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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, 1999
[ ] 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)
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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)
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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, 2000 was 9,311,000.
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SCOVILL HOLDINGS INC.
SCOVILL FASTENERS INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
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PART I Page No.
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Item 1. Business ................................................................................... 3
Item 2. Properties ................................................................................. 9
Item 3. Legal Proceedings .......................................................................... 10
Item 4. Submission of Matters to a Vote of Security-Holders ........................................ 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................... 11
Item 6. Selected Financial Data .................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................. 19
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 ......................................... 20
Item 11. Executive Compensation ..................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. 23
Item 13. Certain Relationships and Related Transactions ............................................. 25
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K ..................................... 26
INDEX OF FINANCIAL STATEMENTS .............................................................. F-1
SIGNATURES
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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, 1999, 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 brands, 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):
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1995 1996 1997 1998 1999
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Total Net Sales ..................... $66,388 $91,632 $95,861 $92,476 $89,190
Apparel Group
Net sales ....................... $46,309 $48,258 $53,262 $53,444 $52,330
% of total net sales ............ 69.8% 52.6% 55.5% 57.8% 58.7%
Industrial Group(1)
Net Sales ....................... $14,924 $19,747 $31,698 $28,161 $27,157
% of total net sales ............ 22.4% 21.6% 33.1% 30.4% 30.4%
Other(2)
Net sales ....................... $ 5,155 $23,627 $10,901 $10,871 $ 9,703
% of total net sales ............ 7.8% 25.8% 11.4% 11.8% 10.9%
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(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
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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 seeks to increase revenues from China and other countries in Asia.
Management believes this expansion will allow the Company to maintain its
customer base at U.S. manufacturers who strive to reduce costs, seek sources for
their products outside the United States and enhance their 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, 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.
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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.
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.
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 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
In the third and fourth quarters of 1999, the Company began implementing a
profit improvement plan (the "Plan"). The Plan included cost reductions in
manufacturing. The Plan is expected to result in increased operating cash flow
and operating profit and is expected to be fully implemented by the second
quarter of 2000.
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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.
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.
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.
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 primary
vendors through June 2000. Due to the favorable pricing available, the Company
secured pricing in lieu of hedging for 2000. 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 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
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European countries. The Company has an agreement with an Asian distributor,
which provides the Company with expanded distribution capability (including
stocking of products) in Southeast Asia.
Marketing. The Company services lower volume 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. In March 2000, the Company will
begin accepting orders electronically on its website.
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. 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 primary customer service center is
located in Clarkesville, Georgia and is dedicated to handling customer orders.
The center is staffed by service representatives who 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 has a sales
center and distribution warehouse at its facility in Torreon, Mexico. This
center is staffed by bi-lingual customer service representatives.
Field Service. The Company provides product support through a dedicated
field service organization. The Company has 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 its 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.
Backlog. At December 31, 1999 and 1998, the Company had an order backlog of
approximately $6.2 million and $7.3 million respectively. Management does not
believe that a material amount of orders constituting such backlog at December
31, 1999 will remain unfilled by the end of May 2000.
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 1999, 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
33% 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
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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 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 relationships based on its ability to supply quality products.
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 16 patents relating to its fasteners and attaching
machinery and it has one patent pending.
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, 1999, the Company employed 646 people. Approximately 120
were employed in administrative and sales positions and 526 were employed in
manufacturing positions. None of the Company's employees at the Clarkesville or
the Montreal facilities is represented by a labor union. The 53 non-management
employees at the Belgium facility belong to a labor union. 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
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leases manufacturing facilities in Montreal, Canada, and owns a manufacturing
facility in Braine-le-Comte, Belgium.
The Company maintains a central distribution warehouse at its Georgia facility
and a satellite warehouse in 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. 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.
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, 1999, the Company had reserves of approximately $1.6
million for environmental liabilities. Of the total reserve for environmental
liabilities, $1.3 million represents the maximum amount of 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 its cash
flow, financial condition or results of operations. 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.
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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.
The Company amended its Certificate of Incorporation in November 1999 to
convert outstanding Series B Preferred Stock into Common Stock and increased the
number of authorized shares of Common Stock from 6 million to 15 million shares.
Options, which previously existed, were for a unit consisting of one share each
of Common Stock and Series B Preferred Stock. All options now represent a unit
consisting of two shares of Common Stock. Accordingly, all option and share
information included herein has been adjusted to reflect the total number of
common shares on a retroactive basis.
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.
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, 1999, 1998 and 1997 and the years ended December 31, 1999 and 1998 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 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.
-11-
<PAGE>
<TABLE>
<CAPTION>
Predecessor--
Alper Predecessor--KSCO Company
------------ ---------------------------------------- ---------------------------------------
Period From Period From Period From Period
January 1, October 17, Year January 1, From Year Year
1995 to 1995 to Ended 1997 to Inception to Ended Ended
October 17, December 31, December 31, November 26, December 31, December 31, December 31,
1995 1995 1996 1997 1997 1998 1999
----------- ---------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales ...................... $53,589 $12,799 $91,632 $89,167 $6,694 $ 92,476 $ 89,190
Gross profit ................... 13,329 3,446 27,032 25,164 2,103 24,364 19,534
Operating income (loss)(1) ..... 5,187 1,380 7,424 7,746 627 1,732 (12,598)
Income (loss) before income
taxes and extraordinary loss .. 1,164 274 1,021 2,431 (704) (14,281) (29,691)
Net income (loss) available to
common stockholders (2) ....... $ 1,164 $ 116 $ (852) $ 1,319 $ (781) $ (9,767) $(28,602)
======= ======= ======= ======= ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Predecessor-KSCO Company
----------------------- -----------------------------------
December 31, December 31,
1995 1996 1997 1998 1999
----------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital ........................ $ 6,688 $ 17,562 $ 15,815 $ 18,689 $ 16,887
Total assets ........................... 88,577 103,866 226,202 217,267 174,596
Total debt (3) ......................... 41,538 37,718 129,848 141,313 151,095
Redeemable preferred stock ............. -- -- 9,400 -- --
Stockholders' equity ................... 18,263 21,421 31,409 32,535 (12,615)
</TABLE>
_____
(1) The Company began implementing a profit improvement plan in the third
quarter of 1999. In connection with such plan, the Company recorded a
restructuring and asset impairment charge of $12,608 which includes the
impairment of goodwill and certain fixed assets. In connection with the
profit improvement plan, the Company charged $2,676 to cost of sales, $3,469
to selling, general and administrative expenses, $12,608 to restructuring
charge and $140 to other income. Had it not been for such charges, operating
income would have been $6,015.
(2) In January 1996, the Company refinanced its previously existing credit
agreements, 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.
(3) Excludes off-balance sheet financing pursuant to the Synthetic Lease, that
existed from October 1995 to November 1996, proceeds of which were applied
toward repayment of debt of $31,268 in November 1996.
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 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). The purchase of KSCO by SAI and the mergers of SAI and
KSCO into Fasteners are together referred to herein as the "Saratoga
Acquisition."
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<PAGE>
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").
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").
In November 1999, the Company entered into an amendment to the Credit Facility
(the "Facility Amendment") which adjusted the Credit Facility's financial
covenants and provided an additional term loan of up to $10 million (the
"Tranche B Loan"). The Facility Amendment adjusted the Credit Facility's fixed
charge coverage ratio covenant, funded indebtedness to EBITDA ratio covenant and
adjusted the amortization schedule of the Term Loan. The new $10 million
Tranche B Loan was funded through multiple lenders including owners of the
Company. The new Tranche B Loan bears interest at 17.5%, will mature in
November 2004, and is subject to the requirements and conditions set forth in
the Facility Amendment and Credit Facility. The Tranche B Loan does not require
cash interest or principal payments until final maturity. The Company borrowed
$8 million under the Tranche B loan in November 1999 and used the proceeds to
fund an interest payment on its Notes and for other working capital purposes.
The Company's Tranche B Loan allows the Company to borrow up to $2 million
solely for the use of funding additional consideration pursuant to a management
consulting arrangement the Company entered into during 1999. Such borrowing is
subject to certain conditions precedent set forth in the Tranche B Loan and the
Credit Facility.
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.
During 1999, the Company recorded restructuring charges related to a profit
improvement plan (the "Plan") designed to cut the operating costs of the Company
through the outsourcing of the production of certain products previously
manufactured by the Company. The charge consisted of (1) $7.1 million in
goodwill impairment charge; (2) $3.2 million of fixed assets written off as they
were designated to be disposed of (3) $1.5 million in charges related to
severance and trademark impairment charges related to the Company's European
operations; (4) $0.5 million in severance costs for 21 employees terminated as a
result of the Plan (of which $0.2 million was accrued December 31, 1999); and
(5) $0.3 million in other miscellaneous charges.
In connection with the Plan, the Company charged $2.7 million to cost of
sales relating to reserves for discontinued inventory items created due to
either low margin or low volume, $3.4 million to general and administrative
expenses for costs related to implementing the Plan, $12.6 million to
restructuring charge (all of which was non-cash) and $0.1 to other income. The
charge to other income/expense includes $0.6 million related to legal fees from
non-operating matters, $0.7 million of product development costs of abandoned
projects, offset by $1.4 million of income resulting from an adjustment to the
contract with a former parent for environmental obligations, plus $0.2 million
of other miscellaneous charges related to the disposal of a division of the PCI
product line. The Plan is expected to result in increased operating cash flow
and operating profit. The Plan is expected to be fully implemented by the second
quarter of 2000.
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.
-13-
<PAGE>
Results of Operations
Fiscal Year 1999 Compared with Fiscal Year 1998
Net Sales. Net sales decreased $3.3 million, or 3.6% from $92.5 million to
$89.2 million. Industrial group revenues declined $1.0 million, or 3.6%, from
$28.2 million to $27.2 million. Such decline was the result of manufacturing
constraints in the PCI product line and limited product offerings. European
operation sales decreased $1.2 million, or 10.7%, from $10.9 million to $9.7
million. In addition, Apparel group revenue decreased by $1.1 million, or 2.1%,
from 53.4 million to $52.3 million.
Gross Profit. Gross profit in 1999 includes $2.7 million of one-time
charges in conjunction with the Company's profit improvement plan. Excluding
these one-time charges, gross profit decreased by $2.2 million, or 8.8%, from
$24.4 million to $22.2 million and gross margin decreased from 26.3% to 24.9%.
The Company has continued to experience negative product sales mix in its
Apparel revenues in Asia as well as within the Industrial Group. While the
Company has successfully followed infantswear production offshore, this revenue
is at lower margins due to additional freight and distribution costs.
Selling, General and Administrative Expenses ("SG&A"). SG&A increased $0.5
million, or 3.1%, from $15.7 million to $16.2 million and represented 18.2% and
17.5% of sales for the years ended December 31, 1998 and 1999, respectively.
General & Administrative expenses includes $3.4 million of non-recurring
expenses related to implementing the profit improvement plan in the third and
fourth quarters of 1999. Excluding these one-time charges, SG&A decreased by
$2.9 million, or 18.9%. Such decrease is a result of the restructuring plan
implemented in June 1998 and the profit improvement plan implemented during the
third and fourth quarters of 1999. See discussion regarding restructuring
below.
Amortization expense. The balance sheet includes $88.3 million of assets
designated as goodwill and trademarks that represent 46% of total assets. The
Company recorded an impairment charge of $7.1 million related to goodwill which
was originally allocated to fixed assets which the Company elected to dispose of
in 1999. Goodwill arises when an acquiror pays more for a business than the
fair value of the tangible and separately measurable intangible net assets
acquired. Beginning in 2000, amortization expense will be approximately $187
lower on an annual basis as a result of the goodwill impairment charge.
Generally accepted accounting principles require that this and all other
intangible assets be amortized over the period benefited. Management has
determined that the period benefited by the goodwill and trademarks will be no
less than 40 years, given, among other things, the fact that the Company has
been in existence for almost 200 years. In the event that management determined
that the period benefited would be less that 40 years due to market conditions
or other external factors, then the Company's operating results could be
significantly impacted as a result of amortizing goodwill and trademarks over a
shorter period.
Amortization expense decreased $0.6 million from $3.9 million to $3.3
million as a result of the full amortization of a non-compete agreement.
Restructuring and Asset Impairment Charge. In the third and fourth quarters
of 1999, the Company began implementing a profit improvement plan (the "Plan").
In connection with the Plan, the Company incurred one-time pre-tax charges in
the fourth quarter of 1999 of $12.6 million. These charges include the
impairment of assets, principally goodwill of $7.1 million. The impairment
charge also includes $3.2 million of fixed assets, including $0.2 million of
disposal costs, which the Company elected to dispose of in 1999 which relate to
the manufacture of certain items in its PCI product line which will be
outsourced. The assets are expected to be disposed of in early 2000. The charge
also includes $0.5 million in severance costs for 21 employees who were
-14-
<PAGE>
terminated in conjunction with the Plan, $0.2 million of this amount will be
paid in subsequent periods through June 2000 and is included in accrued
liabilities as of December 31, 1999. In addition, the charge includes $1.5
million in charges consisting of severance costs and write-off of intangibles
related to the Company's European operations. Finally, $0.3 million of
miscellaneous costs consisting primarily of costs related to terminated leases.
The Plan is expected to be implemented by the second quarter of 2000.
In connection with the Plan, the Company charged $2.7 million to cost of sales
of non-recurring charges relating to reserves for discontinued inventory items
created due to either low margin or low volume, $12.6 million to restructuring
charge and $0.1 to other income. The charge to other income/expense includes
$0.6 million related to legal fees from non-operating matters, $0.7 million of
product development costs of abandoned projects, offset by $1.4 million of
income resulting from an adjustment to the contract with a former parent for
environmental obligations, plus $0.2 million of other miscellaneous charges
related to the disposal of a division of the PCI product line. Other charges
related to the profit improvement plan included $3.4 million in SG&A.
Operating Income. Operating income decreased $14.3 million, from $1.7 million
to an operating loss of $12.6 million primarily as a result of a restructuring
charge of $12.6 million and other non-recurring items included in cost of sales
and SG&A of $2.7 million and $3.4 million, respectively.
Interest Expense. Interest expense increased $0.9 million, from $15.9
million to $16.8 million due to additional borrowings outstanding under the
Revolving Credit Facility during 1999, the Tranche B Loan established in
November 1999, in addition to an increase in the Company's interest rates.
Net Tax Provision (Benefit). The benefit for income taxes was $1.1 million in
1999 compared to $4.7 million for 1998. The decrease in the income tax benefit
is a result of the Company fully offsetting its deferred tax liabilities with
its deferred tax assets in April 1999; therefore, no income tax benefit was
recognized subsequent to April 1999.
Net Income (Loss). Net loss for 1998 was $28.6 million for 1999 compared to
$9.8 million for 1998 which is attributable to the factors discussed above.
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 11.2%, from $31.7 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. The gross margin decreased from 28.4% to 26.3% in
1998. 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. The gross margin in Europe to improved with regained business in
1999; however, the margin trends with respect to price competition in Asia are
expected to continue.
-15-
<PAGE>
Selling, General and Administrative Expenses ("SG&A"). SG&A was $15.7
million, which represents 17.0% of sales for the year ended December 31, 1998.
Amortization Expense. The Company's balance sheet at December 31, 1998
includes $98,301 of assets designated as "goodwill" and "trademarks" that
represent 45% of total assets. Goodwill arises when an acquiror pays more for a
business than the fair value of the tangible and separately measurable
intangible net assets acquired. Generally accepted accounting principles
require that this and all other intangible assets be amortized over the period
benefited. Management has determined that the period benefited by the goodwill
and trademarks will be no less than 40 years, given, among other things, the
fact that the Company has been in existence for almost 200 years. In the event
that management determined that the period benefited would be less than 40 years
due to market conditions or other external factors, then the Company's operating
results could be significantly impacted as a result of amortizing goodwill and
trademarks over a shorter period.
Restructuring and Asset Impairment Charge. In June 1998, the Company
announced a corporate restructuring plan. The plan included 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 paid to 32 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 paid
the severance benefits discussed above through June 30, 1999, the majority of
which, $0.6 million, was paid in the third and fourth quarters of 1998. The
assets related to the production of plastic components, which were disposed in
July 1998, had a net book value of $1.2 million. As a result of the
restructuring, the Company realized reductions in future operating expenses of
approximately $1.7 million in the second half of 1998 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 was $15.9 million for the year ended
December 31, 1998 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.
Net Income (Loss). Net loss for 1998 was $9.8 million, which is
attributable to the factors discussed above.
Liquidity and Capital Resources
As of December 31, 1999, $14.9 million was outstanding under the Revolving
Credit Facility with $3.2 million of availability. The Company's sources of
funds include income from operations, borrowings under the Revolving Credit
facility and borrowings under the Tranche B Loan. 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 2000. 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.
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<PAGE>
In November 1999 the Company entered into an amendment to the Credit Facility
(the "Facility Amendment") which adjusted the Credit Facility's financial
covenants and provided an additional term loan of up to $10 million (the
"Tranche B Loan"). The Facility Amendment adjusted the Credit Facility's fixed
charge coverage ratio covenant, funded indebtedness to EBITDA ratio covenant and
adjusted the amortization schedule of the Term Loan. The new $10 million
Tranche B Loan was funded through multiple lenders including owners of the
Company. The new Tranche B Loan bears interest at 17.5%, will mature in
November 2004, and is subject to the requirements and conditions set forth in
the Facility Amendment and Credit Facility. The Tranche B Loan does not require
cash interest or principal payments until final maturity. The Company borrowed
$8 million under the Tranche B Loan in November 1999 and used the proceeds to
fund an interest payment on its Notes and for other working capital purposes.
Scheduled debt repayments under the Credit Facility and the Notes are $0.3
million in 2000, $3.0 million in 2001, $6.0 million in 2002, $31.1 million in
2003, $8.0 million in 2004 and $100.0 million (representing the Notes)
thereafter.
The Company's Tranche B Loan allows the Company to borrow up to $2 million
solely for the use of funding additional consideration pursuant to a management
consulting arrangement the Company entered into during 1999. Such borrowing is
subject to certain conditions precedent set forth in the Tranche B Loan and the
Credit Facility.
Capital Expenditures
The Company's capital expenditures during 1999 aggregated approximately $4.5
million which were primarily for reconditioning and purchases of attaching
machines and plant machinery and equipment. Capital expenditures for 2000 and
2001 are expected to be less than $5.0 million per year.
Cash Flows
Net cash used in the Company's operating activities was $4.0 million for
1999. Principal working capital changes included a decrease of $3.2 million in
accounts payable, a $1.6 million increase in accrued expenses, and a $6.1
million decrease in inventory. The Company's cash used in investing activities
was $4.5 million for capital expenditures. Net cash provided by financing
activities was $8.6 million, reflecting an increase in borrowings under the
Revolving Credit Facility of $2.0 million, borrowings of $8.0 million of the
Tranche B Loan, net of repayments of $1.4 million.
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.
The Indenture governing the Notes and the Credit Facility each 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,
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<PAGE>
restructuring and assets impairment charge, non-recurring charges and management
fees. EBITDA, as defined, for the purpose of this report and under the Company's
Credit Facility are consistent.
The Company has included information concerning EBITDA, as defined, in this
report because it is used by certain investors as a measure of a company's
ability to service its debt. EBITDA, as defined, 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, as defined, 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 had been calculated by the Company:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Net Income (loss)....................... $(28,602) $(9,537)
Income tax (benefit).................... (1,089) (4,744)
Interest expense........................ 16,839 15,965
Other expense........................... 254 48
Depreciation............................ 9,775 10,006
Amortization............................ 3,309 3,938
Management fee.......................... 600 658
Non-recurring charges................... 6,005 --
Restructuring and asset
impairment charge...................... 12,608 2,968
-------- -------
EBITDA $ 19,699 $19,302
======== =======
</TABLE>
For the year ended December 31, 1999 compared to the year ended December 31,
1998, EBITDA, as defined, increased $0.4 million, or 2.1%, from $19.3 million to
$19.7 million primarily as a result of a decrease in SG&A expenses (excluding
non-recurring charges), offset by a decrease in gross profit.
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 1999, the Company secured the supply of a substantial portion of its
copper needs with primary vendors through June 2000. 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.
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<PAGE>
Year 2000
As of the date of this report, the Company has not incurred any significant
operating difficulties related to the Year 2000 issue. The Company's Year 2000
efforts included implementing and testing new systems. The Company also
communicated with a significant portion of its major customers, vendors and
suppliers to determine the extent to which the Company may have been vulnerable
to those third parties' failure to remediate their own Year 2000 issues. This
process of addressing Year 2000 issues was essentially completed by September
1999.
Based on experience to date, the Company does not believe that any problems
resulting from the Year 2000 issue will have a material adverse effect on its
financial condition or results of operations.
The costs incurred related to systems implementation in 1999 and 1998 were
not material to the Company's results of operations, financial condition or cash
flow.
Accounting Standards
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, as amended by statement of Financial Accounting Standards
No. 137, will be effective for the Company's fiscal year 2001. 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 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; 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; 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.
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<PAGE>
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-22 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
Part III
Item 10. Directors and Executive Officers
Executive Officers and Directors
Set forth below are the names, ages as of December 31, 1999, 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>
John H. Champagne ............ 51 President
Martin A. Moore .............. 40 Executive Vice President, Treasurer, Chief Financial Officer and Secretary
Robert W. Feltz .............. 50 Executive Vice President--Sales and Marketing
William F. Andrews ........... 68 Chairman of the Board
Christian L. Oberbeck ........ 40 Director
Kirk R. Ferguson............... 32 Director
Alan N. Colner................. 45 Director
</TABLE>
Mr. Champagne joined the Company as Vice President of Manufacturing in 1996.
He has also served as Executive Vice President - Industrial Group and then
Executive Vice President - Engineering. Mr. Champagne was appointed to
President in January 2000. 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. 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.
-20-
<PAGE>
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, 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 and several privately held companies.
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. 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) 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, (ii) Saratoga will have the right to designate
up to five directors and (iii) 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.
-21-
<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. Champagne, 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. Champagne serves as
President and has an annual salary of $165,000. 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 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, 1999.
Compensation of Executive Officers
The following Summary Compensation Table contains information concerning the
compensation provided by the Company in 1999 and 1998 to President and the other
executives other than the President (together, the "Named Executive Officers")
of the Company.
-22-
<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>
John H. Champagne ............. 1999 $140,795 $20,000 -- $3,634(1)
President 1998 136,500 -- 2,844(1)
Martin A. Moore ............... 1999 $187,819 20,000 -- 3,522(1)
Executive Vice President 1998 187,819 -- 5,195(2)
and Chief Financial Officer
Robert W. Feltz ............... 1999 $162,500 20,000 -- 3,047(1)
Executive Vice President-- 1998 162,500 -- -- 4,562(3)
Sales and Marketing
David J. Barrett (4) .......... 1999 $243,750 -- -- 4,570(1)
Former President and 1998 243,750 -- -- 6,594(5)
Chief Executive Officer
</TABLE>
____
(1) Represents matching contributions made by the Company to the Named
Executive Officers' accounts under the Company's 401(k) plan.
(2) 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).
(3) 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).
(4) Effective September 23, 1999, David J. Barrett resigned his position with
the Company.
(5) 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).
The Company granted no options to purchase shares of Common Stock during 1999.
The Company has no outstanding stock appreciation rights ("SARs") and granted
no SARs during fiscal 1999.
The following table sets forth information of the value of unexercised options
held at December 31, 1999 by the Named Executive Officers.
<TABLE>
<CAPTION>
Fiscal Year-End Stock Table
Number of Securities Underlying Unexercised Value of Unexercised
Options at December 31, In-The Money Options at
1999(1) December 31, 1999
--------------------------------------------- ------------------------------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---------------------- --------------------------------------------- ------------------------------------------
<S> <C> <C>
David J. Barrett(2) ... 107,472/0 $800,000/0
Martin A. Moore(3) .... 87,322/0 650,000/0
Robert W. Feltz ....... 73,216/0 545,000/0
John H. Champagne(3) .. 40,302/0 300,000/0
</TABLE>
_____
(1) Options are exercisable for two shares of Common Stock.
(2) David J. Barrett retains ownership of his unexercised options through
November 26, 2007.
(3) 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, 2000 of (i) each person known by
Holdings to own beneficially 5% or more of the Common Stock, (ii)
-23-
<PAGE>
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)............................................... 6,255,000 67.2
Co-Investment Partners, L.P. (2).............................................. 2,000,000 21.5
Moore Global Investments, Ltd./ Remington Investment Strategies, L.P. (3)..... 1,400,000 15.0
WLD Partners, Ltd. (4)........................................................ 800,000 8.6
William F. Andrews (5)........................................................ 40,302 *
Christian L. Oberbeck (1)..................................................... 6,255,500 67.2
Alan N. Colner (3)............................................................ 1,400,000 15.0
David J. Barrett (6).......................................................... 214,944 2.3
Martin A. Moore (5)........................................................... 174,644 1.9
John H. Champagne (5)......................................................... 80,604 *
Robert W. Feltz (6)........................................................... 146,432 1.6
All directors and executive officers as a group (9 persons)(6)................ 6,911,926 74.2
</TABLE>
_____
* Less than one percent.
(1) Includes (i) 641,828 shares held by Saratoga Partners III, C.V. and (ii)
1,344,000 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 Mr. Oberbeck a director of the Company, to vote
the shares of Common Stock held or controlled by Saratoga Partners III, L.P.
Mr. Oberbeck disclaims beneficial ownership of the shares of Common Stock
held by Saratoga Partners III, L.P.
(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 1,344,000 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
-24-
<PAGE>
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) Represents Common Stock issuable upon exercise of options to purchase Common
Stock pursuant to option agreements.
(7) Includes 6,255,000 shares owned and/or voted by Saratoga and as to which Mr.
Oberbeck exercises voting power. Mr. Oberbeck disclaims 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 1999,
the Company recorded $600,000 of management fees to Saratoga and at December 31,
1999, accrued liabilities includes $300,000 of accrued management fees. The
Company paid $83,000 to Saratoga in December 1999 for fees related to the
Facility Amendment. 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 134,000 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.
-25-
<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, 1999 and 1998
Consolidated Statements of Operations for the periods ended December 31,
1999, December 31, 1998, and December 31, 1997
Consolidated Statements of Cash Flows for the periods ended December 31,
1999, December 31, 1998, and December 31, 1997
Consolidated Statements of Stockholders' Equity for the periods ended
December 31, 1999, December 31, 1998, and December 31, 1997
Notes to Consolidated Financial Statements
(2) Supplemental Consolidated Financial Statement Schedules for each of the
periods in the three years ended December 31, 1999:
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.++
3.6 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.++
3.11 Certificate of Amendment of Certificate of Incorporation of Scovill Fasteners Inc.
3.12 By-laws of Scovill Fasteners Inc.++
3.13 Certificate of Amendment of Certificate of Incorporation of Scovill Holdings Inc.
4.02 Amended and Restated Credit Agreement.***
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).+
10.1.1 Management Services Agreement among Scovill Fasteners Inc. and Saratoga Partners III, L.P.**
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ---------------------------------------------------------------------------------------------------------------
<C> <S>
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, 1998.++
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.**
21.1 List of Subsidiaries of Scovill Holdings Inc.++
21.2 List of Subsidiaries of Scovill Fasteners Inc.+
27.1 Financial Data Schedule - Scovill Holdings Inc.
27.2 Financial Data Schedule - Scovill Fasteners Inc.
</TABLE>
_____
+ 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.
*** Incorporated by Reference to Exhibit of the same number to the Company's
Form 10-Q/A as filed with the Securities and Exchange Commission on
December 16, 1999
(b) Reports of Form 8-K
No Form 8-K was filed during the last quarter of the year ended December 31,
1999.
-27-
<PAGE>
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................................................ F-2
Consolidated balance sheets as of December 31, 1999 and 1998............................................ F-3
Consolidated statements of operations for the periods ended December 31, 1999, December 31, 1998,
November 26, 1997 and December 31, 1997................................................................ F-4
Consolidated statements of cash flows for the periods ended December 31, 1999, December 31, 1998,
November 26, 1997 and December 31, 1997................................................................ F-5
Consolidated statements of stockholders' equity for the periods ended December 31, 1999, December 31,
1998, November 26, 1997 and December 31, 1997.......................................................... 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, 1999
and December 31, 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1999 and
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. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999 and 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,
in conformity with accounting principles generally accepted in the United
States.
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 17, 2000
F-2
<PAGE>
Scovill Holdings Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 405 $ 293
Accounts receivable, net of allowances of $1,722 and $1,132, respectively......... 12,350 12,319
Inventories....................................................................... 18,493 24,573
Other............................................................................. 522 572
-------- --------
Total Current Assets........................................................... 31,770 37,757
Property, Plant and Equipment, Net.................................................. 60,746 69,421
Intangible Assets................................................................... 98,937 110,089
-------- --------
$191,453 $217,267
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt.............................................. $ 910 $ 3,530
Accounts payable.................................................................. 5,200 8,379
Accrued liabilities............................................................... 7,589 6,202
Accrued interest.................................................................. 1,184 957
-------- --------
Total Current Liabilities...................................................... 14,883 19,068
-------- --------
Long-Term Liabilities
Revolving line of credit.......................................................... 14,878 12,900
Long-term debt.................................................................... 134,141 124,893
Employee benefits................................................................. 21,233 24,032
Deferred income taxes............................................................. -- 319
Other............................................................................. 2,076 3,520
-------- --------
Total Long-Term Liabilities.................................................... 172,328 165,664
-------- --------
Commitments and Contingencies
Series A Cumulative Redeemable Exchangeable Preferred Stock, $.001 par value,
200,000 shares authorized, none outstanding at December 31, 1999 and 1998
(liquidation preference of $100 per share)....................................... -- --
-------- --------
Stockholders' Equity
Preferred Stock, $.0001 par value, 1,000,000 shares authorized none issued and
outstanding at December 31, 1999.............................................
Series B Preferred Stock, $.0001 par value, 6,000,000 shares authorized,
4,655,500 shares issued and outstanding at December 31, 1998...................... -- --
Common Stock, $.0001 par value, 15,000,000 and 6,000,000 shares authorized, at
December 31, 1999 and 1998, respectively 9,311,000 and 4,655,500 shares issued
and outstanding at December 31, 1999 and 1998, respectively ...................... -- --
Additional paid-in capital--preferred.............................................. 49,942 49,942
Additional paid-in capital--common................................................. 503 503
Predecessor basis adjustment....................................................... (7,831) (7,831)
Retained earnings (deficit)........................................................ (39,150) (10,548)
Accumulated other comprehensive income............................................. 778 469
-------- --------
Total Stockholders' Equity..................................................... 4,242 32,535
-------- --------
$191,453 $217,267
======== ========
</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
Year Ended Year Ended Inception January 1, 1997
December 31, December 31, through to
1999 1998 December 31, November 26,
1997 1997
------------------------------------------------------- ---------------
<S> <C> <C> <C> <C>
Net sales.............................. $ 89,190 $92,476 $6,694 $89,167
Cost of sales.......................... 69,656 68,112 4,591 64,003
-------- ------- ------ -------
Gross profit......................... 19,534 24,364 2,103 25,164
Selling expenses....................... 9,169 8,861 682 8,857
General and administrative
expenses.............................. 7,046 6,865 463 5,816
Amortization expense................... 3,309 3,938 331 2,745
Restructuring and asset
impairment charge .................. 12,608 2,968 -- --
-------- ------- ------ -------
Operating Income(loss)............... (12,598) 1,732 627 7,746
Other expense, net..................... 254 48 114 1,621
Interest expense....................... (16,839) 15,965 1,217 3,694
-------- ------- ------ -------
Income (loss) before income
tax provision (benefit)............... (29,691) (14,281) (704) 2,431
Income tax provision
(benefit)............................. (1,089) (4,744) (38) 1,112
-------- ------- ------ -------
Net income (loss)...................... $(28,602) $(9,537) $ (666) $ 1,319
-------- ------- ------ -------
Dividends and accretion on
redeemable preferred stock............ -- 230 115 --
Net income (loss) available
to common stockholders................ $(28,602) $(9,767) $ (781) $ 1,319
======== ======= ====== =======
</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 Year Ended through to
December 31, December 31, December 31, November 26,
1999 1998 1997 1997
------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) available to common
stockholders.............................. $(28,602) $ (9,767) $ (781) $ 1,319
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............... 13,973 15,025 835 7,822
Assets impairment charge....................... 10,063 940 -- --
Non-operating preferred stock dividends.... -- (345) -- --
Deferred income taxes...................... (1,521) (4,895) 1,502 (287)
Changes in operating assets and liabilities
Accounts receivable, net................. (31) (817) 1,147 (3,009)
Inventories.............................. 6,080 (281) (1,656) (4,187)
Other current assets..................... 50 267 (125) 461
Accounts payable......................... (3,179) (3,079) (1,946) 2,816
Accrued liabilities...................... 1,614 (3,840) 3,217 1,139
Other assets and liabilities............. (2,433) 1,124 (1,490) (2,437)
-------- -------- --------- -------
Net cash (used in) provided by operating
activities.................................... (3,986) (5,668) 703 3,637
-------- -------- --------- -------
Cash Flows from Investing Activities:
Cash paid in business acquisitions, net of
cash acquired................................. -- -- (94,615) --
Acquisition costs.............................. -- -- (11,105) --
Additions to property, plant and equipment..... (4,508) (8,332) (31,112) (6,354)
-------- -------- --------- -------
Net cash used in investing activities.......... (4,508) (8,332) (136,832) (6,354)
-------- -------- --------- -------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit.. 1,978 12,900 (12,230) 2,806
Issuance of long-term debt..................... 8,000 -- 128,000 --
Repayments of long-term debt................... (1,372) (1,428) (26,320) (250)
Issuance of preferred stock.................... -- -- 49,100 --
Issuance of common stock....................... -- 10,345 400 1,240
Redemption of preferred stock................. -- (10,345) -- --
-------- -------- --------- -------
Net cash provided by financing activities...... 8,606 11,472 138,950 3,796
-------- -------- --------- -------
Net (Decrease)/Increase in Cash............... 112 (2,528) 2,821 1,079
Cash and Cash Equivalents at Beginning of
Period...................................... 293 2,821 -- 603
-------- -------- --------- -------
Cash and Cash Equivalents at End of Period..... $ 405 $ 293 $ 2,821 $ 1,682
======== ======== ========= =======
Supplemental Disclosure of Cash Flow
Information:..................................
Interest paid.............................. $ 15,460 $ 16,007 $ 318 $ 4,066
======== ======== ========= =======
Income taxes paid.......................... $ 264 $ 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>
Accumulated Other
Comprehensive Income
---------------------- Series A
Series B Additional Predecessor Retained Foreign Compre- Redeemable
Common Preferred Paid- Basis Earnings Currency hensive Preferred
Stock Stock in Capital Adjustment (Deficit) Translation Income Stock
The Predecessor -KSCO
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 89 $0 $ 22,086 $ 0 $ (736) $ (18) $ (842) $ 0
-------------------------------------------------------------------------------------------
Foreign Currency Translation (291) (291)
Tax benefit - option exercise 5 1,224
Net Income 1,319 1,319
-------------------------------------------------------------------------------------------
Balance, November 26, 1997 $ 94 $0 $ 23,310 $ 0 $ 583 $(309) $ 1,028 $ 0
-------------------------------------------------------------------------------------------
The Company
===================================================================================================================================
Acquisition - Elimination of
Predecessor-KSCO
Equity (Note 1) $(94) $0 $(23,310) $ 0 $ (583) 309 - $ 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 $ 0 $0 $ 40,100 $(7,831) $ (781) $ (79) $ (860) $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 $ 0 $0 $ 50,445 $(7,831) $(10,548) $ 469 $ (9,219) $ 0
-------------------------------------------------------------------------------------------
Tax benefit - option exercise
Net Income (loss) available to common
stockholders $(28,602) $(28,602)
Foreign Currency Translation $ 309 309
-------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 0 $0 $ 50,445 $(7,831) $(39,150) $ 778 $(28,293) $ 0
===========================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are integral part of
these statements.
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, 1999 and 1998 and the
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and 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 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.
The Saratoga Acquisition and the related application of purchase accounting
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.
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.
F-7
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 1999 and 1998 were $360 and
$3,563 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 44.4% and 50.0% of
all inventories as of December 31, 1999 and 1998, 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 of the
acquisition date, 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, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999
Accumulated
Gross amortization Net
--------- ------------ ---------
<S> <C> <C> <C>
Goodwill ........................ $ 79,057 $(4,497) $ 74,560
Trademarks ...................... 14,500 (755) 13,745
Deferred financing fees ......... 12,348 (2,306) 10,042
Covenants not to compete ........ 2,547 (2,072) 475
Other ........................... 115 -- 115
-------- ------- --------
$108,567 $(9,630) $ 98,937
======== ======= ========
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
======== ======= ========
</TABLE>
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 represents an agreement with Alper, a former
parent of Fasteners, and is amortized over 5 years.
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 policy with respect to the recoverability of goodwill includes an
assessment of discounted projected future cash flows, before interest, using an
estimated economic rate of return that would be customary in determining fair
value in current markets for similar businesses.
The Company recorded an impairment charge of $7.1 million related to
goodwill which was originally allocated to fixed assets which the Company
elected to dispose of in 1999. Goodwill arises when an acquiror pays more for a
business than the fair value of the tangible and separately measurable
intangible net assets acquired. The impairment charge is recorded on the income
statement in "Restructuring and asset impairment charge." The remaining goodwill
will continue to be amortized over forty years.
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.
F-9
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
Stock
The Company amended its Certificate of Incorporation in November 1999 to
convert outstanding Series B Preferred Stock into Common Stock and increased the
number of authorized shares of Common Stock from 6 million to 15 million shares.
Options, which previously existed, were for a unit consisting of one share each
of Common Stock and Series B Preferred Stock. All options now represent a unit
consisting of two shares of Common Stock. Accordingly, all option and share
information included herein has been adjusted to reflect the total number of
common shares on a retroactive basis.
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
as a component of Accumulated Other Comprehensive Income. Realized gains and
losses from foreign currency transactions during the periods ended December 31,
1999, 1998 and 1997 and November 26, 1997 were not material.
Restructuring Charge
During 1999, the Company recorded restructuring charges related to a profit
improvement plan (the "Plan") designed to cut the operating costs of the Company
through the outsourcing of the production of certain products previously
manufactured by the Company. The charge consisted of (1) $7.1 million in
goodwill impairment charge as discussed above; (2) $3.2 million of fixed assets
written off as they were designated to be disposed of (3) $1.5 million in
charges related to severance and trademark impairment charges related to the
Company's European operations; (4) $0.5 million in severance costs for 21
employees terminated as a result of the Plan (of which $0.2 million was accrued
December 31, 1999); and (5) $0.3 million in other miscellaneous charges.
In connection with the Plan, the Company charged $2.7 million to cost of
sales relating to reserves for discontinued inventory items created due to
either low margin or low volume, $3.4 million to general and administrative
expenses for costs related to implementing the Plan, $12.6 million to
restructuring charge (all of which was non-cash) and $0.1 to other income. The
charge to other income/expense includes $0.6 million related to legal fees from
non-operating matters, $0.7 million of product development costs of abandoned
projects, offset by $1.4 million of income resulting from an adjustment to the
contract with a former parent for environmental obligations, plus $0.2 million
of other miscellaneous charges related to the disposal of a division of the PCI
product line.
F-10
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
$217, $199, $34 and $304, for the periods ended December 31, 1999, 1998 and 1997
and November 26, 1997, 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 primary
vendor through June 2000. Due to the favorable pricing available, the Company
secured pricing in lieu of hedging for 2000. 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. There were no commodity options
held at December 31, 1999 and 1998.
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.
New Accounting Standards
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, as amended by Statement of Financial Accounting Standards
No. 137, will be effective for the Company's fiscal year 2001. Management
believes that this Statement will not have a significant impact on the Company's
financial condition or results of operations.
F-11
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 1999, 1998 and 1997 includes only
net income (loss) and foreign currency translation.
Note 3. Inventories
Inventories as of December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Raw Material....................... $ 1,555 $ 1,901
Work in Process.................... 4,416 4,797
Attaching Machine Spare Parts ..... 7,822 8,219
Finished Goods..................... 4,700 9,656
------- -------
$18,493 $24,573
======= =======
</TABLE>
The value of inventories is reported net of allowances for obsolete, slow-moving
and discontinued product line inventory of $991 and $1,113 as of December 31,
1999 and 1998, respectively. If the FIFO method had been used to value all
inventories, inventories would have been decreased by $610 and $862 at December
31, 1999 and 1998. In 1999, the partial liquidation of the 1997 LIFO base layer
decreased cost of products sold by $334. In 1998, the impact of the partial
liquidation of the 1997 LIFO base layer was inconsequential.
Note 4. Property, Plant and Equipment
Property, plant and equipment as of December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Land and improvements...................... $ 324 $ 325
Computer equipment and software............ 2,458 2,329
Buildings and improvements................. 7,735 7,570
Attaching equipment........................ 40,280 38,048
Machinery, equipment and tooling........... 25,249 28,835
-------- -------
76,046 77,107
Accumulated depreciation................... (15,300) (7,686)
-------- -------
$ 60,746 $69,421
======== =======
</TABLE>
Depreciation expense was $9,775, $10,006, $440 and $5,077 for the periods
ended December 31, 1999, 1998 and 1997 and November 26, 1997, respectively.
F-12
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Accrued Liabilities
Accrued liabilities as of December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Salaries, wages and benefits..... $1,580 $1,155
Pension, current portion......... 2,360 1,107
Deferred taxes................... -- 1,202
Other............................ 3,649 2,738
------ ------
$7,589 $6,202
====== ======
</TABLE>
Note 6. Long-term Debt
Long-term debt as of December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Senior notes.................. $100,000 $100,000
Term note..................... 25,500 27,000
Tranche B Loan................ 8,000 --
Revolving line of credit...... 14,878 12,900
Other......................... 1,345 1,173
Capital lease obligations..... 206 250
-------- --------
149,929 141,323
Less--Current maturities...... (910) (3,530)
-------- --------
Total long-term debt.......... $149,019 $137,793
======== ========
</TABLE>
Senior Notes
The Notes are guaranteed by Holdings. Holdings has no operations other than
the payment of a management fee to Saratoga (See Note 13.) The Notes and the
guarantee are senior unsecured obligations of the Company and Holdings and bears
interest at 11.25% per annum. Interest on the Notes is payable semi-annually on
May 30 and November 30 of each year and mature on November 26, 2007. 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.
All balance sheet amounts are identical between Holdings and Fasteners for
each of December 31, 1999 and 1998. The statement of operations for Holdings for
the year ended December 31, 1999 and 1998 includes a management fee to Saratoga
included in general and administrative expenses for $600 and $658, respectively
which is not reflected in Fasteners.
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 Credit Facility is subject to
limitations based on eligible accounts receivable, eligible inventory and
maximum over advance allowance, as defined. The Credit Facility, as amended,
F-13
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allows Fasteners to choose among interest rate options of LIBOR plus 3.0% to
3.25% or the Base Rate plus 2.0% to 2.25%. 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.
In November 1999, the Company entered into an amendment to the Credit Facility
(the "Facility Amendment") which adjusted the Credit Facility's financial
covenants and provided an additional term loan of $10 million (the "Tranche B
Loan"). The Facility Amendment adjusted the Credit Facility's fixed charge
coverage ratio covenant, funded indebtedness to EBITDA ratio covenant and
adjusted the amortization schedule of the Term Loan. The new $10 million
Tranche B Loan was funded through lenders including owners of the Company. The
new Tranche B Loan bears interest at 17.5%, will mature in November 2004, and is
subject to the requirements and conditions set forth in the Facility Amendment
and Credit Facility. The Tranche B Loan does not require cash interest or
principal payments until final maturity. The Company borrowed $8 million under
the Tranche B Loan in November 1999 and used the proceeds to fund an interest
payment on its Notes and for other working capital purposes.
As of December 31, 1999, Fasteners had borrowings of $25,500 (at LIBOR)
outstanding under the Term Loan with $14,878 outstanding under the Revolving
Credit Facility and $3,222 of unused credit availability. 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. The Credit Facility expires in November 2007. Under
the Credit Facility, interest rates ranged from 7.7% at LIBOR to 10.75% at Base
Rate and the weighted average interest rate was 8.5% for the year ended December
31, 1999. The interest rate was 9.39% at LIBOR and 10.75% at Base Rate at
December 31, 1999. As of December 31, 1999, the Company believes that it is in
compliance with all provisions of its various loan agreements.
The Company's Tranche B Loan allows the Company to borrow up to $2 million
solely for the use of funding additional consideration pursuant to a management
consulting arrangement the Company entered into during 1999. Such borrowing is
subject to certain conditions precedent set forth in the Tranche B Loan and the
Credit Facility.
Other debt at December 31, 1999 and 1998 includes outstanding obligations of
Scovill-Europe.
Maturities, excluding capital lease obligations, of long-term debt as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000................................. $ 789
2001................................. 3,430
2002................................. 6,264
2003................................. 31,173
2004................................. 8,041
Thereafter........................... 100,026
--------
$149,723
========
</TABLE>
The carrying value of long-term debt at December 31, 1999 and 1998
approximates fair value.
F-14
<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 7. Other Long Term Liabilities
Other long term liabilities as of December 31, 1999 and 1998 consisted
primarily of liabilities for environmental matters of $1,576 and $3,005 at
December 31, 1999 and 1998, respectively.
Note 8. Other Expense
Other expense for the year ended December 31, 1999 included income of $1.4
million related to the settlement of an environmental liability, $0.6 million of
expense related to legal fees incurred for non-operating matters, $0.7 million
of product development costs for abandoned projects, $0.2 million for the loss
on sale of a division and $0.2 million of other expenses.
Note 9. Lease Commitments
Operating Leases
Fasteners leases office space, office equipment and vehicles for various
periods through the year 2004 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, 1999, future
minimum annual rental commitments are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000.............................. $474
2001.............................. 217
2002.............................. 111
2003.............................. 93
2004 and thereafter............... 12
----
Total minimum lease payments...... $907
====
</TABLE>
Rental expense for operating leases was $1,225, $1,182, $493 and $5,422 for
the periods ended December 31, 1999, 1998 and 1997 and November 26, 1997,
respectively.
Note 10. Restructuring and Asset Impairment Charge
During 1999, the Company recorded restructuring charges related to a profit
improvement plan (the "Plan") designed to cut the operating costs of the Company
through the outsourcing of the production of certain products previously
manufactured by the Company. The charge consisted of (1) $7.1 million in
goodwill impairment charge as discussed above; (2) $3.2 million of fixed assets
written off as they were designated to be disposed of (3) $1.5 million in
charges related to severance and trademark impairment charges related to the
Company's European operations; (4) $0.5 million in severance costs for 21
employees terminated as a result of the Plan (of which $0.2 million was accrued
December 31, 1999); and (5) $0.3 million in other miscellaneous charges.
In connection with the Plan, the Company charged $2.7 million to cost of
sales relating to reserves for discontinued inventory items created due to
either low margin or low volume, $3.4 million to general and administrative
expenses for costs related to implementing the Plan, $12.6 million to
restructuring charge (all of which was non-cash) and $0.1 to other income. The
charge to other income/expense includes $0.6 million related to legal fees from
non-operating matters, $0.7 million of product development costs of abandoned
projects, offset by $1.4 million of income resulting from an adjustment to the
contract with a former parent for environmental obligations, plus $0.2 million
of other miscellaneous charges related to the disposal of a division of the PCI
product line.
F-15
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. 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 January 1, 1997
Year Ended Year Ended Inception to To November 26,
December 31, 1999 December 31, 1998 December 31, 1997 1997
------------------------------------------------------------ ------------------
<S> <C> <C> <C> <C>
Domestic...... $(28,693) $(15,015) $ (6) $ 505
Foreign....... (998) 734 (698) 1,926
-------- -------- ----- ------
$(29,691) $(14,281) $(704) $2,431
======== ======== ===== ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Company Predecessor - KSCO
------------------------------------------------------------ ------------------
Period from
Period from January 1, 1997
Year Ended Year Ended Inception to To November 26,
December 31, 1999 December 31, 1998 December 31, 1997 1997
------------------------------------------------------------ ------------------
<S> <C> <C> <C> <C>
Current...... $ -- $ -- $(1,360) $1,065
Deferred..... (1,521) (4,895) 1,440 (415)
Foreign...... 432 151 (118) 462
------- ------- ------- ------
$(1,089) $(4,744) $ (38) $1,112
======= ======= ======= ======
</TABLE>
The difference between the United States Federal statutory income tax rate and
the consolidated effective income tax rate is summarized as follows:
F-16
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Company Predecessor - KSCO
---------------------------------------------------------- ------------------
Period from
Period from January 1, 1997
Year Ended Year Ended Inception to To November 26,
December 31, 1999 December 31, 1998 December 31, 1997 1997
---------------------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Federal income tax (benefit)
expense at statutory rates....... $(10,095) $(4,856) $(239) $ 827
State income tax (benefit)
provision, net of federal taxes... (1,485) (714) (35) 122
Valuation Allowance................ 4,838 -- -- --
Benefit for net operating
Losses........................... -- -- -- (362)
Amortization of goodwill/
deferred financing fees.......... 842 852 56 552
Non-deductible Goodwill
Impairment....................... 4,334 -- -- --
Foreign tax impact................. 432 (61) 175 65
Other.............................. 45 35 5 (92)
-------- ------- ----- ------
$ (1,089) $(4,744) $ (38) $1,112
======== ======= ===== ======
</TABLE>
Deferred tax consequences of significant temporary differences are as follows
as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets........................................... $(16,261) $(16,376)
Trademarks............................................. (5,237) (5,548)
Inventories............................................ (155) (1,081)
Other.................................................. (48) (46)
-------- --------
(21,701) (23,051)
-------- --------
Deferred tax assets:
NOL carry forward (expiring in 2012 and 2018)......... 17,617 10,892
Pension and Postretirement health and life benefits... 8,078 9,242
Environmental matters................................. 610 1,172
Other................................................. 234 224
-------- --------
26,539 21,530
-------- --------
Net tax (liability) asset................................ 4,838 (1,521)
-------- --------
Valuation allowance...................................... (4,838) --
-------- --------
$ - $ (1,521)
======== ========
</TABLE>
Note 12. 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.
F-17
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company will contribute $2,360 to its pension plan for each of the
years 2000 and 2001.
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 $865 and $1,131 at December 31, 1999 and 1998,
respectively of which $710 and $972 was classified as long-term at December 31,
1999 and 1998, respectively. Pension expense for this plan was $81, $83, $7 and
$77 for the periods ended December 31, 1999 and 1998 and 1997 and November 26,
1997, 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.
<TABLE>
<CAPTION>
Pension Plan Postretirement Benefit Plan
---------------------- ---------------------------
December 31, December 31,
1999 1998 1999 1998
---------------------- ---------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year........................ $29,892 $29,364 $13,796 $14,451
Interest cost.................................................. 2,059 2,018 1,169 1,019
Gain/Loss on obligation........................................ (902) 1,674 146 --
Benefits paid.................................................. (3,079) (3,164) (1,799) (1,674)
------- ------- ------- -------
Benefit obligation at end of year.............................. 27,970 29,892 13,312 13,796
Less fair value of plan assets................................. 19,635 19,221 -- --
------- ------- ------- -------
Obligation in excess of plan assets............................ 8,335 10,671 13,312 13,796
Unrecognized net loss (gain)................................... (933) 300 -- --
------- ------- ------- -------
Accrued pension/postretirement costs........................... 9,268 10,371 13,312 13,796
Less current portion........................................... 2,360 1,107 -- --
------- ------- ------- -------
Long-term liabilities.......................................... $ 6,908 $ 9,264 $13,312 $13,796
======= ======= ======= =======
<CAPTION>
Pension Plan Postretirement Benefit Plan
---------------------- ---------------------------
December 31, December 31,
1999 1998 1999 1998
---------------------- ---------------------------
Fair value of plan assets at the beginning of the year......... $19,221 $20,272 N/A N/A
Actual return of plan assets................................... 2,508 2,113
Employer contributions......................................... 985 --
Benefits paid.................................................. (3,079) (3,164)
Fair value of plan assets at end of year....................... $19,635 $19,221
======= =======
</TABLE>
F-18
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net pension and postretirement benefit cost consisted of the following:
<TABLE>
<CAPTION>
Pension Plan
--------------------------------------------------------------------------------
Company Predecessor-KSCO
----------------------------------------------------------- ------------------
Period from Period from
Year Ended Year Ended Inception to January 1, 1997 to
December 31, 1999 December 31, 1998 December 31, 1997 November 26, 1997
----------------------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Interest cost...................... $ 2,059 $ 2,018 $ 177 $ 1,945
Service cost....................... -- -- -- --
Actual return on plan assets.......... (1,874) (2,113) (122) (1,340)
Net amortization and deferral......... -- 426 (31) (343)
------- ------- ----- -------
Net periodic benefit cost............. $ 185 $ 331 $ 24 $ 262
======= ======= ===== =======
Postretirement Benefit Plan
--------------------------------------------------------------------------------
Company Predecessor-KSCO
----------------------------------------------------------- ------------------
Period from Period from
Year Ended Year Ended Inception to January 1, 1997 to
December 31, 1999 December 31, 1998 December 31, 1997 November 26, 1997
----------------------------------------------------------- ------------------
Interest cost......................... $ 1,169 $ 1,019 $ 86 $ 942
Service cost.......................... -- -- -- --
Actual return on plan assets.......... -- -- -- --
Net amortization and deferral......... 146 -- -- --
------- ------- ----- -------
Net periodic benefit cost............. $ 1,315 $ 1,019 $ 86 $ 942
======= ======= ===== =======
</TABLE>
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, 1999:
<TABLE>
<CAPTION>
1% point 1% point
Increase Decrease
---------------------------------------
<S> <C> <C>
Effect on total service and interest cost components $ (76) $ 84
Effect on postretirement obligation (981) 1,086
</TABLE>
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 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 8.00% 7.25% 8.00% 7.25%
Expected return on plan assets 10.00% 9.00% N/A N/A
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000; the rate was assumed
to decrease gradually to 5% for 2005 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 $264, $291, $24 and $261 for the periods ended December 31, 1999, 1998 and
1997 and November 26, 1997, respectively.
F-19
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
During October 1995, Fasteners granted certain executives options to purchase
a total of 727,000 shares of common stock. 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>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of year...... 180,688 180,688 727,000
Options outstanding, end of year............ 180,688 180,688 --
Options exercisable......................... -- -- --
Options granted--Predecessor-KSCO........... -- -- 242,000
Exercise price.............................. $ 2.56 $ 2.56 $ 2.56
Grant date.................................. February 1997 February 1997 February 1997
Options exercised/surrendered............... -- -- 788,312
</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. Agreements have been executed for two of the four individuals who rolled
over options representing 180,688 options. For the remaining two individuals,
option agreements for 127,624 options have not yet been finalized and such
options are considered surrendered in the above table during 1997 and remain
unissued as of December 31, 1999. Options represent a unit consisting of two
shares of Common Stock.
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, $0 and $126
for the year ended December 31, 1999 and 1998, the period from Inception to
December 31, 1997 and January 1, 1997 to November 26, 1997, respectively, based
on a risk free rate of return of 7.0% and an expected 5 year life of the
options.
Note 13. 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 is recorded as an operating expense of Holdings. During 1999 and
1998, the Company recorded $600 and $658 of management fees to Saratoga
representing management fees for the year ended December 31, 1999 and for the
period from November 26, 1997 to December 31, 1998, respectively. No such
payments were made from Inception through December 31, 1997. Additionally, the
Company paid Saratoga $83 for fees related to the Facility Amendment in December
1999. At December 31, 1999 accrued liabilities includes $300 in unpaid
management fees.
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 for the period ended November 26, 1997.
F-20
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. 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, 1999, Fasteners has accruals for
environmental matters of $1,576 which are not anticipated to be of a capital
nature. Of the total reserve for environment liabilities, $1,250 represents the
maximum contractual payments to a former parent. 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 $23 in 2000, $223 in 2001, $473 in 2002 , $623 in 2003
and $504 thereafter.
Note 15. Business Segments
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 each of calendar 1999 and 1998, no single
customer accounted for more than 8% of the Company's total net sales, and the
Company's ten largest customers accounted for approximately 33% and 30%,
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 1999 $52,330 $27,157 $ 9,703 $89,190
1998 53,444 28,161 10,871 92,476
1997 53,262 31,698 10,901 95,861
Operating Income (3) 1999 $14,279 $ 4,774 $ 646 $19,699
1998 13,539 5,139 624 19,302
1997 13,990 6,773 1,373 22,136
Identifiable Assets 1999 $47,730 $ 9,742 $ 6,035 $63,507
1998 56,396 8,789 7,438 72,623
</TABLE>
(1) Includes all Canadian operations.
(2) Represents Scovill-Europe operations.
F-21
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Operating Income (i) includes allocations of general and administrative
expenses based on sales and (ii) excludes depreciation, amortization,
restructuring and asset impairment charge, charges the Company has deemed to
be non-recurring for internal reporting purposes and management fees.
The following is a reconciliation of operating income from reportable segments
above to operating income on the financial statements:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income from reportable segments $ 19,699 $ 19,302 $22,136
Depreciation (9,775) (10,006) (5,517)
Amortization (3,309) (3,938) (3,076)
Lease expense -- -- (4,719)
Management fee (600) (658) (451)
Other non-recurring charges (6,005) -- --
Restructuring charge (12,598) (2,968) --
-------- -------- -------
Total operating income (loss) $(12,598) $ 1,732 $ 8,373
======== ======== =======
</TABLE>
The following is a reconciliation of identifiable assets from reportable
segments to the financial statements:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Identifiable assets from reportable segments $ 63,507 $ 72,623
Identifiable assets not identifiable by reportable segment 127,946 144,644
-------- --------
Total identifiable assets $191,453 $217,267
======== ========
</TABLE>
The Company only segregates certain assets for reporting purposes, including
the assets of the Company's subsidiaries, inventory and attaching
equipment.
F-22
<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/ John H. Champagne
------------------------
John H. Champagne,
President
Date: March 30, 2000
Each person whose signature appears below hereby constitutes and appoints John
H. Champagne 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/ JOHN H. CHAMPAGNE President March 30, 2000
- --------------------------
John H. Champagne
/s/ MARTIN A. MOORE Executive Vice President and March 30, 2000
- -------------------------- Chief Financial Officer and
Martin A. Moore Principal Accounting Officer
/s/ WILLIAM F. ANDREWS Chairman of the Board March 30, 2000
- --------------------------
William F. Andrews
/s/ CHRISTIAN L. OBERBECK Director March 30, 2000
- --------------------------
Christian L. Oberbeck
/s/ KIRK R. FERGUSON Director March 30, 2000
- --------------------------
Kirk R. Ferguson
<PAGE>
SCHEDULE II
SCOVILL HOLDINGS INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999. 1998 AND 1997
<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 FROM
THE ASSETS TO WHICH THEY APPLY:
<S> <C> <C> <C> <C>
(1) For the year ended December 31, 1999 $1,132 $921 $331 $1,722
====== ==== ==== ======
(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
====== ==== ==== ======
</TABLE>
(1) The Company
(2) Predecessor - KSCO
S-1
<PAGE>
EXHIBIT 3.13
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
SCOVILL HOLDINGS INC.
Scovill Holdings Inc. (the "Corporation"), a corporation organized
-----------
under the General Corporation law of the State of Delaware (the "DGCL"), does
----
hereby certify:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth the following amendment to the Certificate of
Incorporation of the Corporation, declaring the amendment to be advisable and
calling for the submission of the proposed amendment to the stockholders of the
Corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
"RESOLVED, that Article IV of the Certificate of Incorporation of the
Corporation be, and hereby is, amended to read in its entirety as follows:
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the Corporation
shall have the authority to issue, from time to time, is (i) 15,000,000
shares of Common Stock, par value $.0001 per share (the "Common Stock") and
------------
(ii) 1,000,000 shares of Preferred Stock, par value $.0001 per share (the
"Preferred Stock").
---------------
Effective as of the date of filing of this Certificate of
Amendment of the Certificate of Incorporation of the Corporation with the
Secretary of State of the State of Delaware (the "Conversion Date"), each
---------------
outstanding share of Series B Preferred Stock ("Series B") is converted,
--------
without any other action being required on the part of the holder thereof,
into one share of Common Stock; and any certificate representing a share or
shares of Series B shall as of the Conversion Date represent only the right
to receive the same number of shares of Common Stock. Series B is hereby
canceled and references thereto are hereby eliminated from this Certificate
of Incorporation.
<PAGE>
Each share of Common Stock shall be entitled to one vote. So
long as any Common Stock is outstanding, and except as otherwise expressly
provided elsewhere herein, each share of Common Stock shall entitle the
holder thereof to one vote on all matters to be voted upon at any meeting
of the stockholders of the Corporation.
Shares of Common Stock issued pursuant to the Stock Agreement
dated August 25, 1999 among the Corporation and Mehdi Ali, James Laird and
Mehdi Ali, Jr. shall be subject to the provisions contained therein.
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors of the Corporation (the "Board") is
-----
expressly authorized at any time, and from time to time, to provide for the
issuance of shares of Preferred Stock in one or more series, for such
consideration (not less than its par value) and with such designations,
powers, preferences and relative, participating, optional or special
rights, and such qualifications, limitations or restrictions, as shall be
determined by the Board and fixed by resolution or resolutions adopted by
the Board providing for the number of shares in each series.
The rights of holders of shares of capital stock to take any
action as provided in this Article IV may be exercised at any annual
meeting of stockholders or at a special meeting of stockholders held for
such purpose as provided in the By-laws or at any adjournment thereof, or
by the written consent, delivered to the Secretary of the Corporation, of
the holders of the minimum number of shares required to take such action."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, the stockholders of the Corporation took action by executing a
written consent in lieu of a special meeting in accordance with Section 228 of
the DGCL pursuant to which the necessary number of shares was voted in favor of
the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
IN WITNESS THEREOF, the Corporation has caused this Certificate to be
signed by William F. Andrews, its Chairman, this 10th day of September, 1999.
By: /s/ William F. Andrews
----------------------
William F. Andrews
Chairman
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001051860
<NAME> SCOVILL HOLDINGS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 405
<SECURITIES> 0
<RECEIVABLES> 14,072
<ALLOWANCES> 1,722
<INVENTORY> 18,493
<CURRENT-ASSETS> 31,770
<PP&E> 60,746
<DEPRECIATION> 15,300
<TOTAL-ASSETS> 191,453
<CURRENT-LIABILITIES> 14,883
<BONDS> 149,019
0
0
<COMMON> 0
<OTHER-SE> 4,242
<TOTAL-LIABILITY-AND-EQUITY> 191,453
<SALES> 89,190
<TOTAL-REVENUES> 89,190
<CGS> 69,656
<TOTAL-COSTS> 85,871
<OTHER-EXPENSES> 16,171
<LOSS-PROVISION> 921
<INTEREST-EXPENSE> 16,839
<INCOME-PRETAX> (29,691)
<INCOME-TAX> (1,089)
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