10.17 to Form S-4 Registration Statement No. 333-16917. 10.18 Amended and Restated Line of Credit Agreement among Wallace International de Puerto Rico, Inc., International Silver de Puerto Rico, Inc. and Banco Popular de Puerto Rico dated October 15, 1996. Incorporated by reference from Exhibit 10.18 to Form S-4 Registration Statement No. 333-16917. 10.19 Agreement, dated as of February 2, 1996, by and among the Company, Lifetime Hoan Corporation and Far-B Acquisition Corp. Incorporated by reference from Exhibit 10.19 to Form S-4 Registration Statement No. 333-16917. 10.20 Agreement, dated as of May 3, 1996, by and among the Company, Farberware Inc. and Meyer Manufacturing Co. Ltd. Incorporated by reference from Exhibit 10.20 to Form S-4 Registration Statement No. 333-16917. 10.21 License Agreement, dated as of July 12, 1996, by and between Farberware Inc. and Service Merchandise Company, Inc. (redacted to omit certain royalty information). Incorporated by reference from Exhibit 10.21 to Form S-4 Registration Statement No. 333-16917. 10.22 Agreement, dated as of October 16, 1996, among Farberware Inc., Service Merchandise Company, Inc. and Windmere-Durable Holdings, Inc. (amending Item 10.21). Incorporated by reference from Exhibit 10.22 to Form S-4 Registration Statement No. 333-16917. 10.23 Commitment Letter between Banco Popular de Puerto Rico and Wallace International de PR, Inc. dated May 1, 1997. Incorporated by reference from Exhibit 10-1 to Form 10-Q dated August 13, 1997. 10.24 Letter Agreement between Banco Popular de Puerto Rico and Wallace International de PR, Inc. dated May 12, 1997. Incorporated by reference from Exhibit 10-2 to Form 10-Q dated August 13, 1997. 10.25 Amendment No. 1, dated as of July 31, 1997, to Loan and Security Agreement, dated as of April 16, 1997. Incorporated by reference from Exhibit 10-1 to Form 10-Q dated November 12, 1997. 10.26 Amendment No. 2, dated as of December 31, 1997, to Loan and Security Agreement, dated as of April 16, 1997. 10.27 Amendment No. 3 dated as of January 26, 1998 to Employment Agreement dated as of August 16, 1991 between E. Merle Randolph and the Company. 10.28 Purchase and Sale Agreement dated as of January 28, 1998 by and among The Claremont Company, Inc. and Faye A. Florence, Leonard Florence and E. Merle Randolph, Trustees of 175 Amlegion Realty Trust.
10.29 Escrow Agreement dated January 28, 1998 by and among Faye A. Florence, Leonard Florence and E. Merle Randolph, Trustees of 175 Amlegion Realty Trust and The Claremont Company and Hutchins, Wheeler & Dittmar, A Professional Corporation. 10.30 Agreement between Rauch Industries, Inc. and Guy Yocom Construction, Inc., dated July 31, 1997. 10.31 Agreement between Rauch Industries, Inc. and C.A.S. Construction Inc., dated August 25, 1997. 10.32 Varco-Pruden Purchase Order dated June 16, 1997. 10.33 Amendment No. 3, dated as of March 30, 1998, to Loan and Security Agreement, dated as of April 16, 1997. 11 Statement re: computation of per share earnings. 22 List of Subsidiaries. Incorporated by reference from Exhibit 22 to Form S-4 Registration Statement No. 333-16917. 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule