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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 28, 1998
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)
33-0596831
(I.R.S. Employer Identification No.)
2160 North Central Road
Fort Lee, New Jersey
(Address of principal executive offices)
07024
(Zip Code)
Registrant's telephone number, including area code (201) 592-0008
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
10 1/8% Senior Subordinated Notes due 2007, Series B
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of June 22, 1998, was approximately
$67,619,281.
The number of shares outstanding of the registrant's common stock, as of
June 22, 1998, is as follows:
Class Number of Shares
- -----------------------------------------------------------------------
Common Stock, par value $.01 per share 5,084,216
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement in connection with its 1998
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 fabric and cushions, with operations in North America, Europe
and Asia. The Company sells airbag fabric domestically and cushions worldwide to
all of the major airbag module integrators that outsource such products. The
Company believes it produces approximately 50% of all outsourced airbag fabric
utilized in North America and that it manufactures approximately 49% of all
outsourced airbag cushions in North America.
The Company believes the JPS Acquisition (as defined herein) represents
an important step in its airbag growth strategy because it has and will continue
to enable the Company to combine SCFTI's (as defined herein) low-cost operations
and strong market position in airbag fabric with its low-cost operations and
strong market position in airbag cushions to exploit worldwide growth in demand
for airbag module systems ("airbags" or "airbag modules"). According to the
automotive research firm, Tier One, the worldwide market for automotive airbag
modules has grown from approximately 3.6 million installed airbag modules in
1991 to approximately 87.7 million in 1997. According to the same source,
installed airbag modules are projected to more than double to approximately
158.0 million by the year 2000 as a result of increasing usage of airbags in
Europe and Asia and growth in demand for side-impact airbags. EBITDA represents
income from operations before interest, taxes, depreciation and amortization and
excludes the current year's impact of reorganization and relocation expenses.
The Company's consolidated fiscal 1998 net sales and EBITDA were $170.3 million
and $26.0 million, respectively.
As part of its airbag growth strategy, the Company has recently
commenced manufacturing and supplying metal airbag module components to its
customers, further increasing the content per airbag module supplied by the
Company. Sales of airbag fabric, cushions and related metal components accounted
for approximately $125.8 million or 73.9% of consolidated fiscal 1998 net sales.
Sales of airbag cushions accounted for approximately $68.8 million or 82.0% and
approximately $49.1 million or 51.7% of the Company's fiscal 1997 and 1996 net
sales, respectively. The Company believes that it is also, as a result of the
JPS Acquisition, a leading manufacturer of value-added technical fabrics used in
a variety of niche industrial and commercial applications such as ballistics
material for luggage, filtration, aircraft escape slides, military tents and
certain technical apparel. Such fabrics accounted for $17.4 million or 10.2% of
consolidated fiscal 1998 net sales and are produced using the same machinery
that produces airbag fabric. The unique ability to interchange airbag and
specialty technical fabrics using the same equipment and similar manufacturing
processes allows the Company to effectively utilize its manufacturing assets and
lower per unit overhead costs. The Company also produces defense related
products, primarily projectiles and other metal components for small to medium
caliber training and tactical ammunition and continues as a systems integrator
and manufacturer for ordnance programs, which accounted for $27.2 million or
15.9% of the Company's consolidated fiscal 1998 net sales and $19.7 million or
11.4%, and $45.9 million or 48.3% of the Company's fiscal 1997 and 1996 net
sales, respectively.
Significant Transactions
The JPS Acquisition. On July 24, 1997, the Company, through a
newly-formed, wholly-owned subsidiary, Safety Components Fabric Technologies,
Inc., acquired (the "JPS Acquisition") all of the assets and assumed certain
liabilities of the Air Restraint/Technical Fabrics Division (the "Division") of
JPS Automotive L.P. ("JPS Automotive"), a subsidiary of Collins & Aikman
Corporation, for approximately $58.8 million after giving effect to post-closing
adjustments. The purchase price included the repayment of approximately $650,000
of capital lease obligations, direct acquisition costs of approximately $900,000
and approximately $1.2 million for the purchase of a building in conjunction
with the JPS Acquisition (the Division is sometimes hereinafter referred to as
"JPS" or "SCFTI"). The Debt Offering (as defined herein) was conditioned upon,
and a significant portion of the proceeds thereof were used to finance, the JPS
Acquisition. SCFTI is a leading, low-cost supplier of airbag fabric in North
America and is also a leading manufacturer of value-added technical fabrics used
in a variety of niche industrial and commercial applications. The Company
believes the JPS Acquisition represents an important step in its airbag growth
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strategy because it has enabled, and will continue to enable, the Company to:
(i) combine strong market positions in airbag fabric and cushions; (ii)
integrate low-cost manufacturing capabilities in airbag fabric and cushions to
exploit the worldwide growth in demand for airbag modules; (iii) interchange
airbag and specialty technical fabrics using the same equipment and
manufacturing processes thereby allowing the Company to effectively utilize its
manufacturing assets; and (iv) enhance and expand its customer base.
The Debt Offering. On July 24, 1997, the Company issued $90,000,000
aggregate principal amount of its 10 1/8% Senior Subordinated Notes due 2007,
Series A (the "Old Notes") to BT Securities Corporation, Alex. Brown & Sons
Incorporated and BancAmerica Securities, Inc. (collectively, the "Initial
Purchasers") in a transaction not registered under the Securities Act of 1933,
as amended (the "Securities Act"), in reliance upon an exemption thereunder (the
"Debt Offering"). The Debt Offering was conditioned upon, and a significant
portion of the proceeds thereof was used to finance, the JPS Acquisition. On
September 2, 1997, the Company commenced an offer to exchange (the "Exchange
Offer") the Old Notes for $90,000,000 aggregate principal amount of its 10 1/8%
Senior Subordinated Notes due 2007, Series B (the "Exchange Notes," together
with the Old Notes, the "Notes"). All of the Old Notes were exchanged for
Exchange Notes pursuant to the terms of the Exchange Offer, which expired on
October 1, 1997. The Exchange Notes evidence the same debt as the Old Notes
(which they replaced). However the issuance of the Exchange Notes has been
registered under the Securities Act, and therefore the Exchange Notes do not
bear legends restricting the transfer thereof.
The Valentec Acquisition. Pursuant to a definitive Stock Purchase
Agreement, effective as of May 22, 1997, the Company acquired in a tax-free
stock for stock transaction all of the outstanding capital stock of Valentec
(the "Valentec Acquisition"). Valentec was the Company's largest shareholder
immediately prior to the Valentec Acquisition owning approximately 27% or
1,379,200 shares of Common Stock. Immediately prior to the Valentec Acquisition,
Robert A. Zummo, the President, Chief Executive Officer and a director of the
Company, was also the President, Chief Executive Officer, a director and
majority shareholder approximately (74.2%) of Valentec, Francis X. Suozzi, a
consultant to and director of Valentec and a director of the Company, was a
minority shareholder approximately (21.2%) of Valentec, and the Valentec
International Corporation Employee Stock Ownership Plan (the "ESOP") was a
minority shareholder approximately (4.6%) of Valentec. The Company issued an
aggregate of 1,369,200 newly issued shares of Common Stock to the shareholders
of Valentec. The purchase price aggregated approximately $15.1 million,
including estimated direct acquisition costs of approximately $1.3 million.
Valentec is a high-volume manufacturer of stamped and precision machined
products for the automotive, commercial and defense industries. Valentec's
machining capabilities and relationships with airbag module integrators has
enabled 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.
Airbag Related Products
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, most of whom produce most of the
components required for a complete module. However, as the industry has evolved,
module integrators have increasingly outsourced non-proprietary components such
as cushions to those companies specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource the majority of their cushion requirements as they focus
on the development of proprietary technologies such as inflators and sensors.
Only one of the module integrators currently weaves its own airbag fabric and
the remainder purchase fabric from airbag fabric producers such as the Company.
A characteristic of the industry is that certain customers of airbag
cushion suppliers are also competitors. The Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. While none of the module integrators produce airbag
cushions for third parties, the Company may compete with its customers to supply
their own internal cushion requirements. However, most of the Company's
suppliers do not produce cushions for the same car/truck model for which the
Company produces cushions.
3
Another characteristic of the airbag industry is the existence of
potential barriers to entry. New entrants that wish to produce and supply airbag
cushions or airbag fabric must undergo a rigorous qualification process, which
can take as long as three years. The Company believes that in addition to
deterring new entrants, the existence of this qualification process represents
switching costs for module integrators that are required to assist the new
supplier in meeting automakers' requirements. Additionally, the Company believes
module integrators are, like their automaker customers, trying to limit the
number of suppliers.
Products
The Company's automotive products include passenger, driver side and
side impact airbag cushions manufactured for installation in over 40 car and
truck models sold worldwide; airbag fabric for sale to airbag manufacturers; and
stamped and machined components used in airbag modules, including passenger
airbag retainers that attach the airbag cushion to the module's reaction can, as
well as driver side module products and components used in airbag inflators.
Sales of airbag related products (inclusive of sales of airbag fabric) for
fiscal year 1998 accounted for approximately 73.9% of the Company's consolidated
fiscal 1998 net sales. Sales of airbag related products for fiscal years 1997
and 1996 accounted for approximately 82.0% and 51.7%, respectively, of the
Company's consolidated fiscal 1997 and 1996 net sales, respectively.
The Company also manufactures a wide array of specialty technical
fabrics for consumer and industrial uses. These fabrics include: (i) high-end
luggage fabrics, including "ballistics" fabric used in Hartman and Tumi brands
of luggage; (ii) filtration fabrics used in 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, protective
apparel worn by firefighters, fuel cells, bomb and cargo chutes, oil containment
booms, aircraft escape slides, 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 supply contracts of up to twelve
months. Sales of technical related products accounted for approximately $17.4
million or 10.2% of the Company's consolidated fiscal 1998 net sales and are
produced using the same equipment and manufacturing process that the Company
uses to produce airbag fabric. The market for the Company's technical related
products is highly segmented by product line. Marketing and sales of the
Company's technical related products is conducted by the Company's marketing and
sales staff based in Greenville, South Carolina. Manufacturing of these products
occurs at the South Carolina facility, using the same machines that weave the
airbag fabrics which enables the Company to take advantage of demand
requirements for the various products with minimal expenditure on production
retooling costs. By manufacturing technical products with the same machines that
weave airbag fabric, the Company is able to more effectively utilize capacity at
its South Carolina plant and lower per unit overhead costs.
Customers
Sales of airbag related products to TRW and Petri accounted for
approximately 36.1% and 15.6%, respectively, of the Company's consolidated
fiscal 1998 net sales. See Note 9 to the Company's Notes to Consolidated
Financial Statements included elsewhere in this Report for certain disclosure
regarding the Company's industry segments.
The Company sells its airbag cushions to airbag module integrators for
inclusion in specified model cars generally pursuant to requirements contracts.
Certain of these customers also manufacture airbag cushions to be used in their
production of airbag modules.
The Company's largest airbag fabric customers include TRW, Breed
Technologies (as successor in interest to AlliedSignal) ("Breed"), AutoLiv and
Delphi and the Company also sells to Reeves, Bradford, ABC and Mexican
Industries. The Company sells its fabric either directly to a module integrator
or, in some cases, to a fabricator (such as the Company), which sells a sewn
airbag to the module integrator. Because driver-side fabric historically has
been coated (to prevent the driver's exposure to high temperatures) before
fabrication into airbags, the Company also sells fabric to coating companies,
which then resell the coated fabric to either an airbag fabricator or module
integrator. Sales are either made against purchase orders, pursuant to releases
on open purchase orders, or pursuant to short-term supply contracts generally
having a duration of up to twelve months. The following describes the Company's
contractual relationship with its significant customers.
TRW. The Company has one requirements contract with TRW with respect to
TRW's North American airbag cushion requirements and another requirements
contract with respect to TRW's European airbag cushion requirements. Under these
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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
provided to 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 25.0% 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.
The Company also has a one-year supply agreement with TRW, terminating
January 1, 1999, for the supply of airbag fabric, which has been in the past and
can be in the future renewed on an annual basis.
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 cushion requirements,
which are expected to be approximately 5.3 million airbag cushions during fiscal
year 1999.
AutoLiv. The Company has also entered into requirements contracts with
AutoLiv. This agreement is substantially similar to the Petri contract. Pursuant
to the AutoLiv contract, the Company has agreed to manufacture 390,000 airbag
cushions for model year 1999. In addition, the Company was recently awarded
significant airbag cushion orders from AutoLiv, pursuant to which the Company is
expected to manufacture an additional 3.1 million airbag cushions on an annual
basis, representing an additional $39.0 million in annual revenues. The approval
of the automobile manufacturers is required prior to commencement of production
of such airbag cushions by the Company.
Breed. Breed's supply agreement has a duration of three years,
terminating in November 1998 for the supply of all airbag fabric outsourced by
Breed. The Company cannot predict what the actual quantity requirements will be
under this agreement.
Suppliers
The Company's principal airbag cushion fabric customers generally
approve all suppliers of major airbag components or airbag fabric raw materials,
as the case may be. These suppliers are approved after undergoing a rigorous
qualification process on their products and manufacturing capabilities. In many
cases, only one approved source of supply exists for certain airbag components.
In the event that a sole source supplier experiences prolonged delays in product
shipments or no longer qualifies as a supplier, the Company would work together
with its customers 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.
The raw materials for the Company's fabric operations largely consist
of synthetic yarns provided by AZKO, DuPont, Breed, Unifi and Hoechst Celanese,
among others. The primary yarns include nylon, polyester and Nomex. DuPont is
the leading supplier of airbag fabric yarn to both the market and the Company.
Approximately 90.0% of the nylon yarn used in the Company's airbag fabric
operations is supplied by DuPont pursuant to purchase orders or releases on open
purchase orders. There is no underlying supply agreement with DuPont.
Capacity
The Company's Mexican facility has the capacity to manufacture 5.0
million airbag cushions per year and manufactured 2.3 million passenger side and
driver side airbag cushions in fiscal year 1998. The Company has budgeted
approximately $13.0 of capital expenditures required to manufacture airbag
cushions currently in backlog. The Company's United Kingdom facility has the
current capacity to manufacture approximately 2.3 million airbag cushions per
year and manufactured approximately 100,000 driver side airbag cushions in
fiscal 1998. The Company's
5
German facility manufactured approximately 3.6 million driver side and side
impact airbag cushions in fiscal 1998 and has the current capacity to
manufacture approximately 2.8 million airbag cushions per year. The Company
intends to relocate such facility and expects to move certain operations from
such facility to its facility in the Czech Republic and its facility in the
United Kingdom by early fiscal year 2000. The Company's Czech Republic facility,
which began production in 1997, produced approximately 850,000 passenger side
and driver side airbag cushions in fiscal 1998, and has a current capacity to
manufacture approximately 3.5 million airbag cushions per year. The Company
believes that its present capacity is sufficient to meet its currently
forecasted expansion in production for the foreseeable future.
The Company entered into a joint venture agreement during fiscal year 1997,
which establishes a joint venture, based in Hong Kong, 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 a separate company
owned by the Company's joint venture partner. The joint venture has the capacity
to produce approximately 2.0 million airbag cushions per year, and expects to
begin production in fiscal year 1999. The Company is contemplating the
introduction of weaving capabilities at this facility through its operations at
its South Carolina facility.
The Company's South Carolina facility has a current capacity to
manufacture approximately 30.0 million yards of fabric per year and manufactured
17.4 million yards of fabric in fiscal year 1998. The Company utilizes rapier
weaving machines that are highly versatile in their ability to produce a broad
array of specialty technical fabrics for use in a large number of applications.
In addition, the Company's machinery and equipment have the capability to weave
all types of yarns specified by airbag module integrators. The ability to easily
interchange the machines between air restraint fabric and other specialty
technical fabrics allows the Company to maximize returns on plant assets.
Since 1993, the Company has invested $34.5 million in capacity
expansion, significant modernization of its manufacturing facilities and
equipment upgrades.
Sales and Marketing
The Company markets and sells airbag cushions and airbag fabric through its
direct marketing and sales forces based in Greenville, South Carolina and
Germany. Prior to fiscal year 1998, the Company conducted its airbag cushion
sales and marketing through the efforts of its management and through Champion
Sales & Service Co. ("Champion"), an outside marketing firm engaged by the
Company since May 1992. Champion and Mr. Zummo, the Company's Chairman of the
Board, President and Chief Executive Officer, were instrumental in establishing
the Company's relationship with TRW. The Company was obligated to pay Champion a
commission of 2% on all sales of airbag cushions and airbag related components
to TRW in North America. The Company and the shareholders of Champion have
entered into a definitive agreement, dated as of December 22, 1997, pursuant to
which, the Company acquired all of the issued and outstanding capital stock of
Champion for an aggregate purchase price of $2,960,000 plus certain amounts
previously paid to Champion and the shareholders of Champion (the "Champion
Transaction"). In connection with the Champion Transaction, the Company also
entered into a definitive Put Agreement (the "Put Transaction") with an
associate of Champion (the "Associate") who had the right to a portion of any of
the above-referenced commissions actually received by Champion. Pursuant to the
Put Transaction, the Associate has the option to put to the Company, subject to
certain conditions, all of the issued and outstanding capital stock of Duchi &
Associates, Inc., an entity affiliated with Champion, for a put price of
$740,000. The Champion Transaction includes, and the Put Transaction (as a
condition to its exercise) will include, a twenty year management services
agreement between the Company and each of the Champion shareholders and the
Associate, respectively. The terms of each such management services agreement
prohibits the Champion shareholders, or the Associate, as the case may be, from
competing with certain businesses of the Company for a period of five years.
Each such management services agreement also provides that the Company has the
option, at its sole discretion, to extend the non-competition period for three
successive five year periods, upon payment of a nominal extension fee. See Notes
1 and 8 to the Company's Notes to Consolidated Financial Statements included
elsewhere in this Report.
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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 and AutoLiv, each of which are airbag module
integrators that produce a substantial portion of their own airbag cushions for
their own consumption. While TRW does not generally manufacture airbag cushions
for the same vehicle models that the Company manufactures for TRW, AutoLiv
manufactures airbag cushions for the same models that the Company manufactures
for AutoLiv. Most airbag module integrators subcontract a portion of their
requirements for airbag cushions. The Company believes that its good working
relationship with its customers, the Company's high volume and low-cost
manufacturing capabilities, consistency and level of quality products, the
agreements with TRW, the lengthy process necessary to qualify as a supplier to
an automobile manufacturer and the costs in the automotive industry associated
with changes in established suppliers create certain barriers to entry for
potential competitors.
In 1997, the total North American airbag fabric market totaled
approximately $151.0 million, up from $148.0 million in the prior year. The
Company shares this market with another major competitor, Milliken and three
smaller fabric manufacturers. In addition, Takata, an airbag module integrator,
produces fabric for its airbag cushions. Barriers to entry into this market
include the substantial capital requirements and lengthy lead-times required for
certification of a new participant's fabrics by buyers.
The automotive airbag cushion, airbag fabric and airbag module markets
are highly competitive. Some of the Company's current and potential competitors
have greater financial and other resources than the Company. The Company
competes primarily on the basis of its price, product quality, reliability, and
capability to produce a high volume of many models of passenger side and driver
side airbags. Increased competition, as well as price reductions of airbag
systems, would adversely affect the Company's revenues and profitability. In
addition, the Company believes that SCFTI will provide it with some measure of
vertical integration, enhancing its ability to compete in the automotive airbag
industry.
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 airbag cushions
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 underwent similar,
rigorous design validation and process validation tests in order to qualify as a
supplier to AutoLiv, which recently granted a purchase order to the Company for
airbag cushions.
The Company has extensive quality control systems in its airbag related
manufacturing facilities, including the inspection and testing of all products
and is QS9000 certified. 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
airbag cushions 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.
The Company's airbag fabric operations also seek to maintain a high
level of quality throughout the manufacturing process. The airbag fabric
operations have been certified as a Quality Assurance Approved Supplier by each
of Breed, TRW, AutoLiv and Mexican Industries. In addition, the airbag fabric
operations' laboratory 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. Moreover, the Company is the only
airbag fabric manufacturer to have its entire business (not just its
manufacturing facility) certified under QS9000.
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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.
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 $27.2 million or 15.9% of the Company's consolidated
fiscal 1998 net sales and $19.7 million or 11.4%, and $45.9 million or 48.3% of
the Company's fiscal 1997 and 1996 net sales, respectively. See Note 9 to the
Company's Notes to Consolidated Financial Statements included elsewhere in this
Report for certain disclosure regarding the Company's industry segments.
Systems Contract
In September 1994, the Company was awarded a contract by the United
States Army (the "Systems Contract"). The Systems Contract backlog was $14.5
million at March 28, 1998, and the Company expects to reduce such backlog to
$2.6 million by late fiscal 1999. 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. The Company resumed shipments in February 1998 and expects to be
completed with all deliveries under the Systems Contract in early fiscal 2000.
In connection with the delays, the Company, after consultation with legal
counsel, has filed a claim with the Government of approximately $5.6 million, of
which the Company has recognized, based upon its assessment of the likelihood of
success, approximately $3.8 million in net sales in fiscal year 1998 on the
percentage of completion basis, proportionate to the Systems Contract.
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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 United States Armed Forces are training rounds. In the past the Company has
regularly received replenishment orders from the United States Armed Forces for
its inventory of training ammunition.
Markets and Customers
The Company's defense related sales are made to the United States Armed
Forces, certain prime defense contractors for the United States Armed Forces and
foreign governments or contractors for foreign governments. The Company is a
principal or sole source supplier for many of the projectiles and other metal
components it manufactures. There can be no assurance, however, that other
companies will not begin to manufacture such products in the future and replace
part or all of the sales by the Company of these products.
Manufacturing and Production
The Company manufactures projectiles and other metal components for
inclusion in small to medium caliber ammunition utilizing primarily
multi-spindle screw machines at its manufacturing facility in Galion, Ohio. The
manufacturing process includes the impact extrusion of steel bars to form the
blank or rough form shape of the metal components, the machining of the inside
and outside of the metal components to form their final shape, various heat and
phosphate treatments and painting. The Company believes that its manufacturing
equipment, machinery and processes are sufficient for its current needs and for
its needs in the foreseeable future, with minimal preventive maintenance.
Suppliers
The Company believes that adequate supplies of the raw materials used
in the manufacture of its small to medium caliber products are available from
existing and, in most cases, alternative sources, although the Company is
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.
9
United States Government Contracts
Virtually all of the Company's defense related contracts, including the
Systems Contract, are negotiated as firm fixed price contracts with the United
States Government or certain of the United States Government's prime
contractors. These contracts are subject to audit and may be adjusted
accordingly.
A majority of the Company's manufacturing agreements with the United
States Armed Forces and its prime defense contractors are for the provision of
components for a one year term (two years in the case of the Systems Contract),
subject, in certain cases, to the right of the United States Government to renew
the contract for an additional term. Renewals of United States Government
contracts depend upon annual Congressional appropriations and the current
requirements of the United States Armed Forces. See "-- Markets and Customers."
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 Defense Operation's ordnance manufacturing for United States Government and
prime defense contractors has historically occurred from January through
September and there is generally a lower level of manufacturing and sales during
the fourth quarter of the calendar year.
Backlog
The Company does not reflect an order for 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 28, 1998, the Company had a defense-related backlog of
approximately $23.2 million of which $20.6 million is expected to be completed
before the end of fiscal year 1999. As of March 31, 1997, the Company had a
defense-related backlog of approximately $24.4 million.
Risks of Foreign Operations
Certain of the Company's consolidated sales are generated outside of
the United States. Foreign operations and exports to foreign markets are subject
to a number of special risks, including, but not limited to, risks with respect
to fluctuations in currency exchange rates, economic and political
destabilization, other disruption of markets, restrictive actions by foreign
governments (such as restrictions on transfer of funds, export duties and
quotas, foreign customs and tariffs and unexpected changes in regulatory
environments), changes in foreign laws regarding trade and investment,
difficulty in obtaining distribution and support, nationalization, the laws and
policies of the United States affecting trade, foreign investment and loans, and
foreign tax laws. There can be no assurance that one or a combination of these
factors will not have a material adverse effect on the Company's ability to
increase or maintain its foreign sales or on its results of operations.
In addition, the Company has significant manufacturing operations in
foreign countries and purchases a portion of its raw materials from foreign
suppliers. The production costs, profit margins and competitive position of the
Company are affected by the strength of the currencies in countries where it
manufactures or purchases goods relative to the strength of the currencies in
countries where its products are sold.
10
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 28, 1998, the Company employed approximately 2,365 employees.
The Company's hourly employees in Mexico are entitled to a federally-regulated
minimum wage, which is adjusted, at minimum, every two years. None of the
Company's 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
Like similar companies, the Company's operations and properties are
subject to a wide variety of increasingly complex and stringent federal, state,
local and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws, including but not limited to,
those under CERCLA may impose joint and several liability and may apply to
conditions at properties presently or formerly owned or operated by an entity or
its predecessor as well as to conditions of properties at which wastes or other
contamination attributable to an entity or its predecessor have been sent or
otherwise come to be located. The nature of the Company's operations exposes it
to the risk of claims with respect to such matters and there can be no assurance
that violations of such laws have not occurred or will not occur or that
material costs or liabilities will not be incurred in connection with such
claims. Based upon its experience to date, the Company believes that the future
cost of compliance with existing Environmental Laws and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new information,
changes in existing Environmental Laws or their interpretation, and more
vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material.
The Company has identified two areas of underground contamination at
the Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed up by annual
maintenance. The consultants also estimate that remediation costs will be
approximately $250,000. However, depending on the actual extent of impact to the
Company or more stringent regulatory criteria, these costs could be higher.
Additionally, an underground contamination involving machinery fluids exists at
the Valentec facility in Costa Mesa, California and a site remediation plan has
been approved by the Regional Water Quality Control Board. Such plan will take
approximately five years to implement at an estimated cost of approximately
$368,000. To date, the Company has spent approximately $244,000 on implementing
such plan. The remediation plan currently includes the simultaneous operation of
a groundwater and vapor extraction system. In addition, the Division has been
identified along with numerous other parties as a Potentially Responsible Party
at the Aquatech Environmental, Inc. Superfund Site. The Company believes that it
is a de minimis party with respect to the site and that future clean-up costs
incurred by the Company will not be material. 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 the Company's Notes to Consolidated
Financial Statements included elsewhere in this Report.
Patents
The Company holds four patents and three additional patents are
pending. All of such patents relate to technical improvements for enhancement of
product performance with respect to the Company's airbag, fabric and technical
11
related products. Provided that all requisite maintenance fees are paid, two of
the patents held by the Company expire in 2013 and the third and fourth patents
held by the Company expire in 2014 and 2017, respectively.
Engineering, Research & Development
The Company's fabric operations have maintained an active design and
development effort focused toward new and enhanced products and manufacturing
processes. The Company specifically designs and engineers its fabrics to meet
its customers' applications and needs. While most design requirements are
originated by the component manufacturer, the Company is dedicated to improving
the quality of existing products, as well as developing new products for all
applications. Costs associated with design and development were not material to
the Company's financial statements.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Fort Lee, New Jersey.
The Company manufactures automotive and industrial products in six locations,
with total plant area of approximately 1,382,025 square feet (including
administrative, engineering and research and development areas housed at plant
sites). Below is an overview of the Company's manufacturing and office
facilities as of March 28, 1998. See Note 6 to the Company's Notes to
Consolidated Financial Statements included elsewhere in this Report for more
information regarding certain of the Company's obligations that are secured by
certain assets of the Company, including its owned facilities.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
Airbag and Technical Fabrics Related
Products
Ensenada, Mexico (airbag cushions) ................. 97,000(1) Leased 1998(2)
Greenville, South Carolina (airbag and
technical related fabrics; warehouse)............. 820,040(1)(6) Owned NA
Germany (airbag cushions)........................... 55,000(3) Leased 1998(4)
Czech Republic (airbag cushions).................... 100,000(5) Owned NA
Gwent, Wales (airbag cushions)...................... 60,000(5) Leased 2003
Costa Mesa, California (metal airbag
components and defense products).................. 129,000(6)(7) Leased 1999
Otay Mesa, California (warehouse)(8)................ 15,700 Leased 1998
Fort Lee, New Jersey (10)........................... 4,685 Leased 2007
Defense(9)
Mount Arlington, New Jersey (defense
systems).......................................... 3,600(10) Leased 2000
Galion, Ohio (defense products)..................... 97,000(6) Owned NA
(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.
12
ITEM 3. LEGAL PROCEEDINGS
Valentec, which was acquired by the Company in May 1997 has been the
subject of an investigation by the Department of Justice regarding a bid-rigging
and kickbacks scheme alleged to have occurred between 1988 and 1992. The
Department of Justice Antitrust Division has contended that former subsidiaries
or divisions of the former Valentec participated in such misconduct in part
through the actions of a former marketing agent and former employees, in order
to obtain certain government contracts. The Government has contended that
Valentec is liable for the acts of its predecessors on a theory of successor
corporate criminal liability. The Government contends that the alleged kickbacks
were made through the former Valentec Kisco and Valentec Galion operations while
those operations were owned and operated by the former Valentec from the late
1980's through 1992, prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. No
officer or director of the Company or its subsidiaries is alleged to have
participated in, or known about, such conduct. The Company has no recourse
against the entity which owned Valentec during the operative time period due to
contractual restrictions in the purchase agreement between Mr. Zummo and such
entity. The Company has determined that it is in its best interest to settle
such matter in order to avoid the costs and distractions associated with
contesting the Department of Justice's legal theories on successor liability.
Therefore, a plea agreement has been negotiated with the Antitrust Division of
the Department of Justice (the "Plea Agreement"). Among other things, the terms
of the Plea Agreement provide for the entry of a guilty plea by Valentec to a
one-count criminal violation of participating in a combination and conspiracy to
suppress competition in violation of the Sherman Antitrust Act, 15 U.S.C.ss.1,
the payment by Valentec of a $500,000 fine and an agreement by the Government to
not further criminally prosecute the Company, its subsidiaries, or any of their
respective officers, directors or employees as to the alleged bid-rigging and
kickback scheme. The Plea Agreement will remain subject to the approval of the
United States District Court for the Western District of Tennessee, Eastern
Division (the "Court"). The Plea Agreement, if approved by the Court, would not
release Valentec or its affiliates from potential civil claims that might be
asserted by the United States Department of Justice Civil Division against
Valentec or its affiliates arising out of the Government's investigation of
conduct that is alleged to have occurred in the time frame prior to Mr. Zummo's
1993 leveraged buy-out of Valentec. The Company has had preliminary discussions
with the Civil Division regarding the resolution of such potential civil claims.
As of March 28, 1998 no understanding has been reached as to such potential
civil claims. See Note 8 to the Company's Notes to Consolidated Financial
Statements included elsewhere in this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
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 range of high and low bid
information for the Common Stock for each full quarterly period within the two
most fiscal years.
High Low
Year Ended March 28, 1998
First Quarter $ 11 1/4 $ 8 5/8
Second Quarter $ 17 1/8 $ 9 3/4
Third Quarter $ 17 1/2 $ 10 1/2
Fourth Quarter $ 15 1/4 $ 11 3/4
Year Ended March 31, 1997
First Quarter $ 14 3/4 $ 9 1/4
Second Quarter $ 13 3/4 $ 9 1/2
Third Quarter $ 13 $ 8 3/4
Fourth Quarter $ 13 $ 9 1/4
As of June 24, 1998 there were approximately 61 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.
As of July 1, 1997, the Company entered into a one year Agreement (the
"Market Pathways Agreement") for Financial Public Relations Services with Market
Pathways Financial Relations Incorporated ("Market Pathways"), pursuant to which
the Company issued to Market Pathways, in exchange for certain financial and
public relations services, options to purchase 15,000 shares of Common Stock at
an exercise price per share of $9.75, the closing bid price of the Common Stock,
as quoted by the NASDAQ Stock Market on July 1, 1997. Such options were
exercisable immediately after the issuance thereof and expire on the date that
is twelve months from the date of the Market Pathways Agreement. In addition,
the Company agreed to register, at the Company's expense, the shares of Common
Stock underlying such options upon the written request of Market Pathways.
Pursuant to each the of Company's Agreements with Corporate Relations
Group, an affiliate of Market Pathways ("CRG"), dated as of July 1, 1996 and
1995, the Company issued to CRG 3,500 shares of Common Stock in exchange for
certain financial and public relations services rendered thereunder.
The issuance of the Company's securities under its agreements with
Market Pathways and CRG were issued in reliance upon the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended.
Effective as of May 22, 1997, the Company acquired in a tax-free stock
for stock transaction all of the outstanding capital stock of Valentec in
consideration for the issuance to the stockholders of Valentec of an aggregate
of 1,369,200 newly issued shares of Common Stock. Such transaction was not
registered under the Securities Act in reliance upon the exemption under Section
4(2) thereof. See "Business - Significant Transactions".
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data as of and for the fiscal years ended March
28, 1998, 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"). The consolidated financial statements of the Company
as of and for the year ended March 28, 1998 has been audited by Arthur Andersen
LLP, independent accountants. The combined and consolidated financial statements
of the Company and the Valentec Divisions, for the fiscal years ended March 31,
1997, 1996 and 1995 and for the period from April 28, 1993 through March 31,
1994 have been audited by Price Waterhouse LLP, independent accountants.
During the 1998 fiscal year, the Company incurred approximately $1.8
million ($1.2 million net of tax benefit of $600,000) of costs associated with
the reorganization and relocation of its foreign operations. These costs are
investments toward consolidating production within the Company's foreign
operations to its low-cost facilities located within the foreign market.
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 per share data and footnotes)
INCOME STATEMENT DATA
Eleven
Months
April 28,
1993
Year Ended Through
March 28, Years Ended March 31, March 31,
------------------------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 (1) 1994
------------------------------------------------------------------
Net Sales $170,310 $ 83,958 $ 94,942 $ 51,779 $ 22,444
Cost of Goods Sold 138,573 67,934 81,908 44,553 18,895
Gross Profit 31,737 16,204 13,304 7,226 3,549
Selling, general and administrative
Expenses 10,729 7,072 5,430 4,050 2,738
Relocation and reorganization costs 1,789 - - - -
Amortization 1,742 348 - - -
Non-recurring consulting charge - - - - 1,250 (2)
Operating income (loss) 17,477 8,604 7,604 3,176 (439)
Other expense (income) 33 208 (807) (484) (83)
Interest expense 7,747 1,555 381 244 235
Income (loss) before income taxes 9,697 6,841 8,030 3,416 (591)
Income tax provision (benefit) 3,689 2,995 3,116 1,283 (207)
Income (loss) before extraordinary
Item and cumulative effect of
Accounting change 6,008 3,846 4,914 2,133 (384)
Extraordinary item-deferred
financing costs (less tax benefit of $225) - (383) - - -
Cumulative effect of change in accounting
for deferred product launch costs (less
tax benefit of $718) - (1,259) - - -
Net Income (loss) $ 6,008 $ 2,204 $ 4,914 $ 2,133 $ (384)
15
PER SHARE DATA (3)
Eleven
Months
April 28,
1993
Year Ended Through
March 28, Years Ended March 31, March 31,
------------------------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 (1) 1994
------------------------------------------------------------------
Basic per share data:
Income before extraordinary item and
cumulative effect of accounting change $1.20 $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, basic $1.20 $0.44 $0.99 $0.53 -
===== ===== ===== ===== =====
Diluted per share data:
Income before extraordinary item and
cumulative effect of accounting change $1.17 $0.76 $0.97 $0.52 -
Extraordinary item - (0.08) - - -
Cumulative effect of change in accounting
for deferred product launch costs - (0.25) - - -
----- ----- ----- ----- -----
Net income per share, assuming dilution $1.17 $0.43 $0.97 $0.52 -
===== ===== ===== ===== =====
Income before extraordinary item - $3,846 - - -
===== ===== ===== ===== =====
Earnings per common share - $ 0.77 - - -
===== ===== ===== ===== =====
Net income $6,008 $3,463 $5,017 $ 950 -
===== ===== ===== ===== =====
Net income per share, basic $ 1.20 $ 0.69 $ 1.01 $0.24 -
===== ===== ===== ===== =====
Net income per share, assuming dilution $ 1.17 $ 0.69 $ .99 $0.23 -
===== ===== ===== ===== =====
Weighted average common shares
outstanding, basic 5,027 5,027 4,981 4,031 -
===== ===== ===== =====
Weighted average common shares
outstanding, assuming dilution 5,147 5,050 5,083 4,112 -
===== ===== ===== =====
16
BALANCE SHEET DATA
(in thousands)
March 28, March 31,
--------- --------------------------------------------------
1998 1997 1996 1995 1994
--------- --------------------------------------------------
Working capital $ 29,488 $ 11,755 $ 25,067 $ 8,206 $ 1,504
Total assets 198,897 73,407 49,831 28,311 12,837
Long-term debt, net of current portion 24,739 21,296 3,087 2,043 4,760
Senior subordinated debt 90,000 - - - -
Stockholders' equity 39,194 35,274 35,344 15,971 -
Division equity - - - - 866
- ----------------------------------------------
Notes to Selected Financial Data:
(1) The Company did not declare dividends during fiscal year 1998, 1997,
1996 or 1995.
(2) 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. In September 1993, in order to
recognize these key sales and marketing representatives' contribution
to the growth of the Company's Automotive Division and to incentivize
them to continue serving in that capacity, the Valentec division agreed
to issue common stock in the company at an aggregate price lower than
fair market value of the shares at the time (as determined by an
independent appraiser) by $1.3 million. The aggregate number of shares
of stock issued was 268,800, representing a fair market value of $4.65
per share, as determined by the independent appraiser. Accordingly,
this amount was recorded as an expense in the period from April 28,
1993 through March 31, 1994. The shares of common stock were issued
during the period from April 28, 1993 through March 31, 1994.
(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 period
prior to the fiscal year ended March 31, 1995.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is a leading low-cost independent supplier of automotive
airbag fabric and cushions, with operations in North America, Europe and Asia.
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.
During fiscal year 1997, the Company expanded its production and sales
in Europe through its acquisition of Phoenix Airbag GmbH ("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.
During fiscal year 1998, the Company further expanded its operations in
the automotive sector with strategic acquisitions. Effective May 1997, the
Company acquired all of the outstanding capital stock of Valentec International
Corporation ("Valentec") in a stock for stock exchange (the "Valentec
Acquisition"), enabling the Company to manufacture and supply additional airbag
system components. Immediately prior to the Valentec Acquisition, Robert A.
Zummo, the President, Chief Executive Officer, and a director of the Company,
was also the President, Chief Executive Officer, a director and majority
shareholder approximately (74.2%) of Valentec, Francis X. Suozzi, a consultant
to and director of Valentec and a director of the Company, was a minority
shareholder approximately (21.2%) of Valentec, and the Valentec International
Corporation Employee Stock Ownership Plan (the "ESOP") was a minority
shareholder approximately (4.6%) of Valentec. The acquisition of Valentec was
accounted for as a purchase and, accordingly, is 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.
Additionally, on July 24, 1997, the Company purchased all of the assets
and assumed certain liabilities of the Air Restraint and Industrial Fabrics
Division of JPS Automotive L.P., now referred to as SCFTI. SCFTI is a leading,
low-cost supplier of airbag fabric in North America and is also a leading
manufacturer of value-added technical fabrics used in a variety of niche
industrial and commercial applications. The acquisition was accounted for as a
purchase and, accordingly, is included in the Company's accounts beginning on
July 24, 1997.
During the 1998 fiscal year, the Company incurred approximately $1.8
million ($1.2 million net of tax benefit of $600,000, or $.23 per share) of
costs associated with the reorganization and relocation of its foreign
operations. These costs are investments toward consolidating production within
the Company's foreign operations to its low-cost facilities located within the
foreign market.
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. These product launch costs are included
in cost of sales. 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, related to the write-off of deferred financing costs incurred for the
previous credit facility.
18
Results of Operations
The following table sets forth certain operating results as a
percentage of net sales for the periods indicated:
Years Ended
--------------------------------------------------
March 28, March 31, March 31,
1998 1997 1996
--------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 81.4 80.9 86.3
Gross profit 18.6 19.1 13.7
Selling, general and administrative expense 6.3 8.4 5.7
Income from operations 10.3 10.3 8.0
Interest expense (income), net 4.6 1.6 (0.2)
Income before extraordinary item and
cumulative effect of change in accounting 3.5 4.6 5.2
Net income 3.5 2.6 5.2
Year Ended March 28, 1998 Compared to Year Ended March 31, 1997
Net Sales. Net sales increased by $86.4 million or 102.9% to $170.3
million in fiscal year 1998 compared to fiscal year 1997. The increase was
primarily attributable to the acquisition of SCFTI and Valentec, which
contributed approximately $75.1 million on a combined basis. The remaining
increase was primarily attributable to the European operations. During the
fourth quarter of fiscal year 1998, the Company resumed shipment to the U.S.
Army under the Systems Contract, which had previously been delayed due to 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. In connection therewith, the Company, after consultation with
legal counsel, has filed a claim related to the delay of approximately $5.6
million, of which the Company has recognized, based upon its assessment of the
likelihood of success, approximately $3.8 million in net sales during fiscal
year 1998 on the percentage of completion basis, proportionate to the Systems
Contract. Additionally, the German mark has devalued approximately 13% in
comparison to fiscal year 1997, which impacts the comparability of results
throughout this discussion. The impact on net sales was a decrease of $3.0
million or 1.8%.
Gross Profit. Gross profit increased by $15.7 million or 98.1% to $31.7
million in fiscal year 1998 compared to fiscal year 1997. The increase was
primarily attributable to the acquisition of SCFTI and Valentec, which
contributed approximately $12.0 million on a combined basis, the remaining
increase was primarily attributable to the Defense Operation which completed
certain programs and resumed shipments on the Systems Contract.
Gross profit as a percentage of sales decreased to approximately 18.6%
for fiscal year 1998 from 19.1% for fiscal year 1997. The decrease as a
percentage was due to the inclusion of SCFTI, which has historically lower gross
margins compounded by the price reductions at Phoenix Airbag, partially offset
by an increase in Defense Operations. The textile industry generally produces
margins in the range of 13% to 14% due to the capital intensive production
process. In accordance with the Phoenix Airbag relocation strategy, production
is currently being shifted from Germany to the Company's Czech Republic and
Wales facilities. The Company expects margins to improve in Europe in fiscal
year 1999 upon the completion of the wind down of the Phoenix Airbag operations
in Germany. The devaluation of the German mark impacted gross profit unfavorably
by $665,000 or 2.1%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.7 million or 51.7% to $10.7 million in
fiscal year 1998 compared to fiscal year 1997. The increase was primarily
attributable to the acquisitions of SCFTI and Valentec. However, selling,
general and administrative expenses as a percentage of sales decreased to 6.3%
in fiscal year 1998 from 8.4% in fiscal year 1997.
19
Reorganization and Relocation Costs. In fiscal year 1998 the Company
incurred approximately $1.8 million of costs associated with the reorganization
and relocation of its foreign operations. These costs are investments toward
consolidating production within the Company's foreign operations to its low-cost
facilities located within the foreign market.
Operating Income. Operating income increased by $8.9 million or 103.1%
to $17.5 million in fiscal year 1998 compared to fiscal year 1997. Operating
income increased primarily due to the acquisitions of SCFTI and Valentec and by
the improved results of the Defense Operation. This was partially offset by the
Company's North American (exclusive of SCFTI and Valentec) which yielded lower
operating income compared to fiscal year 1997 primarily as a result of price
reductions. Operating income was also partially offset by price reductions and
reorganization and relocation costs in Europe as well as the devaluation of the
German mark. The devaluation of the German mark impacted operating income
unfavorably by approximately $492,000 or 2.8%.
Interest Expense. Interest expense increased $6.2 million to $7.7
million in fiscal year 1998 compared to fiscal year 1997. This increase was
attributable to the issuance of the 10 1/8% Senior Subordinated Notes (the
"Notes"), the proceeds of which were used primarily to acquire SCFTI and repay
amounts then outstanding under the Company's credit facilities with KeyBank.
Income Taxes. The effective tax rate on pre-tax income was 38.0% in
fiscal year 1998 compared to 43.7% in fiscal year 1997. The tax rate decreased
compared to the prior year due to the increasing percentage of income generated
from domestic operations, primarily SCFTI, which have lower tax rates than the
European operations and the reversal of foreign tax reserves no longer needed.
Net Income. Net income increased to $6.0 million in fiscal year 1998
from $2.2 million in fiscal year 1997. This increase was a result of the factors
identified above. The devaluation of the German mark impacted net income
unfavorably by approximately $208,000 or 3.5%.
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 inability to ship the Systems Contract
which had 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. 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 airbags 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, the gross profits of 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."
20
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
attributable to the Automotive Operation, specifically from the costs of 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 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. Operating
income in the Automotive Operation increased by $3.6 million primarily
attributable to the acquisition of Phoenix Airbag, which contributed
approximately $4.8 million. This increase in European Operations 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 shipments of 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 effective tax rate applied on 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 the 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.
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 is expected to be funded
through a combination of cash flows from operations, equipment financing,
revolving credit borrowings and the proceeds from potential future Company
public offerings.
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old
Notes") to BT Securities Corporation, Alex. Brown & Sons Incorporated and
BancAmerica Securities, Inc. (collectively, the "Initial Purchasers") in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon an exemption thereunder (the "Debt
Offering"). On September 2, 1997, the Company commenced an offer to exchange
(the "Exchange Offer", together with the Debt Offering, the "Offering") the Old
Notes for $90.0 million aggregate principal amount of its 10 1/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for Exchange Notes
pursuant to the terms of the Exchange Offer, which expired on October 1, 1997.
Interest on the Notes accrues from July 24, 1997 and is payable semi-annually in
arrears on each of January 15 and July 15 of each year, commencing January 15,
1998. The Notes are general unsecured obligations of the Company and are
21
subordinated in right of payment to all existing and future senior indebtedness
and to all existing and future indebtedness of the Company's subsidiaries that
are not guarantors. All of the Company's direct and indirect wholly-owned
domestic subsidiaries are guarantors. The Indenture with respect to the Notes
contains certain restrictive covenants that impose limitations upon, among other
things, the Company's ability to incur additional indebtedness.
As of May 21, 1997, the Company, Phoenix Airbag 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"). Prior to the consummation of the
Offering, the Credit Agreement provided for (i) a term loan in the principal
amount of $15.0 million (the "Term Loan") and (ii) a revolving credit facility
(the "Revolving Credit Facility") in the aggregate principal amount of $12.0
million (including letter of credit facilities). The indebtedness under the
Credit Agreement bore 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). Upon the consummation of the Offering, the Company used the
proceeds thereof to repay the Term Loan and amounts then outstanding under the
Revolving Credit Facility. In connection therewith, the Company's credit
facility with KeyBank was converted into a $27.0 million Revolving Credit
Facility, bearing interest at LIBOR plus 1.00% with a commitment fee of 0.25% on
any unused portion, with the remaining terms and conditions being similar to the
previous Revolving Credit Facility. Any indebtedness under the Credit Agreement
will be secured by substantially all the assets of the Company. As of March 28,
1998, total borrowings under the Credit Agreement were $14.2 million bearing
interest at LIBOR (5.68750% as of March 28, 1998) plus 1.00%. 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.
Net cash generated from operations was approximately $600,000
during fiscal year 1998. Cash used in investing activities in fiscal year 1998
was $80.9 million. Net cash provided by financing activities in fiscal year 1998
was $78.4 million. The Company's operations provided an unusually low source of
funds due to the extraordinary growth the Company experienced, primarily related
to the recent acquisitions, and the relocation and reorganization costs
associated with foreign operations. The Company paid additional costs and
consideration in connection with the acquisition of Phoenix Airbag, primarily
the $2.2 million earn-out accrued at the end of fiscal year 1997 during fiscal
year 1998. In addition, the annual performance targets for 1997 were met and
approximately $2.0 million of additional purchase price is accrued at March 28,
1998, and paid subsequently, in connection with the acquisition of Phoenix
Airbag. The Company incurred certain costs in connection with the acquisition of
Valentec of approximately $2.5 million. Included in these costs were advances to
Valentec prior to the Valentec Acquisition for the purpose of funding
operations. The Company used approximately $58.8 million to purchase SCFTI, (see
discussion below). Cash proceeds from financing activities were used to purchase
SCFTI, repay the Term Loan and Revolving Credit Facility with KeyBank, and repay
certain liabilities of Valentec in connection with the Valentec Acquisition.
These activities resulted in a net decrease in cash of $2.3 for fiscal year
1998.
Capital expenditures were $13.8 million in fiscal year 1998.
Capital expenditures in fiscal year 1998 were used to complete the construction
of the new facility in the Czech Republic and the acquisition of additional
equipment to expand the Company's production capacity worldwide to fulfill new
orders from new and existing customers in fiscal year 1999 and beyond. Capital
expenditures for fiscal year 1999 are anticipated to be approximately $13.0
million.
Pursuant to a definitive Stock Purchase Agreement, effective as of May
22, 1997, the Company acquired all of the outstanding common stock of Valentec.
Valentec was the Company's largest shareholder immediately prior to the Valentec
Acquisition owning approximately 27%, or 1,379,200 shares of the issued and
outstanding shares of the Company's Common Stock to the shareholders of
Valentec. The Company issued an aggregate of 1,369,200 newly issued shares of
Common Stock to the shareholders of Valentec. The acquisition was accounted for
as a purchase. The purchase price aggregated approximately $15.1 million,
including estimated direct acquisition costs of approximately $1.3 million. In
addition, the Company advanced Valentec approximately $1.3 million for the
purpose of funding operations prior to the Valentec Acquisition.
22
Pursuant to a definitive Asset Purchase Agreement, on July 24, 1997,
the Company purchased all of the assets and assumed certain liabilities of the
Division. The acquisition was accounted for as a purchase. The purchase price
aggregated approximately $58.8 million. The purchase price included the
repayment of approximately $650,000 of capital lease obligations, direct
acquisition costs of approximately $900,000, and approximately $1.2 million for
the purchase of a building in conjunction with the Asset Purchase Agreement. The
Company funded the purchase of the Division out of the proceeds from the
issuance of the Notes.
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,
the ability of Safety Components to realize anticipated cost savings and
earnings projections by the Valentec division; the ability of the Company to
realize the proceeds of the delay claim against the Government related to the
Systems Contract; the continued performance by SCFTI at or above historical
levels; world-wide economic conditions; dependence of revenues upon several
major module suppliers and pricing pressures.
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. The Company adopted
the statement effective December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income
Summary" ("FAS 130"). FAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general- purpose financial statements. It also requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
statement is effective for the Company's annual and interim financial reports
beginning in the fiscal year ending March 27, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments to be
reported in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for the Company's annual and interim financial
reports beginning in the fiscal year ending March 27, 1999.
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.
23
Year 2000
The Year 2000 issue is the result of computer programs written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company does not believe that the future costs relating to the Year
2000 issues will have a material impact on the Company's consolidated financial
position, results of operations or cash flows. The Company is not yet in a
position to assess whether its customers will attain Year 2000 compliance in a
timely manner or the impact of any such non-compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item appears in Item 14(a)(1) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
24
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 1998 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 Purcahse 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
3.6(18) Certificate of Incorporation of Automotive Safety Components
International,Inc.(f/k/a Automotive Safety Systems International,
Inc.)
3.7(18) Certificate of Amendment to the Certificate of Incorporation of
Automotive Safety Components International, Inc. ("Automotive
Safety")
3.8(18) Bylaws of Automotive Safety
3.9(18) Certificate of Incorporation of ASCI Holdings Germany (DE), Inc.
("Holdings Germany")
3.10(18) Bylaws of Holdings Germany
3.11(18) Certificate of Incorporation of ASCI Holdings UK (DE), Inc.
("Holdings UK")
3.12(18) Bylaws of Holdings UK
3.13(18) Certificate of Incorporation of ASCI Holdings Mexico (DE), Inc.
("Holdings Mexico")
3.14(18) Bylaws of Holdings Mexico
3.15(18) Certificate of Incorporation of ASCI Holdings Czech (DE), Inc.
("Holdings Czech")
3.16(18) Bylaws of Holdings Czech
3.17(18) Certificate of Incorporation of ASCI Holdings Asia (DE), Inc.
("Holdings Asia")
3.18(18) Bylaws of Holdings Asia
3.19(18) Certificate of Incorporation of Valentec International Corporation
(f/k/a RAZ Acquisition Corporation) ("Valentec")
3.20(18) Certificate of Amendment to the Certificate of Incorporation of
Valentec
3.21(18) Bylaws of Valentec
3.22(18) Certificate of Incorporation of Galion, Inc. ("Galion")
3.23(18) Bylaws of Galion
3.24(18) Certificate of Incorporation of Valentec Systems, Inc. ("Valentec
Systems")
3.25(18) Bylaws of Valentec Systems
3.26(18) Certificate of Incorporation of Safety Components Fabric
Technologies, Inc.
25
3.27(18) Bylaws of Safety Components Fabric Technologies, Inc.
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(16) 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)
4.4(18) Form of Indenture, dated as of July 24, 1997, by and among Safety
Components, the Subsidiary Guarantors named therein and IBJ Schroder
Bank & Trust Company.
4.5(18) Registration Rights Agreement, dated as of July 24, 1997 by and
among Safety Components, the guarantors named therein, BT Securities
Corporation, Alex Brown & Sons Incorporated and BancAmerica
Securities, Inc.
4.6(18) Form of 101/8% Senior Subordinated Note Due 2007, Series A,
including Form of Guarantee
4.7(18) Form of 101/8 % Senior Subordinated Note Due 2007, Series B,
including Form of Guarantee
4.8(18) Form of Amendment No. 2 to Pledge Agreement, dated as of July 15,
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 and Automotive Safety
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 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(16) Credit Agreement, dated as of March 15, 1996, among Safety
Components, Automotive Safety, Galion, Valentec Systems, Inc. and
CUSA
10.20(16) Pledge and Security Agreement, dated as of March 15, 1996, made by
Safety Components, Automotive Safety, Galion and Valentec Systems in
favor of CUSA
26
*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 Holdings
Germany and Bank of America National Trust and Savings Association
("BANT & SA") 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 and Citicorp
USA, Inc.
10.26(14) Amendment No. 1 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and BANT & SA dated as of
September 30, 1996
10.27(14) Amendment No. 2 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and BANT & SA dated as of
October 31, 1996
10.28(14) Amendment No. 3 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and BANT & SA 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(16) Employment Agreement, dated as of February 15, 1997, between Safety
Components and Jeffrey J. Kaplan
*10.31(16) Employment Agreement, dated as of May 19, 1997, between Safety
Components and Thomas W. Cresante
10.32(16) Consulting Agreement, dated as of May 31, 1997, between Safety
Components and W. Hardy Myers
10.33(16) 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(16) 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(16) 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)
10.36(17) Asset Purchase Agreement, dated as of June 30, 1997, between Safety
Components and JPS Automotive L.P.
10.37(18) Purchase Agreement, dated as of July 21, 1997, by and among Safety
Components, BT Securities Corporation, Alex Brown & Sons
Incorporated and BankAmerica Securities, Inc.
10.38(18) Form of Amendment No. 2 to Credit Agreement, dated as of July 15,
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
10.39(18) Form of Amendment No. 2 to Subsidiary Guaranty, dated as of July 15,
1997, among the guarantors named therein, KeyBank National
Association, as administrative agent for itself and the other
Lenders (as defined in the Credit Agreement)
10.40(18) Form of Amendment No. 2 to Security Agreement , dated as of July 15,
1997, among the assignors named therein and KeyBank National
Association, as collateral agent for the benefit of the Secured
Creditors (as defined therein)
*10.41 Offer Letter, dated January 23, 1998, between Safety Components and
Philip Lelliot
*10.42 Employment Agreement, dated as of March 9, 1998, between Valentec
International Corporation LLC (as successor in interest to Valentec)
and Paul M. Betz
*10.43 Employment Agreement, dated as of March 4, 1998, between Safety
Components and Robert Sepulveda
10.44 Consulting Agreement, dated as of May 14, 1998, between Safety
Components and Thomas W. Cresante
27
10.45 Severance Agreement, dated as of May 18, 1998, among Automotive
Safety Components International Limited, Valentec International
Limited and John L. Hakes
*10.46 Safety Components Senior Management Incentive Plan
*10.47 Safety Components Management Incentive Plan
*10.48 Safety Components Stock Appreciation Rights Award Plan
21.1 Subsidiaries of Safety Components
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K, dated January 16, 1998, regarding Safety Component's change in
independent accountants.
* 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.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended March 31, 1997.
(17) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on August 4, 1997.
(18) Incorporated by reference to the Company's Registration Statement on Form
S-4, filed with the Commission on August 12, 1997.
28
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 25, 1998
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 25, 1998
- ----------------------- President and Chief Executive
Robert A. Zummo Officer (Principal Executive Officer)
/S/ JEFFREY J. KAPLAN Executive Vice President, Chief June 25, 1998
- --------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/S/ GEORGE D. PAPADOPOULOS Corporate Controller and Secretary June 25, 1998
- -------------------------- (Principal Accounting Officer)
George D. Papadopoulos
/S/ JOSEPH J. DIOGUARDI Director June 25, 1998
- -----------------------
Joseph J. DioGuardi
/S/ FRANCIS X. SUOZZI Director June 25, 1998
- ---------------------
Francis X. Suozzi
/S/ ROBERT J. TOROK Director June 25, 1998
- -------------------
Robert J. Torok
29
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page Number
REPORTS OF INDEPENDENT ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 28, 1998 and March 31, 1997. F-4
Consolidated Statements of Operations for the Years ended March 28,
1998, March 31, 1997 and 1996. F-5
Consolidated Statements of Stockholders' Equity for the Years ended
March 31, 1996 and 1997 and March 28, 1998. F-6
Consolidated Statements of Cash Flows for the Years ended March 28,
1998, March 31, 1997 and 1996. F-7
Notes to Consolidated Financial Statements. F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Safety Components International, Inc.:
We have audited the accompanying consolidated balance sheet of Safety Components
International, Inc. (a Delaware corporation) and subsidiaries as of March 28,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Safety Components
International, Inc. and subsidiaries as of March 28, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, New York
June 5, 1998
F-2
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. listed in the accompanying "Index to Financial
Statements" on page F-1, present fairly, in all material respects, the financial
position of Safety Components International, Inc. and its subsidiaries as of
March 31, 1997, and the results of their operations and their cash flows for
each of the two 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.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Costa Mesa, California
May 22, 1997, except for Notes 1 and 6, which are as of June 30, 1997
F-3
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 28, 1998 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 6,049 $ 8,320
Accounts receivable, net (Notes 2 and 4)............................... 39,208 11,751
Inventories (Notes 2 and 4)............................................ 19,935 6,378
Prepaid and other...................................................... 4,196 870
------- -------
Total current assets........................................... 69,388 27,319
Property, plant and equipment, net (Notes 2 and 4)....................... 66,279 28,295
Receivable from affiliate (Note 5)....................................... 1,206 4,348
Intangible assets, net (Note 2).......................................... 55,923 10,991
Other assets............................................................. 6,101 2,454
------- -------
Total assets................................................... $198,897 $73,407
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 23,009 $ 7,792
Earnout payable (Note 1)............................................... 1,958 2,211
Accrued liabilities.................................................... 12,558 2,476
Current portion of long-term obligations (Note 6)...................... 2,375 3,085
------- -------
Total current liabilities...................................... 39,900 15,564
Long-term obligations (Note 6)........................................... 24,739 21,296
Senior subordinated debt (Note 6)........................................ 90,000 --
Other long-term liabilities.............................................. 5,064 1,273
------- -------
Total liabilities.............................................. 159,703 38,133
------- -------
Commitments and contingencies (Note 8)
Stockholders' equity (Notes 3 and 11):
Preferred stock: $.10 par value per share -- 2,000,000 shares
authorized; no shares outstanding at March 28, 1998 and
March 31, 1997, respectively........................................ -- --
Common stock: $.01 par value per share -- 10,000,000 shares authorized;
6,538,075 and 5,138,875 shares issued at March 28, 1998
and March 31, 1997, respectively.................................... 65 51
Common stock warrants.................................................. 1 1
Additional paid-in-capital............................................. 44,040 30,062
Treasury stock, 1,492,692 and 113,492 shares, at March 28, 1998 and
March 31, 1997, respectively, at cost.................................. (15,439) (1,647)
Retained earnings...................................................... 15,191 9,183
Cumulative translation adjustment (Note 2)............................. (4,664) (2,376)
------- -------
Total stockholders' equity..................................... 39,194 35,274
------- -------
Total liabilities and stockholders' equity..................... $198,897 $73,407
======= =======
See notes to consolidated financial statements.
F-4
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 28, 1998 and March 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
---------- ---------- ----------
Net sales (Notes 2 and 5).............................. $ 170,310 $ 83,958 $ 94,942
Cost of sales, excluding depreciation (Note 2)......... 133,572 65,891 80,804
Depreciation........................................... 5,001 2,043 1,104
---------- ---------- ----------
Gross profit................................. 31,737 16,024 13,034
Selling and marketing expenses......................... 1,829 1,375 1,102
General and administrative expenses.................... 8,900 5,697 4,328
Amortization of intangible assets (Note 2)............. 1,742 348 --
Relocation and reorganization costs (Note 1)........... 1,789 -- --
---------- ---------- ----------
Income from operations....................... 17,477 8,604 7,604
Other expense (income)................................. 33 208 (807)
Interest expense....................................... 7,747 1,555 381
---------- ---------- ----------
Income before income taxes................... 9,697 6,841 8,030
Provision for income taxes (Notes 2 and 7)............. 3,689 2,995 3,116
---------- ---------- ----------
Income before extraordinary item and cumulative effect
of accounting change................................. 6,008 3,846 4,914
Extraordinary item--deferred 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............................................. $ 6,008 $ 2,204 $ 4,914
========== ========== ==========
Earnings per common share (Note 2):
Income before extraordinary item and cumulative
effect of change in accounting.................... $ 1.20 $ 0.77 $ 0.99
Extraordinary item................................... -- (0.08) --
Cumulative effect of change in accounting for
product launch costs.............................. -- (0.25) --
---------- ---------- ----------
Net income per share................................. $ 1.20 $ 0.44 $ 0.99
========== ========== ==========
Weighted average number of shares outstanding, basic... 5,027 5,027 4,981
========== ========== ==========
Earnings per common share, assuming dilution (Notes 2
and 12):
Income before extraordinary item and cumulative
effect of change in accounting.................... $ 1.17 $ 0.76 $ 0.97
Extraordinary item................................... -- (0.08) --
Cumulative effect of change in accounting for
product launch costs.............................. -- (0.25) --
---------- ---------- ----------
Net income per share, assuming dilution.............. $ 1.17 $ 0.43 $ 0.97
========== ========== ==========
Weighted average number of shares outstanding, assuming
dilution............................................. 5,147 5,050 5,083
========== ========== ==========
Note: Pro forma amounts assuming the new accounting method in 1997 is applied
retroactively are reflected in tabular form in Note 2.
See notes to consolidated financial statements.
F-5
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND MARCH 28, 1998
(IN THOUSANDS, EXCEPT SHARES)
COMMON COMMON COMMON ADDITIONAL CUMULATIVE
STOCK STOCK STOCK PAID-IN TREASURY RETAINED TRANSLATION
SHARES AMOUNT WARRANTS CAPITAL STOCK EARNINGS ADJUSTMENT
--------- ------ --------- ---------- -------- --------- ----------
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)
Issuance of common stock.......... 1,399,200 14 -- 13,978 -- -- --
Acquisition of treasury stock..... (1,379,200) -- -- -- (13,792) -- --
Net Income for the year ended
March 28, 1998.................. -- -- -- -- -- 6,008 --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (2,288)
--------- ------ --------- -------- -------- --------- ----------
Balance at March 28, 1998........... 5,045,383 $ 65 $ 1 $ 44,040 $(15,439) $ 15,191 $ (4,664)
========= ====== ========= ======== ======== ========= ==========
See notes to consolidated financial statements.
F-6
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 28, 1998 and March 31, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
-------- ------- -------
Cash Flows From Operating Activities:
Net income................................................. $ 6,008 $ 2,204 $ 4,914
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation............................................ 5,001 2,043 1,104
Amortization............................................ 1,742 348 --
Extraordinary item...................................... -- 638 --
Cumulative effect of change in accounting principle..... -- 1,977 --
Deferred taxes.......................................... 1,024 (280) --
Changes in operating assets and liabilities:
Accounts receivable................................... (14,873) 5,968 (9,662)
Inventories........................................... (3,132) 375 532
Prepaid and other current assets...................... (1,114) 55 (268)
Other assets.......................................... (62) (2,309) (440)
Accounts payable...................................... 7,917 (1,547) 749
Accrued liabilities................................... (1,896) 1,643 (429)
-------- ------- -------
Net cash provided by (used in) operating
activities....................................... 615 11,115 (3,500)
-------- ------- -------
Cash Flows From Investing Activities:
Additions to property, plant and equipment.............. (13,765) (8,613) (4,588)
Acquisition costs and advances to Valentec.............. (2,522) -- --
Acquisition of Champion................................. (3,398) -- --
Acquisition of SCFTI.................................... (58,768) -- --
Acquisition of Phoenix Airbag, net of cash acquired..... (2,455) (24,257) --
-------- ------- -------
Net cash (used in) investing activities............ (80,908) (32,870) (4,588)
-------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from Notes................................. 86,053 -- --
Net proceeds from sale of common stock.................. 230 4 16,568
Purchase of treasury stock.............................. -- (268) (1,379)
Repurchase of common stock warrants..................... -- -- (94)
(Repayments)proceeds from term notes.................... (16,812) 20,000 --
(Repayments) borrowings of debt and long-term
obligations........................................... (11,849) (3,764) 1,460
Net borrowing on revolving credit facility.............. 11,245 2,931 --
Proceeds from mortgage and financing notes.............. 9,500 -- --
-------- ------- -------
Net cash provided by financing activities.......... 78,367 18,903 16,555
-------- ------- -------
Effect of exchange rate changes on cash...................... (345) (861) (280)
-------- ------- -------
Change in cash and cash equivalents.......................... (2,271) (3,713) 8,187
Cash and cash equivalents, beginning of period............... 8,320 12,033 3,846
-------- ------- -------
Cash and cash equivalents, end of period..................... $ 6,049 $ 8,320 $12,033
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 4,790 $ 1,555 $ 381
Income taxes............................................ 1,665 1,819 2,344
Supplemental disclosure of non-cash transactions:
Equipment acquired under capital lease obligations......... $ -- $ 1,430 $ --
See notes to consolidated financial statements.
F-7
Note 1 Organization and Business
Safety Components International, Inc. (the "Company" or "SCI") is a
leading, low cost independent supplier of automotive airbag fabric and cushions
with operations in North America, Europe and Asia. The Company is also a leading
manufacturer of value-added technical fabrics used in a variety of niche
industrial and commercial applications. In addition, the Company supplies metal
airbag components to its airbag customers utilizing its machining and stamping
capabilities. In addition, the Company also produces defense related products,
primarily projectiles and other metal components for small to medium caliber
training and tactical ammunition, and continues as a systems integrator for
ordnance programs.
On May 13, 1994, upon the completion of its initial public offering
("Initial Public Offering"), SCI acquired certain assets and assumed certain
liabilities from Valentec International Corporation ("Valentec"), which
represented the airbag cushion operation of Valentec at that time. Also, at that
time and up to the fiscal year 1998 Valentec Acquisition, defined herein, Robert
A. Zummo, the President, Chief Executive Officer and a director of the Company,
was also the President, Chief Executive Officer, a director and majority
shareholder (74.2%) of Valentec, Francis X. Suozzi, a consultant to and director
of Valentec and a director of the Company, was a minority shareholder (21.2%) of
Valentec, and the Valentec International Corporation Employee Stock Ownership
Plan (the "ESOP") was a minority shareholder (4.6%) of Valentec.
On August 6, 1996, Automotive Safety Components International, Inc.
("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 dated
June 6, 1996, as amended (the "Agreement"). In accordance with the terms of the
Agreement, 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 during fiscal
year 1998. The annual performance targets for 1997 were met and approximately
$2.0 million of additional purchase price is accrued at March 28, 1998. The
Company intends to relocate the Phoenix Airbag facility and expects to move
certain operations from such facility to its facility in the Czech Republic and
its facility in the United Kingdom by early fiscal year 2000. During the 1998
fiscal year, the Company incurred approximately $1.8 million ($1.2 million net
of tax benefit of $600,000) of costs associated with the reorganization and
relocation of its foreign operations. These costs are investments toward
consolidating production within the Company's foreign operations to its low-cost
facilities located within the foreign market.
The acquisition was accounted for as a purchase. Although ASCI will
acquire the remaining 20% interest effective December 31, 1998, ASCI has been
and continues to be entitled to 100% of the income or losses, risks and rewards
of Phoenix Airbag since 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 28, 1998, the cumulative
purchase price amounted to approximately $26.5 million, including $3.4 million
of direct acquisition costs. Management of the Company allocated the purchase
consideration for Phoenix Airbag assets, net of liabilities assumed, at fair
market value, with the excess allocated to goodwill. Goodwill of $14.4 million
will be amortized over twenty-five years on a straight line basis.
Effective as of May 22, 1997, the Company acquired all of the
outstanding capital stock of Valentec in a tax free stock-for-stock exchange
(the "Valentec Acquisition"). Valentec is a high-volume manufacturer of stamped
and precision-machined products for the automotive, commercial and defense
industries. Valentec was the Company's largest shareholder immediately prior to
the Valentec Acquisition owning approximately 27%, or 1,379,200 shares of the
issued and outstanding shares of the Company's common stock to the shareholders
of Valentec. The Company issued an aggregate of 1,369,200 newly issued shares of
Common Stock to the shareholders of Valentec. The acquisition was accounted for
as a purchase. The purchase price aggregated approximately $15.1 million,
including estimated direct acquisition costs of approximately $1.3 million. In
F-8
addition, the Company advanced Valentec approximately $1.3 million for the
purpose of funding operations prior to the Valentec Acquisition. The operations
of Valentec are included in the accounts of the Company beginning on May 22,
1997. Management of the Company allocated the purchase consideration for
Valentec assets, net of liabilities assumed, at fair market value, with the
excess allocated to goodwill. Goodwill of $18.7 million will be amortized over
twenty-five years on a straight line basis.
On July 24, 1997, the Company, through a newly formed
wholly-owned subsidiary, Safety Components Fabric Technologies, Inc. ("SCFTI"),
aqcuired (the "JPS Acquisition") all of the assets and assumed certain
liabilities of the Air Restraint/Technical Fabrics Division of JPS Automotive
L.P. (the "Division"). SCFTI is a leading, low-cost supplier of airbag fabric in
North America and is also a leading manufacturer of value-added technical
fabrics used in a variety of niche industrial and commercial applications. The
JPS Acquisition was accounted for as a purchase. The purchase price aggregated
approximately $58.8 million, after giving effect to post-closing adjustments.
The purchase price also included the repayment of approximately $650,000 of
capital lease obligations, direct acquisition costs of approximately $900,000,
and approximately $1.2 million for the purchase of a building in conjunction
with the JPS Acquisition. The operations of SCFTI are included in the accounts
beginning on July 24, 1997. Management of the Company allocated the purchase
consideration for SCFTI assets, net of liabilities assumed, at fair market
value, with the excess allocated to goodwill. Goodwill of $18.4 million will be
amortized over forty years based on a straight line method.
Additionally, on December 22, 1997, the Company acquired all of the
issued and outstanding capital stock of the Champion Sales and Service Company
("Champion") for an aggregate amount of $3.4 million including direct
acquisition costs of approximately $125,000 (the "Champion Transaction"). In
conjunction with the Champion Transaction, the Company has entered into
management services agreements with the former shareholders of Champion. The
terms of each such management services agreement prohibits the Champion
shareholders from competing with certain businesses of the Company for a period
of five years. Each such management services agreement also provides that the
Company has the option, at its sole discretion, to extend the non-competition
period for three successive five year periods, upon payment of a nominal
extension fee. Accordingly, the Company has allocated the purchase consideration
to these non-compete agreements.
The unaudited pro forma revenues, net income and net income per common
share, assuming: (i) the Valentec Acquisition; (ii) the JPS Acquisition; (iii)
the completion of the debt offering (Note 6) and application of the proceeds
therefrom; (iv) the Phoenix Acquisition; and (v) the Champion Transaction was
consummated on April 1, 1996 are as follows below (in thousands). The Unaudited
Pro Forma Financial Data does not purport to represent what the Company's
results of operations actually would have been if those transactions had been
consummated on the date or for the periods indicated, or what such results will
be for any future date or for any future period.
Pro Forma Years Ended
--------------------------
March 28, March 31,
1998 1997
-------- --------
Revenues $194,635 $173,208
======== ========
Net income $ 5,420 $ 1,040
======== ========
Net income per common share, basic $ 1.08 $ 0.21
======== ========
Net income per common share, assuming dilution $ 1.05 $ 0.21
======== ========
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.
F-9
Revenue recognition
Revenues are generally recognized as units are shipped to customers.
The Company accounts for long-term contracts under the percentage of
completion method, whereby progress toward contract completion is measured on a
cost incurred basis (including direct labor, materials and allocable indirect
manufacturing overhead and general and administrative costs). Losses on
long-term contracts are recognized in the period when such losses are
identified. On certain contracts with the U.S. Government, contract costs,
including indirect costs, are subject to audit and adjustment by negotiations
between the Company and government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final settlement
based on historical results.
Annual revenues from major customers
The Company had sales to two customers in fiscal year 1998 aggregating
approximately 36% and 16% of net revenues, respectively. In fiscal year 1997,
the Company had sales to two customers aggregating approximately 47% and 23% of
net revenues, respectively. In fiscal year 1996, the Company had sales to two
customers aggregating approximately 48% and 39% of net revenues, respectively.
Concentration of credit risk
The Company is subject to a concentration of credit risk consisting of
its trade receivables. At March 28, 1998, two customers accounted for
approximately 25% and 7% of its trade receivables, respectively; at March 31,
1997, two customers accounted for 15% and 17% 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
useful lives or the term of the underlying lease.Estimated useful lives by class
of assets are as follows:
Machinery and Equipment.................. 5 - 10 years
Furniture and Fixtures................... 3 - 5 years
Buildings................................ 25 - 40 years
Leasehold improvements................... Lesser of useful life
or lease term
F-10
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.
Intangible assets
Intangible and other assets primarily consist of goodwill, non-compete
agreements and patents associated with the Company's acquisitions, and are
stated at cost less accumulated amortization. Intangible assets are amortized
over the expected periods to be benefited, which have been determined to have
lives between 15 and 40 years. Accumulated amortization at March 28, 1998 and
March 31, 1997 was approximately $2.1 million and $348,000, 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 and is included in cost of sales. 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, March 31,
1997 1996
-------- --------
Income before extraordinary item $3,846 $5,017
====== ======
Income before extraordinary item per
common share,basic $ 0.77 $ 1.01
====== ======
Income before extraordinary item per
common share, assuming dilution $ 0.76 $ 0.99
====== ======
Net income $3,463 $5,017
====== ======
Net income per common share, basic $ 0.69 $ 1.01
====== ======
Net income per common share, assuming
dilution $ 0.69 $ 0.99
====== ======
F-11
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, whose functional currency is the U.S. Dollar, have been translated
into U.S. dollars. Accordingly, all assets and liabilities outside the United
States are translated to U.S. Dollars at the rate of exchange in effect at the
balance sheet date. Income and expense items are translated at the weighted
average exchange rate prevailing during the period. Translation adjustments are
recorded as a separate component of stockholders' equity. During the year ended
March 28, 1998, translation adjustments, primarily attributable to the Company's
German and Czech Republic subsidiaries, accounted for substantially all of the
change in cumulative translation adjustment activity as reflected in the
accompanying consolidated financial statements.
The financial statements of the Company's subsidiary in Mexico, whose
functional currency is the U.S. Dollar, are remeasured into U.S. Dollars.
Accordingly, monetary assets and liabilities are translated at the rate of
exchange in effect at the balance sheet date and non-monetary assets and
liabilities at historical rates. Income and expense items are translated at a
weighted average exchange rate prevailing during the period, except expenses
related to non-monetary assets and liabilities which are translated at
historical rates. The effect of foreign currency adjustment for this entity is
included in the results of operations. During the reported periods herein, such
amounts were not significant.
Foreign currency transaction gains or losses are reflected in
operations. During the years ended March 28, 1998 and March 31, 1997 transaction
losses charged to operations amounted to $72,000 and $379,000, respectively. In
1996, 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 28, 1998 and March 31, 1997 based on the
short-term nature of these instruments. Advances to affiliates have no readily
ascertainable fair market value, and accordingly, their fair values 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.
F-12
Total costs deferred and included under other assets in the accompanying
consolidated balance sheets at March 28, 1998 and March 31, 1997 were $4.5
million and $405,000, respectively. During fiscal 1997, the Company terminated
its line of credit with a bank and 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 Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS includes unexercised stock options
using the treasury stock method (Note 12).
Use of estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the amounts and disclosures reported in
the financial statements and accompanying notes. Significant estimates made by
management include allowances for doubtful accounts receivable, reserves for
inventories, legal actions and environmental issues, and costs to complete on
long term contracts. Actual results could differ from those estimates.
Accounting changes
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," which revises the manner in which
earnings per share is calculated. The Company adopted this statement as of March
28, 1998, and all per share amounts included herein have been restated
accordingly. The effect of the adoption was not material. Additionally, in 1997,
the FASB issued Statement No. 130, "Reporting Comprehensive Income," and
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements, which are effective for the Company in fiscal
year 1999, expand and modify disclosures and, accordingly, will have no impact
on the Company's reported financial position, results of operations or cash
flows.
Fiscal year
Effective in fiscal year 1998, the Company changed its fiscal year to
end on the last Saturday of March. The impact on the current year of three fewer
days of operations was not material.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the March 28, 1998 presentation.
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
F-13
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 Company
repurchased warrants to purchase 23,600 shares of Common Stock during fiscal
year 1996. The remaining warrants at March 28, 1998 are outstanding. 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 were 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
"Additional 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 $16.6 million (including the proceeds received pursuant to the
exercise of the over allotment option described below) has been used to fund the
future growth of the business. In conjunction with the Additional 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 Additional Offering Price, less underwriting discounts. The entire option
was exercised within the 30 day period.
Note 4 Composition Of Certain Consolidated Balance Sheet Components
(in thousands)
March 28, 1998 March 31, 1997
-------------- --------------
Accounts receivable:
Billed receivables, net of reserves of $245 at March 28, 1998 $29,034 $ 9,152
Unbilled receivables (net of unliquidated progress payments of
$12,795 and $9,846 in 1998 and 1997, respectively) 8,759 1,834
Other 1,415 765
------- -------
$39,208 $11,751
======= =======
Inventories:
Raw materials $ 6,072 $ 3,339
Work-in-process 6,743 2,073
Finished goods 7,120 966
------- -------
$19,935 $ 6,378
======= =======
Property, plant and equipment:
Land and building $ 9,134 $ 8,435
Machinery and equipment 50,571 18,768
Furniture and fixtures 2,319 2,074
Construction in process 12,956 2,822
------- -------
74,980 32,099
Less - accumulated depreciation and amortization (8,701) (3,804)
------- -------
$66,279 $28,295
======= =======
F-14
Included in unbilled receivables, at March 28, 1998, is $3.9 million of a
claim the company filed with the Government for delays incurred related to a
systems contract the Company has with the U.S. Army. The Company expects to
realize this receivable in fiscal 1999.
Note 5 Related Party Transactions
During fiscal years 1998, 1997 and 1996, prior to the Valentec Acquisition,
the Company allocated certain of its corporate general and administrative
expenses to Valentec totaling $47,000, $726,000 and $659,000, respectively,
based on a formula of revenue, fixed assets and payroll costs. In the opinion of
management, the allocation method used was reasonable.
The Company purchases from Valentec certain components that are used in its
products. Prior to the Valentec Acquisition purchases totaled $405,000, $2.6
million and $774,000 for the years ended March 28, 1998, March 31, 1997 and
1996, respectively.
The Company sells certain components to and performed certain services for
affiliates. Sales to affiliates totaled $566,000, $104,000, and $4.3 million for
the years ended March 28, 1998, March 31, 1997 and 1996, respectively. Included
in sales that are to affiliates in fiscal year 1998 is $500,000 for services
rendered to Valentec International Limited ("VIL"), a U.K. company, majority
owned by the President of the Company. The Company served as a sales
representative in procuring a defense contract for VIL and arranging its
sub-contractors. At March 28, 1998, the Company had receivables from VIL
aggregating $1.2 million, which includes approximately $700,000 of costs
incurred by the Company on behalf of VIL. The Company's management believes this
amount is collectable based on a letter of credit, which VIL has with its
customer related to its defense contract.
In connection with the Valentec Acquisition, the Company assumed a demand
note payable to VIL of $800,000 and a five-year term note payable to VIL of $2.0
million. The Company paid all amounts related to these notes during fiscal 1998.
The Company subleases space from VIL for its European automotive
operations. Sublease payments for the years ended March 28, 1998, March 31, 1997
and 1996 were $195,000, $117,000 and $121,000, respectively. In addition, the
Company has been allocated its pro-rata portion of certain manufacturing
overhead expenses based on square footage, as well as a pro-rata portion of
shared general and administrative expenses. Such costs totaled $570,000,
$358,000 and $254,000 for the years ended March 28, 1998, March 31, 1997 and
1996, respectively.
F-15
Note 6 Long-Term Obligations (in thousands)
March 28, 1998 March 31, 1997
-------------- --------------
Senior Subordinated Notes due July 15, 2007, bearing
interest at 10 1/8% $ 90,000 $ -
KeyBank revolving credit facility due May 05, 2002, bearing
interest at 1.0% over LIBOR 14,176 -
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
Bank Austria mortgage note, due March 31, 2007, bearing
interest at 1.0% over LIBOR 7,125 -
Note payable, principal due in annual installments of $212
beginning January 12, 1999 to January 12, 2002, with interest
at 7.22% in semiannual installments, secured by assets of
the Company's United Kingdom subsidiary 847 820
Capital equipment notes payable, due in monthly installments
with interest at 8.53% to 16.0% maturing at various rates
through June 2002, secured by machinery and equipment 4,966 3,369
-------- --------
117,114 24,381
Less - current portion (2,375) (3,085)
-------- --------
$114,739 $ 21,296
======== ========
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old
Notes") to BT Securities Corporation, Alex. Brown & Sons Incorporated and
BancAmerica Securities, Inc. (collectively, the "Initial Purchasers") in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon an exemption thereunder (the "Debt
Offering"). On September 2, 1997, the Company commenced an offer to exchange
(the "Exchange Offer", together with the Debt Offering, the "Offering") the Old
Notes for $90.0 million aggregate principal amount of its 10 1/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for Exchange Notes
pursuant to the terms of the Exchange Offer, which expired on October 1, 1997.
Interest on the Notes accrue from July 24, 1997 and is payable semi-annually in
arrears on each of January 15 and July 15 of each year. The first semi-annual
interest payment was made on January 15, 1998 to the holders for an aggregate of
$4.4 million. The Company incurred approximately $3.9 million of fees and
expenses related to the Offering. Such fees have been deferred and will be
charged to operations over the expected term of the Notes, not to exceed 10
years. The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture, pursuant to which the Notes were issued) and to
all existing and future indebtedness of the Company's subsidiaries that are not
Guarantors. All of the Company's direct and indirect wholly-owned domestic
subsidiaries are Guarantors (Note 14).
The Company, Phoenix Airbag and Automotive Safety Components
International Limited entered into an agreement with KeyBank National
Association, as administrative agent ("KeyBank"), dated as of May 21, 1997 as
amended (the "Credit Agreement"). The Credit Agreement consists of a $27.0
million revolving credit facility for a five year term, bearing interest at
LIBOR (5.68750% as of March 28, 1998) plus 1.00% with a commitment fee of 0.25%
per annum for any unused portion. The proceeds from KeyBank were used to repay
the Bank of America NT&SA term loan and revolving credit. KeyBank was
subsequently repaid with the proceeds from the Offering. The Company incurred
approximately $470,000 of financing fees and related costs. These costs have
been deferred and will be charged to operations over the expected term of the
Credit Agreement not to exceed 5 years. The indebtedness under the Credit
Agreement is secured by substantially all the assets of the Company. The Credit
Agreement contains certain restrictive covenants that impose limitations upon,
F-16
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. The Company will use the
revolving credit facility to fund working capital. Letters of credit outstanding
at March 28, 1998 was $3.4 million.
On June 4, 1997, the Company secured a $7.5 million mortgage note
facility with Bank of Austria. The note is payable in semi-annual installments
of $375,000 through March 31, 2007 and bears interest at 1.0% over LIBOR. The
note is secured by the assets of the Company's Czech Republic facility. The
Company incurred approximately $437,000 of financing fees and related costs.
These costs have been deferred and will be charged to operations over the
expected term of the note not to exceed 5 years.
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.
Future annual minimum principal payments at March 28, 1998 are as
follows (in thousands):
1999 $ 2,375
2000 2,540
2001 2,055
2002 1,719
2003 15,050
Thereafter 93,375
--------
$117,114
========
Note 7 Income Taxes
The income tax provision is comprised of the following (in thousands):
March 28, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
Current taxes:
Federal $ 1,313 $ 935 $ 1,934
State 204 154 327
Foreign (48) 916 124
Deferred taxes:
Federal 986 (177) 311
State 130 (49) 47
Foreign 1,104 1,216 373
----- ----- ----
$ 3,689 $ 2,995 $ 3,116
======= ======= =======
The income tax provision differs from the amount computed by applying the
federal income tax rate to income before income taxes as follows:
March 28, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
Expected taxes at federal statutory rate 34% 34% 34%
State income taxes, net of federal benefits 3 2 5
Foreign earnings taxed at different rates 3 7 -
Reversal of foreign contingency reserve (4) - -
Non-deductible intangibles and other, net 2 1 -
-- - -
38% 44% 39%
== == ==
F-17
The primary components of net current deferred tax assets of $1.8
million is included in other current assets at March 28, 1998, and net long-term
deferred tax liabilities of $2.3 million and $1.3 million which are included in
other long-term liabilities at March 28, 1998 and March 31, 1997, respectively,
in the accompanying consolidated balance sheet, are as follows (in thousands):
March 28, 1998 March 31, 1997
-------------- --------------
Deferred tax assets (liabilities):
Accrued liabilities $ 714 $ 103
Inventory 1,093 193
Property, plant and equipment (3,182) (1,552)
Intangibles (1,334) -
Net operating loss acquired from Valentec 1,674 -
Foreign net operating loss 335 -
Other 179 (7)
------ ------
$ (521) $(1,263)
====== =======
In addition, net tax benefits of $784,000 and $859,000 at March 28,
1998 and March 31, 1997, respectively, were recorded directly through equity as
part of the cumulative translation adjustment account. These amounts relate to
translation losses resulting from inter-company note receivable balances from
Phoenix Airbag to one of the Company's domestic subsidiaries.
No taxes have been provided relating to the possible distribution of
approximately $5.7 million of undistributed earnings considered to be
permanently reinvested in foreign operations. The amount of such additional
taxes that would be payable if such earnings were distributed is estimated to be
approximately $1.8 million.
Note 8 Commitments and Contingencies
Operating leases
The Company has non-cancelable operating leases for equipment and
office space that expire at various dates through 2003. Certain of the lease
payments are subject to adjustment for inflation. The Company incurred rent
expense of $1.6 million, $927,000 and $612,000 for the years ended March 28,
1998, March 31, 1997 and 1996, respectively.
Future annual minimum lease payments for all non-cancelable operating
leases as of March 28, 1998 are as follows (in thousands):
1999 $1,314
2000 974
2001 447
2002 439
2003 474
Thereafter 549
------
$4,197
======
Environmental issues
The Company has identified two areas of underground contamination at
the Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed up by annual
F-18
maintenance. The consultant also estimates that remediation costs will be
approximately $250,000, for which the Company had accrued prior to fiscal year
1998 and is included in other long-term liabilities at March 28, 1998. However,
depending on the actual extent of impact to the Company or more stringent
regulatory criteria, these costs could be higher. Additionally, an underground
contamination involving machinery fluids exists at the Valentec facility in
Costa Mesa, California and a site remediation plan has been approved by the
Regional Water Quality Control Board. Such plan will take approximately five
years to implement at an estimated cost of approximately $368,000, for which the
Company had accrued as part of accrued liabilities. To date, the Company has
spent approximately $244,000 on implementing such plan. The remediation plan
currently includes the simultaneous operation of a groundwater and vapor
extraction system. In addition, the Division has been identified along with
numerous other parties as a Potentially Responsible Party at the Aquatech
Environemental, Inc. Superfund Site. The Company believes that it is a de
minimis party with respect to the site and that future clean-up costs incurred
by the Company will not be material. In the opinion of management, no material
expenditures will be required for its environmental control efforts and the
final outcome of these matters will not have a material adverse effect on the
Company's results of operations or financial position. The Company believes that
it currently is in compliance with applicable environmental regulations in all
material respects. Management's opinion is based on the advice of an independent
consultant on environmental matters.
Champion Transaction
In connection with the Champion Transaction, the Company also entered
into a definitive Put Agreement (the "Put Transaction") with an associate of
Champion (the "Associate") who had the right to a portion of any of the sales
commissions actually received by Champion. Pursuant to the Put Transaction, the
Associate has the option to put to the Company, subject to certain conditions,
all of the issued and outstanding capital stock of Duchi & Associates, Inc., an
affiliated entity, for a put price of $740,000. The Put Transaction will include
(as a condition to its exercises), a twenty year management services agreement
and non-compete between the Company and the Associate. The Company believes the
Put Transaction will be exercised, and accordingly, has recorded $740,000 as an
intangible asset and accrued for the Put Transaction at March 28, 1998 as part
of accrued liabilities.
Legal proceedings
Valentec, which was acquired by the Company in May 1997 has been the
subject of an investigation by the Department of Justice regarding a bid-rigging
and kickbacks scheme alleged to have occurred between 1988 and 1992. The
Department of Justice Antitrust Division has contended that former subsidiaries
or divisions of the former Valentec participated in such misconduct in part
through the actions of a former marketing agent and former employees, in order
to obtain certain government contracts. The Government has contended that
Valentec is liable for the acts of its predecessors on a theory of successor
corporate criminal liability. The Government contends that the alleged kickbacks
were made through the former Valentec Kisco and Valentec Galion operations while
those operations were owned and operated by the former Valentec from the late
1980's through 1992, prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. No
officer or director of the Company or its subsidiaries is alleged to have
participated in, or known about, such conduct. The Company has no recourse
against the entity which owned Valentec during the operative time period due to
contractual restrictions in the purchase agreement between Mr. Zummo and such
entity. The Company has determined that it is in its best interest to settle
such matter in order to avoid the costs and distractions associated with
contesting the Department of Justice's legal theories on successor liability.
Therefore, a plea agreement has been negotiated with the Antitrust Division of
the Department of Justice (the "Plea Agreement"). Among other things, the terms
of the Plea Agreement provides for the entry of a guilty plea by Valentec to a
one-count criminal violation of participating in a combination and conspiracy to
suppress competition in violation of the Sherman Antitrust Act, 15 U.S.C.ss.1,
the payment by Valentec of a $500,000 fine and an agreement by the Government to
not further criminally prosecute the Company, its subsidiaries, or any of their
respective officers, directors or employees as to the alleged bid-rigging and
kickback scheme. The Plea Agreement will remain subject to the approval of the
United States District Court for the Western District of Tennessee, Eastern
Division (the "Court"). In connection with the Plea Agreement the Company has
accrued approximately $500,000 as part of accrued liabilities with a
corresponding increase to goodwill. The Plea Agreement, if approved by the
Court, would not release Valentec or its affiliates from potential civil claims
that might be asserted by the United States Department of Justice Civil Division
F-19
against Valentec or its affiliates arising out of the Government's investigation
of conduct that is alleged to have occurred in the time frame prior to Mr.
Zummo's 1993 leveraged buy-out of Valentec. In addition the Company has had
preliminary discussions with the Civil Division regarding the resolution of such
potential civil claims. The Company has accrued an additional amount equal to
that of the Plea Agreement included as part of accrued liabilities with a
corresponding increase to goodwill.
During fiscal year 1998 the Company settled a separate matter relating
to Valentec, which arose prior to the Valentec Acquisition, for $600,000. As of
March 28, 1998, $300,000 was paid and $300,000 is accrued as part of accrued
liabilities with a corresponding increase to goodwill.
Note 9 Business Segment Information
The Company's operations have been classified into two business
segments: (i) Automotive - The Company manufactures airbag fabric and cushions
and metal components for several domestic and foreign automobile manufacturers
under contracts with major airbag systems integrators. (ii) Defense - The
Company acts as a systems integrator for the U.S. Army, coordinating the
manufacture and assembly of components supplied by various subcontractors. The
Company's Defense Operations also manufactures projectiles and other metal
components for small to medium caliber training and tactical ammunition for the
U.S. Armed Forces.
Summarized financial information by business segment is as follows (in
thousands):
March 28, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
Net Sales:
Automotive $143,190 $ 68,827 $ 49,091
Defense 27,120 15,131 45,851
-------- -------- --------
$170,310 $ 83,958 $ 94,942
======== ======== ========
Operating income:
Automotive $ 14,788 $ 8,549 $ 4,324
Defense 6,690 1,853 4,604
Corporate (4,001) (1,798) (1,324)
-------- -------- --------
$ 17,477 $ 8,604 $ 7,604
======== ======== ========
Total assets at period end:
Automotive $173,622 $60,800 $ 21,518
Defense 16,433 8,251 16,924
Corporate 8,842 4,356 11,389
-------- -------- --------
$198,897 $ 73,407 $ 49,831
======== ======== ========
Depreciation and amortization:
Automotive $ 6,346 $ 2,036 $ 796
Defense 397 355 308
-------- -------- --------
$ 6,743 $ 2,391 $ 1,104
======== ======== ========
Capital expenditures:
Automotive $ 13,159 $ 8,092 $ 3,863
Defense 606 521 725
-------- -------- --------
$ 13,765 $ 8,613 $ 4,588
======== ======== ========
F-20
Summarized financial information by geographic area is as follows (in
thousands):
March 28, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
Net Sales (1):
North America $124,507 $46,371 $77,333
Europe 45,803 37,587 17,609
-------- ------- -------
$170,310 $83,958 $94,942
======== ======= =======
Operating income:
North America $ 11,833 $ 3,089 $ 6,555
Europe 5,644 5,515 1,049
-------- ------- -------
$ 17,477 $ 8,604 $ 7,604
======== ======= =======
Total assets at period end:
North America $149,140 $24,930 $37,974
Europe 49,757 48,477 11,857
-------- ------- -------
$198,897 $73,407 $49,831
======== ======= =======
- ----------------------------------------
(1) Foreign and domestic sales are representative of amounts reported by
geographic region
Note 10 Employee Benefit Plans
The Company has two defined contribution plans qualified under Section
401(k) of the Internal Revenue Code for eligible employees. Both plans provide
for discretionary employer contributions. One plan, referred to as the "SCI
Plan", had been Valentec's prior to the Valentec acquisition. The SCI Plan, in
fiscal year 1998 provided a company match equal to 25% of the employee's
contribution up to 6% of the employee's salary. The second plan, the "Galion
Plan", in fiscal year 1998 provided a company match equal to 25% of the
employee's contribution up to 8% of the employee's salary. Employer
contributions become 100% vested after six years of vested service. The Company
contributed an aggregate of approximately $140,000 during fiscal year 1998 to
the SCI Plan and Galion Plan. The Company made no contributions during any prior
years presented in the consolidated financial statements.
Note 11 Common Stock and Stock Options
Common Stock
During fiscal year 1998, the Company acquired an aggregate of 1,379,200
shares of Common Stock and issued an aggregate of 1,369,200 shares of Common
Stock, each in connection with the Valentec Acquisition (Note 1). The remainder
of shares of Common Stock issued during fiscal year 1998 were from stock option
agreements exercised. During fiscal year 1997, the Company purchased 23,492
shares of Common Stock. The purchased shares are held in treasury and are
accounted for at cost.
Stock Options
The Company's stock option plan ("Plan"), as amended, provides for the
issuance of options to purchase up to an aggregate of 1,050,000 shares of SCI's
Common Stock to key officers, employees of SCI or its affiliates, directors and
consultants. The options granted vest in three equal installments on the first
three anniversary dates of the grant. Each award is determined by the
Compensation Committee of the Board of Directors on an individual basis, except
for awards to non-officer directors, which are determined pursuant to a
F-21
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 28, 1998 March 31, 1997 March 31, 1996
-------------- -------------- --------------
Net income: As Reported $6,008 $2,204 $4,914
====== ====== ======
Pro Forma $5,390 $1,941 $4,756
====== ====== ======
Net income per share, basic: As Reported $1.20 $0.44 $0.99
===== ===== =====
Pro Forma $1.07 $0.39 $0.95
===== ===== =====
A summary of the status of the Company's stock option plan at March 28,
1998, March 31, 1997 and 1996 and changes during the years then ended is
presented in the table and narrative below:
March 28, 1998 March 31, 1997 March 31, 1996
---------------------- ---------------------- --------------------------
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 531,999 $12.57 288,625 $13.06 210,500 $10.79
Granted 611,500 11.86 244,499 11.97 84,500 18.65
Exercised (23,000) 10.00 (375) 10.00 - -
Forfeited (40,566) 14.11 (750) 10.00 (6,375) 12.06
--------- --------- ---------
Outstanding at end of year 1,079,933 12.16 531,999 12.57 288,625 13.06
--------- ===== --------- ===== ========= =====
Exercisable at end of year 312,865 12.43 122,250 12.04 50,750 10.57
========= ===== ========= ===== ========= =====
Weighted average fair value
of options granted $4.61 $5.48 $8.85
Of the 1,079,933 options outstanding at March 28, 1998, 179,500 have an
exercise price of $10.00, with a weighted average exercise price of $10.00 and a
weighted average remaining contractual life of 5.85 years; 129,500 of these
options are exercisable with a weighted average exercise price of $10.00. An
additional 476,000 options have exercise prices between $10.25 and $11.50 with a
weighted average exercise price of $10.82 and a weighted average remaining
contractual life of 8.47 years; 90,831 of these options are exercisable with a
weighted average exercise price of $11.19. An additional 344,933 options have
exercise prices between $12.13 and $14.88 with a weighted average exercise price
of $13.51 and a weighted average remaining contractual life of 8.98 years;
34,700 of these options are exercisable with a weighted average exercise price
of $13.23. The remaining 79,500 options have exercise prices between $17.13 and
$21.73 with a weighted average exercise price of $19.26 and a weighted average
remaining contractual life of 4.81 years; 57,834 of these options are
exercisable with a weighted average exercise price of $19.33. 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 1998, 1997 and 1996, respectively: risk-free interest rates of 6.1,
6.7 and 6.5 percent; zero percent dividends for all years; expected lives of
5.0, 6.2 and 6.8 years; and expected volatility of 31.4, 32.4 and 32.4 percent.
F-22
At March 28, 1998 the Company had granted to key employees and
non-employee directors certain options to purchase shares of Common Stock
("Certain Options"), subject to approval by the Company's shareholders, to the
extent necessary, of an increase in the number of shares authorized to be issued
under the Plan. Subsequent to March 28, 1998, options to purchase an aggregate
of approximately 140,000 shares of Common Stock were forfeited. Accordingly, the
Certain Options granted to key employees are no longer subject to shareholder
approval. The portion of the Certain Options granted to non-employee directors
remain subject to shareholder approval.
Note 12 - Reconciliation to Diluted Earnings Per Share (in thousands)
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.
Year Ended
------------------------------------------------------
March 28, March 31,
-------------------------------------
1998 1997 1996
------------------------------------------------------
Net income $6,008 $2,204 $4,914
====== ====== ======
Weighted average number of common shares used
in basic earnings per share 5,027 5,027 4,981
Effect of dilutive securities:
Stock options 117 23 77
Warrants 3 - 25
----- ----- -----
Weighted average number of common shares and
dilutive potential common stock used in diluted
earnings per share 5,147 5,050 5,083
===== ===== =====
Options on 285,500, 185,499, and 62,500 shares of Common Stock were not
included in computing diluted earnings per share as of March 28, 1998, March 31,
1997 and 1996, respectively, because their effects were antidilutive. Warrants
to purchase 104,400 shares of Common Stock were not included in computing
diluted earnings per share as of March 31, 1997 because their effects were
antidilutive.
F-23
Note 13 Unaudited Quarterly Results
Unaudited quarterly financial information for fiscal year 1997 and 1998
is set forth below. The Company recorded the cumulative effect of the change in
accounting principle and the extraordinary item during the fourth quarter of
fiscal year 1997. The Company did not restate quarters in fiscal 1997, however,
an amended quarterly table is included below. All dollar amounts are in
thousands except per share data.
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, basic $ 0.17 $ 0.23 $ 0.28 $ 0.09
Net income per share, basic $ 0.17 $ 0.23 $ 0.28 $ (0.24)
Income before extraordinary item and
cumulative effect of accounting
change per share, assuming dilution $ 0.17 $ 0.23 $ 0.28 $ 0.08
Net income per share, assuming dilution $ 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, basic $ 0.17 $ 0.20 $ - $ -
Net (loss) income per share, basic $ (0.08) $ 0.12 $ 0.22 $ 0.20
Income before extraordinary item and
cumulative effect of accounting
change per share, assuming dilution $ 0.17 $ 0.20 $ - $ -
Net (loss) income per share, assuming
dilution $ (0.08) $ 0.12 $ 0.22 $ 0.18
Quarter Ended
----------------------------------------------------------------
Company
----------------------------------------------------------------
June 30, September 30, December 31, March 28,
1997 1997 1997 1998
---- ---- ---- ----
Fiscal 1998
Revenues $ 27,629 $ 42,728 $ 47,370 $ 52,583
Income from operations $ 3,032 $ 4,129 $ 4,725 $ 5,591
Net income $ 1,435 $ 1,282 $ 1,386 $ 1,905
Net income per share, basic $ 0.29 $ 0.26 $ 0.28 $ 0.38
Net income per share, assuming dilution $ 0.29 $ 0.25 $ 0.27 $ 0.38
F-24
Note 14 - Supplemental Guarantor Condensed Consolidating Financial Statements
In connection with the Offering (see Note 3), the Notes are guaranteed on a
senior unsecured basis, jointly and severally, by each of the Company's
principal wholly-owned domestic operating subsidiaries and certain of its
indirect wholly-owned subsidiaries (the "Guarantors"). The condensed
consolidating financial statements of the Guarantors are presented below.
Management believes the condensed consolidating financial statements presented
are meaningful in understanding the financial position, results of operations
and cash flows of the Guarantor subsidiaries.
MARCH 28, 1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents............ $ 794 $ 5,172 $ 83 $ -- $ 6,049
Accounts receivable, net............. 31,918 7,188 102 -- 39,208
Inventories.......................... 17,068 2,867 -- -- 19,935
Prepaid and other.................... 1,309 343 2,544 -- 4,196
------- ------- ------- ------- -------
Total current assets......... 51,089 15,570 2,729 -- 69,388
------- ------- ------- ------- -------
Property, plant and equipment, net..... 42,677 22,585 1,017 -- 66,279
Receivable from affiliates............. 500 252 454 -- 1,206
Intangible assets, net................. 40,136 15,787 -- -- 55,923
Other assets........................... 7,432 386 7,453 (9,170) 6,101
------- ------- ------- ------- -------
Total assets................. $141,834 $ 54,580 $ 11,653 $(9,170) $198,897
======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 17,200 $ 5,351 $ 458 $ -- $ 23,009
Earnout payable...................... -- 1,958 -- -- 1,958
Accrued liabilities.................. 4,575 4,357 3,626 -- 12,558
Intercompany accounts short-term..... 4,788 2,262 (7,050) -- --
Current portion of long-term
obligations....................... 1,333 289 753 -- 2,375
------- ------- ------- ------- -------
Total current liabilities.... 27,896 14,217 (2,213) -- 39,900
------- ------- ------- ------- -------
Long-term obligations.................. 2,517 1,661 20,561 -- 24,739
Senior subordinated debt............... -- -- 90,000 -- 90,000
Intercompany accounts long term........ 99,278 26,830 (126,108) -- --
Other long-term liabilities............ 553 1,668 2,843 -- 5,064
------- ------- ------- ------- -------
Total liabilities............ $130,244 $ 44,376 $(14,917) $ -- $159,703
------- ------- ------- ------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock: $.10 par value per
share -- 2,000,000 shares authorized;
no shares outstanding at March 28,1998 -- -- -- -- --
Common stock: $.01 par value per
share -- 10,000,000 shares authorized;
6,538,075 shares issued at
March 28, 1998...................... -- 5,578 65 (5,578) 65
Common stock warrants................ -- -- 1 -- 1
Additional paid-in-capital........... -- 2,807 44,040 (2,807) 44,040
Treasury stock, 1,492,692 at March 28,
1998 at cost........................ -- -- (15,439) -- (15,439)
Retained earnings, (accumulated
deficit)............................ 11,590 6,483 (2,097) (785) 15,191
Cumulative translation adjustment.... -- (4,664) -- -- (4,664)
------- ------- ------- ------- -------
Total stockholders' equity... 11,590 10,204 $ 26,570 $ (9,170) $ 39,194
------- ------- ------- ------- -------
Total liabilities and
stockholders' equity....... $141,834 $54,580 $ 11,653 $ (9,170) $198,897
======= ======= ======= ======= =======
See notes to consolidated financial statements.
F-25
SAFETY COMPONENTS INTERNATIONAL, INC.
MARCH 31, 1997
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents............ $ 13 $ 8,250 $ 57 $ -- $ 8,320
Accounts receivable, net............. 5,641 6,081 29 -- 11,751
Inventories.......................... 3,682 2,696 -- -- 6,378
Prepaid and other.................... 123 402 345 -- 870
------- ------- -------- ------- -------
Total current assets......... 9,459 17,429 431 -- 27,319
------- ------- -------- -------
Property, plant and equipment, net..... 8,075 19,072 1,457 (309) 28,295
Receivable from affiliates............. 1,488 1,179 1,681 4,348
Goodwill............................... -- 10,991 -- -- 10,991
Other assets........................... 6,559 938 3,906 (8,949) 2,454
------- ------- -------- ------- -------
Total assets................. $ 25,581 $ 49,609 $ 7,475 $(9,258) $ 73,407
======= ======= ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 3,268 $ 3,979 $ 545 $ -- $ 7,792
Earnout payable...................... 2,211 -- -- -- 2,211
Accrued liabilities.................. 2,037 2,546 (1,983) (124) 2,476
Intercompany accounts short term..... (3,023) 2,280 743 -- --
Current portion of long-term
obligations....................... 2,832 250 3 -- 3,085
------- ------- -------- ------- -------
Total current liabilities.... 7,325 9,055 (692) (124) 15,564
------- ------- -------- -------
Long-term obligations.................. 15,920 3,662 1,714 -- 21,296
Other long-term liabilities............ -- 727 546 -- 1,273
Intercompany accounts long term........ (5,871) 26,013 (20,142) -- --
------- ------- -------- ------- -------
Total liabilities............ 17,374 39,457 (18,574) (124) 38,133
------- ------- -------- ------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock: $.10 par value per
share -- 2,000,000 shares authorized;
no shares outstanding at March 31,
1997................................. -- -- -- -- --
Common stock: $.01 par value per share
10,000,000 shares authorized;
5,138,875 issued at March 31,
1997................................. -- 5,578 51 (5,578) 51
Common stock warrants................ -- -- 1 -- 1
Additional paid-in-capital........... -- 2,807 30,062 (2,807) 30,062
Treasury stock, 113,492 shares at
March 31, 1997....................... -- -- (1,647) -- (1,647)
Retained earnings (accumulated
deficit)............................. 8,207 4,143 (2,418) (749) 9,183
Cumulative translation adjustment.... -- (2,376) -- -- (2,376)
------- ------- -------- ------- -------
Total stockholders' equity... 8,207 10,152 26,049 (9,134) 35,274
------- ------- -------- ------- -------
Total liabilities and
stockholders' equity....... $ 25,581 $ 49,609 $ 7,475 $(9,258) $ 73,407
======= ======= ======== ======= =======
F-26
FOR THE YEAR ENDED MARCH 28, 1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
Net sales.............................. $124,507 $ 52,895 $ -- $ (7,092) $170,310
Cost of sales.......................... 98,650 40,922 -- (6,000) 133,572
Depreciation........................... 3,440 1,601 86 (126) 5,001
------- ------- ------- ------- -------
Gross profit................. 22,417 10,372 (86) (966) 31,737
------- ------- ------- ------- -------
Selling and marketing expenses......... 1,478 126 -- 225 1,829
General and administrative............. 3,524 2,555 3,641 (820) 8,900
Amortization of goodwill............... 926 542 274 -- 1,742
Relocation and reorganization costs.... 655 1,134 -- -- 1,789
------- ------- ------- ------- -------
Income from operations....... 15,834 6,015 (4,001) (371) 17,477
------- ------- ------- ------- -------
Other expense ......................... 9,004 533 (9,463) (41) 33
Interest expense ...................... (680) 2,099 6,328 -- 7,747
------- ------- ------- ------- -------
Income before income taxes... 7,510 3,383 (866) (330) 9,697
Provision for income taxes............. 3,142 1,056 (399) (110) 3,689
------- ------- ------- ------- -------
Net income (loss)...................... $ 4,368 $ 2,327 $ (467) $ (220) $ 6,008
======= ======= ======= ======= =======
F-27
FOR THE YEAR ENDED MARCH 31, 1997
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
Net sales.............................. $ 46,371 $ 43,645 $ -- $(6,058) $ 83,958
Cost of sales.......................... 38,383 32,846 -- (5,338) 65,891
Depreciation........................... 1,013 1,030 -- -- 2,043
------- ------- ------- ------- -------
Gross profit................. 6,975 9,769 -- (720) 16,024
------- ------- ------- ------- -------
Selling and marketing expenses......... 730 366 279 -- 1,375
General and administrative............. 2,390 2,462 1,382 (537) 5,697
Amortization of goodwill............... -- 348 -- -- 348
------- ------- ------- ------- -------
Income from operations....... 3,855 6,593 (1,661) (183) 8,604
------- ------- ------- ------- -------
Other expense ......................... (274) 451 (6) 37 208
Interest expense ...................... 851 1,064 (669) 309 1,555
------- ------- ------- ------- -------
Income before income taxes... 3,278 5,078 (986) (529) 6,841
------- ------- ------- ------- -------
Provision for income taxes............. 1,244 2,250 (375) (124) 2,995
Income before extraordinary item and
cumulative effect of accounting
change............................... 2,034 2,828 (611) (405) 3,846
Extraordinary item..................... -- -- (383) -- (383)
Cumulative effect of change in
accounting for deferred product
launch costs......................... (564) (695) -- -- (1,259)
------- ------- ------- ------- -------
Net income (loss)...................... $ 1,470 $ 2,133 $ (994) $ (405) $ 2,204
======= ======= ======= ======= =======
F-28
FOR THE YEAR ENDED MARCH 31, 1996
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
Net sales.............................. $ 77,333 $ 22,748 $ -- $(5,139) $ 94,942
Cost of sales.......................... 65,782 19,634 -- (4,612) 80,804
Depreciation........................... 797 307 -- -- 1,104
------- ------- ------- ------- -------
Gross profit................. 10,754 2,807 -- (527) 13,034
------- ------- ------- ------- -------
Selling and marketing expenses......... 1,088 14 -- -- 1,102
General and administrative............. 2,268 1,263 1,324 (527) 4,328
------- ------- ------- ------- -------
Income from operations....... 7,398 1,530 (1,324) -- 7,604
------- ------- ------- -------
Other expense ......................... (298) (254) (561) 306 (807)
Interest expense ...................... 158 49 174 -- 381
------- ------- ------- ------- -------
Income before income taxes... 7,538 1,735 (937) (306) 8,030
Provision for income taxes............. 3,075 442 (401) -- 3,116
------- ------- ------- ------- -------
Net income (loss)...................... $ 4,463 $ 1,293 $ (536) $ (306) $ 4,914
======= ======= ======= ======= =======
F-29
FOR THE YEAR ENDED MARCH 28, 1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
Net cash provided by (used in)
operating activities................. $ (5,509) $ 4,312 $ 1,812 $ -- $ 615
Cash Flows From Investing Activities:
Additions to property, plant and
equipment......................... (6,294) (6,796) (675) -- (13,765)
Acquisition costs, net of cash
acquired.......................... (64,688) (2,455) -- -- (67,143)
-------- ------- ------- ------- --------
Net cash used in investing
activities........................... (70,982) (9,251) (675) -- (80,908)
-------- ------- ------- ------- --------
Cash Flows From Financing Activities:
Proceeds from notes.................. -- -- 86,053 -- 86,053
Net proceeds from issuance of stock.. -- -- 230 -- 230
(Repayments) proceeds from term notes. (16,812) -- -- -- (16,812)
(Repayments) borrowing of debt and
long-term obligations............. (1,117) (732) (10,000) -- (11,849)
Net borrowing on revolving credit
facility.......................... -- (1,230) 12,475 -- 11,245
Proceeds from mortgage and financing
notes............................. 2,000 -- 7,500 -- 9,500
Change in investment in subsidiary... (1) -- 1 -- --
Changes in intercompany accounts..... 93,151 4,170 (97,321) -- --
-------- ------- ------- ------- --------
Net cash provided by
financing activities................. 77,221 2,208 (1,062) -- 78,367
-------- ------- ------- ------- --------
Effect of exchange rate changes on
cash................................. -- (345) -- -- (345)
-------- ------- ------- ------- --------
Change in cash and cash equivalents.... 730 (3,076) 75 -- (2,271)
Cash and cash equivalents, beginning of
period............................... 13 8,250 57 -- 8,320
-------- ------- ------- ------- --------
Cash and cash equivalents, end of
period............................... $ 743 $ 5,174 $ 132 $ -- $ 6,049
======== ======= ======= ======= ========
F-30
FOR THE YEAR ENDED MARCH 31, 1997
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
Net cash provided by (used in)
operating activities................. $ 13,740 $ 5,430 $(1,968) $(6,087) $ 11,115
Cash Flows From Investing Activities:
Additions to property, plant and
equipment......................... (1,468) (6,097) (1,357) 309 (8,613)
Purchase of Phoenix Airbag, net of
cash acquired..................... (24,257) -- -- -- (24,257)
-------- ------- ------- ------- --------
Net cash used in investing
activities........................... (25,725) (6,097) (1,357) 309 (32,870)
-------- ------- ------- ------- --------
Cash Flows From Financing Activities:
Net proceeds from sale of stock...... -- -- 4 -- 4
Purchase of treasury stock........... -- -- (268) -- (268)
Proceeds from term note.............. 20,000 -- -- -- 20,000
(Repayments) borrowing of debt and
long-term obligations............. (3,764) -- -- -- (3,764)
Net borrowing on revolving credit
facility.......................... -- 1,230 1,701 -- 2,931
Change in investment in subsidiary... (5,778) -- -- 5,778 --
Changes in intercompany accounts..... 1,535 6,530 (8,065) -- --
-------- ------- ------- ------- --------
Net cash provided by
financing activities................. 11,993 7,760 (6,628) 5,778 18,903
-------- ------- ------- ------- --------
Effect of exchange rate changes on
cash................................. -- (861) -- -- (861)
-------- ------- ------- ------- --------
Change in cash and cash equivalents.... 8 6,232 (9,953) -- (3,713)
Cash and cash equivalents, beginning of
period............................... 5 2,018 10,010 -- 12,033
-------- ------- ------- ------- --------
Cash and cash equivalents, end of
period............................... $ 13 $ 8,250 $ 57 $ -- $ 8,320
======== ======= ======= ======= ========
F-31
FOR THE YEAR ENDED MARCH 31, 1996
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
Net cash provided by (used in)
operating activities................. $ (2,544) $ 756 $(2,485) $ 773 $ (3,500)
Cash Flows From Investing Activities:
Additions to property, plant and
equipment......................... (2,407) (1,279) (133) (769) (4,588)
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (2,407) (1,279) (133) (769) (4,588)
------- ------- ------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from sale of stock...... -- 1,861 16,568 (1,861) 16,568
Purchase of treasury stock........... -- -- (1,379) -- (1,379)
Repurchase of common stock
warrants.......................... -- -- (94) -- (94)
(Repayments) borrowings of debt and
long-term obligations............. 1,633 (173) -- -- 1,460
Change in investment in subsidiary... (306) -- (1,865) 2,171 --
Changes in intercompany accounts..... 3,620 (1,838) (1,501) (281) --
------- ------- ------- ------- -------
Net cash provided by
financing activities................. 4,947 (150) 11,729 29 16,555
------- ------- ------- ------- -------
Effect of exchange rate changes on
cash................................. -- (280) -- -- (280)
------- ------- ------- ------- -------
Change in cash and cash equivalents.... (4) (953) 9,111 33 8,187
Cash and cash equivalents, beginning of
period............................... 9 2,938 899 -- 3,846
------- ------- ------- ------- -------
Cash and cash equivalents, end of
period............................... $ 5 $ 1,985 $10,010 $ 33 $ 12,033
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F-32