<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
_____________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _______________ TO __________________
COMMISSION FILE NUMBER 333-43195
Commission File Number 333-43195-01
SCOVILL FASTENERS INC.
SCOVILL HOLDINGS INC.
(Exact name of registrants as specified in their respective charters)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3965 95-3959561
Delaware 6719 58-2365743
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
SCOVILL FASTENERS INC.
SCOVILL HOLDINGS INC.
POST OFFICE BOX 44
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)
___________________
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 [ ]
Number of shares of Common Stock outstanding as of October 15, 1998 was
4,655,500.
<PAGE>
SCOVILL HOLDINGS INC.
SCOVILL FASTENERS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
-----------
Item 1. Financial Statements -
<S> <C>
Consolidated Balance Sheets at September 30, 1998 and December 31, 1997... 3
Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1998 and 1997................................ 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997.............................................. 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................... 12
SIGNATURES ............................................................... 13
</TABLE>
2
<PAGE>
SCOVILL HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 547 $ 2,821
Accounts receivable, net of allowances of $1,233 and $894, respectively........... 15,596 11,502
Inventories....................................................................... 25,220 24,292
Other........................................................................ 589 839
-------- --------
Total Current Assets.................................................... 41,952 39,454
-------- --------
Property, Plant and Equipment, Net.................................................. 69,071 72,505
Intangible Assets .................................................................. 111,651 114,243
-------- --------
$222,674 $226,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ............................................ $ 3,632 $ 1,649
Accounts payable ................................................................ 7,346 11,458
Accrued liabilities ............................................................. 7,707 9,470
Accrued interest ................................................................ 3,907 1,062
-------- --------
Total Current Liabilities .................................................... 22,592 23,639
-------- --------
Long-Term Liabilities
Revolving line of credit ........................................................ 9,950 --
Long-term debt ................................................................... 125,813 128,199
Employee benefits ............................................................... 24,486 24,499
Deferred income taxes ........................................................... 1,815 5,380
Other............................................................................. 3,419 3,676
-------- --------
Total Long-Term Liabilities .................................................. 165,483 161,754
-------- --------
Series A Cumulative Redeemable Exchangeable Preferred Stock, $.001 par value,
200,000 shares authorized, none at September 30, 1998 and 100,000 issued
at December 31, 1997 (liquidation preference of $100 per share)........... -- 9,400
-------- --------
Stockholders' Equity
Series B Preferred Stock, $.0001 par value, 16,200,000 shares authorized,
4,655,500 at September 30, 1998 and 3,655,500 at December 31, 1997 shares issued
and outstanding.................................................................. -- --
Common stock, $.0001 par value, 6,000,000 shares authorized,
4,655,500 at September 30, 1998 and 3,655,500 at December 31, 1997 shares
issued and outstanding ...................................................... -- --
Additional paid-in capital--preferred ............................................ 49,942 39,700
Additional paid-in capital--common ............................................... 503 400
Predecessor basis adjustment ..................................................... (7,831) (7,831)
Retained earnings (deficit) ...................................................... (8,252) (781)
Foreign currency translation adjustment .......................................... 237 (79)
-------- --------
Total Stockholders' Equity ................................................... 34,599 31,409
-------- --------
$222,674 $226,202
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
SCOVILL HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(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 THE COMPANY PREDECESSOR - KSCO
---------------- ------------------- ---------------- -------------------
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
1998 (UNAUDITED) 1997 (UNAUDITED) 1998 (UNAUDITED) 1997 (UNAUDITED)
----------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Net sales ..................................... $70,939 | $73,466 $21,945 | $23,701
Cost of sales ................................. 52,628 | 53,368 16,635 | 17,502
-------- | ------- ------- | -------
Gross profit ................................. 18,311 | 20,098 5,310 | 6,199
Selling, general and administrative | |
expenses ................................... 11,735 | 11,697 3,650 | 3,498
Restructuring and asset impairment | |
charge...................................... 2,968 | -- 1,000 | --
Amortization expense .......................... 2,924 | 2,230 972 | 731
-------- | ------- ------- | -------
Operating income (loss) ...................... 684 | 6,171 (312) | 1,970
Other expense ................................ 62 | 430 10 | 179
Interest expense .............................. 11,470 | 2,493 3,973 | 866
-------- | ------- ------- | -------
Income (loss) before income | |
tax provision (benefit) ................... (10,848) | 3,248 (4,295) | 925
Income tax provision | |
(benefit) ................................. (3,607) | 1,436 (1,432) | 514
-------- | ------- ------- | -------
Net income (loss) ............................. $ (7,241) | $ 1,812 $(2,863) | $ 411
-------- | ------- ------- | -------
Dividends on redeemable | |
preferred stock............................... 230 | -- -- | --
-------- | ------- ------- | -------
Net income (loss) available | |
to common stockholders.................. $ (7,471) | $ 1,812 $(2,863) | $ 411
======== | ======= ======= | =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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
----------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
1998 (UNAUDITED) 1997 (Unaudited)
----------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) available
to common stockholders...................... $ (7,471) | $ 1,812
Adjustments to reconcile net |
income (loss) available to |
common stockholders to net |
cash provided by (used in) |
operating activities: |
Depreciation............................... 8,279 | 4,213
Amortization............................... 3,497 | 2,230
Deferred income taxes .................... (1,918) | (723)
Asset impairment charge.................... 940 | --
Non-operating preferred stock dividends.... 345 | --
|
Changes in operating |
assets and liabilities: |
Accounts receivable, net................ (4,094) | (2,610)
Inventories ........................... (928) | (2,431)
Other current assets .................. 250 | 434
Accounts payable ...................... (4,112) | (1,131)
Accrued liabilities ................... 812 | 1,263
Other assets and |
liabilities .......................... (1,370) | (364)
-------- | -------
NET CASH (USED IN) PROVIDED |
BY OPERATING ACTIVITIES..................... (5,770) | 2,693
-------- | -------
CASH FLOWS FROM INVESTING |
ACTIVITIES: |
Additions to property, plant |
and equipment............................... (6,044) | (4,114)
-------- | -------
NET CASH USED IN INVESTING |
ACTIVITIES.................................. (6,044) | (4,114)
-------- | -------
CASH FLOWS FROM FINANCING |
ACTIVITIES: |
Net borrowings on line of |
credit..................................... 9,950 | 2,506
Proceeds of long-term debt ................. -- | 213
Repayments of long-term debt................. (410) | (490)
Redemption of preferred |
stock and payments of dividends............ (10,345) | --
Issuance of common and |
preferred stock .......................... 10,345 | --
-------- | -------
NET CASH PROVIDED BY |
FINANCING ACTIVITIES....................... 9,540 | 2,229
-------- | -------
NET (DECREASE) INCREASE IN |
CASH........................................ (2,274) | 808
CASH AT BEGINNING OF PERIOD.................. 2,821 | 603
-------- | -------
CASH AT END OF PERIOD........................ $ 547 | $ 1,411
======== | =======
SUPPLEMENTAL DISCLOSURE OF |
CASH FLOW INFORMATION |
Interest paid ........................ $ 8,051 | $ 2,411
======== | =======
Income taxes paid .................... $ 70 | $ 86
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(ALL AMOUNTS EXPRESSED IN THOUSANDS, OR AS OTHERWISE NOTED)
NOTE 1. BASIS OF PRESENTATION AND BUSINESS
The interim financial statements presented herein include the accounts of
Scovill Holdings Inc. ("Holdings") and its wholly owned subsidiaries (together
with Holdings, the "Company") as of September 30, 1998 and December 31, 1997 and
for the three and nine month periods ended September 30, 1998 and of
Predecessor KSCO (defined below) for the three and nine month periods ended
September 30, 1997.
The accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments which are in the
opinion of the Company necessary for a fair statement of the results of the
interim periods. The operating results for the three and nine month periods
ended September 30, 1998 and 1997 are not indicative of the results that would
be obtained for the entire fiscal year or any other interim period. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these consolidated financial statements pursuant to the
applicable rules and regulations of the SEC. These financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the annual report on Form 10-K for the year ended
December 31, 1997.
Scovill Acquisition Inc. ("SAI") and Holdings, both Delaware corporations, were
formed by Saratoga Partners III L.P. in 1997 to effect the acquisition of
Scovill Fasteners Inc., a Delaware Corporation ("Fasteners"). Pursuant to a
Stock Purchase Agreement, SAI, then a wholly-owned subsidiary of Holdings,
purchased all of the capital stock of KSCO Acquisition Corporation ("KSCO" or
"Predecessor-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. As a result, Fasteners is
currently a wholly owned subsidiary of Holdings. The purchase of KSCO capital
stock by SAI and the mergers of SAI and KSCO into Fasteners are together
referred to as the "Saratoga Acquisition." The effect of such changes
significantly impairs the comparability of the results of operations of the
Company and the Predecessor-KSCO.
In connection with the Saratoga Acquisition, the Company issued $100 million of
11.25% Senior Notes due 2007 (the "Notes"), pursuant to an Indenture, dated
November 26, 1997. The proceeds of the Notes offering were used to finance, in
part, the purchase by SAI of all of the capital stock of KSCO which then owned
all of the capital stock of the Company. Following the mergers described above,
the Notes became obligations of Fasteners. In connection with the Saratoga
Acquisition, Fasteners entered into a new senior secured credit facility (the
"New 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").
The Company is in the process of amending certain provisions of its Credit
Facility to allow for a proposed acquisition and in the third quarter amended
the New Credit Facility to revise certain EBITDA definitions. The New Credit
Facility amendment will be completed concurrent with the consummation of the
acquisition, which is expected in the fourth quarter 1998.
6
<PAGE>
<TABLE>
<CAPTION>
NOTE 2. INVENTORIES
<S> <C>
</TABLE>
Inventories consisted of the following at:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------------------------------------
<S> <C> <C>
Raw materials $ 2,341 $ 2,792
Work in process 6,938 6,310
Finished goods 15,941 15,190
------------------------------------------------------
$25,220 $24,292
======================================================
</TABLE>
NOTE 3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
In June 1998, the Company announced a corporate restructuring plan. The plan
includes outsourcing the production of plastic components, which was previously
performed in the Company's existing manufacturing facilities. As a result, in
June 1998, the Company recorded a restructuring charge of approximately $1.0
million related to severance payments to be paid to approximately 30 terminated
employees and a $1.0 million asset impairment charge related to plastics
component part production fixed assets to be disposed of under the plan. In
July 1998, under the restructuring plan discussed above, an additional severance
benefit was paid under the terms of an employment agreement.
NOTE 4. PREFERRED STOCK REDEMPTION
In February 1998, the Company sold additional shares of common stock for
approximately $10.3 million. The proceeds were used to redeem the outstanding
redeemable exchangeable preferred stock and warrants.
NOTE 5. NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), and Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -
an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132), effective
January 1, 1998. SFAS 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity. SFAS 131 introduces a new segment
reporting model called the "management approach." The management approach is
based on the manner in which management organizes segments within a company for
making operating decisions and assessing performance. The management approach
replaces the notion of industry and geographic segments. SFAS 132 revises
disclosures about pension and other postretirement benefit plans, yet it does
not change the measurement or recognition of those plans. The disclosures
relative to SFAS 130, 131 and 132 do not significantly affect the Company's
current disclosures and will be presented in the Company's 1998 Annual Report on
Form 10-K.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). This Statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 will be effective for the Company's fiscal year 2000.
Management believes that this Statement will not have a significant impact on
the Company's financial condition or results of operations.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain 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. Such forward-looking statements are based on management's current
plans and expectations and are subject to a number of uncertainties that could
cause actual results to differ materially from those described in such
statements. Such uncertainties and risks include, but are not limited to: the
highly leveraged nature of the Company, its substantial debt service
requirements and the substantial operating and financing restrictions on the
Company under the terms of the New Credit Facility, as amended, the Indenture,
and the other agreements governing the Company's indebtedness; the risks and
uncertainties inherent in doing business abroad, the volatility of the price of
raw materials; increasing domestic and foreign competition; increasingly complex
and stringent environmental laws and regulations; delays or difficulties
associated with systems conversion and Year 2000 compliance; and general
economic conditions. The preceding list of uncertainties, however, is not
intended to be exhaustive, and should be read in conjunction with other
cautionary statements in the Company's publicly-filed reports and its final Form
S-1 Registration Statement, dated December 24, 1997 (Commission File No. 333-
43195).
NINE MONTHS ENDED SEPTEMBER 30, 1998 (COMPANY) COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997 (PREDECESSOR-KSCO)
Net Sales Net sales decreased $2.5 million, or 3.4% from $73.4 million to $70.9
million. Such decrease is primarily a result of decreased sales in industrial
markets evidenced by decreased sales of $0.8 and $1.2 million in the DOT and PCI
product lines, respectively, in addition to a decrease in sales of $0.7 million
in the plastics product line and $0.3 million in sales of Scovill-Europe, offset
by increased sales in Asian markets.
Gross Profit Gross profit decreased $1.8 million, or 8.9% from $20.1 million to
$18.3 million, which is primarily a result of a decrease in sales volume, in
addition to a change in sales mix.
Selling, General and Administrative Expenses ("SG&A") SG&A remained consistent
at $11.7 million which equaled 16.6% and 15.9% of sales for each of the nine
month periods ended September 30, 1998 and 1997.
Restructuring and Asset Impairment Charge In June 1998, the Company announced a
corporate restructuring plan. The plan includes outsourcing the production of
plastic components, which was previously performed in the Company's existing
manufacturing facilities. As a result, in June 1998, the Company recorded a
restructuring charge of approximately $1.0 million related to severance payments
to be paid to approximately 30 terminated employees and a $1.0 million
impairment charge related to plastics component part production fixed assets to
be disposed of under the plan. The Company will pay the severance benefits
discussed above over 12 months ending June 30, 1999, the majority of which will
be paid in the second and third quarters of 1998. In July 1998, an additional
severance benefit of $1.0 million was paid under the terms of an employment
agreement. As a result of the restructuring, the Company expects reductions in
future annual operating expenses which should enable the Company to be more
competitive.
Operating Income Operating income decreased $5.5 million as a result of a
decrease in gross profit of $1.8 million, a restructuring and impairment charge
of $3.0 million, in addition to an increase in amortization expense of $0.7
million as a result of increased goodwill in connection with the Saratoga
Acquisition.
Interest Expense Interest expense increased by $9.0 million as a result of the
increase in debt under the Notes and the New Credit Facility.
8
<PAGE>
Income Tax Provision (Benefit) The income tax benefit was $3.6 million in the
nine months ended September 30, 1998 compared to a provision of $1.4 million in
the nine months ended September 30, 1997.
Net Income (Loss) The net loss available to common stockholders was $7.5
million in the nine months ended September 30, 1998 compared to net income of
$1.8 million in the nine months ended September 30, 1997 attributable to the
factors discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 1998 (COMPANY) COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997 (PREDECESSOR-KSCO)
Net Sales Net sales decreased $1.8 million, or 7.4% from $23.7 million to $21.9
million. Such decrease is primarily a result of decreased sales in industrial
markets evidenced by decreased sales of $0.5 million and $0.4 million in the DOT
and PCI product lines, respectively. Additionally, sales in Europe and Canada
each decreased by $0.3 million for the three months ended September 30, 1998
compared with the three months ended September 30, 1997. Additionally, sales in
Asia decreased $0.5 million, offset by increased sales in Mexico of $0.1 million
for the three months ended September 30, 1998 compared with the three months
ended September 30, 1997.
Gross Profit Gross profit decreased $0.9 million, or 14.3% from $6.2 million to
$5.3 million, which is primarily a result of decreased sales volume.
Selling, General and Administrative Expenses ("SG&A") SG&A increased $0.2
million, or 4.3% from $3.5 million to $3.7 million for the three months ended
September 30, 1998 and 1997, respectively and equaled approximately 16.6% and
14.8% of sales for the three months ended September 30, 1998 and 1997,
respectively.
Restructuring and Asset Impairment Charge See discussion above.
Operating Income (Loss) Operating income decreased $2.3 million primarily as a
result of a decrease in gross profit of $0.9 million, a restructuring charge
recorded in July 1998 of $1.0 million, an increase in SG&A of $0.2 million, in
addition to an increase in amortization expense of $0.2 million as a result of
increased goodwill in connection with the Saratoga Acquisition.
Interest Expense Interest expense increased by $3.1 million as a result of the
increase in debt under the Notes and the New Credit Facility.
Income Tax Provision (Benefit) The income tax benefit was $1.4 million in the
three months ended September 30, 1998 compared to a provision of $0.5 million in
the three months ended September 30, 1997.
Net Income (Loss) The net loss was $2.9 million in the three months ended
September 30, 1998 compared to net income of $0.4 million in the three months
ended September 30, 1997 attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company derived its cash from funds generated by operations
and from third-party financings. As of September 30, 1998 and December 31,
1997, $10.0 million and $0 borrowings were outstanding under the Revolving
Credit Facility, with $8.6 million of availability at September 30, 1998. In
December 1997, the Company issued $100 million of 11.25% Senior Notes, the
proceeds of which were used to finance, in part, the purchase by SAI of all of
the capital stock of KSCO which then owned all of the capital stock of the
Company. 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,
9
<PAGE>
together with borrowings under the New Credit Facility, will be sufficient to
meet its operating expenses and capital requirements, and its debt service
requirements over the next twelve months and beyond. 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.
As of November 12, 1998, the Company is in final negotiations for the
acquisition of a company based in the Northeast U.S. that manufactures and
distributes eyelets and fasteners primarily for the electric component and
medical product industries, for an estimated purchase price ranging from $5 to
$6.5 million. Although management is confident the proposed acquisition will be
completed, there can be no assurances that such transaction will be consummated
or consummated within the fourth quarter of 1998.
The Company is in the process of amending certain provisions of its Credit
Facility to allow for the proposed acquisition and in the third quarter amended
the New Credit Facility to revise certain EBITDA definitions. The New Credit
Facility amendment will be completed concurrent with the consummation of the
acquisition, which is expected in the fourth quarter 1998.
YEAR 2000 COMPLIANCE
The widespread use of computer software that relies on two digits, rather that
four digits, to define the applicable year when performing computation functions
may cause computers and computer-controlled systems to malfunction when
processing data on and after January 1, 2000 (the "Y2K issue").
In consideration of the potential impact of the Y2K issue on its domestic
business, operations, and financial condition, the Company has addressed issues
which may arise from its systems as described below. The Company's foreign
subsidiaries are in the process of either implementing new systems or upgrading
existing systems which are expected to be Y2K compliant.
The Company has implemented an integrated software package, BPCS, effective July
1, 1998 which is Y2K compliant. BPCS was implemented as a complete Enterprise
Resource Planning (ERP) package which is utilized by the Company's customer
service, manufacturing shop floor, and accounting departments. The Company's
manufacturing processes are not dependent upon computer technology and therefore
should not be affected by the Y2K issue. The Company estimates that its future
costs for remediation of Y2K issues on a Company-wide basis will not have
significant impact on the financial condition of the Company.
The Company is in the process of inquiring of its suppliers and vendors, and
significant customers to determine that their operations are Y2K compliant.
Where practicable, the Company will seek alternative sources of suppliers.
However, such Y2K-related failures by such parties remain a possibility and
could have an adverse impact on the Company's results of operations or financial
condition.
The Company believes that its continuing assessment, planning and implementation
process will be effective to achieve a level of readiness that will meet the
challenges presented by Y2K issues in a timely manner. Although the Company is
evaluating the Y2K readiness of third-party software, computer technology and
other hardware and software, the Company cannot guarantee the Y2K readiness of
third-party products, services, or providers that may impact the Company's
operations.
Based on the remediation efforts to date, the Company does not believe that any
problems resulting from the Y2K issue will have a material adverse effect on its
financial condition or results of operations.
EBITDA
EBITDA is defined for the purpose of this report as net income (loss) before
interest expense (including amortization of deferred financing costs), provision
(benefit) for income taxes, depreciation, amortization, rental payments on
synthetic lease on attaching machines, restructuring and asset impairment
charge, and management fees.
10
<PAGE>
The Company has included information concerning EBITDA in this report because it
is used by certain investors as a measure of a company's ability to service its
debt. EBITDA is not required or recognized as a measure of financial
performance under generally accepted accounting principles in the U.S. ("GAAP"),
and should not be considered an alternative to net income determined in
accordance with GAAP as an indicator of operating performance or as an
alternative to cash flow from operating activities determined in accordance with
GAAP as a measure of liquidity. The Company's use of EBITDA may not be
comparable to similarly titled measures used by other companies due to their use
of different financial statement components in calculating EBITDA.
EBITDA decreased $1.5 million, or 9.2%, from $16.8 million to $15.3 million
primarily as a result of a decrease in gross profit, resulting from decreased
sales volume for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997.
EBITDA decreased $1.0 million, or 18.2%, from $5.5 million to $4.5 million
primarily as a result of a decrease in gross profit, resulting from a decrease
in sales volume for the three months ended September 30, 1998 compared to the
three months ended September 30, 1997.
Cash Flows
Net cash used in the Company's operating activities was $5.8 million for the
first nine months of 1998. Principal working capital changes included increases
of $4.1 million and $0.9 million in accounts receivable and inventories,
respectively, and a net decrease of accounts payable and accrued liabilities of
$3.3 million. The Company's cash used in investing activities during the first
nine months of 1998 was $6.0 million for capital expenditures. Net cash
provided by financing activities was $9.5 million, of which $10.0 million
represents borrowings under the Revolving Credit Facility.
The Indenture and the New Credit Facility place significant restrictions on the
Company's ability to incur additional indebtedness, pay dividends or repurchase
stock or make other distributions, create liens, make certain investments, sell
assets, or enter into mergers or consolidations.
11
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 4.01 - Amendment No. 3 to the Bank Credit Agreement
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K
None
12
<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.
Date: November 13, 1998 /s/ David J. Barrett
-----------------------
DAVID J. BARRETT,
Chief Executive Officer and Director
Date: November 13, 1998 /s/ Martin A. Moore
----------------------
MARTIN A. MOORE
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
13
<PAGE>
Exhibit 4.01
AMENDMENT NO. 3 TO THE
CREDIT AGREEMENT
Dated as of September 30, 1998
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT among Scovill Holdings Inc., a
Delaware corporation (the "Parent"), Scovill Fasteners Inc., a Delaware
corporation (the "Borrower"), PCI Group, Inc., a Delaware corporation ("PCI"),
--------
Rau Fastener Company, LLC, a Delaware limited liability company ("Rau"), Scomex,
Inc., a Delaware corporation ("Scomex"), the banks, financial institutions and
------
other institutional lenders parties to the Credit Agreement referred to below
(collectively, the "Banks") and Credit Agricole Indosuez, as administrative
agent and collateral agent (the "Administrative Agent").
--------------------
PRELIMINARY STATEMENTS:
(1) The Parent, the Borrower, PCI, Rau, Scomex, the Banks, the
Administrative Agent, Swiss Bank Corporation, Stamford Branch, as documentation
agent and syndication agent, and SBC Warburg Dillon Read Inc., as advisor and
arranger, have entered into a Credit Agreement dated as of November 26, 1997,
and amendments thereto dated as of January 9, 1998, and February 20, 1998 (such
Credit Agreement, as so amended, being the "Credit Agreement"). Capitalized
----------------
terms not otherwise defined in this Amendment have the same meanings as
specified in the Credit Agreement.
(2) The Borrower has entered into a letter of intent to acquire
(the "Acquisition"), a Connecticut corporation, for approximately $6,300,000. In
-----------
connection with the Acquisition, the Borrower has requested that the definition
of "Consolidated EBITDA" be revised to reflect certain cost savings achieved by
the Borrower over the past year.
(3) The Required Banks are, on the terms and conditions stated
below, willing to grant the request of the Borrower and the Borrower and the
Required Banks have agreed to further amend the Credit Agreement as hereinafter
set forth.
SECTION 1. Amendments to Credit Agreement. The definition of
-------------------------------
"Consolidated EBITDA" in Section 1.01 of the Credit Agreement is, effective as
-------------------
of the date hereof and subject to the satisfaction of the conditions precedent
set forth in Section 2, hereby amended by (i) deleting the word "and"
immediately following the phrase "for such period" in the fourth line thereof
and (ii) adding immediately preceding the phrase "less the sum of " continued in
the sixth line thereof the following:
", and (v) for each 12 consecutive month period containing any of
the quarters ended on March 31, 1998, June 30, 1998 or September
30, 1998, an amount equal to (1) if such period contains one such
quarter, $511,851, (2) if such period contains two such quarters,
$1,023,702 and (3) if such period contains three such quarters,
$1,535,553 (which amount reflects a reduction of salaried and
temporary labor during such quarters)".
14
<PAGE>
SECTION 2. Conditions of Effectiveness. This Amendment shall become
---------------------------
effective as of the date first above written when, and only when, the
Administrative Agent shall have received counterparts of this Amendment executed
by the Borrower, the other Credit Parties and the Required Banks or, as to any
of the Banks, advice satisfactory to the Administrative Agent that such Bank has
executed this Amendment and Section 1 shall become effective when, and only
when, the Administrative Agent shall have additionally received all of the
following documents, each such document (unless otherwise specified) dated the
date of receipt thereof by the Administrative Agent (unless otherwise specified)
and in sufficient copies for each Bank, in form and substance satisfactory to
the Administrative Agent (unless otherwise specified) and in sufficient copies
for each Bank:
(a) A certificate signed by a duly authorized officer of the Borrower
stating that:
(i) The representations and warranties contained in Section 3
are correct on and as of the date of such certificate as though made
on and as of such date other than any such representations or
warranties that, by their terms, refer to a date other than the date of
such certificate; and
(ii) No event has occurred and is continuing that constitutes a
Default.
(b) Detailed consolidated financial projections for the fiscal
years ending December 31, 1999, December 31, 2000 and December 31, 2001.
The effectiveness of this Amendment is conditioned upon the accuracy of the
factual matters described herein. This Amendment is subject to the provisions of
Section 15.10 of the Credit Agreement.
SECTION 3. Representations and Warranties of the Credit Parties. Each
----------------------------------------------------
Credit Party represents and warrants as follows:
(a) Corporate Status. Each of the Parent and its Subsidiaries (i) is a
----------------
duly organized and validly existing corporation or limited liability
company in good standing under the laws of the jurisdiction of its
incorporation or organization, (ii) has the corporate or other power and
authority to own its property and assets and to transact the business in
which it is engaged and presently proposes to engage and (iii) is duly
qualified and is authorized to do business and is in good standing in each
jurisdiction where the ownership, leasing or operation of property or the
conduct of its business requires such qualifications, except for failures
to be so qualified which, in the aggregate, would not be reasonably likely
to have a material adverse effect on the performance, business, assets,
nature of assets, liabilities, operations, properties, condition (financial
or otherwise) or prospects of the Borrower and its Subsidiaries taken as a
whole.
(b) Corporate Power and Authority. Each of the Parent and its
-----------------------------
Subsidiaries has the power to execute, deliver and perform the terms and
provisions of this Amendment and the Credit Agreement as amended by this
Amendment (collectively, the "Documents") and has taken all necessary
---------
corporate or other action to authorize the execution, delivery and
performance by it of each of such Documents. Each of the Parent and its
Subsidiaries has duly executed and delivered each of the Documents to which
it is party, and each of such Documents constitutes the legal, valid and
15
<PAGE>
binding obligation of such party enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
limiting creditors' rights generally or by general equitable principles
(regardless of whether the issue of enforceability is considered in a
proceeding in equity or at law).
(c) No Violation. Neither the execution, delivery or performance by
------------
the Parent or any of its Subsidiaries of the Documents to which it is a
party, nor compliance by it with the terms and provisions hereof or
thereof, (i) will contravene any provision of any applicable law, statute,
rule or regulation or any order, writ, judgment, injunction or decree of
any court or governmental instrumentality, (ii) will conflict with or
result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default or event of default under, or result
in the creation or imposition of (or the obligation to create or impose),
any Lien (except pursuant to the Security Documents) upon any of the
property or assets of the Parent or any of its Subsidiaries pursuant to the
terms of any indenture, mortgage, deed of trust, credit agreement or loan
agreement, or any other agreement, contract or instrument to which the
Parent or any of its Subsidiaries is a party or by which it or any of its
property or assets is bound, or to which it may be subject or (iii) will
violate any provision of the Certificate of Incorporation or By-Laws (or
similar organizational documents) of the Parent or any of its Subsidiaries.
(d) Governmental Approval. No order, consent, approval, license,
----------------------
authorization or validation of, or filing, recording or registration with
(except as has been obtained or made on or prior to the Initial Borrowing
Date and as is in full force and effect), or exemption by, any governmental
or public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with, (i) the execution, delivery
and performance of any Document or (ii) the legality, validity, binding
effect or enforceability of any such Document.
(e) Litigation. Other than with respect to matters set forth on
----------
Schedule VIII to the Credit Agreement, there are no actions, suits or
proceedings pending or, to the best knowledge of the Borrower or any of its
Subsidiaries, threatened that (a) would have a material adverse effect on
the operations or financial condition of the Parent, Merger Sub, KSCO and
the Borrower together with their respective Subsidiaries, taken as a whole,
or (b) involves a reasonable possibility of (i) a material adverse effect
on (x) the ability of any of the Credit Parties to perform their respective
obligations hereunder or under any of the other Credit Documents or (y) the
rights, remedies and benefits available to the Agents, the Issuing Bank and
the Banks hereunder or under any of the other Credit Documents, or (ii)
adversely affecting the validity or enforceability of any Documents, or
which would be materially inconsistent with the assumptions underlying the
forecasts previously provided to the Agents, the Issuing Bank and the
Banks.
(f) The Security Documents. (i) The provisions of the Security
----------------------
Agreement are effective to create in favor of the Collateral Agent for the
benefit of the Secured Creditors a legal, valid and enforceable security
interest in all right, title and interest of the respective Credit Parties
in the Collateral described therein and, the Collateral Agent, for the
benefit of the Secured Creditors, will have, upon making the necessary
filings in the appropriate filing office, a fully perfected first Lien on,
and security interest in, all right, title and interest of the respective
Credit Parties, in all of the Collateral described therein, subject to no
other Liens other than Permitted Liens.
(ii) The recordation of the Security Agreement in the United States
Patent and Trademark Office, together with filings on Form UCC- 1 in all
applicable jurisdictions made pursuant to the Security Agreement, will be
effective, under federal and state law, to perfect the security interest
granted to the Collateral Agent in the Trademarks and Patents covered by
the Security Agreement and the filing of the Security Agreement with the
16
<PAGE>
United States Copyright Office together with filings on Form UCC- 1 made
pursuant to the Security Agreement will be effective under federal and
state law to perfect the security interest granted to the Collateral Agent
in the Copyrights covered by the Security Agreement. Each of the Credit
Parties party to the Security Agreement has good and merchantable title to
all Collateral described therein, free and clear of all Liens except those
described above in subsection (a) above and in this subsection (b).
(iii) From and after the Initial Borrowing Date, the Mortgages
create, as security for the obligations purported to be secured thereby, a
valid and enforceable and, upon making the necessary filings in the
appropriate filing office, perfected security interest in and Lien on all
of the Mortgaged Properties in favor of the Collateral Agent (or such other
trustee as may be required or desirable under local law) for the benefit of
the Secured Creditors, superior to and prior to the rights of all third
persons (except that the security interest created in the Mortgaged
Properties may be subject to the Permitted Encumbrances related thereto)
and subject to no other Liens (other than Permitted Liens). Each of the
Borrower and its Subsidiaries has good and marketable title at the time of
the grant thereof and at all times thereafter to all Mortgaged Properties,
free and clear of all Liens except those described in the first sentence of
this subsection (iii).
SECTION 4. Reference to and Effect on the Credit Documents. (a) On and
-----------------------------------------------
after the effectiveness of this Amendment, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof' or words of like import
referring to the Credit Agreement, and each reference in the Notes and each of
the other Credit Documents to "the Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended by this Amendment.
(b) The Credit Agreement, as specifically amended by this Amendment,
is and shall continue to be in full force and effect and is hereby in all
respects ratified and confirmed. Without limiting the generality of the
foregoing, the Security Documents and all of the Collateral described therein do
and shall continue to secure the payment of all Obligations of the Credit
Parties under the Credit Documents, in each case as amended by this Amendment.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Bank or any Agent under any of the Loan Documents,
nor constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. Costs and Expenses. Each of the Parent and the Borrower
------------------
jointly and severally agree to pay on demand all costs and expenses of the
Agents in connection with the preparation, execution, delivery and
administration, modification and amendment of this Amendment and the other
instruments and documents to be delivered hereunder (including, without
limitation, the reasonable fees and expenses of counsel for the Agents) in
accordance with the terms of Section 15.01 of the Credit Agreement.
SECTION 6. Execution in Counterparts. This Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 7. Governing Law. This Amendment shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
SCOVILL HOLDINGS INC.
/S/ MARTIN A. MOORE
------------------------
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
SCOVILL FASTENERS INC.
/S/ MARTIN A. MOORE
------------------------
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
PCI GROUP, INC.
/S/ MARTIN A. MOORE
------------------------
SECRETARY
RAU FASTENER COMPANY, LLC
/S/ MARTIN A. MOORE
------------------------
SECRETARY
SCOMEX, INC.
/S/ MARTIN A. MOORE
------------------------
SECRETARY
CREDIT AGRRICOLE INDOSUEZ
As Administrative Agent and as a Bank
/S/ MICHAEL AROUGHETI
------------------------
/S/ PATRICIA FRANKEL
------------------------
INDOSUEZ CAPITAL FUNDING IV, L.P.
By: INDOSUEZ CAPITAL, as Portfolio Advisor
/S/ FRANCOISE BERTHELOT
------------------------
UBS AG, Stamford Branch
/S/ JAMES J. DIAZ
------------------------
EXECUTIVE DIRECTOR
LOAN PORTFOLIO SUPPORT, US
/S/ RICHARD T. CONWAY
------------------------
ASSOCIATE DIRECTOR
LOAN PORTFOLIO SUPPORT, US
18
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By: PILGRIM AMERICA INVESTMENTS, INC.,
as its Investment Manager
/S/ MICHEL PRINCE, CFA
------------------------
VICE PRESIDENT
IBJ SCHRODER BANK & TRUST COMPANY
/S/ MARK H. MINTER
------------------------
MANAGING DIRECTOR
SUMMIT BANK
/S/ NANCY Z. REIMANN
------------------------
VICE PRESIDENT
SANWA BUSINESS CREDIT CORPORATION
/S/ LAWRENCE J. PLACEK
------------------------
VICE PRESIDENT
19
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