SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
2160 North Central Road, New Jersey, 07024
(Address and zip code of principal executive offices)
33-0596831
(IRS Employer Identification Number)
(201) 592-0008
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of November 12, 1997, was 5,031,383.
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION
The unaudited consolidated financial information at September 30, 1997 and
for the three and six month period ended September 30, 1997 and the audited
consolidated financial information at March 31, 1997 relate to Safety Components
International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets as of September 30, 1997 and
March 31, 1997 3
Consolidated Statements of Operations for the
three months ended September 30, 1997 and 1996 4
Consolidated Statements of Operations for the
six months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for
three months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
2
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SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and per share data)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------ --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 10,589 $ 8,320
Accounts receivable, net ................................... 29,678 11,751
Inventories ................................................ 16,530 6,378
Prepaid and other .......................................... 2,593 870
-------- -------
Total current assets .......................... 59,390 27,319
Property, plant and equipment, net ...................................... 62,175 28,295
Receivable from affiliate ............................................... - 4,348
Intangible assets, net ................................................. 51,153 10,991
Other assets ............................................................ 6,971 2,454
-------- -------
Total assets .................................. $179,689 $73,407
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $17,721 $ 7,792
Earnout payable ............................................ - 2,211
Accrued liabilities ........................................ 14,829 2,476
Current portion of long-term obligations ................... 2,673 3,085
-------- -------
Total current liabilities ..................... 35,223 15,564
Long-term obligations ................................................... 12,934 21,296
Senior subordinated debt 90,000 -
Other long-term liabilities ............................................. 4,382 1,273
-------- -------
Total liabilities ............................. 142,539 38,133
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.10 par value per share - 2,000,000 shares
authorized; no shares outstanding at
September 30, 1997 and March 31, 1997 ............... - -
Common stock: $.01 par value per share - 10,000,000 shares
authorized; 5,015,383 and 5,025,383 shares issued and
outstanding at September 30, 1997 and
March 31, 1997, respectively ........................ 50 51
Common stock warrants ...................................... 1 1
Additional paid-in-capital ................................. 43,804 30,062
Treasury stock, 1,492,692 and 113,492 shares, at September 30,
1997 and March 31, 1997 respectively, at cost ....... (15,438) (1,647)
Retained earnings .......................................... 12,110 9,183
Cumulative translation adjustment .......................... (3,377) (2,376)
-------- -------
Total stockholders' equity .................... 37,150 35,274
-------- -------
Total liabilities and stockholders' equity .... $179,689 $73,407
======== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net Sales ...................................................... $42,728 $18,877
Cost of sales, excluding depreciation .......................... 34,106 14,579
Depreciation ................................................... 1,333 522
------- -------
Gross profit ...................................... 7,289 3,776
Selling and marketing expenses ................................. 623 395
General and administrative expenses ............................ 2,133 979
Amortization of goodwill ....................................... 404 154
------- -------
Income from operations ............................ 4,129 2,248
Other expense (income), net .................................... (70) 9
Interest expense ............................................... 2,165 240
------- -------
Income before income taxes ........................ 2,034 1,999
Provision for income taxes ..................................... 752 851
------- -------
Net income ..................................................... $ 1,282 $ 1,148
======= =======
Net income per share ........................................... $ 0.26 $ 0.23
======= =======
Weighted average number of shares outstanding .................. 5,021 5,048
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net Sales ...................................................... $70,357 $35,049
Cost of sales, excluding depreciation .......................... 55,262 27,822
Depreciation ................................................... 2,138 859
------- -------
Gross profit ...................................... 12,957 6,368
Selling and marketing expenses ................................. 911 697
General and administrative expenses ............................ 4,296 1,823
Amortization of goodwill ....................................... 589 154
------- -------
Income from operations ............................ 7,161 3,694
Other expense (income), net .................................... 89 73
Interest expense ............................................... 2,647 250
------- -------
Income before income taxes ........................ 4,425 3,371
Provision for income taxes ..................................... 1,708 1,370
------- -------
Net income ..................................................... $ 2,717 $ 2,001
======= =======
Net income per share ........................................... $ 0.54 $ 0.40
======= =======
Weighted average number of shares outstanding .................. 5,021 5,059
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities ............. $ 4,979 $ 6,013
-------- -------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............. (6,626) (4,928)
Additional consideration and costs for Phoenix Airbag .. (2,455) (22,572)
Acquisition costs for Valentec ......................... (809) -
Advances to Valentec prior to acquisition .............. (1,215) -
Acquisition SCFT ....................................... (57,582) -
-------- -------
Net cash used in investing activities ............. (68,687) (27,500)
-------- -------
Cash Flows From Financing Activities:
Net proceeds from Notes ................................ 86,265
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) -
Repayment of KeyBank term note ......................... (15,000) -
Exercise of stock options .............................. 50 -
Purchase of treasury stock ............................. - (268)
(Repayments) borrowing of debt and long-term obligations (9,309) 18,602
Net (repayments) borrowing on revolving credit facility . (2,931) 432
-------- -------
Net cash provided in financing activities ......... 66,763 18,766
-------- -------
Effect of exchange rate changes on cash ......................... (786) (15)
-------- -------
Change in cash and cash equivalents ............................. 2,269 (2,736)
Cash and cash equivalents, beginning of period .................. 8,320 13,045
-------- -------
Cash and cash equivalents, end of period ........................ $ 10,589 $10,309
======== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO 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 be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended March 31, 1997. 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 Aktiengesellschaft
("Phoenix AG") in Hamburg, Germany. The purchase from Phoenix AG was made in
accordance with the terms and conditions of the Agreement Concerning the Sale
and Transfer of all the Shares in Phoenix Airbag GmbH dated June 6, 1996, as
amended. Company representatives have met with the staff of Phoenix Airbag and
the Betriebsrat (the German Works Council) to communicate the intended closure
of the manufacturing facility in Hildesheim, Germany. This intended closure is
due to the increased market pressures experienced in the European business
segment. The Company expects to move the operations from the facility in Germany
to its facility in the Czech Republic and its facility in Gwent, Wales in the
United Kingdom September 1998. The Company estimates the costs of the closure to
be $4,500,000, a major portion of which relates to the "Social Plan" for the
employees designed by the Betriebsrat. Accordingly, the Company has recorded an
accrual for such closure and severance costs as part of the purchase during the
second quarter.
Effective as of May 22, 1997, the Company acquired all of the outstanding
capital stock of Valentec International Corporation ("Valentec"). 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 for the entire three-month period ended September 30, 1997 and
beginning on May 22, 1997 for the six-month period ended September 30, 1997.
On July 24, 1997, the Company, through newly formed wholly-owned
subsidiary, Safety Components Fabric Technologies, Inc., purchased all of the
assets and assumed certain liabilities of the Air Restraint and Industrial
Fabrics Division of JPS Automotive L.P. (SCFT). SCFT is a leading, low-cost
7
<PAGE>
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 operations of SCFT are included in the three and
six-month period ended September 30, 1997 beginning on July 24, 1997.
Additionally, on July 24, 1997, the Company, issued $90.0 million of 10
1/8% Senior Subordinated Notes (the "Notes") due July 15, 2007 (see Note 3). A
substantial portion of the proceeds of the Notes were used by the Company to
purchase the Division, repay the term loan and amounts outstanding under the
revolving credit facility with KeyBank as of July 24, 1997 and pay certain fees
and expenses associated with the acquisition of the Division and the Notes.
NOTE 2 COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS
(in thousands)
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Accounts receivable:
Billed receivables $ 25,432 $ 9,152
Unbilled receivables (net of unliquidated progress
payments of $11,104 and $9,846 at September 30, 1997 and
March 31, 1997, respectively) 3,484 1,834
Other 762 765
------- -------
$29,678 $11,751
======= =======
Inventories:
Raw materials $ 5,654 $ 3,339
Work-in-process 5,558 2,073
Finished goods 5,318 966
------- -------
$16,530 $ 6,378
======= =======
Property, plant and equipment:
Land and building $10,100 $ 8,435
Machinery and equipment 49,946 20,842
Construction in process 8,027 2,822
------- -------
68,043 32,099
Less - accumulated depreciation and amortization (5,868) (3,804)
------- -------
$62,175 $28,295
======= =======
</TABLE>
8
<PAGE>
NOTE 3 LONG-TERM OBLIGATIONS (in thousands)
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Senior Subordinated Notes at 10 1/8% $ 90,000 $ -
KeyBank revolving credit facility - -
Bank of America NT&SA term loan and revolving credit facility,
bearing interest at 2.25% and 2.0% over LIBOR (6.54% at
March 31, 1997), respectively, refinanced May 21, 1997 - 20,192
Bank Austria mortgage note 7,125 -
Valentec International Limited note payable at 7.0%, principal
and interest due in monthly installments of $39,600 1,887 -
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 809 820
Capital equipment notes payable, due in monthly installments
with interest at 9.25% to 16.5% maturing at various rates
through June 2002, secured by machinery and equipment 5,786 3,369
------- -------
105,607 24,381
Less - current portion (2,673) (3,085)
------- -------
$102,934 $21,296
======= =======
</TABLE>
On July 24, 1997, the Company issued (the "Offering") $90.0 million of 10
1/8% Senior Subordinated Notes (the Notes) due July 15, 2007. Interest on the
Notes accrue from July 24, 1997 and is payable semi-annually in arrears on each
of January 15 and July 15 of each year, commencing January 15, 1998. The Notes
are general unsecured obligations of the Company and are subordinated in right
of payment to all existing and future Senior Indebtedness and to all existing
and future indebtedness of the Company's subsidiaries that are not Guarantors.
All of the Company's direct and indirect wholly-owned domestic subsidiaries are
Guarantors. The Company incurred approximately $3.7 million of fees and expenses
related to the Offering. Such fees have been deferred and will be amortized over
the expected term of the Notes, not to exceed 10 years.
The Company, Phoenix Airbag and Automotive Safety Components International
Limited entered into an agreement with KeyBank National Association, as
9
<PAGE>
administrative agent ("KeyBank"), and the lending institutions named therein, as
of May 21, 1997 as amended (the "Credit Agreement"). The Credit Agreement
consists of a $27.0 million revolving credit facility for a five year term,
bearing interest at LIBOR plus 1.00% (5.66% as of September 30, 1997) 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.
The Company will use the revolving credit facility to fund working capital.
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information for the six months ended
September 30, 1996 presents a summary of the consolidated results of operations
of the Company as if the acquisition of Valentec, SCFT and Phoenix Airbag, and
the issuance of the Notes had occurred on April 1, 1996, with pro forma
adjustments to give effect to the amortization of goodwill, interest charges and
certain other adjustments, together with the related income tax effect. The
unaudited pro forma information for the six months ended September 30, 1997
presents a summary of the consolidated results of operations of the Company as
if the transactions had occurred on April 1, 1997.
Pro Forma Pro Forma
September 30, 1997 September 30, 1996
------------------ ------------------
(unaudited) (unaudited)
Net sales $ 94,682 $ 84,991
Net income $ 2,161 $ 1,071
Net income per share $ .43 $ .21
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Second Quarter Ended September 30, 1997 Compared to Second Quarter Ended
September 30, 1996
Net Sales. Net sales increased by $23.9 million or 126.4% to $42.7 million
for the second quarter of fiscal year 1998 compared to the second quarter of
fiscal year 1997. The increase was primarily attributable to the acquisition of
SCFT and Valentec, which contributed approximately $20.1 million on a combined
basis. The remaining increase in sales volume was attributable to European
operations, specifically Phoenix Airbag, offset by lower net sales in North
American airbag sales. Phoenix Airbag was acquired on August 5, 1996 and
included in the Company's entire second quarter of fiscal year 1998 whereas in
the second quarter of fiscal year 1997 Phoenix Airbag was included for
approximately two months.
Gross Profit. Gross profit increased by $3.5 million or 93.0% to $7.3
million for the second quarter of fiscal year 1998 compared to the second
quarter of fiscal year 1997. The increase was primarily attributable to the
acquisition of SCFT and Valentec, which contributed approximately $3.2 million
on a combined basis. Additionally, European operations increased due to the
inclusion of Phoenix Airbag for an additional month, when compared with the
second quarter of fiscal year 1997, partially offset by lower margins on North
American airbag sales due to lower sales.
Gross profit as a percentage of sales decreased to approximately 17.1% for
the second quarter of fiscal year 1998 from 20.0% for the second quarter of
fiscal year 1997. The decrease as a percentage was due to the historically lower
gross margins at SCFT offset by greater contribution to gross profit by Phoenix
Airbag and Valentec. The textile industry generally produces margins in the
range of 13% to 14% due to the intensive production process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.4 million or 100.0% to $2.8 million for
the second quarter of fiscal year 1998 compared to the second quarter of fiscal
year 1997. The increase was primarily attributable to the acquisitions of SCFT
and Valentec, which approximated $475,000 on a combined basis. Expenses of the
European operations increased approximately $335,000 due to the inclusion of
Phoenix Airbag and the Czech Republic facility, which were in full production
during the second quarter of fiscal year 1998 compared to the second quarter of
fiscal year 1997 when Phoenix Airbag had only been included for a two month
period and the Czech Republic facility had not yet been operating. 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 decreased to 6.5% for the
second quarter of fiscal year 1998 from 7.3% for the second quarter of fiscal
year 1997.
Operating Income. Operating income increased by $1.9 million or 83.7% to
$4.1 million for the second quarter of fiscal year 1998 compared to the second
quarter of fiscal year 1997. Operating income increased primarily due to the
acquisitions of SCFT and Valentec and the inclusion of Phoenix Airbag for the
full three-month period, partially offset by lower operating income in North
American airbags.
Interest Expense. Interest expense increased $1.9 million to $2.2 million
for the second quarter of fiscal year 1998 compared to the second quarter of
fiscal year 1997. This increase was attributable to the issuance of the 10 1/8%
Senior Subordinated Notes (the "Notes"), the proceeds of which was used
primarily to acquire SCFT and repay amounts then outstanding under the Company's
credit facilities with KeyBank.
11
<PAGE>
Income Taxes. The income tax rate applied against pre-tax income was 37.0%
for the second quarter of fiscal year 1998 compared to 42.6% for the second
quarter of fiscal year 1997. The tax rate decreased as compared to the prior
year due to the increasing percentage of income generated from SCFT and
Valentec, which have lower tax rates than the European operations. Additionally,
the Company is currently benefiting from net operating loss carry-forwards that
were acquired in connection with the Valentec acquisition.
Net Income. Net income increased to $1.3 million for the second quarter of
fiscal year 1998 compared to $1.1 million for the second quarter of fiscal year
1997. This increase is a result of the items discussed above.
Six Months Ended September 30, 1997 Compared to Six Months Ended September 30,
1996
Net Sales. Net sales increased by $35.3 million or 100.7% to $70.4 million
for the first six months of fiscal year 1998 compared to the first six months of
fiscal year 1997. The increase was primarily attributable to the acquisition of
SCFT and Valentec, which contributed approximately $21.5 million on a combined
basis. The remaining increase in sales volume was primarily attributable to
European operations, specifically Phoenix Airbag. Phoenix Airbag was acquired on
August 5, 1996 and included in the Company's entire first six months of fiscal
year 1998 whereas in the first six months of fiscal year 1997 Phoenix Airbag was
included for approximately two months. The increase at Phoenix Airbag was
approximately $14.1 million
Gross Profit. Gross profit increased by $6.6 million or 103.5% to $13.0
million for the first six months of fiscal year 1998 compared to the first six
months of fiscal year 1997. The increase was primarily attributable to the
acquisition of SCFT and Valentec, which contributed approximately $3.8 million
on a combined basis. The remaining increase was primarily attributable to the
inclusion of Phoenix Airbag for a full six-month period, partially offset by
lower margins in the North American airbag sales due to lower sales.
Gross profit as a percentage of sales increased to approximately 18.4% for
the first six months of fiscal year 1998 from 18.2% for the first six months of
fiscal year 1997. The increase as a percentage was due to the greater
contribution to gross profit by Phoenix Airbag and Valentec offset by the
historically lower gross margins at SCFT. The textile industry generally
produces margins in the range of 13% to 14% due to the intensive production
process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.7 million or 106.6% to $5.2 million for
the first six months of fiscal year 1998 compared to the first six months of
fiscal year 1997. The increase was primarily attributable to expenses of the
European operations, which increased approximately $900,000 due to Phoenix
Airbag and the Czech Republic facility which were in full production during the
first six months of fiscal year 1998 compared to the first six months of fiscal
year 1997, when Phoenix Airbag had only been included for a two month period and
the Czech Republic facility had not yet been operating. The acquisition of SCFT
and Valentec, contributed approximately $621,000 of the increase on a combined
basis. The remaining increase was due to a combination of additional costs
incurred in corporate services and North American manufacturing operations.
Selling, general and administrative expenses as a percentage of sales increased
slightly to 7.4% for the first six months of fiscal year 1998 from 7.2% for the
first six months of fiscal year 1997.
12
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Operating Income. Operating income increased by $3.5 million or 93.97% to
$7.2 million for the first six months of fiscal year 1998 compared to the first
six months of fiscal year 1997. Operating income increased primarily due to the
acquisitions of SCFT and Valentec, and the inclusion of Phoenix Airbag for the
full six-month period, partially offset by lower operating income in North
American airbags.
Interest Expense. Interest expense increased $2.4 million to $2.6 million
for the first six months of fiscal year 1998 compared to the first six months of
fiscal year 1997. This increase was attributable to the issuance of the Notes,
the proceeds of which was used primarily to acquire SCFT and repay amounts then
outstanding under the Company's credit facilities with KeyBank.
Income Taxes. The income tax rate applied against pre-tax income was 38.6%
for the first six months of fiscal year 1998 compared to 40.6% for the first six
months of fiscal year 1997. The tax rate decreased as compared to prior year due
to the increasing percentage of income generated from SCFT and Valentec, which
have lower tax rates than the European operations. Additionally, the Company is
currently benefiting from net operating loss carry-forwards that were acquired
during the Valentec acquisition.
Net Income. Net income increased to $2.7 million for the first six months
of fiscal year 1998 compared to $2.0 million for the first six months of fiscal
year 1997. This increase is a result of the items discussed above.
Liquidity and Capital Resources
As the Company's business grows, its equipment and working capital
requirements will also continue to increase as a result of the anticipated
growth of the automotive operations. This growth will be funded through a
combination of cash flow from operations, equipment financing, revolving credit
borrowings and the proceeds from potential future Company public offerings.
On July 24, 1997, the Company issued (the "Offering") $90.0 million of
Notes due July 15, 2007. Interest on the Notes accrues from July 24, 1997 and is
payable semi-annually in arrears on each of January 15 and July 15 of each year,
commencing January 15, 1998. The Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future
Senior Indebtedness and to all existing and future indebtedness of the Company's
subsidiaries that are not Guarantors. All of the Company's direct and indirect
wholly-owned domestic subsidiaries are Guarantors. The Company incurred
approximately $3.7 million of fees and expenses related to the Offering. Such
fees have been deferred and will be amortized over the expected term of the
Notes, not to exceed 10 years. The Indenture with respect to the Notes contains
certain restrictive covenants that impose limitations upon, among other things,
the Company's ability to incur additional indebtedness.
As of May 21, 1997, the Company, Phoenix Airbag and Automotive Safety
Components International Limited ("ASCIL" and collectively, the "Borrowers")
entered into the Credit Agreement with KeyBank National Association, as
administrative agent ("KeyBank"), and the lending institutions named therein
(the "Credit Agreement"). Prior to the consummation of the Offering, the Credit
Agreement provided for (i) a term loan in the principal amount of $15.0 million
(the "Term Loan") and (ii) a revolving credit facility (the "Revolving Credit
Facility") in the aggregate principal amount of $12.0 million (including letter
of credit facilities). The indebtedness under the Credit Agreement bore interest
at a rate equal to either (i) the greater of KeyBank's prime rate or (ii) the
sum of LIBOR plus 1.00% for term loans (and 1.25% for revolving loans, subject
to reduction to 1.00% upon consummation of the Offering so long as no default or
event of default shall have occurred and be continuing). Upon the consummation
of the Offering, the Company used the proceeds thereof to repay the Term Loan
13
<PAGE>
and amounts then outstanding under the Revolving Credit Facility. In connection
therewith, the Company's credit facility with KeyBank was converted into a $27.0
million Revolving Credit Facility, bearing interest at LIBOR plus 1.00% with a
commitment fee of 0.25% on any unused portion, with the remaining terms and
conditions being similar to the previous Revolving Credit Facility. The Company
incurred approximately $200,000 of financing fees in connection with the KeyBank
credit facility. Any indebtedness under the Credit Agreement will be secured by
substantially all the assets of the Company. The Credit Agreement contains
certain restrictive covenants that impose limitations upon, among other things,
the Company's ability to change its business; merge; consolidate or dispose of
assets; incur liens; make loans and investments; incur indebtedness; pay
dividends and other distributions; engage in certain transactions with
affiliates; engage in sale and lease-back transactions; enter into lease
agreements; and make capital expenditures.
Net cash generated from operations was $5.0 million during the first six
months of fiscal year 1998. Cash used in investing activities was $68.7 million.
Cash used for capital expenditures was $6.6 million. The Company also paid
additional costs and consideration in connection with the acquisition of Phoenix
Airbag, primarily the $2.2 million earn-out accrued at the end of fiscal year
1997. The Company incurred certain costs in connection with the acquisition of
Valentec of approximately $809,000. In addition, the Company also made advances
to Valentec prior to acquisition for the purpose of funding operations. The
Company used approximately $57.6 million to purchase SCFT, (see to discussion
below). Net cash provided by financing activities in the first six months of
fiscal year 1998 was $66.8 million. Cash proceeds from financing activities were
used to purchase SCFT, repay the Term Loan and Revolving Credit Facility with
KeyBank, and repay certain liabilities of the newly acquired Valentec. These
activities resulted in a net increase in cash of $2.3 million in the first six
months of fiscal year 1998.
Capital expenditures were $6.6 million in the first six months of fiscal
year 1998. Capital expenditures in the first six months of fiscal year 1998 were
used to complete the construction of the new facility in the Czech Republic,
purchase a building adjacent to SCFT, and the acquisition of additional
equipment to expand the Company's production capacity worldwide.
Pursuant to a definitive Stock Purchase Agreement, effective as of May 22,
1997, the Company acquired all of the outstanding common stock of Valentec
International Corporation ("Valentec") in a tax-free stock-for-stock exchange.
Valentec is a high-volume manufacturer of stamped and precision-machined
products for the automotive, commercial and defense industries. Valentec was the
Company's largest shareholder immediately prior to the acquisition owning
approximately 27%, or 1,379,200 shares of the issued and outstanding shares of
the Company's common stock. The Company issued, to the shareholders of Valentec,
1,369,200 newly issued shares of its common stock. The acquisition was accounted
for as a purchase. The purchase price aggregated approximately $14.3 million,
including estimated direct acquisition costs of approximately $600,000.
Pursuant to a definitive Asset Purchase Agreement, on July 24, 1997, the
Company purchased all of the assets and assumed certain liabilities of the Air
Restraint and Industrial Fabrics Division of JPS Automotive L.P., referred to
herein as 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 acquisition
was accounted for as a purchase. The purchase price aggregated approximately
$57.6 million, subject to post-closing adjustments. The purchase price included
the repayment of approximately $650,000 of capital lease obligations and direct
acquisition costs of approximately $700,000. The Company funded the purchase of
SCFT out of the proceeds from the issuance of the Notes.
During the second quarter of fiscal year 1998, Company representatives met
with the staff of Phoenix Airbag and the Betriebsrat (the German Works Council)
to communicate the intended closure of the manufacturing facility in Hildesheim,
Germany. This intended closure is due to the increased market pressures
14
<PAGE>
experienced in the European business segment. The Company expects to move the
operations from the facility in Germany to its facility in the Czech Republic
and its facility in Gwent, Wales in the United Kingdom by September 1998. The
Company estimates the costs of the closure to be $4,500,000, a major portion of
which relates to the "Social Plan" for the employees designed by the
Betriebsrat, which is expected to be funded by operations.
The above discussion may contain forward-looking statements that involve
risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market condition risks, the
ability of Safety Components to realize anticipated cost savings and earnings
projections by the Valentec division; the continued performance by the Safety
Components Fabrics Technologies Division at or above historical levels;
world-wide economic conditions; dependence of revenues upon several major module
suppliers and pricing pressures.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
----------- ------------------------------------------------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K filed on June 6, 1997 relating
to the acquisition of Valentec. Including the audited
financial statements of VIC for the year ended March 31, 1997
and the notes related thereto.
Current Report on Form 8-K/A filed on October 6, 1997 relating
to the acquisition of SCFT, included the (i) unaudited
financial statements of the JPS Automotive L.P. Air Restraints/
Fabrics Division for the period from 3/30/97 to 6/28/97, the
period from 12/29/96 to 3/29/97 and the notes related thereto;
(ii) audited financial statements of the JPS Automotive L.P.
Air Restraints/Fabrics Division for the period from 12/12/96 to
12/28/96 and the period from 1/1/96 to 12/11/96 and the year
ended 12/31/95 and the period from 6/29/94 to 1/1/95 and the
notes related thereto; and (iii) the audited fiancial
statements of the Air Restraints/Industrial Fabrics Division of
the JPS Textile Group, Inc. for the period from 12/26/93 to
6/28/94 and the notes related thereto.
16
<PAGE>
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
(Registrant)
DATED: November 13, 1997 BY: /s/ JEFFREY J. KAPLAN
----------------------------
Jeffrey J. Kaplan
Executive Vice President and
Chief Financial Officer
17
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
INCOME.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 10,589
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<RECEIVABLES> 29,970
<ALLOWANCES> 292
<INVENTORY> 16,530
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<TOTAL-LIABILITY-AND-EQUITY> 179,689
<SALES> 70,357
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<CGS> 57,400
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