<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _______________ TO__________________
Commission File Number 333-43195
Commission File Number 333-43195-01
SCOVILL FASTENERS INC.
SCOVILL HOLDINGS INC.
(Exact name of registrants as specified in their respective charters)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3965 95-3959561
Delaware 6719 58-2365743
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Scovill Fasteners Inc.
Scovill Holdings Inc.
1802 Scovill Drive
Clarkesville, Georgia 30523
706-754-4181
(Name, address, including zip code, and telephone number, including area code,
of registrants' principal executive offices)
___________________
Securities registered pursuant to Section 12(b) of the Act: NONE
___________________
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the Registrant:
None. (See Part II, Item 5.)
Number of shares of Common Stock outstanding as of March 15, 1999 was 4,655,500.
<PAGE>
SCOVILL HOLDINGS INC.
SCOVILL FASTENERS INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page No.
--------
<S> <C> <C>
Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 10
Item 3. Legal Proceedings.................................................................... 11
Item 4. Submission of Matters to a Vote of Security-Holders.................................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 12
Item 6. Selected Financial Data............................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 20
Item 8. Financial Statements and Supplementary Data........................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 21
Item 11. Executive Compensation................................................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 25
Item 13. Certain Relationships and Related Transactions........................................ 26
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K................................ 27
INDEX OF FINANCIAL STATEMENTS................................................................... F-1
SIGNATURES
</TABLE>
-2-
<PAGE>
PART I
Unless the context otherwise requires, references to the "Company," in this
Report include Scovill Holdings Inc. and its wholly-owned subsidiary Scovill
Fasteners Inc. and their respective operating subsidiaries and predecessors.
This report includes product names, trade names and marks of companies other
than the Company and Holdings (as defined below). All other company or product
names are trademarks, registered trademarks, trade names or marks of their
respective owners and are not the property of the Company or Holdings.
Certain terms used herein are defined in Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Item 1. Business
Business Overview
Scovill Fasteners ("Fasteners"), whose business has been in continuous
operation since 1802, is a designer, manufacturer and distributor of apparel
fasteners and specialty industrial fasteners. The Scovill name is the oldest and
one of the most well known brands in the fasteners industry. In the year ended
December 31, 1998, the Company sold more than 11 billion fastener units
worldwide. The Company has achieved and maintained its reputation by offering
its customers an integrated system of high quality fasteners, proprietary
attaching machines, technical service, on-site maintenance and customized
applications and design services tailored to individual customer needs.
The Company has two main product segments: the Apparel Group and the
Industrial Group. The Apparel Group, through its Gripper and DuraMark brands,
produces snaps, tack buttons, rivets, burrs and other snap fastener products
used in numerous apparel applications.
The Industrial Group, primarily through its DOT and PCI product lines,
produces specialty industrial fasteners including large snaps, windshield clips,
turn buttons, eyelets, grommets, screw studs, gypsy studs and other specialty
fasteners. These products are used in a broad range of industries, including
marine textile, automotive, aerospace, military, medical/surgical products,
luggage, leather goods, electronic equipment, sporting and recreational goods
and consumer batteries.
Financial information and other disclosures relating to the Company's business
segments and operations in various geographic areas are provided in the Notes to
the Consolidated Financial Statements.
Product Overview
The Company competes in two broad market segments primarily focused on apparel
manufacturers and on producers of specialty industrial products.
The following table sets forth, for the periods specified, the net sales and
the percentage of total net sales contributed by each product category for the
year ended December 31 (dollars in thousands):
-3-
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Net Sales................ $65,428 $66,388 $91,632 $95,861 $92,476
Apparel Group
Net sales.................. $45,536 $46,309 $48,258 $53,262 $53,444
% of total net sales....... 69.6% 69.8% 52.6% 55.5% 57.8%
Industrial Group(1)
Net Sales.................. $14,175 $14,924 $19,747 $31,698 $28,161
% of total net sales....... 21.7% 22.4% 21.6% 33.1% 30.4%
Other(2)
Net sales.................. $ 5,717 $ 5,155 $23,627 $10,901 $10,871
% of total net sales....... 8.7% 7.8% 25.8% 11.4% 11.8%
</TABLE>
- --------------
(1) Includes all Canadian operations.
(2) Includes (a) European operations, (b) the zipper product line, which was
discontinued in 1996, and (c) Rau and PCI prior to their integration in
April and October 1996, respectively, into the Clarkesville facility.
Amounts also include Scovill Europe subsequent to the Rau and Daude
acquisitions in January and March 1996.
Apparel Group
Industry Overview
The apparel snap fastener market includes snap fasteners, tack buttons, rivets
and burrs and excludes other apparel devices such as zippers, buttons and
velcro. The apparel fastener market is large, with many customers and suppliers.
The primary customers for apparel snap fasteners are manufacturers of staple
garments such as jeans, infantswear, childrenswear and outerwear. Demand for
apparel snap fasteners is related to apparel industry trends generally, which
are affected by demographics. The production of each category of apparel depends
upon population trends and consumer spending in each apparel category.
Despite improvements in technology, manufacturing processes in the apparel
industry are still quite labor-intensive. Because labor is such a significant
cost component in apparel manufacturing, manufacturers in low-wage, developing
countries enjoy a cost advantage over U.S. manufacturers. In response, many U.S.
companies have been shifting assembly operations to low-wage countries or
turning to foreign-based contractors in an effort to lower their production
costs. As a result, some export growth has consisted of shipments of garment
parts for assembly abroad and subsequent re-importation into the United States.
The Company has been able to follow a large portion of its customers' production
abroad, as evidenced by its more than 2,700 attaching machines located outside
of the United States. In addition, in marketing to national accounts the Company
will continue to implement its "retail pull" strategy by leveraging
relationships with customers that move sourcing abroad and expanding its
distribution channels overseas to better serve them.
Product Lines
The Company's Apparel Group is composed of three main product lines: Gripper,
DuraMark and Attaching Machines. The Apparel Group serves six garment product
segments of the apparel business: infantswear, childrenswear, jeans, workwear,
leisurewear/fashion and disposables. The Company competes in the apparel
fastener business in the Americas, Asia, the Pacific Rim and Europe.
The Company has remained a leader in the apparel business through the
manufacture and sale of its Gripper product line, which consists of a variety of
fasteners such as ring sockets, segmented sockets, short and long prongs and
western pearls. In addition, the Company has continued to grow its DuraMark
product line, which consists of large snap fasteners, tack buttons, rivets and
burrs. Through its "total system" approach, the Company leases approximately
8,000 attaching machines so that customers may attach the apparel fasteners to
their apparel
-4-
<PAGE>
products. When viewed together, the Apparel Group's product offerings, attaching
machines and support services have enabled the Company to provide a
comprehensive fastener system that improves customer product quality and lowers
customers' product costs. In connection with the Company's global expansion
strategy, it may, in certain cases, sell its attaching machines rather than
lease them.
The Company, in connection with its distributor in Asia, Acotex, seeks to
increase distribution capacity in China and other countries in Asia. Management
believes this expansion will allow the Company to maintain its customer base as
U.S. manufacturers, seeking to reduce costs, seek sources for their products
outside the United States and to enhance its ability to compete with local
manufacturers and distributors.
Gripper. Gripper is a type of snap fastener with a stud-and-socket design
that was trademarked by the Company in 1937. Although Gripper is a versatile
snap fastener that can be used on almost any type of garment, it is most
commonly used with infantswear, toddler clothing, workwear, uniforms, western-
style shirts and womenswear. In addition to apparel applications, Gripper
fasteners are used in toys, wallets and a variety of other accessories.
DuraMark. The DuraMark product line includes large snap fasteners and tack
buttons, rivets and burrs made from brass, steel, aluminum, zinc and copper.
Large snap fasteners differ from Gripper fasteners in that they are based on a
ring-socket design rather than the segmented-socket design used in Gripper
fasteners. The Company's large snap fasteners are marketed under their trade
names: Mighty-Snap and Maxi-Snap. Mighty Snap and Maxi-Snap fasteners are
generally larger than Gripper fasteners and are normally used in apparel-related
applications where greater strength is required, such as outerwear garments.
Tack buttons are most commonly used as the waist-fastening button above the
zipper on jeans or other types of pants. Tack buttons derive their name from the
fact that they are attached to the garment from the back with a tack, rather
than being sewn to the garment. Rivets and burrs are generally sold in tandem
with tack buttons for reinforcement in stressed areas of heavy clothing such as
jeans. In addition to being functional, tack buttons, rivets and burrs typically
serve decorative functions. Accordingly, they have matching finishes and
designs. They are produced in numerous sizes and colors and typically include a
customer brand logo.
Attaching Machine Leases. The Company leases to its customers, pursuant to
short-term lease agreements (generally one year, subject to renewal, with a 60-
day notice clause), approximately 8,000 attaching machines, which are used at
customer locations to attach its products. The reliability and efficiency of the
Company's attaching machinery, which include patented components, have proven to
be key factors in maintaining a stable base of apparel fastener sales. In
connection with the Company's global expansion strategy, it may, in certain
cases, sell its attaching machines rather than lease them.
The attaching machines are used primarily for apparel products. They are used
less frequently for industrial products because attaching machines are better
suited for high volume, non-bulky items that can be readily fed through the
guides at the point of attachment. Many industrial fasteners are attached by
hand or as part of another manufacturing process.
The Company supplies its customers with three core models of apparel fastener
attaching machinery that can be customized to customers' specifications through
the addition of auxiliary attachments. The Company designs and assembles these
machines and periodically reconditions them in its Clarkesville facility.
Typically, as part of the leasing arrangements, the Company's field
technicians provide on-site maintenance services with guaranteed 24-hour
response time (primarily in the Americas). Some customers perform the
maintenance themselves with Company-trained personnel. When machines require
more comprehensive reconditioning services, they are sent to the in-house
reconditioning center in Clarkesville.
-5-
<PAGE>
Industrial Group
Industry Overview
The industrial fastener market serves a wide range of manufacturers, including
those in the marine textiles, automotive, aerospace, military, medical/surgical
products, electronic equipment, sporting goods and consumer battery industries.
Growth in this market is influenced by both the general economy and consumer
purchases of electronics, automobiles, housing and footwear. The industrial
fastener market is large and highly fragmented. The market is comprised of a
variety of niche segments with specialized customers, competitors and products.
The Company estimates that the industry segments in which it currently competes
constitute less than 10% of the overall market. The Company believes that there
is no dominant manufacturer that competes in all of its product lines, and the
Company intends to broaden its participation through new products and product
line extensions.
The businesses the Company serves with its DOT, PCI and Plastics product lines
are largely in North America. The Company has made limited sales of DOT products
in European markets. The Company plans to increase sales efforts through
Scovill-Europe in Belgium, France and the United Kingdom.
The Company believes that there are opportunities to expand its product
offerings to include electronic equipment (such as PC boards), consumer
batteries (such as male and female connectors), identification bracelets (Tag
Lock, one-time fasteners), and grommets and washers (such as leisure products
and utility bags), among others.
Product Lines
The Company's Industrial Group is comprised of three main product lines: DOT,
PCI and Plastic Fasteners. Industrial fasteners are sold through direct sales
and authorized distributors to a wide variety of customers, including
manufacturers of marine textiles, sporting and recreational products,
electronics, electrical equipment and footwear. The Company competes mostly in
the specialty fastener market in the Americas (including Canada) and, to a more
limited extent, in Europe and Asia.
To remain competitive in the industrial fastener industry, the Company intends
to focus on methods of improving plant efficiency and cost reduction. While
investing in research and development to create new products and to re-engineer
product lines acquired through acquisitions, the Company is also actively
developing new applications for its current industrial products.
DOT. DOT fasteners include large snaps, windshield clips, turn buttons, screw
studs, gypsy studs and other specialty fasteners. An advantage of certain DOT
products is their locking feature. Examples of DOT products with a locking
feature include Pull-the-DOT, which is a unidirectional lock designed to open
only when properly aligned, and the Common Sense line, which has a positive
locking feature that offers strength and durability. DOT fasteners are used for,
among other things: marine textiles, automobiles, awnings, luggage, athletic
outerwear, sporting goods, tents and packaging.
PCI. With the acquisition of PCI in January 1996, the Company expanded its
industrial product line to include footwear eyelets, grommets, washers,
industrial eyelets, and specialty stampings. The Company's supply division
provides specialized setting tools and supplies so that PCI customers can
customize third-party manufactured attaching machines to accommodate PCI
fasteners. These products are largely able to utilize the DOT distribution
channels.
Plastic Fasteners. The Company's plastic fastener line is principally
composed of three products that are known by their trade names: Whipper Snap,
Color Snap and Tag Lock. The Whipper Snap was the first plastic snap fastener.
Each Whipper Snap is composed of four parts and employs a four-prong design that
grips fabric securely without tearing. Currently, the Whipper Snap is the most
important of the Company's plastic fasteners, measured by sales volumes, and is
primarily sold for use in protective disposable medical apparel. Since late
1992, the demand
-6-
<PAGE>
for disposable medical garments has increased as a result of new OSHA
regulations governing the medical profession.
Color Snaps are used in packaging and other non-apparel applications. The Tag
Lock fastener is a one-way fastener that is most commonly used for one-time use
identification bracelets such as hospital bracelets and amusement park entrance
wristbands.
Manufacturing Operations
During June 1998, the Company announced a corporate restructuring plan which
included downsizing of certain administrative and sales functions and
outsourcing the production of plastic components, which was previously performed
in the Company's existing manufacturing facilities. Approximately 30 employees
were terminated under this plan. As of December 31, 1998, the Company has a
liability of $0.3 million related primarily to severance obligations made during
the restructuring which will be paid by June 1999. In conjunction with the
restructuring of the Company's manufacturing organization and implementation of
improved manufacturing techniques, the Company commenced a value-added capital
expenditures program. This program emphasizes investments that improve the
efficiency of the Company's manufacturing operations, increase product quality,
enhance the safety of workers and in some cases, require a reduction in the
number of employees. The Company is creating an internal training center
staffed by Company personnel to train newer employees on tooling and machine
maintenance.
By integrating the acquisitions of Rau and PCI (see Background discussion in
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations) into its Clarkesville facility, the Company has increased
production volume at the facility, which has enabled it to absorb more fixed
costs and indirect labor costs. The Company's manufacturing organization
focuses on its product lines rather than production processes. The Company has
five separate production units, each dedicated to a particular product line.
These production units, in turn, are subdivided into a number of manufacturing
cells. Each production unit consists of dedicated equipment, employees and
management.
The Company defines capacity by individual manufacturing cells within five
product line-oriented production units, as opposed to functional processes such
as stamping or plating. The Company believes it has sufficient manufacturing
capacity in each of its product lines to meet current customer demands,
including anticipated growth thereof. By optimizing its operations, adding
shifts and outsourcing particular activities, the Company believes that it can
significantly increase the output of the Clarkesville facility with limited
capital expenditures. There can be no assurance, however, of such a result.
The manufacture of a majority of the Company's products begins with the
stamping of the relevant raw material. Some products are formed through a series
of stamping steps using progressive dies while others are formed through a
single stamping step using sophisticated forming dies. These products are then
cleaned to reduce lubricant residues and prepare the surface for finishing
before being assembled and packed for shipping. To facilitate shipping, the
Company works with several different common carriers and its manufacturing
facility is readily accessible to the interstate highway system. Availability
and cost of transportation are not competitive factors affecting the Company's
business in North American markets. However, the Company continues to increase
its distribution capacities in Asia to minimize the cost of transportation from
North America to Asia.
Insurance
The Company maintains property insurance, liability insurance, business
interruption insurance and other insurance policies customary to the
manufacturing industry. The Company believes that its policies are sufficient to
cover any potential loss or liability that is likely to arise in the future.
-7-
<PAGE>
Raw Materials
The prices of raw materials are subject to volatility. The Company's principal
raw materials are brass, steel, zinc and nickel alloys, of which brass is the
most significant. These raw materials are commodities that are widely available.
The Company has secured a substantial portion of its copper needs with a
primary vendor through 1999. Due to the favorable pricing available, the
Company secured pricing in lieu of hedging for 1999. To the extent that the
price for the Company's remaining needs increases before prices are set, there
can be no assurance that the Company will be able to set the price low enough to
enable the Company to achieve adequate margins on finished products, although it
has in the past been able to pass a portion of any price increase in materials
to its customers.
The Company has strong relationships with many of the largest suppliers of raw
and processed materials in the United States. The Company's policy is to
establish arrangements with select vendors, based upon price, quality, and
delivery terms. By limiting the number of its suppliers, the Company believes
that it obtains materials of consistently high quality at favorable prices. In
addition to purchase contracts, the Company has tolling agreements with some of
its suppliers whereby the suppliers reprocess the Company's scrap for a fixed
charge. These relationships afford the Company certain purchasing advantages,
including stable supply and favorable pricing arrangements. The Company believes
it is able to obtain favorable pricing of raw materials as it achieves greater
production, due to its ability to place larger orders with commodity suppliers.
Marketing and Sales
The Company's sales and marketing organization consists of four functional
areas: sales, customer service, field service and product support. These four
areas work in close cooperation with one another in an effort to maximize the
Company's sales revenue and to offer superior customer service. The general
marketing strategy of the Company is to differentiate itself from other fastener
manufacturers by offering a full range of premium branded products and services.
Components of this strategy include offering attaching machine service,
engineering and sales support through the maintenance of a network of service
personnel, a large direct field sales organization, applications engineering,
and product design and development.
Sales. The sales organization is divided by domestic U.S. regions.
Products in Europe are sold through a combination of direct sales in Belgium,
France, and the United Kingdom as well as through distributors in fifteen
European countries. The Company has a distribution agreement with Acotex, which
provides the Company with expanded distribution capability (including stocking
of products) in Southeast Asia.
Marketing. The Company services lower volume customers (particularly DOT
customers) through a telemarketing group included in customer service in
Clarkesville, Georgia, which enables the Company to reach a large number of
diversified customers throughout the United States in a cost-effective manner.
To reach its markets, the Company employs a general promotional mix, utilizing
a direct field sales staff, a telemarketing group and authorized distributors.
The sales activity is supported by participation in trade exhibitions, as well
as a full advertising program in trade publications. Other promotional
activities include publicity announcements, entertainment functions, advertising
novelties and a Company website. The Company's product management team supports
the sales organization by focusing on pricing strategy, providing new product
information and by facilitating product improvement projects.
Customer Service. The Company provides customers with a "total system"
approach, which includes the fasteners, attaching equipment and dedicated field
service. The Company believes that its sales depend on in-depth knowledge of
customer manufacturing procedures, responsiveness to product design changes,
consistent product quality, timely delivery, and efficient and reliable
attaching machinery. Typically, the buying decision requires a consensus among
the customer's plant managers, plant engineers and merchandising and purchasing
personnel. The Company's sales force has been able to develop and maintain long-
term customer relationships. The Company's
-8-
<PAGE>
primary customer service center is located in Clarkesville, Georgia and is
dedicated to handling customer orders. The center is staffed by thirteen
customer service representatives. These representatives work with the Company's
sales personnel and customer purchasing representatives to process orders and
ensure that all specifications are met. The customer service center also handles
inquiries regarding order changes, delivery and billing.
The Company maintains branch sales and distribution offices in El Paso, Texas
to service the Southern and Western apparel regions and Lewiston, Maine to
service the industrial footwear markets in the Northeast. Additionally, the
Company has a sales center and distribution warehouse at its facility in
Torreon, Mexico. This center is staffed by two bi-lingual customer service
representatives.
Field Service. The Company provides product support through a dedicated
field service organization. The Company has 25 field service personnel in
North America who regularly visit customer locations and maintain attaching
machines at customer locations throughout the United States, Mexico, Latin
America and Canada. Through the service representatives, the Company is able to
minimize the downtime of its attaching machinery and increase machine
efficiency.
Product Support. The Company's product support includes a quality assurance
department that maintains an applications laboratory staffed by applications
engineers and technicians. The applications laboratory performs a variety of
tests, including strength and durability testing, in order to evaluate the
suitability of a fastener for a customer's application. The Company's
engineering department employs dedicated graphics designers. These designers
work with a CAD/CAM system to adapt customers' logo designs to the Company's
fastener products. The Company also has a dedicated research and development
department, which focuses on new product development.
Backlog. At December 31, 1998 and 1997, the Company had an order backlog of
approximately $7.3 million and $9.4 million respectively. Management does not
believe that a material amount of orders constituting such backlog at December
31, 1998 will remain unfilled by the end of May 1999.
Customers. The Company serves two major markets: apparel and industrial. The
Apparel Group serves six primary market segments, consisting of infantswear,
childrenswear, jeans, workwear, leisurewear/fashion and disposables. A trend in
the apparel industry is to move to lower cost production, most commonly in Asia
and Latin America. The Company, with its distribution networks in Mexico and
Asia, is able to help apparel manufacturers with this transition. The
Industrial Group serves six primary market segments, consisting of automotive,
marine textiles, military, leather, sporting goods and medical.
In 1998, no single customer accounted for more than 8% of the Company's total
net sales, and the Company's 10 largest customers accounted for approximately
30% of the Company's total net sales. The Company's broad line of products for
apparel and specialty industrial use reduces its exposure to any one customer
segment and to fashion trends. The Company plans to expand its customer base by
introducing new products and developing applications for existing products. The
loss of any single customer would not have a material adverse effect on the
Company.
Competition. The Company operates in a highly competitive environment. Some
of the Company's competitors have greater financial resources and may be less
leveraged than the Company. As a result of its presence in both the apparel and
industrial markets and the diversity of its products, the Company believes that
no single competitor competes with the Company across the entire range of the
Company's product lines.
Although the primary competitive factors for the Company's products vary
somewhat across different product categories, the principal factors influencing
competition are breadth of product line, cost of raw materials, cost of
attaching machinery, price, quality and customer service. Brand recognition is
also a differentiating factor in the Apparel Group, which includes the Gripper
product line, and in the Industrial Group, which includes the DOT product line.
The Company believes that it has remained competitive by developing strong
customer relations based on its ability to supply quality products.
-9-
<PAGE>
Other factors affecting the Company's ability to compete domestically and
internationally include the ability of domestic and foreign manufacturers of
fasteners and other stamped metal products to move capacity quickly into
production in the industry segments in which the Company sells its products. As
a result, the Company faces price competition from a number of sources.
Trademarks and Patents. The Company currently uses numerous trademarks and
trade names in its business, including Color Snap(R), Common Sense(TM), DOT(R),
DuraMark(R), Gemini/(TM)/, Gripper(R), Klikit(R), Maxi-Snap/(TM)/, Mighty-
Snap(TM), PCI(TM), Pull-the-DOT(R), Tag Loc(TM) and Whipper Snap(R). In
addition, the Company owns 25 patents relating to its fasteners and attaching
machinery and it has 3 patents pending. Although the products and services
underlying such trademarks and patents have achieved significant brand
recognition and, as a result, are of significant economic value, the Company
does not believe that any individual trademark or patent is of material
importance to the Company's business.
The Company also relies upon trade secret protection of its confidential and
proprietary information. The Company routinely enters into confidentiality
agreements with both high- and low-level employees. There can be no assurance
that such measures will be successful or that competitors will not be able to
discover the trade secrets on their own.
Governmental Regulations
A number of regulations affect the Company's business. The Company believes
that it complies with all laws and regulations affecting its business and that
it does not have any material liabilities under such laws and regulations. The
Company also believes that compliance with all such laws and regulations will
not, individually or in the aggregate, have a material adverse effect on the
Company's capital expenditures, earnings or competitive position. See also
"Legal Proceedings--Environmental Matters."
Employees
As of December 31, 1998, the Company employed 760 people. Approximately 132
were employed in administrative and sales positions and 628 were employed in
manufacturing positions. The number of employees at the Company's Clarkesville
facility decreased by approximately 100 people during 1998 due to a corporate
restructuring plan and attrition. None of the Company's employees at the
Clarkesville or the Montreal facilities is represented by a labor union. The 82
non-management employees at the Belgium facility may belong to a labor union,
but under Belgian law, such membership is not required to be disclosed to the
Company. The Company believes that its relationships with its employees are
satisfactory.
Item 2. Properties
The Company's U.S. manufacturing facilities are situated on 31 acres owned by
the Company in Clarkesville, Georgia (approximately 90 miles northeast of
Atlanta, Georgia) and include a 230,000 square foot building used for
manufacturing and administration, as well as a 26,400 square foot attaching
machine center. The Company also leases manufacturing facilities in Montreal,
Canada, and owns a manufacturing facility in Braine-le-Comte, Belgium. The
Company also leases distribution facilities in Nottingham, England and Soucy-en-
Brie, France (outside of Paris).
The Company maintains a central distribution warehouse at its Georgia facility
and satellite warehouses in Maine, Texas and Mexico. Its products are also
available from distributor facilities located throughout Canada, the United
States, Western Europe, Central America, South America, and the Far East. The
Company intends to use its facilities in Belgium to increase the distribution of
its products in Europe. Goods are packaged to meet market needs for safe
handling and effective storage, and customized packaging is available for
distributors in select market channels such as the marine product line.
-10-
<PAGE>
Item 3. Legal Proceedings
From time to time, the Company is named in claims involving manufacturers,
contractual disputes and other matters arising in the ordinary course of the
Company's business. Currently, no legal proceedings are pending against or
involve the Company that, in the opinion of management, could reasonably be
expected to have a material adverse effect on the business, financial condition
or results of operations of the Company.
Environmental Matters
Like similar companies, the Company's operations and properties are subject to
a wide variety of increasingly complex and stringent federal, state, local and
foreign environmental laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials and wastes, the remediation of contaminated soil
and groundwater, and the health and safety of employees (collectively,
"Environmental Laws").
The Company is currently subject, and may in the future be subject, to
liability under Environmental Laws for remediation of contamination at currently
or formerly owned or operated facilities including, presently, remediation at
its Clarkesville, Georgia facility. In addition, from time to time, the Company
has been cited for violations of Environmental Laws. The sanctions for failure
to comply with such Environmental Laws can include significant civil penalties,
injunctive relief and denial or loss of, or imposition of significant
restrictions on, environmental permits. In addition, the Company could be
subject to suit by third parties in connection with violations of or liability
under Environmental Laws. In the event of liability under Environmental Laws,
the Company intends to pursue available statutory and contractual remedies, and
defenses including any applicable rights of contribution and indemnification
from predecessors in interest.
As of December 31, 1998, the Company had reserves of approximately $3.0
million for environmental liabilities. Of the total reserve for environmental
liabilities, $2.7 million represents contractual payments to a former parent.
Because Environmental Laws have historically become increasingly more stringent,
costs and expenses relating to environmental control and compliance may increase
in the future.
The nature of the Company's current and former operations, and those of its
predecessors, exposes it to the risk of claims with respect to environmental
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. Based upon its experience to
date, the Company believes that the future cost of compliance with existing
Environmental Laws, and liability for known environmental claims pursuant to
such Environmental Laws, will not have a material adverse effect on the cash
flow, financial condition or results of operations of the Company. However,
future events, such as new information, changes in existing Environmental Laws
or their interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
material.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
-11-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Neither Holdings nor Fasteners has a class of capital stock, including their
respective classes of common stock, registered pursuant to the Securities
Exchange Act of 1934, as amended. There is no established public trading market
for the Common Stock. Holdings has never declared or paid any cash dividends on
its Common Stock, and Fasteners pays quarterly dividends to Holdings for
management fee purposes, but is otherwise restricted from paying dividends.
In February 1998, Holdings sold an additional 1,000,000 shares of each of
Holdings' Common Stock, par value $0.00001 per share (the "Common Stock") and
Holdings' Series B Preferred Stock, par value $0.00001 per share (the "Series B
Preferred Stock") for approximately $10.3 million, which sale was exempt from
registration pursuant to Section 4(2) of the Securities Act because of the
private nature of the transaction and the financial sophistication of the
purchaser involved. The proceeds from this sale were used by Holdings to redeem
its outstanding Series A Cumulative Redeemable Exchangeable Preferred Stock and
warrants.
Item 6. Selected Financial Data
Selected Consolidated Historical Financial Data
(Dollars in thousands)
On November 26, 1997, Scovill Acquisition Inc. purchased all of the
outstanding stock of KSCO Acquisition Corp. ("Predecessor-KSCO"). Fasteners was
a wholly owned subsidiary of Alper Holdings USA, Inc. ("Predecessor-Alper")
through October 17, 1995 when all of its stock was purchased by KSCO (See
Background discussion in Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations).
The following table presents selected historical financial data of the
Company, Predecessor-KSCO and Predecessor-Alper as of the dates and for the
periods indicated, including the results of operations of acquired companies
from their respective dates of acquisition. The financial data as of
December 31, 1998 and 1997 and for the period from November 26, 1997 to
December 31, 1997 have been derived from the consolidated financial statements
of the Company audited by Arthur Andersen LLP, independent public accountants.
The financial data as of December 31, 1995 and 1996 and for the period from
January 1, 1995 to October 17, 1995, the period from October 17, 1995 to
December 31, 1995, the year ended December 31, 1996, and the period from
January 1, 1997 to November 26, 1997 have been derived from the consolidated
financial statements of Predecessor-Alper and Predecessor-KSCO audited by Arthur
Andersen LLP, independent public accountants. The financial data for the year
ended December 31, 1994 has been derived from the consolidated financial
statements of Predecessor-Alper audited by Deloitte & Touche LLP, independent
auditors. The selected historical financial data 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 included
elsewhere herein.
The consolidated financial statements of the Company, the Predecessor-KSCO and
the Predecessor-Alper are not comparable in certain respects.
-12-
<PAGE>
<TABLE>
<CAPTION>
Predecessor--Alper Predecessor--KSCO Company
----------------------- ----------------------------------------- --------------------------
Period From Period From Period From Period
Year January 1, October 17, Year January 1, From Year
Ended 1995 to 1995 to Ended 1997 to Inception to Ended
December October 17, December 31, December 31, November 26, December 31, December 31,
31, 1994 1995 1995 1996 1997 1997 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.......................... $65,428 $53,589 $12,799 $91,632 $89,167 $6,694 $ 92,476
Gross profit....................... 18,383 13,329 3,446 27,032 25,164 2,103 24,364
Operating income................... 7,438 5,187 1,380 7,424 7,746 627 1,732
Income (loss) before income taxes
and extraordinary loss............ 2,975 1,164 274 1,021 2,431 (704) (14,281)
Net income (loss) available to
common stockholders (1)........... $ 2,341 $ 1,164 $ 116 $ (852) $ 1,319 $ (781) $ (9,767)
======= ======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Predecessor--Alper Predecessor--KSCO Company
------------------------ ----------------------------------------- --------------------------
December 31, December 31, December 31,
1994 1995 1996 1997 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital...................... $ 7,810 $ 6,688 $ 17,562 $ 15,815 $ 18,689
Total assets......................... 76,448 88,577 103,866 226,202 217,267
Total debt (2)....................... 14,516 41,538 37,718 129,848 141,323
Redeemable preferred stock.......... 19,439 -- -- 9,400 --
Stockholders' equity (3)............. 29,043 18,263 21,421 31,409 32,535
</TABLE>
_____
(1) In January 1996, the Company refinanced its previously existing credit
agreements with the Former Credit Facility, which resulted in an
extraordinary after-tax charge of $950 in the first quarter of 1996 from the
write-off of related deferred financing costs.
(2) Excludes off-balance sheet financing pursuant to the Synthetic Lease,
proceeds of which were applied toward repayment of debt of $31,268 in
November 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(3) Stockholders' equity includes affiliate advances, demand notes and
debentures from Predecessor-Alper's parent at December 31, 1994 of $31,237.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto. All dollar figures have
been rounded to the nearest one-tenth of one million for presentation purposes.
Background
Scovill Acquisition Inc. ("SAI") and Scovill Holdings Inc. ("Holdings"),
both Delaware corporations, were formed by Saratoga Partners III, L.P.
("Saratoga") in 1997 to effect the acquisition of Scovill Fasteners Inc., a
Delaware Corporation ("Fasteners" or the "Company"). SAI purchased KSCO
Acquisition Corporation ("KSCO") in 1997 for approximately $168.8 million. The
purchase of KSCO by SAI and the mergers of SAI and KSCO into Fasteners are
together referred to herein as the "Saratoga Acquisition."
The Saratoga Acquisition of Fasteners was accounted for as a purchase.
Accordingly, the consolidated financial statements of Fasteners reflect the
purchase method of accounting effective November 26, 1997. In connection with
the Saratoga Acquisition, the Company issued (the "Initial Offering")
$100,000,000 of 11.25% Senior Notes due 2007 (the "Notes") pursuant to an
Indenture (the "Indenture"). The Company completed an exchange of the Notes
for identical, but publicly-tradeable notes pursuant to an exchange offer
registered with the Securities and Exchange Commission ("SEC").
-13-
<PAGE>
In connection with the Saratoga Acquisition, Fasteners entered into a new
senior secured credit facility (the "Credit Facility"), consisting of a $28.0
million term loan (the "Term Loan") and a $25.0 million revolving credit
facility (the "Revolving Credit Facility").
Proceeds from the Initial Offering, the Term Loan and investments from
management and Saratoga were used to finance the purchase price of the Saratoga
Acquisition, repurchase attaching machinery subject to a synthetic lease (the
"Synthetic Lease"), repay the Company's existing credit facility (the "Former
Credit Facility") and pay related fees and expenses. The Saratoga Acquisition,
the repurchase of attaching machinery subject to the Synthetic Lease, the
repayment of the Former Credit Facility, the establishment of the Credit
Facility and the Initial Offering, are collectively referred to herein as the
"Transactions."
In November 1996, the Company refinanced its attaching machinery under the
Synthetic Lease with General Electric Capital Corporation ("GECC"). Pursuant
to the Synthetic Lease, GECC leased to the Company various fastener equipment,
which the Company then subleased to its customers. The Company originally sold
the equipment to GECC for $31.3 million. The lease was accounted for as an
operating lease in accordance with Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The Synthetic Lease was terminated, and the
equipment subject thereto repurchased, in connection with the Transactions.
During January 1996, Fasteners purchased Rau Fastener Company, LLC ("Rau")
for $7.9 million and PCI Group, Inc. ("PCI") for $15.6 million, excluding
certain costs related to financing and consummating the acquisitions. The Rau,
PCI and Daude acquisitions were accounted for using the purchase method of
accounting and, as a result, the Company's financial statements include the
results of operations of Rau, PCI and Daude from their dates of acquisition.
Rau primarily manufactured snap fasteners with locations and subsidiaries
operating in Providence, Rhode Island, Braine-le-Comte, Belgium ("Scovill-
Europe") and Montreal, Canada. PCI manufactured industrial and shoe eyelets and
light metal stampings. In March 1996, Scovill-Europe acquired Daude in Paris,
France and combined its operations into Scovill-Europe. In June 1998, Scovill-
Europe acquired a fastener distributor in the United Kingdom which enabled it to
expand its presence in Europe. The acquired distributor was a customer of
Scovill-Europe. Scovill-Europe acquired the assets and liabilities of the
distributor in exchange for the forgiveness of the outstanding accounts
receivable of $0.5 million.
General
The Company, whose business has been in continuous operation since 1802, is a
designer, manufacturer and distributor of apparel and specialty industrial
fasteners. The Scovill name is the oldest and one of the most well known brands
in the fasteners industry. The Company has achieved and maintained its
reputation by offering its customers an integrated system of high quality
fasteners, proprietary attaching machines, technical service, on-site
maintenance and customized applications and design services tailored to
individual customer needs. The Company has two main product groups: the Apparel
Group and the Industrial Group.
Revenues include sales of fastener products and rental income from the leasing
of attaching machines to customers. Cost of sales includes the costs of raw
materials, labor and variable and fixed manufacturing overhead. Selling, general
and administrative expenses consist primarily of salaries and benefits paid to
sales and administrative personnel, commissions, and travel, marketing and
advertising expenses.
The results of operations of the Company and Predecessor-KSCO have been
combined for purposes of discussion of the results of operations for fiscal year
1997.
Results of Operations
Fiscal Year 1998 Compared with Fiscal Year 1997 (Combined Company and
Predecessor - KSCO)
Net Sales. Net sales decreased $3.4 million, or 3.5%, from $95.9 million to
$92.5 million. The decline was attributable to lower Industrial Group revenues
which declined $3.5 million, or 12.4%, from $31.7
-14-
<PAGE>
million to $28.2 million. In the Industrial Group, the PCI product line
experienced significant declines resulting from manufacturing restraints arising
from workforce skill set availability and constrained product offerings.
Industrial Group revenues were further impacted by reduced demand for government
and medical fasteners, predominantly in the DOT markets. The Apparel Group
revenues increased $0.2 million, or 0.3%. Throughout 1998, many domestic
infantswear and jeans manufacturers, in search of lower labor costs, transferred
production of garments either to Asia or Mexico/Central America. Accordingly,
the Company was able to significantly increase its Mexico and Asia revenues
thereby effectively offsetting any domestic volume erosion. The Company's
European revenues were unchanged from 1997.
Gross Profit. Gross profit decreased by $2.9 million, or 10.3%, from $27.3
million to $24.4 million. In addition to the margin impact of lower Industrial
Group revenue volume, the Company experienced negative product sales mix in its
Apparel revenues in Asia. While the Company has successfully followed
infantswear production offshore, this revenue is at lower margins and is
impacted by intense price competition. Additionally, the European subsidiary
experienced the loss of two large customers but was able to replace the lost
volume at lower margins. Overall, the Company was able to partially offset the
negative margin impact by the execution of its restructuring plan and other cost
reduction activities during 1998.
Selling, General and Administrative Expenses ("SG&A"). SG&A decreased
slightly from $15.8 million to $15.7 million, which represents 17.0% and 16.5%
of sales for each of the years ended December 31, 1998 and 1997, respectively.
Restructuring and Asset Impairment Charge. In June 1998, the Company
announced a corporate restructuring plan. The plan includes outsourcing the
production of plastic components, which was previously performed in the
Company's existing manufacturing facilities. The Company recorded a
restructuring charge of $3.0 million comprised of approximately $1.0 million
related to severance payments to be paid to approximately 30 terminated
employees, an additional severance benefit of $1.0 million that was paid under
the terms of an employment arrangement and a $1.0 million impairment charge
related to plastics component part production fixed assets to be disposed of
under the plan. The Company will pay the severance benefits discussed above
through June 30, 1999, the majority of which was paid in the third and fourth
quarters of 1998. As a result of the restructuring, the Company expects
reductions in future annual operating expenses of approximately $1.7 million
which should enable the Company to be more competitive.
Operating Income. Operating income decreased $6.7 million from $8.4 million
to $1.7 million as a result of a restructuring charge of $3.0 million, a
decrease in gross profit of $2.9 million, an increase in amortization expense of
$0.9 million as a result of increased goodwill and deferred financing fees in
connection with the Saratoga acquisition, offset by a decrease in SG&A of $0.1
million.
Interest Expense. Interest expense increased by $11.0 million, from $4.9
million to $15.9 million as a result of the issuance by the Company of $100.0
million aggregate principal amount of its 11.25% Senior Notes due 2007, in
addition to outstanding borrowings under the Credit Facility.
Income Tax Provision (Benefit). The benefit for income taxes was $4.7 million
in 1998 compared to an income tax provision of $1.1 million in 1997.
Net Income (Loss). Net loss for 1998 was $9.8 million compared to net income
of $0.5 million in 1997, which is attributable to the factors discussed above.
Fiscal Year 1997 (Combined Company and Predecessor - KSCO) Compared with Fiscal
Year 1996
Net Sales. Net sales increased $4.3 million, or 4.6%, from $91.6 million to
$95.9 million. The increase of $1.9 million, or 2.0%, was attributable, in part,
to receipt of revenues from the former Rau and PCI operations for a full twelve
months in 1997, compared to approximately eleven months of revenues in 1996,
measured from the dates of acquisition. Strong jeans and denimwear orders also
contributed approximately $1.7 million, or 1.8%, of additional overall Apparel
Group sales. The Company's international subsidiaries also experienced increased
sales,
-15-
<PAGE>
resulting from the acquisition of Daude. These increases were partially offset
by initial sales declines resulting from customer concerns relating to
publicized workforce unrest due to the relocation of the PCI operations from New
Bedford, Massachusetts to Clarkesville, Georgia during the latter part of 1996.
The PCI facility in New Bedford was closed in October 1996. Employees of this
facility who were not relocated or chose not to be relocated received severance
and other benefits subject to the shutdown agreement negotiated between the
labor union representing the employees and the Company. The Company no longer
has any employees in New Bedford.
Gross Profit. Gross profit increased $0.3 million, or 0.9%, from $27.0
million to $27.3 million. Gross margin decreased from 29.5% to 28.4%. The cost
of goods sold in 1997 includes rental expense of $4.7 million related to the
Synthetic Lease. Without the effect of the Synthetic Lease transaction, gross
profit would have increased by an additional $.9 million to $28.2 million, and
gross margin would have increased to 29.4%, of which $0.8 million resulted
primarily from the Company's relocation and integration of operations from the
Rau, PCI and Daude acquisitions during 1996. In the case of the Rau and PCI
integrations, additional manufacturing volume at the Clarkesville facility
absorbed a greater portion of fixed costs.
Selling, General and Administrative Expenses. SG&A decreased $1.3 million,
or 7.2%, from $17.1 million to $15.8 million. The decrease was primarily
attributable to reductions, in late 1996, in the number of salespeople after
integration of the Rau and PCI operations and the related decrease in travel,
advertising and commission expenses. SG&A was 16.5% of net sales for 1997
compared to 18.6% for 1996.
Operating Income. Operating income increased $1.0 million, or 12.8%, from
$7.4 million to $8.4 million. The increase was primarily attributable to
acquisitions stemming from SG&A reductions and increased volume.
Interest Expense. Interest expense decreased $1.0 million, or 17.5%, from
$5.9 million to $4.9 million. This decrease was attributable to the repayment of
indebtedness with proceeds from the Synthetic Lease. Interest expense was $1.2
million from November 26, 1997 through December 31, 1997 as a result of the
Initial Offering and the Term Loan used to finance the Saratoga Acquisition.
Income Tax Provision. The provision for income taxes was $1.1 million in
1997 compared to $.9 million for 1996.
Net Income. Net income for 1997 was $0.5 million compared to a loss of $.9
million in 1996 (all of which was attributable to an extraordinary loss related
to the early extinguishment of debt in January 1996). The remaining impact was
attributable to the factors discussed above.
Liquidity and Capital Resources
As of December 31, 1998, $12.9 million was outstanding under the Revolving
Credit Facility. The Company's liquidity requirements consist primarily of
scheduled payments of principal and interest on its indebtedness, working
capital needs and capital expenditures. The Company believes that its operating
cash flow, together with borrowings under the Credit Facility, will be
sufficient to meet its operating expenses and capital requirements, and its debt
service requirements through 1999. However, in the event the Company requires
additional capital during such period, it will be required to secure new capital
sources or expand its bank credit facility. In such event, there can be no
assurances that additional capital will be available or available on terms
acceptable to the Company.
During the third and fourth quarters of 1998, the Company amended certain
EBITDA definitions of its Credit Facility and amended certain provisions to
reset financial covenants for subsequent periods. In addition, an amendment to
the Credit Facility waived the capital expenditures requirements and funded
indebtedness to consolidated EBITDA ratio for 1998.
Scheduled debt repayments are $3.4 million in 1999, $5.4 million in 2000, $6.2
million in 2001, $6.0 million in 2002, $7.0 million in 2003 and $113.0 million
(including the Notes) thereafter.
-16-
<PAGE>
Capital Expenditures
The Company's capital expenditures during 1998 aggregated approximately $8.3
million which were primarily for reconditioning and purchases of attaching
machines and plant machinery and equipment. Capital expenditures for 1999 and
2000 are expected to be less than $5.0 million per year.
Cash Flows
Net cash used in the Company's operating activities was $5.7 million for 1998.
Principal working capital changes included a decrease of $3.1 million in
accounts payable, a $4.0 million decrease in accrued expenses, a $0.8 million
increase in accounts receivable and $0.3 million increase in inventory. The
Company's cash used in investing activities was $8.3 million for capital
expenditures. Net cash provided by financing activities was $11.5 million,
reflecting an increase in borrowings under the Revolving Credit Facility of
$12.9 million, net of repayments of $1.4 million.
Net cash provided in the Company's operating activities was $4.3 million for
1997. Principal working capital changes included increases of $1.9 million and
$5.8 million in accounts receivable and inventory, respectively. The Company's
cash used in investing activities during 1997 was $143.2 million related
principally to the Saratoga Acquisition of $94.6 million, repayment of the
Synthetic Lease and capital expenditures. Net cash provided by financing
activities was $142.7 million, reflecting $128.0 million of debt issued in
connection with the Saratoga Acquisition and $29.5 million of the issuance of
Holdings' preferred stock and $20.0 million of the issuance of Common Stock.
The Indenture and the Credit Facility place significant restrictions on the
Company's ability to incur additional indebtedness, pay dividends or repurchase
stock or make other distributions, create liens, make certain investments, sell
assets, or enter into mergers or consolidations.
EBITDA
EBITDA is defined for the purpose of this report as net income (loss) before
interest expense (including amortization of deferred financing costs), provision
(benefit) for income taxes, depreciation, amortization, rental payments on
synthetic lease on attaching machines, restructuring and assets impairment
charge, and management fees.
The Company has included information concerning EBITDA in this report because
it is used by certain investors as a measure of a company's ability to service
its debt. EBITDA is not required or recognized as a measure of financial
performance under generally accepted accounting principles in the U.S. ("GAAP"),
and should not be considered an alternative to net income determined in
accordance with GAAP as an indicator of operating performance or as an
alternative to cash flow from operating activities determined in accordance with
GAAP as a measure of liquidity. The Company's use of EBITDA may not be
comparable to similarly titled measures used by other companies due to their use
of different financial statement components in calculating EBITDA.
EBITDA decreased $2.8 million, or 12.8%, from $22.1 million to $19.3 million
primarily as a result of a decrease in gross profit, resulting from decreased
sales volume for the year ended December 31, 1998 compared to the year ended
December 31, 1997.
EBITDA increased $4.0 million, or $22.3%, from $18.1 to $22.1 million for the
year ended December 31, 1997 compared to the year ended December 31, 1996 partly
as a result of revenues form the former Rau and PCI operation for a full year of
revenues in 1997 compared with eleven months in 1996, measured from the dates of
acquisition. These operations were integrated into the Clarkesville location
and additional manufacturing volume absorbed a greater portion of fixed costs.
Additionally, SG&A costs were reduced with the integration of Rau and PCI by
related decreases in travel, advertising and commission expenses. Strong jeans
and denimwear orders also
-17-
<PAGE>
contributed to increased Apparel Group sales. The Company's international
subsidiaries also experienced increased sales, resulting from the acquisition of
Daude.
Inflation
Inflation had a nominal impact on operations during the last three years.
Increases in operating costs were consistent with the general inflation rate and
were offset by management cost control measures and productivity improvements.
Hedging Activities
During 1998, the Company secured a substantial portion of its copper needs
with its primary vendor through 1999. Therefore, the hedging program was
temporarily discontinued. From late 1995 to early 1998, the Company entered
into certain hedging transactions regarding its raw material purchases. The
Company purchased copper and zinc call and put options that are regularly traded
on exchanges. These transactions (commonly referred to as "Bull Spreads")
attempt to effectively ensure maximum and minimum net purchase costs. For the
year ended December 31, 1998 and 1997, hedging activities resulted in trading
gains/losses (reflected in cost of sales) of $177,000 loss and $69,000 gain,
respectively. See Note 2 to the audited financial statements.
Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates (the "Y2K
issue"). As a result computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
In consideration of the potential impact of Y2K issue on its domestic
business, operations, and financial condition, the Company has addressed issues
which may arise from its systems as described below. The Company's foreign
subsidiaries are in the process of either implementing new systems or upgrading
existing systems which are expected to be Y2K compliant.
The Company implemented an integrated software package, BPCS, effective July
1, 1998, which is Y2K compliant. BPCS was implemented as a complete Enterprise
Resource Planning (ERP) package which is utilized by the Company's customer
service, manufacturing shop floor, and accounting departments. The Company's
manufacturing processes are not dependent upon computer technology and therefore
should not be affected by the Y2K issue.
The Company is in the process of inquiring of its suppliers and vendors, and
significant customers to determine that their operations are Y2K compliant.
Where practicable, the Company will seek alternative sources of suppliers.
However, such Y2K-related failures by such parties remain a possibility and
could have an adverse impact on the Company's results of operations or financial
condition.
The Company believes that its continuing assessment, planning and
implementation process will be effective to achieve a level of readiness that
will meet the challenges presented by Y2K issues in a timely manner. Although
the Company is evaluating the Y2K readiness of third-party software, computer
technology and other hardware and software, the Company cannot guarantee the Y2K
readiness of third-party products, services, or providers that may impact the
Company's operations.
-18-
<PAGE>
Based on the remediation efforts to date, the Company does not believe that
any problems resulting from the Y2K issue will have a material adverse effect on
its financial condition or results of operations.
The costs incurred related to systems implementation in 1998 were not material
to the Company's results of operations, financial condition or cash flow. The
Company believes that future costs of system implementation are primarily
enhancements to provide for more complete utilization of the software and are
not requirements for Y2K readiness and will not have a material impact on the
Company's results of operations, financial condition or cash flows.
Acquisitions
The Company intends to pursue attractive acquisition opportunities that
provide products and services that complement those currently offered by the
Company or enhance the ability of the Company to increase efficiencies or
achieve cost savings. Depending upon the nature, size and timing of future
acquisitions, the Company may be required to raise additional capital. Any
potential additional indebtedness incurred to finance acquisitions could
adversely affect the Company's liquidity and financial condition. There can be
no assurance that the Credit Facility, the Indenture or any other loan
agreements to which the Company may become a party or subject to will permit
such additional financing or that such additional financing will be available to
the Company on terms acceptable to its management or at all. The timing, size or
success of any acquisition effort and the associated potential capital
commitments are currently not known, and there can be no assurance that the
Company will be able to successfully identify suitable acquisition candidates,
obtain financing on satisfactory terms, complete acquisitions, integrate
acquired operations into its existing operations or expand into new markets.
Also, once integrated, an acquisition may not achieve anticipated levels of
revenue, profitability or productivity or otherwise perform as expected. While
there can be no assurance, based on current facts and circumstances, management
believes it has adequate cash flows and financing alternatives to fund its
current operations and to implement its acquisition strategy.
In June 1998, Scovill-Europe acquired a fastener distributor in the United
Kingdom which enabled it to expand its presence in Europe. The distributor was
a customer of Scovill-Europe. Scovill-Europe acquired the assets and
liabilities of the distributor in exchange for forgiveness of the outstanding
accounts receivable of $0.5 million.
The Company anticipated an acquisition of a manufacturer and distributor of
eyelets to occur in the fourth quarter of 1998. However, the acquisition did not
materialize.
Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), and Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -
an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132), effective
January 1, 1998. SFAS 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity. SFAS 131 introduces a new segment
reporting model called the "management approach." The management approach is
based on the manner in which management organizes segments within a company for
making operating decisions and assessing performance. The management approach
replaces the notion of industry and geographic segments. SFAS 132 revises
disclosures about pension and other postretirement benefit plans, yet it does
not change the measurement or recognition of those plans. The disclosures
relative to SFAS 130, 131 and 132 are presented in the Company's 1998
Consolidated Financial Statements included herein.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). This Statement requires companies to record
-19-
<PAGE>
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be effective for the Company's
fiscal year 2000. Management believes that this Statement will not have a
significant impact on the Company's financial condition or results of
operations.
"Safe Harbor" Statement
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on management's current plans
and expectations and are subject to a number of uncertainties that could cause
actual results to differ materially from those described in such statements.
Such uncertainties and risks include, but are not limited to: the highly
leveraged nature of the Company, its debt service requirements and the operating
and financing restrictions on the Company by the terms of the Credit Facility,
the Indenture, and the other agreements governing the Company's indebtedness;
the risks and uncertainties inherent in doing business abroad and the possible
negative impact of the North American Free Trade Agreement (NAFTA) on the
Company's sales in the U.S. market; the availability of, and the ability to
close and finance acquisition opportunities on terms acceptable to the Company;
the volatility of the price of raw materials; increasing competition; reliance
on key personnel; increasingly complex and stringent environmental laws and
regulations; delays or difficulties associated with systems conversion and Year
2000 compliance; and general economic conditions. The preceding list of
uncertainties, however, is not intended to be exhaustive, and should be read in
conjunction with other cautionary statements made herein and in the Company's
publicly-filed reports and its Form S-1 Registration Statement, dated December
24, 1997 (Commission File No. 333-43195), and all amendments thereto (the
"Registration Statement"), including, but not limited to the "Risk Factors"
set forth in the Registration Statement.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the general instructions to Rule 305 of SEC Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 7a and by Rule
305 of SEC Regulation S-K are inapplicable to Holdings and Fasteners at this
time due to materiality.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information required by
this item are filed as part of this Report on pages F-1 through F-23 and page S-
1 immediately preceding the signature page to this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
-20-
<PAGE>
Part III
Item 10. Directors and Executive Officers
Executive Officers and Directors
Set forth below are the names, ages as of December 31, 1998, and a brief
description of the business experience of each person who serves as an executive
officer or director of Fasteners. The executive officers and directors of
Holdings are the same as those of Fasteners.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David J. Barrett........... 48 President, Chief Executive Officer and Director
Martin A. Moore............ 39 Executive Vice President, Treasurer, Chief Financial Officer and Secretary
John H. Champagne.......... 50 Executive Vice President--Engineering
Robert W. Feltz............ 49 Executive Vice President--Sales and Marketing
William F. Andrews......... 67 Chairman of the Board
Christian L. Oberbeck...... 39 Director
Charles P. Durkin, Jr...... 59 Director
Kirk R. Ferguson........... 31 Director
Alan N. Colner............. 44 Director
</TABLE>
Mr. Barrett has been with the Company since November 1991, when he joined as
Vice President of Operations. Mr. Barrett has been President and CEO since 1995.
He has also served as Executive Vice President of Operations. Prior to joining
the Company, Mr. Barrett held various manufacturing, operational and
administrative positions with the Newell Company and Continental Group, Inc.
Mr. Moore joined the Company as Director of Finance in February 1992. He has
also served as the Vice President of Finance and the Vice President of Finance
and Administration. Mr. Moore was promoted to Executive Vice President/Chief
Financial Officer in 1997. Prior to joining the Company, Mr. Moore held various
financial, controller and manufacturing positions with Frantschach AG, Quality
Forms, Inc. and Society Corporation.
Mr. Champagne joined the Company as Vice President of Manufacturing in 1996.
He was named Executive Vice President - Industrial Group in 1997 and then
Executive Vice President - Engineering in 1998. Before joining the Company, Mr.
Champagne worked at Rau Fastener, Inc. from 1968 to 1995, serving as President
and Director from 1988 to 1995. He also served as President of Rau Fasteners,
LLC from 1995 to 1996.
Mr. Feltz joined the Company as National Sales and Service Manager in 1980. He
was named Executive Vice President - Business Development in September 1997 and
then Executive Vice President - Sales and Marketing in 1998. He has also served
as Vice President of Sales and Marketing Worldwide. Prior thereto, he worked at
Talon, Inc., a zipper manufacturer.
Mr. Andrews has been Chairman of the Company's Board of Directors since 1996.
From 1981 to 1986, he was Chairman, President and Chief Executive Officer of
Scovill Manufacturing, Co., where he worked for more than 20 years. Mr. Andrews
is also Chairman of Northwestern Steel & Wire Company, a manufacturer of
structural beams,
-21-
<PAGE>
rod and wire. From 1993 to 1995, Mr. Andrews was Chairman and Chief Executive
Officer of Amdura Corporation, a manufacturer of hardware and industrial
equipment. From 1990 to 1992, he was President and Chief Executive Officer of
UNR Industries, Inc., a diversified manufacturer of steel products. Prior to
1990, Mr. Andrews was President of Massey Investment Company and Chairman,
President, and Chief Executive Officer of Singer Sewing Company. Mr. Andrews is
also a director of Black Box Corporation; Johnson Controls, Inc.; Katy
Industries; Navistar, Inc.; Dayton Superior Corporation and Trex Company, LLC.
Mr. Oberbeck became a director of the Company upon consummation of the
Saratoga Acquisition and is a member of the Executive committee of the Board of
Directors. Mr. Oberbeck is one of the founders of Saratoga Partners where he
has been a Managing Director since its formation as an independent entity in
September 1998. Prior to that time Mr. Oberbeck was a Managing Director of SBC
Warburg Dillon Read Inc. since September 1997, the successor entity of Dillon,
Read & Co. Inc. where he was a Managing Director from February 1995 to September
1997, responsible for the management of the Saratoga funds. Prior to joining
Dillon, Read & Co. Inc., Oberbeck was a Managing Director of Castle Harlan, Inc.
where he worked from October 1987 until February 1995. Mr. Oberbeck is a
Director of Equality Specialties, Inc., J&W Scientific Incorporated, and Koppers
Industries, Inc.
Mr. Durkin has been a director of the Company since February 1998 and is a
member of the Executive Committee of the Board of Directors. Mr. Durkin is one
of the founders of Saratoga Partners, where he has been a Managing Director
since its formation as an independent entity in September 1998. Prior to that he
had been Managing Director of SBC Warburg Dillon Read Inc. in September 1997,
the successor entity of Dillon, Read & Co. Inc. where Mr. Durkin started his
investment banking career in 1966 specializing in mergers and acquisitions, and
became a Managing Director in 1974. Mr. Durkin is a director of a number of
companies, including Equality Specialties, Inc., Koppers Industries, Inc. and
USI Holdings Corporation. Mr. Durkin's nomination as a director of the Company
was designated by Saratoga Partners III, L.P. under the terms of the
Stockholders' Agreement.
Mr. Colner has been a director of the Company since July 1998. Since August
1996 he has served as Managing Director, Private Equity Investments at Moore
Capital Management, Inc. Before joining Moore, he was a Managing Director of
Corporate Advisors, L.P., the general partner of Corporate Partners, a private
equity fund affiliated with Lazard Freres & Co. LLC. Mr. Colner also serves as
a director of iVillage Inc. and several privately held companies. Mr. Colner
received his M.B.A. from the Stanford University Graduate School of Business and
his B.A. from Yale University.
Mr. Ferguson has been a director of the Company since October 1998. Mr.
Ferguson is a Principal of Saratoga Partners where he has worked since its
formation as an independent entity in September 1998. Prior to that time Mr.
Ferguson had been employed by SBC Warburg Dillon Read Inc. since September 1997,
the successor entity of Dillon, Read & Co. Inc. where he was hired into the
corporate buyout group in May 1997. Before joining Dillon Read, Mr. Ferguson
was an investment professional with Perry Corp. and a consultant with Monitor
Company, Inc. Mr. Ferguson received his M.B.A. from Harvard Business School and
his A.B. from Stanford University.
Board Designations
Pursuant to a Stockholders Agreement among Holdings and certain investors and
members of management, until at least 25% of the Common Stock is publicly
traded, (i) David J. Barrett will be elected to serve as a director for so long
as he shall be an officer and an employee of Holdings or of a Subsidiary
thereof, (ii) Moore Investments, Ltd. and Remington Investment Strategies, L.P.
together will have the right to designate one member of the Board of Directors
of Holdings so long as such investors together hold at least 50% of their
original investment in Holdings, (iii) Saratoga will have the right to designate
up to five directors and (iv) Co-Investment Partners, L.P. ("Co-Investment
Partners") has the right to receive notice of all meetings of the Board of
Directors of Holdings and to have a representative attend such meetings so long
as it holds at least 50% of its original investment in Holdings.
-22-
<PAGE>
Item 11. Executive Compensation
Employment Arrangements
In order to assure the continued service of executive management, the Company
operates under employment arrangements ("Employment Arrangements") with
Messrs. Barrett, Moore, and Feltz (each, an "Executive," and together, the
"Executives"). The Executives are in the process of negotiating formal
employment contracts, but such arrangements are not finalized as of the date of
this report. The terms under negotiation include salary, term, severance
payments upon change in control and termination. Mr. Barrett serves as Chief
Executive Officer of the Company and has an annual salary of $243,750. Mr. Moore
serves as Chief Financial Officer of the Company and has an annual salary of
$187,819. Mr. Feltz serves as Executive Vice President--Sales and Marketing of
the Company and has an annual salary of $162,500. Each Executive is entitled to
participate in the Company's benefit plans for senior executives and receives
certain fringe benefits, including a car, personal computer and cellular
telephone.
Board Member Compensation
The Company may compensate the members of the Board of Directors who are not
full-time employees of the Company on an annual and per meeting basis, in an
amount and on a basis as may be determined in the future. The Company also may
compensate members of committees of the Board of Directors for each Committee
meeting attended. Directors of the Company receive reimbursement of their
reasonable out-of-pocket expenses incurred in connection with their board
activities. The Company has purchased directors' and officers' insurance for its
executive officers and directors.
New Incentive Stock Option Plan
The Company has proposed a new stock option plan (the "New Plan") for key
executives and managers which provides for the grant of stock options
("Options") to purchase 1,100,000 shares of the Common Stock of Holdings. The
New Plan has the following terms: Options granted under the New Plan will have
an exercise price equal to the fair market value of the stock underlying the
Option on the date of the grant, which exercise price will increase annually at
a rate of 9% of the value of the unit (each unit consisting of one share of
Common Stock and one share of Series B preferred stock), and Options will vest
over a period of 5 years commencing on the first anniversary of the date of the
grant. Vested options may be exercised by payment of the exercise price in cash
or, if approved by Holdings' stock option committee, by delivery of a promissory
note. Upon a participant's termination of employment for cause, all of such
participant's Options will immediately expire. If a participant's employment
terminates by reason of (i) death, (ii) disability, (iii) retirement or (iv)
voluntary resignation or termination of employment other than for cause, the
participant's unvested Options will immediately expire and such participant's
vested Options will remain exercisable for a period of 90 days. The Board of
Directors has not yet approved the New Plan. Therefore, no options are
considered outstanding as of December 31, 1998.
Compensation of Executive Officers
The following Summary Compensation Table contains information concerning the
compensation provided by the Company in 1998 and 1997 to its Chief Executive
Officer and the other executives other than the Chief Executive officer
(together, the "Named Executive Officers") of the Company.
-23-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------- --------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
- ------------------------------ ---------- --------------- ------------ --------------- ---------------------
<S> <C> <C> <C> <C> <C>
David J. Barrett 1998 $243,750 -- -- $ 6,594(1)
President and Chief 1997 189,338 $51,000 -- 4,750(2)
Executive Officer
Martin A. Moore 1998 187,819 -- -- 5,195(3)
Executive Vice President-- 1997 149,490 27,000 -- 4,750(2)
and Chief Financial Officer
John H. Champagne 1998 136,500 -- -- 2,844(4)
Executive Vice President-- 1997 133,907 65,000 $80,500(5) 853(2)
Engineering
Robert W. Feltz 1998 162,500 -- -- 4,562(6)
Executive Vice President-- 1997 137,611 25,000 -- 10,068(7)
Sales and Marketing
Michael S. Baxley (8) 1998 171,925 -- 1,000,000(9) 55,176(10)
1997 149,149 -- 161,500(5) 14,798(11)
</TABLE>
_________
(1) Represents matching contributions made by the Company to Mr. Barrett's
account under the Company's 401(k) plan ($6,094) and life insurance
premiums paid by the Company on behalf of Mr. Barrett ($500).
(2) Represents matching contributions made by the Company to the Named
Executive Officers' accounts under the Company's 401(k) plan.
(3) Represents matching contributions made by the Company to Mr. Moore's
account under the Company's 401(k) plan ($4,695) and life insurance
premiums paid by the Company on behalf of Mr. Moore ($500).
(4) Represents matching contributions made by the Company to Mr. Champagne's
account under the Company's 401(K) plan ($2,844).
(5) Represents options issued by Predecessor--KSCO in February 1997.
(6) Represents matching contributions made by the Company to Mr. Feltz's
account under the Company's 401(k) plan ($4,062) and life insurance
premiums paid by the Company on behalf of Mr. Feltz ($500).
(7) Includes reimbursement for the office relocation to home office ($6,000)
and matching contributions made by the Company to Mr. Feltz's account under
the Company's 401(k) plan ($4,068).
(8) Mr. Baxley joined the Company in February 1997 and left the Company's
employment in 1998.
(9) Mr. Baxley left the Company's employment in 1998 and he received the value
of his equity investment rolled over from Predecessor-KSCO.
(10) Includes reimbursement for relocation expenses ($51,371) and matching
contributions made by the Company to Mr. Baxley's account under the
Company's 401(k) plan ($3,805).
(11) Includes reimbursement for relocation expenses ($12,895) and matching
contributions made by the Company to Mr. Baxley's account under the
Company's 401(k) plan ($1,903).
The Company granted no options to purchase shares of Common Stock during 1998.
The Company has no outstanding stock appreciation rights ("SARs") and granted
no SARs during fiscal 1998.
The following table sets forth information of the value of unexercised options
held at December 31, 1998 by the Named Executive Officers.
-24-
<PAGE>
Fiscal Year-End Stock Table
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised
Options at December 31, In-The Money Options at
1998(1) December 31, 1998
------- -----------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
---- -------------------------- --------------------------
<S> <C> <C>
David J. Barrett 107,472/0 $800,000/0
Martin A. Moore 87,322/0 650,000/0
Robert W. Feltz 73,216/0 545,000/0
John H. Champagne 40,302/0 300,000/0
</TABLE>
_____
(1) Options are exercisable for the number of units set forth in the table, each
unit consisting of one share of Common Stock and one share of Series B
Preferred Stock. The share numbers reflect options the Company expects to
issue pursuant to option agreements that have not yet been executed.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock at March 15, 1999 of (i) each person known by
Holdings to own beneficially 5% or more of the Common Stock, (ii) each current
director of Holdings, (iii) each Named Executive Officer and (iv) all current
directors and executive officers of Holdings as a group. According to rules
adopted by the SEC, a person is the "beneficial owner" of securities if he or
she has or shares the power to vote them or to direct their investment or has
the right to acquire beneficial ownership of such securities within 60 days
through the exercise of an option, warrant, right of conversion of a security or
otherwise. Except as otherwise noted, the indicated owners have sole voting and
investment power with respect to shares beneficially owned.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-----------------------------------
Name Number of Shares Percent of Class
- ---- ---------------- ----------------
<S> <C> <C>
Saratoga Partners III, L.P. (1)............................................. 3,127,500 67.2
Co-Investment Partners, L.P. (2)............................................ 1,000,000 21.5
Moore Global Investments, Ltd./ Remington Investment Strategies, L.P. (3)... 700,000 15.0
WLD Partners, Ltd. (4)...................................................... 400,000 8.6
William F. Andrews (5)...................................................... 20,151 *
Charles P. Durkin, Jr. (1).................................................. 3,127,500 67.2
Christian L. Oberbeck (1)................................................... 3,127,500 67.2
Alan N. Colner (3).......................................................... 700,000 15.0
David J. Barrett (5)........................................................ 107,472 2.3
Martin A. Moore (5)......................................................... 87,322 1.9
John H. Champagne (5)....................................................... 40,302 *
Robert W. Feltz (5)......................................................... 73,216 1.6
All directors and executive officers as a group (9 persons)(6).............. 3,455,963 74.2
</TABLE>
_____
* Less than one percent.
(1) Includes (i) 320,914 shares held by Saratoga Partners III, C.V. and (ii)
672,000 shares held by Co-Investment Partners L.P. with respect to which
Saratoga Partners III, L.P. has sole voting power pursuant to the Voting
Agreement (see "Certain Transactions--Voting Agreement"). The address of
Saratoga Partners III, L.P. is 535 Madison Avenue, New York, New York 10022.
Saratoga's general partner is DR-Associates IV, L.P., of which the general
partner is Saratoga Associates III LLC ("Saratoga Associates"). Saratoga
Associates has authorized Messrs. Durkin and Oberbeck, directors of the
Company, to vote the shares of Common Stock held or controlled by Saratoga
Partners III, L.P. Messrs. Durkin and Oberbeck disclaim beneficial ownership
of the shares of Common Stock held by Saratoga Partners III, L.P.
-25-
<PAGE>
(2) The address of Co-Investment Partners is 660 Madison Avenue, New York, New
York 10021. Pursuant to the Voting Agreement described in "Item 13--Voting
Agreement", Co-Investment Partners L.P. has granted Saratoga sole voting
power with respect to 672,000 of such shares.
(3) Moore Capital Management, Inc., a Connecticut corporation, is vested with
investment discretion with respect to portfolio assets held for the account
of Moore Global Investments, LTD. ("MGI"). Moore Capital Advisors, L.L.C., a
New York limited liability company, is the sole general partner of Remington
Investment Strategies, L.P. ("RIS"). Mr. Louis M. Bacon is the majority
shareholder of Moore Capital Management, Inc., and is the majority equity
holder of Moore Capital Advisors, L.L.C. As a result, Mr. Bacon, though he
disclaims beneficial ownership of such shares, may be deemed to be the
beneficial owner of the aggregate shares by MGI and RIS. Alan Colner is a
Managing Director, Private Equity Investments, at Moore Capital Management,
Inc., which is the trading advisor of MGI. Mr. Colner does not have voting
or investment power with respect to the shares of securities owned by MGI or
RIS, and disclaims beneficial ownership of such shares. The address of
Moore Capital Management, Inc. is 1251 Avenue of the Americas, New York, New
York 10020. Mr. Martin A. Moore is not affiliated with any of the entities
set forth above.
(4) The address of WLD Partners, Ltd. is Las Olas Centre, 450 East Las Olas
Boulevard, Suite 900, Fort Lauderdale, Florida 33301.
(5) Represents Common Stock issuable upon exercise of options to purchase Common
Stock pursuant to option agreements which have not yet been executed.
(6) Includes 3,127,500 shares owned and/or voted by Saratoga and as to which
Messrs. Durkin and Oberbeck exercise voting power. Messrs. Durkin and
Oberbeck disclaim beneficial ownership of such shares. See footnote 1 above.
Item 13. Certain Relationships and Related Transactions
Transactions with Saratoga
In connection with the Transactions, the Company entered into an agreement
with Saratoga, pursuant to which the Company will pay a management fee of
$150,000 per quarter to Saratoga (the "Management Services Agreement"). In
addition, Saratoga will provide the Company advisory services with significant
business transactions, such as acquisitions, for which the Company will pay
Saratoga compensation comparable for similarly situated companies. During 1998,
the Company paid $658,000 of management fees to Saratoga representing management
fees for the period from November 26, 1997 to December 31, 1998.
Voting Agreement
Pursuant to an agreement dated February 20, 1998 (the "Voting Agreement"),
Co-Investment Partners has appointed Saratoga as its proxy to vote 672,000 of
the 1,000,000 shares of Common Stock it owned as of that date. The Voting
Agreement will terminate upon at least 20% of the outstanding Common Stock being
offered and sold in a public offering registered under the Act.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Documents incorporated by reference or filed with this Report
(1) The following financial statements of Scovill Holdings Inc. are included
in Part II, Item 8:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the periods ended December 31,
1998, December 31, 1997, November 26, 1997 and December 31, 1996
Consolidated Statements of Cash Flows for the periods ended December 31,
1998, December 31, 1997, November 26, 1997 and December 31, 1996
Consolidated Statements of Stockholders' Equity for the periods ended
December 31, 1998, December 31, 1997, November 26, 1997 and December 31,
1996
Notes to Consolidated Financial Statements
(2) Supplemental Consolidated Financial Statement Schedules for each of the
periods in the three years ended
December 31, 1998:
Schedule II--Valuation and Qualifying Accounts--Allowance for
Uncollectible Accounts
Schedules other than those referred to above are omitted and are not
applicable or not required, or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------- ---------------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of Scovill Holdings Inc, as amended.+
3.2 Certificate of Designation, Preferences, and Relative, Participating, Optional and Other Special Rights of 13
3/4% Series A Cumulative Redeemable Exchangeable Preferred Stock
3.3 Certificate of Designation, Preferences, and Relative, Participating, Option and Other Special Rights of
Series B Preferred Stock.++
3.4 By-laws of Scovill Holdings Inc.+
3.5 Certificate of Incorporation of AF Acquisition Corp.++
3.6 Certificate of Amendment of Certificate of Incorporation of AF Acquisition Corp.++
3.7 Certificate of Amendment of Certificate of Incorporation of Scovill Apparel Fasteners Inc.++
3.8 Certificate of Amendment of Certificate of Incorporation of Scovill Apparel Fasteners Inc.++
3.9 Certificate of Change of Location of Registered Office and of Registered Agent of Scovill Fasteners Inc.++
3.10 Certificate of Ownership and Merger Merging KSCO New Co. into Scovill Fasteners Inc.++
3.11 Certificate of Amendment of Certificate of Incorporation of Scovill Fasteners Inc.++
3.12 By-laws of Scovill Fasteners Inc.++
4.1 Indenture dated as of November 26, 1997 among Scovill Acquisition Inc., Scovill Holdings Inc., as Guarantor,
and United States Trust Company of New as Trustee (including Form of Note).+
4.2 Registration Rights Agreement dated as of November 26, 1997 among Scovill Acquisition Inc., Scovill Holdings
Inc. and SBC Warburg Dillon Read Inc. and BT Alex Brown Incorporated.+
10.1.1 Management Services Agreement among Scovill Fasteners Inc. and Saratoga Partners III, L.P.**
</TABLE>
-27-
<PAGE>
Exhibit No. Description
- -------------- ----------------------------------------------------------------
10.1.8 Stock Purchase Agreement dated as of October 10, 1997 among SLF
Corporation, KSCO Acquisition Corporation, and the
Stockholders of KSCO Acquisition Corporation.++
10.1.10 Tax Sharing Agreement dated as of November 26, 1997 by and among
Scovill Holdings Inc., Scovill Fasteners Inc., and the SFI
Subgroup.++
10.1.18 Scovill Holdings Inc. Subscription Agreement dated as of
November 26, 1997++
10.1.21 Credit Agreement dated as of November 26, 1997.++
10.1.23 Joinder Agreement dated as of February 20, 1998.**
10.1.24 Voting Agreement dated as of February 20, 1998 by and between
Saratoga Partners III, L.P., Scovill Holdings Inc., and Co-
Investment Partners, L.P.**
10.1.25 Subscription Agreement dated as of February 20, 1998 by and
between Scovill Holdings Inc. and Co-Investment Partners,
L.P.**
10.1.26 Repurchase and Termination Agreement dated as of February 20,
1998 by and between Scovill Holdings Inc., SBC Warburg Dillon
Read Inc., BT Alex. Brown Incorporated and United States Trust
Company of New York.**
10.1.27 Amendment No. 1 to the Credit Agreement
10.1.28 Amendment No. 2 to the Credit Agreement
10.1.29 Amendment No. 3 to the Credit Agreement
10.1.30 Amendment No. 4 to the Credit Agreement
21.1 List of Subsidiaries of Scovill Holdings Inc.++
21.2 List of Subsidiaries of Scovill Fasteners Inc.+
27 Financial Data Schedule.
- ----------
+ Incorporated by Reference to Exhibit of the same number to the Company's
Registration Statement on Form S-1 (No. 333-43195), as filed with the
Securities and Exchange Commission on December 24, 1997
++ Incorporated by Reference to Exhibit of the same number to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (No. 333-43195), as
filed with the Securities and Exchange Commission on January 13, 1998.
* Incorporated by Reference to Exhibit of the same number to the Company's
Amendment No. 3 to Registration Statement on Form S-1 (No. 333-43195), as
filed with the Securities and Exchange Commission on February 11, 1998.
** Incorporated by Reference to Exhibit of the same number to the Company's
Post-Effective Amendment No. 1 to Registration Statement on Form S-1
(No. 333-43195), as filed with the Securities and Exchange Commission on
February 27, 1998.
(b) Reports of Form 8-K
No Form 8-K was filed during the last quarter of the year ended December 31,
1998.
-28-
<PAGE>
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
<S> <C>
Page
------
Report of Independent Public Accountants............................................................... F-2
Consolidated balance sheets as of December 31, 1998 and 1997........................................... F-3
Consolidated statements of operations for the periods ended December 31, 1998, December 31, 1997,
November 26, 1997 and December 31, 1996............................................................... F-4
Consolidated statements of cash flows for the periods ended December 31, 1998, December 31, 1997,
November 26, 1997 and December 31, 1996............................................................... F-5
Consolidated statements of stockholders' equity for the periods ended December 31, 1998, December 31,
1997, November 26, 1997 and December 31, 1996......................................................... F-6
Notes to consolidated financial statements............................................................. F-7
Schedule II--Valuation and Qualifying Accounts--Allowance for Uncollectible Accounts................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Scovill Holdings Inc.
We have audited the accompanying consolidated balance sheets of Scovill
Holdings Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and December 31, 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1998 and
for the period from Inception, November 26, 1997 through December 31, 1997. We
have also audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Predecessor-KSCO (business identified in
Note 1) for the period from January 1, 1997 through November 26, 1997 and the
year ended December 31, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule referred to below 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 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scovill Holdings
Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for the year ended December 31, 1998 and the
period from November 26, 1997 through December 31, 1997; and of Predecessor-KSCO
for the period from January 1, 1997 through November 26, 1997 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the financial
statements index is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 9, 1999
F-2
<PAGE>
Scovill Holdings Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ....................................................... $ 293 $ 2,821
Accounts receivable, net of allowances of $1,132 and $894, respectively ......... 12,319 11,502
Inventories ..................................................................... 24,573 24,292
Other ........................................................................... 572 839
-------- --------
Total Current Assets ......................................................... 37,757 39,454
-------- --------
Property, Plant and Equipment, Net ................................................ 69,421 72,505
-------- --------
Intangible Assets ................................................................. 110,089 114,243
-------- --------
$217,267 $226,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ............................................ $ 3,530 $ 1,649
Accounts payable ................................................................ 8,379 11,458
Accrued liabilities ............................................................. 6,202 9,470
Accrued interest ................................................................ 957 1,062
-------- --------
Total Current Liabilities .................................................... 19,068 23,639
-------- --------
Long-Term Liabilities
Revolving line of credit ........................................................ 12,900 --
Long-term debt .................................................................. 124,893 128,199
Employee benefits ............................................................... 24,032 24,499
Deferred income taxes ........................................................... 319 5,380
Other ........................................................................... 3,520 3,676
-------- --------
Total Long-Term Liabilities .................................................. 165,664 161,754
-------- --------
Commitments and Contingencies
Series A Cumulative Redeemable Exchangeable Preferred Stock, $.001 par value,
200,000 shares authorized, none at December 31, 1998 and 100,000 issued at........
December 31, 1997 (liquidation preference of $100 per share)..................... -- 9,400
-------- --------
Stockholders' Equity
Series B Preferred Stock, $.0001 par value, 16,200,000 shares authorized,
4,655,500 at December 31, 1998 and 3,655,500 at December 31, 1997 shares
issued and outstanding .......................................................... -- --
Common Stock, $.0001 par value, 6,000,000 shares authorized,
4,655,500 at December 31, 1998 and 3,655,500 at December 31, 1997 shares
issued and outstanding .......................................................... -- --
Additional paid-in capital--preferred ............................................ 49,942 39,700
Additional paid-in capital--common ............................................... 503 400
Predecessor basis adjustment ..................................................... (7,831) (7,831)
Retained earnings (deficit) ...................................................... (10,548) (781)
Accumulated other comprehensive income (loss) .................................... 469 (79)
-------- --------
Total Stockholders' Equity ................................................... 32,535 31,409
-------- --------
$217,267 $226,202
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
Scovill Holdings Inc.
Consolidated Statements of Operations
(in thousands, except share data)
The consolidated financial statements of the Company and the Predecessor-KSCO
are not comparable in certain respects (Note 1).
<TABLE>
<CAPTION>
The Company Predecessor--KSCO
-----------------------------------------------------------------------------
Period from Period from
Inception January 1, 1997
Year Ended through to Year Ended
December 31, December 31, November 26, December 31,
1998 1997 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ...................... $ 92,476 $6,694 $89,167 $91,632
Cost of sales .................. 68,112 4,591 64,003 64,600
-------- ------ ------- -------
Gross profit ................. 24,364 2,103 25,164 27,032
Selling expenses ............... 8,861 682 8,857 10,220
General and administrative
expenses ...................... 6,865 463 5,816 6,831
Amortization expense ........... 3,938 331 2,745 2,557
Restructuring charge ........... 2,968 -- -- --
-------- ------ ------- -------
Operating Income ............. 1,732 627 7,746 7,424
Other expense .................. 48 114 1,621 450
Interest expense ............... 15,965 1,217 3,694 5,953
-------- ------ ------- -------
Income (loss) before income
tax provision (benefit)
and extraordinary loss ........ (14,281) (704) 2,431 1,021
Income tax provision
(benefit) .................... (4,744) (38) 1,112 923
-------- ------ ------- -------
Income (loss) before
extraordinary loss ............ (9,537) (666) 1,319 98
Extraordinary loss, net of
$613 tax benefit .............. -- -- -- 950
-------- ------ ------- -------
Net income (loss) .............. $ (9,537) $ (666) $ 1,319 $ (852)
-------- ------ ------- -------
Dividends and accretion on
redeemable preferred
stock ......................... 230 115 -- --
-------- ------ ------- --------
Net income (loss) available
to common stockholders.......... $ (9,767) $ (781) $ 1,319 $ (852)
======== ====== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
Scovill Holdings Inc.
Consolidated Statements of Cash Flows
(in thousands)
The consolidated financial statements of the Company and the Predecessor-KSCO
are not comparable in certain respects (Note 1).
<TABLE>
<CAPTION>
The Company Predecessor--KSCO
---------------------------------------- --------------------------------------
Period from Period from
Inception January 1, 1997
Year Ended through to Year Ended
December 31, December 31, November 26, December 31,
1998 1997 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) available to common
stockholders....................................... $ (9,767) $ (781) $ 1,319 $ (852)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ..................... 15,025 835 7,822 11,268
Assets impairment charge............................ 940 -- -- --
Non-operating preferred stock dividends............. (345) -- -- --
Deferred income taxes ............................. (4,895) 1,502 (287) 265
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Accounts receivable, net ........................ (817) 1,147 (3,009) (931)
Inventories ..................................... (281) (1,656) (4,187) (6,231)
Other current assets ............................ 267 (125) 461 (883)
Accounts payable ................................ (3,079) (1,946) 2,816 3,042
Accrued liabilities ............................. (3,840) 3,217 1,139 (4,031)
Other assets and liabilities .................... 1,124 (1,490) (2,437) (3,063)
-------- --------- ------- --------
Net cash (used in) provided by operating
activities ........................................ (5,668) 703 3,637 (1,416)
-------- --------- ------- --------
Cash Flows from Investing Activities:
Cash paid in business acquisitions, net of
cash acquired ................................... -- (94,615) -- (23,110)
Acquisition costs ..................................... -- (11,105) -- (2,140)
Additions to property, plant and equipment ............ (8,332) (31,112) (6,354) (5,695)
Proceeds from sale/leaseback of attaching
machines ........................................... -- -- -- 31,267
Proceeds from sales of property, plant and
equipment ............................................ -- -- -- 2,264
-------- --------- ------- --------
Net cash used in investing activities ................. (8,332) (136,832) (6,354) 2,586
-------- --------- ------- --------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit......... 12,900 (12,230) 2,806 2,324
Issuance of long-term debt ............................ -- 128,000 -- 23,967
Repayments of long-term debt .......................... (1,428) (26,320) (250) (31,268)
Issuance of preferred stock ........................... -- 49,100 -- --
Issuance of common stock .............................. 10,345 400 1,240 4,000
Redemption of preferred stock.......................... (10,345) -- -- --
-------- --------- ------- --------
Net cash (used in) provided by financing
activities ........................................... 11,472 138,950 3,796 (977)
-------- --------- ------- --------
Net (Decrease)/Increase in Cash ...................... (2,528) 2,821 1,079 193
Cash and Cash Equivalents at Beginning of
Period................................................. 2,821 -- 603 410
-------- --------- ------- --------
Cash and Cash Equivalents at End of Period ............ $ 293 $ 2,821 $ 1,682 $ 603
======== ========= ======= ========
Supplemental Disclosure of Cash Flow
Information
Interest paid ..................................... $ 16,007 $ 318 $ 4,066 $ 5,062
======== ========= ======= ========
Income taxes paid ................................. $ 207 $ 189 $ 54 $ --
======== ========= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
Scovill Holdings Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Series B Additional Paid-in Predecessor Basis
Common Stock Preferred Stock Capital Adjustment
The Predecessor - KSCO
===========================================================================================================================
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 73 $ 0 $ 18,102 $ 0
--------------------------------------------------------------------------------------
Issuance of Common Stock 16 3,984
Foreign Currency Translation
Net Income (loss)
--------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 89 $ 0 $ 22,086 $ 0
--------------------------------------------------------------------------------------
Foreign Currency Translation
Tax benefit option exercise 5 1,224
Net Income
--------------------------------------------------------------------------------------
Balance, November 26, 1997 $ 94 $ 0 $ 23,210 $ 0
======================================================================================
The Company
==============================================================================================================================
Acquisition Elimination of
Predecessor-KSCO Equity (Note 1) $ (94) $ 0 $(23,310) $ 0
Issuance of Common and Preferred 40,100
Stock
Predecessor Basis Adjustment (7,831)
Foreign Currency Translation
Net Income (loss) available to
common stockholders
-----------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 0 $ 0 $ 40,100 $(7,831)
-----------------------------------------------------------------------------------------
Net Income (loss) available to
common stockholders
Foreign Currency Translation
Issuance/Redemption of Common and
Preferred Stock 10,345
-----------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 0 $ 0 $ 50,445 $(7,831)
=========================================================================================
Retained Earnings Accumulated Other Total Stockholders' Series A Redeemable
(Deficit) Comprehensive Income Equity Preferred Stock
The Predecessor - KSCO
==============================================================================================================================
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 116 $ (28) $ 18,263 $ 0
-------------------------------------------------------------------------------------------
Issuance of Common Stock 4,000
Foreign Currency Translation 10 10
Net Income (loss) (852) (852)
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ (736) $ (18) $ 21,421 $ 0
-------------------------------------------------------------------------------------------
Foreign Currency Translation (291) (291)
Tax benefit option exercise 1,229
Net Income 1,319 1,319
Balance, November 26, 1997 $ 583 $(309) $ 23,678 $ 0
===========================================================================================
The Company
==============================================================================================================================
Acquisition Elimination of
Predecessor-KSCO Equity (Note 1) $ (583) $ 309 $(23,678) $ 0
Issuance of Common and Preferred
Stock 40,100 9,400
Predecessor Basis Adjustment (7,831)
Foreign Currency Translation (79) (79)
Net Income (loss) available to
common stockholders (781) (781)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ (781) $ (79) $ 31,409 $ 9,400
-------------------------------------------------------------------------------------------
Net Income (loss) available to
common stockholders (9,767) (9,767)
Foreign Currency Translation 548 548
Issuance/Redemption of Common and
Preferred Stock 10,345 $(9,400)
-------------------------------------------------------------------------------------------
Balance, December 31, 1998 $(10,548) $ 469 $ 32,535 $ 0
===========================================================================================
</TABLE>
F-6
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts expressed in thousands, except for share
amounts, or as otherwise noted)
Note 1. Basis of Presentation
The consolidated balance sheets as of December 31, 1998 and 1997 and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1998 and the period from November 26, 1997
("Inception") to December 31, 1997 include the accounts of Scovill Holdings
Inc. ("Holdings") and Scovill Fasteners Inc. ("Fasteners"), a wholly-owned
subsidiary of Holdings (collectively referred to as the "Company"). Scovill
Acquisition Inc. ("SAI") and Holdings were formed by Saratoga Partners III,
L.P. ("Saratoga") to effect the acquisition of the Company. Under a Stock
Purchase Agreement, SAI purchased all of the capital stock of KSCO Acquisition
Corporation ("KSCO") on November 26, 1997 for a purchase price of
approximately $168.8 million less the amount of indebtedness of the Company
existing immediately prior to closing of the acquisition (including indebtedness
that was not repaid in connection with the transactions). Concurrently with the
acquisition, SAI merged with and into KSCO, and KSCO merged with and into
Fasteners, with Fasteners surviving the mergers. The purchase of KSCO capital
stock by SAI and the mergers of SAI and KSCO into Fasteners are together
referred to herein as the "Saratoga Acquisition."
The consolidated statements of operations, stockholders' equity and cash flows
for the period from January 1, 1997 to November 26, 1997 and the year ended
December 31, 1996 include the accounts of KSCO and Scovill Fasteners Inc., a
wholly-owned subsidiary of KSCO (collectively referred to as the "Predecessor-
KSCO"), both of which are Delaware corporations.
During January 1996, Fasteners purchased the outstanding common stock of Rau
Fastener Company, LLC ("Rau") for $7,892 and PCI Group, Inc. ("PCI") for
$15,551, excluding certain costs related to financing and consummating the
acquisitions. Rau primarily manufactured snap fasteners with locations and
subsidiaries operating in Providence, Rhode Island, Brussels, Belgium
("Scovill-Europe") and Montreal, Canada. PCI manufactured industrial and shoe
eyelets and light metal stampings.
The Saratoga Acquisition and the related application of purchase accounting
(Note 3) resulted in changes to the capital structure of the Predecessor-KSCO
and the historical bases of various assets and liabilities. The effect of such
changes significantly impairs comparability of the financial position and
results of operations of the Company and the Predecessor-KSCO. Accordingly a
line has been used to separate the financial statements of the Company after the
Saratoga Acquisition.
The Company is a leading manufacturer of apparel fasteners, such as snaps,
tack buttons and rivets, primarily serving the jeans wear and infantswear market
segments. The Company produces non-apparel fastener products for use in cars,
boats, luggage, leather goods and packaging, generally marketed under the DOT(R)
trademark. Fasteners' other non-apparel products also include industrial and
shoe eyelets and light metal stampings marketed under PCI. The Company also
designs and manufactures fastener attaching equipment, leased to customers and
placed in customers' manufacturing facilities. The Company's customers include
many of the leading apparel design and manufacturing companies in North America,
Europe and Asia.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
Significant transactions and balances between Holdings, Fasteners and its
wholly-owned subsidiaries and entities which comprise the Predecessor-KSCO have
been eliminated in consolidation.
F-7
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash includes cash and cash equivalents which consist of highly liquid
investments, having original maturities of three months or less when acquired.
Included in accounts payable as of December 31, 1998 and 1997 were $3,563 and
$2,121 respectively of cash overdrafts.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for all domestic inventories
(excluding spare parts), which accounted for approximately 50.0% and 55.0% of
all inventories as of December 31, 1998 and 1997, respectively. Cost for the
remaining inventories is determined using the first-in, first-out (FIFO) method.
Inventory costs include material, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment purchased in the Saratoga Acquisition, as well
as the acquisitions of PCI and Rau, are stated at fair market value, as
prescribed by the purchase method of accounting. Subsequent purchases of
property, plant and equipment are stated at cost, net of accumulated
depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The following useful lives are used for recognizing
depreciation expense for financial reporting purposes:
Leasehold improvements ................................. lease term
Buildings and improvements ............................. 5-30 years
Attaching equipment .................................... 8 years
Computer equipment ..................................... 3-5 years
Machinery, equipment and tooling ....................... 3-12 years
Major renewals and betterments which extend the useful life of an asset are
capitalized; routine maintenance and repairs are expensed as incurred. Upon sale
or retirement of assets, the asset cost and related accumulated depreciation are
removed from the accounts and any related gain or loss is reflected in
operations.
F-8
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible Assets at December 31, 1998 and 1997 consisted of the following:
1998
Accumulated
Gross amortization Net
---------- -------------- ----------
Goodwill .......................... $ 86,174 $(2,339) $ 83,835
Trademarks ........................ 15,015 (549) 14,466
Deferred financing fees ........... 11,797 (1,226) 10,571
Covenants not to compete .......... 2,547 (1,416) 1,131
Other ............................. 86 -- 86
-------- ------- --------
$115,619 $(5,530) $110,089
======== ======= ========
1997
Accumulated
Gross amortization Net
---------- ------------- ----------
Goodwill .......................... $ 86,230 $ (181) $ 86,049
Trademarks ........................ 14,840 (149) 14,691
Deferred financing fees ........... 11,105 (102) 11,003
Covenants not to compete .......... 2,547 (109) 2,438
Other ............................. 62 -- 62
-------- ------- --------
$114,784 $ (541) $114,243
======== ======= ========
Goodwill and trademarks are amortized on a straight-line basis over 40 years.
Deferred financing fees are amortized over the term of the related outstanding
debt. Covenants not to compete consist of agreements with Alper, a former
parent of Fasteners, and with the former owners of PCI; such agreements are
amortized over 5 and 3 years, respectively.
Goodwill represents the excess of cost over the estimated fair value of the
net assets of acquired businesses. Should events or circumstances occur
subsequent to any business acquisition which bring into question the realizable
value or impairment of any component of goodwill, the Company will evaluate the
remaining useful life and balance of goodwill, and make appropriate adjustments.
The Company's principal considerations in determining impairment include the
strategic benefit to the Company of the particular business related to the
questioned component of goodwill, as measured by future operating income levels
and expected undiscounted future cash flows.
Environmental Matters
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Environmental expenditures include
site investigation, physical remediation, operation and maintenance and legal
and administrative costs. Environmental accruals are established for sites where
it is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated.
Revenue Recognition
Revenue from the sale of fastener products is recorded on the date goods are
shipped to the customer. Sales returns and allowances are recorded as a charge
against revenue in the period in which the related sales are recognized. Revenue
from the lease of attaching machinery is recorded over the applicable rental
period.
F-9
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Income taxes are recorded in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
utilizes the asset and liability method, under which deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
currently enacted statutory rates to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Under
SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Fasteners periodically evaluates the recognition of deferred tax assets and
provides a valuation allowance for any portion of such assets not considered
realizable.
Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are translated in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," which requires that foreign currency assets and
liabilities be translated using the exchange rates in effect at the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing throughout the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into US
dollars are recorded as the cumulative foreign currency translation adjustment
within stockholders' equity. Realized gains and losses from foreign currency
transactions during the periods ended December 31, 1998 and 1997, November 26,
1997 and December 31, 1996 were not material.
Research and Development Costs
Research, development, pre-production and start-up costs related to both
present and future products are expensed as incurred. Such costs amounted to
$199, $34, $304 and $377, for the periods ended December 31, 1998 and 1997,
November 26, 1997 and December 31, 1996, respectively and are classified as a
component of "General and administrative expenses" in the accompanying
consolidated statements of operations.
Financial Instruments
The Company has secured a substantial portion of its copper needs with a
primary vendor through 1999. Due to the favorable pricing available, the
Company secured pricing in lieu of hedging for 1999. The Company used futures
contracts through early 1998 to manage its inventory, both to set pricing on
purchases and to reduce the Company's exposure to price fluctuations. Under
existing accounting literature, these activities are accounted for as hedging
activities. To qualify as a hedge, the item must expose the Company to inventory
pricing risk, and the related contract must reduce that exposure and be
designated by the Company as a hedge. Additionally, to hedge expected
transactions, the significant characteristics and expected terms of such
transactions must be identified and it must be probable that the transaction
will occur.
Gains and losses on futures contracts, including gains and losses upon
termination of the contract, are matched to inventory purchases and are included
in the carrying value of inventory and charged or credited to cost of sales as
such inventory is sold or used in production. The fair market value of commodity
options held at December 31, 1998 and 1997, was $0 and $(157), respectively.
If derivative transactions do not meet the criteria for hedges, the Company
recognizes unrealized gains or losses as they occur. If a hedged transaction no
longer exists or a hedged anticipated transaction is deemed no longer probable
to occur, cumulative gains and losses on the hedge are recognized immediately in
income and subsequent changes in fair market value of the derivative transaction
are recognized in the period the change occurs.
F-10
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), and Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -
an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132), effective
January 1, 1998. SFAS 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity including foreign currency translation
adjustments and is presented in the statements of stockholders' equity. Prior
year financial statements have been reclassified to conform to the SFAS 130
requirements. SFAS 131 introduces a new segment reporting model called the
"management approach." The management approach is based on the manner in which
management organizes segments within a company for making operating decisions
and assessing performance. The management approach replaces the notion of
industry and geographic segments. SFAS 132 revises disclosures about pension
and other postretirement benefit plans, yet it does not change the measurement
or recognition of those plans.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). This Statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 will be effective for the Company's fiscal year 2000.
Management believes that this Statement will not have a significant impact on
the Company's financial condition or results of operations.
Comprehensive Income
The Company adopted SFAS 130 in the first quarter of fiscal 1998. SFAS 130
requires the reporting of a measure of all changes in equity of an entity that
result from recognized transactions and other economic events other than
transactions with owners in their capacity as owners. Other comprehensive
income (loss) for the years ended December 31, 1998 and 1997 includes only
foreign currency translation. The calculation of comprehensive income is as
follows:
<TABLE>
<CAPTION>
Company Predecessor - KSCO
--------------------------------------------------------------------------
Period from Period from January
Year Ended Inception to 1, 1997 to
December 31, 1998 December 31, 1997 November 26, 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) $(9,767) $(781) $1,319
Foreign Currency Translation Adjustments 548 (79) (291)
------- ----- ------
Comprehensive Income (Loss) $(9,219) $(860) $1,028
======= ===== ======
</TABLE>
F-11
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Acquisitions
The Saratoga Acquisition of Fasteners described in Note 1 was accounted for as
a purchase. Accordingly, the consolidated financial statements of Fasteners
reflect the purchase method of accounting effective November 26, 1997. The
purchase price was approximately $168.8 million, less the amount of the
indebtedness of the Company existing immediately prior to closing of the
Acquisition (including indebtedness that was not repaid with the Saratoga
Acquisition). In connection with the Saratoga Acquisition, the Company issued
$100,000,000 of 11.25% Senior Notes ("Notes") due 2007 in a private placement
offering under Rule 144A ("Initial Offering"). The proceeds of the Initial
Offering were used to finance, in part, the purchase by SAI of all of the
capital stock of KSCO which then owned all of the capital stock of the Company.
Predecessor-KSCO merged with and into KSCO, with KSCO surviving, and KSCO merged
with and into the Company, with the Company surviving. Following the mergers
described above, the Notes became obligations of the Company. Subsequent to the
Saratoga Acquisition, the Notes were registered with the SEC in an exchange
offering under virtually identical terms with the Initial Offering.
In connection with the Acquisition, Saratoga and certain other investors made
a $36.6 million equity investment, consisting of (i) $0.4 million in shares of
Holdings' Common Stock, par value $0.0001 per share (the "Common Stock"), and
(ii) $36.2 million aggregate liquidation preference of Holdings' Series B
Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock")
(collectively, the "Saratoga Investment"). Management and the Chairman of the
Board rolled over $3.4 million of their stock options in KSCO into options to
purchase Common Stock and Series B Preferred Stock (the "Management
Investment"). The Saratoga Investment and the Management Investment are
referred to as the "Equity Investments." Concurrently with the Initial
Offering, Holdings sold, for gross proceeds of $10.0 million, 100,000 Units
("Units Offering"), each Unit consisting of $100 liquidation preference of the
Company's Series A Cumulative Redeemable Exchangeable Preferred Stock (the
"Senior Preferred Stock") and one warrant (the "Warrants") to purchase
Common Stock. In February 1998, Holdings sold an additional 1,000,000 shares of
each of common stock and Series B Preferred Stock for approximately $10.3
million. The proceeds from the sale were used to redeem the outstanding Series
A Cumulative Redeemable Exchangeable preferred Stock and Warrants. The net
proceeds of the Equity Investments and the Units Offering totaled $49.5 million,
after fees and expenses to Holdings of $0.5 million.
Management maintained a continuing ownership interest in the Company.
Accordingly, stockholders' equity and the excess of purchase cost over book
value have been reduced by $7,831 pursuant to the provisions of the Emerging
Issues Task Force Issue No. 88-16 of the Financial Accounting Standards Board.
In connection with the Saratoga Acquisition, Fasteners entered into a new
senior secured credit facility (the "Credit Facility"), consisting of a $28.0
million term loan (the "Term Loan") and a $25.0 million revolving credit
facility (the "Revolving Credit Facility").
Proceeds from the Equity Investment, the Initial Offering and the Term Loan
were used to finance the purchase price in the Acquisition, repurchase attaching
machinery subject to a synthetic lease (the "Synthetic Lease"), repay the
Company's existing credit facility (the "Former Credit Facility") and pay
related fees and expenses.
The allocation of the purchase price to the underlying net assets acquired was
based upon the fair value of the net assets as follows:
F-12
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase price.................................. $168,800
Deferred financing fees......................... 11,705
--------
Total purchase price .................... 180,505
Less--value assigned to assets and liabilities
Cash......................................... 5,213
Accounts receivable.......................... 12,650
Inventories.................................. 22,634
Other current assets......................... 714
Property, plant, and equipment............... 72,004
Deferred financing fees...................... 11,705
Other long-term assets....................... 17,880
Accounts payable and accrued liabilities..... (22,313)
Long term liabilities and debt assumed....... (26,156)
--------
94,331
--------
Goodwill..................................... $ 86,174
========
In June 1998, Scovill-Europe acquired a fastener distributor in the United
Kingdom which enabled it to expand its presence in Europe. The distributor was
a customer of Scovill-Europe. Scovill-Europe acquired the assets and
liabilities of the distributor in exchange for the forgiveness of the
outstanding accounts receivable of $0.5 million.
Note 4. Inventories
Inventories as of December 31, 1998 and 1997 consisted of the following:
1998 1997
------------------------------
Raw Material........................ $ 1,901 $ 2,792
Work in Process..................... 4,797 6,310
Attaching Machine Spare Parts ...... 8,219 6,971
Finished Goods...................... 9,656 8,219
------- -------
$24,573 $24,292
======= =======
The value of inventories is reported net of allowances for obsolete, slow-
moving and discontinued product line inventory of $1,113 and $1,182 as of
December 31, 1998 and 1997, respectively. If the FIFO method had been used to
value all inventories, inventories would have been decreased by $862 at December
31, 1998 and remained unchanged at December 31, 1997. In 1998, the impact of
the partial liquidation of the 1997 LIFO base layer was immaterial.
F-13
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Property, Plant and Equipment
Property, plant and equipment as of December 31, 1998 and 1997 consisted of the
following:
1998 1997
-----------------------
Land and improvements...................... $ 325 $ 324
Computer equipment and software............ 2,329 1,173
Buildings and improvements................. 7,570 7,088
Attaching equipment........................ 38,048 34,084
Machinery, equipment and tooling........... 28,835 30,276
------- -------
77,107 72,945
Accumulated depreciation................... (7,686) (440)
------- -------
$69,421 $72,505
======= =======
Depreciation expense was $10,006, $440, $5,077 and $6,829 for the periods
ended December 31, 1998 and 1997, November 26, 1997 and December 31, 1996,
respectively.
In November 1996, Fasteners refinanced its attaching equipment under a
sale/leaseback arrangement. The lease was an operating lease in accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases."
In connection with the Saratoga Acquisition, Fasteners repurchased attaching
machinery under the lease agreement for $30,212, an amount which approximates
fair value.
Note 6. Accrued Liabilities
Accrued liabilities as of December 31, 1998 and 1997 consisted of the following:
1998 1997
--------------------------
Salaries, wages and benefits.............. $1,155 $1,514
Deferred taxes............................ 1,202 1,036
Pension, current portion.................. 1,107 1,088
Other..................................... 2,738 5,832
------ ------
$6,202 $9,470
====== ======
Note 7. Long-term Debt
Long-term debt as of December 31, 1998 and 1997 consisted of the following:
1998 1997
-----------------------------------
Senior notes........................ $100,000 $100,000
Term note........................... 27,000 28,000
Revolving line of credit............ 12,900 --
Other............................... 1,173 1,501
Capital lease obligations........... 250 347
-------- --------
141,323 129,848
Less--Current maturities............ (3,530) (1,649)
-------- --------
Total long-term debt................ $137,793 $128,199
======== ========
F-14
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Notes are guaranteed by Holdings. The Notes and the guarantee are senior
unsecured obligations of the Company and Holdings. Interest on the Notes is
payable semi-annually on May 30 and November 30 of each year. The Notes are
redeemable at the option of the Company, in whole or in part, at any time after
November 30, 2002, at redemption prices as defined, plus accrued and unpaid
interest and Liquidated Damages, as defined. Upon the occurrence of a change in
control, as defined, the Company will be required to make an offer to purchase
all or any part of each holder's Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
the purchase.
Credit Facility
In connection with the Acquisition, Fasteners entered into a Credit Facility,
consisting of a $28,000 Term Loan and a $25,000 Revolving Credit Facility.
Borrowings under the Credit Facility are collateralized by all of Fasteners'
assets. Borrowing availability under the revolving line of credit is subject to
limitations based on eligible accounts receivable and eligible inventory, as
defined. The Credit Facility allows Fasteners to choose among interest rate
options of LIBOR plus 2.5% or the Base Rate plus 1.5%. The Credit Facility
requires that Fasteners meet certain covenants which, among other things,
requires the maintenance of ratios related to leverage and cash flow and limits
the level of capital expenditures and operating leases. The Credit Facility
requires an annual commitment fee of 0.5% of the total unused commitment, less
letters of credit and amounts borrowed, and requires Fasteners to make quarterly
payments of accrued interest outstanding on the Term Loan and the Revolving
Credit Facility.
During the third and fourth quarters of 1998, the Company amended certain
EBITDA definitions of its Credit Facility and certain provisions to reset
financial covenants for subsequent periods. In addition, an amendment to the
Credit Facility waived the capital expenditures requirements and funded
indebtedness to consolidated EBITDA ratio for 1998.
As of December 31, 1998, Fasteners had borrowings of $27,000 (at LIBOR)
outstanding under the Term Loan with $12,900 outstanding under the Revolving
Credit Facility and $6,460 of unused credit availability. As of December 31,
1997, Fasteners had borrowings of $28,000 ($14,000 at each of Base Rate and
LIBOR) outstanding under the Term Loan with zero borrowings under the Revolving
Credit Facility and $15,270 of unused credit availability. The Credit Facility
expires in November 2007. Under the Credit Facility, interest rates ranged from
7.7% at LIBOR to 10% at Base Rate and the weighted average interest rate was
8.4% for the year ended December 31, 1998. The interest rate was 7.7% at LIBOR
and 9.25% at Base Rate at December 31, 1998.
Other debt at December 31, 1998 and 1997 includes outstanding obligations of
Scovill-Europe.
Maturities, excluding capital lease obligations, of long-term debt as of
December 31, 1998 are as follows:
1999....................... $ 3,422
2000....................... 5,352
2001....................... 6,244
2002....................... 6,030
2003....................... 7,030
Thereafter................. 112,995
--------
$141,073
========
All outstanding obligations under the Former Credit Facility were repaid in
November 1997 in connection with the Saratoga Acquisition.
The carrying value of long-term debt at December 31, 1998 and 1997
approximates fair value.
F-15
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has included information concerning EBITDA in this report because
it is used by certain investors as a measure of a company's ability to service
its debt. EBITDA is not required or recognized as a measure of financial
performance under generally accepted accounting principles in the U.S. ("GAAP"),
and should not be considered an alternative to net income determined in
accordance with GAAP as an indicator of operating performance or as an
alternative to cash flow from operating activities determined in accordance with
GAAP as a measure of liquidity. The Company's use of EBITDA may not be
comparable to similarly titled measures used by other companies due to their use
of different financial statement components in calculating EBITDA.
Note 8. Other Long Term Liabilities
Other long term liabilities as of December 31, 1998 and 1997 consisted
primarily of liabilities for environmental matters of $3,005 and $3,155 at
December 31, 1998 and 1997, respectively.
Note 9. Lease Commitments
Operating Leases
Fasteners leases office space, office equipment and vehicles for various
periods through the year 2003 and it is expected in the normal course of
operations that the leases may be extended or replaced. Certain leases provide
for contingent rentals based upon additional usage of equipment and vehicles in
excess of a specified minimum. Leases for real estate generally include options
to renew for periods ranging from one to ten years. At December 31, 1998, future
minimum annual rental commitments are as follows:
1999........................... $ 580
2000........................... 415
2001........................... 145
2002........................... 47
2003 and thereafter............ 46
.. ------
Total minimum lease payments... $1,233
======
Rental expense for operating leases was $1,182, $493, $5,422 and $1,756 for
the periods ended December 31, 1998 and 1997, November 26, 1997 and December 31,
1996, respectively.
Capital Lease
In 1996, Fasteners entered into a lease agreement for computer equipment which
is classified as a capital lease. The net book value of the leased equipment
included in Property, Plant and Equipment at December 31, 1998 was $96 which was
included in computer equipment and software. Future minimum payments, by year,
under noncancelable capital leases consist of the following at December 31,
1998:
1999........................................... $ 130
2000........................................... 130
2001........................................... 22
-----
Total minimum lease payments................... $ 282
Amounts representing interest.................. (32)
-----
Present value of net minimum lease payments.... 250
Less current portion........................... (108)
-----
Long-term capital lease obligation............. $ 142
=====
F-16
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10. Income Taxes
The following is a summary of the components of income (loss) before income
taxes and extraordinary loss:
<TABLE>
<CAPTION>
Company Predecessor - KSCO
---------------------------------------------------------------------------------
Period from Period from
Year Ended Inception to January 1, 1997 to Year Ended
December 31, 1998 December 31, 1997 November 26, 1997 December 31, 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic.......... $(15,015) $ (6) $ 505 $1,317
Foreign........... 734 (698) 1,926 (296)
-------- ----- ------ ------
$(14,281) $(704) $2,431 $1,021
======== ===== ====== ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Company Predecessor - KSCO
-------------------------------------------------------------------------------------
Period from Period from
Year Ended Inception to January 1, 1997 to Year Ended
December 31, 1998 December 31, 1997 November 26, 1997 December 31, 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current.............. $ -- $(1,360) $1,065 $ --
Deferred............. (4,895) 1,440 (415) 265
Foreign.............. 151 (118) 462 45
------- ------- ------ ----
$(4,744) $ (38) $1,112 $310
======= ======= ====== ====
</TABLE>
The difference between the United States Federal statutory income tax rate and
the consolidated effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
Company Predecessor - KSCO
-----------------------------------------------------------------------
Period from
Year Ended Inception to Period from
December 31, December 31, January 1, 1997 to Year Ended
1998 1997 November 26, 1997 December 31, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax (benefit)
expense at statutory rates..... $(4,856) $(239) $ 827 $ 429
State income tax (benefit)
provision, net of federal
taxes......................... (714) (35) 122 66
Benefit for net operating
losses......................... -- -- (362) --
Benefit for extraordinary
item........................... -- -- -- (613)
Amortization of goodwill/
deferred financing fees........ 852 56 552 292
Foreign tax impact.............. (61) 175 65 45
Other........................... 35 5 (92) 91
------- ----- ------ -----
$(4,744) $ (38) $1,112 $ 310
======= ===== ====== =====
</TABLE>
F-17
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax consequences of significant temporary differences are as follows
as of December 31, 1998 and 1997:
1998 1997
-------------------------
Deferred tax liabilities:
Fixed assets.................. $(16,376) $(15,919)
Trademarks.................... (5,548) (5,600)
Inventories................... (1,081) (990)
Other......................... (46) (46)
-------- --------
(23,051) (22,555)
-------- --------
Deferred tax assets:
NOL carryforward (expiring
in 2012 and 2018)............ 10,892 4,857
Pension and Postretirement
health and life benefits..... 9,242 9,986
Environmental matters......... 1,172 1,230
Other......................... 224 66
-------- --------
21,530 16,139
-------- --------
$ (1,521) $ (6,416)
======== ========
In connection with the acquisitions of PCI and Rau, the former owners of PCI
and Rau, respectively indemnified the Company from any potential future tax
liabilities that may arise from periods prior to the dates of acquisition.
Note 11. Pension And Other Employee Benefit Plans
Pension Plan and Postretirement Plan
Fasteners sponsors noncontributory defined benefit pension plans. On December
31, 1994, Fasteners curtailed future benefits attributable to participants of
its pension plans. The effect of this curtailment resulted in the elimination of
defined pension benefits for all future services of active employees
participating in the plans. Additionally, Fasteners assumed the obligations of
two pension plans sponsored by PCI. The PCI plans were merged with the Fasteners
plans effective March 31, 1996.
The amounts funded by Fasteners for any plan year are not less than the
minimum required under the Employee Retirement Income Security Act.
Fasteners has an additional defined benefit non-qualified pension plan
covering former employees and former employees of PCI. The pension liability
relating to this plan was $1,131 and $1,022 at December 31, 1998 and 1997,
respectively of which $972 and $928 was classified as long-term at December 31,
1998 and 1997, respectively. Pension expense for this plan was $83, $7, $77 and
$79 for the periods ended December 31, 1998 and 1997, November 26, 1997 and
December 31, 1996, respectively.
Fasteners sponsors several defined benefit postretirement health and life
insurance benefit plans that cover both salaried and non-salaried former
employees. Fasteners assumed the obligations of a postretirement health and life
plan for former employees of PCI. All of the participants are retired employees
and beneficiaries, mostly from operations which were previously sold or
discontinued. Fasteners reserves the right to amend or discontinue all or any
part of those plans at any time. Fasteners' funding policy for its
postretirement plans is on a pay-as-you-go basis.
F-18
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pension Plan Postretirement Benefit Plan
--------------------------------------------------
December 31, December 31,
1998 1997 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $29,364 $29,867 $14,451 $14,572
Interest cost 2,018 2,122 1,019 1,028
Loss on obligation 1,674 575 -- --
Benefits paid (3,164) (3,200) (1,674) (1,149)
--------------------------------------------------
Benefit obligation at end of year 29,892 29,364 13,796 14,451
Less fair value of plan assets 19,221 20,272 -- --
--------------------------------------------------
Obligation in excess of plan assets 10,671 9,092 13,796 14,451
Unrecognized net loss/(gain) 300 (947) -- --
--------------------------------------------------
Accrued pension/postretirement costs 10,371 10,039 13,796 14,451
Less current portion 1,107 1,099 -- --
--------------------------------------------------
Long-term liabilities $ 9,264 $ 8,940 13,796 $14,451
==================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Plans Postretirement Benefit Plan
-------------------------------------------------
December 31, December 31,
Change in plan assets 1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets at the beginning of the year $20,272 $21,938 N/A N/A
Actual return of plan assets 2,113 1,462
Employer contributions -- 72
Benefits paid (3,164) (3,200)
------- -------
Fair value of plan assets at end of year $19,221 $20,272
=================================================
</TABLE>
Net pension and postretirement benefit cost consisted of the following:
<TABLE>
<CAPTION>
Pension Plan
-----------------------------------------------------------------------------------------
Company Predecessor-KSCO
-----------------------------------------------------------------------------------------
Period from Period from January 1,
Year Ended Inception to 1997 to Year Ended
December 31, 1998 December 31, 1997 November 26, 1997 December 31, 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest cost $ 2,018 $ 177 $ 1,945 $ 2,110
Service cost -- -- -- 97
Actual return on plan assets (2,113) (122) (1,340) (2,962)
Net amortization and deferral 426 (31) (343) 588
-----------------------------------------------------------------------------------------
Net periodic benefit cost $ 331 $ 24 $ 262 $ (167)
=========================================================================================
Postretirement Benefit Plan
-----------------------------------------------------------------------------------------
Company Predecessor KSCO
-----------------------------------------------------------------------------------------
Period from Period from January
Year Ended Inception to 1, 1997 to Year Ended
December 31, 1998 December 31, 1997 November 26, 1997 December 31, 1996
-----------------------------------------------------------------------------------------
Interest cost $1,019 $86 $942 $ 990
Service cost -- -- -- 101
Actual return on plan assets -- -- -- --
Net amortization and deferral -- -- -- --
-----------------------------------------------------------------------------------------
Net periodic benefit cost $1,019 $86 $942 $1,091
=========================================================================================
</TABLE>
F-19
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An increase or decrease in the health care cost trend rate of one percentage
point would have the following effect on the postretirement cost and obligation
as of December 31, 1998:
1% point 1% point
Increase Decrease
-----------------------
Effect on total service and interest cost components $ 83 $ 93
Effect on postretirement obligation 1,146 1,277
The following is a summary of assumptions used to reflect expectations of
future economic conditions as they relate to Fasteners' pension and
postretirement plans:
<TABLE>
<CAPTION>
Weighted-average assumptions as of Pension Plan Postretirement Benefit Plan
December 31 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets 9.00% 9.00% N/A N/A
</TABLE>
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999; the rate was assumed
to decrease gradually to 6% for 2004 and remain at that level thereafter. The
health care cost trend rate has a significant effect on the amounts reported.
401(k) Plan
Fasteners sponsors a 401(k) savings plan for salaried and non-salaried
employees. Participation in the plan is optional. Employer contributions are
equal to 50% of employee contributions, up to 5% of the participant's annual
salary, subject to certain limitations. Fasteners' contributions to this plan
were $291, $24, $261 and $248 for the periods ended December 31, 1998 and 1997,
November 26, 1997 and December 31, 1996, respectively.
Stock Options
During October 1995, Fasteners granted certain executives options to purchase
a total of 727,000 shares of common stock at an option price of $2.50 per share.
These options vested immediately upon a change in control or over a three-year
period upon achievement of specified performance targets. As of December 31, the
options are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of year....... -- 727,000 727,000
Options outstanding, end of year............. -- -- 727,000
Options exercisable.......................... -- -- 242,275
Options granted--Predecessor-KSCO............ -- 242,000 --
Exercise price............................... -- $2.50 $2.50
Grant date................................... -- February 1997 --
Options exercised/surrendered................ -- 969,000 --
</TABLE>
On the date of the Saratoga Acquisition, outstanding options that had not been
exercised were to be rolled into options of the Company at equivalent economic
values; however, as the formal option agreements of the Company have not yet
been finalized, such options (442,653) were considered surrendered in the above
table during 1997, and remain unissued as of December 31, 1998.
F-20
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fasteners adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized for the stock
options granted. Had compensation cost of Fasteners' stock options granted been
determined consistent with the provisions of SFAS 123, Fasteners' compensation
expense would have increased by approximately $0, $0, $126 and $105 for the year
ended December 31, 1998, the period from Inception to December 31, 1997, January
1, 1997 to November 26, 1997 and the year ended December 31, 1996, respectively,
based on a risk free rate of return of 7.0% and an expected 5 year life of the
options.
Note 12. Related Party Transactions
Holdings entered into a management agreement with Saratoga in which Holdings
pays $150 per quarter to Saratoga. Such payment is funded with a dividend from
Fasteners and will be recorded as an operating expense of Holdings. No such
payments were made from Inception through December 31, 1997. During 1998, the
Company paid $658 of management fees to Saratoga representing management fees
for the period from November 26, 1997 to December 31, 1998.
Pursuant to a management agreement, Kohlberg provided Fasteners with general
corporate administrative services. Kohlberg received a management fee to recover
its operating expenses based upon an allocation of time devoted to Fasteners.
The management fee was $451 and $425 for the period ended November 26, 1997 and
the year ended December 31 1996, respectively. On January 24, 1996, Fasteners
paid a fee of $1 million to Kohlberg in conjunction with the acquisitions of PCI
and Rau.
Note 13. Commitments And Contingencies
Fasteners is occasionally made a party to litigation, claims and assertions
from outside parties during the normal course of business. Management does not
believe that the unfavorable resolution of any such matters currently existing
would have a material unfavorable impact upon the Company's financial position
or results of operations.
As a result of Fasteners' almost 200 years of industrial operations, Fasteners
is involved in environmental protection matters relating to the discharge of
materials into the environment and new such matters arise from time to time.
Fasteners is involved in clean-ups of a current and a former operating location.
In general, Fasteners has established accruals for those hazardous waste sites
where it is probable that a loss has been incurred and the amount of the loss
can be reasonably estimated. At December 31, 1998, Fasteners has accruals on a
discounted basis, using a rate of 7.5%, for environmental matters in the amount
of $3,005 which are not anticipated to be of a capital nature. Of the total
reserve for environment liabilities, $2,662 represents contractual payments to a
former parent. The undiscounted amounts of the expected payments totaled $4,151
at December 31, 1998. The reliability and precision of the loss estimates are
affected by numerous factors, such as the complexity of investigation and
remediation, the stage of site evaluation, the allocation of responsibility
among potentially responsible parties and the assertion of additional claims.
Fasteners adjusts its accruals from time to time as a result of changes in
performance standards, remediation technology, available information and other
relevant factors. The expected payments for environmental obligations consist of
$429 in each of 1999 and 2000, $476 in 2001, $619 in 2002 and $2,198 thereafter.
F-21
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Business Segments
Effective for 1998, the Company adopted SFAS 131. Prior period amounts have
been restated to conform to the requirement of this Statement.
The Company's businesses are organized and internally reported as three
segments: Apparel, Industrial, and European operations. The European operations
include some of the same products as both apparel and industrial. However, the
European operations are managed separately and thus reported as a separate
segment. Sales are reported and classified based on the customers' location.
The Company's customers include many large and well-known apparel and
industrial manufacturing companies. In calendar 1998 and 1997, no single
customer accounted for more than 8% and 7%, respectively of the Company's total
net sales, and the Company's ten largest customers accounted for approximately
30% and 28%, respectively of the Company's total net sales. The Company's broad
line of products for apparel and specialty industrial use reduces its exposure
to any one customer segment and to fashion trends.
<TABLE>
<CAPTION>
Other /
Business Segment European Total
Information Year Apparel Industrial (1) Operations (2) Company
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 1998 $53,444 $28,161 $10,871 $92,476
1997 53,262 31,698 10,901 95,861
1996 48,799 32,079 10,754 91,632
Operating Income (3) 1998 $13,539 $ 5,139 $ 624 $19,302
1997 13,990 6,773 1,373 22,136
1996 11,254 6,147 692 18,093
Identifiable Assets 1998 $56,396 $ 8,789 $ 7,438 $72,623
1997 49,171 10,341 7,017 66,529
</TABLE>
(1) Includes all Canadian operations.
(2) Includes Scovill-Europe operations and discontinued zipper segment in 1996.
(3) Operating Income (i) includes allocations of general and administrative
expenses based on sales and (ii) excludes depreciation, amortization, lease
expense under Synthetic lease, management fees and the restructuring
charge.
The following is a reconciliation of operating income from reportable segments
above to operating income on the financial statements:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income from reportable segments $19,302 $22,136 $18,093
Depreciation 10,006 5,517 6,829
Amortization 3,938 3,076 2,557
Lease expense -- 4,719 858
Management fee 658 451 425
Restructuring charge 2,968 -- --
-----------------------------------
Total operating income $ 1,732 $ 8,373 $ 7,424
===================================
</TABLE>
F-22
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of identifiable assets from reportable
segments to the financial statements:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Identifiable assets from reportable segments $ 72,623 $ 66,529
Identifiable assets not identifiable by reportable segment 144,644 159,673
Total identifiable assets $217,267 $226,202
=======================
</TABLE>
The Company only segregates certain assets for reporting purposes, including
the assets of the Company's subsidiaries, inventory and attaching equipment.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Scovill Holdings Inc.
Scovill Fasteners Inc.
/s/ David J. Barrett
-----------------------
David J. Barrett,
Chief Executive Officer and Director
Date: March 30, 1999
Each person whose signature appears below hereby constitutes and appoints
David J. Barrett and Martin A. Moore the true and lawful attorneys-in-fact and
agents of the undersigned, with full power of substitution and resubstitution,
for and in the name, place and stead of the undersigned, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission, and hereby grants to
such attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ DAVID J. BARRETT Chief Executive Officer, March 30, 1999
- ------------------------- President and Director
David J. Barrett
/s/ MARTIN A. MOORE Executive Vice President and March 30, 1999
- ------------------------- Chief Financial Officer and
Martin A. Moore Principal Accounting Officer
/s/ WILLIAM F. ANDREWS Chairman of the Board March 30, 1999
- -------------------------
William F. Andrews
/s/ CHRISTIAN L. OBERBECK Director March 30, 1999
- -------------------------
Christian L. Oberbeck
/s/ KIRK R. FERGUSON Director March 30, 1999
- -------------------------
Kirk R. Ferguson
<PAGE>
SCHEDULE II
SCOVILL HOLDINGS INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at Beginning Additions charged to Deductions from Balance at
Classification of Period costs and expenses reserve end of period
- -------------------------------------------------------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
DEDUCTED FOM THE ASSETS TO WHICH THEY
APPLY:
<S> <C> <C> <C> <C>
(1) For the year ended December 31, 1998 $894 $677 $439 $1,132
==== ==== ==== ======
(1) For the period from November 26, 1997
to December 31, 1997 $879 $ 20 $ 5 $ 894
==== ==== ==== ======
(2) For the period from January 1, 1997
to November 26, 1997 $640 $346 $107 $ 879
==== ==== ==== ======
(2) For the year ended December 31, 1996 $326 $376 $ 62 $ 640
==== ==== ==== ======
</TABLE>
(1) The Company
(2) Predecessor - KSCO
S-1
<PAGE>
EXHIBIT 10.1.27
LETTER AMENDMENT
Dated as of January 17, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "Banks") party
-----
to the Credit Agreement referred to
below and to Credit Agricole Indosuez,
as administrative agent and as collateral
agent (the "Administrative Agent"),
--------------------
Swiss Bank Corporation, Stamford Branch,
as documentation and syndication agent,
and SBC Warburg Dillon Read Inc., as
advisor and arranger, for the Banks
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of November 26, 1997 (as amended,
supplemented or otherwise modified through the date hereof, the "Credit
------
Agreement") among the undersigned and you. Capitalized terms not otherwise
- ---------
defined in this Letter Amendment have the same meanings as specified in the
Credit Agreement.
It is hereby agreed by you and us as follows:
You have indicated your willingness, on the terms and conditions stated
below, to so agree. Accordingly, it is hereby agreed by you and us as follows:
Section 10.10 of the Credit Agreement is, effective as of the date of this
Letter Amendment, hereby amended in full to read as follows:
"10.10 Funded Indebtedness to Consolidated EBITDA. The Borrower shall
------------------------------------------
not permit the ratio of Funded Indebtedness (measured as of the applicable date
set forth below in this Section 10.10) of the Borrower and its Subsidiaries on a
consolidated basis to Consolidated EBITDA of the Borrower (measured as specified
below) to be greater than the ratio set forth opposite such date below:
Fiscal Quarter
Ended Ratio
-------------- --------
March 31, 1998 6.50:1.0
June 30, 1998 6.50:1.0
September 30, 1998 6.50:1.0
December 31, 1998 6.50:1.0
March 31, 1999 6.25:1.0
June 30, 1999 6.25:1.0
September 30, 1999 6.25:1.0
<PAGE>
December 31, 1999 6.25:1.0
March 31, 2000 5.75:1.0
June 30, 2000 5.75:1.0
September 30, 2000 5.75:1.0
December 31, 2000 5.75:1.0
March 31, 2001 5.50:1.0
June 30, 2001 5.50:1.0
September 30, 2001 5.50:1.0
December 31, 2001 5.50:1.0
March 31, 2002 5.00:1.0
June 30, 2002 5.00:1.0
September 30, 2002 5.00:1.0
December 31, 2002 5.00:1.0
March 31, 2003 4.50:1.0
June 30, 2003 4.50:1.0
September 30, 2003
and each fiscal
quarter thereafter 4.50:1.0
For purposes of calculating the ratios specified above in this Section 10.10,
Consolidated EBITDA of the Borrower shall be: (i) for the period ending March
31, 1998, Consolidated EBITDA of the Borrower for the fiscal quarter ending
March 31, 1998 multiplied by four, (ii) for the period ending June 30, 1998,
Consolidated EBITDA of the Borrower for the two consecutive fiscal quarters
ending June 30, 1998 multiplied by two, (iii) for the period ending September
30, 1998, Consolidated EBITDA of the Borrower for the three consecutive fiscal
quarters ending September 30, 1998 multiplied by a fraction of 4/3, and (iv) for
each subsequent period, Consolidated EBITDA of the Borrower for a period of four
consecutive fiscal quarters of the Borrower, in each case taken as one
accounting period, ending on a date set forth above."
This Letter Amendment shall become effective as of the date first
above written when, and only when, the Administrative Agent shall have received
counterparts of this Letter Amendment executed by the undersigned and the
Required Banks or, as to any of the Banks, advice satisfactory to the
Administrative Agent that such Bank has executed this Letter Amendment. This
Letter Amendment is subject to the provisions of Section 15.10 of the Credit
Agreement.
On and after the effectiveness of this Letter Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, and each reference in
the Notes and each of the other Credit Documents to "the Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement, shall mean and be a reference to the Credit Agreement, as amended by
this Letter Amendment.
The Credit Agreement, the Notes, and each of the other Credit
Documents, as specifically amended by this Letter Amendment, are and shall
continue to be in full force and effect and are hereby in all respects ratified
and confirmed. Without limiting the generality of the foregoing, the Security
Documents and all of the Collateral described therein do and shall continue to
secure the payment of all Obligations of the Credit Parties under the Credit
Documents, in each case as amended by this Letter Amendment. The execution,
delivery and effectiveness of this Letter Amendment shall not, except as
expressly provided herein, operate as a waiver of any right, power or remedy of
any Bank or the Administrative Agent under the Credit Agreement or any of the
other Credit Documents, nor constitute a waiver of any provision of the Credit
Agreement or any of the other Credit Documents.
2
<PAGE>
If you agree to the terms and provisions hereof, please evidence such
agreement by executing and returning at least six counterparts of this Letter
Amendment to Shearman & Sterling, 599 Lexington Avenue, New York, N.Y. 10022-
6069, Attention: Ghassan M. Atiyah.
This Letter Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Letter Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Letter Amendment.
3
<PAGE>
This Letter Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
Very truly yours,
SCOVILL FASTENERS INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
SCOVILL HOLDINGS INC.
/S/ CHRISTIAN L. OBERBECK
PCI GROUP, INC.
/S/ MARTIN A. MOORE
SECRETARY
RAU FASTENER COMPANY, L.L.C.
/S/ MARTIN A. MOORE
SECRETARY
SCOMEX, INC.
/S/ MARTIN A. MOORE
SECRETARY
4
<PAGE>
Agreed as of the date first above written:
CREDIT AGRICOLE INDOSUEZ
Individually and as Administrative Agent
/S/ MICHAEL AROGHETI
VICE PRESIDENT
/S/ PATRICIA FRANKEL
FIRST VICE PRESIDENT
SWISS BANK CORPORATION,
STAMFORD BRANCH
Individually and as Documentation Agent
and Syndication Agent
/S/ THOMAS EGGENSCHWILER
EXECUTIVE DIRECTOR
CREDIT RISK MANAGEMENT
/S/ DOROTHY MCKINLEY
ASSOCIATE DIRECTOR
BANKING PRODUCTS SUPPORT, N.A.
5
<PAGE>
EXHIBIT 10.1.28
LETTER AMENDMENT
Dated as of February 20, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "Banks") parties
-----
to the Credit Agreement referred to below
and to Credit Agricole Indosuez, as the
Issuing Bank and as administrative agent and
as collateral agent (the "Administrative Agent"),
--------------------
Swiss Bank Corporation, Stamford Branch,
as documentation and syndication agent,
and SBC Warburg Dillon Read Inc., as
advisor and arranger, for the Banks
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of November 26, 1997, and the
Letter Amendment thereto dated as of January 9, 1998 (such Credit Agreement, as
so amended and as otherwise amended, supplemented or modified through the date
hereof, the "Credit Agreement") among the undersigned and you. Capitalized
----------------
terms not otherwise defined in this Letter Amendment have the same meanings as
specified in the Credit Agreement.
As part of the financing for the Acquisition, the Mergers and the
Refinancings, Scovill Holdings Inc. (the "Parent") issued to SBC Warburg Dillon
------
Read Inc. ("SBCWDR") and BT Alex. Brown Incorporated (together, "BT"), for gross
------ --
proceeds of $10,000,000, 100,000 units (the "Units"), each Unit consisting of
-----
$100 liquidation preference of 13-3/4% Series A Cumulative Redeemable
Exchangeable Preferred Stock, par value $0.001, of the Parent and one warrant to
purchase common stock, par value $0.0001 per share, of the Parent (the "Parent
------
Common Stock"). The Parent has agreed to repurchase (the "Repurchase") from
- ------------ ----------
SBCWDR and BT, and SBCWDR and BT have agreed to sell to the Parent, the Units
for $10,000,000 plus accrued and unpaid dividends. The Parent intends to issue
(the "Issuance") Parent Common Stock and Series B Preferred Stock to Co-
--------
Investment Partners, L.P. ("Co-Investment") and use the proceeds received
-------------
therefrom to finance the Repurchase. The Credit Parties have requested that the
Required Lenders agree to amend Sections 1, 5.02(A)(d)(i) and 10.13(b) of the
Credit Agreement to permit the Repurchase and the Issuance.
You have indicated your willingness, on the terms and conditions stated
below, to so agree. Accordingly, it is hereby agreed by you and us as follows:
The Credit Agreement is, effective as of the date of this Letter Amendment,
hereby amended as follows:
(a) Section 1 is amended by adding the following definition in its correct
alphabetic order:
<PAGE>
"'Equity Exchange' shall mean the issuance by the Parent
---------------
of 1,000,000 shares of Parent Common Stock and 1,000,000 shares
of Series B Preferred Stock to Co-Investment pursuant to a
Subscription Agreement dated as of February 20, 1998, between the
Parent and Co-Investment for an aggregate purchase price of
$10,320,833, and the substantially concurrent repurchase by the
Parent of the Senior Preferred Stock and the warrants to purchase
Parent Common Stock issued in connection with the Units
Offering."
(b) Clause (i) of Section 5.02(A)(d) is amended in its entirety to
read as follows:
"(i) 100% of the cash proceeds (net of underwriting
discounts and commissions and all other reasonable costs
associated with such transaction), in excess of $7,500,000 in the
aggregate, from any sale or issuance after the Effective Date of
equity securities of the Parent, the Borrower or any of the
Borrower's Subsidiaries (other than the Equity Transactions and
the Equity Exchange) otherwise permitted by Section 10.13;
provided, however, notwithstanding the foregoing, that with
-------- -------
respect to the issuance and sale of common stock by the Parent to
any of the Parent's then existing shareholders or to not more
than 25 'accredited investors' (as defined in Regulation D
promulgated pursuant to the Securities Act) pursuant to a private
placement, no prepayment of the Loans shall be required to be
made with the cash proceeds of such issuance and sale to the
extent such cash proceeds are used to make an acquisition
permitted under (S) 10.02 and"
(c) Section 10.13(b) is amended in its entirety to read as follows:
"(b) The Parent shall not issue any capital stock,
except for the Equity Transactions, the Equity Exchange and
issuances of Parent Common Stock with respect to which, after
giving effect to such issuance, no Default or Event of Default
will exist under Section 11.11."
This Letter Amendment shall become effective as of the date first above
written when, and only when, the Administrative Agent shall have received
counterparts of this Letter Amendment executed by the undersigned and the
Required Banks or, as to any of the Banks, advice satisfactory to the
Administrative Agent that such Bank has executed this Letter Amendment. The
effectiveness of this Letter Amendment is conditioned upon the accuracy of the
factual matters described herein. This Letter Amendment is subject to the
provisions of Section 15.10 of the Credit Agreement.
On and after the effectiveness of this Letter Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the Notes and
each of the other Credit Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement, as amended by this Letter Amendment.
The Credit Agreement, the Notes and each of the other Credit Documents, as
specifically amended by this Letter Amendment, are and shall continue to be in
full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Security Documents and all
of the Collateral described therein do and shall continue to secure the payment
of all
2
<PAGE>
Obligations of the Credit Parties under the Credit Documents, in each case as
amended by this Letter Amendment. The execution, delivery and effectiveness of
this Letter Amendment shall not, except as expressly provided herein, operate as
a waiver of any right, power or remedy of any Bank or any Agent under any of the
Credit Documents, nor constitute a waiver of any provision of any of the Credit
Documents.
If you agree to the terms and provisions hereof, please evidence such
agreement by executing and returning counterparts of this Letter Amendment to
Douglas Buffone at Shearman & Sterling, 599 Lexington Avenue, New York, New York
10022-6069, Fax: (212) 848-7179.
This Letter Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Letter Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Letter Amendment.
This Letter Amendment shall be governed by, and construed in accordance
with, the laws of the State of New York.
Very truly yours,
SCOVILL FASTENERS INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
SCOVILL HOLDINGS INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
PCI GROUP, INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
RAU FASTENER COMPANY, L.L.C.
/S/ MARTIN A. MOORE
SCOMEX, INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
3
<PAGE>
Agreed as of the date first above written:
CREDIT AGRICOLE INDOSUEZ
Individually and as Administrative Agent
/S/ MICHAEL AROUGHETI
VICE PRESIDENT
/S/ KEN KENCEL
MANAGING DIRECTOR
SWISS BANK CORPORATION,
STAMFORD BRANCH
Individually and as Documentation Agent
and Syndication Agent
/S/ WENDY P. FIELD
EXECUTIVE DIRECTOR
/S/ MICHAEL C. LAUNG
ASSOCIATE DIRETOR
CREDIT RISK MANAGEMENT
4
<PAGE>
EXHIBIT 10.1.29
AMENDMENT NO. 3 TO THE
CREDIT AGREEMENT
Dated as of September 30, 1998
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT among Scovill Holdings Inc., a
Delaware corporation (the "Parent"), Scovill Fasteners Inc., a Delaware
corporation (the "Borrower"), PCI Group, Inc., a Delaware corporation ("PCI"),
---------
Rau Fastener Company, LLC, a Delaware limited liability company ("Rau"), Scomex,
Inc., a Delaware corporation ("Scomex "), the banks, financial institutions and
-------
other institutional lenders parties to the Credit Agreement referred to below
(collectively, the "Banks") and Credit Agricole Indosuez, as administrative
agent and collateral agent (the "Administrative Agent ").
---------------------
PRELIMINARY STATEMENTS:
(1) The Parent, the Borrower, PCI, Rau, Scomex, the Banks, the
Administrative Agent, Swiss Bank Corporation, Stamford Branch, as documentation
agent and syndication agent, and SBC Warburg Dillon Read Inc., as advisor and
arranger, have entered into a Credit Agreement dated as of November 26, 1997,
and amendments thereto dated as of January 9, 1998, and February 20, 1998 (such
Credit Agreement, as so amended, being the "Credit Agreement"). Capitalized
----------------
terms not otherwise defined in this Amendment have the same meanings as
specified in the Credit Agreement.
(2) The Borrower has entered into a letter of intent to acquire
(the "Acquisition"), a Connecticut corporation, for approximately $6,300,000. In
-----------
connection with the Acquisition, the Borrower has requested that the definition
of "Consolidated EBITDA" be revised to reflect certain cost savings achieved by
the Borrower over the past year.
(3) The Required Banks are, on the terms and conditions stated
below, willing to grant the request of the Borrower and the Borrower and the
Required Banks have agreed to further amend the Credit Agreement as hereinafter
set forth.
SECTION 1. Amendments to Credit Agreement. The definition of
--------------------------------
"Consolidated EBITDA" in Section 1.01 of the Credit Agreement is, effective as
- --------------------
of the date hereof and subject to the satisfaction of the conditions precedent
set forth in Section 2, hereby amended by (i) deleting the word "and"
immediately following the phrase "for such period" in the fourth line thereof
and (ii) adding immediately preceding the phrase "less the sum of " continued in
the sixth line thereof the following:
", and (v) for each 12 consecutive month period containing any of
the quarters ended on March 31, 1998, June 30, 1998 or September
30, 1998, an amount equal to (1) if such period contains one such
quarter, $511,851, (2) if such period contains two such quarters,
$1,023,702 and (3) if such period contains three such quarters,
$1,535,553 (which amount reflects a reduction of salaried and
temporary labor during such quarters)".
<PAGE>
SECTION 2. Conditions of Effectiveness. This Amendment shall become
-----------------------------
effective as of the date first above written when, and only when, the
Administrative Agent shall have received counterparts of this Amendment executed
by the Borrower, the other Credit Parties and the Required Banks or, as to any
of the Banks, advice satisfactory to the Administrative Agent that such Bank has
executed this Amendment and Section 1 shall become effective when, and only
when, the Administrative Agent shall have additionally received all of the
following documents, each such document (unless otherwise specified) dated the
date of receipt thereof by the Administrative Agent (unless otherwise specified)
and in sufficient copies for each Bank, in form and substance satisfactory to
the Administrative Agent (unless otherwise specified) and in sufficient copies
for each Bank:
(a) A certificate signed by a duly authorized officer of the Borrower
stating that:
(i) The representations and warranties contained in Section
3 are correct on and as of the date of such certificate as though made
on and as of such date other than any such representations or
warranties that, by their terms, refer to a date other than the date of
such certificate; and
(ii) No event has occurred and is continuing that constitutes a
Default.
(b) Detailed consolidated financial projections for the fiscal years
ending December 31, 1999, December 31, 2000 and December 31, 2001 .
The effectiveness of this Amendment is conditioned upon the accuracy of the
factual matters described herein. This Amendment is subject to the provisions of
Section 15.10 of the Credit Agreement.
SECTION 3. Representations and Warranties of the Credit Parties. Each
----------------------------------------------------
Credit Party represents and warrants as follows:
(a) Corporate Status. Each of the Parent and its Subsidiaries (i) is a
-----------------
duly organized and validly existing corporation or limited liability
company in good standing under the laws of the jurisdiction of its
incorporation or organization, (ii) has the corporate or other power and
authority to own its property and assets and to transact the business in
which it is engaged and presently proposes to engage and (iii) is duly
qualified and is authorized to do business and is in good standing in each
jurisdiction where the ownership, leasing or operation of property or the
conduct of its business requires such qualifications, except for failures
to be so qualified which, in the aggregate, would not be reasonably likely
to have a material adverse effect on the performance, business, assets,
nature of assets, liabilities, operations, properties, condition (financial
or otherwise) or prospects of the Borrower and its Subsidiaries taken as a
whole.
(b) Corporate Power and Authority. Each of the Parent and its
-----------------------------
Subsidiaries has the power to execute, deliver and perform the terms and
provisions of this Amendment and the Credit Agreement as amended by this
Amendment (collectively, the
2
<PAGE>
"Documents") and has taken all necessary corporate or other action to
---------
authorize the execution, delivery and performance by it of each of such
Documents. Each of the Parent and its Subsidiaries has duly executed and
delivered each of the Documents to which it is party, and each of such
Documents constitutes the legal, valid and binding obligation of such party
enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors' rights
generally or by general equitable principles (regardless of whether the
issue of enforceability is considered in a proceeding in equity or at law).
(c) No Violation. Neither the execution, delivery or performance by
------------
the Parent or any of its Subsidiaries of the Documents to which it is a
party, nor compliance by it with the terms and provisions hereof or
thereof, (i) will contravene any provision of any applicable law, statute,
rule or regulation or any order, writ, judgment, injunction or decree of
any court or governmental instrumentality, (ii) will conflict with or
result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default or event of default under, or result
in the creation or imposition of (or the obligation to create or impose),
any Lien (except pursuant to the Security Documents) upon any of the
property or assets of the Parent or any of its Subsidiaries pursuant to the
terms of any indenture, mortgage, deed of trust, credit agreement or loan
agreement, or any other agreement, contract or instrument to which the
Parent or any of its Subsidiaries is a party or by which it or any of its
property or assets is bound, or to which it may be subject or (iii) will
violate any provision of the Certificate of Incorporation or By-Laws (or
similar organizational documents) of the Parent or any of its Subsidiaries.
(d) Governmental Approval. No order, consent, approval, license,
---------------------
authorization or validation of, or filing, recording or registration with
(except as has been obtained or made on or prior to the Initial Borrowing
Date and as is in full force and effect), or exemption by, any governmental
or public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with, (i) the execution, delivery
and performance of any Document or (ii) the legality, validity, binding
effect or enforceability of any such Document.
(e) Litigation. Other than with respect to matters set forth on
----------
Schedule VIII to the Credit Agreement, there are no actions, suits or
proceedings pending or, to the best knowledge of the Borrower or any of its
Subsidiaries, threatened that (a) would have a material adverse effect on
the operations or financial condition of the Parent, Merger Sub, KSCO and
the Borrower together with their respective Subsidiaries, taken as a whole,
or (b) involves a reasonable possibility of (i) a material adverse effect
on (x) the ability of any of the Credit Parties to perform their respective
obligations hereunder or under any of the other Credit Documents or (y) the
rights, remedies and benefits available to the Agents, the Issuing Bank and
the Banks hereunder or under any of the other Credit Documents, or (ii)
adversely affecting the validity or enforceability of any Documents, or
which would be materially inconsistent with the assumptions underlying the
forecasts previously provided to the Agents, the Issuing Bank and the
Banks.
(f) The Security Documents. (i) The provisions of the Security
----------------------
Agreement are effective to create in favor of the Collateral Agent for the
benefit of the Secured Creditors a legal, valid and enforceable security
interest in all right, title and interest of
3
<PAGE>
the respective Credit Parties in the Collateral described therein and, the
Collateral Agent, for the benefit of the Secured Creditors, will have, upon
making the necessary filings in the appropriate filing office, a fully
perfected first Lien on, and security interest in, all right, title and
interest of the respective Credit Parties, in all of the Collateral
described therein, subject to no other Liens other than Permitted Liens.
(ii) The recordation of the Security Agreement in the United States
Patent and Trademark Office, together with filings on Form UCC- 1 in all
applicable jurisdictions made pursuant to the Security Agreement, will be
effective, under federal and state law, to perfect the security interest granted
to the Collateral Agent in the Trademarks and Patents covered by the Security
Agreement and the filing of the Security Agreement with the United States
Copyright Office together with filings on Form UCC- 1 made pursuant to the
Security Agreement will be effective under federal and state law to perfect the
security interest granted to the Collateral Agent in the Copyrights covered by
the Security Agreement. Each of the Credit Parties party to the Security
Agreement has good and merchantable title to all Collateral described therein,
free and clear of all Liens except those described above in subsection (a) above
and in this subsection (b).
(iii) From and after the Initial Borrowing Date, the Mortgages create, as
security for the obligations purported to be secured thereby, a valid and
enforceable and, upon making the necessary filings in the appropriate filing
office, perfected security interest in and Lien on all of the Mortgaged
Properties in favor of the Collateral Agent (or such other trustee as may be
required or desirable under local law) for the benefit of the Secured Creditors,
superior to and prior to the rights of all third persons (except that the
security interest created in the Mortgaged Properties may be subject to the
Permitted Encumbrances related thereto) and subject to no other Liens (other
than Permitted Liens). Each of the Borrower and its Subsidiaries has good and
marketable title at the time of the grant thereof and at all times thereafter to
all Mortgaged Properties, free and clear of all Liens except those described in
the first sentence of this subsection (iii).
SECTION 4. Reference to and Effect on the Credit Documents. (a) On and
-----------------------------------------------
after the effectiveness of this Amendment, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof' or words of like import
referring to the Credit Agreement, and each reference in the Notes and each of
the other Credit Documents to "the Credit Agreement", "thereunder", "thereof' or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended by this Amendment.
(b) The Credit Agreement, as specifically amended by this Amendment,
is and shall continue to be in full force and effect and is hereby in all
respects ratified and confirmed. Without limiting the generality of the
foregoing, the Security Documents and all of the Collateral described therein do
and shall continue to secure the payment of all Obligations of the Credit
Parties under the Credit Documents, in each case as amended by this Amendment.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Bank or any Agent under any of the Loan Documents,
nor constitute a waiver of any provision of any of the Loan Documents.
4
<PAGE>
SECTION 5. Costs and Expenses. Each of the Parent and the Borrower
------------------
jointly and severally agree to pay on demand all costs and expenses of the
Agents in connection with the preparation, execution, delivery and
administration, modification and amendment of this Amendment and the other
instruments and documents to be delivered hereunder (including, without
limitation, the reasonable fees and expenses of counsel for the Agents) in
accordance with the terms of Section 15.01 of the Credit Agreement.
SECTION 6. Execution in Counterparts. This Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 7. Governing Law. This Amendment shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
SCOVILL HOLDINGS INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
SCOVILL FASTENERS INC.
/S/ MARTIN A. MOORE
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
PCI GROUP, INC.
/S/ MARTIN A. MOORE
SECRETARY
RAU FASTENER COMPANY, LLC
/S/ MARTIN A. MOORE
SECRETARY
SCOMEX, INC.
/S/ MARTIN A. MOORE
SECRETARY
CREDIT AGRRICOLE INDOSUEZ
As Administrative Agent and as a Bank
/S/ MICHAEL AROUGHETI
VICE PRESIDENT
/S/ PATRICIA FRANKEL
FIRST VICE PRESIDENT
INDOSUEZ CAPITAL FUNDING IV, L.P.
By: INDOSUEZ CAPITAL, as Portfolio Advisor
/S/ FRANCOISE BERTHELOT
6
<PAGE>
UBS AG, Stamford Branch
/S/ JAMES J. DIAZ
EXECUTIVE DIRECTOR
LOAN PORTFOLIO SUPPORT, US
/S/ RICHARD T. CONWAY
ASSOCIATE DIRECTOR
LOAN PORTFOLIO SUPPORT, US
PILGRIM AMERICA PRIME RATE TRUST
By: PILGRIM AMERICA INVESTMENTS, INC.,
as its Investment Manager
/S/ MICHEL PRINCE, CFA
VICE PRESIDENT
IBJ SCHRODER BANK & TRUST COMPANY
/S/ MARK H. MINTER
MANAGING DIRECTOR
SUMMIT BANK
/S/ NANCY Z. REIMANN
VICE PRESIDENT
SANWA BUSINESS CREDIT CORPORATION
/S/ LAWRENCE J. PLACEK
VICE PRESIDENT
7
<PAGE>
EXHIBIT 10.1.30
AMENDMENT AND WAIVER NO. 4 TO THE
CREDIT AGREEMENT
Dated as of December 31, 1998
AMENDMENT AND WAIVER NO. 4 TO THE CREDIT AGREEMENT among Scovill
Holdings Inc., a Delaware corporation (the "Parent"), Scovill Fasteners Inc., a
------
Delaware corporation (the "Borrower"), PCI Group, Inc., a Delaware corporation
--------
("PCI"), Rau Fastener Company, LLC, a Delaware limited liability company
---
("Rau"), Scomex, Inc., a Delaware corporation ("Scomex"), the banks, financial
--- ------
institutions and other institutional lenders party to the Credit Agreement
referred to below (collectively, the "Banks") and Credit Agricole Indosuez, as
-----
administrative agent and collateral agent (the "Administrative Agent").
--------------------
PRELIMINARY STATEMENTS:
(1) The Parent, the Borrower, PCI, Rau, Scomex, the Banks, the
Administrative Agent, Swiss Bank Corporation, Stamford Branch, as documentation
agent and syndication agent, and SBC Warburg Dillon Read Inc., as advisor and
arranger, have entered into a Credit Agreement dated as of November 26, 1997,
and amendments thereto dated as of January 9, 1998, February 20, 1998 and
September 30, 1998 (such Credit Agreement, as so amended, being the "Credit
------
Agreement"). Capitalized terms not otherwise defined in this Amendment and
- ---------
Waiver have the same meanings as specified in the Credit Agreement.
(2) The Borrower has requested that (i) the requirements of Section
10.10 (Funded Indebtedness to Consolidated EBITDA ratio) for the accounting
period ending on December 31, 1998 be waived, (ii) the requirements of Section
10.08 (Capital Expenditures) be waived for the fiscal year ended on December 31,
1998, (iii) the Fixed Charge Coverage Ratio and the Funded Indebtedness to
Consolidated EBITDA ratio levels set forth in Sections 10.09 and 10.10,
respectively, of the Credit Agreement be amended and (iv) the minimum net worth
level set forth in Section 10.20 of the Credit Agreement be amended.
(3) The Required Banks are, on the terms and conditions stated below,
willing to grant the request of the Borrower as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is,
------------------------------
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 3, hereby amended as follows:
(a) The definition of "Applicable Margin" in Section 1.01 is amended in
full to read as follows:
"'Applicable Margin' shall mean a percentage per annum equal to (i) in the
-----------------
case of Term Loans and Revolving Loans that are maintained as Base Rate Loans,
2.00% and (ii) in the case of Term Loans and Revolving Loans that are maintained
as Eurodollar Loans, 3.00%."
(b) Section 10.09 is amended in full to read as follows:
<PAGE>
"10.09 Fixed Charge Coverage Ratio. The Borrower shall not permit the
---------------------------
Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters
of the Borrower, in each case taken as one accounting period, ended on a date
set forth below to be less than the ratio set forth opposite such date:
Fiscal Quarter |
Ended | Ratio
---------------------------|--------------
|
March 31, 1998 | 1.1:1.0
---------------------------|--------------
June 30, 1998 | 1.1:1.0
---------------------------|--------------
September 30, 1998 | 1.1:1.0
---------------------------|--------------
December 31, 1998 | 1.1:1.0
---------------------------|--------------
March 31, 1999 | 1.0:1.0
---------------------------|--------------
June 30, 1999 | 1.0:1.0
---------------------------|--------------
September 30, 1999 | 1.0:1.0
---------------------------|--------------
December 31, 1999 | 1.0:1.0
---------------------------|--------------
March 31, 2000 | 1.0:1.0
---------------------------|--------------
June 30, 2000 | 1.0:1.0
---------------------------|--------------
September 30, 2000 | 1.0:1.0
---------------------------|--------------
December 31, 2000 | 1.0:1.0
---------------------------|--------------
March 31, 2001 | 1.1:1.0
---------------------------|--------------
June 30, 2001 | 1.1:1.0
---------------------------|--------------
September 30, 2001 | 1.1:1.0
---------------------------|--------------
December 31, 2001 | 1.1:1.0
---------------------------|--------------
March 31, 2002 |
---------------------------|--------------
and each fiscal quarter |
thereafter" | 1.15:1.0
---------------------------|--------------
(c) Section 10.10 is amended in full to read as follows:
"10.10 Funded Indebtedness to Consolidated EBITDA. The
------------------------------------------
Borrower shall not permit the ratio of Funded Indebtedness
(measured as of the applicable date listed below in this Section
10.10) of the Borrower and its Subsidiaries on a consolidated
basis to Consolidated EBITDA of the Borrower for any period of
four consecutive fiscal quarters of the Borrower, in each case
taken as one accounting period, ending on a date set forth below
to be greater than the ratio set forth opposite such date below:
Fiscal Quarter |
Ended | Ratio
--------------------------|--------------
|
March 31, 1998 | 6.50:1.0
--------------------------|--------------
June 30, 1998 | 6.50:1.0
--------------------------|--------------
September 30, 1998 | 6.50:1.0
--------------------------|--------------
December 31, 1998 | 6.50:1.0
--------------------------|--------------
March 31, 1999 | 7.50:1.0
--------------------------|--------------
June 30, 1999 | 7.50:1.0
--------------------------|--------------
September 30, 1999 | 7.00:1.0
--------------------------|--------------
December 31, 1999 | 6.75:1.0
--------------------------|--------------
March 31, 2000 | 6.40:1.0
--------------------------|--------------
2
<PAGE>
June 30, 2000 | 6.15:1.0
--------------------------|--------------
September 30, 2000 | 6.00:1.0
--------------------------|--------------
December 31, 2000 | 5.75:1.0
--------------------------|--------------
March 31, 2001 | 5.50:1.0
--------------------------|--------------
June 30, 2001 | 5.50:1.0
--------------------------|--------------
September 30, 2001 | 5.50:1.0
--------------------------|--------------
December 31, 2001 | 5.50:1.0
--------------------------|--------------
March 31, 2002 | 5.00:1.0
--------------------------|--------------
June 30, 2002 | 5.00:1.0
--------------------------|--------------
September 30, 2002 | 5.00:1.0
--------------------------|--------------
December 31, 2002 | 5.00:1.0
--------------------------|--------------
March 31, 2003 | 4.50:1.0
--------------------------|--------------
June 30, 2003 | 4.50:1.0
--------------------------|--------------
September 30, 2003 | 4.50:1.0"
and each fiscal quarter |
thereafter |
(d) Section 10.20 is amended in full to read as follows:
"10.20 Minimum Net Worth. The Borrower shall maintain at all
-----------------
times an excess of consolidated total assets over consolidated total
liabilities (excluding any amount otherwise included in consolidated
total liabilities as a result of accrued but unpaid scheduled
Dividends), in each case, of the Borrower and its Subsidiaries of not
less than $20,000,000."
SECTION 2. Waivers. The Required Banks hereby agree to waive the
-------
following:
(a) The requirements of Section 10.10 of the Credit Agreement solely
for the accounting period, consisting of four consecutive fiscal
quarters of the Borrower, ending on December 31, 1998.
(b) The requirements of Section 10.08 of the Credit Agreement solely
for the fiscal year ended December 31, 1998.
SECTION 3. Conditions of Effectiveness. This Amendment and Waiver
---------------------------
shall become effective as of the date first above written when, and only when
(i) the Administrative Agent shall have received counterparts of this Amendment
and Waiver executed by the Borrower, the other Credit Parties and the Required
Banks or, as to any of the Banks, advice satisfactory to the Administrative
Agent that such Bank has executed this Amendment and Waiver and (ii) the
Administrative Agent shall have additionally received all of the following
documents, each such document (unless otherwise specified) dated the date of
receipt thereof by the Administrative Agent (unless otherwise specified), in
form and substance satisfactory to the Administrative Agent (unless otherwise
specified), and in sufficient copies for each Bank:
(a) Certified copies of (i) the resolutions of the Board of Directors
of (A) each Credit Party approving this Amendment and Waiver and (ii) all
documents evidencing other necessary corporate action and governmental
approvals, if any, with respect to this Amendment and Waiver.
(b) A certificate of the Secretary or an Assistant Secretary of each
Credit Party certifying the names and true signatures such Credit Party
authorized to sign this Amendment and Waiver.
3
<PAGE>
(c) A certificate signed by a duly authorized officer of the Borrower
stating that:
(i) The representations and warranties contained in Section
4 are correct on and as of the date of such certificate as though made
on and as of such date other than any such representations or
warranties that, by their terms, refer to a date other than the date
of such certificate; and
(ii) No event has occurred and is continuing that
constitutes a Default.
(d) Detailed consolidated financial projections for the fiscal years
ending December 31, 1999, December 31, 2000 and December 31, 2001.
This Amendment and Waiver is subject to the provisions of Section 15.10 of the
Credit Agreement.
SECTION 4. Representations and Warranties of the Credit Parties.
----------------------------------------------------
Each Credit Party represents and warrants as follows:
(a) Corporate Status. Each of the Parent and its Subsidiaries (i)
----------------
is a duly organized and validly existing corporation or limited liability
company in good standing under the laws of the jurisdiction of its
incorporation or organization, (ii) has the corporate or other power and
authority to own its property and assets and to transact the business in
which it is engaged and presently proposes to engage and (iii) is duly
qualified and is authorized to do business and is in good standing in each
jurisdiction where the ownership, leasing or operation of property or the
conduct of its business requires such qualifications, except for failures
to be so qualified which, in the aggregate, would not be reasonably likely
to have a material adverse effect on the performance, business, assets,
nature of assets, liabilities, operations, properties, condition (financial
or otherwise) or prospects of the Borrower and its Subsidiaries taken as a
whole.
(b) Corporate Power and Authority. Each of the Parent and its
-----------------------------
Subsidiaries has the power to execute, deliver and perform the terms and
provisions of this Amendment and Waiver and the Credit Agreement as amended
by this Amendment and Waiver (collectively, the "Documents") and has taken
---------
all necessary corporate or other action to authorize the execution,
delivery and performance by it of each of such Documents. Each of the
Parent and its Subsidiaries has duly executed and delivered each of the
Documents to which it is party, and each of such Documents constitutes the
legal, valid and binding obligation of such party enforceable in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to or limiting creditors' rights generally or by general equitable
principles (regardless of whether the issue of enforceability is considered
in a proceeding in equity or at law).
(c) No Violation. Neither the execution, delivery or performance by
------------
the Parent or any of its Subsidiaries of the Documents to which it is a
party, nor compliance by it with the terms and provisions hereof or
thereof, (i) will contravene any provision of any applicable law, statute,
rule or regulation or any order, writ, judgment, injunction or decree of
any court or governmental instrumentality, (ii) will conflict with or
result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default or event of default under, or result
in the creation or imposition of (or the obligation to create or impose),
any Lien (except pursuant to the Security Documents) upon any of the
property or assets of the Parent or any of its Subsidiaries pursuant to the
terms of any indenture, mortgage, deed of trust, credit agreement or loan
agreement, or any other agreement, contract or instrument to which the
Parent or any of its Subsidiaries is a party or by which it or any of its
property or assets is bound, or to which it may be subject or (iii) will
violate
4
<PAGE>
any provision of the Certificate of Incorporation or By-Laws (or similar
organizational documents) of the Parent or any of its Subsidiaries.
(d) Governmental Approvals. No order, consent, approval, license,
----------------------
authorization or validation of, or filing, recording or registration with
(except as has been obtained or made on or prior to the Initial Borrowing
Date and as is in full force and effect), or exemption by, any governmental
or public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with, (i) the execution, delivery
and performance of any Document or (ii) the legality, validity, binding
effect or enforceability of any such Document.
(e) Litigation. Other than with respect to matters set forth on
----------
Schedule VIII to the Credit Agreement, there are no actions, suits or
proceedings pending or, to the best knowledge of the Borrower or any of its
Subsidiaries, threatened that (a) would have a material adverse effect on
the operations or financial condition of the Parent and the Borrower
together with their respective Subsidiaries, taken as a whole, or (b)
involves a reasonable possibility of (i) a material adverse effect on (x)
the ability of any of the Credit Parties to perform their respective
obligations hereunder or under any of the Credit Documents or (y) the
rights, remedies and benefits available to the Agents, the Issuing Bank and
the Banks hereunder or under any of the Credit Documents, or (c) would be
materially inconsistent with the assumptions underlying the forecasts
previously provided to the Agents, the Issuing Bank and the Banks.
(f) The Security Documents. (i) The provisions of the Security
----------------------
Agreement are effective to create in favor of the Collateral Agent for the
benefit of the Secured Creditors a legal, valid and enforceable security
interest in all right, title and interest of the respective Credit Parties
in the Collateral described therein, and the Collateral Agent, for the
benefit of the Secured Creditors, in the case of the Credit Parties, has, a
fully perfected first Lien on, and security interest in, all right, title
and interest of the respective Credit Parties, in all of the Collateral
described therein, subject to no other Liens other than Permitted Liens.
(ii) The recordation of the Security Agreement in the United
States Patent and Trademark Office, together with filings on Form UCC-
1 in all applicable jurisdictions made pursuant to the Security
Agreement, is effective, under federal and state law, to perfect the
security interest granted to the Collateral Agent in the Trademarks
and Patents covered by the Security Agreement and the filing of the
Security Agreement with the United States Copyright Office, together
with filings on Form UCC-1 made pursuant to the Security Agreement is
effective under federal and state law to perfect the security interest
granted to the Collateral Agent in the Copyrights covered by the
Security Agreement. Each of the Credit Parties party to the Security
Agreement has good and merchantable title to all Collateral described
therein, free and clear of all Liens except those described above in
subsection (i) of this Section 3(f) and in this subsection (ii).
(iii) From and after the Initial Borrowing Date, the
Mortgages create, as security for the obligations purported to be
secured thereby, a valid, enforceable and perfected security interest
in and Lien on all of the Mortgaged Properties in favor of the
Collateral Agent (or such other trustee as may be required or
desirable under local law) for the benefit of the Secured Creditors,
superior to and prior to the rights of all third persons (except that
the security interest created in the Mortgaged Properties may be
subject to the Permitted Encumbrances related thereto) and subject to
no other Liens (other than Permitted Liens). Each of the Borrower and
its Subsidiaries has good and marketable title at the time of the
grant thereof and at all times thereafter to all Mortgaged Properties,
free and clear of all Liens except those described in the first
sentence of this subsection (iii).
5
<PAGE>
SECTION 5. Further Actions Subsequent to the Effectiveness of
--------------------------------------------------
Amendment and Waiver. The Borrower hereby agrees that at any time and from time
- --------------------
to time to the extent that the Required Banks or any of the Agents request in
order to fulfill the requirements of any applicable statute, regulation or order
of any governmental body, to preserve, protect, enforce or realize upon the
security interests granted to the Secured Creditors pursuant to the Security
Documents, each Credit Party shall, and shall cause each of its Subsidiaries to,
cooperate with and promptly take all actions necessary to assist the Banks, the
Issuing Bank and the Agents, including, without limitation, to make, execute,
acknowledge, file and/or deliver to the Banks, the Issuing Bank or the Agents,
as the case may be, such information, documents, certificates, reports and other
assurances or instruments, which the Banks, the Issuing Bank or the Agents, as
the case may be, deems appropriate or advisable to comply with such statutes,
regulations or orders so as to preserve, protect, enforce or realize upon such
security interests granted to the Secured Creditors.
SECTION 6. Reference to and Effect on the Credit Documents. (a) On
-----------------------------------------------
and after the effectiveness of this Amendment and Waiver, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the Notes and
each of the other Credit Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement, as amended by this Amendment and
Waiver.
(b) The Credit Agreement, as specifically amended by this Amendment
and Waiver, is and shall continue to be in full force and effect and is hereby
in all respects ratified and confirmed. Without limiting the generality of the
foregoing, the Security Documents and all of the Collateral described therein do
and shall continue to secure the payment of all Obligations of the Credit
Parties under the Credit Documents, in each case as amended by this Amendment
and Waiver.
(c) The execution, delivery and effectiveness of this Amendment and
Waiver shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Bank or any Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
SECTION 7. Costs and Expenses. Each of the Parent and the Borrower
------------------
jointly and severally agree to pay on demand all costs and expenses of the
Agents in connection with the preparation, execution, delivery and
administration, modification and amendment of this Amendment and Waiver and the
other instruments and documents to be delivered hereunder (including, without
limitation, the reasonable fees and expenses of counsel for the Agents) in
accordance with the terms of Section 15.01 of the Credit Agreement.
SECTION 8. Execution in Counterparts. This Amendment and Waiver may
-------------------------
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment and Waiver by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment and Waiver.
SECTION 9. Governing Law. This Amendment and Waiver shall be
-------------
governed by, and construed in accordance with, the laws of the State of New
York.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be executed by their respective officers thereunto duly authorized, as
of the date first above written.
SCOVILL HOLDINGS INC.
/s/ Martin A. Moore
executive vice president
chief financial officer
SCOVILL FASTENERS INC.
/s/ Martin A. Moore
executive vice president
chief financial officer
PCI GROUP, INC.
/s/ Martin A. Moore
Secretary
RAU FASTENER COMPANY, LLC
/s/ Martin A. Moore
Secretary
SCOMEX, INC.
/s/ Martin A. Moore
Secretary
7
<PAGE>
CREDIT AGRICOLE INDOSUEZ
as Administrative Agent and as a Bank
/s/ MICHAEL AROUGHETI
VICE PRESIDENT
/s/ PATRICIA FRANKEL
FIRST VICE PRESIDENT
INDOSUEZ CAPITAL FUNDING IV, L.P.
By: INDOSUEZ CAPITAL, as Portfolio
Advisor
/s/ DAN H. SMITH
MANAGING DIRECTOR
UBS AG, Stamford Branch
/s/ DENISE M. CLERKIN
ASSOCIATE DIRECTOR
LOAN PORTFOLIO, US
/s/ THOMAS R. SALAZANO
ASSOCIATE DIRECTOR
LOAN PORTFOLIO, US
PILGRIM AMERICA PRIME RATE TRUST
By: PILGRIM AMERICA INVESTMENTS,
INC., as its Investment Manager
/s/ MICHAEL PRINCE, CFA
VICE PRESIDENT
IBJ WHITEHALL BANK & TRUST COMPANY (Formerly
known as IBJ Schroder Bank & Trust
Company)
/s/ JEFFREY M. GOODRICH
DIRECTOR
SUMMIT BANK
/s/ NANCY Z. REIMANN
VICE PRESIDENT
FLEET BUSINESS CREDIT CORPORATION
/s/ BRYAN M. CORSINI
SENIOR VICE PRESIDENT
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001051885
<NAME> SCOVILL FASTENERS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 293
<SECURITIES> 0
<RECEIVABLES> 13,451
<ALLOWANCES> 1,132
<INVENTORY> 24,573
<CURRENT-ASSETS> 37,757
<PP&E> 77,107
<DEPRECIATION> 7,686
<TOTAL-ASSETS> 217,267
<CURRENT-LIABILITIES> 19,068
<BONDS> 137,793
0
0
<COMMON> 0
<OTHER-SE> 32,535
<TOTAL-LIABILITY-AND-EQUITY> 217,267
<SALES> 92,476
<TOTAL-REVENUES> 92,476
<CGS> 68,112
<TOTAL-COSTS> 83,180
<OTHER-EXPENSES> 6,954
<LOSS-PROVISION> 677
<INTEREST-EXPENSE> 15,965
<INCOME-PRETAX> (13,623)
<INCOME-TAX> (4,744)
<INCOME-CONTINUING> (8,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,879)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001051860
<NAME> SCOVILL HOLDINGS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 293
<SECURITIES> 0
<RECEIVABLES> 13,451
<ALLOWANCES> 1,132
<INVENTORY> 24,573
<CURRENT-ASSETS> 37,757
<PP&E> 77,107
<DEPRECIATION> 7,686
<TOTAL-ASSETS> 217,267
<CURRENT-LIABILITIES> 19,068
<BONDS> 137,793
0
0
<COMMON> 0
<OTHER-SE> 32,535
<TOTAL-LIABILITY-AND-EQUITY> 217,267
<SALES> 92,476
<TOTAL-REVENUES> 92,476
<CGS> 68,112
<TOTAL-COSTS> 83,838
<OTHER-EXPENSES> 6,954
<LOSS-PROVISION> 677
<INTEREST-EXPENSE> 15,965
<INCOME-PRETAX> (14,281)
<INCOME-TAX> (4,744)
<INCOME-CONTINUING> (9,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,537)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
