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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended March 25, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Corporate Center, 40 Emery Street
Greenville, South Carolina 29605
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
10 1/8% Senior Subordinated Notes due 2007, Series B
(Title of Class)
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 at least the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of 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 [ ].
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of July 7, 2000, was approximately $250,000
The number of shares outstanding of the registrant's common stock, as of
July 7, 2000, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,136,316
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS
The Company
Safety Components International, Inc. (the "Company" or "Safety
Components"), a Delaware corporation which was formed on January 12, 1994 as a
wholly-owned subsidiary of Valentec International Corporation, a Delaware
corporation (currently known as Valentec International Corporation, LLC as
successor in interest by operation of law, "Valentec"), is a leading, low-cost,
independent supplier of automotive airbag fabric and cushions, with operations
in North America and Europe. The Company's 1997 acquisition, through Safety
Components Fabric Technologies, Inc., a wholly-owned subsidiary of the Company,
of all of the assets and assumption of certain liabilities of the Air
Restraint/Technical Fabrics Division (the "Division") of JPS Automotive L.P., a
subsidiary of Collins & Aikman Corporation (the Division is sometimes
hereinafter referred to as "SCFTI") was a further step in the Company's airbag
growth strategy because it has enabled the Company to combine SCFTI's weaving
operations and strong market position in airbag fabric with its cut and sew
operations and strong market position in airbag cushions to exploit worldwide
growth in demand for airbag module systems ("airbags" or "airbag modules").
The Company sells airbag fabric domestically and cushions worldwide to all
of the major airbag module integrators that outsource such products. The Company
believes it produces approximately 50% of all outsourced airbag fabric utilized
in North America, and that it manufactures approximately 50% of all outsourced
airbag cushions in North America and Europe. The Company believes that it is
also a leading manufacturer of value-added technical fabrics used in a variety
of niche industrial and commercial applications such as ballistics material for
luggage, filtration, aircraft escape slides, military tents and fire service
apparel.
Sales of automotive fabric, airbag cushions and technical fabric products
(the "automotive and fabrics" business or "core operations") accounted for
approximately $194.7 million or 85.3% of consolidated fiscal 2000 net sales. For
purposes hereof, fiscal 2000 means the fiscal year ended March 25, 2000, fiscal
1999 means the fiscal year ended March 27, 1999 and fiscal 1998 means the fiscal
year ended March 28, 1998. Sales of automotive and fabrics accounted for
approximately $178.3 million or 81.0% and approximately $129.7 million or 78.1%
of the Company's fiscal 1999 and 1998 net sales, respectively. The unique
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows the Company to more
effectively utilize its manufacturing assets and lower per unit overhead costs.
The Company also produces automotive metal components, defense related products,
primarily projectiles and other metal components (the "metal and defense"
business or "non-core operations") for small to medium caliber training and
tactical ammunition and continues as a systems integrator and manufacturer for
ordnance programs, which accounted for $33.6 million or 14.7% of the Company's
consolidated fiscal 2000 net sales and $41.6 million or 18.9% and $36.4 million
or 21.9% of the Company's fiscal 1999 and 1998 net sales, respectively.
The Company announced in November 1999 that management had identified
certain errors relating to the Company's previously issued consolidated
financial statements for fiscal 1999 and fiscal 1998 which required further
investigation and restatement of the financial statements for those periods, as
well as the financial statements for the twenty-six weeks ended September 25,
1999. The audit committee, consisting only of outside members of the Board of
Directors, with the assistance of special counsel and an independent public
accounting firm, conducted a thorough investigation of these matters and
determined that the restatement related primarily to two items. The first item
required the reversal of a duplicate booking of a sale and the related
receivable in the Company's defense operations. It was determined that a sale
and related receivable in the Company's non-core defense operations in the
aggregate amount of $4.6 million (before a related tax provision of $1.8
million) had been recorded twice. The second item required the reversal of
certain items totaling $772,000 (before a related tax provision of $297,000)
incorrectly recorded in income in connection with a loan transaction. The
restatement for fiscal 1998, reduced previously reported net sales by $4.2
million to net sales of $166.1 million and previously reported net income by
$2.7 million to a net income of $3.3
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million. The restatement for fiscal 1999, reduced previously reported net sales
by $1.3 million to net sales of $220.0 million and increases previously reported
net loss by $797,000 to a loss of $13.7 million.
The deterioration in the Company's financial condition that became evident
in fiscal 1999, arising from a confluence of negative developments, particularly
in the non-core businesses, caused it to experience material liquidity
constraints. In addition, following the Company's restatement of its earnings
and a default with respect to obligations under its credit agreement, KeyBank
and Fleet Bank, the "Senior Lenders", notified the trustee for the Company's
10.125% Senior Subordinated Notes (the "Notes") that they were exercising their
rights to block a scheduled interest payment due on January 18, 2000.
On February 18, 2000, the common stock of the Company was delisted from the
NASDAQ stock market.
The Company and an informal committee comprised of holders of over
two-thirds in aggregate dollar amount of the Notes began negotiations and in
early April 2000 reached an agreement (the "Restructuring Agreement") that would
be effected through a voluntary filing under Chapter 11 of the United States
Bankruptcy Code. Pursuant to the Restructuring Agreement, the claims of the
holders of the Company's Senior Subordinated Notes ("Noteholders") will be
converted in the right to receive 96.8% of the Company's equity after it emerges
from Chapter 11. The current shareholders, excluding Robert Zummo, the Company's
Chairman and Chief Executive Officer, will receive 3.2% of the Company's post
bankruptcy equity and warrants to acquire 12% of such equity.
In addition to the Restructuring Agreement, the Company also reached an
agreement with the Senior Lenders subject to a paydown, to replace their credit
agreement with a post-petition subordinated debtor-in-possession ("DIP")
financing facility.
On April 10, 2000 (the "Petition Date"), the Company and certain of its U.S
subsidiaries (including Safety Components Fabric Technologies, Inc. and
Automotive Safety Components International, Inc., but excluding Valentec
International Corporation, LLC, Valentec Systems Inc. and Galion, Inc.,
collectively, "Safety Filing Group," filed a voluntary petition under Chapter 11
of the Bankruptcy Code with the United States Bankruptcy Court for the District
of Delaware (the "Chapter 11 Bankruptcy Petition").
On April 26, 2000, in conjunction with the filing of the Chapter 11
Bankruptcy Petition, the Safety Filing Group received Bankruptcy Court approval
of a $30.6 million senior DIP financing facility that it had executed with Bank
of America, N.A. The senior DIP financing is expected to provide adequate
funding for all post petition trade and employee obligations, the partial
paydown of the pre-petition secured debt, as well as the Company's ongoing
operating needs during the restructuring process. Upon closing of the senior DIP
financing facility on May 9, 2000, the Senior Lenders received a principal
paydown of approximately $17 million and retained the remaining approximately
$20.9 million portion of their indebtedness as an 11% per annum post-petition
subordinated DIP facility as a replacement of their pre-petition credit
facility.
On May 19, 2000, Safety Filing Group filed its Statement of Financial
Affairs and Schedules of Assets and Liabilities and, on May 24, 2000, the Court
entered an order setting July 7, 2000 as the general filing deadline for
creditors, to file their proof of claims.
On June 12, 2000, the Safety Filing Group filed with the United States
Bankruptcy Court its Joint Plan of Reorganization (the "Plan") pursuant to Rule
3016 (b), and its Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code. A hearing will be held on July 19, 2000 to consider approval of
the Disclosure Statement. The Plan and the Disclosure Statement, both of which
are subject to revision by the Company prior to the Court hearing date, reflect
a time-phased, payout of 100% all pre-petition claims of all creditors. Under
the Plan, new shares of common and preferred stock would be authorized and new
common stock would be issued. All Noteholder claims in the approximately
aggregate amount of $96.4 million will be completely satisfied through the
ratably proportionate distribution of common stock.
On March 31, 1999, the Company entered into an Investment Agreement (the
"Brera Investment Agreement") with Brera Capital Partners, LLC, a Delaware
limited liability company, and Brera Capital Partners Limited Partnership, a
Delaware limited partnership, through a newly-formed Delaware limited liability
company, Brera SCI, LLC ("Brera"), which provided for, among other things, a
$28.0 million convertible preferred stock investment by
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Brera in the Company. On May 4, 1999, the Company and Brera mutually agreed to
terminate the Brera Investment Agreement.
Core Operations
Structure of the Airbag Industry
Airbag systems consist of an airbag module and an electronic control
module, which are currently integrated by auto-makers into their respective
vehicles. Airbag modules consist of inflators, cushions, housing and trim covers
and are assembled by module integrators, most of whom produce most of the
components required for a complete module. However, as the industry has evolved,
module integrators have increasingly outsourced non-proprietary components such
as cushions to those companies specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource the majority of their cushion requirements as they focus
on the development of proprietary technologies such as inflators and sensors.
Only one of the module integrators currently weaves its own airbag fabric and
the remainder purchase fabric from airbag fabric producers such as the Company.
A characteristic of the industry is that certain customers of airbag
cushion suppliers are also competitors. The Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. While none of the module integrators produce airbag
cushions for third parties, the Company may compete with its customers to supply
their own internal cushion requirements. However, most of the Company's
suppliers do not produce cushions for the same car/truck model for which the
Company produces cushions.
Another characteristic of the airbag industry is the existence of potential
barriers to entry. New entrants that wish to produce and supply airbag cushions
or airbag fabric must undergo a rigorous qualification process, which can take
as long as two years. The Company believes that in addition to deterring new
entrants, the existence of this qualification process represents switching costs
for module integrators that are required to assist the new supplier in meeting
auto-makers' requirements. Additionally, the Company believes module integrators
are, like their auto-maker customers, trying to limit the number of suppliers.
Products
The Company's automotive products include passenger, driver side, head and
thorax protection curtains, side impact and knee airbag cushions manufactured
for installation in over 50 car and truck models sold worldwide; airbag fabric
for sale to airbag manufacturers; and stamped and machined components used in
airbag modules, including passenger airbag retainers that attach the airbag
cushion to the module's reaction can, as well as driver side module products and
components used in airbag inflators. Sales of airbag related products (inclusive
of sales of airbag fabric) for fiscal year 2000 accounted for approximately
74.5% of the Company's consolidated fiscal 2000 net sales. Sales of airbag
related products for fiscal years 1999 and 1998 accounted for approximately
70.2% and 67.6% of the Company's consolidated fiscal 1999 and 1998 net sales,
respectively.
The Company also manufactures a wide array of specialty technical fabrics
for consumer and industrial uses. These fabrics include: (i) high-end luggage
fabrics, including "ballistics" fabric used in Hartman and Tumi brands of
luggage; (ii) filtration fabrics used in aluminum, coal, steel, cement, clay and
brewing industries; (iii) woven fabrics for use by manufacturers of coated
products; (iv) specialty fabrics used in police jackets, protective apparel worn
by firefighters, fuel cells, bomb and cargo chutes, oil containment booms,
aircraft escape slides, and gas diaphragms; and (v) release liners used in tire
manufacturing. Sales are made against purchase orders, pursuant to releases on
open purchase orders, or pursuant to short-term supply contracts of up to twelve
months. Sales of technical related products accounted for approximately 10.8% of
the Company's consolidated fiscal 2000 net sales. Sales of technical related
products for fiscal years 1999 and 1998 accounted for approximately 10.9% and
10.5% of the Company's consolidated net sales, respectively. The market for the
Company's technical related products is highly segmented by product line.
Marketing and sales of the Company's technical related products is conducted by
the Company's marketing and sales staff based in Greenville, South Carolina.
Manufacturing of these products occurs at the South Carolina facility, using
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the same equipment and manufacturing process that the Company uses to produce
airbag fabric which enables the Company to take advantage of demand requirements
for the various products with minimal expenditures on production retooling
costs. By manufacturing technical products with the same machines that weave
airbags fabric, the Company is able to more effectively utilize capacity at its
South Carolina plant and lower per unit overhead costs.
Customers
Sales of airbag related products to TRW, Autoliv and Petri accounted for
approximately 27%, 19% and 17%, respectively, of the Company's consolidated
fiscal 2000 net sales. The loss of any such customer could have a material
adverse effect on the Company. See Note 8 to the Company's Notes to Consolidated
Financial Statements included elsewhere in this Report for certain disclosure
regarding the Company's industry segments.
The Company sells its airbag cushions to airbag module integrators for
inclusion in specified model cars generally pursuant to requirements contracts.
Certain of these customers also manufacture airbag cushions to be used in their
production of airbag modules.
The Company's largest airbag cushion customers include TRW, Autoliv and
Petri and the Company's largest airbag fabric customers include TRW, Autoliv and
Delphi. The Company also sells airbag fabric to Reeves, Bradford, ABC and
Mexican Industries. The Company sells its fabric either directly to a module
integrator or, in some cases, to a fabricator (such as the Company), which sells
a sewn airbag to the module integrator. Because driver-side fabric historically
has been coated (to prevent the driver's exposure to high temperatures) before
fabrication into airbags, the Company also sells fabric to coating companies,
which then resell the coated fabric to either an airbag fabricator or module
integrator. Sales are either made against purchase orders, pursuant to releases
on open purchase orders, or pursuant to short-term supply contracts generally
having a duration of up to twelve months.
The following describes the Company's contractual relationship with its
significant customers, the loss of one or more of which could have a material
adverse effect on the Company.
TRW. The Company has a global supply agreement with TRW with respect to the
supply of airbag fabric, airbag cushions and airbag metal components. The global
supply agreement includes price and cost reduction targets by the Company, as
well as sales growth targets to the Company, although TRW is not obligated to
purchase such amounts under the global supply agreement. If price or cost
reduction targets or sales growth targets are not met, TRW and the Company have
agreed to renegotiate pricing or sales volume targets, as applicable.
Autoliv. The Company supplies airbag cushions and airbag fabric to Autoliv
based upon releases from formal purchase orders, which typically cover a period
of twelve months and are negotiated prior to commitment with respect to price
and quantity. No contractual obligation to enter into annual supply agreements
with the Company exists with this customer.
Petri. The Company's "evergreen" agreement with Petri provides that prior
to the commencement of each calendar year, the parties will negotiate price,
quantity and other relevant terms of the airbag cushion supply contract for such
calendar year. Petri is under no contractual obligation to enter into such
annual supply agreements with the Company.
Suppliers
The Company's principal airbag cushion fabric customers generally approve
all suppliers of major airbag components or airbag fabric raw materials, as the
case may be. These suppliers are approved after undergoing a rigorous
qualification process on their products and manufacturing capabilities. In many
cases, only one approved source of supply exists for certain airbag components.
In the event that a sole source supplier experiences prolonged delays in product
shipments or no longer qualifies as a supplier, the Company would work together
with its customers to identify another qualified source of supply. Although
alternative sources of supply exist, a prolonged delay in the approval by the
Company's customers of any such alternative sources of supply could adversely
affect the Company's
5
operating results. Under the Company's agreements with its customers, any
changes in the cost of major components are passed through to the customers.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by DuPont, AZKO, Breed, Unifi and Hoechst Celanese,
among others. The primary yarns include nylon, polyester and Nomex. DuPont is
the leading supplier of airbag fabric yarn to both the market and the Company.
Approximately 90.0% of the nylon yarn used in the Company's airbag fabric
operations is supplied by DuPont pursuant to purchase orders or releases on open
purchase orders. The loss of DuPont as a supplier could have a material adverse
affect on the Company.
Capacity
The Company's Mexican and European facilities manufactured and shipped over
14 million airbag cushions to the Company's North American and European
customers during fiscal 2000 and the Company believes it has adequate capacity
to manufacture its fiscal 2001 budget requirements.
The Company's South Carolina facility has a current capacity to manufacture
approximately 30.0 million yards of fabric per year and manufactured
approximately 26.4 million yards of fabric in fiscal year 2000. The Company
utilizes rapier weaving machines that are versatile in their ability to produce
a broad array of specialty technical fabrics for use in a large number of
applications. In addition, the Company's machinery and equipment have the
capability to weave all types of yarns and fabrics specified by airbag module
integrators as well as a broad variety of technical fabrics. The ability to
easily interchange the machines between air restraint fabric and other specialty
technical fabrics allows the Company to maximize returns on plant assets.
Sales and Marketing
The Company markets and sells airbag cushions and airbag fabric through its
direct marketing and sales forces based in Mexico, California, South Carolina
and Germany. Prior to fiscal year 1998, the Company conducted its airbag cushion
sales and marketing through the efforts of its management and through Champion
Sales & Service Co. ("Champion"), an outside marketing firm engaged by the
Company since May 1992. Champion and Mr. Zummo, the Company's Chairman of the
Board, President and Chief Executive Officer, were instrumental in establishing
the Company's relationship with TRW. The Company was obligated to pay Champion a
commission of 2% on all sales of airbag cushions and airbag related components
to TRW in North America. The Company and the shareholders of Champion entered
into a definitive agreement, dated as of December 22, 1997, pursuant to which,
the Company acquired all of the issued and outstanding capital stock of Champion
for an aggregate purchase price of $3.4 million plus certain amounts previously
paid to Champion and the shareholders of Champion (the "Champion Transaction").
In connection with the Champion Transaction, the Company also entered into a
definitive Put Agreement (the "Put Transaction") with an associate of Champion
(the "Associate") who had the right to a portion of any of the above-referenced
commissions actually received by Champion. Pursuant to the Put Transaction, the
Associate had the option to put to the Company, subject to certain conditions,
all of the issued and outstanding capital stock of Duchi & Associates, Inc., an
entity affiliated with Champion, for a put price of $740,000. The exercise of
such put option was consummated as of January 13, 1999. The Champion Transaction
and the Put Transaction include a twenty-year management services agreement
between the Company and each of the Champion shareholders and the Associate,
respectively. The terms of each such management services agreement prohibits the
Champion shareholders, or the Associate, as the case may be, from competing with
certain businesses of the Company for a period of five years. Each such
management services agreement also provides that the Company has the option, in
its sole discretion, to extend the non-competition period for three successive
five-year periods, upon payment of a nominal extension fee. See Note 1 to the
Company's Notes to Consolidated Financial Statements included elsewhere in this
report.
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with its airbag module integrator customers, which produce
a substantial portion of their own airbag cushions for their own consumption,
but do not generally manufacture
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airbag cushions for the same vehicle models that the Company manufactures. Most
airbag module integrators subcontract a portion of their requirements for airbag
cushions. The Company believes that its good working relationship with its
customers, the Company's high volume and low-cost manufacturing capabilities,
consistency and level of quality products, the agreements or relationships with
its module integrator customers, the lengthy process necessary to qualify as a
supplier to an automobile manufacturer and the costs in the automotive industry
associated with changes in established suppliers create certain barriers to
entry for potential competitors.
In 1999, the total North American airbag fabric market totaled over $150.0
million. The Company shares this market with another major competitor, Milliken,
and three smaller fabric manufacturers. In addition, Takata, an airbag module
integrator, produces fabric for its airbag cushions. Barriers to entry into this
market include the substantial capital requirements and lengthy lead-times
required for certification of a new participant's fabrics by buyers.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, and
capability to produce a high volume of many models of passenger side and driver
side airbags. In addition, SCFTI has provided the Company with some measure of
vertical integration, enhancing its ability to compete in the automotive airbag
industry. Increased competition, as well as price reductions of airbag systems,
would adversely affect the Company's revenues and profitability.
Technical Center
The European Operations have recently restructured the Engineering Group.
Lead Engineers have been assigned as key customer manager, each engineer is
responsible for a given customer. Supporting each of these lead engineers are
technical specialist, quality engineers and manufacturing engineers. This
arrangement allows the same team to take responsibility for the product from
cradle to grave, assuring robust quotes, smooth launches and efficient
production.
Additionally, the Company has formalized development initiatives by
creating a Technical Center in Hildesheim, Germany. The center has the ability
to conduct static deployment and analysis using high speed video equipment. In
October 2000, the Company is scheduled to add pendulum test capability. There
also exists a full sample shop with manual and CNC sewing equipment,
production-style laser cutter, volume measurement and analysis, textile welding
and other non-sewn fastening equipment. The Technical Center also has a complete
materials laboratory, managed by an experienced materials engineer.
Additionally, the Technical Center utilizes the services and expertise of the
laboratory and textile experts in Greenville. There are also satellite
engineering functions in Wales, United Kingdom.
Qualification and Quality Control
The Company successfully completed the process of qualifying as an airbag
supplier, with the customer base now including Autoliv, Bradford, Dalphi,
Delphi, Petri, TG and TRW. Each of the customers requires the Company to meet
specific requirements for design validation. The customer participates in the
design and process validations and must be satisfied with the reliability and
performance prior to awarding a purchase order. The Company satisfies all
standards and requirements relating to product performance, which then qualifies
the Company to be a supplier.
The Company has extensive quality control and quality assurance systems in
its facilities including inspection and testing of all products and is QS 9000
and ISO 9002 certified. The Company also performs process capability studies and
design of experiments to determine that the manufacturing process's meet or
exceed the quality levels required by each customer.
The Company's overseas facilities also operate under similar quality
systems that meet ISO 9000, ISO 9001 and ISO 9002, which are the international
standards for quality. As is the case with U.S. customers the automobile
manufacturers may conduct their own design and process testing, however, the
Company is Technical Center located in Hildesheim, Germany has the ability to
conduct similar design and testing.
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The Companies airbag fabric operations also maintain the highest level of
quality through each and every process. The fabric operations have been
certified as approved suppliers by all of its automotive customers. In addition
the fabric operations laboratories have obtained accreditation against ISO Guide
25, ASTM, DIN, JIS and A2LA as well as UL accreditation. The Company was the
first airbag fabric manufacture to have its entire business (not just its
manufacturing facility) certified under QS 9000.
Governmental Regulations
Airbag systems installed in automobiles sold in the United States must
comply with certain government regulations, including Federal Motor Vehicle
Safety Standard 208, promulgated by the United States Department of
Transportation. The Company's customers are required to self-certify that airbag
systems installed in vehicles sold in the United States satisfy these
requirements. The Company's operations are subject to various environmental,
employee safety and wage and transportation related statutes and regulations.
The Company believes that it is in substantial compliance with existing laws and
regulations and has obtained or applied for the necessary permits to conduct its
business operations.
Product Liability
The Company is engaged in a business which could expose it to possible
claims for injury resulting from the failure of products sold by it. In the
past, there has been increased public attention to injuries and deaths of
children and small adults due to the force of the inflation of airbags. To date,
however, the Company has not been named as a defendant in any product liability
lawsuit nor threatened with any such lawsuit. The Company maintains product
liability insurance coverage which management believes to be adequate. However,
a successful claim brought against the Company resulting in a final judgment in
excess of its insurance coverage could have a material adverse effect on the
Company.
Non-Core Operations
The Company is a supplier and systems integration of military ordnance and
other related products as well as of projectiles and other metal components for
small to medium caliber training and tactical ammunition. Sales of metal and
defense related products accounted for $33.6 million or 14.7% of the Company's
consolidated fiscal 2000 net sales and $41.6 million or 18.9%, and $36.4 million
or 21.9% of the Company's fiscal 1999 and 1998 net sales, respectively. See Note
8 to the Company's Notes to Consolidated Financial Statements included elsewhere
in this Report for certain disclosure regarding the Company's industry segments.
On June 27, 2000, Valentec Systems, Inc. received from the Department of
the Army a Notice of Partial Termination for Production of 120mm Fin Assemblies
(the "Partial Termination"). The Company has reserved an amount at March 25,
2000 that management believes is adequate based on the information available and
on advisement from legal counsel. The Company is reviewing the process to appeal
the Partial Termination, however, there can be no assurances as to the final
decision by the Department of the Army.
As discussed in Note 2 to the consolidated financial statements, management
of the Company continually evaluates the recoverability of its long-lived
assets. Among other factors considered in such evaluation are the historical and
projected operating performance of business operations. Operating results of
Valentec deteriorated during fiscal 2000 arising from the loss of business with
a major customer. Valentec was unable to offset this loss with increased sales
with other customers. Accordingly, management concluded that intangible assets
in the amount of $17.7 million were no longer recoverable through future
operations and such amount was written-off during fiscal 2000.
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Systems Contract
In September 1994, the Company was awarded a contract by the United States
Army (the "Systems Contract"). The Systems Contract backlog was $5.1 million at
March 27, 1999, and the Company has eliminated such backlog at March 25, 2000.
The mortar cartridges sold by the Company to the United States Army pursuant to
the Systems Contract will be utilized in free standing, long-range artillery
weapons in support of infantry units. As a systems integrator, the Company does
not manufacture the mortar cartridges itself, but is a prime contractor,
coordinating the manufacture and assembly of the product components by various
subcontractors. As the prime contractor, the Company was responsible for
conducting quality control inspections and ensuring that the contract was
fulfilled in a timely and efficient manner.
The deliveries of completed mortar cartridges were initially expected to
begin in September 1995, and the Systems Contract was expected to be completed
by September 1996. Due to a delay by one of its subcontractors, the Company has
experienced delays in the shipment of mortar cartridges against the original
shipment schedule. The delay relates to matters between such subcontractor and
the United States Army. As a result of these issues, the United States Army had
extended the time for delivery under the Systems Contract. The Company resumed
shipments in February 1998 and such shipments have been completed during fiscal
2000.
Other
The Company manufactures metal airbag module components for the automotive
airbag industry, projectiles and other metal components primarily for 20
millimeter ammunition and to a lesser extent for 25 and 30 millimeter ammunition
used by the United States Armed Forces. This ammunition is fired from guns
mounted on aircraft, naval vessels and armored vehicles. The metal components
manufactured by the Company are shipped to a loading facility, operated either
by the United States Government or a prime defense contractor, which loads the
explosives, assembles the rounds and packages the ammunition for use. The
Company primarily manufactures components that are used in training rounds,
which are similar to tactical rounds but do not contain the same explosive or
incendiary devices contained in tactical rounds. Because of the continuous use
of training ammunition, the majority of the rounds purchased by the United
States Armed Forces are training rounds. In the past the Company has regularly
received replenishment orders from the United States Armed Forces for its
inventory of training ammunition.
Markets and Customers
The Company's defense related sales are made to the United States Armed
Forces, certain prime defense contractors for the United States Armed Forces and
foreign governments or contractors for foreign governments. The Company is a
principal or sole source supplier for many of the projectiles and other metal
components it manufactures. There can be no assurance, however, that other
companies will not begin to manufacture such products in the future and replace
part or all of the sales by the Company of these products.
Manufacturing and Production
The Company manufactures metal airbag module components for the automotive
airbag industry and other metal components at its Costa Mesa, California
operation and projectiles and other metal components for inclusion in small to
medium caliber ammunition utilizing primarily multi-spindle screw machines at
its manufacturing facility in Galion, Ohio. The manufacturing process includes
the impact extrusion of steel bars to form the blank or rough form shape of the
metal components, the machining of the inside and outside of the metal
components to form their final shape, various heat and phosphate treatments and
painting. The Company believes that its manufacturing equipment, machinery and
processes are sufficient for its current needs and for its needs in the
foreseeable future, with minimal preventive maintenance.
Suppliers
The Company believes that adequate supplies of the raw materials used in
the manufacture of its small to medium caliber products are available from
existing and, in most cases, alternative sources, although the Company is
9
frequently limited to procuring such materials and components from sources
approved by the United States Government.
Quality Control
The Company's defense operations employ Statistical Process Controls
extensively throughout its manufacturing process to ensure that required quality
levels are maintained and that products are manufactured in accordance with
specifications. The Company satisfies the United States Government quality
control standard Million-Q-9858A and ISO-9002. Under the Systems Contract, the
Company is responsible for conducting inspections of the subcontractors for the
program to ensure that they meet these same standards.
Competition
The Company competes for contracts with other potential suppliers based on
price and the ability to manufacture superior quality products to required
specifications and tolerances. The Company believes that it has certain
competitive advantages including its high volume, cost-efficient manufacturing
capability, its co-development of new products with its customers, and the
United States Government's inclination to remain with long-term reliable
suppliers. Since the Company's processes do not include a significant amount of
proprietary information, however, there can be no assurance that other companies
will not, in time, be able to duplicate the Company's manufacturing processes.
United States Government Contracts
Virtually all of the Company's defense related contracts, including the
Systems Contract, are negotiated as firm fixed price contracts with the United
States Government or certain of the United States Government's prime
contractors. These contracts are subject to audit and may be adjusted
accordingly.
A majority of the Company's manufacturing agreements with the United States
Armed Forces and its prime defense contractors are for the provision of
components for a one year term (two years in the case of the Systems Contract),
subject, in certain cases, to the right of the United States Government to renew
the contract for an additional term. Renewals of United States Government
contracts depend upon annual Congressional appropriations and the current
requirements of the United States Armed Forces. United States Government
contracts and contracts with defense contractors are, by their terms, subject to
termination by the United States Government for its convenience. Fixed price
contracts provide for payment upon termination for items delivered to and
accepted by the United States Government, and, if the termination is for
convenience, for payment of the contractor's costs incurred through the date of
termination plus the costs of settling and paying claims by terminated
subcontractors, other settlement expenses and a reasonable profit on the costs
incurred.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry in which there are seasonal
plant shutdowns in the third and fourth quarters of each calendar year. Although
the Systems Contract is not seasonal in nature, there have been and will
continue to be variations in revenues from the Systems Contract based upon costs
incurred by the Company in fulfilling the Systems Contract in each quarter. The
majority of the metal and defense ordnance manufacturing for United States
Government and prime defense contractors has historically occurred from January
through September and there is generally a lower level of manufacturing and
sales during the fourth quarter of the calendar year.
Backlog
The Company does not reflect an order for airbag cushions or airbag fabric
in backlog until it has received a purchase order and a material procurement
release which specifies the quantity ordered and specific delivery dates.
Generally, these orders are shipped within four to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
backlog is a reliable measure of future airbag sales.
10
As of March 25, 2000, the Company had a defense-related backlog of
approximately $11.3 million all of which is expected to be eliminated before the
end of fiscal year 2001. As of March 27, 1999, the Company had a defense-related
backlog of approximately $10.8 million.
Risks of Foreign Operations
Certain of the Company's consolidated sales are generated outside of the
United States. Foreign operations and exports to foreign markets are subject to
a number of special risks, including, but not limited to, risks with respect to
fluctuations in currency exchange rates, economic and political destabilization,
other disruption of markets, restrictive actions by foreign governments (such as
restrictions on transfer of funds, export duties and quotas, foreign customs and
tariffs and unexpected changes in regulatory environments), changes in foreign
laws regarding trade and investment, difficulty in obtaining distribution and
support, nationalization, the laws and policies of the United States affecting
trade, foreign investment and loans, and foreign tax laws. There can be no
assurance that one or a combination of these factors will not have a material
adverse effect on the Company's ability to increase or maintain its foreign
sales or on its results of operations.
In addition, the Company has significant manufacturing operations in
foreign countries and purchases a portion of its raw materials from foreign
suppliers. The production costs, profit margins and competitive position of the
Company are affected by the strength of the currencies in countries where it
manufactures or purchases goods relative to the strength of the currencies in
countries where its products are sold.
Certain of the Company's operations generate net sales and incur expenses
in foreign currencies. The Company's financial results from international
operations may be affected by fluctuations in currency exchange rates. Certain
exchange rate risks to the Company are limited by contractual clauses in the
Company's agreement with TRW for European supply of airbags. Future fluctuations
in certain currency exchange rates could adversely affect the Company's
financial results.
Employees
At March 25, 2000, the Company employed approximately 2,778 employees. The
Company's hourly employees in Mexico are entitled to a federally-regulated
minimum wage, which is adjusted, at minimum, every two years. The Company's
employees at its Mexican facility and certain employees of Valentec Systems are
unionized. In addition, Automotive Safety Components International GmbH & Co. KG
(formerly known as Phoenix Airbag GmbH & Co. KG "Phoenix Airbag"), the Company's
wholly-owned German subsidiary, has a workers' council pursuant to German
statutory labor law and a vast majority of the employees of Phoenix Airbag are
members of a labor union. The employees at the Company's facilities in the U.K.
are also represented by a workers' council. The Company has not experienced any
work stoppages related to its work force and considers its relations with its
employees and the unions currently representing any of its employees to be good.
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 international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws, including but not limited to,
those under CERCLA may impose joint and several liability and may apply to
conditions at properties presently or formerly owned or operated by an entity or
its predecessor as well as to conditions of properties at which wastes or other
contamination attributable to an entity or its predecessor have been sent or
otherwise come to be located. The nature of the Company's operations exposes it
to the risk of claims with respect to such matters and there can be no assurance
that violations of such laws have not occurred or will not occur or 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
11
liability for known environmental claims pursuant to such Environmental Laws,
will not have a material adverse effect on the Company's financial position or
results of operations and cash flows. 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.
The Company has identified two areas of underground contamination at the
Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed up by annual
maintenance. The consultants also estimate that remediation costs will be
approximately $250,000, for which the Company had accrued prior to fiscal year
1998 and is included in other long-term liabilities at March 25, 2000 and March
27, 1999. However, depending on the actual extent of impact to the Company or
more stringent regulatory criteria, these costs could be higher. Additionally,
an underground contamination involving machinery fluids exists at the Valentec
facility in Costa Mesa, California and a site remediation plan has been approved
by the Regional Water Quality Control Board. The remediation plan currently
involves the simultaneous operation of a groundwater and vapor extraction
system. Such plan will take approximately five years to implement at an
estimated cost of approximately $368,000, for which the Company had accrued as
part of accrued liabilities. To date, the Company has spent approximately
$325,000 on implementing such plan. In addition, SCFTI has been identified along
with numerous other parties as a Potentially Responsible Party at the Aquatech
Environmental, Inc. Superfund Site. The Company believes that it is a de minimis
party with respect to the site and that future clean-up costs incurred by the
Company will not be material.
A Phase II study revealed limited organic groundwater contamination at the
Company's converter facility in South Carolina. At the time of the Company's
purchase of such facility, $185,000 of the purchase price thereof was placed in
escrow to pay for, if necessary, environmental remediation and monitoring at
such facility. Based on the results of the groundwater monitoring that already
has been conducted, and on the Company's discussions with the South Carolina
Department of Health and Environmental Control ("DHEC"), it appears likely that
no further work will be required.
Low levels of VOCs were found at the Company's Automotive facility in South
Carolina during groundwater sampling. In February 1999, the facility received a
notice letter from DHEC regarding the groundwater contamination. While DHEC
acknowledges that there does not appear to be an active source for groundwater
impact at the facility, it required the facility to perform sampling of two
existing monitoring wells located on the Automotive parcel for VOCs. Low levels
of VOCs again were detected. A meeting was held with DHEC to discuss the
sampling results. DHEC has requested that the Company (i) confirm that no
residential wells exist in the area, (ii) perform additional sampling, and (iii)
propose a program in-site remediation of the groundwater, involving injection of
nutrients to biodegrade to organic compounds in the groundwater. The Company
does not at this time believe that these costs will be material. The Company
cannot evaluate the likelihood of further DHEC requirements at this time.
In the opinion of management, no material expenditures will be required for
its environmental control efforts and the final outcome of these matters will
not have a material adverse effect on the Company's results of operations or
financial position. The Company believes that it currently is in compliance with
applicable environmental regulations in all material respects. Management's
opinion is based on the advice of an independent consultant on environmental
matters.
Patents
The Company holds twelve patents and six additional patents are pending.
Sixteen of such patents relate to technical improvements for enhancement of
product performance with respect to the Company's airbag, fabric and technical
related products and two relate to automotive products at Valentec. Provided
that all requisite maintenance fees are paid, three of the patents held by the
company expire in 2014, two expire in 2016, one expires in 2017, three more
expire in 2018, one expires in 2019, and two expire in 2020.
12
Engineering, Research & Development
The Company's fabric and airbag cushions operations have maintained an
active design and development effort focused toward new and enhanced products
and manufacturing processes. The Company specifically designs and engineers its
fabrics to meet its customers' applications and needs. While most design
requirements are originated by the component manufacturer, the Company is
dedicated to improving the quality of existing products, as well as developing
new products for all applications. Costs associated with design and development
for fabric and airbag cushions were approximately $665,000 during fiscal 2000.
In addition, the Company incurred approximately $278,000 during fiscal 2000 in
connection with the development of proprietary products for the automotive
industry. Valentec has developed a high performance exhaust system, under its
Zummo Performance Products business unit, which is intended for sale through
retail and wholesale channels, although no formal marketing plans have yet been
developed.
Related Parties
The Company established a reserve in the amount of $0.6 million in the
second quarter of fiscal 2000 against its receivable of $1.2 million from
Valentec International Ltd. ("VIL"), an affiliated party, as a result of
uncertainty as to the affiliate's ability to generate sufficient cash to repay
such amount. An agreement was signed in January 2000 between the Company and
Robert A. Zummo, the Chief Executive Officer of the Company, whereby Mr. Zummo
pledged to the Company his stock in the Company as collateral against such
indebtedness. Mr. Zummo is the principal shareholder of VIL. Further, Mr. Zummo
agreed to direct VIL to remit to the Company, in satisfaction of a portion of
the receivable, $564,000 to be received from a foreign customer. In connection
with the restructuring agreement signed in April 2000, discussed below, the
pledged collateral has diminished in value, and Mr. Zummo has agreed to reduce
future payments to him under his employment agreement to cover such receivable
in the event the cash is not received from the foreign customer by July 1, 2001.
In addition, the Company has agreed to release VIL from any amounts due in
excess of such receivable.
13
ITEM 2. PROPERTIES
The Company relocated its corporate headquarters from Fort Lee, New Jersey
to Greenville, South Carolina during fiscal 2000. The Company manufactures
automotive and industrial products in seven locations, with total plant area of
approximately 1,373,000 square feet (including administrative, engineering and
research and development areas housed at plant sites). Below is an overview of
the Company's manufacturing and office facilities as of June 23, 2000. See Note
5 to the Company's Notes to Consolidated Financial Statements included elsewhere
in this Report for more information regarding certain of the Company's
obligations that are secured by certain assets of the Company, including its
owned facilities.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Airbag and Technical Fabrics Related Products
Ensenada, Mexico (airbag cushions) .............. 97,000(1) Leased 2003(2)
Greenville, South Carolina (airbag and
technical related fabrics; warehouse and ...... Owned NA
corporate offices) .............................. 826,040(1)
Bavendstedt, Germany (airbag cushions) .......... 70,000(1) Owned NA
Czech Republic (airbag cushions) ................ 100,000(3) Owned NA
Gwent, Wales (airbag cushions) .................. 60,000(3) Leased 2003
Carlsbad, California (airbag cushions) .......... 2,840(4) Leased 2004
Otay Mesa, California (warehouse) ............... 15,700(5) Leased 2003
Fort Lee, New Jersey (former corporate office) .. 4,685(4) Leased 2007
Metal and Defense
Costa Mesa, California (metal ................... 129,000(3)(6) Leased 2009
components and defense products)
Mount Arlington, New Jersey (defense
systems) ...................................... 3,600(4) Leased Sept. 2000
Galion, Ohio (defense products) ................. 97,000(3) Owned NA
- ----------
(1) Office, manufacturing and research and development space.
(2) Lease is subject to two one-year renewal options.
(3) Manufacturing and office space.
(4) Office space.
(5) Finished goods distribution center.
(6) Consists of two facilities.
14
ITEM 3. LEGAL PROCEEDINGS
After the Company's announcement of the restatements in November 1999, the
Company and several of its present or former officers and directors were named
defendants in a class action litigation commenced by shareholders of the Company
in the United States District Court for the District of New Jersey. Eight
separate lawsuits were filed, alleging violations of the federal securities
laws, and all have been consolidated into one action. The parties are currently
negotiating a settlement of the litigation, which will require approval by the
District Court, as well as the federal bankruptcy court in which the Company's
Chapter 11 petition is currently pending. Management does not presently believe
that a resolution consistent with present negotiations would have a material
effect on the financial statements.
Valentec, which was acquired by the Company in May 1997, has been the
subject of an investigation by the Department of Justice regarding a bid-rigging
and kickbacks scheme alleged to have occurred between 1988 and 1992. The
Department of Justice Antitrust Division has contended that former subsidiaries
or divisions of the former Valentec participated in such misconduct in part
through the actions of a former marketing agent and former employees, in order
to obtain certain government subcontracts awarded by Martin Marietta Ordnance
Systems (the predecessor-in-interest to Lockheed Martin). The Government also
contended that Valentec was liable for the acts of its predecessors on a theory
of successor corporate criminal liability. The Government contended that the
alleged kickbacks were made through the former Valentec Kisco and Valentec
Galion operations while those operations were owned and operated by the former
Valentec from the late 1980's through 1992, prior to the 1993 leveraged buy-out
of Valentec by Robert A. Zummo, the President and Chief Executive Officer of the
Company. No officer or director of the Company or its subsidiaries was alleged
to have participated in, or known about, such conduct. The Company has no
recourse against the entity which owned Valentec during the operative time
period due to contractual restrictions in the purchase agreement between Mr.
Zummo and such entity. The Company determined that it was in its best interest
to settle such matter in order to avoid the costs and distractions associated
with contesting the Department of Justice's legal theories on successor
liability. Therefore, a plea agreement was negotiated with the Antitrust
Division of the Department of Justice (the "Plea Agreement"), pursuant to which
Valentec entered a plea, as the successor to the former Valentec Galion
division, to a one-count criminal information of participating in a combination
and conspiracy to suppress competition in violation of the Sherman Antitrust
Act, 15 U.S.C.ss.1, and agreed to pay a $500,000 fine, all of which was paid
during fiscal year 1999. The Plea Agreement also includes an agreement by the
Government not to further criminally prosecute the Company, its subsidiaries, or
any of their respective officers, directors or employees as to the alleged
bid-rigging and kickback scheme. The Plea Agreement does not release the Company
or Valentec from potential civil claims that might be asserted by the United
States Department of Justice Civil Division against Valentec arising out of the
Government's investigation of conduct that is alleged to have occurred in the
time frame prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. The Company
has had discussions with the Civil Division regarding the resolution of such
potential civil claims. As of the date hereof no understanding had been reached
with the Civil Division as to such potential civil claims. The Company denies
that it is liable for any such potential civil claims. In early 1999, Lockheed
Martin named Valentec as a defendant in a civil action already pending in the
United States District Court for the Western District of Tennessee ("the
Court"). Lockheed Martin asserts that Valentec, as the corporate
successor-in-interest to the former Valentec International Corporation, is
civilly liable to Lockheed Martin under antitrust, breach of contract and other
theories of liability for damages. Lockheed Martin claims that it sustained such
civil damages in part as a consequence of the bid-rigging and kickback scheme
said to have occurred in connection with subcontracts awarded to the former
Valentec Galion by Lockheed Martin's predecessor-in-interest, Martin Marietta
Ordnance Systems, Inc. between 1988 and 1992. Lockheed Martin also seeks a
declaratory judgment that Valentec and the other named defendants shall be held
liable and shall indemnify Lockheed Martin to the extent that the United States
Government makes and establishes civil claims against Lockheed Martin arising
out of such purported antitrust and bid-rigging scheme. Such civil claims have
been established at $270,000. Valentec denies that Valentec has any such
liability to Lockheed Martin and, accordingly, has moved to dismiss all such
claims. On February 29, 2000, the Court dismissed and otherwise entered
judgement in Valentec's favor in all causes of action of the Lockheed Martin
case. However, Lockheed Martin's claim for indemnification for civil claims of
the U.S. Government was not dismissed. Accordingly, Lockheed Martin has filed an
amended complaint against Valentec and the other defendants for $340,000,
representing $270,000 paid by Lockheed Martin to the U.S. Government and $70,000
in legal fees. A settlement offer has been proffered by Lockheed Martin at an
amount for which the Company is adequately reserved.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders on December 13,
1999.
At the Annual Meeting, Joseph J. DioGuardi and John C. Corey were elected
Class I directors of the Company. The number of shares of the Company's common
stock voted in favor of the election of Messrs. DioGuardi and Corey were
3,056,139 and 3,388,390, respectively, and the number of such shares withheld
were 708,741 and 376,490. In addition, the following other directors continued
as such after the Annual Meeting: Robert J. Torok and Robert A. Zummo.
At the Annual Meeting, the Company's stockholders also voted in favor of
the approval of an amendment to the Company's 1994 Stock Option Plan (the "1994
Plan") to i) increase the number of shares of the Company's common stock
issuable under the 1994 Plan to officers, key employees and consultants from
935,000 shares in the aggregate to 1,375,000 shares in aggregate and ii)
increase the number of shares issuable to non-employee directors under the 1994
Plan from 75,000 shares in the aggregate to 125,000 shares in the aggregate. The
vote of approval for such amendment was 1,340,671 FOR, 520,378 AGAINST, and
9,135 ABSTAINING
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock was listed on the Nasdaq National Market (Nasdaq symbol:
ABAGE) until February 18, 2000, at which time the common stock was delisted from
the Nasdaq Stock Market). The following table sets forth the range of high and
low bid information for reported sale prices of the Common Stock for each full
quarterly period within the two most recent fiscal years.
High Low
---- ---
Year Ended March 25, 2000
First Quarter $ 8.94 $ 4.50
Second Quarter $ 6.25 $ 2.69
Third Quarter $ 3.94 $ 1.00
Fourth Quarter $ 1.88 $ 0.50
Year Ended March 27, 1999
First Quarter $19.00 $13.63
Second Quarter $18.25 $ 9.38
Third Quarter $17.25 $10.00
Fourth Quarter $15.88 $ 5.50
As of July 7, 2000 there were approximately 131 holders of record of the
Common Stock.
The Company has, to date, not paid any cash dividends to its stockholders
and presently intends to continue its policy of retaining its earnings to
support the growth and development of its business. The Company's existing
credit agreement restricts the Company's ability to pay dividends.
17
Item 6. Selected Financial Data
The selected financial data as of and for the fiscal years ended March 25,
2000, March 27, 1999, March 28, 1998, and March 31, 1997 and 1996 are derived
from the consolidated financial statements of the Company. The consolidated
financial statements of the Company as of and for the years ended March 25,
2000, March 27, 1999 and March 28, 1998 have been audited by Arthur Andersen
LLP, independent accountants. The consolidated financial statements of the
Company for the fiscal years ended March 31, 1997 and 1996 have been audited by
PricewaterhouseCoopers LLP, independent accountants.
Management discovered certain matters relating to the Company's financial
statements for fiscal 1999 and fiscal 1998 which required further investigation
and restatement of the financial statements for those periods, as well as the
financial statements for the twenty-six weeks ended September 25, 1999. The
audit committee consisting only of outside members of the Board of Directors,
with the assistance of special counsel and an independent public accounting
firm, conducted a thorough investigation of these matters and determined that
the restatement related primarily to two items. The first item required the
reversal of a duplicate booking of a sale and the related receivable in the
Company's defense operations and the second item required the reversal of
certain items incorrectly recorded in income in connection with a loan
transaction. The restatement for the fiscal year ended March 28, 1998 reduces
previously reported net sales by $4.2 million to net sales of $166.1 million and
previously reported net income by $2.7 million to a net income of $3.3 million.
The restatement for the fiscal year ended March 27, 1999 reduces previously
reported net sales by $1.3 million to net sales of $220.0 million and increases
previously reported net loss by $797,000 to a loss of $13.7 million. The
cumulative effect on retained earnings was $2.7 million and $3.5 million as of
March 28, 1998 and March 27, 1999, respectively.
During fiscal 2000, the Company incurred approximately $4.0 million of
costs associated with the investigation and restatement of the Company's
financial statements for fiscal 1998 and 1999, and the restructuring of the
Company's balance sheet.
During the third quarter of fiscal 2000 the Company recognized a goodwill
impairment charge of $17.7 million, related to the Valentec acquisition. The
operating results of Valentec deteriorated during the year arising from the loss
of business with a major customer. Valentec was unable to offset this loss with
increased sales with other customers. Management concluded that the intangible
assets were no longer recoverable through operations and such amount was written
off in the financial statements during the third quarter of fiscal 2000.
During fiscal 1999, after exploring a variety of strategic alternatives,
the Company entered into the Brera Investment Agreement. The Company and Brera
subsequently reached a mutual agreement to terminate such agreement. The Company
incurred approximately $2.5 million of fees and expenses during fiscal 1999
related to the Brera Investment Agreement and its termination. This charge
included a reimbursement to Brera for fees and expenses incurred by it.
During fiscal 1999 and fiscal 1998, the Company incurred approximately $2.4
million ($1.2 million, net of tax benefit of $1.2 million) and $1.8 million
($1.2 million net of tax benefit of $600,000) of costs associated with the
reorganization and relocation of its foreign operations, respectively. These
costs were investments toward consolidating production within the Company's
foreign operations to its low-cost facilities located within the foreign market.
During fiscal 1997, the Company changed its accounting for product launch
costs from the deferral method to the expense as incurred method. The Company
recorded the cumulative effect of this change in accounting principle in the
amount of $1.3 million, net of income taxes, or $0.25 per share. During fiscal
year 1997, $1.8 million ($1.1 million net of tax benefit of $704,000) of product
launch costs were expensed. In addition, in connection with a new loan agreement
with Bank of America National Trust and Savings Association, which replaced the
revolving credit with Citicorp US, Inc., the Company recorded an extraordinary
loss of $383,000, net of income taxes, or $0.08 per share, relating to the
write-off of deferred financing costs incurred for the previous credit facility.
18
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto, included elsewhere in this Report.
INCOME STATEMENT DATA (in thousands, except per share data and footnotes)
Restated Restated
Year Ended Year Ended Year Ended Years Ended
March 25 March 27, March 28, March 31,
-------------------------------------------------------------------------
2000(1) 1999(1) 1998(1) 1997(1) 1996(1)
-------------------------------------------------------------------------
Net sales $ 228,266 $ 219,981 $ 166,074 $ 83,958 $ 94,942
Cost of goods sold 200,185 196,760 138,767 67,934 81,908
--------- --------- --------- --------- ---------
Gross profit 28,081 23,221 27,307 16,024 13,034
Selling, general and administrative
Expenses 16,353 16,030 10,796 7,072 5,430
Research and development expenses 943 1,090 357 -- --
Terminated investment agreement costs -- 2,500 -- -- --
Amortization 2,078 2,362 1,742 348 --
Relocation and reorganization costs -- 3,238 1,789 -- --
Goodwill impairment charge 17,676 -- -- -- --
Restructuring and restatement 3,969 -- -- -- --
--------- --------- --------- --------- ---------
Operating (loss) income (12,938) (1,999) 12,623 8,604 7,604
Other expense (income) 1,937 2,197 (397) 208 (807)
Interest expense 14,116 12,788 7,747 1,555 381
--------- --------- --------- --------- ---------
Income (loss) before income taxes (28,991) (16,984) 5,273 6,841 8,030
Income tax (benefit) provision 6,154 (3,321) 1,927 2,995 3,116
--------- --------- --------- --------- ---------
(Loss) income before extraordinary
item and cumulative effect of
accounting change (35,145) (13,663) 3,346 3,846 4,914
Extraordinary item-deferred
financing costs (less tax benefit of $225) -- -- -- (383) --
Cumulative effect of change in accounting
for deferred product launch costs (less
tax benefit of $718) -- -- -- (1,259) --
--------- --------- --------- --------- ---------
Net (loss) income $ (35,145) $ (13,663) $ 3,346 $ 2,204 $ 4,914
========= ========= ========= ========= =========
19
PER SHARE DATA(2)
Restated Restated
Year Ended Year Ended Year Ended Years Ended
March 25, March 27, March 28, March 31,
2000(1) 1999(1) 1998(1) 1997(1) 1996(1)
--------------------------------------------------------------------
Basic per share data:
Income (loss) before extraordinary item and
Cumulative effect of accounting change $ (6.84) $ (2.67) $ 0.67 $ 0.77 $ 0.99
Extraordinary item -- -- (0.08) --
Cumulative effect of change in accounting
for deferred product launch costs -- -- -- (0.25) --
--------- --------- --------- --------- ---------
Net income (loss) per share, basic $ (6.84) $ (2.67) $ 0.67 $ 0.44 $ 0.99
========= ========= ========= ========= =========
Diluted per share data:
Income (loss) before extraordinary item and
Cumulative effect of accounting change $ (6.84) $ (2.67) $ 0.65 $ 0.76 $ 0.97
Extraordinary item -- -- (0.08) --
Cumulative effect of change in accounting
for deferred product launch costs -- -- -- (0.25) --
--------- --------- --------- --------- ---------
Net income (loss) per share, assuming $ (6.84) $ (2.67) $ 0.65 $ 0.43 $ 0.97
========= ========= ========= ========= =========
dilution
Income before extraordinary item and
Cumulative effect of accounting change -- -- $ 3,846 --
=========
Earnings per common share -- -- $ 0.77 --
=========
Net (loss) income $ (35,145) $ (13,663) $ 3,346 $ 2,204 $ 4,914
========= ========= ========= ========= =========
Net (loss) income per share, basic $ (6.84) $ (2.67) $ 0.67 $ 0.44 $ 0.99
========= ========= ========= ========= =========
Net (loss) income per share, assuming $ (6.84) $ (2.67) $ 0.65 $ 0.43 $ 0.97
========= ========= ========= ========= =========
dilution
Weighted average common shares
Outstanding, basic 5,136 5,112 5,027 5,027 4,981
========= ========= ========= ========= =========
Weighted average common shares
Outstanding, assuming dilution 5,136 5,112 5,147 5,050 5,083
========= ========= ========= ========= =========
BALANCE SHEET DATA
(in thousands)
Restated Restated
March 25, March 27, March 28, March 31,
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Senior subordinated debt $ 90,000 $ 90,000 $ 90,000 $ -- $ --
Working capital (100,150) 35,274 25,304 11,755 25,050
Total assets 175,560 217,970 194,633 73,407 49,831
Long-term debt, net of current portion 15,736 53,700 24,739 21,296 3,087
Stockholders' (deficit) equity (14,440) 22,456 36,532 35,274 35,344
- ----------
Notes to Selected Financial Data:
(1) The Company did not declare dividends during fiscal years 2000, 1999, 1998,
1997 or 1996.
(2) The weighted average number of common shares outstanding as of March 31,
1996, includes the weighted average of the pro forma number of shares
assumed issued prior to the Company's initial public offering in May 1994
to retire inter-company and other indebtedness.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a leading low-cost independent supplier of automotive airbag
fabric and cushions, with operations in North America and Europe. Due to the
Company's historical and anticipated growth, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto, appearing herein.
Management discovered certain matters relating to the Company's financial
statements for fiscal 1999 and fiscal 1998 which required further investigation
and restatement of the financial statements for those periods, as well as the
financial statements for the twenty-six weeks ended September 25, 1999. The
audit committee consisting only of outside members of the Board of Directors,
with the assistance of special counsel and an independent public accounting
firm, conducted a thorough investigation of these matters and determined that
the restatement related primarily to two items. The first item required the
reversal of a duplicate booking of a sale and the related receivable in the
Company's defense operations and the second item required the reversal of
certain items incorrectly recorded in income in connection with a loan
transaction. The restatement for the fiscal year ended March 28, 1998 reduces
previously reported net sales by $4.2 million to net sales of $166.1 million and
previously reported net income by $2.7 million to a net income of $3.3 million.
The restatement for the fiscal year ended March 27, 1999 reduces previously
reported net sales by $1.3 million to net sales of $220.0 million and increases
previously reported net loss by $797,000 to a loss of $13.7 million. The
cumulative effect on retained earnings was $2.7 million and $3.5 million as of
March 28, 1998 and March 27, 1999, respectively.
During the third quarter of fiscal 2000 the Company recognized a goodwill
impairment charge of $17.7 million, related to the Valentec acquisition. The
operating results of Valentec deteriorated during the year arising from the loss
of business with a major customer. Valentec was unable to offset this loss with
increased sales with other customers. Management concluded that the intangible
assets were no longer recoverable through operations and such amount was written
off in the financial statements during the third quarter of fiscal 2000.
During fiscal 2000, the Company incurred approximately $4.0 million of
costs associated with the investigation and restatement of the Company's
financial statements for fiscal 1998 and 1999, and the restructuring of the
Company's balance sheet. Such costs were necessary for the financial stability
of the Company for the future.
During the third quarter of fiscal 1999 the Company reevaluated its
strategic decision to exit the manufacturing of airbags in Hildesheim, Germany.
The original plan developed in December 1996 called for the closure and move of
the entire manufacturing operation to the Company's Czech Republic and United
Kingdom production facilities. During fiscal 1999, the Company incurred
approximately $2.4 million ($1.2 million net of tax benefit of $1.2 million, or
$0.23 per share) of costs associated with the relocation of substantially all of
its labor-intensive passenger airbags operations to its lower labor cost Czech
Republic facility. During fiscal 1998, the Company incurred approximately $1.8
million ($1.2 million net of tax benefit of $600,000, or $0.23 per share) of
costs, which were charged to operations, associated with the reorganization and
relocation of its foreign operations. These costs were investments toward
consolidating labor-intensive production within the Company's foreign operations
to its lower cost facilities located within the foreign market. While the
Company accomplished the move of substantially all of its labor-intensive
passenger airbag operations, the Company decided not to move the remaining
automated airbag operations, primarily driver and side impact bags. The decision
to continue manufacturing in Germany was based on the existing and anticipated
program delivery commitments. The Company purchased a new facility in
Bavendstedt, Germany near the existing facility and completed its move into the
new facility during the second quarter of fiscal year 2000. The new German
facility has allowed the Company to conduct its operations in Germany in a more
efficient and cost effective manner.
21
Results of Operations
The following table sets forth certain operating results as a percentage of
net sales for the periods indicated:
Years Ended
------------------------------
Restated Restated
March 25, March 27, March 28,
2000 1999 1998
--------- --------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 87.7 89.4 83.6
Gross profit 12.3 10.6 16.4
Selling, general and administrative expense 7.2 7.3 6.5
Income (loss) from operations (5.7) (0.9) 7.6
Interest expense, net 6.2 5.8 4.7
Net income (loss) (15.4) (6.2) 2.0
Year Ended March 25, 2000, Compared to Year Ended March 27, 1999, as restated
Net Sales. Net sales increased by $8.3 million or 3.8% to $228.3 million in
fiscal 2000 compared to fiscal 1999. The increase was primarily attributable to
increased sales volume from new awards from existing customers in the U.S. and
European core operations, offset by lower sales in the non-core operations.
North American core operations showed increased sales of 11.3% for air bag
cushions and related fabric products over the prior fiscal year. European core
operations had increased sales of 6.1% over the prior fiscal year, despite such
sales having been adversely impacted (approximately 4.7%) by foreign currency
translation rates. With respect to fabric sales, technical fabrics increased $.7
million or 2.9% over the prior fiscal year, while airbag fabric sales decreased
by $1.5 million or 3.2% although the decrease in external sales volume was
accompanied by a much greater increase in internal sales volume to the Company's
Enseneda, Mexico airbag plant in support of their higher demand for airbag
cushions. The non-core operations had a decrease in sales of $8.0 million or
19.3% below the prior fiscal year; such decreases were attributable primarily to
lower volume at all of the non-core operations, including specifically lower
sales for the M16 links and 120 MM mortar system which were significantly below
the prior year due to the phase out of those contracts.
Gross Profit. Gross profit increased by $4.9 million or 21.1% to $28.1
million compared to the prior fiscal year. Approximately $6.9 million of the
increase was attributable to margin gains in the core operations arising from
efficiency improvements and related successes in the Lean Manufacturing program
which the Company began implementing since the beginning of fiscal 2000 and
favorable product mix. Non-core operations adversely impacted overall gross
profit by $2.0 million due to decreased sales volumes. Gross profit as a
percentage of sales increased to approximately 12.3% from 10.6% for the prior
fiscal year. The increase as a percentage of sales was due to the items
discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $16.4 million increased by $0.3 million or 2.0%
compared to the prior fiscal year. The prior fiscal year included the writeoff
of $1.5 million of receivables associated with a contract dispute with a
significant customer of Valentec. Selling, general and administrative expenses
as a percentage of sales decreased to 7.2% in the current fiscal year from 7.3%
for the prior fiscal year due to the above-referenced items.
Research and Development Expenses. Research and development expenses
decreased by $0.2 million or 13.5% to $0.9 million compared to the prior fiscal
year. The majority of the research and development costs were incurred at SCFTI
in its technical fabrics division, in Europe for airbag related products and at
Valentec in connection with the development of proprietary products for the
automotive industry.
Terminated Investment Agreement Costs. The Company expensed approximately
$2.5 million of fees and expenses during the fourth quarter of fiscal 1999
related to the Brera Investment Agreement and its termination.
Reorganization and Relocation Costs. Within the European operations, the
Company incurred approximately $2.4 million of costs associated with the move of
labor intensive passenger airbag lines from the Company's German facility to its
lower labor cost Czech Republic facility. These costs included, but were not
limited to, contract laborers, duplicate personnel, increased scrap costs and
freight costs. The Company also expensed approximately $0.3 million associated
with the closure of the China facility, as part of an effort to consolidate
manufacturing operations within Europe and maximize the capacity of the European
operations. During the fiscal 1998 the Company incurred approximately $1.8
million of costs associated with the reorganization and relocation of its
foreign operations. The Company also expensed approximately $0.5 million during
the fourth quarter of fiscal 1999 related to the anticipated relocation of its
corporate office into its South Carolina facility.
Goodwill Impairment Charge. The Company recognized a goodwill impairment
charge of $17.7 million with no associated tax benefit, related to the 1997
acquisition of Valentec. Operating results of Valentec deteriorated during
fiscal 2000 arising from the loss of business with a major customer. The
subsidiary was unable to offset this loss with increased sales with other
customers. Accordingly, management concluded that intangible assets in the
amount of
22
$17.7 million was no longer recoverable through future operations and such
amount was written-off in the Company's financial statements for the quarter
ended December 25, 1999.
Restatement and Restructuring Costs. The Company incurred approximately
$4.0 million of legal, professional and re-financing related costs associated
with the investigation and restatement of its financial statements for fiscal
years 1998 and 1999, and its restructuring efforts leading up to its filing
under Chapter 11 on April 10, 2000.
Operating Income/Loss. Operating loss increased by $11.0 million to $13.0
million or 550.0% compared to the prior fiscal year. The decrease was primarily
attributable to the items discussed above.
Other Expense. Other expense in fiscal 2000 consisted primarily of a
write-off of obsolete fixed assets of approximately $0.7 million and crystalized
and uncrystalized exchange losses of $0.8 million. Other expenses in fiscal 1999
consisted primarily of a write-off of investments of approximately $0.5 million
during the third quarter of fiscal 1999, a write-down of fixed assets held for
sale of approximately $0.7 million during the third quarter of fiscal 1999, and
a write-down of fixed assets held for sale or approximately $0.8 million during
the fourth quarter of fiscal 1999. The investment, made in early fiscal 1997 in
an unaffiliated company, related to a specific type of airbag fabric, which the
Company no longer believes will yield any future benefits. The write-down of an
asset held for sale, purchased in fiscal 1998, related to a specific line of
business at Valentec for which sales did not materialize resulting in a
determination by the Company to sell the related assets. The write-down during
the fourth quarter related to the disposal of China assets of approximately $0.2
million and revaluation of fixed assets held for sale at Valentec of
approximately $0.6 million.
Interest Expense. Interest expense increased $1.3 million to $14.1 as
compared to the prior year. The increase is primarily due to higher revolving
credit balances during the year and the mortgage for the new German facility.
Income Taxes. Income taxes for fiscal 2000 reflect adjustments for deferred
tax valuation allowances established against deferred tax assets and the
non-deductibility of the Valentec goodwill impairment charge discussed above.
Net Loss. Net loss of $35.1 million in fiscal 2000 compared to the loss of
$13.7 million for fiscal 1999. This decrease resulted from the items discussed
above.
Year Ended March 27, 1999, as restated, Compared to Year Ended March 28, 1998,
as restated
Net Sales. Net sales increased by $53.9 million or 32.5% to $220.0 million
in fiscal 1999 compared to fiscal 1998. The increase was primarily attributable
to the inclusion of the operations of SCFTI for the entire fiscal 1999,
increased sales volume in Europe, and increased sales in the defense operations,
offset by lower sales at Valentec. SCFTI was acquired on July 24, 1997 and
included in the Company's entire fiscal year 1999, whereas SCFTI was included
for approximately eight months during fiscal 1998. This resulted in an increase
in sales of approximately $22.3 in fiscal 1999 compared to fiscal 1998. Valentec
was acquired effective as of May 22, 1997 and included in the Company's entire
fiscal 1999, whereas Valentec was included for approximately ten months during
fiscal 1998. Sales at Valentec decreased approximately $3.8 million for the
entire fiscal 1999 as compared to the ten months of fiscal 1998. The decrease in
sales at Valentec was primarily the result of contract disputes and subsequent
loss of such contracts, offset by the inclusion of Valentec for the additional
two months. European automotive operations sales increased approximately $27.0
million in fiscal 1999 due to increased volumes. The European operations grew
59% during fiscal 1999 as compared to fiscal 1998 due to significant airbag
cushion awards from existing customers. Defense sales increased approximately
$12.9 million in fiscal 1999 compared to fiscal 1998, primarily due to the
resumption in delivery under the Company's 120 millimeter mortar systems
contract with the U.S. Army. The increase in airbag sales was offset in part by
the effects of the General Motors strike during fiscal 1999 and price decreases
to the Company's customers. Sales of airbag fabric, cushions and metal
components to suppliers of General Motors were significantly reduced during
fiscal 1999. The total impact on sales of the GM strike during fiscal 1999 was
approximately $4.5 million.
Gross Profit. Gross profit decreased by $4.1 million or 15% to $23.2
million in fiscal 1999 compared to fiscal 1998. Approximately $2.0 million of
the decrease was attributable to the European operations, and approximately $3.0
million to the decrease in sales at Valentec. The decrease was partially offset
by the inclusion of the operations of
23
SCFTI for the entire fiscal 1999. The European operating margins suffered during
fiscal 1999 due to the initial ramp up phase of new programs, compounded by one
of the Company's European customers experiencing internal production problems.
The production problem our customer experienced caused it to temporarily curtail
orders, while the Company maintained its facilities to enable it to produce at
historical production rates. Valentec's gross profit decreased primarily as a
result of lost margin on lost sales during fiscal 1999 due to certain contract
disputes and the loss of such contracts. The Company has implemented a
substantial cost reduction program to return Valentec to higher gross profit
margins. SCFTI contributed additional gross profit of approximately $2.4 million
in fiscal 1999 as compared to fiscal 1998. Additionally, the impact of the
General Motors strike on gross profit of the Company was approximately $1.3
million during fiscal 1999. The strike resulted in the loss of gross margin from
lost sales during the period, and the costs of additional personnel who had been
hired for the ramp up of certain programs that were delayed. These newly trained
employees were not laid off because the Company anticipated a timely ending to
the strike.
Gross profit as a percentage of sales decreased to approximately 10.6% for
fiscal 1999 from 16.4% for fiscal 1998. The decrease as a percentage of sales
was due to the items discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $5.2 million or 48.5% to $16.0 million in
fiscal 1999 compared to fiscal 1998. Increased selling, general and
administrative expenses resulted primarily from the inclusion of SCFTI and
Valentec for the entire period during fiscal 1999. The Company also wrote off
$1.5 million of receivables associated with a contract dispute with a
significant customer of Valentec. Selling, general and administrative expenses
as a percentage of sales increased to 7.3% in fiscal 1999 from 6.5% for fiscal
1998 due to the above-referenced items.
Research and Development Expenses. Research and development expenses
increased by $0.7 million or 205.3% to $1.1 million in fiscal 1999 compared to
fiscal 1998. Research and development costs at Valentec during fiscal 1999 of
approximately $0.6 million were incurred in connection with the development of
proprietary products for the automotive industry. Valentec has developed a high
performance exhaust system, under its Zummo Performance Products business line
anticipated to be sold through retail and wholesale channels. The Company
believes the margins for these products will be in excess of existing historical
margins at Valentec, although sales for fiscal 2000 are not expected to be
material. The remaining research and development costs were incurred at SCFTI in
its technical fabrics division.
Terminated Investment Agreement Costs. The Company expensed approximately
$2.5 million of fees and expenses during the fourth quarter of fiscal 1999
related to the Brera Investment Agreement and its termination.
Reorganization and Relocation Costs. Within the European operations, the
Company incurred approximately $2.4 million of costs associated with the move of
labor intensive passenger airbag lines from the Company's German facility to its
lower labor cost Czech Republic facility. These costs included, but were not
limited to, contract laborers, duplicate personnel, increased scrap costs and
freight costs. The Company also expensed approximately $0.3 million associated
with the closure of the China facility, as part of an effort to consolidate
manufacturing operations within Europe and maximize the capacity of the European
operations. During the fiscal 1998 the Company incurred approximately $1.8
million of costs associated with the reorganization and relocation of its
foreign operations. The Company also expensed approximately $0.5 million during
the fourth quarter of fiscal 1999 related to the anticipated relocation of its
corporate office into its South Carolina facility.
Operating Income/Loss. Operating income decreased by $14.6 million or
115.8% to a loss of $2.0 million in fiscal 1999 compared to fiscal 1998. The
decrease was primarily attributable to the items discussed above.
Other Expense. Other expenses in fiscal 1999 consisted primarily of a
write-off of investments of approximately $0.5 million during the third quarter
of fiscal 1999, a write-down of fixed assets held for sale of approximately $0.7
million during the third quarter of fiscal 1999, and a write-down of fixed
assets held for sale of approximately $0.8 million during the fourth quarter of
fiscal 1999. The investment, made in early fiscal 1997 in an unaffiliated
company, related to a specific type of airbag fabric, which the Company no
longer believed will yield any future benefits. The write-down of an asset held
for sale, purchased in fiscal 1998, related to a specific line of business at
Valentec for which sales did not materialize resulting in a determination by the
Company to sell the related assets. The write-down during the fourth quarter
related to the disposal of China assets of approximately $0.2 million and
revaluation of fixed assets held for sale at Valentec of approximately $0.6
million.
24
Interest Expense. Interest expense increased $5.0 million to $12.8 million
in fiscal 1999 compared to fiscal 1998. This increase was primarily attributable
to the issuance of the Company's 10 1/8% Senior Subordinated Notes, the proceeds
of which were used primarily for the acquisition of SCFTI, outstanding for an
additional four months during fiscal 1999. Debt also increased under the
Company's revolving credit facility to fund operations and the Master Equipment
Lease Agreement, dated as of July 10, 1998, between KeyCorp, a division of
KeyCorporate Capital Inc. and the Company.
Income Taxes. The effective income tax rate on pre-tax loss was 19.6% for
fiscal 1999 compared to an effective income tax rate of 36.5% on pre-tax income
for fiscal 1998. The tax benefit rate was lower during fiscal 1999 due to a
valuation reserve established against deferred tax assets of $1.7 million
related to Valentec net operating losses incurred prior to the Company's
acquisition of Valentec. Additionally, the Company had income at higher foreign
tax rates, while losses were at lower domestic rates. Lastly, the tax rate was
impacted by the non-deductible goodwill amortization at Valentec.
Net (Loss) Income Net income decreased to a loss of $13.7 million in fiscal
1999 compared to income of $3.3 million for fiscal 1998. This decrease resulted
from the items discussed above.
Liquidity and Capital Resources
The Company's equipment and working capital requirements will continue to
increase as a result of the anticipated growth of the Automotive and Fabrics
operations. This growth is expected to be funded through a combination of cash
flows from operations, equipment financing, and through the use of amended lines
of credit with the Company's Senior Lenders, as discussed in the following
paragraphs.
On April 26, 2000, in conjunction with the filing of the Chapter 11
Bankruptcy Petition, the Safety Filing Group received Bankruptcy Court approval
of a $30.6 million senior DIP financing facility that it had executed with Bank
of America, N.A. The senior DIP financing is expected to provide adequate
funding for all post petition trade and employee obligations, the partial
paydown of the pre-petition secured debt, as well as the Company's ongoing
operating needs during the restructuring process. Upon closing of the senior DIP
financing facility on May 9, 2000, the Senior Lenders received a principal
paydown of approximately $17 million and retained the remaining approximately
$20.9 million portion of their indebtedness as an 11% per annum post-petition
subordinated DIP facility as a replacement of their pre-petition credit
facility.
The Company is in the process of negotiating with potential exit financing
lenders to review its options of funding of Post Bankruptcy needs, although no
commitment has been received so far.
The Company and an informal committee comprised of holders of over
two-thirds in aggregate dollar amount of the Notes began negotiations and in
early April 2000 reached an agreement (the "Restructuring Agreement") that would
be effected through a voluntary filing under Chapter 11 of the United States
Bankruptcy Code. Pursuant to the Restructuring Agreement, the claims of the
holders of the Company's senior subordinated notes ("Noteholders") will be
converted in the right to receive 96.8% of the Company's equity after it emerges
from Chapter 11. The current shareholders, excluding Robert Zummo, the Company's
Chairman and Chief Executive Officer, will receive 3.2% of the Company's post
bankruptcy equity and warrants to acquire 12% of such equity.
Credit Agreement
The Company, ASCI GmbH and Automotive Safety Components International
Limited, a wholly-owned subsidiary of the Company organized under the laws of
the United Kingdom, entered into an agreement with KeyBank National Association,
as administrative agent ("KeyBank"), dated as of May 21, 1997 as amended to date
(the "Credit Agreement"). The Credit Agreement consists of a $40.0 million
revolving credit facility for a five year term ($37.9 million outstanding as of
March 25, 2000), bearing interest at LIBOR (6.13% as of March 25, 2000) plus
3.0% with a commitment fee of 1.0% per annum for any unused portion. The initial
proceeds from KeyBank were used to repay the Bank of America NT&SA term loan and
revolving credit facility. KeyBank was subsequently repaid with the proceeds
from the Offering. The Company incurred approximately $470,000 of financing fees
and related costs. These costs have been deferred and are being charged to
operations over the expected term of the Credit Agreement not to exceed 5 years.
The Credit Agreement contains certain restrictive covenants that impose
limitations upon, among other things, the Company's ability to change its
business; merge; consolidate or dispose of assets; incur liens; make loans and
investments; incur indebtedness; pay dividends and other distributions; engage
in certain transactions with affiliates; engage in sale and lease-back
transactions; enter into lease agreements; and make capital expenditures.
On October 9, 1998, the Company entered into Amendment No. 4 to the Credit
Agreement, which increased the revolving credit facility from $27.0 million to
$40.0 million, and added Fleet Bank as a member of the bank syndicate. KeyBank
and Fleet Bank each provide fifty percent of the financing available under the
Credit Agreement and KeyBank remains as acting agent.
On June 24, 1999, the Company entered into Amendment No. 6 to the Credit
Agreement, which among other covenants requires the Company to earn $30.0
million of EBITDA (as such term is defined in the Credit Agreement) in fiscal
year 2000. Such covenant is tested monthly based upon cumulative targets for the
year. Covenants for Fixed Charge Coverage, Interest Coverage and Minimum Net
Income are also based on the $30.0 million EBITDA target. In
25
addition, the interest rate was increased to LIBOR plus 3.0% and the commitment
fee was increased to 1.0%. The Company issued to the Lenders ten-year warrants
to acquire 20,000 shares of the Company's common stock at current market value
per share. Additionally, the Company will be subject, as of June 24, 2000, to a
Senior Funded Debt to EBITDA ratio covenant of 1.5 to 1.0 and a Minimum
Consolidated Net Worth covenant. In addition, under Amendment No. 6 to the
Credit Agreement the Lenders waived certain financial covenants for periods
through the date of such amendment. As of March 25, 2000 there was no
availability under the Credit Agreement and the Company was in default of
certain financial covenants. Consequently, obligations outstanding under the
Credit Agreement are classified as current liabilities as of March 25, 2000 in
the consolidated balance sheet. The indebtedness under the Credit Agreement is
secured by substantially all the assets of the Company.
Senior Subordinated Notes
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old
Notes") to BT Securities Corporation, Alex. Brown & Sons Incorporated and
BancAmerica Securities, Inc. in a transaction not registered under the
Securities Act of 1933, as amended, in reliance upon an exemption thereunder
(the "Debt Offering"). On September 2, 1997, the Company commenced an offer to
exchange (the "Exchange Offer", together with the Debt Offering, the "Offering")
the Old Notes for $90.0 million aggregate principal amount of its 10 1/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for the Exchange
Notes pursuant to the terms of the Exchange Offer, which expired on October 1,
1997. Interest on the Notes accrues from July 24, 1997 and is payable
semi-annually in arrears on each of January 15 and July 15 of each year. The
Company has accrued as of March 25, 2000, as part of accrued liabilities,
approximately $6.5 million of interest. The Company incurred approximately $3.9
million of fees and expenses related to the Offering. Such fees have been
deferred and are being charged to operations over the expected term of the
Notes, not to exceed 10 years. The Notes are general unsecured obligations of
the Company and are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined in the Indenture pursuant to which the Notes
were issued) and to all existing and future indebtedness of the Company's
subsidiaries that are not Guarantors. All of the Company's direct and indirect
wholly-owned domestic subsidiaries are Guarantors (Note 14).
On January 18, 2000, the Company did not make a scheduled interest payment
on its 10.1/8% Senior Subordinated Notes (the "Notes"). The senior lenders of
the Company had previously notified the trustee for the Company's Notes that
they were exercising their rights to block such interest payment.
Other
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The Company applied the entire proceeds to satisfy outstanding
indebtedness under the KeyBank revolving credit facility, thereby increasing the
availability under the revolving credit facility. The KeyCorp financing
agreement has a seven-year term, bears interest at a fixed rate of 7.09% via an
interest swap agreement, and requires monthly payments of $150,469, secured by
certain equipment located at SCFTI. The rate swap is considered immaterial to
the Company's financial position at March 25, 2000.
On April 1, 1999, the Company secured a $2.9 million mortgage note facility
with Deutsche Bank to purchase a facility in Bavendstedt, Germany. The note is
secured by the real estate in Germany acquired through the mortgage and is
further secured by a guarantee issued by the Company. In July 1999 the Company
refinanced the note and reduced the outstanding indebtedness to $2.1 million.
The new German facility has allowed the Company to conduct its operations in
Germany in a more efficient and cost effective manner.
During fiscal year 2000, net cash provided by operations was $11.2 million.
Such cash provided was primarily by the reduction of accounts receivable and
inventories from the prior year. Additionally, the Company incurred non-cash
charges of approximately $17.7 million, which related to the goodwill impairment
charge during the third quarter of fiscal year 2000 at Valentec and $8.8 million
of depreciation. Cash used by investing activities was $9.8 million, of which
$7.7 million was used for the acquisition of additional equipment to expand the
Company's production capacity worldwide. The Company also paid the final
consideration in connection with the acquisition of ASCI GmbH, which consisted
of a $2.0 million earn-out accrued at the end of fiscal year 1999. Net cash used
in financing activities in fiscal year 2000 was
26
$1.5 million, which was primarily from the Company's repayments on various debt
instruments. These repayments were offset by borrowings of $700,000 on the
Credit Agreement and a $2.9 million mortgage on the German facility. The above
activities, in conjunction with the effect of foreign exchange rates resulted in
a net decrease in cash of $343,000 in fiscal year 2000.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and
Hedging Activities," effective, as amended, for years beginning after June 15,
2000. This new standard requires recognition of all derivatives, including
certain derivative instruments embedded in other contracts, as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The Company is in the process of reviewing the
effect, if any, that SFAS 133 will have on the Company's consolidated financial
statements and disclosures.
Seasonality and Inflation
The Automotive Operation's business is subject to the seasonal
characteristics of the automotive industry in which there are seasonal plant
shutdowns in the third and fourth calendar quarters of each year. Although the
Systems Contract is not seasonal in nature, there will be variations in revenues
from the Systems Contract based upon costs incurred by the Company in fulfilling
the Systems Contract in each quarter. The majority of the Defense Operation's
ordnance manufacturing for U.S. Government and prime defense contractors occurs
from January through September and there is generally a lower level of
manufacturing and sales during the fourth calendar quarter. The Company does not
believe that its operations to date have been materially affected by inflation.
Year 2000 Compliance
The year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company relies on systems developed by other parties in regard to its
business, accounting and operational software. Based on its evaluation, the
Company believes that its significant business, accounting and operations
hardware and software are year 2000 compliant. To date, no problems have arisen,
and the Company expects none. There can be no assurance that future problems
will not arise.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Credit Agreement are
outstanding, the Company has market risk relating to such amounts because the
interest rates under the Credit Agreement are variable.
The Company's operations in Germany, the UK and the Czech Republic expose
the Company to currency exchange rates risks. Currently, the Company does not
enter into any hedging arrangements to reduce this exposure. The Company is not
aware of any facts or circumstances that would significantly impact such
exposures in the near-term. If, however, there was a sustained decline of these
currencies versus the U.S. dollar, then the consolidated financial statements
could be materially effected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item appears in Item 14(a)(1) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
28
PART III
ITEMS 10, 11, 12 AND 13.
The information called for by Items 10, 11, 12 and 13 of this Form 10-K
will be filed by amendment within the allotted time period.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements, related notes thereto and reports of
independent accountants required by Item 8 are listed on page F-1
herein.
(2) Unless otherwise attached, all financial statement schedules are
omitted because they are not applicable or the required information is
shown in the Company's consolidated financial statements or the notes
thereto.
(3) Exhibits:
2.3 Joint Plan of Reorganization of Safety Components Debtors
Under Chapter 11 Bankruptcy Code dated June 12, 2000.
3.1(1) Certificate of Incorporation of Safety Systems
International, Inc.
3.2(1) Amended and Restated Certificate of Incorporation of Safety
Systems International, Inc.
3.3(1) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Systems
International, Inc.
3.4(11) Certificate of Amendment to the Amended and Restated
Certificate of Safety Components International, Inc. (the
"Company" or "Safety Components")
3.5(1) By-laws of Safety Components
4.1(2) Warrant Agreement, dated as of May 13, 1994 between
Hampshire Securities Corporation and Safety Components
4.2(15) Registration Rights Agreement, dated as of May 22, 1997, by
and among Safety Components, Robert A. Zummo, Francis X.
Suozzi and the Valentec International Corporation Employee
Stock Ownership Plan
4.4(18) Form of Indenture, dated as of July 24, 1997, by and among
Safety Components, the Subsidiary Guarantors named therein
and IBJ Schroder Bank & Trust Company.
4.5(18) Registration Rights Agreement, dated as of July 24, 1997 by
and among Safety Components, the guarantors named therein,
BT Securities Corporation, Alex Brown & Sons Incorporated
and BancAmerica Securities, Inc.
4.6(18) Form of 10 1/8% Senior Subordinated Note Due 2007, Series A,
including Form of Guarantee
4.7(18) Form of 10 1/8 % Senior Subordinated Note Due 2007, Series
B, including Form of Guarantee
4.11(26) Restructuring Agreement dated April 6, 2000 between Safety
Components, Robert A. Zummo and the consenting holders
signatory thereto.
4.12(27) First Amendment to Restructuring Agreement dated as of May
10, 2000 between Safety Components and the consenting
holders signatory thereto.
10.2(3) Airbag Purchase Agreement by and between TRW Vehicle Safety
Systems, Inc. and Valentec International Corporation
("Valentec") dated March 31, 1993 (confidential treatment
granted as to part)
10.3(3) Long-Term Contract for the Supply of Airbags by and between
TRW REPA GmbH and Valentec International Limited ("VIL"),
dated September 20, 1993 (confidential treatment granted as
to part)
10.4(2) Representation Agreement, effective as of May 13, 1994, by
and between Automotive Safety Components International, Inc.
("Automotive Safety") and Champion Sales and Service Co.
("Champion")
29
*10.5(4) Employment Agreement, effective as of May 13, 1994, between
Safety Components and Robert A. Zummo
*10.7(4) Stock Option Plan of Safety Components
10.10(9) Corporate Services Agreement, dated as of April 1, 1995,
between Valentec International Corporation and Safety
Components
10.11(2) Facility Agreement, dated May 13, 1994, between Valentec
International Corporation and Automotive Safety
10.12(2) Facility Agreement, dated May 13, 1994, between VIL and
Automotive Safety Components International, Limited
("Automotive Limited")
10.13(2) Representation Agreement, effective as of May 13, 1994, by
and between Automotive Limited and Champion
10.14(5) Form of Sublease Agreement, dated May 13, 1994, between VIL
and Automotive Limited
10.16(7) Contract DAAA09-94-C-0532 between Safety Components and the
U.S. Army (the "Systems Contract")
10.18(8) Lease Agreement, dated February 15, 1995 between Inmobiliara
Calibert, S.A. de C.V. and Automotive Safety Components
International SA. de C.V.
10.19(16) Credit Agreement, dated as of March 15, 1996, among Safety
Components, Automotive Safety, Galion, Valentec Systems,
Inc. and CUSA
10.20(16) Pledge and Security Agreement, dated as of March 15, 1996,
made by Safety Components, Automotive Safety, Galion, Inc.
and Valentec Systems, Inc. in favor of CUSA
10.22(10) Underwriting Agreement, dated June 15, 1995, among BT
Securities Corporation, Prime Charter Ltd., Safety
Components, Valentec International Corporation and the other
selling stockholders named therein
10.23(14) TRW/SCI Multi Year Agreement dated as of April 1, 1996 among
TRW Vehicle Safety Systems, Inc., TRW, Inc. and Safety
Components. Confidential treatment requested as to certain
portions of this exhibit. Such portions have been redacted
10.31(17) Asset Purchase Agreement, dated as of June 30, 1997, between
Safety Components and JPS Automotive L.P.
10.39(19) Consulting Agreement, dated as of May 14, 1998, between
Safety Components and Thomas W. Cresante
*10.41(19) Safety Components Senior Management Incentive Plan
*10.42(19) Safety Components Management Incentive Plan
*10.43(19) Safety Components Stock Appreciation Rights Award Plan
10.44(20) Safety Components 1994 Stock Option Plan, as amended
*10.49(21) Form of Employment Agreement, dated as of June 1, 1998
between Safety Components and Stephen Duerk.
10.50(21) Form of Master Equipment Lease Agreement, dated as of July
10, 1998, between KeyCorp Leasing, a division of Key
Corporate Capital Inc. and Safety Components.
10.56(22) Investment Agreement, dated as of March 31, 1999, between
Brera SCI, LLC and Safety Components.
10.57(22) Termination Agreement, dated as of May 4, 1999, between
Brera SCI, LLC, Brera Capital Partners, LLC and Safety
Components
10.59(23) Warrant Agreement, dated as of June 23, 1999, by and among
Safety Components International, Inc., KeyBank National
Association and Fleet Bank.
10.60(24) Credit Agreement, dated as of April 1, 1999, by and among
Automotive Safety Components International GmbH & Co. KG and
Deutsche Bank.
*10.61(24) Severance Agreement dated as of August 31, 1999, between
Safety Components International, Inc. and Jeffrey J. Kaplan.
10.62(24) Consulting Agreement dated as of August 12, 1999, between
Safety Components International, Inc. and Francis X. Suozzi.
10.63(24) Stock Option Agreement, dated as of July 23, 1999, between
Safety Components International, Inc. and Francis X. Suozzi.
10.64(24) Letter Agreement, dated as of July 12, 1999, between Safety
Components International, Inc. and Francis X. Suozzi.
10.65(25) Pledge Agreement, dated January 31, 2000 by and between
Safety Components International, Inc. and Robert A. Zummo.
30
10.66 Subordinated Secured Superpriority Debtor-In-Possession
Credit Agreement dated as of April 7, 2000 by and among
Safety Components, Automotive Limited, Automotive Safety
Components International GmbH & Co. K.G., the guarantors
named therein and Keybank National Association, as
administrative agent, and the lending institutions name
therein.
10.67 Senior Secured Superpriority Debtor-In-Possession Loan and
Security Agreement dated as of April 7, 2000 by and among
Safety Components, the subsidiaries named therein as
borrowers, the guarantors named therein and Bank of America,
N.A., as agent.
21.1 Subsidiaries of Safety Components
23.0 Consent of Arthur Andersen LLP dated July 10, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K.
April 10, 2000 - Current Report on Form 8-K
May 10, 2000 - Current Report on Form 8-K
* Indicates exhibits relating to executive compensation.
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (the "1994 Registration Statement")
filed with the Securities and Exchange Commission (the
"Commission") on February 11, 1994.
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994, filed
with the Commission.
(3) Incorporated by reference to Amendment No. 2 to the 1994
Registration Statement, filed with the Commission on March
18, 1994.
(4) Incorporated by reference to Amendment No. 3 to the 1994
Registration Statement, filed with the Commission on April
20, 1994.
(5) Incorporated by reference to Amendment No. 4 to the 1994
Registration Statement, filed with the Commission on May 3,
1994.
(7) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1994, filed
with the Commission.
(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.
(9) Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form S-1, filed with the
Commission on May 19, 1995.
(10) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995.
(11) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995.
(14) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996.
(15) Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on June 6, 1997.
(16) Incorporated by reference to the Company's Annual Report on
Form 10-K, for the fiscal year ended March 31, 1997.
(17) Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on August 4, 1997.
(18) Incorporated by reference to the Company's Registration
Statement on Form S-4, filed with the Commission on August
12, 1997.
(19) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 28, 1998.
(20) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 27, 1998.
31
(21) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 26, 1998.
(22) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 27, 1999.
(23) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 26, 1999.
(24) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 25, 1999.
(25) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 25, 1999.
(26) Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on April 13, 2000.
(27) Incoporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on May 19, 2000.
32
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.
SAFETY COMPONENTS INTERNATIONAL, INC.
By: /s/ Robert A. Zummo
--------------------------
Robert A. Zummo
Chairman of the Board and
Chief Executive Officer
Date: July 10, 2000
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.
Name and Signature Title Date
- ------------------ ----- ----
/s/ Robert A. Zummo Chairman of the Board and July 10, 2000
- ---------------------------
Robert A. Zummo Chief Executive Officer
(Principal Executive Officer)
/s/ John C. Corey President, Chief Operating Officer July 10, 2000
- ---------------------------
John C. Corey and Director
/s/ Brian P. Menezes Vice President, Chief Financial July 10, 2000
- ---------------------------
Brian P. Menezes Officer (Principal Financial Officer)
/s/ Marston D. Anderson Corporate Controller July 10, 2000
- ---------------------------
Marston D. Anderson (Principal Accounting Officer)
/s/ Joseph J. DioGuardi Director July 10, 2000
- ---------------------------
Joseph J. DioGuardi
/s/ Robert J. Torok Director July 10, 2000
- ---------------------------
Robert J. Torok
33
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Number
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS (1999 and 1998 as restated, (Note 1))
Consolidated Balance Sheets as of March 25, 2000 and March 27, 1999 F-3
Consolidated Statements of Operations for the Years ended March 25, 2000,
March 27, 1999 and March 28, 1998 F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the Years ended
March 28, 1998, March 27, 1999 and March 25, 2000 F-5
Consolidated Statements of Cash Flows for the Years ended March 25, 2000,
March 27, 1999 and March 28, 1998 F-6
Notes to Consolidated Financial Statements F-7
SUPPLEMENTAL SCHEDULE:
II Valuation and Qualifying Accounts F-39
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Safety Components International, Inc.:
We have audited the accompanying consolidated balance sheets of Safety
Components International, Inc. (a Delaware corporation) and subsidiaries as of
March 25, 2000 and March 27, 1999 (1999 as restated, (Note 1)), and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the three fiscal years in the period ended March 25, 2000
(1999 and 1998 as restated, (Note 1)). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 a 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 financial position of Safety Components
International, Inc. and subsidiaries as of March 25, 2000 and March 27, 1999
(1999 as restated, (Note 1)), and the results of their operations and their cash
flows for each of the three fiscal years in the period ended March 25, 2000
(1999 and 1998 as restated, (Note 1)) in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, on April 10, 2000, the Company and certain of
its U.S. subsidiaries each filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. On June 12, 2000, the Company filed its
plan of reorganization and disclosure statement, which detailed information
including management's turnaround business strategy. In addition, the Company
has suffered recurring losses from operations and at March 25, 2000 had a net
working capital deficit and shareholders' deficit. Continuation of the business
is dependent upon the confirmation of a plan of reorganization, the confirmation
of a disclosure statement (court hearing scheduled on July 19, 2000), the
ability to secure on-going debtor-in-possession and exit financing and the
ability to achieve successful future operations. The current
debtor-in-possession status of the Company, along with the factors indicated
above, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements, taken as a whole.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, New York
June 30, 2000
F-2
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
As of March 25, 2000, and March 27, 1999
(1999 as restated (Note 1))
(in thousands, except share and per share data)
Restated
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 10,264 $ 10,607
Accounts receivable, net (Notes 2 and 3) ............................ 41,281 42,671
Receivable from affiliate, net (Note 4) ............................ 564 4,554
Inventories, net (Notes 2 and 3) .................................... 14,826 21,445
Prepaid and other (Note 6) .......................................... 2,898 6,296
--------- ---------
Total current assets ................................... 69,833 85,573
Property, plant and equipment, net (Notes 2 and 3) ............................. 65,779 68,697
Intangible assets, net (Note 2) ................................................ 35,391 57,606
Other assets (Notes 2 and 6) ................................................... 4,557 6,094
--------- ---------
Total assets ........................................... $ 175,560 $ 217,970
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable .................................................... $ 22,373 $ 28,093
Earnout payable (Note 1) ............................................ -- 2,111
Accrued liabilities ................................................. 16,023 16,107
Current portion of long-term obligations and
senior subordinated debt (Notes 1 and 5) ...................... 131,587 3,988
--------- ---------
Total current liabilities .............................. 169,983 50,299
Long-term obligations (Notes 1 and 5) .......................................... 15,736 53,700
Senior subordinated debt (Notes 1 and 5) ....................................... -- 90,000
Other long-term liabilities (Note 6) ........................................... 4,281 1,515
--------- ---------
Total liabilities ...................................... 190,000 195,514
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' (deficit) equity (Notes 1 and 10):
Preferred stock: $.10 par value per share - 2,000,000 shares
authorized and unissued ...................................... -- --
Common stock: $.01 par value per share - 10,000,000 shares
authorized; 6,629,008 shares issued .......................... 66 66
Common stock warrants ............................................... 51 1
Additional paid-in-capital .......................................... 45,168 45,168
Treasury stock: 1,492,692 shares, at cost .......................... (15,439) (15,439)
Accumulated deficit ................................................. (36,279) (1,134)
Cumulative translation adjustment (Notes 2, 6 and 12) ............... (8,007) (6,206)
--------- ---------
Total stockholders' (deficit) equity ................... (14,440) 22,456
--------- ---------
Total liabilities and stockholders' (deficit) equity ... $ 175,560 $ 217,970
========= =========
See notes to consolidated financial statements.
F-3
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 25, 2000, and March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
(in thousands, except per share data)
Restated Restated
2000 1999 1998
--------- --------- ---------
Net sales (Notes 2 and 4) .................................................. $ 228,266 $ 219,981 $ 166,074
Cost of sales, excluding depreciation (Note 2) ............................. 191,376 189,032 133,766
Depreciation ............................................................... 8,809 7,728 5,001
--------- --------- ---------
Gross profit ................................................. 28,081 23,221 27,307
Selling and marketing expenses ............................................. 3,803 3,122 1,686
General and administrative expenses ........................................ 12,550 12,908 9,110
Research and development expenses .......................................... 943 1,090 357
Terminated investment agreement costs (Note 1) ............................. -- 2,500 --
Amortization of intangible assets (Note 2) ................................. 2,078 2,362 1,742
Relocation and reorganization costs (Note 1) ............................... -- 3,238 1,789
Goodwill impairment charge (Note 2) ........................................ 17,676 -- --
Restructuring and restatement (Note 1) ..................................... 3,969 -- --
--------- --------- ---------
(Loss) income from operations ................................ (12,938) (1,999) 12,623
Other expense (income), net ................................................ 1,937 2,197 (397)
Interest expense, net ...................................................... 14,116 12,788 7,747
--------- --------- ---------
(Loss) income before income taxes ............................ (28,991) (16,984) 5,273
Provision (benefit) for income taxes (Note 6) .............................. 6,154 (3,321) 1,927
--------- --------- ---------
Net (loss) income .......................................................... $ (35,145) $ (13,663) $ 3,346
========= ========= =========
(Loss) earnings per common share, basic (Note 2) ........................... $ (6.84) $ (2.67) $ 0.67
========= ========= =========
Weighted average number of shares outstanding, basic ....................... 5,136 5,112 5,027
========= ========= =========
(Loss) earnings per common share, assuming dilution (Notes 2 and 11) ....... $ (6.84) $ (2.67) $ 0.65
========= ========= =========
Weighted average number of shares outstanding, assuming dilution ........... 5,136 5,112 5,147
========= ========= =========
See notes to consolidated financial statements.
F-4
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
For the Years Ended March 28, 1998, March 27, 1999, and March 25, 2000
(1999 and 1998 as restated, (Note 1))
(in thousands, except shares )
Common Common Common Additional
Stock Stock Stock Paid -in
Shares Amount Warrants Capital
---------- ---------- ---------- ----------
Balance at March 31, 1997 ................... 5,025,383 $ 51 $ 1 $ 30,062
Issuance of common stock .............. 1,399,200 14 -- 13,978
Acquisition of treasury stock ......... (1,379,200) -- -- --
Net income for the year ended
March 28, 1998 ..................... -- -- -- --
Foreign currency translation adjustment -- -- -- --
---------- ---------- ---------- ----------
Balance at March 28, 1998 (restated) ........ 5,045,383 65 1 44,040
Issuance of common stock .............. 90,933 1 -- 1,128
Net loss for the year ended
March 27, 1999 ..................... -- -- -- --
Foreign currency translation adjustment -- -- -- --
---------- ---------- ---------- ----------
Balance at March 27, 1999 (restated) ........ 5,136,316 66 1 45,168
Issuance of common stock warrants ..... -- -- 50 --
Net loss for the year ended
March 25, 2000 ..................... -- -- -- --
Foreign currency translation adjustment -- -- -- --
---------- ---------- ---------- ----------
Balance at March 25, 2000 ................... 5,136,316 $ 66 $ 51 $ 45,168
========== ========== ========== ==========
Retained
Earnings Other
Treasury (Accumulated Comprehensive
Stock Deficit) Income
---------- ---------- ----------
Balance at March 31, 1997 ................... $ (1,647) $ 9,183 $ (2,376)
Issuance of common stock .............. -- -- --
Acquisition of treasury stock ......... (13,792) -- --
Net income for the year ended
March 28, 1998 ..................... -- 3,346 --
Foreign currency translation adjustment -- -- (2,288)
---------- ---------- ----------
Balance at March 28, 1998 (restated) ........ (15,439) 12,529 (4,664)
Issuance of common stock .............. -- -- --
Net loss for the year ended
March 27, 1999 ..................... -- (13,663) --
Foreign currency translation adjustment -- -- (1,542)
---------- ---------- ----------
Balance at March 27, 1999 (restated) ........ (15,439) (1,134) (6,206)
Issuance of common stock warrants ..... -- -- --
Net loss for the year ended
March 25, 2000 ..................... -- (35,145) --
Foreign currency translation adjustment -- -- (1,801)
---------- ---------- ----------
Balance at March 25, 2000 ................... $ (15,439) $ (36,279) $ (8,007)
========== ========== ==========
See notes to consolidated financial statements.
F-5
SAFETY COMPONENTS INTERNATIONAL, INC.
CCONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
(in thousands)
Restated Restated
2000 1999 1998
-------- -------- --------
Cash Flows From Operating Activities:
Net income (loss) ...................................................... $(35,145) $(13,663) $ 3,346
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation ...................................................... 8,809 7,728 5,001
Goodwill Impairment Charge ........................................ 17,676 -- --
Amortization ...................................................... 2,078 2,362 1,742
Provision for bad debts ........................................... 780 1,600 245
Loss on disposal and write-off of fixed assets and investments .... 870 2,339 --
Deferred taxes .................................................... 6,154 (4,162) (738)
Changes in operating assets and liabilities:
Accounts receivable and receivable from affliate .............. 4,029 (12,367) (11,237)
Inventories ................................................... 6,619 (1,824) (2,799)
Prepaid and other current assets .............................. (8) 638 (1,114)
Other assets .................................................. 2,782 778 (62)
Accounts payable .............................................. (5,096) 4,998 7,917
Accrued liabilities ........................................... 1,659 1,853 (1,736)
-------- -------- --------
Net cash provided by (used in) operating activities .......... 11,207 (9,720) 565
-------- -------- --------
Cash Flows From Investing Activities:
Additions to property, plant and equipment, net ................... (7,741) (13,854) (13,715)
Acquisition costs and advances to Valentec ........................ -- (502) (2,522)
Acquisition of Champion ........................................... -- (86) (3,398)
Acquisition of SCFTI ............................................. -- (242) (58,768)
Acquisition of Phoenix Airbag, net of cash acquired ............... (2,061) (1,958) (2,455)
-------- -------- --------
Net cash used in investing activities ....................... (9,802) (16,642) (80,858)
-------- -------- --------
Cash Flows From Financing Activities:
Net proceeds from Notes ........................................... -- -- 86,053
Net proceeds from sale of common stock ............................ -- 1,056 230
Repayment of term notes ........................................... -- -- (16,812)
Net proceeds from A.I. Credit Corp. note .......................... -- 724 --
(Repayments) borrowings of debt and long-term obligations ......... (5,115) 10,000 (11,849)
Net borrowing on revolving credit facility ........................ 700 23,024 11,245
Proceeds from (repayments of) mortgage and financing notes ........ 2,907 (3,174) 9,500
-------- -------- --------
Net cash (used in) provided by financing activities .......... (1,508) 31,630 78,367
-------- -------- --------
Effect of exchange rate changes on cash ........................................ (240) (710) (345)
-------- -------- --------
Change in cash and cash equivalents ............................................ (343) 4,558 (2,271)
Cash and cash equivalents, beginning of period ................................. 10,607 6,049 8,320
-------- -------- --------
Cash and cash equivalents, end of period ....................................... $ 10,264 $ 10,607 $ 6,049
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 9,191 $ 12,144 $ 4,790
Income taxes ...................................................... 35 391 1,665
Supplemental disclosure of non-cash transactions:
Equipment acquired under capital lease obligations ..................... $ 1,085 $ -- $ --
See notes to consolidated financial statements.
F-6
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 1 Organization and Business
Safety Components International, Inc. (the "Company" or "SCI") is a
leading, low-cost, independent supplier of automotive airbag fabric and
cushions, technical fabrics, metal airbag components and defense related
products, with operations in North America and Europe.
Restructuring and Chapter 11 Bankruptcy Petition
The deterioration in the Company's financial condition that became evident
in fiscal 1999, arising from a confluence of negative developments, particularly
in the non-core businesses, caused it to experience material liquidity
constraints. In addition, following the Company's restatement of its earnings
and a default with respect to obligations under its credit agreement, KeyBank
and Fleet Bank, the "Senior Lenders", notified the trustee for the Company's 10
1/8% Senior Subordinated Notes (the "Notes") that they were exercising their
rights to block a scheduled interest payment due on January 18, 2000.
On February 18, 2000 the common stock of the Company was delisted from the
NASDAQ stock market.
The Company and an informal committee comprised of holders of over
two-thirds in aggregate dollar amount of the Notes began negotiations and in
early April 2000 reached an agreement (the "Restructuring Agreement") that would
be effected through a voluntary filing under Chapter 11 of the United States
Bankruptcy Code. Pursuant to the Restructuring Agreement, the claims of the
holders of the Notes ("Noteholders") will be converted in the right to receive
96.8% of the Company's equity after it emerges from Chapter 11. The current
shareholders, excluding Robert Zummo, the Company's Chairman and Chief Executive
Officer, will receive 3.2% of the Company's post bankruptcy equity and warrants
to acquire 12% of such equity. In addition to the Restructuring Agreement, the
Company also reached an agreement with the Senior Lenders subject to a paydown,
to replace their credit agreement with a post-petition subordinated
debtor-in-possession ("DIP") financing facility.
On April 10, 2000 (the "Petition Date"), the Company and certain of its U.S
subsidiaries (including Safety Components Fabric Technologies, Inc. and
Automotive Safety Components International, Inc., but excluding Valentec
International Corporation, LLC, Valentec Systems Inc. and Galion, Inc.);
collectively, "Safety Filing Group," filed a voluntary petition under Chapter 11
of the Bankruptcy Code with the United States Bankruptcy Court for the District
of Delaware (the "Chapter 11 Bankruptcy Petition"). Since the filing date, the
Safety Filing Group has been operating their businesses as debtors in
possession.
On April 26, 2000, in conjunction with the filing of the Chapter 11
Bankruptcy Petition, the Safety Filing Group received Bankruptcy Court approval
of a $30.6 million senior DIP financing facility that it had executed with Bank
of America, N.A. The senior DIP financing is expected to provide adequate
funding for all post-petition trade and employee obligations, the partial
paydown of the pre-petition secured debt, as well as the Company's ongoing
operating needs during the restructuring process. Upon closing of the senior DIP
financing facility on May 9, 2000, the Senior Lenders received a principal
paydown of approximately $17 million and retained the remaining approximately
$20.9 million portion of their indebtedness as an 11% per annum post-petition
subordinated DIP facility as a replacement of their pre-petition credit
facility. The Company is in the process of negotiating with potential exit
financing lenders to review its options of funding of Post Bankruptcy needs,
although no commitment has been received so far.
On May 19, 2000, Safety Filing Group filed its Statement of Financial
Affairs and Schedules of Assets and Liabilities and, on May 24, 2000, the Court
entered an order setting July 7, 2000 as the general filing deadline for
creditors, to file their proof of claims. In Chapter 11 cases, substantially all
liabilities of the Safety Filing Group as of the Petition Date (approximately
$166.6 million) are subject to compromise under a plan of reorganization.
F-7
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
On June 12, 2000, the Safety Filing Group filed with the United States
Bankruptcy Court its Joint Plan of Reorganization (the "Plan") pursuant to Rule
3016 (b), and its Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code. A hearing will be held on July 19, 2000 to consider approval of
the Disclosure Statement. The Plan and the Disclosure Statement, both of which
are subject to revision by the Company prior to the Court hearing date, reflect
a time-phased, payout of 100% all pre-petition claims of all creditors. Under
the Plan, new shares of common and preferred stock would be authorized and new
common stock would be issued. All Noteholder claims in the approximately
aggregate amount of $96.4 million will be completely satisfied through the
ratably proportionate distribution of common stock.
As reflected in the Company's consolidated financial statements, the
Company incurred approximately $4.0 million of legal, professional and
re-financing related costs associated with the investigation and restatement of
its financial statements for fiscal years 1998 and 1999, and its restructuring
efforts leading up to its filing under Chapter 11 on April 10, 2000. During the
Chapter 11 proceedings, the Company will continue to incur such costs associated
with its restructuring efforts. The Company's ability to continue as a going
concern is dependent upon the confirmation of a plan of reorganization, the
ability to secure on-going debtor in possession and exit financing and the
ability to achieve successful future operations. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Restatement of Previously Issued Financial Statements
Subsequent to the issuance of the Company's consolidated financial
statements for the fiscal years ended March 27, 1999 and March 28, 1998, the
Company determined that the reported results for those years were misstated. The
Company with the assistance of independent counsel and other professionals
conducted an investigation and determined that the restatement related primarily
to two items as further discussed herein. It was determined that a sale and
related receivable in the Company's defense operations in the aggregate amount
of $4.6 million (before a related tax provision of $1.8 million), which had been
appropriately recorded in fiscal years ended March 31, 1996, 1997 and March 28,
1998 at a subsidiary level, was also recorded in fiscal 1998 and 1999 at the
parent company level. Additionally in fiscal 1999, certain items were
incorrectly recorded in income in connection with a loan transaction of $772
(before a related tax provision of $297). On November 3, 1998, the Company
entered into an unsecured note facility with A.I. Credit Corp. of $772
(including transaction and other fees), which requires monthly payments of $29
and bears a stated interest rate of 7.57% per annum. Such transaction had
originally been recorded incorrectly as an insurance contract with the cash
proceeds reflected in income. Certain other less significant items were restated
in both fiscal years. The accompanying consolidated financial statements, as
restated as of March 27, 1999 and March 28, 1998, and for the two fiscal years
in the period ended March 27, 1999, present the restated results.
F-8
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
A summary of the effects of the restatement follows (in thousands, except
per share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Year Ended For Fiscal Year Ended
March 27, 1999 March 28, 1998
---------------------------- ----------------------------
As Previously As Previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
Net sales ....................................................... $ 221,279 $ 219,981 $ 170,310 $ 166,074
Cost of sales, excluding depreciation ........................... 188,804 189,032 133,358 133,766
Depreciation .................................................... 7,728 7,728 5,001 5,001
--------- --------- --------- ---------
Gross profit ............................................... 24,747 23,221 31,951 27,307
--------- --------- --------- ---------
Selling and marketing expenses .................................. 3,122 3,122 1,686 1,686
General and administrative expenses ............................. 12,976 12,908 8,900 9,110
Research and development expenses ............................... 1,090 1,090 357 357
Terminated investment agreement costs ........................... 2,500 2,500 -- --
Amortization of intangible assets ............................... 2,362 2,362 1,742 1,742
Relocation and reorganization costs ............................. 3,238 3,238 1,789 1,789
--------- --------- --------- ---------
(Loss) income from operations .............................. (541) (1,999) 17,477 12,623
--------- --------- --------- ---------
Other expense (income), net ..................................... 2,397 2,197 33 (397)
Interest expense ................................................ 12,750 12,788 7,747 7,747
--------- --------- --------- ---------
(Loss) income before income taxes .......................... (15,688) (16,984) 9,697 5,273
(Benefit) provision for income taxes ............................ (2,822) (3,321) 3,689 1,927
--------- --------- --------- ---------
Net (loss) income ............................................... $ (12,866) $ (13,663) $ 6,008 $ 3,346
========= ========= ========= =========
Net (loss) income per share, basic .............................. $ (2.52) $ (2.67) $ 1.20 $ 0.67
========= ========= ========= =========
Weighted average number of shares outstanding, basic ............ 5,112 5,112 5,027 5,027
========= ========= ========= =========
Net (loss) income per share, assuming dilution .................. $ (2.52) $ (2.67) $ 1.17 $ 0.65
========= ========= ========= =========
Weighted average number of shares outstanding,
assuming dilution ............................................... 5,112 5,112 5,147 5,147
========= ========= ========= =========
F-9
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATED BALANCE SHEETS
As of March 27,1999 As of March 28,1998
------------------- -------------------
As Previously As Previously
Reported As Restated Reported As Restated
-------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 10,607 $ 10,607 $ 6,049 $ 6,049
Accounts receivable, net .............................. 47,284 42,671 39,208 35,327
Receivable from affiliate ............................. 4,583 4,554 -- --
Inventories ........................................... 21,445 21,445 19,935 19,792
Prepaid and other ..................................... 6,296 6,296 4,196 4,196
--------- --------- --------- ---------
Total current assets ....................................... 90,215 85,573 69,388 65,364
--------- --------- --------- ---------
Property, plant and equipment, net ................... 68,747 68,697 66,279 66,229
Receivable from affiliate ............................. -- -- 1,206 1,206
Intangible assets, net ................................ 57,796 57,606 55,923 55,733
Other assets .......................................... 6,094 6,094 6,101 6,101
--------- --------- --------- ---------
Total assets ............................................... $ 222,852 $ 217,970 $ 198,897 $ 194,633
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 28,093 $ 28,093 $ 23,009 $ 23,009
Earnout payable ....................................... 2,111 2,111 1,958 1,958
Accrued liabilities ................................... 15,993 16,107 12,558 12,718
Current portion of long-term obligations .............. 3,769 3,988 2,375 2,375
--------- --------- --------- ---------
Total current liabilities .................................. 49,966 50,299 39,900 40,060
--------- --------- --------- ---------
Long-term obligations ................................. 53,195 53,700 24,739 24,739
Senior subordinated debt .............................. 90,000 90,000 90,000 90,000
Other long-term liabilities ........................... 3,776 1,515 5,064 3,302
--------- --------- --------- ---------
Total liabilities .......................................... 196,937 195,514 159,703 158,101
--------- --------- --------- ---------
Stockholders' equity
Preferred stock: ...................................... -- -- -- --
Common stock .......................................... 66 66 65 65
Common stock warrants ................................. 1 1 1 1
Additional paid-in-capital ............................ 45,168 45,168 44,040 44,040
Treasury stock ........................................ (15,439) (15,439) (15,439) (15,439)
Retained earnings (accumulated deficit) ............... 2,325 (1,134) 15,191 12,529
Cumulative translation adjustment ..................... (6,206) (6,206) (4,664) (4,664)
--------- --------- --------- ---------
Total stockholders' equity ................................. 25,915 22,456 39,194 36,532
--------- --------- --------- ---------
Total liabilities and stockholders' equity ................. $ 222,852 $ 217,970 $ 198,897 $ 194,633
========= ========= ========= =========
F-10
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Acquistions
On August 6, 1996, Automotive Safety Components International, Inc., a
wholly-owned subsidiary of the Company, acquired 80% of the outstanding capital
stock of Automotive Safety Components International GmbH & Co. KG (formerly
known as Phoenix Airbag GmbH & Co. KG, "ASCI GmbH"). The purchase from Phoenix
Aktiengesellschaft ("Phoenix AG") was made in accordance with the terms and
conditions of the Agreement Concerning the Sale and Transfer of all the Shares
in Phoenix Airbag GmbH dated June 6, 1996, as amended (the "Agreement"). In
accordance with the terms of the Agreement, the Company was required to pay
additional purchase price to Phoenix AG if ASCI GmbH met certain annual
performance targets for calendar years 1996, 1997 and 1998. ASCI GmbH met its
performance targets and has paid $6.3 million of contingent purchase price. No
amount was accrued as of March 25, 2000 as the earnout period has ended.
The ASCI GmbH acquisition was accounted for as a purchase. ASCI acquired
the remaining 20% interest effective December 31, 1998 and was entitled to 100%
of the income or losses, risks and rewards of Phoenix Airbag since August 6,
1998. Accordingly all assets and liabilities were reflected at fair value at the
date of acquisition, and no minority interest was recorded in the accompanying
consolidated financial statements for Phoenix AG's remaining 20% interest.
Through March 27, 1999, the cumulative purchase price amounted to approximately
$28.6 million, including $3.4 million of direct acquisition costs. Management of
the Company allocated the purchase consideration for Phoenix Airbag assets, net
of liabilities assumed, at fair market value, with the excess allocated to
goodwill. Goodwill of $16.5 million is being amortized over twenty-five years on
a straight-line basis.
During the third quarter of fiscal year 1999 the Company reevaluated its
strategic decision to exit the manufacturing of airbags within Hildesheim,
Germany. The original plan called for the closure and move of the Company's
entire manufacturing operation in Hildesheim, Germany to the Company's Czech
Republic and United Kingdom production facilities. During the 1999 fiscal year,
the Company incurred approximately $2.4 million, which was recorded within
relocation and reorganization expense ($1.2 million net of tax benefit of $1.2
million), of costs associated with the relocation of substantially all of the
labor-intensive passenger airbags. During the 1998 fiscal year, the Company
incurred approximately $1.8 million ($1.2 million net of tax benefit of
$600,000) of costs associated with the reorganization and relocation of its
foreign operations. These costs were investments toward consolidating
labor-intensive production within the Company's foreign operations to its
low-cost facilities located within the foreign market. While the Company
accomplished the move of substantially all of the labor-intensive passenger
airbags, the Company had decided not to move the remaining automated airbag
operations, primarily driver and side impact bags. The decision to remain in
Germany was based on current and anticipated program delivery commitments at
that time. The Company purchased a new facility in Bavendstedt, Germany near the
existing facility and completed its move into the new facility during the second
quarter of fiscal year 2000. The new German facility has allowed the Company to
conduct its operations in Germany in a more efficient and cost effective manner.
Effective as of May 22, 1997, the Company acquired all of the outstanding
capital stock of Valentec International Corporation (Valentec) in a tax free
stock-for-stock exchange (the "Valentec Acquisition"). Valentec is a high-volume
manufacturer of stamped and precision-machined products for the automotive,
commercial and defense industries. Valentec was the Company's largest
shareholder immediately prior to the Valentec Acquisition. The acquisition was
accounted for as a purchase. The purchase price aggregated approximately $15.1
million, including estimated direct acquisition costs of approximately $1.3
million. In addition, the Company advanced Valentec approximately $1.3 million
for the purpose of funding operations prior to the Valentec Acquisition. The
operations of Valentec are included in the accounts of the Company beginning on
May 22, 1997. Management of the Company allocated the purchase consideration for
Valentec assets, net of liabilities assumed, at fair market value, with the
excess allocated to goodwill. The net remaining balance of $17.7 million of
goodwill was written off in the third quarter of fiscal year 2000 (See Note 2).
On July 24, 1997, the Company, through a newly formed wholly-owned
subsidiary, Safety Components Fabric Technologies, Inc. ("SCFTI"), acquired
("the JPS Acquisition") all of the assets and assumed certain liabilities of the
Air Restraint/Technical Fabrics Division of JPS Automotive L.P. (the
"Division"). SCFTI is a leading, low-cost supplier of airbag fabric in North
America and is also a leading manufacturer of value-added technical fabrics used
in a
F-11
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
variety of niche industrial and commercial applications. The JPS Acquisition was
accounted for as a purchase. The purchase price aggregated approximately $58.9
million, after giving effect to post-closing adjustments. The operations of
SCFTI are included in the accounts beginning on July 24, 1997. Management of the
Company allocated the purchase consideration for SCFTI assets, net of
liabilities assumed, at fair market value, with the excess allocated to
goodwill. Goodwill of $19.2 million is being amortized over forty years based on
a straight line method.
Additionally, on December 22, 1997, the Company acquired all of the issued
and outstanding capital stock of Champion Sales and Service Company ("Champion")
for an aggregate amount of $3.4 million including direct acquisition costs of
approximately $125,000 (the "Champion Transaction"). In conjunction with the
Champion Transaction, the Company entered into management services agreements
with the former shareholders of Champion. The terms of each such management
services agreement prohibits the Champion shareholders from competing with
certain businesses of the Company for a period of five years. Each such
management services agreement also provides that the Company has the option, at
its sole discretion, to extend the non-competition period for three successive
five year periods, upon payment of a nominal extension fee. Accordingly, the
Company has allocated the purchase consideration to these non-compete
agreements. The Company also entered into a definitive Put Agreement (the "Put
Transaction") with an associate of Champion (the "Associate") who had the right
to a portion of any of the sales commissions actually received by Champion.
Pursuant to the Put Transaction, the Associate had the option to put to the
Company, subject to certain conditions, all of the issued and outstanding
capital stock of Duchi & Associates, Inc., an affiliated entity, for a put price
of $740,000. The Put Transaction included (as a condition to its exercise), a
twenty year management services agreement and non-compete between the Company
and the Associate. The Company recorded $740,000 as an intangible asset and
accrued for the Put Transaction at March 28, 1998 as part of accrued
liabilities. The exercise of such option was consummated as of January 13, 1999.
During fiscal year 1999, after exploring a variety of strategic
alternatives, the Company entered into an Investment Agreement ("the Brera
Investment Agreement") with Brera Capital Partners, LLC, a Delaware limited
liability company, and Brera Capital Partners Limited Partnership, a Delaware
limited partnership, through a newly-formed Delaware limited liability company,
Brera SCI, LLC ("Brera"), which provided for, among other things, a $28.0
million convertible preferred stock investment by Brera in the Company. On May
4, 1999, the Company and Brera reached a mutual agreement to terminate the Brera
Investment Agreement. The Company expensed approximately $2.5 million of fees
and expenses during the fourth quarter of fiscal year 1999 related to the
agreement and its subsequent termination. This charge included a reimbursement
to Brera for fees and expenses incurred by it. The Company paid approximately
$2.0 million of the fees and expenses in fiscal year 2000.
The unaudited pro forma revenues, net income and net income per common
share, assuming: (i) the Valentec Acquisition; (ii) the JPS Acquisition; (iii)
the completion of the debt offering (Note 5) and application of the proceeds
therefrom; (iv) the Phoenix Acquisition; and (v) the Champion Transaction was
consummated on April 1, 1996 are as follows below (in thousands, except per
share data). The Unaudited Pro Forma Financial Data does not purport to
represent what the Company's results of operations actually would have been if
those transactions had been consummated on the date or for the period indicated,
or what such results will be for any future date or for any future period.
Pro Forma Restated Year Ended
March 28, 1998
--------------
Revenues $ 190,399
===========
Net income $ 2,758
===========
Net income per common share, basic $ 0.55
===========
Net income per common share, assuming dilution $ 0.54
===========
F-12
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 2 Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the wholly owned and majority-owned subsidiaries of Safety Components
International, Inc. All significant intercompany transactions have been
eliminated.
Revenue recognition
The Company recognizes revenue from product sales when it has shipped the
goods or ownership has been transferred to the customer for goods to be held for
future shipment at the customer's request.
The Company accounts for long-term contracts under the percentage of
completion method, whereby progress toward contract completion is measured on a
cost incurred basis (including direct labor, materials and allocable indirect
manufacturing overhead and general and administrative costs). Losses on
long-term contracts are recognized in the period when such losses are
identified. On certain contracts with the U.S. Government, contract costs,
including indirect costs, are subject to audit and adjustment by negotiations
between the Company and government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final settlement
based on historical results.
Annual revenues from major customers
The Company had sales to three customers in its automotive and fabrics
operating segment in fiscal year 2000 aggregating approximately 27%, 19% and 17%
of net revenues, respectively. The Company had sales to two customers in its
automotive and fabrics operating segment in fiscal year 1999 aggregating
approximately 27% and 17% of net revenues, respectively. In fiscal year 1998,
the Company had sales to two customers, in its automotive and fabrics operating
segment aggregating approximately 37% and 16% of net revenues, respectively.
Concentration of credit risk
The Company is subject to a concentration of credit risk consisting of its
trade receivables. At March 25, 2000, three customers accounted for
approximately 28%, 24% and 21% of its trade receivables, respectively; at March
27, 1999, two customers accounted for 23% and 11% of its trade receivables,
respectively. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company evaluates potential
losses for uncollectible accounts and such losses have historically been
immaterial and within management's expectations.
Environmental expenditures
Environmental expenditures that result from the remediation of an existing
condition caused by past operations that will not contribute to current or
future revenues are expensed. Expenditures which extend the life of the related
property or prevent future environmental contamination are capitalized.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.
Inventories
Inventories represent direct labor, materials and overhead costs incurred
for products not yet delivered and are stated at the lower of cost (first-in,
first-out) or market.
F-13
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the underlying lease. Estimated useful lives by
class of assets are as follows:
Machinery and Equipment........................ 5 - 10 years
Furniture and Fixtures......................... 3 - 5 years
Buildings...................................... 25 - 40 years
Leasehold improvements......................... Lesser of useful life
or lease term
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of significant items are capitalized.
The Company assesses the recoverability of long-lived assets periodically.
If there is an indication of impairment of such assets, the amount of
impairment, if any, is charged to operations in the period in which impairment
is determined by management. The methodology that management is expected to use
to project results of operations will be based on projected undiscounted cash
flows generated from the assets in service. No impairment of assets will be
recorded below their estimated net realizable value.
Intangible assets
Intangible and other assets primarily consist of patents and goodwill and
non-compete agreements associated with the Company's acquisitions and are stated
at cost less accumulated amortization. Intangible assets are amortized over the
expected periods to be benefited, which have been determined to have lives
between 15 and 40 years. Accumulated amortization at March 25, 2000 and March
27, 1999 was approximately $4.9 million and $4.8 million, respectively.
The Company periodically assesses the recoverability of intangible assets
by determining whether the amortization of the balances over its remaining life
can be recovered through projected undiscounted cash flows, considering the
historical and projected operating performance of business operations. Any
impairment is charged to operations in the period in which impairment is
determined by management.
At December 1999, the Company recognized a goodwill impairment charge of
$17.7 million with no associated tax benefit, related to the 1997 acquisition of
Valentec. Operating results of Valentec deteriorated during fiscal 2000 arising
from the loss of business with a major customer. The subsidiary has been unable
to offset this loss with increased sales with other customers. Accordingly,
management has concluded that intangible assets in the amount of $17.7 million
are no longer recoverable through future operations and such amount were
written-off in the Company's financial statements for the quarter ended December
25, 1999. In determining the amount of the impairment charge, the Company
evaluated the recoverability of the long-lived assets pursuant to SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The Company determined that Valentec's estimated future
undiscounted cash flows were below the carrying value of Valentec's goodwill.
Accordingly, during the third quarter of Fiscal 2000, the Company adjusted the
carrying value of Valentec's goodwill to its estimated fair value. The estimated
fair value was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved. The Company believes that its projections,
based on recent historical trends and current market conditions, is its best
estimate of Valentec's future performance, although there can be no assurances
that such estimates will be indicative of future results.
F-14
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Product launch costs
Product launch costs are expensed as incurred.
Foreign currency translation
The Company follows the principles of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation," ("SFAS 52") in accounting for
foreign operations. The financial statements of the Company's subsidiaries whose
functional currency is the local currency, except the accounts of the Mexican
subsidiary, whose functional currency is the U.S. dollar, have been translated
into U.S. dollars. Accordingly, all assets and liabilities outside the United
States are translated to U.S. dollars at the rate of exchange in effect at the
balance sheet date. Income and expense items are translated at the weighted
average exchange rate prevailing during the period. Translation adjustments are
recorded as a separate component of stockholders' equity. During the years ended
March 25, 2000, and March 27, 1999, translation adjustments, primarily
attributable to the Company's German and Czech Republic subsidiaries, accounted
for substantially all of the change in cumulative translation adjustment
activity as reflected in the accompanying consolidated financial statements.
The financial statements of the Company's subsidiary in Mexico, whose
functional currency is the U.S. dollar, are remeasured into U.S. dollars.
Accordingly, monetary assets and liabilities are translated at the rate of
exchange in effect at the balance sheet date and non-monetary assets and
liabilities at historical rates. Income and expense items are translated at a
weighted average exchange rate prevailing during the period, except expenses
related to non-monetary assets and liabilities which are translated at
historical rates. The effect of foreign currency adjustment for this entity is
included in the results of operations. During the reported periods herein, such
amounts were not significant.
Foreign currency transaction gains or losses are reflected in operations.
During the years ended March 25, 2000, March 27, 1999 and March 28, 1998
transaction losses charged to operations amounted to $358,000, $107,000 and
$72,000, respectively.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Fair value of financial instruments
The consolidated financial statements include financial instruments whereby
the fair market value of such instruments may differ from amounts reflected on a
historical basis. Financial instruments of the Company consist of cash deposits,
accounts receivable, advances to affiliates, accounts payable, certain accrued
liabilities, long-term debt and capital leases. The carrying amount of the
Company's long term debt approximates fair market value based on prevailing
market rates. The Company's other financial instruments generally approximate
their fair values at March 25, 2000, and March 27, 1999, based on the short-term
nature of these instruments. Advances to affiliates have no readily
ascertainable fair market value.
Deferred financing costs
Costs incurred in connection with financing activities (Note 5), are
capitalized and amortized using the straight-line method which approximates the
effective interest method, and charged to interest expense in the accompanying
consolidated statements of operations. Total costs deferred and included under
other assets in the
F-15
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
accompanying consolidated balance sheets at March 25, 2000 and March 27, 1999
were $3.7 million and $3.9 million, respectively. As a result of the bankruptcy
filing discussed in Note 1 these costs are expected to be written off as the
debt is refinanced.
Earnings per share
Earnings per share amounts have been computed using Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
establishes standards for computing and presenting earnings per share ("EPS").
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. It also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Diluted EPS includes unexercised stock options using
the treasury stock method. (See Note 11).
Use of estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the amounts and disclosures reported in
the financial statements and accompanying notes. Significant estimates made by
management include allowances for doubtful accounts receivable, reserves for
inventories, legal actions and environmental issues, and costs to complete on
long term contracts. Actual results could differ from those estimates.
Research and Development Costs
Research and development costs are charged to operations when incurred and
are included in operating expenses. The amounts charged in fiscal years 2000,
1999 and 1998 were $943,000, $1.1 million and $357,000, respectively.
Fiscal year
Effective in fiscal year 1998, the Company changed its fiscal year to end
on the last Saturday of March.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the March 25, 2000 presentation.
F-16
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 3 Composition of Certain Consolidated Balance Sheet Components
(in thousands)
Restated
March 25, 2000 March 27, 1999
-------------- --------------
Accounts receivable:
Billed receivables, net of reserves of $219 and $500 at
March 25, 2000 and March 27, 1999, respectively $ 36,151 $ 38,899
Unbilled receivables (net of unliquidated progress payments of
$0 and $472 at March 25, 2000, and March 27, 1999,
respectively) 4,152 2,690
Other 978 1,082
-------- --------
$ 41,281 $ 42,671
======== ========
Inventories:
Raw materials $ 6,189 $ 6,805
Work-in-process 5,988 6,973
Finished goods 2,649 7,667
-------- --------
$ 14,826 $ 21,445
======== ========
Property, plant and equipment:
Land and building $ 13,901 $ 10,583
Machinery and equipment 70,225 66,507
Furniture and fixtures 3,299 2,608
Construction in process 984 4,994
-------- --------
88,409 84,692
Less - accumulated depreciation and amortization (22,630) (15,995)
-------- --------
$ 65,779 $ 68,697
======== ========
Note 4 Related Party Transactions
The Company sold certain components to and performed certain services for
affiliates. Sales to affiliates totaled $566,000 for the year ended March 28,
1998. Included in sales to affiliates in fiscal year 1998 is a $500,000 fee for
services rendered to Valentec International Limited ("VIL"), a U.K. company,
majority owned by Robert A. Zummo, the Chief Executive Officer and Chairman of
the Board of the Company. The Company served as a sales representative in
procuring a defense contract for VIL and arranging its sub-contractors. During
fiscal year 1999, the Company incurred additional costs on behalf of VIL in
connection with the defense contract procured for VIL during fiscal year 1998.
These additional costs, approximately $3.4 million, were collected in May 1999.
The Company established a reserve in the amount of $0.6 million in the second
quarter of the fiscal year ending March 25, 2000 against its receivable of $1.2
million from VIL, an affiliated party, as a result of uncertainty as to the
affiliate's ability to generate sufficient cash to repay such amount. An
agreement has been signed in January 2000 between the Company and Mr. Zummo,
whereby Mr. Zummo has pledged to the Company his stock in the Company as
collateral against such indebtedness. Further, Mr. Zummo has agreed to direct
VIL to remit to the Company in satisfaction of a portion of the receivable,
$564,000 to be received from a foreign customer. In connection with the
restructuring agreement signed in April 2000, discussed in Note 1, the pledged
collateral has diminished in value, and Mr. Zummo has agreed to reduce future
payments to him under his employment agreement to cover such receivable in the
event the cash is not received from the foreign customer by July 1, 2001. In
addition, the Company has agreed to release VIL from any amounts due in excess
of such receivable. There were no sales to VIL during fiscal 2000.
The Company subleased space from VIL for its European automotive
operations, until April 1998, at which time the Company assumed the entire lease
agreement. Sublease payments for the year ended March 28, 1998, were
F-17
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
$195,000. In addition, prior to the assumption of the entire lease agreement,
the Company has been allocated its pro-rata portion of certain manufacturing
overhead expenses based on square footage, as well as a pro-rata portion of
shared general and administrative expenses. Such costs totaled $570,000 for the
year ended March 28, 1998.
The Company purchases from Valentec certain components that are used in its
products. Prior to the Valentec Acquisition purchases totaled $405,000 for the
year ended March 28, 1998.
In connection with the Valentec Acquisition, the Company assumed a demand
note payable to VIL of $800,000 and a five-year term note payable to VIL of $2.0
million. The Company paid all amounts related to these notes during fiscal 1998.
Note 5 Long-Term Obligations (in thousands)
Restated
March 25, 2000 March 27, 1999
-------------- --------------
Senior Subordinated Notes due July 15, 2007, bearing
interest at 10 1/8% $ 90,000 $ 90,000
KeyBank revolving credit facility due May 05, 2002, bearing
interest at 3.0% over LIBOR 37,850 37,200
KeyCorp equipment note due July 10, 2005, bearing interest at 7.09% 8,074 9,210
Bank Austria mortgage note, due March 31, 2007, bearing
interest at 1.0% over LIBOR 5,625 6,375
Deutsche Bank mortgage note, $801 due June 30, 2009 and $1,335 due
June 30, 2019, bearing interest at 4.05% and 3.75%, respectively 2,136 0
Note payable, principal due in annual installments of $212 Beginning January
12, 1999 to January 12, 2002, with interest at 7.22% in semiannual
installments, secured by assets of the
Company's United Kingdom subsidiary 398 608
A.1 Credit Corp note, due in monthly installments of $29 beginning January 3,
1999 to November 3, 2001, bearing interest at 7.57%
(See Note 1) 526 724
Capital equipment notes payable, due in monthly installments with interest at
8.02% to 16.0% maturing at various rates
Through June 2002, secured by machinery and equipment 2,714 3,571
--------- ---------
147,323 147,688
Less - Current portion (131,587) (3,988)
--------- ---------
$ 15,736 $ 143,700
========= =========
Senior Subordinated Notes
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old
Notes") to BT Securities Corporation, Alex. Brown & Sons Incorporated and
BancAmerica Securities, Inc. in a transaction not registered under the
Securities Act of 1933, as amended, in reliance upon an exemption thereunder
(the "Debt Offering"). On September 2, 1997, the Company commenced an offer to
exchange (the "Exchange Offer", together with the Debt Offering, the "Offering")
the Old
F-18
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Notes for $90.0 million aggregate principal amount of its 10 1/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for the Exchange
Notes pursuant to the terms of the Exchange Offer, which expired on October 1,
1997. Interest on the Notes accrues from July 24, 1997 and is payable
semi-annually in arrears on each of January 15 and July 15 of each year. The
Company has accrued as of March 25, 2000, as part of accrued liabilities,
approximately $6.5 million of interest. The Company incurred approximately $3.9
million of fees and expenses related to the Offering. Such fees have been
deferred and are being charged to operations over the expected term of the
Notes, not to exceed 10 years. The Notes are general unsecured obligations of
the Company and are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined in the Indenture pursuant to which the Notes
were issued) and to all existing and future indebtedness of the Company's
subsidiaries that are not Guarantors. All of the Company's direct and indirect
wholly-owned domestic subsidiaries are Guarantors (See Note 14).
On January 18, 2000, the Company did not make a scheduled interest payment
on its 10 1/8% Senior Subordinated Notes (the "Notes"). The senior lenders of
the Company had previously notified the trustee for the Company's Notes that
they were exercising their rights to block such interest payment. As of March
25, 2000, the Notes were in default and classified as current liabilities in the
accompanying consolidated balance sheet. See description of the Restructuring
Agreement in Note 1.
Credit Agreement
The Company, ASCI GmbH and Automotive Safety Components International
Limited, a wholly-owned subsidiary of the Company organized under the laws of
the United Kingdom, entered into an agreement with KeyBank National Association,
as administrative agent ("KeyBank"), dated as of May 21, 1997 as amended to date
(the "Credit Agreement"). The Credit Agreement consists of a $40.0 million
revolving credit facility for a five year term ($37.9 million outstanding as of
March 25, 2000), bearing interest at LIBOR (6.13% as of March 25, 2000) plus
3.0% with a commitment fee of 1.0% per annum for any unused portion. The initial
proceeds from KeyBank were used to repay the Bank of America NT&SA term loan and
revolving credit facility. KeyBank was subsequently repaid with the proceeds
from the Offering. The Company incurred approximately $470,000 of financing fees
and related costs. These costs have been deferred and are being charged to
operations over the expected term of the Credit Agreement not to exceed 5 years.
The Credit Agreement contains certain restrictive covenants that impose
limitations upon, among other things, the Company's ability to change its
business; merge; consolidate or dispose of assets; incur liens; make loans and
investments; incur indebtedness; pay dividends and other distributions; engage
in certain transactions with affiliates; engage in sale and lease-back
transactions; enter into lease agreements; and make capital expenditures.
On October 9, 1998, the Company entered into Amendment No. 4 to the Credit
Agreement, which increased the revolving credit facility from $27.0 million to
$40.0 million, and added Fleet Bank as a member of the bank syndicate. KeyBank
and Fleet Bank each provide fifty percent of the financing available under the
Credit Agreement and KeyBank remains as acting agent.
On June 24, 1999, the Company entered into Amendment No. 6 to the Credit
Agreement, which among other covenants requires the Company to earn $30.0
million of EBITDA (as such term is defined in the Credit Agreement) in fiscal
year 2000. Such covenant is tested monthly based upon cumulative targets for the
year. Covenants for Fixed Charge Coverage, Interest Coverage and Minimum Net
Income are also based on the $30.0 million EBITDA target. In addition, the
interest rate was increased to LIBOR plus 3.0% and the commitment fee was
increased to 1.0%. The Company issued to the Lenders ten-year warrants to
acquire 20,000 shares of the Company's common stock at current market value per
share. Additionally, the Company will be subject, as of June 24, 2000, to a
Senior Funded Debt to EBITDA ratio covenant of 1.5 to 1.0 and a Minimum
Consolidated Net Worth covenant. In addition, under Amendment No. 6 to the
Credit Agreement the Lenders waived certain financial covenants for periods
through the date of such amendment. As of March 25, 2000 there was no
availability under the Credit Agreement and the Company was in default of
certain financial covenants. Consequently, obligations outstanding under the
Credit Agreement are
F-19
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
classified as current liabilities as of March 25, 2000 in the consolidated
balance sheet. The indebtedness under the Credit Agreement is secured by
substantially all the assets of the Company. See description of the
Restructuring Agreement in Note 1.
Other Long-term Obligations
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The Company applied the entire proceeds to satisfy outstanding
indebtedness under the KeyBank revolving credit facility, thereby increasing the
availability under the revolving credit facility. The KeyCorp financing
agreement has a seven-year term, bears interest at a fixed rate of 7.09% via an
interest swap agreement, and requires monthly payments of $150,469, secured by
certain equipment located at SCFTI. The rate swap is considered immaterial to
the Company's financial position at March 25, 2000.
On June 4, 1997, the Company secured a $7.5 million mortgage note facility
with Bank of Austria. The note is payable in semi-annual installments of
$375,000 through March 31, 2007 and bears interest at 1.0% over LIBOR. The note
is secured by the assets of the Company's Czech Republic facility. The Company
incurred approximately $437,000 of financing fees and related costs. These costs
have been deferred and will be charged to operations over the expected term of
the note not to exceed 5 years.
On November 3, 1998, the Company entered into an unsecured note facility
with A.1 Credit Corp. of $772,000 (including transaction and other fees), which
requires monthly payments of $29,000 and bears stated interest at 7.57% (see
Note 1).
On April 1, 1999, the Company secured a $2.9 million mortgage note facility
with Deutsche Bank to purchase a facility in Bavendstedt, Germany. The note is
secured by the real estate in Germany acquired through the mortgage and is
further secured by a guarantee issued by the Company. In July 1999, the Company
refinanced the note and reduced the outstanding indebtedness to $2.1 million.
The new German facility has allowed the Company to conduct its operations in a
more efficient and cost effective manner.
Future annual minimum principal payments at March 25, 2000 are due in the
following fiscal years (amounts are in thousands):
2001 $131,587
2002 3,629
2003 2,796
2004 2,295
2005 2,776
Thereafter 4,240
--------
$147,323
========
F-20
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 6 Income Taxes
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Year ended
-------------------------------------------------
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
Current taxes:
Federal -- $ (930) $ 1,313
State -- 110 204
Foreign -- (138) (48)
Deferred taxes:
Federal 5,280 (2,845) (518)
State 450 45 (128)
Foreign 424 437 1,104
------- ------- -------
$ 6,154 $(3,321) $ 1,927
======= ======= =======
The provision (benefit) for income taxes differs from the amount computed
by applying the federal income tax rate to income before income taxes as
follows:
Year ended
--------------------------------
Restated Restated
March 25, March 27, March 28,
2000 1999 1998
--------- --------- ---------
Expected taxes at federal statutory rate (34%) (34%) 34%
State income taxes, net of federal benefits -- -- 3
Foreign earnings taxed at different rates (2) 1 3
Reversal of foreign contingency reserve -- -- (4)
Valuation allowance on deferred tax assets 35 11 --
Non-deductible intangibles and other, net 22 2 1
--- --- ---
21% (20%) 37%
=== === ===
The primary components of net current deferred tax assets of $1.6 million
and $2.5 million included in other current assets at March 25, 2000 and March
27, 1999, respectively, net non-current deferred tax assets of $1.5 million
included in other non-current assets at March 27, 1999, and net long-term
deferred tax liabilities of $3.1 million and $0.6 million which are included in
other long-term liabilities at March 25, 2000 and March 27, 1999, respectively,
in the accompanying consolidated balance sheet, are as follows (in thousands):
Restated
March 25, March 27,
2000 1999
-------- --------
Deferred tax assets (liabilities):
Accrued liabilities $ 1,032 $ 486
Inventory 519 625
Property, plant and equipment (6,240) (5,956)
Intangibles (2,851) (1,638)
Net operating loss acquired from Valentec 1,674 1,674
Federal net operating loss 15,537 8,179
Foreign net operating loss 622 1,455
Other (38) 325
-------- --------
Net deferred tax (liabilities) assets
before valuation allowances: 10,255 5,150
Valuation allowance on deferred tax assets (11,797) (1,674)
-------- --------
Net deferred tax (liabilities) assets: $ (1,542) $ 3,476
======== ========
In addition, net tax benefits of $708,000 and $668,000 at March 25, 2000
and March 27, 1999, respectively, were recorded directly through equity as part
of the cumulative translation adjustment account. These amounts relate
F-21
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
to translation losses resulting from inter-company note receivable balances from
Phoenix Airbag to one of the Company's domestic subsidiaries.
No taxes have been provided relating to the possible distribution of
approximately $8.4 million of undistributed earnings considered to be
permanently reinvested in foreign operations. No additional taxes would be
payable at March 25, 2000 if such earnings were distributed due to the Company's
net operating loss position.
Note 7 Commitments and Contingencies
On June 27, 2000, Valentec Systems, Inc. received from the Department of
the Army a Notice of Partial Termination for Production of 120mm Fin Assemblies
(the "Partial Termination"). Management has estimated that the upper end of the
range for potential loss resulting from the Partial Termination could be as high
as $3.3 million. The Company has reserved an amount at March 25, 2000 that
management believes is adequate based on the information available and on
advisement from legal counsel. The Company is reviewing the process to appeal
the Partial Termination, however there can be no assurances as to the final
decision by the Department of the Army.
Operating leases
The Company has non-cancelable operating leases for equipment and office
space that expire at various dates through 2009. Certain of the lease payments
are subject to adjustment for inflation. The Company incurred rent expense of
$2.9 million, $2.6 million and $1.6 million for the years ended March 25, 2000,
March 27, 1999 and March 28, 1998, respectively.
Future annual minimum lease payments for all non-cancelable operating
leases as of March 25, 2000 are as follows (in thousands):
2001 $ 2,328
2002 2,274
2003 2,227
2004 1,261
2005 1,201
Thereafter 5,797
-------
$15,088
=======
F-22
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Environmental issues
The Company has identified two areas of underground contamination at the
Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed up by annual
maintenance. The consultants also estimate that remediation costs will be
approximately $250,000, for which the Company had accrued prior to fiscal year
1998 and is included in other long-term liabilities at March 25, 2000 and March
27, 1999. However, depending on the actual extent of impact to the Company or
more stringent regulatory criteria, these costs could be higher. Additionally,
an underground contamination involving machinery fluids exists at the Valentec
facility in Costa Mesa, California and a site remediation plan has been approved
by the Regional Water Quality Control Board. The remediation plan currently
involves the simultaneous operation of a groundwater and vapor extraction
system. Such plan will take approximately five years to implement at an
estimated cost of approximately $368,000, for which the Company had accrued as
part of accrued liabilities. To date, the Company has spent approximately
$325,000 on implementing such plan. In addition, SCFTI has been identified along
with numerous other parties as a Potentially Responsible Party at the Aquatech
Environmental, Inc. Superfund Site. The Company believes that it is a de minimis
party with respect to the site and that future clean-up costs incurred by the
Company will not be material.
A Phase II study revealed limited organic groundwater contamination at the
Company's converter facility in South Carolina. At the time of the Company's
purchase of such facility, $185,000 of the purchase price thereof was placed in
escrow to pay for, if necessary, environmental remediation and monitoring at
such facility. Based on the results of the groundwater monitoring that already
has been conducted, and on the Company's discussions with the South Carolina
Department of Health and Environmental Control ("DHEC"), it appears likely that
no further work will be required.
Low levels of VOCs were found at the Company's Automotive facility in South
Carolina during groundwater sampling. In February 1999, the facility received a
notice letter from DHEC regarding the groundwater contamination. While DHEC
acknowledges that there does not appear to be an active source for groundwater
impact at the facility, it required the facility to perform sampling of two
existing monitoring wells located on the Automotive parcel for VOCs. Low levels
of VOCs again were detected. A meeting was held with DHEC to discuss the
sampling results. DHEC has requested that the Company (i) confirm that no
residential wells exist in the area, (ii) perform additional sampling, and (iii)
propose a program in-site remediation of the groundwater, involving injection of
nutrients to biodegrade to organic compounds in the groundwater. The Company
does not at this time believe that these costs will be material. The Company
cannot evaluate the likelihood of further DHEC requirements at this time.
In the opinion of management, no material expenditures beyond those accrued
at March 25, 2000 will be required for its environmental control efforts and the
final outcome of these matters will not have a material adverse effect on the
Company's results of operations or financial position. The Company believes that
it currently is in compliance with applicable environmental regulations in all
material respects. Management's opinion is based on the advice of an independent
consultant on environmental matters.
Legal proceedings
After the Company's announcement of the restatements in November 1999, the
Company and several of its present or former officers and directors were named
defendants in a class action litigation commenced by shareholders of the Company
in the United States District Court for the District of New Jersey. Eight
separate lawsuits were filed, alleging violations of the federal securities
laws, and all have been consolidated into one action. The parties are currently
negotiating a settlement of the litigation, which will require approval by the
District Court, as well as the federal bankruptcy court in which the Company's
Chapter 11 petition is currently pending. Management does not
F-23
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
presently believe that a resolution consistent with present negotiations would
have a material effect on the financial statements.
Valentec, which was acquired by the Company in May 1997, has been the
subject of an investigation by the Department of Justice regarding a bid-rigging
and kickbacks scheme alleged to have occurred between 1988 and 1992. The
Department of Justice Antitrust Division has contended that former subsidiaries
or divisions of the former Valentec participated in such misconduct in part
through the actions of a former marketing agent and former employees, in order
to obtain certain government subcontracts awarded by Martin Marietta Ordnance
Systems (the predecessor-in-interest to Lockheed Martin). The Government also
contended that Valentec was liable for the acts of its predecessors on a theory
of successor corporate criminal liability. The Government contended that the
alleged kickbacks were made through the former Valentec Kisco and Valentec
Galion operations while those operations were owned and operated by the former
Valentec from the late 1980's through 1992, prior to the 1993 leveraged buy-out
of Valentec by Robert A. Zummo, the President and Chief Executive Officer of the
Company. No officer or director of the Company or its subsidiaries was alleged
to have participated in, or known about, such conduct. The Company has no
recourse against the entity which owned Valentec during the operative time
period due to contractual restrictions in the purchase agreement between Mr.
Zummo and such entity. The Company determined that it was in its best interest
to settle such matter in order to avoid the costs and distractions associated
with contesting the Department of Justice's legal theories on successor
liability. Therefore, a plea agreement was negotiated with the Antitrust
Division of the Department of Justice (the "Plea Agreement"), pursuant to which
Valentec entered a plea, as the successor to the former Valentec Galion
division, to a one-count criminal information of participating in a combination
and conspiracy to suppress competition in violation of the Sherman Antitrust
Act, 15 U.S.C.ss.1, and agreed to pay a $500,000 fine, all of which was paid
during fiscal year 1999. The Plea Agreement also includes an agreement by the
Government not to further criminally prosecute the Company, its subsidiaries, or
any of their respective officers, directors or employees as to the alleged
bid-rigging and kickback scheme. The Plea Agreement does not release the Company
or Valentec from potential civil claims that might be asserted by the United
States Department of Justice Civil Division against Valentec arising out of the
Government's investigation of conduct that is alleged to have occurred in the
time frame prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. The Company
has had discussions with the Civil Division regarding the resolution of such
potential civil claims. As of the date hereof no understanding had been reached
with the Civil Division as to such potential civil claims. The Company denies
that it is liable for any such potential civil claims. In early 1999, Lockheed
Martin named Valentec as a defendant in a civil action already pending in the
United States District Court for the Western District of Tennessee ("the
Court"). Lockheed Martin asserts that Valentec, as the corporate
successor-in-interest to the former Valentec International Corporation, is
civilly liable to Lockheed Martin under antitrust, breach of contract and other
theories of liability for damages. Lockheed Martin claims that it sustained such
civil damages in part as a consequence of the bid-rigging and kickback scheme
said to have occurred in connection with subcontracts awarded to the former
Valentec Galion by Lockheed Martin's predecessor-in-interest, Martin Marietta
Ordnance Systems, Inc. between 1988 and 1992. Lockheed Martin also seeks a
declaratory judgment that Valentec and the other named defendants shall be held
liable and shall indemnify Lockheed Martin to the extent that the United States
Government makes and establishes civil claims against Lockheed Martin arising
out of such purported antitrust and bid-rigging scheme. Such civil claims have
been established at $270,000. Valentec denies that Valentec has any such
liability to Lockheed Martin and, accordingly, has moved to dismiss all such
claims. On February 29, 2000, the Court dismissed and otherwise entered
judgement in Valentec's favor in all causes of action of the Lockheed Martin
case. However, Lockheed Martin's claim for indemnification for civil claims of
the U.S. Government was not dismissed. Accordingly, Lockheed Martin has filed an
amended complaint against Valentec and the other defendants for $340,000,
representing $270,000 paid by Lockheed Martin to the U.S. Government and $70,000
in legal fees. A settlement offer has been proffered by Lockheed Martin at an
amount for which the Company is adequately reserved.
From time to time, the Company is a defendant in legal actions involving
claims arising in the normal course of business. The Company believes that as a
result of its legal defenses none of these actions presently pending, if
F-24
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
decided adversely, would have a material adverse effect on its financial
position, results of operations or cash flows, either individually or in the
aggregate.
During fiscal year 1998 the Company settled a separate matter relating to
Valentec, which arose prior to the Valentec Acquisition, for $600,000. During
fiscal years 1998, 1999 and 2000, $400,000 was paid by the Company. As of March
25, 2000, $200,000 remains in accrued liabilities.
Note 8 Business Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal year 1999. The Company's
operations have been classified into two operating segments: (i) Automotive and
Fabric - The Company manufactures fabrics and automotive airbags for several
domestic and foreign automobile manufacturers under contracts with major airbag
systems integrators. Included in Automotive and Fabric are technical fabric
products, which are produced using similar production processes as for airbag
fabric; and (ii) Metal and Defense - The Company acts as a systems integrator
for the U.S. Army, coordinating the manufacture and assembly of components
supplied by various subcontractors. Included in the Metal and Defense are metal
components manufactured for commercial purposes, which are produced using
similar production processes as other metal components. The Company's Defense
Operations also manufactures projectiles and other metal components for small to
medium caliber training and tactical ammunition for the U.S. Armed Forces and
contractors within the defense business.
In the second quarter of fiscal year 2000, management determined that the
Company's reportable operating segments, disclosed in previous filings, were no
longer consistent with the manner in which management reviews the Company's
business operations and assesses the performance of its various product lines.
Accordingly, the Company has realigned its reportable operating segments to more
appropriately reflect management's current practice. The Company evaluates
performance and allocates resources based on earnings (operating income) before
interest, taxes, depreciation and amortization (EBITDA). The Company's
reportable segments are differentiated by product and production process. The
reportable segments are each managed separately because they manufacture
distinct products with different production processes. Amounts for fiscal years
1999 and 1998 have been reclassified to conform with management's revised
approach to managing the business. Summarized financial information by business
segment follows (in thousands).
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
Revenues from external customers:
Airbag cushions $ 123,838 $ 106,644 $ 75,573
Airbag fabric 46,205 47,768 36,681
Technical fabric 24,624 23,936 17,400
--------- --------- ---------
Automotive and fabrics $ 194,667 $ 178,348 $ 129,654
========= ========= =========
Systems integrator $ 16,384 $ 22,621 $ 11,313
Metal components 17,215 19,012 25,107
--------- --------- ---------
Metal and defense $ 33,599 $ 41,633 $ 36,420
========= ========= =========
EBITDA:
Automotive and fabrics $ 25,263 $ 16,805 $ 17,138
Metal and defense (160) (500) 5,969
Corporate (9,568) (8,214) (3,741)
--------- --------- ---------
$ 15,535 $ 8,091 $ 19,366
========= ========= =========
F-25
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
Unusual items:
Automotive and fabrics
Effect of General Motors strike $ -- $ 1,300 $ --
Relocation and Reorganization -- 2,400 1,789
-------- -------- --------
-- $ 3,700 $ 1,789
======== ======== ========
Corporate
Reorganization and restatement $ 3,969 $ --
Terminated investment agreement -- 2,500 $ --
Relocation and Reorganization -- 838 --
-------- -------- --------
$ 3,969 $ 3,338 $ --
======== ======== ========
Write-down of impaired long-lived assets and goodwill:
Automotive and fabrics $ -- $ 1,839 $ --
Metal and defense 17,676 -- --
Corporate -- 500 $ --
-------- -------- --------
$ 17,676 $ 2,339 $ --
======== ======== ========
Total assets at fiscal year end:
Automotive and fabrics $149,388 $163,076 $138,166
Metal and defense 19,058 43,826 47,625
Corporate 7,114 11,068 8,842
-------- -------- --------
$175,560 $217,970 $194,633
======== ======== ========
Capital expenditures:
Automotive and fabrics $ 7,974 $ 12,130 $ 13,159
Metal and defense 740 1,488 556
Corporate 112 236 --
-------- -------- --------
$ 8,826 $ 13,854 $ 13,715
======== ======== ========
The Company attributes its revenues from external customers and long-lived
assets to a particular country based on the location of each of the Company's
production facilities. Summarized financial information by geographic area is as
follows:
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
Revenues from external customers:
United States $104,428 $113,337 $ 90,501
Mexico 46,651 33,888 29,770
Germany 54,222 58,697 35,133
Total Europe 77,187 72,756 45,803
Long-lived assets excluding goodwill
and other intangibles at period end:
United States $ 39,672 $ 43,911 $ 43,844
Mexico 1,093 1,130 970
Germany 9,905 7,796 8,108
Total Europe 15,109 15,860 13,307
F-26
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 9 Employee Benefit Plans
The Company had two defined contribution plans qualified under Section
401(k) of the Internal Revenue Code for eligible employees. Both plans provide
for discretionary employer contributions. One plan, referred to as the "SCI
Plan", had been Valentec's prior to the Valentec acquisition; the other plan is
the "Galion Plan." The SCI Plan and the "Galion Plan", provide for a company
match equal to 50% of the employee's contribution up to 6% of the employee's
salary. Employer contributions become 100% vested after two years of vested
service. Effective January 1, 2000, the Galion Plan merged into the SCI Plan.
The Company contributed an aggregate of approximately $403,000, $398,000 and
$140,000 during fiscal years 2000, 1999 and 1998, respectively, to the SCI Plan
and Galion Plan.
Note 10 Common Stock and Stock Options
Common Stock
During fiscal year 1999, the Company issued an aggregate of 90,933 shares
of Common Stock from stock option agreements exercised. During fiscal year 1998,
the Company acquired an aggregate of 1,379,200 shares of Common Stock and issued
an aggregate of 1,369,200 shares of Common Stock, each in connection with the
Valentec Acquisition (Note 1). The remainder of shares of Common Stock issued
during fiscal year 1998 were from stock option agreements exercised. There was
no activity in the Company's common stock for fiscal year 2000.
Stock Options
The Company's stock option plan ("Plan"), as amended, provides for the
issuance of options to purchase up to an aggregate of 1,500,000 shares of SCI's
Common Stock to key officers, employees of SCI or its affiliates, directors and
consultants. The options granted vest in three equal installments on the first
three anniversary dates of the grant. Each award is determined by the
Compensation Committee of the Board of Directors on an individual basis, except
for awards to non-officer directors, which are determined pursuant to a formula.
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts (in thousands, except per share
data):
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
Net (loss) income: As Reported $ (35,145) $ (13,663) $ 3,346
=========== =========== ===========
Pro Forma $ (35,886) $ (14,496) $ 2,728
=========== =========== ===========
Net (loss) income per share, basic: As Reported $ (6.84) $ (2.67) $ 0.67
=========== =========== ===========
Pro Forma $ (6.99) $ (2.84) $ 0.54
=========== =========== ===========
F-27
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
A summary of the status of the Company's stock option plan at March 25,
2000, March 27, 1999 and March 28, 1998 and changes during the years then ended
is presented in the table and narrative below:
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
----------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise Of Exercise of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 878,267 12.56 1,079,933 $12.16 531,999 $12.57
Granted 592,500 5.78 53,000 14.96 611,500 11.86
Exercised -- -- (75,933) 10.83 (23,000) 10.00
Forfeited (230,600) 11.41 (178,733) 11.63 (40,566) 14.11
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 1,240,167 9.53 878,267 12.56 1,079,933 12.16
========== ========== ========== ========== ========== ==========
Exercisable at end of year 548,406 12.34 516,000 12.30 312,865 12.43
========== ========== ========== ========== ========== ==========
Weighted average fair value
of options granted $3.10 $5.96 $4.61
Of the 1,240,167 options outstanding at March 25, 2000, 437,000 have
exercise prices between $2.59 and $6.00 with a weighted average exercise price
of $5.25 and a weighted average remaining contractual life of 9.19 years; none
of these options are currently exercisable. An additional 214,000 options have
exercise prices between $8.50 and $10.00, with a weighted average exercise price
of $9.30 and a weighted average remaining contractual life of 7.08 years; 97,350
of these options are currently exercisable with a weighted average exercise
price of $10.00. An additional 283,167 options have exercise prices between
$10.25 and $11.50 with a weighted average exercise price of $11.05 and a
weighted average remaining contractual life of 7.16 years; 232,985 of these
options are currently exercisable with a weighted average exercise price of
$11.12. An additional 259,500 options have exercise prices between $12.13 and
$14.88 with a weighted average exercise price of $13.54 and a weighted average
remaining contractual life of 7.67 years; 179,575 of these options are currently
exercisable with a weighted average exercise price of $13.57. The remaining
46,500 options have exercise prices between $15.88 and $21.73 with a weighted
average exercise price of $19.30 and a weighted average remaining contractual
life of 6.02 years; 38,496 of these options are currently exercisable with a
weighted average exercise price of $20.01. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 2000, 1999
and 1998, respectively: risk-free interest rates ranged from 5.0 to 6.7 percent;
zero percent dividends for all years; expected lives of 6.0, 5.0, and 5.0 years;
and expected volatility of 51.0, 35.6, and 31.4 percent.
F-28
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 11 - Reconciliation to Diluted Earnings Per Share (in thousands)
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of dilutive
potential common stock.
Restated Restated
March 25, 2000 March 27, 1999 March 28,1998
-------------- -------------- -------------
Net (loss) income $(35,145) $(13,663) $3,346
======== ======== ========
Weighted average number of common shares used
in basic earnings per share 5,136 5,112 5,027
Effect of dilutive securities:
Stock options -- -- 117
Warrants -- -- 3
-------- -------- --------
Weighted average number of common shares and
Dilutive potential common stock used in diluted
Earnings per share 5,136 5,112 5,147
======== ======== ========
At March 25, 2000, options on 1,240,167 shares of common stock and warrants
for 124,400 shares of common stock were considered antidulitive and therefore
were not included in computing diluted earnings per share. These constituted all
common stock equivalents at year-end. Options on 878,267 and 285,500 shares of
common stock were not included in computing diluted earnings per share at March
27, 1999, and March 28, 1998, respectively, because their effects were
antidilutive. Warrants for 104,400 shares of common stock were not included in
computing diluted earnings per share at March 27, 1999, because their effects
were antidilutive.
Note 12 - Comprehensive Income (in thousands)
During the first quarter of fiscal year 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income", which became effective for fiscal years
beginning after December 15, 1997. This Statement requires disclosure of
comprehensive income, defined as the total of net income and all other non-owner
changes in equity, which under generally accepted accounting principles, are
recorded directly to the stockholders' equity section of the consolidated
balance sheet. In SCI's case, the non-owner changes in equity relate to foreign
currency translation adjustments. Comprehensive income is as follows:
Restated Restated
March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
Net (loss) income $(35,145) $(13,663) $3,346
Foreign currency translation adjustment (1,801) (1,542) (2,288)
-------- -------- --------
Comprehensive (loss) income $(36,946) $(15,205) $1,058
======== ======== ========
F-29
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 13 Unaudited Quarterly Results
Unaudited quarterly financial information for fiscal years 2000 and 1999 is
set forth below. All dollar amounts are in thousands except per share data.
------------------------------------------------------
Quarter Ended
------------------------------------------------------
Restated Restated
June 26, September 25, December 25, March 25,
1999 1999 1999 2000
-------- -------- -------- --------
Fiscal 2000
Revenues $ 63,845 $ 53,391 $ 55,254 $ 55,776
Income (loss) from operations $ 4,496 $ 1,410 $(16,404) $ (2,440)
Net income (loss) $ 641 $ (1,431) $(19,238) $(15,117)
Net income (loss) per share, basic $ 0.12 $ (0.28) $ (3.75) $ (2.94)
Net income (loss) per share, $ 0.12 $ (0.28) $ (3.75) $ (2.94)
assuming dilution
------------------------------------------------------
Quarter Ended (Restated)
------------------------------------------------------
June 27, September 26, December 26, March 27,
1998 1998 1998 1999
-------- -------- -------- --------
Fiscal 1999, as restated
Revenues $ 51,065 $ 52,301 $ 60,900 $ 55,715
Income (loss) from operations $ 4,417 $ 2,759 $ (1,599) $ (7,576)
Net income (loss) $ 889 $ (320) $ (3,699) $(10,533)
Net income (loss) per share, basic $ 0.18 $ (.06) $ (0.72) $ (2.06)
Net income (loss) per share, $ 0.17 $ (.06) $ (0.72) $ (2.06)
assuming dilution
F-30
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
Note 14 - Supplemental Guarantor Condensed Consolidating Financial Statements
In connection with the Offering (see Note 5), the Notes are guaranteed on a
senior unsecured basis, jointly and severally, by each of the Company's
principal wholly-owned domestic operating subsidiaries and certain of its
indirect wholly-owned subsidiaries (the "Guarantors"). The condensed
consolidating financial statements of the Guarantors are presented below.
Management believes the condensed consolidating financial statements presented
are meaningful in understanding the financial position, results of operations
and cash flows of the Guarantor subsidiaries.
CONSOLIDATING BALANCE SHEETS
March 25, 2000
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
-------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ 250 $ 5,209 $ 4,805 -- $ 10,264
Accounts receivable, net .................................. 28,543 12,738 -- -- 41,281
Receivable from affiliate .................................. -- -- 564 -- 564
Inventories ................................................ 11,670 3,156 -- -- 14,826
Prepaid and other .......................................... 515 930 1,453 -- 2,898
--------- --------- --------- --------- ---------
Total current assets ............................................ 40,978 22,033 6,822 -- 69,833
--------- --------- --------- --------- ---------
Property, plant and equipment, net ........................ 39,003 26,107 669 -- 65,779
Intangible assets, net ..................................... 21,223 14,168 -- -- 35,391
Other assets ............................................... 5,844 58 7,020 (8,365) 4,557
--------- --------- --------- --------- ---------
Total assets .................................................... $ 107,048 $ 62,366 $ 14,511 $ (8,365) $ 175,560
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ........................................... $ 14,588 $ 6,194 $ 1,591 -- $ 22,373
Earnout payable ............................................ -- -- -- -- --
Accrued liabilities ........................................ 4,098 2,949 8,976 -- 16,023
Intercompany accounts short term ........................... 12,831 12,213 (25,044) -- --
Current portion of long-term obligations ................... 834 511 130,242 -- 131,587
--------- --------- --------- --------- ---------
Total current liabilities ....................................... 32,351 21,867 115,765 169,983
--------- --------- --------- --------- ---------
Long-term obligations ...................................... 928 2,975 11,833 -- 15,736
Senior subordinated debt ................................... -- -- -- -- --
Intercompany accounts long term ............................ 105,403 25,582 (130,985) -- --
Other long-term liabilities ................................ 352 3,185 744 -- 4,281
--------- --------- --------- --------- ---------
Total liabilities ............................................... 139,034 53,609 (2,643) -- 190,000
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' (deficit) equity
Preferred stock: $.10 par value per share 2,000,000
Shares authorized; no shares outstanding
at March 25, 2000 .................................... -- -- -- -- --
Common stock: $.01 par value per share -10,000,000
Shares authorized; 6,629,008 issued at March 25, 2000 ...... (16) 5,580 60 (5,558) 66
Common stock warrants ...................................... -- -- 51 -- 51
Additional paid-in-capital ................................. -- 2,807 45,168 (2,807) 45,168
Treasury stock, 1,492,692 shares
at March 25, 2000, at cost ........................... -- -- (15,439) -- (15,439)
Retained earnings (accumulated deficit) .................... (31,970) 8,377 (12,686) -- (36,279)
Cumulative translation adjustment .......................... -- (8,007) -- -- (8,007)
--------- --------- --------- --------- ---------
Total stockholders' (deficit) equity ............................ (31,986) 8,757 17,154 (8,365) (14,440)
========= ========= ========= ========= =========
Total liabilities and stockholder's (deficit) equity ............ $ 107,048 $ 62,366 $ 14,511 $ (8,365) $ 175,560
========= ========= ========= ========= =========
F-31
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING BALANCE SHEETS
March 27, 1999, as restated
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
-------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 379 $ 7,230 $ 2,998 $ -- $ 10,607
Accounts receivable, net ................................. 30,033 12,618 20 -- 42,671
Receivable from affiliate ................................. 4,554 -- -- -- 4,554
Inventories ............................................... 17,674 3,771 -- -- 21,445
Prepaid and other ......................................... 565 883 4,848 -- 6,296
--------- --------- --------- --------- ---------
Total current assets ........................................... 53,205 24,502 7,866 -- 85,573
--------- --------- --------- --------- ---------
Property, plant and equipment, net ....................... 42,938 24,787 972 -- 68,697
Intangible assets, net .................................... 40,492 17,114 -- -- 57,606
Other assets .............................................. 7,133 53 8,255 (9,347) 6,094
--------- --------- --------- --------- ---------
Total assets ................................................... $ 143,768 $ 66,456 $ 17,093 $ (9,347) $ 217,970
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 15,299 $ 9,862 $ 2,932 $ -- $ 28,093
Earnout payable ........................................... -- 2,111 -- -- 2,111
Accrued liabilities ....................................... 5,353 4,737 6,017 -- 16,107
Intercompany accounts short term .......................... 9,492 10,167 (19,659) -- --
Current portion of long-term obligations .................. 1,138 658 2,192 -- 3,988
--------- --------- --------- --------- ---------
Total current liabilities ...................................... 31,282 27,535 (8,518) -- 50,299
--------- --------- --------- --------- ---------
Long-term obligations ..................................... 1,421 962 51,317 -- 53,700
Senior subordinated debt .................................. -- -- 90,000 -- 90,000
Intercompany accounts long term ........................... 112,346 26,347 (138,693) -- --
Other long-term liabilities ............................... (1,639) 2,779 375 -- 1,515
--------- --------- --------- --------- ---------
Total liabilities .............................................. 143,410 57,623 (5,519) -- 195,514
--------- --------- --------- --------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock: $.10 par value per share 2,000,000
Shares authorized; no shares outstanding
at March 27, 1999 .................................. -- -- -- -- --
Common stock: $.01 par value per share -10,000,000
Shares authorized; 6,629,008 issued
at March 27, 1999 .................................... -- 5,580 66 (5,580) 66
Common stock warrants ..................................... -- -- 1 -- 1
Additional paid-in-capital ................................ -- 2,807 45,168 (2,807) 45,168
Treasury stock, 1,492,692 shares
at March 27, 1999, at cost ......................... -- -- (15,439) -- (15,439)
Retained earnings (accumulated deficit) ................... 358 6,652 (7,184) (960) (1,134)
Cumulative translation adjustment ......................... -- (6,206) -- -- (6,206)
--------- --------- --------- --------- ---------
Total stockholders' equity ..................................... 358 8,833 22,612 (9,347) 22,456
--------- --------- --------- --------- ---------
Total liabilities and stockholder's equity ..................... $ 143,768 $ 66,456 $ 17,093 $ (9,347) $ 217,970
========= ========= ========= ========= =========
F-32
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended March 25, 2000
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------------------------------------------------------------------------
Net sales ...................................... $ 151,079 $ 86,142 $ -- $ (8,955) $ 228,266
Cost of sales, excluding depreciation .......... 128,998 70,827 -- (8,449) 191,376
Depreciation ................................... 5,518 3,245 229 (183) 8,809
--------- --------- --------- --------- ---------
Gross profit .............................. 16,563 12,070 (229) (323) 28,081
--------- --------- --------- --------- ---------
Selling and marketing expenses ................. 2,643 1,108 52 -- 3,803
General and administrative expenses ............ 4,266 3,622 5,549 (887) 12,550
Research and development expenses .............. 705 238 -- -- 943
Terminated investment agreement costs .......... -- -- -- -- --
Amortization of goodwill ....................... 18,738 661 355 -- 19,754
Restructuring and restatement costs ............ -- -- 3,969 -- 3,969
--------- --------- --------- --------- ---------
Income (loss) from operations ............. (9,789) 6,441 (10,154) 564 (12,938)
--------- --------- --------- --------- ---------
Other expense .................................. 22,736 1,414 (22,099) (114) 1,937
Interest expense ............................... (1,386) 2,762 12,740 -- 14,116
--------- --------- --------- --------- ---------
Income (loss) before income taxes ......... (31,139) 2,265 (795) 678 (28,991)
(Benefit) provision for income taxes ........... -- 485 5,960 (291) 6,154
--------- --------- --------- --------- ---------
Net (loss) income .............................. $ (31,139) $ 1,780 $ (6,755) $ 969 $ (35,145)
========= ========= ========= ========= =========
F-33
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended March 27, 1999, as restated
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
--------------------------------------------------------------------------------
Net sales ...................................... $ 147,225 $ 81,469 $ -- $ (8,713) $ 219,981
Cost of sales, excluding depreciation .......... 125,994 70,121 226 (7,309) 189,032
Depreciation ................................... 5,008 2,774 222 (276) 7,728
--------- --------- --------- --------- ---------
Gross profit .............................. 16,223 8,574 (448) (1,128) 23,221
--------- --------- --------- --------- ---------
Selling and marketing expenses ................. 2,808 271 43 -- 3,122
General and administrative expenses ............ 6,796 2,168 4,607 (663) 12,908
Research and development expenses .............. 1,090 -- -- -- 1,090
Terminated investment agreement costs .......... -- -- 2,500 -- 2,500
Amortization of goodwill ....................... 1,316 681 365 -- 2,362
Relocation and reorganization costs ............ -- 2,400 838 -- 3,238
--------- --------- --------- --------- ---------
Income (loss) from operations ............. 4,213 3,054 (8,801) (465) (1,999)
--------- --------- --------- --------- ---------
Other expense .................................. 16,749 70 (14,489) (133) 2,197
Interest expense ............................... (1,250) 2,549 11,491 (2) 12,788
--------- --------- --------- --------- ---------
Income (loss) before income taxes ......... (11,286) 435 (5,803) (330) (16,984)
(Benefit) provision for income taxes ........... (1,888) 255 (1,533) (155) (3,321)
--------- --------- --------- --------- ---------
Net (loss) income .............................. $ (9,398) $ 180 $ (4,270) $ (175) $ (13,663)
========= ========= ========= ========= =========
F-34
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended March 28, 1998, as restated
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
-------------------------------------------------------------------------------
Net sales ...................................... $ 120,271 $ 52,895 $ -- $ (7,092) $ 166,074
Cost of sales, excluding depreciation .......... 98,844 40,922 -- (6,000) 133,766
Depreciation ................................... 3,440 1,601 86 (126) 5,001
--------- --------- --------- --------- ---------
Gross profit .............................. 17,987 10,372 (86) (966) 27,307
--------- --------- --------- --------- ---------
Selling and marketing expenses ................. 1,335 126 -- 225 1,686
General and administrative expenses ............ 3,634 2,555 3,741 (820) 9,110
Research and development expenses .............. 357 -- -- -- 357
Amortization of goodwill ....................... 926 542 274 -- 1,742
Relocation and reorganization costs ............ 655 1,134 -- -- 1,789
--------- --------- --------- --------- ---------
Income (loss) from operations ............. 11,080 6,015 (4,101) (371) 12,623
--------- --------- --------- --------- ---------
Other expense .................................. 8,574 533 (9,463) (41) (397)
Interest expense ............................... (680) 2,099 6,328 -- 7,747
--------- --------- --------- --------- ---------
Income (loss) before income taxes ......... 3,186 3,383 (966) (330) 5,273
Provision (benefit) for income taxes ........... 1,419 1,056 (438) (110) 1,927
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ 1,767 $ 2,327 $ (528) $ (220) $ 3,346
========= ========= ========= ========= =========
F-35
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended March 25, 2000
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
---------------------------------------------------------------------------
Net cash provided by (used in)
Operating activities .......................... $ 480 $ 3,794 $ 6,933 $ -- $ 11,207
Cash Flows from Investing Activities:
Additions to property, plant
and equipment ............................. (1,488) (6,217) (36) -- (7,741)
Acquisition costs, net of cash
acquired ................................. -- (2,061) -- -- (2,061)
-------- -------- -------- ------------ --------
Net cash used in investing Activities ........... (1,488) (8,278) (36) -- (9,802)
-------- -------- -------- ------------ --------
Cash Flows from Financing Activities:
Net proceeds from issuance of
stock ...................................... -- -- -- -- --
(Repayments) borrowing of
debt and long-term obligations ............. (1,290) (1,669) (2,156) -- (5,115)
Net borrowing on revolving
credit facility ............................ -- -- 700 -- 700
Proceeds from mortgage and
financing notes ............................ -- 2,907 -- -- 2,907
Change in investment in
subsidiary ................................. -- -- -- -- --
Changes in intercompany
accounts ................................... 2,168 1,466 (3,634) -- --
-------- -------- -------- ------------ --------
Net cash provided by financing
activities ................................. 878 2,704 (5,090) -- (1,508)
-------- -------- -------- ------------ --------
Effect of exchange rate changes
on cash ......................................... -- (240) -- -- (240)
-------- -------- -------- ------------ --------
Change in cash and cash
equivalents ..................................... (130) (2,020) 1,807 -- (343)
Cash and cash equivalents,
beginning of period ............................. 380 7,229 2,998 -- 10,607
-------- -------- -------- ------------ --------
Cash and cash equivalents,
end of period ................................... $ 250 $ 5,209 $ 4,805 $ -- $ 10,264
======== ======== ======== ============ ========
F-36
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended March 27, 1999, as restated
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
---------------------------------------------------------------------------
Net cash provided by (used in)
Operating activities ........................ $ (4,821) $ 3,443 $ (7,889) $ (453) $ (9,720)
Cash Flows from Investing Activities:
Additions to property, plant
and equipment ........................... (8,040) (5,848) (236) 270 (13,854)
Acquisition costs, net of cash
acquired ............................... (744) (1,958) (86) -- (2,788)
-------- -------- -------- -------- --------
Net cash used in investing Activities ......... (8,784) (7,806) (322) 270 (16,642)
-------- -------- -------- -------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of
stock .................................... -- -- 1,056 -- 1,056
(Repayments) borrowing of
debt and long-term obligations ........... 724 -- 10,000 -- 10,724
Net borrowing on revolving
credit facility .......................... -- -- 23,024 -- 23,024
Proceeds from mortgage and
financing notes .......................... (1,291) (331) (1,552) -- (3,174)
Change in investment in
subsidiary ............................... (183) -- -- 183 --
Changes in intercompany
accounts ................................. 13,940 7,462 (21,402) -- --
-------- -------- -------- -------- --------
Net cash provided by financing
activities ............................... 13,190 7,131 11,126 183 31,630
-------- -------- -------- -------- --------
Effect of exchange rate changes
on cash ....................................... -- (710) -- -- (710)
-------- -------- -------- -------- --------
Change in cash and cash
equivalents ................................... (415) 2,058 2,915 -- 4,558
Cash and cash equivalents,
beginning of period ........................... 794 5,172 83 -- 6,049
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period ................................. $ 379 $ 7,230 $ 2,998 $ -- $ 10,607
======== ======== ======== ======== ========
F-37
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 25, 2000, March 27, 1999 and March 28, 1998
(1999 and 1998 as restated, (Note 1))
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended March 28, 1998, as restated
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities .......................... $ (5,559) $ 4,312 $ 1,812 $ -- $ 565
Cash Flows from Investing
Activities:
Additions to property, plant
and equipment ........................... (6,244) (6,796) (675) -- (13,715)
Acquisition costs,
net of cash acquired .................... (64,688) (2,455) -- -- (67,143)
-------- -------- -------- ---- --------
Net cash used in investing
Activities .............................. (70,932) (9,251) (675) -- (80,858)
-------- -------- -------- ---- --------
Cash Flows from Financing
Activities:
Proceeds from notes ........................... -- -- 86,053 -- 86,053
Net proceeds from issuance of
stock .................................... -- -- 230 -- 230
(Repayments) proceeds from
term notes ............................... (16,812) -- -- -- (16,812)
(Repayments) borrowing of
debt and long-term obligations ........... (1,117) (732) (10,000) -- (11,849)
Net borrowing on revolving
credit facility .......................... -- (1,230) 12,475 -- 11,245
Proceeds from mortgage and
financing notes .......................... 2,000 -- 7,500 -- 9,500
Change in investment in
subsidiary ............................... (1) -- 1 -- --
Changes in intercompany accounts .............. 93,151 4,170 (97,321) -- --
-------- -------- -------- ---- --------
Net cash provided by
financing activities ..................... 77,221 2,208 (1,062) -- 78,367
-------- -------- -------- ---- --------
Effect of exchange rate changes
on cash ....................................... -- (345) -- -- (345)
-------- -------- -------- ---- --------
Change in cash and cash
equivalents ................................... 730 (3,076) 75 -- (2,271)
Cash and cash equivalents,
beginning of period ........................... 13 8,250 57 -- 8,320
-------- -------- -------- ---- --------
Cash and cash equivalents, end of period ........... $ 743 $ 5,174 $ 132 $ -- $ 6,049
======== ======== ======== ==== ========
F-38
Schedule II - Valuation and Qualifying Accounts
Additions
Charged to
Beginning Costs and Deductions Ending
Balance Expenses Write-Offs Balance
------- -------- ---------- -------
For the year ended March 28, 1998:
Allowance for doubtful accounts $ -- $ 245 $ -- $ 245
European relocation & reorganization reserve -- 3,603 1,103 2,500
======= ======= ======= =======
$ -- $ 3,848 $ 1,103 $ 2,745
======= ======= ======= =======
For the year ended March 27, 1999:
Allowance for doubtful accounts $ 245 $ 1,855 $ 1,600 $ 500
European relocation & reorganization reserve 2,500 -- 1,243 1,257
Relocation & reorganization -- 500 -- 500
Reserve on deferred tax assets -- 1,674 -- 1,674
------- ------- ------- -------
$ 2,745 $ 4,029 $ 2,843 $ 3,931
======= ======= ======= =======
For the year ended March 25, 2000:
Allowance for doubtful accounts $ 500 $ 156 $ 437 $ 219
European relocation & reorganization reserve 1,257 -- 1,257 --
Relocation & reorganization 500 23 147 376
Reserve for receivable from affiliate -- 600 -- 600
Reserve on deferred tax assets 1,674 10,123 -- 11,797
------- ------- ------- -------
$ 3,931 $10,902 $ 1,841 $12,992
======= ======= ======= =======
F-39