<PAGE> 1
SAFETY COMPONENTS INTERNATIONAL, INC.
2160 North Central Road
Fort Lee, New Jersey 07204
August 27, 1997
Alonzo Llorens
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Mail Stop 3-5
Dear Mr. Llorens:
We respectfully request that the Registration Statement on
Form S-4, File No. 333-33387, of Safety Components International, Inc., be
declared effective at 3:00 p.m., Eastern Standard Time, on August 29, 1997, or
as soon thereafter as possible.
Very truly yours,
SAFETY COMPONENTS INTERNATIONAL, INC.
By: /s/ Jeffrey J. Kaplan
Name: Jeffrey J. Kaplan
Title: Executive Vice President
and Chief Financial Officer
<PAGE> 2
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10022-9998
August 29, 1997
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration Statement of Safety Components
International, Inc. on Form S-4 - File No. 333-33387,
as amended (the "Registration Statement")
Ladies and Gentlemen:
On behalf of our client, Safety Components International, Inc.
(the "Company"), attached for filing is Amendment No. 1 to the above referenced
Registration Statement on Form S-4.
Any questions or comments regarding the enclosed should be
directed to Richard A. Goldberg at (212) 891-9221 or the undersigned at (212)
891-9360.
Very truly yours,
/s/ Maria Gattuso
-----------------
Maria Gattuso
Enclosure
<PAGE> 3
As filed with the Securities and Exchange Commission on August 29, 1997
Registration No. 333-33387
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
<TABLE>
<S> <C>
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0596831
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
AUTOMOTIVE SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0611750
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ASCI HOLDINGS GERMANY (DE), INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0727084
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ASCI HOLDINGS UK (DE), INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0727081
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ASCI HOLDINGS MEXICO (DE), INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0727083
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ASCI HOLDINGS CZECH (DE), INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0727080
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ASCI HOLDINGS ASIA (DE), INC.
(Exact name of registrant as specified in its charter)
Delaware 3714 33-0757465
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
VALENTEC INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 3714 54-1658773
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
GALION, INC.
(Exact name of registrant as specified in its charter)
Delaware 3483 33-0611991
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
VALENTEC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 3489 33-0618610
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
SAFETY COMPONENTS FABRIC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 2221 58-2328795
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2160 North Central Road
Fort Lee, NJ 07024
(201) 592-0008
(Address, including zip code, and telephone
number, including area code, of registrant's
principal offices)
----------
JEFFREY J. KAPLAN
2160 North Central Road
Fort Lee, NJ 07024
(201) 592-0008
(Name, address, including zip code, and
telephone number, including area code, of
agent for service)
---------
Copies to:
RICHARD A. GOLDBERG, ESQ.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
(212)758-9500
--------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of holding company and there is compliance with
General Instruction G, check the following box: [ ]
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission acting pursuant to said
section 8(a), may determine.
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 1997
PROSPECTUS
OFFER FOR ANY AND ALL OUTSTANDING
10-1/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR 10-1/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
SAFETY COMPONENTS INTERNATIONAL, INC.
The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , unless extended.
---------------------
Safety Components International, Inc., a Delaware corporation (the
"Company" or "SCI"), is hereby offering, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal," which together with this Prospectus
constitutes the "Exchange Offer"), to issue $90,000,000 aggregate principal
amount of its 10-1/8% Senior Subordinated Notes due 2007, Series B (the
"Exchange Notes") in exchange for a like principal amount of the issued and
outstanding 10-1/8% Senior Subordinated Notes due 2007, Series A, of the Company
(the "Old Notes" and together with the Exchange Notes, the "Notes").
The Old Notes were sold by the Company on July 24, 1997 to BT
Securities Corporation, BancAmerica Securities, Inc. and Alex. Brown & Sons
Incorporated (the "Initial Purchasers") in a transaction not registered under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
an exemption under the Securities Act (the "Offering"). The Initial Purchasers
subsequently resold the Old Notes (i) within the United States to qualified
institutional buyers in reliance upon Rule 144A under the Securities Act and
(ii) to a limited number of institutional "accredited investors," within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act, that agreed
in writing to comply with certain transfer restrictions and other conditions.
Accordingly, the Old Notes may not be reoffered or otherwise transferred in the
United States or to U.S. Persons (as defined in Regulation S under the
Securities Act) unless registered under the Securities Act or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The Offering was conditioned upon, and a significant portion of the
proceeds of the Offering was used to fund, the Company's acquisition of all of
the assets of the Air Restraint/Industrial Fabrics Division of JPS Automotive
L.P. ("JPS"), a subsidiary of Collins & Aikman Corporation (the "JPS
Acquisition"), which was consummated on July 24, 1997. The Old Notes are
designated for trading in the Private Offering, Resales and Trading through
Automated Linkages ("Portal") Market of the National Association of Securities
Dealers, Inc. and are eligible for resale pursuant to Rule 144A under the
Securities Act. After the Exchange Offer, the Old Notes that remain outstanding
will continue to be subject to the restrictions on transfer contained in the
legend thereon and may not be offered or sold except pursuant to an exemption
from, or in a transaction not subject to the registration requirements of, the
Securities Act.
There is no established trading market for the Exchange Notes. The
Initial Purchasers have advised the Company that they presently intend to make a
market in the Exchange Notes as permitted by applicable laws and regulations.
The Initial Purchasers are not obligated, however, to make a market in the
Exchange Notes and any market-making may be discontinued at any time at the sole
discretion of the Initial Purchasers. The Company does not presently intend to
list the Exchange Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, no assurance can
be given as to the liquidity of, or trading markets for, Exchange Notes or that
an active public market for the Exchange Notes will develop. See "Risk
Factors--Absence of Established Trading Market." To the extent that a market for
the Exchange Notes does develop, the market value of the Exchange Notes will
depend on market conditions (such as yields on alternative investments, general
economic conditions, the Company's financial condition and other conditions).
Such conditions might cause the Exchange Notes, to the extent that they are
actively traded, to trade at a significant discount from face value.
The terms of the Exchange Notes are identical in all material
respects to the Old Notes, except that (i) the Exchange Notes will bear a Series
B designation and a different CUSIP Number from the Old Notes, (ii) the issuance
of the Exchange Notes will have been registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof and (iii) holders of the Exchange Notes will not be entitled to certain
rights of holders of Old Notes under the Registration Rights Agreement (as
defined). The Exchange Notes will evidence the same debt as the Old Notes (which
<PAGE> 6
they replace) and will be issued under and be entitled to the benefits of the
Indenture (the "Indenture"), dated as of July 24, 1997, by and among the
Company, the Guarantors named therein and IBJ Schroder Bank & Trust Company, as
Trustee (the "Trustee" or the "Exchange Agent"). See "The Exchange Offer" and
"Description of Exchange Notes."
Interest on the Exchange Notes will accrue from the date of original
issuance of the Old Notes, i.e., July 24, 1997 (the "Issue Date"), payable
semi-annually in arrears on each of January 15 and July 15 of each year,
commencing January 15, 1998 at the rate of 10 1/8% per annum. Holders whose Old
Notes are accepted for exchange will be deemed to have waived the right to
receive any interest accrued on the Old Notes.
The Exchange Notes will be redeemable, in whole or in part, at the
option of the Company on or after July 15, 2002 at the redemption prices set
forth herein, plus accrued interest to the date of redemption. In addition, the
Exchange Notes are not redeemable by the Company prior to July 15, 2002, except
that, at any time on or prior to July 15, 2000, the Company, at its option, may
redeem, with the net cash proceeds of one or more Public Equity Offerings (as
defined) by the Company, up to 25% of the aggregate principal amount of the
Notes originally issued, at a redemption price equal to 110.125% of the
principal amount thereof, plus accrued interest to the date of redemption,
provided that at least 75% of the aggregate principal amount of the Notes
originally issued remains outstanding immediately following such redemption.
Upon a Change of Control (as defined), each holder of Exchange Notes will have
the right to require the Company to repurchase such holder's Exchange Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the repurchase date. In addition, the Company will be obligated to
offer to repurchase the Notes at 100% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase in the event of certain
Asset Sales (as defined). See "Description of the Exchange Notes."
The Exchange Notes will be, and the Old Notes are, (i) general
unsecured obligations of the Company and (ii) subordinated in right of payment
to all existing and future Senior Indebtedness (as defined), including, without
limitation, the Company's obligations under the Credit Agreement (as defined),
and structurally subordinate to all existing and future indebtedness of the
Company's subsidiaries that are not Guarantors (as defined). The Exchange Notes
will rank, and the Old Notes rank, (i) pari passu in right of payment with any
future senior subordinated indebtedness of the Company and (ii) senior in right
of payment to all other subordinated obligations of the Company. As of June 30,
1997, on a pro forma basis after giving effect to the Offering and the use of
proceeds described therein, the Company and its subsidiaries would have had an
aggregate of $17.0 million of Senior Indebtedness (excluding unused commitments
of $27.0 million (excluding outstanding letters of credit) available under the
Credit Agreement) and the Company's subsidiaries that are not Guarantors would
have had approximately $9.6 million of indebtedness outstanding which would rank
senior to the Notes. See "Use of Proceeds," "Unaudited Pro Forma Financial Data"
and "Description of the Credit Agreement" and "Risk Factors--Subordination of
Exchange Notes to Senior Indebtedness."
The Exchange Notes will be, and the Old Notes are, unconditionally
guaranteed on a senior subordinated basis by the Company's domestic subsidiaries
(the "Guarantors"). The Guarantees (as defined herein) are, or will be, as the
case may be, general unsecured obligations of the Guarantors and are, or will
be, as the case may be, subordinated in right of payment to all existing and
future Guarantor Senior Indebtedness (as defined). The Guarantees rank, or will
rank, as the case may be, pari passu with any future senior subordinated
indebtedness of the Guarantors and rank, or will rank, as the case may be,
senior in right of payment to all other subordinated obligations of the
Guarantors. As of June 30, 1997, on a pro forma basis after giving effect to the
Offering and the use of proceeds described therein, the Guarantors collectively
would have had approximately $7.4 million of Guarantor Senior Indebtedness
(excluding guarantees of Senior Indebtedness).
-----------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES.
-----------------------
The current offer and sale of the Exchange Notes are being
registered under the Registration Statement of which this Prospectus forms a
part in order to satisfy certain obligations of the Company contained in the
Registration Rights Agreement (the "Registration Rights Agreement"), dated as of
July 24, 1997, between the Company and the Trustee, on behalf of the original
purchasers of the Old Notes and various Exchange Agreements between the Company
and holders of
ii
<PAGE> 7
the Old Notes who are a party thereto (collectively, the "Exchange Agreements").
Based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission") set forth in certain "no-action" letters issued to third
parties and unrelated to the Company and the Exchange Offer, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes in violation of the provisions of the Securities Act. See "The
Exchange Offer--Resale of the Exchange Notes." Holders of Old Notes wishing to
accept the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. A
broker-dealer holding Old Notes may participate in the Exchange Offer provided
that it acquired the Old Notes for its own account as a result of market-making
or other trading activities. Each broker-dealer (a "Participating
Broker-Dealer") that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired by such Participating Broker-Dealer as a
result of market-making or other trading activities. The Company and the
Guarantors have agreed to make available, during the period required by the
Securities Act, a prospectus meeting the requirements of the Securities Act for
use by any Participating Broker Dealer and other persons, if any, with similar
prospectus delivery requirements for use in connection with any such resale of
Exchange Notes. See "The Exchange Offer--Purpose and Effect of the Exchange
Offer" and "Plan of Distribution."
The Company will accept for exchange Old Notes validly tendered prior
to 5:00 p.m., New York City time, on , 1997, unless extended by the
Company in its sole discretion (the "Expiration Date"). Tenders of Old Notes may
be withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions, but is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered for exchange. See "The
Exchange Offer--Certain Conditions to the Exchange Offer."
The Company will not receive any proceeds from the Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will pay all the
expenses incident to the Exchange Offer (other than any underwriting discounts
or commissions). In the event the Company terminates the Exchange Offer and does
not accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the holders thereof. See "The Exchange Offer."
-----------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE GUARANTORS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES
iii
<PAGE> 8
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE
CONTENTS OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR
SHOULD CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OF THE GUARANTORS IS MAKING ANY REPRESENTATION TO ANY
PROSPECTIVE INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN
INVESTMENT THEREIN BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR SIMILAR
LAWS.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR
A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
-----------------------
The Date of this Prospectus is , 1997
iv
<PAGE> 9
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (together
with all amendments thereto referred to herein as the "Registration Statement"
under the Securities Act, with the Commission covering the securities being
offered by this Prospectus. This Prospectus does not contain all the information
set forth or incorporated by reference in the Registration Statement and the
exhibits and schedules relating thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement and the exhibits and
schedules thereto which are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the offices of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other documents
referred to are not necessarily complete, and are qualified in all respects by
such reference.
The Company is currently subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Commission. The Registration Statement, as well as such
periodic reports, proxy statements and other information, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington D.C. 20549; or at its regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The Company's common stock, $.01 par value per share (the "Common
Stock"), is quoted on the NASDAQ National Market System ("NASDAQ") and periodic
reports, proxy and information statements and other information concerning the
Company can also be inspected at NASDAQ.
In addition, the Company has agreed that, for so long as any Notes
remain outstanding, it will deliver to the Trustee within 15 days after filing
of the same with the Commission, copies of the quarterly and annual reports and
of the information, documents and other reports, if any, which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act.
v
<PAGE> 10
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and is
subject to, the more detailed information and the consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. As used
herein, unless the context otherwise requires, the terms the "Company" and "SCI"
refer to Safety Components International, Inc. and its subsidiaries. As used
herein, capitalized terms relating to the terms of the Exchange Notes shall have
the respective meanings ascribed to them in "Description of the Exchange Notes."
This prospectus includes "forward-looking statements" within the
meaning of section 27a of the Securities Act and Section 21e of the Exchange
Act. All statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements regarding the Company's
future financial position, business strategy, budgets, projected costs and plans
and objectives of management for future operations, are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"intend," "estimate" "anticipate," "believe," or "continue," or the negative
thereof or variations thereon or similar terminology. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("cautionary statements") are
disclosed under "risk factors" and elsewhere in this Prospectus, including,
without limitation, in conjunction with the forward-looking statements included
in this Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the cautionary statements.
THE COMPANY
SCI is a leading, low-cost independent supplier of automotive airbag
fabric and cushions, with operations in North America, Europe and Asia. The
Company sells airbag fabric domestically and cushions worldwide to all of the
major airbag module integrators that outsource such products. The Company
believes it produces approximately 40% of all airbag fabric utilized in North
America and that it manufactures approximately 10% of all airbag cushions
installed worldwide.
The Company believes the JPS Acquisition represents an important
step in its airbag growth strategy because it will enable the Company to combine
JPS's low-cost operations and strong market position in airbag fabric with its
low-cost operations and strong market position in airbag cushions to exploit
worldwide growth in demand for airbag module systems ("airbags" or "airbag
modules"). According to the automotive research firm, Tier One, the worldwide
market for automotive airbag modules has grown from approximately 3.6 million
installed airbag modules in 1991 to approximately 57.2 million in 1996.
According to the same source, installed airbag modules are projected to more
than double to approximately 123.1 million by the year 2000 as a result of
increasing usage of airbags in Europe and Asia and growth in demand for
side-impact airbags. The Company's pro forma consolidated fiscal 1997 net sales
and Adjusted EBITDA (as defined) were $173.2 million and $23.4 million,
respectively.
As part of its airbag growth strategy, the Company has recently
commenced manufacturing and supplying metal airbag module components to its
customers, further increasing the content per airbag module supplied by the
Company. Airbag fabric, cushions and related metal components accounted for
$130.9 million or 75.6% of pro forma consolidated fiscal 1997 net sales. The
Company believes that it is also, as a result of the JPS Acquisition, a leading
manufacturer of value-added synthetic fabrics used in a variety of niche
industrial and commercial applications such as ballistics luggage, industrial
filtration systems, aircraft escape slides, military tents and certain
industrial apparel. Industrial fabrics accounted for $22.6 million or 13.0% of
pro forma consolidated fiscal 1997 net sales and are produced using the same
machinery that produces airbag fabric. The ability to interchange airbag and
specialty industrial fabrics using the same equipment and similar manufacturing
processes allows the Company to effectively utilize its manufacturing assets and
lower per unit overhead costs. The Company also produces defense related
products, primarily projectiles and other metal components for small to medium
caliber training and tactical ammunition, which accounted for $19.7 million or
11.4% of the Company's pro forma consolidated fiscal 1997 net sales.
1
<PAGE> 11
COMPETITIVE STRENGTHS
The Company has developed a strong competitive position in the
airbag fabric and cushion segments of the airbag module market and believes that
additional growth opportunities exist as a result of the following competitive
strengths:
Market Leadership. The Company is a leading independent supplier of
automotive airbag fabric and cushions with operations in North America, Europe
and Asia. The Company believes that it produces approximately 40% of all airbag
fabric sold in North America, the largest market for airbag fabric, and that it
accounts for approximately 10% of the global market for airbag cushions. The
Company supplies airbag fabric to every domestic airbag module integrator that
outsources all or a portion of its airbag fabric requirements, including
AlliedSignal Inc. ("AlliedSignal"), TRW, Inc. ("TRW") and AutoLiv Automotive
Safety Products, Inc. ("AutoLiv") (whose aggregate sales accounted for over 60%
of all domestic airbag modules installed in 1996). The Company also supplies
approximately 70% and 100% of all airbag cushions outsourced by TRW and Petri
Inc. ("Petri"), respectively (whose aggregate sales accounted for approximately
30% of installed modules worldwide in 1996). Moreover, as an established airbag
cushion supplier, the Company believes that certain barriers to entry exist,
such as difficulty in obtaining qualification requirements imposed by
automakers, which will assist the Company in maintaining or increasing market
share by limiting the ability of new suppliers to enter the market.
Low-Cost Producer. The Company is a low-cost producer of automotive
airbag fabric and cushions. Its low-cost position is facilitated by: (i) low
labor rates in various international production facilities; (ii) high levels of
automation in certain production facilities; and (iii) high capacity utilization
rates as a result of interchangeable production processes. In addition, the
Company has recently entered into a joint venture to produce finished airbag
cushions in China, which will enable the Company to take advantage of lower
labor costs as that facility begins commercial production.
Integrated Manufacturing Process. The JPS Acquisition is expected to
result in a more integrated manufacturing process, eventually reducing the
Company's cost of raw materials and providing it with the ability to package
both fabric and cushions in response to customer demand. In addition, the JPS
Acquisition is expected to enable the Company to reduce fabric waste and to
transfer weaving technologies to its airbag cushion production facilities.
Global Manufacturing and Sourcing Capabilities. The Company has
airbag cushion production facilities in Mexico, Germany, the Czech Republic and
Wales and recently established a joint venture for airbag cushion production in
China. The Company believes it benefits from its global manufacturing strategy
through: (i) low labor costs; (ii) customer and geographic diversity; (iii) less
sensitivity to regional economic downturns; and (iv) access to new customers and
the ability to service existing customers in high growth regions such as Europe
and Asia. In addition, the Company believes it has the ability to transfer
weaving technology to certain geographic regions that are not currently being
serviced.
Commitment to Quality and Service. The Company believes its
commitment to quality and customer service is a competitive advantage. As a
result of its stringent emphasis on quality control and its advanced inspection
processes, the Company has attained a near zero defect rate on the production of
its airbag cushions. Most of the Company's facilities meet industry quality
standards such as QS-9000/ISO 9002, and all seven of the Company's plants are
expected to be so certified prior to 1997 year-end. In addition, the Company
believes its reliable on-time delivery performance and advanced research and
development capabilities have resulted in strong customer relationships, which
the Company believes will continue to result in recurring revenues, particularly
in light of supplier qualification requirements and customers' desires to
consolidate suppliers.
Ancillary Products and Services. The Company has established strong
positions in various niche fabric markets and has targeted a number of high
growth market segments in which it believes it will be able to gain significant
market share. In addition, the Company will continue to identify new
applications for its airbag manufacturing and machining capabilities and further
diversify into related products to maximize capacity utilization.
GROWTH STRATEGY
The Company has experienced rapid growth in sales and profitability
in recent years due to increased production and outsourcing of airbag cushions
by its airbag module integrator customers. The Company has also recently
benefited from the production of other airbag components in response to
increased outsourcing of such parts by airbag module integrators.
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<PAGE> 12
Installation of airbag modules is expected to double between 1996 and 2000 and
the Company believes that it is well-positioned to benefit from this growth due
to its global presence, low-cost integrated production capabilities and strong
customer relationships. Specific elements of the Company's growth strategy
include:
Enhance Low-Cost Position. The ability to remain a low-cost supplier
is a key element of the Company's automotive airbag growth strategy as it
enables the Company to price its products competitively, gain market share and
maintain or increase profit margins. To enhance its low-cost position, the
Company is evaluating a number of cost reduction opportunities including: (i)
consolidating its European production facilities; (ii) consolidating certain
administrative functions; (iii) reducing labor costs through automation; (iv)
reducing transportation costs; and (v) exploiting economies of scale,
particularly as production volumes increase at its new Czech Republic facility.
Labor costs are also expected to decline as the Chinese joint venture becomes a
production source. In addition, the combination of the Company and the Air
Restraint/Industrial Fabrics Division of JPS also presents opportunities to
further reduce airbag cushion production costs.
Increase Airbag Volumes. The Company has been and believes it will
continue to be successful in attaining product qualification and acceptance
among airbag customers. Airbag cushion sales have increased from 783,000 units
in fiscal year 1994 to 5.2 million units in fiscal year 1997 as a result of
rapid growth in demand for airbag modules in North American and European markets
and the continuing trend among airbag module integrators to purchase airbag
components from third parties, such as the Company, specializing in the
production of those components. The Company believes it is well-positioned to
benefit from the continued strong demand for airbag modules due to its: (i)
low-cost manufacturing strategy; (ii) established relationships with airbag
module integrators; and (iii) its reputation for high product quality standards.
Diversify Production Within Core Competence/Distribution Network.
The Company intends to increase revenues and maximize plant efficiencies by
providing related products to new and existing customers. The Company has
successfully applied its manufacturing expertise to develop new products
utilizing existing manufacturing capabilities. For example, the Company has
expanded from parachute and metal parts production for the military into airbag
cushions and metal products for airbag module integrators. Additionally, as a
result of the JPS Acquisition, the Company is well-positioned to further
diversify its business and exploit additional opportunities for growth by
cross-marketing complementary manufacturing capabilities.
Increase Content Per Airbag Module. The machining operations
acquired through the acquisition of Valentec International Corporation
("Valentec") will enable the Company to increase the content per airbag module
supplied to the Company's customers. The Company has recently started
manufacturing and assembling end caps and retainer brackets to airbags produced
for two of its largest airbag customers and believes that additional
opportunities exist to increase the amount of content supplied to its customers.
This strategy is intended to benefit the Company's customers by enabling them to
consolidate suppliers while at the same time rendering the Company less
dependent on industry volumes as content per airbag module increases.
Expand Through Strategic Acquisitions. The Company intends to
selectively pursue opportunities to acquire companies that offer complementary
products or services to those industries currently served by the Company. This
will enable existing and future customers to consolidate supply sources by
obtaining a broader range of value added products and services from the Company.
The Company also intends to evaluate new technologies and processes that will
enable it to reduce product costs and/or increase the level of products or
services provided to existing and future customers. The Company will also
continue to evaluate acquisitions and joint ventures that will enable the
Company to further integrate production of airbags and other products.
SIGNIFICANT TRANSACTIONS
The JPS Acquisition. On July 24, 1997, the Company acquired all of
the assets of the Air Restraint/lndustrial Fabrics Division (the "Division") of
JPS for $56.3 million in cash (including 18 looms delivered at closing) and the
assumption of certain liabilities, subject to post closing adjustments. In
addition, the Company made a payment to JPS at the closing to enable it to pay
off existing indebtedness of the Division of approximately $650,000 at the
closing. The Offering was conditioned upon, and a significant portion of the
proceeds of the Offering was used to finance, the JPS Acquisition. Safety
Components Fabric Technologies, Inc., a newly formed wholly-owned subsidiary of
the Company,
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<PAGE> 13
acquired all of the assets under the JPS Acquisition (the Division is sometimes
hereinafter referred to as "JPS" or "SCFT"). SCFT is a leading, low-cost
supplier of airbag fabric in North America and is also a leading manufacturer of
value-added synthetic fabrics used in a variety of niche industrial and
commercial applications. The Company believes the JPS Acquisition represents an
important step in its airbag growth strategy because it will enable the Company
to: (i) combine strong market positions in airbag fabric and cushions; (ii)
integrate low-cost manufacturing capabilities in airbag fabric and cushions to
exploit the worldwide growth in demand for airbag modules; (iii) interchange
airbag and specialty industrial fabrics using the same equipment and
manufacturing processes thereby allowing the Company to effectively utilize its
manufacturing assets; and (iv) enhance and expand its customer base. See
"Business--Significant Transactions--The JPS Acquisition."
The Valentec Acquisition. Pursuant to a definitive Stock Purchase
Agreement, effective as of May 22, 1997, the Company acquired in a tax-free
stock for stock transaction all of the outstanding capital stock of Valentec
(the "Valentec Acquisition"). Valentec is a high-volume manufacturer of stamped
and precision machined products for the automotive, commercial and defense
industries. The Company believes that Valentec's machining capabilities and
relationships with airbag module integrators will enable the Company to increase
the amount of content per airbag module supplied by the Company. Pursuant to
this strategy, the Company has begun producing end caps and retainer brackets
for two of its larger airbag module customers. In addition, the Company believes
that it will be able to eliminate certain duplicative corporate functions at
Valentec, resulting in improved efficiencies and cost savings. See
"Business--Significant Transactions--The Valentec Acquisition."
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<PAGE> 14
THE INITIAL OFFERING
Old Notes................ The Old Notes were sold by the Company on
July 24, 1997 to BT Securities Corporation,
BancAmerica Securities, Inc. and Alex. Brown
& Sons Incorporated (the "Initial
Purchasers") pursuant to a Purchase
Agreement dated July 21, 1997 (the "Purchase
Agreement"). The Initial Purchasers
subsequently resold the Old Notes (i) within
the United States to qualified institutional
buyers, in reliance upon Rule 144A under the
Securities Act and (ii) to a limited number
of institutional "accredited investors,"
within the meaning of Rule 501(a)(1), (2),
(3) or (7) under the Securities Act, that
agreed in writing to comply with certain
transfer restrictions and other conditions.
Registration Rights
Agreement.............. Pursuant to the Purchase Agreement, the
Company, the Guarantors and the Initial
Purchasers entered into the Registration
Rights Agreement, which grants the holders
of the Old Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy such exchange rights
which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
Securities Offered....... $90,000,000 aggregate principal amount of
10 1/8% Senior Subordinated Notes due 2007,
Series B, of the Company.
The Exchange Offer....... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Old Notes. As of the date hereof,
$90,000,000 aggregate principal amount of
Old Notes are outstanding. The Company will
issue the Exchange Notes to holders on or
promptly after the Expiration Date.
Based on interpretations by the staff of the
Commission set forth in certain "no-action"
letters issued to third parties and
unrelated to the Company and the Exchange
Offer, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by
holders thereof (other than any such holder
which is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery
provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holders' business
and such holders have no arrangement or
understanding with any person to participate
in the distribution of such Exchange Notes
in violation of the provisions of the
Securities Act. See "The Exchange Offer --
Resale of the Exchange Notes." Holders of
Old Notes wishing to accept the Exchange
Offer must represent to the Company, as
required by the Registration Rights
Agreement, that such conditions have been
met.
A Participating Broker-Dealer holding Old
Notes may participate in the Exchange Offer
provided that it acquired the Old Notes for
its own account as a result of market-making
or other trading activities. Each
Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection
with any resale of such Exchange Notes. This
Prospectus, as it may be amended or
supplemented from time to time, may be used
by a Participating Broker-Dealer in
connection with resales of Exchange Notes
received in exchange for Old Notes where
such Old Notes were acquired by
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<PAGE> 15
such Participating Broker-Dealer as a result
of market-making or other trading
activities. The Company and the Guarantors
have agreed to make available, during the
period required by the Securities Act, a
prospectus meeting the requirements of the
Securities Act for use by any Participating
Broker-Dealer and other persons, if any,
with similar prospectus delivery
requirements for use in connection with any
such resale of Exchange Notes. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "Plan of Distribution."
Any holder who tenders in the Exchange Offer
with the intention to participate, or for
the purpose of participating, in a
distribution of the Exchange Notes could not
rely on the position of the staff of the
Commission enunciated in "no-action" letters
and, in the absence of an exemption
therefrom, must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such
requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date.................. 5:00 p.m., New York City time, on
1997 unless the Exchange Offer is extended,
in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and the
Old Notes...................... Interest on the Exchange Notes will accrue
from the Issue Date, i.e., July 24, 1997.
Holders whose Old Notes are accepted for
exchange will be deemed to have waived the
right to receive any interest accrued on the
Old Notes. See "The Exchange Offer --
Interest on the Exchange Notes."
Conditions to the Exchange
Offer.......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company, but it is not conditioned upon
any minimum aggregate principal amount of
Old Notes being tendered for exchange. See
"The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes.......................... Each holder of Old Notes wishing to accept
the Exchange Offer must complete, sign and
date the accompanying Letter of Transmittal,
or a facsimile thereof, in accordance with
the instructions contained herein and
therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes and any other
required documents, to the Exchange Agent,
prior to 5:00 p.m., New York City time, on
the Expiration Date at the address set forth
herein. By executing the Letter of
Transmittal, each holder will represent to
the Company, among other things, (i) that
any Exchange Notes to be received by it will
be acquired in the ordinary course of its
business, (ii) that at the time of the
commencement of the Exchange Offer it has no
arrangement or understanding with any person
to participate in the distribution (within
the meaning of Securities Act) of the
Exchange Notes in violation of the
Securities Act, (iii) that it is not an
"affiliate" (as defined in Rule 405
promulgated under the Securities Act) of the
Company, (iv) if such holder is not a
Participating Broker-Dealer, that it is not
engaged in, and does not intend to engage
in, the distribution of Exchange Notes and
(v) if such holder is a Participating
Broker-Dealer that will receive Exchange
Notes for its own account in exchange for
Old Notes that were acquired as a result of
market-making or other trading activities,
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<PAGE> 16
that it will deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resale of such Exchange
Notes. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and
"--Procedures for Tendering."
Untendered Old Notes............. Upon consummation of the Exchange Offer the
provisions of the Registration Rights
Agreement shall continue to apply (i) in the
case of any holders that, in certain
circumstances, become holders of
unregistered Exchange Notes with respect to
Old Notes, (ii) in the case of any holder
that participates in the Exchange Offer and
does not receive Exchange Notes on the date
of the exchange that may be sold without
restriction under state and federal
securities laws (other than due solely to
the status of such holder as an "affiliate"
of the Company within the meaning of the
Securities Act) and (iii) to Exchange Notes
held by Participating Broker Dealers.
Consequences of
Failure to
Exchange....................... The Old Notes that are not exchanged
pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such Old
Notes may be resold only (i) to the Company,
(ii) pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some other
exemption under the Securities Act, (iii)
outside the United States to a foreign
person pursuant to the requirements of Rule
904 under the Securities Act, or (iv)
pursuant to an effective registration
statement under the Securities Act. See "The
Exchange Offer--Consequences of Failure to
Exchange."
Shelf Registration Statement..... If, (i) because of any change in law or in
currently prevailing interpretations of the
staff of the Commission, the Company and the
Guarantors are not permitted to effect an
Exchange Offer, (ii) the Exchange Offer is
not consummated within 135 days of the Issue
Date, (iii) in certain circumstances,
certain holders of unregistered Exchange
Notes so request, or (iv) in the case of any
Holder that participates in the Exchange
Offer, such Holder does not receive Exchange
Notes on the date of the exchange that may
be sold without restriction under state and
federal securities laws (other than due
solely to the status of such Holder as an
affiliate of the Company or any Guarantor
within the meaning of the Securities Act),
then in each case, the Company and the
Guarantors have agreed to (x) promptly
deliver to the holders and the Trustee
written notice thereof and (y) at their sole
expense, (a) as promptly as practicable,
file a shelf registration statement covering
resales of the Notes (the "Shelf
Registration Statement"), (b) use their best
efforts to cause the Shelf Registration
Statement to be declared effective under the
Securities Act and (c) use their best
efforts to keep effective the Shelf
Registration Statement until the earlier of
two years after the Issue Date or such time
as all of the applicable Notes have been
sold thereunder. The Company will, in the
event that a Shelf Registration Statement is
filed, provide to each holder copies of the
prospectus that is a part of the Shelf
Registration Statement, notify each such
holder when the Shelf Registration Statement
for the Notes has become effective and take
certain other actions as are required to
permit unrestricted resales of the Notes. A
Holder that sells Notes pursuant to the
Shelf Registration Statement will be
required to be named as a selling security
holder in the related prospectus and to
deliver a prospectus to purchasers, will be
subject to certain of the civil liability
provisions under the Securities Act in
connection with such sales and will be bound
by the provisions of the Registration Rights
Agreement that are applicable to such holder
(including certain indemnification rights
and obligations).
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<PAGE> 17
Special Procedures for
Beneficial Owners.............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender any Old
Notes beneficially owned by it should
contact such registered holder promptly and
instruct such registered holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior
to completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time. The Company will keep the
Exchange Offer open for not less than twenty
business days in order to provide for the
transfer of registered ownership.
Guaranteed Delivery
Procedures..................... Holders of Old Notes who wish to tender
their Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal
or any other documents required by the
Letter of Transmittal to the Exchange Agent
(or comply with the procedures for book-
entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights................ Tenders may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes
and Delivery of
Exchange Notes................. The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange
Offer."
Certain Federal Income
Tax Considerations............. The exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer should not be
a taxable event for United States federal
income tax purposes, because under existing
Treasury regulations, the Exchange Notes
will not differ materially in kind or extent
from the Old Notes. See "Certain Federal
Income Tax Considerations--The Exchange
Offer."
Use of Proceeds.................. There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
Exchange Agent................... IBJ Schroder Bank & Trust Company
THE EXCHANGE NOTES
General.......................... The form and terms of the Exchange Notes are
the same as the form and terms of the Old
Notes (which they replace) except that (i)
the Exchange Notes bear a Series B
designation and a different CUSIP Number
from the Old Notes, (ii) the Exchange Notes
have been registered under the Securities
Act and, therefore, will not bear legends
restricting the transfer thereof, and (iii)
the holders of Exchange Notes will not be
entitled to certain rights under
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<PAGE> 18
the Registration Rights Agreement, including
the provisions providing for an increase in
the interest rate on the Old Notes in
certain circumstances relating to the timing
of the Exchange Offer, which rights will
terminate when the Exchange Offer is
consummated. See "The Exchange
Offer--Purpose and Effect of the Exchange
Offer." The Exchange Notes will evidence the
same debt as the Old Notes and will be
entitled to the benefits of the Indenture.
See "Description of Exchange Notes."
Securities Offered............... $90,000,000 aggregate principal amount of
10 1/8% Senior Subordinated Notes due 2007,
Series B.
Issuer........................... Safety Components International, Inc.
Maturity Date.................... July 15, 2007.
Interest Payment Dates........... Interest on the Exchange Notes will be
payable semi-annually in arrears on each of
January 15 and July 15 of each year,
commencing January 15, 1998.
Optional Redemption.............. The Exchange Notes will be redeemable, in
whole or in part, at the option of the
Company on or after July 15, 2002 at the
redemption prices set forth herein, plus
accrued interest to the date of redemption.
In addition, the Exchange Notes are not
redeemable by the Company prior to July 15,
2002, except that, at any time on or prior
to July 15, 2000, the Company, at its
option, may redeem, with the net cash
proceeds of one or more Public Equity
Offerings by the Company, up to 25% of the
aggregate principal amount of the Notes
originally issued, at a redemption price
equal to 110.125% of the principal amount
thereof, plus accrued interest thereon, if
any, to the date of redemption, provided
that at least 75% of the aggregate principal
amount of the Notes originally issued
remains outstanding immediately following
such redemption. See "Description of the
Exchange Notes -- Redemption."
Change of Control................ Upon a Change of Control, each holder of
Exchange Notes will have the right to
require the Company to repurchase such
holder's Exchange Notes at a price equal to
101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the
repurchase date. See "Description of the
Exchange Notes -- Change of Control."
Ranking.......................... The Exchange Notes will be, and the Old
Notes are, (i) general unsecured obligations
of the Company and (ii) subordinated in
right of payment to all existing and future
Senior Indebtedness, including, without
limitation, the Company's obligations under
the Credit Agreement, and structurally
subordinate to all existing and future
indebtedness of the Company's subsidiaries
that are not Guarantors. The Exchange Notes
will rank, and the Old Notes rank, (i) pari
passu in right of payment with any future
senior subordinated indebtedness of the
Company and (ii) senior in right of payment
to all other subordinated obligations of the
Company. As of June 30, 1997 on a pro forma
basis after giving effect to the Offering
and the use of proceeds described therein,
the Company and its subsidiaries would have
had an aggregate of approximately $17.0
million of Senior Indebtedness (excluding
unused commitments of $27.0 million
(excluding outstanding letters of credit)
available under the Credit Agreement) and
the Company's subsidiaries that are not
Guarantors would have had approximately $9.6
million of indebtedness outstanding which
would rank senior to the Notes. See "Use of
Proceeds," "Unaudited Pro Forma Financial
Data," "Description of the Credit Agreement"
and "Risk Factors -- Subordination of
Exchange Notes to Senior Indebtedness."
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<PAGE> 19
Guarantees....................... The Exchange Notes will be, and the Old
Notes are, unconditionally guaranteed on a
senior subordinated basis by the Guarantors.
The Guarantees are, or will be, as the case
may be, general unsecured obligations of the
Guarantors and are, or will be, as the case
may be, subordinated in right of payment to
all existing and future Guarantor Senior
Indebtedness. The Guarantees rank, or will
rank, as the case may be, pari passu with
any future senior subordinated indebtedness
of the Guarantors and rank, or will rank, as
the case may be, senior in right of payment
to all other subordinated obligations of the
Guarantors. As of June 30, 1997, on a pro
forma basis after giving effect to the
Offering and the use of proceeds described
therein, the Guarantors collectively would
have had approximately $7.4 million of
Guarantor Senior Indebtedness (excluding
guarantees of Senior Indebtedness).
Certain Covenants................ The Indenture contains certain covenants
with respect to the Company and its
subsidiaries that restricts, among other
things, (a) the incurrence of additional
indebtedness, (b) the payment of dividends
and other restricted payments, (c) the
creation of certain liens, (d) the use of
proceeds from sales of assets and subsidiary
stock, (e) sale and leaseback transactions
and (f) transactions with affiliates. The
Indenture also restricts the Company's
ability to consolidate or merge with or
into, or to transfer all or substantially
all of its assets to, another person. In
addition, under certain circumstances, the
Company will be required to offer to
purchase the Exchange Notes, in whole or in
part, at a purchase price equal to 100% of
the principal amount thereof plus accrued
interest to the date of repurchase, with the
proceeds of certain Asset Sales. These
restrictions and requirements are subject to
a number of important qualifications and
exceptions. See "Description of the Exchange
Notes -- Certain Covenants."
For additional information regarding the Notes, see "Description of the Exchange
Notes."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of
the Exchange Notes offered hereby. In consideration for issuing the Exchange
Notes contemplated in this Prospectus, the Company will receive Old Notes in a
like principal amount, the form and terms of which are the same as the forms and
terms of the Exchange Notes (which replace the Old Notes), except as otherwise
described herein. The Old Notes surrendered in exchange for the Exchange Notes
will be cancelled and cannot be reissued.
The gross proceeds of $90.0 million from the Offering were used to:
(i) consummate the JPS Acquisition, including expenses thereto; (ii) repay the
Term Loan and any amounts then outstanding under the Revolving Credit Facility;
(iii) pay related fees and expenses and (iv) purchase a building in South
Carolina adjacent to the existing SCFT facility. The remaining proceeds of the
Offering will be used for working capital and general corporate purposes.
Pending such uses, the net proceeds of the Offering have been invested in
short-term, interest-bearing securities. See "Use of Proceeds."
RISK FACTORS
Holders of Old Notes should carefully consider the specific factors
set forth under "Risk Factors," as well as the other information and data
included in this Prospectus.
-----------------------
The Company was formed as a Delaware corporation on January 12, 1994
as a wholly-owned subsidiary of Valentec. Immediately prior to the closing of
the Company's initial public offering on May 13, 1994 (the "Initial Public
Offering"), Valentec contributed certain assets to certain subsidiaries of the
Company in return for cash consideration (the "Transfer of Assets"). The
Company's principal office is located at 2160 North Central Road, Fort Lee, NJ
07024 and its telephone number is (201) 592-0008.
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<PAGE> 20
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth certain selected historical and
unaudited pro forma financial data of the Company. The historical data as of
March 31, 1995, 1996 and 1997 and June 30, 1996 and 1997 has been derived from
the Consolidated Financial Statements of the Company. The pro forma data have
been derived from the Unaudited Pro Forma Financial Data of the Company included
elsewhere in this Prospectus. The Unaudited Pro Forma Financial Data does not
purport to represent what the Company's results of operations actually would
have been if the transactions referred to therein had been consummated on the
date or for the periods indicated, or what such results will be for any future
date or for any future period. The Company's results of operation for the three
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the entire year ended March 31, 1998. The information below
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
----------------------------------------------- -----------------------------------
PRO FORMA
1995(1) 1996(1) 1997(1)(2) 1997(3) 1996 1997 PRO FORMA(3)
------- ------- ---------- -------- ---- ---- ------------
(IN THOUSANDS, EXCEPT RATIOS)
RESULTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 51,779 $ 94,942 $ 83,958 $173,208 $ 16,172 $ 27,629 $ 48,309
Gross profit ...................... 7,226 13,034 16,024 28,124 2,592 5,668 8,384
Operating income .................. 3,176 7,604 8,604 13,362 1,446 3,032 4,422
Interest expense (income), net .... 126 (197) 1,319 10,563 10 523 2,639
Income before extraordinary item
and cumulative effect of accounting
change (4) ........................ 2,133 4,914 3,846 940 853 1,435 1,031
Net income ........................ 2,133 4,914 2,204 940 853 1,435 1,031
Net income per share ................. $ .53 $ .99 $ .44 $ .19 $ .17 $ .29 $ .21
Weighted average number of shares
outstanding .......................... 4,031 4,981 5,027 5,021 5,069 5,021 5,015
OTHER DATA
EBITDA(5) ......................... $ 3,919 $ 8,708 $ 12,756 $ 22,217 $ 1,783 $ 4,022 $ 6,084
Adjusted EBITDA(5) ................ -- -- -- 23,428 -- -- 6,593
Depreciation and amortization ..... 743 1,104 2,391 6,997 337 990 1,662
Capital expenditures(6) ........... 2,473 4,588 8,613 10,554 2,047 1,828 1,840
Ratio of adjusted EBITDA to
interest expense, net ............. -- -- -- 2.2x -- -- 2.5x
Ratio of net debt to adjusted
EBITDA ............................ -- -- -- -- -- -- 3.6x
Ratio of earnings to fixed
charges(7) ........................ 28.1x -- 6.2x 1.2x 138.2x 5.6x 1.6x
Airbag cushion units(8) ........... 2,116 2,610 5,179 6,194 756 1,742 1,742
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents ......... $ 3,846 $ 12,033 $ 8,320 -- $ 5,461 $ 2,772 $ 13,396
Working Capital ................... 8,206 25,050 11,755 -- 22,296 3,245 32,561
Total assets ...................... 28,311 49,831 73,407 -- 47,137 94,516 175,096
Total debt ........................ 2,412 3,784 24,381 -- 3,998 34,371 107,024
Stockholders' equity .............. 15,971 35,344 35,274 -- 35,936 35,915 35,915
</TABLE>
11
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------------- ---------------------------------
PRO FORMA
1995(1) 1996(1) 1997(1)(2) 1997 (3) 1996 1997 PRO FORMA (3)
------- ------- ---------- --------- ---- ---- -------------
(IN THOUSANDS, EXCEPT RATIOS)
CASH FLOWS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operations ........... $ (901) $ (3,500) $ 11,115 -- $ (4,524) $ 2,088 NA
Cash flows from investing activities . (2,473) (4,588) (32,870) -- (2,047) (5,934) NA
Cash flows from financing activities . 7,084 16,555 18,903 -- (80) (798) NA
</TABLE>
- --------
(1) The Company did not declare dividends during fiscal year 1997,
1996 or 1995.
(2) In August 1996, the Company acquired Phoenix Airbag (as
defined). The transaction was accounted for as a purchase using the purchase
method of accounting.
(3) The Summary Unaudited Pro Forma Financial Data is derived from
the Unaudited Pro Forma Financial Data included elsewhere in this Prospectus.
The pro forma results of operations data for the year ended March 31, 1997 give
effect to: (i) the Valentec Acquisition; (ii) the JPS Acquisition; (iii) the
completion of the Offering and the application of the net proceeds therefrom;
(iv) the Phoenix Acquisition (as defined); and (v) certain Subsequent
Transactions (as defined), as if each had occurred on April 1, 1996. The pro
forma results of operations data for the three months ended June 30, 1997 give
effect to the events described in items (ii), (iii) and (v), as if each had
occurred on April 1, 1997. The related pro forma balance sheet data as of June
30, 1997 gives effect to the events described in items (ii) and (iii) as if
these had occurred on June 30, 1997.
(4) Income before extraordinary item and cumulative effect of
accounting change for the year ended March 31, 1997 excludes one-time charges
of: (i) $383,000, net of income taxes, for deferred financing costs written-off
during fiscal year 1997; and (ii) $1.3 million, net of income taxes, due to the
Company's change in accounting for product launch costs from the deferral method
to the expense as incurred method.
(5) EBITDA represents income from operations plus depreciation and
amortization and excludes the current year's impact of previously deferred
product launch costs now expensed due to the accounting principle change made in
fiscal year 1997. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. However,
EBITDA should not be considered as an alternative to net income as a measure of
operating results or to cash flows from operations as a measure of liquidity in
accordance with generally accepted accounting principles. Adjusted EBITDA
excludes non-recurring costs charged to JPS of $1.2 million for the year ended
March 31, 1997 and $509,000 for the three months ended June 28, 1997, which
consists of allocated cost of sales and selling, general and administrative
expenses from JPS.
(6) Pro forma capital expenditures do not include equipment obtained
under capital lease obligations of $1.4 million or the building and 18 looms
purchased for approximately $1.3 million and $1.5 million, respectively, in
connection with the JPS Acquisition. However, capital expenditures include a
non-recurring investment of $7.1 million for pro forma and fiscal year 1997
related to the construction of the Company's new Czech Republic facility, which
was subsequently financed. Excluding this non-recurring investment for the Czech
Republic facility, pro forma and fiscal year 1997 capital expenditures would
have been $3.5 million and $1.5 million, respectively.
(7) For purposes of determining the ratio of earnings to fixed
charges, earnings are defined as income before income taxes, plus fixed charges.
Fixed charges consist of net interest expense on all indebtedness including
amortization of deferred debt issuance costs and deferred financing costs.
(8) Pro forma 1997 airbag cushion units includes the unit sales of
Phoenix Airbag for the period April 1, 1996 through August 5, 1996. Refer to
Note 2 of Notes to Unaudited Pro Forma Financial Data.
12
<PAGE> 22
RISK FACTORS
Prospective investors should carefully consider the following
factors in addition to the other information set forth in this Prospectus before
tendering Old Notes in exchange for Exchange Notes. The risk factors set forth
below are generally applicable to the Old Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE; DEBT SERVICE OBLIGATIONS
The Company is highly leveraged. At June 30, 1997, on a pro forma
basis, after giving effect to the Offering and the application of the net
proceeds therefrom to consummate the JPS Acquisition and repay the Term Loan and
the Revolving Credit Facility, the Company would have had total indebtedness of
approximately $107.0 million. See "Capitalization." The Company may incur
additional indebtedness in the future, including Senior Indebtedness, subject to
limitations imposed by the Indenture and the Credit Agreement. The level of the
Company's indebtedness could have important consequences to holders of the
Notes, including: (i) a substantial portion of the Company's cash flow from
operations must be dedicated to debt service and will not be available for other
purposes, (ii) the Company's ability to obtain additional debt financing in the
future for working capital, capital expenditures or acquisitions may be limited
and (iii) the Company's level of indebtedness could limit its flexibility in
reacting to changes in the industry and economic conditions generally. Certain
of the Company's competitors may currently operate on a less leveraged basis and
therefore could have significantly greater operating and financing flexibility
than the Company. The Company's ability to make payments with respect to the
Notes and to satisfy its other debt obligations will depend on its future
operating performance and the ability to refinance indebtedness, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control.
As a result of the issuance of the Old Notes, the Company's interest
expense has increased compared to prior years. The Company believes, based on
current circumstances, that the Company's cash flow, together with available
borrowings under the Credit Agreement, will be sufficient to permit the Company
to meet its operating expenses and to service its debt requirements as they
become due for the foreseeable future. Significant assumptions underly this
belief, including, among other things, that the Company will succeed in
implementing its business strategy and there will be no material adverse
developments in the business, liquidity or capital requirements of the Company.
If the Company is unable to service its indebtedness, it will be forced to adopt
an alternative strategy that may include actions such as reducing or delaying
acquisitions, capital expenditures, selling assets, restructuring or refinancing
its indebtedness or seeking additional equity capital. There can be no
assurance, however, that the Company's business will generate cash flow at or
above projected levels or that any alternative strategies could be effected on
satisfactory terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Furthermore, repayment of the Notes is dependent upon the Company
refinancing its indebtedness or obtaining new equity capital. There can be no
assurance that the Company will be able to achieve this objective.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability
to: incur additional indebtedness; incur liens; pay dividends or make certain
other restricted payments; enter into certain transactions with affiliates;
incur indebtedness that is subordinate in right of payment to any Senior
Indebtedness and senior in right of payment to the Notes; impose restrictions on
the ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person; or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company. See "Description of the Exchange Notes--Certain Covenants." If the
Company fails to comply with these covenants, it would be in default under the
Indenture and the principal and accrued interest on the Notes would become due
and payable. In addition, the Credit Agreement contains restrictive covenants
and requires the Company to maintain specified financial ratios and satisfy
certain financial tests. The Company's ability to meet such financial ratios and
tests may be affected by events beyond its control, and there can be no
assurance that the Company will meet such tests. A breach of any of these
covenants could result in an event of default under the Credit Agreement. In an
event of default under the Credit Agreement, the lenders thereunder could elect
to declare all amounts borrowed, together with accrued interest, to be
immediately due and payable and the lenders under the Credit Agreement could
terminate all commitments thereunder. If any such indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient
13
<PAGE> 23
to repay in full such indebtedness and the other indebtedness of the Company,
including the Notes. In addition, a default under the Credit Agreement or the
instruments governing the Company's other indebtedness could constitute a
cross-default under the Indenture and any instruments governing the Company's
other indebtedness, and a default under the Indenture could constitute a
cross-default under the Credit Agreement and any instruments governing the
Company's other indebtedness. See "Description of the Exchange Notes --Certain
Covenants" and "Description of the Credit Agreement."
SUBORDINATION OF EXCHANGE NOTES TO SENIOR INDEBTEDNESS
The Exchange Notes will be, and the Old Notes are, subordinated in
right of payment to all existing and future Senior Indebtedness, including,
without limitation, the Company's obligations under the Credit Agreement, and
structurally subordinated to all existing and future indebtedness of the
Company's subsidiaries that are not Guarantors. Under the terms of the
Indenture, the Company will be permitted, upon the satisfaction of certain
conditions, to incur additional secured indebtedness. See "Description of the
Credit Agreement," "Description of the Exchange Notes -- Subordination" and
"--Certain Covenants." As of June 30, 1997, on a pro forma basis after giving
effect to the Offering and the application of the estimated net proceeds
therefrom to consummate the JPS Acquisition and repay the Term Loan and any
amounts then outstanding under the Revolving Credit Facility, the Company and
its subsidiaries would have had an aggregate of approximately $17.0 million of
Senior Indebtedness (excluding unused commitments of $27.0 million (excluding
outstanding letters of credit) available under the Credit Agreement) and the
Company's subsidiaries that are not Guarantors would have had approximately $9.6
million of indebtedness outstanding (including trade payables and current,
long-term and other liabilities and excluding the guarantees by certain of the
Company's subsidiaries of the Company's obligations under the Credit Agreement).
The Company expects, subject to certain restrictions, that it will incur
additional Senior Indebtedness, including Senior Indebtedness under the Credit
Agreement, in connection with the implementation of its airbag growth strategy.
By reason of such subordination, in the event of the liquidation or
insolvency of the Company, creditors of the Company who are not holders of
Senior Indebtedness, including holders of the Notes, may recover less, ratably,
than holders of Senior Indebtedness. The holders of any indebtedness of the
Company's subsidiaries will be entitled to payment of their indebtedness from
the assets of such subsidiaries prior to the holders of any general unsecured
obligations of the Company, including the Notes. If the Company incurs
additional pari passu indebtedness, the holders of such debt would be entitled
to share ratably with the holders of the Notes in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or
other winding up of the Company. This will have the effect of reducing the
amount of proceeds paid to holders of the Notes. In addition, no payments may be
made with respect to the principal of or interest on the Notes if a payment
default exists with respect to Designated Senior Indebtedness (as defined) and,
under certain circumstances, no payments may be made with respect to the
principal of or interest on the Notes for certain periods of time if a
non-payment default exists with respect to Designated Senior Indebtedness. See
"Description of the Exchange Notes --Subordination."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
provisions in the Indenture regarding transfer and exchange of the Old Notes and
the restrictions on transfer of such Old Notes as set forth in the legend
thereon as a consequence of the issuance of the Old Notes pursuant to exemption
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register Old Notes under the Securities Act. See "The Exchange Offer."
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Old Notes
pursuant to the Exchange Offer will be made only after a timely receipt by the
Company of such Old Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Old
Notes desiring to tender such Old Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty to
give notification of defects or irregularities with respect to the tenders of
Old Notes for exchange. Old Notes that are not tendered or are
14
<PAGE> 24
tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof, and, upon consummation of the Exchange Offer certain registration
rights under the Registration Rights Agreement will terminate. In addition, any
holder of Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
FRAUDULENT CONVEYANCE RISKS; POSSIBLE INVALIDITY OF GUARANTEES
The Company's obligations on the Exchange Notes will be, and the
Company's obligations on the Old Notes are, guaranteed on a joint and several
basis by the Guarantors. The incurrence by the Company and the Guarantors of the
indebtedness evidenced by the Notes, the full and unconditional, joint and
several guarantees by the Guarantors of the Old Notes (the "Old Guarantees") and
the Exchange Notes (the "New Guarantees"), and the use by the Company of the
proceeds of the Old Notes to effect the JPS Acquisition, may be subject to
review under relevant federal and state fraudulent conveyance statutes in a
bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of
the Company or the Guarantors. Under these statutes, if a court were to find
that at the time the Notes, or the Old Guarantees or the New Guarantees
(collectively, the "Guarantees"), as the case may be, were issued, (a) the
Company or any of the Guarantors issued the Notes or a Guarantee with the intent
of hindering, delaying or defrauding current or future creditors or (b)(i) the
Company or any of the Guarantors received less than reasonably equivalent value
or fair consideration for issuing the Notes or a Guarantee, as the case may be,
and (ii) the Company or any such Guarantor, as the case may be, (A) was
insolvent or was rendered insolvent by reason of the JPS Acquisition, the
Offering and the Exchange Offer, (B) was engaged, or was about to engage, in a
business or transaction for which its assets constituted unreasonably small
capital or (C) intended to incur, or believed that it would incur, debts beyond
its ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under the fraudulent conveyance statutes), such court
could void the Notes or such Guarantee, subordinate such obligations to
presently existing and future indebtedness of the Company and such Guarantor or
take other action detrimental to the holders of the Notes, including, under
certain circumstances, invalidating the Notes.
The measure of insolvency for purposes of the foregoing
considerations will vary depending upon the law of the jurisdiction that is
being applied in any such proceeding. Generally, however, the Company and the
Guarantors would be considered insolvent if, at the time they incur or incurred
the indebtedness constituting the Notes or the Guarantees, either (a) the fair
market value (or fair saleable value) of their assets on a going concern basis
is less than the amount required to pay the probable liability on their total
existing debts and liabilities (including contingent liabilities) as they become
absolute and matured or (b) they are incurring debt beyond their ability to pay
as such debt matures.
In addition, the Guarantees may be subject to the claim that, since
the Guarantees were incurred for the benefit of the Company (and only indirectly
for the benefit of the Guarantors), they were incurred for less than reasonably
equivalent value or fair consideration. As described above, a court could
therefore void the Guarantees or subordinate them to other obligations of the
Guarantors.
The Company and the Guarantors believe that, at the time of the
issuance of the Notes and the Guarantees, as the case may be, the Company and
the Guarantors were or will be, as the case may be, (a) neither insolvent nor
rendered insolvent thereby, (b) in possession of sufficient capital to pay their
debts as the same mature or become due and to operate their respective
businesses effectively and (c) incurring debts within their respective abilities
to pay. In reaching the foregoing conclusions, the Company and the Guarantors
have relied upon their analysis of internal cash flow projections and estimated
values of assets and liabilities of the Company and the Guarantors (including
rights of contribution and indemnification in connection with the Guarantees).
There can be no assurance, however, that a court passing on such questions would
reach the same conclusions. See "Description of the Exchange Notes--Guarantees."
15
<PAGE> 25
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Notes will have the right to require the Company to repurchase all or a portion
of such holder's Exchange Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase. If a Change of Control
were to occur, there can be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing, to pay the
repurchase price for all Exchange Notes tendered by holders thereof. Further,
the provisions of the Indenture may not afford holders of Exchange Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company that may
adversely affect holders of Exchange Notes, if such transaction does not result
in a Change of Control. In addition, the terms of the Credit Agreement may limit
the Company's ability to repurchase any Exchange Notes and will also identify
certain events that would constitute a Change of Control, as well as certain
other events with respect to the Company or certain of its subsidiaries, that
would constitute an event of default under the Credit Agreement. See
"Description of the Credit Agreement." Any future credit agreements or other
agreements relating to other indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from repurchasing
Exchange Notes, the Company could seek the consent of its lenders to the
repurchase of Exchange Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such consent or repay
such borrowing, the Company would remain prohibited from repurchasing Exchange
Notes. In such case, the Company's failure to repurchase tendered Exchange Notes
would constitute an Event of Default under the Indenture, which would, in turn,
constitute a further default under certain of the Company's existing debt
agreements and may constitute a default under the terms of other indebtedness
that the Company may enter into from time to time. See "Description of the
Exchange Notes -- Change of Control."
ABSENCE OF ESTABLISHED TRADING MARKET
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to (i) the
liquidity of any such market that may develop, (ii) the ability of holders of
Exchange Notes to sell their Exchange Notes or (iii) the price at which the
holders of Exchange Notes would be able to sell their Exchange Notes. If such a
market were to exist, the Exchange Notes could trade at prices that may be
higher or lower than their principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar notes and
the financial performance of the Company and its subsidiaries. The Company has
been advised by the Initial Purchasers that, following completion of this
offering, they presently intend to make a market in the Exchange Notes. However,
the Initial Purchasers are not obligated to do so, and any market-making
activity with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. See "The Exchange
Offer." There can be no assurance that even following registration of the
Exchange Notes an active trading market will exist for the Exchange Notes, or
that such trading market will be liquid.
RELIANCE ON MAJOR CUSTOMERS
The Company's customers are airbag module integrators, such as TRW
and Petri. Sales of airbag related products to TRW, Petri and AlliedSignal
accounted for approximately 31.2%, 12.8% and 7.6%, respectively, of the
Company's pro forma consolidated fiscal 1997 net sales of airbag related
products. The Company's contracts for airbag cushions and airbag fabric are
typically requirements contracts which do not bind any customer to purchase
specified quantities until such customer has issued a purchase order to the
Company. The Company's agreements with TRW with respect to airbag cushions are
driver side (in North America only) and passenger side airbag requirement
contracts which are subject to termination under certain conditions and which
are otherwise terminable by TRW upon 90 days' prior written notice. The Company
and Petri are parties to an "evergreen" agreement, pursuant to which the parties
agree upon price, quantity, and other terms at the beginning of each calendar
year. No binding obligation exists with respect to renewal of this contract each
year. A significant reduction of purchases by or the loss of any one of these
customers would have a material adverse effect on the Company. See "Business --
Airbag Related Products -- Customers."
16
<PAGE> 26
PRICING OF AUTOMOTIVE AIRBAG MODULES; TRENDS IN INDUSTRY
The continued sale of airbags by the Company is conditioned upon,
among other things, the Company's prices remaining competitive. The Company's
agreements with TRW require the Company to pass along certain cost savings to
TRW. The Company's future profitability will depend on, among other things, its
ability to continue to improve its manufacturing efficiencies and maintain a
cost structure that will enable the Company to offer competitive prices. The
Company anticipates that it will continue to incur capital expenditures to
accomplish these objectives. See "Business --Airbag Related Products --
Customers."
CHARACTERISTICS OF THE AUTOMOTIVE INDUSTRY; SEASONALITY
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, the timing
of the introduction of new models of automobiles for which the Company
manufactures airbags, changes in consumer vehicle preferences, governmental
regulation of auto safety, potential work stoppages, adverse weather conditions,
potential problems with obtaining supplies and other risks of production. In
addition, the Company's automotive products business is subject to the seasonal
characteristics of the automotive industry in which there are seasonal shutdowns
in the third and fourth calendar quarters of each year which typically result in
lower shipments of airbags during these quarters. Sluggish consumer spending on
automobiles could have a material adverse impact on the Company. See "Business
- -- Seasonality."
In addition, automotive suppliers such as the Company are under
constant pressure from their major customers to reduce product costs, improve
quality and provide additional design and engineering capabilities. Remaining a
low cost supplier of automotive airbags worldwide constitutes one of the
Company's primary goals. However, there can be no assurance that the Company
will be able to continually improve or maintain its product margins on product
sales to its customers.
According to Tier One, demand for airbag modules is anticipated to
increase over the next few years although it is also anticipated that industry
revenue will flatten during such period due to, among other things, continued
downward pressure on the price of automotive airbag modules and components as a
result of competition and manufacturing efficiencies. Moreover, a significant
portion of the demand for airbag modules is expected to result from increased
demand for side-impact airbag cushions, which require less fabric than the
driver and passenger-side airbag cushions.
COMPETITION
There are several companies, some with greater financial resources
than the Company, which produce or are capable of producing products which
compete with the products manufactured by the Company. These companies include
airbag module integrators, such as TRW, Delphi Interior Lighting ("Delphi") and
AutoLiv, which produce substantial quantities of airbag cushions to satisfy
their own requirements. However, certain barriers to entry exist for potential
new competitors into the airbag business, including switching costs. There can
be no assurance that TRW, Delphi, AutoLiv or other automotive suppliers or
automobile manufacturers will not seek in the future to satisfy more of their
airbag cushion requirements through internal manufacturing capabilities or other
airbag cushion manufacturers. Increased competition, as well as price reductions
of airbag modules, would adversely affect the Company's revenues and
profitability. See "Business -- Airbag Related Products -- Competition" and "--
Customers."
Milliken & Co. ("Milliken") and certain smaller manufacturers
compete with the Company as a supplier of airbag fabric to airbag module
integrators. In addition, certain airbag module integrators, including Takata,
Inc. (which is also known as Highland Industries) ("Takata"), produce all airbag
fabric used in their airbag manufacturing operations.
The Company is one of two suppliers under contract with the United
States Army to supply 120 millimeter mortar cartridges. However, the defense
industry is highly competitive and there can be no assurance that other
suppliers will not be awarded contracts for products sold by the Company. See
"Business -- Defense Related Products -- Competition" and "-- Markets and
Customers."
17
<PAGE> 27
DEPENDENCE ON SUPPLIERS
Under its agreements with TRW and with various branches of the
United States Armed Forces and its prime contractors, such customers must
approve the source of supply of all major components used by the Company. TRW
has thus far approved only one qualified source of supply for certain airbag
components. A prolonged delay in product shipments by the Company's qualified
suppliers combined with a delay in the approval by TRW or the United States
Armed Forces or its prime contractors of alternate qualified suppliers could
adversely affect the Company's operating results. In addition, certain of the
Company's suppliers are also competitors or potential competitors of the Company
with respect to the sale of products directly to the Company's customers. See
"Business -- Airbag Related Products -- Suppliers" and "-- Defense Related
Products -- Manufacturing and Production."
The Company currently plans to vertically integrate its operations
by using the fabric produced by SCFT in the manufacture of its airbags, although
such change in the supply of fabric will not be cost-effective unless it
coincides with a customer's change in its airbag model. There can be no
assurance that the Company's customers will approve the use of SCFT fabric. If
such fabric is approved, there can be no assurance that the Company will be able
to successfully integrate its operations, or that cost savings will result from
such integration. Under industry standards, any fabric lines sold by SCFT must
be certified by each of its customers. In order to use SCFT's fabric in its
airbag cushions for any customer, the Company will be required to certify with
such customer the use of SCFT's fabric in its automotive airbags. Certification
may take an extended period of time, in some cases, up to six months to one
year. Although management of each of SCFT and the Company considers its customer
relationships to be good, there can be no assurance that the required
certifications will be obtained from its customers. If customer certification is
delayed or not obtained, there could be a material adverse effect on the
business of the Company.
Approximately 85% of SCFT's customers have specified the use of E.I.
DuPont de Nemours and Co. ("DuPont") yarn or an equivalent alternative in the
production of SCFT's fabrics. Management of the Company believes that SCFT's
relationship with DuPont is excellent. However, given the superior quality of
DuPont's nylon yarn, if SCFT becomes unable to obtain DuPont yarn, there is no
assurance that SCFT would be able to obtain a yarn of equivalent quality from
another manufacturer or that the failure to obtain an equivalent yarn would not
have a material adverse effect on the business of SCFT or its ability to fill
its customers' orders.
COSTS AND RISKS IN ACQUISITION AND EXPANSION STRATEGY
The Company's future operations and earnings will be largely
dependent upon the Company's ability to integrate the operations of SCFT into
the current operations of the Company. The operations of SCFT vary in scope and
type from the Company's current operations. There can be no assurance that the
Company will be able to successfully integrate such operations with those of the
Company, and a failure to do so would have a material adverse effect on the
Company's financial position, results of operations and cash flows.
Additionally, although the Company does not currently have any agreement or
understanding with respect to any specific acquisition plans, the need to focus
management's attention on integration of new operations, as well as other
factors, may limit the Company's ability to successfully pursue acquisitions or
other opportunities related to its business for the foreseeable future. Also,
successful integration of operations will be subject to numerous contingencies,
some of which are beyond management's control. These contingencies include
general and regional economic conditions, competition and changes in regulation.
The ability of the Company to successfully implement its acquisition
strategy depends upon a number of factors. For example, the Company must
identify acquisition opportunities in the automotive products or related
industries, successfully negotiate, finance and consummate such acquisitions,
comply with applicable regulatory restrictions (including antitrust laws) in the
United States and abroad and integrate the acquired business into the Company.
There can be no assurance that the Company will be able to identify suitable
acquisition candidates at favorable acquisition prices or that it will be able
to finance and consummate any such acquisitions and integrate the acquired
business. In past acquisitions, the Company has been successful in reducing
product and organization costs upon consummation and integration of the
acquisitions. However, there can be no assurance that the Company will be able
to integrate any new acquisitions successfully into its operations and achieve
costs savings from such integration. See "Business -- Growth Strategy."
18
<PAGE> 28
As the Company expands its airbag business worldwide, it may incur
additional expenses resulting from this expansion, which could adversely affect
the Company's operating profits. For example, the Company operated a temporary
facility in Germany during fiscal year 1995 and two temporary facilities in the
Czech Republic during fiscal year 1997, in order to meet TRW's demand for
airbags, which resulted in the incurrence of additional operating expenses
during this period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company may experience unanticipated
start-up costs in connection with the establishment of its new manufacturing
facility in the Czech Republic. See "Business -- Growth Strategy" and "-- Airbag
Related Products -- Capacity."
DEPENDENCE ON KEY PERSONS
The Company's continued success may depend to a significant degree
upon the services of Robert A. Zummo, the Chairman of the Board, President and
Chief Executive Officer of the Company. See "Management -- Employment
Agreements." The Company maintains, and is the beneficiary under, a key man life
insurance policy on Mr. Zummo in the amount of approximately $2.5 million. In
addition, the loss of the services of Thomas W. Cresante, Executive Vice
President and Chief Operating Officer of the Company, and Jeffrey J. Kaplan,
Executive Vice President and Chief Financial Officer of the Company, and the
inability to attract replacements of these key personnel could have a material
adverse effect on the Company. See "Management."
PRODUCT LIABILITY
Through sales of its airbag products, the Company is engaged in a
business which could result in possible claims for injury resulting from the
failure of its products. Recently, there has been increased public attention to
injuries and deaths of children and small adults due to the force of the
inflation of airbags. Although the Company has not been named as a defendant in
any product liability lawsuit nor threatened with any such lawsuit, the Company
has a risk of exposure to product liability claims. Product liability insurance
is maintained, but there can be no assurance that insurance coverage will
continue to be available on terms acceptable to the Company or that such
coverage will be adequate for any liabilities that might be incurred. See
"Business -- Airbag Related Products -- Product Liability."
RISKS OF FOREIGN OPERATIONS
For the year ended March 31, 1997, 21.7% of the Company's pro forma
consolidated net sales was generated outside of the United States. Foreign
operations and exports to foreign markets are subject to a number of special
risks, including, but not limited to, risks with respect to fluctuations in
currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive actions by foreign governments (such as
restrictions on transfer of funds, export duties and quotas, foreign customs and
tariffs and unexpected changes in regulatory environments), changes in foreign
laws regarding trade and investment, difficulty in obtaining distribution and
support, nationalization, the laws and policies of the United States affecting
trade, foreign investment and loans, and foreign tax laws. There can be no
assurance that one or a combination of these factors will not have a material
adverse effect on the Company's ability to increase or maintain its foreign
sales or on its results of operations.
In addition, the Company has significant manufacturing operations in
foreign countries and purchases a portion of its raw materials from foreign
suppliers. The production costs, profit margins and competitive position of the
Company are affected by the strength of the currencies in countries where it
manufactures or purchases goods relative to the strength of the currencies in
countries where its products are sold.
Certain of the Company's operations generate net sales and incur
expenses in foreign currencies. The Company's financial results from
international operations may be affected by fluctuations in currency exchange
rates. Certain exchange rate risks to the Company are limited by contractual
clauses in the Company's agreement with TRW for European supply of airbags.
Future fluctuations in certain currency exchange rates could adversely affect
the Company's financial results. See "Business -- Airbag Related Products --
Customers."
19
<PAGE> 29
ADVERSE EFFECT OF REGULATION AND GOVERNMENT POLICY; ENVIRONMENTAL LAWS
Domestic and foreign political developments and government
regulations and policies directly affect the automotive consumer products and
defense industries in the United States and abroad. Regulations and policies
relating to over-the-highway vehicles include standards established by the
United States Department of Transportation for motor vehicle safety. The
modification of existing laws, regulations or policies, or the adoption of new
laws, regulations or policies, could have an adverse effect on the Company. As a
government contractor, the Company is subject to extensive and complex United
States 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 with these laws and regulations could subject the Company to
civil and criminal penalties, and under certain circumstances, suspension and
debarment from future government contracts for a specified period of time.
Like similar companies, the Company's operations and properties are
subject to a wide variety of increasingly complex and stringent federal, state,
local and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws, including but not limited to
those under the Comprehensive Environmental Response Compensation & Liability
Act ("CERCLA" or "Superfund"), may impose joint and several liability and may
apply to conditions at properties presently or formerly owned or operated by an
entity or its predecessors, as well as to conditions at properties at which
wastes or other contamination attributable to an entity or its predecessors have
been sent or otherwise come to be located. The nature of the Company's
operations exposes it to the risk of claims with respect to such matters and
there can be no assurance that violation of such laws have not occurred or will
not occur or that material costs or liabilities will not be incurred in
connection with such claims. Based upon its experience to date, the Company
believes that the future cost of compliance with existing Environmental Laws and
liability for known environmental claims pursuant to such Environmental Laws,
will not have a material adverse effect on the Company's financial position or
results of operations and cash flows. However, future events, such as new
information, changes in existing Environmental Laws or their interpretation, and
more vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material. See "Business --
Environmental Matters"; Note 8 to Notes to the Company's Consolidated Financial
Statements, Note 7 to Notes to Valentec's Financial Statements, Note 12 to Notes
to JPS' Financial Statements and Note 11 to JPS' Financial Statements.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Zummo beneficially owns approximately 20.2% of the outstanding
Common Stock. Accordingly, Mr. Zummo may have the ability to control the
election of the Company's directors and thus, subject to his fiduciary duties,
direct the future operations of the Company and control other actions requiring
stockholder approval, including certain fundamental corporate transactions such
as a merger or sale of substantially all of the assets of the Company. See
"Security Ownership of Certain Beneficial Owners and Management."
VARIABILITY OF DEFENSE INDUSTRY
The Company's reliance upon defense programs for a significant
portion of its defense related sales has certain inherent risks, including the
uncertainty of domestic economic conditions, dependence on Congressional
appropriations and administrative allotment of funds, changes in governmental
policies which may reflect military and political developments and other factors
characteristic of the defense industry. See "Business -- Defense Related
Products -- Markets and Customers" and "-- United States Government Contracts."
As of June 30, 1997, the Company had a defense related backlog of
approximately $22.6 million of which $8.8 million is expected to be completed
before the end of fiscal year 1998. Although the Company believes that the
backlog of approximately $19.0 million from its systems contract for mortar
cartridges (the "Systems Contract") with the United States Army will ultimately
be realized, there can be no assurance that it will be successful in realizing
such revenues. In any event the Company does not believe that its revenues from
the defense related products will be as significant in the future as it has been
historically for the Company.
20
<PAGE> 30
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 Company. 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 defense related operations of the Company
may not be indicative of future performance.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes contemplated in this
Prospectus, the Company will receive Old Notes in a like principal amount, the
form and terms of which are the same as the forms and terms of the Exchange
Notes (which replace the Old Notes), except as otherwise described herein. The
Old Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase or decrease in the indebtedness of the Company.
As such, no effect has been given to the Exchange Offer in the pro forma
statements or capitalization tables.
The gross proceeds of $90.0 million from the Offering were used to:
(i) consummate the JPS Acquisition, including expenses thereto; (ii) repay the
Term Loan and any amounts then outstanding under the Revolving Credit Facility;
(iii) pay related fees and expenses and (iv) purchase a building in South
Carolina adjacent to the existing SCFT facility. The remaining proceeds of the
Offering will be used for working capital and general corporate purposes.
Pending such uses, the net proceeds of the Offering have been invested in
short-term, interest-bearing securities. See "Description of the Credit
Agreement," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Unaudited Pro
Forma Financial Data" included elsewhere in this Prospectus.
CAPITALIZATION
The following table sets forth the historical capitalization of the
Company as of June 30, 1997 derived from its unaudited consolidated financial
statements and the unaudited pro forma capitalization of the Company on such
date after giving effect to the Offering and the application of the estimated
net proceeds therefrom to consummate the JPS Acquisition and repay the Term Loan
and all amounts then outstanding under the Revolving Credit Facility. This table
should be read in conjunction with the Financial Statements and "Selected
Historical and Unaudited Pro Forma Financial Data" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
ACTUAL PRO FORMA
------ ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents ............... $ 2,772 $ 13,396
======== ========
Debt:
Credit Facility(1) .......... $ 17,928 $ --
Capital Lease Obligations ... 6,111 6,692
Exchange Notes offered hereby -- 90,000
Other Debt .................. 10,332 10,332
-------- --------
Total Debt .................. 34,371 107,024
Total Stockholders' Equity .............. 35,915 35,915
-------- --------
Total Capitalization .................... $ 70,286 $142,939
======== ========
</TABLE>
- ----------
21
<PAGE> 31
(1) Actual amounts at June 30, 1997 represented amounts outstanding
under the Credit Agreement. Such amounts were repaid out of the proceeds of the
Offering. See "Management Discussion and Analysis of Financial Condition and
Results of Operations." The credit facility existing under the Credit Agreement
as of the closing of the Offering permits a maximum aggregate borrowing of $27.0
million, all of which (excluding outstanding letters of credit) was available at
the closing of the Offering.
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Unaudited Pro
Forma Financial Data") as of June 30, 1997 (and for the three months ended June
28, 1997, in the case of the Division), for the year ended March 31, 1997, and
for the three months ended June 30, 1997 (and for the three months ended June
28, 1997, in the case of the Division), has been derived by the application of
pro forma adjustments to the financial statements of the Company, Valentec, and
the Division. The historical accounts of JPS as of, and for the twelve months
ended, March 29, 1997, are derived from its audited financial statements as of
December 28, 1996 plus the three month period ended March 29, 1997 less the
three month period ended March 31, 1996, included elsewhere in this Prospectus.
The pro forma financial data for the year ended March 31, 1997 gives effect to:
(i) the Valentec Acquisition; (ii) the JPS Acquisition; (iii) the completion of
the Offering and application of the proceeds therefrom; (iv) the Phoenix
Acquisition; and (v) certain Subsequent Transactions. The pro forma statement of
operations data for the year ended March 31, 1997 gives effect to the events
described in items (i), (ii), (iii), (iv) and (v) as if each had occurred on
April 1, 1996. The pro forma statement of operations data for the three months
ended June 30, 1997 gives effect to the events described in items (ii), (iii)
and (v) as if each had occurred on April 1, 1997. The related pro forma balance
sheet data gives effect to the events described in items (ii) and (iii) as if
each had occurred on June 30, 1997. The adjustments are described in the
accompanying notes. The Unaudited Pro Forma Financial Data does not purport to
represent what the Company's results of operations actually would have been if
those transactions had been consummated on the date or for the periods
indicated, or what such results will be for any future date or for any future
period. The Unaudited Pro Forma Financial Data should be read in conjunction
with "Selected Historical and Unaudited Pro Forma Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus.
22
<PAGE> 32
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITIONS OFFERING AND OFFERING AND SUBSEQUENT
SCI VALENTEC JPS ACQUISITIONS ACQUISITIONS FINANCING
3/31/97 3/31/97 3/29/97 ADJUSTMENTS TOTALS TRANSACTIONS PRO FORMA
------- ------- ------- ----------- ------ ------------ ---------
STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... $ 83,958 $ 14,026 $ 65,570 $ 9,654(a) $173,208 $ -- $173,208
Cost of sales ................ 64,130 12,144 55,127 6,428(b) 137,829 -- 137,829
Depreciation ................. 2,043 546 2,306 599(b) 5,494 -- 5,494
Product launch costs ......... 1,761 -- -- -- 1,761 -- 1,761
-------- -------- -------- -------- -------- -------- --------
Gross Profit .............. 16,024 1,336 8,137 2,627 28,124 -- 28,124
Selling and marketing
expenses .................. 1,375 -- -- 503(c) 1,878 -- 1,878
General and administrative
expenses .................. 5,697 1,683 3,229 675(d) 11,284 -- 11,284
Amortization ................. 348 -- 900 352(e) 1,600 -- 1,600
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ............. 8,604 (347) 4,008 1,097 13,362 -- 13,362
-------- -------- -------- -------- -------- -------- --------
Other expense (income) ....... 444 (538) 332 605(f) 843 -- 843
Interest expense, net ........ 1,319 1,183 499 7,341(g) 10,342 221(i) 10,563
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes .................. 6,841 (992) 3,177 (6,849) 2,177 (221) 1,956
Provision (benefit) for
income taxes .............. 2,995 (286) 453 (2,058)(h) 1,104 (88)(j) 1,016
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle .............. $ 3,846 $ (706) $ 2,724 $ (4,791) $ 1,073 $ (133) $ 940
======== ======== ======== ======== ======== ======== ========
Income (loss) before
extraordinary item and
cumulative effect of change
in accounting principle per
share ..................... $ 0.77 -- -- -- -- -- $ 0.19
======== ======== ======== ======== ======== ======== ========
Weighted average number of
shares outstanding ........ 5,027 -- -- -- -- -- 5,021
OTHER FINANCIAL DATA:
EBITDA(1) .................... $ 12,756 $ 199 $ 7,214 $ 2,048 $ 22,217 $ -- $ 22,217
Adjusted EBITDA(1) ........... 12,756 199 8,425 2,048 23,428 -- 23,428
Capital expenditures(2) ...... 8,613 1,116 825 -- 10,554 -- 10,554
</TABLE>
- -------
(1) EBITDA represents income from operations plus depreciation and
amortization and excludes the current year's impact of previously deferred
product launch costs now expensed due to the accounting principle change made in
fiscal year 1997. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. However,
EBITDA should not be considered as an alternative to net income as a measure of
operating results or to cash flows from operations as a measure of liquidity in
accordance with generally accepted accounting principles. Adjusted EBITDA
excludes non-recurring costs charged to JPS of $1.2 million, which consists of
allocated cost of sales and selling, general and administrative expenses from
JPS.
23
<PAGE> 33
(2) Pro forma capital expenditures do not include equipment obtained
under capital lease obligations of $1.4 million or the building and 18 looms
purchased for approximately $1.3 million and $1.5 million, respectively, in
connection with the JPS Acquisition. However, capital expenditures include a
non-recurring investment of $7.1 million for pro forma and fiscal year 1997
related to the construction of the Company's new Czech Republic facility which
was subsequently financed. Excluding the non-recurring investment for the Czech
Republic facility pro forma and fiscal year 1997 capital expenditures would have
been $3.5 million and $1.5 million, respectively.
See Unaudited Notes to Pro Forma Financial Data.
24
<PAGE> 34
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF PRO FORMA ADJUSTMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE
MONTHS
REF ADJUSTMENT MARCH 31, 1997
--- ---------- --------------
<S> <C> <C> <C>
Net sales....................................... (a) Revenues of Phoenix prior to August 6,
1996 (date of acquisition) (Note 2)............ $12,381
Eliminate intercompany sales between
SCI and Valentec............................... (2,727)
-------
9,654
Cost of sales................................... (b) Cost of Sales of Phoenix prior to August
6, 1996 (Note 2)............................... 9,155
Depreciation for Phoenix prior to
acquisition (Note 2)........................... 249
Eliminate intercompany cost of sales
between SCI and Valentec....................... (2,727)
Additional depreciation related to JPS
property, plant and equipment
(Note 2)....................................... 350
-------
7,027
-------
Increase in gross profit........................ 2,627
-------
Selling and marketing expenses.................. (c) Selling and marketing expenses of
Phoenix prior to August 6, 1996
(Note 2)....................................... 503
General and administrative (d) General and Administrative expense of
expenses...................................... Phoenix prior to August 6, 1996
(Note 2)....................................... 675
Goodwill amortization........................... (e) Amortization of Phoenix goodwill prior
to August 6, 1996 (Note 2)..................... 153
Amortization of Valentec goodwill
(Note 1)....................................... 672
Eliminate JPS historical goodwill
amortization (Note 1).......................... (884)
Amortization of JPS goodwill (Note 1)............. 411
-------
352
-------
Increase of operating income.................... 1,097
-------
Other expense (income).......................... (f) Elimination of income from Valentec's
investment in SCI (Note 1)..................... 605
Interest expense................................ (g) Increase in interest expense due to Notes
issued in Offering (Notes 1 and 4)............. 9,113
Increase in interest expense due on note
payable to affiliate (Note 4).................. 140
Increase in interest expense related to
Phoenix prior to August 6, 1996
(Note 2)...................................... 83
</TABLE>
25
<PAGE> 35
<TABLE>
<S> <C> <C> <C>
Increase amortization of deferred
financing costs incurred from KeyBank
(Notes 1 and 2)................................ 40
Increase amortization of deferred
financing costs incurred from Offering
(Notes 1 and 2)................................ 330
-------
Total Interest Expense Pro Forma............ 9,706
Eliminate historical interest expense for
long-term debt repaid from Offering
proceed........................................ (2,365)
-------
Pro Forma Interest Adjustment
Required.................................... 7,341
-------
Decrease in income before
income taxes.................................. (6,849)
-------
Provision (benefit) for income (h) Income tax benefit attributable to
taxes......................................... additional interest on Notes issued in
Offering (Note 5).............................. (2,963)
Income tax benefit attributable to fiscal
year 1997 operating losses from
Valentec (Note 5).............................. (353)
Increase income tax provision to
corporate tax rates for JPS (Note 5)........... 785
Income taxes of Phoenix prior to August
6, 1996 (Note 5)............................... 473
-------
(2,058)
-------
Decrease in income before
extraordinary item and
cumulative effect of change in
accounting principle.......................... $(4,791)
=======
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
26
<PAGE> 36
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF SUBSEQUENT TRANSACTIONS
(IN THOUSANDS)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE
MONTHS
REF ADJUSTMENT MARCH 31, 1997
<S> <C> <C> <C>
Interest Expense..................... (i) Increase in SCI interest expense due to mortgage
financing from Bank Austria (Notes 4 and 6).................. $563
Increase in SCI interest expense due to new equipment
financing (Notes 4 and 6).................................... 160
Increase amortization of deferred financing costs
incurred from Bank Austria (Notes 1 and 2)................... 15
Eliminate historical interest expense for long-term debt
repaid from subsequent transactions.......................... (517)
--------
221
Provision (benefit) for income (j) Income tax benefit attributable to additional interest from
taxes................................. subsequent financing transactions (Note 5)................... (88)
--------
Decrease in net income................ $133
=======
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
27
<PAGE> 37
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION
SCI JPS
THREE THREE PRO FORMA
MONTHS MONTHS OFFERING AND OFFERING AND SUBSEQUENT
ENDED ENDED ACQUISITIONS ACQUISITIONS FINANCING
6/30/97 6/28/97 ADJUSTMENTS TOTALS TRANSACTIONS PRO FORMA
------- ------- ----------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales ................. $27,629 $ 20,680 $ -- $48,309 $ -- $48,309
Cost of sales ............. 21,156 17,395 -- 38,551 -- 38,551
Depreciation .............. 805 536 33(a) 1,374 -- 1,374
------- -------- ------- ------- ----- -------
Gross Profit ........... 5,668 2,749 (33) 8,384 -- 8,384
Sell and marketing
expenses ............... 288 -- -- 288 -- 288
General and administrative
expenses ............... 2,163 1,223 -- 3,386 -- 3,386
Amortization .............. 185 122 (19)(b) 288 -- 288
------- -------- ------- ------- ----- -------
Income (loss) from
operations ........... 3,032 1,404 (14) 4,422 -- 4,422
------- -------- ------- ------- ----- -------
Other expenses (income) ... 118 (20) -- 98 -- 98
Interest expense, net ..... 523 17 1,995(c) 2,535 104(e) 2,639
------- -------- ------- ------- ----- -------
Income (loss) before
taxes ................ 2,391 1,407 (2,009) 1,789 (104) 1,685
Provision (benefit) for
income taxes ........... 956 -- (260)(d) 696 (42)(f) 654
------- -------- ------- ------- ----- -------
Net income (loss) ......... $ 1,435 $ 1,407 $(1,749) $ 1,093 $ (62) $ 1,031
======= ======== ======= ======= ===== =======
Net income (loss) per share $ .29 -- -- -- -- $ .21
======= =======
Weighted average number of
shares outstanding ..... 5,021 -- -- -- -- 5,015
OTHER FINANCIAL DATA:
EBITDA(1) ................. $ 4,022 $ 2,062 $ -- $ 6,084 $ -- $ 6,084
Adjusted EBITDA(1) ........ -- -- -- 6,593 -- 6,593
Capital expenditures(2) ... 1,828 12 -- 1,840 -- 1,840
</TABLE>
-------
(1) EBITDA represents income from operations plus depreciation and
amortization and excludes the current year's impact of previously deferred
product launch costs now expensed due to the accounting principle change made in
fiscal year 1997. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. However,
EBITDA should not be considered as an alternative to net income as a measure of
operating results or to cash flows from operations as a measure of liquidity in
accordance with generally accepted accounting principles. Adjusted EBITDA
excludes non-recurring costs charged to JPS of $509,000, which consists of
allocated cost of sales and selling, general and administrative expenses from
JPS.
(2) Pro forma capital expenditures do not include the building and 18
looms purchased for approximately $1.3 million and $1.5 million, respectively,
in connection with the JPS Acquisition.
See Unaudited Notes to Pro Forma Financial Data.
28
<PAGE> 38
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF PRO FORMA ADJUSTMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
REF ADJUSTMENT JUNE 30, 1997
--- ---------- -------------
<S> <C> <C> <C>
Cost of sales............................. (a) Additional depreciation related to JPS
property, plant and equipment (Note 2)......... $ 33
-----------
Decrease in gross profit.................. 33
-----------
Goodwill amortization..................... (b) Eliminate JPS historical goodwill
amortization (Note 1).......................... (122)
Amortization of JPS goodwill (Note 1)............ 103
-----------
(19)
Decrease of operating income.............. (14)
-----------
Interest expense.......................... (c) Increase in interest expense due to Notes
issued in Offering (Notes 1 and 4)............. 2,278
Increase interest expense due on note
payable to affiliate (Note 4).................. 17
Increase amortization of deferred
financing costs incurred from KeyBank
(Notes 1 and 2)................................ 5
Increase amortization of deferred
financing costs incurred from Offering
(Notes 1 and 2)................................ 83
-----------
Total Interest Expense Pro Forma............ 2,383
Eliminate historical interest expense for
long-term debt repaid from Offering
proceeds....................................... (388)
-----------
Pro Forma Interest Adjustment
Required.................................... 1,995
-----------
Decrease in income before
income taxes............................ (2,009)
-----------
Provision (benefit) for income
taxes................................... (h) Income tax benefit attributable to
additional interest on Notes issued in
Offering (Note 5).............................. (798)
Increase income tax provision to
corporate tax rates for JPS (Note 5)........... 538
-----------
(260)
-----------
Decrease in income before
extraordinary item and
cumulative effect of change in
accounting principle.................... $ (1,749)
===========
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
29
<PAGE> 39
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF SUBSEQUENT TRANSACTIONS
(IN THOUSANDS)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
REF ADJUSTMENT JUNE 30, 1997
--- ---------- -------------
<S> <C> <C> <C>
Interest Expense....................... (i) Increase in SCI interest expense due to mortgage
financing from Bank Austria (Notes 4 and 6)................... $ 94
Increase in SCI interest expense due to new equipment
financing (Notes 4 and 6)..................................... 26
Increase amortization of deferred financing costs
incurred from Bank Austria (Notes 1 and 2).................... 2
Eliminate historical interest expense for long-term debt
repaid from subsequent transactions........................... (18)
-----
104
Provision (benefit) for income (j) Income tax benefit attributable to additional interest from
taxes.................................. subsequent financing transactions (Note 5)....................... (42)
-----
Decrease in net income................. $ 62
=====
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
30
<PAGE> 40
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION OFFERING AND
SCI JPS ACQUISITION
6/30/97 6/28/97 ADJUSTMENTS PRO FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ..... $ 2,772 $ 2 $ 10,622(a) $ 13,396
Accounts receivable, net ...... 16,000 14,173 -- 30,173
Inventories ................... 7,576 9,094 -- 16,670
Prepaid and other ............. 2,790 262 (203)(b) 2,849
-------- ------- -------- ---------
Total current assets ....... 29,138 23,531 10,419 63,088
Property, plant and equipment,
net ......................... 34,032 24,706 2,186(c) 60,924
Goodwill, net ................. 27,602 14,927 1,511(d) 44,040
Other assets .................. 3,744 273 3,027(e) 7,044
-------- ------- -------- ---------
Total assets ............... $ 94,516 $63,437 $ 17,143 $ 175,096
======== ======= ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable .............. $ 13,221 $ 5,434 $ -- $ 18,655
Accrued liabilities ........... 7,436 1,619 -- 9,055
Current portion of long-term
obligations ................ 5,236 581 (3,000)(f) 2,817
-------- ------- -------- ---------
Total current liabilities 25,893 7,634 (3,000) 30,527
Long-term obligations ......... 29,135 -- 75,072(g) 104,207
Other long-term liabilities ... 3,573 874 -- 4,447
-------- ------- -------- ---------
Total liabilities ........ 58,601 8,508 72,072 139,181
======== ======= ======== =========
STOCKHOLDERS' EQUITY:
Preferred stock ............... -- -- -- --
Common stock .................. 50 -- -- 50
Common stock warrants ......... 1 -- -- 1
Additional paid-in capital .... 43,754 52,311 (52,311)(h) 43,754
Treasury stock ................ (15,438) -- -- (15,438)
Retained earnings (accumulated
deficit) ................... 10,828 2,618 (2,618)(h) 10,828
Cumulative translation
adjustment ................. (3,280) -- -- (3,280)
-------- ------- -------- ---------
Total stockholders' equity 35,915 54,929 (54,929) 35,915
-------- ------- -------- ---------
Total liabilities and
stockholders' equity ....... $ 94,516 $63,437 $ 17,143 $ 175,096
======== ======= ======== =========
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
31
<PAGE> 41
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SUMMARY OF PRO FORMA ADJUSTMENTS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF
REF ADJUSTMENT JUNE 30, 1997
--- ---------- -------------
<S> <C> <C> <C>
Cash and cash equivalents......... (a) Net proceeds from Notes (Notes 1 and 4)................... $90,000
Payment of deferred financing costs for Offering
(Notes 1 and 4)......................................... (3,300)
Payment for acquisition fees (Note 1)..................... (600)
Purchases of equipment from
Offering proceeds (Notes 1 and 3)....................... (1,250)
Paydown of SCI's notes payable from Offering
proceeds (Note 4)....................................... (17,928)
Purchase of JPS (Note 1).................................. (56,300)
--------
10,622
Prepaid and other................. (b) Eliminate JPS's current deferred tax assets
(Note 5)................................................ (203)
--------
Increase in current assets........ 10,419
--------
Property, plant and
equipment, net.................. (c) Adjustment to property, plant and equipment to
fair value.............................................. (1,216)
Eliminate accumulated depreciation accounts............... 1,216
Adjustment to machinery and equipment to fair
value in connection with the acquisition of JPS
(Notes 1 and 3)......................................... 677
Purchases of property and equipment from
Offering proceeds (Note 2).............................. 1,250
Purchased property and equipment from
Offering proceeds (Notes 1 and 3)....................... 259
--------
2,186
Goodwill, net..................... (d) Record goodwill from acquisition of JPS
(Note 1)................................................ 16,438
Eliminate historical JPS goodwill (Note 1)................ (14,927)
--------
1,511
Other assets...................... (e) Record debt acquisition costs related to the
Notes (Notes 1 and 4)................................... 3,300
Eliminate JPS deferred tax assets......................... (273)
Record SCI's investment in JPS for total cash
paid.................................................... 56,900
Eliminate SCI's investment in JPS in
consolidation........................................... (56,900)
--------
3,027
--------
Increase in total assets.......... $ 17,143
========
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
<PAGE> 42
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SUMMARY OF PRO FORMA ADJUSTMENTS -- (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS OF
REF ADJUSTMENT JUNE 30, 1997
--- ---------- -------------
<S> <C> <C> <C>
Current portion of
long-term obligations.......... (f) Repayment of SCI's current portion of notes payable
to Bank of America NT&SA (as defined)
(Note 4).................................................... $ (3,000)
---------
Decrease in current
liabilities.................... (3,000)
Long-term obligations............. (g) Issuance of Notes (Notes 1 and 4).............................. 90,000
Repayment of SCI's notes payable to Bank of
America NT&SA (Note 4)...................................... (14,928)
---------
75,072
---------
Increase in total liabilities..... 72,072
---------
Stockholders' equity.............. (h) Eliminate JPS's historical equity.............................. (52,311)
Eliminate JPS's historical retained earnings................... (2,618)
---------
Decrease in stockholders'
equity......................... (54,929)
---------
Increase in total liabilities
and stockholders'
equity......................... $ 17,143
=========
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
33
<PAGE> 43
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
NOTE 1 TRANSACTIONS
Valentec Acquisition
Valentec is a high-volume manufacturer of stamped and precision
machine products in the automotive, commercial and defense industries.
Immediately prior to the closing of the Valentec Acquisition, Valentec sold its
wholly-owned subsidiary, Valentec International Limited ("VIL"), for a nominal
amount. In connection with the Valentec Acquisition, the Company assumed a
demand note payable to VIL of $800,000 and a five year term note of $2.0 million
(see Note 4) in satisfaction of certain intercompany obligations between
Valentec and VIL. The stock of the Company, 1,379,200 shares, previously held by
Valentec was reacquired and has been recorded as treasury shares at fair value.
Goodwill of approximately $16.8 million has been recorded in the June 30, 1997
balance sheet and will be amortized over 25 years. Amortization of goodwill has
been included in the accompanying unaudited pro forma consolidated statements of
operations amounting to approximately $672,000 for the year ended March 31,
1997. Additionally, the Company had certain related transactions, which have
been eliminated for pro forma presentation for the year ended March 31, 1997.
For the three months ended June 30, 1997 the Valentec Acquisition is reflected
from the effective date of acquisition. The operations for the period April 1,
1997 to May 21, 1997 are not considered significant and, accordingly, have been
excluded from the accompanying unaudited pro forma statement of operations for
the three months ended June 30, 1997.
JPS Acquisition
On July 24, 1997, the Company acquired all of the assets of the
Division for $56.3 million in cash, including 18 looms (approximated value of
$1.5 million) which were delivered to the Company at closing plus the assumption
of certain liabilities, subject to post-closing adjustments. In addition, the
Company made a payment to JPS at the closing to enable it to pay off existing
indebtedness of the Division of approximately $650,000 at the closing. In
addition, the Company purchased an adjacent building for approximately $1.3
million. The Company estimates direct acquisition costs to be approximately
$600,000. The JPS Acquisition was accounted for as a purchase, with the excess
of the purchase price over the fair value of the net assets acquired allocated
to goodwill. The Company adjusted property, plant and equipment in the
accompanying historical financial statements of the Division to fair value in
the amount of $677,000. Goodwill has been estimated at $16.4 million and will be
amortized over 40 years. Amortization of goodwill has been included in the
accompanying unaudited pro forma consolidated statements of operations amounting
to approximately $411,000 for the year ended March 31, 1997 and $103,000 for the
three months ended June 30, 1997. Additionally, the Division had preexisting
amortization of goodwill totaling approximately $884,000 for the year ended
March 29, 1997 and $122,000 for the three months ended June 28, 1997 which was
reversed from the accompanying unaudited proforma consolidated statements of
operations.
Notes
The Company incurred approximately $3.3 million of fees and expenses
related to the Offering. Such fees will be deferred and charged to operations
over the expected term of the Notes, not to exceed 10 years.
Interest is payable on the Old Notes, and will be payable on the
Exchange Notes, semi-annually at a rate of 10.125% beginning January 15, 1998,
on a pro forma basis. Included in the unaudited pro forma statement of
operations is interest expense of $9.1 million for the year ended March 31, 1997
and $2.3 million for the three months ended June 30, 1997.
NOTE 2 PRINCIPLES OF ACCOUNTING FOR UNAUDITED PRO FORMA FINANCIAL DATA
The historical consolidated financial statements include the accounts
of the Company and its substantially-owned subsidiaries. The accounts of Phoenix
Airbag GmbH ("Phoenix" or "Phoenix Airbag"), which was acquired by the Company
on August 6, 1996 (the "Phoenix Acquisition"), have been included in the
Company's historical consolidated financial
34
<PAGE> 44
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
statements beginning August 6, 1996 (date of acquisition). Accordingly,
management adjusted, on a pro forma basis, the historical accounts for Phoenix
based on its actual results of operations for the year ended March 31, 1997.
For the year ended March 31, 1997, the accompanying unaudited pro
forma statements of operations have been adjusted to reflect, on a pro forma
basis, the historical results of Phoenix for a full year, and management's
estimates of costs and expenses for the period April 1, 1996 through August 5,
1996 as follows (in thousands):
<TABLE>
<S> <C>
Net sales .................................. $12,381
Cost of sales .............................. 9,155
Depreciation ............................... 249
Selling, general and administrative expenses 1,178
Amortization of goodwill ................... 153
Interest expense ........................... 83
Income tax expense ......................... 473
-------
Increase in net income ..................... $ 1,090
=======
Airbag cushion units produced .............. 1,015
=======
</TABLE>
NOTE 3 PROPERTY, PLANT AND EQUIPMENT, NET
Property and equipment has been increased for the purchase of a
building for approximately $1.3 million, equipment for $1.5 million to be used
by SCFT, and the adjustment to fair value of $677,000 of existing equipment at
SCFT. The building and equipment have been purchased with proceeds received from
the Offering. The building has an estimated useful life of 40 years and the
equipment has an estimated useful life of 10 years. The accompanying unaudited
pro forma consolidated statements of operations include additional depreciation
amounting to $350,000 for the year ended March 29, 1997 and $33,000 for the
three months ended June 28, 1997, which has been included as costs of goods
sold.
NOTE 4 LONG-TERM OBLIGATIONS
The Credit Agreement with KeyBank provided for a Term Loan (as
defined) of $ 15.0 million and a Revolving Credit Facility (as defined) of $12.0
million. The loans under the Credit Agreement will mature on May 31, 2002 and
are secured by substantially all the assets of the Company. Upon completion of
the Offering, the Company used the proceeds to repay the Term Loan and amounts
then outstanding under the Revolving Credit Facility. In connection therewith,
the Company's credit facility with KeyBank was converted into a $27.0 million
revolving credit facility (the "New Credit Facility"), bearing interest at LIBOR
plus 1.00% with a commitment fee of 0.25% for any unused portion, with the
remaining terms and conditions being similar to the previous revolving credit
facility. The Company incurred approximately $200,000 of financing fees in
connection with the KeyBank credit facility. The Credit Agreement contains
certain restrictive covenants that impose limitations upon, among other things,
the Company's ability to change its business; merge, consolidate or dispose of
assets; incur liens; make loans and investments; incur indebtedness; pay
dividends and other distributions; engage in certain transactions with
affiliates; engage in sale and lease-back transactions; enter into lease
agreements; and make capital expenditures.
Effective as of May 22, 1997, the Company completed the acquisition
of Valentec. The Company assumed all of Valentec's outstanding obligations as of
that date, including two term notes of approximately $5.1 million (net of assets
held by the lender), a revolving line of credit of approximately $1.7 million,
as of May 22, 1997 and equipment financings of approximately $1.1 million as of
May 22, 1997. Approximately $6.8 million of such indebtedness described in this
paragraph was retired in May and June 1997 with proceeds received from the Bank
Austria mortgage note (see below).
In connection with the Valentec Acquisition, the Company assumed a
demand note payable to VIL of $800,000 and a five year term note of $2.0
million, payable in 60 monthly installments of approximately $39,600, together
with interest at 7.0% per annum. Interest expense of $140,000 has been included
in the unaudited pro forma statement of operations for
35
<PAGE> 45
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
the year ended March 31, 1997 to reflect this obligation. For the three months
ended June 30, 1997 interest is included from May 22, 1997 in the historical
results and a pro forma adjustment has been included in the amount of $17,000
for the period April 1, 1997 through May 21, 1997.
On June 4, 1997, the Company secured a $7.5 million mortgage note
facility with Bank Austria. The note is payable in semi-annual installments
through March 31, 2007 and bears an interest rate of 7.5%. The note is secured
by the assets of the Company's Czech Republic facility. The Company increased
interest expense in the accompanying unaudited pro forma statement of operations
by $563,000 for these borrowings as if they were outstanding for the year ended
March 31, 1997. Additionally, for the three months ended June 30, 1997 the
Company increased interest expense by $94,000.
Deferred Financing Costs
Deferred financing costs, included in other assets, will arise, or
arose, as the case may be, from the issuance of the Notes (see Note 1), the
KeyBank Credit Facility and the Subsequent Transactions (see Note 6). Costs will
be capitalized and amortized using the effective interest method. Amounts
charged to interest expense in the accompanying unaudited pro forma consolidated
statements of operations amounted to $385,000 for the year ended March 31, 1997.
For the three months ended June 30, 1997 the amount charged to interest expense
on a pro forma basis was $90,000.
NOTE 5 INCOME TAXES
The Company adjusted the tax provision of the Division as if it were
taxed as a corporation for the twelve months ended March 29, 1997 and the three
months ended June 28, 1997. The Company also recorded a tax benefit for
additional expenses, which are deductible for income tax purposes and included
in the pro forma presentation.
NOTE 6 SUBSEQUENT TRANSACTIONS
Subsequent to the Valentec Acquisition, the Company entered into
certain financing arrangements. On June 4, 1997, the Company secured a $7.5
million mortgage note facility with Bank Austria (see Note 4). The proceeds were
used to repay approximately $6.8 million of debt obligations assumed by the
Company as part of the Valentec Acquisition. In connection with this mortgage,
the Company incurred approximately $150,000 of financing fees. Additionally, the
Company replaced certain existing capital lease obligations with new capital
lease obligations with similar terms. These transactions are collectively known
as the "Subsequent Transactions."
36
<PAGE> 46
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
FINANCIAL DATA
The following selected historical and unaudited pro forma financial
data is derived from, and qualified by reference to, the Company's Consolidated
Financial Statements and the notes thereto. The selected financial data for the
periods from April 28, 1993 through March 31, 1994 and January 1, 1993 through
April 27, 1993 is derived from the combined Automotive and Galion divisions of
Valentec for those periods. The pro forma data have been derived from the
Unaudited Pro Forma Financial Data of the Company included elsewhere in this
Prospectus. The Unaudited Pro Forma Financial Data does not purport to represent
what the Company's results of operations actually would have been if the
transactions referred therein had been consummated on the date or for the
periods indicated, or what such results will be for any future date or for any
future period. The Company's results of operation for the three months ended
June 30, 1997 are not necessarily indicative of the results that may be expected
for the entire year ended March 31, 1998. The information below should be read
in conjunction with the Consolidated Financial Statements of the Company and the
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOUR ELEVEN
MONTHS MONTHS
JANUARY 1, APRIL 28, THREE MONTHS ENDED
1993 1993 YEAR ENDED MARCH 31, JUNE 30, 1997
THROUGH THROUGH ---------------------------------------- ------------------------------
APRIL 27, MARCH 31, PRO FORMA
1993 1994 1995(1) 1996(1) 1997(1)(2) 1997(3) 1996 1997 PRO FORMA (3)
---- ---- ------- ------- ---------- ------- ---- ---- -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................... $ 4,580 $ 22,444 $ 51,779 $ 94,942 $ 83,958 $173,208 $16,172 $ 27,629 $ 48,309
Cost of sales ................ 4,436 18,895 44,553 81,908 67,934 145,084 13,580 21,961 39,925
Gross profit ................. 144 3,549 7,226 13,034 16,024 28,124 2,592 5,668 8,384
Selling, general and
administrative expenses ... 538 2,738 4,050 5,430 7,072 13,162 1,146 2,451 3,674
Operating income (loss) ...... (394) (439) 3,176 7,604 8,604 13,362 1,446 3,032 4,422
Interest expense (income),
net ........................ 10 235 126 (197) 1,319 10,563 10 523 2,639
Income (loss) before income
taxes ...................... (417) (591) 3,416 8,030 6,841 1,956 1,372 2,391 1,685
Income tax provision
(benefit) .................. (167) (207) 1,283 3,116 2,995 1,016 519 956 654
Income before extraordinary
item and cumulative effect
of accounting changes ...... (250) (384) 2,133 4,914 3,846 940 853 1,435 1,031
Extraordinary item--deferred
financing costs (less tax
benefit of $255)(4) ........ -- -- -- -- (383) -- -- -- --
Cumulative effect of change in
accounting for deferred
product launch costs (less
tax benefit of $718)(5).... -- -- -- -- (1,259) -- -- -- --
Net income ................... (250) (384) 2,133 4,914 2,204 940 853 1,435 1,031
-------- -------- -------- -------- -------- -------- ------- -------- --------
Net income per share ......... NA NA $ .53 $ .99 $ .44 $ .19 .17 $ .29 $ .21
======== ======== ======== ======== ===== ======== ========
Weighted average number of
shares outstanding ......... NA NA 4,031 4,981 5,027 5,021 5,069 5,021 5,015
======== ======== ======== ======== ===== ======== ========
OTHER DATA:
EBITDA(6) .................... $ (248) $ 1,125 $ 3,919 $ 8,708 $ 12,756 $ 22,217 1,783 $ 4,022 $ 6,084
Adjusted EBITDA(6) ........... -- -- -- -- -- 23,428 -- -- 6,593
Depreciation and
amortization ............... 146 314 743 1,104 2,391 6,997 337 990 1,662
Capital expenditures(7) ...... 198 3,710 2,473 4,588 8,613 10,554 2,047 1,828 1,840
Ratio of earnings to fixed
charges(8) ................. -- 28.1x -- 6.2x 1.2x 138.2x 5.6x 1.6x
</TABLE>
37
<PAGE> 47
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Airbag cushion units(9) .. 61 783 2,116 2,610 5,179 6,194 756 1,742 1,742
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents $ 28 $ 31 $ 3,846 $ 12,033 $ 8,320 -- $ 5,461 $ 2,772 $ 13,396
Working capital .......... 749 1,504 8,206 25,050 11,755 -- 22,296 3,245 32,561
Total assets ............. 4,943 12,837 28,311 49,831 73,407 -- 47,137 94,516 175,096
Total debt ............... -- 5,529 2,412 3,784 24,381 -- 3,998 34,371 107,024
Stockholders' equity ..... -- -- 15,971 35,344 35,274 -- 35,936 35,915 35,915
Division (deficit) equity (1,223) 866 -- -- -- -- -- -- --
CASH FLOW DATA:
Cash flows from operations $ 193 $ 108 $ (901) $ (3,500) $ 11,115 NA $ (4,524) $ 2,088 NA
Cash flows from investing
activities ............. (198) (3,710) (2,473) (4,588) (32,870) NA (2,047) (5,934) NA
Cash flows from financing
activities ............. 20 3,605 7,084 16,555 18,903 NA (80) (798) NA
</TABLE>
- --------
(1) The Company did not declare dividends during fiscal year 1997, 1996
or 1995.
(2) In August 1996, the Company acquired Phoenix Airbag. The
transaction was accounted for as a purchase using the purchase method of
accounting.
(3) The pro forma results of operations data for the year ended March
31, 1997 give effect to: (i) the Valentec Acquisition; (ii) the JPS Acquisition;
(iii) the completion of the Offering and the application of the net proceeds
therefrom; (iv) the Phoenix Acquisition; and (v) certain Subsequent
Transactions, as if each had occurred on April 1, 1996. The pro forma results of
operations data for the three months ended June 30, 1997 gives effect to the
events described in items (ii), (iii) and (v), as if each had occurred on April
1, 1997. The related pro forma balance sheet data as of June 30, 1997 gives
effect to the events described in items (ii) and (iii) as if these had occurred
on June 30, 1997.
(4) As part of the bank refinancing that occurred in fiscal year 1997,
approximately $383,000 in deferred financing costs were charged against
operations, net of certain tax benefits of $255,000.
(5) During fiscal year 1997, the Company changed its accounting for
product launch costs from the deferral method to the expense as incurred method.
The Company recorded the cumulative effect of this change in accounting
principle of approximately $ 1.3 million, net of certain tax benefits of
$718,000.
(6) EBITDA represents income from operations plus depreciation and
amortization and excludes the current year's impact of previously deferred
product launch costs now expensed due to the accounting principle change made in
fiscal year 1997. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. However,
EBITDA should not be considered as an alternative to net income as a measure of
operating results or to cash flows from operations as a measure of liquidity in
accordance with generally accepted accounting principles. Adjusted EBITDA
excludes non-recurring costs charged to JPS of $1.2 million for the year ended
March 29, 1997 and $509,000 for the three months ended June 28, 1997, which
consists of allocated cost of sales and selling, general and administrative
expenses from JPS.
(7) Pro forma capital expenditures do not include equipment obtained
under capital lease obligations of $1.4 million or the building or 18 looms
purchased for approximately $1.3 million and $1.5 million, respectively, in
connection with the JPS Acquisition. However, capital expenditures include a
non-recurring investment of $7.1 million for pro forma and fiscal year 1997
related to the construction of the Company's new Czech Republic facility, which
was subsequently financed. Excluding this non-recurring investment for the Czech
Republic facility, pro forma and fiscal year 1997 capital expenditures would
have been $3.5 million and $1.5 million, respectively.
(8) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes, plus fixed charges. Fixed
charges consist of net interest expense on all indebtedness including
amortization
38
<PAGE> 48
of deferred debt issuance costs and deferred financing costs. For the four
months from January 1, 1993 through April 27, 1993 and the eleven months from
April 28, 1993 through March 31, 1994, earnings were insufficient to cover fixed
charges by $167,000 and $207,000, respectively. In fiscal year 1996, the Company
did not incur fixed charges.
(9) Pro forma 1997 airbag cushion units includes the unit sales of
Phoenix Airbag for the period April 1, 1996 through August 5, 1996. Refer to
Note 2 of Notes to Unaudited Pro Forma Financial Data.
39
<PAGE> 49
SELECTED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial information for fiscal years 1996 and
1997 of the Company is set forth below. The Company recorded the cumulative
effect of the change in accounting principle and the extraordinary item during
the fourth quarter of fiscal year 1997. The Company did not restate prior
quarters. During the 1997 fiscal year, the Company changed its accounting for
product launch costs from the deferral method to the expense as incurred method.
Management believes expensing such costs is comparable with its industry peer
group. Expensing such costs as incurred is considered the preferable method of
accounting and, accordingly, management recorded the cumulative effect of this
change in accounting principle totaling $2.0 million ($1.3 million after income
taxes or $0.24 per share) effective April 1, 1996, in accordance with Accounting
Principles Board Opinion No. 20. During the fiscal year ended March 31, 1997,
the Company incurred approximately $ 1.8 million of product launch costs which,
under the previously used accounting method, would have been capitalized to
deferred product launch costs. Under the new accounting policy, such costs were
expensed as incurred. During the first quarter of fiscal year 1997, the Company
terminated its line of credit with a bank and accordingly charged the associated
deferred financing costs to operations as an extraordinary item. The charge was
approximately $383,000 (net of income tax benefit of $255,000). All dollar
amounts are in thousands except per share data.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996
------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1996
Revenues .............................................. $23,683 $25,317 $24,447 $21,495
Income from operations ................................ $ 1,562 $ 1,952 $ 1,943 $ 2,147
Net income ............................................ $ 1,047 $ 1,343 $ 1,297 $ 1,227
Net income per share .................................. $ 0.24 $ 0.26 $ 0.25 $ 0.24
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1997
Revenues ................................... $16,172 $18,877 $24,662 $ 24,247
Income from operations ..................... $ 1,446 $ 2,248 $ 3,150 $ 1,760
Income before extraordinary item and
cumulative effect of accounting change ... $ 853 $ 1,148 $ 1,420 $ 425
Net income ................................. $ 853 $ 1,148 $ 1,420 $ (1,217)
Income before extraordinary item and
cumulative effect of accounting change per
share .................................... $ 0.17 $ 0.23 $ 0.28 $ 0.09
Net income per share ....................... $ 0.17 $ 0.23 $ 0.28 $ (0.24)
</TABLE>
<TABLE>
<CAPTION>
Amended Quarter Ended
--------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
AMENDED Fiscal 1997
Revenues ................................... $ 16,172 $18,877 $24,662 $24,247
Income from operations ..................... $ 1,416 $ 1,971 $ 2,627 $ 2,590
Income before extraordinary item and
cumulative effect of accounting change ... $ 835 $ 982 $ -- $ --
Net (loss) income .......................... $ (424) $ 599 $ 1,106 $ 923
Income before extraordinary item and
cumulative effect of accounting change per
share .................................... $ 0.17 $ 0.20 $ -- $ --
Net (loss) income per share ................ $ (0.08) $ 0.12 $ 0.22 $ 0.20
</TABLE>
40
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Due to the Company's historical and anticipated growth including growth
through acquisitions, the Company believes that period-to-period comparisons of
its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. The following discussion should be
read in conjunction with the Company's consolidated financial statements and
notes thereto appearing herein.
The Company is a leading manufacturer and supplier of airbag cushions
to Tier 1 airbag module suppliers for a variety of automobiles and light trucks.
In fiscal 1997, the Company expanded its production and sales through
its acquisition of Phoenix Airbag in Germany and construction of its
manufacturing facility in the Czech Republic. In May 1997, the Company acquired
Valentec which enables the Company to manufacture and supply additional airbag
system components. Currently, Valentec manufactures metal airbag components
using machinery and stamping processes, among other industrial and commercial
products, which are sold domestically.
In July 1997, the JPS Acquisition was consummated, pursuant to which,
SCFT acquired all of the assets of the Division. The Offering was conditioned
upon, and a significant portion of the proceeds of the Offering were used to
finance, the JPS Acquisition. SCFT is a leading manufacturer of airbag fabric in
North America, as well as other specialty fabrics. Currently, the Company is
required by certain of its customers to purchase airbag fabric from vendors
other than SCFT. Should the Company obtain approval from certain of its vendors
to purchase fabric from SCFT, the Company may improve its overall operating
results.
Change in Accounting Principle and Extraordinary Item
During the 1997 fiscal year, the Company changed its accounting for
product launch costs from the deferral method to the expense as incurred method.
The Company recorded the cumulative effect of this change in accounting
principle in the amount of $2.0 million before income taxes effective April 1,
1996, in accordance with Accounting Principles Board Opinion No. 20. The fiscal
1997 deferred product launch costs of $1.8 million would have been capitalized
under the previously used accounting method rather than expensed as part of
costs of goods sold. The resulting impact of the change, including fiscal 1997's
deferral, totaled $2.3 million after income taxes, or $.46 per share. The
Company's determination was based on the fact that expensing such costs as
incurred is considered the preferable method of accounting and is a more
conservative approach. This change will allow management and its shareholders to
be better able to compare operating performance on a going-forward basis.
Additionally, in connection with a loan agreement with Bank of America
National Trust and Savings Association ("Bank of America NT&SA"), which replaced
the revolving credit with Citicorp US, Inc., the Company recorded an
extraordinary loss of $383,000 (net of income taxes of $255,000), or $0.08 per
share, relating to the write off of deferred financing costs incurred for the
previous credit facility.
41
<PAGE> 51
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- ------------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .......................... 86.0 86.3 80.9 84.0 79.5
Gross profit ................................ 14.0 13.7 19.1 16.0 20.5
Selling, general and administrative expense . 7.8 5.7 8.4 7.1 8.9
Income from operations ...................... 6.1 8.0 10.3 9.0 11.0
Interest expense (income), net .............. 0.2 (0.2) 1.6 0.0 1.9
Income before extraordinary item and
cumulative effect of change in accounting 4.1 5.2 4.6 5.3 5.2
Net income .................................. 4.1 5.2 2.6 5.3 5.2
EBITDA ...................................... 7.6 9.2 15.2 11.0 14.6
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales increased by $11.5 million or 70.8% to $27.6
million for the first quarter of fiscal year 1998 compared to the first quarter
of fiscal year 1997. The increase was primarily attributable to increased sales
volume in Europe attributable to the acquisition of Phoenix Airbag which
contributed approximately $10.1 million. Phoenix Airbag was acquired on August
5, 1996 and included in the Company's entire fiscal quarter of fiscal year 1998
whereas in the first quarter of fiscal year 1997 Phoenix Airbag had not yet been
acquired. The remaining increase was due to the addition of Valentec during the
first quarter of fiscal year 1998 offset by lower sales in the defense
operations due to delays in the current contract schedule for the Company's
Systems Contract with the U.S. Army. This delay is the result of the failure of
one of the Company's subcontractors to meet the U.S. Army's revised engineering
standards and obtain government process approval for final load, assembly and
pack. As a result of these issues, the U.S. Army has extended the time for
delivery and the Company now anticipates, based upon discussions with the
subcontractor and the U.S. Army, that deliveries will begin in late fiscal 1998.
Gross Profit. Gross profit increased by $3.1 million or 118.7% to $5.7
million for the first quarter of fiscal year 1998 compared to the first quarter
of fiscal year 1997. The increase was primarily attributable to increased sales
volume in Europe due to the acquisition of Phoenix Airbag, which contributed
approximately $2.9 million to gross profit.
Gross profit as a percentage of sales increased to approximately 20.5%
for the first quarter of fiscal year 1998 from 16.1% for the first quarter of
fiscal year 1997. The increase as a percentage was due to the greater
contribution to gross profit by Phoenix Airbag, which has a higher gross margin
percentage than the remainder operations due to automation.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.3 million or 156.3% to $2.2 million for
the first quarter of fiscal year 1998 compared to the first quarter of fiscal
year 1997. The increase was primarily attributable to the automotive operations.
With the addition of Phoenix Airbag, the new Czech Republic facility and
Valentec, costs increased approximately $660,000. The remaining increase was due
to a combination of additional costs incurred in the North American
manufacturing operations and corporate services. Selling, general and
administrative expenses as a percentage of sales increased slightly to 7.8% for
the first quarter of fiscal year 1998 from 5.2% for the first quarter of fiscal
year 1997.
42
<PAGE> 52
Operating Income. Operating income increased by $1.6 million or 109.7%
to $3.0 million for the first quarter of fiscal year 1998 compared to the first
quarter of fiscal year 1997. Operating income from automotive operations
increased by $1.3 million primarily attributable to the acquisition of Phoenix
Airbag and Valentec.
Interest Expense. Interest expense increased $513,000 to $523,000 for
the first quarter of fiscal year 1998 compared to the first quarter of fiscal
year 1997. This increase was a direct result of the term loan used for the
acquisition of Phoenix Airbag and borrowings under the revolving credit facility
with Bank of America, which were subsequently refinanced through KeyBank (as
defined). The increase of other expense is primarily attributable to losses on
foreign currency transactions.
Income Taxes. The income tax rate applied against pre-tax income was
40.0% for the first quarter of fiscal year 1998 compared to 37.8% for the first
quarter of fiscal year 1997. The tax rate increased as compared to the prior
year due to the increasing percentage of income generated from European
operations, which have higher tax rates than U.S. operations.
Net Income. Net income increased to $1.4 million for the first quarter
of fiscal year 1998 compared to $853,000 for the first quarter of fiscal year
1997. This increase is a result of the items discussed above.
EBITDA. EBITDA increased by $2.2 million or 125.6% to $4.0 million in
the first quarter of fiscal year 1998 compared to the first quarter of fiscal
year 1997. This increase is a result of the items discussed above.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Net Sales. Net sales decreased by $11.0 million or 11.6% to $84.0
million in fiscal year 1997 compared to fiscal year 1996. The decrease was
primarily attributable to lower revenues in defense related operations partially
offset by an increase in automotive related operations. The decrease in defense
related revenues of $30.7 million reflects the current contract schedule for the
Systems Contract which was delayed. The reduced sales under the Systems Contract
were partially offset by the increased sales of metal ordnance products. The
increase in automotive related sales of $19.7 million was primarily attributable
to the acquisition of Phoenix Airbag, which contributed approximately $25.4
million, partially offset by lower European sales to TRW. European sales to TRW
decreased as a result of lower unit prices reflecting redesigned products and
lower fabric prices. The Company's sales of passenger and driver side airbags
produced for the North American market decreased by approximately $242,000,
primarily as a result of increased sales to Delphi and increased sales of driver
side bags to TRW, offset by lower sales of passenger side airbags to TRW.
Gross Profit. Gross profit increased by $3.0 million or 22.9% to $16.0
million in fiscal year 1997 compared to fiscal year 1996. The increase was
primarily attributable to automotive profits, which increased by $5.8 million.
The increase was primarily attributable to increased sales volume in Europe due
to the acquisition of Phoenix Airbag, which contributed approximately $6.9
million to gross profit. This increase was offset by lower margins in North
America and defense related operations. The decrease of approximately $996,000
in North America was primarily the result of the change in accounting principle
discussed above, offset by lower costs due to ongoing cost reduction programs.
The impact of the change in accounting principle was to currently expense
product launch costs, previously deferrable, of $1.8 million. The decrease in
defense related operations of $2.8 million was primarily a result of the delays
due to the Systems Contract discussed earlier.
Gross profit as a percentage of sales increased to approximately 19.1 %
for fiscal year 1997 from 13.7% for fiscal year 1996. Exclusive of the impact of
the change in accounting principle, gross profit as a percentage of sales would
have been approximately 21.2% for fiscal year 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.6 million or 30.2% to $7.1 million in
fiscal year 1997 compared to fiscal year 1996. The increase was primarily
attributable to automotive operations, specifically from the acquisition of
Phoenix Airbag, which was approximately $1.9 million, partially offset by lower
costs in the U.K. due to lower sales. Selling, general and administrative
expenses as a percentage of sales increased slightly to 8.4% for fiscal year
1997 from 5.7% for fiscal year 1996. The increase related to the continued
expansion of the Company's automotive and industrial related operations,
including additional support personnel and marketing.
43
<PAGE> 53
Operating Income. Operating income increased by $1.0 million or 13.2%
to $8.6 million in fiscal year 1997 compared to fiscal year 1996. Operating
income from automotive operations increased by $3.6 million primarily
attributable to the acquisition of Phoenix Airbag, which contributed
approximately $4.8 million. This increase was partially offset by lower
operating income in North America. The decrease of approximately $876,000 in
North America was primarily the result of the change in accounting principle
discussed above, offset by lower costs due to ongoing cost reduction programs.
The impact of the change in accounting principle was to currently expense
product launch costs, which were previously deferred in the comparable period.
The increase in automotive operations was partially offset by a decrease in
defense related operations of $2.6 million which reflected lower sales due to
delays in the current contract schedule for the Systems Contract, partially
offset by improved margins on metal ordnance products, resulting from increased
sales volumes, improved overhead absorption and a change in product mix.
Interest Expense. Interest expense increased $1.2 million or 308.1% to
$1.6 million for fiscal year 1997 compared to fiscal year 1996. This increase
was a direct result of the $20.0 million term loan used for the acquisition of
Phoenix Airbag. The increase of other expense is primarily attributable to
losses on foreign currency transactions.
Income Taxes. The income tax rate applied against pre-tax income was
43.7% for fiscal year 1997 compared to 38.8% for fiscal year 1996. The tax rate
increased as compared to the prior year due to the increasing percentage of
income generated from European operations, which have higher tax rates than U.S.
operations.
Net Income. Net income decreased to $2.2 million for fiscal year 1997
compared to $4.9 million in fiscal year 1996. Net income decreased due to the
impact of the extraordinary item and the cumulative effect of accounting change
as discussed above. Income before extraordinary item and cumulative effect of
accounting change was $3.8 million for fiscal year 1997 compared to $4.9 million
for fiscal year 1996. The decrease was primarily the impact of the change in
accounting principle for product launch costs during fiscal year 1997. These
costs, which were previously deferrable, are currently expensed as incurred. The
impact on fiscal year 1997 was to expense $1.8 million ($1.1 million net of tax
benefit of $704,000) of product launch costs.
EBITDA. EBITDA increased by $4.1 million or 46.5% to $12.8 million in
fiscal year 1997 compared to fiscal year 1996. The increase was the result of
the items mentioned above. EBITDA excludes the current year's impact of
previously deferred product launch costs now expensed due to the accounting
principle change made in fiscal year 1997. These costs would have been excluded
as amortization under the prior accounting treatment, therefore, the change in
accounting principle's impact on fiscal year 1997 has been excluded.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Net Sales. Net sales increased $43.2 million or 83.4% to $94.9 million
in fiscal year 1996 compared to fiscal year 1995. The increase was primarily
attributable to defense related operations, which increased $37.1 million as a
result of significantly higher revenues from the Systems Contract and, to a
lesser extent, increased shipments of metal ordnance components. The increase in
automotive sales was $6.0 million as a result of increased production. The unit
sales from automotive operations increased approximately 23.3% over the prior
year, while overall sales increased by 14.0%. 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 1996.
Gross Profit. Gross profit increased by $5.8 million or 80.4% to $13.0
million in fiscal year 1996 compared to fiscal year 1995. The increase was
primarily attributable to defense operations, which increased $4.0 million.
Gross profit increased primarily as a result of higher sales from the Systems
Contract, partially offset by changes in the metal ordnance component product
mix, with decreased sales of several older, higher margin defense programs and
higher sales of newer, lower margin defense and commercial programs. The
automotive operations increased $1,773,000 for fiscal year 1996. The improvement
in gross profit resulted primarily from the increased sales volume, and to a
lesser extent from greater efficiencies related to higher levels of production.
Gross profit was unfavorably impacted in the current fiscal year by certain
program delays and the General Motors labor dispute in the fourth fiscal
quarter. During the year ended March 31, 1995, the continued improvement in the
gross profit of automotive related North American operations was partially
offset by certain
44
<PAGE> 54
expenses related to the expansion of automotive related European operations.
Specifically, during the year ended March 31, 1995, TRW accelerated demand for
airbags in Europe which required the Company to operate, on a temporary basis, a
high cost facility in Germany pending the transfer of certain manufacturing
operations to two Czech subcontractors. Certain costs relating to the launching
of new programs in North America and Europe were capitalized during this period.
During fiscal 1997, the Company changed its accounting for product launch costs
from the deferral method to the expense as incurred method as described above
under "-- Overview -- Change in Accounting Principle and Extraordinary Item."
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.4 million or 34.1% to $5.4 million in
fiscal year 1996 compared to fiscal year 1995. The increase was primarily
attributable to defense related operations, which increased $868,000 in fiscal
year 1996 reflecting increased expenses related to the Systems Contract, higher
bid and proposal costs associated with potential future contracts and higher
corporate overhead expenses. Automotive operations increased $512,000 primarily
from greater expenditures related to the continued expansion of the Company's
automotive operations, including additional support personnel, increased
marketing and professional services and higher corporate overhead expenses,
including increased staffing, legal, accounting and insurance expenses.
Operating Income. Operating income increased by $4.4 million or 139.4%
to $7.6 million in fiscal year 1996 compared to fiscal year 1995. The increase
was primarily attributable to defense related operations, which increased $3.2
million primarily as a result of higher income from the Systems Contract,
partially offset by higher corporate overhead expenses and, to a lesser extent,
lower margins on metal ordnance components. Automotive operations increased $1.3
million primarily as a result from the continued improvement in the
profitability of the manufacturing operations due to higher sales volume and
greater efficiencies, partially offset by increased expenses for administrative,
marketing and professional services supporting the ongoing expansion of the
Company's automotive operations.
Net Income. Net income increased to $4.9 million for fiscal year 1996
compared to $2.1 million in fiscal year 1995 for the reasons discussed above.
EBITDA. EBITDA increased by $4.8 million or 122.2% to $8.7 million in
fiscal year 1996 compared to fiscal year 1995. The increase was the result of
the items mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its equipment and working capital
requirements will also continue to increase as a result of the anticipated
growth of the automotive and industrial related operations. This growth will be
funded through a combination of cash flow from operations, equipment financing,
revolving credit borrowings and proceeds from the Offering and future public
offerings.
On August 6, 1996 the Company acquired Phoenix Airbag, a major European
airbag cushion manufacturer located in Hildesheim, Germany. The acquisition was
funded through a loan agreement with Bank of America NT&SA. Amounts outstanding
on the Bank of America NT&SA term loan and revolving credit facility were
subsequently refinanced through KeyBank. Pursuant to a stock purchase agreement,
the Company initially acquired 80% of Phoenix AG's interest in Phoenix Airbag
for a purchase price of approximately $22.0 million, subject to a net worth
adjustment. The Company will acquire the remaining 20% interest effective
December 31, 1998, but is entitled to all of the income of Phoenix Airbag from
the date of the acquisition. The additional purchase price of up to
approximately $7.5 million for the remaining 20% interest is contingent on
Phoenix Airbag meeting certain annual performance targets for the calendar years
1996 through 1998. Phoenix Airbag met the performance targets for calendar year
1996 and $2.2 million of the contingent purchase price was paid April 28, 1997.
If the annual performance targets for calendar years 1997 and 1998 are not met,
the Company will acquire the remaining 20% without any additional consideration.
Additionally, the Company will, under certain circumstances, be required to
provide a bank guaranty, in September 1997, to secure the payment of up to
approximately $4.0 million of the contingent purchase price.
As of May 21, 1997, the Company, Phoenix Airbag and Automotive Safety
Components International Limited ("ASCIL" and collectively, the "Borrowers")
entered into the Credit Agreement with KeyBank National Association, as
administrative agent ("KeyBank"), and the lending institutions named therein
(the "Credit Agreement"). Prior to the consummation of the Offering, the Credit
Agreement provided for (i) the Term Loan in the principal amount of $ 15.0
million and (ii) the
45
<PAGE> 55
Revolving Credit Facility in the aggregate principal amount of $12.0 million
(including letter of credit facilities). Upon the consummation of the Offering,
the Company used the proceeds thereof to repay the Term Loan and amounts then
outstanding under the Revolving Credit Facility. In connection therewith, the
Company's credit facility with KeyBank was converted into the New Credit
Facility, bearing interest at LIBOR plus 1.00% with a commitment fee of 0.25%
for any unused portion, with the remaining terms and conditions being similar to
the previous revolving credit facility. The Company incurred approximately
$200,000 of financing fees in connection with the KeyBank credit facility. The
indebtedness under the Credit Agreement is secured by substantially all the
assets of the Company. The revolving loans under the Credit Agreement will
mature on May 31, 2002. The Credit Agreement contains certain restrictive
covenants that impose limitations upon, among other things, the Company's
ability to change its business; merge, consolidate or dispose of assets; incur
liens; make loans and investments; incur indebtedness; pay dividends and other
distributions; engage in certain transactions with affiliates; engage in sale
and lease-back transactions; enter into lease agreements; and make capital
expenditures.
The Company generated (used) net cash from operations of $11.1 million,
($3.5) million and ($901,000) in the fiscal years ended March 31, 1997, 1996 and
1995, respectively. The net cash in fiscal year 1997 was used for net capital
expenditures of $8.6 million, while during fiscal years 1996 and 1995 the
Company used an additional $4.6 million and $2.5 million, respectively, for net
capital expenditures. In fiscal year 1997, $24.3 million of net cash was used to
acquire Phoenix Airbag. Net cash provided by financing activities in fiscal year
1997 includes $22.9 million proceeds from the Term Loan, and the net proceeds
from the Revolving Credit Facility, which was used in part to repay $3.8 million
long-term debt and obligations, and purchase of treasury stock. Net cash
provided by financing activities in fiscal year 1996 includes $18.0 million in
proceeds from the sale of common stock and proceeds from long-term debt, which
was used in part to purchase $1.4 million of treasury stock and $94,000 of
common stock warrants. Net cash provided by financing activities in fiscal year
1995 included $14.6 million in proceeds from the sale of common stock, which was
used in part to pay for consideration of transferred assets of $1.9 million,
repay $3.3 million long-term debt and obligations and repay certain intercompany
accounts totaling $2.3 million. These activities resulted in a net decrease in
cash of $3.7 million in fiscal year 1997, a net increase in cash of $8.2 million
in fiscal year 1996, and a net increase in cash of $3.8 million in fiscal year
1995. Net cash generated from operations was $2.1 million during the first
quarter of fiscal year 1998. Cash used by investing activities was $5.9 million.
Cash used for capital expenditures was $1.8 million. The Company also paid
additional costs and consideration in connection with the acquisition of Phoenix
Airbag, which was primarily the $2.2 million earn-out accrued at the end of
fiscal year 1997. In addition, the Company incurred certain costs in connection
with the acquisitions of Valentec and the Division of approximately $342,000 and
$163,000, respectively. The Company also made advances to Valentec prior to the
Valentec Acquisition for the purpose of funding operations. Net cash used by
financing activities in the first quarter of fiscal year 1998 was $5.5 million.
Cash proceeds from financing activities were used to repay certain liabilities
of the newly acquired Valentec and repay the term loan and revolving credit
facility with Bank of America National Trust and Savings Association. These
activities resulted in a net decrease in cash of $5.5 million in the first
quarter of fiscal year 1998.
Capital expenditures were $8.6 million in fiscal year 1997, compared to
$4.6 million and $2.5 million in fiscal years 1996 and 1995, respectively. In
fiscal year 1997 capital expenditures included the construction of the new
facility in the Czech Republic, and the acquisition of additional equipment to
expand the Company's production capacity worldwide. Capital expenditures for
fiscal year 1998 are estimated to be $8.7 million, which includes $1.2 million
outstanding commitments for capital expenditures for additional property, plant
and equipment from fiscal year 1997. Capital expenditures for fiscal year 1998
include the completion of the Czech facility and the acquisition of additional
equipment to further expand the Company's production capacity worldwide. The
Company expects to fund these capital expenditures through operations and the
New Credit Facility. Pro forma capital expenditures do not include equipment
obtained under capital lease obligations of $1.4 million or the building and 18
looms purchased for approximately $1.3 million and $1.5 million, respectively,
in connection with the JPS Acquisition. However, capital expenditures include a
non-recurring investment of $7.1 million for pro forma and fiscal year 1997
related to the construction of the Company's new Czech Republic facility, which
was subsequently financed. Excluding this non-recurring investment for the Czech
Republic facility, pro forma and fiscal year 1997 capital expenditures would
have been $3.5 million and $1.5 million, respectively. Capital expenditures were
$1.8 million in the first quarter of fiscal year 1998. Capital expenditures in
the first quarter of fiscal year 1998 were used to complete the construction of
the new facility in the Czech Republic, and for the acquisition of additional
equipment to expand the Company's production capacity worldwide.
46
<PAGE> 56
SEASONALITY AND INFLATION
The automotive and industrial related business is subject to the
seasonal characteristics of the automotive industry in which there are seasonal
plant shutdowns in the third and fourth calendar quarters of each year. Although
the Systems Contract is not seasonal in nature, there will be variations in
revenues from the Systems Contract based upon costs incurred by the Company in
fulfilling the Systems Contract in each quarter. The majority of the defense
operation's ordnance manufacturing for U.S. Government and prime defense
contractors occurs from January through September and there is generally a lower
level of manufacturing and sales during the fourth calendar quarter. The Company
does not believe that its operations to date have been materially affected by
inflation.
BUSINESS
THE COMPANY
The Company, is a leading, low-cost independent supplier of automotive
airbag fabric and cushions, with operations in North America, Europe and Asia.
The Company sells airbag fabric domestically and cushions worldwide to all of
the major airbag module integrators that outsource such products. The Company
believes it produces approximately 40% of all airbag fabric utilized in North
America and that it manufactures approximately 10% of all airbag cushions
installed worldwide.
The Company believes the JPS Acquisition represents an important step
in its airbag growth strategy because it will enable the Company to combine JPS'
low-cost operations and strong market position in airbag fabric with its
low-cost operations and strong market position in airbag cushions to exploit
worldwide growth in demand for airbag module systems ("airbags" or "airbag
modules"). According to the automotive research firm, Tier One, the worldwide
market for automotive airbag modules has grown from approximately 3.6 million
installed airbag modules in 1991 to approximately 57.2 million in 1996.
According to the same source, installed airbag modules are projected to more
than double to approximately 123.1 million by the year 2000 as a result of
increasing usage of airbags in Europe and Asia and growth in demand for
side-impact airbags. The Company's pro forma consolidated fiscal 1997 net sales
and Adjusted EBITDA were $173.2 million and $23.4 million, respectively.
As part of its airbag growth strategy, the Company has recently
commenced manufacturing and supplying metal airbag module components to its
customers, further increasing the content per airbag module supplied by the
Company. Airbag fabric, cushions and related metal components accounted for
$130.9 million or 75.6% of pro forma consolidated fiscal 1997 net sales. The
Company believes that it is also, as a result of the JPS Acquisition, a leading
manufacturer of value-added synthetic fabrics used in a variety of niche
industrial and commercial applications such as ballistics luggage, industrial
filtration systems, aircraft escape slides, military tents and certain
industrial apparel. Industrial fabrics accounted for $22.6 million or 13.0% of
pro forma consolidated fiscal 1997 net sales and are produced using the same
machinery that produces airbag fabric. The ability to interchange airbag and
specialty industrial fabrics using the same equipment and similar manufacturing
processes allows the Company to effectively utilize its manufacturing assets and
lower per unit overhead costs. The Company also produces defense related
products, primarily projectiles and other metal components for small to medium
caliber training and tactical ammunition, which accounted for $19.7 million or
11.4% of the Company's pro forma consolidated fiscal 1997 net sales and $45.9
million or 48.3%, and $8.7 million or 16.8% of the Company's fiscal 1996 and
1995 net sales, respectively.
COMPETITIVE STRENGTHS
The Company has developed a strong competitive position in the airbag
fabric and cushion segments of the airbag module market and believes that
additional growth opportunities exist as a result of the following competitive
strengths:
Market Leadership. The Company is a leading independent supplier of
automotive airbag fabric and cushions with operations in North America, Europe
and Asia. The Company believes that it produces approximately 40% of all airbag
fabric sold in North America, the largest market for airbag fabric, and that it
accounts for approximately 10% of the global market for airbag cushions The
Company supplies airbag fabric to every domestic airbag module integrator that
outsources all or a portion of its airbag fabric requirements, including
AlliedSignal, TRW and AutoLiv (whose aggregate sales
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<PAGE> 57
accounted for over 60% of all domestic airbag modules installed in 1996). The
Company also supplies approximately 70% and 100% of all airbag cushions
outsourced by TRW and Petri, respectively (whose aggregate sales accounted for
approximately 30% of installed modules worldwide in 1996). Moreover, as an
established airbag cushion supplier, the Company believes that certain barriers
to entry exist, such as difficulty in obtaining qualification requirements
imposed by automakers, which will assist the Company in maintaining or
increasing market share by limiting the ability of new suppliers to enter the
market.
Low-Cost Producer. The Company is a low-cost producer of automotive
airbag fabric and cushions. Its low-cost position is facilitated by: (i) low
labor rates in various international production facilities; (ii) high levels of
automation in certain production facilities; and (iii) high capacity utilization
rates as a result of interchangeable production processes. In addition, the
Company has recently entered into a joint venture to produce finished airbag
cushions in China, which will enable the Company to take advantage of lower
labor costs as that facility begins commercial production.
Integrated Manufacturing Process. The JPS Acquisition is expected to
result in a more integrated manufacturing process, eventually reducing the
Company's cost of raw materials and providing it with the ability to package
both fabric and cushions in response to customer demand. In addition, the JPS
Acquisition is expected to enable the Company to reduce fabric waste and to
transfer weaving technologies to its airbag cushion production facilities.
Global Manufacturing and Sourcing Capabilities. The Company has airbag
cushion production facilities in Mexico, Germany, the Czech Republic and Wales
and recently established a joint venture for airbag cushion production in China.
The Company believes it benefits from its global manufacturing strategy through:
(i) low labor costs; (ii) customer and geographic diversity; (iii) less
sensitivity to regional economic downturns; and (iv) access to new customers and
the ability to service existing customers in high growth regions such as Europe
and Asia. In addition, the Company believes it has the ability to transfer
weaving technology to certain geographic regions that are not currently being
serviced.
Commitment to Quality and Service. The Company believes its commitment
to quality and customer service is a competitive advantage. As a result of its
stringent emphasis on quality control and its advanced inspection processes, the
Company has attained a near zero defect rate on the production of its airbag
cushions. Most of the Company's facilities meet industry quality standards such
as QS-9000/ISO 9002, and all seven of the Company's plants are expected to be so
certified prior to 1997 year-end. In addition, the Company believes its reliable
on-time delivery performance and advanced research and development capabilities
have resulted in strong customer relationships, which the Company believes will
continue to result in recurring revenues, particularly in light of supplier
qualification requirements and customers' desires to consolidate suppliers.
Ancillary Products and Services. The Company has established strong
positions in various niche fabric markets and has targeted a number of high
growth market segments in which it believes it will be able to gain significant
market share. In addition, the Company will continue to identify new
applications for its airbag manufacturing and machining capabilities and further
diversify into related products to maximize capacity utilization.
GROWTH STRATEGY
The Company has experienced rapid growth in sales and profitability in
recent years due to increased production and outsourcing of airbag cushions by
its airbag module integrator customers. The Company has also recently benefited
from the production of other airbag components in response to increased
outsourcing of such parts by airbag module integrators. Installation of airbag
modules is expected to double between 1996 and 2000 and the Company believes
that it is well-positioned to benefit from this growth due to its global
presence, low-cost integrated production capabilities and strong customer
relationships. Specific elements of the Company's growth strategy include:
Enhance Low-Cost Position. The ability to remain a low-cost supplier is
a key element of the Company's automotive airbag growth strategy as it enables
the Company to price its products competitively, gain market share and maintain
or increase profit margins. To enhance its low-cost position, the Company is
evaluating a number of cost reduction opportunities including: (i) consolidating
its European production facilities; (ii) consolidating certain administrative
functions; (iii) reducing labor costs through automation; (iv) reducing
transportation costs; and (v) exploiting economies of scale, particularly as
production volumes increase at its new Czech Republic facility. Labor costs are
also expected to decline
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<PAGE> 58
as the Chinese joint venture becomes a production source. In addition, the
combination of the Company and the Division also presents opportunities to
further reduce airbag cushion production costs.
Increase Airbag Volumes. The Company has been and believes it will
continue to be successful in attaining product qualification and acceptance
among airbag customers. Airbag cushion sales have increased from 783,000 units
in fiscal year 1994 to 5.2 million units in fiscal year 1997 as a result of
rapid growth in demand for airbag modules in North American and European markets
and the continuing trend among airbag module integrators to purchase airbag
components from third parties, such as the Company, specializing in the
production of those components. The Company believes it is well-positioned to
benefit from the continued strong demand for airbag modules due to its: (i)
low-cost manufacturing strategy; (ii) established relationships with airbag
module integrators; and (iii) reputation for high product quality standards.
Diversify Production Within Core Competence/Distribution Network. The
Company intends to increase revenues and maximize plant efficiencies by
providing related products to new and existing customers. The Company has
successfully applied its manufacturing expertise to develop new products
utilizing existing manufacturing capabilities. For example, the Company has
expanded from parachute and metal parts production for the military into airbag
cushions and metal products for airbag module integrators. Additionally, as a
result of the JPS Acquisition, the Company is well-positioned to further
diversify its business and exploit additional opportunities for growth by
cross-marketing complementary manufacturing capabilities.
Increase Content Per Airbag Module. The machining operations acquired
through the Valentec Acquisition will enable the Company to increase the content
per airbag module supplied to the Company's customers. The Company has recently
started manufacturing and assembling end caps and retainer brackets to airbags
produced for two of its largest airbag customers and believes that additional
opportunities exist to increase the amount of content supplied to its customers.
This strategy is intended to benefit the Company's customers by enabling them to
consolidate suppliers while at the same time rendering the Company less
dependent on industry volumes as content per airbag module increases.
Expand Through Strategic Acquisitions. The Company intends to
selectively pursue opportunities to acquire companies that offer complementary
products or services to those industries currently served by the Company. This
will enable existing and future customers to consolidate supply sources by
obtaining a broader range of value added products and services from the Company.
The Company also intends to evaluate new technologies and processes that will
enable it to reduce product costs and/or increase the level of products or
services provided to existing and future customers. The Company will also
continue to evaluate acquisitions and joint ventures that will enable the
Company to further integrate production of airbags and other products.
SIGNIFICANT TRANSACTIONS
The JPS Acquisition. On July 24, 1997, the Company acquired all of the
assets of the Division for $56.3 million in cash including 18 looms
(approximated value of $1.5 million) which were delivered to the Company at
closing plus the assumption of certain liabilities, subject to post-closing
adjustments. In addition, the Company made a payment to JPS at the closing to
enable it to pay off existing indebtedness of the Division of approximately
$650,000 at the closing. The Offering was conditioned upon, and a significant
portion of the proceeds of the Offering were used to finance, the JPS
Acquisition, which was consummated on July 24, 1997. SCFT is a leading, low-cost
supplier of airbag fabric in North America and is also a leading manufacturer of
value-added synthetic fabrics used in a variety of niche industrial and
commercial applications. The Company believes the JPS Acquisition represents an
important step in its airbag growth strategy because it will enable the Company
to: (i) combine strong market positions in airbag fabric and cushions; (ii)
integrate low-cost manufacturing capabilities in airbag fabric and cushions to
exploit the worldwide growth in demand for airbag modules; (iii) interchange
airbag and specialty industrial fabrics using the same equipment and
manufacturing processes thereby allowing the Company to effectively utilize its
manufacturing assets; and (iv) enhance and expand its customer base.
The Valentec Acquisition. Pursuant to a definitive Stock Purchase
Agreement, effective as of May 22, 1997, the Company acquired in a tax-free
stock for stock transaction all of the outstanding capital stock of Valentec.
Valentec is a high-volume manufacturer of stamped and precision machined
products for the automotive, commercial and defense industries. The Company
believes that Valentec's machining capabilities and relationships with airbag
module integrators will enable
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<PAGE> 59
the Company to increase the amount of content per airbag module supplied by the
Company. Pursuant to this strategy, the Company has begun producing end caps and
retainer brackets for two of its larger airbag module customers. In addition,
the Company believes that it will be able to eliminate certain duplicative
corporate functions at Valentec, resulting in improved efficiencies and cost
savings.
AIRBAG RELATED PRODUCTS
Airbag and Airbag Fabric Industry
Airbag Module Growth. The worldwide market for airbag modules has grown
rapidly in recent years from approximately 3.6 million installed units in 1991
to approximately 57.2 million in 1996. According to automotive research firm
Tier One, installed module sales are projected to more than double from
approximately 57.2 million in 1996 to 123.1 million in 2000 as a result of
increasing usage of airbags in Europe and Asia and growth in demand for
side-impact bags. The following table summarizes the historical and projected
growth in worldwide unit volume:
<TABLE>
<CAPTION>
HISTORICAL PROJECTED
-------------------------------------------- --------------------------------------------
(UNITS IN MILLIONS) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North America.............. 2.9 4.7 8.5 16.3 22.7 26.4 31.1 35.7 40.1 42.5
Europe..................... 0.2 1.5 4.8 8.4 12.6 17.3 23.7 32.4 39.5 46.5
Asia-Pacific............... 0.5 0.7 3.1 5.9 9.6 13.6 18.8 25.4 30.9 34.1
---- ---- ---- ---- ---- ---- ---- ---- ----- -----
Total................. 3.6 6.9 16.4 30.6 44.9 57.3 73.6 93.5 110.5 123.1
==== ==== ==== ==== ==== ==== ==== ==== ===== =====
</TABLE>
- -------
Source: Tier One
The North American market is forecasted to increase from 26.4 million
installed modules in 1996 to 42.5 million units in 2000. National Highway
Transportation Safety Administration ("NHTSA") regulations require installation
of driver-side and passenger-side airbags in all U.S. passenger cars beginning
in model year 1998 and on light trucks in model year 1999. Canadian-produced
cars are also being built to these standards, as are all Mexican-built vehicles
that are exported to the United States, Canada and Europe.
The European airbag module market is forecasted to increase from 17.3
million installed modules in 1996 to 46.5 million in 2000, an increase of 29.2
million. The adoption of airbags in Europe is consumer demand driven rather than
governmentally mandated. The European market is quickly moving towards 100%
installation of driver-side and passenger-side airbags as a result of declining
unit costs and increasing safety consciousness of Europeans. Approximately 21.7%
of the Company's net sales in fiscal year 1997 were from Europe and the Company
believes its three European facilities provide sufficient capacity to service
the projected increase in demand for airbag units in the region.
The Asia-Pacific market, dominated by Japanese and Korean automakers, is
forecasted to increase from 13.6 million installed modules in 1996 to
approximately 34.1 million in 2000. Installation rates on Japanese vehicles are
expected to approach those of the United States by 2000. The Company currently
sells directly to KIA Motors Corp. ("KIA") and the Company's airbag cushions are
currently sold for installation in Toyota, Nissan and Mazda automobile models.
The Company believes that its Chinese joint venture is well-positioned to meet
the increasing requirements of Asian automakers.
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<PAGE> 60
Structure of the Airbag Industry. Airbag systems consist of an airbag
module and an electronic control module, which are currently integrated by
automakers into their respective vehicles as illustrated in the chart below.
--------------------
Automakers
(system integrators)
--------------------
|
|
-------------------------
Tier 1 Airbag Module Integrators
Suppliers (airbag modules and some
sensors and electronics)
-------------------------
| | |
| | |
------------- | ------------
Tier 2 Inflator | Cushion
Suppliers Manufacturers | Suppliers
------------- | ------------
| | | | |
| | | | |
------------- ------------------------ -------------
Tier 3 Integrator Various Metal Parts Fabric
Suppliers Manufacturers and Manufacturers
Material Suppliers
------------- ------------------------ -------------
- ----------------
Source: Tier One
Airbag modules consist of inflators, cushions, housing and trim covers and
are assembled by module integrators, most of whom produce most of the components
required for a complete module. However, as the industry has evolved, module
integrators have increasingly outsourced non-proprietary components such as
cushions to those companies specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource the majority of their cushion requirements as they focus
on the development of proprietary technologies such as inflators and sensors.
Only one of the module integrators currently weaves its own airbag fabric and
the rest purchase fabric from airbag fabric producers such as the Company.
A characteristic of the industry is that certain customers of airbag
cushion suppliers are also competitors. The Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. While none of the module integrators produce airbag
cushions for third parties, the Company may compete with its customers to supply
their own internal cushion requirements. However, most of the Company's
suppliers do not produce cushions for the same car/truck model for which the
Company produces cushions.
Another characteristic of the airbag industry is the existence of potential
barriers to entry. New entrants that wish to produce and supply airbag cushions
must undergo a rigorous qualification process, which can take as long as three
years. The Company believes that in addition to deterring new entrants, the
existence of this qualification process represents switching costs for module
integrators that are required to assist the new supplier in meeting automakers'
requirements. Additionally, the Company believes Tier 1 suppliers are, like
their automaker customers, trying to limit the number of suppliers.
Products
The Company's automotive products include passenger, driver side and side
impact airbags manufactured for installation in over 40 car and truck models
sold worldwide; airbag fabric for sale to airbag manufacturers; and stamped and
machined components used in airbag modules, including passenger airbag retainers
that attach the airbag cushion to the module's reaction can, as well as driver
side module products and components used in airbag inflators.
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The Company's airbag cushions are produced for installation in over 40 car
and truck models including those listed below:
Ford: Chrysler: Opel:
Mark VII Neon Astra
Jaguar XJS Omega
Continental General Motors:
Grand Marquis Astro (Van) Porsche:
Crown Victoria Safari (Van)
CK (Truck) 993
Toyota: Nissan: Rover:
Lexus DC21 (Truck) 600 Series
Avalon Pathfinder (Truck) Range Rover
Discovery
Mazda: Audi: VW:
626/MX6 A4 Golf
Festiva A6 Passat
Probe T4
Millenia Sharan
Unos Galaxy
Xedos
KIA: BMW: Saab:
Sephia 7 Series 9000
Concord 5 Series
3 Series Mercedes:
E Class
S Class
SL
Customers
Sales of airbag related products to TRW, Petri and AlliedSignal accounted
for approximately 31.2%, 12.8% and 7.6%, respectively, of the Company's pro
forma consolidated fiscal 1997 net sales of airbag related products. Sales of
airbag cushions to TRW and Petri accounted for approximately 41.8% and 20.4%,
respectively, of the Company's pro forma consolidated fiscal 1997 net sales of
airbag cushions. Sales of airbag fabric to AlliedSignal and TRW accounted for
approximately 30.7% and 22.7%, respectively, of the Company's pro forma
consolidated fiscal 1997 net sales of airbag fabric.
The Company sells its airbag cushions to airbag module integrators for
inclusion in specified model cars generally pursuant to requirements contracts.
Certain of these customers also manufacture airbag cushions to be used in their
production of airbag modules.
The Company's largest airbag fabric customers include TRW, AlliedSignal,
Delphi and AutoLiv and the Company also sells to Reeves, Bradford, ABC, Mexican
Industries and Breed Technologies. Of the four largest domestic module
integrators, three use the Company's airbag fabric and the fourth sources all of
its fabrics internally. The Company sells its fabric either directly to a module
integrator or, in some cases, to a fabricator (such as the Company), which sells
a sewn airbag to the module integrator. Because driver-side fabric historically
has been coated (to prevent the driver's exposure to high temperatures) before
fabrication into airbags, the Company also sells fabric to coating companies,
which then resell the coated fabric to either an airbag fabricator or module
integrator. Sales are either made against purchase orders, pursuant
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<PAGE> 62
to releases on open purchase orders, or pursuant to short-term supply contracts
generally having a duration of up to twelve months. The following describes the
Company's contractual relationship with its significant customers.
TRW. The Company has one requirements contract with TRW with respect to
North American airbag cushion requirements and another requirements contract
with respect to TRW's European airbag cushion requirements. Under these
contracts, TRW has agreed to purchase its requirements for airbag cushions for
specific models of automobiles at prices to be agreed upon prior to the
beginning of each model year. Each agreement provides that cost reductions of
the Company will result in price reductions to TRW. Neither agreement requires
the customer to purchase a specified number of airbag cushions. Each agreement
is terminable by the customer on 90 days' prior written notice. The North
American requirements agreement is for driver and passenger side airbag cushions
for specified models in model years 1996 through 1999 and requires the Company
to maintain capacity to manufacture and ship 25.0% more airbag cushions than
actual quantity estimates provided by TRW. The European requirements agreement
contains penalty payments in the event that the Company is delayed in delivering
the airbag cushion quantities required.
The Company also has a one-year supply agreement with TRW, terminating
January 1, 1998, for the supply of airbag fabric.
Petri. The Company's "evergreen" agreement with Petri provides that prior
to commencement of each calendar year the parties will negotiate price, quantity
and other relevant terms of the airbag cushion supply contract for such calendar
year. Petri is under no contractual obligation to enter into such annual supply
agreements with the Company. The Company's agreement with Petri provides for the
supply of all of Petri's airbag cushion requirements, which are expected to be
3.0 million airbag cushions during fiscal year 1998.
AutoLiv and MST. The Company has also entered into requirements contracts
with MST, which was recently acquired by TRW, and AutoLiv. These agreements are
substantially similar to the Petri contract. Pursuant to the AutoLiv contract,
the Company has agreed to manufacture 390,000 airbag cushions for model year
1999. Pursuant to the MST contract, the Company expects to deliver to MST
348,000 airbag cushions during fiscal year 1998.
AlliedSignal. AlliedSignal's supply agreement has a duration of three
years, terminating in 1999 for the supply of all airbag fabric outsourced by
AlliedSignal. The Company cannot predict what the actual quantity requirements
will be under this agreement.
Suppliers
The Company's principal airbag cushion fabric customers generally approve
all suppliers of major airbag components or airbag fabric raw materials, as the
case may be. These suppliers are approved after undergoing a rigorous
qualification process on their products and manufacturing capabilities. In many
cases, only one approved source of supply exists for certain airbag components.
In the event that a sole source supplier experiences prolonged delays in product
shipments or no longer qualifies as a supplier, the Company would work together
with its customers 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.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by DuPont, AlliedSignal, Unifi and Hoechst Celanese.
These yarns include nylon, polyester and Nomex. DuPont is the leading supplier
of airbag fabric yarn to both the market and the Company. Approximately 90.0% of
the nylon yarn used in the Company's airbag fabric operations is supplied by
DuPont pursuant to purchase orders or releases on open purchase orders. There is
no underlying supply agreement with DuPont.
Capacity
The Company's Mexican facility has a current capacity to manufacture 5.0
million airbag cushions per year and manufactured 2.3 million passenger side and
driver side airbag cushions in fiscal year 1997. The Company's United Kingdom
facility will have by the end of fiscal year 1998 the capacity to manufacture
approximately 880,000 airbag cushions per year
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and manufactured 350,000 driver side airbag cushions in fiscal 1997. The
Company's German facility, acquired in the Phoenix Acquisition, manufactured
approximately 3.1 million driver side and side impact airbag cushions in fiscal
1997 and has the current capacity to manufacture 4.1 million airbag cushions per
year. The Company's Czech Republic facility, which began production in 1997, is
expected to produce 1.2 million passenger side and driver side airbag cushions
in fiscal 1998, and has a current capacity to manufacture 1.8 million airbag
cushions per year. The Company believes that its present capacity is sufficient
to meet its currently forecasted production for the foreseeable future.
Increases in capacity referenced above are based on capital expenditure programs
included in the Company's fiscal 1998 budget. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company has recently entered into a joint venture agreement for the
production of airbag cushions in China. The Company owns an 80% interest in the
joint venture. The plant and labor for the joint venture is provided by the
Company's joint venture partner. The joint venture has the capacity to produce
approximately 2.0 million airbag cushions per year and commercial production is
expected to commence in June 1998. The Company is contemplating the introduction
of weaving capabilities at this facility through the JPS Acquisition.
The Company's South Carolina facility has a current capacity to manufacture
31.5 million yards of fabric per year and manufactured 20.3 million yards of
fabric in fiscal 1997. The Company utilizes rapier weaving machines that are
highly versatile in their ability to produce a broad array of specialty
industrial fabrics for use in a large number of applications. In addition, the
Company's machinery and equipment have the capability to weave all types of
yarns specified by airbag module integrators. The ability to easily interchange
the machines between air restraint fabric and other specialty industrial fabrics
allows the Company to maximize returns on plant assets. Since 1993, the Company
has invested $19.4 million in capacity expansion, significant modernization of
its manufacturing facilities and equipment upgrades. In addition, in connection
with the JPS Acquisition, the Company acquired an adjacent manufacturing
facility and 18 additional looms which are expected to further enhance the
Company's manufacturing capacity and flexibility.
Sales and Marketing
The Company markets and sells airbag cushions through a direct sales force
based in Costa Mesa, California, and airbag fabric through its marketing and
sales force based in Greenville, South Carolina.
Prior to 1996, the Company conducted its airbag cushion sales and marketing
through the efforts of its management and through Champion Sales & Service Co.
("Champion"), an outside marketing firm engaged by the Company since May 1992.
Champion and Mr. Zummo, the Company's Chief Executive Officer, were instrumental
in establishing the Company's relationship with TRW. The Company was obligated
to pay Champion a commission of 2% on all sales of airbag cushions and airbag
related components to TRW. The Company believes its reputation and existing
relationships with airbag customers diminish the need for an outside marketing
firm, and accordingly, the Company's agreement with Champion has been
subsequently modified a number of times. The Company and Champion have a dispute
as to the commission that Champion has been entitled to since April 1996. The
Company believes that, to the extent that Champion may be entitled to a
commission, such commission would not exceed 1.5% and Champion believes it is
entitled to a commission of 3%. The outcome of this dispute is not expected to
have a material adverse effect on the Company's financial statements. The
Representation Agreement between the Company and Champion restricts Champion
from selling or marketing products of other companies which compete with the
products sold by the Company. The Company's direct sales force includes certain
affiliates of Champion.
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with TRW and AutoLiv, each of which are airbag module
integrators that produce a substantial portion of their own airbag cushions for
their own consumption. While TRW does not generally manufacture airbag cushions
for the same vehicle models that the Company manufactures for TRW, AutoLiv
manufactures airbag cushions for the same models that the Company manufactures
for AutoLiv. Most airbag module integrators subcontract a portion of their
requirements for airbag cushions. The Company believes that its good working
relationship with its customers, the Company's high volume and low-cost
manufacturing capabilities, consistency and level of quality products, the
agreements with TRW, the lengthy process necessary to qualify as a supplier to
an automobile
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<PAGE> 64
manufacturer and the desire in the automotive industry to avoid changes in
established suppliers due to substantial costs of such changes create certain
barriers to entry for potential competitors.
In 1996, the total North American airbag fabric market totaled
approximately $148.0 million, up from $138.0 million in the prior year. The
Company shares this market with another major competitor, Milliken and three
smaller fabric manufacturers. In addition, Takata, an airbag module integrator,
produces fabric for its airbag cushions. Barriers to entry into this market
include the substantial capital requirements and lengthy lead-times required for
certification of a new participant's fabrics by buyers.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, and
capability to produce a high volume of many models of passenger side and driver
side airbags. Increased competition, as well as price reductions of airbag
systems, would adversely affect the Company's revenues and profitability. In
addition, the Company believes that its acquisition of JPS will provide it with
some measure of vertical integration, enhancing its ability to compete in the
automotive airbag industry.
Qualification and Quality Control
The Company successfully completed the rigorous process of qualifying as an
airbag supplier to TRW in 1992. Each of the Company's airbag cushions
manufactured for TRW is required to pass design validation and process
validation tests established by the automobile manufacturers and supervised by
TRW relating to the product's design and manufacture. TRW participates in these
design and process validations and must be satisfied with the product's
reliability and performance prior to awarding a production order. The Company
satisfies the QPS-0100 standard set by TRW for design and process validation,
which qualifies it to be a supplier to TRW. The Company underwent similar,
rigorous design validation and process validation tests in order to qualify as a
supplier to AutoLiv, which recently granted a purchase order to the Company.
The Company has extensive quality control systems in its airbag related
manufacturing facilities, including the inspection and testing of all products.
The Company also undertakes process capability studies to determine that the
Company's manufacturing processes have the capability of producing at the
quality levels required by its customers.
The Company's United Kingdom facility operates under TRW's quality system
which meets or exceeds ISO 9000, an international standard for quality. The
Company's German facility also satisfies ISO 9000 standards. This qualification
has enabled the Company's European operations to manufacture airbag cushions
under the Company's agreement with TRW. As is the case in the United States,
however, the automobile manufacturers may conduct their own design and process
validation tests of the Company's operations.
The Company's airbag fabric operations also seek to maintain a high level
of quality throughout the manufacturing process. The airbag fabric operations
have been certified as a Quality Assurance Approved Supplier by each of
AlliedSignal, TRW, AutoLiv and Mexican Industries. In addition, the airbag
fabric operations' laboratory has obtained Accreditation Against ISO-Guide 25 to
ASTM and DIN Test Methods from the American Association of Laboratory
Accreditation and GP-10 certification from General Motors. Moreover, the Company
is the only airbag fabric manufacturer to have its entire business (not just its
manufacturing facility) certified under QS-9000.
Governmental Regulations
Airbag systems installed in automobiles sold in the United States must
comply with certain government regulations, including Federal Motor Vehicle
Safety Standard 208, promulgated by the United States Department of
Transportation. The Company's customers are required to self-certify that airbag
systems installed in vehicles sold in the United States satisfy these
requirements. The Company's operations are subject to various environmental,
employee safety and wage and transportation related statutes and regulations.
The Company believes that it is in substantial compliance with existing laws and
regulations and has obtained or applied for the necessary permits to conduct its
business operations.
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Product Liability
The Company is engaged in a business which could expose it to possible
claims for injury resulting from the failure of products sold by it. Recently,
there has been increased public attention to injuries and deaths of children and
small adults due to the force of the inflation of airbags. To date, however, the
Company has not been named as a defendant in any product liability lawsuit nor
threatened with any such lawsuit. The Company maintains product liability
insurance coverage which management believes to be adequate. However, a
successful claim brought against the Company resulting in a final judgment in
excess of its insurance coverage could have a material adverse effect on the
Company.
INDUSTRIAL FABRIC RELATED PRODUCTS
The Company manufactures a wide array of specialty synthetic fabrics for
consumer and industrial uses. These fabrics include: (i) high-end luggage
fabrics, including "ballistics" fabric used in Hartman and Tumi brands of
luggage; (ii) filtration fabrics used in the aluminum, coal, steel, cement, clay
and brewing industries; (iii) woven fabrics for use by manufacturers of coated
products; (iv) specialty fabrics used in police jackets, protective apparel worn
by firefighters, fuel cells, bomb and cargo chutes, oil containment booms,
aircraft escape slides, gas diaphragms; and (v) release liners used in tire
manufacturing. Sales are made against purchase orders, releases on open purchase
orders, or pursuant to short-term supply contracts of up to twelve months. Sales
of industrial related products accounted for $22.6 million or 13.0% of the
Company's pro forma consolidated fiscal 1997 net sales.
The market for the Company's industrial related products is highly
segmented by product line. Marketing and sales of the Company's industrial
related products is conducted by the Company's marketing and sales staff based
in Greenville, South Carolina.
Manufacturing of these products occurs at the South Carolina facility,
using the same machines that weave the airbag fabrics which enables the Company
to take advantage of demand requirements for the various products with minimal
expenditure on production retooling costs. By manufacturing industrial products
with the same machines that weave airbag fabric, the Company is able to more
effectively utilize capacity at its South Carolina plant and lower per unit
overhead costs.
DEFENSE RELATED PRODUCTS
The Company is a supplier of military ordnance and other related products
as well as of projectiles and other metal components for small to medium caliber
training and tactical ammunition. Sales of defense related products accounted
for $19.7 million or 11.4% of the Company's pro forma consolidated fiscal 1997
net sales.
Systems Contract
In September 1994, the Company was awarded the Systems Contract by the
United States Army. The Systems Contract backlog was $18.6 million at March 31,
1997, and the Company expects to reduce such backlog to $10.8 million by late
fiscal 1998. The mortar cartridges sold by the Company to the United States Army
pursuant to the Systems Contract will be utilized in free standing, long-range
artillery weapons in support of infantry units. As a systems integrator, the
Company does not manufacture the mortar cartridges itself, but is a prime
contractor, coordinating the manufacture and assembly of the product components
by various subcontractors. Accordingly, the Systems Contract has not
necessitated a significant investment in capital equipment. As the prime
contractor, the Company is responsible for conducting quality control
inspections and ensuring that the contract is fulfilled in a timely and
efficient manner.
The deliveries of completed mortar cartridges were initially expected to
begin in September 1995, and the Systems Contract was expected to be completed
by September 1996. Due to a delay by one of its subcontractors, the Company has
experienced delays in the shipment of mortar cartridges against the original
shipment schedule. The delay relates to matters between such subcontractor and
the United States Army. As a result of these issues, the United States Army has
extended the time for delivery under the Systems Contract, and the Company now
anticipates that the initial deliveries of mortar cartridges will commence in
late fiscal 1998.
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<PAGE> 66
Other
The Company manufactures projectiles and other metal components primarily
for 20 millimeter ammunition and to a lesser extent for 25 and 30 millimeter
ammunition used by the United States Armed Forces. This ammunition is fired from
guns mounted on aircraft, naval vessels and armored vehicles. The metal
components manufactured by the Company are shipped to a loading facility,
operated either by the United States Government or a prime defense contractor,
which loads the explosives, assembles the rounds and packages the ammunition for
use. The Company primarily manufactures components that are used in training
rounds, which are similar to tactical rounds but do not contain the same
explosive or incendiary devices contained in tactical rounds. Because of the
continuous use of training ammunition, the majority of the rounds purchased by
the U.S. Armed Forces are training rounds. The U.S. Armed Forces regularly
replenishes its inventory of training ammunition.
Markets and Customers
The Company's defense related sales are made to the United States Armed
Forces, certain prime defense contractors for the United States Armed Forces and
foreign governments or contractors for foreign governments. The Company is a
principal or sole source supplier for many of the projectiles and other metal
components it manufactures. There can be no assurance, however, that other
companies will not begin to manufacture such products in the future and replace
part or all of the sales by the Company of these products.
Manufacturing and Production
The Company manufactures projectiles and other metal components for
inclusion in small to medium caliber ammunition utilizing primarily
multi-spindle screw machines at its manufacturing facility in Galion, Ohio. The
manufacturing process includes the impact extrusion of steel bars to form the
blank or rough form shape of the metal components, the machining of the inside
and outside of the metal components to form their final shape, various heat and
phosphate treatments and painting. The Company believes that its manufacturing
equipment, machinery and processes are sufficient for its current needs and for
its needs in the foreseeable future, with minimal preventive maintenance.
Suppliers
The Company believes that adequate supplies of the raw materials used in
the manufacture of its small to medium caliber products are available from
existing and, in most cases, alternative sources, although the Company is
frequently limited to procuring such materials and components from sources
approved by the United States Government.
Quality Control
The Company's defense operations employ Statistical Process Controls
extensively throughout its manufacturing process to ensure that required quality
levels are maintained and that products are manufactured in accordance with
specifications. The Company satisfies the United States Government quality
control standard Million-Q-9858A and ISO-9002. Under the Systems Contract, the
Company is responsible for conducting inspections of the subcontractors for the
program to ensure that they meet these same standards.
Competition
The Company competes for contracts with other potential suppliers based on
price and the ability to manufacture superior quality products to required
specifications and tolerances. The Company believes that it has certain
competitive advantages including its high volume, cost-efficient manufacturing
capability, its co-development of new products with its customers, and the
United States Government's inclination to remain with long-term reliable
suppliers. Since the Company's processes do not include a significant amount of
proprietary information, however, there can be no assurance that other companies
will not, in time, be able to duplicate the Company's manufacturing processes.
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<PAGE> 67
United States Government Contracts
Virtually all of the Company's defense related contracts, including the
Systems Contract, are firm fixed price contracts with the United States
Government or certain of the United States Government's prime contractors. Under
fixed price contracts, the Company agrees to perform certain work for a fixed
price and, accordingly, realizes all of the benefit or detriment resulting from
decreases or increases in the costs of performing the contract.
A majority of the Company's manufacturing agreements with the United States
Armed Forces and its prime defense contractors are for the provision of
components for a one year term (two years in the case of the Systems Contract),
subject, in certain cases, to the right of the United States Government to renew
the contract for an additional term. Renewals of United States Government
contracts depend upon annual Congressional appropriations and the current
requirements of the United States Armed Forces. See "-- Markets and Customers."
United States Government contracts and contracts with defense contractors are,
by their terms, subject to termination by the United States Government for its
convenience. Fixed price contracts provide for payment upon termination for
items delivered to and accepted by the United States Government, and, if the
termination is for convenience, for payment of the contractor's costs incurred
through the date of termination plus the costs of settling and paying claims by
terminated subcontractors, other settlement expenses and a reasonable profit on
the costs incurred.
SEASONALITY
The Company's automotive products business is subject to the seasonal
characteristics of the automotive industry in which there are seasonal plant
shutdowns in the third and fourth quarters of each calendar year. Although the
Systems Contract is not seasonal in nature, there have been and will continue to
be variations in revenues from the Systems Contract based upon costs incurred by
the Company in fulfilling the Systems Contract in each quarter. The majority of
the Company's manufacturing under its agreements with the United States
Government and prime defense contractors has historically occurred from January
through September and there is generally a lower level of manufacturing and
sales during the fourth quarter of the calendar year.
BACKLOG
The Company does not reflect an order for airbags or airbag fabric in
backlog until it has received a purchase order and a material procurement
release which specifies the quantity ordered and specific delivery dates.
Generally, these orders are shipped within four to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
backlog is a reliable measure of future airbag sales.
As of June 30, 1997, the Company had a defense-related backlog of
approximately $22.6 million of which $8.8 million is expected to be completed
before the end of fiscal year 1998. As of June 30, 1996, the Company had a
defense-related backlog of approximately $21.0 million.
EMPLOYEES
At June 15, 1997, the Company employed approximately 2,150 employees. 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
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws, including but not limited to,
those under the Comprehensive Environmental Response, Compensation & Liability
Act ("CERCLA" or "Superfund") may impose joint and several liability and may
apply to conditions at properties presently or
58
<PAGE> 68
formerly owned or operated by an entity or its predecessor as well as to
conditions of properties at which wastes or other contamination attributable to
an entity or its predecessor have been sent or otherwise come to be located. The
nature of the Company's operations exposes it to the risk of claims with respect
to such matters and there can be no assurance that violations of such laws have
not occurred or will not occur or that material costs or liabilities will not be
incurred in connection with such claims. Based upon its experience to date, the
Company believes that the future cost of compliance with existing Environmental
Laws and liability for known environmental claims pursuant to such Environmental
Laws, will not have a material adverse effect on the Company's financial
position or results of operations and cash flows. However, future events, such
as new information, changes in existing Environmental Laws or their
interpretation, and more vigorous enforcement policies of regulatory agencies,
may give rise to additional expenditures or liabilities that could be material.
The Company has identified two areas of underground contamination at the
Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed up by annual
maintenance. The consultants also estimate that remediation costs will be
approximately $250,000. However, depending on the actual extent of impact to the
property or more stringent regulatory criteria, these costs could be higher.
Additionally, an underground contamination involving machinery fluids exists at
the Valentec facility in Costa Mesa, California and a site remediation plan has
been approved by the Regional Water Quality Control Board. Such plan will take
approximately five years to implement at an estimated cost of approximately
$368,000. The remediation plan currently includes the simultaneous operation of
a groundwater and vapor extraction system. In addition, JPS has been identified
along with numerous other parties as a Potentially Responsible Party ("PRP") at
the Aquatech Environmental, Inc. Superfund Site. JPS believes that it is a de
minimis party with respect to the site and that future clean-up costs incurred
by JPS will not be material. In the opinion of management, no material
expenditures will be required for its environmental control efforts and the
final outcome of these matters will not have a material adverse effect on the
Company's results of operations or financial position. The Company believes that
it currently is in compliance with applicable environmental regulations in all
material respects. See Note 8 to the Company's Notes to Consolidated Financial
Statements included elsewhere in this Prospectus, Note 7 to Valentec's Notes to
Financial Statements, Note 12 to the Division's Notes to Financial Statements
and Note 11 to the Division's Notes to Financial Statements.
FACILITIES
The Company maintains its corporate headquarters in Costa Mesa, California.
The Company manufactures automotive and industrial products in six locations,
with total plant area of approximately 969,564 square feet (including
administrative, engineering and research and development areas housed at plant
sites). Below is an overview of the Company's manufacturing and office
facilities:
<TABLE>
<CAPTION>
FLOOR AREA OWNED/ LEASE NUMBER OF
LOCATION (SQ. FT.) LEASED EXPIRATION EMPLOYEES
-------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C>
AIRBAG AND INDUSTRIAL FABRICS RELATED
PRODUCTS
Ensenada, Mexico (airbag cushions) ......................... 97,000(1) Leased 1998(2) 971
Greenville, South Carolina (airbag and
industrial related fabrics)............................... 445,040(1) Owned NA 371
Germany (airbag cushions)................................... 55,000(3) Leased 1998(4) 248
Czech Republic (airbag cushions)............................ 100,000(5) Owned NA 233
Gwent, Wales (airbag cushions).............................. 20,000(5) Leased 2003 58
Costa Mesa, California (metal airbag
components and defense products).......................... 139,000(6)(7) Leased 1999 173
Otay Mesa, California (warehouse)(8)........................ 7,900 Leased 1998 3
Fort Lee, New Jersey (10)................................... 4,685 Leased 2007 8
DEFENSE(9)
Mount Arlington, New Jersey (defense
systems).................................................. 3,600(10) Leased 2000 10
Galion, Ohio (defense products)............................. 97,000(6) Owned NA 75
</TABLE>
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<PAGE> 69
- ----------
(1) Office, manufacturing and research and development space.
(2) Lease is subject to two one-year renewal options.
(3) Manufacturing, sales and administration space.
(4) The lease with respect to the 40,000 square feet comprising manufacturing
space expires in 1998. The lease with respect to the 15,000 square feet
comprising sales and administrative space expires in 2001.
(5) Manufacturing and office space.
(6) Manufacturing and administrative space.
(7) Consists of two facilities.
(8) Finished goods distribution center.
(9) Defense related products are also manufactured at the Costa Mesa facility
listed above.
(10) Office space.
PATENTS
The Company holds three patents and three additional patents are
pending. All of such patents relate to technical improvements for enhancement of
product performance with respect to the Company's fabric and industrial related
products. Provided that all requisite maintenance fees are paid, two of the
patents held by the Company expire in 2013 and the third patent held by the
Company expires in 2014.
ENGINEERING, RESEARCH & DEVELOPMENT
The Company's airbag fabric operations have maintained an active
design and development effort focused toward new and enhanced products and
manufacturing processes. The Company specifically designs and engineers its
fabrics to meet its customers' applications and needs. While most design
requirements are originated by the component manufacturer, the Company is
dedicated to improving the quality of existing products, as well as developing
new products for all applications.
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<PAGE> 70
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and members of the Board of Directors of the
Company and their respective ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert A. Zummo.............................. 56 Chairman of the Board, President and Chief
Executive Officer
Thomas W. Cresante........................... 50 Executive Vice President and Chief
Operating Officer
Jeffrey J. Kaplan............................ 49 Director, Executive Vice President and Chief
Financial Officer
John L. Hakes................................ 57 President, European Operations
Victor Guadagno.............................. 57 President, Valentec Systems, Inc.
Paul L. Sullivan............................. 51 President, Automotive Safety Components
Asia-Pacific Ltd.
Richard R. Vande Voorde...................... 52 President, Galion, Inc.
Paul M. Betz................................. 38 Vice President and General Manager, Wells
Division of Valentec International
Corporation
George D. Papadopoulos....................... 25 Corporate Controller and Secretary
Daniel R. Smith.............................. 28 Treasurer
Joseph J. DioGuardi.......................... 57 Director
Francis X. Suozzi............................ 56 Director
Robert J. Torok.............................. 66 Director
</TABLE>
Robert A. Zummo. Mr. Zummo has served as Chairman of the Board,
President and Chief Executive Officer of the Company since its inception in
January 1994. Mr. Zummo is also the Chief Executive Officer of Valentec, which
was acquired by the Company in May 1997, and has served in such capacity since
1989. Valentec is a manufacturer of defense-related products and parts for the
computer and medical industries. From 1985 to 1989, Mr. Zummo was President and
Chief Executive Officer of General Defense Corporation, a defense contractor in
Hunt Valley, Maryland, where he previously served as Executive Vice President
and Chief Operating Officer from 1983 to 1985. Mr. Zummo has more than 30 years
experience in the defense and aerospace manufacturing industries.
Thomas W. Cresante. Mr. Cresante has served as Executive Vice
President, Chief Operating Officer of the Company since May 1997. From October
1996 to May 1997, Mr. Cresante served as President of Worldwide Operations of
AlliedSignal-Safety Restraints Systems. From January 1996 to October 1996, Mr.
Cresante served as Vice President of Operations of AlliedSignal-Aerospace
Sector. From January 1990 to May 1995, Mr. Cresante served as Vice President of
Operations of the TRW Inflatable Restraints Division. From January 1984 to
November 1989, Mr. Cresante served as Vice President of Manufacturing of ITT
Hancock, a manufacturer of components and systems for the automotive industry.
Jeffrey J. Kaplan. Mr. Kaplan has served as Executive Vice President,
Chief Financial Officer and a Director of the Company since February 1997. From
October 1993 to February 1997, Mr. Kaplan served as Executive Vice President,
Chief Financial Officer and a Director of International Post Limited ("IPL"), a
leading provider of post-production services for commercial and advertising
markets; and he served as Senior Vice President and Chief Financial Officer of
Video Services Corporation from September 1987 to February 1994 and Senior Vice
President and Chief Financial Officer of Audio Plus Video International, Inc., a
subsidiary of IPL, from September 1987 to February 1997. Mr. Kaplan was a
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<PAGE> 71
financial advisor to various public and private companies from September 1985 to
September 1987. From November 1978 until August 1985, Mr. Kaplan was employed by
Clabir Corporation, a New York Stock Exchange listed company, where he last
served as Executive Vice President and Chief Financial Officer.
John L Hakes. Mr. Hakes has served as President of the European
Operations since June 1995. Mr. Hakes has also served as a managing director of
VIL since June 1995. Mr. Hakes served as the Chief Executive Officer of Thorn
Security & Electronics, an international manufacturer of military electronics,
fire protection and intrusion control products from 1991 through 1994. From 1986
through 1991, Mr. Hakes served as the Chief Executive Officer of Thorn EMI
Electronics, one of the largest military electronics suppliers to the United
Kingdom Ministry of Defense.
Victor Guadagno. Mr. Guadagno has served as President of Valentec
Systems, Inc. since the inception of the Company's Systems business in 1994 and
has served as Vice President/General Manager of Valentec's Wells Division from
September 1994 until September 1995. Mr. Guadagno joined Valentec in 1986 as
Vice President/General Manager of the Product Development Division, and was
promoted to Vice President of Corporate Marketing in 1989. Prior to joining
Valentec, Mr. Guadagno was President and sole shareholder of Target Research,
Inc., a business engaged in the research and development of ammunition for the
United States Army. Mr. Guadagno began his career as a development engineer with
the United States Army and has over 35 years of experience in the defense
industry, including systems contracting.
Paul L. Sullivan. Mr. Sullivan has served as President of Automotive
Safety Components Asia-Pacific, Ltd. since February 1997. Mr. Sullivan served as
President of the North American Automotive Operations from May 1995 to February
1997, as Vice President and General Manager of the North American Automotive
Division from January 1994 to May 1995, and was Vice President and General
Manager of Valentec's Wells Division from July 1993 to January 1994. From July
1992 to July 1993, Mr. Sullivan was Vice President and General Manager of
Valentec's Kisco Division, a manufacturer of component parts for large caliber
tank ammunition. From December 1990 to June 1992, Mr. Sullivan was plant manager
of the Bussman Division of Cooper Industries, a manufacturer of electrical
protection component parts. From January 1988 to December 1990, Mr. Sullivan was
Operations Manager of Valentec's Kisco Division. Mr. Sullivan has over 25 years
of managerial experience in multi-plant operations in the defense and automotive
industries.
Richard R. Vande Voorde. Mr. Vande Voorde has served as President of
Galion, Inc. since May 1995 and previously served as Vice President and General
Manager of the Company's Galion Division since the inception of the Company.
From 1989 to January 1994 Mr. VandeVoorde served as Executive Vice President of
Valentec Galion. From 1986 to 1989, Mr. Vande Voorde was Vice President of
Finance of Valentec Galion. From November 1983 to June 1986, Mr. Vande Voorde
served as Manager of Accounting Operations of Ideal Electric Company, a division
of Carrier Corporation which manufactured custom-designed electrical generators.
Carrier Corporation is a subsidiary of United Technologies Corporation.
Paul M. Betz. Mr. Betz has served as General Manager of the Wells
Division of Valentec International Corporation since January 1997. Mr. Betz
served as Vice President of Sales and Marketing for both Valentec International
Corporation and Safety Components International, Inc. from October 1995 to
December 1996. From April 1994 to September 1995, Mr. Betz served as Director of
Sales and Marketing for Automated Solutions Incorporated. From July 1982 to
March 1994, Mr. Betz held several engineering, program management and account
management positions with General Motors Corporation, General Electric
Corporation and their joint venture affiliate, FANUC, Ltd. of Japan.
George D. Papadopoulos. Mr. Papadopoulos has served as Corporate
Controller and Secretary of the Corporation since March 1997. From April 1996 to
March 1997, Mr. Papadopoulos served as Corporate Controller of International
Post Limited, a leading provider of post-production services for commercial and
advertising markets. From July 1993 to April 1996, Mr. Papadopoulos was employed
by Arthur Andersen LLP, a leading public accounting firm, serving in various
capacities, the most recent of which was as a Senior Accountant.
Daniel R. Smith. Mr. Smith has served as Treasurer of the Corporation
since March 1997. From July 1991 to March 1997, Mr. Smith was employed by Arthur
Andersen LLP, a leading public accounting firm, as a Manager.
Joseph J. DioGuardi. Mr. DioGuardi has served as a director of the
Company since 1994. Mr. DioGuardi was a member of the United States House of
Representatives from 1985 through 1989, representing the 20th Congressional
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<PAGE> 72
District in Westchester County, New York. Since leaving Congress, Mr. DioGuardi
founded and now chairs a non-partisan foundation named "Truth in Government,"
aimed at promoting fiscal responsibility and budgetary reform. Mr. DioGuardi is
an international spokesman for human rights and is Chairman of the Albanian
American Civic League. Mr. DioGuardi, a Certified Public Accountant, has 22
years of public accounting experience with Arthur Andersen & Co., serving as
Partner from 1972 to 1984. Mr. DioGuardi is also a director of Neurocorp, Ltd.,
a publicly held corporation in the business of utilizing software, databases and
medical devices for the diagnosis and treatment of brain-related disorders.
Francis X. Suozzi. Mr. Suozzi has served as a director of the Company
since 1994. Mr. Suozzi is a director of Valentec. Mr. Suozzi is currently
employed as the treasurer and a senior vice president of Nabisco Holdings
Corporation. Prior to taking this position in March 1995, Mr. Suozzi was a vice
president of RJR Nabisco, Inc., involved in financings and acquisitions. Mr.
Suozzi is also a director of First Intercontinental Group, an investment banking
concern based in Washington, D.C. Prior to forming First Intercontinental Group
in 1991, Mr. Suozzi was Regional Director of Corporate Finance for Gruntal &
Co., a securities firm headquarters in New York City, from 1988 to 1991. From
1975 through 1984, Mr. Suozzi was a director of Avco Community Developers Inc.,
a real estate development company which was publicly traded from 1975 to 1978,
and was also a director of Nashville City Bank from 1979 to 1982.
Robert J Torok. Mr. Torok has served as a director of the Company
since 1994. Until May 1996, when Mr. Torok retired, Mr. Torok was a Vice
President and Partner of Korn/Ferry International, an executive search firm
based in New York City and had served in such position since 1980. Prior to
1980, Mr. Torok was Senior Vice President of Sikorsky Aircraft, a division of
United Technologies Corporation, a diversified manufacturing company based in
Hartford, Connecticut, where Mr. Torok worked from 1958 to 1980. Mr. Torok has
22 years of experience in engineering, manufacturing and management.
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<PAGE> 73
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by SCI to the
Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company for the Company's fiscal year
ended March 31, 1997 (each person appearing in the table is referred to as a
"Named Executive"). The amounts reflected in the table for the period during
fiscal year 1995 prior to the Company's initial public offering in May 1994
represent an allocation of the total compensation paid by Valentec to the Named
Executives based on an estimate of the portion of time spent by the Named
Executives on matters relating to the Valentec Automotive Division and Valentec
Galion which were transferred to the Corporation immediately prior to the
Initial Public Offering (the "Transfer of Assets").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------------------------ ----------------------
LTIP
NAME AND RESTRICTED SECURITIES PAYOUTS ALL OTHER
PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL STOCK UNDERLYING ------- COMPENSATION
------------------ YEAR ($) ($) COMPENSATION ($) AWARDS ($) OPTIONS (#) ($) ($) (1)
---- ------ ----- ---------------- ---------- ----------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Zummo, ................. 1997 297,000 0 0 0 10,000 0 9,600
Chairman of the Board, President 1996 275,000 60,000 0 0 10,000 0 7,680
and Chief Executive Officer 1995 250,000 75,000 0 0 50,000 0 8,000
Victor Guadagno, ................. 1997 162,000 0 0 0 5,000 0 6,000
President, Valentec Systems, Inc. 1996 150,000 25,000 0 0 15,000 0 6,231
1995 132,212 0 0 0 10,000 0 6,000
John L. Hakes, ................... 1997 164,273 0 0 0 10,000 0 0
President, European Operations (2) 1996 147,000 46,500 0 0 25,000 0 0
Paul L. Sullivan, ................ 1997 145,000 0 0 0 5,000 0 6,000
President, Automotive Safety 1996 145,918 25,000 0 0 5,000 0 6,000
Components Asia-Pacific, Ltd. (3) 1995 123,079 25,000 0 0 25,000 0 6,923
W. Hardy Myers, .................. 1997 142,000 0 0 0 10,000 0 6,000
President, North American 1996 132,000 40,000 0 0 10,000 0 4,800
Automotive Operations (4) 1995 120,000 50,000 0 0 50,000 0 6,000
</TABLE>
- -------
(1) Amount reflects automobile allowances.
(2) Mr. Hakes joined the Company in June 1995.
(3) Mr. Sullivan joined the Company in September 1994. Mr. Sullivan became
Vice President, North American Automotive Operations effective September
26, 1996. Prior to such time, Mr. Sullivan served as President, North
American Automotive Operations.
(4) From February 15, 1997 to the time of Mr. Myers' departure from the
Company in May 1997, Mr. Myers was the President, North America Automotive
Operations, Treasurer and Secretary of the Company. Prior to February 15,
1997, Mr. Myers served as Chief Financial Officer, Treasurer, Secretary
and a director of the Company.
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<PAGE> 74
OPTIONS GRANT IN LAST FISCAL YEAR
The following options were granted to the Named Executives during
fiscal year 1997 under the Company's 1994 Stock Option Plan, as amended.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------ ---------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ----------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Zummo ........... 10,000 4.23% $14.17 5/10/2001(1) $39,149 $ 86,509
John L. Hakes ............. 10,000 4.23% $12.88 5/10/2003(1) $52,435 $122,195
Victor Guadagno............ 5,000 2.12% $12.88 5/10/2006(1) $40,501 $102,637
Paul L. Sullivan .......... 5,000 2.12% $12.88 5/10/2006(1) $40,501 $102,637
W. Hardy Myers............. 10,000 4.23% $12.88 5/10/2006(1) $81,002 $205,274
</TABLE>
- -------
(1) Became exercisable in four equal annual installments beginning May 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS
VALUES
The following table summarizes for each of the Named Executives the
number of stock options exercised during the fiscal year ended March 31, 1997,
the aggregate dollar value realized upon exercise, the total number of
unexercised options, if any, held at March 31, 1997 and the aggregate dollar
value of in-the-money, unexercised options, held at March 31, 1997. The value
realized upon exercise is the difference between the fair market value of the
underlying stock on the exercise date and the exercise or base price of the
option. The value of unexercised, in-the money options at fiscal year-end is the
difference between its exercise or base price and the fair market value of the
underlying stock on March 31, 1997, which was $10.00 per share.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS OF IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE FISCAL YEAR END (#) AT FISCAL YEAR END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert A. Zummo .......... 0 N/A 27,500/42,500 *
John L. Hakes ............ 0 N/A 6,250/28,750 *
Victor Guadagno .......... 0 N/A 7,500/21,250 *
Paul L. Sullivan ......... 0 N/A 13,750/21,250 *
W. Hardy Myers ........... 0 N/A 27,500/42,500 *
</TABLE>
- ---------
* None of the options referenced in the chart were in-the-money on March 31,
1997.
65
<PAGE> 75
EMPLOYMENT AGREEMENTS
Mr. Zummo serves as President and Chief Executive Officer of the
Company pursuant to a five-year employment agreement which became effective upon
the consummation of the Company's Initial Public Offering. The employment
agreement provides that Mr. Zummo will allocate at least 80% of his working
time, attention and energies to the affairs of the Company and the remaining 20%
to Valentec; however, Mr. Zummo has been spending substantially all of his
working time performing services for the Company since the closing of the
Valentec Acquisition. Mr. Zummo's base salary for the first year of the term is
$250,000, subject to annual increases at the discretion of the Board of
Directors. In August 1997, the Compensation Committee of the Board of Directors
approved an increase of salary payable to Mr. Zummo under his employment
agreement to $450,000. In addition to the base salary, the employment agreement
provides for an annual incentive bonus. Mr. Zummo was not awarded a bonus for
fiscal 1997. In July 1997, the Compensation Committee of the Board of Directors
approved a bonus to Mr. Zummo of $75,000 contingent upon the completion of the
JPS Acquisition based on Mr. Zummo's performance in connection with such
acquisition. In the event Mr. Zummo's employment is terminated without "Cause"
(as defined in the employment agreement), the Company is required to pay Mr.
Zummo an amount equal to his full salary and incentive bonus in effect for the
year immediately preceding termination for the remainder of the full term. If
Mr. Zummo's employment is terminated by the Company in connection with a "change
in control" (as defined in the employment agreement), the Company is required to
pay Mr. Zummo an amount equal to two times his full salary and bonus in respect
of the year immediately preceding termination. In addition, if Mr. Zummo's
employment agreement is not renewed by the Company after the expiration of the
initial five-year term other than for "Cause," the Company would be required to
continue to pay Mr. Zummo's full salary and incentive bonus in effect for the
year immediately preceding termination for a period of one year from the time of
termination.
Mr. Cresante serves as Executive Vice President and Chief Operating
Officer of the Company pursuant to a three-year employment agreement which
became effective in May 1997. The employment agreement provides that Mr.
Cresante will allocate at least 80% of his working time, attention and energies
to the affairs of the Company and the remaining 20% to Valentec; however, Mr.
Cresante has been spending substantially all of his working time performing
services for the Company since the closing of the Valentec Acquisition. Mr.
Cresante's base salary for the first year of the term is $235,000, subject to
annual increases at the discretion of the Board of Directors. In addition to the
base salary, the employment agreement provides for an annual incentive bonus,
including a minimum bonus of $50,000 for fiscal 1998. Pursuant to the terms of
the employment agreement, Mr. Cresante was awarded options to purchase 225,000
shares of Common Stock issued on May 19, 1997 under the Company's 1994 Stock
Option Plan. The issuance of such options is subject to the conditions set forth
in the employment agreement, including the approval by the stockholders of the
Company of an increase in the number of shares authorized for issuance under the
Company's 1994 Stock Option Plan as may be necessary for the issuance of such
options. In the event Mr. Cresante's employment is terminated without "Cause"
(as defined in the employment agreement), the Company is required to pay Mr.
Cresante an amount equal to his full salary and incentive bonus in effect for
the year immediately preceding termination for the remainder of the full term.
If Mr. Cresante's employment is terminated by the Company in connection with a
"change in control" (as defined in the employment agreement), the Company is
required to pay Mr. Cresante an amount equal to two times his full salary and
incentive bonus in respect of the year immediately preceding termination. In
addition, if Mr. Cresante's employment agreement is not renewed by the Company
after the expiration of the initial three-year term other than for "Cause," the
Company would be required to continue to pay Mr. Cresante's full salary and
incentive bonus in effect for the year immediately preceding termination for a
period of one year from the time of termination.
Mr. Kaplan serves as Executive Vice President and Chief Financial
Officer of the Company pursuant to a three-year employment agreement which
became effective in February 1997. The employment agreement provides that Mr.
Kaplan will allocate at least 80% of his working time, attention and energies to
the affairs of the Company and the remaining 20% to Valentec; however, Mr.
Kaplan has been spending substantially all of his working time performing
services for the Company since the closing of the Valentec Acquisition. Mr.
Kaplan's base salary for the first year of the term is $220,000, subject to
annual increases at the discretion of the Board of Directors. In addition to the
base salary, the employment agreement provides for an annual incentive bonus,
including a minimum bonus of $30,000 for fiscal 1998. In August 1997, the
Compensation Committee of the Board of Directors approved a transactional bonus
to Mr. Kaplan of $30,000 based on Mr. Kaplan's performance in connection with
the JPS Acquisition, the Valentec Acquisition and related financings. Pursuant
to the terms of the employment agreement, Mr. Kaplan was awarded options under
the Company's 1994 Stock Option Plan in accordance with the following schedule:
(i) options to purchase 125,000 shares of Common Stock were issued on
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<PAGE> 76
February 15, 1997; (ii) options to purchase 50,000 shares of Common Stock were
issued on April 1, 1997 and (iii) options to purchase 50,000 shares of Common
Stock were to be issued on April 1, 1998, unless Mr. Kaplan was not, for any
reason, an employee of the Company on such date. In August 1997, the
Compensation Committee of the Board of Directors approved the acceleration of
the issuance of the options referenced in (iii) above to August 13, 1997 and a
change in the vesting schedule of all options from four years to three years.
The issuance of such options is subject to the conditions set forth in the
employment agreement, including the approval by the stockholders of the Company
of any increase in the number of shares authorized for issuance under the
Company's 1994 Stock Option Plan as may be necessary for the issuance of such
options. In the event Mr. Kaplan's employment is terminated without "Cause" (as
defined in the employment agreement), the Company is required to pay Mr. Kaplan
an amount equal to his full salary and incentive bonus in effect for the year
immediately preceding termination for the remainder of the full term. If Mr.
Kaplan's employment is terminated by the Company in connection with a "change in
control" (as defined in the employment agreement), the Company is required to
pay Mr. Kaplan an amount equal to two times his full salary and incentive bonus
in respect of the year immediately preceding termination. In addition, if Mr.
Kaplan's employment agreement is not renewed by the Company after the expiration
of the initial three-year term other than for "Cause," the Company would be
required to continue to pay Mr. Kaplan's full salary and incentive bonus in
effect for the year immediately preceding termination for a period of one year
from the time of termination.
Mr. Hakes serves as President, European Automotive Operations
pursuant to an employment agreement (the "Hakes Employment Agreement") which
became effective in June 1995. The agreement has an initial term of one year and
may be terminated thereafter on twelve months' notice by either the Company or
Mr. Hakes. Mr. Hakes' base salary for the first year of the term is pound
sterling 95,000, and is subject to annual increases at the discretion of the
Board of Directors. In addition to the base salary, the Hakes Employment
Agreement provides for an annual incentive bonus. Mr. Hakes was not awarded a
bonus for fiscal 1997. If Mr. Hakes' employment is terminated by the Company in
connection with a "change in control" (as defined in the Hakes Employment
Agreement), the Company is required to pay Mr. Hakes an amount equal to his full
salary effective on the date of the change in control for a period of one full
year. Pursuant to the Hakes Employment Agreement, Mr. Hakes also provides
services to VIL in return for compensation paid by VIL.
Mr. Guadagno serves as President of Valentec Systems, Inc. pursuant
to a two-year employment agreement which became effective in September 1994, the
term of which was extended to September 1997. Mr. Guadagno's base salary for the
first year of the term was $150,000, and is subject to annual increases at the
discretion of the Board of Directors. In addition to the base salary, the
employment agreement provides for an annual incentive bonus. Mr. Guadagno was
not awarded a bonus for fiscal 1997. In the event Mr. Guadagno's employment is
terminated without "Cause" (as defined in the employment agreement), the Company
would be required to continue to pay Mr. Guadagno's full salary for a period of
twelve months from the time of termination. In addition, if Mr. Guadagno's
employment agreement is not renewed by the Company after the expiration of the
term other than for "Cause," the Company would be required to continue to pay
Mr. Guadagno's full salary for a period of six months from the time of
termination.
Mr. Sullivan serves as President of Automotive Safety Components
Asia-Pacific Ltd. pursuant to a two-year employment agreement which became
effective in September 1994, the term of which was extended to September 1997.
Mr. Sullivan's base salary for the first year of the term is $125,000, subject
to annual increases at the discretion of the Board of Directors. In addition to
the base salary, the employment agreement provides for an annual incentive
bonus. Mr. Sullivan was not awarded a bonus for fiscal 1997. In the event Mr.
Sullivan's employment is terminated without "Cause" (as defined in the
employment agreement), the Company would be required to continue to pay Mr.
Sullivan's full salary for a period of twelve months from the time of
termination. In addition, if Mr. Sullivan's employment agreement is not renewed
by the Company after the expiration of the term other than for "Cause," the
Company would be required to continue to pay Mr. Sullivan's full salary for a
period of six months from the time of termination.
From February 1997 until his departure from the Company in May 1997,
Mr. Myers served as President, North American Automotive Operations, Treasurer
and Secretary of the Company. Prior to February 1997, Mr. Myers served as Chief
Financial Officer, Treasurer and Secretary of the Company pursuant to a
three-year employment agreement which became effective upon the consummation of
the Initial Public Offering. The employment agreement provided that Mr. Myers
would allocate at least 80% of his working time, attention and energies to the
affairs of the Company and the remaining 20% to Valentec . Mr. Myers' base
salary for the first year of the term was $150,000, and was subject to annual
increases at the discretion of the Board of Directors. In addition to the base
salary, Mr. Myers' employment agreement provided for an annual
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<PAGE> 77
incentive bonus. Mr. Myers did not receive a bonus for fiscal 1997. Pursuant to
the employment agreement, in the event Mr. Myers' employment was terminated
without "Cause" (as defined in the employment agreement), the Company would have
been required to pay Mr. Myers an amount equal to his full salary and incentive
bonus in effect for the year immediately preceding termination for the remainder
of the full term of employment. Pursuant to the employment agreement, if Mr.
Myers' employment was terminated by the Company in connection with a "change in
control" (as defined in the employment agreement), the Company would have been
required to pay Mr. Myers an amount equal to two times his full salary and bonus
in respect to the year immediately preceding termination. The Company has
entered into a Consulting Agreement (the "Consulting Agreement") with Mr. Myers
pursuant to which Mr. Myers will provide consulting services to the Company for
a term of one year. As compensation for such services, Mr. Myers will receive
$184,000 payable in twelve monthly installments; the options previously awarded
to Mr. Myers under the Company's 1994 Stock Option Plan have been fully vested
pursuant to the Consulting Agreement and are available for exercise within a
ninety day period from the termination date of the Consulting Agreement; and the
Company will provide to Mr. Myers certain benefits under the Company's benefit
plans as well as certain life and health insurance benefits.
BOARD OF DIRECTORS
Directors who are employees of the Company receive no compensation,
as such, for service as members of the Board. Directors who are not employees of
the Company receive an annual retainer of $20,000 and an attendance fee of
$1,250 for each Board meeting or committee meeting attended in person by that
director and $300 for each telephonic Board meeting or committee meeting in
which such director participated, provided that fees for in-person meetings of
the Board and committees shall not exceed $1,250 per day. All Directors are
reimbursed for expenses incurred in connection with attendance at meetings. See
"--Directors' Options."
STOCK OPTION PLAN
On January 27, 1994, the Board of Directors of the Company adopted,
and the stockholders approved, the 1994 Stock Option Plan of the Company and on
May 4, 1996 and July 29, 1996 the Board of Directors approved certain amendments
to the Plan which were subsequently approved by the stockholders (such plan, as
amended, being referred to herein as the "Plan"). The Plan provides for the
issuance of options (each an "Option") to purchase up to 550,000 shares of
Common Stock. Of this total, Options to purchase 510,000 shares may be granted
to officers, key employees and consultants of the Company and Options to
purchase 40,000 shares may be granted to non-employee directors of the Company.
On July 22, 1997, the Board of Directors adopted amendments to the Plan, subject
to stockholder approval at the next annual meeting of stockholders, including an
amendment to increase the aggregate number of shares of Common Stock issuable
under the Plan to 1,050,000, with 1,000,000 of such shares issuable under
Options that may be granted to officers, key employees and consultants of the
Company and 50,000 of such shares issuable under Options that may be granted to
non-employee directors of the Company. As of the date hereof, the Company had
granted Options to purchase 912,499 shares to officers, key employees and
consultants of the Company (of which Options to purchase 460,000 shares have
been issued to officers of the Company subject to approval of the stockholders
of the Company of the amendment to the Plan described above) and Options to
purchase 21,000 shares to non-employee directors of the Company. The Plan is
designed to provide an incentive to officers, key employees, consultants and
non-employee directors of the Company by making available to them an opportunity
to acquire a proprietary interest or to increase their proprietary interest in
the Company. Any Option granted under the Plan which is forfeited, expires or
terminates prior to vesting or exercise will again be available for award under
the Plan. The Stock Option Committee of the Board of Directors administers the
Plan. The terms of specific Options are determined by the Stock Option
Committee. Generally, Options are granted at an exercise price of not less than
the fair market value of the Common Stock on the date of grant. Each Option is
exercisable during the period or periods specified in the option agreement,
which generally does not exceed ten years from the date of grant.
DIRECTORS' OPTIONS
Each non-employee director receives an Option to purchase 2,500
shares of Common Stock, vesting in equal installments over a four-year period,
in each calendar year in which he serves as a director of the Company. The
exercise price of the shares of Common Stock subject to Options granted to each
non-employee director is the fair market value of the shares of Common Stock on
the date of grant. Options granted to non-employee directors, with limited
exceptions, may only be exercised within ten years of the date of grant and
while the recipient of the Option is a director of the Company.
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<PAGE> 78
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Suozzi served as a member of the Compensation Committee of the
Board of Directors during fiscal year 1997. Mr. Suozzi is a director of Valentec
and owned approximately 21% of all of the issued and outstanding shares of
Valentec prior to selling all such shares to the Company pursuant to the
Valentec Acquisition. See "Certain Transactions."
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<PAGE> 79
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table and notes set forth information as of July 15,
1997 with respect to the voting securities of the Company beneficially owned by
all person(s) known by the Company to be the beneficial owner of more than 5% of
the Common Stock, by each director of the Company, by each of the Named
Executives and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON
------------------------------------ -------------------- ------
STOCK(1)
--------
<S> <C> <C>
Robert A. Zummo(2)(3).......................... 1,021,576(4) 20.2%
Cramer Rosenthal McGlynn, Inc.
707 Westchester Avenue
White Plains, New York 10604................ 276,400(5) 5.5%
FMR Corp
82 Devonshire Street
Boston, Massachusetts 02109................. 276,200(6) 5.5%
Victor Guadagno (2)............................ 16,250(7) *
John L. Hakes(2)............................... 15,000(7) *
Jeffrey J. Kaplan(2)........................... 0 *
W. Hardy Myers(2).............................. 70,500(8) 1.4%
Paul L. Sullivan(2)............................ 23,000(9) *
Joseph J. DioGuardi(2)......................... 2,250(7) *
Francis X. Suozzi(2)(3)........................ 328,051(10) 6.5%
Robert J. Torok(2)............................. 2,250(7) *
All executive officers and directors as a group
(consisting of 14 individuals)(11)........... 1,500,127(12) 28.9%
</TABLE>
- --------
* Less than 1%
(1) Shares beneficially owned, as recorded in this table, are expressed as a
percentage of the shares of Common Stock outstanding as of July 15, 1997,
net of treasury shares. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named in this
table, any securities which such person or group of persons has the right
to acquire within 60 days of the date hereof, is deemed to be outstanding
for purposes of computing the percentage ownership of such person or
persons, but is not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person.
(2) Address for each person is c/o Safety Components International, Inc., 2160
North Central Road, Fort Lee, NJ 07024.
(3) In connection with the Valentec Acquisition, Messrs. Zummo and Suozzi
entered into an agreement, pursuant to which it was agreed, among other
things, that for a period of three years from the date thereof, Mr. Suozzi
will vote all shares of Common Stock beneficially owned by him on any
manner put to a vote of the shareholders of the Company in the same manner
as recommended by a majority of the Board of Directors of the Company or
if no such recommendation has been made, as directed by Mr. Zummo;
provided, that such agreement shall terminate if Mr. Suozzi shall cease to
be on the Board of Directors (other than as a result of his resignation).
The shares beneficially owned by Mr. Suozzi are not included in this table
as being beneficially owned by Mr. Zummo.
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<PAGE> 80
(4) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 45,000 shares of Common Stock.
(5) Number of shares beneficially owned by Cramer, Rosenthal McGlynn, Inc.
("CRMI"), an investment company registered under Section 8 of the
Investment Advisers Act of 1940, according to a Schedule 13G filed by CRMI
with the Commission in February 1997.
(6) The information in the table relating to FMR Corp. and the information in
this footnote is from a Schedule 13G filed with the Commission in February
1997, by FMR Corp., Edward C. Johnson, Abigail P. Johnson, Fidelity
Management & Research Company and Fidelity Management Trust Company.
Fidelity Management & Research Company ("Fidelity"), 82 Devonshire Street,
Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 500 shares or 0.01% of the Common
Stock outstanding of the Company as a result of acting as investment
adviser to various investment companies registered under Section 8 of the
Investment Company Act of 1940. Edward C. Johnson 3d, FMR Corp., through
its control of Fidelity, and the Funds each has sole power to dispose of
the 500 shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson
3d, Chairman of FMR Corp., has the sole power to vote or direct the voting
of the shares of Common Stock owned directly by the Fidelity Funds, which
power resides with the Funds' Boards of Trustees. Fidelity carries out the
voting of the shares under written guidelines established by the Funds'
Boards of Trustees. Fidelity Management Trust Company, 82 Devonshire
Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR
Corp. and a bank as defined in Section 3(a)(6) of the Exchange Act is the
beneficial owner of 276,700 shares or 5.49% of the Common Stock
outstanding of the Company as a result of its serving as investment
manager of the institutional account(s). Edward C. Johnson 3d and FMR
Corp., through its control of Fidelity Management Trust Company, each has
sole dispositive power over 275,700 shares and sole power to vote or to
direct the voting of 253,900 shares, and no power to vote or to direct the
voting of 21,800 shares of common stock owned by the institutional
account(s) as reported above. Members of the Edward C. Johnson 3d family
and trusts for their benefit are the predominant owners of Class B shares
of common stock of FMR Corp., representing approximately 49% of the voting
power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns
24.5% of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson
3d is Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR
Corp. The Johnson family group and all other Class B shareholders have
entered into a shareholders' voting agreement under which all Class B
shares will be voted in accordance with the majority vote of Class B
shares. Accordingly, through their ownership of voting common stock and
the execution of the shareholders' voting agreement, members of the
Johnson family may be deemed, under the Investment Company Act of 1940, to
form a controlling group with respect to FMR Corp.
(7) Represents only options which are currently exercisable (or exercisable
within 60 days) to purchase shares of Common Stock.
(8) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 70,000 shares of Common Stock.
(9) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 22,500 shares of Common Stock.
(10) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 2,250 shares of Common Stock.
(11) Includes Mr. Myers who is a Named Executive but departed from the Company
in May 1997.
(12) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 184,250 shares of Common Stock.
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<PAGE> 81
CERTAIN TRANSACTIONS
Pursuant to a definitive Stock Purchase Agreement, dated as of May
22, 1997, the Company acquired (the "Valentec Acquisition") all of the
outstanding stock of Valentec from Robert A. Zummo, Francis X. Suozzi and the
Valentec International Company Employee Stock Ownership Plan (the "ESOP").
Valentec was the Company's largest shareholder immediately prior to the Valentec
Acquisition owning approximately 27% of the issued and outstanding shares of
Common Stock. Immediately prior to the Valentec Acquisition, Robert A. Zummo,
the Chairman of the Board, President and Chief Executive Officer of the Company,
was also a director, the President, Chief Executive Officer and owner of
approximately 74% of all of the issued and outstanding shares of Valentec, and
Francis X. Suozzi, a consultant to and a director of Valentec and a director of
the Company, was the owner of approximately 21% of all of the issued and
outstanding shares of Valentec. The consideration paid to the shareholders of
Valentec in connection with the Valentec Acquisition consisted of an aggregate
of 1,369,200 newly issued shares of Common Stock, which is approximately equal
to the number of shares of Common Stock held by Valentec. The shares of Common
Stock held by Valentec have become treasury shares and are not considered
outstanding. Therefore, there has been no increase in the Company's outstanding
shares as a result of the Valentec Acquisition. Messrs. Zummo and Suozzi now
beneficially own, directly, approximately 20% and 6.5%, respectively, of the
outstanding Common Stock of the Company. In addition, Messrs. Zummo and Suozzi
and the ESOP received demand and piggyback registration rights in connection
with the Valentec Acquisition. The Indebtedness assumed by the Company in
connection with the Valentec Acquisition was approximately $14.7 million as of
May 22, 1997 (inclusive of intercompany indebtedness of $4.3 million, which has
been eliminated in consolidation as a result of the Valentec Acquisition) of
which approximately $7.1 million has been repaid. The indebtedness assumed by
the Company included $2.8 million in indebtedness to VIL of which $800,000 was
evidenced by a demand note (of which approximately $530,000 has been repaid) and
$2.0 million is evidenced by a five year note payable in monthly installments of
approximately $40,000. Both such notes bear interest at 7% per annum. Subsequent
to the closing of the Valentec Acquisition through June 30, 1997, an aggregate
of approximately $28,000 in principal and $ 12,000 in interest has been paid to
VIL by the Company under the five year note.
The purchase price for the Valentec Acquisition was negotiated
between Valentec and a special committee consisting of independent members of
the Board of Directors of the Company. The special committee was advised by
independent legal counsel and an independent financial adviser. The Company's
Board of Directors received an opinion from the special committee's financial
adviser as to the fairness from a financial point of view of the consideration
received by the Company to the Company's shareholders other than Valentec.
Immediately prior to the Valentec Acquisition, Mr. Zummo acquired the
88.8% equity interest in VIL owned by Valentec for a cash payment of $75,000.
Prior to the Valentec Acquisition, certain agreements and
arrangements existed between the Company and Valentec. Robert A. Zummo has been
an officer and director of Valentec since 1993, and until the Valentec
Acquisition, was a stockholder of Valentec. Until his departure from the Company
in May 1997, W. Hardy Myers was an officer and director of Valentec. Prior to
the consummation of the Valentec Acquisition, Messrs. Zummo, Cresante and Kaplan
were required to spend at least 80% of their working time performing services
for the Company with the remaining portion of their time spent performing
services for Valentec and they were compensated separately by Valentec and the
Company for the respective services rendered as employees to each company.
Messrs. Zummo, Cresante and Kaplan presently spend substantially all of their
working time performing services for the Company. Mr. Hakes, the President of
the Company's European Operations, also provides part time services as a
managing director to VIL pursuant to the Hakes Employment Agreement and is paid
separately for such services by VIL. See "Business--Significant Transactions"
for a description of the Valentec Acquisition.
Prior to the Valentec Acquisition, the Company purchased from
Valentec metal components for inclusion in its passenger side airbags at prices
approved by the Company's customers for automotive airbags. Purchases by the
Company from Valentec for such components during fiscal year 1995, 1996 and 1997
totalled $1.3 million, $774,000 and $2.6 million, respectively. Valentec also
supplies directly to such customers metal components for inclusion in airbag
systems manufactured by such customers.
72
<PAGE> 82
During the first year following the Initial Public Offering, the
Company believed that it was more cost-efficient to continue to receive certain
of the corporate services described above and certain other services from
Valentec, as opposed to duplicating these services on a stand-alone basis.
Accordingly, the Company and Valentec entered into a corporate services
agreement (the "Corporate Services Agreement") pursuant to which Valentec has
provided certain facilities and services to the Company and its subsidiaries,
including corporate headquarters and financial, accounting and treasury
services. For fiscal year 1995, the Company was charged $145,000 under the
Corporate Services Agreement based upon the cost of such services to Valentec
and the Company's pro rata portion of those costs. For fiscal year 1995, the
Company also provided certain executive services to Valentec, including certain
services rendered on behalf of Valentec by Messrs. Zummo and Myers. The Company
charged Valentec $146,000 for these services. In addition, the Company has
provided certain executive, financial, accounting and treasury services to
Valentec and has charged Valentec for its pro rata portion of those costs. There
was also a joint purchasing of insurance which was arranged and paid for by the
Company and for which Valentec reimbursed the Company for its pro rata share.
For each of fiscal year 1996 and 1997, the Company charged Valentec $659,000 and
$726,000, respectively, for the foregoing services. The Corporate Services
Agreement had an initial term of twelve months, subject to renewal each year
thereafter and was terminable at the Company's option. The Corporate Services
Agreement was terminated in connection with the Valentec Acquisition.
The Company's U.K. subsidiary and VIL are parties to a Shared
Services Agreement, relating to administration, financial, engineering and other
shared costs. Payments from the Company to VIL for each of fiscal 1995, 1996 and
1997 were $248,000, $254,000 and $358,000, respectively, under the Shared
Services Agreement.
The Company sub-leases space from VIL for its European automotive
operations pursuant to a separate sublease agreement and facility usage
agreement in the U.K. In addition to the lease payments of approximately pound
sterling 70,000 per year under the sublease agreement, the facility usage
agreement provides for the Company to be allocated its pro rata portion of the
manufacturing overhead (e.g. utilities, plant security) and general and
administrative expenses of the facility (e.g. purchasing, plant accounting).
These allocations are based primarily on square footage and on volume of
production. The sublease and facility usage agreement relating to the European
automotive operation each have an initial term expiring in 2003. Payments from
the Company to VIL under the lease for each of 1995, 1996 and 1997 were
$112,000, $121,000 and $117,000, respectively.
Prior to the Valentec Acquisition, Valentec subcontracted the
manufacture of certain ammunition and automotive components to the Company,
subject to the Company's manufacturing capacity and certain contractual
limitations. Under these subcontracts, the Company was entitled to receive all
compensation relating to the manufacture of such components. The amount paid by
Valentec to the Company under such subcontracts for fiscal year 1995, 1996 and
1997 was $1.0 million, $4.3 million and $104,000, respectively.
Under federal law, the Company and certain of its subsidiaries would
be subject to liability for the consolidated federal income tax liabilities of
the consolidated group during the period when Valentec was the common parent. As
part of the Transfer of Assets, Valentec agreed, however, to indemnify the
Company and such subsidiaries for such federal income tax liability (and certain
state and local tax liabilities) that the Company or any such subsidiary is
actually required to pay. Prior to the Valentec Acquisition and to the extent
that Valentec could offset the taxable income generated by Valentec against
losses, if any, generated by such subsidiaries for periods prior to the Transfer
of Assets, the agreements relating to the Transfer of Assets may have benefited
Valentec insofar as loss carry-forwards which would otherwise have been
available to the Company would be utilized by Valentec.
In connection with the public offering by the Company, Valentec and
certain other stockholders of an aggregate of 1,725,000 shares of Common Stock
consummated in June 1995 (the "1995 Offering"), pursuant to the underwriting
agreement relating to the 1995 Offering, the selling stockholders in the 1995
Offering and the Company agreed to indemnify each other with respect to certain
liabilities, including liabilities under the Securities Act, or to contribute to
payment that such parties may be required to make in respect thereof.
DESCRIPTION OF THE CREDIT AGREEMENT
As of May 21, 1997, the Company, Phoenix and ASCIL entered into the
Credit Agreement with KeyBank and the lending institutions named therein.
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Prior to the Offering, the Credit Agreement provided for (i) a term
loan (the "Term Loan") in the principal amount of $15.0 million and (ii) a
revolving credit facility (the "Revolving Credit Facility") in the aggregate
principal amount of up to $12.0 million (including letter of credit facilities).
Upon completion of the Offering, the Company used the proceeds to repay the Term
Loan and amounts then outstanding under the Revolving Credit Facility. In
connection therewith, the Company's credit facility with KeyBank was converted
into a $27.0 million revolving credit facility (the "New Credit Facility") with
the remaining terms and conditions being similar to the previous revolving
credit facility. In addition, there is a $15 million sublimit on borrowings
under the New Credit Facility for acquisitions, a $7.5 million sublimit on
borrowings under the New Credit Facility by the Company and a $2.0 million
sublimit on borrowings under the New Credit Facility by Phoenix and ASCIL in the
aggregate. The New Credit Facility under the Credit Agreement will mature on May
31, 2002 and is secured by substantially all the assets of the Company.
The New Credit Facility under the Credit Agreement bears interest at
LIBOR plus 1.00% with a commitment fee of 0.25% for any unused portion. The
Credit Agreement also provides for letter of credit fees of not more than 1.25%
of the aggregate face amount of standby and documentary letters of credit under
the Credit Agreement.
The Credit Agreement contains certain restrictive covenants that
impose limitations upon, among other things, the Company's ability to change its
business; merge, consolidate or dispose of assets; incur liens; make loans and
investments; incur indebtedness; pay dividends and other distributions; engage
in certain transactions with affiliates; engage in sale and lease-back
transactions; enter into lease agreements; and make capital expenditures.
The Credit Agreement contains events of default customary for
facilities of its type, including with limitation, the Company's failure to pay
principal, interest, fees or other amounts when due; the Company's breach of any
covenants, representations or warranties; cross-default and cross-acceleration;
bankruptcy, insolvency or similar events involving the Company or its
subsidiaries; the unenforceability of any of the agreements or liens securing
payment of the obligations under the Credit Agreement; and the occurrence or
existence of any event or circumstance which has a material adverse effect upon
the Company as compared with the consolidated financial statements of the
Company as of the end of its fiscal year 1996.
The Company has guaranteed the obligations of Phoenix and ASCIL under
the Credit Agreement. The U.S. subsidiaries of the Company have guaranteed the
obligations of the Borrowers under the Credit Agreement. The Borrowers'
obligations under the Credit Agreement and the U.S. subsidiaries' obligations
under the guarantees are also secured by substantially all of the property of
the Company and its subsidiaries.
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued as a separate series under the
Indenture. The form and terms of the Exchange Notes are the same as the form and
terms of the Old Notes (which they replace) except that (i) the Exchange Notes
bear a Series B designation and a different CUSIP Number from the Old Notes,
(ii) the Exchange Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof, and (iii) the
holders of Exchange Notes will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for an
increase in the interest rate on the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights will terminate when the
Exchange Offer is consummated. The following summary of certain provisions of
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Trust Indenture Act of 1939, as
amended (the "TIA"), and to all of the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the Indenture may be obtained from the Company or the Initial
Purchasers. The definitions of certain capitalized terms used in the following
summary are set forth below under "-- Certain Definitions." For purposes of this
section, references to the "Company" include only the Company and not its
subsidiaries.
The Old Notes are, and the Exchange Notes will be, general unsecured
obligations of the Company, ranking subordinate in right of payment to all
existing and future Senior Indebtedness, including, without limitation, the
Company's obligations under the Credit Agreement, and structurally subordinate
to all existing and future indebtedness of the Company's subsidiaries that are
not Guarantors. The Exchange Notes will rank, and the Old Notes rank, (i) pari
passu in right of payment with any future senior subordinated indebtedness of
the Company and (ii) senior in right of payment to all other subordinated
obligations of the Company.
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The Exchange Notes will be issued in fully registered form only,
without coupons, in denominations of $1,000 and integral multiples thereof.
Initially, the Trustee will act as Paying Agent ("Paying Agent") and Registrar
for the Old Notes. The Exchange Notes may be presented for registration or
transfer and exchange at the offices of the Registrar, which initially will be
the Trustee's corporate trust office. The Company may change any Paying Agent
and Registrar without notice to holders of the Notes. The Company will pay
principal (and premium, if any) on the notes at the Trustee's corporate office
in New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
holders. Any Old Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150,000,000.
Old Notes in the aggregate principal amount of $90,000,000 were issued in the
Offering and will mature on July 15, 2007. Additional amounts may be issued in
one or more series from time to time, subject to the limitations set forth under
"Certain Covenants--Limitation on Incurrence of Additional Indebtedness."
Interest on the Exchange Notes will accrue at the rate of 10 1/8% per annum and
will be payable semiannually in arrears on each January 15 and July 15,
commencing on January 15, 1998, to the persons who are registered holders at the
close of business on the fifteenth day immediately preceding the applicable
interest payment date. Interest on the Exchange Notes will accrue from the Issue
Date.
The Notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after July 15,
2002, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on July 15 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002. . . . . . . . . . . . . . . . . 105.063%
2003. . . . . . . . . . . . . . . . . 103.797%
2004. . . . . . . . . . . . . . . . . 102.531%
2005. . . . . . . . . . . . . . . . . 101.266%
2006 and thereafter . . . . . . . . . 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. Notwithstanding the
foregoing, at any time, or from time to time, on or prior to July 15, 2000, the
Company may, at its option, redeem, with the net cash proceeds of one or more
Public Equity Offerings by the Company, up to 25% of the aggregate principal
amount of the Notes originally issued, at a redemption price equal to 110.125%
of the principal amount thereof, plus accrued interest thereon, if any, to the
date of redemption, provided that at least 75% of the aggregate principal amount
of the Notes originally issued remain outstanding immediately following such
redemption. In order to effect the foregoing redemption with the proceeds of any
Public Equity Offering, the Company shall make such redemption not more than 60
days after the consummation of any such Public Equity Offering.
As used herein, "Public Equity Offering" means an underwritten public
offering of Qualified Capital Stock of the Company pursuant to a registration
statement filed with the Commission in accordance with the Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at
any time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on
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which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; provided further,
however, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis
as is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Old Notes is, and on the
Exchange Notes will be, subordinated in right of payment to the prior payment in
full in cash or Cash Equivalents of all Obligations on Senior Indebtedness
whether outstanding on the Issue Date, or thereafter incurred including, without
limitation, the Company's obligations under the Credit Agreement. Upon any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to creditors upon any liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of creditors
or marshaling of assets of the Company or in a bankruptcy, reorganization,
insolvency, receivership or other similar proceeding relating to the Company or
its property, whether voluntary or involuntary, all Obligations due or to become
due upon all Senior Indebtedness shall first be paid in full in cash or Cash
Equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Indebtedness, before any payment or distribution of any kind
or character is made on account of any Obligations on the Notes, or for the
acquisition of any of the Notes for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by declaration or otherwise, of any principal of, interest
on, unpaid drawings for letters of credit issued in respect of, or regularly
accruing fees with respect to, any Senior Indebtedness, no payment of any kind
or character shall be made by or on behalf of the Company or any other Person
(as defined) on its or their behalf with respect to any Obligations on the Notes
or to acquire any of the Notes for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing
with respect to any Designated Senior Indebtedness, as such event of default is
defined in the instrument creating or evidencing such Designated Senior
Indebtedness, permitting the holders of such Designated Senior Indebtedness then
outstanding to accelerate the maturity thereof and if the Representative (as
defined) for the respective issue of Designated Senior Indebtedness gives
written notice of the event of default to the Trustee (a "Default Notice"),
then, unless and until all events of default have been cured or waived or have
ceased to exist or the Trustee receives notice from the Representative for the
respective issue of Designated Senior Indebtedness terminating the Blockage
Period (as defined below), during the 180 days after the delivery of such
Default Notice (the "Blockage Period"), neither the Company nor any other Person
on its behalf shall (x) make any payment of any kind or character with respect
to any Obligations on the Notes or (y) acquire any of the Notes for cash or
property or otherwise. Notwithstanding anything herein to the contrary, in no
event will a Blockage Period extend beyond 180 days from the date the payment on
the Notes was due and only one such Blockage Period may be commenced within any
360 consecutive days. No event of default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Indebtedness shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Indebtedness
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days (it being acknowledged that any subsequent action, or any
breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of
the Company, creditors of the Company who are not holders of Senior
Indebtedness, including the holders of the Notes, may recover less, ratably,
than holders of Senior Indebtedness.
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As of June 30, 1997, on a pro forma basis after giving effect to the
Offering and the use of proceeds described therein, the Company and its
subsidiaries would have had an aggregate of $17.0 million of Senior Indebtedness
(excluding unused commitments of $27.0 million (excluding outstanding letters of
credit) available under the Credit Agreement).
GUARANTEES
Each Guarantor has unconditionally guaranteed, and will
unconditionally guarantee, on a senior subordinated basis, jointly and
severally, to each holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Old Notes and Exchange
Notes, respectively, including the payment of principal of and interest on the
Old Notes and Exchange Notes, respectively. The Old Guarantees are, and the New
Guarantees will be, subordinated to Guarantor Senior Indebtedness on the same
basis as the Old Notes are, and the Exchange Notes will be, subordinated to
Senior Indebtedness.
The obligations of each Guarantor will be limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of such Guarantor and after giving effect to any collections from or payments
made by or on behalf of any other Guarantor in respect of the obligations of
such other Guarantor under its Guarantee or pursuant to its contribution
obligations under the Indenture, will result in the obligations of such other
Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under its Guarantee shall be entitled to a contribution
from each other Guarantor in an amount pro rata, based on the net assets of each
Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets
to the Company or another Guarantor that is a Wholly Owned Restricted Subsidiary
(as defined) without limitation, or with or to the Persons upon the terms and
conditions set forth in the Indenture. See "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Guarantor is sold by the Company and/or one or more of its Restricted
Subsidiaries (as defined) and the sale complies with the provisions set forth in
"-- Certain Covenants -- Limitation on Asset Sales," such Guarantor's Guarantee
will be released.
Separate financial statements of the Guarantors are not included
herein because such Guarantors are jointly and severally liable with respect to
the Company's Obligations pursuant to the Notes, but pro forma condensed
combined consolidating financial statements concerning the Company, the
Guarantors and the Company's non-guarantor subsidiaries are included in the
notes to the Financial Statement included herein.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of
Control, each holder will have the right to require that the Company purchase
all or a portion of such holder's Notes pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
purchase.
The Indenture provides that, prior to the mailing of the notice
referred to below, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full all indebtedness, and
terminate all commitments, under the Credit Agreement and all other Senior
Indebtedness the terms of which require repayment upon a Change of Control or
offer to repay in full all indebtedness, and terminate all commitments, under
the Credit Agreement and all other such Senior Indebtedness and to repay the
Indebtedness owed to each lender which has accepted such offer or (ii) obtain
the requisite consents under the Credit Agreement and all other Senior
Indebtedness to permit the repurchase of the Notes as provided below. The
Company shall first comply with the covenant in the immediately preceding
sentence before it shall be required to repurchase Notes pursuant to the
provisions described below. The Company's failure to comply with the immediately
preceding sentence shall be governed by clause (iii), and not clause (iv), of
"Events of Default" below.
Within 30 days following the date upon which a Change of Control
occurs, the Company must send, by first class mail, a notice to each holder at
such holder's last registered address, with a copy to the Trustee, which notice
shall govern the terms of the Change of Control Offer. Such notice shall state,
among other things, the purchase date, which must be no earlier than 30 days nor
later than 45 days from the date such notice is mailed, other than as may be
required by law (the
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"Change of Control Payment Date"). Holders electing to have a Note purchased
pursuant to a Change of Control Offer will be required to surrender the Note,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third business day prior to the Change of
Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would need to seek third party financing to the extent it does
not have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain any such financing.
Neither the Board of Directors of the Company nor the Trustee may
waive the covenant relating to a holder's right to repurchase upon a Change of
Control. Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on its property, to make Restricted Payments and to make Asset Sales
may also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of the
Notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company. While such restrictions cover a wide variety of arrangements which
have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the holders of Notes protection in all circumstances
from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will
not, and will not cause or permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, guarantee, acquire, become
liable, contingently or otherwise, with respect to, or otherwise become
responsible for payment of (collectively, "incur"), any Indebtedness (including,
without limitation, Acquired Indebtedness other than Permitted Indebtedness.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time of or as a consequence of the incurrence
of any such Indebtedness, the Company and the Restricted Subsidiaries may incur
Indebtedness (including, without limitation, Acquired Indebtedness) if on the
date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.25 to 1.0. No Indebtedness incurred pursuant to the next
preceding sentence shall be included in calculating any limitation set forth in
the definition of Permitted Indebtedness. Upon the repayment of Indebtedness
which may have been incurred pursuant to more than one provision of this
Indenture, the Company may, in its sole discretion, designate which provision
such Indebtedness shall have been incurred under.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions made to the Company or any Restricted Subsidiary of the Company
and other than any dividend or distribution payable solely in Qualified Capital
Stock of the Company) on or in respect of shares of the Company's Capital Stock
to holders of such Capital Stock; (b) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the
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Company or any warrants, rights or options to purchase or acquire shares of any
class of such Capital Stock (other than the exchange of such Capital Stock or
any warrants, rights or options to acquire shares of any class of Capital Stock
of the Company for Qualified Capital Stock of the Company); (c) other than
repayments by any Subsidiary Guarantor or the Company or repayments from the
Company to VIL with respect to the VIL Note, make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company or a Subsidiary Guarantor
that is subordinate or junior in right of payment to the Notes or such
Subsidiary Guarantor's Guarantee; or (d) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses (a),
(b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of
such Restricted Payment or immediately after giving effect thereto, (i) a
Default or an Event of Default shall have occurred and be continuing, or (ii)
the Company is not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant above, or (iii) the aggregate
amount of all Restricted Payments (including such proposed Restricted Payment)
made subsequent to the Issue Date (the amount expended for such purposes, if
other than in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) shall
exceed the sum of: (v) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned during the period beginning on the first day of the fiscal
quarter including the Issue Date and ending on the last day of the fiscal
quarter ending at least 30 days prior to the date the Restricted Payment occurs
(the "Reference Date") (treating such period as a single accounting period);
plus (w) 100% of the aggregate net proceeds (including the fair market value of
any business or property other than cash) received by the Company from any
Person (other than a Subsidiary of the Company) from the issuance and sale
subsequent to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock of the Company, including treasury stock; plus (x) without
duplication of any amounts included in clause (iii)(w) above, 100% of the
aggregate net cash proceeds of any equity contribution received by the Company
from a holder of the Company's Capital Stock (excluding, in the case of clauses
(iii)(w) and (x), any net cash proceeds from a Public Equity Offering to the
extent used to redeem the Notes); plus (y) an amount equal to the net reduction
in Investments in Unrestricted Subsidiaries resulting from dividends, interest
payments, repayments of loans or advances, or other transfers of cash, in each
case, to the Company or to any Restricted Subsidiary of the Company from
Unrestricted Subsidiaries (but without duplication of any such amount included
in cumulative Consolidated Net Income of the Company), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (in each case valued as
provided in "--Limitation on Restricted and Unrestricted Subsidiaries" below),
not to exceed, in the case of an Unrestricted Subsidiary, the amount of
Investments previously made by the Company or any Restricted Subsidiary of the
Company in such Unrestricted Subsidiary and which were treated as a Restricted
Payment under the Indenture; plus (z) an amount which, when aggregated with
Investments made under clause (viii) of the definition of "Permitted
Investments," does not exceed $5.0 million.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph shall not prohibit: (1) the payment of any
dividend or consummation of irrevocable redemption within 60 days after the date
of declaration of such dividend or giving of irrevocable redemption notice if
the dividend or redemption would have been permitted on the date of declaration
or giving of irrevocable redemption notice; (2) if no Default or Event of
Default shall have occurred and be continuing, the acquisition of any shares of
Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior in
right of payment to the Notes either (i) solely in exchange for shares of
Qualified Capital Stock of the Company, or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of (A) shares of Qualified Capital Stock of the Company or (B)
Refinancing Indebtedness; (4) if no Default or Event of Default shall have
occurred and be continuing, repurchases of Capital Stock deemed to occur upon
the exercise of stock options if such Capital Stock represents a portion of the
exercise price thereof, (5) if no Default or Event of Default shall have
occurred and be continuing, payments by the Company to repurchase Capital Stock
or other securities of the Company from directors, officers and other employees
of the Company or any of its Restricted Subsidiaries in an aggregate amount not
to exceed in any one calendar year the sum of (A) $500,000 and (B) any amounts
permitted to have been paid in any preceding calendar years under subclause (A)
above to the extent such amounts were not so paid in any such prior calendar
years; provided that such payments shall not exceed $3.0 million in the
aggregate; (6) if no Default or Event of Default shall have occurred and be
continuing, payments by the Company to repurchase Qualified Capital Stock or
other securities of the Company for purposes of making contributions of
Qualified Capital Stock of the Company to employees
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of the Company pursuant to a qualified retirement plan of the Company or any of
its Subsidiaries; and (7) if no Default or Event of Default shall have occurred
and be continuing, payments by the Company to repurchase Qualified Capital Stock
of the Company in connection with a substantially concurrent transaction in
which the Company reissues such repurchased Qualified Capital Stock as all or a
part of the consideration for the acquisition of property or assets; provided,
however, that such acquisition is consummated within 180 days of such
repurchase. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the immediately
preceding paragraph, amounts expended pursuant to clauses (1), (2)(ii),
(3)(ii)(A) and (7) (to the extent that the value of the Qualified Capital Stock
reissued shall have been included in clause (iii)(w) of the preceding paragraph)
shall be included in such calculation.
Limitation on Restricted and Unrestricted Subsidiaries. The Board of
Directors of the Company may, if no Default or Event of Default shall have
occurred and be continuing or would arise therefrom, designate an Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that (i) any such
redesignation shall be deemed to be an incurrence as of the date of such
redesignation by the Company and its Restricted Subsidiaries of the Indebtedness
(if any) of such redesignated Subsidiary for purposes of "--Limitation on
Incurrence of Additional Indebtedness" above, and (ii) unless such redesignated
Subsidiary shall not have any Indebtedness outstanding (other than Permitted
Indebtedness), no such designation shall be permitted if immediately after
giving effect to such redesignation and the incurrence of any such additional
Indebtedness, the Company could not incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to "--Limitation on Incurrence of
Additional Indebtedness" above.
The Board of Directors of the Company also may, if no Default or
Event of Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under "--Limitation on Restricted
Payments" above and (ii) immediately after giving effect to such designation,
the Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to "--Limitation of Incurrence of Additional
Indebtedness" above. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by the filing with the Trustee of a
certified copy of the resolution of the Board of Directors of the Company giving
effect to such designation or redesignation and an officers' certificate
certifying that such designation or redesignation complied with the foregoing
conditions and setting forth in reasonable detail the underlying calculations.
The Indenture provides that for purposes of the covenant described
under "--Limitation on Restricted Payments" above, (i) an "Investment" shall be
deemed to have been made at the time any Restricted Subsidiary of the Company is
designated as an Unrestricted Subsidiary in an amount (proportionate to the
Company's equity interest in such Subsidiary) equal to the net worth of such
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
as an Unrestricted Subsidiary; (ii) at any date, the aggregate amount of all
Restricted Payments made as Investments since the Issue Date shall exclude and
be reduced by an amount (proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated as a Restricted Subsidiary, not
to exceed, in the case of any such redesignation of an Unrestricted Subsidiary
as a Restricted Subsidiary, the amount of Investments previously made by the
Company and its Restricted Subsidiaries in such Unrestricted Subsidiary (in each
case (i) and (ii), "net worth" is to be calculated based upon the fair market
value of the assets of such Subsidiary as of any such date of designation); and
(iii) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer.
The Indenture provides that notwithstanding the foregoing, the Board
of Directors of the Company may not designate any Restricted Subsidiary of the
Company to be an Unrestricted Subsidiary if, after any such designation, (a) the
Company or any Restricted Subsidiary of the Company (i) provides credit support
for, or a guarantee of, any Indebtedness of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness) or (ii) is
directly or indirectly liable for any Indebtedness of such Subsidiary or (b)
such Subsidiary owns any Capital Stock of, or holds any Lien on any property of,
the Company or any Restricted Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated.
The Indenture provides that Subsidiaries of the Company that are not
designated by the Board of Directors of the Company as Restricted or
Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries of the
Company. Notwithstanding the foregoing, all Subsidiaries of an Unrestricted
Subsidiary will be Unrestricted Subsidiaries.
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Limitation on Asset Sales. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(i) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as determined in good
faith by the Company's Board of Directors), (ii) at least 75% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, from such Asset Sale shall be in the form of cash or Cash Equivalents
and is received at the time of such disposition; and (iii) upon the consummation
of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary
to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of
receipt thereof either (A) to prepay any Senior Indebtedness and, in the case of
any Senior Indebtedness under any revolving credit facility, effect a permanent
reduction in the commitment available under such revolving credit facility, (B)
to make an investment in properties and assets that replace the properties and
assets that were the subject of such Asset Sale or in properties and assets that
will be used in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related or complementary
thereto (as determined in good faith by the Company's Board of Directors)
("Replacement Assets"), or (C) a combination of prepayment and investment
permitted by the foregoing clauses (iii)(A) and (iii)(B). Pending final
application, the Company or the applicable Restricted Subsidiary may temporarily
reduce Indebtedness under any revolving credit facility or invest in cash or
Cash Equivalents. On the 361st day after an Asset Sale or such earlier date, if
any, as the Board of Directors of the Company or of such Restricted Subsidiary
determines not to apply the Net Cash Proceeds relating to such Asset Sale as set
forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence
(each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash
Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each, a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than
30 nor more than 45 days following the applicable Net Proceeds Offer Trigger
Date, from all Holders on a pro rata basis, that amount of Notes equal to the
Net Proceeds Offer Amount at a price equal to 100% of the principal amount of
the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to
the date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary of the
Company, as the case may be, in connection with any Asset Sale is converted into
or sold or otherwise disposed of for cash (other than interest received with
respect to any such non-cash consideration), then such conversion or disposition
shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds
thereof shall be applied in accordance with this covenant. The Company or any
such Restricted Subsidiary of the Company, as the case may be, may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount
equal to or in excess of $5.0 million resulting from one or more Asset Sales (at
which time, the entire unutilized Net Proceeds Offer Amount, and not just the
amount in excess of $5.0 million, shall be applied as required pursuant to this
paragraph).
Notwithstanding the immediately preceding paragraph, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraph to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and/or Cash
Equivalents and (ii) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets received by
the Company or any of its Restricted Subsidiaries in connection with any Asset
Sale permitted to be consummated under this paragraph shall constitute Net Cash
Proceeds subject to the provisions of the preceding paragraph.
Notice of each Net Proceeds Offer will be mailed to the record
Holders as shown on the register of Holders within 25 days following the Net
Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with
the procedures set forth in the Indenture. Upon receiving notice of the Net
Proceeds Offer, Holders may elect to tender their Notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender Notes in an amount exceeding the Net Proceeds Offer Amount,
Notes of tendering Holders will be purchased on a pro rata basis (based on
amounts tendered). A Net Proceeds Offer shall remain open for a period of 20
business days or such longer period as may be required by law. To the extent the
amount of Notes tendered is less than the offer amount, the Company may use the
remaining Net Proceeds Offer Amount for general corporate purposes and such Net
Proceeds Offer Amount shall be reset to zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with
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the "Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) the Credit Agreement; (4)
non-assignment provisions of any contract or any lease governing a leasehold
interest of any Restricted Subsidiary of the Company; (5) any instrument
governing Acquired Indebtedness, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or the properties or assets of the Person so acquired; (6) agreements
existing on the Issue Date to the extent and in the manner such agreements are
in effect on the Issue Date; or (7) an agreement governing Indebtedness incurred
to Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (3), (5) or (6) above; provided, however,
that the provisions relating to such encumbrance or restriction contained in any
such Indebtedness are no less favorable to the Company in any material respect
as determined by the Board of Directors of the Company in their reasonable and
good faith judgment than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (2), (3), (5) or
(6), respectively.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
will not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or permit or suffer to exist any Liens of any kind against or upon
any property or assets of the Company or any of its Restricted Subsidiaries
(whether owned on the Issue Date or acquired after the Issue Date), or any
proceeds therefrom, or assign or otherwise convey any right to receive income or
profits therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes or any
Guarantee, the Notes and such Guarantee, as the case may be, are secured by a
Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes and the Guarantees are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing Senior Indebtedness; (C) Liens securing the Notes and the Guarantees;
(D) Liens of the Company or a Wholly Owned Restricted Subsidiary of the Company
on assets of any Restricted Subsidiary of the Company; (E) Liens securing
Refinancing Indebtedness which is incurred to Refinance any Indebtedness which
has been secured by a Lien permitted under the Indenture and which has been
incurred in accordance with the provisions of the Indenture; provided, however,
that such Liens (1) are no less favorable to the Holders and are not more
favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced and (2) do not extend to or cover
any property or assets of the Company or any of its Subsidiaries not securing
the Indebtedness so Refinanced (other than property or assets subject to Liens
under clause (B) above); and (F) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company
will not, and will not permit any Subsidiary Guarantor to, incur or suffer to
exist Indebtedness that by its terms (or by the terms of any agreement governing
such Indebtedness) is senior in right of payment to the Notes and subordinate in
right of payment to any other Indebtedness of the Company or such Subsidiary
Guarantor, as the case may be.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and its Restricted Subsidiaries) unless: (i) either (1) the Company shall be the
surviving or continuing corporation or (2) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale,
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assignment, transfer, lease, conveyance or other disposition the properties and
assets of the Company and its Restricted Subsidiaries substantially as an
entirety (the "Surviving Entity") (x) shall be a corporation organized and
validly existing under the laws of the United States or any State thereof or the
District of Columbia and (y) shall expressly assume, by supplemental indenture
(in form and substance satisfactory to the Trustee), executed and delivered to
the Trustee, the due and punctual payment of the principal of, premium, if any,
and interest on all of the Notes and the performance of every covenant of the
Notes, the Indenture and the Registration Rights Agreement on the part of the
Company to be performed or observed, as the case may be; (ii) immediately after
giving effect to such transaction and the assumption contemplated by clause
(i)(2)(y) above (including giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the case
may be, (1) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction and
(2) shall be able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "--Limitation on Incurrence of
Additional Indebtedness" covenant; (iii) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred
and any Lien granted in connection with or in respect of the transaction), no
Default or Event of Default shall have occurred or be continuing; and (iv) the
Company or the Surviving Entity, as the case may be, shall have delivered to the
Trustee an officer's certificate and an opinion of counsel, each stating that
such consolidation, merger, sale, assignment, transfer, lease, conveyance or
other disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
The Indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "--Limitation on Asset Sales") will not, and
the Company will not cause or permit any Subsidiary Guarantor to, consolidate
with or merge with or into any Person other than the Company or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary unless: (a)
the entity formed by or surviving any such consolidation or merger (if other
than the Subsidiary Guarantor) or to which such sale, lease, conveyance or other
disposition shall have been made is a corporation organized and existing under
the laws of the United States or any state thereof or the District of Columbia;
(b) such entity assumes by execution of a supplemental indenture all of the
obligations of the Subsidiary Guarantor under its Guarantee; (c) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis, the
Company could satisfy the provisions of clause (ii) of the first paragraph of
this covenant. Any merger or consolidation of a Subsidiary Guarantor with and
into the Company (with the Company being the surviving entity) or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary need only
comply with clause (iv) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will
not, and will not cause or permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction or series
of related transactions (including, without limitation, the purchase, sale,
lease or exchange of any property or the rendering of any service) with, or for
the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than (x) Affiliate Transactions permitted under paragraph (b) below and (y)
Affiliate Transactions on terms that are no less favorable to the Company than
those that might reasonably have been obtained or are obtainable in a comparable
transaction at such time on an arm's-length basis from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary. All Affiliate
Transactions (and each
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series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $5.0 million shall be approved by the Board of Directors of the
Company or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary of the Company enters into an Affiliate
Transaction (or a series of related Affiliate Transactions related to a common
plan) involving aggregate payments or other property with a fair market value in
excess of $10.0 million, the Company or such Restricted Subsidiary, as the case
may be, shall, prior to the consummation thereof, obtain a favorable opinion as
to the fairness of such transaction or series of related transactions to the
Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees, consultants or agents of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management; (ii) transactions between or
among the Company and any of its Wholly Owned Restricted Subsidiaries or between
or among such Wholly Owned Restricted Subsidiaries or between the Company and/or
any Wholly Owned Restricted Subsidiary and Automotive Safety Components
Asia-Pacific Ltd., provided such transactions are not otherwise prohibited by
the Indenture; (iii) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction contemplated thereby (including pursuant to
any amendment thereto) or in any replacement agreement thereto so long as any
such amendment or replacement agreement is not more disadvantageous to the
Holders in any material respect than the original agreement as in effect on the
Issue Date; and (iv) Restricted Payments permitted by the Indenture.
Additional Subsidiary Guarantees. If the Company or any of its
Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Restricted
Subsidiary that is not a Subsidiary Guarantor or a Foreign Subsidiary, or if the
Company or any of its Restricted Subsidiaries shall organize, acquire or
otherwise invest in another Restricted Subsidiary that is not a Foreign
Subsidiary, then such transferee or acquired or other Restricted Subsidiary
shall (a) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(b) deliver to the Trustee an opinion of counsel stating that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and enforceable obligation of
such Restricted Subsidiary; provided, however that any Restricted Subsidiary
acquired on or after the Issue Date which is prohibited from entering into a
Guarantee pursuant to restrictions contained in any debt instrument or other
agreement in existence at the time such Restricted Subsidiary was so acquired
and was not entered into in anticipation or contemplation of such acquisition
shall not be required to become a Subsidiary Guarantor so long as any such
restriction is in existence and to the extent of such restriction. After the
execution and delivery of such supplemental indenture, such Restricted
Subsidiary shall be a Subsidiary Guarantor for all purposes of the Indenture.
Conduct of Business. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, engage in any businesses other
than the businesses in which the Company is engaged on the Issue Date, giving
effect to the JPS Acquisition, and any businesses reasonably related or
complementary thereto (as determined in good faith by the Company's Board of
Directors).
Reports to Holders. The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies of the quarterly
and annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and the Holders with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of
314(a) of the TIA.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of
Default":
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(i) the failure to pay interest (including Additional
Interest, if any) on any Notes when the same becomes due and payable
and the default continues for a period of 30 days (whether or not
such payment shall be prohibited by the subordination provisions of
the Indenture);
(ii) the failure to pay the principal on any Notes, when
such principal becomes due and payable, at maturity, upon
acceleration, upon redemption or otherwise (including the failure to
make a payment to purchase Notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer) (whether or not such payment
shall be prohibited by the subordination provisions of the
Indenture);
(iii) a default in the observance or performance of any
other covenant or agreement contained in the Indenture which default
continues for a period of 30 days after the Company receives written
notice specifying the default (and demanding that such default be
remedied) from the Trustee or the Holders of at least 25% of the
outstanding principal amount of the Notes (except in the case of a
default with respect to the "Merger, Consolidation and Sale of
Assets" covenant, which will constitute an Event of Default with such
notice requirement but without such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to
any applicable grace periods and any extensions thereof) the
principal amount of any Indebtedness of the Company or any Restricted
Subsidiary of the Company, or the acceleration of the final stated
maturity of any such Indebtedness if the aggregate principal amount
of such Indebtedness, together with the principal amount of any other
such Indebtedness in default for failure to pay principal at final
maturity or which has been accelerated, aggregates $5.0 million or
more at any time;
(v) one or more judgments in an aggregate amount in excess
of $5.0 million shall have been rendered against the Company or any
of its Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or
any of its Significant Subsidiaries;
(vii) any of the Guarantees cease to be in full force and
effect or any of the Guarantees are declared to be null and void or
invalid and unenforceable or any of the Subsidiary Guarantors denies
or disaffirms its liability under its Guarantees (other than by
reason of release of a Subsidiary Guarantor in accordance with the
terms of the Indenture).
If an Event of Default (other than an Event of Default specified in
clause (vi) above) shall occur and be continuing, the Trustee or the Holders of
at least 25% in principal amount of outstanding Notes may declare the principal
of and accrued interest on all the Notes to be due and payable by notice in
writing to the Company and the Trustee specifying the respective Event of
Default and that it is a "notice of acceleration" (the "Acceleration Notice"),
and the same shall become immediately due and payable. If an Event of Default
specified in clause (vi) above occurs and is continuing, then all unpaid
principal of and premium, if any, and accrued and unpaid interest on all of the
outstanding Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in aggregate principal amount of the Notes may rescind
and cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of such acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
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The Holders of a majority in aggregate principal amount of the Notes
may waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Notes.
Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture and under the TIA. Subject to the provisions
of the Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes, except
for (i) the rights of Holders to receive payments in respect of the principal
of, premium, if any, and interest on the Notes when such payments are due, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (iii) the rights, powers,
trust, duties and immunities of the Trustee and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Subsidiary Guarantors, if any, released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders cash in United States dollars, non-callable United States
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; provided, however, such opinion of counsel will not
be required if all the Notes will become due and payable on the maturity date
within one year or are to be called for redemption within one year under
arrangements satisfactory to the Trustee; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit (other than a Default or Event of Default resulting from the
incurrence of Indebtedness all or a portion of the proceeds of which will be
used to defease the Notes); (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or
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violation of, or constitute a default under, the Indenture or any other material
agreement or instrument to which the Company or any of its Restricted
Subsidiaries is a party or by which the Company or any of its Restricted
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance, as the case may be, have been complied with; (viii)
the Company shall have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (ix)
certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
the Notes, as expressly provided for in the Indenture) as to all outstanding
Notes when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Subsidiary Guarantors and the
Trustee, without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, so
long as such change does not, in the opinion of the Trustee, adversely affect
the rights of any of the Holders in any material respect. In formulating its
opinion on such matters, the Trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion of
counsel. Other modifications, waivers and amendments of the Indenture may be
made with the consent of the Holders of a majority in principal amount of the
then outstanding Notes issued under the Indenture, except that, without the
consent of each Holder affected thereby, no amendment or waiver may: (i) reduce
the amount of Notes whose Holders must consent to an amendment; (ii) reduce the
rate of or change or have the effect of changing the time for payment of
interest, including defaulted interest, on any Notes; (iii) reduce the principal
of or change or have the effect of changing the fixed maturity of any Notes, or
change the date on which any Notes may be subject to redemption or repurchase,
or reduce the redemption or repurchase price therefor; (iv) make any Notes
payable in money other than that stated in the Notes; (v) make any change in
provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Notes to waive Defaults or Events of Default;
(vi) amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or make and consummate a Net Proceeds Offer with respect to
any Asset Sale that has been consummated or modify any of the provisions or
definitions with respect thereto; (vii) modify or change any provision of the
Indenture or the related definitions affecting the subordination or ranking of
the Notes or any Guarantee in a manner which adversely affects the Holders in
any material respect; or (viii) release any Subsidiary Guarantor from any of its
obligations under its Guarantee or the Indenture other than in accordance with
the terms of the Indenture.
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GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees are
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an
Event of Default, the Trustee will perform only such duties as are specifically
set forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it by the Indenture, and
use the same degree of care and skill in its exercise as a prudent man or woman
would exercise or use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain
limitations on the rights of the Trustee, should it become a creditor of the
Company or a Subsidiary Guarantor, to obtain payments of claims in certain cases
or to realize on certain property received in respect of any such claim as
security or otherwise. Subject to the TIA, the Trustee will be permitted to
engage in other transactions; provided, however, that if the Trustee acquires
any conflicting interest as described in the TIA, it must eliminate such
conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness " means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
such Person or at the time it merges or consolidates with such Person or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person, and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of such Person or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls or
is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; provided, however,
that Asset Sales shall not include (i) any transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $3.0 million in any consecutive 12-month
period, (ii) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company as permitted under "Merger,
Consolidation and Sale of Assets" or any disposition that constitutes a Change
of Control, (iii) disposals or replacements of obsolete equipment in the
ordinary course of business, and (iv) the sale, lease,
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conveyance, disposition or other transfer by the Company or any Restricted
Subsidiary of assets or property to one or more Wholly Owned Restricted
Subsidiaries in connection with Investments permitted under the "Limitations on
Restricted Payments" covenant.
"Board of Directors" means, as to any Person, the board of directors
of such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be classified and
accounted for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether voting or nonvoting) of corporate stock,
including each class of Common Stock and Preferred Stock of such Person and (ii)
with respect to any Person that is not a corporation, any and all partnership or
other equity interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-l from S&P or at least P-l from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) money market funds which
invest substantially all their assets in securities of the types described in
clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture); (ii) the approval by the holders of Capital Stock of the Company of
any plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture); (iii) any
Person or Group other than the Permitted Holder or a Group controlled by the
Permitted Holder shall become the owner, directly or indirectly, beneficially or
of record, of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Capital Stock of the Company; or
(iv) the replacement of a majority of the Board of Directors of the Company from
the directors who constituted the Board of Directors of the Company on the Issue
Date, and such replacement shall not have been approved by a vote of at least a
majority of the Board of Directors of the Company then still in office who
either were members of such Board of Directors on the Issue Date or whose
election as a member of such Board of Directors was previously so approved.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such Person's common stock, whether
outstanding on the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
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"Consolidated EBITDA" means, with respect to any Person for any
period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to
the extent Consolidated Net Income has been reduced thereby, (A) all income
taxes of such Person and its Restricted Subsidiaries paid or accrued in
accordance with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses or taxes attributable to
sales or dispositions outside the ordinary course of business), (B) Consolidated
Interest Expense and (C) Consolidated Non-cash Charges less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in accordance
with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any pro forma expense and cost reductions
calculated on a basis consistent with Regulation S-X under the Securities Act as
in effect on the Issue Date) (provided that such Consolidated EBITDA shall be
included only to the extent includable pursuant to the definition of
"Consolidated Net Income" attributable to the assets which are the subject of
the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such Asset
Sale or Asset Acquisition (including the incurrence, assumption or liability for
any such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for
any period, the sum, without duplication, of (i) Consolidated Interest Expense,
plus (ii) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of such Person (other than dividends paid in Qualified
Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the denominator
of which is one minus the then current effective consolidated federal, state and
local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
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accrued by such Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP, minus amortization
or write-off of deferred financing costs.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom (a) gains
(and losses) on an after-tax effected basis from asset sales or abandonments or
reserves relating thereto, (b) items classified as extraordinary or nonrecurring
gains or losses (including, without limitation, restructuring costs related to
facilities and/or operating line closings) on an after tax effected basis, (c)
the net income or loss of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary of the
referent Person or is merged or consolidated with the referent Person or any
Restricted Subsidiary of the referent Person, (d) the net income (but not loss)
of any Restricted Subsidiary of the referent Person to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income or loss of any other Person, other than a Subsidiary of the
referent Person, except to the extent (in the case of net income) of cash
dividends or distributions paid to the referent Person, or to a Wholly Owned
Restricted Subsidiary of the referent Person, by such other Person, (f) any
restoration to income of any contingency reserve of an extraordinary,
non-recurring or unusual nature, except to the extent that provision for such
reserve was made out of Consolidated Net Income accrued at any time following
the Issue Date, (g) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during such period
whether or not such operations were classified as discontinued), (h) in the case
of a successor to the referent Person by consolidation or merger or as a
transferee of the referent Person's assets, any earnings of the successor
corporation prior to such consolidation, merger or transfer of assets and (i)
any amortization or write-off of deferred financing costs.
"Consolidated Net Worth " means, with respect to any Person, the
consolidated stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts attributable
to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person for
any period, the aggregate (A) depreciation, (B) amortization, (C) LIFO charges,
(D) the amount of any restructuring reserve or charge, and (E) other non-cash
charges of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding for
purposes of clause (C) any such charges which require an accrual of or a reserve
for cash charges for any future period).
"Credit Agreement" means the Credit Agreement dated as of May 21,
1997 among the Company, Phoenix Airbag GmbH and Automotive Safety Components
International, Inc., and as such agreement may be further amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided, however, that such increase in
borrowings is permitted by the "Limitation on Incurrence of Additional
Indebtedness" covenant above) or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Senior Indebtedness" means (i) Indebtedness under or in
respect of the Credit Agreement and (ii) any other Indebtedness constituting
Senior Indebtedness or Guarantor Senior Indebtedness which, at the time of
determination, has an aggregate principal amount of at least $2.0 million and is
specifically designated in the instrument evidencing such Senior Indebtedness as
"Designated Senior Indebtedness" or "Guarantor Senior Indebtedness" by the
Company or the applicable Subsidiary Guarantor, as the case may be.
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"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (other than as a result of a Change of Control) on or prior to the final
maturity of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the Issue Date, until such amounts are repaid.
"Fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of the
Board of Directors of the Company.
"Foreign Subsidiary" means any Subsidiary of the Company organized
under the laws of a country or jurisdiction other than the United States, any
state or territory thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are in effect on the Issue
Date.
"Guarantor Senior Indebtedness" means, with respect to any Subsidiary
Guarantor, the principal of, premium, if any, and interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at the
rate provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on any Indebtedness of such
Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Guarantor Senior Indebtedness" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, to the extent such interest is an
allowed claim under applicable law) on, and all other amounts owing in respect
of, (x) all monetary obligations of every nature of a Subsidiary Guarantor under
the Credit Agreement, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit, fees,
expenses and indemnities, (y) all Interest Swap Obligations and (z) all
obligations under Currency Agreements, in each case whether outstanding on the
Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) any Indebtedness of a Subsidiary Guarantor
to a Subsidiary of such Subsidiary Guarantor or any Affiliate of such Subsidiary
Guarantor or any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or
guaranteed on behalf of, any shareholder, director, officer or employee of the
Company or any Subsidiary of the Company (including, without limitation, amounts
owed for compensation), (iii) Indebtedness to trade creditors and other amounts
incurred in connection with obtaining goods, materials or services, (iv)
Indebtedness represented by Disqualified Capital Stock, (v) any liability for
federal, state, local or other taxes owed or owing by the Company, (vi)
Indebtedness incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code is without recourse to the Company and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of a Subsidiary Guarantor.
"Holder" means any holder of Notes.
"Indebtedness" means, with respect to any Person, without
duplication, (i) all Obligations of such Person for borrowed money, (ii) all
Obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all Capitalized Lease Obligations of such Person,
(iv) all Obligations of such Person issued or assumed as the deferred
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purchase price of property, all conditional sale obligations and all Obligations
under any title retention agreement (but excluding trade accounts payable and
other accrued liabilities arising in the ordinary course of business that are
not overdue by 90 days or more or are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted), (v) all
Obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) guarantees and other
contingent obligations in respect of Indebtedness referred to in clauses (i)
through (v) above and clause (viii) below, (vii) all Obligations of any other
Person of the type referred to in clauses (i) through (vi) which are secured by
any lien on any property or asset of such Person, the amount of such Obligation
being deemed to be the lesser of the fair market value of such property or asset
or the amount of the Obligation so secured, (viii) all Obligations under
currency agreements and interest swap agreements of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect material financial interest in the Company and (ii) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Interest Swap Obligations " means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" means, with respect to any Person, any direct or
indirect loan or other extension of credit (including, without limitation, a
guarantee) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition by such Person of any Capital
Stock, bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit by
the Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; provided, however, that no such payment of dividends or
distributions or receipt of any such other amounts shall reduce the amount of
any Investment if such payment of dividends or distributions or receipt of any
such amounts would be included in Consolidated Net Income. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Common
Stock of any direct or indirect Restricted Subsidiary of the Company such that,
after giving effect to any such sale or disposition, the Company no longer owns,
directly or indirectly, greater than 50% of the outstanding Common Stock of such
Restricted Subsidiary, the Company shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of the
Common Stock of such former Restricted Subsidiary not sold or disposed of.
"Issue Date" means July 24, 1997.
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
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"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holder" means Robert A. Zummo and his Affiliates.
"Permitted Indebtedness" means, without duplication, each of the
following and the Guarantees:
(i) Indebtedness under the Notes issued on the Issue Date
and the Guarantees outstanding on the Issue Date;
(ii) Indebtedness incurred pursuant to the Credit Agreement
in an aggregate principal amount at any time outstanding not to
exceed $27.0 million in the aggregate reduced by any required
permanent repayments pursuant to the provisions set forth under
"Certain Covenants--Limitation on Asset Sales" (which are accompanied
by a corresponding permanent commitment reduction) thereunder (it
being recognized that a reduction in the borrowing base in and of
itself shall not be deemed a required permanent repayment);
(iii) Interest Swap Obligations of the Company covering
Indebtedness of the Company or any of its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered
into to protect the Company and its Restricted Subsidiaries from
fluctuations in interest rates on Indebtedness incurred in accordance
with the Indenture to the extent the notional principal amount of
such Interest Swap Obligation does not exceed the principal amount of
the Indebtedness to which such Interest Swap Obligation relates;
(iv) Indebtedness under Currency Agreements; provided,
however, that in the case of Currency Agreements which relate to
Indebtedness, such Currency Agreements do not increase the
Indebtedness of the Company and its Restricted Subsidiaries
outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(v) Indebtedness of a Restricted Subsidiary to the Company
or to a Wholly Owned Restricted Subsidiary of the Company for so long
as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no
Liens held by any Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided, however, that if as
of any date any Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such
date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(vi) Indebtedness of the Company to a Wholly Owned
Restricted Subsidiary of the Company for so long as such Indebtedness
is held by a Wholly Owned Restricted Subsidiary of the Company, in
each case subject to no Lien; provided, however, that (a) any
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary
of the Company that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's
obligations under the Indenture and the Notes and (b) if as of any
date any Person other than a Wholly Owned Restricted Subsidiary of
the Company owns or holds any such Indebtedness or a Lien
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in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by
the Company;
(vii) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn
against insufficient funds in the ordinary course of business;
provided, however, that such Indebtedness is extinguished within two
business days of incurrence;
(viii) Indebtedness of the Company or any of its Restricted
Subsidiaries represented by letters of credit for the account of the
Company or such Restricted Subsidiary, as the case may be, in order
to provide security for workers' compensation claims, payment
obligations in connection with self-insurance or similar requirements
in the ordinary course of business;
(ix) Existing Indebtedness (including Indebtedness of the
Company and its Restricted Subsidiaries under the Notes issued on the
Issue Date) outstanding on the Issue Date;
(x) Additional Capitalized Lease Obligations and Purchase
Money Indebtedness of the Company or any of its Restricted
Subsidiaries not to exceed $10.0 million at any one time outstanding;
(xi) Refinancing Indebtedness;
(xii) Indebtedness permitted by clause (viii) of the
definition of "Permitted Investments"; and
(xiii) Additional Indebtedness in an aggregate principal
amount not to exceed $5.0 million at any one time outstanding.
"Permitted Investments " means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or Restricted Subsidiary of the
Company; (ii) Investments in the Company by any Restricted Subsidiary of the
Company; provided, however, that any Indebtedness evidencing such Investment by
a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) Investments in cash and Cash
Equivalents; (iv) loans and advances to employees and officers of the Company
and its Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $750,000 at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary
course of the Company's or its Restricted Subsidiaries' businesses and otherwise
in compliance with the Indenture; (vi) Investments in securities of trade
creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (vii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant; and (viii) additional
Investments in (A) unconsolidated joint ventures in businesses reasonably
related or complementary to those of the Company and its Restricted Subsidiaries
(as determined in good faith by the Company's Board of Directors) made in the
ordinary course of business and (B) Unrestricted Subsidiaries in an aggregate
amount for all such Investments made pursuant to this clause (viii) not to
exceed the amount which, when aggregated with Restricted Payments made under
clause (iii)(z) of "Certain Covenants--Limitation on Restricted Payments," does
not exceed $5.0 million.
"Permitted Liens" means the following types of Liens:
(i) Liens in favor of the Trustee in its capacity as
trustee for the Holders;
(ii) Liens securing Indebtedness outstanding under the
Credit Agreement;
(iii) Liens for taxes, assessments or governmental charges
or claims either (a) not delinquent or (b) contested in good faith by
appropriate proceedings and as to which the Company or its Restricted
Subsidiaries shall have set aside on its books such reserves as may
be required pursuant to GAAP;
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(iv) Statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required
by GAAP shall have been made in respect thereof;
(v) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment
insurance and other types of social security, including any Lien
securing letters of credit issued in the ordinary course of business
consistent with past practice in connection therewith, or to secure
the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money);
(vi) Judgment Liens not giving rise to an Event of Default
so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such
judgment shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
(vii) Easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of its Restricted Subsidiaries;
(viii) Any interest or title of a lessor under any
Capitalized Lease Obligation; provided, however, that such Liens do
not extend to any property or assets which is not leased property
subject to such Capitalized Lease Obligation;
(ix) Liens to secure Purchase Money Indebtedness of the
Company or any Restricted Subsidiary of the Company; provided,
however, that (A) the related Purchase Money Indebtedness shall not
exceed the cost of such property or assets and shall not be secured
by any property or assets of the Company or any Restricted Subsidiary
of the Company other than the property and assets so acquired and (B)
the Lien securing such Indebtedness shall be created within 90 days
of such acquisition;
(x) Liens upon specific items of inventory or other goods
and proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the account of
such Person to facilitate the purchase, shipment or storage of such
inventory or other goods;
(xi) Liens securing reimbursement obligations with respect
to commercial letters of credit which encumber documents and other
property relating to such letters of credit and products and proceeds
thereof;
(xii) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty
requirements of the Company or any of its Restricted Subsidiaries,
including rights of offset and set-off;
(xiii) Liens securing Interest Swap Obligations which
Interest Swap Obligations relate to Indebtedness that is otherwise
permitted under the Indenture;
(xiv) Liens securing Indebtedness under Currency
Agreements; and
(xv) Liens securing Acquired Indebtedness incurred in
accordance with the "Limitation on Incurrence of Additional
Indebtedness" covenant; provided, however, that (A) such Liens
secured such Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of
the Company and (B) such Liens do not extend to or cover any property
or assets of the Company or of any of its Restricted Subsidiaries
other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the
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Company or a Restricted Subsidiary of the Company and are no more
favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company.
"Person" means an individual, partnership, corporation,
unincorporated organization, trust or joint venture, or a governmental agency or
political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such
Person that has preferential rights to any other Capital Stock of such Person
with respect to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness " means Indebtedness the net proceeds of
which are used to finance the cost (including the cost of construction) of
property or assets acquired in the normal course of business by the Person
incurring such Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Receivables" means any right of payment from or on behalf of any
obligor, whether constituting an account, chattel paper, instrument, general
intangible or otherwise, arising from the financing by the Company or any
Restricted Subsidiary of the Company of merchandise or services, and monies due
thereunder, security in the merchandise and services financed thereby, records
related thereto, and the right to payment of any interest or finance charges and
other obligations with respect thereto, proceeds from claims on insurance
policies related thereto, any other proceeds related thereto, and any other
related rights.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or
any Restricted Subsidiary of the Company of Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant (other
than pursuant to clauses (ii), (iii), (iv), (v), (vi), (vii), (viii), (x), (xi),
(xii) or (xiii) of the definition of Permitted Indebtedness), in each case that
does not (1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company or such Restricted Subsidiary, as the case may be, in connection
with such Refinancing), except to the extent that any such increase in
Indebtedness is otherwise permitted by the Indenture or (2) create Indebtedness
with (A) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or (B) a final
maturity earlier than the final maturity of the Indebtedness being Refinanced;
provided, however, that (x) if such Indebtedness being Refinanced is
Indebtedness of the Company, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced
is subordinate or junior to the Notes, then such Refinancing Indebtedness shall
be subordinate to the Notes at least to the same extent and in the same manner
as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of the Issue Date among the Company, the Subsidiary
Guarantors and the Initial Purchasers.
"Representative" means the indenture trustee or other trustee, agent
or representative in respect of any Designated Senior Indebtedness; provided,
however, that if, and for so long as, any Designated Senior Indebtedness lacks
such a representative, then the Representative for such Designated Senior
Indebtedness shall at all times constitute the holders of a majority in
outstanding principal amount of such Designated Senior Indebtedness in respect
of any Designated Senior Indebtedness.
"Restricted Subsidiary" means, with respect to any Person, any
Subsidiary of such Person which at the time of determination is not an
Unrestricted Subsidiary.
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"Sale and Leaseback Transaction " means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of the Company of any
property, whether owned by the Company or any Restricted Subsidiary of the
Company at the Issue Date or later acquired, which has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such Person or to
any other Person from whom funds have been or are to be advanced by such Person
on the security of such property.
"Senior Indebtedness" means the principal of, premium, if any, and
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on any Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, to the extent such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Indebtedness" shall
not include (i) any Indebtedness of the Company to a Subsidiary of the Company
or any Affiliate of the Company or any of such Affiliate's Subsidiaries, (ii)
Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer
or employee of the Company or any Subsidiary of the Company (including, without
limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or owing
by the Company, (vi) Indebtedness incurred in violation of the Indenture
provisions set forth under "Limitation on Incurrence of Additional
Indebtedness," (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code is without
recourse to the Company and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of the
Company.
"Significant Subsidiary" shall have the meaning set forth in Rule
1.02(w) of Regulation S-X under the Securities Act.
"Subsidiary" means, with respect to any Person, (i) any corporation
of which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means (a) each of the Company's Restricted
Subsidiaries as of the Issue Date other than the Foreign Subsidiaries and (b)
each of the Company's Restricted Subsidiaries that in the future executes a
supplemental indenture in which such Restricted Subsidiary agrees to be bound by
the terms of the Indenture as a Subsidiary Guarantor; provided, however, that
any Person constituting a Subsidiary Guarantor as described above shall cease to
constitute a Subsidiary Guarantor when its Guarantee is released in accordance
with the terms of the Indenture.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with "Certain
Covenants--Limitation on Restricted and Unrestricted Subsidiaries" above. Any
such designation may be revoked by a Board Resolution of the Company delivered
to the Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
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"Wholly Owned Restricted Subsidiary" means, with respect to any
Person, any Restricted Subsidiary of such Person of which all the outstanding
voting securities normally entitled to vote in the election of directors are
owned by such Person or any Wholly Owned Restricted Subsidiary of such Person.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on July 24, 1997 to
the Initial Purchasers pursuant to the Purchase Agreement, dated as of July 21,
1994, by and among the Initial Purchasers, the Company and the Guarantors (the
"Purchase Agreement"). The Initial Purchasers subsequently resold the Old Notes
(i) within the United States to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and (ii) to a limited number of institutional
"accredited investors," within the meaning of Rule 501(a) (1), (2), (3) or (7)
under the Securities Act, that agreed in writing to comply with certain transfer
restrictions and other conditions. As a condition to the Purchase Agreement, the
Company, the Guarantors and the Initial Purchasers entered into the Registration
Rights Agreement on the Issue Date pursuant to which the Company agreed, for the
benefit of the holders, that it will at its expense (i) within 30 days after the
Issue Date (the "Filing Date"), file a registration statement on an appropriate
registration form (the "Exchange Offer Registration Statement") with the
Commission with respect to a registered offer (the "Exchange Offer") to exchange
the Old Notes for notes of the Company (the "Exchange Notes"), guaranteed by the
Guarantors, which Exchange Notes will have terms identical to the Old Notes
(except (A) the Exchange Notes will bear a Series B designation and a different
CUSIP Number from the Old Notes, (B) the issuance of the Exchange Notes will
have been registered under the Securities Act and, therefore, the Exchange Notes
will not bear legends restricting the transfer thereof and (C) holders of the
Exchange Notes will not be entitled to certain rights of holders of Old Notes
under the Registration Rights Agreement) and (ii) use its best efforts to cause
the Exchange Offer Registration Statement to be declared effective under the
Securities Act within 105 days after the Issue Date. Upon the Exchange Offer
Registration Statement being declared effective, the Company and the Guarantors
will offer the Exchange Notes (and the related guarantees) in exchange for
surrender of the Old Notes (and the related guarantees). The Company and the
Guarantors will keep the Exchange Offer open for acceptance for not less than 20
business days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the holders of Old Notes. For each of the Old
Notes surrendered pursuant to the Exchange Offer, the holder who surrendered
such Old Note will receive an Exchange Note having a principal amount equal to
that of the surrendered Old Note. Interest on each Exchange Note will accrue
from the Issue Date.
Based on interpretations by the staff of the Commission set forth in
certain "no-action" letters issued to third parties and unrelated to the Company
and the Exchange Offer, the Company believes that Exchange Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act; provided, however, that each holder that
wishes to exchange its Old Notes for Exchange Notes will be required to
represent (i) that any Exchange Notes to be received by it will be acquired in
the ordinary course of its business, (ii) that at the time of the commencement
of the Exchange Offer it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of Securities Act) of the
Exchange Notes in violation of the Securities Act, (iii) that it is not an
"affiliate" (as defined in Rule 405 promulgated under the Securities Act) of the
Company, (iv) if such holder is not a Participating Broker-Dealer, that it is
not engaged in, and does not intend to engage in, the distribution of Exchange
Notes and (v) if such holder is a Participating Broker-Dealer that will receive
Exchange Notes for its own account in exchange for Old Notes that were acquired
as a result of market-making or other trading activities, that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes (other than a resale of an unsold allotment
from the original sale of the Old Notes) with the Prospectus contained in the
Exchange Offer Registration Statement. The Company and the Guarantors have
agreed to make available, during the period required by the Securities Act, a
prospectus meeting the requirements of the Securities Act for use by
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements for use in connection with any resale of such Exchange
Notes. In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdictions or an exemption
therefrom is available and complied with.
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If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company and the Guarantors
are not permitted to effect an Exchange Offer, (ii) the Exchange Offer is not
consummated within 135 days of the Issue Date, (iii) in certain circumstances,
certain holders of unregistered Exchange Notes so request, or (iv) in the case
of any holder that participates in the Exchange Offer, such holder does not
receive Exchange Notes on the date of the exchange that may be sold without
restriction under state and federal securities laws (other than due solely to
the status of such holder as an affiliate of the Company or any Guarantor within
the meaning of the Securities Act), then in each case, the Company and the
Guarantors will (x) promptly deliver to the holders and the Trustee written
notice (the "Shelf Notice") thereof and (y) at their sole expense, (a) as
promptly as practicable, file a shelf registration statement covering resales of
the Notes (the "Shelf Registration Statement"), (b) use their best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use their best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after the Issue Date or
such time as all of the applicable Notes have been sold thereunder. The Company
will, in the event that a Shelf Registration Statement is filed, provide to each
holder copies of the prospectus that it is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Notes has become effective and take certain other actions as are required to
permit unrestricted resales of the Notes. A holder that sells Notes pursuant to
the Shelf Registration Statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such
holder (including certain indemnification rights and obligations).
If the Company or the Guarantors fail to comply with the above
provision or if the Exchange Offer Registration Statement or the Shelf
Registration Statement fails to become effective, then, as liquidated damages,
additional interest (the "Additional Interest") shall become payable in respect
of the Notes as follows:
(i) if (A) neither the Exchange Offer Registration
Statement nor the Shelf Registration Statement is filed with the
Commission within 30 days following the Issue Date or (B)
notwithstanding that the Company and the Guarantors have consummated
or will consummate an Exchange Offer, the Company and the Guarantors
are required to file a Shelf Registration Statement and such Shelf
Registration Statement is not filed on or prior to the date required
by the Registration Rights Agreement, then commencing on the day
after either such required filing date, Additional Interest shall
accrue on the principal amount of the Notes at a rate of .50% per
annum for the first 90 days immediately following each such filing
date, such Additional Interest rate increasing by an additional .50%
per annum at the beginning of each subsequent 90-day period; or
(ii) if (A) neither the Exchange Offer Registration
Statement nor a Shelf Registration Statement is declared effective by
the Commission within 105 days following the Issue Date or (B)
notwithstanding that the Company and the Guarantors have consummated
or will consummate an Exchange Offer, the Company and the Guarantors
are required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the Commission on
or prior to the 76th day following the date such Shelf Registration
Statement was filed, then, commencing on the day after either such
required effective date, Additional Interest shall accrue on the
principal amount of the Notes at a rate of .50% per annum for the
first 90 days immediately following such date, such Additional
Interest rate increasing by an additional .50% per annum at the
beginning of each subsequent 90-day period; or
(iii) if (A) the Company and the Guarantors have not
exchanged Exchange Notes for all Old Notes validly tendered in
accordance with the terms of the Exchange Offer on or prior to the
45th day after the date on which the Exchange Offer Registration
Statement was declared effective or (B) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to
the second anniversary of the Issue Date (other than after such time
as all Notes have been disposed of thereunder), then Additional
Interest shall accrue on the principal amount of the Notes at a rate
of .50% per annum for the first 90 days commencing on (x) the 46th
day after such effective date, in the case of (A) above, or (y) the
day such Shelf Registration Statement ceases to be effective in the
case of (B) above, such Additional Interest rate increasing by an
additional .50% per annum at the beginning of each subsequent period;
provided, however, that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.0% per annum; provided, further, however, that (1) upon the
filing of the Exchange Offer Registration Statement or a Shelf Registration
Statement (in
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the case of clause (i) above), (2) upon the effectiveness of the Exchange Offer
Registration or a Shelf Registration Statement (in the case of clause (ii)
above), or (3) upon the exchange of Exchange Notes for all Old Notes tendered
(in the case of clause (iii) (A) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii) (B) above), Additional Interest on the Old Notes as a result of
such clause (or the relevant subclause thereof), as the case may be, shall cease
to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii)
or (iii) above will be payable in cash, on the same original interest payment
dates as the Old Notes.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and
terms of the Old Notes except that (i) the Exchange Notes bear a Series B
designation and a different CUSIP Number from the Old Notes, (ii) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the Exchange
Notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
terminated. The Exchange Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture. See "Description of the
Exchange Notes."
As of the date of this Prospectus, $90,000,000 aggregate principal
amount of Old Notes were outstanding. This Prospectus and the Letter of
Transmittal are being mailed to persons who were holders of Old Notes on the
close of business on the date of this Prospectus.
Holders of Old Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Exchange Offer. See "--Fees and Expenses."
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
on 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered Holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner, whether before or after any tender of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes will accrue from the Issue Date, i.e.,
July 24, 1997, payable semi-annually in arrears on each of January 15 and July
15 of each year, commencing January 15, 1998 at the rate of 10-1/8% per annum.
Holders whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any interest accrued on the Old Notes.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal and other required documents must be
completed and received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. Delivery of the Old Notes may be made by book-entry transfer in accordance
with the procedures described below. Confirmation of such book-entry transfer
must be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the second paragraph under the
heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
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Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
register holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution (as defined
below) unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantee must be by a member firm of
the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
offices of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to the Company of their authority to so act must be submitted with
the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time
of receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Issuer shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, a soon as practicable following the
Expiration Date.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes
are not immediately available, (ii) who cannot deliver their Old Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent or
(iii) who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(j) the tender is made through an Eligible Institution;
(k) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting
forth the name and address of the holder, the certificate number(s) of such Old
Notes and the principal amount of Old Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes (or a
confirmation of book-entry transfer of such Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(l) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal are
received by the Exchange Agent upon three New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Old
Notes properly tendered and will issue the Exchange Notes promptly after
acceptance of the Old Notes. See "Conditions" below. For purposes of the
Exchange Offer, the Company will be deemed to have accepted properly tendered
Old Notes for exchange when, as and if the Company has given oral or written
notice thereof to the Exchange Agent. For each Old Note accepted for exchange,
the holder of such Old Note will receive an Exchange Note having a principal
amount equal to that of the surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Notes or a
timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal and all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering holder thereof (for, in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
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To withdraw a tender of Old Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company
shall not be required to accept for exchange, or exchange Exchange Notes for,
any Old Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by any governmental agency which might materially impair the ability of the
Company or the Guarantors to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or the Guarantors;
(b) the Exchange Offer violates applicable law or any applicable
interpretation of the staff of the Commission; or
(c) any governmental approval has not been obtained, which approval
the Company and the Guarantors shall deem necessary for the consummation of the
Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions
with respect to the Exchange Offer and accept all properly tendered Old Notes
which have not been withdrawn. In addition, the Company has reserved the right,
notwithstanding the satisfaction of each of the foregoing conditions, to
terminate or amend the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered or accepted for exchange.
EXCHANGE AGENT
IBJ Schroder Bank and Trust Company, which also acts as Trustee under
the Indenture, has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed
Delivery should be directed to the Exchange Agent addressed as follows:
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<TABLE>
<S> <C> <C>
IBJ SCHRODER BANK & TRUST COMPANY
By Overnight Courier:
One State Street Plaza
New York, NY 10004
Attn: Securities Processing Window
Subcellar One (SC-1)
By Mail: By Facsimile Transmission By Hand:
P.O. Box 84 (for Eligible Institutions only): One State Street Plaza
Bowling Green Station (212) 858-2611 New York, NY 10004
New York, NY 10274-0084 Attn: Securities Processing
Attn: Reorganization Operations Confirm by Telephone: Window
Department (212) 858-2103 Subcellar One (SC-1)
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE
A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with
the Exchange Offer and will not make any payments to brokers, dealers or others
to solicit acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company. Such expenses include fees and expenses of
the Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Old Notes, which is face value, as reflected in the Company's accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Company. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Old
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Old Notes are eligible for resale pursuant to
Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
Following the consummation of the Exchange Offer, holders of the Old
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Old Notes will not have any further registration rights, except
with respect to a Shelf Registration Statement in the event that a Shelf Notice
is delivered by the Company, and such Old Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
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RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations
by the staff of the Commission set forth in certain "no-action" letters issued
to third parties and unrelated to the Company and the Exchange Offer, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes in violation of the provisions of the Securities Act.
However, if any holder acquires Exchange Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such "no-action" letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating
Broker-Dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. As contemplated by these "no-action"
letters and the Registration Rights Agreement, each holder accepting the
Exchange Offer is required to make certain representations to the Company in the
Letter of Transmittal. See "Purpose and Effect of Exchange Offer."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain United States federal income
and estate tax consequences to U.S. Holders and Non-U.S. Holders of the Exchange
Offer, and of owning and disposing of the Exchange Notes. The terms "U.S.
Holder" and "Non-U.S. Holder" refer, respectively, to persons that are or are
not classified as United States persons.
As used herein, the term "United States person" means a holder of an
Exchange Note who is a citizen or resident of the United States, or that is a
corporation or other entity taxable as a corporation created or organized in or
under the laws of the United States or any political subdivision thereof, an
estate the income of which is subject to United States federal income taxation
regardless of its source or a trust if (i) a U.S. court is able to exercise
primary supervision over the trust's administration and (ii) one or more U.S.
fiduciaries have the authority to control all of the trust's substantial
decisions.
This discussion does not deal with all aspects of United States
federal income and estate taxation that may be relevant to holders of the
Exchange Notes and does not deal with tax consequences arising under the laws of
any foreign, state or local jurisdiction. It is, moreover, based upon the
provisions of existing law on the date hereof, including, in particular, the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
promulgated thereunder and other administrative and judicial interpretations
thereof, all of which are subject to change at any time, with or without
retroactive effect. This discussion also generally assumes that each holder
holds the Exchange Notes as capital assets and that any amounts received by a
Non-U.S. Holder with respect to the Exchange Notes are not effectively connected
with the conduct by such Non-U.S. Holder of a trade or business in the United
States. Each prospective holder is advised to consult its own tax adviser with
respect to current and possible future tax consequences of acquiring, holding
and disposing of the Exchange Notes.
THE EXCHANGE OFFER
The exchange of Old Notes for Exchange Notes pursuant to the Exchange
Offer should not be a taxable event for United States federal income tax
purposes, because under existing Treasury regulations, the Exchange Notes will
not differ materially in kind or extent from the Old Notes. Accordingly, such
exchange will not result in taxable income, gain or loss to a holder, or to the
Company. A holder which participates in the Exchange Offer shall have the same
tax basis and holding period in the Exchange Notes immediately after the
exchange as such holder had in the Old Notes immediately prior to the exchange.
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U.S. HOLDERS
Interest on the Exchange Notes. Interest on an Exchange Note will be
taxable to a U.S. Holder as ordinary interest income in accordance with the U.S.
Holder's method of tax accounting at the time that such interest is accrued or
(actually or constructively) received.
Premium and Market Discount. A U.S. Holder of an Exchange Note
purchased at a premium (i.e., a cost greater than its principal amount) may
elect to amortize such premium (as an offset to interest income), using a
constant-yield method, over the remaining term of the Exchange Note. Special
rules apply which may require the amount of premium and the amortization thereof
to be determined with reference to the optional redemption price and date. A
U.S. Holder that elects to amortize such premium must reduce its tax basis in an
Exchange Note by the amount of the premium amortized during the holding period.
With respect to a U.S. Holder that does not elect to amortize bond premium, the
amount of bond premium will continue to be reflected in the U.S. Holder's tax
basis. Therefore, a U.S. Holder that does not elect to amortize such premium,
and that holds the Exchange Note to maturity, will generally be required to
treat the premium as capital loss when the Exchange Note matures.
If a U.S. Holder of an Exchange Note purchases the Exchange Note at
an amount that is less than its principal amount, the Exchange Note generally
will be considered to bear "market discount" in the hands of such U.S. Holder.
In such case, gain realized by the U.S. Holder on the sale, exchange, or
retirement and unrealized appreciation on certain nontaxable dispositions of the
Exchange Note generally will be treated as ordinary interest income to the
extent of the market discount that accrued on the Exchange Note while held by
such U.S. Holder and to the extent it has not previously been included in income
(pursuant to an election by the U.S. Holder to include such market discount in
income as it accrues). In addition, the U.S. Holder may be required to defer the
deduction of a portion of the interest paid on any indebtedness incurred or
continued to purchase or carry the Exchange Note. In general terms, market
discount on an Exchange Note will be treated as accruing ratably over the term
of such Exchange Note, or, at the election of the U.S. Holder, under a constant
yield method. However, a U.S. Holder may elect to include market discount in
income on a current basis as it accrues (on either a ratable or constant yield
basis), in lieu of treating a portion of any gain realized on the sale of an
Exchange Note as ordinary income. If a U.S. Holder so elects, the interest
deduction deferral rule described above will not apply.
Disposition of the Notes. In general, the U.S. Holder of an Exchange
Note will recognize capital gain or loss upon the sale, redemption, retirement
or other disposition of the Exchange Note measured by the difference between the
amount realized (except to the extent attributable to the payment of accrued
interest not previously included in income) and the U.S. Holder's tax basis in
the Exchange Note. A U.S. Holder's tax basis in an Exchange Note generally will
equal the cost of the Exchange Note to the U.S. Holder increased by the amount
of market discount, if any, previously taken into income by the U.S. Holder or
decreased by any amortized bond premium and any payments other than payments of
interest made on such Note. Except to the extent characterized as market
discount the gain or loss on such disposition of the Notes will be capital gain
or loss. The recently-enacted Taxpayer Relief Act (the "Act") of 1997 provides
for the alternative rates of tax dependency on (i) whether the U.S. Holder is an
individual or corporation, (ii) how long the U.S. Holder held the Exchange Note
at the time of disposition, and (iii) the year of disposition (i.e., because the
maximum rate of tax on net capital gains, as defined in the Act, for individuals
is reduced in later years). U.S. Holders are urged to consult their tax advisers
regarding the type of capital gain and the tax rates thereon which may be
generated upon the sale or other disposition of an Exchange Note.
NON-U.S. HOLDERS
Payments of Interest. A Non-U.S. Holder will not be subject to United
States federal income tax by withholding or otherwise on payments of interest on
an Exchange Note (provided that the beneficial owner of the Exchange Note
fulfills the statement requirements set forth in applicable Treasury
regulations) unless (A) such Non-U.S. Holder (i) actually or constructively owns
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote, (ii) is a controlled foreign corporation related,
directly or indirectly, to the Company through stock ownership, or (iii) is a
bank receiving interest described in Section 881(c)(3)(A) of the Code or (B)
such interest is effectively connected with the conduct of a trade or business
by the Non-U.S. Holder in the United States.
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Gain on Disposition of the Notes. A Non-U.S. Holder will not be
subject to United States federal income tax by withholding or otherwise on any
gain realized upon the disposition of an Exchange Note unless (i) in the case of
a Non-U.S. Holder who is an individual, such Non-U.S. Holder is present in the
United States for a period or periods aggregating 183 days or more during the
taxable year of the disposition (in which case such individual may be taxed as a
U.S. Holder in any event) or (ii) the gain is effectively connected with the
conduct of a trade or business by the Non-U.S. Holder in the United States.
Effectively Connected Income. To the extent that interest income or
gains on the disposition of the Exchange Notes are effectively connected with
the conduct of a trade or business of the Non-U.S. Holder in the United States,
such income will be subject to United States federal income tax at the same
rates generally applicable to United States persons. Additionally, in the case
of a U.S. Holder which is a corporation, such effectively connected income may
be subject to the United States branch profits tax at the rate of 30% (or lower
treaty rate).
Treaties. A tax treaty between the United States and a country in
which a Non-U.S. Holder is a resident may alter the tax consequences described
above.
Estate Tax. Exchange Notes held at the time of death by an
individual holder, who at such time was not a citizen or resident of the United
States, will not be subject to United States federal estate tax, provided that
at such time, (i) the holder did not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote; and (ii) payments of interest with respect to the Exchange
Notes would not have been, if received at the time of such individual's death,
effectively connected with the conduct of a United States trade or business by
such individual.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Interest and payments of proceeds from the disposition by certain
non-corporate holders of Exchange Notes may be subject to backup withholding at
a rate of 31%. Such a U.S. Holder generally will be subject to backup
withholding at a rate of 31% unless the recipient of such payment supplies an
accurate taxpayer identification number, as well as certain other information,
or otherwise establishes, in the manner prescribed by law, an exemption from
backup withholding. Any amount withheld under backup withholding is allowable as
a credit against the U.S. Holder's federal income tax upon furnishing the
required information to the Internal Revenue Service.
Generally, backup withholding of United States federal income tax at
a rate of 31% and information reporting may apply to payments of principal,
interest and premium (if any) to Non-U.S. Holders that are not "Exempt
Recipients" and that fail to provide certain information as may be required by
United States law and applicable regulations. The payment of the proceeds of the
disposition of Exchange Notes to or through the United States office of a broker
will be subject to information reporting and backup withholding at a rate of 31%
unless the owner certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The proceeds of the disposition
by a Non-U.S. Holder of Exchange Notes to or through a foreign office of a
broker will not be subject to backup withholding. However, if such broker is a
United States person, a controlled foreign corporation for United States tax
purposes, or a foreign person 50% or more of whose gross income from all sources
for a specified three-year period is from activities that are effectively
connected with a United States trade or business, information reporting will
apply unless such broker has documentary evidence (other than merely a foreign
address) in its files of the owner's status as a Non-U.S. Holder and has no
actual knowledge to the contrary. Certain certification requirements may have to
be satisfied in order to avoid backup withholding under the foregoing rules.
Under temporary Treasury regulations, both backup withholding and information
reporting will apply to the proceeds from such dispositions if the broker has
actual knowledge that the payee is a U.S. Holder.
Holders should consult their tax advisors regarding the application
of information reporting and backup withholding in their particular situation
and the availability of an exemption therefrom, and the procedures for obtaining
any such exemption.
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BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Old Notes (and the
related guarantees) are represented by one or more permanent global certificates
in definitive, fully registered form (the "Outstanding Global Notes") and the
Exchange Notes (and the related guarantees) will be issued in the form of one or
more, permanent global certificates in definitive fully registered form (the
"Exchange Global Notes"). The term "Global Notes" means the Outstanding Global
Note, or the Exchange Global Note, as the context may require. The Outstanding
Global Notes were deposited on the date of closing of the sale of the Old Notes,
and the Exchange Global Notes will be deposited on the date of closing of the
Exchange Offer, with, or on behalf of, DTC and registered in the name of a
nominee of DTC. The Outstanding Global Notes are subject to certain restrictions
on transfer set forth therein and will bear a legend regarding such
restrictions.
Old Notes and Exchange Notes held by "qualified institutional
buyers" (as defined in Rule 144A promulgated under the Securities Act) ("QIBs")
or "accredited investors" within the meaning of 501(a)(1), (2), (3) or (7) under
the Securities Act ("Accredited Investors") who are not QIBs, in each case who
elect to take physical delivery of their certificates instead of holding their
interests through the Global Notes (and which are thus ineligible to trade
through DTC) (collectively referred to herein as the "Non-Global Purchasers")
were, or will be, as the case may be, issued in registered form (the
"Certificated Security"). Upon the transfer to a QIB or Accredited Investor of
any Certificated Security initially issued to a Non-Global Purchaser, such
Certificated Security will, unless the transferee requests otherwise or the
Global Notes have previously been exchanged in whole for Certificated
Securities, be exchanged for an interest in the Global Notes.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs and Accredited Investors may hold
their interests in the Global Notes directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of
the Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest
(including Additional Interest) on the Global Notes will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Company expects that DTC or its nominee, upon receipt of any
payment of principal, premium, if any, and interest (including Additional
Interest) on the Global Notes, will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the Global Notes as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Notes held through such participants will be
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the
ordinary way through DTC's same-day funds system in accordance with DTC rules
and will be settled in same-day funds. If a holder requires physical delivery of
a Certificated Security for any reason, including to sell Notes to persons in
states that require physical delivery of the Notes, or to pledge
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<PAGE> 120
such securities, such holder must transfer its interest in the Global Notes, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including the presentation of Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of Notes as to which
such participant or participants has or have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Notes for Certificated Securities, which it will distribute to its participants
and which will be legended with respect to transfer restrictions applicable
thereto.
DTC has advised the Company as follows: DTC is a limited-purpose
trust company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of DTC,
it is under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable
to continue as a depositary for the Global Notes and a successor depositary is
not appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Notes, which certificates will bear the
legends with respect to transfer restrictions applicable thereto, if any.
PLAN OF DISTRIBUTION
Except as provided herein, this Prospectus may not be used for an
offer to sell, resell or other transfer of Exchange Notes.
There is no existing market for the Old Notes. No assurance can be
given as to the liquidity of, or trading markets for, the Exchange Notes.
Based on interpretations by the staff of the Commission set forth in
certain "no-action" letters to third parties and unrelated to the Company and
the Exchange Offer, and subject to the immediately following sentence, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by the holders
thereof without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes in violation of the provisions of the Securities Act.
However, any holder of Old Notes who is an"affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (i) will not be able to rely on the interpretation by the staff
of the Commission set forth in the above-mentioned no-action letters, (ii) will
not be able to tender its Old Notes in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Old Notes unless such sale or
transfer is made pursuant to an exemption from such requirements.
Each holder of the Old Notes (other than certain specified holders)
who wishes to exchange Old Notes for Exchange Notes in the Exchange Offer will
be required to represent to the Company, among other things, (i) that any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business, (ii) that at the time of the
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commencement of the Exchange Offer, it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes in violation of the Securities Act, (iii)
that it is not an "affiliate" (as defined in Rule 405 promulgated under the
Securities Act) of the Company, (iv) if such holder is not a Participating
Broker-Dealer, that it is not engaged in, and does not intend to engage in, the
distribution of Exchange Notes and (v) if such holder is a Participating
Broker-Dealer that will receive Exchange Notes for its own account in exchange
for Old Notes that were acquired as a result of market-making or other trading
activities, that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The
Commission has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the Exchange Notes (other
than a resale of an unsold allotment from the original sale of the Old Notes)
with the Prospectus contained in the Exchange Offer Registration Statement. The
Company and the Guarantors have agreed to make available, during the period
required by the Securities Act, a prospectus meeting the requirements of the
Securities Act for use by Participating Broker-Dealers and other persons, if
any, with similar prospectus delivery requirements for use in connection with
any resale of such Exchange Notes. In addition, until ________ , 1997, (90 days
after the date of this Prospectus), all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.
Each Participating Broker-Dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver this Prospectus in connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer who holds Old Notes acquired for its own
account as a result of market-making activities or other trading activities in
connection with resales of Exchange Notes received in Exchange of Old Notes.
The Company will not receive any proceeds from the exchange of Old
Notes for Exchange Notes, including those exchanged by Participating
Broker-Dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, or at prices related
to such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through broker-dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any person that participates in the
distribution of such Exchange Notes may be deemed an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such broker-dealers may
be deemed to be underwriting compensation under the Securities Act.
During the period required by the Securities Act, the Company will
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such documents
in the Letter of Transmittal. The Company has agreed, pursuant to the
Registration Rights Agreement, to pay all expenses incident to the Exchange
Offer (other than any underwriting discounts or commissions), including
reasonable fees and disbursements of one special counsel for all of the holders
of the Notes. In addition, the Company and the Guarantors agreed to indemnify
the holders of the Notes against certain liabilities.
By acceptance of this Exchange Offer, each broker-dealer that
receives Exchange Notes for Old Notes pursuant to the Exchange Offer agrees
that, upon receipt of notice from the Company of the happening of any event
which makes any statement in this Prospectus untrue in any material respect or
which requires the making of any changes in this Prospectus in order to make the
statement herein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend the use of this
Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such broker-dealer. If the Company gives any such
notice to suspend the use of the Prospectus, it will extend the period during
which it will provide additional copies of this Prospectus referred to above by
the number of days during the period from and including the date of the giving
of such notice up to and including when broker-dealers shall have received
copies of the supplemented or amended Prospectus necessary to permit resales of
Exchange Notes.
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LEGAL MATTERS
The validity of the securities offered hereby will be passed upon
for the Company by Shereff, Friedman, Hoffman & Goodman, LLP.
EXPERTS
The consolidated financial statements of Safety Components
International, Inc. as of March 31, 1997 and March 31, 1996, for the three years
ended March 31, 1997 included in this Prospectus have been audited by Price
Waterhouse LLP, independent accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in auditing and accounting. The financial statements of Valentec
International Corporation as of March 31, 1997 and for the year ended March 31,
1997 included in this Prospectus have been audited by Price Waterhouse LLP,
independent accountants, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
auditing and accounting. The financial statements of the Air Restraint/
Industrial Fabrics Division of JPS as of December 28, 1996, and December 31,
1995, and for the period from December 12, 1996 to December 28, 1996, the period
from January 1, 1996 to December 11, 1996, the year ended December 31, 1995, and
the period from June 29, 1994 to January 1, 1995, included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in auditing and accounting
in giving said reports. The financial statements of the Air Restraint/lndustrial
Fabrics Division of JPS Textile Group, Inc. for the period from December 26,
1993 to June 28, 1994 included in this Prospectus have been audited by Coopers &
Lybrand L.L.P., independent accountants, upon the authority of said firm as
experts in auditing and accounting. The financial statements of Phoenix AG's
Airbag Division as of December 31, 1995 and the balance sheet as of December 31,
1994 as well as the revenues of 1994 included in this Prospectus have been
audited by BDO Deutsche Warentreuhand AG, Hamburg, independent accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon said firm as experts in auditing and accounting. The consolidated
financial statements of Phoenix Airbag as of August 5, 1996 and for the period
from January 1, 1996 through August 5, 1996, included in this Prospectus have
been audited by Price Waterhouse, GmbH, Hamburg Germany, independent
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in auditing and
accounting.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SAFETY COMPONENTS INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.................................................. F-3
Consolidated Balance Sheets as of March 31, 1997 and 1996.......................... F-4
Consolidated Statements of Operations for Each of the Three Years in the Period
Ended March 31, 1997............................................................ F-5
Consolidated Statements of Stockholders' Equity for Each of the Three Years Ended
March 31, 1997.................................................................. F-6
Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended March 31, 1997............................................................ F-7
Notes to Consolidated Financial Statements......................................... F-8
Condensed Consolidated Balance Sheet as of June 30, 1997 (Unaudited)............... F-33
Condensed Consolidated Statements of Operations for the Three-Month Periods Ended
June 30, 1997 and June 30, 1996 (Unaudited)..................................... F-34
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended
June 30, 1997 and June 30, 1996 (Unaudited)..................................... F-35
Notes to Consolidated Financial Statements (Unaudited)............................. F-36
VALENTEC INTERNATIONAL CORPORATION FINANCIAL STATEMENTS
Report of Independent Accountants.................................................. F-40
Historical Balance Sheet Excluding Assets and Liabilities of Valentec
International, Ltd. as of March 31, 1997........................................ F-41
Historical Statements of Operations and Accumulated Deficit Excluding Operations of
Valentec International, Ltd. for the Year Ended March 31, 1997.................. F-42
Historical Statements of Cash Flows Excluding Cash Flows of Valentec International,
Ltd. for the Year Ended March 31, 1997.......................................... F-43
Notes to Historical Financial Statements........................................... F-44
JPS AUTOMOTIVE L.P. AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION INTERIM FINANCIAL
STATEMENTS
Balance Sheets as of June 28, 1997 (Unaudited), March 29, 1997 (Unaudited) and
December 28, 1996............................................................... F-56
Statements of Operations for the Period from March 30, 1997, to June 28, 1997, the
Period from December 29, 1996, to March 29, 1997 (Unaudited) and the Period from
January 1, 1996, to March 30, 1996 (Unaudited).................................. F-57
Statements of Cash Flows for the Period from March 30, 1997, to June 28, 1997, the
Period from December 29, 1996, to March 29, 1997 (Unaudited) and the Period from
January 1, 1996, to March 30, 1996 (Unaudited).................................. F-58
Notes to Interim Financial Statements.............................................. F-59
JPS AUTOMOTIVE L.P. AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................... F-64
Balance Sheets as of December 28, 1996 and December 31, 1995....................... F-65
Statements of Operations for the Period from December 12, 1996 to December 28, 1996
and the Period from January 1, 1996 to December 11, 1996 and the Year Ended
December 31, 1995 and the period from June 29, 1994, to January 1, 1995......... F-66
Statements of Divisional Equity for the Period from December 12, 1996 to December
28, 1996 and the Period from January 1, 1996 to December 11, 1996 and the Year
Ended December 31, 1995 and the period from June 29, 1994, to January 1, 1995... F-67
Statements of Cash Flows for the Period from December 12, 1996 to December 28, 1996
and the Period from January 1, 1996 to December 11, 1996 and the Year Ended
December 31, 1995 and the period from June 29, 1994, to January 1, 1995......... F-68
Notes to Financial Statements...................................................... F-69
</TABLE>
F-1
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION OF JPS TEXTILE GROUP, INC.
Report of Independent Accountants.................................................. F-85
Statement of Income for the Period from December 26, 1993 to June 28, 1994......... F-86
Statement of Divisional Equity for the Period from December 26, 1993 to June 28,
1994............................................................................ F-87
Statement of Cash Flows for the Period from December 26, 1993 to June 28, 1994..... F-88
Notes to Financial Statements...................................................... F-89
PHOENIX AG'S AIRBAG DIVISION
Report of Independent Accountants.................................................. F-94
Balance Sheets as of December 31, 1995 and December 31, 1994....................... F-95
Statement of Operations and Retained (Deficit) Earnings for the Year Ended December
31, 1995........................................................................ F-96
Cash Flow Statement for the Year Ended December 31, 1995 and December 31, 1996..... F-97
Notes to the Accounts.............................................................. F-98
PHOENIX AIRBAG GmbH
Report of Independent Accountants.................................................. F-102
Balance Sheet as of August 5, 1996................................................. F-103
Statement of Operations for the Period from January 1, 1996 to August 5, 1996...... F-104
Statement of Cash Flows for the Period from January 1, 1996 to August 5, 1996...... F-105
Notes to the Financial Statements.................................................. F-106
</TABLE>
F-2
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Safety Components International, Inc.:
In our opinion, the consolidated financial statements of Safety Components
International, Inc. and subsidiaries listed in the accompanying "Index to
Financial Statements" appearing on page F-1, present fairly, in all material
respects, the consolidated financial position of Safety Components
International, Inc. and its subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997 in conformity with generally
accepted accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these consolidated financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for product launch costs in fiscal year
1997.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 22, 1997 except for Notes 1, 6 and 13, which are as of July 24, 1997
F-3
<PAGE> 126
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 8,320 $12,033
Accounts receivable, net (Notes 2 and 4)............................... 11,751 16,597
Inventories (Notes 2 and 4)............................................ 6,378 5,315
Prepaid and other...................................................... 870 925
------- -------
Total current assets........................................... 27,319 34,870
Property, plant and equipment, net (Notes 2 and 4)....................... 28,295 12,192
Receivable from affiliate (Note 5)....................................... 4,348 17
Intangible assets, net (Note 2).......................................... 10,991 --
Other assets............................................................. 2,454 2,752
------- -------
Total assets................................................... $73,407 $49,831
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 7,792 $ 8,066
Earnout payable (Note 1)............................................... 2,211 --
Accrued liabilities.................................................... 2,476 1,057
Current portion of long-term obligations (Note 6)...................... 3,085 697
------- -------
Total current liabilities...................................... 15,564 9,820
Long-term obligations (Note 6)........................................... 21,296 3,087
Other long-term liabilities.............................................. 1,273 1,580
------- -------
Total liabilities.............................................. 38,133 14,487
------- -------
Commitments and contingencies (Note 8)
Stockholders' equity (Notes 3 and 11):
Preferred stock: $.10 par value per share -- 2,000,000 shares
authorized; no shares outstanding at March 31, 1997 and 1996........ -- --
Common stock: $.01 par value per share -- 10,000,000 shares authorized;
5,025,383 and 5,048,500 shares issued and outstanding at March 31,
1997 and 1996, respectively......................................... 51 51
Common stock warrants.................................................. 1 1
Additional paid-in-capital............................................. 30,062 30,058
Treasury stock, 113,492 and 90,000 shares, at March 31, 1997 and 1996,
respectively, at cost............................................... (1,647) (1,379)
Retained earnings...................................................... 9,183 6,979
Cumulative translation adjustment (Note 2)............................. (2,376) (366)
------- -------
Total stockholders' equity..................................... 35,274 35,344
------- -------
Total liabilities and stockholders' equity..................... $73,407 $49,831
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 127
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales (Notes 2 and 5).............................. $ 83,958 $ 94,942 $ 51,779
Cost of sales, excluding depreciation and product
launch costs......................................... 64,130 80,804 43,810
Depreciation........................................... 2,043 1,104 743
Product launch costs (Note 2).......................... 1,761 -- --
---------- ---------- ----------
Gross profit................................. 16,024 13,034 7,226
Selling and marketing expenses......................... 1,375 1,102 894
General and administrative expenses.................... 5,697 4,328 3,156
Amortization of goodwill (Note 2)...................... 348 -- --
---------- ---------- ----------
Income from operations....................... 8,604 7,604 3,176
Other expense (income)................................. 208 (807) (484)
Interest expense....................................... 1,555 381 244
---------- ---------- ----------
Income before income taxes................... 6,841 8,030 3,416
Provision for income taxes (Notes 2 and 7)............. 2,995 3,116 1,283
---------- ---------- ----------
Income before extraordinary item and cumulative effect
of accounting change................................. 3,846 4,914 2,133
Extraordinary item -- financing costs (less tax benefit
of $255) (Note 2).................................... (383) -- --
Cumulative effect of change in accounting for product
launch costs (less tax benefit of $718) (Note 2)..... (1,259) -- --
---------- ---------- ----------
Net income............................................. $ 2,204 $ 4,914 $ 2,133
========== ========== ==========
Earnings per common share (Note 2):
Income before extraordinary item and cumulative
effect of change in accounting.................... $ 0.77 $ 0.99 $ 0.53
Extraordinary item................................... (0.08) -- --
Cumulative effect of change in accounting for
deferred product launch costs..................... (0.25) -- --
---------- ---------- ----------
Net income per share................................. $ 0.44 $ 0.99 $ 0.53
========== ========== ==========
Weighted average number of shares outstanding.......... 5,026,501 4,980,884 4,030,787
========== ========== ==========
</TABLE>
Note: Pro forma amounts assuming the new accounting method is applied
retroactively are reflected in tabular form in Note 2.
See notes to consolidated financial statements.
F-5
<PAGE> 128
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON COMMON COMMON ADDITIONAL CUMULATIVE
STOCK STOCK STOCK PAID-IN TREASURY RETAINED TRANSLATION DIVISION
SHARES AMOUNT WARRANTS CAPITAL STOCK EARNINGS ADJUSTMENT EQUITY
--------- ------ --------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,1994............ 2,400,000 $ 24 $-- $ -- $ -- $ -- $ -- $ 866
Net income for the period from
April 1, 1994 to May 13, 1994... -- -- -- -- -- -- -- 68
Transfer of Assets (Note 3)....... -- -- -- 934 -- -- -- (934)
Capital contribution from Valentec
(Note 3)........................ (100,000) (1) -- -- -- -- -- --
Issuance of common stock (Note
3).............................. 1,760,000 18 -- 12,661 -- -- -- --
Issuance of warrants for 128,000
shares of common stock (Note
3).............................. -- -- 1 -- -- -- -- --
Net income for the period from May
14, 1994 to March 31, 1995...... -- -- -- -- -- 2,065 -- --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- 269 --
--------- --- ------- ------- ------ ------- -----
--
Balance at March 31, 1995........... 4,060,000 41 13,595 -- 2,065 269 --
1
Issuance of common stock.......... 1,078,500 10 16,557 -- -- -- --
--
Purchase of treasury stock........ (90,000) -- -- (1,379) -- -- --
--
Repurchase of warrants for
23,600 shares of common
stock........................... -- -- (94) -- -- -- --
--
Net Income for the year ended
March 31, 1996.................. -- -- -- -- 4,914 -- --
--
Foreign currency translation
adjustment...................... -- -- -- -- -- (635) --
--
--------- --- ------- ------- ------ ------- -----
--
Balance at March 31, 1996........... 5,048,500 51 30,058 (1,379) 6,979 (366) --
1
Issuance of common stock.......... 375 -- 4 -- -- -- --
--
Purchase of treasury stock........ (23,492) -- -- (268) -- -- --
--
Net Income for the year ended
March 31, 1997.................. -- -- -- -- 2,204 -- --
--
Foreign currency translation
adjustment...................... -- -- -- -- -- (2,010) --
--
--------- --- ------- ------- ------ ------- -----
--
Balance at March 31, 1997........... 5,025,383 $ 51 $ 30,062 $(1,647) $ 9,183 $ (2,376) $ --
$ 1
========= === ======= ======= ====== ======= =====
==
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 129
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................. $ 2,204 $ 4,914 $ 2,133
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation............................................ 2,043 1,104 743
Amortization............................................ 348 -- --
Extraordinary item...................................... 638 -- --
Cumulative effect of change in accounting principle..... 1,977 -- --
Deferred income taxes................................... (280) -- --
Changes in operating assets and liabilities:
Accounts receivable................................... 5,968 (9,662) (4,607)
Inventories........................................... 375 532 (3,024)
Prepaid and other current assets...................... 55 (268) (60)
Other assets.......................................... (2,309) (440) (1,500)
Accounts payable...................................... (1,547) 749 4,938
Accrued liabilities................................... 1,643 (429) 476
-------- ------- -------
Net cash provided by (used in) operating
activities....................................... 11,115 (3,500) (901)
-------- ------- -------
Cash Flows From Investing Activities:
Additions to property, plant and equipment................. (8,613) (4,588) (2,473)
Purchase of Phoenix Airbag, net of cash acquired........... (24,257) -- --
-------- ------- -------
Net cash (used in) investing activities............ (32,870) (4,588) (2,473)
-------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from sale of common stock..................... 4 16,568 14,564
Purchase of treasury stock................................. (268) (1,379) --
Repurchase of common stock warrants........................ -- (94) --
Payment to parent company in consideration for transfer of
assets.................................................. -- -- (1,885)
Proceeds from term note.................................... 20,000 -- --
(Repayments) borrowings of debt and long-term
obligations............................................. (3,764) 1,460 (3,269)
Net borrowing on revolving credit facility................. 2,931 -- --
Changes in intercompany accounts........................... -- -- (2,326)
-------- ------- -------
Net cash provided by financing activities.......... 18,903 16,555 7,084
-------- ------- -------
Effect of exchange rate changes on cash...................... (861) (280) 96
-------- ------- -------
Change in cash and cash equivalents.......................... (3,713) 8,187 3,806
Cash and cash equivalents, beginning of period............... 12,033 3,846 40
-------- ------- -------
Cash and cash equivalents, end of period..................... $ 8,320 $12,033 $ 3,846
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,555 $ 381 $ 134
Income taxes............................................ 1,819 2,344 993
Supplemental disclosure of non-cash transactions:
Equipment acquired under capital lease obligations......... $ 1,430 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 130
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BUSINESS
Safety Components International, Inc. (the "Company" or "SCI") was formed
to acquire certain assets and assume certain liabilities from Valentec
International Corporation ("Valentec Oldco"). Raz Acquisition Corporation
("RAZ") was formed to acquire all of the outstanding common stock of Valentec
Oldco from Insilco Corporation ("Insilco"). Subsequent to the acquisition,
Valentec Oldco was merged into RAZ which subsequently changed its name to
Valentec International Corporation ("Valentec") which was effected on August 27,
1993. The acquisition was accounted for as a purchase. The operations from April
1, 1994 to May 12, 1994 are reflected as division equity in the accompanying
consolidated stockholders' equity. On May 13, 1994, upon the completion of its
initial public offering ("Initial Public Offering"), the Company acquired
certain assets and assumed certain liabilities from Valentec which were
accounted for utilizing the historical bases of Valentec similar to that of a
pooling of interest.
On August 6, 1996, Automotive Safety Components International ("ASCI"), a
wholly-owned subsidiary of the Company, acquired 80% of the outstanding capital
stock of Phoenix Airbag GmbH ("Phoenix Airbag"). Phoenix Airbag was a
corporation organized under the laws of the Republic of Germany, and at the time
of the acquisition, was a wholly-owned subsidiary of Phoenix Aktiengesellschaft
("Phoenix AG") in Hamburg, Germany. The purchase from Phoenix AG was made in
accordance with the terms and conditions of the Agreement Concerning the Sale
and Transfer of all the Shares in Phoenix Airbag GmbH ("Stock Purchase
Agreement") dated June 6, 1996, as amended. The acquisition was completed on
August 5, 1996.
Pursuant to the Stock Purchase Agreement, eighty percent of Phoenix AG's
interest in Phoenix Airbag was acquired for an initial purchase price of $20.0
million, subject to a net worth adjustment which decreased the initial purchase
price by $2.0 million. Additional purchase consideration of up to approximately
$7.0 million for the remaining twenty percent interest is contingent on Phoenix
Airbag meeting certain performance targets during calendar years 1996 through
1998. If the annual targets are met, payments are to be paid annually commencing
April 30, 1997. Phoenix Airbag met its performance target for calendar 1996, and
ASCI paid its first contingent purchase price payment $2.2 million subsequent to
March 31, 1997. Accordingly, such payment is accrued in the accompanying
consolidated balance sheet at March 31, 1997. If the remaining performance
targets are not met, ASCI would acquire the remaining twenty percent without the
payment of any additional consideration. Additionally, ASCI may, under certain
circumstances, be required to provide a bank guaranty to Phoenix AG, in August
1997, to secure the payment of up to approximately $4.8 million of the
contingent purchase price.
The acquisition was accounted for as a purchase. Although ASCI will acquire
the remaining 20% interest effective December 31, 1998, it is entitled to 100%
of the income or losses, risks and rewards of Phoenix Airbag commencing August
6, 1996. Accordingly, all assets and liabilities were reflected at fair value at
the date of acquisition, and no minority interest was recorded in the
accompanying consolidated financial statements for Phoenix AG's remaining 20%
interest. Through March 31, 1997, the cumulative purchase price amounted to
approximately $24.2 million, including $3.1 million of direct acquisition costs.
Management of the Company allocated the purchase consideration for Phoenix
Airbag assets at fair market value, net of liabilities assumed, with the excess
allocated to goodwill. The unaudited pro forma revenues, net income and
F-8
<PAGE> 131
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income per common share, assuming the acquisition of Phoenix Airbag was
consummated on April 1, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA MARCH 31,
--------------------
1997 1996
------- --------
<S> <C> <C>
Revenues........................................................ $96,339 $128,118
======= ========
Income before extraordinary item and cumulative effect of
accounting change............................................. $ 4,473 $ --
======= ========
Net income...................................................... $ 2,831 $ 5,469
======= ========
Income before extraordinary item and cumulative effect of
accounting change per common share............................ $ 0.89 $ --
======= ========
Net income per common share..................................... $ 0.56 $ 1.10
======= ========
</TABLE>
The Company's Automotive segment manufactures automotive airbags for
specific models of several domestic and foreign automobile manufacturers under
contracts with major airbag systems producers. The Company's Automotive segment
operates in the United States, Europe and Mexico. Through March 31, 1997, the
majority of the Company's sales have been made in the United States. To date,
TRW Vehicle Safety Systems, Inc. ("TRW") and its affiliates have been the
Company's major automotive airbag customer (see Note 2); however, the
acquisition of Phoenix Airbag has significantly diversified the Company's
concentration of sales to this customer and in the United States. In addition,
the Company recently formed a subsidiary to manufacture certain of its products
in a newly constructed facility in the Czech Republic.
The Defense segment consists of two main operating units: Galion and
Systems. Galion manufactures projectiles and other metal components for small to
medium caliber training and tactical ammunition for the U.S. Armed Forces.
Galion also manufactures metal components for use in the automotive and consumer
products industries. Systems was established in June 1994 to serve as the prime
contractor under a $60.0 million systems contract for mortar cartridges (the
"Systems Contract") for the U.S. Army, coordinating the manufacture and assembly
of components supplied by various subcontractors.
Effective as of May 22, 1997, the Company acquired all of the outstanding
stock of Valentec in a stock for stock exchange. Prior to such transaction,
Valentec divested Valentec International Limited ("VIL"), its majority-owned
subsidiary. See Note 13 "Subsequent Events" for further discussion. Valentec is
a high volume manufacturer of stamped and precision machine products in the
automotive, commercial and defense industries, including the manufacture of
belted links for small to medium caliber ammunition and other defense-related
industries.
On July 24, 1997, the Company acquired substantially all of the net assets
of the Air Restraints/Industrial Fabrics Division of JPS Automotive L.P. ("JPS")
for $56.3 million in cash, including the assumption of certain liabilities and
subject to post-closing adjustments (Note 13). In addition, the Company made a
payment to JPS at the closing to enable it to pay off existing indebtedness of
the Division of approximately $650,000 at the closing. The Company will also
incur certain acquisition costs related to the JPS acquisition. JPS is one of
the world's largest manufacturers and suppliers of airbag fabrics as well as
other-value added synthetics fabrics used in a variety of industrial and
commercial applications.
The acquisition of Valentec and JPS were accounted for using the purchase
method of accounting and, accordingly, have been included in the accounts of the
Company as of the respective closing dates of each such acquisition from the
dates of close.
F-9
<PAGE> 132
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the majority-owned subsidiaries of Safety Components International, Inc. All
significant intercompany transactions have been eliminated.
Revenue recognition
Revenues are generally recognized as units are shipped to customers.
The Company accounts for certain long-term contracts under the percentage
of completion method, whereby progress toward contract completion is measured on
a cost incurred basis (including direct labor, materials and allocable indirect
manufacturing overhead and general and administrative costs). Losses on
long-term contracts are recognized in the period when such losses are
identified. On certain contracts with the U.S. Government, contract costs,
including indirect costs, are subject to audit and adjustment by negotiations
between the Company and government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final settlement
based on historical results.
Annual revenues from major customers
The Company had sales to two customers in fiscal year 1997 aggregating 47%
and 23% of net revenues, respectively. In fiscal year 1996, the Company had
sales from two customers aggregating 48% and 39% of net revenues, respectively.
In fiscal year 1995, the Company had sales to one customer aggregating 83% of
net revenues.
Concentration of credit risk
The Company is subject to a concentration of credit risk consisting of its
trade receivables. At March 31, 1997, two customers accounted for approximately
15% and 17% of its trade receivables, respectively; at March 31, 1996, two
customers accounted for 21% and 51% of its trade receivables, respectively. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company evaluates potential losses for uncollectible
accounts and such losses have historically been immaterial and within
management's expectations.
Environmental expenditures
Environmental expenditures that result from the remediation of an existing
condition caused by past operations that will not contribute to current or
future revenues are expensed. Expenditures which extend the life of the related
property or prevent future environmental contamination are capitalized.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.
Inventories
Inventories represent direct labor, materials and overhead costs incurred
for products not yet delivered and are stated at the lower of cost (first-in,
first-out) or market.
F-10
<PAGE> 133
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of their estimated
lives or the term of the underlying lease. Estimated useful lives by class of
assets are as follows:
<TABLE>
<S> <C>
Machinery and Equipment................................................ 5 - 10 years
Furniture and Fixtures................................................. 3 - 5 years
Leasehold improvements................................................. 10 - 20 years
Buildings.............................................................. 25 - 40 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of significant items are capitalized. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the respective accounts and any
resulting gain or loss is recognized.
The Company assesses the recoverability of long-lived assets by determining
whether the depreciation or amortization of the balances over its remaining life
can be recovered through projected undiscounted cash flows. If there is an
indication of impairment of such assets, the amount of impairment, if any, will
be measured based on projected discounted cash flows and, if available,
comparable market values, and will be charged to operations in the period in
which impairment is determined by management. The methodology that management is
expected to use to project results of operations will be based on a trend line
of expected cash flows generated from the assets in service. No impairment of
assets will be recorded below their estimated net realizable value.
Intangible assets
Intangible and other assets consist of goodwill and patents (see Notes 1
and 3) associated with the acquisition of Phoenix Airbag and are stated at cost
less accumulated amortization. Goodwill and patents are amortized over the
expected periods to be benefited, which have been determined to be between 15
and 25 years, respectively.
The Company assesses the recoverability of intangible assets by determining
whether the amortization of the balances over its remaining life can be
recovered through projected undiscounted cash flows. If there is an indication
of impairment of such assets, the amount of impairment, if any, will be measured
based on projected discounted cash flows and will be charged to operations in
the period in which impairment is determined by management.
Product launch costs
During the 1997 fiscal year, the Company changed its accounting for product
launch costs from the deferral method to the expense as incurred method.
Management believes expensing such costs is comparable with its industry peer
group. Expensing such costs as incurred is considered the preferable method of
accounting and, accordingly, management recorded the cumulative effect of this
change in accounting principle totaling $2.0 million ($1.3 million after income
taxes or $0.25 per share) effective April 1, 1996, in accordance with Accounting
Principles Board Opinion No. 20. During the fiscal year ended March 31, 1997,
the Company incurred approximately $1.8 million of product launch costs which,
under the previously used accounting method, would have been capitalized to
deferred product launch costs. Under the new accounting policy, such costs were
expensed as incurred. The pro forma amounts shown below have been adjusted for
the effect of retroactive application for product launch costs and the related
change in provision for income taxes.
F-11
<PAGE> 134
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma amounts assuming the new accounting method is applied
retroactively are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Income before extraordinary item............. $3,846 -- --
=========== =========== ===========
Income before extraordinary item per common
share................................... $ 0.77 -- --
=========== =========== ===========
Net Income................................... $3,463 $5,017 $ 950
=========== =========== ===========
Net Income per common share................ $ 0.69 $ 1.01 $ 0.24
=========== =========== ===========
</TABLE>
Foreign currency translation
The Company follows the principles of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation," ("FAS 52") in accounting for
foreign operations. The financial statements of the Company's subsidiaries,
whose functional currency is the local currency, except the accounts of the
Mexican subsidiary, have been translated into U.S. dollars. Accordingly, all
assets and liabilities outside the United States are translated to U.S. Dollars
at the rate of exchange in effect at the balance sheet date. Income and expense
items are translated at the weighted average exchange rate prevailing during the
period. Translation adjustments are recorded as a separate component of
stockholders' equity. During the year ended March 31, 1997, translation
adjustments, primarily attributable to the Company's German and Czech Republic
subsidiaries, accounted for substantially all of the change in cumulative
translation adjustment activity as reflected in the accompanying consolidated
financial statements.
The financial statements of the Company's subsidiary in Mexico, whose
functional currency is the U.S. Dollar, are remeasured into U.S. Dollars.
Accordingly, monetary assets and liabilities are translated at the rate of
exchange in effect at the balance sheet date and non-monetary assets and
liabilities at historical rates. Income and expense items are translated at a
weighted average exchange rate prevailing during the period, except expenses
related to non-monetary assets and liabilities which are translated at
historical rates. The effect of foreign currency adjustment for this entity is
included in the results of operations. During the reported periods herein, such
amounts were not significant.
Foreign currency transaction gains or losses are reflected in operations.
During the year ended March 31, 1997, transaction losses charged to operations
amounted to $379,000; in 1996 and 1995, such gains and losses were not
significant.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the liabilities method specified by FAS 109, the deferred tax
assets and liabilities are measured each year based on the difference between
the financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates. Additionally, a valuation allowance is recorded
for that portion of deferred tax assets for which it is more likely than not
that the assets will not be realized. The deferred tax provision is the result
of changes in the deferred tax assets and liabilities.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-12
<PAGE> 135
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of financial instruments
The consolidated financial statements include financial instruments whereby
the fair market value of such instruments may differ from amounts reflected on a
historical basis. Financial instruments of the Company consist of cash deposits,
accounts receivable, advances to affiliates, accounts payable, certain accrued
liabilities, long-term debt and capital leases. The carrying amount of the
Company's long term debt approximates fair market value based on prevailing
market rates. The Company's other financial instruments generally approximate
their fair values at March 31, 1997 and 1996 based on the short-term nature of
these instruments. Advances to affiliates have no readily ascertainable fair
market value and, accordingly, their fair value are not readily determinable.
Deferred financing costs
Costs incurred in connection with financing activities (Note 6), are
capitalized and amortized using the effective interest method, and charged to
interest expense in the accompanying consolidated statements of operations.
Total costs deferred and included in the accompanying consolidated balance
sheets at March 31, 1997 and 1996 were $405,000 and $589,000, respectively.
During fiscal 1997, the Company terminated its line of credit with a bank. Costs
deferred at March 31, 1996 were charged in the accompanying consolidated
statement of operations as an extraordinary item, net of applicable income
taxes.
Earnings per share
Earnings per share amounts have been computed using the weighted average
number of common shares outstanding during each period. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128 establishes
standards for computing and presenting earnings per share ("EPS"). It replaces
the presentation of primary EPS with a presentation of basic EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. It also requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. This statement is effective for the
Company beginning with its quarterly period ending December 31, 1997, earlier
adoption is not permitted. Since the Company's capital structure is considered
simple for reporting EPS, the adoption of this principle is not expected to have
a material impact on EPS reporting.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the March 31, 1997 presentation.
Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which require management to make
estimates and assumptions that effect the amounts and disclosures reported in
the financial statements and accompanying notes. Significant estimates made by
management include allowances for doubtful accounts receivable, reserves for
inventories, legal actions and environmental issues, and costs to complete on
long term contracts. Actual results could differ from those estimates.
F-13
<PAGE> 136
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 PUBLIC OFFERINGS
Initial Public Offering
On May 13, 1994, the Company completed its Initial Public Offering by
selling 1.6 million shares of previously unissued common stock at $10.00 per
share (the "Initial Public Offering Price"). In conjunction with the Initial
Public Offering, the underwriter was granted warrants to purchase 128,000 shares
of the Company's common stock at 130% of the Initial Public Offering Price
($13.00) exercisable over a four-year period commencing one year after the
effective date of the registration statement (May 6, 1994). The net proceeds to
the Company from the Initial Public Offering of approximately $14.6 million
(including the proceeds received pursuant to the exercise of the over allotment
option described below) were used to retire the Company's portion of Valentec's
short and long-term debt, pay off its intercompany debt balances with Valentec
(such debt balances were assumed in connection with the transfer of assets
described in Note 1) and pay cash consideration to Valentec for the transfer of
assets. The remaining proceeds have been used to fund the additional growth of
the business. In conjunction with the Initial Public Offering, the underwriter
was granted a 30 day option to purchase up to an aggregate of 240,000 additional
shares (of which 80,000 were to be sold by Valentec) at the Initial Public
Offering Price, less underwriting discounts and accountable expenses. The entire
option was exercised within the 30 day period.
Additional Offering
On June 21, 1995, the Company completed an additional offering (the
"Offering") of 1.5 million shares of common stock at $17.00 per share (the
"Offering Price"), of which the Company sold 1.0 million shares of previously
unissued common stock and Valentec and other selling shareholders sold 500,000
shares. The net proceeds to the Company from the Offering of approximately $16.5
million (including the proceeds received pursuant to the exercise of the over
allotment option described below) has been, and will continue to be, used to
fund the future growth of the business. In conjunction with the Offering, the
underwriter was granted a 30 day option to purchase up to an aggregate of
225,000 additional shares (of which 75,000 shares and 150,000 shares were to be
sold by the Company and Valentec and other selling shareholders, respectively)
at the Offering Price, less underwriting discounts. The entire option was
exercised within the 30 day period.
F-14
<PAGE> 137
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Billed receivables.................................... $ 9,152 $ 4,779
Unbilled receivables (net of unliquidated progress
payments of $9,846 and $30,945 in 1997 and 1996,
respectively)...................................... 1,834 8,588
Other................................................. 765 3,230
------- -------
$ 11,751 $ 16,597
======= =======
Inventories:
Raw materials......................................... $ 3,339 $ 2,297
Work-in-process....................................... 2,073 1,958
Finished goods........................................ 966 1,060
------- -------
$ 6,378 $ 5,315
======= =======
Property, plant and equipment:
Land and building..................................... $ 8,435 $ 1,241
Machinery and equipment............................... 18,768 10,001
Furniture and fixtures................................ 2,074 749
Construction in process............................... 2,822 2,373
------- -------
32,099 14,364
Less -- accumulated depreciation and amortization..... (3,804) (2,172)
------- -------
$ 28,295 $ 12,192
======= =======
</TABLE>
NOTE 5 RELATED PARTY TRANSACTIONS
For periods prior to the Initial Public Offering, the Company was allocated
a portion of Valentec's corporate general and administrative expenses (excluding
interest) based on a formula of revenue, fixed assets and payroll costs. In the
opinion of management, the allocation method used was reasonable. Corporate
charges totaled $60,000 for the year ended March 31, 1995. During fiscal years
1997 and 1996, the Company allocated certain of its corporate general and
administrative expenses to Valentec totaling $726,000 and $659,000,
respectively, using a similar basis for allocating expenses as previously
discussed.
The Company purchases certain components used in its products from
affiliates. Purchases from affiliates totaled $2.6 million, $774,000 and $1.3
million for the years ended March 31, 1997, 1996 and 1995, respectively.
The Company sells certain components to affiliates for use in their
products. Sales to affiliates totaled $104,000, $4.3 million and $1.0 million
for the years ended March 31, 1997, 1996 and 1995, respectively.
The Company subleases space from VIL for its European automotive
operations. Sublease payments for the years ended March 31, 1997, 1996 and 1995
were $117,000, $121,000 and $112,000, respectively. In addition, the Company is
allocated its pro-rata portion of certain manufacturing overhead expenses based
on square footage, as well as a pro-rata portion of shared general and
administrative expenses. Such costs totaled $358,000, $254,000 and $248,000 for
the years ended March 31, 1997, 1996 and 1995, respectively.
At March 31, 1997 and 1996, the Company has a receivable from Valentec
aggregating $4.3 million, which was realized through the stock for stock
exchange on May 22, 1997.
F-15
<PAGE> 138
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 LONG-TERM OBLIGATIONS
Long-term obligations outstanding were as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Bank of America NT&SA (as defined) term loan and
revolving credit facility, bearing interest at 2.25%
and 2.0% over LIBOR (6.54% at March 31, 1997),
respectively, refinanced May 21, 1997................. $ 20,192 $ --
Note payable, principal due in annual installments of
$205,000 beginning January 12, 1999 to January 12,
2002, with interest at 7.22% in semiannual
installments, secured by assets of the Company's
United Kingdom subsidiary............................. 820 764
Capital equipment notes payable, due in monthly
installments with interest at 9.0% to 11.32% maturing
at various rates through April 2001, secured by
machinery and equipment............................... 3,369 3,020
------- ------
24,381 3,784
Less -- current portion................................. (3,085) (697)
------- ------
$ 21,296 $3,087
======= ======
</TABLE>
On August 1, 1996, the Company entered into a loan agreement with Bank of
America National Trust and Savings Association ("Bank of America NT&SA"). This
credit facility was refinanced on May 21, 1997 as discussed in the following
paragraph. The proceeds provided the Company with financing for the acquisition
of Phoenix Airbag in the form of a $20.0 million acquisition term loan, to be
amortized over a four-year period. The loan agreement also provided for a $5.5
million revolving credit facility and a non-revolving stand-by letter of credit
facility to secure payment, if necessary, for the contingent purchase price for
the acquisition of Phoenix Airbag. The term loan, revolving credit facility and
stand-by letter of credit facility are collectively referred to as the "Bank of
America Facility". Indebtedness under the Bank of America Facility was secured
by substantially all the assets of the Company. Outstanding borrowings on the
Bank of America Facility term loan and revolving credit facility at March 31,
1997 were $17.3 million and $2.9 million, respectively.
On May 21, 1997, the Company, Phoenix Airbag and Automotive Safety
Components International Limited ("ASCIL" collectively, the "Borrowers") entered
into an agreement with KeyBank National Association, as administrative agent
("KeyBank"), and the lending institutions named therein (the "Credit
Agreement"). Prior to the completion of the offering, (the "Offering") of $90
million of 10 1/8 Senior Subordinated Notes of the Company due 2007 (the
"Notes") (see Note 13), the Credit Agreement provided for (i) a term loan in the
principal amount of $15.0 million (the "Term Loan") and (ii) a revolving credit
facility in the aggregate principal amount of $12.0 million (including letter of
credit facilities). Upon completion of the Offering, the Company used the
proceeds to repay the Term Loan and the amounts then outstanding under the
Revolving Credit Facility. In connection therewith, the Company's credit
facility with KeyBank was converted into a $27.0 million revolving credit
facility, bearing interest at LIBOR plus 1.00% with a commitment fee of 0.25%
per annum for any unused portion. The indebtedness under the Credit Agreement is
secured by substantially all the assets of the Company (so long as no default or
event of default shall have occurred and be continuing). The revolving loans
under the Credit Agreement will mature on May 31, 2002. The Credit Agreement
contains certain restrictive covenants that impose limitations upon, among other
things, the Company's ability to change its business; merge, consolidate or
dispose of assets; incur liens; make loans and investments; incur indebtedness;
pay dividends and other distributions; engage in certain transactions with
affiliates; engage in sale and lease-back transactions; enter into lease
agreements; and make capital expenditures.
F-16
<PAGE> 139
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future annual minimum principal payments, under the refinanced terms
through KeyBank at March 31, 1997, as follows (in thousands):
<TABLE>
<S> <C>
1998....................................................... $ 3,085
1999....................................................... 4,019
2000....................................................... 3,811
2001....................................................... 3,739
2002....................................................... 3,617
Thereafter................................................. 6,110
-------
$24,381
=======
</TABLE>
During fiscal year 1997, the Company entered into a sale-leaseback of
certain equipment which is accounted for as a capital lease. The Company
received proceeds (which approximated the carrying value of the asset at the
time of sale) of approximately $1.5 million; no gain or loss was recorded in
connection with this transaction. The agreement requires that specified
machinery and equipment used in the Company's operations be pledged as
collateral, among other criteria. The Company imputed interest at 9% per annum.
Effective as of May 22, 1997, the Company completed the acquisition of
Valentec (Notes 1 and 13). The Company assumed all of Valentec's outstanding
obligations as of that date, including two term notes of approximately $5.1
million, a revolving line of credit of approximately $1.4 million, as of March
31, 1997 and equipment financings of approximately $1.1 million as of March 31,
1997. In addition, the Company assumed a demand note payable to VIL of $800,000
and a five year note payable an aggregate of $2.0 million in connection with
certain intercompany obligations between Valentec and VIL.
On June 4, 1997, the Company obtained a $7.5 million mortgage note facility
with Bank Austria. The note is payable in semi-annual installments of $375,000
beginning September 30, 1997 through March 31, 2007 and bears an interest rate
of 7.5%. The note is secured by the assets of the Company's Czech Republic
facility.
In May and June 1997, the Company paid approximately $6.5 million of the
obligations assumed in the Valentec acquisition with the proceeds of the KeyBank
credit facility, Bank Austria mortgage note and the $2.0 million equipment
financing. The $2.0 million equipment financing bears interest at 9.38% and is
payable monthly beginning July 1, 1997 through July 1, 2002 and is secured by
certain fixed assets of Valentec.
NOTE 7 INCOME TAXES
Income before income taxes comprises the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Domestic................................. $2,670 $6,291 $2,379
Foreign.................................. 4,171 1,739 1,037
------ ------ ------
$6,841 $8,030 $3,416
====== ====== ======
</TABLE>
F-17
<PAGE> 140
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision comprises the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Taxes currently payable:
Federal................................ $ 935 $1,934 $ 602
State.................................. 154 327 114
Foreign................................ 916 124 372
Deferred taxes:
Federal................................ (177) 311 148
State.................................. (49) 47 47
Foreign................................ 1,216 373 --
------ ------ ------
$2,995 $3,116 $1,283
====== ====== ======
</TABLE>
The income tax provision differs from the amount computed by applying the
federal income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Expected taxes at federal statutory
rate................................... 34% 34% 34%
State income taxes, net of federal
benefits............................... 2 5 5
Foreign earnings taxed at different
rates.................................. 7 -- 1
Change in deferred tax asset valuation
allowance.............................. -- -- (4)
Other, net............................... 1 -- 2
---
-- - -- -
44%
39% 38%
===
=== ===
</TABLE>
The primary components of deferred tax assets and liabilities, included in
other long-term liabilities in the accompanying consolidated balance sheet, are
as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets (liabilities):
Accrued liabilities................................... $ 103 $ 37
Inventory............................................. 193 203
Property, plant and equipment......................... (1,552) (862)
Deferred product launch costs......................... -- (688)
Other................................................. (7) --
------- -------
$ (1,263) $ (1,310)
======= =======
</TABLE>
No taxes have been provided relating to the possible distribution of
approximately $4.2 million of undistributed earnings considered to be
permanently reinvested. The amount of such additional taxes that would be
payable if such earnings were distributed is estimated to be approximately
$950,000.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Operating leases
The Company has noncancelable operating leases for equipment and office
space that expire at various dates through 2002. Certain of the lease payments
are subject to adjustment for inflation, which have been normalized to
operations. The Company incurred rent expense of $927,000, $612,000 and $272,000
for the years ended March 31, 1997, 1996 and 1995, respectively.
F-18
<PAGE> 141
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future annual minimum lease payments for all noncancelable operating leases
as of March 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,130
1999........................................................ 1,068
2000........................................................ 1,092
2001........................................................ 573
2002........................................................ 308
Thereafter.................................................. 403
------
$4,574
======
</TABLE>
Environmental issues
The Company has identified two areas of underground contamination at its
facility in Galion, Ohio. One area involves a localized plating solution spill,
which is currently being handled by the existing waste water treatment system.
The second area involves a chlorinated solvent spill in the vicinity of a former
above ground storage area. The Company has retained environmental consultants to
quantify the extent of this problem. The Company has accrued $243,000 for the
estimated cost of additional testing and remediation which are included in the
long-term liabilities in the accompanying consolidated balance sheet at March
31, 1997. The Company's environmental consultants estimate that the Company's
voluntary plan of remediation will take three to five years to complete. In the
opinion of management, the total remediation costs are not expected to have a
material adverse effect on the Company's results of operations or financial
position. Management's opinion is based on the advice of an independent
consultant on environmental matters.
Legal proceedings
From time to time, the Company is the subject of legal proceedings for
various matters. In management's opinion, there are no material claims currently
pending.
NOTE 9 BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
automotive and defense. See Note 1 for a description of business segments.
F-19
<PAGE> 142
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information by business segment is as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales:
Automotive............................. $ 68,827 $ 49,091 $ 43,073
Defense................................ 15,131 45,851 8,706
------- ------- -------
$ 83,958 $ 94,942 $ 51,779
======= ======= =======
Operating income:
Automotive............................. $ 7,255 $ 3,658 $ 2,397
Defense................................ 1,349 3,946 779
------- ------- -------
$ 8,604 $ 7,604 $ 3,176
======= ======= =======
Total assets at period end:
Automotive............................. $ 60,800 $ 21,518 $ 20,429
Defense................................ 8,251 16,924 5,899
Corporate.............................. 4,356 11,389 1,983
------- ------- -------
$ 73,407 $ 49,831 $ 28,311
======= ======= =======
Depreciation and amortization:
Automotive............................. $ 2,036 $ 796 $ 489
Defense................................ 355 308 254
------- ------- -------
$ 2,391 $ 1,104 $ 743
======= ======= =======
Capital expenditures:
Automotive............................. $ 8,092 $ 3,863 $ 1,979
Defense................................ 521 725 494
------- ------- -------
$ 8,613 $ 4,588 $ 2,473
======= ======= =======
</TABLE>
Summarized financial information by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales(1):
North America.......................... $ 46,371 $ 77,333 $ 34,274
Europe................................. 37,587 17,609 17,505
------- ------- -------
$ 83,958 $ 94,942 $ 51,779
======= ======= =======
Operating income:
North America.......................... $ 3,089 $ 6,555 $ 3,143
Europe................................. 5,515 1,049 33
------- ------- -------
$ 8,604 $ 7,604 $ 3,176
======= ======= =======
Total assets at period end:
North America.......................... $ 24,930 $ 37,974 $ 16,251
Europe................................. 48,477 11,857 12,060
------- ------- -------
$ 73,407 $ 49,831 $ 28,311
======= ======= =======
</TABLE>
- ---------------
(1) Foreign and domestic sales are representative of amounts reported by
geographic region
F-20
<PAGE> 143
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 BENEFIT PLAN
SCI participates in Valentec's defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code for eligible employees. The plan
provides for discretionary employer contributions. The Company made no employer
contributions during any of the periods presented in the consolidated financial
statements.
NOTE 11 COMMON STOCK AND STOCK OPTIONS
Common Stock
During fiscal years 1997 and 1996, the Company purchased 23,492 shares and
90,000 shares of common stock, respectively. The shares are held in treasury and
are accounted for at cost. See Note 13 for common stock issued to acquire
Valentec and treasury shares obtained in connection with such acquisition.
Stock Options
In conjunction with the Initial Public Offering, SCI established a stock
option plan ("Plan"). The Plan, as amended, provides for the issuance of options
to purchase an aggregate of 550,000 shares of SCI's common stock to key
officers, employees of SCI or its affiliates, directors and consultants. Each
award is determined by the Compensation Committee of the Board of Directors on
an individual basis, except for awards to non-officer directors, which are
determined pursuant to a formula. The Company accounts for these plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized.
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts (in thousands, except per share
data):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net Income:
As Reported................................
$2,204 $4,914 $2,133
------ ------
Pro Forma..................................
$1,941 $4,756 $2,133
------ ------
Net Income Per Share:
As Reported................................
$ 0.44 $ 0.99 $ 0.53
====== ======
Pro Forma..................................
$ 0.39 $ 0.95 $ 0.53
====== ======
</TABLE>
A summary of the status of the Company's stock option plan at March 31,
1997, 1996 and 1995 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 288,625 $13.06 210,500 $10.79 -- $ --
Granted.................................. 244,499 11.97 84,500 18.65 243,500 10.68
Exercised................................ (375) 10.00 -- -- -- --
Forfeited................................ (750) 10.00 (6,375) 12.06 (33,000) 10.00
------- ------- -------
Outstanding at end of year............... 531,999 12.57 288,625 13.06 210,500 10.79
------- ----- ------- ----- ------- -----
Exercisable at end of year............... 122,250 12.04 50,750 10.57 -- --
======= ===== ======= ===== ======= =====
Weighted average fair value of options
granted................................ $ 5.48 $ 8.85 $ 4.94
</TABLE>
F-21
<PAGE> 144
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the 531,999 options outstanding at March 31, 1997, 200,000 have exercise
prices between $10.00 and $14.88, with a weighted average exercise price of
$10.15 and a weighted average remaining contractual life of 6.1 years; 98,375 of
these options are exercisable with a weighted average exercise price of $10.28.
An additional 87,500 options have exercise prices between $17.13 and $21.00 with
a weighted average exercise price of $19.28 and a weighted average remaining
contractual life of 6.6 years; 23,875 of these options are exercisable with a
weighted average exercise price of $19.30. The remaining 244,499 options have
exercise prices between $10.25 and $14.17 with a weighted average exercise price
of $11.97 and a weighted average remaining contractual life of 9.3 years; none
of these options are currently exercisable. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1997, 1996
and 1995, respectively: risk-free interest rates of 6.7, 6.5 and 7.2 percent;
dividends for all years; expected lives of 6.2, 6.8 and 6.0 years; and expected
volatility of 32.4 percent for all years.
F-22
<PAGE> 145
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
In connection with the Offering (see Note 13), the Notes are, and the
Exchange Notes will be, guaranteed on a senior unsecured basis, jointly and
severally, by each of the Company's principal wholly-owned domestic operating
subsidiaries and certain of its indirect wholly-owned subsidiaries (the
"Guarantors"). The condensed consolidating financial statements of the
Guarantors are presented below. Management believes the condensed consolidating
financial statements presented are meaningful in understanding the financial
position, results of operations and cash flows of the Guarantor subsidiaries.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 13 $ 8,250 $ 57 $ -- $ 8,320
Accounts receivable.................. 5,641 6,081 29 -- 11,751
Inventories.......................... 3,682 2,696 -- -- 6,378
Prepaid and other.................... 123 402 345 -- 870
------- ------- -------- ------- -------
Total current assets......... 9,459 17,429 431 -- 27,319
Property, plant and equipment, net..... 8,075 19,072 1,457 (309) 28,295
Receivable from affiliates............. 1,488 1,179 1,681 4,348
Goodwill............................... -- 10,991 -- -- 10,991
Other assets........................... 6,559 938 3,906 (8,949) 2,454
------- ------- -------- ------- -------
Total assets................. $ 25,581 $ 49,609 $ 7,475 $(9,258) $ 73,407
======= ======= ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 3,268 $ 3,979 $ 545 $ -- $ 7,792
Earnout payable...................... 2,211 -- -- -- 2,211
Accrued liabilities.................. 2,037 2,546 (1,983) (124) 2,476
Intercompany accounts short term..... (3,023) 2,280 743 -- --
Current portion of long-term
obligations....................... 2,832 250 3 -- 3,085
------- ------- -------- ------- -------
Total current liabilities.... 7,325 9,055 (692) (124) 15,564
Long-term obligations.................. 15,920 3,662 1,714 -- 21,296
Other long-term liabilities............ -- 727 546 -- 1,273
Intercompany accounts long term........ (5,871) 26,013 (20,142) -- --
------- ------- -------- ------- -------
Total liabilities............ 17,374 39,457 (18,574) (124) 38,133
------- ------- -------- ------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock: $.10 par value --
2,000,000 shares authorized; no
shares outstanding................ -- -- -- -- --
Common stock; $.01 par value --
10,000,000 shares authorized;
5,025,383 outstanding............. -- 5,578 51 (5,578) 51
Common stock warrants................ -- -- 1 -- 1
Additional paid-in-capital........... -- 2,807 30,062 (2,807) 30,062
Treasury stock....................... -- -- (1,647) -- (1,647)
Cumulative translation adjustment.... -- (2,376) -- -- (2,376)
Retained earnings (accumulated
deficit).......................... 8,207 4,143 (2,418) (749) 9,183
------- ------- -------- ------- -------
Total stockholders' equity... 8,207 10,152 26,049 (9,134) 35,274
------- ------- -------- ------- -------
Total liabilities and
stockholders' equity....... $ 25,581 $ 49,609 $ 7,475 $(9,258) $ 73,407
======= ======= ======== ======= =======
</TABLE>
F-23
<PAGE> 146
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 5 $ 1,985 $ 10,010 $ 33 $ 12,033
Accounts receivable.................. 14,502 2,349 -- (254) 16,597
Inventories.......................... 3,625 1,690 -- -- 5,315
Prepaid and other.................... 154 116 349 306 925
------- ------- -------- ------- -------
Total current assets......... 18,286 6,140 10,359 85 34,870
Property, plant and equipment, net..... 7,619 3,683 121 769 12,192
Receivable from affiliates............. (270) 414 (127) -- 17
Goodwill............................... -- 805 -- (805) --
Other assets........................... 1,307 1,063 3,541 (3,159) 2,752
------- ------- -------- ------- -------
Total assets................. $ 26,942 $ 12,105 $ 13,894 $(3,110) $ 49,831
======= ======= ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 6,071 $ 1,756 $ 239 $ -- $ 8,066
Accrued liabilities.................. 3,328 807 (3,384) 306 1,057
Intercompany accounts short term..... -- 45 (45) -- --
Current portion of long-term
obligations....................... 512 185 -- -- 697
------- ------- -------- ------- -------
Total current liabilities.... 9,911 2,793 (3,190) 306 9,820
Long-term obligations.................. 1,956 1,131 -- -- 3,087
Other long-term liabilities............ 20 631 929 -- 1,580
Intercompany accounts long term........ 8,318 2,415 (11,289) 556 --
------- ------- -------- ------- -------
Total liabilities............ 20,205 6,970 (13,550) 862 14,487
------- ------- -------- ------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock: $.10 par value --
2,000,000 shares authorized; no
shares outstanding................ -- -- -- -- --
Common stock; $.01 par value --
10,000,000 shares authorized;
5,025,383 outstanding............. -- 16 51 (16) 51
Common stock warrants................ -- -- 1 -- 1
Additional paid-in-capital........... -- 3,807 30,058 (3,807) 30,058
Treasury stock....................... -- -- (1,379) -- (1,379)
Cumulative translation adjustment.... -- (366) -- -- (366)
Retained earnings (accumulated
deficit).......................... 6,737 1,678 (1,287) (149) 6,979
------- ------- -------- ------- -------
Total stockholders' equity... 6,737 5,135 27,444 (3,972) 35,344
------- ------- -------- ------- -------
Total liabilities and
stockholders' equity....... $ 26,942 $ 12,105 $ 13,894 $(3,110) $ 49,831
======= ======= ======== ======= =======
</TABLE>
F-24
<PAGE> 147
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1995
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 2,881 $ 66 $ 899 $ -- $ 3,846
Accounts receivable.................. 6,255 17 -- -- 6,272
Inventories.......................... 5,948 -- -- -- 5,948
Prepaid and other.................... 134 281 243 -- 658
------- ---- -------- ------- -------
Total current assets......... 15,218 364 1,142 -- 16,724
Property, plant and equipment, net..... 8,551 353 4 -- 8,908
Receivable from affiliates............. 47 -- 790 -- 837
Goodwill............................... 915 -- -- (915) --
Other assets........................... 1,875 21 946 (1,000) 1,842
------- ---- -------- ------- -------
Total assets................. $ 26,606 $738 $ 2,882 $(1,915) $ 28,311
======= ==== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 7,276 $ 21 $ 157 $ -- $ 7,454
Accrued liabilities.................. 2,584 263 (1,315) -- 1,532
Intercompany accounts short term..... (157) 131 26 -- --
Current portion of long-term
obligations....................... 369 -- -- -- 369
------- ---- -------- ------- -------
Total current liabilities.... 10,072 415 (1,132) -- 9,355
Long-term obligations.................. 2,043 -- -- -- 2,043
Other long-term liabilities............ 745 -- 197 -- 942
Intercompany accounts long term........ 9,069 -- (9,069) -- --
------- ---- -------- ------- -------
Total liabilities............ 21,929 415 (10,004) -- 12,340
------- ---- -------- ------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock: $.10 par value --
2,000,000 Shares authorized; no
shares outstanding................ -- -- -- -- --
Common stock; $.01 par value --
10,000,000 Shares authorized;
5,025,383 outstanding............. -- 16 41 (16) 41
Common stock warrants................ -- -- 1 -- 1
Additional paid-in-capital........... 1,946 -- 13,595 (1,946) 13,595
Treasury stock....................... -- -- -- -- --
Cumulative translation adjustment.... -- 269 -- -- 269
Retained earnings (accumulated
deficit).......................... 2,731 38 (751) 47 2,065
------- ---- -------- ------- -------
Total stockholders' equity... 4,677 323 12,886 (1,915) 15,971
------- ---- -------- ------- -------
Total liabilities and
stockholders' equity....... $ 26,606 $738 $ 2,882 $(1,915) $ 28,311
======= ==== ======== ======= =======
</TABLE>
F-25
<PAGE> 148
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1997
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 46,371 $ 43,645 $ -- $(6,058) $ 83,958
Cost of sales.......................... 36,722 32,746 -- (5,338) 64,130
Product launch costs................... 1,661 100 -- -- 1,761
Depreciation........................... 1,013 1,030 -- -- 2,043
------- ------- ------- ------- -------
Gross profit................. 6,975 9,769 -- (720) 16,024
Selling and marketing expenses......... 730 366 279 -- 1,375
General and administrative............. 2,390 2,462 1,382 (537) 5,697
Amortization of goodwill............... -- 348 -- -- 348
------- ------- ------- ------- -------
Income form operations....... 3,855 6,593 (1,661) (183) 8,604
Other expense (income)................. (274) 451 (6) 37 208
Interest expense (income).............. 851 1,064 (669) 309 1,555
------- ------- ------- ------- -------
Income before income taxes... 3,278 5,078 (986) (529) 6,841
Provision for income taxes............. 1,244 2,250 (375) (124) 2,995
------- ------- ------- ------- -------
Income before extraordinary item and
cumulative effect of accounting
change............................... 2,034 2,828 (611) (405) 3,846
Extraordinary item..................... -- -- (383) -- (383)
Cumulative effect of change in
accounting for deferred product
launch costs......................... (564) (695) -- -- (1,259)
------- ------- ------- ------- -------
Net income (loss)...................... $ 1,470 $ 2,133 $ (994) $ (405) $ 2,204
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1996
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 77,333 $ 22,748 $ -- $(5,139) $ 94,942
Cost of sales.......................... 65,782 19,634 -- (4,612) 80,804
Depreciation........................... 797 307 -- -- 1,104
------- ------- ------- ------- -------
Gross profit................. 10,754 2,807 -- (527) 13,034
Selling and marketing expenses......... 1,088 14 -- -- 1,102
General and administrative............. 2,268 1,263 1,324 (527) 4,328
Amortization of goodwill............... -- -- -- -- --
------- ------- ------- ------- -------
Income form operations....... 7,398 1,530 (1,324) -- 7,604
Other expense (income)................. 264 (237) -- (306) (807)
Interest expense (income).............. 736 32 (387) -- 381
------- ------- ------- ------- -------
Income before income taxes... 7,538 1,735 (937) (306) 8,030
Provision for income taxes............. 3,075 442 (401) -- 3,116
------- ------- ------- ------- -------
Net income (loss)...................... $ 4,463 $ 1,293 $ (536) $ (306) $ 4,914
======= ======= ======= ======= =======
</TABLE>
F-26
<PAGE> 149
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1995
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 51,779 $4,371 $ -- $(4,371) $ 51,779
Cost of sales.......................... 44,128 3,606 -- (3,924) 43,810
Depreciation........................... 715 28 -- -- 743
------- ------ ------- ------- -------
Gross profit................. 6,936 737 -- (447) 7,226
Selling and marketing expenses......... 744 -- 150 -- 894
General and administrative............. 1,977 462 1,164 (447) 3,156
Amortization of goodwill............... -- -- -- -- --
------- ------ ------- ------- -------
Income form operations....... 4,215 275 (1,314) -- 3,176
Other expense (income)................. (640) (74) -- 230 (484)
Interest expense (income).............. 307 -- (63) -- 244
------- ------ ------- ------- -------
Income before income taxes... 4,548 349 (1,251) (230) 3,416
Provision for income taxes............. 1,664 119 (500) -- 1,283
------- ------ ------- ------- -------
Net income (loss)...................... $ 2,884 $ 230 $ (751) $ (230) $ 2,133
======= ====== ======= ======= =======
</TABLE>
F-27
<PAGE> 150
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1997
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................. $ 13,740 $ 5,430 $(1,968) $(6,087) $ 11,115
-------- ------- ------- ------- --------
Cash Flows From Investing Activities:
Additions to property, plant and
equipment......................... (1,468) (6,097) (1,357) 309 (8,613)
Purchase of Phoenix Airbag, net of
cash acquired..................... (24,257) -- -- -- (24,257)
-------- ------- ------- ------- --------
Net cash used in investing
activities................. (25,725) (6,097) (1,357) 309 (32,870)
-------- ------- ------- ------- --------
Cash Flows From Financing Activities:
Net proceeds from sale of stock...... -- -- 4 -- 4
Change in investment in subsidiary... (5,778) -- -- 5,778 --
Purchase of treasury stock........... -- -- (268) -- (268)
Proceeds from term note.............. 20,000 -- -- -- 20,000
(Repayments) borrowing of debt and
long-term obligations............. (3,764) -- -- -- (3,764)
Net borrowing on revolving credit
facility.......................... -- 1,230 1,701 -- 2,931
Changes in intercompany accounts..... 1,535 6,530 (8,065) -- --
-------- ------- ------- ------- --------
Net cash provided by
financing activities....... 11,993 7,760 (6,628) 5,778 18,903
-------- ------- ------- ------- --------
Effect of exchange rate changes on
cash................................. -- (861) -- -- (861)
-------- ------- ------- ------- --------
Change in cash and cash equivalents.... 8 6,232 (9,953) -- (3,713)
Cash and cash equivalents, beginning of
period............................... 5 2,018 10,010 -- 12,033
-------- ------- ------- ------- --------
Cash and cash equivalents, end of
period............................... $ 13 $ 8,250 $ 57 $ -- $ 8,320
======== ======= ======= ======= ========
</TABLE>
F-28
<PAGE> 151
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1996
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................. $ (2,544) $ 756 $(2,485) $ 773 $ (3,500)
------- ------- ------- ------- -------
Cash Flows From Investing Activities:
Additions to property, plant and
equipment......................... (2,407) (1,279) (133) (769) (4,588)
------- ------- ------- ------- -------
Net cash used in investing
activities................. (2,407) (1,279) (133) (769) (4,588)
------- ------- ------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from sale of stock...... -- 1,861 16,568 (1,861) 16,568
Change in investment in subsidiary... (306) -- (1,865) 2,171 --
Purchase of treasury stock........... -- -- (1,379) -- (1,379)
Repurchase of common stock
warrants.......................... -- -- (94) -- (94)
(Repayments) borrowings of debt and
long-term obligations............. 1,633 (173) -- -- 1,460
Changes in intercompany accounts..... 3,620 (1,838) (1,501) (281) --
------- ------- ------- ------- -------
Net cash provided by
financing activities....... 4,947 (150) 11,729 29 16,555
------- ------- ------- ------- -------
Effect of exchange rate changes on
cash................................. -- (280) -- -- (280)
------- ------- ------- ------- -------
Change in cash and cash equivalents.... (4) (953) 9,111 33 8,187
Cash and cash equivalents, beginning of
period............................... 9 2,938 899 -- 3,846
------- ------- ------- ------- -------
Cash and cash equivalents, end of
period............................... $ 5 $ 1,985 $10,010 $ 33 $ 12,033
======= ======= ======= ======= =======
</TABLE>
F-29
<PAGE> 152
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1995
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................. $ 1,759 $ 350 $(1,943) $(1,067) $ (901)
------- ----- ------- ------- -------
Cash Flows From Investing Activities:
Additions to property, plant and
equipment......................... (2,294) (175) (4) -- (2,473)
------- ----- ------- ------- -------
Net cash (used in) investing
activities................. (2,294) (175) (4) -- (2,473)
------- ----- ------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from sale of stock...... (230) -- 14,564 230 14,564
Payment to parent company in
consideration for transfer of
assets............................ -- -- (1,885) -- (1,885)
(Repayments) borrowing of debt and
long-term obligations............. (3,269) -- -- -- (3,269)
Changes in intercompany accounts..... 6,909 (230) (9,842) 837 (2,326)
------- ----- ------- ------- -------
Net cash provided by
financing activities....... 3,410 (230) 2,837 1,067 7,084
------- ----- ------- ------- -------
Effect of exchange rate changes on
cash................................. -- 96 -- -- 96
------- ----- ------- ------- -------
Change in cash and cash equivalents.... 2,875 41 890 -- 3,806
Cash and cash equivalents, beginning of
period............................... 6 25 9 -- 40
------- ----- ------- ------- -------
Cash and cash equivalents, end of
period............................... $ 2,881 $ 66 $ 899 $ -- $ 3,846
======= ===== ======= ======= =======
</TABLE>
NOTE 13 SUBSEQUENT EVENTS
Pursuant to a definitive Stock Purchase Agreement, dated as of May 22,
1997, the Company acquired all of the outstanding common stock of Valentec in a
tax-free stock-for-stock exchange. Valentec was the Company's largest
shareholder immediately prior to the acquisition owning approximately 27%, or
1,379,200 shares, of the issued and outstanding shares of the Company's common
stock. In connection with the acquisition, the Company issued the shareholders
of Valentec an aggregate of 1,369,200 newly issued shares of its common stock.
The purchase price for the Valentec acquisition was negotiated between
Valentec and a special committee consisting of independent members of the Board
of Directors of the Company. The special committee was advised by independent
legal counsel and an independent financial advisor. The Company's Board of
Directors received an opinion from the special committee's financial advisor as
to the fairness from a financial point of view of the consideration to be
received by the Company to the Company's shareholders other than Valentec.
The acquisition was accounted for as a purchase. The aggregate purchase
price amounted to approximately $14.3 million, including estimated direct
acquisition costs of approximately $600,000. No adjustments to assets and
liabilities acquired were recorded as their carrying value approximated their
fair value, except for common stock of the Company held by Valentec, in which
these common shares were recorded as treasury shares at market value of $13.7
million. These shares were previously accounted for under the equity method of
accounting for the investment by Valentec. Management intends to merge Valentec
into the Company during fiscal 1998. The excess of the purchase price over the
fair value of the net assets acquired was allocated to goodwill.
F-30
<PAGE> 153
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 24, 1997, the Company acquired all of the assets of the Air
Restraint/Industrial Fabrics Division of JPS Automotive L.P. for cash of $56.3
million, including the assumption of certain liabilities, subject to
post-closing adjustments (the "JPS Acquisition"). In addition, the Company made
a payment to APS at the closing to enable it to pay off existing indebtedness of
the Division of approximately $650,000 at the closing. The acquisition was
accounted for as a purchase.
The Company financed the cash portion of the purchase price with a portion
of the proceeds of the Offering. The Notes mature July 15, 2007 and accrue
interest from the date of issuance. Interest is payable semi-annually, in
arrears, on January 15 and July 15 of each year, commencing January 15, 1998.
The Notes are subordinate to all existing indebtedness of the Company and its
subsidiaries and are guaranteed by the domestic subsidiaries of the Company.
The Notes are redeemable, in whole or in part, at the option of the Company
on or after July 15, 2002 at redemption prices ranging from 105.063% to 100.000%
of the principal amount thereof, plus accrued interest to the date of
redemption. In addition, the Notes are not redeemable by the Company prior to
July 15, 2002, except that, at any time on or prior to July 15, 2000, the
Company, at its option, may redeem, with the net cash proceeds of one or more
Public Equity Offerings, as defined, by the Company, up to 25% of the aggregate
principal amount of the Notes originally issued, at a redemption price equal to
110.125% of the principal amount thereof, plus accrued interest thereon, if any,
to the date of redemption provided that at least 75% of the aggregate principal
amount of the Notes originally issued remains outstanding immediately following
such redemption.
Upon a Change of Control, as defined, each holder of Notes will have the
right to require the Company to repurchase such holder's Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date.
The provisions of the agreement underlying the Notes contain certain
covenants with respect to the Company and its subsidiaries that restrict, among
other things, (a) the incurrence of additional indebtedness, (b) the payment of
dividends and other restricted payments, (c) the creation of certain liens, (d)
the use of proceeds from sales of assets and subsidiary stock, (e) sale and
leaseback transactions, (f) transactions with affiliates and (g) the Company's
ability to consolidate or merge with or into, or to transfer all or
substantially all of its assets to another person. In addition, under certain
circumstances, the Company will be required to offer to purchase the Notes, in
whole or in part, at a purchase price equal to 100% of the principal amount
thereof plus accrued interest to the date of repurchase with the proceeds of
certain sales of assets.
Additionally, pursuant to the terms of agreements underlying the Notes, the
Company entered into a registration rights agreement (the "Registration Rights
Agreement"), pursuant to which the Company has agreed, for the benefit of
holders of the Notes, that it will, at its expense for the benefit of the
holders, (i) within 30 days after July 24, 1997 (the "Issue Date"), file a
registration statement on an appropriate registration form (the "Exchange Offer
Registration Statement") with the Securities and Exchange Commission with
respect to a registered offer (the "Exchange Offer") to exchange the Notes for
notes of the Company (the "Exchange Notes"), guaranteed by the domestic
subsidiaries of the Company (the "Guarantors"), which will have terms identical
to the Notes, except (A) the Exchange Notes will bear a Series B designation,
(B) the issuance of the Exchange Notes will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof and (C)
holders of the Exchange Notes will not be entitled to certain rights of holders
of Notes under the Registration Rights Agreement and (ii) use its best efforts
to cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act within 105 days after the Issue Date. Upon the Exchange
Offer Registration Statement being declared effective, the Company and the
Guarantors will offer to all holders of the Notes an opportunity to exchange
their securities for a like principal amount of the Exchange Notes (and the
related guarantees).
F-31
<PAGE> 154
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma condensed balance sheet information assuming the
acquisitions and the Senior Subordinated Notes were effected on March 31, 1997
is as follows (in thousands):
<TABLE>
<S> <C>
Current assets............................................ $ 60,379
========
Noncurrent assets......................................... $109,637
========
Current liabilities....................................... $ 26,082
========
Total liabilities......................................... $134,742
========
</TABLE>
Unaudited pro forma condensed consolidated operations information assuming
the acquisitions and the Senior Subordinated Notes (and acquisition of Phoenix
Airbag -- see Note 1) were effected on April 1, 1996 is as follows (in
thousands, except per share data):
<TABLE>
<S> <C>
Revenues.................................................. $173,208
========
Income before extraordinary item and change in accounting
principle............................................... $ 1,055
========
Income per share before extraordinary item and change in
accounting principle.................................... $ 0.21
========
</TABLE>
The unaudited pro forma condensed consolidated operations information is
not necessarily indicative of the actual results which would have been attained
if the acquisitions and the Senior Subordinated Notes would have been
consummated on April 1, 1996.
F-32
<PAGE> 155
SAFETY COMPONENTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,772
Accounts receivable, net....................................................... 16,000
Inventories.................................................................... 7,576
Prepaid and other.............................................................. 2,790
-------
Total current assets................................................... 29,138
Property, plant and equipment, net............................................... 34,032
Intangible assets, net........................................................... 27,602
Other assets..................................................................... 3,744
-------
Total assets........................................................... $94,516
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $13,221
Accrued liabilities............................................................ 7,436
Current portion of long-term obligations....................................... 5,236
-------
Total current liabilities.............................................. 25,893
Long-term obligations............................................................ 29,135
Other long-term liabilities...................................................... 3,573
-------
Total liabilities...................................................... 58,601
-------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.10 par value per share -- 2,000,000 shares authorized; no
shares outstanding at June 30, 1997......................................... --
Common stock: $.01 par value per share -- 10,000,000 shares authorized;
6,508,075 shares issued, 5,015,383 shares outstanding at June 30, 1997...... 50
Common stock warrants.......................................................... 1
Additional paid-in-capital..................................................... 43,754
Treasury stock, 1,492,692 shares, at cost...................................... (15,438)
Retained earnings.............................................................. 10,828
Cumulative translation adjustment.............................................. (3,280)
-------
Total stockholders' equity............................................. 35,915
-------
Total liabilities and stockholders' equity............................. $94,516
=======
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE> 156
SAFETY COMPONENTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales........................................................ $ 27,629 $ 16,172
Cost of sales, excluding depreciation............................ 21,156 13,243
Depreciation..................................................... 805 337
------- -------
Gross profit........................................... 5,668 2,592
Selling and marketing expenses................................... 288 302
General and administrative expenses.............................. 2,163 844
Amortization of goodwill......................................... 185 --
------- -------
Income from operations................................. 3,032 1,446
Other expense (income), net...................................... 118 64
Interest expense................................................. 523 10
------- -------
Income before income taxes............................. 2,391 1,372
Provision for income taxes....................................... 956 519
------- -------
Net income....................................................... $ 1,435 $ 853
======= =======
Net income per share............................................. $ 0.29 $ 0.17
======= =======
Weighted average number of shares outstanding.................... 5,021 5,069
======= =======
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE> 157
SAFETY COMPONENTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash provided by (used in) operating activities.............. $ 2,088 $ (4,524)
-------- -------
Cash Flows From Investing Activities:
Additions to property, plant and equipment..................... (1,828) (2,047)
Additional consideration and costs for Phoenix Airbag.......... (2,386) --
Acquisition costs for Valentec................................. (342) --
Advances to Valentec prior to acquisition...................... (1,215) --
Initial acquisition costs for JPS.............................. (163) --
-------- -------
Net cash used in investing activities.................. (5,934) (2,047)
-------- -------
Cash Flows From Financing Activities:
Proceeds from KeyBank term note................................ 15,000 --
Proceeds from Bank Austria mortgage............................ 7,500 --
Proceeds from Transamerica financing........................... 2,000 --
Repayment of Bank of America NT&SA term note................... (16,812) --
Purchase of treasury stock..................................... -- (268)
(Repayments) borrowings of debt and long-term obligations...... (8,483) (172)
Net borrowing on revolving credit facility..................... (3) 360
-------- -------
Net cash used in financing activities.................. (798) (80)
-------- -------
Effect of exchange rate changes on cash.......................... (904) 79
-------- -------
Change in cash and cash equivalents.............................. (5,548) (6,572)
Cash and cash equivalents, beginning of period................... 8,320 12,033
-------- -------
Cash and cash equivalents, end of period......................... $ 2,772 $ 5,461
======== =======
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE> 158
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Safety Components International, Inc. ("SCI" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from this report, as is permitted by such rules
and regulations; however, SCI believes that the disclosures are adequate to make
the information presented not misleading. It is suggested that these
consolidated financial statements for the year ended March 31, 1997 be read in
conjunction with the audited consolidated financial statements and notes thereto
included elsewhere in this Registration Statement. The Company has experienced,
and expects to continue to experience, variability in net sales and net income
from quarter to quarter. Therefore, the results of the interim periods presented
herein are not necessarily indicative of the results to be expected for any
other interim period or the full year.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods.
On August 6, 1996, Automotive Safety Components International Inc., a
wholly-owned subsidiary of the Company, acquired 80% of the outstanding capital
stock of Phoenix Airbag GmbH ("Phoenix Airbag"). Phoenix Airbag was a
corporation organized under the laws of the Republic of Germany, and at the time
of the acquisition, was a wholly-owned subsidiary of Phoenix Akdengesellschaft
("Phoenix AG") in Hamburg, Germany. The purchase from Phoenix AG was made in
accordance with the terms and conditions of the Agreement Concerning the Sale
and Transfer of all the Shares in Phoenix Airbag GmbH dated June 6, 1996, as
amended. The acquisition was completed on August 5, 1996. The operations of
Phoenix Airbag are included for the entire three month period ended June 30,
1997.
Effective as of May 22, 1997, the Company acquired all of the outstanding
capital stock of Valentec International Corporation ("Valentec") (see Note 4).
Valentec is a high-volume manufacturer of stamped and precision-machined
products for the automotive, commercial and defense industries. The operations
of Valentec are included in the three month period ended June 30, 1997 beginning
on May 22, 1997.
F-36
<PAGE> 159
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2 COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS (IN
THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Accounts receivable:
Billed receivables............................................................ $12,882
Unbilled receivables (net of unliquidated progress payments of $10,428)....... 2,140
Other......................................................................... 978
-------
$16,000
=======
Inventories:
Raw materials................................................................. $ 3,332
Work-in-process............................................................... 2,968
Finished goods................................................................ 1,276
-------
$ 7,576
=======
Property, plant and equipment:
Land and building............................................................. $ 7,379
Machinery and equipment....................................................... 27,863
Construction in process....................................................... 3,398
-------
38,640
Less -- accumulated depreciation and amortization............................. (4,608)
-------
$34,032
=======
</TABLE>
NOTE 3 LONG-TERM OBLIGATIONS (IN THOUSANDS)
Long-term obligations outstanding were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
KeyBank term loan and revolving credit facility................................. $17,928
Bank Austria mortgage note...................................................... 7,500
Valentec International Limited note payable at 7.0%, principal and interest due
in monthly installments of $39,600............................................ 2,000
Note payable, principal due in annual installments of $205,000 beginning January
12, 1999 to January 12, 2002, with interest at 7.22% in semiannual
installments, secured by assets of the Company's United Kingdom subsidiary.... 832
Capital equipment notes payable, due in monthly installments with interest at
9.0% to 11.32% maturing at various rates through April 2001, accrued by
machinery and equipment....................................................... 6,111
-------
34,371
Less -- current portion......................................................... (5,236)
-------
$29,135
=======
</TABLE>
On May 21, 1997, the Company, Phoenix Airbag and Automotive Safety
Components International Limited entered into an agreement with KeyBank National
Association, as administrative agent ("Keybank"), and the lending institutions
named therein (the "Credit Agreement"). The proceeds of the Credit Agreement
were used to repay the Bank of America National Trust and Savings Association
("Bank of America NT&SA") term loan and revolving credit facility. The Credit
Agreement initially provided for (i) a term loan in the principle amount of
$15.0 million (the "Term Loan") and (ii) a revolving credit facility in the
aggregate principal amount of $12.0 million (including letter of credit
facilities) as of March 31, 1997.
F-37
<PAGE> 160
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The indebtedness under the Credit Agreement is secured by substantially all the
assets of the Company and initially bore interest at a rate equal to either (i)
the greater of KeyBank's prime rate or (ii) the sum of LIBOR (5.72% as of June
30, 1997) plus 1.00% for term loans (and 1.25% for revolving loans). Upon the
issuance of the $90.0 million Senior Subordinated Notes (see Note 4), all
outstanding borrowings under the Credit Agreement were repaid and the Credit
Agreement was converted into a $27.0 million revolving credit facility for a
five year term, bearing interest at LIBOR plus 1.00% with a commitment fee of
0.25% per annum for any unused portion. The Company will use the revolving
credit facility to fund working capital.
On June 4, 1997, the Company secured a $7.5 million mortgage note facility
with Bank Austria. The note is payable in semi-annual installments of $375,000
beginning September 30, 1997 through March 31, 2007 and bears an interest rate
of 7.5%. The note is secured by the assets of Company's Czech Republic facility.
In May and June 1997, the Company repaid approximately $6.5 million of the
obligations assumed in the Valentec acquisition out of the proceeds of the
KeyBank credit facility, Bank Austria mortgage note and a $2.0 million equipment
financing. The $2.0 million equipment financing bears interest at 9.38% and is
payable monthly beginning July 1, 1997 through July 1, 2002 and is secured by
certain fixed assets of Valentec.
NOTE 4 SIGNIFICANT TRANSACTIONS
Pursuant to a definitive Stock Purchase Agreement, effective as of May 22,
1997, the Company acquired all of the outstanding common stock of Valentec in a
tax-free stock-for-stock exchange. Valentec was the Company's largest
shareholder immediately prior to the acquisition owning approximately 27%, or
1,379,200 shares of the issued and outstanding shares of the Company's common
stock. In connection with such acquisition, the Company issued the shareholders
of Valentec 1,369,200 newly issued shares of its common stock.
The purchase price for the Valentec acquisition was negotiated between
Valentec and a special committee consisting of independent members of the Board
of Directors of the Company. The special committee was advised by independent
legal counsel and an independent financial adviser. The Company's Board of
Directors received an opinion from the special committee's financial adviser as
to the fairness from a financial point of view of the consideration to be
received by the Company to the Company's shareholders other than Valentec.
The acquisition was accounted for as a purchase. The aggregate purchase
price amounted to approximately $14.3 million, including estimated direct
acquisition costs of approximately $600,000. No significant adjustments to
assets and liabilities acquired will be recorded as their carrying value
approximates their fair value, except the common stock of the Company held by
Valentec, which common stock has been recorded as treasury stock at market value
of $13.8 million. These shares of common stock were previously accounted for
under the equity method of accounting for the investment by Valentec. Management
intends to merge Valentec into the Company during fiscal 1998. The excess of the
purchase price over the fair value of the net assets acquired of $16.8 million
was allocated to goodwill and will be amortized over 25 years.
On June 30, 1997, the Company entered into a definitive agreement to
acquire (the "JPS Acquisition") all of the assets and assume certain liabilities
of the Air Restraint/Industrial Fabrics Division (the "Division") of JPS
Automotive L.P. ("JPS"). JPS is a leading, low-cost supplier of airbag fabric in
North America and is also a leading manufacturer of value-added synthetic
fabrics used in a variety of niche industrial and commercial applications. On
July 24, 1997 the Company purchased the Division for approximately $56.9
million, which included the repayment of approximately $650,000 of capital lease
obligations. The purchase price is subject to post closing adjustments, which
will ultimately affect goodwill. The Company estimates direct acquisition costs
to be approximately $600,000. The acquisition has been accounted for as a
purchase, with the excess of the purchase price over the fair value of the net
assets acquired allocated to goodwill. Goodwill will
F-38
<PAGE> 161
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
be amortized over 40 years. The assets were acquired through the Company's newly
formed wholly-owned subsidiary, Safety Components Fabric Technologies, Inc.,
which will be the operating entity on a going forward basis.
On July 24, 1997, the Company issued (the "Offering") $90.0 million
principal amount of its 10 1/8% Senior Subordinated Notes (the "Notes") due July
15, 2007. Interest on the Notes will accrue from July 24, 1997 and will be
payable semi-annually in arrears on each of January 15 and July 15 of each year,
commencing January 15, 1998. The Notes are general unsecured obligations of the
Company and subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) and structually subordinated to all existing and
future indebtedness of the Company's subsidiaries that are not Guarantors. All
of the Company's direct and indirect wholly-owned domestic subsidiaries are
Guarantors. A substantial portion of the proceeds of the Notes were used by the
Company to consummate the JPS Acquisition, repay the term loan and amounts
outstanding under the revolving credit facility with KeyBank as of July 24,
1997, pay certain fees and expenses associated with the JPS Acquisition and the
Notes and purchase a building adjacent to the facility acquired in the JPS
Acquisition. The balance of the proceeds will be used for working capital and
general corporate purposes. The Company estimates that it incurred approximately
$3.3 million of fees and expenses related to the Offering. Such fees will be
deferred and amortized over the expected term of the Notes, not to exceed 10
years.
F-39
<PAGE> 162
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
and Valentec International Corporation
In our opinion, the financial statements of Valentec International
Corporation listed in the accompanying "Index to Financial Statements" appearing
on page F-1, present fairly, in all material respects, the financial position of
Valentec International Corporation, excluding Valentec International, Ltd. as of
March 31, 1997, and the results of operations and its cash flows for the year
then ended 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 audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting policies used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 22, 1997
F-40
<PAGE> 163
VALENTEC INTERNATIONAL CORPORATION
HISTORICAL BALANCE SHEET
EXCLUDING ASSETS AND LIABILITIES OF
VALENTEC INTERNATIONAL, LTD (NOTE 1)
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................. $ 37
Accounts receivable, net of allowance for doubtful accounts of $52............... 2,181
Inventories (Notes 2 and 3)...................................................... 1,225
Deferred income taxes (Notes 2 and 6)............................................ 762
Prepaid expenses and other....................................................... 651
-------
Total current assets..................................................... 4,856
Property and equipment, net of accumulated depreciation of $1,498 (Notes 2 and
3)............................................................................... 4,605
Other assets (Notes 2 and 3)....................................................... 714
Investment in affiliate (Notes 2 and 11)........................................... 10,333
-------
Total assets............................................................. $20,508
=======
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable................................................................. $ 2,874
Payable to affiliate (Note 4).................................................... 4,348
Accrued liabilities (Notes 3 and 7).............................................. 1,945
Current portion of note payable to affiliate (Note 4)............................ 1,146
Current portion of long-term obligations (Note 5)................................ 571
-------
Total current liabilities................................................ 10,884
Long-term obligations (Note 5)................................................... 7,004
Note payable to affiliate (Note 4)............................................... 1,654
Other long-term liabilities (Notes 3 and 7)...................................... 2,436
Deferred income taxes (Notes 2 and 6)............................................ 2,056
-------
Total liabilities........................................................ 24,034
-------
Commitments and contingencies (Note 7)
Capital deficiency (Note 11):
Common stock, $.01 par value per share, 3,000,000 shares authorized;
2,160,000 shares issued and outstanding....................................... 22
Additional paid-in capital....................................................... 428
Accumulated deficit.............................................................. (3,976)
-------
Total capital deficiency................................................. (3,526)
-------
Total liabilities and capital deficiency................................. $20,508
=======
</TABLE>
See notes to financial statements.
F-41
<PAGE> 164
VALENTEC INTERNATIONAL CORPORATION
HISTORICAL STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
EXCLUDING OPERATIONS OF VALENTEC INTERNATIONAL LTD. (NOTE 1)
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Net revenues (Notes 2 and 9):
Trade revenues................................................................... $11,403
Sales to affiliates.............................................................. 2,623
-------
Total revenues........................................................... 14,026
Cost of revenues................................................................... 12,690
-------
Gross profit............................................................. 1,336
Selling and marketing expenses..................................................... 99
General and administrative expenses................................................ 1,584
-------
Operating loss........................................................... (347)
Other expense...................................................................... 67
Interest expense................................................................... 1,183
Income from investment in affiliate (Notes 2 and 11)............................... 605
-------
Loss before income taxes................................................. (992)
Income tax benefit (Notes 2 and 6)................................................. (286)
-------
Net loss................................................................. (706)
Accumulated deficit, beginning of year............................................. (3,270)
-------
Accumulated deficit, end of year................................................... $(3,976)
=======
</TABLE>
See notes to financial statements.
F-42
<PAGE> 165
VALENTEC INTERNATIONAL CORPORATION
HISTORICAL STATEMENT OF CASH FLOWS
EXCLUDING CASH FLOWS OF VALENTEC INTERNATIONAL, LTD. (NOTE 1)
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (706)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 546
Net Income from investment in affiliate....................................... (605)
Other......................................................................... 28
Changes in operating assets and liabilities:
Accounts receivable, net.................................................... 1,585
Inventories................................................................. (111)
Deferred income taxes....................................................... (407)
Prepaid expenses and other.................................................. (158)
Accounts payable............................................................ 415
Accrued liabilities......................................................... 415
Reserve for litigation...................................................... (1,176)
-------
Other liabilities........................................................... (2,901)
-------
Net cash used in operating activities......................................... (3,075)
-------
Cash flows from investing activities:
Additions to property and equipment.............................................. (1,116)
Proceeds from sale of fixed assets............................................... 1,119
Proceeds from sale of building................................................... 1,185
-------
Net cash provided by investing activities..................................... 1,188
-------
Cash flows from financing activities:
Net repayments under long-term obligations....................................... (1,193)
Repayment of advances from affiliates............................................ (1,237)
Net Borrowings from affiliates................................................... 3,031
-------
Net cash provided by financing activities..................................... 601
Increase in cash and cash equivalents.............................................. (1,286)
Cash and cash equivalents, beginning of year....................................... 1,323
-------
Cash, end of year.................................................................. $ 37
=======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................................................... $ 1,199
Income taxes.................................................................. 8
</TABLE>
See notes to financial statements.
F-43
<PAGE> 166
VALENTEC INTERNATIONAL CORPORATION
NOTES TO HISTORICAL FINANCIAL STATEMENTS
EXCLUDING VALENTEC INTERNATIONAL, LTD.
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
On April 27, 1993, the management of Valentec International Corporation and
subsidiaries ("Valentec") completed a management buyout (the "Acquisition") from
its parent company, Insilco Corporation. Subsequent to the Acquisition, certain
of Valentec's business entities were transferred into a new subsidiary, Safety
Components International, Inc., ("SCI") which completed its initial public
offering in May 1994. The purchase price for the assets and liabilities retained
by Valentec in May 1994 was $3.7 million with the excess of purchase price over
the fair value of the net assets acquired of $2.8 million allocated to goodwill.
The effects of the acquisition were "pushed down" to Valentec. In fiscal 1996,
goodwill was determined to be unrecoverable and charged to operations.
Effective as of May 22, 1997, Valentec, immediately prior to the close of
its statutory tax-free stock for stock exchange with SCI (Note 11), divested
itself of its 88.8% owned United Kingdom subsidiary, Valentec International
Limited ("VIL"). Accordingly, the accompanying financial statements include only
the assets and liabilities, revenues and expenses of Valentec acquired by SCI
(hereinafter defined as the "Company"). The Company is a manufacturer of stamped
and precision machined products for the automotive, commercial and defense
industries. The Company also manages the acquisition of ordnance systems for
international customers. The Company's manufacturing operations and headquarters
are located in California.
NOTE 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.
Annual revenues from major customers
The Company had sales from two customers in fiscal year 1997 aggregating
34% and 19% of net revenues, respectively.
Concentration of credit risk
At March 31, 1997, two customers accounted for approximately 31% and 29%,
respectively of its accounts receivable. The Company is potentially subject to a
concentration of credit risk consisting of its accounts receivable. 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 immaterial and
within management's expectations.
Environmental expenditures
Environmental expenditures which extend the life of the related property or
prevent future environmental contamination are capitalized. Expenditures that
result from the remediation of an existing condition caused by past operations
that do 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.
F-44
<PAGE> 167
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
Inventories
Inventories represent direct labor, materials and overhead costs incurred
for products not yet delivered and are stated at the lower of cost (first-in,
first-out) or market.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives by class of assets are as follows:
<TABLE>
<S> <C>
Machinery and equipment 5-10 years
Furniture and fixtures 3-5 years
Leasehold improvements 3-10 years or term of lease, whichever is shorter
</TABLE>
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of assets 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. Depreciation and amortization expense during fiscal 1997
amounted to $546,000.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and ceratin identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable and that certain long-lived assets and identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value,
less cost of sale.
Investment in affiliate
The Company accounts for its 27% investment in SCI under the equity method
of accounting, whereby the Company recognizes its proportionate share of income
or loss as an adjustment to the carrying value of the investment at historical
cost. At March 31, 1997, the Company owned 1,369,200 shares of SCI's common
stock. The total estimated fair value of the Company's holdings on March 31,
1997 was approximately $13.7 million.
The Company has not included certain financial information of its investee
SCI, as such information is included in the Consolidated Financial Statements of
SCI elsewhere herein.
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 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 when temporary
differences are expected to reverse. 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
(benefit) is the result of changes in the deferred tax assets and liabilities.
F-45
<PAGE> 168
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Fair value of financial instruments
The financial statements include financial instruments whereby the fair
market value of such instruments may differ from amounts reflected on a
historical basis. Financial instruments of the Company consist of cash deposits,
accounts receivable, accounts payable, certain accrued liabilities, long-term
obligations and capital leases. The Company's financial instruments generally
approximate their fair values at March 31, 1997. Payables to affiliates
generally have no market and as a result, have no readily determinable fair
value.
Use of 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. Significant estimates made by management
include allowances for doubtful accounts receivable, reserves for inventories,
legal actions and environmental matters, as well as costs to complete on
long-term contracts. Actual results could differ from those estimates.
NOTE 3 COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS AT MARCH 31, 1997
The composition of certain balance sheet items is as follows (in
thousands):
<TABLE>
<S> <C>
Inventories:
Raw materials.................................... $ 854
Work-in-process.................................. 306
Finished goods................................... 65
--------
$ 1,225
========
</TABLE>
F-46
<PAGE> 169
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
<TABLE>
<S> <C>
Property, plant and equipment:
Land and building................................ $ 74
Machinery and equipment.......................... 4,859
Furniture and fixtures........................... 199
Construction in process.......................... 971
--------
6,103
--------
Less accumulated depreciation and amortization... (1,498)
--------
$ 4,605
========
Other assets:
Deposits......................................... $ 571
Other............................................ 143
--------
$ 714
========
Accrued liabilities (Notes 6 and 7):
Reserves for litigation.......................... $ 587
Deferred rent.................................... 232
Reserve for workers compensation................. 201
Income taxes payable............................. 158
Reserve for building repair...................... 150
Reserve for environmental matters................ 150
Other............................................ 467
--------
$ 1,945
========
Other long-term liabilities (Note 7):
Reserve for building repair...................... $ 850
Reserve for litigation........................... 799
Deferred rent.................................... 342
Reserve for environmental matters................ 235
Other............................................ 210
--------
$ 2,436
========
</TABLE>
NOTE 4 RELATED PARTY TRANSACTIONS
The Company sells certain components to affiliates for use in their
products. Sales to affiliates totaled $2.6 million for the year ended March 31,
1997. The Company purchases certain components from affiliates for use in its
products. Purchases from affiliates amounted to $104,000 for the year ended
March 31, 1997.
SCI allocates certain corporate general and administrative expenses to the
Company, such charges were $726,000 for the year ended March 31, 1997. In
addition, SCI has made advances to the Company from time to time. At March 31,
1997, such amount, which is noninterest bearing, was $4.3 million.
At March 31, 1997, the Company has a payable to VIL amounting to $2.8
million as a result of the divestiture of VIL (Notes 1 and 11). Subsequent to
March 31, 1997, certain transactions were effected which resulted in
indebtedness to SCI of $2.5 million in connection with the support of the
operations of the Company and VIL prior to the acquisition of the Company by SCI
effective as of May 22, 1997. In addition, subsequent to March 31, 1997, the
Company assumed a demand note payable to VIL of $800,000 and a 7% note payable
in the aggregate amount of $2 million. The $2 million note is payable monthly
with interest in equal installments over five years.
F-47
<PAGE> 170
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
Future annual principal payments under this note payable to affiliate,
including the demand note of $800,000, at March 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................ $1,146
1999................................................ 371
2000................................................ 398
2001................................................ 427
2002 and thereafter................................. 458
------
$2,800
======
</TABLE>
NOTE 5 LONG-TERM OBLIGATIONS
Long-term obligations outstanding as of March 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
Revolving credit agreements, as described below............................. $1,424
Term notes, as described below.............................................. 5,071
Capital equipment notes payable, due in monthly installments with interest
rates from 9.28% to 12.75%, maturing at various dates through October
2000, secured by machinery and equipment.................................. 1,080
-------
Total debt.................................................................. 7,575
Less current portion...................................................... (571)
-------
Long-term debt, less current portion........................................ $7,004
=======
</TABLE>
The Company's credit facilities, which were subsequently retired in the
first quarter of fiscal 1998, consisted of the following at March 31, 1997: (1)
a revolving credit agreement, payable at the discretion of the Company with a
$4.0 million maximum limit secured by accounts receivable and inventory with
interest paid monthly at prime plus 2.5% (10.75% at March 31, 1997), (2) a $1.2
million term note, secured by fixed assets with interest paid monthly at prime
plus 2.5% (10.75% at March 31, 1997), and (3) a demand note with a $6.0 million
dollar maximum borrowing capacity with interest paid monthly at LIBOR plus 3%
for working capital advances and libor plus 1% for investment financing.
Substantially all of the assets of the Company were pledged as collateral under
the Company's available credit facilities.
In May and June 1997, subsequent to the completion of the acquisition of
the Company by SCI (Notes 1 and 11), the Company retired its revolving credit
and term notes with the proceeds of a $2.0 million equipment note and a loan
totaling $4.5 million from SCI. The equipment note is payable in equal monthly
installments with an interest rate of 9.38% over five years. The loan received
subsequent to year end from SCI bears no interest, has no defined due date and
is intended by SCI management to be long-term in nature.
Future annual maturities of long-term debt, as affected by the retirement
of the credit facilities through proceeds from the equipment note and SCI, as of
March 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $ 571
1999................................................ 716
2000................................................ 700
2001................................................ 502
2002................................................ 467
Thereafter.......................................... 4,619
------
Total..................................... $7,575
======
</TABLE>
F-48
<PAGE> 171
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
NOTE 6 INCOME TAXES
The income tax benefit comprises the following (in thousands):
<TABLE>
<S> <C>
Current:
Federal............................................ $ --
State.............................................. --
-----
Deferred:
Federal............................................ (329)
State.............................................. 43
-----
(286)
-----
$(286)
=====
</TABLE>
The following is a reconciliation of the tax benefit using a Federal
statutory tax rate of 34%:
<TABLE>
<CAPTION>
AMOUNT RATE
-------- ---
<S> <C> <C>
Tax at statutory rate...................... (337,000) (34%)
State income taxes, net.................... (59,000) (6)
Other...................................... 8,000 1
State net operating loss carryforward
limitation............................... 102,000 10
-------- ---
(286,000) (29%)
======== ===
</TABLE>
The Company has the following deferred tax assets (liabilities) (in
thousands):
<TABLE>
<S> <C>
Investment in affiliate............................ $(4,134)
Property and equipment............................. (111)
Accruals and reserves.............................. 1,205
Net operating losses............................... 1,746
Valuation allowance................................ --
-------
Net deferred tax asset(liability).................. $(1,294)
=======
</TABLE>
At March 31, 1997, the Company had Federal and state net operating loss
carryforwards of $4.8 million and $1.7 million, respectively, expiring in
various years beginning in 2002. The amount of net operating losses that may be
utilized in the future may be subject to limitations in the event of a change in
control of the Company, as defined in the Internal Revenue Code.
NOTE 7 COMMITMENTS AND CONTINGENCIES
Operating leases
The Company has noncancellable operating leases for office space and
equipment that expire at various dates through 2000.
F-49
<PAGE> 172
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
Future annual minimum lease payments for all noncancellable operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ 906
1999.............................................. 904
2000.............................................. 603
------
Total future annual minimum lease payments.......... $2,413
======
</TABLE>
Certain of the lease payments are subject to adjustment for increases in
utility costs, real estate taxes and inflation. Accordingly, rent expense has
been normalized. The Company incurred rent expense of $868,000 for the year
ended March 31, 1997. At March 31, 1997, deferred rent included in total
liabilities amounted to $574,000.
Environmental issues
The Company has certain environmental contingencies as of March 31, 1997.
Phase I and II investigations have identified certain environmental issues at
its Costa Mesa, California location which will require remediation. The
Company's management estimates that its maximum liability for these
environmental matters, over the life of the remediation program, will be
$385,000. Such amount is included in total liabilities (Note 3) as of March 31,
1997.
No other significant environmental matters are known by management.
Deferred compensation and other matters
The Company has a deferred compensation agreement with the widow of an
officer of a former division. The liability related to this agreement was
approximately $151,000 at March 31, 1997.
Legal proceedings
The Company is subject to various legal actions arising out of the conduct
of its business, relating to product liability. In one case, the plaintiff
contends that the Company's products failed inspection. However, the Company
contends that the design of the products were produced in accordance with the
design specifications. The Company has already received a favorable initial
ruling. In another case, the plaintiff contends that the Company bore
responsibility for the failure of a product to pass first article production
ballistics testing. The matter was resolved in October 1996, resulting in the
Company testing the product and paying for any failing products. The Company
estimates that one lot does not meet specifications and has accrued for the
rework costs. In the opinion of management of the Company, amounts accrued for
assessments and rework of $1.4 million in connection with these matters are
adequate.
The Company is obligated to make certain repairs, including the parking
lot, the roof and structure to the Costa Mesa, California facility prior to the
lease expiration date of 2000. In the opinion of management of the Company,
amounts accrued for repairs for the building of $1.0 million are adequate.
NOTE 8 BENEFIT PLANS
The Company has a defined contribution plan intended to qualify 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 financial statements.
F-50
<PAGE> 173
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
During the year ended March 31, 1997, the Company established an Employee
Stock Ownership Plan (ESOP). The plan participants include all individuals who
were employed by the Company on January 1, 1996. All participants in the plan
will vest over a five year period from the inception of the plan.
NOTE 9 BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
automotive and defense.
Summarized financial information by business segment as of and for the year
ended March 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Net Sales:
Automotive....................................... $ 9,479
Defense.......................................... 4,547
-------
$14,026
=======
Operating loss:
Automotive....................................... $ (239)
Defense.......................................... (108)
-------
$ (347)
=======
Identifiable assets:
Automotive....................................... $13,945
Defense.......................................... 6,563
-------
$20,508
=======
Depreciation and amortization:
Automotive....................................... $ 371
Defense.......................................... 175
-------
$ 546
=======
Capital expenditures:
Automotive....................................... $ 953
Defense.......................................... 163
-------
$ 1,116
=======
</TABLE>
F-51
<PAGE> 174
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
NOTE 10 SUPPLEMENTAL INFORMATION
In connection with the Offering and the Exchange Offer, the Company is or
will be, respectively, a guarantor, and accordingly, the following condensed
financial information is provided:
HISTORICAL BALANCE SHEET
EXCLUDING ASSETS AND LIABILITIES OF VALENTEC INTERNATIONAL, LTD. (NOTE 1)
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,323
Accounts receivable, net......................................................... 3,766
Inventories...................................................................... 1,114
Deferred income taxes............................................................ 959
Prepaid expenses and other....................................................... 2,494
-------
Total current assets..................................................... 9,656
Property, plant, and equipment, net................................................ 4,901
Other assets....................................................................... 906
Investment in affiliate............................................................ 9,756
-------
Total assets............................................................. $25,219
=======
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable................................................................. $ 2,459
Payable to affiliates............................................................ 1,317
Accrued liabilities.............................................................. 1,497
Other current liabilities........................................................ 1,297
Current portion of long-term obligations......................................... 4,760
-------
Total current liabilities................................................ 11,330
Long-term obligations.............................................................. 4,008
Notes payable to affiliates........................................................ 4,037
Other long-term liabilities........................................................ 5,249
Deferred income taxes.............................................................. 3,415
-------
Total liabilities........................................................ 28,039
Capital Deficiency:
Common stock, $.01 par value per share, 3,000,000 shares authorized; 2,160,000
shares issued and outstanding................................................. 22
Additional paid-in capital....................................................... 428
Accumulated deficit.............................................................. (3,270)
-------
Total capital deficiency................................................. (2,820)
-------
Total liabilities and capital deficiency................................. $25,219
=======
</TABLE>
F-52
<PAGE> 175
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
HISTORICAL STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
EXCLUDING OPERATIONS OF VALENTEC INTERNATIONAL LTD. (NOTE 1)
FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
Net revenues........................................................... $19,367 $16,979
Cost of revenues....................................................... 16,778 16,145
------- -------
Gross profit................................................. 2,589 834
Selling and marketing expenses......................................... 226 389
General and administrative expenses.................................... 1,754 2,303
Restructuring charges.................................................. 13,954 --
------- -------
Operating loss............................................... 13,345 (1,858)
Other expense (income)................................................. 366 (549)
Gain on partial sale of investment in affiliate........................ 9,712 8,186
Gain on sale of fixed assets........................................... -- 1,147
Interest expense, net.................................................. 1,132 617
Income from investment in affiliate (Notes 2 and 11)................... 1,343 957
------- -------
Income (loss) before income taxes............................ (3,788) 8,364
Income taxes........................................................... (1,020) 4,629
------- -------
Net income (loss)............................................ (2,768) 3,735
Repurchase of common stock............................................. (575) --
Retained earnings (accumulated deficit) beginning of year.............. 73 (3,662)
------- -------
Retained earnings (accumulated deficit) end of year.................... $(3,270) $ 73
======= =======
</TABLE>
F-53
<PAGE> 176
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
HISTORICAL STATEMENT OF CASH FLOWS
EXCLUDING CASH FLOWS OF VALENTEC INTERNATIONAL, LTD. (NOTE 1)
FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $(2,768) $ 3,735
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization..................................... 728 567
Income from investment in affiliate............................... (1,343) (957)
Gain on partial sale of investment in affiliate................... (9,712) (8,186)
Changes in operating assets and liabilities:
Accounts receivable, net........................................ (1,667) 320
Inventories..................................................... 160 (43)
Deferred income taxes........................................... (304) 3,941
Prepaid expenses and other...................................... (842) (672)
Accounts payable................................................ 351 (349)
Accrued liabilities............................................. (436) (800)
Other liabilities............................................... (1,048) (3,826)
------- -------
Net cash used in operating activities........................ (16,881) (6,270)
------- -------
Cash flows from investing activities:
Additions to property and equipment.................................. (700) (1,632)
Proceeds from partial sale of investment in affiliate................ 16,509 1,621
------- -------
Net cash provided by (used in) investing activities.......... 15,809 (11)
------- -------
Cash flows from financing activities:
Net borrowings under long-term obligations........................... 3,284 771
Repurchase of common stock........................................... (625) --
Net borrowings of notes payable to affiliates........................ 138 4,070
Net borrowings from affiliate........................................ (499) 1,537
------- -------
Net cash provided by (used in) financing activities.......... 2,298 6,378
Increase in cash and cash equivalents.................................. 1,226 97
Cash beginning of year................................................. 97 0
------- -------
Cash and cash equivalents, end of year................................. $ 1,323 $ 97
======= =======
</TABLE>
F-54
<PAGE> 177
VALENTEC INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXCLUDING VALENTEC INTERNATIONAL, LTD.
NOTE 11 SUBSEQUENT EVENTS
Pursuant to a definitive Stock Purchase Agreement, dated as of May 22,
1997, SCI acquired all of the outstanding common stock of the Company in a
tax-free stock-for-stock exchange. As a condition to the consummation of such
acquisition, the Company divested VIL, the proceeds from which were
insignificant. The Company was SCI's largest shareholder immediately prior to
the acquisition owning approximately 27%, or 1,379,200 shares of the issued and
outstanding shares of the SCI common stock. SCI issued the shareholders of the
Company an aggregate of 1,369,200 newly issued shares of its common stock.
The purchase price for the acquisition of the Company by SCI was negotiated
between the Company and a special committee consisting of independent members of
the Board of Directors of SCI. The special committee was advised by independent
legal counsel and an independent financial advisor as to the fairness from a
financial point of view of the consideration to be received by SCI to SCI's
shareholders other than the Company.
The acquisition was accounted for as a purchase. The aggregate purchase
price amounted to approximately $14.3 million, including direct acquisition
costs of approximately $600,000. The assets and liabilities acquired approximate
their fair value, except for the common stock of SCI held by the Company. These
common shares which were previously accounted for under the equity method of
accounting for the investment by the Company will be recorded as treasury shares
at their estimated fair value of $13.7 million. Management intends to merge the
Company into SCI during fiscal 1998. The excess of the purchase price over the
fair value of the net assets acquired will be allocated to goodwill.
Also see Notes 4 and 5 for additional information regarding subsequent
events.
F-55
<PAGE> 178
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1997 1996
JUNE 28, ----------- ------------
1997 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 2 $ 2 $ 2
Accounts receivable, net of allowance for doubtful
accounts of $307, $160 and $169.................... 14,173 9,949 9,500
Inventories........................................... 9,094 9,329 7,889
Deferred tax assets................................... 203 210 187
Other current assets.................................. 59 72 116
------- ------- -------
Total current assets.......................... 23,531 19,562 17,694
------- ------- -------
Property, plant and equipment:
Land and land improvements............................ 286 286 250
Buildings and leasehold improvements.................. 881 881 881
Machinery, equipment and furnishings.................. 23,501 22,874 23,049
Construction in progress.............................. 1,254 628 617
------- ------- -------
Total......................................... 25,922 24,669 24,797
Less -- Accumulated depreciation and amortization..... (1,216) (681) (105)
------- ------- -------
Property, plant and equipment, net............ 24,706 23,988 24,692
------- ------- -------
Goodwill, net of amortization........................... 14,927 15,049 14,968
------- ------- -------
Other assets............................................ 273 273 321
------- ------- -------
$63,437 $58,872 $ 57,675
======= ======= =======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 581 $ 600 $ 625
Accounts payable...................................... 5,434 3,909 3,028
Accounts payable to related parties................... 0 167 0
Accrued expenses...................................... 1,619 1,275 1,315
------- ------- -------
Total current liabilities..................... 7,634 5,951 4,968
------- ------- -------
Long-term debt.......................................... 0 197 380
------- ------- -------
Other liabilities....................................... 874 817 843
------- ------- -------
Commitments and contingencies (Note 5)
Divisional equity -- Investments and advances from JPS
Automotive L.P........................................ 54,929 51,907 51,484
------- ------- -------
$63,437 $58,872 $ 57,675
======= ======= =======
</TABLE>
F-56
<PAGE> 179
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
MARCH 30, DECEMBER 29, JANUARY 1, APRIL 1,
1997 TO 1996, TO 1996, TO 1996 TO
JUNE 28, MARCH 29, MARCH 30, JUNE 30,
1997 1997 1996 1996
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................... $ 20,680 $ 16,691 $ 16,052 $17,575
Cost of goods sold........................... 17,931 14,570 13,732 15,789
------- ------- ------- -------
Gross profit................................. 2,749 2,121 2,320 1,789
Selling, general and administrative
expenses................................... 905 754 760 376
Corporate general and administrative
allocated
costs...................................... 440 187 295 295
------- ------- ------- -------
Income from operations....................... 1,404 1,180 1,265 1,115
Interest expense............................. (17) (22) (31) (29)
Interest expense allocated from JPS
Automotive L.P............................. 0 0 (144) (68)
Other income (expense), net.................. 20 0 (17) 0
------- ------- ------- -------
Income before income taxes................... 1,407 1,158 1,073 1,018
Income tax provision......................... 0 442 0 0
------- ------- ------- -------
Net income................................... $ 1,407 $ 716 $ 1,073 $ 1,018
======= ======= ======= =======
</TABLE>
F-57
<PAGE> 180
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
PERIOD FROM PERIOD FROM
DECEMBER 29, JANUARY 1,
1996, TO 1996, TO
MARCH 29, MARCH 30,
1997 1996
------------ -----------
<S> <C> <C>
Operating activities:
Net income........................................................ $ 716 $ 1,073
Adjustments to reconcile net income to net cash provided by
operating activities --
Deferred income tax provision.................................. 25 0
Depreciation and amortization.................................. 670 839
Debt issuance cost amortization................................ 0 34
Loss on disposal of assets..................................... 0 17
Changes in operating assets and liabilities:
Accounts receivable.......................................... (449) (232)
Inventories.................................................. (1,440) (308)
Accounts payable............................................. 1,048 1,438
Other assets and liabilities................................. (22) (414)
------- -------
Net cash provided by operating activities................. 548 2,447
------- -------
Net cash used in investing activities -- Capital expenditures....... (47) (51)
------- -------
Financing activities:
Net transactions with JPS Automotive L.P. ........................ (293) (734)
Repayment of long-term debt....................................... (208) (1,662)
------- -------
Net cash used in financing activities..................... (501) (2,396)
------- -------
Net change in cash.................................................. 0 0
Cash, beginning of period........................................... 2 3
------- -------
Cash, end of period................................................. $ 2 $ 3
======= =======
</TABLE>
F-58
<PAGE> 181
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS:
The financial statements include the accounts of the Air
Restraint/Industrial Fabrics division of JPS Automotive L.P. and its
subsidiaries ("JPS Automotive"). These financial statements have been prepared
without audit pursuant to Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements reflect all adjustments considered necessary for a fair presentation
of the financial position, results of operations and cash flows. Results of
operations for interim periods are not necessarily indicative of results for the
full year. For further information, refer to the audited financial statements
and notes thereto for the Air Restraint/Industrial Fabrics division of JPS
Automotive for the period December 12, 1996, to December 28, 1996, the period
January 1, 1996, to December 11, 1996, the year ended December 31, 1995 and the
period June 29, 1994 to January 1, 1995.
The 1996 Acquisition
On December 11, 1996, Collins & Aikman Corporation ("C&A"), through its
subsidiaries, acquired JPS Automotive from Foamex International Inc. ("Foamex")
pursuant to an Equity Purchase Agreement dated August 28, 1996, as amended
December 11, 1996 (the "1996 Acquisition"). The purchase price for the 1996
Acquisition was an aggregate of approximately $220 million, subject to
postclosing adjustment, consisting of approximately $195 million of indebtedness
of JPS Automotive and approximately $25 million in cash paid to Foamex. In the
accompanying financial statements, for periods subsequent to the 1996
Acquisition, the Air Restraint/Industrial Fabrics division is referred to as the
"Division."
Immediately prior to the 1996 Acquisition, JPS Automotive was converted
from a Delaware limited partnership into an association which is taxable as a
corporation for federal, state and local income tax purposes. JPS Automotive is
included in the consolidated federal income tax return of C&A. Income taxes for
periods subsequent to the 1996 Acquisition reflect the pushdown of the
Division's impact on the consolidated tax position of C&A.
The 1994 Acquisition
JPS Automotive L.P. was formed on May 17, 1994, for the purpose of
acquiring a 100% ownership interest in JPS Automotive Products Corp. ("Products
Corp."), which was purchased for nominal consideration on May 25, 1994. On June
28, 1994, subsidiaries of Foamex, the owners of all participating interests in
JPS Automotive, made capital contributions to Products Corp. On June 28, 1994,
Products Corp. acquired the assets of the automotive products and industrial
fabrics divisions of JPS Textile Group, Inc. ("JPS Textile") (the "1994
Acquisition"). Effective October 3, 1994, Products Corp. transferred and
assigned substantially all of its assets, subject to substantially all of its
liabilities, to the Predecessor Company, which agreed to assume such
liabilities. In the accompanying financial statements, for periods prior to
December 12, 1996, the Air Restraint/Industrial Fabrics division is referred to
as the "Predecessor Company."
F-59
<PAGE> 182
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. INVENTORIES:
The components of inventories consist of (in thousands):
<TABLE>
<CAPTION>
JUNE 28, MARCH 29, DECEMBER 28,
1997 1997 1996
-------- --------- ------------
<S> <C> <C> <C>
Raw materials and supplies................ $1,671 $ 2,150 $1,975
Work-in-process........................... 2,830 2,621 2,877
Finished goods............................ 4,593 4,558 3,037
------ ------ ------
Total........................... 9,094 $ 9,329 $7,889
====== ====== ======
</TABLE>
3. GOODWILL:
Goodwill allocated to the Division from the 1996 Acquisition, representing
the excess of purchase price over the fair value of net assets acquired in the
1996 Acquisition, is being amortized on a straight-line basis over the period of
40 years. The Predecessor Company's allocation of the JPS Automotive goodwill
relating to the 1994 Acquisition was also amortized using the straight-line
method over a 40-year period. Amortization of goodwill for the period from March
30, 1997 to June 28, 1997, the period from December 29, 1996, to March 29, 1997,
the period April 1, 1996, to June 30, 1996 and the period from January 1, 1996,
to March 30, 1996, was $122 thousand, $94 thousand and $266 thousand,
respectively. Accumulated amortization at March 29, 1997 and June 28, 1997, was
$126 thousand, $254 thousands and $248 thousand, respectively. The carrying
value of goodwill will be reviewed periodically based on the nondiscounted cash
flows and pretax income over the remaining amortization periods. Should this
review indicate that the goodwill balance will not be recoverable, the
Division's carrying value of the goodwill will be reduced. At March 29, 1997,
management believes its goodwill of approximately $15 million was fully
recoverable.
4. RELATED-PARTY TRANSACTIONS AND ALLOCATIONS:
JPS Automotive performed certain services and incurred certain costs for
the Division and the Predecessor Company. Services provided include treasury,
risk management, employee benefits, legal services, data processing, credit and
collections and other general corporate services. The costs of the services
provided by JPS Automotive have been allocated to the Division and the
Predecessor Company based upon a combination of estimated use and the relative
sales of the business to the total operations of JPS Automotive. Costs allocated
to the Division and the Predecessor Company for these services were $176
thousand, $187 thousand, $295 thousand and $295 thousand for the period from
March 30, 1997, to June 28, 1997, the period from December 29, 1996, to March
29, 1997 the period from April 1, 1996, to June 30, 1996, and the period from
January 1, 1996, to March 30, 1996, respectively.
JPS Automotive provided certain management information systems supporting
the manufacturing operations of the Division and the Predecessor Company. The
costs of the services provided by JPS Automotive have been allocated to the
Division and the Predecessor Company based upon estimated use. Costs allocated
to the Division and the Predecessor Company for these services were $69
thousand, $63 thousand, $71 thousand and $71 thousand for the period from March
30, 1997, to June 28, 1997, and the period from December 29, 1996, to March 29,
1997, the period from April 1, 1996, to June 30, 1997, and the period from
January 1, 1996, to March 30, 1996, respectively. These costs are included in
cost of goods sold in the accompanying statements of operations.
The Division and the Predecessor Company used a warehouse owned by the JPS
Automotive Carpet and Trim division to store and distribute certain finished
goods inventory. Costs charged to the Division and the
F-60
<PAGE> 183
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Predecessor Company by the Carpet and Trim division for rent, utilities and
payroll costs associated with the use of this warehouse were approximately $57
thousand, $57 thousand, $57 thousand and $58 thousand for the period from March
30, 1997, to June 28, 1997, the period from December 29, 1996, to March 29,
1997, the period from April 1, 1996 to June 30, 1996 and the period from January
1, 1996, to March 30, 1996, respectively. These costs are included in cost of
goods sold in the accompanying statements of operations.
JPS Automotive administered its insurance programs on a corporate-wide
basis and charged its individual participating subsidiaries and divisions based
on estimated claims and loss experience. Costs charged by JPS Automotive to the
Division and the Predecessor Company for automotive and general liability,
workers' compensation and employee group health claims and insurance amounted to
$413 thousand and $344 thousand for the period from December 29, 1996, to March
29, 1997, and the period from January 1, 1996, to March 30, 1996, respectively.
Analysis of Net Transactions with JPS Automotive L.P.
Due to the intent to forgive any net balance in investments and advances to
or from JPS Automotive upon the sale of the Division by JPS Automotive, the net
intercompany balance has been classified as a component of divisional equity in
the accompanying financial statements. Significant components of the net
transactions with JPS Automotive have been summarized as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
PERIOD FROM PERIOD FROM
DECEMBER 29, JANUARY 1,
1996, TO 1996, TO
MARCH 29, MARCH 30,
1997 1996
------------ -----------
<S> <C> <C>
Cash transactions --
Corporate general and administrative allocated
costs.......................................... $ 187 $ 295
Corporate management information systems allocated
costs.......................................... 63 71
Corporate administered insurance program costs.... 413 344
Change in allocated debt of JPS Automotive........ 0 1,505
Interest expense allocated from JPS Automotive.... 0 144
Net transfers of cash to JPS Automotive........... (956) (3,093)
----- -------
$ (293) $ (734)
===== =======
</TABLE>
Other Related-party Activities of the Division
At March 29, 1997, Collins & Aikman Products Co. ("C&A Products"), a wholly
owned subsidiary of C&A, has pledged the ownership interests in its significant
subsidiaries, including its partnership interests in JPS Automotive, as security
for debt of C&A Products totaling $458 million.
C&A Products currently provides general administrative services to JPS
Automotive pursuant to a preexisting Services Agreement assigned to C&A Products
by Foamex (the "Existing Services Agreement"). In connection with the 1996
Acquisition, C&A currently contemplates an amendment to the Existing Services
Agreement to expressly provide that the services provided by C&A Products will
include certain administrative and management functions previously conducted by
JPS Automotive. For the period from March 30, 1997, to June 28, 1997, and the
period from December 29, 1996, to March 29, 1997, the Division was charged $207
thousand and $167 thousand, respectively by C&A Products for certain
administrative and management services in accordance with the Existing Services
Agreement.
F-61
<PAGE> 184
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Other Related-party Activities of the Predecessor Company
The Predecessor Company, through JPS Automotive, regularly entered into
transactions with its affiliates in the ordinary course of business.
In connection with the 1994 Acquisition, JPS Automotive entered into a
supply agreement (the "Supply Agreement") with Foamex and certain of its
affiliates. Pursuant to the terms of the Supply Agreement, at the option of JPS
Automotive, Foamex purchased certain raw materials which were necessary for the
manufacture of the Predecessor Company's products, and would resell such raw
materials to the Predecessor Company at a price equal to net cost plus
reasonable out-of-pocket expenses. During the period from January 1, 1996, to
March 30, 1996, the Predecessor Company purchased approximately $6.5 million of
raw materials under the Supply Agreement with Foamex.
Prior to the 1996 Acquisition, outstanding borrowings of JPS Automotive
under its term and revolving loan arrangements were allocated, along with the
related interest expense and deferred debt issuance costs, to the Predecessor
Company based on the ratio of the assets of the Predecessor Company which served
as collateral for the debt, which consisted of accounts receivable and
inventory, to the total of the assets of JPS Automotive which served as
collateral for the debt. The Predecessor Company was allocated interest expense
of approximately $144 thousand for the period from January 1, 1996, to March 30,
1996, associated with these borrowings.
5. COMMITMENTS AND CONTINGENCIES:
From time to time, the Division has been involved in various legal
proceedings. Management believes that such litigation is routine in nature and
incidental to the conduct of its business, and that none of such litigation, if
determined adversely to the Division, would have a material adverse effect on
the financial condition or results of operations of the Division.
The Division is subject to various federal, state and local environmental
laws and regulations that (i) affect ongoing operations and may increase capital
costs and operating expenses and (ii) impose liability for the costs of
investigation and remediation and certain other damages related to on-site and
off-site soil and groundwater contamination. The Division believes it has
obtained or applied for the material permits necessary to conduct its business.
To date, compliance with applicable environmental laws has not had and, in the
opinion of management, based on the facts presently known to it, is not expected
to have a material adverse effect on the Division's financial condition or
results of operations.
Although not named as a potentially responsible party for any
environmentally contaminated sites, the Division and the Predecessor Company
accrued environmental costs at March 29, 1997, and March 30, 1996, of
approximately $325 thousand and $350 thousand, respectively; $48 thousand and
$50 thousand of which are included in current liabilities, respectively. In
addition, at March 30, 1996, the Predecessor Company recorded a $75 thousand
receivable for indemnification of environmental liabilities by JPS Textiles, the
former owner of JPS Automotive.
Although it is possible that new information or future events could require
the Division to reassess its potential exposure relating to pending
environmental matters, management believes that, based on the facts presently
known to it, the resolution of such environmental matters will not have a
material adverse effect on the Division's financial condition or results of
operations. The possibility exists, however, that new environmental legislation
may be passed or environmental regulations may be adopted, or other
environmental conditions may be found to exist, that may require expenditures
not currently anticipated which may be material, and there can be no assurance
that the Division has identified or properly assessed all potential
environmental liability arising from its activities or properties.
F-62
<PAGE> 185
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. SUBSEQUENT EVENT:
On July 24, 1997, JPS Automotive sold all of the assets of the Division to
Safety Components International, Inc. for $56.3 million, including the
assumption of certain liabilities and subject to postclosing adjustments. In
addition, the Company made a payment to JPS at the closing to enable it to pay
off existing indebtedness of the Division of approximately $650,000 at closing.
F-63
<PAGE> 186
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of JPS Automotive L.P.:
We have audited the accompanying balance sheets of the Air
Restraint/Industrial Fabrics division of JPS Automotive L.P. as of December 28,
1996, and December 31, 1995, and the related statements of operations,
divisional equity and cash flows for the period from December 12, 1996, to
December 28, 1996, the period from January 1, 1996, to December 11, 1996, the
year ended December 31, 1995, and the period from June 29, 1994, to January 1,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Air Restraint/Industrial
Fabrics division of JPS Automotive L.P. as of December 28, 1996, and December
31, 1995, and the results of its operations and its cash flows for the period
from December 12, 1996, to December 28, 1996, the period from January 1, 1996,
to December 11, 1996, the year ended December 31, 1995, and the period from June
29, 1994, to January 1, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
July 10, 1997, (except with respect
to the matter discussed in Note 16,
as to which the date is July 24, 1997.)
F-64
<PAGE> 187
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 2 $ 3
Accounts receivable, net of allowance for doubtful accounts of
$169
and $317...................................................... 9,500 10,310
Inventories...................................................... 7,889 9,011
Deferred tax assets.............................................. 187 0
Other current assets............................................. 116 211
------- -------
Total current assets..................................... 17,694 19,535
------- -------
Property, plant and equipment:
Land and land improvements....................................... 250 245
Buildings and leasehold improvements............................. 881 2,331
Machinery, equipment and furnishings............................. 23,049 26,104
Construction in progress......................................... 617 1,036
------- -------
Total.................................................... 24,797 29,716
Less -- Accumulated depreciation and amortization................ (105) (2,503)
------- -------
Property, plant and equipment, net....................... 24,692 27,213
------- -------
Goodwill, net of amortization...................................... 14,968 41,054
------- -------
Other assets....................................................... 321 641
------- -------
$ 57,675 $ 88,443
======= =======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 625 $ 630
Current portion of allocated long-term debt of JPS Automotive
L.P. ......................................................... 0 358
Accounts payable................................................. 3,028 1,893
Accounts payable to related parties.............................. 0 798
Accrued expenses................................................. 1,315 1,675
------- -------
Total current liabilities................................ 4,968 5,354
------- -------
Long-term debt..................................................... 380 954
------- -------
Allocated long-term debt of JPS Automotive L.P. ................... 0 5,842
------- -------
Other liabilities.................................................. 843 746
------- -------
Commitments and contingencies (Notes 10, 12 and 13)................
Divisional equity -- Investments and advances from JPS Automotive
L.P. ............................................................ 51,484 75,547
------- -------
$ 57,675 $ 88,443
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-65
<PAGE> 188
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1, JUNE 29,
1996, TO 1996, TO YEAR ENDED 1994, TO
DECEMBER 28, DECEMBER 11, DECEMBER 31, JANUARY 1,
1996 1996 1995 1995
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales...................................... $2,110 $ 62,821 $ 73,080 $41,888
Cost of goods sold............................. 1,916 54,679 62,299 33,257
------ ------- ------- -------
Gross profit................................... 194 8,142 10,781 8,631
Selling, general and administrative expenses... 147 3,029 3,347 1,439
Corporate general and administrative allocated
costs........................................ 39 1,028 1,074 399
------ ------- ------- -------
Income from operations......................... 8 4,085 6,360 6,793
Interest expense............................... 0 (100) (165) (110)
Interest expense allocated from JPS Automotive
L.P.......................................... 0 (552) (594) (316)
Other income (expense), net.................... 21 (370) 11 2
------ ------- ------- -------
Income before income taxes..................... 29 3,063 5,612 6,369
Income tax provision........................... 11 0 0 0
------ ------- ------- -------
Net income..................................... $ 18 $ 3,063 $ 5,612 $ 6,369
====== ======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-66
<PAGE> 189
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
STATEMENTS OF DIVISIONAL EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
PREDECESSOR COMPANY:
Pushdown of acquisition basis and initial contributions by JPS Automotive
L.P. ........................................................................ $ 69,473
Net income...................................................................... 6,369
Net transactions with JPS Automotive L.P........................................ (2,175)
--------
Balance, January 1, 1995........................................................ 73,667
Net income...................................................................... 5,612
Net transactions with JPS Automotive L.P........................................ (3,732)
--------
Balance, December 31, 1995...................................................... 75,547
Net income...................................................................... 3,063
Net transactions with JPS Automotive L.P........................................ (6,808)
--------
Balance, December 11, 1996...................................................... 71,802
Acquisition of JPS Automotive L.P. by Collins & Aikman Corporation.............. (71,802)
--------
$ 0
========
- --------------------------------------------------------------------------------------------
JPS AUTOMOTIVE:
Pushdown of acquisition basis and initial contributions by partners............. $ 50,050
Net income...................................................................... 18
Net transactions with JPS Automotive L.P........................................ 1,416
--------
Balance, December 28, 1996...................................................... $ 51,484
========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-67
<PAGE> 190
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1, JUNE 29,
1996, TO 1996, TO YEAR ENDED 1994, TO
DECEMBER 28, DECEMBER 11, DECEMBER 31, JANUARY 1,
1996 1996 1995 1995
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Operating activities:
Net income................................... $ 18 $ 3,063 $ 5,612 $ 6,369
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization............. 137 3,238 2,880 1,212
Debt issuance cost amortization........... 0 128 247 83
Loss on disposal of assets................ 0 322 82 0
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable..................... (242) 1,052 3,351 (1,747)
Inventories............................. 520 602 781 (285)
Accounts payable........................ (1,876) 2,213 (4,140) 625
Other assets and liabilities............ 27 (237) (692) (727)
------- ------- ------- -------
Net cash provided by (used in)
operating activities............... (1,416) 10,381 8,121 5,530
------- ------- ------- -------
Net cash used in investing
activities -- Capital expenditures........... 0 (829) (4,106) (3,785)
------- ------- ------- -------
Financing activities:
Net transactions with JPS Automotive L.P. ... 1,416 (6,808) (4,429) (2,175)
Proceeds from (repayments of) of long-term
debt, net................................. 0 (2,745) 414 433
------- ------- ------- -------
Net cash provided by (used in)
financing activities............... 1,416 (9,553) (4,015) (1,742)
------- ------- ------- -------
Net change in cash............................. 0 (1) 0 3
Cash, beginning of period...................... 2 3 3 0
------- ------- ------- -------
Cash, end of period............................ $ 2 $ 2 $ 3 $ 3
======= ======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-68
<PAGE> 191
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
The Air Restraint/Industrial Fabrics division of JPS Automotive L.P. and
subsidiaries ("JPS Automotive") operates in the automotive products and
industrial fabrics segments, including the design, manufacture and sale of
airbag fabric for passenger cars and light trucks and other specialty industrial
fabrics.
On December 11, 1996, all of the outstanding equity of JPS Automotive was
acquired from Foamex International, Inc. ("Foamex") by Collins & Aikman
Corporation ("C&A"), through its subsidiaries (the "1996 Acquisition"). (See
Note 3). In the accompanying financial statements, for periods subsequent to the
1996 Acquisition, the Air Restraint/Industrial Fabrics division is referred to
as the "Division."
JPS Automotive was formed on May 17, 1994, for the purpose of acquiring a
100% ownership interest in JPS Automotive Products Corp. ("Products Corp."),
which was purchased for nominal consideration on May 25, 1994. On June 28, 1994,
subsidiaries of Foamex, the owners of all partnership interests in JPS
Automotive, made capital contributions to Products Corp. On June 28, 1994,
Products Corp. acquired the assets of the automotive products and industrial
fabrics divisions of JPS Textile Group, Inc. ("JPS Textile") (the "1994
Acquisition"). Effective October 3, 1994, Products Corp. transferred and
assigned substantially all of its assets, subject to substantially all of its
liabilities, to JPS Automotive, which agreed to assume such liabilities. In the
accompanying financial statements, for the periods from June 29, 1994, through
December 11, 1996, the Air Restraint/Industrial Fabrics division is referred to
as the "Predecessor Company."
2. BASIS OF PRESENTATION:
The Division and the Predecessor Company
The balance sheet as of December 28, 1996, and the statements of
operations, cash flows and divisional equity for the period from December 12,
1996, to December 28, 1996, pertain to the Division. The balance sheet as of
December 31, 1995, and the statements of operations, cash flows and divisional
equity for the period from January 1, 1996, to December 11, 1996, for the year
ended December 31, 1995 and the period from June 29, 1994, to January 1, 1995,
pertain to the Predecessor Company.
Transfers of operating funds between the Division (or the Predecessor
Company) and JPS Automotive occur on a noninterest-bearing basis, with the net
amount of these transfers reflected as investments and advances from JPS
Automotive L.P. in the accompanying financial statements. The net balance in
investments and advances from JPS Automotive L.P. at December 28, 1996, of $51.4
million is classified as divisional equity in the accompanying balance sheet due
to the intent to forgive any net balance in investments and advances from JPS
Automotive L.P. upon the sale of the Division by JPS Automotive.
As indicated above, the accompanying financial statements present the
financial position, results of operations and cash flows of the Division and the
Predecessor Company as if it were a separate entity for all periods presented.
In accordance with Staff Accounting Bulletin ("SAB") No. 54 of the Securities
and Exchange Commission, JPS Automotive's investment in the Division (or the
Predecessor Company) is reflected in the financial statements of the Division
and the Predecessor Company ("pushdown accounting") during the applicable
periods. The accompanying financial statements reflect the allocation of the
purchase price in excess of the net assets acquired on the same basis as in the
financial statements of JPS Automotive.
For the periods up through December 11, 1996, as required by SAB No. 73, a
portion of certain term and revolving bank debt and the related debt issuance
costs and interest expense of JPS Automotive has been allocated to the
Predecessor Company as a result of certain of the Predecessor Company's assets,
which consist of accounts receivable and inventory, serving as security for such
debt. The debt was retired in connection with the 1996 Acquisition (see Note 7).
The allocations have been made based upon the ratio of the assets of the
Predecessor Company which served as collateral for the debt to the total of the
assets of JPS
F-69
<PAGE> 192
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Automotive which served as collateral for the debt. The average interest rates
on this debt for the period from January 1, 1996, to December 11, 1996, the year
ended December 31, 1995, and the period from June 29, 1994, to January 1, 1995,
were 9.3%, 9.2% and 10.4%, respectively. Interest has not been computed on the
remaining intercompany balances.
JPS Automotive performed certain services and incurred certain costs for
the Division and the Predecessor Company. Services provided include treasury,
risk management, employee benefits, legal services, data processing, credit and
collections and other general corporate services. The costs of the services
provided by JPS Automotive have been allocated to the Division and the
Predecessor Company based upon a combination of estimated use and the relative
sales of the business to the total operations of JPS Automotive. Costs allocated
to the Division and the Predecessor Company for these services were $39
thousand, $1 million, $1.1 million and $399 thousand for the period from
December 12, 1996, to December 28, 1996, the period from January 1, 1996, to
December 11, 1996, the year ended December 31, 1995, and the period from June
29, 1994, to January 1, 1995, respectively. In the opinion of management, the
method of allocating these costs is believed to be reasonable. However, the
costs of these services charged to the Division and the Predecessor Company are
not necessarily indicative of the costs that would have been incurred if the
Division or the Predecessor Company had performed these functions.
JPS Automotive administered its insurance programs on a corporate-wide
basis and charged its individual participating subsidiaries and divisions based
on estimated claims and loss experience. Costs charged by JPS Automotive to the
Division and the Predecessor Company for automotive and general liability,
workers' compensation and employee group health claims and insurance amounted to
$60 thousand, $1.4 million, $1.9 million and $614 thousand in the period from
December 12, 1996, to December 28, 1996, the period from January 1, 1996, to
December 11, 1996, the year ended December 31, 1995, and the period from June
29, 1994 to January 1, 1995, respectively. The accompanying balance sheets
include amounts for automotive and general liability, workers' compensation and
employee group health claims.
Collins & Aikman Products Co. ("C&A Products"), a wholly owned subsidiary
of C&A, currently provides general administrative services to JPS Automotive
pursuant to a preexisting Services Agreement assigned to C&A Products by Foamex
(the "Existing Services Agreement"). For the period from December 12, 1996, to
December 28, 1996, no amounts were paid or accrued by JPS Automotive or the
Division under this agreement.
3. JPS AUTOMOTIVE ACQUISITIONS:
The 1996 Acquisition
As discussed in Note 1, on December 11, 1996, C&A, through its
subsidiaries, acquired JPS Automotive from Foamex pursuant to an Equity Purchase
Agreement dated August 28, 1996, as amended December 11, 1996. The purchase
price for the 1996 Acquisition was an aggregate of approximately $220 million,
subject to postclosing adjustment, consisting of approximately $195 million of
indebtedness of JPS Automotive and approximately $25 million in cash paid to
Foamex.
The 1996 Acquisition has been accounted for as a purchase and, pursuant to
the provisions of SAB No. 54 and the rules of pushdown accounting, the 1996
Acquisition gave rise to a new basis of accounting for JPS Automotive. The
purchase price and related acquisition expenses exceeded the fair value of the
net assets acquired by approximately $126.4 million, which was pushed down and
recorded by JPS Automotive as goodwill and is being amortized over 40 years. The
allocation of the total purchase price to the Division resulted in reported
goodwill of $15.0 million related to the 1996 Acquisition.
In addition to the pushdown of goodwill, adjustments to certain assets and
liabilities of the Predecessor Company were recorded as a result of the 1996
Acquisition and the application of pushdown accounting. A
F-70
<PAGE> 193
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
comparison of the Division's assets and liabilities after the 1996 Acquisition
to those of the Predecessor Company prior to the 1996 Acquisition is as follows
(in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 11, DECEMBER 12,
1996 1996
------------ ------------
<S> <C> <C>
Current assets..................................... $ 17,828 $ 17,981
Property, plant and equipment, net................. 25,528 24,793
Goodwill........................................... 40,031 15,000
Other assets....................................... 415 332
Current liabilities................................ 8,348 6,891
Long-term debt..................................... 2,947 380
Other liabilities.................................. 705 785
======= =======
</TABLE>
The above December 12, 1996, balances, which are subject to postclosing
adjustment, reflect the revaluation of the Division's assets and liabilities to
their estimated fair values at the date of the 1996 Acquisition.
Unaudited pro forma net income of the Division for the period from January
1, 1996, to December 28, 1996, and for the year ended December 31, 1995,
assuming that the 1996 Acquisition occurred at the beginning of each period,
would have been approximately $3.8 million and approximately $6.4 million,
respectively. The pro forma adjustments, which would not affect net sales,
reflect primarily reduced depreciation, goodwill amortization and interest
expense offset by the pro forma impact of income taxes.
The 1994 Acquisition
On June 28, 1994, JPS Automotive acquired the businesses and assets of the
automotive products and industrial fabrics divisions of JPS Textile. The
acquired assets included property, plant and equipment, inventories and certain
contract rights, as well as certain stock and limited and general partnership
interests in joint ventures. As a part of the 1994 Acquisition, agreements were
reached relating to the purchase of assets, the granting of a reciprocal
easement, a provision for certain services, the supply of certain materials and
the sharing of taxes. The 1994 Acquisition was made pursuant to the terms of an
asset purchase agreement, dated as of May 25, 1994 (the "Asset Purchase
Agreement"), by and among JPS Textile, its affiliates and Foamex. The aggregate
consideration for the 1994 Acquisition was $290.3 million, which included
acquisition costs of $8.3 million and the assumption of long-term debt of $15.6
million. The cost of the acquisition was allocated on the estimated basis of the
fair value of the assets acquired and the liabilities assumed. The acquisition
was funded by (i) the net proceeds from the sale by JPS Automotive of $180
million principal amount of its 11 1/8% Senior Notes due 2001 ("Senior Notes"),
(ii) $90 million in cash and (iii) the net proceeds of $10 million in term loan
borrowings by JPS Automotive. Goodwill was approximately $168 million, which
included 1995 payments of approximately $4.5 million in settlement of certain
matters contained in the Asset Purchase Agreement and a 1995 adjustment of $5.6
million to adjust the original estimated appraised values of property, plant and
equipment. As a result of the allocation of the total purchase price, goodwill
reported by the Predecessor Company from the 1994 Acquisition was $42.6 million,
which included $2.2 million relating to the 1995 payments and adjustments.
F-71
<PAGE> 194
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fiscal Year
As a result of the 1996 Acquisition, the Division's fiscal year ends on the
last Saturday of December. Prior to that time, the Predecessor Company's fiscal
year ended on the Sunday closest to the thirty-first day of December.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Cash
The Division and the Predecessor Company were a party to JPS Automotive's
centralized cash management system pursuant to which cash receipts and
disbursements were processed on a combined basis. Accordingly, for financial
reporting purposes, the only amounts presented in the accompanying balance
sheets as cash are petty cash funds, with amounts for unapplied cash receipts
and outstanding disbursement checks presented as a component of divisional
equity.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
inventories is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings is 25 to 40 years, and the range
for machinery, equipment and furnishings is 3 to 15 years. Leasehold
improvements are amortized over the shorter of the terms for the respective
leases or the estimated lives of the leasehold improvements. For income tax
reporting purposes, the Division uses accelerated depreciation methods.
Cost of maintenance and repairs is charged to expense as incurred. Renewals
and improvements are capitalized. Upon retirement or other disposition of items
of plant and equipment, cost of items and related accumulated depreciation are
removed from the accounts and any gain or loss is included in operations.
In connection with the 1996 Acquisition, the Division's property, plant and
equipment was recorded at the appraised values reflecting the intended future
use of the facilities and equipment.
Long-Lived Assets
In 1996, the Predecessor Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and that certain long-lived
assets and identifiable intangibles to be disposed of be reported at the lower
of carrying
F-72
<PAGE> 195
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amount or fair value less cost to sell. The adoption of SFAS No. 121 did not
have a material impact on the Predecessor Company's results of operations.
As a result of its ongoing assessment of long-lived assets, during the
period from January 1, 1996, to December 11, 1996, the Predecessor Company
recorded a charge of approximately $117 thousand for the write-down of certain
machinery and equipment to their estimated realizable values as the assets were
assessed by management to have no continuing use. The write-down of machinery
and equipment is included in other income (expense), net in the accompanying
statement of operations.
Debt Issuance Costs
Debt issuance costs recorded by the Predecessor Company reflect an
allocation of certain amounts incurred by JPS Automotive in obtaining financing
under the term and revolving bank debt discussed in Notes 2 and 7. These costs
are amortized over the term of the related debt using the interest method.
Accumulated amortization as of December 31, 1995, was approximately $214
thousand.
In connection with the 1996 Acquisition and the subsequent retirement of
debt, the debt issuance costs allocated to the Division were eliminated as a
result of the application of pushdown accounting (see Notes 2 and 3).
Goodwill
As discussed in Note 3, the acquisition of JPS Automotive by C&A has been
accounted for as a purchase and, pursuant to SAB No. 54 and the rules of
pushdown accounting, gave rise to a new basis of accounting. As a result, a
proportionate share of the JPS Automotive goodwill relating to the 1996
Acquisition was allocated to the Division. The goodwill is being amortized over
a 40-year period, and accumulated amortization as of December 28, 1996, was
approximately $32 thousand. The carrying value of goodwill will be reviewed
periodically based on the undiscounted cash flows and pretax income over the
remaining amortization period. Should this review indicate that the goodwill
balance will not be recoverable, the Division's carrying value of goodwill will
be reduced. At December 28, 1996, management believes the goodwill is fully
recoverable.
The Predecessor Company's allocation of the JPS Automotive goodwill
relating to the 1994 Acquisition was amortized using the straight-line method
over a 40-year period (see Note 3). Accumulated amortization as of December 31,
1995, was approximately $1.6 million.
Environmental Matters
The Division records its best estimate when it believes it is probable that
an environmental liability has been incurred and the amount of loss can be
reasonably estimated. The Division also considers estimates of certain
reasonably possible environmental liabilities in determining the aggregate
amount of environmental reserves. Accruals for environmental liabilities are
generally included in the balance sheet as other noncurrent liabilities at
undiscounted amounts and exclude claims for recoveries from insurance or other
third parties. Accruals for insurance or other third-party recoveries for
environmental liabilities are recorded when it is probable that the claim will
be realized.
Postemployment Benefits
Effective June 29, 1994, the Predecessor Company adopted SFAS No. 112,
"Employers' Accounting for Post-Employment Benefits." Under this method of
accounting, benefits are accrued when it becomes probable that such benefits
will be paid and when sufficient information exists to make reasonable estimates
of the amounts to be paid.
F-73
<PAGE> 196
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Division recognizes revenue from product sales when it has shipped the
goods or ownership has been transferred to the customer for goods to be held for
future shipment at the customer's request. The Division generally allows its
customers the right of return only in the case of defective products. The
Division provides a reserve for estimated defective product based on sales.
Income Taxes
Income taxes for all periods are determined in accordance with SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires the use of the
liability method in which deferred income taxes are provided for temporary
differences between the financial reporting and income tax basis of assets and
liabilities using the income tax rates, under existing legislation, expected to
be in effect at the date such temporary differences are expected to reverse.
Immediately prior to the 1996 Acquisition, JPS Automotive was converted
from a Delaware limited partnership into an association which is taxable as a
corporation for federal, state and local income tax purposes. JPS Automotive is
included in the consolidated federal income tax return of C&A. Income taxes for
periods subsequent to the 1996 Acquisition reflect the pushdown of the
Division's impact on the consolidated tax position of C&A.
Prior to the 1996 Acquisition, JPS Automotive, as a limited partnership,
was not subject to federal income taxes and, therefore, no current or deferred
income tax provision has been provided for such taxes in the accompanying
financial statements of the Predecessor Company.
JPS Automotive had a tax-sharing agreement that provided for payment to the
partners of amounts that would be required to be paid if JPS Automotive were a
corporation filing separate income tax returns. At the time of the 1996
Acquisition, Foamex assigned to C&A Products the tax-sharing agreement.
Newly Issued Accounting Standard
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 96-1, "Environmental Remediation
Liabilities." SOP 96-1 provides authoritative guidance on specific accounting
issues related to the recognition, measurement, display and disclosure of
environmental remediation liabilities. SOP 96-1 addresses only those actions
undertaken in response to a threat of litigation or assertion of a claim. It
does not address accounting for pollution control costs with respect to current
operations or for costs of future site restoration on closure required upon
cessation of operations. SOP 96-1 is effective for fiscal years beginning after
December 15, 1996. The Division does not expect that adoption of this standard
will have a material impact on its financial position or results of operations.
5. INVENTORIES:
The components of inventories consist of (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials and supplies......................... $1,975 $2,652
Work-in-process.................................... 2,877 2,325
Finished goods..................................... 3,037 4,034
------ ------
Total.................................... $7,889 $9,011
====== ======
</TABLE>
F-74
<PAGE> 197
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES:
Accrued expenses are summarized below (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Payroll and employee benefits...................... $ 765 $1,109
Property taxes..................................... 413 404
Other.............................................. 137 162
------ ------
Total.................................... $1,315 $1,675
====== ======
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Equipment financing................................ $1,005 $1,584
Allocation of JPS Automotive term and revolving
loans............................................ 0 6,200
------ ------
Subtotal................................. 1,005 7,784
Less -- Current portion............................ 625 988
------ ------
Long-term debt..................................... $ 380 $6,796
====== ======
</TABLE>
Equipment Financing
Certain equipment has been purchased with financing provided by a financial
institution. Although JPS Automotive is the actual borrower under these
agreements, the liabilities for this financing have been reflected in the
accompanying balance sheets since the liabilities are secured by the Division's
and the Predecessor Company's equipment. The financing agreements bear interest
between 8.05% and 9.67% and amounts are payable in monthly installments.
Interest expense of $0, $100 thousand, $165 thousand and $110 thousand for the
period from December 12, 1996, to December 28, 1996, the period from January 1,
1996, to December 11, 1996, the year ended December 31, 1995, and the period
from June 29, 1994, to January 1, 1995, respectively, is recorded in the
accompanying statements of operations, and the annual cash payments for interest
approximates the amounts expensed. The final installments under the agreements
occur at various dates through December 1998. The Division's future installment
payments are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year --
1997...................................................... $ 625
1998...................................................... 380
------
$1,005
======
</TABLE>
Allocation of JPS Automotive Term and Revolving Loans
In conjunction with the 1994 Acquisition, JPS Automotive entered into a
credit agreement which provided for loans of up to $35 million, of which $10
million was available as a term loan and up to $25 million was available under a
revolving line of credit. In connection with the 1996 Acquisition, the
outstanding
F-75
<PAGE> 198
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
borrowings at December 11, 1996, of $9.2 million under the term loan were
repaid. At December 11, 1996, there were no outstanding borrowings under the
revolving line of credit. The credit agreement was subsequently terminated.
As discussed in Note 2, outstanding borrowings of JPS Automotive under the
term and revolving loan arrangements were allocated, along with the related
interest expense and deferred debt issuance costs, to the Predecessor Company
based on the ratio of the assets of the Predecessor Company which served as
collateral for the debt, which consisted of accounts receivable and inventory,
to the total of the assets of JPS Automotive which served as collateral for the
debt. At December 31, 1995, the accompanying balance sheet includes $498
thousand of unamortized deferred debt issuance costs and $6.2 million of debt
allocated to the Predecessor Company associated with these loans. In addition,
the Predecessor Company was allocated interest expense of approximately $552
thousand, $594 thousand and $316 thousand for the period from January 1, 1996,
to December 11, 1996, the year ended December 31, 1995, and the period from June
29, 1994 to January 1, 1995, respectively, associated with these borrowings.
8. EMPLOYEE BENEFIT PLANS:
The 1996 Acquisition did not significantly affect the employee benefit
plans offered to the employees of the Division.
Defined Benefit Pension Plan
Effective January 1, 1995, the Predecessor Company began participating in
the Retirement Pension Plan for Employees of JPS Automotive L.P. (the "Plan")
for salaried and certain hourly employees. Benefits are based on the employees'
final average compensation, years of benefit service, the covered compensation
in effect at retirement and the employees' ages when payment begins. Actuarially
determined calculations for the Division and the Predecessor Company as a
stand-alone entity are included in the accompanying financial statements.
As part of the 1996 Acquisition, the Division recognized all prior service
cost, net losses and minimum liabilities. Accordingly, the period from December
12, 1996, to December 28, 1996, does not reflect any net amortization or
deferrals.
The actuarially determined net periodic pension cost includes the following
components (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------
PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1,
1996, TO 1996, TO YEAR ENDED
DECEMBER 28, DECEMBER 11, DECEMBER 31,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost.................................. $6 $119 $ 62
Interest cost................................. 1 17 4
Actual return on plan assets.................. 0 (6) 0
Net amortization and deferral................. 0 14 4
-- ---- ----
Total............................... $7 $144 $ 70
== ==== ====
</TABLE>
Funding of retirement costs for this plan both satisfies the minimum
funding requirements of the Employee Retirement Income Security Act of 1974 and
does not exceed the full funding limitations of the Internal Revenue Code
("IRC") of 1986, as amended. Plan investments consist primarily of cash
equivalents.
F-76
<PAGE> 199
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the actuarially determined portion of the
Plan's funded status and the amounts recognized in the accompanying balance
sheets as of December 28, 1996, and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations --
Vested benefits.......................................... $ (226) $ (89)
Nonvested benefits....................................... (22) (7)
----- -----
Accumulated benefit obligations....................... $ (248) $ (96)
===== =====
Total projected benefit obligations........................ $ (381) $ (127)
Fair value of plan assets.................................. 190 4
----- -----
Plan assets less than projected benefit obligations........ (191) (123)
Unrecognized prior service cost............................ 0 53
Unrecognized net loss...................................... 0 3
Additional minimum liability............................... 0 (26)
----- -----
Accrued pension cost.................................. $ (191) $ (93)
===== =====
</TABLE>
Significant assumptions used in determining the plan's unfunded status are
as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Expected long-term rate of return on plan assets........... 8.0% 8.0%
Discount rate on projected benefit obligations............. 7.5 7.3
Rates of increase in compensation levels (where
applicable).............................................. 4.5 4.3
=== ===
</TABLE>
Defined Contribution Plan
The Division participates in JPS Automotive's defined contribution plan
which qualifies under Section 401(k) of the IRC and covers eligible employees.
Employee contributions are voluntary and subject to certain limitations as
imposed by the IRC. The Division, through JPS Automotive, makes a matching
contribution of 25% of each employee's contribution with a maximum matching
contribution of 1 1/2% of each employee's base compensation. The Predecessor
Company, through JPS Automotive, also provided an additional 25% match of each
employee's contribution to a fund which invested in Foamex common stock with a
maximum contribution of 3% of each employee's base compensation. The
contributions of the Division and the Predecessor Company were approximately $5
thousand for the period from December 12, 1996, to December 28, 1996, $86
thousand for the period from January 1, 1996, to December 11, 1996, $51 thousand
for the year ended December 31, 1995, and $21 thousand for the period from June
29, 1994, to January 1, 1995.
Postretirement Benefits
JPS Automotive provides postretirement health care and life insurance
benefits for eligible employees and retirees of the Division and retirees of the
Predecessor Company. These plans are unfunded, and JPS Automotive retains the
right to modify or eliminate these benefits. Actuarially determined calculations
for the Division and the Predecessor Company as a stand-alone entity are
included in the accompanying financial statements.
F-77
<PAGE> 200
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The actuarially determined net periodic postretirement benefit cost
includes the following components (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1, JUNE 29,
1996, TO 1996, TO YEAR ENDED 1994, TO
DECEMBER 28, DECEMBER 11, DECEMBER 31, JANUARY 1,
1996 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost for benefits earned..... $1 $ 13 $ 12 $ 5
Interest cost on liability........... 2 32 46 26
Net amortization..................... 0 5 0 0
-- --- --- ----
Net periodic postretirement benefit
cost............................... $3 $ 50 $ 58 $ 31
== === === ====
</TABLE>
The following table sets forth the actuarially determined amount of net
postretirement benefit obligation included in the accompanying balance sheets
(in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Retirees.................................................... $243 $245
Fully eligible active plan participants..................... 143 144
Other active plan participants.............................. 89 90
---- ----
Accumulated postretirement benefit obligation............... 475 479
Unrecognized prior service gain from plan amendments........ 0 (231)
Unrecognized net gain....................................... 0 198
---- ----
Net postretirement benefit obligation....................... $475 $446
==== ====
</TABLE>
As part of the 1996 Acquisition, the Division recognized all previously
unrecognized net gains and losses.
Since JPS Automotive has capped its annual liability per person and all
future cost increases will be passed on to retirees, the annual rate of increase
in health care costs does not affect the Division's postretirement benefit
obligation. The discount rate used in determining the accumulated postretirement
benefit obligation as of December 28, 1996, and December 31, 1995, was 7.5% and
7.8%, respectively.
Postemployment Benefits
JPS Automotive provides certain postemployment benefits to former or
inactive employees of the Division and the Predecessor Company and their
dependents during the time period following employment but before retirement. On
June 29, 1994, the Predecessor Company adopted SFAS No. 112. The Predecessor
Company's adoption of SFAS No. 112 did not have a significant impact on the
consolidated statements of operations. As of December 28, 1996, and December 31,
1995, the Division's and the Predecessor Company's actuarially determined
portion of the liability for postemployment benefits was $26 thousand for each
period and is included in other noncurrent liabilities in the accompanying
balance sheets.
9. INCOME TAXES:
Immediately prior to the 1996 Acquisition, JPS Automotive was converted
from a Delaware limited partnership into an association which is taxable as a
corporation for federal, state and local income tax purposes. JPS Automotive
remains a Delaware limited partnership for all purposes other than federal and
state income taxes.
F-78
<PAGE> 201
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Division, through JPS Automotive, is included in the consolidated
federal income tax return of C&A. Income taxes for periods subsequent to the
1996 Acquisition reflect the pushdown of the Division's impact on the
consolidated tax position of C&A, which approximate income taxes computed on a
separate return basis. Income taxes for the periods prior to the 1996
Acquisition are provided on a separate return basis. As discussed in Note 4, JPS
Automotive was a party to a tax-sharing agreement with Foamex that was assigned
to C&A Products at the time of the 1996 Acquisition. Although no payments were
made by JPS Automotive to either Foamex or C&A Products under the tax-sharing
agreement as a result of consolidated operations from June 29, 1994, to December
28, 1996, calculation of income taxes on a stand-alone basis for the Division
and the Predecessor Company in accordance with the tax-sharing agreement would
have resulted in obligations to Foamex of approximately $2.0 million for the
period from June 29, 1994, to January 1, 1995, and approximately $270 thousand
for the year ended December 31, 1995. No amounts would have been payable under
the tax-sharing agreement for the period from January 1, 1996, to December 11,
1996.
Components of the provision for income taxes subsequent to the 1996
Acquisition are summarized as follows (in thousands):
<TABLE>
<S> <C>
Federal --
Current...................................................... $ 0
Deferred..................................................... 9
---
9
---
State --
Current...................................................... 0
Deferred..................................................... 2
---
2
---
$11
===
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1, JUNE 29,
1996, TO 1996, TO YEAR ENDED 1994, TO
DECEMBER 28, DECEMBER 11, DECEMBER 31, JANUARY 1,
1996 1996 1995 1995
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Statutory income tax................ $ 10 $ 1,215 $ 2,099 $ 2,132
State income taxes, net of
federal........................... 1 0 0 0
Permanent difference on partnership
income............................ 0 (1,215) (2,099) (2,132)
--- ------- ------- -------
$ 11 $ 0 $ 0 $ 0
=== ======= ======= =======
</TABLE>
As a result of the change in JPS Automotive's tax status that resulted from
the 1996 Acquisition, deferred tax assets and liabilities are provided on the
temporary differences between the financial reporting and tax bases of the
Division's assets and liabilities. While the equity purchase of JPS Automotive
results in carryover tax basis in the assets, such carryover basis reflects the
fair market value as a result of the deemed taxable sale and revaluation to fair
market value in the hands of the seller just prior to the purchase by C&A
F-79
<PAGE> 202
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and its subsidiaries. The components of the net deferred tax assets as of
December 28, 1996, were as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets --
Pension and postretirement benefits................................. $253
Other employee benefits............................................. 143
Other liabilities and reserves...................................... 117
----
513
Deferred tax liability -- Goodwill amortization....................... (5)
----
Net deferred tax assets............................................... $508
====
</TABLE>
The above amounts have been classified in the December 28, 1996, balance
sheet as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets --
Current............................................................. $187
Noncurrent, included in other noncurrent assets..................... 321
----
$508
====
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Division is obligated under various noncancelable lease agreements for
rental of machinery and computer equipment which remained outstanding following
the 1996 Acquisition. Many of the leases contain renewal options with varying
terms and escalation clauses that provide for increased rentals based upon
increases in the Consumer Price Index, real estate taxes and lessors' operating
expenses. Total minimum rental commitments required under operating leases at
December 28, 1996, are (in thousands):
<TABLE>
<S> <C>
1997...................................................... $ 92
1998...................................................... 41
1999...................................................... 19
2000...................................................... 7
----
$159
====
</TABLE>
Rental expense charged to operations under operating leases by the Division
approximated $6 thousand for the period from December 12, 1996, to December 28,
1996, $113 thousand for the period from January 1, 1996, to December 11, 1996,
$197 thousand for the year ended December 31, 1995 and $115 thousand for the
period from June 29, 1994, to January 1, 1995. Substantially all such rental
expense represented the minimum rental payments under operating leases.
11. RELATED-PARTY TRANSACTIONS AND ALLOCATIONS:
As discussed in Note 2, JPS Automotive performed certain services and
incurred certain costs for the Division and the Predecessor Company. Services
provided include treasury, risk management, employee benefits, legal services,
data processing, credit and collections, and other general corporate services.
The costs of the services provided by JPS Automotive have been allocated to the
Division and the Predecessor Company based upon a combination of estimated use
and the relative sales of the business to the total operations of JPS
Automotive. Costs allocated to the Division and the Predecessor Company for
these services were $39 thousand, $1 million, $1.1 million and $399 thousand for
the period from December 12, 1996, to December 28,
F-80
<PAGE> 203
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996, the period from January 1, 1996, to December 11, 1996, the year ended
December 31, 1995 and the period from June 29, 1994, to January 1, 1995,
respectively.
JPS Automotive provided certain management information systems supporting
the manufacturing operations of the Division and the Predecessor Company. The
costs of the services provided by JPS Automotive have been allocated to the
Division and the Predecessor Company based upon estimated use. Costs allocated
to the Division and the Predecessor Company for these services were $0, $260
thousand, $262 thousand and $115 thousand for the period from December 12, 1996,
to December 28, 1996, the period from January 1, 1996, to December 11, 1996, the
year ended December 31, 1995, and the period from June 29, 1994, to January 1,
1995, respectively. These costs are included in cost of goods sold in the
accompanying statements of operations.
The Division and the Predecessor Company used a warehouse owned by the JPS
Automotive Carpet and Trim division to store and distribute certain finished
goods inventory. Costs charged to the Division and the Predecessor Company by
the Carpet and Trim division for rent, utilities and payroll costs associated
with the use of this warehouse were approximately $20 thousand, $215 thousand,
$118 thousand and $28 thousand for the period from December 12, 1996, to
December 28, 1996, the period from January 1, 1996, to December 11, 1996, the
year ended December 31, 1995, and the period from June 29, 1994, to January 1,
1995, respectively. These costs are included in cost of goods sold in the
accompanying statements of operations.
Analysis of Net Transactions with JPS Automotive L.P.
Due to the intent to forgive any net balance in investments and advances to
or from JPS Automotive upon the sale of the Division by JPS Automotive, the net
intercompany balance has been classified as a component of divisional equity in
the accompanying financial statements. Significant components of the net
transactions with JPS Automotive have been summarized as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1, JUNE 29,
1996, TO 1996, TO YEAR ENDED 1994, TO
DECEMBER 28, DECEMBER 11, DECEMBER 31, JANUARY 1,
1996 1996 1995 1995
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Cash transactions --
Corporate general and administrative
allocated costs..................... $ 39 $ 1,028 $ 1,074 $ 399
Corporate management information
systems allocated costs............. 0 260 262 115
Corporate administered insurance
program costs....................... 60 1,400 1,900 614
Change in allocated debt of JPS
Automotive.......................... 0 2,165 (1,199) (1,000)
Interest expense allocated from JPS
Automotive.......................... 0 552 594 316
Net transfers of cash from (to) JPS
Automotive.......................... 1,317 (12,213) (7,060) (2,619)
------ ------- ------- --------
1,416 (6,808) (4,429) (2,175)
Other activity --
Adjustment to goodwill allocation...... 0 0 697 0
------ ------- ------- --------
$1,416 $ (6,808) $ (3,732) $(2,175)
====== ======= ======= =======
</TABLE>
Other Related-party Activities of the Division
At December 28, 1996, C&A Products has pledged the ownership interests in
its significant subsidiaries, including its partnership interests in JPS
Automotive, as security for debt of C&A Products totaling $640.6 million.
F-81
<PAGE> 204
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 2, C&A Products currently provides general
administrative services to JPS Automotive pursuant to the Existing Services
Agreement. In connection with the 1996 Acquisition, C&A currently contemplates
an amendment to the Existing Services Agreement to expressly provide that the
services provided by C&A Products will include certain administrative and
management functions previously conducted by JPS Automotive. For the period from
December 12, 1996, to December 28, 1996, no amounts were paid or accrued by the
Division.
Other Related-party Activities of the Predecessor Company
The Predecessor Company, through JPS Automotive, regularly entered into
transactions with its affiliates in the ordinary course of business.
In connection with the 1994 Acquisition, JPS Automotive entered into a
supply agreement (the "Supply Agreement") with Foamex and certain of its
affiliates. Pursuant to the terms of the Supply Agreement, at the option of JPS
Automotive, Foamex would purchase certain raw materials which were necessary for
the manufacture of the Predecessor Company's products, and resell such materials
to the Predecessor Company at a price equal to net cost plus reasonable
out-of-pocket expenses. During the period from January 1, 1996, to December 11,
1996, the year ended December 31, 1995, and the period from June 29, 1994, to
January 1, 1995, the Predecessor Company purchased $20.2 million, $33 million
and $0, respectively, of raw materials under the Supply Agreement with Foamex.
12. ENVIRONMENTAL:
The Division is subject to various federal, state and local environmental
laws and regulations that (i) affect ongoing operations and may increase capital
costs and operating expenses and (ii) impose liability for the costs of
investigation and remediation and certain other damages related to on-site and
off-site soil and groundwater contamination. The Division believes it has
obtained or applied for the material permits necessary to conduct its business.
To date, compliance with applicable environmental laws has not had and, in the
opinion of management, based on the facts presently known to it, is not expected
to have a material adverse effect on the Division's financial condition or
results of operations.
Although not named as a potentially responsible party for any
environmentally contaminated sites, the Division and the Predecessor Company
accrued environmental costs at December 28, 1996, and December 31, 1995, of
approximately $325 thousand and $354 thousand, respectively, $48 thousand and
$54 thousand of which is included in current liabilities, respectively. In
addition, as of December 31, 1995, JPS Automotive had a receivable of $500
thousand for indemnification of environmental liabilities from JPS Textile,
former owner of JPS Automotive, of which $75 thousand was allocated to and
included in noncurrent assets of the Predecessor Company based on an allocation
of the total JPS Automotive environmental liability. The environmental
receivable was written off during the period from January 1, 1996, to December
11, 1996, as JPS Automotive management believes that the realization of the
receivable established for indemnification is remote.
Although it is possible that new information or future events could require
the Division to reassess its potential exposure relating to pending
environmental matters, management believes that, based on the facts presently
known to it, the resolution of such environmental matters will not have a
material adverse effect on the Division's financial condition or results of
operations. The possibility exists, however, that new environmental legislation
may be passed or environmental regulations may be adopted, or other
environmental conditions may be found to exist, that may require expenditures
not currently anticipated which may be material, and there can be no assurance
that the Division has identified or properly assessed all potential
environmental liability arising from its activities or properties.
F-82
<PAGE> 205
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. LITIGATION:
From time to time, the Division has been involved in various legal
proceedings. Management believes that such litigation is routine in nature and
incidental to the conduct of its business, and that none of such litigation, if
determined adversely to the Division, would have a material adverse effect on
the financial condition or results of operations of the Division.
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK:
Concentration of Credit Risk
Financial instruments which potentially subject the Division to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Division's customers operate primarily in the automotive and industrial
fabrics industries. The Division performs ongoing credit evaluations of its
customers and generally does not require collateral. The Division maintains
allowance accounts for potential losses and such losses have been within
management's expectations. The percentage of sales to the three principal
customers were as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 12, JANUARY 1, JUNE 29,
1996, TO 1996, TO YEAR ENDED 1994, TO
DECEMBER 28, DECEMBER 11, DECEMBER 31, JANUARY 1,
1996 1996 1995 1995
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Allied Signal.................... 17% 23% 33% 37%
TRW.............................. 11 18 23 23
Travis Textiles.................. 17 7 8 5
== == == ==
</TABLE>
Accounts receivable due from the three principal customers as a percentage
of total accounts receivable are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
DECEMBER 28, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Allied Signal.............................................. 21% 30%
TRW........................................................ 14 23
Travis Textiles............................................ 11 6
== ==
</TABLE>
The Division's exposure to credit risk associated with nonpayment by these
customers is affected by conditions or occurrences primarily within the
automotive and industrial fabrics segments. Substantially all trade receivables
from these three customers were current at December 28, 1996.
Disclosure About Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for the Division's
financial instruments, which consist primarily of accounts receivable, accounts
payable, accrued liabilities and long-term debt approximate fair value based on
the Division's assessment of available market information and appropriate
valuation methodologies. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instruments.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-83
<PAGE> 206
JPS AUTOMOTIVE L.P.
AIR RESTRAINT/INDUSTRIAL FABRICS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reliance on Principal Supplier
One supplier currently supplies substantially all of the Division's
requirements for nylon yarn, the principal raw material used in the Division's
airbag products. While the Division believes that there are adequate alternative
sources of supply from which it could fulfill its nylon yarn requirements, the
unanticipated termination of the current supply arrangement or a prolonged
interruption in shipments could have a material adverse effect on the Division.
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
The quarterly financial data of 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------
FIRST SECOND THIRD FOURTH FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1996(1) --
Net sales....................................... $16,052 $17,575 $14,980 $14,214 $ 2,110
Gross profit.................................... 2,320 1,949 1,784 2,089 194
Net income...................................... 1,073 685 373 932 18
======= ======= ======= ======= ======
1995 --
Net sales....................................... $22,753 $18,456 $16,200 $15,671 N/A
Gross profit.................................... 3,291 3,667 1,930 1,893 N/A
Net income...................................... 2,160 2,377 682 393 N/A
======= ======= ======= ======= ======
</TABLE>
- ---------------
(1) The fourth quarter results of the Predecessor Company are through December
11, 1996, and include the $117 thousand write-down of certain machinery and
equipment (see Note 4). The Division's fourth quarter results are only for
the period from December 12, 1996, to December 28, 1996, the period
following the acquisition of JPS Automotive by C&A.
16. SUBSEQUENT EVENT:
On July 24, 1997, JPS Automotive sold all of the assets of the Division to
Safety Components International, Inc. for $56.3 million, including the
assumption of certain liabilities and subject to postclosing adjustments.
F-84
<PAGE> 207
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Collins & Aikman Corporation:
We have audited the accompanying statements of income, divisional equity
and cash flows of the Air Restraint/Industrial Fabrics (the "Division") Division
of JPS Textile Group, Inc. ("JPS Textile") for the period from December 26, 1993
to June 28, 1994. These financial statements are the responsibility of the
Division's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As more fully discussed in Note 2, to these financial statements, the
Division was acquired by Foamex International, Inc. on June 28, 1994 and the
Division subsequently was acquired in 1996 by Collins & Aikman Corporation
("C&A"). In June 1997 C&A entered into a letter of intent to sell the Division.
These financial statements do not include any adjustments arising from such sale
transactions.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, divisional equity and cash
flows of the Air Restraint/Industrial Fabrics Division of JPS Textile Group,
Inc. from December 26, 1993 to June 28, 1994, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Spartanburg, South Carolina
July 10, 1997
F-85
<PAGE> 208
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
STATEMENT OF INCOME
FOR THE PERIOD FROM DECEMBER 26, 1993 TO JUNE 28, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $40,157
Cost of goods sold................................................................. 33,738
------
Gross profit............................................................. 6,419
Selling, general and administrative expenses....................................... 1,320
Corporate general and administrative allocated costs............................... 908
------
Income from operations................................................... 4,191
Interest expense................................................................... 562
Other expense, net................................................................. 80
------
Income before income taxes............................................... 3,549
Provision for income taxes......................................................... 1,313
------
Net income............................................................... $ 2,236
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-86
<PAGE> 209
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
STATEMENT OF DIVISIONAL EQUITY
FOR THE PERIOD FROM DECEMBER 26, 1993 TO JUNE 28, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance, December 25, 1993........................................................ $ 17,831
Net income...................................................................... 2,236
Net transactions with JPS Textile............................................... (1,219)
--------
Balance, June 28, 1994............................................................ $ 18,848
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-87
<PAGE> 210
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 26, 1993 TO JUNE 28, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Operating activities:
Net income..................................................................... $ 2,236
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation................................................................ 1,086
Loss on disposal of assets.................................................. 82
Deferred taxes.............................................................. 281
Changes in operating assets and liabilities:
Accounts receivable....................................................... (2,134)
Inventories............................................................... (1,760)
Accounts payable.......................................................... 3,824
Accrued expenses.......................................................... 532
Other assets and liabilities.............................................. (13)
-------
Net cash provided by operating activities.............................. 4,134
-------
Net cash (used in) investing activities, capital expenditures.................... (4,364)
-------
Financing activities:
Net transactions with JPS Textile.............................................. (1,219)
Allocated long-term debt (Note 2).............................................. 1,444
-------
Net cash provided by financing activities.............................. 225
-------
Net change in cash..................................................... (5)
Cash, beginning of period........................................................ 5
-------
Cash, end of period.............................................................. $ -0-
=======
Supplemental cash flow information, cash paid for interest....................... $ 562
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-88
<PAGE> 211
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The Air Restraint/Industrial Fabrics Division (the "Division") of JPS
Textile Group, Inc. ("JPS Textile") operates in the automotive products and
industrial fabrics segments, including the design, manufacture and sale of
airbag fabric for passenger cars and light trucks and other specialty industrial
fabrics.
The statements of income, divisional equity and cash flows for the period
from December 26, 1993 to June 28, 1994 pertain to the Division.
2. DIVISION ACQUISITIONS
JPS Automotive L.P. ("JPS Automotive") was formed on May 17, 1994, for the
purpose of acquiring a 100% ownership interest in JPS Automotive Products Corp.
("Products Corp."), which was purchased for nominal consideration on May 25,
1994. On June 28, 1994, subsidiaries of Foamex International, Inc. ("Foamex"),
the owners of all partnership interests in JPS Automotive, made capital
contributions to Products Corp. On June 28, 1994, Products Corp. acquired the
assets of the automotive products and industrial fabrics divisions of JPS
Textile. Effective October 3, 1994, Products Corp. transferred and assigned
substantially all of its assets, subject to substantially all of its
liabilities, to JPS Automotive, which agreed to assume such liabilities. In the
accompanying financial statements, the Air Restraint/Industrial Fabrics division
is referred to as the Division.
On December 11, 1996, all of the outstanding equity of JPS Automotive was
acquired from Foamex by Collins & Aikman Corporation ("C&A"), through its
subsidiaries.
On July 24, 1997, C&A sold all of the assets of the Division to Safety
Components International Inc. for $56.3 million in cash, including the
assumption of certain liabilities and subject to postclosing adjustments. In
addition, Safety Components International, Inc. made a payment to JPS Automotive
at the closing to enable it to pay off existing indebtedness of the Division of
approximately $650,000 at the closing.
Transfers of operating funds between the Division and JPS Textile occur on
a noninterest-bearing basis, with the net amount of these transfers reflected as
investments and advances from JPS Textile. The net balance in investments and
advances from JPS Textile at June 28, 1994 and December 25, 1993 of $18.8 and
$17.8 million, respectively, is classified as divisional equity in the
accompanying balance sheets.
As indicated above, the accompanying financial statements present the
results of operations and cash flows of the Division as if it were a separate
entity for the period presented.
For the period ended June 28, 1994, as required by Staff Accounting
Bulletin No. 73 of the Securities and Exchange Commission, a portion of certain
term and revolving bank debt interest expense of JPS Textile has been allocated
to the Division as a result of certain of the Division's assets, which consist
of accounts receivable and inventory, serving as security for such debt. The
allocations have been made based upon the ratio of the assets of the Division
which served as collateral for such debt to the total of the assets of JPS
Textile which served as collateral for the debt. The average interest rate on
this debt for the period ended June 28, 1994, was approximately 7%. Interest has
not been computed on the remaining intercompany balances.
JPS Textile performed certain services and incurred certain costs for the
Division. Services provided include treasury, risk management, employee
benefits, legal services, data processing, credit and collections and other
general corporate services. The costs of the services provided by JPS Textile
have been allocated to the Division based upon a combination of estimated use
and the relative sales of the business to the total operations of JPS Textile.
Costs allocated to the Division for these services were $908 thousand for the
period ended June 28, 1994. In the opinion of management, the method of
allocating these costs is believed to be
F-89
<PAGE> 212
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reasonable. However, the costs of these services charged to the Division are not
necessarily indicative of the costs that would have been incurred if the
Division had performed these functions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of the Division financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Environmental Matters
The Division records its best estimate when it believes it is probable that
an environmental liability has been incurred and the amount of loss can be
reasonably estimated. The Division also considers estimates of certain
reasonably possible environmental liabilities in determining the aggregate
amount of environmental reserves. Accruals for environmental liabilities are
generally included in the balance sheet as other noncurrent liabilities at
undiscounted amounts and exclude claims for recoveries from insurance or other
third parties. Accruals for insurance or other third-party recoveries for
environmental liabilities are recorded when it is probable that the claim will
be realized.
Revenue Recognition
The Division recognizes revenue from product sales when it has shipped the
goods or ownership has been transferred to the customer for goods to be held for
future shipment at the customer's request. The Division generally allows its
customers the right of return only in the case of defective products. The
Division provides a reserve for estimated defective products based on sales.
Income Taxes
Income taxes for all periods are determined in accordance with SFAS No.109,
"Accounting for Income Taxes". SFAS No.109 requires the use of the liability
method in which deferred income taxes are provided on the temporary differences
between the financial reporting and income tax basis of assets and liabilities
using the income tax rates, under existing legislation, expected to be in effect
at the date such temporary differences are expected to reverse. Income taxes of
the Division for the period ended June 28, 1994 are computed as if it filed a
separate tax return.
Newly Issued Accounting Standard
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 96-1, "Environmental Remediation
Liabilities". SOP 96-1 provides authoritative guidance on specific accounting
issues related to the recognition, measurement, display and disclosure of
environmental remediation liabilities. SOP 96-1 addresses only those actions
undertaken in response to a threat of litigation or assertion of a claim. It
does not address accounting for pollution control costs with respect to current
operations or for costs of future site restoration on closure required upon
cessation of operations. SOP 96-1 is effective for fiscal years beginning after
December 15, 1996. The Division does not expect adoption of this standard will
have a material impact on its financial position or results of operations.
F-90
<PAGE> 213
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. BENEFIT PLANS
Defined Benefit Pension Plan
Substantially all of the Division's employees are covered by defined
benefit pension plans sponsored by JPS Textile. The plans provide pension
benefits that are based on the employees' compensation during the last ten years
of employment. The Division's policy is to fund the annual contribution required
by applicable regulations. Expense for the Defined Benefit Pension Plans was not
material.
401(k) Savings Plans
The Division also participated in JPS Textile's salaried employees'
savings, investment and profit-sharing plan which is available to employees
meeting eligibility requirements. The Division's expense was approximately $20
thousand for the period ended June 28, 1994.
Postretirement Benefits
The Division provides postretirement health care and life insurance
benefits for eligible employees and retirees of the Division. These plans are
unfunded, and the Division retains the right to modify or eliminate these
benefits. Actuarially determined calculations for the Division and as a
stand-alone entity are included in the accompanying financial statements.
Expense for the period ended June 28, 1994 totaled approximately $40
thousand.
Since JPS Textile has capped its annual liability per person and all future
cost increases will be passed on to retirees, the annual rate of increase in
health care costs does not affect the Division's postretirement benefit
obligation.
5. INCOME TAXES
The provision for income taxes for the period ended June 28, 1994 includes
the following:
<TABLE>
<S> <C>
Federal:
Current........................................... $ 949
Deferred.......................................... 258
------
1,207
------
State:
Current........................................... 83
Deferred.......................................... 23
------
106
------
$1,313
======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Division is obligated under various noncancelable lease agreements for
rental of machinery and computer equipment. Many of the leases contain renewal
options with varying terms and escalation clauses that provide for increased
rentals based upon increases in the Consumer Price Index, real estate taxes and
F-91
<PAGE> 214
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lessors' operating expenses. Total minimum rental commitments required under
operating leases at June 28, 1994 are (in thousands):
<TABLE>
<S> <C>
1995.................................................. $193
1996.................................................. 187
1997.................................................. 181
1998.................................................. 122
1999 and thereafter................................... 4
</TABLE>
Rental expense charged to operations under operating leases by the Division
approximated $100 thousand for the period ended June 28, 1994. Substantially all
such rental expense represented the minimum rental payments under operating
leases.
7. RELATED-PARTY TRANSACTIONS AND ALLOCATIONS
As discussed in Note 2, JPS Textile performed certain services and incurred
certain costs for the Division. Services provided include treasury, risk
management, employee benefits, legal services, data processing, credit and
collections, and other general corporate services. The costs of the services
provided by JPS Textile has been allocated to the Division based upon a
combination of estimated use and the relative sales of the business to the total
operations of JPS Textile. Costs allocated to the Division for these services
were approximately $843 thousand for the period ended June 28, 1994. JPS Textile
provided certain management information systems supporting the manufacturing
operations of the Division. The costs of the services provided by JPS Textile
has been allocated to the Division based upon estimated use. Costs allocated to
the Division for these services were $65 thousand for the period ended June 28,
1994. The cost is included in the accompanying statement of income.
The Division used a warehouse owned by JPS Textile to store and distribute
certain finished goods inventory. Costs charged to the Division by JPS Textile
for rent, utilities and payroll costs associated with the use of this warehouse
were approximately $150 thousand for the period ended June 28, 1994. These costs
are included in selling, general and administrative expenses in the accompanying
statement of income.
Analysis of Net Transactions with JPS Textile
The net intercompany balance has been classified as a component of
divisional equity in the accompanying financial statements. Significant
components of the net transactions with JPS Textile have been summarized for the
period ended June 28, 1994 as follows (in thousands):
<TABLE>
<S> <C>
Cash transactions:
Corporate general and administrative allocated costs..................... $ 843
Corporate management information systems allocated costs................. 65
Interest expense allocated from JPS Textile.............................. 373
Change in allocated debt of JPS Textile.................................. (2,138)
Net transfers of cash to JPS Textile..................................... (362)
-------
$(1,219)
=======
</TABLE>
8. ENVIRONMENTAL
The Division is subject to various federal, state and local environmental
laws and regulations that (i) affect ongoing operations and may increase capital
costs and operating expenses and (ii) impose liability for the costs of
investigation and remediation and certain other damages related to on-site and
off-site soil and
F-92
<PAGE> 215
AIR RESTRAINT/INDUSTRIAL FABRICS
DIVISION OF JPS TEXTILE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
groundwater contamination. The Division believes it has obtained or applied for
the material permits necessary to conduct its business. To date, compliance with
applicable environmental laws has not had and, in the opinion of management,
based on the facts presently known to it, is not expected to have a material
adverse effect on the Division's financial condition or results of operations.
Although it is possible that new information or future events could require
the Division to reassess its potential exposure relating to pending
environmental matters, management believes that, based on the facts presently
known to it, the resolution of such environmental matters will not have a
material adverse effect on the Division's financial condition or results of
operations.
The possibility exists, however, that new environmental legislation may be
passed or environmental regulations may be adopted, or other environmental
conditions may be found to exist, that may require expenditures not currently
anticipated which may be material, and there can be no assurance that the
Division has identified or properly assessed all potential environmental
liability arising from its activities or properties.
9. LITIGATION
From time to time, the Division has been involved in various legal
proceedings. Management believes that such litigation is routine in nature and
incidental to the conduct of its business, and that none of such litigation, if
determined adversely to the Division, would have a material adverse effect on
the financial condition or results of operations of the Division.
10. CONCENTRATION OF RISK
The Division's customers operate primarily in the automotive and industrial
fabrics industries. The Division performs ongoing credit evaluations of its
customers and generally does not require collateral. The Division maintains
allowance accounts for potential losses and such losses have been within
management's expectations.
The percentage of sales to the three principal customers for the period
ended June 28, 1994, respectively was as follows:
<TABLE>
<S> <C>
Allied Signal........................................... 28%
TRW..................................................... 10
Travis Textiles......................................... 6
</TABLE>
The Division's exposure to credit risk associated with nonpayment by these
customers is affected by conditions or occurrences primarily within the
automotive and industrial fabrics segments. Substantially all trade receivables
from these three customers were current at June 28, 1994.
Reliance on Principal Supplier -- One supplier currently supplies
substantially all of the Division's requirements for nylon yarn, the principal
raw material used in the Division's airbag products. While the Division believes
that there are adequate alternative sources of supply from which it could
fulfill its nylon yarn requirements, the unanticipated termination of the
current supply arrangement or a prolonged interruption in shipments could have a
material adverse effect on the Division.
11. SUBSEQUENT EVENT
On July 24, 1997, C&A sold all of the assets of the Division to Safety
Components International, Inc. for $56.3 million in cash, including the
assumption of certain liabilities and subject to postclosing adjustments. In
addition, Safety Components International, Inc. made a payment to JPS Automotive
at the closing to enable it to pay off existing indebtedness of the Division of
approximately $650,000 at the closing.
F-93
<PAGE> 216
REPORT OF INDEPENDENT ACCOUNTANTS
Board of
Safety Components International
Costa Mesa, California
USA
Audit Opinion
We have audited the accompanying balance sheet of PHOENIX AG's Airbag
Division as of December 31, 1995 and the related statement of operations and a
statement of cash flow for the year then ended and the balance sheet as of
December 31, 1994 as well as the revenues of 1994.
We have conducted our audit in accordance with foreign standards that are
substantially the same as United States Generally Accepted Auditing standards.
It included an examination of the underlying documentation of the PHOENIX AG's
Airbag Division and audit procedures we considered appropriate. The accounting
system was audited by us as the auditors of the PHOENIX AG earlier. In our
opinion on behalf of the annual accounts of PHOENIX AG for the year ended
December 31, 1995 we confirmed that the accounting principles comply with the
German legal requirements.
In our opinion the balance sheet of PHOENIX AG's Airbag Division as of
December 31, 1995, expressed in Deutsche Mark, and the related statement of
income and cash flow 1995, and the balance sheet as of December 31, 1994 as well
as the revenues for the year ended December 31, 1994 as disclosed in the note 15
present fairly the financial position of the airbag division as of December 31,
1995 and comply with the accounting principles of the United States of America.
Hamburg, October 7, 1996
BDO Deutsche Warentreuhand
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
F-94
<PAGE> 217
FINANCIAL STATEMENTS OF THE YEAR ENDED
DECEMBER 31, 1995 OF PHOENIX AG'S AIRBAG DIVISION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
NOTES DM DM
----- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Inventories.............................................. 3 3,913,485 2,463,787
---------- ----------
Fixed Assets............................................... 4
Intangible fixed assets.................................. 25,712 51,760
Machinery and equipment.................................. 6,334,992 6,103,522
Assets under construction................................ 301,557 0
---------- ----------
6,662,261 6,155,282
---------- ----------
10,575,746 8,619,069
========== ==========
LIABILITIES
Current account PHOENIX AG............................... 8,849,226 9,320,799
Accruals................................................. 5 136,000 123,810
Deferred taxation........................................ 13 1,044,550 1,754,460
---------- ----------
10,029,776 11,199,069
---------- ----------
SHAREHOLDERS EQUITY/(DEFICIT).............................. 6 545,970 (2,580,000)
---------- ----------
10,575,746 8,619,069
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE> 218
STATEMENT OF OPERATIONS
AND RETAINED (DEFICIT) EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NOTE DM
---- -----------
<C> <S> <C> <C>
1. Net sales........................................................... 7 43,015,600
2. Cost of sales....................................................... 8 (35,411,735)
-----------
3. Gross profit........................................................ 7,603,865
4. Research and development............................................ 9 (1,223,000)
5. Sales Expenses...................................................... 10 (1,038,000)
6. General and administrative expenses................................. 11 (1,568,300)
-----------
7. Profit before interest and taxes.................................... 3,774,565
8. Interest............................................................ 12 0
9. Taxes............................................................... 13 (648,595)
-----------
10. Net income.......................................................... 3,125,970
11. Retained deficit at the beginning of the year....................... (2,580,000)
-----------
12. Retained earnings at the end of the year............................ 545,970
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE> 219
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DM
----------
<S> <C>
Net income....................................................................... 3,125,970
Plus depreciation on fixed assets................................................ 2,372,055
Changes in current assets and liabilities
Inventories.................................................................... (1,449,698)
Accruals....................................................................... 12,190
Deferred taxes................................................................. (709,910)
Repayment of current account PHOENIX AG........................................ (471,573)
----------
Net cash provided by operating activities...................................... 2,879,034
Capital expenditures -- Net cash used in investing activities.................... (2,879,034)
----------
Cash at end of the year.......................................................... 0
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 220
NOTES TO THE ACCOUNTS
1. DESCRIPTION OF BUSINESS
The production of sewn airbags was a division of PHOENIX AG in Hildesheim
during the years 1994 and 1995. PHOENIX AG started to produce sewn airbags in
1994 to replace the gummed airbags.
With a founding contract dated November 14, 1995, and with effect from
January 1, 1996, PHOENIX AG transferred its airbag production into a separate
legal entity called Phoenix Airbag GmbH ("Phoenix Airbag"). Phoenix Airbag was
subsequently sold under a contract dated June 6, 1996 and amended on June 28 and
August 6, 1996, with effect from January 1, 1996 to a subsidiary of Safety
Components International, Inc.
2. SIGNIFICANT ACCOUNTING PRINCIPLES
The financial Statements have been prepared in accordance with Generally
Accepted Accounting Principles of the United States of America. The particular
accounting principles adopted are described below.
Due to the fact that the sewn airbag production was only a division within
the PHOENIX AG's business, the balance sheet only includes those assets and
liabilities/accruals which relate directly to the airbag production. Neither
trade debtors nor creditors to suppliers are included.
The financial statements have been prepared under the historical cost
convention and are expressed in German Marks (DM).
The airbag division is potentially subject to a concentration of credit
risk consisting of its trade receivables, relying only on two domestic customers
(Petri AG, MST Automative GmbH).
The financial statements have been prepared in conformity with Generally
Accepted Accounting Principles of the United States of America, which required
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.
All overheads, general and administrative expenses are allocated to the
airbag division based on reasonable cost accounting principles.
3. INVENTORIES
Inventories as of December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
------------ ------------
1995 1994
------------ ------------
DM DM
<S> <C> <C>
Raw materials, tools....................................... 1,168,699 751,383
Unfinished goods........................................... 1,213,925 489,947
Finished goods............................................. 1,530,861 1,222,457
--------- ---------
3,913,485 2,463,787
========= =========
</TABLE>
Inventories are valued at the lower of cost or market value net of adequate
provisions for obsolete inventories. Raw materials are valued at weighted
average cost. Unfinished and finished goods are valued at full absorption
costing.
F-98
<PAGE> 221
NOTES TO THE ACCOUNTS -- (CONTINUED)
4. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
------------ ------------
1995 1994
------------ ------------
DM DM
<S> <C> <C>
Intangible fixed assets
At cost.................................................... 257,108 254,563
Less accumulated depreciation.............................. (231,396) (202,803)
-------- --------
25,712 51,760
======== ========
</TABLE>
TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
------------ ------------
1995 1994
------------ ------------
DM DM
<S> <C> <C>
At cost
Machinery and equipment.................................. 11,692,525 9,328,091
Furniture, fixtures and office equipment................. 1,222,771 1,051,810
Assets under construction................................ 301,557 0
---------- ----------
13,216,853 10,379,901
---------- ----------
Accumulated depreciation
Machinery and equipment.................................. 5,762,734 3,614,890
Furniture, fixtures and office equipment................. 817,570 661,489
---------- ----------
6,580,304 4,276,379
---------- ----------
Net book value............................................. 6,636,549 6,103,522
========== ==========
</TABLE>
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is provided using the reducing-balance method, applied over the expected useful
life of assets five to ten years. Machinery and equipment is generally
depreciated over a period of ten years. Low value items up to DM 800 are
depreciated 100% during the period of acquisition.
Additions and improvements are capitalized, maintenance and repairs are
expensed when incurred.
5. ACCRUALS
Accruals consist of pension obligation, valued according to German tax
requirements (DM 53,000) and other obligations to employees (DM 83,000).
6. SHAREHOLDERS EQUITY
Shareholders equity includes only retained earnings (deficit). All
investments by PHOENIX AG have been netted by the current account.
7. SALES
Sales include only the production of sewn airbag.
<TABLE>
<CAPTION>
DM
----------
<S> <C>
Gross sales less VAT............................................. 43,350,700
Discounts........................................................ 335,100
----------
43,015,600
==========
</TABLE>
F-99
<PAGE> 222
NOTES TO THE ACCOUNTS -- (CONTINUED)
8. COST OF SALES
<TABLE>
<CAPTION>
DM
----------
<S> <C>
Material......................................................... 21,379,000
Wages............................................................ 8,988,060
Depreciation of fixed assets..................................... 2,372,055
Sundry costs..................................................... 2,672,620
----------
35,411,735
==========
</TABLE>
Sundry costs consist of overheads such as rent for the plant, repair and
maintenance, auxiliary material, energy, proportion of production management and
other services.
9. RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
DM
---------
<S> <C>
Direct costs of airbag............................................ 781,000
Proportion of facilities provided by the central department....... 442,000
---------
1,223,000
=========
</TABLE>
10. SALES EXPENSES
<TABLE>
<CAPTION>
DM
---------
<S> <C>
Wages and salaries................................................ 334,000
Freight and packaging............................................. 519,000
Warehouse......................................................... 180,000
Sundry............................................................ 5,000
---------
1,038,000
=========
</TABLE>
11. GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
DM
---------
<S> <C>
General overheads allocated to the airbag division such as
managing director of airbag itself................................ 231,000
proportion of PHOENIX AG's management............................. 347,000
purchase department............................................... 132,000
finance, cost- and controlling department......................... 252,000
insurance......................................................... 132,000
duties............................................................ 133,000
logistic and restructure department............................... 136,000
other internal and external services.............................. 205,300
---------
1,568,300
=========
</TABLE>
12. INTEREST
No interest are allocated to the airbag division.
13. TAXES
The income tax charges are calculated as if the airbag division was already
a separate legal entity in 1995 and 1994.
F-100
<PAGE> 223
NOTES TO THE ACCOUNTS -- (CONTINUED)
The tax charges comprise corporation tax and municipal trade tax on income.
Municipal trade tax is a deductible expense for corporation profits tax
purposes. The effective rate for municipal trade tax was 17% in 1995. The
standard rate of corporation tax is 45% of taxable income. This rate will be
reduced to 30% for distributed profits. In consistency with the assumption of
the period January to July 1996 the corporation tax was calculated using the
standard rate.
The net operating loss of 1994 (DM 2,580,000) was netted against pre tax
income of 1995.
Deferred taxes at a rate of 54.4% income taxes were accrued for special
depreciations on fixed assets allowed according to German fiscal law for
investments in the region along the former border to the Deutsche Demokratische
Republik.
<TABLE>
<CAPTION>
DM
---------
<S> <C>
Current income tax 1995......................................... 1,358,505
less reduction of deferred taxes................................ (709,910)
---------
648,595
=========
</TABLE>
14. CONTINGENT LIABILITIES AND COMMITMENTS
As of December 31, 1995 and 1994 there were no contingent liabilities and
commitments.
15. RESULTS OF OPERATIONS OF PHOENIX AG'S AIRBAG DIVISION FOR THE YEAR ENDED
DECEMBER 31, 1994
The following information for the year ended December 31, 1994 includes the
audited revenues and unaudited costs of the airbag product line of Phoenix's
parent, PHOENIX AG. Costs for 1994 have been included for informational purposes
and are unaudited since the airbag division was in the process of being
established and the organizational structure was not designed to segregate costs
between product lines. Costs for 1994 are based on the internal operating
statements of PHOENIX AG. Included in costs are certain adjustments made by
management to allocate common expenditures utilized by the various product lines
located in PHOENIX AG's Hildesheim facility.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
DM (000)
-----------------
<S> <C>
Revenues (audited)......................................... 19,718
Costs (unaudited) Cost of sales............................ (18,673)
Research and development................................. (1,559)
Selling, general and administrative...................... (2,010)
Other.................................................... (56)
-------
Income before income taxes................................. (2,580)
Provision for income taxes................................. 0
-------
Net income................................................. (2,580)
=======
</TABLE>
F-101
<PAGE> 224
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Safety Components International, Inc.
Costa Mesa, California
United States of America
1. We have audited the accompanying balance sheet of Phoenix Airbag GmbH,
Hildesheim (a German limited liability company) expressed in Deutsche
Mark as of August 5, 1996 and the related statements of operations, of
stockholders' equity and of cash flows for period from January 1, 1996
to August 5, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
2. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
3. In our opinion, the financial statements audited by us present fairly,
in all material respects, the financial position of Phoenix Airbag GmbH,
Hildesheim as of August 5, 1996 and the results of its operations and
its cash flows for the period from January 1, 1996 to August 5, 1996, in
conformity with generally accepted accounting principles in the United
States of America.
Hamburg, October 7, 1996
/s/ Price Waterhouse
F-102
<PAGE> 225
PHOENIX AIRBAG GMBH, HILDESHEIM
BALANCE SHEET AS OF AUGUST 5, 1996
<TABLE>
<CAPTION>
AUGUST 5,
1996
NOTES ----------
----- DM
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash..................................................................... 428
Trade accounts receivable................................................ 2,3 6,044,852
Other accounts receivable................................................ 68,888
Inventories.............................................................. 2,4 2,131,377
Phoenix AG current account............................................... 1,5 478,348
----------
Total current assets....................................................... 8,723,893
----------
PLANT AND EQUIPMENT........................................................ 2,6
At cost.................................................................. 13,923,472
Less: Accumulated depreciation........................................... (7,239,991)
----------
Net book value........................................................... 6,683,481
----------
GOODWILL, LICENSES AND SOFTWARE............................................ 2,7
At cost.................................................................. 257,108
Less: Accumulated depreciation........................................... (244,810)
----------
Net book value........................................................... 12,298
----------
15,419,672
==========
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable................................................... 1,886,712
Other accounts payable and accrued liabilities........................... 2,668,500
Taxation................................................................. 8 3,047,000
----------
Total current liabilities.................................................. 7,602,212
----------
LONG-TERM LIABILITIES
Deferred taxation........................................................ 8 752,096
----------
Total liabilities.......................................................... 8,354,308
----------
STOCKHOLDERS' EQUITY
Common stock............................................................. 1 1,500,000
Additional paid-in capital............................................... 3,500,000
Net income for the period................................................ 2,065,364
----------
Total stockholders' equity................................................. 7,065,364
----------
15,419,672
=========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-103
<PAGE> 226
PHOENIX AIRBAG GMBH, HILDESHEIM
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO AUGUST 5, 1996
<TABLE>
<CAPTION>
THE PERIOD ENDED
NOTES AUGUST 5, 1996
----- ----------------
DM
<S> <C> <C>
Net sales............................................................. 2 34,926,270
Cost of sales......................................................... (26,595,873)
-----------
Gross profit.......................................................... 8,330,397
Research and development.............................................. (782,000)
Selling expenses...................................................... (555,234)
General and administrative expenses................................... (2,037,135)
-----------
Profit before interest and taxes...................................... 4,956,028
Interest (net)........................................................ (136,118)
Taxation.............................................................. 8 (2,754,546)
-----------
Net income............................................................ 2,065,364
===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-104
<PAGE> 227
PHOENIX AIRBAG GMBH, HILDESHEIM
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO AUGUST 5, 1996
<TABLE>
<CAPTION>
THE PERIOD ENDED
AUGUST 5, 1996
----------------
<S> <C>
<CAPTION>
DM
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... 2,065,364
----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 1,336,728
Loss on retirement of fixed assets.......................................... 12,704
----------
1,349,432
----------
Changes in current assets and liabilities:
(Increase)/decrease in
Accounts receivable trade and other......................................... (6,113,740)
Inventories................................................................. 1,782,108
Phoenix AG current account.................................................. (9,873,544)
Increase/(decrease) in
Trade accounts payable...................................................... 1,886,712
Other accounts payable and accrued liabilities.............................. 2,532,500
Taxation.................................................................... 3,047,000
----------
(6,739,264)
----------
Net cash used by operating activities......................................... (3,324,468)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in fixed assets................................................... (1,382,950)
----------
Net cash used by investing activities......................................... (1,382,950)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Share capital paid in......................................................... 5,000,000
Decrease in deferred taxation................................................. (292,454)
----------
Net cash provided by financing activities..................................... 4,707,546
----------
Increase in cash.............................................................. 428
Cash at beginning of the period............................................... --
----------
Cash at end of the period..................................................... 428
==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-105
<PAGE> 228
PHOENIX AIRBAG GMBH, HILDESHEIM
NOTES TO THE FINANCIAL STATEMENTS
AS OF AUGUST 5, 1996
1. DESCRIPTION OF BUSINESS
With a founding contract ("Einbringungsvertrag") dated November 14, 1995
effective as of January 1, 1996, Phoenix AG transferred its airbag production,
which is located in Hildesheim, Germany, into a separate legal entity called
"Phoenix Airbag GmbH". Phoenix Airbag GmbH was subsequently sold under a
contract dated June 6, 1996 as amended on June 28, 1996 and August 5, 1996 to AB
9607 Verwaltungs GmbH & Co KG, a wholly owned subsidiary of Safety Components
International, Inc. ("SCI"). The transaction closed at the end of business on
August 5, 1996.
At January 1, 1996, only certain assets (ie inventories and fixed assets)
and only some specific business-related liabilities were transferred into the
new GmbH. Cash, trade accounts receivable and trade accounts payable were all
netted into the PHOENIX AG current account.
As Phoenix Airbag GmbH was not a separate legal entity prior to January 1,
1996, the accompanying financial statements were prepared as of December 31,
1995 and the twelve months then ended, which were audited by BDO Deutsche
Warentreuhand AG, based on the assets and liabilities, revenues and expenses
transferred to Phoenix Airbag GmbH.
2. SIGNIFICANT ACCOUNTING POLICIES
a) General
The company maintains its books of record and prepares the financial
statements in Deutsche Mark in accordance with generally accepted accounting
principles in Germany. Certain reclassifications are made to restate the
Company's financial statements in conformity with generally accepted accounting
principles in the United States of America.
b) Financial statement preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c) Revenue recognition
Sales are recognized at the time when the goods are shipped, net of
discounts granted and VAT.
d) Concentration of credit risk
The Company is potentially subject to a concentration of credit risk
consisting of its trade accounts receivables, a significant portion of which are
due from Petri AG and MST Automotive. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
company maintains reserves for potential losses for uncollectible amounts and
such losses have historically been within management's expectations.
e) Trade accounts receivable
Trade accounts receivable consist of amounts receivable from customers net
of allowances for doubtful accounts and cash discounts.
F-106
<PAGE> 229
PHOENIX AIRBAG GMBH, HILDESHEIM
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
f) Inventories
Inventories consist of raw materials, unfinished and finished goods. Raw
materials are valued at weighted average cost. Unfinished and finished goods are
valued at the lower of full absorption costing and net realisable value.
g) Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the reducing-balance method over estimated useful
lives of three to ten years. In the past, where allowable, the maximum
accelerated depreciation allowable under German tax laws was recognised.
Additions and improvements are capitalized. Maintenance and repairs are
expensed when incurred. As permitted under German income tax law, the company
charges the acquisition cost of low value items (costs not in excess of DM 800)
to depreciation expense during the year of acquisition.
h) Goodwill, licenses and software
Software acquired from third parties is stated at cost less accumulated
depreciation. Depreciation is provided using the straight line method over
estimated useful lives of three years.
3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable as of August 5, 1996 consisted of the following:
<TABLE>
<CAPTION>
AUGUST 5,
1996
---------
DM
<S> <C>
Trade accounts receivable......................... 6,203,852
Allowance for doubtful amounts and cash (159,000)
discounts.......................................
---------
6,044,852
=========
</TABLE>
4. INVENTORIES
Inventories as of August 5, 1996 consisted of the following:
<TABLE>
<CAPTION>
AUGUST 5,
1996
---------
DM
<S> <C>
Raw materials..................................... 1,493,728
Unfinished goods.................................. 318,565
Finished goods.................................... 319,084
---------
2,131,377
=========
</TABLE>
5. PHOENIX AG CURRENT ACCOUNT
As part of the transfer at January 1, 1996 of fixed assets and inventories
and some specific business-related liabilities from Phoenix AG into the newly
founded company, which had a share capital of DM 5,000,000, a current account
liability to Phoenix AG of DM 4,395,196 was set up representing the difference
between the net assets contributed and the Company's share capital. During the
period ended August 5, 1996, this current account was repaid primarily through
the movement on the cashpooling arrangement which still existed between Phoenix
AG and the Company. As per August 5, 1996 the Phoenix AG current account showed
an amount due to the Company of DM 478 348.
F-107
<PAGE> 230
PHOENIX AIRBAG GMBH, HILDESHEIM
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6. PLANT AND EQUIPMENT
Plant and equipment as of August 5, 1996 consisted of the following:
<TABLE>
<CAPTION>
AUGUST 5,
1996
----------
DM
<S> <C>
At cost
Plant and machinery............................ 12,017,091
Furniture, fixtures and office equipment....... 1,327,268
Assets under construction...................... 579,113
----------
13,923,472
----------
Accumulated Depreciation
Plant and machinery............................ 6,359,240
Furniture, fixtures and office equipment....... 880,751
----------
7,239,991
----------
6,683,481
==========
Net book value
Depreciation expense........................... 1,323,314
==========
</TABLE>
7. GOODWILL, LICENCES AND SOFTWARE
Goodwill, licences and software as of August 5, 1996 consisted of the
following:
<TABLE>
<CAPTION>
AUGUST 5,
1996
---------
DM
<S> <C>
At cost
Software......................................... 257,108
-------
Accumulated Depreciation
Software......................................... 244,810
-------
Net book value..................................... 12,298
=======
Depreciation expense............................. 13,414
=======
</TABLE>
8. TAXATION
In Germany, tax assessments do not become final until the accounting
records and tax returns for the periods concerned have been examined by the tax
authorities. These reviews by the tax authorities have to be carried out within
five years after the year of assessment.
The income tax charge comprises corporation profits tax and municipal trade
tax on income. Municipal trade taxes are also a deductible expense for
corporation profits tax purposes. The effective rate for municipal trade tax on
income in 1996 was 17%. The standard rate of corporation profits tax is 45% of
taxable income but distributed profits qualify for a rate reduction to 30%.
Dividends paid or declared are subject to withholding tax at the rate of 25% of
the gross dividend.
Income taxes for the seven month period to August 5, 1996 have been
calculated as if that seven month period would be the relevant fiscal period.
F-108
<PAGE> 231
PHOENIX AIRBAG GMBH, HILDESHEIM
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes at a rate of 54.4% were accrued for special depreciations on
fixed assets which were allowed according to German fiscal laws for investments
made in the region along the border to the former German Democratic Republic.
The taxation charge for the 7 month period ended August 5, 1996 consisted
of the following:
<TABLE>
<CAPTION>
DM
---------
<S> <C>
Current income tax................................ 3,047,000
Deferred tax...................................... (292,454)
----------
-
Total tax charge for the period................... 2,754,546
===========
</TABLE>
The movement on the deferred tax account for the 7 month period ended
August 5, 1996 was as follows:
<TABLE>
<CAPTION>
DM
---------
<S> <C>
Deferred tax liability as at January 1, 1996...... 1,044,550
Released to income................................ (292,454)
----------
-
Deferred tax liability as at August 5, 1996....... 752,096
===========
</TABLE>
9. CONTINGENT LIABILITIES AND COMMITMENTS
As of August 5, 1996 the Company had no contingent liabilities or
commitments.
F-109
<PAGE> 232
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS PAGE
Prospectus Summary ...................................................... 1
Risk Factors ............................................................ 13
Use of Proceeds ......................................................... 21
Capitalization .......................................................... 21
Unaudited Pro Forma Financial Data ...................................... 22
Selected Historical and Unaudited Pro Forma
Financial Data ........................................................ 37
Selected Quarterly Financial Data ....................................... 40
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 41
Business ................................................................ 47
Management .............................................................. 61
Security Ownership By Certain Beneficial
Owners and Management ................................................. 70
Certain Transactions .................................................... 72
Description of the Credit Agreement ..................................... 73
Description of the Exchange Notes ....................................... 74
The Exchange Offer ...................................................... 99
Certain Federal Income Tax Considerations ............................... 107
Book-Entry; Delivery and Form ........................................... 110
Plan of Distribution .................................................... 111
Legal Matters ........................................................... 113
Experts ................................................................. 113
Index to Consolidated Financial Statements .............................. F-1
UNTIL , 1997, (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
OFFER FOR ALL OUTSTANDING 10-1/8%
SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A, IN EXCHANGE
FOR 10-1/8% SENIOR SUBORDINATED
NOTES DUE 2007, SERIES B, WHICH
HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED
PROSPECTUS
The Exchange Agent for the Exchange Offer is:
IBJ SCHRODER BANK & TRUST COMPANY
By Facsimile: (212) 858-2611
Confirmation by Telephone: (212) 858-2103
By Hand/Overnight Courier
IBJ SCHRODER BANK & TRUST COMPANY
ONE STATE STREET
NEW YORK, NEW YORK 10004
ATTENTION: SECURITIES PROCESSING WINDOW
SUBCELLAR ONE (SC-1)
By Mail
IBJ SCHRODER BANK & TRUST COMPANY
P.O. BOX 84
BOWLING GREEN STATION
NEW YORK, NY 10274-0084
ATTENTION: REORGANIZATION OPERATIONS
DEPARTMENT
<PAGE> 233
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The indemnification of officers and directors of Safety Components
International, Inc. (the "Company") is governed by Section 145 of the Delaware
General Corporation Law (the "DGCL") and the Certificate of Incorporation of the
Company (the "Certificate"). Among other things, the DGCL permits
indemnification of a director, officer, employee or agent of the Company in
civil, criminal, administrative or investigative actions, suits or proceedings
(other than an action by or in the right of the corporation) to which such
person is a party or is threatened to be made a party by reason of the fact of
such relationship with the corporation or the fact that such person is or was
serving in a similar capacity with another entity at the request of the
corporation against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, if he
had no reasonable cause to believe his conduct was unlawful. No indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which the action or
suit was brought determines upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. Under the DGCL, to the extent that a director, officer, employee or
agent is successful, on the merits or otherwise, in the defense of any action,
suit or proceeding or any claim, issue or matter therein (whether or not the
suit is brought by or in the right of the corporation), he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith. In all cases in which indemnification is permitted
(unless ordered by a court), it may be made by the corporation only as
authorized in the specific case upon a determination that the applicable
standard of conduct has been met by the party to be indemnified. The
determination must be made by a majority of the directors who were not parties
to the action, suit or proceeding, even though less than a quorum, or if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or by the stockholders. The statute authorizes the
corporation to pay expenses (including attorneys' fees) incurred by an officer
or director in advance of a final disposition of a proceeding upon receipt of an
undertaking by or on behalf of the person to whom the advance will be made, to
repay the advances if it shall ultimately be determined that he was not entitled
to indemnification. Such expenses (including attorneys' fees) incurred by other
employees and agents may be paid upon such terms and conditions, if any, as the
Board may determine. The DGCL provides that indemnification and advances of
expenses permitted thereunder are not to be exclusive of any rights to which
those seeking indemnification or advancement of expenses may be entitled under
any By-law, agreement, vote of stockholders or disinterested directors, or
otherwise. The DGCL also authorizes the corporation to purchase and maintain
liability insurance on behalf of its directors, officers, employees and agents
regardless of whether the corporation would have the statutory power to
indemnify such persons against the liabilities insured.
The Certificate the Company provides that the Company shall
indemnify each person who was or is made a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative(hereinafter
a "Proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director, officer employee or agent
of the Company or is or was serving at the request of the Company as director,
officer employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or alleged action in
any other capacity while service as a director, officer, employee or agent, to
the maximum extent authorized by the DGCL, and the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines, excise
taxes or penalties pursuant to the Employee Retirement Income Security Act of
1974, as amended, and amounts paid or to be paid in settlement) reasonably
incurred by such person in connection with
II-1
<PAGE> 234
such proceeding and such indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators. The Certificate
provides that the right to indemnification contained therein is a contract right
and includes the right to be paid by the Company for the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that if the DGCL so requires, the payment of such expenses incurred by
a director or officer in advance of the final disposition of a proceeding shall
be made only upon receipt by the Company of an undertaking by or on behalf of
such person to repay all amounts so advanced if it shall ultimately be
determined that such person is not entitled to be indemnified by the Company as
authorized in the Certificate. The Company maintains directors' and officers'
liability insurance ("Liability Insurance") covering certain liabilities
incurred by the directors and officers of the Company in connection with the
performance of their duties.
The Certificate of Incorporation for each of the Guarantors provides
that no director of each such Guarantor shall be personally liable to the
respective Guarantor or such Guarantor's respective stockholders for monetary
damages for breach of a fiduciary duty as a director; provided, however, that to
the extent required by the provisions of Section 102(b)(7) of the DGCL or any
successor statute, or any other laws of the State of Delaware, the provision in
the Certificate of Incorporation of the respective Guarantor shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the respective Guarantor or such Guarantor's respective
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL hereafter is amended to authorize further
elimination or limitation of the liability of directors, then the liability of a
director of each of the Guarantors, in addition to the limitation on personal
liability provided in the Certificate of Incorporation of the respective
Guarantor, shall be limited to the fullest extent permitted by the amended DGCL.
Any repeal or modification of the indemnification provisions by the stockholders
of each of the Guarantors shall be prospective only, and shall not adversely
affect any limitation on the personal liability of a director of the respective
Guarantor existing as of the time of such repeal or modification. The Liability
Insurance covers certain liabilities incurred by the directors and officers of
the respective Guarantors in connection with the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
2.1(12) Agreement, dated June 6, 1996, among AB 9607 Verwaltungs GmbH
& Co. KG., Phoenix Aktiengesellschaft and Phoenix Airbag GmbH
(the "Phoenix Purchase Agreement") (confidential treatment
requested as to part)
2.2(12) Amendment Agreement, dated June 28, 1996, to the Phoenix
Purchase Agreement
3.1(1) Certificate of Incorporation of Safety Systems International,
Inc.
3.2(1) Amended and Restated Certificate of Incorporation of Safety
Systems International, Inc.
3.3(1) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Systems International,
Inc.
3.4(11) Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Safety Components
International, Inc. ("Safety Components")
3.5(1) By-laws of Safety Components
3.6(18) Certificate of Incorporation of Automotive Safety Components
International, Inc. (f/k/a Automotive Safety Systems
International, Inc.)
3.7(18) Certificate of Amendment to the Certificate of Incorporation
of Automotive Safety Components International, Inc.
("Automotive Safety")
3.8(18) Bylaws of Automotive Safety
3.9(18) Certificate of Incorporation of ASCI Holdings Germany (DE),
Inc. ("Holdings Germany")
3.10(18) Bylaws of Holdings Germany
3.11(18) Certificate of Incorporation of ASCI Holdings UK (DE), Inc.
("Holdings UK")
3.12(18) Bylaws of Holdings UK
3.13(18) Certificate of Incorporation of ASCI Holdings Mexico (DE),
Inc. ("Holdings Mexico")
II-2
<PAGE> 235
3.14(18) Bylaws of Holdings Mexico
3.15(18) Certificate of Incorporation of ASCI Holdings Czech (DE), Inc.
("Holdings Czech")
3.16(18) Bylaws of Holdings Czech
3.17(18) Certificate of Incorporation of ASCI Holdings Asia (DE), Inc.
("Holdings Asia")
3.18(18) Bylaws of Holdings Asia
3.19(18) Certificate of Incorporation of Valentec International
Corporation (f/k/a RAZ Acquisition Corporation) ("Valentec")
3.20(18) Certificate of Amendment to the Certificate of Incorporation
of Valentec
3.21(18) Bylaws of Valentec
3.22(18) Certificate of Incorporation of Galion, Inc. ("Galion")
3.23(18) Bylaws of Galion
3.24(18) Certificate of Incorporation of Valentec Systems, Inc.
("Valentec Systems")
3.25(18) Bylaws of Valentec Systems
3.26(18) Certificate of Incorporation of Safety Components Fabric
Technologies, Inc.
3.27(18) Bylaws of Safety Components Fabric Technologies, Inc.
4.1(2) Warrant Agreement, dated as of May 13, 1994, between Hampshire
Securities Corporation and Safety Components
4.2(15) Registration Rights Agreement, dated as of May 22, 1997, by
and among Safety Components, Robert A. Zummo, Francis X.
Suozzi and the Valentec International Corporation Employee
Stock Ownership Plan
4.3(16) Form of Pledge Agreement, dated as of May 21, 1997, made by
the Pledgors named therein in favor of KeyBank National
Association, as collateral agent for the benefit of the
Secured Creditors (as defined therein)
4.4(18) Form of Indenture, dated as of July 24, 1997, by and among
Safety Components, the Subsidiary Guarantors named therein and
IBJ Schroder Bank & Trust Company.
4.5(18) Registration Rights Agreement, dated as of July 24, 1997 by
and among Safety Components, the guarantors named therein, BT
Securities Corporation, Alex Brown & Sons Incorporated and
BancAmerica Securities, Inc.
4.6(18) Form of 10 1/8% Senior Subordinated Note Due 2007, Series A,
including Form of Guarantee
4.7(18) Form of 10 1/8 % Senior Subordinated Note Due 2007, Series B,
including Form of Guarantee
4.8(18) Form of Amendment No. 2 to Pledge Agreement, dated as of July
15, 1997, made by the Pledgors named therein in favor of
KeyBank National Association, as collateral agent for the
benefit of the Secured Creditors (as defined therein)
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP
10.2(3) Airbag Purchase Agreement by and between TRW Vehicle Safety
Systems, Inc. and Valentec, dated March 31, 1993 (confidential
treatment granted as to part)
10.3(3) Long-Term Contract for the Supply of Airbags by and between
TRW REPA GmbH and Valentec International Limited ("VIL"),
dated September 20, 1993 (confidential treatment granted as to
part)
10.4(2) Representation Agreement, effective as of May 13, 1994, by and
between Automotive Safety and Champion Sales and Service Co.
("Champion")
*10.5(4) Employment Agreement, effective as of May 13, 1994, between
Safety Components and Robert A. Zummo
*10.6(4) Employment Agreement, effective as of May 13, 1994, between
Safety Components and W. Hardy Myers
*10.7(4) Stock Option Plan of Safety Components
10.8(2) Master Asset Transfer Agreement, dated May 13, 1994, among
Valentec, Safety Components, Galion and Automotive Safety
10.9(2) Asset Purchase Agreement, dated May 13, 1994, between VIL and
Automotive Safety Components International Limited
("Automotive Limited")
10.10(9) Corporate Services Agreement, dated as of April 1, 1995,
between Valentec and Safety Components
10.11(2) Facility Agreement, dated May 13, 1994, between Valentec and
Automotive Safety
10.12(2) Facility Agreement, dated May 13, 1994, between VIL and
Automotive Limited
II-3
<PAGE> 236
10.13(2) Representation Agreement, effective as of May 13, 1994, by and
between Automotive Limited and Champion
10.14(5) Form of Sublease Agreement, dated May 13, 1994, between VIL
and Automotive Limited
*10.15(6) Employment Agreement, dated as of September 29, 1994, by and
between Safety Components and Paul L. Sullivan
10.16(7) Contract DAAA09-94-C-0532 (Systems Contract) between Safety
Components and the U.S. Army (the "Systems Contract")
*10.17(8) Employment Agreement, effective as of September 19, 1994,
between Safety Components and Victor Guadagno
10.18(8) Lease Agreement, dated February 15, 1995, between Inmobiliara
Calibert, S.A. de C.V. and Automotive Safety Components
International SA. de C.V.
10.19(16) Credit Agreement, dated as of March 15, 1996, among Safety
Components, Automotive Safety, Galion, Valentec Systems and
CUSA
10.20(16) Pledge and Security Agreement, dated as of March 15, 1996,
made by Safety Components, Automotive Safety, Galion and
Valentec Systems in favor of CUSA
*10.21(10) Employment Agreement, dated June 1, 1995, between Automotive
Limited and John Laurence Hakes
10.22(10) Underwriting Agreement, dated June 15, 1995, among BT
Securities Corporation, Prime Charter Ltd., Safety Components,
Valentec and the other selling stockholders named therein
10.23(13) Loan Agreement between the Company, Automotive Safety and
Holdings Germany and Bank of America National Trust and
Savings Association, dated August 1, 1996
10.24(14) TRW/SCI Multi Year Agreement, dated as of April 1, 1996, among
TRW Vehicle Safety Systems, Inc., TRW, Inc. and Safety
Components. Confidential treatment requested as to certain
portions of this exhibit. Such portions have been redacted
10.25(14) Exhibits to Credit Agreement, dated as of March 15, 1996,
among Safety Components, Automotive Safety, Galion, Valentec
Systems and Citicorp USA, Inc.
10.26(14) Amendment No. 1 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and Bank of America
National Trust & Savings Association, dated as of September
30, 1996
10.27(14) Amendment No. 2 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and Bank of America
National Trust & Savings Association, dated as of October 31,
1996
10.28(14) Amendment No. 3 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and Bank of America
National Trust & Savings Association, dated as of December 31,
1996
10.29(15) Stock Purchase Agreement, dated as of May 22, 1997, by and
among Robert A. Zummo, Francis X. Suozzi, the Valentec
International Corporation Employee Stock Ownership Plan and
Safety Components
*10.30(16) Employment Agreement, dated as of February 15, 1997, between
Safety Components and Jeffrey J. Kaplan
*10.31(16) Employment Agreement, dated as of May 19, 1997, between Safety
Components and Thomas W. Cresante
10.32(16) Consulting Agreement, dated as of May 31, 1997, between Safety
Components and W. Hardy Myers
10.33(16) Credit Agreement (the "Credit Agreement"), dated as of May 21,
1997, by and among Safety Components, Phoenix Airbag and
Automotive Limited, as borrowers, and KeyBank National
Association, as administrative agent, and the lending
institutions named therein
10.34(16) Form of Subsidiary Guaranty, dated as of May 21, 1997, among
the guarantors named therein, KeyBank National Association, as
administrative agent for itself and the other Lenders (as
defined in the Credit Agreement)
10.35(16) Form of Security Agreement, dated as of May 21, 1997, among
the assignors named therein and KeyBank National Association,
as collateral agent for the benefit of the Secured Creditors
(as defined therein)
10.36(17) Asset Purchase Agreement, dated as of June 30, 1997, between
Safety Components and JPS Automotive L.P.
II-4
<PAGE> 237
10.37(18) Purchase Agreement, dated as of July 21, 1997, by and among
Safety Components, BT Securities Corporation, Alex Brown &
Sons Incorporated and BancAmerica Securities, Inc.
10.38(18) Form of Amendment No. 2 to Credit Agreement, dated as of July
15, 1997, by and among Safety Components, Phoenix Airbag and
Automotive Limited, as borrowers, and KeyBank National
Association, as administrative agent, and the lending
institutions named therein
10.39(18) Form of Amendment No. 2 to Subsidiary Guaranty, dated as of
July 15, 1997, among the guarantors named therein, KeyBank
National Association, as administrative agent for itself and
the other Lenders (as defined in the Credit Agreement)
10.40(18) Form of Amendment No. 2 to Security Agreement , dated as of
July 15, 1997, among the assignors named therein and KeyBank
National Association, as collateral agent for the benefit of
the Secured Creditors (as defined therein)
12.1 Statement re computation of ratios
21.1 Subsidiaries of Safety Components
23.1 Consents of Price Waterhouse LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Coopers & Lybrand LLP
23.4 Consent of BDO Deutsche Warentreuhand Aktiengesellschaft
24.1(18) Power of Attorney of officers and directors of the Company
(see Page II-8 of the Original Form S-4 (as defined below))
24.2(18) Power of Attorney of officers and directors of the Guarantors
(see Pages II-9 to II-18 of the Original Form S-4)
25.1(18) Statement of eligibility of Trustee
99.1 Form of Letter of Transmittal with respect to the Exchange
Offer
99.2 Form of Notice of Guaranteed Delivery
99.3 Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and other Nominees
99.4 Letter to Clients
99.5 Instruction to Registered Holder and/or Book Entry Transfer
Participant from Beneficial Owner
99.6(18) Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9
- ----------
* Indicates exhibits relating to executive compensation.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (the "1994 Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") on February 11, 1994.
(2) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1994, filed with the Commission.
(3) Incorporated by reference to Amendment No. 2 to the 1994 Registration
Statement, filed with the Commission on March 18, 1994.
(4) Incorporated by reference to Amendment No. 3 to the 1994 Registration
Statement, filed with the Commission on April 20, 1994.
(5) Incorporated by reference to Amendment No. 4 to the 1994 Registration
Statement, filed with the Commission on May 3, 1994.
(6) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1994 filed with the Commission.
(7) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended December 31, 1994, filed with the Commission.
II-5
<PAGE> 238
(8) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1995.
(9) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-1, filed with the Commission on May 19, 1995.
(10) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1995.
(11) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1995.
(12) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996.
(13) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996.
(14) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended December 31, 1996.
(15) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on June 6, 1997.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed with the Commission on June 30, 1997.
(17) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on August 4, 1997.
(18) Incorporated by reference to the Company's Registration Statement on Form
S-4, filed with the Commission on August 12, 1997 (the "Original Form
S-4").
(b) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 22. UNDERTAKINGS
A. The undersigned registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-6
<PAGE> 239
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) The undersigned registrants hereby undertake to respond
to requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(5) The undersigned registrants hereby undertake to supply
by means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in this Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-7
<PAGE> 240
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Safety
Components International, Inc. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-4 and has
duly caused Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on the 29th day of August, 1997.
SAFETY COMPONENTS INTERNATIONAL, INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment
No. 1 to this Registration Statement has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo Chairman of the Board, August 29, 1997
- --------------------------------- President and Chief Executive Officer
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
* Director August 29, 1997
- ---------------------------------
Joseph J. DioGuardi
* Director August 29, 1997
- ---------------------------------
Francis X. Suozzi
* Director August 29, 1997
- ---------------------------------
Robert J. Torok
</TABLE>
* By: /s/ Jeffrey J. Kaplan
----------------------------
Jeffrey J. Kaplan
Attorney-in-fact
II-8
<PAGE> 241
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Galion,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-4 and has duly caused Amendment No. 1 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York on the
29th day of August, 1997.
GALION, INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
* Director August 29, 1997
- ---------------------------------
Francis X. Suozzi
</TABLE>
* By: /s/ Jeffrey J. Kaplan
----------------------------
Jeffrey J. Kaplan
Attorney-in-fact
II-9
<PAGE> 242
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Valentec
Systems, Inc. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused Amendment No.
1 to this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City New York, State of New York on the 29th
day of August, 1997.
VALENTEC SYSTEMS, INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo Chief Executive Officer August 29, 1997
- --------------------------------- and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
</TABLE>
II-10
<PAGE> 243
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, ASCI
Holdings Germany (DE), Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly caused
Amendment No. 1 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 29th day of August, 1997.
ASCI HOLDINGS GERMANY (DE), INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
</TABLE>
II-11
<PAGE> 244
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, ASCI
Holdings Mexico (DE), Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly caused
this Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 29th day of August, 1997.
ASCI HOLDINGS MEXICO (DE), INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
</TABLE>
II-12
<PAGE> 245
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, ASCI
Holdings UK (DE), Inc. certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-4 and has duly caused
Amendment No. 1 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 29th day of August, 1997.
ASCI HOLDINGS UK (DE), INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
</TABLE>
II-13
<PAGE> 246
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, ASCI
Holdings Czech (DE), Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly caused
Amendment No. 1 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 29th day of August, 1997.
ASCI HOLDINGS CZECH (DE), INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
</TABLE>
II-14
<PAGE> 247
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, ASCI
Holdings Asia (DE), Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly caused
Amendment No. 1 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 29th day of August, 1997.
ASCI HOLDINGS ASIA (DE), INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
</TABLE>
II-15
<PAGE> 248
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Automotive Safety Components International, Inc. certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-4 and has duly caused Amendment No. 1 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York on the 29th day of August, 1997.
AUTOMOTIVE SAFETY COMPONENTS
INTERNATIONAL, INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
* Director August 29, 1997
- ---------------------------------
Francis X. Suozzi
</TABLE>
* By: /s/ Jeffrey J. Kaplan
----------------------------
Jeffrey J. Kaplan
Attorney-in-fact
II-16
<PAGE> 249
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Valentec
International Corporation certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly caused
Amendment No. 1 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 29th day of August, 1997.
VALENTEC INTERNATIONAL CORPORATION
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive Officer August 29, 1997
- --------------------------------- and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Corporate Controller August 29, 1997
- --------------------------------- and Secretary
George D. Papadopoulos (Principal Accounting Officer)
* Director August 29, 1997
- ---------------------------------
Francis X. Suozzi
</TABLE>
* By: /s/ Jeffrey J. Kaplan
----------------------------
Jeffrey J. Kaplan
Attorney-in-fact
II-17
<PAGE> 250
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Safety
Components Fabric Technologies, Inc. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-4 and has
duly caused Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on the 29th day of August, 1997.
SAFETY COMPONENTS FABRIC TECHNOLOGIES, INC.
By: /s/ Robert A. Zummo
---------------------------------
Robert A. Zummo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert A. Zummo President, Chief Executive August 29, 1997
- --------------------------------- Officer and Director
Robert A. Zummo (Principal Executive Officer)
/s/ Jeffrey J. Kaplan Executive Vice President, Chief August 29, 1997
- --------------------------------- Financial Officer and Director
Jeffrey J. Kaplan (Principal Financial Officer)
/s/ George D. Papadopoulos Secretary August 29, 1997
- --------------------------------- (Principal Accounting Officer)
George D. Papadopoulos
</TABLE>
II-18
<PAGE> 1
EXHIBIT 5.1
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 THIRD AVENUE
NEW YORK, N.Y. 10022-9998
----------
TELEPHONE (212) 758-9500
FACSIMILE (212) 758-9526
TELEX 237328
August 29, 1997
Safety Components International, Inc. and the
Guarantors listed on Annex A attached hereto
2160 North Central Road
Fort Lee, New Jersey 07024
Gentlemen:
Safety Components International, Inc., a Delaware corporation (the
"Company") and the Guarantors listed on Annex A attached hereto (the
"Guarantors"), are transmitting for filing with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (the
"Registration Statement"), for the purpose of registering the Company's offer to
exchange (the "Exchange Offer") $90,000,000 aggregate principal amount of the
Company's 10 1/8% Senior Subordinated Notes due 2007, Series B (the "Exchange
Notes") for a like principal amount of the Company's outstanding 10 1/8% Senior
Subordinated Notes due 2007, Series A (the "Old Notes," together with the
Exchange Notes, the "Notes"). The Old Notes have been, and the Exchange Notes
will be, issued pursuant to the Indenture (the "Indenture") dated as of July 24,
1997 by and among the Company, the Guarantors and IBJ Schroder Bank & Trust
Company as trustee. The Registration Statement also registers the guarantees of
the Exchange Notes by the Guarantors (the "New Guarantees"). This opinion is an
exhibit to the Registration Statement. Any capitalized terms used but not
defined herein shall have the respective meanings ascribed to such terms in the
Registration Statement.
We have from time to time acted as special securities counsel to the
Company and the Guarantors in connection with certain corporate and securities
matters, and in such capacity we have participated in various corporate and
other proceedings taken by or on behalf of the Company and the Guarantors in
connection with the Exchange Offer and the New Guarantees by the Company and the
Guarantors, respectively, as contemplated by the Registration Statement.
<PAGE> 2
Safety Components International, Inc..
Guarantors listed on Annex A attached hereto
August 29, 1997
Page 2
We have examined copies (in each case signed, certified or otherwise proven to
our satisfaction to be genuine) of the Company and the Guarantors' respective
Certificates of Incorporation with all amendments thereto, By-Laws of the
Company and each of the Guarantors as presently in effect, minutes and other
instruments evidencing actions taken by their respective directors and
stockholders, the Registration Statement and exhibits thereto, the Indenture,
the Notes, the Purchase Agreement, the Registration Rights Agreement and such
other documents and instruments relating to the Company, the Guarantors and the
Exchange Offer as we have deemed necessary under the circumstances.
We note that we are members of the Bar of the State of New York and
insofar as this opinion may involve the laws of the State of Delaware, our
opinion is based solely upon our reading of the Delaware General Corporation law
as reported in the Prentice-Hall Corporation Law Service, provided, however,
that our opinion as to the due incorporation, valid existence and good standing
of the Company and each of the Guarantors in Delaware is based solely upon a
Certificate of Good Standing obtained from the Secretary of State of the State
of Delaware for the Company and each of the respective Guarantors. Whether or
not expressly stated in the opinion below, the conclusions set forth below are
expressed with respect to the laws of the State of New York, the Delaware
General Corporation Law (subject to the immediately preceding sentence) and the
federal laws of the United States of America, and we express no opinion as to
the applicability or effect of the laws of any other jurisdiction upon the
conclusions set forth below. We express no opinion as to the application of the
securities or "blue sky" laws of any state, including the State of Delaware or
New York, to the offer and/or sale of the Securities.
We express no opinion with respect to the effectiveness or
enforceability against third parties of the New Guarantees. In addition, our
opinions in paragraphs 2 through 4, with respect to the legality, validity,
binding nature and enforceability, as the case may be, of the Indenture is
limited by, or subject to the following clauses (a) through (g):
(a) The effect of applicable bankruptcy, insolvency, fraudulent
conveyance, moratorium, reorganization and similar laws affecting
the enforcement of creditors' rights and remedies generally;
(b) General principles of equity and the discretion of the court
before which any proceeding for enforceability may be brought,
including principles of commercial reasonableness, good faith and
fair dealing (regardless of whether such enforceability is
considered in a proceeding at law or in equity);
(c) The unenforceability under certain circumstances, under state or
federal law or court decisions, of provisions providing for the
indemnification of or
<PAGE> 3
Safety Components International, Inc..
Guarantors listed on Annex A attached hereto
August 29, 1997
Page 3
contribution to, or prospective release of, a party with respect to
a liability (x) where such indemnification or contribution is
contrary to public policy or federal or state securities laws or (y)
for its own negligent or wrongful acts;
(d) The unenforceability under certain circumstances, under state or
federal law or court decisions, of provisions that purport to
establish (or may be construed to establish) evidentiary standards;
(e) The unenforceability under certain circumstances, under state or
federal law or court decisions, of provisions expressly or by
implication waiving broadly or vaguely stated rights, unknown future
rights, defenses to obligations or rights granted by law or statute,
where such waivers are against public policy or prohibited by law;
(f) The unenforceability under certain circumstances of provisions
to the effect that rights or remedies are not exclusive, that every
right or remedy is cumulative and may be exercised in addition to or
with any other right or remedy, that election of a particular remedy
or remedies does not preclude recourse to one or more other
remedies, that any right or remedy may be exercised without notice,
or that failure to exercise or delay in exercising rights or
remedies will not operate as a waiver of any such right or remedy;
and
(g) The unenforceability of provisions providing for the payment of
interest if the rate provided for therein would constitute usury
under the laws of the State of New York.
Based on the foregoing, it is our opinion that:
1. The Company and each of the Guarantors has been duly incorporated
and is validly existing and in good standing under the laws of the State of
Delaware.
2. The Indenture has been duly executed and delivered by the Company
and each of the Guarantors and constitutes the legal, valid and binding
obligations of the Company and each of the Guarantors, enforceable against the
Company and each of the Guarantors in accordance with its terms.
3. The Exchange Notes (substantially in the form filed as an exhibit
to the Registration Statement) have been duly authorized by the Company and when
executed in accordance with the terms of the Indenture and delivered in exchange
for the Old Notes in
<PAGE> 4
Safety Components International, Inc..
Guarantors listed on Annex A attached hereto
August 29, 1997
Page 4
accordance with the terms of the Exchange Offer, the Exchange Notes will
constitute, the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
4. The New Guarantees have been duly authorized by each of the
respective Guarantors, and when executed by each of the respective Guarantors in
accordance with the terms of the Indenture and delivered in exchange for the Old
Notes and the Guarantees of the Old Notes in accordance with the terms of the
Exchange Offer, the New Guarantees will constitute, the legal, valid and binding
obligations of each of the respective Guarantors, enforceable against each of
the respective Guarantors in accordance with their respective terms.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to any application under the securities
or other laws of any state of the United States or any foreign jurisdiction
which relates to the offering which is the subject of this opinion, and to the
references to this firm appearing under the heading "Legal Matters" in the
Prospectus that is contained in the Registration Statement.
This opinion is as of the date hereof, is limited to the law in
effect as of the date hereof, and we undertake no obligation to advise you of
any change, whether legal or factual, in any matter set forth herein. This
opinion is furnished to you in connection with the filing of the Registration
Statement, and is not to be used, circulated, quoted or otherwise relied upon
for any other purposes, except as expressly provided in the preceding paragraph.
Very truly yours,
/s/ SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN,LLP
---------------------------------------------
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
SFH&G:RAG:JSH:MG
<PAGE> 5
ANNEX A
LIST OF GUARANTORS
Galion, Inc.
Valentec Systems, Inc.
ASCI Holdings Germany (DE), Inc.
ASCI Holdings Mexico (DE), Inc.
ASCI Holdings UK (DE), Inc.
ASCI Holdings Czech (DE), Inc.
ASCI Holdings Asia (DE), Inc.
Automotive Safety Components International, Inc.
Valentec International Corporation
Safety Components Fabric Technologies, Inc.
<PAGE> 1
EXHIBIT 12.1
SAFETY COMPONENTS INTERNATIONAL, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Four Months
January 1, 1993 Eleven Months April
through April 27, 28, 1993 through Year Ended March 31, Pro Forma
1993 March 31, 1994 1995 1996 1997 March 31, 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense (income), net $ 10 $ 235 $ 126 $ (197) $ 1,319 $10,563
------- ------- ------- ------- ------- -------
Earnings:
Income (loss) before income taxes (417) (591) 3,416 8,030 6,841 1,956
Add back fixed charges 10 235 126 (197) 1,319 10,563
------- ------- ------- ------- ------- -------
(407) (356) 3,542 7,833 8,160 12,519
Ratio of earnings to fixed charges (1)
-- -- 28.1x -- 6.2x 1.2x
<CAPTION>
Three Months Ended June 30,
1996 1997 Pro Forma
------- ------- -------
<S> <C> <C> <C>
Fixed Charges:
Interest expense (income), net $ 10 $ 523 $ 2,639
------- ------- -------
Earnings:
Income (loss) before income taxes 1,372 2,391 1,685
Add back fixed charges 10 523 2,639
------- ------- -------
1,382 2,914 4,324
Ratio of earnings to fixed charges (1)
138.2x 5.6x 1.6x
</TABLE>
(1) For the Four Months January 1, 1993 through April 27, 1993 and the Eleven
Months April 28, 1993 through March 31, 1994, earnings were insufficient
to cover fixed charges by $167,000 and $207,000, respectively. In fiscal
year 1996, the Company did not incur fixed charges.
<PAGE> 1
EXHIBIT 21.1
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION WHERE NAMES UNDER WHICH SUBSIDIARY DOES
ORGANIZED BUSINESS
<S> <C> <C>
Galion, Inc. Delaware Valentec Galion
Valentec Galion, Inc.
Galion, a Division of Valentec International
Corporation
Valentec Systems, Inc. Delaware
ASCI Holdings Germany (DE), Inc. Delaware
ASCI Holdings Mexico (DE), Inc. Delaware
ASCI Holdings UK (DE), Inc. Delaware
ASCI Holdings Czech (DE), Inc. Delaware
ASCI Holdings Asia (DE), Inc. Delaware
Phoenix Airbag Verwaltungs GmbH Germany
Phoenix Airbag GmbH & Co. KG Germany
Automotive Safety Components
International S.A. de C.V. Mexico
Automotive Safety Components United Kingdom
International Limited
Automotive Safety Components Asia - Delaware
Pacific Ltd.
Automotive Safety Components Czech Republic
International, s.r.o.
Automotive Safety Components Delaware Valentec Automotive
International, Inc. Valentec Wells
Valentec International Corporation Delaware Valentec Wells, Inc.
Valentec Wells Division of Valentec
International Corp.
Safety Components Fabric Technologies, Delaware
Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
The Board of Directors of
Safety Components International, Inc.
We agree to the inclusion in the Prospectus for $90,000,000 of Senior
Subordinated Notes, of our report, dated October 7, 1996, on our audit of the
financial statements of Phoenix Airbag GmbH. We also consent to the use of our
name under "Experts."
/s/ Price Waterhouse GmbH
- --------------------------------
Price Waterhouse GmbH
August 29, 1997
Wirtschaftsprufungsgesellschaft
<PAGE> 2
The Board of Directors of
Safety Components International, Inc.
We hereby consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report, dated May 22, 1997, relating
to the financial statements of Valentec International Corporation, excluding
Valentec International Ltd., which appear in such Prospectus. We also consent to
the references to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
- --------------------------------
PRICE WATERHOUSE LLP
August 29, 1997
Costa Mesa, California
<PAGE> 3
The Board of Directors of
Safety Components International, Inc.
We hereby consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report, dated May 22, 1997, except for
Notes 1, 6 and 13 which are as of July 24, 1997, relating to the consolidated
financial statements of Safety Components International, Inc. and subsidiaries,
which appear in such Prospectus. We also consent to the references to us under
the heading "Experts" in such Prospectus.
/S/ PRICE WATERHOUSE LLP
- --------------------------------
PRICE WATERHOUSE LLP
August 29, 1997
Costa Mesa, California
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
dated July 10, 1997, (except with respect to the matter discussed in Note 16, as
to which the date is July 24, 1997), and to all references to our Firm included
in or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
------------------------------
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
August 28, 1997.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated July 10, 1997, on our audit of the financial statements of the Air
Restraint/Industrial Fabrics Division of JPS Textile Group, Inc. We also consent
to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
------------------------------
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
August 27, 1997
<PAGE> 1
EXHIBIT 23.4
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ BDO Deutsche Warentreuhand
Aktiengesellschaft
------------------------------
BDO Deutsche Warentreuhand
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Hamburg
August 29, 1997
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
SAFETY COMPONENTS INTERNATIONAL, INC.
OFFER FOR ANY AND ALL OUTSTANDING
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
PURSUANT TO THE PROSPECTUS, DATED ___________, 1997.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<TABLE>
<S> <C> <C>
BY OVERNIGHT DELIVERY: BY MAIL: BY HAND:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
One State Street P.O. Box 84 One State Street
New York, NY 10004 Bowling Green Station New York, NY 10004
Attn: Securities Processing Window New York, NY 10274-0084 Attn: Securities Processing Window
Subcellar One (SC-1) Attn: Reorganization Operations Subcellar One (SC-1)
Department
</TABLE>
FACSIMILE TRANSMISSION NUMBER:
(212) 858-2611
CONFIRM BY TELEPHONE:
(212) 858-2103
-------------
FOR INFORMATION CALL:
(212) 858-2103
-------------
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that it has received and reviewed the
Prospectus, dated ___________, 1997 (the "Prospectus"), of Safety Components
International, Inc., a Delaware corporation (the "Company"), and this Letter of
Transmittal (the "Letter"), which together constitute the Company's offer to
exchange any and all outstanding 10 1/8% Senior
1
<PAGE> 2
Subordinated Notes Due 2007, Series A (the "Old Notes") of the Company for a
like aggregate principal amount of 10 1/8% Senior Subordinated Notes Due 2007,
Series B (the "Exchange Notes"; and, together with the Old Notes, the "Notes")
of the Company from the holders ("Holders") thereof (the "Exchange Offer").
For each Old Note accepted for exchange, the Holder of such Old Note
will receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note. The terms of the Exchange Notes are identical in all
material respects to the Old Notes, except that (i) the Exchange Notes will bear
a Series B designation and a different CUSIP Number from the Old Notes, (ii) the
issuance of the Exchange Notes will have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (iii) Holders
of the Exchange Notes will not be entitled to certain registration rights
relating to the Old Notes. The Exchange Notes, and the Old Notes remaining after
the Exchange Offer, mature on July 15, 2007. Interest on the Exchange Notes will
accrue from the date of original issuance of the Old Notes, payable
semi-annually in arrears on each of January 15 and July 15 of each year,
commencing January 15, 1998 at the rate of 10 1/8% per annum. Holders whose Old
Notes are accepted for exchange will be deemed to have waived the right to
receive any interest accrued on the Old Notes. The Exchange Notes will be
redeemable, in whole or in part, at the option of the Company, on or after July
15, 2002 at the redemption prices set forth therein, plus accrued interest to
the date of redemption. See "Description of Exchange Notes" section of the
Prospectus.
The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the Holders of the Old Notes of any extension
by means of a press release or other public announcement prior to 9:00 A.M., New
York City time, on the next business day after the previously scheduled
Expiration Date.
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered or accepted for exchange. However,
the Exchange Offer is subject to certain conditions. Please see the Prospectus
under the section entitled "The Exchange Offer--Conditions."
The Exchange Offer is not being made to, nor will tenders be accepted
from or on behalf of, Holders of Old Notes in any jurisdiction in which the
making or acceptance of the Exchange Offer would not be in compliance with the
laws of such jurisdiction.
This Letter is to be completed by a Holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of certificates for Old
Notes, if available, is to be made by book-entry transfer to the account
maintained by IBJ Schroder Bank & Trust Company (the "Exchange Agent") at the
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in "The Exchange Offer -- Procedures for Tendering" section
of the Prospectus. Holders of Old Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or confirmation of
the book-entry tender of their Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The undersigned has completed the appropriate boxes below and signed
this Letter to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
2
<PAGE> 3
List below the Old Notes to which his Letter relates. If the space
provided below is inadequate, the Certificate numbers and principal amount of
Old Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES 1 2 3
- -------------------------------------------------------------------------------------------------------------------
Aggregate
Principal Amount Principal
Certificate of Amount
Names(s) and Address(es) of Registered Holders(s) Number(s)* Old Notes(s) Tendered**
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
Total
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to
have tendered ALL of the Old Notes represented by the Old Notes
indicated in column 2. See Instruction 2.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPETE THE FOLLOWING:
Name of Tendering Institution_____________________________________________
Account Number________________ Transaction Code Number__________________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s)___________________________________________
Window Ticket Number (if any)_____________________________________________
Date of Execution of Notice of Guaranteed Delivery________________________
Name of Institution which guaranteed delivery_____________________________
If Delivered by Book-Entry Transfer, Complete the Following:
Account Number_________________ Transaction Code Number__________________
[ ] CHECK HERE IF YOU ARE BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name:_____________________________________________________________________
Address:__________________________________________________________________
__________________________________________________________________
3
<PAGE> 4
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
its agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company) with respect to the tendered Old Notes with
the full power of substitution to (i) deliver certificates for such Old Notes to
the Company and deliver all accompanying evidences of transfer and authenticity
to, or upon the order of, the Company, (ii) present such Old Notes for transfer
on the books of the Company and (iii) receive for the account of the Company all
benefits and otherwise exercise all rights of beneficial ownership of such Old
Notes, all in accordance with the terms of the Exchange Offer. The power of
attorney granted in this paragraph shall be deemed to be irrevocable from and
after the Expiration Date and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any Exchange Notes to be received by
the undersigned will be acquired in the ordinary course of business of the
undersigned, that at the time of the commencement of the Exchange Offer, the
undersigned has no arrangement or understanding with any person to participate
in the distribution (within the meaning of the Securities Act) of the Exchange
Notes in violation of the Securities Act and that the undersigned is not an
"affiliate" (as defined in Rule 405 under the Securities Act) of the Company.
The undersigned agrees that acceptance of any tendered Old Notes by the Company
and the issuance of Exchange Notes in exchange therefor will constitute
performance in full by the Company of its obligations under the Registration
Rights Agreement (as defined in the Prospectus) and that the Company will have
no further obligations or liabilities thereunder (except in limited
circumstances).
The undersigned also acknowledges as follows: This Exchange Offer is being made
in reliance on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain "no-action" letters issued to
third parties and unrelated to the Company and the Exchange Offer, and based on
such interpretations, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes in violation of the provisions of the
Securities Act. Any Holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes could not rely on the position of the staff of the Commission
enunciated in "no-action" letters and, in the absence of an exemption therefrom,
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Failure to comply with
such requirements in such instance may result in such Holder incurring liability
under the Securities Act for which the Holder is not indemnified by the Company.
However, the undersigned acknowledges that the Company has not sought its own
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in such
other circumstances.
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. If the undersigned is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Old Notes that were acquired as a result of
market-making or other trading activities, that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such Exchange Notes. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes, the undersigned is not deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. The above-referenced
prospectus may be the prospectus relating to the Exchange Offer only if it
contains a plan of distribution with respect to such resale transactions (but
need not name the undersigned or disclose the amount of Exchange Notes held by
the undersigned).
4
<PAGE> 5
The undersigned will, upon request, execute and deliver any additional documents
deemed by the Company or the Exchange Agent to be necessary or desirable to
complete the sale, assignment and transfer of the Old Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer -- Withdrawal Rights" section of the Prospectus.
For purposes of this Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
and written notice thereof to the Exchange Agent.
The undersigned understands that tenders of the Old Notes pursuant to any one of
the procedures described under "The Exchange Offer--Procedures for Tendering" in
the Prospectus and in the Instructions hereto will constitute a binding
agreement between the undersigned and the Company in accordance with the terms
and subject to the conditions set forth herein and in the Prospectus.
The undersigned recognizes that under certain circumstances set forth in the
Prospectus under "The Exchange Offer--Conditions" the Company will not be
required to accept for exchange any of the Old Notes tendered. Old Notes not
accepted for exchange or withdrawn will be returned (or, in the case of Old
Notes tendered by book-entry transfer through the Book-Entry Transfer Facility,
will promptly be credited to an account maintained at the Book-Entry Transfer
Facility), without expense, to the undersigned at the address set forth below
unless otherwise indicated under "Special Delivery Instructions" below as
promptly as practicable after the Expiration Date.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the Exchange Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE
AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET
FORTH IN SUCH BOX ABOVE.
5
<PAGE> 6
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9)
Dated:__________________________________ ______________________________, 1997
x_______________________________________ ______________________________, 1997
x_______________________________________ ______________________________, 1997
Signature(s) by Owner Date
Area Code and Telephone Number____________________________________________
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) authorized to become registered holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title. See Instruction 3.
Name(s):________________________________________________________________________
________________________________________________________________________________
(Please Type or Print)
Capacity:_______________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
(Including Zip Code)
SIGNATURE GUARANTEE
(if required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution:________________________________________________________
(Authorized Signature)
________________________________________________________________________________
(Title)
________________________________________________________________________________
(Name and Firm)
6
<PAGE> 7
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
Exchange Notes are to be issued in the name of and sent to someone other than
the person or persons whose signature(s) appear(s) on this Letter above, or if
Old Notes delivered by book-entry transfer which are not accepted for exchange
are to be returned by credit to an account maintained at the Book-Entry Transfer
Facility other indicated above.
Issue: Exchange Notes and/or Old Notes to:
Name(s)_________________________________________________________________________
(Please Type or Print)
________________________________________________________________________________
(Please Type or Print)
Address_________________________________________________________________________
________________________________________________________________________________
(Zip Code)
(Complete Substitute Form W-9)
Credit unexchanged Old Notes delivered by
book-entry transfer to the Book-Entry
Transfer Facility account set forth below.
__________________________________
(Book-Entry Transfer Facility
Account Number, if applicable)
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
Exchange Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter above or to such person or persons at an
address other than shown in the box entitled "Description of Old Notes" on this
Letter above.
Issue: Exchange Notes and/or Old Notes to:
Name(s)_________________________________________________________________________
(Please Type or Print)
________________________________________________________________________________
(Please Type or Print)
Address_________________________________________________________________________
________________________________________________________________________________
(Zip Code)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR
OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE
NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY
BOX ABOVE.
7
<PAGE> 8
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer for any and all
outstanding
10 1/8% Senior Subordinated Notes Due 2007
in Exchange for
10 1/8% Senior Subordinated Notes Due 2007, Series B
of Safety Components International, Inc.
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter is to be completed by noteholders either if certificates
are to be forwarded herewith or if tenders are to be made pursuant to the
procedures for delivery by book-entry transfer set forth in "The Exchange Offer
- -- Procedures for Tendering" section of the Prospectus. Certificates for all
physically tendered Old Notes, or Book-Entry Confirmation, as the case may be,
as well as a properly completed and duly executed Letter (or manually signed
facsimile hereof) and any other documents required by this Letter, must be
reviewed by the Exchange Agent at the address set forth herein on or prior to
the Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures set forth below.
Noteholders whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures (i) such entry must be made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent must
receive from such Eligible Institution a properly completed and duly executed
Letter (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially
in the form provided by the Company (by telegram, telex, facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of Old
Notes and the amount of Old Notes tendered, setting forth the tender is being
made thereby and guaranteeing that within five New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, or a Book-Entry
Confirmation, and any other documents required by the Letter will be deposited
by the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or
Book-Entry Confirmation as the case may be, and all other document required by
this Letter, are received by the Exchange Agent within three NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other
required documents is at the election and risk of the tendering holders, but the
delivery will be deemed made only when actually received or confirmed by the
Exchange Agent. If Old Notes are sent by mail, it is suggested that the mailing
be made sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. TENDER BY HOLDER; PARTIAL TENDERS.
Only a Holder of Old Notes may tender such Old Notes in the Exchange
Offer. Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on behalf of such beneficial owners. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing this Letter and delivering such owner's Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed bond power from the
registered Holder. The transfer of registered ownership may take considerable
time.
Tenders of Old Notes will be accepted only in denominations of $1,000
or integral multiples thereof. If less than all of the Old Notes evidenced by a
submitted certificate are to be tendered, the tendering holder(s) should fill in
the aggregate principal amount of Old Notes to be tendered in the box above
entitled "Description of Old Notes -- Principal
8
<PAGE> 9
Amount tendered." A reissued certificate representing the balance of nontendered
Old Notes will be sent to such tendering Holder (except in the case of
book-entry tenders), unless otherwise provided in the appropriate box on this
Letter promptly after the Expiration Date. All of the Old Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
3. SIGNATURES OF THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes
tendered hereby, the signature must correspond exactly with the name as written
on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder or holders of the
Old Notes specified herein and tendered hereby, no endorsements of certificates
or separate bond powers are required. If, however, the Exchange Notes are to be
issued, or any untendered Old Notes are to be reissued, to a person other than
the registered holder, then endorsements of any certificates transmitted hereby
or separate bond powers are required. Signatures on such certificate(s) must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder
or holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter or any certificates or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF
A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (i) BY A REGISTERED HOLDER OF
OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY
PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A
SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES TENDERED) WHO HAS NOT
COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY
INSTRUCTIONS" ON THIS LETTER, OR (ii) FOR THE ACCOUNT OF AN ELIGIBLE
INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box
the name and address to which Exchange Notes issued pursuant to the Exchange
Offer and/or substitute certificates evidencing Old Notes not exchanged are to
be issued or sent, if different from the name or address of the person signing
this Letter. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. Noteholders tendering Old Notes by book-entry transfer may request
that Old Notes not exchanged be credited to such account maintained at the
Book-Entry Transfer Facility as such noteholder may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter.
9
<PAGE> 10
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose
Old Notes are accepted for exchange must provide the Company (as payor) with
such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form
W-9 below, which in the case of a tendering holder who is an individual, is his
or her social security number. If the Company is not provided with the current
TIN or an adequate basis for an exemption, such tendering holder may be subject
to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery
to such tendering holder of Exchange Notes may be subject to backup withholding
in an amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to backup withholding as a result of a failure to report all interest or
dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
Checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
transfer of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, Exchange Notes and/or substitute Old Notes not exchanged are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered holder of the Old Notes tendered hereby, or if tendered Old
Notes are registered in the name of any person other than the person signing
this Letter, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Company or its order pursuant to the Exchange
Offer, the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or
all conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
10
<PAGE> 11
Neither the Company, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Old Notes nor shall any of them incur any liability for failure to
give any such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests
for additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
11
<PAGE> 12
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART 1-PLEASE PROVIDE YOUR TIN IN -----------------------------------
THE BOX AT RIGHT AND CERTIFY BY Social Security Number
SUBSTITUTE SIGNING AND DATING BELOW
FORM W-9 or
-----------------------------------
Department of the Treasury Employer Identification Number
or
-----------------------------------
Individual Taxpayer Identification
Number
------------------------------------------------------------------------------------
Payer's Request for Taxpayer PART 2-Check the box if you are NOT subject to backup withholding under
Identification Number (TIN) the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code
because (1) you have not been notified that you are subject to backup
withholding as a result of failure to report all interest or dividends
or (2) the IRS has notified you that you are no longer subject to
backup withholding. / /
------------------------------------------------------------------------------------
CERTIFICATION-UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT THE INFORMATION PROVIDED ON THIS PART 3
FORM IS TRUE, CORRECT AND COMPLETE.
Awaiting TIN -- / /
SIGNATURE DATE , 1997
-------------------------------- ------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACK-UP
WITHHOLDING OF 31% OF ALL REPORTABLE PAYMENTS MADE TO YOU PURSUANT TO
THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 3 OF
SUBSTITUTE FORM W-9.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number to the payor, 31% of all
payments made to me pursuant to the Exchange Offer shall be retained until I
provide a taxpayer identification number to the payor and that, if I do not
provide my taxpayer identification number within sixty (60) days, such retained
amounts shall be remitted to the Internal Revenue Service as a backup
withholding and 31% of all reportable payments made to me thereafter will be
withheld and remitted to the Internal Revenue Service until I provide a number.
DATE: , 1997
- -------------------------------------- ------------------------------
Signature
- --------------------------------------------------------------------------------
12
<PAGE> 1
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
SAFETY COMPONENTS INTERNATIONAL, INC.
OFFERING FOR ANY AND ALL OUTSTANDING
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
PURSUANT TO THE PROSPECTUS, DATED ____________, 1997.
As set forth in the Prospectus dated ____________, 1997 (as the same may
be amended from time to time, the "Prospectus") of Safety Components
International, Inc. (the "Company") under the caption "The Exchange Offer--
Guaranteed Delivery Procedures," and in the accompanying Letter of Transmittal
(the "Letter of Transmittal") and Instruction 1 thereto, this form or one
substantially equivalent hereto must be used to accept the Company's offer (the
"Exchange Offer") to exchange any and all outstanding 10 1/8% Senior
Subordinated Notes Due 2007, Series A (the "Old Notes") of the Company for a
like aggregate principal amount of 10 1/8% Senior Subordinated Notes Due 2007,
Series B (the "Exchange Notes") of the Company from the holders ("Holders")
thereof if (i) certificates representing the Old Notes to be exchanged are not
immediately available or (ii) the procedures for book-entry transfer cannot be
completed prior to the Expiration Date (as defined below). This form, properly
completed and duly executed, may be delivered by mail or hand delivery or
transmitted, via facsimile, to IBJ Schroder Bank & Trust Company (the "Exchange
Agent") as set forth below. All capitalized terms used herein but not defined
herein shall have the meanings ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5 P.M. , NEW YORK CITY TIME, ON ___________,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5 P.M. , NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent for the Exchange offer is:
<TABLE>
<S> <C> <C>
BY OVERNIGHT DELIVERY: BY MAIL: BY HAND:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
One State Street P.O. Box 84 One State Street
New York, NY 10004 Bowling Green Station New York, NY 10004
Attn: Securities Processing Window New York, NY 10274-0084 Attn: Securities Processing Window
Subcellar One (SC-1) Attn: Reorganization Operations Subcellar One (SC-1)
Department
</TABLE>
FACSIMILE TRANSMISSION NUMBER:
(212) 858-2611
CONFIRM BY TELEPHONE:
(212) 858-2103
FOR INFORMATION CALL:
(212) 858-2103
Delivery of this instrument to an address other than as set forth
above, or transmission of instructions via facsimile other than as set forth
above, will not constitute a valid delivery.
This form is not to be used to guarantee signatures. If a signature on
the Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and
subject to the conditions set forth in the Prospectus and the Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures."
All authority herein conferred or agreed to be conferred by this Notice
of Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE SIGN AND COMPLETE
<TABLE>
<CAPTION>
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<S> <C>
Signatures of Registered Holder(s) or Authorized Date: ...................................................
Signatory:.........................................
................................................... Address:.................................................
................................................... .........................................................
Name(s) of Registered Holder(s): .................. Area Code and Telephone No.:.............................
................................................... If Notes will be delivered by book-entry transfer, check
trust company below:
...................................................
Principal Amount of Old Notes Tendered: ........... / / The Depository Trust Company
Depository Account No:..............................
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</TABLE>
<PAGE> 3
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This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly as
their name(s) appear on certificates for Old Notes or on a security position
listing as the owner of Old Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):........................................................................
................................................................................
Capacity: ......................................................................
Address(es): ...................................................................
................................................................................
................................................................................
Do not send Old Notes with this form. Old Notes should be sent to the Exchange
Agent together with a properly completed and duly executed Letter of
Transmittal.
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GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a member firm of a registered national securities exchange or
of the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or a correspondent in the United States, hereby
guarantees that, within three New York Stock Exchange trading days from the date
of this Notice of Guaranteed Delivery, a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof), together with certificates
representing the Old Notes tendered hereby in proper form for transfer (or
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at a Book-Entry Transfer Facility, pursuant to the procedure for
book-entry transfer set forth in the Prospectus under the caption "The Exchange
Offer -- Procedures for Tendering"), and required documents will be deposited by
the undersigned with the Exchange Agent.
Name of Firm:............................ ......................................
Authorized Signature
Address:................................. Name:.................................
......................................... Title:................................
Area Code and Telephone No. ............. Date:.................................
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DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND
VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE> 1
Exhibit 99.3
Offer for any and all Outstanding
10 1/8% Senior Subordinated Notes Due 2007, Series A
In Exchange for
10 1/8% Senior Subordinated Notes Due 2007, Series B
of Safety Components International, Inc.
Pursuant to the Prospectus
dated _______, 1997
___________, 1997
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are enclosing herewith the materials listed below relating to the
offer by Safety Components International, Inc. (the "Company") to exchange, upon
the terms and subject to the conditions set forth in the Prospectus dated
_________, 1997 (the "Prospectus") and in the related Letter of Transmittal (the
"Letter of Transmittal," together with the Prospectus, the "Exchange Offer"),
any and all outstanding 10 1/8% Senior Subordinated Notes Due 2007, Series A
("Old Notes") of the Company for a like aggregate principal amount of 10 1/8%
Senior Subordinated Notes Due 2007, Series B of the Company.
Enclosed herewith are copies of the following documents:
1. The Prospectus;
2. The Letter of Transmittal for your use and for the information of
your clients, together with guidelines of the Internal Revenue Service for
Certification of Taxpayer Identification Number on Substitute Form W-9 providing
information relating to backup federal income tax withholding;
3. Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if the Old Notes and all other required documents cannot be delivered on
or prior to the Expiration Date;
4. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Beneficial Owner; and
5. A form of letter which may be sent to your clients for whose account
you hold the Old Notes in your name or in the name of a nominee, accompanying
the instruction form referred to above, for obtaining such clients' instructions
with regard to the Exchange Offer;
PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON __________, 1997, UNLESS EXTENDED. WE URGE YOU TO CONTACT YOUR
CLIENTS AS PROMPTLY AS POSSIBLE.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) any Exchange Notes acquired by it will be
acquired in the ordinary course of its business, (ii) at the time of the
commencement of the Exchange Offer, it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act of 1933, as amended (the "Securities Act")) of the Exchange Notes
in violation of the Securities Act, (iii) it is not an "affiliate" (as defined
in Rule 405 promulgated under the Securities Act) of the Company, (iv) if such
holder is not a broker-dealer, that it is not engaged in, and does not intend to
engage in, the distribution of Exchange Notes, and (v) if such holder is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Old Notes that were acquired as a result of market-making or other trading
activities, that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes.
<PAGE> 2
By acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes, such broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The enclosed Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Beneficial Owner contains an authorization by the
beneficial owners of the Old Notes for you to make the foregoing
representations.
The Company will not pay any fees or commissions to any broker or
dealer or other person (other than the Exchange Agent (as defined below)) for
soliciting tenders of the Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 6 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed materials may be obtained from IBJ
Schroder Bank & Trust Company (the "Exchange Agent"), at its address and
telephone number set forth on the back cover of the enclosed Prospectus.
Very truly yours,
Safety Components International, Inc.
2
<PAGE> 1
Exhibit 99.4
Offer for any and all Outstanding
10 1/8 % Senior Subordinated Notes Due 2007, Series A
In Exchange for
10 1/8 % Senior Subordinated Notes Due 2007, Series B
of Safety Components International, Inc.
__________, 1997
TO OUR CLIENTS:
Enclosed for your consideration is the Prospectus dated _______, 1997
(as the same may be amended from time to time, the "Prospectus") and a related
Letter of Transmittal (the "Letter of Transmittal," together with the
Prospectus, the "Exchange Offer") relating to the offer by Safety Components
International, Inc. (the "Company") to exchange any and all outstanding 10 1/8%
Senior Subordinated Notes Due 2007, Series A of the Company for a like aggregate
principal amount of 10 1/8% Senior Subordinated Notes Due 2007, Series B of the
Company.
Please Note that the Exchange Offer will expire at 5:00 p.m., New York
City time, on _______________, 1997, unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
WE ARE THE REGISTERED HOLDER OF THE OLD NOTES HELD BY US FOR YOUR
ACCOUNT. A TENDER OF ANY SUCH OLD NOTES CAN BE MADE ONLY BY US AS THE REGISTERED
HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED
TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER OLD NOTES
HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to
tender any or all of the Old Notes held by us for your account, pursuant to the
terms and conditions set forth in the Exchange Offer. We also request that you
confirm that we may on your behalf make the representations contained in the
Letter of Transmittal that are to be made with respect to you as beneficial
owner.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (ii) at the time of the
commencement of the Exchange Offer, it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act of 1933, as amended (the "Securities Act")) of the Exchange Notes
in violation of the Securities Act, (iii) it is not an "affiliate" (as defined
in Rule 405 promulgated under the Securities Act) of the Company, (iv) if such
holder is not a broker-dealer, that it is not engaged in, and does not intend to
engage in, the distribution of Exchange Notes, and (v) if such holder is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Old Notes that were acquired as a result of market-making or other trading
activities, that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes, such broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Very truly yours,
<PAGE> 1
Exhibit 99.5
Instruction to Registered Holder and/or Book
Entry Transfer Participant from Beneficial Owner
for
Tender of 10 1/8 Senior Subordinated Notes Due 2007, Series A
in Exchange for
10 1/8 Senior Subordinated Notes Due 2007, Series B
OF SAFETY COMPONENTS INTERNATIONAL, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON __________________, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
______________, 1997 (the "Prospectus") of Safety Components International,
Inc., a Delaware corporation (the "Company"), and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), that together constitute the
Company's offer (the "Exchange Offer") to exchange any and all outstanding
10 1/8 Senior Subordinated Notes Due 2007, Series A (the "Old Notes") of the
Company for a like aggregate principal amount of 10 1/8 Senior Subordinated
Notes Due 2007, Series B (the "Exchange Notes") of the Company. Capitalized
terms used but not defined herein have the meanings ascribed to them in the
Prospectus.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by you relating to
the Exchange Offer with respect to the Old Notes held by you for the account of
the undersigned.
The aggregate face amount of the Old Notes held by you for the account
of the undersigned is (FILL IN AMOUNT):
$___________________ of the 10 1/8 Senior Subordinated Notes Due 2007,
Series A.
With respect to the Exchange Offer, the undersigned hereby instructs
you (CHECK APPROPRIATE BOX):
/ / To TENDER the following Old Notes held by you for the account of
the undersigned (INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED (IF ANY)):
$____________________
/ / Not to TENDER any Old Notes held by you for the account of the
undersigned.
<PAGE> 2
If the undersigned instructs you to tender the Old Notes held by you
for the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including, but not limited to, the representations, that (i)
any Exchange Notes to be received by the undersigned will be acquired in the
ordinary course of business of the undersigned, (ii) at the time of the
commencement of the Exchange Offer, the undersigned has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act of 1933, as amended (the "Securities Act")) of the
Exchange Notes in violation of the Securities Act, (iii) the undersigned is not
an "affiliate" (as defined in Rule 405 promulgated under the Securities Act) of
the Company, (iv) if the undersigned is not a broker-dealer, the undersigned is
not engaged in, and does not intend to engage in, the distribution of Exchange
Notes, and (v) if the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making or other trading activities, that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, the undersigned is not deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
SIGN HERE
Name of beneficial owner(s):
-----------------------------------------
Signature(s):
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Name(s) (please print):
------------------------------------------
Address:
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Telephone Number:
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Taxpayer Identification or Social Security Number:
------------------
Date:
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