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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 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to _____________________
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3190 Pullman Street 92626
Costa Mesa, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 662-7756
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ([section]229.405) is not contained herein, and
will not be contained, to the best of the 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 [X] .
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of July 11, 1996, was approximately
$42,382,518.
The number of shares outstanding of each of the registrant's classes of
common stock as of July 11, 1996, is as follows:
Class Number of Shares
----- ----------------
Common Stock, par value $.01 per share 5,025,008
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 1996
annual meeting of stockholders (the "Proxy Statement") are incorporated by
reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
General
Safety Components International, Inc., a Delaware corporation (the
"Company" or "Safety Components"), is an international manufacturer of
automotive airbags and a supplier of military ordnance products. The Company
is organized into two divisions: Automotive and Defense. The Automotive
Division manufactures passenger and driver side airbags for final installation
in various vehicle models sold in North America, Europe and, to a lesser
extent, Asia. The Defense Division is a leading United States supplier of
projectiles and other metal components for small to medium caliber military
ammunition and is also a systems integrator for the U.S. Army for the delivery
of 120 millimeter mortar cartridges.
During the past several years, the demand for automotive airbags has
grown rapidly in the North American, European and Asian markets. This
worldwide growth is expected to continue due to several factors, including
increased consumer demand, the introduction of new products such as side
impact airbags, existing government regulations in the U.S. and the increasing
affordability of airbag systems. The Automotive Division's primary strategy is
to increase its airbag sales to current and prospective customers by being the
lowest cost supplier of automotive airbags worldwide. As a result of this
strategy, the Company was awarded a purchase order in September 1995 from
Delphi Interior and Lighting ("Delphi"), a subsidiary of General Motors
Corporation ("GM"), pursuant to which Delphi has committed to purchase from
the Company approximately 50% of Delphi's requirements for passenger side
airbags for its C/K Truck models for model year 1997 (the "Delphi Purchase
Order"). Consistent with its growth strategy, the Company plans to
significantly increase its airbag manufacturing capacity during the next 18
months. As part of its expansion plan, the Company is constructing a new
manufacturing facility in the Czech Republic and intends to expand its
manufacturing capacity at its existing facilities in the United Kingdom and
Mexico. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." In June 1996, the
Company entered into a purchase agreement (the "Phoenix Purchase Agreement")
to acquire Phoenix Airbag GmbH, a major European airbag manufacturer based in
Hildesheim, Germany. See "-Automotive Division" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company was formed as a Delaware corporation on
January 12, 1994 as a wholly-owned subsidiary of Valentec International
Corporation, a Delaware corporation ("Valentec").
Automotive Division
Safety Components presently manufactures airbags at production
facilities located in the U.K. and Mexico and under two sub-contracting
arrangements in the Czech Republic. The Company manufactures airbags for TRW
Vehicle Safety Systems Inc. ("TRW-U.S."), one of the largest worldwide
suppliers of automotive airbag systems, for sale in the North American and
Asian markets and for TRW Repa GmbH ("TRW-Europe"; together with TRW-U.S.,
"TRW") for sale in the European market. Safety Components
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currently is TRW's largest external supplier of passenger side airbags and
believes that it is presently supplying approximately 30% of TRW's overall
passenger side airbag requirements. The Company currently manufactures airbags
under agreements with TRW (the "TRW Agreements") for various GM, Ford,
Chrysler, Toyota, Mazda, Nissan and KIA models for the North American and
Asian markets and various Mercedes, BMW, Volkswagen, Rover and Audi models for
the European market. Safety Components recently commenced manufacturing
passenger side airbags for Delphi under the Delphi Purchase Order.
In June 1996, the Company entered into the Phoenix Purchase Agreement
with Phoenix AG of Hamburg, Germany to purchase Phoenix AG's subsidiary,
Phoenix Airbag GmbH ("Phoenix"), a major European airbag manufacturer. Under
the Phoenix Purchase Agreement, the Company initially would acquire eighty
percent (80%) of Phoenix AG's interest in Phoenix for a purchase price of
approximately $22 million, subject to a net worth adjustment. The Company
would acquire the remaining twenty percent (20%) effective December 31, 1998,
but would be entitled to all of the income of Phoenix from the date of the
acquisition. The purchase price of up to approximately $7.5 million for the
remaining twenty percent (20%) interest is contingent on Phoenix meeting
certain revenue targets. If those targets are met, the contingent purchase
price would be paid in three annual installments commencing April 30, 1997. If
the targets are not met, the Company would acquire the remaining twenty
percent (20%) without the payment of any additional consideration.
Additionally, the Company would, under certain circumstances, be required to
provide a bank guaranty, in August 1997, to secure the payment of up to
approximately $4.0 million of the contingent purchase price. The Company has
provided Phoenix AG a deposit of approximately $1.65 million with respect to
the acquisition of Phoenix. Under the terms of the Phoenix Purchase Agreement,
if the acquisition is not consummated by August 15, 1996, Phoenix AG would not
be required to consummate the transaction and the Company would forfeit its
deposit. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Phoenix currently supplies driver side, passenger side and side
impact airbags to two major European airbag system suppliers for inclusion in
various vehicle models manufactured by several European automobile
manufacturers, including Mercedes, BMW, Audi, Opel, Volkswagen and Porsche.
Phoenix has a highly automated manufacturing facility located in Hildesheim,
Germany. In addition to manufacturing the airbags, Phoenix is involved in
research and development relating to the design of new airbag products. The
acquisition of Phoenix is expected to significantly enhance and increase the
customer base and revenues of the Company's European operations. The preceding
sentence includes a forward looking statement which is contingent upon the
continuation of historical trends and certain volume assumptions.
Automotive Airbag Industry
The worldwide market for airbags has grown rapidly in recent years.
Global demand for airbags is expected to continue to increase substantially in
the future. In the U.S., the unit sales of airbags has grown rapidly due to
legislated vehicle safety requirements and increasing consumer demand for
airbag systems as a result of the demonstrated effectiveness of airbags at
saving lives and helping to prevent serious injuries. Existing U.S.
legislation requires the installation of both driver and passenger side
airbags in 100% of all new passenger cars sold in the U.S. by model year 1998
and 100% of all light trucks, buses
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and multi-purpose passenger vehicles sold in the U.S. by model year 1999. In
response to consumer demand, side impact airbags have recently been added to
certain automobiles and the addition of rear seat airbags is anticipated in
the future. The demand for these new airbag products, in conjunction with new
occupant sensing and crash detection technology, is expected to result in
continued growth in the automotive airbag market. The Company continues to
actively seek to position itself to participate in the growth of the worldwide
airbag market through obtaining new customers, geographic expansion and joint
ventures and acquisitions. The Company is not aware of any foreign
governmental legislation mandating the use of automotive airbags, but believes
that airbag sales in Europe and Asia will continue to increase primarily in
response to consumer demand. While the Company believes that these and other
factors will contribute to the growth of the worldwide airbag market, the
foregoing constitutes a forward looking statement and there can be no assurance
that historical growth trends will be an accurate indicator of future growth. As
a supplier to the automotive industry, the Company's airbag business is
dependent on many factors including the level of vehicle sales in each market,
which are cyclical and dependent on, among other things, consumer spending,
potential work stoppages, adverse weather conditions, potential problems with
obtaining supplies and other risks of production.
Suppliers
The Company's customers, TRW and Delphi, generally approve all
suppliers of major airbag components. These suppliers are approved after
undergoing a rigorous qualification process on their products and
manufacturing capabilities. In many cases, only one approved source of supply
exists for certain airbag components. In the event that a sole source supplier
experiences prolonged delays in product shipments or no longer qualifies as a
supplier, the Company would work together with its customers to identify
another qualified source of supply. Although alternative sources of supply
exist, a prolonged delay in the approval by the Company's customers of any
such alternative sources of supply could adversely affect the Company's
operating results. Under the Company's agreements with its customers, any
changes in the cost of major components are passed through to the customers.
Capacity
The Company's Mexican facility currently manufactures passenger side
and driver side airbags over two shifts at a current rate of approximately
2,600,000 airbags per year. The U.K. facility, in conjunction with its
subcontracting arrangements in the Czech Republic, currently manufactures
passenger side and driver side airbags at a current rate of approximately
800,000 airbags per year. The Company anticipates that the Czech facility,
upon completion, will have initial capacity to manufacture between 2 and 3
million airbags per year.
Qualification and Quality Control
The Company successfully completed the rigorous process of qualifying
as a supplier to TRW in 1992. Each of the Company's airbags manufactured for
TRW is required to pass design validation and process validation tests
established by the automobile manufacturers and supervised by TRW relating to
the product's design and manufacture. TRW participates in these design and
process validations and must be satisfied with the product's reliability and
performance prior to awarding a production order. The
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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 Delphi.
The Company's U.K. and Czech subcontracting facilities operate under
TRW's quality system which meets or exceeds ISO 9000, an international
standard for quality. This qualification has enabled the Company's European
operations to manufacture airbags under the Company's agreement with TRW-
Europe. As is the case in the U.S., however, the automobile manufacturers may
conduct their own design and process validation tests of the Company's
operations.
The Company has extensive quality control systems in its airbag
manufacturing facilities, including the inspection and testing of all
products. The Company also undertakes process capability studies to determine
that the Company's manufacturing processes have the capability of producing at
the quality levels required by its customers.
Sales and Marketing
The Company conducts its sales and marketing through the efforts of
its management and through Champion Sales & Service Co. ("Champion"), an
outside marketing firm engaged by the Company since May 1992. Champion and Mr.
Zummo, the Company's Chief Executive Officer, were instrumental in
establishing the Company's relationship with TRW. The Company currently is
obligated to pay Champion a commission of 2% on all sales to TRW. The Company
and Champion are in the process of renegotiating the terms of Champion's
Representation Agreement with respect to TRW. Under its current Representation
Agreements with the Company, Champion is restricted from selling or marketing
products of other companies which compete with the products sold by the
Company. During fiscal year 1996, the Company established a direct sales force
to market to customers other than TRW. This sales force currently includes a
newly hired vice-president of marketing, as well as certain affiliates of
Champion.
Customers
Prior to the Company's obtaining the Delphi Purchase Order, TRW-U.S.
and TRW-Europe were the Company's only customers for automotive airbags. Sales
to TRW-U.S. and TRW-Europe accounted for approximately 30% and 19%,
respectively, of the Company's total sales in the fiscal year ended March 31,
1996. No significant deliveries were made under the Delphi Purchase Order
during fiscal year 1996. The Company's contractual relations with its
customers are described in detail below.
TRW.
---
The U.S. Agreement. The Company's agreement with TRW-U.S. (the
"U.S. Agreement") is a requirements contract, under which TRW-U.S. has agreed
to purchase airbags from the Company in amounts sufficient to satisfy
TRW-U.S.'s requirements for inclusion in certain automobile models, provided
that the Company's prices, technology, delivery, performance and quality
remain competitive. The U.S. Agreement does not obligate TRW-U.S. to purchase
a specified number of passenger side airbags, but
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instead contains quantity estimates of TRW-U.S.'s requirements for passenger
side airbags for specified models in model years 1993 through 1997. These
quantity estimates increase to a level of approximately 2,000,000 units for
model year 1997. The quantity estimates contained in the U.S. Agreement are
provided solely for the Company's planning purposes and do not constitute a
commitment or obligation on the part of TRW to purchase such quantities.
Pursuant to the U.S. Agreement, the Company is required to maintain the
capacity to manufacture and ship to TRW-U.S. 25% more airbags than the actual
quantity estimates for each model year and specified models covered by such
agreement. The existing orders for driver side airbags were placed pursuant to
purchase orders and are not subject to the terms of the U.S. Agreement.
The U.S. Agreement contains price adjustment provisions contemplating
upward or downward adjustments for changes in the cost of fabric and contains
other provisions concerning the pricing of materials. In addition, the U.S.
Agreement calls for certain reductions in the Company's pricing to TRW- U.S.
to reflect increases in the Company's productivity, including but not limited
to reductions in direct labor usage and overhead. The U.S. Agreement grants
TRW the right to terminate such agreement upon the occurrence of any of the
following events: the Company's failure to comply with any term of such
agreement; the Company's bankruptcy, insolvency or dissolution; the Company's
failure to give TRW-U.S. reasonable assurances of the Company's future
performance pursuant to a request for such assurances; or any other event
which causes reasonable doubt as to the Company's ability to render due
performance under such agreement. Under the U.S. Agreement, the Company is not
precluded from manufacturing and selling automotive airbags to other
manufacturers of airbag systems that compete with TRW-U.S. Such manufacture
and sale may not be conducted within the same facility used by the Company to
manufacture airbags for TRW-U.S., however, and also is subject to customary
restrictions regarding confidential and proprietary information.
The Company is in discussions with TRW regarding the extension of the
U.S. Agreement. While the Company believes that it will reach an agreement
with TRW for such an extension, no understanding has been reached to date and
there can be no assurance that such an understanding will be reached. The
Company believes that, should the U.S. Agreement expire, the Company will
compete for additional passenger side airbag business on a model-by-model
annual purchase order basis, similar to the arrangement currently in place for
driver side airbags. This type of arrangement is consistent with automotive
industry practice.
The European Agreement. The initial term of the Company's agreement
with TRW-Europe (the "European Agreement") commenced with the initiation of
deliveries on January 1, 1994 and ended December 31, 1995. Thereafter, the
European Agreement automatically extended for a four month term and continues
to extend for successive three month terms thereafter until either party gives
the other party three months' written notice of termination.
The European Agreement provides that TRW-Europe will purchase 100% of
its requirements of passenger side airbags for specified models at specified
prices from the Company.
The European Agreement provides that if the Company is unable, due to
its own fault, to manufacture and deliver the quantities of airbags as
required in such agreement, the Company shall pay
6
TRW-Europe 5,000 German Marks per week of delay for each specified model of
airbags covered by the European Agreement. The prices contained in the
European Agreement have been, and may in the future be, revised by the parties
from time to time in accordance with certain terms of the agreement, which
provide that if the exchange rate of German Marks to British Pounds moves
above or below certain agreed-upon exchange rates, the prices will be adjusted
accordingly. Under the European Agreement, the Company is not precluded from
manufacturing and selling automotive airbags to other manufacturers of airbag
systems that compete with TRW-Europe.
Delphi.
------
In September 1995, the Company received the Delphi Purchase Order,
pursuant to which Delphi has committed to purchase from the Company
approximately 50% of Delphi's requirements for passenger side airbags for its
C/K Truck models for model year 1997. The Company believes, based upon recent
market publications, that Delphi will manufacture approximately 1,200,000 C/K
Trucks for model year 1997, and, accordingly, the Company estimates that it
will supply approximately 600,000 passenger side airbags to Delphi under the
Delphi Purchase Order. The foregoing estimate includes a forward looking
statement and no assurance can be given that Delphi will purchase that number
of airbags from the Company. Factors which may result in a lower number of
airbags manufactured pursuant to the Delphi Purchase Order include a lack of
demand for C/K Trucks, a general slowdown in the automotive industry or a
labor dispute. Delphi is not obligated to purchase a minimum number of airbags
from the Company.
Competition
The Company competes with several independent suppliers of automotive
airbags in the U.S. and Europe as well as TRW and Delphi, each of which are
integrated manufacturers which produce a substantial portion of their own
airbags. While TRW does not generally manufacture airbags for the same vehicle
models that the Company manufactures for TRW, Delphi does manufacture airbags
for the same models that the Company manufactures under the Delphi Purchase
Order. Delphi, like many other airbag system suppliers, generally subcontracts
a portion of its requirements for automotive airbags. The Company believes
that its good working relationship with its customers, the Company's high
volume and low cost manufacturing capability, the existence of the agreements
with TRW, the lengthy process necessary to qualify as a supplier to an
automobile manufacturer and the desire in the automotive industry to avoid
changes in established suppliers create certain barriers to entry for
potential competitors for the airbag business of the Company's customers.
There can be no assurance, however, that TRW, Delphi or other automotive
suppliers, which have greater financial resources than the Company, will not
in the future increase their manufacturing capabilities with the view to
replacing the demand for the Company's automotive airbags or that they will
not turn to other suppliers of airbags for either existing or new models.
The automotive airbag and airbag systems 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.
7
Governmental Regulations
Airbag systems installed in automobiles sold in the U.S. must comply
with government regulations, including Federal Motor Vehicle Safety Standard
208, promulgated by the U.S. Department of Transportation. The Company's
customers are required to self-certify that airbag systems installed in
vehicles sold in the U.S. 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.
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 Division
The Defense Division is a supplier of military ordnance and other
related products. In September 1994, the Company was awarded a systems
contract for $60 million by the U.S. Army for the delivery of 120 mm mortar
cartridges (the "Systems Contract"). The Defense Division is also a leading
U.S. supplier of projectiles and other metal components for small to medium
caliber training and tactical ammunition. The Defense Division is currently a
sole source supplier of many of the projectiles and other metal components it
manufactures.
Systems Contract
In September 1994, the Defense Division was awarded the Systems
Contract by the U.S. Army. The mortar cartridges sold by the Company to the
U.S. Army 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. Under the Systems Contract, the
Company coordinates and oversees the manufacture and assembly of the
components for the mortar cartridges, the loading of the explosives at a
loading facility, the testing of the completed product and the delivery of the
completed and fully tested product to the U.S. Army. In coordinating these
functions, the Company is responsible for conducting quality control
inspections and ensuring that the contract is fulfilled in a timely and
efficient manner.
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As a prime contractor, the Company generally is subject to the risk
that its subcontractors will not perform in a timely and satisfactory manner,
thereby causing delays in the delivery of completed mortar cartridges to the
U.S. Army. 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 U.S. Army. As a result of these issues, the U.S.
Army has extended the time for delivery under the Systems Contract, and the
Company now anticipates that the initial deliveries of mortar cartridges will
commence in September 1996.
In December 1995, the Company submitted a bid for a follow-on order to
the Systems Contract of approximately $20 million, which was unsuccessful. While
the Company continues to bid on other systems contract opportunities, the
Company's failure to receive the award for the follow-on order could adversely
affect the level of sales in the Company's Defense Division upon completion of
the current Systems Contract.
Ammunition Components
The Defense Division 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 U.S. 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 U.S. Government or a prime defense
contractor, which loads the explosives, assembles the rounds and packages the
ammunition for use.
The Defense Division primarily manufactures components that are used
in training rounds, which are similar to tactical rounds but do not contain
the same explosive or incendiary devices contained in tactical rounds. Because
of the continuous use of training ammunition, the majority of the rounds
purchased by the U.S. Armed Forces on an ongoing basis are training rounds.
The U.S. Armed Forces regularly replenishes its inventory of training
ammunition. The procurement of training ammunition generally is not dependent
upon military conflicts, as is the case with the procurement of tactical
ammunition.
Commercial Products
The Defense Division continues to diversify its product base by
utilizing its existing manufacturing capacity to manufacture metal components
for sale in the consumer products and automotive industries. The Company
intends to capitalize on its existing manufacturing capacity and its
relationships developed through its automotive business to continue to expand
its commercial sales. Some capital improvements in machinery and equipment may
be required in the future in order to continue to pursue certain commercial
opportunities.
9
Markets and Customers
Virtually all of the Company's defense related sales are to the U.S.
Armed Forces or certain prime defense contractors. For fiscal year 1996,
approximately 81% of the Defense Division's sales were made directly to one or
more of the branches of the U.S. Armed Forces and approximately 13% were to
prime defense contractors.
The Defense Division currently 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. In 1994, Olin Corporation acquired the
Aerojet Ordnance Division from Gencorp Inc. Aerojet has manufacturing
capability for small to medium caliber ammunition. The Company believes that
as a result of such acquisition, the Defense Division's volume of new orders
for projectiles and parts from Olin Corporation could be adversely affected.
To date, sales to Olin Corporation have not been materially adversely
affected.
Changes in the strategic direction of defense spending, the timing of
defense procurements and specific defense program appropriation decisions may
adversely affect the performance of the Defense Division, and therefore the
Company, in future years. The precise impact of these matters will depend on
the timing and size of the changes and decisions, and the Company's ability to
mitigate their impact with new business and/or cost reductions. In view of the
continuing uncertainty regarding the size, content and priorities of the
annual Department of Defense budget, the historical financial information
relating to the Company's Defense Division may not be indicative of future
performance.
While the Company has sold limited quantities of ammunition
components to foreign customers in the past, the Company does not anticipate
that foreign sales will constitute a substantial portion of its sales in the
future.
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,
10
although the Company is frequently limited to procuring such materials and
components from sources approved by the U.S. Government.
Quality Control
The Defense Division employs 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 U.S. Government quality control
standard Mil-Q-9858A. 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 Defense Division 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 U.S. 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.
U.S. Government Contracts and Regulations
Virtually all of the Company's defense related contracts, including
the Systems Contract, are firm fixed price contracts with the U.S. Government
or certain of the U.S. Government's prime contractors. Under fixed price
contracts, the Company agrees to perform certain work for a fixed price and,
accordingly, realizes all of the benefit or detriment resulting from decreases
or increases in the costs of performing the contract. Fixed price contracts
carry certain inherent risks, including problems with underestimating costs,
the introduction of new technologies and potential economic and other changes
that may occur over the contract period. Because of economies of scale that
may be realized during the contract term, however, fixed price contracts may
offer significant profit potential.
A majority of the Company's manufacturing agreements with the U.S.
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 U.S. Government to
renew the contract for an additional term. Renewals of U.S. Government
contracts depend upon annual Congressional appropriations and the current
requirements of the U.S. Armed Forces. See "- Markets and Customers." U.S.
Government contracts and contracts with defense contractors are, by their
terms, subject to termination by the U.S. Government for its convenience.
Fixed price contracts provide for payment upon termination for items delivered
to and accepted by the U.S. 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.
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As a government contractor, the Company is subject to extensive and
complex U.S. Government procurement laws and regulations, which provide for
ongoing government reviews of contract procurement, performance and
administration, including routine audits by the Defense Contract Audit Agency
(the "DCAA"). Failure to comply, even inadvertently, with these laws and
regulations could subject the Company or the Defense Division to civil and
criminal penalties, and under certain circumstances, suspension and debarment
from future government contracts for a specified period of time. Recent audits
conducted by the DCAA have not identified any material overcharges or
discrepancies.
Seasonality
The Automotive Division's 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 Division's manufacturing under its agreements with
the U.S. 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 in backlog until it
has received a purchase order and a material procurement release which
specifies the quantity ordered and specific delivery dates. Generally, these
orders are shipped within four to eight weeks of receipt of the purchase order
and material release. As a result, the Company does not believe backlog is a
reliable measure of future airbag sales.
As of March 31, 1996, the Defense Division had backlog of
approximately $26,300,000, of which $22,600,000 is expected to be completed
before the end of fiscal year 1997. As of March 31, 1995, the amount of the
Defense Division's backlog was approximately $62,800,000, reflecting the
receipt of the Systems Contract in fiscal year 1995.
Currency Risk
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 European Agreement. Material fluctuations in certain currency
exchange rates could adversely affect the Company's financial results.
12
Employees
At March 31, 1996, the Company employed approximately 790 employees
in its Automotive Division and 100 employees in its Defense Division. The
Company's hourly employees in Mexico are unionized and, in addition, are
entitled to a federally-regulated minimum wage, which is adjusted, at minimum,
every two years. None of the Company's other employees are unionized. The
Company has not experienced any work stoppages related to its work force and
considers its relations with its employees to be good.
Environmental Matters
The Company has identified two areas of underground contamination at
the Company's facility in Galion, Ohio. One area involves a localized plating
solution spill which currently is being handled by the existing waste water
treatment system. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem; such
environmental consultants have estimated that the Company's voluntary plan of
remediation will take three to five years to complete. In the opinion of
management, no material expenditures will be required for its environmental
control efforts and the final outcome of these matters will not have a
material adverse effect on the Company's results of operations or financial
position. The Company believes that it currently is in compliance with
applicable environmental regulations in all material respects. See Note 8 to
Notes to the Company's Consolidated Financial Statements included elsewhere in
this Report.
ITEM 2. PROPERTIES
Headquarters. The Company currently maintains its corporate
headquarters at Valentec's leased facility in Costa Mesa, California. Under a
Corporate Services Agreement with Valentec, the Company pays its pro rata
portion of the rental costs and related expenses.
Automotive Division. The Company's airbag manufacturing plant in
Ensenada, Mexico is occupied under a three year lease expiring in 1998 with
two one-year renewal options. The Mexican plant has approximately 97,000
square feet of office, manufacturing and research and development space. The
Company's Automotive Division also maintains a 7,900 square foot finished
goods distribution center in Otay Mesa, California under a three year lease
expiring in 1998. In addition, the Company has a 2,750 square foot office in
Scottsdale, Arizona under a three year lease expiring in 1998.
The Company's U.K. subsidiary is located in Gwent, Wales. Through the
Welsh Development Agency, the U.K. government built a 20,000 square foot
addition to the existing facility of Valentec International Limited, a majority
owned subsidiary of Valentec ("VIL") for use by the Company. The Company
currently occupies this space pursuant to a sublease with VIL that expires in
2003. VIL has leased the premises from the Welsh Development Agency under a
ten year lease which also expires in 2003. In equipping its U.K. facility, the
Company is benefitting from the U.K. Industrial Development Act 1982, pursuant
to which the Company is receiving a grant equal to 37.5% of the capital cost
of equipping the facility up to a maximum of [pound]935,000 against an
investment of [pound]2,490,000.
13
In April 1996, the Company commenced construction of a manufacturing
facility in the Czech Republic, and expects to complete construction of this
facility in fiscal year 1998. The facility initially will include 100,000 square
feet of office and manufacturing space.
Defense Division. The Company currently leases a 3,600 square foot
office in Mt. Arlington, New Jersey for the administration of the Systems
Contract. The Company's defense production facility is located in Galion,
Ohio, where the Company currently owns and occupies a manufacturing plant and
administrative offices totaling approximately 97,000 square feet. The Defense
Division facilities are adequate for the current and anticipated levels of
production.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4a. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and members of the Board of Directors of the
Company and their respective ages and positions are as follows:
Name Age Position
---- --- --------
Robert A. Zummo 55 Chairman of the Board, President and Chief Executive Officer
Victor Guadagno 56 President, Defense Division - Systems
John L. Hakes 56 President, European Automotive Operations
W. Hardy Myers 32 Director, Chief Financial Officer and Secretary
Paul L. Sullivan 50 President, North American Automotive Operations
Richard R. Vande Voorde 52 President, Defense Division - Galion
Joseph J. DioGuardi 55 Director
Francis X. Suozzi 55 Director
Robert J. Torok 65 Director
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq National Market (Nasdaq
symbol: ABAG). The following table sets forth the high and low reported sale
prices of the Common Stock on the Nasdaq National Market for the period
commencing on May 6, 1994, the day the Common Stock was first publicly traded,
through March 31, 1996.
High Low
---- ---
Year Ended March 31, 1996
First Quarter $ 20 3/4 $ 16 1/2
Second Quarter $ 21 1/4 $ 15
Third Quarter $ 19 1/2 $ 13 3/4
Fourth Quarter $ 15 3/4 $ 12 1/2
Year Ended March 31, 1995
First Quarter $ 13 1/2 $ 9 1/4
Second Quarter $ 19 1/4 $ 10 3/4
Third Quarter $ 22 $ 16
Fourth Quarter $ 22 1/2 $ 16 1/2
As of July 12, 1996, there were approximately 102 holders of record
of the Common Stock. Based upon information available to it, the Company
believes that there are at least 3,200 beneficial holders 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.
15
Item 6. Selected Financial Data
The selected financial data as of and for the fiscal years ended March
31, 1996 and March 31, 1995, for the periods from April 28, 1993 through March
31, 1994 and January 1, 1993 through April 27, 1993 and for each year in the
two year period ended December 31, 1992 are derived from the combined and
consolidated financial statements of the Company and the Automotive and Galion
divisions of Valentec (the "Valentec Divisions") which have been audited by
Price Waterhouse LLP, independent accountants. The selected financial data as
of and for the period from January 1, 1992 through April 30, 1992 are derived
from unaudited financial statements of the Valentec Divisions, but in the
opinion of management, contain all adjustments, consisting only of normal,
recurring adjustments, which are necessary for a fair statement of the results
of such periods. Subsequent to the management buy-out of Valentec on April 27,
1993 (the "Management Buy-Out"), Valentec and the Company changed their
respective fiscal year ends from December 31 to March 31. The accounting bases
of the Valentec Divisions subsequent to the Valentec Management Buy-Out on
April 27, 1993 differs from the historical accounting bases of these
divisions. 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.
Years Ended Eleven Years Ended
March 31, Months Four Months December 31,
----------- ------ ----------- ------------
April 28, January 1, January 1,
1993 1993 1992
through through through
March 31, April 27, April 30,
1996 (1) 1995(1) 1994 1993 1992 1992 1991
-------- ------- ---- ---- ---- ---- ----
(in thousands, except share and per share data and footnotes)
Income Statement Data
Net sales........................... $94,942 $51,779 $22,444 $4,580 $2,097 $7,061 $5,932
Cost of goods sold.................. 81,908 44,553 18,895 4,436 1,443 6,223 4,689
------ ------ -------- -------- ------- ------- ------
Gross profit........................ 13,034 7,226 3,549 144 654 838 1,243
Selling, general and
administrative expenses.......... 5,430 4,050 2,738 538 207 828 512
Non-recurring consulting charge..... - - 1,250(2) - - - -
----- ----- --------- ---------- --------- ---------- ------
Operating income (loss)............. 7,604 3,176 (439) (394) 447 10 731
Other expense (income).............. (229) (366) (83) 13 - - -
Interest expense (income), net...... (197) 126 235 10 11 39 27
----- ---- --------- ---------- ------- ---------- -------
Income (loss) before income
taxes............................ 8,030 3,416 (591) (417) 436 (29) 704
Income tax provision (benefit) 3,116 1,283 (207) (167) 174 (11) 282
----- ------ --------- -------- ------ -------- ------
Net income (loss)................... $4,914 $2,133 $ (384) $ (250) $ 262 $ (18) $ 422
====== ====== ========= ======= ========= ========= ======
Per Share Data
Pro forma earnings per share(3) $0.99 $0.53 - - - - -
Pro forma weighted average
common and common equivalent
shares outstanding.............. 4,980,884 4,030,787 - - - - -
16
March 31, December 31,
-------- -----------
April 27,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(in thousands)
--------------
Balance Sheet
Working capital................................... $25,067 $ 8,206 $1,504 $ 749 $1,076 $ 401
Total assets...................................... 49,831 28,311 12,837 4,943 4,800 2,886
Long-term debt, net of current portion............ 3,087 2,043 4,760 - 64 24
Division equity (deficit)......................... - - 866 (1,223) (973) (955)
Stockholders' equity.............................. 35,344 15,971 - - - -
- -----
(1) The Company did not declare dividends during fiscal year 1995 or 1996.
(2) As more fully described in Note 5 to Notes to the Company's
Consolidated Financial Statements, the Valentec Divisions incurred a
$1,250,000 non-recurring, non-cash expense related to the issuance of
shares of Common Stock to certain stockholders and affiliates of
Champion.
(3) The pro forma weighted average number of common and common equivalent
shares outstanding 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 intercompany and other indebtedness.
The Valentec Divisions did not have a defined capital structure and,
as a result, earnings per share amounts are not presented for the
periods prior to the fiscal year ended March 31, 1995.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Due to the Company's historical and anticipated growth, the
Company believes that period-to-period comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication
of future performance. The following discussion should be read in conjunction
with the Company's consolidated financial statements and notes thereto,
appearing elsewhere in this Report.
Automotive Division. The Automotive Division commenced
operations as part of Valentec in May 1992. Product qualification and initial
production began in July 1992 with the first significant sales occurring in
October 1992. In March 1993, the Company signed a five-year requirements
contract with TRW, contemplating increasing deliveries of airbags over the
term of the contract. In order to obtain the five-year contract, the Company
had to position itself to meet TRW's delivery schedules. As a result, the
Company incurred significant start-up costs in 1992 and 1993 and continues to
incur start-up costs as it expands its operations. As a result of these costs,
the operating results of the Automotive Division are not necessarily
indicative of future operating results. The Company signed a two-year
agreement and commenced manufacturing of passenger side airbags in Europe for
TRW in December 1993 and also received orders and commenced manufacturing
driver side airbags in the U.S. for TRW in April 1994.
As the Company continues to expand worldwide, it will
continue to experience variability in its operating results. During fiscal
year 1995, the Company operated a temporary facility in Germany in order to
meet TRW-Europe's rapidly growing demand for airbags, which adversely affected
the Company's operating profits during that fiscal year. The Company currently
subcontracts certain aspects of the manufacturing process for airbags in
Europe to two subcontractors in the Czech Republic. The Company expects to
replace the functions of these subcontractors with its own facility currently
under construction in the Czech Republic. The Automotive Division's business
is also subject to the seasonal characteristics of the automotive industry in
which there are plant shutdowns in the third and fourth quarters of each
calendar year, typically resulting in lower shipments of airbags during these
quarters. Additionally, the Company's operating results could be impacted by
the timing of the introduction of new models of automobiles for which the
Company manufactures airbags, changes in consumer vehicle preferences and
major labor disputes in the automobile industry.
Defense Division. Historically, the demand for the Defense
Division's products has been driven primarily by the U.S. Government's
purchase of small and medium caliber military ammunition. In September 1994,
the Company was awarded the Systems Contract. Under the Systems Contract, the
Company serves as the prime contractor coordinating the manufacture and
assembly of the product components by various subcontractors. The Systems
Contract is accounted for on the percentage of completion basis. Accordingly,
the Company will experience variability in revenues from the Systems Contract
because revenues are based upon the costs incurred in fulfilling this
contract. In December
18
1995, the Company submitted a bid for a $20 million follow-on order to the
Systems Contract, which was unsuccessful. While the Company continues to bid
on other systems contract opportunities, the Company's failure to receive the
award for the follow-on order could adversely affect the level of sales in the
Company's Defense Division upon completion of the current Systems Contract.
Results of Operations
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
Net Sales. Net sales for the Automotive Division increased to
$49,091,000 for the year ended March 31, 1996 from $43,073,000 for the same
period in the prior year. The Automotive Division's unit sales increased
approximately 23% over the prior year, while overall sales increased by 14%.
The Company's unit sales continued to increase reflecting higher sales of both
passenger and driver side airbags. Sales were unfavorably impacted in the
current period by the softening U.S. automotive market and a changing product
mix in Europe, and to a lesser extent, decreases in material prices, delays on
certain model year 1996 programs by certain original equipment manufacturers
and the GM labor dispute in the fourth quarter of fiscal year 1997.
Net sales for the Defense Division increased to $45,851,000 for the
year ended March 31, 1996 from $8,706,000 for the same period in the prior
year. Sales increased period to period as a result of significantly higher
revenues from the Systems Contract and, to a lesser extent, increased
shipments of metal ordnance components. Due to certain delays in the Systems
Contract, the Company expects to experience variability quarter to quarter in
fiscal year 1997. Sales for the Defense Division are expected to be generally
lower in fiscal year 1997.
Gross Profit. Gross profit for the Automotive Division increased to
$7,134,000 for the year ended March 31, 1996 from $5,361,000 for the prior
year. The improvement in gross profit resulted primarily from the increased
sales volume, and to a lesser extent from greater efficiencies related to
higher levels of production. Gross profit was unfavorably impacted in the
current fiscal year by certain program delays and the GM labor dispute in the
fourth fiscal quarter. During the year ended March 31, 1995, the continued
improvement in the gross profit of the Automotive Division's North American
operations was partially offset by certain expenses related to the expansion
of the Automotive Division's European operations. Specifically, during the
year ended March 31, 1995, TRW-Europe's accelerated demand for airbags in
Europe required the Company to operate, on a temporary basis, a high cost
facility in Germany pending the transfer of certain manufacturing operations
to two Czech subcontractors. Margins in Europe are expected to remain lower
than in the U.S. until the Company transitions its European passenger airbag
manufacturing to its facility in the Czech Republic currently under
construction. The Company expects this transition to occur in fiscal 1998.
Certain costs relating to the launching of new programs in North America and
Europe have been capitalized and will be amortized over the estimated lives of
such programs.
Gross profit for the Defense Division increased to $5,900,000 for the
year ended March 31, 1996 from $1,865,000 for the prior year. Gross profit
increased primarily as a result of higher sales from the
19
Systems Contract, partially offset by changes in the metal ordnance component
product mix, with decreased sales of several older, higher margin defense
programs and higher sales of newer, lower margin defense and commercial
programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the Automotive Division increased to $3,476,000
for the year ended March 31, 1996 from $2,964,000 for the prior year. The
increase resulted primarily from greater expenditures related to the continued
expansion of the Company's automotive operations, including additional support
personnel, increased marketing and professional services and higher corporate
overhead expenses.
Selling, general and administrative expenses for the Defense Division
increased to $1,954,000 for the year ended March 31, 1996 from $1,086,000 for
the prior year, reflecting increased expenses related to the Systems Contract,
higher bid and proposal costs associated with potential future contracts and
higher corporate overhead expenses.
The higher corporate overhead expense allocated to the Automotive and
Defense Divisions in the current period resulted principally from increased
expenses for administration, marketing and professional services associated
with the continued growth and expansion of the Company's operations, including
increased staffing, legal, accounting and insurance expenses.
Operating Income. The Automotive Division had operating income of
$3,658,000 for the year ended March 31, 1996 from $2,397,000 for the prior
year. The increase resulted primarily from the continued improvement in the
profitability of the manufacturing operations due to higher sales volume and
greater efficiencies, partially offset by increased expenses for
administrative, marketing and professional services supporting the ongoing
expansion of the Company's automotive operations.
Operating income for the Defense Division increased to $3,946,000 for
the year ended March 31, 1996, compared to $779,000 for the prior year.
Operating income increased as a result of higher income from the Systems
Contract, partially offset by higher corporate overhead expenses and, to a
lesser extent, lower margins on metal ordnance components.
Net Income. Net income increased to $4,914,000 for the year ended
March 31, 1996 from $2,133,000 for the prior year. The decline in other income
is attributable to lower translation gains on foreign currency transactions,
while the increase in interest income is attributable to the Company's
increased cash balances.
Year Ended March 31, 1995 Compared to the Period from April 28, 1993 through
March 31, 1994 (the "Eleven Months")
Net Sales. Net Sales for the Automotive Division increased
to $43,073,000 for the year ended March 31, 1995 from $14,970,000 for the
Eleven Months. Sales to TRW continued to grow dramatically in the fiscal year
ended March 31, 1995 with the first significant shipments of driver side
airbags for the North American market and passenger side airbags for the
European market. Passenger
20
side airbag production for the North American and Asian markets continued to
increase in the fiscal year ended March 31, 1995 as the Company produced
passenger side airbags for additional vehicle platforms.
Net sales for the Defense Division increased to $8,706,000
for the year ended March 31, 1995 from $7,474,000 for the Eleven Months. The
Defense Division's sales increased as a result of initial revenues from
performance of the Systems Contract, partially offset by lower demand for
metal ordnance components.
Gross Profit. Gross profit of the Automotive Division
increased to $5,361,000 for the year ended March 31, 1995 from $1,155,000 for
the Eleven Months. The improvement in gross profit resulted primarily from the
increased sales volume, and to a lesser extent from greater efficiencies
related to higher levels of production. The Eleven Months was negatively
impacted by expenses incurred to achieve initial volume production in the
Mexican facility. During the year ended March 31, 1995, the continued
improvement in the gross profit of the Automotive Division's North American
operations was partially offset by certain expenses related to the expansion
of the Automotive Division's European operations. Specifically, accelerated
demand for airbags in Europe by TRW required the Company during the year ended
March 31, 1995, to operate, on a temporary basis, a high cost facility in
Germany pending the transfer of certain manufacturing operations to a Czech
subcontractor. Certain costs relating to the launching of new programs in
North America and Europe have been capitalized and will be amortized over the
estimated lives of such programs.
Gross profit for the Defense Division decreased to
$1,865,000 for the year ended March 31, 1995 from $2,394,000 for the Eleven
Months. The gross profit declined as a result of lower margin sales from new
defense and commercial programs and the phase-out of several older, higher
margin defense programs. Additionally, lower sales period to period at the
Galion facility impacted the Division's fixed overhead absorption, further
impacting gross profit.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the Automotive Division decreased to
$2,964,000 for the year ended March 31, 1995 from $3,443,000 for the Eleven
Months. The decrease from period to period was due primarily to a $1,250,000
non-recurring, non-cash expense in the earlier period related to the issuance
of shares of Common Stock to the Champion Holders (see Note 5 to the Company's
consolidated financial statements), offset, to a large extent, by higher
expenses in the current period related to the continued expansion of the
Company's businesses. This expansion necessitated an increase in the number of
support personnel, higher corporate overhead expenses as a result of being a
public company and increased marketing expenses on higher sales volumes.
Selling, general and administrative expenses for the Defense
Division increased to $1,086,000 for the year ended March 31, 1995 from
$545,000 for the Eleven Months, reflecting increased expenses related to the
Systems Contract.
Operating Income. The Automotive Division had operating
income of $2,397,000 for the year ended March 31, 1995, compared to an
operating loss of $2,288,000 for the Eleven Months.
21
The increase from period to period resulted primarily from the continued
improvement in the profitability of the manufacturing operations due to higher
sales volume and greater efficiencies, partially offset by certain expenses
related to the Automotive Division's European expansion and higher corporate
overhead expenses. The prior period also included a $1,250,000 non-recurring,
non-cash expense related to the issuance of shares of Common Stock to the
Champion Holders.
Operating income for the Defense Division declined to
$779,000 for the year ended March 31, 1995, compared to $1,849,000 for the
Eleven Months. Operating margins in the current period were negatively
impacted by lower sales volume at the Division's Galion facility, a changing
product mix reflecting the phase-out of several older, higher margin defense
programs which were replaced by new lower margin defense and commercial work
and higher administration expenses related to the Systems Contract.
Net Income. Net income increased to $2,133,000 for the year
ended March 31, 1995 from a loss of $384,000 for the Eleven Months as the
higher net income of the Automotive Division exceeded the decline in the
income of the Defense Division. In addition, other income increased in the
current period as a result of favorable foreign currency movements. Interest
expense also declined period to period reflecting lower borrowings, while
income tax expense increased reflecting the Company's shift to taxable
earnings.
Period from January 1, 1993 through April 27, 1993 Compared to the Period from
January 1, 1992 through April 30, 1992 (each referred to as a "Four Month
Period")
Net Sales. Net sales for the Automotive Division were
$1,527,000 for the Four Month Period ended April 27, 1993, as the Company
qualified as a supplier of airbags to TRW-U.S., signed a five-year
requirements contract for passenger side airbags in March 1993, received
initial orders for delivery and commenced shipments to TRW-U.S. There were no
sales for the Automotive Division during the Four Month Period ended April 30,
1992.
The Defense Division's net sales increased to $3,053,000 for
the Four Month Period ended April 27, 1993 from $2,097,000 for the Four Month
Period ended April 30, 1992, primarily due to the shipment of a foreign order
of $825,000.
Gross Profit. Gross profit (loss) of the Automotive Division
for the Four Month Period ended April 27, 1993 was $(630,000), while there
were no results of operations for the Four Month Period ended April 30, 1992.
Cost of sales of the Automotive Division of $2,157,000 for the Four Month
Period ended April 27, 1993 exceeded net sales for such period as the Company
incurred significant start-up costs including expenses incurred in qualifying
the airbag products, hiring of management, installation of facilities and
equipment in advance of customer orders and manufacturing start-up costs.
Gross profit for the Defense Division increased to $774,000
for the Four Month Period ended April 27, 1993 from $654,000 for the Four
Month Period ended April 30, 1992. The increase in
22
net sales was partially offset by higher material costs on certain products
and an increase in overhead expenses.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses were $258,000 for the Automotive Division
for the Four Month Period ended April 27, 1993, while there were no such
expenses for the Four Month Period ended April 30, 1992. These continued
increases in selling, general and administrative expenses were due primarily
to higher salary and benefit costs related to additional operational and
administrative personnel hired to manage the expansion of the Automotive
Division, and, to a lesser extent, higher commissions on higher sales volumes
and increased corporate overhead allocations.
Selling, general and administrative expenses for the Defense
Division increased to $280,000 for the Four Month Period ended April 27, 1993
from $207,000 for the Four Month Period ended April 30, 1992. This increase is
attributable primarily to a higher corporate overhead allocation.
Operating Income. The Company had an operating loss of
$394,000 for the Four Month Period ended April 27, 1993 compared to operating
income of $447,000 for the Four Month Period ended April 30, 1992. The
operating loss in the later period is attributable to the Automotive
Division's continued start-up costs, offset in part by Galion's operating
income.
Net Income. The Company incurred a net loss of $250,000 for
the Four Month Period ended April 27, 1993 compared with net income of
$262,000 for the Four Month Period ended April 30, 1992. The income tax
provision (benefit) was calculated based upon the combined results of
operations of the Valentec Divisions and using a 40% combined federal and
state income tax rate.
Liquidity and Capital Resources
As the Company's business has grown, overall cash
requirements for equipment and working capital have historically been met
through a combination of the proceeds from the Company's public offerings,
cash flow from operations, equipment financing and revolving credit
borrowings. The Company's expects its equipment and working capital
requirements to continue to increase as a result of the anticipated growth of
the Automotive Division.
On June 21, 1995, the Company completed an additional equity
offering which resulted in net proceeds to the Company of approximately
$16,500,000, including the underwriters' exercise of the over-allotment
option. The Company has and will continue to use the net proceeds from this
offering to expand and enhance its existing worldwide airbag manufacturing
operations, to construct a new facility in the Czech Republic and enhance
research and development and prototype capabilities.
On March 15, 1996, the Company terminated its $3.5 million
credit facility with Congress Financial Corporation, (see Note 6 to Notes to
the Company's Consolidated Financial Statements) and entered into a $10.0
million credit facility with Citicorp USA, Inc., to be used for working
capital purposes (the "Credit Facility"). Indebtedness under the Credit
Facility is secured by substantially all the
23
assets of the Company and bears interest at the prime rate. The Credit
Facility contains certain financial covenants, including limitations on
indebtedness and liens, minimum interest and fixed charge coverage ratios,
maximum leverage, minimum tangible net worth and limitation on the payment of
dividends.
In June 1996, the Company entered into the Phoenix Purchase Agreement
to purchase Phoenix Airbag GmbH, a major European airbag manufacturer. The
purchase price for the acquisition is approximately $22 million, subject to a
net worth adjustment, plus a contingent purchase price of approximately $7.5
million. The contingent purchase price would be paid in three annual
installments commencing April 30, 1997 if certain targets are met by Phoenix.
Under the Phoenix Purchase Agreement, the Company would, under certain
circumstances, be required to provide a bank guaranty in August 1997 with
respect to up to approximately $4.0 million of the contingent purchase price.
The Company has provided to Phoenix AG a deposit of approximately $1.65
million with respect to the acquisition of Phoenix. Under the terms of the
Phoenix Purchase Agreement, if the acquisition is not consummated by August
15, 1996, Phoenix AG would not be required to consummate the transaction and
the Company would forfeit its deposit.
The Company has received a proposal letter from a U.S. bank to
provide financing for the acquisition of Phoenix in the form of a $20 million
term loan, amortizing over a period of four years. The proposal does not
constitute a commitment, which would be subject, among other conditions, to
the completion of due diligence by the bank. In connection with such term
loan, the Company would obtain a new $6 million revolving credit facility
(replacing the existing Credit Facility) and a non- revolving stand-by letter
of credit facility to secure payment, if necessary, of the contingent purchase
price for the acquisition of Phoenix. (The term loan, revolving credit
facility and stand-by letter of credit facility are collectively referred to
as the "New Credit Facility".) The New Credit Facility would bear interest at
the prime rate and be secured by substantially all the assets of the Company.
The New Credit Facility would contain certain financial covenants, including
limitation on additional indebtedness and liens, fixed charge coverage ratios,
maximum leverage, minimum ratio of current assets to current liabilities and
minimum tangible net worth. The Company anticipates that the New Credit
Facility will be available prior to August 15, 1996. The Company is also in
discussions with other potential financing sources relating to the
acquisition. There can be no assurance, however, that the New Credit Facility
will be obtained by August 15, 1996, or if it is not obtained, that
alternative sources will be available.
New Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of " (FAS 121). FAS 121 requires the Company to review long-lived assets and
certain intangible assets for impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
In the event the sum of the expected undiscounted future cash flows resulting
from the use of the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its
fair value is recorded. FAS 121 also requires that long-lived assets and
certain intangible assets to be disposed of be recorded at the lower of
carrying value or fair value less disposal costs. Management has deferred
adoption of FAS 121,
24
which is effective for the Company beginning in the fiscal year ending March
31, 1997. Due to the complexities of the calculations that are required to
implement FAS 121, the effect on the Company's consolidated financial
statements of adopting this statement is not yet known nor reasonably
estimable.
Seasonality and Inflation
The Automotive Division'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 Division'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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item appears in Item 14(a)(1) and (2)
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
Except for information included in Item 4a of this report,
the information called for by Items 10, 11, 12 and 13 of this Report is
incorporated by reference to those portions of the Company's 1996 Proxy
Statement which contain 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.
25
(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 Agreement, dated June 6, 1996, among AB 9607
Verwaltungs GmbH & Co. KG., Phoenix
Aktiengesellschaft and Phoenix Airbag GmbH (the
"Phoenix Purchase Agreement") (confidential treatment
requested as to part)
2.2 Amendment Agreement, dated June 28, 1996, to the
Phoenix Purchase Agreement
3.1(1) Certificate of Incorporation of Safety Systems
International, Inc.
3.2(1) Amended and Restated Certificate of Incorporation of
Safety Systems International, Inc.
3.3(1) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Systems
International, Inc.
3.4(11) Certificate of Amendment to the Amended and Restated
Certificate of Safety Components International, Inc.
("Safety Components")
3.5(1) By-laws of Safety Components
4.1(2) Warrant Agreement, dated as of May 13, 1994 between
Hampshire Securities Corporation and Safety Components
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)
26
10.4(2) Representation Agreement, effective as of May 13, 1994,
by and between Automotive Safety Components
International, Inc. ("Automotive Safety") and Champion
Sales and Service Co. ("Champion")
*10.5(4) Employment Agreement, effective as of May 13, 1994,
between Safety Components and Robert A. Zummo
*10.6(4) Employment Agreement, effective as of May 13, 1994,
between Safety Components and W. Hardy Myers
*10.7(4) Stock Option Plan of Safety Components
10.8(2) Master Asset Transfer Agreement, dated May 13, 1994,
among Valentec, Safety Components, Galion, Inc.
("Galion"), and Automotive Safety
10.9(2) Asset Purchase Agreement, dated May 13, 1994, between
VIL and Automotive Safety Components International
Limited ("Automotive Limited")
10.10(9) Corporate Services Agreement, dated as of April 1, 1995,
between Valentec and Safety Components
10.11(2) Facility Agreement, dated May 13, 1994, between
Valentec and Automotive Safety
10.12(2) Facility Agreement, dated May 13, 1994, between VIL and
Automotive Limited
10.13(2) Representation Agreement, effective as of May 13, 1994,
by and between Automotive Limited and Champion
10.14(5) Form of Sublease Agreement, dated May 13, 1994,
between VIL and Automotive Limited
*10.15(6) Employment Agreement, dated as of September 29, 1994
by and between Safety Components and Paul L. Sullivan
10.16(7) Contract DAAA09-94-C-0532 (Systems Contract)
between Safety Components and the U.S. Army (the
"Systems Contract")
*10.17(8) Employment Agreement, effective as of September 19,
1994, between Safety Components and Victor Guadagno
27
10.18(8) Lease Agreement, dated February 15, 1995 between
Inmobiliara Calibert, S.A. de C.V. and Automotive Safety
Components International SA. de C.V.
10.19 Credit Agreement, dated as of March 15, 1996, among
Safety Components, Automotive Safety, Galion, Valentec
Systems, Inc. and CUSA
10.20 Pledge and Security Agreement, dated as of March 15,
1996, made by Safety Components, Automotive Safety,
Galion and Valentec Systems in favor of CUSA
10.21(10) Employment agreement, dated June 1, 1995, between
Automotive Limited and John Laurence Hakes
10.22(10) Underwriting Agreement, dated June 15, 1995, among BT
Securities Corporation, Prime Charter Ltd., Safety
Components, Valentec and the other selling stockholders
named therein
11 Statement of Computation of Per Share Earnings
21.1 Subsidiaries of Safety Components
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
-----------------------------------------------
* Indicates exhibits relating to executive compensation.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (the "1994 Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") on February 11,
1994.
(2) Incorporated by reference to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1994, filed with the Commission.
(3) Incorporated by reference to Amendment No. 2 to the 1994
Registration Statement, filed with the Commission on March 18, 1994.
28
(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
29
APITAL PRINTING SYSTEMS]
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: July 15, 1996
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
------------------
Robert A. Zummo Chairman of the Board, July 15, 1996
President and Chief Executive
Officer (Principal Executive
Officer)
/s/W. Hardy Myers
------------------
W. Hardy Myers Director, Chief Financial Officer July 15, 1996
and Treasurer (Principal
Financial and Accounting
Officer)
/s/Joseph J. DioGuardi
------------------
Joseph J. DioGuardi Director July 15, 1996
/s/Francis X. Suozzi
------------------
Francis X. Suozzi Director July 15, 1996
/s/Robert J. Torok
------------------
Robert J. Torok Director July 15, 1996
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants. F-2
Consolidated Balance Sheets as of March 31, 1996 and March 31, 1995 F-3
Consolidated Statements of Operations for the Years ended March 31,
1996 and March 31, 1995, for the Period from April 28, 1993 through
March 31, 1994 and for the Period from January 1 through
April 27, 1993. F-4
Consolidated Statements of Stockholders' Equity for the Years ended
March 31, 1996 and March 31, 1995, for the Period from April 28, 1993
through March 31, 1994 and for the Period from January 1 through
April 27, 1993. F-5
Consolidated Statements of Cash Flows for the Years ended
March 31, 1996 and March 31, 1995, for the Period from
April 28, 1993 through March 31, 1994 and for the Period from
January 1 through April 27, 1993. F-6
Notes to Consolidated Financial Statements. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Safety Components International, Inc.
In our opinion, the consolidated financial statements of Safety Components
International, Inc. and Safety Components International, a division of Valentec
International Corporation (Successor Division), listed in the accompanying index
appearing under Item 14(a)(1) and (2) on page F-1, present fairly in all
material respects, the financial position of Safety Components International,
Inc. and its subsidiaries at March 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, and the period from
April 28, 1993 through March 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
In our opinion, the consolidated financial statements of Safety Components
International, a division of Valentec International Corporation (Predecessor
Division), listed in the accompanying Index appearing under Item 14(a)(1) and
(2) on page F-1, present fairly. In all material respects, the results of
operations and cash flows of Safety Components International, a division of
Valentec International Corporation (Predecessor Division), for the period from
January 1, 1993 through April 27, 1993, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
April 30, 1996, except as to Note 12, which is as of July 11, 1996
F-2
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, March 31,
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 12,033 $ 3,846
Accounts receivable (Notes 2 and 4) .................. 16,614 7,109
Inventories (Notes 2 and 4) .......................... 5,315 5,948
Prepaid and other .................................... 925 658
-------- --------
Total current assets .............................. 34,887 17,561
Property, plant and equipment (Notes 2 and 4) ........... 12,192 8,908
Other assets (Note 2) ................................... 2,752 1,842
-------- --------
Total assets ...................................... $ 49,831 $ 28,311
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 8,066 $ 7,454
Accrued liabilities (Note 4) ......................... 1,057 1,532
Current portion of long-term obligations
(Note 6) .......................................... 697 369
-------- --------
Total current liabilities ......................... 9,820 9,355
Long-term obligations (Note 6) .......................... 3,087 2,043
Other long-term liabilities (Note 4) .................... 1,580 942
-------- --------
Total liabilities ................................. 14,487 12,340
Commitments and contingencies (Note 8)
Stockholders' equity (Notes 1, 3 and 11):
Preferred stock, $.10 par value per share,
authorized 2,000,000 shares, no shares
issued..............................................
Common stock, $.01 par value per share,
authorized 10,000,000 shares, issued and
outstanding 5,048,500 shares and 4,060,000
shares at March 31, 1996 and 1995,
respectively ....................................... 51 41
Common stock warrants ................................ 1 1
Additional paid-in capital ........................... 30,058 13,595
Treasury stock, 90,000 shares, at cost ............... (1,379)
Retained earnings .................................... 6,979 2,065
Cumulative translation adjustment .................... (366) 269
-------- --------
Total stockholders' equity ........................ 35,344 15,971
-------- --------
Total liabilities and stockholders' equity ........ $49,831 $ 28,311
======== ========
See notes to consolidated financial statements.
F-3
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Period from Period from
Year Year April 28, 1993 January 1, 1993
ended ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- -------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Net sales ........................ $ 94,942 $ 51,779 $ 22,444 $ 4,580
Cost of sales .................... 81,908 44,553 18,895 4,436
----------- ----------- ----------- -----------
Gross profit ................... 13,034 7,226 3,549 144
Selling and marketing expense .... 1,102 894 402 68
General and administrative expense 4,328 3,156 2,336 470
Non-recurring consulting charge
(Note 5) ....................... 1,250
----------- ----------- ----------- -----------
Operating income (loss) ........ 7,604 3,176 (439) (394)
Other expense (income) ........... (229) (366) (83) 13
Interest income .................. 578 118
Interest expense ................. 381 244 235 10
----------- ----------- ----------- -----------
Income (loss) before income taxes 8,030 3,416 (591) (417)
Provision (benefit) for income
taxes (Notes 2 and 7) .......... 3,116 1,283 (207) (167)
----------- ----------- ----------- -----------
Net income (loss) .............. $ 4,914 $ 2,133 $ (384) $ (250)
=========== =========== =========== ===========
Earnings per common and common
equivalent share (Note 2) ...... $ .99 $ .53
=========== ===========
Weighted average common
and common equivalent shares ... 4,980,884 4,030,787
=========== ===========
See notes to consolidated financial statements.
F-4
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARES)
Common Common Common Additional Cumulative
Stock Stock Stock Paid-in Treasury Retained Translation Division
Shares Amount Warrants Capital Stock Earnings Adjustment Equity
------ ------ -------- ------- ----- -------- ---------- ------
PREDECESSOR DIVISION
Balances at December 31, 1992................ $ (973)
Net loss for the period from
January 1, 1993 to April 27, 1993.......... (250)
-------
Balances at April 27, 1993................... $(1,223)
=======
SUCCESSOR DIVISION AND
THE COMPANY
Issuance of common stock..................... 2,400,000 $24 $ $ $ $ $ $
Settlement of obligation to issue
stock (Note 5)............................. 1,250
Net loss for the period from April 28,
1993 to March 31, 1994..................... (384)
--------- ---- --- ------- -------- ------ ----- ------
Balances at March 31, 1994................... 2,400,000 24 866
Net income for the period from
April 1, 1994 to May 13, 1994.............. 68
Transfer of assets (Note 3).................. 934 (934)
Capital contribution from Valentec
(Note 3)................................... (100,000) (1)
Issuance of common stock (Note 3)............ 1,760,000 18 12,661
Issuance of warrants for 128,000
shares of common stock (Note 3)............ 1
Net income for the period from
May 14, 1994 to March 31, 1995............. 2,065
Foreign currency translation adjustment...... 269
--------- ---- --- ------- -------- ------ ----- ------
Balances at March 31, 1995................... 4,060,000 41 1 13,595 2,065 269 $ 0
======
Issurance of common stock.................... 1,078,500 10 16,557
Purchase of treasury stock................... (90,000) (1,379)
Re-purchase 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)
--------- ---- --- ------- -------- ------ -----
Balances at March 31, 1996................... 5,048,500 $51 $1 $30,058 $(1,379) $6,979 $(366)
========== ==== === ======= ======== ====== =====
See notes to consolidated financial statements.
F-5
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Period from Period from
Year Year April 28, 1993 January 1, 1993
ended ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- ------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Cash flow from operating activities:
Net income (loss) .................................. $ 4,914 $ 2,133 $ (384) $ (250)
Adjustments to reconcile net income:
(loss) to net cash provided by (used
for) operating activities:
Depreciation ................................ 1,104 743 314 146
Non-recurring consulting charge ............. 1,250
Changes in assets and liabilities:
Accounts receivable ....................... (9,662) (4,607) (1,108) 161
Inventories ............................... 532 (3,024) (816) (235)
Prepaid and other current assets .......... (268) (60) (554) (2)
Accounts payable .......................... 749 4,938 1,112 224
Accrued liabilities ....................... (429) 476 264 227
Other assets and liabilities .............. (440) (1,500) 30 (78)
-------- -------- -------- --------
Net cash provided by (used
for) operating activities ..................... (3,500) (901) 108 193
-------- -------- -------- --------
Cash flow used for investing activities:
Additions to property, plant and
equipment ..................................... (4,588) (2,473) (3,710) (198)
-------- -------- -------- --------
Cash flow provided by financing activities:
Net proceeds from sale of common stock ............. 16,568 14,564
Purchase of treasury stock ......................... (1,379)
Repurchase of common stock warrants ................ (94)
Payment to parent company in consideration
for transfer of assets ........................ (1,885)
Net borrowing (repayments) under
long-term obligations ......................... 1,460 (3,269) 4,196 (64)
Changes in intercompany accounts ................... (2,326) (591) 84
-------- -------- -------- --------
Net cash provided by financing activities ..... 16,555 7,084 3,605 20
-------- -------- -------- --------
Effect of exchange rate changes on cash .............. (280) 96
-------- -------- -------- --------
Change in cash and cash equivalents .................. 8,187 3,806 3 15
Cash and cash equivalents, beginning of period ....... 3,846 40 28 13
-------- -------- -------- --------
Cash and cash equivalents, end of period ............. $ 12,033 $ 3,846 $ 31 $ 28
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Interest ........................................... $ 381 $ 134 $ 17
Income taxes ....................................... 2,344 993
See notes to consolidated financial statements.
F-6
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the businesses of Safety Components International, Inc. (the Company) and
its subsidiaries. The Company was formed for the purpose of acquiring the
assets and assuming the liabilities of certain divisions of Valentec
International Corporation (Valentec), including the Galion Division, the U.S.
Automotive Division (including Valentec's Mexican subsidiary, Valentec de
Mexico S.A. de C.V.) and the U.K. Automotive Division of Valentec's U.K.
subsidiary, Valentec International Limited (VIL) in conjunction with its
initial public offering (the Initial Public Offering) (see Note 3) completed
on May 13, 1994.
On April 27, 1993, RAZ Acquisition Corporation acquired all of the
outstanding common stock of Valentec (the Acquisition) from Insilco
Corporation (Insilco). Subsequent to the Acquisition, Valentec was merged into
RAZ Acquisition Corporation which subsequently changed its name to Valentec
International Corporation. The Acquisition was accounted for as a purchase.
The financial statements of the Division prior to the Acquisition as presented
for the period January 1, 1993 to April 27, 1993 are identified as
"Predecessor Division" and subsequent to the Valentec Acquisition, but prior
to the Initial Public Offering of the Company as "Successor Division."
The accompanying consolidated financial statements for the periods
subsequent to the Initial Public Offering include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying financial statements for the periods prior to the Initial
Public Offering include the accounts of Safety Components International (the
Division), which was created by combining the U.S. Automotive and Galion
Divisions of Valentec and the U.K. Automotive Division of VIL.
The Company's Automotive Division manufactures automotive airbags for
specific models of several domestic and foreign automobile manufacturers under
contracts with major airbag systems producers. To date, TRW Vehicle Safety
Systems, Inc. (TRW) and its affiliates have been the Company's major
automotive airbag customer.
The Defense Division consists of two main operating units: Galion and
Systems. Galion manufactures projectiles and other metal components for small
to medium caliber training and tactical ammunition for the U.S. Armed Forces.
Galion also manufactures metal components for use in the automotive and
consumer products industries. Systems was established in June 1994 to serve as
the prime contractor under a $60 million systems contract for mortar
cartridges (the Systems Contract) for the U.S. Army, coordinating the
manufacture and assembly of components supplied by various subcontractors.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenues are generally recognized as units are shipped to customers.
The Company accounts for certain long-term contracts under the
percentage of completion method, whereby progress toward contract completion
is measured on a cost incurred basis (including direct labor, materials and
allocable indirect manufacturing overhead and general and administrative
costs). Losses on long-term contracts are recognized in the period when such
losses are identified. On certain contracts with the U.S. Government, contract
costs, including indirect costs, are subject to audit and adjustment by
negotiations between the Company and government representatives. Contract
revenues have been recorded in amounts which are expected to be realized upon
final settlement.
F-7
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from major customers
Revenues from major customers were as follows (in thousands):
Period from Period from
Year Year April 28, 1993 January 1, 1993
ended ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- -------------- -------------- --------------
(The Company) (The Company) (Successor (Predecesor
Division) Division)
TRW ...................... $46,038 $43,004 $14,970 $ 1,527
Direct sales to the U.S.
Government ............. 37,145 2,553 1,699 842
Indirect sales to the U.S.
Government ............. 5,954 5,213 5,387 2,104
Concentration of credit risk
The Company is potentially subject to a concentration of credit risk
consisting of its trade receivables, a significant portion of which are due
from TRW, the U.S. Government and certain prime defense contractors. The
Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential
losses for uncollectible accounts and such losses have historically been
within management's expectations.
Environmental expenditures
Environmental expenditures that pertain to current operations and relate
to future revenues are expensed or capitalized consistent with the Company's
capitalization policy. 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. 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. Estimated losses resulting from changes in
contract cost estimates are recognized in the period such losses are
identified by management.
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, which range from 3 to 25 years.
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of significant items are capitalized. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the respective accounts and any
resulting gain or loss is recognized.
F-8
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS
121 requires the Company to review long-lived assets and certain intangible
assets for impairment when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. In the event the sum of
the expected undiscounted future cash flows resulting from the use of the
asset is less than the carrying amount of the asset, an impairment loss equal
to the excess of the asset's carrying value over its fair value is recorded.
FAS 121 also requires that long-lived assets and certain intangible assets to
be disposed of be recorded at the lower of carrying value or fair value less
disposal costs. Management has deferred adoption of FAS 121, which is
effective for the Company beginning in the fiscal year ending March 31, 1997.
Due to the complexities of the calculations that are required to implement FAS
121, the effect on the Company's consolidated financial statements of adopting
this statement is not yet known nor reasonably estimable.
Product launch costs
The Company capitalizes certain product launch costs, to the extent such
costs are recoverable over estimated contractual production cycles. Such costs
are amortized on a straight-line basis over the lesser of the related
estimated contractual production cycle or five years. Deferred product launch
costs totaled $1,977,000 and $1,819,000 for the years ended March 31, 1996 and
March 31, 1995, respectively, and are included in other assets; such costs
were insignificant at March 31, 1994.
Foreign currency translation
The Company follows the principle 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 subsidiary in
the U.K., whose functional currency is the British pound, have been translated
into U.S. dollars. The financial statements of the Company's subsidiary in
Mexico, whose functional currency is the U.S. dollar, are remeasured into U.S.
dollars.
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.
For periods prior to the Initial Public Offering, the Company's taxable
income (loss) is included in the consolidated and combined tax returns of
Valentec (subsequent to the Acquisition) or Valentec's former parent, Insilco
(prior to the Acquisition). Historically, Valentec allocated a portion of the
consolidated income tax provision to the Company in an amount generally
equivalent to the provision which would result if the Company filed a separate
income tax return, without regard to net operating loss carryover limitations.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-9
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share
Earnings per share amounts are computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during the period. The weighted average number of common and common equivalent
shares outstanding includes the weighted average of the number of shares
assumed issued prior to the Initial Public Offering necessary to retire all
outstanding intercompany and other indebtedness. Earnings per share amounts
are not presented for the period from April 28, 1993 through March 31, 1994 or
the period from January 1, 1993 through April 27, 1993 as they are not
meaningful.
Fiscal year
Concurrent with the Acquisition, Valentec and the Company adopted a
fiscal year which ends March 31.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the March 31, 1996 presentation.
Estimates
The financial statements have been prepared in conformity with Generally
Accepted Accounting Principles, which require management to make estimates and
assumptions that effect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3.PUBLIC OFFERINGS
Initial Public Offering
On May 13, 1994, the Company completed its Initial Public Offering by
selling 1,600,000 shares of previously unissued common stock at $10.00 per
share (the Initial Public Offering Price). In conjunction with the Initial
Public Offering, the underwriter was granted warrants to purchase 128,000
shares of the Company's common stock at 130% of the Initial Public Offering
Price ($13.00) exercisable over a four-year period commencing one year after
the effective date of the registration statement (May 6, 1994). The net
proceeds to the Company from the Initial Public Offering of approximately
$14,600,000 (including the proceeds received pursuant to the exercise of the
over allotment option described below) were used to retire the Company's
portion of Valentec's short and long-term debt, pay off its intercompany debt
balances with Valentec (such debt balances were assumed in connection with the
transfer of assets described in Note 1) and pay cash consideration to Valentec
for the transfer of assets. The remaining proceeds have been used to fund the
additional growth of the business. In conjunction with the Initial Public
Offering, the underwriter was granted a 30 day option to purchase up to an
aggregate of 240,000 additional shares (of which 80,000 were to be sold by
Valentec) at the Initial Public Offering Price, less underwriting discounts
and accountable expenses. The entire option was exercised within the 30 day
period.
Additional Offering
On June 21, 1995, the Company completed an additional offering (the
Offering) of 1,500,000 shares of common stock at $17.00 per share (the
Offering Price), of which the Company sold 1,000,000 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
$16,500,000 (including the proceeds received pursuant to the exercise of the
over allotment option described below) has been, and will continue to be, used
to fund the future growth of the business. In conjunction with the Offering, the
underwriter was granted a 30 day option to purchase up to an aggregate of
225,000 additional shares (of which 75,000 shares and 150,000 shares were to be
sold by the Company and Valentec and other selling shareholders respectively) at
the Offering Price, less underwriting discounts. The entire option was exercised
within the 30 day period.
F-10
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS (IN THOUSANDS)
March 31, March 31,
1996 1995
---- ----
Accounts receivable:
Billed receivables ................................. $ 4,779 $ 4,947
Unbilled receivables (net of unliquidated
progress payments of $30,945 and $1,351
in 1996 and 1995, respectively) .................. 8,588 1,007
Other ............................................ 3,247 1,155
-------- --------
$ 16,614 $ 7,109
======== ========
Inventories:
Raw materials .................................... $ 2,297 $ 2,878
Work-in-process .................................. 1,958 2,126
Finished goods ................................... 1,060 944
-------- --------
$ 5,315 $ 5,948
======== ========
Property, plant and equipment:
Land and building ................................ $ 1,241 $ 1,150
Machinery and equipment .......................... 10,001 8,135
Furniture and fixtures ........................... 749 425
Construction in process .......................... 2,373 256
-------- --------
14,364 9,966
Accumulated depreciation and amortization ........ (2,172) (1,058)
-------- --------
$ 12,192 $ 8,908
======== ========
Accrued liabilities:
Accrued salaries and related benefits ............ $ 471 $ 641
Accrued property and sales taxes ................. 486 520
Other ............................................ 100 371
-------- --------
$ 1,057 $ 1,532
======== ========
Other long-term liabilities:
Long-term environmental reserve .................. $ 250 $ 350
Deferred income taxes ............................ 1,310 579
Other ............................................ 20 13
-------- --------
$ 1,580 $ 942
======== ========
5.RELATED PARTY TRANSACTIONS
For periods prior to the Initial Public Offering, the Company was
allocated a portion of Valentec's corporate general and administrative
expenses (excluding interest) based on a formula of revenue, fixed assets and
payroll costs. In the opinion of management, the allocation method used was
reasonable. There were no corporate charges for the year ended March 31, 1996.
Corporate charges totaled $60,000, $488,000 and $170,000 for the year ended
March 31, 1995, the period from April 28, 1993 through March 31, 1994 and the
period from January 1, 1993 through April 27, 1993, respectively.
F-11
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company purchases certain components used in its products from
affiliates. Purchases from affiliates totaled $774,000, $1,330,000, $1,419,000
and $245,000 for the years ended March 31, 1996, March 31, 1995, the period
from April 28, 1993 through March 31, 1994, and for the period from January 1,
1993 through April 27, 1993, respectively.
The Company sells certain components to affiliates for use in their
products. Sales to affiliates totaled $4,257,000 and $1,001,000 for the years
ended March 31, 1996 and March 31, 1995, respectively. There were no sales to
affiliates for periods prior to the year ended March 31, 1995.
The Company occasionally rents certain equipment to affiliates at rates
equivalent to its depreciation expense. Rental income totaled $89,000 for the
period from April 28, 1993 through March 31, 1994. There was no rental income
for the years ended March 31, 1996 and March 31, 1995 or for the period from
January 1, 1993 through April 27, 1993.
The Company subleases space from VIL for its European automotive
operations. Sublease payments for the years ended March 31, 1996 and March 31,
1995 were $121,000 and $112,000, respectively. In addition, the Company is
allocated its pro-rata portion of certain manufacturing overhead expenses
based on square footage. The Company also pays a pro-rata portion of shared
general and administrative expenses, such costs totaled $254,000 and $248,000
for the years ended March 31, 1996 and March 31, 1995, respectively.
In September 1993, in order to recognize the Company's 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, Valentec agreed to issue common stock in the Company at an aggregate
price lower than the fair value of the shares at the time (as determined by an
independent appraiser) by $1,250,000. 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.
6.LONG-TERM DEBT
Long-term debt outstanding as of March 31, 1996 and March 31, 1995 is as
follows (in thousands):
March 31, March 31,
1996 1995
---- ----
Capital equipment notes payable, due
in monthly installments with interest at
9.16% to 11.32% maturing at various dates
through May 2001, secured by machinery
and equipment .................................... $ 3,020 $ 1,601
Note payable, principal due in annual
installments of $185,500 beginning
January 12, 1999 to January 12, 2002,
with interest at 7.22% in semiannual
installments beginning June 12, 1994,
secured by the general assets of the
Company's U.K subsidiary ......................... 764 811
------- -------
Total debt ......................................... 3,784 2,412
Less current portion ............................. (697) (369)
------- -------
Long-term debt, less current portion ............... $ 3,087 $ 2,043
======= =======
F-12
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of long-term debt are as follows (in thousands):
1997............................. $ 697
1998............................. 785
1999............................. 954
2000............................. 625
2001............................. 723
------
$3,784
======
The Company entered into a new credit agreement with its bank on March
15, 1996. Substantially all of the assets of the Company are pledged as
collateral under this revolving credit agreement which has a $10 million
maximum limit, repayable at the discretion of the Company, expiring March 15,
1999. Interest is payable monthly at the US prime rate (8.25% at March 31,
1996). There were no amounts outstanding under this facility at March 31,
1996. The provisions of the credit agreement require the Company to maintain
certain financial covenants, including limitations or restrictions on among
other things new indebtedness and liens, disposition of assets and payment of
dividends or other distributions.
Prior to the completion of the Initial Public Offering, the Company was
allocated a portion of Valentec's available credit facilities based on a
formula of collateralized assets. Valentec's credit facilities consisted of a
$7.0 million revolving credit agreement and a $3.5 million term note.
7.INCOME TAXES
Income (loss) before income taxes comprises the following (in
thousands):
Period from Period from
Year Year April 28, 1993 January 1, 1993
Ended Ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- -------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Domestic......... $6,291 $2,379 $(486) $(417)
Foreign.......... 1,739 1,037 (105)
----- ------ ----- -----
$8,030 $3,416 $(591) $(417)
====== ====== ===== =====
F-13
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision (benefit) comprises the following (in
thousands):
Period from Period from
Year Year April 28, 1993 January 1, 1993
Ended Ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- -------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Taxes currently
payable (receivable):
Federal............. $1,934 $ 602 $ (36) $(142)
State............... 327 114 (6) (25)
Foreign............. 124 372 (165)
------ ------ ----- -----
2,385 1,088 (207) (167)
------ ------ ----- -----
Deferred taxes:
Federal............. 311 148
State............... 47 47
Foreign............. 373
------ ------ ----- -----
731 195
------ ------ ----- -----
$3,116 $1,283 $(207) $(167)
====== ====== ===== =====
The income tax provision (benefit) differs from the amount computed by
applying the federal income tax rate to income (loss) before income taxes as
follows:
Period from Period from
Year Year April 28, 1993 January 1, 1993
Ended Ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- ------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Expected taxes at
federal statutory rate.. 34% 34% (34)% (34)%
State income taxes, net
of federal benefits..... 5 5 (1) (6)
Foreign earnings taxed
at different rates...... 1
Change in deferred tax
asset valuation
allowance............... (4)
Other, net................ 2
-- -- --- ---
39% 38% (35)% (40)%
== == === ===
F-14
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The primary components of deferred taxes are as follows (in thousands):
March 31, March 31,
1996 1995
---- ----
(The Company) (The Company)
Deferred tax assets (liabilities):
Net operating loss....... $ 0 $ 307
Accrued liabilities...... 37 59
Inventory................ 203 73
Property, plant and equipment (862) (377)
Deferred product launch costs (688) (641)
----- -----
Net deferred tax balance.... $(1,310) $(579)
======= =====
No taxes have been provided relating to the possible distribution of
approximately $1,580,000 of undistributed earnings considered to be
permanently reinvested, primarily in the United Kingdom. The amount of such
additional taxes that would be payable if such earnings were distributed is
estimated to be approximately $257,000.
8.COMMITMENTS AND CONTINGENCIES
Operating leases
The Company has several noncancelable operating leases for office space
that expire at various dates through 1998. Certain of the lease payments are
subject to adjustment for inflation. The Company incurred rent expense of
$612,000, $272,000, $208,000 and $29,000 for the years ended March 31, 1996
and March 31, 1995, the period from April 28, 1993 through March 31, 1994 and
for the period January 1, 1993 through April 27, 1993, respectively.
Future minimum lease payments for all noncancelable operating leases
having a remaining term in excess of one year at March 31, 1996 are as follows
(in thousands):
1997........................... $ 648
1998........................... 652
1999........................... 99
2000........................... 70
2001........................... 35
------
$1,504
======
Environmental issues
This Company has identified two areas of underground contamination at
its facility in Galion, Ohio. One area involves a localized plating solution
spill which is currently being handled by the existing waste water treatment
system. The second area involves a chlorinated solvent spill in the vicinity
of a former above ground storage area. The Company has retained environmental
consultants to quantify the extent of this problem. The Company has accrued
$250,000 for the estimated cost of additional testing and remediation.
The Company's environmental consultants estimate that the Company's voluntary
plan of remediation will take three to five years to complete. In the opinion
of management, the final outcome of these matters will not have a material
adverse effect on the Company's results of operations or financial position.
F-15
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal proceedings
From time to time, the Company is the subject of legal proceedings for
various matters. There are no material claims currently pending.
9.BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
automotive and defense. See Note 1 for description of business segments.
Summarized financial information by business segment is as follows (in
thousands):
Period from Period from
Year Year April 28, 1993 January 1, 1993
Ended Ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- -------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Net sales:
Automotive........... $49,091 $43,073 $14,970 $1,527
Defense.............. 45,851 8,706 7,474 3,053
------ ------ ------ ------
$94,942 $51,779 $22,444 $4,580
======= ======= ======= ======
Operating income (loss):
Automotive........... $3,658 $2,397 $(2,288) $ (888)
Defense.............. 3,946 779 1,849 494
------ ------ ------ ------
$7,604 $3,176 $ (439) $ (394)
====== ====== ====== ======
Total assets at period end:
Automotive........... $21,518 $20,072 $8,945
Defense.............. 16,924 5,899 3,892
Corporate............ 11,389 1,983
------ ------ ------
$49,831 $27,954 $12,837
======= ======= =======
Depreciation and amortizion:
Automotive........... $ 796 $ 489 $ 110 $ 32
Defense.............. 308 254 204 114
------ ------ ------ ------
$1,104 $ 743 $ 314 $ 146
====== ====== ====== ======
Capital expenditures:
Automotive........... $3,863 $1,979 $3,628 $ 198
Defense.............. 725 494 82
------ ------ ------ ------
$4,588 $2,473 $3,710 $ 198
====== ====== ====== ======
F-16
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information by geographic area is as follows (in
thousands):
Period from Period from
Year Year April 28, 1993 January 1, 1993
Ended Ended through through
March 31, 1996 March 31, 1995 March 31, 1994 April 27, 1993
-------------- ------------- -------------- --------------
(The Company) (The Company) (Successor (Predecessor
Division) Division)
Net sales:
North America .. $ 77,333 $ 34,274 $ 22,139 $ 4,580
Europe ......... 17,609 17,505 305
-------- -------- -------- --------
$ 94,942 $ 51,779 $ 22,444 $ 4,580
======== ======== ======== ========
Operating income (loss):
North America .....$ 6,555 $ 3,143 $ 22 $ (394)
Europe ............ 1,049 33 (461)
-------- -------- -------- --------
$ 7,604 $ 3,176 (439) $ (394)
======== ======== ======== ========
Total assets at period end:
North America .....$ 37,974 $ 15,894 $ 10,327
Europe ............ 11,857 12,060 2,510
-------- -------- --------
$ 49,831 $ 27,954 $ 12,837
======== ======== ========
10. PROFIT SHARING AND OTHER BENEFIT PLANS
SCI participates in Valentec's defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code for eligible employees. The plan
provides for discretionary employer contributions. The Company made no
employer contributions during any of the periods presented in the consolidated
financial statements.
11.STOCK OPTIONS
In conjunction with the Initial Public Offering, SCI established a stock
option plan (The Plan). The Plan provides for the issuance of options to
purchase up to 400,000 shares of SCI's common stock to key officers, employees
of SCI or its affiliates, directors and consultants. Each award is determined
by the Compensation Committee of the Board of Directors on an individual
basis, except for awards to non-officer directors, which are determined pursuant
to a formula.
F-17
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There was no option activity prior to consummation of the Initial Public
Offering. Option activity for the years ended March 31, 1996 and March 31,
1995 are as follows:
Number of Shares Exercise Price
---------------- --------------
Options granted in connection
with the Offering .................. 231,000 $10.00 - 11.00
Other options granted .............. 8,000 19.50
Options cancelled .................. (33,000) 10.00
-------
Balance, March 31, 1995 ............ 206,000 $10.00 - 19.50
Other options granted .............. 84,500 $14.38 - 21.73
Options cancelled .................. (6,375)
-------
Balance, March 31, 1996 ............ 284,125 $10.00 - 21.73
=======
At March 31, 1996, 50,750 options were exercisable. No options were
exercisable at March 31, 1995. Options for the purchase of 115,875 shares and
194,000 shares were available for grant at March 31, 1996 and March 31, 1995,
respectively.
12. SUBSEQUENT EVENT
On June 7, 1996 the Company entered into a definitive Sale and Transfer
Agreement for the purchase of Phoenix Airbag GmbH, an airbag manufacturer
located in Germany. The agreement calls for a base purchase price of
approximately $22 million, subject to a net worth adjustment, plus a contingent
purchase price of up to an additional $7.5 million if Phoenix Airbag GmbH
attains certain revenue performance objectives over the calendar years 1996
through 1998. Under the terms of the purchase agreement the Company would,
under certain circumstances, be required to provide a bank guaranty in August
1997 with respect to the contingent purchase price of up to approximately $4
million. The Company has provided the seller a non-refundable deposit of $1.65
million. Under the terms of the purchase agreement, if the acquisition is not
consummated by August 15, 1996, the seller would not be required to consummate
the transaction and the Company would forfeit its deposit. In conjunction with
the acquisition, the Company has received a proposal letter from a U.S. bank to
provide financing for the acquisition in the form of a $20 million term loan,
amortizing over a period of four years. In connection with such term loan, the
Company would obtain a new $6 million revolving credit facility, replacing its
existing Credit Facility, and a non-revolving stand-by letter of credit facility
to secure payment, if necessary, of the contingent purchase price. The proposal
calls for interest at the prime rate and would be secured by substantially all
the assets of the Company.
F-18