UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the transition period from ______________ to ___________________

Commission File Number: 1-12624

Syratech Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code - 617-561-2200

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  o    NO  ý

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

Number of Shares of Common Stock, Par Value $0.01 per share, outstanding at September 30, 2004 - 3,784,018

INDEX

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

See notes to condensed consolidated financial statements.

1

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)

See notes to condensed consolidated financial statements.

2

SYRATECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

See notes to condensed consolidated financial statements.

3

SYRATECH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands, except share and per share data)

1. FINANCIAL INFORMATION

The accompanying unaudited interim condensed consolidated financial statements of Syratech Corporation and Subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  Certain prior year amounts have been reclassified to conform to the 2004 presentation. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2003 Annual Report on Form 10 - K.

In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary for a fair presentation of the interim periods.  The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

2. FINANCIAL RESTRUCTURING, NOTES PAYABLE AND REVOLVING LOAN FACILITIES

Notes Payable

At September 30, 2004, the Company had debt financing with third parties of $118,271 of 11% Senior Notes which are due April 15, 2007 (the “Senior Notes”) and require interest payments to be made semi-annually on April 15 and October 15. The Senior Notes are general unsecured obligations of the Company and rank pari passu in right of payment with all current and future unsubordinated indebtedness of the Company, including borrowings under its Amended and Restated Loan and Security Agreement dated as of March 26, 2004 (the “Credit Agreement”). However, all borrowings under the Credit Agreement are secured by a first priority lien on the accounts receivable and inventory of the Company but not of its Puerto Rico subsidiary (“Guarantor Subsidiary”) and not of its foreign subsidiary (“Non-guarantor Subsidiary”) (See Note 13). Consequently, the obligations of the Company under the Senior Notes are effectively subordinated to its obligations under its Credit Agreement to the extent of such assets. The Senior Notes became redeemable, in whole or in part, at the Company’s option after April 15, 2002. The Company’s ability to pay dividends is restricted by terms of the Credit Agreement and the Senior Notes. The Senior Notes also include financial covenants, which are less restrictive than the covenants contained in the Credit Agreement. Cross default provisions exist between the Senior Notes and the Credit Agreement.

On October 1, 2004, Syratech Corporation (the “Company”) entered into a letter agreement (the “Noteholder Confidentiality Agreement”) with certain holders of the Senior Notes, regarding a potential recapitalization or restructuring of, or other financial options for, the Company (a “Potential Transaction”). In connection with the Noteholder Confidentiality Agreement, the holders of the Notes formed an ad hoc committee (the “Noteholder Committee”) and engaged Anderson Kill & Olick, P.C. and Houlihan Lokey Howard & Zukin Financial Advisors, Inc., as their respective legal and financial advisors. The Company also entered into confidentiality agreements with Anderson Kill & Olick, P.C. and with Houlihan Lokey Howard & Zukin Financial Advisors, Inc.

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On October 15, 2004, the Company was required to make a semi-annual payment of interest to the holders of the Senior Notes, in the approximate amount of $6,505 (the “Interest Payment”). At a meeting on October 14, 2004, the Company’s Board of Directors determined, after considering, among other things, the Company’s year-to-date performance and the declining liquidity under the Company’s credit facility, that the Company would not make the Interest Payment. Pursuant to the indenture for the Senior Notes, if the non-payment of the Interest Payment continued until November 15, 2004, such non-payment would become an Event of Default.

On October 15, 2004, the Company entered into an Amendment, Acknowledgement and Limited Waiver (the “Waiver”) with the Company’s Lenders (the “Lenders”) under the Credit Agreement. Pursuant to the Waiver, the Lenders agreed to waive any default under the Credit Agreement that might exist as of October 16, 2004 arising from the Company’s non-payment of the Interest Payment on October 15, 2004 (the “Payment Default”). The Company incurred a fee of $175 to execute the waiver.

On November 15, 2004 the Company entered into a Forbearance Agreement and Second Amendment (the “Forbearance Agreement”) to the Credit Agreement which, among other provisions, restricts the Company from paying the Interest Payment before November 15, 2004 to prevent an Event of Default pursuant to the indenture for the Senior Notes. Accordingly, the Company did not make the Interest Payment by the November 15, 2004 deadline and, under the terms of the indenture, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Senior Notes, may declare all the Senior Notes to be due and payable immediately. Accordingly, as of September 30, 2004 the entire balance of the Senior Notes has been classified as a current liability. The Company incurred a fee of $50 to execute the Forbearance Agreement.

The Company and its legal and financial advisors have engaged in negotiations with the legal and financial advisors to the Noteholder Committee regarding a Potential Transaction.  On November 11, 2004, the Company’s Board of Directors approved a term sheet for a Potential Transaction (the “Term Sheet”).  On November 15, 2004, Noteholders holding in excess of two-thirds of the outstanding principal amount of the Notes executed lock-up agreements (the “Lock-up Agreements”) indicating their approval of and support for the Term Sheet.

The Term Sheet contemplates a recapitalization of the Company, which would be accomplished through the initiation by the Company of a voluntary chapter 11 bankruptcy case (the “Chapter 11 Case”) under title 11 of the United States Code (the “Bankruptcy Code”), and the confirmation of a prenegotiated plan of reorganization (the “Prenegotiated Plan”) that provides for the recapitalization in the Term Sheet.  As set forth in the Term Sheet, under the Prenegotiated Plan the current holders of Notes, along with creditors holding up to $10 million in claims arising from the rejection of executory contracts and unexpired leases under section 365 of the Bankruptcy Code during the Chapter 11 Case (the “Rejection Claims”), would share pro rata in 405,000 shares of new common stock of the reorganized Company (the “New Common Stock”) and $55 million of new notes (the “New Notes”) that are convertible into additional New Common Stock, in satisfaction of the Notes and the Rejection Claims.  The holders of the current preferred and common stock of the Company would share pro rata in warrants for 5% of the New Common Stock, as set forth in the Term Sheet.  The Term Sheet provides for all other creditors of the Company to have their claims paid in full under the Prenegotiated Plan.

The Term Sheet also provides for the Company’s senior management team after the recapitalization to be issued 45,000 shares of the New Common Stock, 25% of which will vest on the effective date of the Prenegotiated Plan, 37.5% of which will vest over three years, and 37.5% will vest on the basis of certain performance targets.

The following is a description of the proposed material terms of the $55 million of New Notes. The New Notes would become due after a term of 5 years with interest payable semi-annually. At the option of the Company, the first four coupon payments would bear interest at an annual rate of 8% if the interest is paid in cash, or at 10% if paid in kind  in additional New Notes (“PIK”). Following the first four payments, the New Notes would earn interest at 10% annually. Each one thousand dollar principal amount of New Senior Notes would be convertible into 10 shares of New Common Stock. Conversion would not be permitted during any period that the Company makes or has the option of making PIK coupon payments on New Notes, unless conversion is agreed to by a majority of the Company’s Board of Directors, including the Company’s CEO acting in his capacity as a director, and 75% or more of the outstanding principal amount of New Notes. If 75% or more of the outstanding principal amount of New Notes vote to convert the New Notes into shares of New Common Stock, then all of the outstanding New Notes would be automatically converted on the same terms. The New Notes would be redeemable by the Company at any time at a price equal to 100% of the principal amount plus any accrued and unpaid interest. The New Notes would be redeemable in part by the Company at any time in increments of no less than $10 million principal amount, with the New Notes subject to redemption being redeemed ratably from all holders. The New Notes would receive liens in all of the assets and property of the Company, junior only to the liens granted to secure the indebtedness under or provided for in an Exit Financing Facility.

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As set forth in the Lock-up Agreement, the Company is obligated to commence the Chapter 11 Case no later than December 31, 2004.  The Lock-up Agreements also provide certain dates by which the Company must take certain actions to seek confirmation of the Prenegotiated Plan, and the failure of the Company to take those steps, or to receive confirmation of the Prenegotiated Plan, by those dates would result in the Noteholders being relieved of their obligations under the Lock-up Agreement.  The Company intends to commence the Chapter 11 Case within the time frame provided by the Lock-up Agreement, and to seek confirmation of the Prenegotiated Plan as provided in the Lock-up Agreement.  There can be no assurance, however, that the Company will be successful in obtaining confirmation of the Plan, either on the time table set forth in the Lock-up Agreement or at all.  If the Prenegotiated Plan is not confirmed within the time frame established in the Lock-up Agreement, the Company may lose the support of the Noteholders for its reorganization.  In that circumstance, the Company may seek to propose an alternative plan, dismiss the Chapter 11 Case, convert the Chapter 11 Case to one under chapter 7 of the Bankruptcy Code, or take some other action.

The Company, in conjuction with its advisors, is working to design and implement strategies to provide adequate liquidity for the Company.  However, there can be no assurance as to the success of such efforts.

The Company made no purchases of Senior Notes during the nine month period ended September 30, 2004. During the nine months ended September 30, 2003 the Company purchased $25,675 of its outstanding Senior Notes on the open market, resulting in a pre-tax gain of approximately $9,446.

Revolving Credit Facility

The Company has a Revolving Credit Facility (the “Facility”) under the Credit Agreement dated as of March 26, 2004 (amended effective as of October 15, 2004 and November 15, 2004). Under the Forbearance Agreement entered into as of November 15, 2004, the Lenders have agreed, subject to certain conditions, to forbear from exercising their rights and remedies under the Credit Agreement as a result of the Payment Default until the earlier of December 31, 2004 or the date of commencement of a case under the federal bankruptcy laws. The Forbearance Agreement reduces the Facility from $70,000 to $35,000, reduces the advance rates on inventory and accounts receivable, reduces the maximum borrowings on inventory from $30,000 to $22,500, and requires that all borrowings bear interest at the Lender’s prime rate plus 300 basis points. The Company’s minimum borrowing availability requirement was increased from $7,500 to $8,500 during the period of forbearance.

6

At September 30, 2004, there was $24,001 outstanding under the Facility. Availability under the Facility, net of outstanding letters of credit and minimum availability requirements, was approximately $8,443 at September 30, 2004. Had the collateral advance rates and minimum availability requirements required by the Forbearance Agreement been in effect at September 30, 2004, borrowing availability would have been $6,299.

The Company is in the process of soliciting proposals for new financing from its current Lenders and other financing groups in connection with its planned financial restructuring of the Senior Notes. While management believes that the Company will be able to negotiate successfully with its Senior Noteholders and these other financing sources, there can be no assurance that the Company will be successful or that the results of such negotiations will be favorable to the Company. If the Company’s negotiations are not successful, the Company may not have access to sufficient capital to fund its operations after December 31, 2004.

In July 2004, the Company renewed its Wallace International de Puerto Rico, Inc. credit facility. The renewed facility allows for borrowings up to $500 and expires on January 30, 2005. Its terms require that the facility be paid down to zero for one 15 consecutive day period prior to that date. Borrowings under the facility bear interest at a rate equal to the Prime Rate plus 200 basis points. At September 30, 2004, $471 was outstanding under the Wallace International de Puerto Rico, Inc. credit facility, and unused availability was $29.

The Company’s liquidity depends on cash provided by operating activities and our Revolving Credit Facility. The ability of the Company to continue as a going concern depends, among other things, on: (i) the Company’s ability to maintain adequate borrowing capacity under its Credit Agreement; (ii) the Company’s ability to generate cash from operations; (iii) the duration and outcome of the recapitalization process including the securing of revolving credit facilities; and (iv) the Company’s ability to achieve profitability following a recapitalization. The Company, in conjunction with its advisors, is working to design and implement strategies to provide adequate liquidity for the Company. However, there can be no assurance as to the success of such efforts.

3. DISCONTINUED OPERATIONS

On April 12, 2004, the Company sold its subsidiary Rauch Industries, Inc. (“Rauch”). Accordingly, results of this operation have been classified as discontinued. In connection with the sale, the Company incurred a charge of $3,254 to reduce this business to fair value less costs to sell which was recorded in the three month period ended March 31, 2004, and recorded an additional loss on disposal of $167 related to the final determination of certain asset values in accordance with the sales agreement during the three months ended June 30, 2004. Results for the nine month period ended September 30, 2004, reflect a loss of $3,143 related to the operations of Rauch for the period from January 1 to April 12, 2004.

Net sales and loss from discontinued operation from the sale of Rauch Industries, Inc. are as follows:

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Assets and liabilities of the discontinued operation are as follows:

The liability at September 30, 2004 is primarily related to environmental contingencies associated with Rauch’s divestiture.

On March 21, 2003, the Company sold its indirect wholly owned subsidiary, C.J. Vander Ltd. and its subsidiaries. Net sales and loss from discontinued operation of C.J. Vander Ltd of $1,675 and $53, respectively, were recorded in the three month period ended March 31, 2003.

4. ASSET DISPOSITIONS

On December 18, 2003, the Company sold its corporate headquarters office and distribution property in East Boston MA (“the Property”). The proceeds from the sale of the Property were $14,110, and the Company leased a portion of the property back from the buyer. A gain of $4,319 related to the sale of the Property is being recognized over the 60 month term of the lease. During the nine months ended September 30, 2004, $616 of the gain has been recognized, and $3,703 has been deferred to future periods, of which $2,865 is classified as a long-term deferred gain at September 30, 2004.

On January 15, 2003, the Company through an indirect wholly owned subsidiary sold its warehouse property in Mira Loma CA (“the Mira Loma Property”). Net proceeds of the sale were further reduced by the Buyer’s assumption of $9,787 of the Company’s indebtedness related to the Mira Loma Property. The Buyer leased the Mira Loma Property back to the Company. A gain of $6,085 related to the sale of the Mira Loma Property is being recognized over the term of the lease. At September 30, 2004 a cumulative total of $2,548 of the gain has been recognized, of which $876 was for the nine month period then ended. The deferred gain at September 30, 2004 is $3,537 of which $2,550 is classified as long-term.

5. REORGANIZATION EXPENSES

In the quarter ended September 30, 2004 reorganization expenses of $356 were incurred, consisting of professional fees paid in connection with negotiations with the Company’s lenders and holders of senior notes, and the exploration of financing alternatives and other alternatives available to the Company.

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6. RESTRUCTURING CHARGES

In November 2003 the Company made the decision to cease manufacturing operations and close its North Dighton MA facility. Manufacturing ceased in May 2004, as scheduled. Products formerly manufactured in North Dighton have been relocated to third party manufacturers and to the Company’s Puerto Rico manufacturing facility. The Company recorded a restructuring charge of $1,318 during the three months ended June 30, 2004, of which $1,080 related to obligations under operating leases for occupancy costs, and $238 related to employee severance costs. The operating leases extend through December 2006. It is not anticipated that the Company will be able to sublease the space due to excess space available in the area. Accrued liabilities at September 30, 2004 included a restructuring reserve of $893 as follows:

7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

8. INVENTORIES

Inventories consisted of the following:

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9. INCOME TAXES

Income taxes are recorded for interim periods based upon an estimated annual effective tax rate. The Company’s effective tax rate is impacted by the proportion of its estimated annual income being earned in domestic versus foreign tax jurisdictions and the recording of a valuation allowance. As a result of the Company’s cumulative loss position at September 30, 2004 and uncertainty relative to the timing of profitability in future periods we determined that it is likely that certain historic and current year income tax benefits will not be realized. Consequently, no tax benefit associated with the current quarter has been recognized relating to the U.S. operating losses, and we have established a valuation allowance against all of our remaining net deferred tax assets. The valuation allowance for the net deferred tax assets was increased by $9,631 to $22,650 during the nine months ended September 30, 2004. Upon a favorable change in the operations and financial condition of the Company that results in a determination by management that it is more likely than not that all or a portion of the net deferred tax assets will be utilized, all or a portion of the valuation allowance previously provided for would be eliminated. In addition to the valuation allowance of $9,631, the Company incurred tax expense of $725 due to profitable operations of its Hong Kong and its Puerto Rico subsidiaries during the nine month period ended September 30, 2004.

In July 2003, the Company filed an application for a new tax grant with the Treasury Department of Puerto Rico which was accepted on July 20, 2004. The Company’s grant is effective as of January 1, 2004 and provides for a flat income tax rate of 4%.

10. COMPREHENSIVE INCOME/(LOSS)

Comprehensive income/(loss) includes net income and other comprehensive income. The only items presented in the Company’s consolidated financial statements that are considered other comprehensive income/(loss) are cumulative translation adjustments, which are recorded as components of stockholders’ deficit.

11. RECLASSIFICATION

Certain prior year amounts have been reclassified to conform to the 2004 presentation.

12. EMPLOYEE BENEFIT PLANS

At September 30, 2004, the Company had employment agreements with certain officers and employees for terms ranging from one to three years. These agreements provide for minimum annual salaries aggregating $1,740 and certain other benefits.

13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS

The following supplemental consolidating financial statements as of  September 30, 2004 and December 31, 2003, and for each of the three and nine month periods ended September 30, 2004 and 2003, present separate financial information for the Issuer/Guarantor Parent, the Guarantor Subsidiary, and the Non-Guarantor Subsidiary. Certain prior year amounts have been reclassified to conform with the 2004 presentation. Separate financial statements of each guarantor are not presented because management believes that such statements would not be materially different from the information presented herein.

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SYRATECH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS

September 30, 2004

11

SYRATECH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2003

12

SYRATECH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2004