SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 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)
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)
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)
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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 April 15, 1999 was 4,655,500.
SCOVILL HOLDINGS INC.
SCOVILL FASTENERS INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements -
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998.......... 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998..................................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998..................................................... 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 1. Legal Proceedings.......................................................... 11
Item 2. Changes in Securities and Use of Proceeds.................................. 11
Item 3. Defaults Upon Senior Securities............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders........................ 11
Item 5. Other Information.......................................................... 11
Item 6. Exhibits and Reports on Form 8-K........................................... 11
SIGNATURES................................................................. 12
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Scovill Holdings Inc.
Consolidated Balance Sheets
(in thousands, except share data)
March 31, December 31,
1999 1998
(Unaudited)
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ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 719 $ 293
Accounts receivable, net of allowances of $1,178 and $1,132, respectively......... 14,063 12,319
Inventories....................................................................... 25,236 24,573
Other............................................................................. 768 572
-------- --------
Total Current Assets........................................................... 40,786 37,757
-------- --------
Property, Plant and Equipment, Net.................................................. 68,114 69,421
Intangible Assets................................................................... 108,924 110,089
-------- --------
$217,824 $217,267
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt.............................................. $ 3,913 $ 3,530
Accounts payable.................................................................. 9,453 8,379
Accrued liabilities............................................................... 6,827 6,202
Accrued interest.................................................................. 3,629 957
-------- --------
Total Current Liabilities...................................................... 23,822 19,068
-------- --------
Long-Term Liabilities
Revolving credit facility......................................................... 12,550 12,900
Long-term debt.................................................................... 123,564 124,893
Employee benefits................................................................. 23,980 24,032
Deferred income taxes............................................................. -- 319
Other............................................................................. 3,519 3,520
-------- --------
Total Long-Term Liabilities.................................................... 163,613 165,664
-------- --------
Series A Cumulative Redeemable Exchangeable Preferred Stock, $.001 par value,
200,000 shares authorized, none issued at March 31, 1999 and 1998 (liquidation
preference of $100 per share)..................................................... -- --
-------- --------
Stockholders' Equity
Series B Preferred Stock, $.0001 par value, 16,200,000 shares authorized,
4,655,500 shares issued and outstanding at March 31, 1999 and 1998.............. -- --
Common stock, $.0001 par value, 6,000,000 shares authorized, 4,655,500 shares
issued and outstanding at March 31, 1999 and 1998............................... -- --
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)....................................................... (12,291) (10,548)
Accumulated other comprehensive income............................................ 66 469
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Total Stockholders' Equity..................................................... 30,389 32,535
-------- --------
$217,824 $217,267
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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Scovill Holdings Inc.
Consolidated Statements of Operations
(in thousands)
Three Months Ended March 31,
1999 (Unaudited) 1998 (Unaudited)
-------------------------------------------------
Net sales............................................... $22,357 $24,598
Cost of sales........................................... 16,582 18,110
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Gross profit.......................................... 5,775 6,488
Selling, general and administrative expenses............ 3,773 4,078
Amortization expense.................................... 866 987
------- -------
Operating income...................................... 1,136 1,423
Other (income) expense.................................. (106) (99)
Interest expense........................................ 3,866 3,643
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Income (loss) before income tax
provision (benefit).................................... (2,624) (2,121)
Income tax provision (benefit).......................... (881) (665)
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Net income (loss)....................................... (1,743) $(1,456)
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Dividends on redeemable preferred stock................. -- 230
------- -------
Net income (loss) available to common
stockholders........................................... $(1,743) $(1,686)
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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Scovill Holdings Inc.
Consolidated Statements of Cash Flows
(in thousands)
Three Months ended March 31,
1999 (Unaudited) 1998 (Unaudited)
-------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) available to common stockholders...... $(1,743) $ (1,686)
Adjustments to reconcile net income (loss) available to
common stockholders to net cash provided by (used in)
operating activities:
Depreciation and amortization......................... 3,682 3,964
Deferred income taxes................................. (913) 79
Non-operating Preferred Stock Dividends............... -- (345)
Changes in operating assets and liabilities:
Accounts receivable, net........................... (1,744) (5,276)
Inventories........................................ (663) (288)
Other current assets............................... (196) 88
Accounts payable................................... 1,074 (1,608)
Accrued liabilities................................ 3,297 3,005
Other assets and liabilities....................... 94 (70)
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Net cash provided by (used in) operating activities..... 2,888 (2,137)
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Cash Flows from Investing Activities:
Additions to property, plant and equipment.............. (1,166) (1,777)
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Net cash used in investing activities................... (1,166) (1,777)
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Cash Flows from Financing Activities:
Net (repayments) borrowings on line of credit........... (350) 2,500
Repayments of long-term debt............................ (946) (214)
Redemption of preferred stock and payments of
dividends.............................................. -- (10,345)
Issuance of common and preferred stock.................. -- 10,345
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Net cash (used in) provided by financing activities..... (1,296) 2,286
------- --------
Net Increase (Decrease) in Cash......................... 426 (1,628)
Cash at Beginning of Period............................. 293 2,821
------- --------
Cash at End of Period................................... $ 719 $ 1,193
======= ========
Supplemental Disclosure of Cash Flow Information
Interest paid..................................... $ 906 $ 416
======= ========
Income taxes paid................................. $ 60 $ --
======= ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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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 March 31, 1999 and December 31, 1998 and for
the three months ended March 31, 1999 and 1998.
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules of the Securities and Exchange Commission ("SEC")
and include all adjustments, consisting only of normal recurring adjustments
which are in the opinion of the Company necessary for a fair presentation of the
results of the interim periods. The operating results for the three months
ended March 31, 1999 and 1998 are not necessarily 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, 1998.
Note 2. 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 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.
Note 3. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("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 three months ended March 31, 1999 and 1998
includes only foreign currency translation. The calculation of comprehensive
income is as follows:
March 31, 1999 March 31, 1998
-------------------------------------------------
Net Income (Loss) $(1,743) $(1,686)
Foreign Currency Translation Adjustments (403) 360
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Comprehensive Income (Loss) $(2,146) $(1,326)
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Note 4. Inventories
Inventories consisted of the following at:
March 31, 1999 December 31, 1998
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Raw materials $ 1,896 $ 1,901
Work in process 5,800 4,797
Attaching machine spare parts 8,013 8,219
Finished goods 9,527 9,656
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$25,236 $24,573
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Note 5. 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.
Business Segment Three Months European Total
Information ended March 31, Apparel Industrial (1) Operations (2) Company
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales 1999 $13,207 $6,455 $2,695 $22,357
1998 13,750 7,980 2,868 24,598
Operating Income (3) 1999 $ 3,403 $1,014 $ 263 $ 4,680
1998 3,687 1,452 206 5,345
(1) Includes all Canadian operations.
(2) Represents Scovill-Europe operations.
(3) Operating Income (i) includes allocations of general and administrative
expenses based on sales and (ii) excludes depreciation, amortization and
management fees.
The following is a reconciliation of operating income from reportable segments
above to operating income on the financial statements:
Three Months Ended March 31,
1999 1998
- -------------------------------------------------------------------------------------
Operating income from reportable segments $4,680 $5,345
Less:
Depreciation 2,528 2,785
Amortization 866 987
Management fee 150 150
---------------------------------
Total operating income $1,136 $1,423
=================================
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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 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. 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 by the terms of its Credit Facility, the Indenture, governing its 11.25%
Senior Subordinated Notes 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 the Company's publicly-filed reports.
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Net Sales Net sales decreased $2.2 million, or 9.1% from $24.6 million to
$22.4 million. Such decrease was attributable primarily to lower Industrial
Group revenues which declined $1.5 million, or 19.1% , from $8.0 million to $6.5
million. Within the Industrial Group, PCI revenues declined $0.5 million, or
26.6%, due to manufacturing constraints and accordingly, limitations in product
offerings. DOT revenues declined $0.5 million, or 15.0% from reduced demand in
certain segments, notably medical and government. The Company's Canadian
Operation has also experienced sales declines when compared to the three months
ended March 31, 1998. Apparel Group revenues declined $0.5 million, or 3.9%,
from $13.7 million to $13.2 million primarily from lower domestic revenues. The
Company's European revenues decreased $0.2 million, or 6.0%, from $2.9 million
to $2.7 million.
Gross Profit Gross profit decreased $0.7 million, or 11.0% from $6.5 million
to $5.8 million, which is primarily attributable to a decline in sales discussed
above and to a lesser extent from an unfavorable sales mix.
Selling, General and Administrative Expenses ("SG&A") SG&A decreased $0.3
million, or 7.5%, from $4.1 million to $3.8 million due to a restructuring plan
which the Company implemented in June 1998. SG&A was 16.9% of sales for the
three months ended March 31, 1999 compared to 16.6% for the three months ended
March 31, 1998.
Operating Income Operating income decreased $0.3 million primarily as a result
of a decrease in gross profit of $0.7, partly offset by a decrease in SG&A of
$0.3 million.
Interest Expense Interest expense increased by $0.2 million as a result of
additional borrowings outstanding under a Revolving Credit Facility at March 31,
1999 compared to March 31, 1998.
Income Tax Provision (Benefit) The income tax benefit was $0.9 million in the
three months ended March 31, 1999 compared to $0.7 million in the three months
ended March 31, 1998.
Net Income (Loss) The net loss available to common stockholders was $1.7
million for each of the three months ended March 31, 1999 and 1998 attributable
to the factors discussed above.
-8-
Liquidity and Capital Resources
The Company has outstanding $100 million of 11.25% Senior Subordinated
Notes due 2007 (the "Notes") and a senior secured credit facility (the "Credit
Facility"), consisting of $28.0 million term loan and $25.0 million revolving
credit facility (the "Revolving Credit Facility").
Historically, the Company derived its cash from funds generated by
operations and from third-party financings. As of March 31, 1999 and December
31, 1998, $12.6 million and $12.9 million of borrowings were outstanding under
the Revolving Credit Facility. The Company's liquidity requirements consist
primarily of scheduled payments of principal and interest on its indebtedness,
working capital needs and capital expenditures. The Company believes that its
operating cash flow, together with borrowings under the Credit Facility, will be
sufficient to meet its operating expenses and capital requirements, and its debt
service requirements over the next twelve months and beyond. The Credit Facility
also contains restrictive financial covenants that must be met on a quarterly
basis, and there can be no assurances that the Company will be able to remain in
compliance with these covenants in subsequent periods. 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 on terms
acceptable to the Company.
EBITDA
EBITDA is defined for purposes of this report as net income (loss) before
interest expense (including amortization of deferred financing costs), provision
(benefit) for income taxes, depreciation, amortization and management fees paid
by the Company to its parent company (Saratoga).
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 ("GAAP") in the U.S.,
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 $0.7 million , or 12.4% , from $5.4 million to $4.7
million for the three months ended March 31, 1999 compared to the three months
ended March 31, 1998, primarily as a result of a decrease in gross profit,
resulting from a decrease in sales volume.
Cash Flows
Net cash provided by the Company's operating activities was $2.9 million
for the first three months of 1999 compared to a use of cash of $2.1 million for
the first three months of 1998. Principal working capital changes included
increases of $1.7 million and $0.7 million in accounts receivable and
inventories, respectively, and a net increase of accounts payable and accrued
liabilities of $4.4 million. The Company's cash used in investing activities
during the first three months of 1999 was $1.2 million for capital expenditures.
Net cash used in financing activities was $1.3 million, which represents
repayments of debt and repayment of borrowings under the Revolving Credit
Facility.
The Indenture and the Credit Facility place significant restrictions on the
Company's ability to incur additional indebtedness, pay dividends or repurchase
stock or make other distributions, create liens, make certain investments, sell
assets, or enter into mergers or consolidations.
-9-
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.
-10-
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and the Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) 27.1 - Financial Data Schedule - Scovill Fasteners Inc.
27.2 - Financial Data Schedule - Scovill Holdings Inc.
(b) Reports on Form 8-K
None
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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: May 13, 1999 /s/ David J. Barrett
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David J. Barrett,
Chief Executive Officer and Director
Date: May 13, 1999 /s/ Martin A. Moore
------------------------------------
Martin A. Moore
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
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