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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 31, 1997
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
(State or other jurisdiction of
incorporation or organization)
3190 Pullman Street
Costa Mesa, California
(Address of principal
executive offices)
33-0596831
(I.R.S. Employer
Identification No.)
92626
(Zip Code)
Registrant's telephone number, including area code (714) 662-7756
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)
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 June 19, 1997, was approximately
$52,661,522.
The number of shares outstanding of the registrant's common stock, as
of June 19, 1996, is as follows:
Class Number of Shares
- - -------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,015,383
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement in connection with its
1997 annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference into Part III.
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 ("Valentec"), is a leading, low cost independent supplier of
automotive airbag cushions with operations in North America, Europe and Asia.
The Company sells airbag cushions worldwide to most of the major airbag module
integrators that outsource for such products. In addition to the Company's
airbags products, the Company also produces defense related products, primarily
projectiles and other metal components for small to medium caliber training and
tactical ammunition, which account for $15.1 million or 18% of the Company's
consolidated fiscal 1997 net sales.
SIGNIFICANT TRANSACTIONS
The JPS Acquisition. On June 30, 1997, the Company entered into a
definitive agreement to acquire the air restraints and technical products
division (the "Business") of JPS Automotive L.P. ("JPS Automotive") for $56.3
million (including 18 looms scheduled for delivery prior to closing) plus the
assumption of $797,000 in indebtedness, subject to a post-closing adjustment
(the "JPS Acquisition"). The JPS Acquisition is subject to certain conditions,
including the ability of the Company to obtain financing for such acquisition.
The Company expects to finance the JPS Acquisition with a portion of the
proceeds of a private placement (the "Offering") of $80,000,000 of its Senior
Subordinated Notes. Such Senior Subordinated Notes will not be registered under
the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from registration.
There can be no assurance that such financing will be consummated. JPS
Automotive is a leading, low cost supplier of airbag fabric in North America and
is also a leading manufacturer of value-added synthetic fabrics used in a
variety of niche industrial and commercial applications. The Company believes
the acquisition of JPS Automotive represents an important step in its airbag
growth strategy because it will enable the Company to: (i) combine strong market
positions in fabric and cushions; (ii) integrate low-cost manufacturing
capabilities in airbag fabric and cushions to exploit the continued demand for
airbag modules; (iii) interchange airbag and specialty industrial fabrics using
the same equipment and manufacturing processes thereby allowing the Company to
effectively utilize manufacturing assets and (iv) enhance and expand its
customer base.
The Valentec Acquisition. Pursuant to a definitive Stock Purchase
Agreement, dated as of May 22, 1997, the Company acquired in a stock for stock
transaction all of the outstanding capital stock of Valentec (the "Valentec
Acquisition"). Valentec is a high-volume manufacturer of stamped and precision
machined products for the automotive, commercial and defense industries. The
Company believes that Valentec's machining capabilities and relationships with
airbag module producers will enable the Company to increase the amount of
content per airbag module supplied by the Company. Pursuant to this strategy,
the Company has begun producing end caps and retainer brackets for two of its
larger airbag module customers. In addition, the Company believes that it will
be able to eliminate certain duplicative corporate functions at Valentec,
resulting in improved efficiencies and cost savings.
The foregoing contains forward-looking statements. There are certain
important factors that could cause results to materially differ from those
anticipated from the statements made above. These factors include, but are not
limited to: the ability of Safety Components to consummate the financing
necessary for the JPS Acquisition and the continued performance by JPS
Automotive at historical levels; the ability to realize anticipated cost
savings; the ability to achieve earnings projected by Valentec; the continuation
of favorable trends in the metal stamping business; world-wide automotive sales;
automotive labor strikes or business interruptions; fluctuation in world-wide
economic conditions; dependence of revenues upon several major module suppliers
and pricing pressures.
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The Credit Agreement with KeyBank - As of May 21, 1997, the Company,
Phoenix Airbag GmbH ("Phoenix") and Automotive Safety Components International
Limited entered into a Credit Agreement with KeyBank National Association, as
administrative agent, and the lending institutions named therein (the "Credit
Agreement"). The Credit Agreement provides for (i) a term loan in the principal
amount of $15.0 million and (ii) a revolving credit facility in the aggregate
principal amount of up to $12.0 million (including letter of credit facilities).
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
AIRBAG RELATED PRODUCTS
AIRBAG INDUSTRY
Airbag Module Growth. The worldwide market for airbag modules has grown rapidly
in recent years from approximately 3.6 million installed units in 1991 to
approximately 57.2 million installed units in 1996. According to automotive
research firm Tier One, Inc., installed module sales are projected to more than
double from approximately 57.2 million in 1996 to 123.1 million in 2000 as a
result of increasing penetration in Europe and Asia, growth in demand for side
and rear-impact bags and growth in automotive demand within developing
countries. National Highway Transportation Safety Administration (" NHTSA")
regulations require installation of driver-side and passenger-side airbags in
all U.S. passenger cars beginning in model year 1998 and on light trucks in
model year 1999. Canadian-produced cars are also being built to these standards,
as are all Mexican-built vehicles that are exported to the United States, Canada
and Europe. The adoption of airbags in Europe is consumer demand driven rather
than governmentally mandated. The European market is quickly moving towards 100%
installation of driver-side and passenger-side airbags as a result of declining
unit costs and safety consciousness of Europeans. Approximately 21.7% of the
Company's net sales in fiscal year 1997 were from Europe and the Company
believes its three European facilities provide ample capacity to service the
projected increase in demand for airbag units in the region. Installation rates
on Japanese vehicles are expected to approach those of the United States by the
year 2000. The Company currently sells directly to KIA Motors Corp. ("KIA") and
the Company's airbag cushions are currently sold for installation in Toyota,
Nissan and Mazda automobile models. The Company has recently entered into a
Chinese joint venture to meet the increasing requirements of Asian automakers.
The foregoing contains forward-looking statements. There are certain
important factors that could cause results to materially differ from those
anticipated form the statements made above. These factors include, but are not
limited to: the Company's ability to maintain or increase its market share; the
growth in demand for airbags in Europe and Asia; and the growth in automotive
demand within developing countries.
Structure of the Airbag Industry. Airbag systems consist of an airbag module and
an electronic control module, which are currently integrated by automakers into
their respective vehicles. Airbag modules consist of inflators, cushions,
housing and trim covers and are assembled by module integrators, of which there
are currently seven. All but one of these module integrators produce all of the
components required for a complete module. However, as the industry has evolved,
all but one also outsource a portion of their cushion requirements from Tier 2
suppliers such as the Company.
AUTOMOTIVE PRODUCTS
The Company's automotive products include passenger, driver side and
side impact airbags manufactured for installation in 35 different car and truck
models sold worldwide (including models manufactured by General Motors, Ford,
Chrysler, Toyota, Mazda, Nissan, KIA, Mercedes, BMW, Volkswagen, Rover and
Audi); and stamped and machined components used in airbag systems, 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.
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The Company also manufactures computer peripheral devices and
anti-theft devices for the garment and retail industries.
CUSTOMERS
Sales of airbag related products to TRW Vehicle Safety Systems, Inc.
("TRW") and Petri accounted for approximately 47% and 23%, respectively, of the
Company's consolidated fiscal 1997 net sales.
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 following describes the Company's contractual relationship with its
significant customers.
TRW. The Company has one requirements contract with TRW with respect to
TRW's North American airbag cushion requirements and another requirements
contract with TRW with respect to TRW's European airbag cushion requirements.
Under these contracts, TRW has agreed to purchase its requirements for airbag
cushions for specific models of automobiles at prices to be agreed upon prior to
the beginning of each model year. Each agreement provides that cost reductions
of the Company will result in price reductions to TRW. Neither agreement
requires the customer to purchase a specified number of airbag cushions. Each
agreement is terminable by the customer on 90 days' prior written notice. The
North American requirements agreement is for driver and passenger side airbag
cushions for specified models in model years 1996 through 1999 and requires the
Company to maintain capacity to manufacture and ship 25% more airbag cushions
than actual quantity estimates provided by TRW. The European requirements
agreement contains penalty payments in the event that the Company is delayed in
delivering the airbag cushion quantities required.
Petri. The Company's "evergreen" agreement with Petri provides that
prior to 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. The Company's current agreement with
Petri provides for the supply of all of Petri's airbag requirements, which were
3.0 million airbag cushions during calendar year 1997.
4
SUPPLIERS
The Company's principal airbag cushion customers generally approve all
suppliers of major airbag components. 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 operating results. Under the
Company's agreements with its customers, any changes in the cost of major
components are passed through to the customers.
CAPACITY
The Company's Mexican facility has a current capacity to manufacture
5.0 million airbag cushions per year and manufactured 5.0 million passenger side
and driver side airbag cushions in fiscal year 1997. The Company's United
Kingdom facility has current capacity to manufacture approximately 440,000
airbag cushions per year and manufactured 350,000 driver side airbags in fiscal
1997. The Company's German facility manufactured approximately 3.0 million
driver side and side impact airbags in fiscal 1997 and is at or near full
capacity. The Company's Czech Republic facility which began production in 1997,
has a current capacity of 4.0 million airbags per year and is expected to
produce 1.2 million passenger side and driver side airbags in fiscal 1998. The
Company believes that its present capacity is sufficient to meet its currently
forecasted expansion in production for the foreseeable future.
The Company has recently entered into a joint venture agreement which
establishes a joint venture for the production of airbag cushions in China. The
Company owns an 80% interest in the joint venture. The plant and labor for the
joint venture is provided by the Company's joint venture partner. The joint
venture has the capacity to produce approximately 2.0 million airbag cushions
per year and operations are expected to commence in June 1998. The Company is
contemplating the introduction of weaving capabilities at this facility through
the JPS Acquisition.
Since 1993, the Business has invested $19.4 million in capacity
expansion, significant modernization of its manufacturing facilities and
equipment upgrades. In addition, pursuant to the JPS Acquisition, the Company
will acquire 18 additional looms which is expected to further enhance the
Company's manufacturing capacity and flexibility.
SALES AND MARKETING
The Company markets and sells airbag cushions through a direct sales
force based in Costa Mesa, California. Prior to 1996, 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
Chief Executive Officer, were instrumental in establishing the Company's
relationship with TRW. The Company is obligated to pay Champion a commission of
1.5% and [2%] on all sales of airbags and airbag components, respectively, to
TRW. The Company believes its reputation and existing relationships with airbag
customers diminish the need for an outside marketing firm, and accordingly, the
Company and Champion are in the process of renegotiating the terms of Champion's
Representation Agreement with respect to TRW. Under its current Representation
Agreements with the Company, Champion is restricted from selling or marketing
products of other companies which compete with the products sold by the Company.
The Company's direct sales force includes certain affiliates of Champion.
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 TRW which is an airbag module integrator that
produces a substantial portion of its own airbag cushions for its own
consumption. However, TRW does not generally manufacture airbag cushions for the
same vehicle models that the Company manufactures for TRW. Many airbag module
integrators subcontract a portion of their requirements for airbag cushions. The
Company believes that its good working relationship with its
5
customers, the Company's high volume and low cost manufacturing capability,
consistency and level of quality products, the existence of the agreements with
TRW, the lengthy process necessary to qualify as a supplier to an automobile
manufacturer and the desire in the automotive industry to avoid changes in
established suppliers due to substantial costs of such changes create certain
barriers to entry for potential competitors for the airbag business of the
Company's customers.
The automotive airbag cushion 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. Increased competition, as well as price reductions of airbag
systems, would adversely affect the Company's revenues and profitability.
QUALIFICATION AND QUALITY CONTROL
The Company successfully completed the rigorous process of qualifying
as an airbag supplier to TRW in 1992. Each of the Company's airbags manufactured
for TRW is required to pass design validation and process validation tests
established by the automobile manufacturers and supervised by TRW relating to
the product's design and manufacture. TRW participates in these design and
process validations and must be satisfied with the product's reliability and
performance prior to awarding a production order. The Company satisfies the
QPS-0100 standard set by TRW for design and process validation, which qualifies
it to be a supplier to TRW.
The Company has extensive quality control systems in its airbag
manufacturing facilities, including the inspection and testing of all products.
The Company also undertakes process capability studies to determine that the
Company's manufacturing processes have the capability of producing at the
quality levels required by its customers.
The Company's United Kingdom facility operates under TRW's quality
system which meets or exceeds ISO 9000, an international standard for quality.
The Company's German facility also satisfies ISO 9000 standards. This
qualification has enabled the Company's European operations to manufacture
airbags under the Company's agreement with TRW. As is the case in the United
States, however, the automobile manufacturers may conduct their own design and
process validation tests of the Company's operations.
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. Recently,
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.
6
DEFENSE RELATED PRODUCTS
The Company is a supplier 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 defense related
products accounted for $15.1 million or 18% of the Company's consolidated fiscal
1997 net sales.
SYSTEMS CONTRACT
In September 1994, the Company was awarded Contract DAAA09-94-C-0532
(the "Systems Contract") by the United States Army. The Systems Contract backlog
was $18.6 million at March 31, 1997, and the Company expects to reduce such
backlog to $10.8 million by late fiscal 1998. 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. Accordingly, the
Systems Contract has not necessitated a significant investment in capital
equipment. As the prime contractor, the Company is responsible for conducting
quality control inspections and ensuring that the contract is 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 has extended the time for delivery under the Systems
Contract, and the Company now anticipates that the initial deliveries of mortar
cartridges will commence in late fiscal 1998.
OTHER
The Company manufactures 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 U.S. Armed Forces are training rounds. The U.S. Armed Forces regularly
replenishes 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 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.
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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
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.
Many of the Company's competitors have greater financial resources than the
Company.
UNITED STATES GOVERNMENT CONTRACTS
Virtually all of the Company's defense related contracts, including the
Systems Contract, are firm fixed price contracts with the United States
Government or certain of the United States Government's prime contractors. Under
fixed price contracts, the Company agrees to perform certain work for a fixed
price and, accordingly, realizes all of the benefit or detriment resulting from
decreases or increases in the costs of performing the contract.
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 automotive products 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 Company's manufacturing under its agreements with the 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.
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BACKLOG
The Company does not reflect an order for airbags 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.
As of March 31, 1997, the Company had a defense-related backlog of
approximately $24.4 million of which $10.8 million is expected to be completed
before the end of fiscal year 1998.
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 31, 1997, the Company employed approximately 1,572 employees
with 1,477 of such employees employed with respect to its automotive operations
and 95 employees employed with respect to its defense related operations. The
Company's hourly employees in Mexico are unionized and, in addition, are
entitled to a federally-regulated minimum wage, which is adjusted, at minimum,
every two years. None of the Company's other employees are unionized. The
Company has not experienced any work stoppages related to its work force and
considers its relations with its employees to be good.
ENVIRONMENTAL MATTERS
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 consultant also estimates that remediation costs will be
approximately $300,000. However, depending on the actual extent of impact to the
Company or more stringent regulatory criteria, these costs could be higher.In
addition, a site remediation plan has been approved by the Regional Water
Quality Control Board for the Company's Costa Mesa, California facility. Such
plan will take approximately five years to implement at an estimated cost of
approximately $250,000. The remediation plan currently includes
9
the simultaneous operation of a groundwater and vapor extraction system. 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. See Note 8 to
Notes to Consolidated Financial Statements included elsewhere in this Report.
JPS AUTOMOTIVE
JPS Automotive, through its air restraints and technical products
division (the "Business"), is a leading low cost independent supplier of
automotive airbag fabric in North America and is also a leading manufacturer of
value-added synthetic fabrics used in a variety of niche industrial and
commercial applications. Of the seven current module integrators, only one
weaves airbag fabric; the rest purchase fabric from the Business. See " - Airbag
Related Products - Airbag Industry - Structure of the Airbag Industry."
The Business' largest airbag fabric customers include TRW, AlliedSignal
Inc. ("AlliedSignal"), Delphi Interior and Lighting ("Delphi") and AutoLiv
(Morton) International ("AutoLiv"). The Business also sells to Reeves
Industries, Inc., Bradford, ABC, Mexican Industries of Michigan Inc. ("Mexican
Industries") and BREED Technologies, Inc. Of the four largest module integrators
of systems (which include the airbag and inflator), three use the Business'
airbag fabric and the fourth sources all of its fabrics internally. The Business
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
Business also sells fabric to coating companies, which then resell the coated
fabric to either an airbag fabricator or systems manufacturer. Sales are either
made against purchase orders, to releases on open purchase orders, or pursuant
to short-term supply contracts generally having a duration of up to twelve
months.
The Business has a facility in South Carolina which manufactures airbag
fabric. The Business utilizes rapier weaving machines that are highly versatile
in their ability to produce a broad array of specialty industrial fabrics for
use in a large number of applications. In addition, the Business' machinery and
equipment have the capability to weave all types of yarns specified by air
module integrators. The ability to easily interchange the machines between air
restraint fabric and other specialty industrial fabrics allows the Business to
maximize returns on plant assets.
The Business shares the U.S. airbag fabric market with another major
competitor, Milliken & Co. and three smaller fabric manufacturers. In addition,
Takata Inc. (which is also known as Highland Industries), 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 Business underwent rigorous design validation and process
validation tests, similar to the tests undergone by the Company in qualifying as
a supplier to TRW, in order to qualify as a supplier to TRW and AutoLiv, which
recently granted a purchase order to the Business. The Business' airbag fabric
operations have been certified as a Quality Assurance Approved Supplier by each
of AlliedSignal, TRW, AutoLiv and Mexican Industries. In addition, the
laboratory of the Business' airbag fabric operations has obtained Accreditation
Against ISO-Guide 25 to ASTM and DIN Test Methods from the American Association
of Laboratory Accreditation and GP-10 certification from General Motors.
The Business also manufactures a wide array of specialty synthetic
fabrics for consumer and industrial uses. These fabrics include: (i) luggage
fabrics, including "ballistics" fabric used in Tumi brand luggage; (ii)
filtration fabrics used in the 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, fuel cells, bomb and cargo
chutes, oil booms, gas diaphragms; and (v) release liners used in tire
manufacturing. Sales are made against purchase orders, releases on open purchase
orders, or pursuant to short-term
10
supply contracts of up to twelve months. Manufacturing of these products occurs
at the Business' South Carolina facility, using the same machines that weave the
airbag fabrics which enables the Business to take advantage of demand
requirements for the various products with minimal expenditure on production
retooling costs. Manufacture of the industrial products with the same machines
that weave airbag fabric allows the Business to more effectively utilize
capacity at its South Carolina plant and lower per unit overhead costs.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Costa
Mesa, California. The Company manufactures automotive products in five
locations, with total plant area of approximately 519,500 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:
Floor Area Owned/ Lease Number of
Location (Sq. Ft.) Leased Expiration Employees
---------------------------------------------- ---------- ------ ---------- ---------
Airbag
Ensenada, Mexico (airbags)..................... 97,000 (1) Leased 1998 (2) 971
Germany (airbags).............................. 55,000 (3) Leased 1998 (4) 248
Czech Republic (airbags)....................... 100,000 (5) Owned N/A 233
Gwent, Wales (airbags)......................... 20,000 (5) Leased 2003 58
Costa Mesa, California (airbags and defense)... 139,000 (6,7) Leased 1999 181
Otay Mesa, California8......................... 7,900 Leased 1998 3
Defense (9)
Mount Arlington, New Jersey
(defense systems).............................. 3,600 (10) Leased 10
Galion, Ohio (defense products)................ 97,000 (6) Owned N/A 75
- - ------------------------
1 Office, manufacturing and research and development space.
2 Lease is subject to two one-year renewal options.
3 Manufacturing, sales and administration space.
4 The lease with respect to the 40,000 square feet comprising manufacturing
space expires in 1998. The lease with respect to the 15,000 square feet
comprising sales and administrative space expires in 2001.
5 Manufacturing and office space.
6 Manufacturing and administrative space.
7 Consists of two facilities.
8 Finished goods distribution center.
9 Defense related products are also manufactured at the Costa Mesa facility
listed above.
10 Office space.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq National Market (Nasdaq
symbol: ABAG). The following table sets forth the high and low reported sale
prices of the Common Stock for each full quarterly period within the two most
recent fiscal years.
High Low
------- -------
Year Ended March 31, 1997
First Quarter ...................................... $14 3/4 $ 9 1/4
Second Quarter ..................................... $13 1/4 $ 9 1/2
Third Quarter ...................................... $13 $ 8 3/4
Fourth Quarter ..................................... $13 $10
Year Ended March 31, 1996
First Quarter ...................................... $20 3/4 $16 1/2
Second Quarter ..................................... $21 1/4 $15
Third Quarter ...................................... $19 1/2 $13 3/4
Fourth Quarter ..................................... $15 3/4 $12 1/2
As of June 26, 1997, there were approximately 88 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.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data as of and for the fiscal years ended March
31, 1997, 1996 and 1995 and for the period from April 28, 1993 through March 31,
1994 are derived from the combined and consolidated financial statements of the
Company and the Automotive and Galion divisions of Valentec (the "Valentec
Divisions") which have been audited by Price Waterhouse LLP, independent
accountants. Subsequent to the management buy-out of Valentec on April 27, 1993
(the "Management Buy-Out"), Valentec and the Company changed their respective
fiscal year ends from December 31 to March 31. The accounting bases of the
Valentec Divisions subsequent to the Valentec Management Buy-Out on April 27,
1993 differs from the historical accounting bases of these divisions.
During the 1997 fiscal year, 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.
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.
(in thousands, except share and per share data and footnotes)
INCOME STATEMENT DATA
Eleven
Months
April 28,
1993
Years Ended March 31, Through
---------------------------------- March 31,
1997 (1) 1996 (1) 1995 (1) 1994
----------------------------------------------
Net sales ............................................. $ 83,958 $ 94,942 $ 51,779 $ 22,444
Cost of goods sold .................................... 67,934 81,908 44,553 18,895
Gross profit .......................................... 16,024 13,034 7,226 3,549
Selling, general and administrative expenses .......... 7,420 5,430 4,050 2,738
Non-recurring consulting charge ....................... -- -- -- 1,250
Operating income (loss) ............................... 8,604 7,604 3,176 (439)
Other expense (income) ................................ 208 (807) (484) (83)
Interest expense ...................................... 1,555 381 244 235
Income (loss) before income taxes ..................... 6,841 8,030 3,416 (591)
Income tax provision (benefit) ........................ 2,995 3,116 1,283 (207)
Income (loss) before extraordinary item and cumulative
Effect of accounting change ...................... 3,846 4,914 2,133 (384)
Extraordinary item - deferred financing costs (less tax
Benefit of $255) ................................. (383) - - -
Cumulative effect of change in accounting for deferred
Product launch costs (less tax benefit of $718) . (1,259) - - -
Net income (loss) ..................................... $ 2,204 $ 4,914 $ 2,133 $ (384)
13
Eleven
Months
April 28,
1993
March 31, Through
-------------------------------------- March 31,
1997 (1) 1996 (1) 1995 (1) 1994
--------------------------------------------------
PER SHARE DATA (3)
Income before extraordinary item and cumulative effect of
accounting change ....................................... $0.77 $0.99 $0.53 -
Extraordinary item ......................................... (0.08) - - -
Cumulative effect of change in accounting for deferred
product launch costs .................................... (0.25) - - -
Net income per share ....................................... $0.44 $0.99 $0.53
Weighted average common shares outstanding ................. 5,026,501 4,980,884 4,030,787 -
Pro forma amounts assuming the new accounting method is applied retroactively:
Income before extraordinary item ............................. $3,846 - - -
======
Earnings per common share .................................. $ 0.77 - - -
======
Net Income ................................................... $3,463 $5,017 $ 950 -
====== ====== =====
Earnings per common share .................................. $ 0.69 $ 1.01 $0.24 -
====== ====== =====
BALANCE SHEET DATA
March 31,
-------------------------------------
1997 1996 1995 1994
-------------------------------------
(in thousands)
Working capital .............................................. $11,755 $25,067 $ 8,206 $ 1,504
Total assets ................................................. 73,407 49,831 28,311 12,837
Long-term debt, net of current portion ....................... 21,296 3,087 2,043 4,760
Division equity .............................................. - - - 866
Stockholders' equity ......................................... 35,274 35,344 15,971 -
- - --------------------------------------------
(1) The Company did not declare dividends during fiscal year 1997, 1996 or
1995.
(2) As more fully described in Note 5 to Notes to the Company's
Consolidated Financial Statements, the Valentec Divisions incurred a
$1.3 million non-recurring, non-cash expense related to the issuance
of shares of Common Stock to certain stockholders and affiliates of
Champion.
(3) The weighted average number of common shares outstanding as of March
31, 1996 and 1995 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.
The Valentec Divisions did not have a defined capital structure and,
as a result, earnings per share amounts are not presented for the
periods prior to the fiscal year ended March 31, 1995.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
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.
The Company is a leading low cost independent supplier of airbag
cushions for a variety of automobiles and light trucks to Tier 1 airbag system
suppliers.
During fiscal year 1997, the Company expanded its production and sales
in Europe through its acquisition of Phoenix Airbag in Germany and construction
of its manufacturing facility in the Czech Republic. The acquisition of Phoenix
Airbag was accounted for as a purchase and, accordingly, the operations of
Phoenix Airbag are included in the historical consolidated financial statements
of the Company from August 6, 1996. In May 1997, the Company acquired all of the
outstanding capital stock of Valentec in a stock for stock exchange, which
enables the Company to manufacture and supply additional airbag system
components. In connection with such acquisition, the Company assumed and/or
caused to be paid off approximately $11.7 million of indebtedness, The
acquisition of Valentec will be accounted for as a purchase and, accordingly,
included in the Company's accounts beginning May 22, 1997. Currently, Valentec
manufactures metal airbag components using machining and stamping processes,
among other commercial and defense products.
On June 30, 1997, the Company entered into a definitive agreement to
acquire the air restraints and technical products division of JPS Automotive for
$56.3 million, which is subject to certain conditions, including the Company's
ability to obtain financing. The Company intends to finance the JPS Acquisition
through a private placement of senior subordinated notes. JPS Automotive is a
leading manufacturer of automotive airbag fabrics, as well as other specialty
fabrics. Currently, the Company is required by certain of its customers to
purchase airbag fabric from other vendors. Should the Company obtain approval
from certain of its vendors to purchase fabric from JPS Automotive, the Company
may improve its overall operating results.
CHANGE IN ACCOUNTING PRINCIPLE AND EXTRAORDINARY ITEM
During the 1997 fiscal year, 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 $2.0 million effective April 1, 1996, in accordance
with Accounting Principles Board Opinion No. 20. The fiscal 1997 deferred
product launch costs of $1.8 million would have been capitalized under the
previously used accounting method rather than expensed as part of costs of goods
sold. Total product launch costs expensed in fiscal year 1997 was $2.3 million
after income taxes, or $.46 per share. Management believes its new method is
considered the preferable method of accounting.
Additionally, in connection with a loan agreement in August 1996 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 benefit for income taxes of $255,000), or $0.08 per
share, relating to the write-off of deferred financing costs incurred for the
previous credit facility.
15
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a
percentage of net sales for the periods indicated:
Year ended March 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 80.9 86.3 86.0
Gross profit 19.1 13.7 14.0
Selling, general and administrative expense 8.4 5.7 7.8
Income from operations 10.2 8.0 6.1
Interest expense (income), net 1.6 (0.2) .2
Income before extraordinary item and
cummulative effect of change in accounting 4.6 5.2 4.1
Net income 2.6 5.2 4.1
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
NET SALES. Net sales decreased by $11.0 million or 11.6% to $84.0
million in fiscal year 1997 compared to fiscal year 1996. The decrease was
primarily attributable to lower revenues in the Company's defense operation
("Defense Operation") partially offset by an increase in the Company's
automotive operation ("Automotive Operation"). The decrease in the Defense
Operation of $30.7 million reflects the current contract schedule for the
Systems Contract which has been delayed as a result of the failure of one of the
Company's subcontractors to meet the U.S. Army's revised engineering standards
and obtain government process approval for final load, assembly and pack. As a
result of these issues, the U.S. Army has extended the time for delivery and the
Company now anticipates, based upon discussions with the subcontractor and the
U.S. Army, that deliveries will begin in late fiscal 1998. The reduced sales
under the Systems Contract were partially offset by the increased sales of metal
ordnance products. The increase in the Automotive Operation of $19.7 million was
primarily attributable to the acquisition of Phoenix Airbag, which contributed
approximately $25.4 million, partially offset by lower sales to TRW under the
European requirements agreement. Sales to TRW under the European requirements
agreement decreased as a result of lower unit prices reflecting redesigned
products and lower fabric prices. The Company's sales of passenger and driver
side airbags produced for the North American market decreased by approximately
$242,000, primarily as a result of increased sales to Delphi and increased sales
of driver side bags to TRW under the North American requirements contract,
partially offset by lower sales of passenger side airbags to TRW under the North
American requirements contract.
GROSS PROFIT. Gross profit increased by $3.0 million or 22.9% to $16.0
million in fiscal year 1997 compared to fiscal year 1996. The increase was
primarily attributable to the Automotive Operation, which increased by $5.8
million. The increase was primarily attributable to increased sales volume in
Europe due to the acquisition of Phoenix Airbag, which contributed approximately
$6.9 million to gross profit. This increase was offset by lower margins in North
America and the Defense Operation. The decrease of approximately $996,000 in
North America was primarily the result of the change in accounting principle
discussed above, offset by lower costs due to ongoing cost reduction programs.
The impact of the change in accounting principle was to currently expense
product launch costs, previously deferrable, of $1.8 million. The decrease in
the Defense Operation of $2.8 million was primarily a result of the delays due
to the Systems Contract discussed earlier. See "Defense Related Products -
Systems Contract."
Gross profit as a percentage of sales increased to approximately 19.1%
for fiscal year 1997 from 13.7% for fiscal year 1996. Exclusive of the impact of
the change in accounting principle, gross profit as a percentage of sales would
have been approximately 21.2% for fiscal year 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.6 million or 30.2% to $7.1 million in
fiscal year 1997 compared to fiscal year 1996. The increase was primarily
16
attributable to the Automotive Operation, specifically from the acquisition of
Phoenix Airbag, which was approximately $1.9 million, partially offset by lower
costs in the U.K. due to lower sales. Selling, general and administrative
expenses as a percentage of sales increased slightly to 8.4% for fiscal year
1997 from 5.7% for fiscal year 1996. The increase related to the continued
expansion of the Company's automotive operation, including additional support
personnel and marketing.
OPERATING INCOME. Operating income increased by $1.0 million or 13.2%
to $8.6 million in fiscal year 1997 compared to fiscal year 1996. The Automotive
Operation increased by $3.6 million primarily attributable to the acquisition of
Phoenix Airbag, which contributed approximately $4.8 million. This increase was
partially offset by lower operating income in North America. The decrease of
approximately $876,000 in North America was primarily the result of the change
in accounting principle discussed above, offset by lower costs due to ongoing
cost reduction programs. The impact of the change in accounting principle was to
currently expense product launch costs, which were previously deferred in the
comparable period. The increase in the Automotive Operation was partially offset
by a decrease in the Defense Operation of $2.6 million which reflected lower
sales due to delays in the current contract schedule for the Systems Contract,
partially offset by improved margins on metal ordnance products, resulting from
increased sales volumes, improved overhead absorption and a change in product
mix.
INTEREST EXPENSE. Interest expense increased $1.2 million or 308.1% to
$1.6 million for fiscal year 1997 compared to fiscal year 1996. This increase
was a direct result of the $20.0 million term loan used for the acquisition of
Phoenix Airbag. The increase of other expense is primarily attributable to
losses on foreign currency transactions.
INCOME TAXES. The income tax rate applied against pre-tax income was
43.7% for fiscal year 1997 compared to 38.8% for fiscal year 1996. The tax rate
increased as compared to prior year due to the increasing percentage of income
generated from European operations, which have higher tax rates than U.S.
operations.
NET INCOME. Net income decreased to $2.2 million for fiscal year 1997
compared to $4.9 million in fiscal year 1996. Net income decreased due to the
impact of the extraordinary item and the cumulative effect of accounting change
as discussed above. Income before extraordinary item and cumulative effect of
accounting change was $3.8 million for fiscal year 1997 compared to $4.9 million
for fiscal year 1996. The decrease was primarily the impact of the change in
accounting principle for product launch costs during fiscal year 1997. These
costs, which were previously deferrable, are currently expensed as incurred. The
impact on fiscal year 1997 was to expense $1.8 million ($1.1 million net of tax
benefit of $704,000) of product launch costs.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
NET SALES. Net sales increased $43.2 million or 83.4% to $94.9 million
in fiscal year 1996 compared to fiscal year 1995. The increase was primarily
attributable to the Defense Operation, which increased $37.1 million as a result
of significantly higher revenues from the Systems Contract and, to a lesser
extent, increased shipments of metal ordnance components. The increase at the
Automotive Operation was $6.0 million as a result of increase production. The
Automotive Operation's unit sales increased approximately 23.3% over the prior
year, while overall sales increased by 14.0%. The Company's unit sales continued
17
to increase reflecting higher sales of both passenger and driver side airbags.
Sales were unfavorably impacted in the current period by the softening U.S.
automotive market and a changing product mix in Europe, and to a lesser extent,
decreases in material prices, delays on certain model year 1996 programs by
certain original equipment manufacturers and the GM labor dispute in the fourth
quarter of fiscal year 1996.
GROSS PROFIT. Gross profit increased by $5.8 million or 80.4% to $13.0
million in fiscal year 1996 compared to fiscal year 1995. The increase was
primarily attributable to the Defense Operation, which increased $4.0 million.
Gross profit increased primarily as a result of higher sales from the Systems
Contract, partially offset by changes in the metal ordnance component product
mix, with decreased sales of several older, higher margin defense programs and
higher sales of newer, lower margin defense and commercial programs. The
Automotive Operation increased $1,773,000 for fiscal year 1996. The improvement
in gross profit resulted primarily from the increased sales volume, and to a
lesser extent from greater efficiencies related to higher levels of production.
Gross profit was unfavorably impacted in the current fiscal year by certain
program delays and the GM labor dispute in the fourth fiscal quarter. During the
year ended March 31, 1995, the continued improvement in the gross profit of the
Automotive Operation's North American operations was partially offset by certain
expenses related to the expansion of the Automotive Operation's European
operations. Specifically, during the year ended March 31, 1995, TRW, under the
European requirements contract, accelerated demand for airbags in Europe
required the Company to operate, on a temporary basis, a high cost facility in
Germany pending the transfer of certain manufacturing operations to two Czech
subcontractors. Certain costs relating to the launching of new programs in North
America and Europe were capitalized during this period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.4 million or 34.1% to $5.4 million in
fiscal year 1996 compared to fiscal year 1995. The increase was primarily
attributable to the Defense Operation, which increased $868,000 in fiscal year
1996 reflecting increased expenses related to the Systems Contract, higher bid
and proposal costs associated with potential future contracts and higher
corporate overhead expenses. The Automotive Operation increased $512,000
primarily from greater expenditures related to the continued expansion of the
Company's automotive operations, including additional support personnel,
increased marketing and professional services and higher corporate overhead
expenses, including increased staffing, legal, accounting and insurance
expenses.
OPERATING INCOME. Operating income increased by $4.4 million or 139.4%
to $7.6 million in fiscal year 1996 compared to fiscal year 1995. The increase
was primarily attributable to the Defense Operation, which increased $3.2
million primarily as a result of higher income from the Systems Contract,
partially offset by higher corporate overhead expenses and, to a lesser extent,
lower margins on metal ordnance components. The Automotive Operation increased
$1.3 million primarily as a result from the continued improvement in the
profitability of the manufacturing operations due to higher sales volume and
greater efficiencies, partially offset by increased expenses for administrative,
marketing and professional services supporting the ongoing expansion of the
Company's automotive operations.
NET INCOME. Net income increased to $4.9 million for fiscal year 1996
compared to $2.1 million in fiscal year 1995 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its equipment and working capital
requirements will also continue to increase as a result of the anticipated
growth of the Automotive Operations. This growth will be funded through a
combination of cash flow from operations, equipment financing, revolving credit
borrowings and the proceeds from potential future Company public offerings.
18
On August 6, 1996 the Company acquired Phoenix Airbag (the "Phoenix
Acquisition"), a major European airbag cushion manufacturer located in
Hildesheim, Germany. The acquisition was funded through a loan agreement with
Bank of America National Trust and Savings Association ("Bank of America NT &
SA"). Outstandings on the Bank of America NT & SA term loan ($17.3 million at
March 31, 1997) bore interest at 8.79%, and the Bank of America NT & SA
revolving credit facility ($2.9 million at March 31, 1997) bore interest at
8.54%. The proceeds of the Credit Agreement, defined herein, were used to repay
and terminate the Bank of America NT & SA Facility. Pursuant to the Phoenix
Acquisition, the Company initially acquired 80% of Phoenix AG's interest in
Phoenix Airbag for a purchase price of approximately $22.0 million, subject to a
net worth adjustment. The Company will acquire the remaining 20% interest
effective December 31, 1998, but is entitled to all of the income of Phoenix
Airbag from the date of the acquisition. The additional purchase price of up to
approximately $7.5 million for the remaining 20% interest is contingent on
Phoenix Airbag meeting certain annual performance targets for the calendar years
1996 through 1998. Phoenix Airbag met the performance targets for calendar year
1996 and $2.2 million of the contingent purchase price was paid April 28, 1997.
If the annual performance targets for calendar years 1997 and 1998 are not met,
the Company will acquire the remaining 20% without any additional consideration.
Additionally, the Company will, under certain circumstances, be required to
provide a bank guaranty, in August 1997, to secure the payment of up to
approximately $4.0 million of the contingent purchase price.
As of May 21, 1997, the Company, Phoenix and Automotive Safety
Components International Limited ("ASCIL" and collectively, the "Borrowers")
entered into the Credit Agreement with KeyBank National Association, as
administrative agent ("KeyBank"), and the lending institutions named therein
(the "Credit Agreement"). The Credit Agreement provides for (i) a term loan in
the principal amount of $15.0 million (the "Term Loan") and (ii) a revolving
credit facility in the aggregate principal amount of $12.0 million (including
letter of credit facilities). The indebtedness under the Credit Agreement is
secured by substantially all the assets of the Company and bears interest at a
rate equal to either (i) the greater of KeyBank's prime rate or (ii) the sum of
LIBOR plus 1.00% for term loans (and 1.25% for revolving loans, subject to
reduction to 1.00% upon consummation of the offering so long as no default or
event of default shall have occurred and be continuing). The principal amount of
the Term Loan is payable quarterly commencing September 30, 1997, in the amount
of $750,000, with the last payment due on May 31, 2002 provided that the Term
Loan must be prepaid out of the proceeds of the private placement Offering. The
revolving loans under the Credit Agreement will mature on May 31, 2002. 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 June 30, 1997 the
Company entered into a definitive agreement to acquire all of the assets of JPS
Automotive for $56.3 million (including 18 looms scheduled for delivery prior to
closing) plus the assumption of $797,000 in indebtedness, subject to a
post-closing adjustment. The acquisition is subject to certain conditions,
including a financing condition. The financing is expected to be provided from a
portion of the proceeds of a private placement of $80.0 million in senior
subordinated notes. The remaining proceeds of the Offering are expected to be
used to repay the term loan, to pay transaction fees and expenses, to be used
for the contemplated purchase a building in South Carolina adjacent to the JPS
Automotive facility, and for working capital and general corporate expenses.
Pursuant to a commitment letter with KeyBank, an amendment to the Credit
Agreement shall convert the Credit Agreement into a $27.0 million revolving
credit facility for a five year term bearing interest at LIBOR plus 1.00% with a
commitment fee of 0.25% for any unused portion.
The Company generated (used) net cash from operations of $11.1 million,
($3.5) million and ($901,000) in the fiscal years ended March 31, 1997, 1996 and
1995, respectively. The net cash in fiscal year 1997 was used for net capital
expenditures of $8.6 million, while during fiscal years 1996 and 1995 the
Company used an additional $4.6 million and $2.5 million, respectively, for net
capital expenditures. In fiscal year 1997, $24.3 million of net cash was used to
acquire Phoenix Airbag. Net cash provided by financing activities in fiscal year
1997 includes $22.9 million in proceeds from term note, and the net proceeds
from the revolving credit facility, which was used in part to repay $3.8 million
long-term debt and obligations, and purchase of treasury stock. Net cash
provided by financing activities in fiscal year 1996 includes $18.0 million in
proceeds from the sale of common stock and proceeds from long-term debt, which
19
was used in part to purchase $1.4 million of treasury stock and $94,000 of
common stock warrants. Net cash provided by financing activities in fiscal year
1995 includes $14.6 million in proceeds from the sale of common stock, which was
used in part to pay for consideration of transferred assets of $1.9 million,
repay $3.3 million long-term debt and obligations and repay certain intercompany
accounts totaling $2.3 million. These activities resulted in a net decrease in
cash of $3.7 million in fiscal year 1997, a net increase in cash of $8.2 million
in fiscal year 1996, and a net increase in cash of $3.8 million in fiscal year
1995.
Capital expenditures were $8.6 million in fiscal year 1997, compared to
$4.6 million and $2.5 million in fiscal years 1996 and 1995, respectively.
Capital expenditures in fiscal year 1997 were used to construct the new facility
in the Czech Republic, and the acquisition of additional equipment to expand the
Company's production capacity worldwide. Capital expenditures for fiscal year
1998 are estimated to be $8.7 million, which includes $1.2 million outstanding
commitments for capital expenditures for additional property, plant and
equipment from fiscal year 1997. Capital expenditures for fiscal year 1998
includes the completion of the Czech facility and the acquisition of additional
equipment to further expand the Company's production capacity worldwide. The
Company expects to fund these capital expenditures through operations and the
revolving credit facility.
The above discussion may contain forward-looking statements that
involve risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market condition risks,
costs associated with integration and administration of acquired operations, the
timing of introduction of new models of automobiles for which the Company
manufactures airbags, changes in consumer vehicle preferences, major labor
disputes in the automotive industry, changes in the strategic direction of
defense spending, the ability of a subcontractor of the Company to resolve its
disputes with the U.S. Army, the timing of defense procurement, specific defense
program appropriation decisions and the ability of Safety Components to
consummate the financing necessary for the JPS Acquisition.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"). FAS 128 establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic 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 is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15. This statement is
effective for the Company beginning in the fiscal year ending March 31, 1998,
earlier adoption is not permitted. Since the Company is considered to have a
simple capital structure for reporting EPS, the adoption of this principle will
have no material impact on reported EPS.
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.
20
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
None.
PART III
ITEMS 10, 11, 12 AND 13.
The information called for by Items 10, 11, 12 and 13 of this Form 10-K
is incorporated by reference to those portions of the Company's 1997 Proxy
Statement which contains such information.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The financial statements, related notes thereto and report of
independent accountants required by Item 8 are listed on page F-1
herein.
(2) 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:
2.1(12) Agreement, dated June 6, 1996, among AB 9607 Verwaltungs
GmbH & Co. KG., Phoenix Aktiengesellschaft and Phoenix
Airbag GmbH (the "Phoenix Purchase Agreement") (confidential
treatment requested as to part)
2.2(12) Amendment Agreement, dated June 28, 1996, to the Phoenix
Purchase Agreement
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.
("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
4.3 Form of Pledge Agreement, dated as of May 21, 1997, made by
the Pledgors named therein in favor of KeyBank National
Association, as collateral agent for the benefit of the
Secured Creditors (as defined therein)
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")
*10.5(4) Employment Agreement, effective as of May 13, 1994, between
Safety Components and Robert A. Zummo
*10.6(4) Employment Agreement, effective as of May 13, 1994, between
Safety Components and W. Hardy Myers
*10.7(4) Stock Option Plan of Safety Components
10.8(2) Master Asset Transfer Agreement, dated May 13, 1994, among
Valentec, Safety Components, Galion, Inc. ("Galion"), and
Automotive Safety
21
10.9(2) Asset Purchase Agreement, dated May 13, 1994, between VIL
and Automotive Safety Components International Limited
("Automotive Limited")
10.10(9) Corporate Services Agreement, dated as of April 1, 1995,
between Valentec and Safety Components 10.11(2) Facility
Agreement, dated May 13, 1994, between Valentec and
Automotive Safety 10.12(2) Facility Agreement, dated May 13,
1994, between VIL and 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 *10.15(6) Employment Agreement, dated
as of September 29, 1994 by and between Safety Components
and Paul L. Sullivan
10.16(7) Contract DAAA09-94-C-0532 (Systems Contract) between Safety
Components and the U.S. Army (the "Systems Contract")
*10.17(8) Employment Agreement, effective as of September 19, 1994,
between Safety Components and Victor Guadagno
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 Credit Agreement, dated as of March 15, 1996, among Safety
Components, Automotive Safety, Galion, Valentec Systems,
Inc. and CUSA
10.20 Pledge and Security Agreement, dated as of March 15, 1996,
made by Safety Components, Automotive Safety, Galion and
Valentec Systems in favor of CUSA
*10.21(10) Employment Agreement, dated June 1, 1995, between
Automotive Limited and John Laurence Hakes
10.22(10) Underwriting Agreement, dated June 15, 1995, among BT
Securities Corporation, Prime Charter Ltd., Safety
Components, Valentec and the other selling stockholders
named therein
10.23(13) Loan Agreement between the Company, Automotive Safety and
ASCI Holdings Germany (DE), Inc. and Bank of America
National Trust and Savings Association dated August 1, 1996
10.24(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
10.25(14) Exhibits to Credit Agreement dated as of March 15, 1996
among Safety Components, Automotive Safety, Galion, Valentec
Systems, Inc. and Citicorp USA, Inc.
10.26(14) Amendment No. 1 to Loan Agreement among Safety Components,
Automotive Safety, ASCI Holdings Germany (DE), Inc. and Bank
of America National Trust & Savings Association dated as of
September 30, 1996
10.27(14) Amendment No. 2 to Loan Agreement among Safety Components,
Automotive Safety, ASCI Holdings Germany (DE), Inc. and Bank
of America National Trust & Savings Association dated as of
October 31, 1996
10.28(14) Amendment No. 3 to Loan Agreement among Safety Components,
Automotive Safety., ASCI Holdings Germany (DE), Inc. and
Bank of America National Trust & Savings Association dated
as of December 31, 1996
10.29(15) Stock Purchase Agreement, dated as of May 22, 1997, by and
among Robert A. Zummo, Francis X. Suozzi, the Valentec
International Corporation Employee Stock Ownership Plan and
Safety Components
*10.30 Employment Agreement, dated as of February 15, 1997, between
Safety Components and Jeffrey J. Kaplan
*10.31 Employment Agreement, dated as of May 19, 1997, between
Safety Components and Thomas W. Cresante
10.32 Consulting Agreement, dated as of May 31, 1997, between
Safety Components and W. Hardy Myers
22
10.33 Credit Agreement (the "Credit Agreement"), dated as of May
21, 1997, by and among Safety Components, Phoenix Airbag and
Automotive Limited, as borrowers and KeyBank National
Association, as administrative agent, and the lending
institutions named therein
10.34 Form of Subsidiary Guaranty, dated as of May 21, 1997, among
the guarantors named therein, KeyBank National Association,
as administrative agent for itself and the other Lenders (as
defined in the Credit Agreement)
10.35 Form of Security Agreement, dated as of May 21, 1997, among
the assignors named therein and KeyBank National
Association, as collateral agent for the benefit of the
Secured Creditors (as defined therein)
18.1 Letter from Price Waterhouse LLP regarding change in
accounting principles
21.1 Subsidiaries of Safety Components
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
* 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 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.
(6) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1994 filed with the Commission.
(7) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended December 31, 1994, filed with the Commission.
(8) Incorporated by reference to the Company's 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 Report on Form 10-Q for the
quarter ended June 30, 1995.
(11) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1995.
(12) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996.
(13) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996.
(14) Incorporated by reference to the Company's 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.
23
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, President
and Chief Executive Officer
Date: June 30, 1997
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, June 30, 1997
- - ----------------------- President and Chief Executive
Robert A. Zummo Officer (Principal Executive Officer)
/S/ JEFFREY J. KAPLAN Executive Vice President, Chief June 30, 1997
- - --------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/S/ GEORGE D. PAPADOPOULOS Corporate Controller and Secretary June 30, 1997
- - -------------------------- (Principal Accounting Officer)
George D. Papadopoulos
/S/ JOSEPH J. DIOGUARDI Director June 30, 1997
- - -----------------------
Joseph J. DioGuardi
/S/ FRANCIS X. SUOZZI Director June 30, 1997
- - ---------------------
Francis X. Suozzi
/S/ ROBERT J. TOROK Director June 30, 1997
- - -------------------
Robert J. Torok
24
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Number
-----------
REPORT OF INDEPENDENT ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1997 and 1996. F-3
Consolidated Statements of Operations for the Years ended March 31,
1997, 1996 and 1995. F-4
Consolidated Statements of Stockholders' Equity for the Years ended
March 31, 1997, 1996 and 1995. F-5
Consolidated Statements of Cash Flows for the Years ended March 31,
1997, 1996 and 1995. F-6
Notes to Consolidated Financial Statements. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Safety Components International, Inc.:
In our opinion, the consolidated financial statements of Safety
Components International, Inc. and Subsidiaries listed in the accompanying
"Index to Financial Statements" appearing on page F-1, present fairly, in all
material respects, the consolidated financial position of Safety Components
International, Inc. and its subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997 in conformity with generally
accepted accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these consolidated financial statements in accordance
with generally accepted auditing standards which 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, 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 the
opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for product launch costs in fiscal year
1997.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 22, 1997 except for Notes 1, 6 and 13, which are as of June 30, 1997
F-2
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and March 31, 1996
(in thousands, except per share and per share data)
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 8,320 $12,033
Accounts receivable, net (Notes 2 and 4) ................... 11,751 16,597
Inventories (Notes 2 and 4) ................................ 6,378 5,315
Prepaid and other .......................................... 870 925
------- -------
Total current assets .......................... 27,319 34,870
Property, plant and equipment, net (Notes 2 and 4) ...................... 28,295 12,192
Receivable from affiliate (Note 5) ...................................... 4,348 17
Intangible assets, net (Note 2) ........................................ 10,991 -
Other assets ............................................................ 2,454 2,752
------- -------
Total assets .................................. $73,407 $49,831
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 7,792 $ 8,066
Earnout payable (Note 1) ................................... 2,211 -
Accrued liabilities ........................................ 2,476 1,057
Current portion of long-term obligations (Note 6) .......... 3,085 697
------- -------
Total current liabilities ..................... 15,564 9,820
Long-term obligations (Note 6) .......................................... 21,296 3,087
Other long-term liabilities ............................................. 1,273 1,580
------- -------
Total liabilities ............................. 38,133 14,487
------- -------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 3 and 11):
Preferred stock: $.10 par value per share - 2,000,000 shares
authorized; no shares outstanding at
March 31, 1997 and 1996 ............................. - -
Common stock: $.01 par value per share - 10,000,000 shares
authorized; 5,025,383 and 5,048,500 shares issued and
outstanding at March 31, 1997 and 1996, respectively 51 51
Common stock warrants ...................................... 1 1
Additional paid-in-capital ................................. 30,062 30,058
Treasury stock, 113,492 and 90,000 shares, at March 31, 1997
and 1996, respectively, at cost ..................... (1,647) (1,379)
Retained earnings .......................................... 9,183 6,979
Cumulative translation adjustment (Note 2) ................. (2,376) (366)
------- -------
Total stockholders' equity .................... 35,274 35,344
------- -------
Total liabilities and stockholders' equity .... $73,407 $49,831
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 1997, 1996 and 1995
(in thousands, except per share and per share data)
1997 1996 1995
------- ------- -------
Net Sales (Notes 2 and 5) ...................................... $83,958 $94,942 $51,779
Cost of sales, excluding depreciation and product launch costs . 64,130 80,804 43,810
Depreciation ................................................... 2,043 1,104 743
Product launch costs (Note 2) .................................. 1,761 - -
------- ------- -------
Gross profit ...................................... 16,024 13,034 7,226
Selling and marketing expenses ................................. 1,375 1,102 894
General and administrative expenses ............................ 5,697 4,328 3,156
Amortization of goodwill (Note 2) .............................. 348 - -
------- ------- -------
Income from operations ............................ 8,604 7,604 3,176
Other expense (income) ......................................... 208 (807) (484)
Interest expense ............................................... 1,555 381 244
------- ------- -------
Income before income taxes ........................ 6,841 8,030 3,416
Provision for income taxes (Notes 2 and 7) ..................... 2,995 3,116 1,283
------- ------- -------
Income before extraordinary item and cumulative effect
of accounting change ...................................... 3,846 4,914 2,133
Extraordinary item - financing costs (less tax
benefit of $255) (Note 2) ................................. (383) - -
Cumulative effect of change in accounting for
product launch costs (less tax benefit of $718) (Note 2) .. (1,259) - -
------- ------- -------
Net income ..................................................... $ 2,204 $ 4,914 $ 2,133
======= ======= =======
Earnings per common share (Note 2):
Income before extraordinary item and cumulative effect of
change in accounting ................................. $ 0.77 $ 0.99 $ 0.53
Extraordinary item ........................................ (0.08) - -
Cumulative effect of change in accounting for deferred
product launch costs ................................. (0.25) - -
------- ------- -------
Net income per share ...................................... $ 0.44 $ 0.99 $ 0.53
======= ======= =======
Weighted average number of shares outstanding .................. 5,026,501 4,980,884 4,030,787
========= ========= =========
Note: Pro forma amounts assuming the new accounting method is applied retroactively are reflected in tabular form in Note 2.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended March 31, 1995, 1996 and 1997
(in thousands, except shares)
Common Common Common Additional Cummulative
Stock Stock Stock Paid-in Treasury Retained Translation Division
Shares Amount Warrants Capital Stock Earnings Adjustment Equity
--------- ------ -------- ---------- --------- -------- ----------- --------
Balance at March 31, 1994 ...................... 2,400,000 $24 $- $ - $ - $ - $ - $ 866
Net income for the period from
April 1, 1994 to May 13, 1994 ........... - - - - - - - 68
Transfer of Assets (Note 3 ................. - - - 934 - - - (934)
Capital contribution from
Valentec (Note 3) ....................... (100,000) (1) - - - - - -
Issuance of common stock (Note 3) .......... 1,760,000 18 - 12,661 - - - -
Issuance of warrants for 128,000
shares of common stock (Note 3) ......... - - 1 - - - - -
Net income for the period from
May 14, 1994 to March 31, 1995 .......... - - - - - 2,065 - -
Foreign currency translation adjustment .... - - - - - - 269 -
--------- ------ -------- ---------- --------- -------- ----------- --------
Balance at March 31, 1995 ...................... 4,060,000 41 1 13,595 - 2,065 269 -
Issuance of common stock ................... 1,078,500 10 - 16,557 - - - -
Purchase of treasury stock ................. (90,000) - - - (1,379) - -
Repurchase of warrants for 23,600
shares of common stock .................. - - - (94) - - - -
Net Income for the year ended
March 31, 1996 .......................... - - - - - 4,914 - -
Foreign currency translation adjustment .... - - - - - - (635) -
--------- ------ -------- ---------- --------- -------- ----------- --------
Balance at March 31, 1996 ...................... 5,048,500 51 1 30,058 (1,379) 6,979 (366) -
Issuance of common stock ................... 375 - - 4 - - - -
Purchase of treasury stock ................. (23,492) - - - (268) - -
Net Income for the year ended
March 31, 1997 .......................... - - - - - 2,204 - -
Foreign currency translation adjustment .... - - - - - - (2,010) -
--------- ------ -------- ---------- --------- -------- ----------- --------
Balance at March 31, 1997 ...................... 5,025,383 $51 $1 $30,062 $(1,647) $9,183 (2,376) $ -
========= ====== ======== ========== ========= ======== =========== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
-------- ------- ------
Cash Flows From Operating Activities:
Net income .................................................. $ 2,204 $ 4,914 $ 2,133
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ........................................... 2,043 1,104 743
Amortization ........................................... 348 - -
Extraordinary item ..................................... 638 - -
Cumulative effect of change in accounting principle .... 1,977 - -
Deferred income taxes .................................. (280) - -
Changes in operating assets and liabilities:
Accounts receivable ................................. 5,968 (9,662) (4,607)
Inventories ......................................... 375 532 (3,024)
Prepaid and other current assets .................... 55 (268) (60)
Other assets ........................................ (2,309) (440) (1,500)
Accounts payable .................................... (1,547) 749 (4,938)
Accrued liabilities ................................. 1,643 429 476
-------- ------- -------
Net cash provided by (used in) operating activities 11,115 (3,500) (901)
-------- ------- -------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............. (8,613) (4,588) (2,473)
Purchase of Phoenix Airbag, net of cash acquired ....... (24,257) - -
-------- ------- -------
Net cash (used in) investing activities ........... (32,870) (4,588) (2,473)
-------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from sale of common stock ................. 4 16,568 14,564
Purchase of treasury stock ............................. (268) (1,379) -
Repurchase of common stock warrants .................... - (94) -
Payment to parent company inconsideration
for transfer of assets ......................... - - (1,885)
Proceeds from term note ................................ 20,000 - -
(Repayments) borrowing of debt and long-term obligations (3,764) 1,460 (3,269)
Net borrowing on revolving credit facility ............. 2,931 - -
Changes in intercompany accounts ....................... - - (2,326)
-------- ------- -------
Net cash provided by financing activities ......... 18,903 16,555 7,084
-------- ------- -------
Effect of exchange rate changes on cash ......................... (861) (280) 96
-------- ------- -------
Change in cash and cash equivalents ............................. (3,713) 8,187 3,806
Cash and cash equivalents, beginning of period .................. 12,033 3,846 40
-------- ------- -------
Cash and cash equivalents, end of period ........................ $ 8,320 $12,033 $3,846
======== ======= =======
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest .......................................... $1,555 $ 381 $134
Income taxes ...................................... 1,819 2,344 993
Supplemental disclosure of non-cash transactions:
Equipment acquired under capital lease obligations ..... $1,430 $ - $ -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BUSINESS
Safety Components International, Inc. (the "Company" or "SCI") was
formed to acquire certain assets and assume certain liabilities from Valentec
International Corporation ("Valentec Oldco"). RAZ Acquisition Corporation
("RAZ") was formed to acquire all of the outstanding common stock of Valentec
Oldco from Insilco Corporation ("Insilco"). Subsequent to the acquisition,
Valentec Oldco was merged into RAZ which subsequently changed its name to
Valentec International Corporation ("Valentec") which was effected on August 27,
1993. The acquisition was accounted for as a purchase. The operations from April
1, 1994 to May 12, 1994 are reflected as division equity in the accompanying
consolidated stockholders' equity. On May 13, 1994, upon the completion of its
initial public offering ("Initial Public Offering" ), the Company acquired
certain assets and assumed certain liabilities from Valentec which were
accounted for utilizing the historical bases of Valentec similar to that of a
pooling of interest.
On August 6, 1996, Automotive Safety Components International ("ASCI"),
a wholly-owned subsidiary of the Company, acquired 80% of the outstanding
capital stock of Phoenix Airbag GmbH ("Phoenix Airbag"). Phoenix Airbag was a
corporation organized under the laws of the Republic of Germany, and at the time
of the acquisition, was a wholly-owned subsidiary of Phoenix Aktiengesellschaft
("Phoenix AG") in Hamburg, Germany. The purchase from 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 ("Stock Purchase
Agreement") dated June 6, 1996, as amended. The acquisition was completed on
August 5, 1996.
Pursuant to the Stock Purchase Agreement, eighty percent of Phoenix
AG's interest in Phoenix Airbag was acquired for an initial purchase price of
$20.0 million, subject to a net worth adjustment which decreased the initial
purchase price by $2.0 million. Additional purchase consideration of up to
approximately $7.0 million for the remaining twenty percent interest is
contingent on Phoenix Airbag meeting certain performance targets during calendar
years 1996 through 1998. If the annual targets are met, payments are to be paid
annually commencing April 30, 1997. Phoenix Airbag met its performance target
for calendar 1996, and ASCI paid its first contingent purchase price payment of
$2.2 million subsequent to March 31, 1997. Accordingly, such payment is accrued
in the accompanying consolidated balance sheet at March 31, 1997. If the
remaining performance targets are not met, ASCI would acquire the remaining
twenty percent without the payment of any additional consideration.
Additionally, ASCI may, under certain circumstances, be required to provide a
bank guaranty to Phoenix AG, in August 1997, to secure the payment of up to
approximately $4.8 million of the contingent purchase price.
The acquisition was accounted for as a purchase. Although ASCI will
acquire the remaining 20% interest effective December 31, 1998, it is entitled
to 100% of the income or losses, risks and rewards of Phoenix Airbag commencing
August 6, 1996. 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 31, 1997, the cumulative purchase price amounted to
approximately $24.2 million, including $3.1 million of direct acquisition costs.
Management of the Company allocated the purchase consideration for Phoenix
Airbag assets at fair market value, net of liabilities assumed, with the excess
allocated to goodwill. The unaudited pro forma revenues, net income and net
income per common share, assuming the acquisition of Phoenix Airbag was
consummated on April 1, 1996 are as follows (in thousands):
Pro forma March 31,
--------------------
1997 1996
--------------------
Revenues ............................................... $ 96,339 $128,118
======== ========
Income before extraordinary item and cumulative
effect of accounting change ...................... $ 4,473 $ -
======== ========
Net income ............................................. $ 2,831 $ 5,469
======== ========
Income before extraordinary item and cumulative
effect of accounting change per common share ..... $ 0.89 $ -
======== ========
Net income per common share ............................ $ 0.56 $ 1.10
======== ========
F-7
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Automotive segment manufactures automotive airbags for
specific models of several domestic and foreign automobile manufacturers under
contracts with major airbag systems producers. The Company's Automotive segment
operates in the United States, Europe and Mexico. Through March 31, 1997, the
majority of the Company's sales have been made in the United States. To date,
TRW Vehicle Safety Systems, Inc. ("TRW") and its affiliates have been the
Company's major automotive airbag customer (see Note 2); however, the
acquisition of Phoenix Airbag has significantly diversified the Company's
concentration of sales to this customer and in the United States. In addition,
the Company recently formed a subsidiary to manufacture certain of its products
in a newly constructed facility in the Czech Republic.
The Defense segment consists of two main operating units: Galion and
Systems. Galion manufactures projectiles and other metal components for small to
medium caliber training and tactical ammunition for the U.S. Armed Forces.
Galion also manufactures metal components for use in the automotive and consumer
products industries. Systems was established in June 1994 to serve as the prime
contractor under a $60.0 million systems contract for mortar cartridges (the
"Systems Contract") for the U.S. Army, coordinating the manufacture and assembly
of components supplied by various subcontractors.
Effective as of May 22, 1997, the Company acquired all of the
outstanding stock of Valentec in a stock for stock exchange. Prior to such
transaction, Valentec divested Valentec International Limited ("VIL"), its
majority-owned subsidiary. See Note 13 "Subsequent Events" for further
discussion. Valentec is a high volume manufacturer of stamped and precision
machine products in the automotive, commercial and defense industries, including
the manufacture of belted links for small to medium caliber ammunition and other
defense-related industries.
On June 30, 1997, the Company entered into a definitive agreement to
acquire substantially all of the net assets of the Air Restraints and Industrial
Fabrics Division ("JPS") for $56.3 million, subject to a post closing
adjustment. In addition, the Company will incur certain acquisition costs
related to the JPS acquisition (see Note 13). JPS is one of the world's largest
manufacturers and suppliers of airbag fabrics as well as other-value added
synthetics fabrics used in a variety of industrial and commercial applications.
The acquisitions of Valentec and JPS, assuming JPS is consummated, will
be accounted for using the purchase method of accounting and, accordingly, will
be included in the accounts from the dates of close.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the majority-owned subsidiaries of Safety Components International, Inc. All
significant intercompany transactions have been eliminated.
REVENUE RECOGNITION
Revenues are generally recognized as units are shipped to customers.
The Company accounts for certain 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.
F-8
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL REVENUES FROM MAJOR CUSTOMERS
The Company had sales to two customers in fiscal year 1997 aggregating
47% and 23% of net revenues, respectively. In fiscal year 1996, the Company had
sales from two customers aggregating 48% and 39% of net revenues, respectively.
In fiscal year 1995, the Company had sales to one customer aggregating 83% of
net revenues.
CONCENTRATION OF CREDIT RISK
The Company is subject to a concentration of credit risk consisting of
its trade receivables. At March 31, 1997, two customers accounted for
approximately 15% and 17% of its trade receivables, respectively; at March 31,
1996, two customers accounted for 21% and 51% 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.
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
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
Leasehold improvements............................... 10 - 20 years
Buildings............................................ 25 - 40 years
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of significant items are capitalized. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the respective accounts and any
resulting gain or loss is recognized.
The Company assesses the recoverability of long-lived assets by
determining whether the depreciation or amortization of the balances over its
remaining life can be recovered through projected undiscounted cash flows. If
there is an indication of impairment of such assets, the amount of impairment,
if any, will be measured based on projected discounted cash flows and, if
available, comparable market values, and will be 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
a trend line of expected cash flows generated from the assets in service. No
impairment of assets will be recorded below their estimated net realizable
value.
F-9
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Intangible and other assets consist of goodwill and patents (see Notes
1 and 3) associated with the acquisition of Phoenix Airbag and are stated at
cost less accumulated amortization. Goodwill and patents are amortized over the
expected periods to be benefited, which have been determined to be between 15
and 25 years, respectively.
The Company 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. If there is an
indication of impairment of such assets, the amount of impairment, if any, will
be measured based on projected discounted cash flows and will be charged to
operations in the period in which impairment is determined by management.
PRODUCT LAUNCH COSTS
During the 1997 fiscal year, the Company changed its accounting for
product launch costs from the deferral method to the expense as incurred method.
Management believes expensing such costs is comparable with its industry peer
group. Expensing such costs as incurred is considered the preferable method of
accounting and, accordingly, management recorded the cumulative effect of this
change in accounting principle totaling $2.0 million ($1.3 million after income
taxes or $0.25 per share) effective April 1, 1996, in accordance with Accounting
Principles Board Opinion No. 20. During the fiscal year ended March 31, 1997,
the Company incurred approximately $1.8 million of product launch costs which,
under the previously used accounting method, would have been capitalized to
deferred product launch costs. Under the new accounting policy, such costs were
expensed as incurred. The pro forma amounts shown below have been adjusted for
the effect of retroactive application for product launch costs and the related
change in provision for income taxes.
Pro forma amounts assuming the new accounting method is applied
retroactively are as follows (in thousands, except per share data):
March 31,
------------------------------
1997 1996 1995
------------------------------
Income before extraordinary item ..................... $ 3,846 $ - $ -
========= ====== =====
Income before extraordinary item per common share $ 0.77 $ - $ -
========= ====== =====
Net Income ........................................... $ 3,463 $5,017 $ 950
========= ====== =====
Net Income per common share ...................... $ 0.69 $ 1.01 $0.24
========= ====== =====
FOREIGN CURRENCY TRANSLATION
The Company follows the principles of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation," ("FAS 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, 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 year ended March 31, 1997, 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
F-10
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended March 31, 1997, transaction losses charged to
operations amounted to $379,000; in 1996 and 1995, such gains and losses were
not significant.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the liabilities method specified by FAS 109, the deferred tax
assets and liabilities are measured each year based on the difference between
the financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates. Additionally, a valuation allowance is recorded
for that portion of deferred tax assets for which it is more likely than not
that the assets will not be realized. The deferred tax provision is the result
of changes in the deferred tax assets and liabilities.
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 31, 1997 and 1996 based on the short-term
nature of these instruments. Advances to affiliates have no readily
ascertainable fair market value and , accordingly, their fair value are not
readily determinable.
DEFERRED FINANCING COSTS
Costs incurred in connection with financing activities (Note 6), are
capitalized and amortized using the effective interest method, and charged to
interest expense in the accompanying consolidated statements of operations.
Total costs deferred and included in the accompanying consolidated balance
sheets at March 31, 1997 and 1996 were $405,000 and $589,000, respectively.
During fiscal 1997, the Company terminated its line of credit with a bank. Costs
deferred at March 31, 1996 were charged in the accompanying consolidated
statement of operations as an extraordinary item, net of applicable income
taxes.
EARNINGS PER SHARE
Earnings per share amounts have been computed using the weighted
average number of common shares outstanding during each period. In February
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128
establishes standards for computing and presenting earnings per share ("EPS").
It replaces the presentation of primary EPS with a presentation of basic 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 is computed similarly to fully diluted EPS
pursuant to Accounting Principles Board Opinion No. 15. This statement is
F-11
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effective for the Company beginning with its quarterly period ending December
31, 1997, earlier adoption is not permitted. Since the Company's capital
structure is considered simple for reporting EPS, the adoption of this principle
is not expected to have a material impact on EPS reporting.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the March 31, 1997 presentation.
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 effect 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.
NOTE 3 PUBLIC OFFERINGS
INITIAL PUBLIC OFFERING
On May 13, 1994, the Company completed its Initial Public Offering by
selling 1.6 million shares of previously unissued common stock at $10.00 per
share (the "Initial Public Offering Price"). In conjunction with the Initial
Public Offering, the underwriter was granted warrants to purchase 128,000 shares
of the Company's common stock at 130% of the Initial Public Offering Price
($13.00) exercisable over a four-year period commencing one year after the
effective date of the registration statement (May 6, 1994). The net proceeds to
the Company from the Initial Public Offering of approximately $14.6 million
(including the proceeds received pursuant to the exercise of the over allotment
option described below) were used to retire the Company's portion of Valentec's
short and long-term debt, pay off its intercompany debt balances with Valentec
(such debt balances were assumed in connection with the transfer of assets
described in Note 1) and pay cash consideration to Valentec for the transfer of
assets. The remaining proceeds have been used to fund the additional growth of
the business. In conjunction with the Initial Public Offering, the underwriter
was granted a 30 day option to purchase up to an aggregate of 240,000 additional
shares (of which 80,000 were to be sold by Valentec) at the Initial Public
Offering Price, less underwriting discounts and accountable expenses. The entire
option was exercised within the 30 day period.
ADDITIONAL OFFERING
On June 21, 1995, the Company completed an additional offering (the
"Offering") of 1.5 million shares of common stock at $17.00 per share (the
"Offering Price"), of which the Company sold 1.0 million shares of previously
unissued common stock and Valentec and other selling shareholders sold 500,000
shares. The net proceeds to the Company from the Offering of approximately $16.5
million (including the proceeds received pursuant to the exercise of the over
allotment option described below) has been, and will continue to be, used to
fund the future growth of the business. In conjunction with the Offering, the
underwriter was granted a 30 day option to purchase up to an aggregate of
225,000 additional shares (of which 75,000 shares and 150,000 shares were to be
sold by the Company and Valentec and other selling shareholders respectively) at
the Offering Price, less underwriting discounts. The entire option was exercised
within the 30 day period.
F-12
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS
(in thousands)
March 31,
----------------------
1997 1996
----------------------
Accounts receivable:
Billed receivables ........................... $ 9,152 $ 4,779
Unbilled receivables (net of unliquidated
progress payments of $9,846 and $30,94
in 1997 and 1996, respectively) ............. 1,834 8,588
Other ........................................ 765 3,230
-------- --------
$ 11,751 $ 16,597
======== ========
Inventories:
Raw materials ................................ $ 3,339 $ 2,297
Work-in-process .............................. 2,073 1,958
Finished goods ............................... 966 1,060
-------- --------
$ 6,378 $ 5,315
======== ========
Property, plant and equipment:
Land and building ............................ $ 8,435 $ 1,241
Machinery and equipment ...................... 18,768 10,001
Furniture and fixtures ....................... 2,074 749
Construction in process ...................... 2,822 2,373
-------- --------
32,099 14,364
Less - accumulated depreciation
and amortization ................... (3,804) (2,172)
-------- --------
$ 28,295 $ 12,192
======== ========
NOTE 5 RELATED PARTY TRANSACTIONS
For periods prior to the Initial Public Offering, the Company was
allocated a portion of Valentec's corporate general and administrative expenses
(excluding interest) based on a formula of revenue, fixed assets and payroll
costs. In the opinion of management, the allocation method used was reasonable.
Corporate charges totaled $60,000 for the year ended March 31, 1995. During
fiscal years 1997 and 1996, the Company allocated certain of its corporate
general and administrative expenses to Valentec totaling $726,000 and $659,000,
respectively, using a similar basis for allocating expenses as previously
discussed.
The Company purchases certain components used in its products from
affiliates. Purchases from affiliates totaled $2.6 million, $774,000 and $1.3
million for the years ended March 31, 1997, 1996 and 1995, respectively.
The Company sells certain components to affiliates for use in their
products. Sales to affiliates totaled $104,000, $4.3 million and $1.0 million
for the years ended March 31, 1997, 1996 and 1995, respectively.
The Company subleases space from VIL for its European automotive
operations. Sublease payments for the years ended March 31, 1997, 1996 and 1995
were $117,000, $121,000 and $112,000, respectively. In addition, the Company is
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 $358,000, $254,000 and $248,000 for
the years ended March 31, 1997, 1996 and 1995, respectively.
At March 31, 1997 and 1996, the Company has a receivable from Valentec
aggregating $4.3 million, which was realized through the merger on May 22, 1997.
F-13
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 LONG-TERM OBLIGATIONS
Long-term obligations outstanding were as follows (in thousands):
March 31,
-------------------
1997 1996
-------------------
Bank of America NT & SA term loan and revolving credit
facility, bearing interest at 2.25% and 2.0% over
LIBOR (6.54% at March 31, 1997),
respectively, refinanced May 21, 1997 ................ $ 20,192 $ --
Note payable, principal due in annual installments of
$205,000 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 .................. 820 764
Capital equipment notes payable, due in monthly
installments with interest at 9.0% to 11.32%
maturing at various rates through April
2001, secured by machinery and equipment ............. 3,369 3,020
-------- --------
24,381 3,784
Less - current portion ................................. (3,085) (697)
-------- --------
$ 21,296 $ 3,087
======== ========
On August 1, 1996, the Company entered into a loan agreement with Bank
of America National Trust and Savings Association ("Bank of America NT & SA").
This credit facility was refinanced on May 21, 1997 as discussed in the
following paragraph. The proceeds provided the Company with financing for the
acquisition of Phoenix Airbag in the form of a $20.0 million acquisition term
loan, to be amortized over a four-year period. The loan agreement also provided
for a $5.5 million revolving credit facility and a non-revolving stand-by letter
of credit facility to secure payment, if necessary, for the contingent purchase
price for the acquisition of Phoenix Airbag. The term loan, revolving credit
facility and stand-by letter of credit facility are collectively referred to as
the "Bank of America NT & SA Facility". Indebtedness under the Bank of America
NT & SA Facility was secured by substantially all the assets of the Company.
Outstanding borrowings on the Bank of America NT & SA Facility term loan and
revolving credit facility at March 31, 1997 were $17.3 million and $2.9 million,
respectively.
On May 21, 1997, the Company, Phoenix Airbag and Automotive Safety
Components International Limited ("ASCIL" collectively, the "Borrowers") entered
into an agreement with KeyBank National Association, as administrative agent
("KeyBank"), and the lending institutions named therein (the "Credit
Agreement"). The Credit Agreement provides for (i) a term loan in the principal
amount of $15.0 million (the "Term Loan") and (ii) a revolving credit facility
in the aggregate principal amount of $12.0 million (including letter of credit
facilities). The indebtedness under the Credit Agreement is secured by
substantially all the assets of the Company and bears interest at a rate equal
to either (i) the greater of KeyBank's prime rate or (ii) the sum of LIBOR plus
1.00% for term loans (and 1.25% for revolving loans, subject to reduction to
1.00% upon consummation of the proposed offering of senior subordinated notes
(see Note 13), so long as no default or event of default shall have occurred and
be continuing). The principal amount of the Term Loan is payable quarterly
commencing September 30, 1997, in the amount of $750,000, with the last payment
due on May 31, 2002 provided that the Term Loan must be prepaid out of the
proceeds of the offering senior subordinated notes (see Note 13). The revolving
loans under the Credit Agreement will mature on May 31, 2002. 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. Upon completion of the
offering of senior subordinated notes (see Note 13), pursuant to a commitment
letter with KeyBank, the Credit Agreement will be converted into a $27.0 million
revolving credit facility with a five year term, bearing interest at LIBOR plus
1.00% with a commitment fee of 0.25% per annum for any unused portion.
F-14
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future annual minimum principal payments, under the refinanced terms
through KeyBank at March 31, 1997, are as follows (in thousands):
1998 ................................ $ 3,085
1999 ................................ 4,019
2000 ................................ 3,811
2001 ................................ 3,739
2002 ................................ 3,617
Thereafter .......................... 6,110
-------
$24,381
=======
During fiscal year 1997, the Company entered into a sale-leaseback of
certain equipment which is accounted for as a capital lease. The Company
received proceeds (which approximated the carrying value of the asset at the
time of sale) of approximately $1.5 million; no gain or loss was recorded in
connection with this transaction. The agreement requires that specified
machinery and equipment used in the Company's operations be pledged as
collateral, among other criteria. The Company imputed interest at 9% per annum.
On May 22, 1997, the Company completed the acquisition of Valentec
(Notes 1 and 13). The Company assumed all of Valentec's outstanding obligations
as of that date, including two term notes of approximately $5.1 million, a
revolving line of credit of approximately $1.4 million, as of March 31, 1997 and
equipment financings of approximately $1.1 million as of March 31, 1997. In
addition, the Company issued a $2.0 million note payable and has or will pay
$800,000 to VIL to repay intercompany amounts at the time of the sale.
On June 4, 1997, the Company secured a $7.5 million mortgage note
facility with Bank Austria. The note is payable in semi-annual installments of
$375,000 beginning September 30, 1997 through March 31, 2007 and bears interest
at a rate of 7.5%. The note is secured by the assets of the Company's Czech
Republic facility.
In May and June 1997, the Company paid approximately $6.5 million of
the obligations assumed in the Valentec acquisition with the proceeds of the
KeyBank credit facility, Bank Austria mortgage note and the $2.0 million
equipment financing. The $2.0 million equipment financing bears interest at
9.38% and is payable monthly beginning July 1, 1997 through June 1, 2002 and is
secured by certain fixed assets of Valentec.
NOTE 7 INCOME TAXES
Income before income taxes comprises the following (in thousands):
March 31,
------------------------------
1997 1996 1995
------------------------------
Domestic ................................... $2,670 $6,291 $2,379
Foreign .................................... 4,171 1,739 1,037
------ ------ ------
$6,841 $8,030 $3,416
====== ====== ======
F-15
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision comprises the following (in thousands):
March 31,
------------------------------------
1997 1996 1995
------------------------------------
Taxes currently payable:
Federal ........................ $ 935 $ 1,934 $ 602
State .......................... 154 327 114
Foreign ........................ 916 124 372
Deferred taxes:
Federal ........................ (177) 311 148
State .......................... (49) 47 47
Foreign ........................ 1,216 373 --
------- ------- -------
$ 2,995 $ 3,116 $ 1,283
======= ======= =======
The income tax provision differs from the amount computed by applying
the federal income tax rate to income before income taxes as follows:
March 31,
---------------------
1997 1996 1995
---------------------
Expected taxes at federal statutory rate ............. 34% 34% 34%
State income taxes, net of federal benefits .......... 2 5 5
Foreign earnings taxed at different rates ............ 7 - 1
Change in deferred tax asset valuation allowance ..... - - (4)
Other, net ........................................... 1 - 2
--- --- ---
44% 39% 38%
=== === ===
The primary components of deferred tax assets and liabilities, included
in other long-term liabilities in the accompanying consolidated balance sheet,
are as follows (in thousands):
March 31,
-----------------------
1997 1996
-----------------------
Deferred tax assets (liabilities):
Accrued liabilities ........................ $ 103 $ 37
Inventory .................................. 193 203
Property, plant and equipment .............. (1,552) (862)
Deferred product launch costs .............. - (688)
Other ...................................... (7) -
------- -------
$(1,263) $(1,310)
======= =======
No taxes have been provided relating to the possible distribution of
approximately $4.2 million of undistributed earnings considered to be
permanently reinvested. The amount of such additional taxes that would be
payable if such earnings were distributed is estimated to be approximately
$950,000.
F-16
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 COMMITMENTS AND CONTINGENCIES
Operating leases
The Company has noncancelable operating leases for equipment and office
space that expire at various dates through 2002. Certain of the lease payments
are subject to adjustment for inflation, which have been normalized to
operations. The Company incurred rent expense of $927,000, $612,000 and $272,000
for the years ended March 31, 1997, 1996 and 1995, respectively.
Future annual minimum lease payments for all noncancelable operating
leases as of March 31, 1997 are as follows (in thousands):
1998 ................................. $1,130
1999 ................................. 1,068
2000 ................................. 1,092
2001 ................................. 573
2002 ................................. 308
Thereafter ........................... 403
------
$4,574
======
ENVIRONMENTAL ISSUES
This Company has identified two areas of underground contamination at
its facility in Galion, Ohio. One area involves a localized plating solution
spill, which is currently being handled by the existing waste water treatment
system. 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. The Company has accrued
$243,000 for the estimated cost of additional testing and remediation which are
included in the long-term liabilities in the accompanying consolidated balance
at March 31, 1997. The Company's environmental consultants estimate that the
Company's voluntary plan of remediation will take three to five years to
complete. In the opinion of management, the total remediation costs are not
expected to have a material adverse effect on the Company's results of
operations or financial position. Management's opinion is based on the advice of
an independent consultant on environmental matters.
LEGAL PROCEEDINGS
From time to time, the Company is the subject of legal proceedings for
various matters. In management's opinion, there are no material claims currently
pending.
F-17
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business
segments: automotive and defense. See Note 1 for a description of business
segments.
Summarized financial information by business segment is as follows (in
thousands):
March 31,
---------------------------------
1997 1996 1995
---------------------------------
Net Sales:
Automotive ........................ $68,827 $49,091 $43,073
Defense ........................... 15,131 45,851 8,706
------- ------- -------
$83,958 $94,942 $51,779
======= ======= =======
Operating income:
Automotive ........................ $ 7,255 $ 3,658 $ 2,397
Defense ........................... 1,349 3,946 779
------- ------- -------
$ 8,604 $ 7,604 $ 3,176
======= ======= =======
Total assets at period end:
Automotive ........................ $60,800 $21,518 $20,429
Defense ........................... 8,251 16,924 5,899
Corporate ......................... 4,356 11,389 1,983
------- ------- -------
$73,407 $49,831 $28,311
======= ======= =======
Depreciation and amortization:
Automotive ........................ $ 2,036 $ 796 $ 489
Defense ........................... 355 308 254
------- ------- -------
$ 2,391 $ 1,104 $ 743
======= ======= =======
Capital expenditures:
Automotive ........................ $ 8,092 $ 3,863 $ 1,979
Defense ........................... 521 725 494
------- ------- -------
$ 8,613 $ 4,588 $ 2,473
======= ======= =======
F-18
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information by geographic area is as follows (in
thousands):
March 31,
---------------------------------
1997 1996 1995
---------------------------------
Net Sales (1):
North America ..................... $46,371 $77,333 $34,274
Europe ............................ 37,587 17,609 17,505
------- ------- -------
$83,958 $94,942 $51,779
======= ======= =======
Operating income:
North America ..................... $ 3,089 $ 6,555 $ 3,143
Europe ............................ 5,515 1,049 33
------- ------- -------
$ 8,604 $ 7,604 $ 3,176
======= ======= =======
Total assets at period end:
North America ..................... $24,930 $37,974 $16,251
Europe ............................ 48,477 11,857 12,060
------- ------- -------
$73,407 $49,831 $28,311
======= ======= =======
- - -----------------------------------------
(1) Foreign and domestic sales are representative of amounts reported by
geographic region
NOTE 10 BENEFIT PLAN
SCI participates in Valentec's defined contribution plan qualified
under Section 401(k) of the Internal Revenue Code for eligible employees. The
plan provides for discretionary employer contributions. The Company made no
employer contributions during any of the periods presented in the consolidated
financial statements.
NOTE 11 COMMON STOCK AND STOCK OPTIONS
COMMON STOCK
During fiscal years 1997 and 1996, the Company purchased 23,492 shares
and 90,000 shares of common stock, respectively. The shares are held in treasury
and are accounted for at cost. See Note 13 for common stock issued to acquire
Valentec and treasury shares obtained in connection with such acquisition.
STOCK OPTIONS
In conjunction with the Initial Public Offering, SCI established a stock
option plan ("Plan"). The Plan, as amended, provides for the issuance of options
to purchase an aggregate of 550,000 shares of SCI's common stock to key
officers, employees of SCI or its affiliates, directors and consultants. 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):
March 31,
------------------------------
1997 1996 1995
------------------------------
Net Income:
As Reported ....................... $2,204 $4,914 $2,133
====== ====== ======
Pro Forma ......................... $1,941 $4,756 $2,133
====== ====== ======
Net Income Per Share:
As Reported ....................... $ 0.44 $ 0.99 $ 0.53
====== ====== ======
Pro Forma ......................... $ 0.39 $ 0.95 $ 0.53
====== ====== ======
F-19
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan at March 31,
1997, 1996 and 1995 and changes during the years then ended is presented in the
table and narrative below:
March 31, 1997 March 31, 1996 March 31, 1995
------------------------ ----------------------- ---------------------------
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 288,625 $13.06 210,500 $10.79 - $ -
Granted 244,499 11.97 84,500 18.65 243,500 10.68
Exercised (375) 10.00 - - - -
Forfeited (750) 10.00 (6,375) 12.06 (33,000) 10.00
------- ------- -------
Outstanding at end of year 531,999 12.57 288,625 13.06 210,500 10.79
------- ===== ------- ===== ------- =====
Exercisable at end of year 122,250 12.04 50,750 10.57 - -
======= ===== ====== ===== ======= =====
Weighted average fair value
of options granted $5.48 $8.85 $4.94
Of the 531,999 options outstanding at March 31, 1997, 200,000 have
exercise prices between $10.00 and $14.88, with a weighted average exercise
price of $10.15 and a weighted average remaining contractual life of 6.1 years;
98,375 of these options are exercisable with a weighted average exercise price
of $10.28. An additional 87,500 options have exercise prices between $17.13 and
$21.00 with a weighted average exercise price of $19.28 and a weighted average
remaining contractual life of 6.6 years; 23,875 of these options are exercisable
with a weighted average exercise price of $19.30. The remaining 244,499 options
have exercise prices between $10.25 and $14.17 with a weighted average exercise
price of $11.97 and a weighted average remaining contractual life of 9.3 years;
none of these options are currently exercisable. 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 1997,
1996 and 1995, respectively: risk-free interest rates of 6.7, 6.5 and 7.2
percent; dividends for all years; expected lives of 6.2, 6.8 and 6.0 years; and
expected volatility of 32.4 percent for all years.
F-20
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for fiscal year 1996 and 1997
is set forth below (See Note 2). The Company recorded the cumulative effect of
the change in accounting principle and the extraordinary item during the fourth
quarter of fiscal year 1997 (see Note 2). The Company did not restate prior
quarters. All dollar amounts are in thousands except per share data.
Quarter Ended
----------------------------------------------------------------
Company
----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996
----------------------------------------------------------------
Fiscal 1996
Revenues ................................. $23,683 $25,317 $24,447 $21,495
Income from operations ................... $ 1,562 $ 1,952 $ 1,943 $ 2,147
Net income ............................... $ 1,047 $ 1,343 $ 1,297 $ 1,227
Net income per share ..................... $ 0.24 $ 0.26 $ 0.25 $ 0.24
Quarter Ended
----------------------------------------------------------------
Company
----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
----------------------------------------------------------------
Fiscal 1997
Revenues ................................. $16,172 $18,877 $24,662 $24,247
Income from operations ................... $ 1,446 $ 2,248 $ 3,150 $ 1,760
Income before extraordinary item and
cumulative effect of accounting change... $ 853 $ 1,148 $ 1,420 $ 425
Net income ............................... $ 853 $ 1,148 $ 1,420 $(1,217)
Income before extraordinary item and
cumulative effect of accounting
change per share .................. $ 0.17 $ 0.23 $ 0.28 $ 0.09
Net income per share ..................... $ 0.17 $ 0.23 $ 0.28 $ (0.24)
AMENDED Quarter Ended
----------------------------------------------------------------
Company
----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
----------------------------------------------------------------
AMENDED Fiscal 1997
Revenues ................................. $16,172 $18,877 $24,662 $24,247
Income from operations ................... $ 1,416 $ 1,971 $ 2,627 $ 2,590
Income before extraordinary item and
cumulative effect of accounting change... $ 835 $ 982 $ - $ -
Net (loss) income ........................ $ (424) $ 599 $ 1,106 $ 923
Income before extraordinary item and
cumulative effect of accounting
change per share .................. $ 0.17 $ 0.20 $ - $ -
Net (loss) income per share .............. $ (0.08) $ 0.12 $ 0.22 $ 0.20
F-21
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 SUBSEQUENT EVENTS
Pursuant to a definitive Stock Purchase Agreement, effective as of May
22, 1997, the Company acquired all of the outstanding common stock of Valentec
in a tax-free stock-for-stock exchange. Valentec was the Company's largest
shareholder immediately prior to the acquisition owning approximately 27%, or
1,379,200 shares of the issued and outstanding shares of the Company's common
stock. The Company issued the shareholders of Valentec 1,369,200 newly issued
shares of its common stock.
The purchase price for the Valentec acquisition was negotiated between
Valentec and a special committee consisting of independent members of the Board
of Directors of the Company. The special committee was advised by independent
legal counsel and an independent financial advisor. The Company's Board of
Directors received an opinion from the special committee's financial advisor as
to the fairness from a financial point of view of the consideration to be
received by the Company to the Company's shareholders other than Valentec.
The acquisition will be accounted for as a purchase. The aggregate
purchase price amounted to approximately $14.3 million, including estimated
direct acquisition costs of approximately $600,000. No significant adjustments
to assets and liabilities acquired will be recorded as their carrying value
approximates their fair value, except for common stock of the Company held by
Valentec, which common shares have been recorded as treasury shares at market
value of $13.7 million. These shares were previously accounted for under the
equity method of accounting for the investment by Valentec. Management intends
to merge Valentec during the first quarter of fiscal 1998. The excess of the
purchase price over the fair value of the net assets acquired will be allocated
to goodwill.
On June 30, 1997, the Company entered into a definitive agreement to
acquire substantially all of the assets of the air restraint and technical
products division of JPS for $56.3 million plus the assumption of $797,000 in
indebtedness subject to post-closing adjustments (the "JPS Acquisition"). The
Company expects to finance the JPS Acquisition with a portion of the proceeds of
a private placement of $80.0 million of senior subordinated notes.
Unaudited pro forma condensed balance sheet information assuming the
acquisitions and the senior subordinated notes were effected on March 31, 1997
is as follows (in thousands):
Current assets ........................................... $ 50,679
========
Noncurrent assets ........................................ $108,887
========
Current liabilities ...................................... $ 26,082
========
Total liabilities ........................................ $124,292
========
Unaudited pro forma condensed consolidated operations information
assuming the acquisition and the senior subordinated notes were(and acquisition
of Phoenix Airbag - see Note 1) effected on April 1, 1996 is as follows (in
thousands, except per share data):
Revenues ................................................. $173,208
========
Income before extraordinary item
and change in accounting principle .................... $ 2,011
========
Income per share before extraordinary
item and change in accounting principle ............... $ 0.40
========
The unaudited pro forma condensed consolidated operations information
is not necessarily indicative of the actual results which would have been
attained if the acquisition would have been consummated on April 1, 1996.
F-22
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-23