As filed with the Securities and Exchange Commission on January 6, 1998
Registration No. 333-42021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
PRE-EFFECTIVE AMENDMENT NO.1
TO
REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
----------------------------
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization))
3714
(Primary Standard Industrial Classification Code Number)
33-0596831
(I.R.S. Employer Identification Number)
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
Safety Components International, Inc.
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 the effective date of this registration
statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please 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>
SUBJECT TO COMPLETION, DATED JANUARY 6, 1998
PROSPECTUS
400,801 Shares
SAFETY COMPONENTS INTERNATIONAL, INC.
Common Stock
---------------------
This Prospectus relates to the offer and sale (the "Offering") by the
holders thereof (the "Selling Stockholders") of an aggregate of 400,801 shares
of common stock, par value $0.01 per share (the "Common Stock") of Safety
Components International, Inc. (the "Company"), of which 325,801 have already
been issued and 75,000 will be issued upon the exercise of certain outstanding
options to purchase Common Stock granted under the Company's 1994 Stock Option
Plan. See "Selling Stockholders" and "Plan of Distribution." (The shares of
Common Stock offered hereby are sometimes referred to herein as the "Shares.")
The Common Stock is quoted on The Nasdaq National Market ("Nasdaq") under the
symbol "ABAG". On January 2, 1998, the last reported sales price of the Common
Stock on Nasdaq was $12.75 per share. See "Price Range of Common Stock."
The Shares may be sold from time to time by the Selling Stockholders
directly, or through agents designated from time to time through dealers or
underwriters also to be designated, on terms to be determined at the time of
sale. To the extent required, the specific Shares to be sold, the names of the
Selling Stockholders, the purchase price, the public offering price, the names
of any such agents, dealers or underwriters and any applicable commission or
discount with respect to a particular offer will be set forth in an accompanying
Prospectus supplement (or, if required, a post-effective amendment to the
Registration Statement (as defined herein) of which this Prospectus forms a
part). The distribution of the Shares may be effected in one or more
transactions that may take place on Nasdaq or the over-the-counter market,
including ordinary broker's transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees, commissions or discounts may be paid by
the Selling Stockholders in connection with such sales.
The Selling Stockholders and intermediaries through whom the Shares are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the such shares, and
any profits realized or commissions received may be deemed underwriting
compensation. The Company on the one hand and one of the Selling Stockholders on
the other hand have agreed to indemnify each other under certain circumstances
against certain liabilities, including liabilities under the Securities Act. See
"Plan of Distribution."
The Company will not receive any of the proceeds from the sale of the
Shares offered hereby. Except as otherwise set forth herein, expenses of this
Offering, estimated at approximately $ 37,000, are payable by the Company. The
aggregate proceeds to the Selling Stockholders from the sale of the Shares will
be the purchase price of the Shares sold, less the aggregate underwriting fees,
discounts and commissions, if any. See "Plan of Distribution."
The Shares offered hereby involve a high degree of risk. Prospective
investors should carefully read the factors set forth under "Risk Factors" on
page 7.
-------------------------------------
THESE 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.
Price to Proceeds to Selling
Public Stockholders(1)
- ------------------------- ------------------------- ------------------------
Per Share $ $
- ------------------------- ------------------------- ------------------------
Total $ $
- ------------------------- ------------------------- ------------------------
i
<PAGE>
(1) Substantially all of the expenses incident to the Registration
Statement and the sale of the shares of Common Stock offered hereby to the
public will be borne by the Company, including without limitation, all
registration and filing fees, but excluding fees of counsel to the Selling
Stockholders and certain underwriting fees, discounts or commissions. See "Plan
of Distribution."
The date of this Prospectus is January 6, 1998.
--------------------------------------------------
ii
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 (together with
all amendments thereto referred to herein as the "Registration Statement") under
the Securities Act, with the Securities and Exchange Commission (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 450
Fifth Street, N.W., Washington D.C. 20549; or at its regional offices located at
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 Common Stock is
quoted on Nasdaq and periodic reports, proxy and information statements and
other information concerning the Company can also be inspected at the offices of
the National Association of Securities Dealers, Inc. at 1735 "K" Street, N.W.,
Washington, D.C. 20006.
iii
<PAGE>
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.
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 (as defined) represents an
important step in its airbag growth strategy because it will enable the Company
to combine JPS' (as defined) 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.
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>
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 as the Chinese joint venture becomes a production
source. In addition, the combination of the Company and the Division (as
defined) 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 believes that it 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 in May 1997 of all of the issued and outstanding capital
stock of Valentec International Corporation ("Valentec") has enabled 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.
2
<PAGE>
Significant Transactions
The JPS Acquisition. On July 24, 1997, the Company, through its newly
formed wholly-owned subsidiary, Safety Components Fabric Technologies, Inc.,
acquired all of the assets of the Air Restraint/Industrial Fabrics Division (the
"Division") of JPS Automotive L.P. ("JPS Automotive"), a subsidiary of Collins &
Aikman Corporation (the"JPS Acquisition") 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 Automotive at the closing to enable it to pay off existing indebtedness of
the Division as of the closing of approximately $650,000 (the Division is
sometimes hereinafter referred to as "JPS" or "SCFT"). The Company also
purchased an adjacent building for approximately $1.3 million. 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 has
enabled, and will continue to enable, the Company to: (i) combine strong market
positions in airbag fabric and cushions; (ii) integrate low-cost manufacturing
capabilities in airbag fabric and cushions to exploit the worldwide growth in
demand for airbag modules; (iii) interchange airbag and specialty 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 Debt Offering. On July 24, 1997, the Company issued $90,000,000
aggregate principal amount of its 101/8% Senior Subordinated Notes due 2007,
Series A (the "Old Notes") to BT Securities Corporation, BancAmerica Securities
Inc. and Alex. Brown & Sons Incorporated (the "Initial Purchasers") in a
transaction not registered under the Securities Act in reliance upon an
exemption thereunder (the "Debt Offering"). The Debt Offering was conditioned
upon, and a significant portion of the proceeds of the Debt Offering was used to
finance, the JPS Acquisition. On September 2, 1997, the Company commenced an
offer to exchange (the "Exchange Offer") the Old Notes for $90,000,000 aggregate
principal amount of its 101/8% Senior Subordinated Notes due 2007, Series B (the
"Exchange Notes," together with the Old Notes, the "Notes"). All of the Old
Notes were exchanged for the Exchange Notes pursuant to the terms of the
Exchange Offer, which expired on October 1, 1997. The Exchange Notes evidence
the same debt as the Old Notes (which they replaced). However, the issuance of
the Exchange Notes has been registered under the Securities Act and therefore
the Exchange Notes do not bear legends restricting the transfer thereof.
The Valentec Acquisition. Pursuant to a definitive Stock Purchase
Agreement, effective as of May 22, 1997, the Company acquired in a tax-free
stock for stock transaction all of the issued and 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. Valentec's machining capabilities and relationships with
airbag module integrators have enabled the Company to increase the amount of
content per airbag module supplied by the Company. Pursuant to this strategy,
the Company has begun producing end caps and retainer brackets for two of its
larger airbag module customers. In addition, the Company has been able to
eliminate certain duplicative corporate functions at Valentec, resulting in
improved efficiencies and cost savings. See "Business--Significant
Transactions--The Valentec Acquisition."
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.
3
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered by the Selling
Shareholder ............................. 400,801 shares of Common Stock, par value $0.01 per share of the
Company.
Common Stock Outstanding................. 5,031,383 shares (1)
Nasdaq Common Stock Symbol............... "ABAG"
Use of Proceeds.......................... The Company will not receive any of the proceeds from the sale of
Shares of Common Stock by the Selling Stockholders.
</TABLE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. For a discussion of certain risks relating to such an investment, see
"Risk Factors" on page 7.
-----------------------
- --------------------------
(1) Based on the number of shares outstanding at December 19, 1997.
4
<PAGE>
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 September 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 operations for the six
months ended September 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>
Six Months Ended
Year Ended March 31 September 30
-------------------------------------------- -------------------------------------
Pro Forma Pro Forma
1995(1) 1996(1) 1997(1)(2) 1997(3) 1996 1997 1997(3)
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except ratios)
Results of Operations Data:
Net sales..................... $51,779 $94,942 $83,958 $173,208 $35,049 $70,357 $94,682
Gross profit.................. 7,226 13,034 16,024 28,124 6,368 12,957 16,257
Operating income.............. 3,176 7,604 8,604 13,362 3,694 7,161 8,759
Interest expense (income), net 126 (197) 1,319 10,563 250 2,647 5,299
Income before extraordinary
item and cumulative effect of
accounting change (4)......... 2,133 4,914 3,846 940 2,001 2,717 2,129
Net income...................... 2,133 4,914 2,204 940 2,001 2,717 2,129
Income before extraordinary
item and cumulative effect of
accounting chage per share.... $ .53 $ .99 $ .77 $ .19 $ .40 $ .54 $ .42
Net income per share............ $ .53 $ .99 $ .44 $ .19 $ .40 $ .54 $ .42
Weighted average number of
shares outstanding.............. 4,031 4,981 5,027 5,021 5,059 5,021 5,027
Other Data
EBITDA(5)..................... $3,919 $8,708 $12,756 $22,217 $4,707 $9,888 $12,383
Adjusted EBITDA(5)............ - - - 23,428 - - 12,929
Depreciation and amortization 743 1,104 2,391 6,997 1,013 2,727 3,624
Capital expenditures(6)....... 2,473 4,588 8,613 10,554 4,928 6,626 6,626
Ratio of adjusted EBITDA to
interest expense, net......... - - - 2.2x - - 2.4x
Ratio of net debt to adjusted
EBITDA........................ - - - - - - 3.7x
Ratio of earnings to fixed
charges(7).................... 28.1x - 6.2x 1.2x 14.5x 2.7x 1.6x
Airbag cushion units(8)....... 2,116 2,610 5,179 6,194 1,963 3,352 3,352
Balance Sheet Data(end of period):
Cash and cash equivalents..... $3,846 $12,033 $8,320 - $10,309 $10,589 $10,589
Working Capital............... 8,206 25,050 11,755 - 16,936 24,167 24,167
Total assets.................. 28,311 49,831 73,407 - 75,127 179,689 179,689
Total debt.................... 2,412 3,784 24,381 - 22,837 105,607 105,607
Stockholders' equity.......... 15,971 35,344 35,274 - 36,861 37,150 37,150
Cash flows data:
Cash flows from operations.... $ (901) $(3,500) $11,115 - $ 6,013 $ 4,979 $ 4,979
Cash flows from investing
activities.................... (2,473) (4,588) (32,870) - (27,500) (68,687) (68,687)
Cash flows from financing 7,084 16,555 18,903 - 18,766 66,763 66,763
activities....................
</TABLE>
(1) The Company did not declare dividends during fiscal year 1997, 1996 or
1995.
5
<PAGE>
(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 Debt 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 six months
ended September 30, 1997 give effect to the events described in items (ii),
(iii) and (v), as if each had occurred on April 1, 1997. As of September
30, 1997, the events described in items (i), (ii), (iii), (iv) and (v) have
been included in the historical balance sheet. Accordingly, a pro forma
balance sheet as of September 30, 1997 is not required.
(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 $546,000 for
the six months ended September 30, 1997, which consists of allocated cost
of sales and selling, general and administrative expenses from JPS.
(6) Pro forma capital expenditures for the 1997 fiscal year 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.
6
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before making an
investment in the Common Stock.
Substantial Leverage; Debt Service Obligations
The Company is highly leveraged. At September 30, 1997 total indebtedness
is approximately $105.6 million. See "Capitalization." The Company may incur
additional indebtedness in the future, subject to limitations imposed by the
Indenture pursuant to which the Notes were issued (the "Indenture") and the
Credit Agreement (as defined herein). The level of the Company's indebtedness
could have important consequences to the Company's operating results and
financial condition, 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
satisfy its 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 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."
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 certain 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. 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 to repay in full such indebtedness and the other
indebtedness of the Company. In addition, a default under the Credit
7
<PAGE>
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.
Reliance on Major Customers
The Company's customers are airbag module integrators, such as TRW, Inc.
("TRW") and Petri Inc. ("Petri") Sales of airbag related products to TRW, Petri
and AlliedSignal Inc. ("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."
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.
8
<PAGE>
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
Automotive Safety Products, Inc. ("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."
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.
9
<PAGE>
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 applicable
regulations.
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."
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."
10
<PAGE>
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."
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";
11
<PAGE>
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
Robert A. Zummo, the Chairman of the Board, President and Chief Executive
Officer of the Company, beneficially owns approximately 20.4% of the outstanding
Common Stock and may, in certain circumstances, direct the manner in which
Francis X. Suozzi, a non-employee director of the Company, votes any Common
Stock beneficially owned by him in accordance with the terms of an agreement
entered into between Messrs. Zummo and Suozzi in connection with the Valentec
Acquisition for a period of three years from the date thereof. 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 September 30, 1997, the Company had a defense related backlog of
approximately $21.5 million, of which $7.6 million is expected to be completed
before the end of fiscal year 1998. Although the Company believes that such
backlog, which results 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.
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 Company will not receive any cash proceeds from the issuance of the
Common Stock offered hereby. All proceeds will be received by the Selling
Stockholders.
DIVIDEND POLICY
The Company has, to date, not paid any cash dividends to its stockholders.
The Company currently intends to retain its earnings to support the growth and
development of its business and presently has no intention of paying any
dividends on its Common Stock for the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors of the Company, and will depend on the Company's financial
condition, results of operations and capital requirements, and such other
factors as the Board of Directors deems relevant. The Credit Agreement and the
Indenture restrict the Company's ability to pay dividends.
12
<PAGE>
PRICE RANGES OF COMMON STOCK
The Common Stock is quoted on Nasdaq under the symbol "ABAG." The
following table sets forth the high and low sale prices per share of the Common
Stock as reported on Nasdaq during the periods presented.
Price Range
of Common Stock
High Low
Year Ended March 31, 1996:
First Quarter................................ $ 20 3/4 $ 16 1/2
Second Quarter............................... 21 1/4 15
Third Quarter................................ 19 1/2 13 3/4
Fourth Quarter............................... 15 3/4 12 1/2
Year Ended March 31, 1997:
First Quarter................................ 14 3/4 9 1/4
Second Quarter............................... 13 1/4 9 1/2
Third Quarter................................ 13 8 3/4
Fourth Quarter............................... 13 10
Year Ended March 31, 1998:
First Quarter................................ 11 15/64 8 1/2
Second Quarter............................... 17 1/4 9 3/4
Third Quarter (through January 2, 1998)...... 17 1/2 10 1/2
- ----------------
The last reported sale price of the Common Stock on January 2, 1998, as
reported on Nasdaq was $ 12.75 per share. As of December 26, 1997, there were
approximately 72 holders of record of the Common Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of September 30, 1997 derived from its unaudited consolidated financial
statements. The Company will not receive any proceeds from the sale of the
Common Stock offered hereby. Accordingly, a column to give effect to this
offering on a pro forma basis would not be applicable. 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.
September 30, 1997
(in thousands)
Cash and cash equivalents............................ $ 10,589
=========
Debt:
Credit Facility(1).......................... -
Capital Lease Obligations................... 5,786
Exchange Notes offered hereby............... 90,000
Other Debt.................................. 9,821
---------
Total Debt.................................. 105,607
Total Stockholders' Equity........................... 37,150
---------
Total Capitalization................................. $ 142,757
=========
14
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Unaudited Pro Forma
Financial Data") as of September 30, 1997, for the year ended March 31, 1997,
and for the six months ended September 30, 1997, 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 Debt 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 six months ended September 30, 1997 gives effect to the events described
in items (ii), (iii) and (v) as if each had occurred on April 1, 1997. As of
September 30, 1997, the events described in items (i), (ii), (iii), (iv) and (v)
have been included in the historical balance sheet. Accordingly, a pro forma
balance sheet as of September 30, 1997 is not required. 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.
15
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical 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
------- ------- ------- ----------- ------ ------------ ---------
<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
=====
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
16
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF PRO FORMA ADJUSTMENTS
(in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ref Adjustments March 31, 1997
--- ----------- --------------
<S> <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 Phoenix
expenses 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
</TABLE>
17
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF SUBSEQUENT TRANSACTIONS
(in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ref Adjustments March 31, 1997
--- ----------- --------------
<S> <C>
Increase in interest expense related to
Phoenix prior to August 6, 1996
(Note 2) 83
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
18
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF SUBSEQUENT TRANSACTIONS
(in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ref Adjustments March 31, 1997
--- ----------- --------------
<S> <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
taxes interest from subsequent financing
transactions (Note 5) (88)
--------
Decrease in net income $ 133
========
See Unaudited Notes to Pro Forma Financial Data.
</TABLE>
19
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Historical Acquisition
SCI JPS Pro Forma Pro Forma
Six Months Period From Offering and Offering and Subsequent Six Months
Ended 4/1/97 to Acquisitions Acquisitions Financing Ended
9/30/97 7/24/97 Adjustments Totals Transactions 9/30/97
---------- ----------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Net sales................. $ 70,357 $ 24,325 $ - $ 94,682 $ - $ 94,682
Cost of sales............. 55,262 20,283 - 75,545 - 75,545
Depreciation.............. 2,138 698 44 (a) 2,880 - 2,880
-------- --------- -------- --------- -------- --------
Gross Profit............ 12,957 3,344 (44) 16,257 - 16,257
Sell and marketing
expenses................ 911 113 - 1,024 - 1,024
General and administrative
expenses................ 4,296 1,434 - 5,730 - 5,730
Amortization.............. 589 152 (3)(b) 744 - 744
-------- --------- -------- --------- -------- --------
Income (loss) from
operations........... 7,161 1,645 (47) 8,759 - 8,759
-------- --------- -------- --------- -------- --------
Other expenses (income)... 89 (7) - 82 - 82
Interest expense, net..... 2,647 24 2,524 (c) 5,195 104 (e) 5,299
-------- --------- -------- --------- -------- --------
Income (loss) before
taxes................ 4,425 1,628 (2,571) 3,482 (104) 3,378
Provision (benefit) for
income taxes............ 1,708 - (417)(d) 1,291 (42)(f) 1,249
-------- --------- -------- --------- -------- --------
Net income (loss)......... $ 2,717 $ 1,628 $ (2,154) $ 2,191 $ (62) $ 2,129
======== ========= ======== ========= ======== ========
Net income per share...... $ .54 - - - - $ .42
======== ========
Weighted average number of
shares outstanding........ 5,021 - - - - 5,027
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
20
<PAGE>
<TABLE>
<CAPTION>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF PRO FORMA ADJUSTMENTS
(in thousands)
Six Months
September 30,
Ref Adjustment 1997
--- ---------- ------------
<S> <C> <C> <C>
Cost of sales....................... (a) Additional depreciation related to JPS
property, plant and equipment (Note 2)..... $ 44
--------
Decrease in gross profit............ (44)
Goodwill amortization............... (b) Eliminate JPS historical goodwill
amortization (Note 1)...................... (152)
Amortization of JPS goodwill (Note 1) ....... 155
--------
3
--------
Decrease of operating income........ (47)
Interest expense.................... (c) Increase in interest expense due to Notes
issued in Debt Offering (Notes 1 and 4).... 2,911
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 Debt
Offering (Notes 1 and 2)..................... 121
--------
Total Interest Expense Pro Forma........ 3,054
Eliminate historical interest expense for
long-term debt repaid from Debt
Offering proceeds.......................... (530)
--------
Pro Forma Interest Adjustment
Required................................ 2,524
--------
Decrease in income before
income taxes...................... (2,571)
--------
Provision (benefit) for income
taxes............................. (d) Income tax benefit attributable to
additional interest on Notes issued in
Debt Offering (Note 5)..................... (1,028)
Increase income tax provision to
corporate tax rates for JPS (Note 5)....... 611
--------
(417)
Decrease in income before --------
extraordinary item and
cumulative effect of change in
accounting principle.............. $ (2,154)
========
See Unaudited Notes to Pro Forma Financial Data.
</TABLE>
21
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SUMMARY OF SUBSEQUENT TRANSACTIONS
(in thousands)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six Months
September 30,
Ref Adjustment 1997
--- ---------- -------------
<S> <C> <C> <C>
Interest Expense................. (e) 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
26
financing (Notes 4 and 6)..............................
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 (f) Income tax benefit attributable to additional interest
taxes............................ from subsequent financing transactions (Note 5).......... (42)
-------
Decrease in net income........... $62
=======
</TABLE>
See Unaudited Notes to Pro Forma Financial Data.
22
<PAGE>
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 of
$800,000 and a five year term note of $2.0 million, each payable to VIL (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 $17.3 million has been recorded in the September 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 six months ended September 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 six months ended September 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 as of the closing of approximately $650,000. The
Company also purchased an adjacent building for approximately $1.3 million. 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 of approximately $18.6 million has been recorded in the September 30,
1997 balance sheet 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 $238,000 for the six months ended September 30, 1997.
Additionally, the Division had preexisting amortization of goodwill totaling
approximately $884,000 for the year ended March 29, 1997 and $152,000 for the
six months ended September 28, 1997 which was reversed from the accompanying
unaudited pro forma consolidated statements of operations.
Notes
The Company incurred approximately $3.7 million of fees and expenses
related to the Debt Offering. Such fees have been deferred and will be charged
to operations over the expected term of the Notes, not to exceed 10 years.
Interest is 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 $4.6 million for the six months ended
September 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 substantiallyowned 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 statements beginning August 6, 1996
(date of acquisition). Accordingly, management adjusted,
23
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA -- (Continued)
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):
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
========
NOTE 3 PROPERTY, PLANT AND EQUIPMENT, NET
Property and equipment has been increased for the purchase of a building
for approximately $1.3 million in connection with the JPS Acquisition, 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 Debt 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 $66,000 for the six months ended September 28, 1997,
which has been included as costs of goods sold.
NOTE 4 LONG-TERM OBLIGATIONS
The Credit Agreement with KeyBank (as defined) provided for a Term Loan (as
defined) of $15.0 million and a Revolving Credit Facility (as defined) of $12.0
million. Upon completion of the Debt 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 loans under the Credit Agreement
will mature on May 31, 2002 and are secured by substantially all the assets of
the Company. 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 all
of the issued and outstanding capital stock 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 payable to VIL of $2.0
million, payable in 60 monthly installments of approximately $39,600,
24
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA -- (Continued)
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 the year ended
March 31, 1997 to reflect this obligation. For the six months ended September
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 six months ended September 30, 1997 the Company increased
interest expense by $94,000.
Deferred Financing Costs
Deferred financing costs included in other assets arose from the issuance
of the Notes (see Note 1), the Company's credit facility with KeyBank and the
Subsequent Transactions (see Note 6). Costs have been 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 six months ended
September 30, 1997, the amount charged to interest expense on a pro forma basis
was $188,000.
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 six months
ended September 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."
25
<PAGE>
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 operations for the six months ended
September 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, Six Months Ended
1993 1993 Year Ended March 31 September 30
through through ----------------------------------------- ----------------------------------
April 27, March 31, Pro Forma
1993 1994 1995(1) 1996(1) 1997(1)(2) 1997(3) 1996 1997 1997(3)
---------- --------- ------- ------- ---------- ------- ---- ---- ---------
<S>
(in thousands, except ratios)
Statement of Operations Data: <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $4,580 $22,444 $51,779 $94,942 $83,958 $173,208 $35,049 $70,357 $94,682
Cost of sales.............. 4,436 18,895 44,553 81,908 67,934 145,084 28,681 57,400 78,425
Gross profit............... 144 3,549 7,226 13,034 16,024 28,124 6,368 12,957 16,257
Selling, general and
administrative expenses... 538 2,738 4,050 5,430 7,072 13,162 2,520 5,207 6,754
Operating income (lss).... (394) (439) 3,176 7,604 8,604 13,362 3,694 7,161 8,759
Interest expense (inome)
net....................... 10 235 126 (197) 1,319 10,563 250 2,647 5,299
Income(loss)before income
taxes..................... (417) (591) 3,416 8,030 6,841 1,956 3,371 4,425 3,378
Income tax provision
(benefit)................. (167) (207) 1,283 3,116 2,995 1,016 1,370 1,708 1,249
Income before extraordinary
item and cumulative effect
of accounting change...... (250) (384) 2,133 4,914 3,846 940 2,001 2,717 2,129
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 2,001 2,717 2,129
Income before extraordinary
and cumulative effect of
accounting change per share NA NA $ .53 $ .99 $ .77 $ .19 $ .40 $ .54 $ .42
Net income per share....... NA NA $ .53 $ .99 $ .44 $ .19 $ .40 $ .54 $ .42
Weighted average number of
shares outstanding........ NA NA 4,031 4,981 5,027 5,021 5,059 5,021 5,027
Other Data:
EBITDA(6).................. $(248) $1,125 $3,919 $8,708 $12,756 $22,217 $4,707 $9,888 $12,383
Adjusted EBITDA(6)......... - - - 23,428 - - 12,929
Depreciation and
amortization.............. 146 314 743 1,104 2,391 6,997 1,013 2,727 3,624
Capital expenditures(7).... 198 3,710 2,473 4,588 8,613 10,554 4,928 6,626 6,626
Ratio of earnings to fixed
charges(8)................ - - 28.1x - 6.2x 1.2x 14.5x 2.7x 1.6x
Airbag cushion units(9).... 61 783 2,116 2,610 5,179 6,194 1,963 3,352 3,352
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 28 $ 31 $ 3,846 $12,033 $ 8,320 - $10,309 $10,589 -
Working capital........... 749 1,504 8,206 25,050 11,755 - 16,936 24,167 -
Total assets.............. 4,943 12,837 28,311 49,831 73,407 - 75,127 179,689 -
Total debt................ - 5,529 2,412 3,784 24,381 22,837 105,607 -
Stockholders' equity...... - - 15,971 35,344 35,274 - 36,861 37,150 -
Division (deficit) equity (1,223) 866 - - - - - - -
Cash flow data:
Cash flows from operations $ 193 $ 108 $ (901) $(3,500) $11,115 NA $ 6,013 $ 4,979 $ 4,979
Cash flows from investing
activities............... (198) (3,710) (2,473) (4,588) (32,870) NA (27,500) (68,687) (68,687)
Cash flows from financing 20 3,605 7,084 16,555 18,903 NA 18,766 66,763 66,763
activities...............
</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 Debt 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 six months ended September 30,
1997 gives effect to the events described in items (ii), (iii) and (v), as
if each had occurred on April 1, 1997. As of September 30, 1997, the events
described in items (i), (ii), (iii), (iv) and (v) have been included in the
historical balance sheet.
(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 $546,000 for
the six months ended September 30, 1997, which consists of allocated cost
of sales and selling, general and administrative expenses from JPS.
(7) Pro forma capital expenditures for the 1997 fiscal year 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 of deferred debt issuance costs and deferred financing costs.
For the four months from January 1, 1993
27
<PAGE>
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.
28
<PAGE>
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
has enabled 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, the
Company, through a newly-formed wholly-owned subsidiary, acquired all of the
assets of the Division. The Debt Offering was conditioned upon, and a
significant portion of the proceeds thereof were used to finance, the JPS
Acquisition. The Division 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
the Division. Should the Company obtain approval from certain of its vendors to
purchase fabric from the Division, 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.
29
<PAGE>
Results of Operations
The following table sets forth certain operating results as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------------------- ----------------------
1995 1996 1997 1996 1997
<S> <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 81.8 81.6
Gross profit................................... 14.0 13.7 19.1 18.2 18.4
Selling, general and administrative expense.... 7.8 5.7 8.4 7.2 7.4
Income from operations......................... 6.1 8.0 10.3 10.5 10.2
Interest expense (income), net................. 0.2 (0.2) 1.6 0.7 3.8
Income before extraordinary item and
cumulative effect of change in
accounting................................... 4.1 5.2 4.6 5.7 3.9
Net income..................................... 4.1 5.2 2.6 5.7 3.9
EBITDA......................................... 7.6 9.2 15.2 13.4 14.1
Six Months Ended September 30, 1997 Compared to Six Months Ended September 30, 1996
</TABLE>
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
30
<PAGE>
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.
Operating Income. Operating income increased by $3.5 million or 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 facility 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 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 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.
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 has been 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.
Such increase was primarily the result of 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
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<PAGE>
related to the continued expansion of the Company's automotive and industrial
related operations, including additional support personnel and marketing.
Operating Income. Operating income increased by $1.0 million or 13.2% to
$8.6 million in fiscal year 1997 compared to fiscal year 1996. Operating income
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 General Motors 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
32
<PAGE>
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 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 operations. This growth will be funded through a
combination of cash flow from operations, equipment financing, revolving credit
borrowings and proceeds from potential future public offerings.
Pursuant to a definitive Asset Purchase Agreement, on July 24, 1997, the
Company purchased all of the assets and assumed certain liabilities of 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 $56.3 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. In addition, the Company purchased an adjacent
building for approximately $1.3 million. The Company funded the purchase of SCFT
out of the proceeds from the issuance of the Notes.
On July 24, 1997, the Company issued the Old Notes, which were subsequently
exchanged for Exchange Notes pursuant to the Exchange Offer. Interest on the
Notes accrued 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 of the Company and to
all existing and future indebtedness of the Company's subsidiaries that did not
guarantee the Borrowers' (as defined herein) obligations under the Credit
Agreement. All of the Company's direct and indirect wholly-owned
33
<PAGE>
domestic subsidiaries guaranteed such obligations. The Company incurred
approximately $3.7 million of fees and expenses related to the Debt 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.
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 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 Common stock. In connection with the Valentec
Acquisition, the Company issued to the shareholders of Valentec 1,369,200 newly
issued shares of 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.
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 on 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 may, under certain circumstances, be
required to provide a bank guaranty 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 Debt Offering, the
Credit Agreement provided for (i) the term loan (the "Term Loan") in the
principal amount of $15.0 million and (ii) the revolving credit facility (the
"Revolving Credit Facility") in the aggregate principal amount of $12.0 million
(including letter of credit facilities). Upon the consummation of the Debt
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% 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 is 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 the Division (including an
adjacent building which was purchased for $1.3 million). 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 the
Division, 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.
34
<PAGE>
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 NT&SA. These activities resulted in a net decrease
in cash of $5.5 million in the first quarter 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.
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.
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 Company's 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 by September
1998. The Company estimates the costs of the closure to be approximately $4.5
million, 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.
35
<PAGE>
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.
36
<PAGE>
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.
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 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
37
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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 has enabled 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 Automotive at the
closing to enable it to pay off existing indebtedness of the Division as of the
closing of approximately $650,000. The Company also purchased an adjacent
building for approximately $1.3 million. The Debt Offering was conditioned upon,
and a significant portion of the proceeds thereof were used to finance, the JPS
Acquisition. 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 has enabled, and will continue to enable, the Company to:
(i) combine strong market positions in airbag fabric and cushions; (ii)
integrate low-cost manufacturing capabilities in airbag fabric and cushions to
exploit the worldwide growth in demand for airbag modules; (iii) interchange
airbag and specialty 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 Debt Offering. On July 24, 1997, the Company issued $90,000,000
aggregate principal amount of the Old Notes to the Initial Purchasers in a
transaction not registered under the Securities Act in reliance upon an
exemption thereunder. The Debt Offering was conditioned upon, and a significant
portion of the proceeds thereof was used to finance, the JPS Acquisition. On
September 2, 1997, the Company commenced the Exchange Offer. All of the Old
Notes were exchanged for Exchange Notes pursuant to the terms of the Exchange
Offer which expired on October 1, 1997. The Exchange Notes evidence the same
debt as the Old Notes (which they replaced). However the issuance of the
Exchange Notes has been registered under the Securities Act and therefore the
Exchange Notes do not bear legends restricting the transfer thereof.
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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. Valentec's
machining capabilities and relationships with airbag module integrators has
enabled the Company to increase the amount of content per airbag module supplied
by the Company. Pursuant to this strategy, the Company has begun producing end
caps and retainer brackets for two of its larger airbag module customers. 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 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.
Structure of the Airbag Industry. Airbag systems consist of an airbag
module and an electronic control module, which are currently integrated by
automakers into their respective vehicles. Airbag modules consist of inflators,
cushions, housing and trim covers and are assembled by module integrators, most
of whom produce most of the components required for a complete module. However,
as the industry has evolved, module integrators have increasingly outsourced
non-proprietary components such as cushions to those companies specializing in
the production of individual components. The Company believes that its module
integrator customers will continue to outsource the majority of their cushion
requirements as they focus on the development of proprietary technologies such
as inflators and sensors. Only one of the module integrators currently weaves
its own airbag fabric and the 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.
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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 module integrators are, like
their automaker customers, trying to limit the number of suppliers.
Products
The Company's automotive products include passenger, driver side and side
impact 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.
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 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
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Company's current 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 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 intends to close
such facility and expects to move the operations from such facility to its
facility in the Czech Republic and its facility in Gwent, Wales in the United
Kingdom by September 1998. 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
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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 Chairman of the Board, President and Chief
Executive Officer, were instrumental in establishing the Company's relationship
with TRW. The Company was obligated to pay Champion a commission of 2% on all
sales of airbag cushions and airbag related components to TRW. 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 Company and the
shareholders of Champion have entered into a definitive agreement, dated as of
December 22, 1997, pursuant to which, subject to certain conditions,the Company
will acquire all of the issued and outstanding capital stock of Champion for an
aggregate of $2,960,000 plus certain amounts previously paid to the shareholders
of Champion (the "Champion Transaction"). In connection with the Champion
Transaction, the Company also entered into a definitive Put Agreement (the "Put
Transaction") with an associate of Champion (the "Associate") who has the right
to a portion of any of the above-referenced commissions actually received by
Champion. Pursuant to the Put Transaction, the Associate will have the option to
put to the Company, subject to certain conditions, all of the issued and
outstanding capital stock of Duchi & Associates, Inc., an affiliated entity, for
a put price of $740,000. The Champion Transaction includes, and the Put
Transaction will include (as a condition to its exercise), a twenty year
management services agreement between the Company and each of the Champion
shareholders and the Associate, respectively. Each such management services
agreement will prohibit the Champion shareholders, or the Associate, as the case
may be, from competing with certain businesses of the Company for a period of
five years. The Company will have the option in its sole discretion, to extend
the non-competition period for three additional successive five year periods,
upon payment of an extension fee. The Champion Transaction is expected to close
during January 1998
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with TRW and AutoLiv, each of which are airbag module
integrators that produce a substantial portion of their own airbag cushions for
their own consumption. While TRW does not generally manufacture airbag cushions
for the same vehicle models that the Company manufactures for TRW, AutoLiv
manufactures airbag cushions for the same models that the Company manufactures
for AutoLiv. Most airbag module integrators subcontract a portion of their
requirements for airbag cushions. The Company believes that its good working
relationship with its customers, the Company's high volume and low-cost
manufacturing capabilities, consistency and level of quality products, the
agreements with TRW, the lengthy process necessary to qualify as a supplier to
an automobile manufacturer and the 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
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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 the Division 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.
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
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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 and $21.5
million at March 31, 1997 and September 30, 1997, respectively, and the Company
expects to reduce such backlog by $7.6 million by late fiscal 1998. The mortar
cartridges sold by the Company to the United States Army pursuant to the Systems
Contract will be utilized in free standing, long-range artillery weapons in
support of infantry units. As a systems integrator, the Company does not
manufacture the mortar cartridges itself, but is a prime contractor,
coordinating the manufacture and assembly of the product components by various
subcontractors. Accordingly, the Systems Contract has not necessitated a
significant investment in capital equipment. As the prime contractor, the
Company is responsible for conducting quality control inspections and ensuring
that the contract is fulfilled in a timely and efficient manner.
The deliveries of completed mortar cartridges were initially expected to
begin in September 1995, and the Systems Contract was expected to be completed
by September 1996. Due to a delay by one of its subcontractors, the Company has
experienced delays in the shipment of mortar cartridges against the original
shipment schedule. The delay relates to matters between such subcontractor and
the United States Army. As a result of these issues, the United States Army has
extended the time for delivery under the Systems Contract, and the Company now
anticipates that the initial deliveries of mortar cartridges will commence in
late fiscal 1998.
Other
The Company manufactures projectiles and other metal components primarily
for 20 millimeter ammunition and to a lesser extent for 25 and 30 millimeter
ammunition used by the United States Armed Forces. This ammunition is fired from
guns mounted on aircraft, naval vessels and armored vehicles. The metal
components manufactured by the Company are shipped to a loading facility,
operated either by the United States Government or a prime defense
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contractor, which loads the explosives, assembles the rounds and packages the
ammunition for use. The Company primarily manufactures components that are used
in training rounds, which are similar to tactical rounds but do not contain the
same explosive or incendiary devices contained in tactical rounds. Because of
the continuous use of training ammunition, the majority of the rounds purchased
by the United States Armed Forces are training rounds. The United States 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.
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.
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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 September 30, 1997, the Company had a defense-related backlog of
approximately $21.5 million of which $7.6 million is expected to be completed
before the end of fiscal year 1998. As of September 30, 1996, the Company had a
defense-related backlog of approximately $22.1 million.
Employees
At October 31, 1997, the Company employed approximately 2,020 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 CERCLA may impose joint and several liability and may apply to
conditions at properties presently or formerly owned or operated by an entity or
its predecessor as well as to conditions of properties at which wastes or other
contamination attributable to an entity or its predecessor have been sent or
otherwise come to be located. The nature of the Company's operations exposes it
to the risk of claims with respect to such matters and there can be no assurance
that violations of such laws have not occurred or will not occur or that
material costs or liabilities will not be incurred in connection with such
claims. Based upon its experience to date, the Company believes that the future
cost of compliance with existing Environmental Laws and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new
46
<PAGE>
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. To date, the Company has spent approximately $141,000 on implementing
such plan. The remediation plan currently includes the simultaneous operation of
a groundwater and vapor extraction system. In addition, the Division has been
identified along with numerous other parties as a Potentially Responsible Party
("PRP") at the Aquatech Environmental, Inc. Superfund Site. The Division
believes that it is a de minimis party with respect to the site and that future
clean-up costs incurred by the Division 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 Fort Lee, New Jersey.
The Company manufactures automotive and industrial products in six locations,
with total plant area of approximately 1,344,225 square feet (including
administrative, engineering and research and development areas housed at plant
sites). Below is an overview of the Company's manufacturing and office
facilities as of October 31, 1997:
<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) 825
Greenville, South Carolina (airbag and
industrial related fabrics)....................... 20,040(1) Owned N/A 363
Germany (airbag cushions)........................... 55,000(3) Leased 1998(4) 236
Czech Republic (airbag cushions).................... 100,000(5) Owned N/A 240
Gwent, Wales (airbag cushions)...................... 20,000(5) Leased 2003 65
Costa Mesa, California (metal airbag
components and defense products).................. 139,000(6)(7) Leased 1999 191
Otay Mesa, California (warehouse)(8)................ 7,900 Leased 1998 3
Fort Lee, New Jersey (10)........................... 4,685 Leased 2007 9
Defense(9)
Mount Arlington, New Jersey (defense
systems).......................................... 3,600(10) Leased 2000 9
Galion, Ohio (defense products)..................... 97,000(6) Owned N/A 79
</TABLE>
- ------------
(1) Office, manufacturing and research and development space.
(2) Lease is subject to two one-year renewal options.
(3) Manufacturing, sales and administration space.
47
<PAGE>
(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.
48
<PAGE>
Legal Proceedings
Valentec, which was acquired by the Company in May 1997, and Galion, Inc.,
a wholly-owned subsidiary of the company ("Galion"), have been subjects of an
investigation by the Department of Justice regarding a bid-rigging and kickbacks
scheme alleged to have occurred between 1988 and 1992. The Department of Justice
Antitrust Division has contended that former subsidiaries or divisions of the
former Valentec participated in such misconduct in part through the actions of a
former marketing agent and former employees, in order to obtain certain
government contracts. The Government has contended that Valentec and Galion are
liable for the acts of their predecessors on a theory of successor corporate
criminal liability. The Government contends that the alleged kickbacks were made
through the former Valentec Kisco and Valentec Galion operations while those
operations were owned and operated by the former Valentec from the late 1980's
through 1992, prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. No
officer or director of the Company or its subsidiaries is alleged to have
participated in, or known about, such conduct. The Company has no recourse
against the entity which owned Valentec during the operative time period due to
contractual restrictions in the purchase agreement between Mr. Zummo and such
entity. The Company has determined that it is in its best interest to settle
such matter in order to avoid the costs and distractions associated with
contesting the Department of Justice's legal theories on successor liability.
Therefore, a plea agreement is being negotiated with the Antitrust Division of
the Department of Justice (the "Plea Agreement"). Among other things, the terms
of the proposed Plea Agreement provides for the entry of a guilty plea by
Galion, as the successor to the former Valentec Galion division, to a one-count
criminal violation of participating in a combination and conspiracy to suppress
competition in violation of the Sherman Antitrust Act, 15 U.S.C. ss1, the
payment by Galion of a $500,000 fine and an agreement by the Government to not
further criminally prosecute Galion and not to criminally prosecute the Company,
its subsidiaries, or any of their respective officers, directors or employees as
to the alleged bid-rigging and kickback scheme. As of December 31, 1997,
negotiations are continuing. Once agreement is reached with the Department of
Justice, the Plea Agreement will remain subject to the approval of the United
States District Court for the Western District of Tennessee, Eastern Division
(the "Court"). The Plea Agreement being negotiated, if approved by the Court,
would not release the Company, Valentec or Galion from potential civil claims
that might be asserted by the United States Department of Justice Civil Division
against Galion and/or Valentec arising out of the Government's investigation of
conduct that is alleged to have occurred in the time frame prior to Mr. Zummo's
1993 leveraged buy-out of Valentec. The Company has had preliminary discussions
with the Civil Division regarding the resolution of such potential civil claims.
As of December 31, 1997, no understanding has been reached as to such potential
civil claims.
49
<PAGE>
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................. 26 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 and
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, an airbag module integrator and customer
of the Company. From January 1996 to October 1996, Mr. Cresante served as Vice
President of Operations of AlliedSignal-Aerospace Sector. From January 1990 to
December 1995, Mr. Cresante served as Vice President of Operations of the TRW
Inflatable Restraints Division, an airbag module integrator and customer of the
Company. 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
50
<PAGE>
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 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 Company's North American Automotive Operations from May 1995 to
February 1997, as Vice President and General Manager of the Company's 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.
51
<PAGE>
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
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 has also served as a director of Valentec since April 1993. 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.
52
<PAGE>
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 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
----------------------------------------- ------------------------- -----------------------
Restricted
Name and Other Annual Stock Securities LTIP All Other
Principal Position Salary Bonus Compensation Awards Underlying Payouts Compensation
- -------------------------------- Year ($) ($) ($) ($) Options (#) ($) ($) (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 1996 147,000 46,500 0 0 25,000 0 0
(2)
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.
53
<PAGE>
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) On September 17, 1997, the vesting schedule of such options was
accelerated. Such options now vest in three equal annual installments
(rather than four equal annual installments) commencing one year from the
date of grant.
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.
54
<PAGE>
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. On
September 17, 1997, the vesting schedule of such options was accelerated. Such
options now vest in three equal annual installments (rather than four equal
annual installments) commencing one year from the date of grant. The issuance of
such options was 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 have been necessary for the issuance of such
options. Such stockholder approval was obtained in September 1997. 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. On September 17, 1997, the
Compensation Committee of the Board of Directors approved an increase of salary
payable to Mr. Kaplan under his employment agreement to $247,500. In addition to
the base salary, the employment agreement provides for an
55
<PAGE>
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 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 was 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 have been necessary for the issuance of
such options. Such stockholder approval was obtained in September 1997. 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)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. 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.
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. 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 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
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<PAGE>
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 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. On each of May
4, 1996, July 29, 1996 and July 22, 1997, 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 1,050,000 shares of Common Stock. Of this total, Options to purchase
1,000,000 shares may be granted to officers, key employees and consultants of
the Company and Options to purchase 50,000 shares 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 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 Compensation Committee of the
Board of Directors administers the Plan. The terms of specific Options are
determined by the Compensation 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 in each calendar year in which he serves as a director of the
Company. Historically such Options vested in equal installments over a four-year
period. On September 17, 1997, the vesting schedule of such Options was
accelerated. Such Options now vest in three equal annual installments commencing
one year from the date of grant. Future annual Option grants are expected to
also vest in three equal annual installments commencing one year from the date
of grant. The exercise price of the
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<PAGE>
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.
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>
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table and notes set forth information as of December 19, 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)....................... 1,036,576(5) (14) 20.4%
Cramer Rosenthal McGlynn, Inc.
707 Westchester Avenue
White Plains, New York 10604............. 276,400(6) 5.5%
Boston, Massachusetts 02109................ 276,200(7) 5.5%
Victor Guadagno (2)......................... 21,667(8) (14) *
John L. Hakes(2)............................ 20,000(8) (14) *
Jeffrey J. Kaplan(2)........................ 125,000(5) *
W. Hardy Myers(2)........................... 70,500(9) (14) 1.4%
Paul L. Sullivan(2)......................... 26,500(10)(14) *
Joseph J. DioGuardi(2)...................... 4,833(8) (14) *
Francis X. Suozzi(2)(3)..................... 330,634(11)(14) 6.6%
Robert J. Torok(2).......................... 4,833(8) (14) *
All executive officers and directors
as a group (consisting of 13
individuals)(12).......................... 1,518,377(13)(14) 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 December 19,
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 a
member of 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.
59
<PAGE>
(4) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 60,000 shares of Common Stock. On September 17, 1997, the
vesting schedule of such options was accelerated. Such options now vest in
three equal annual installments (rather than four equal annual
installments) commencing one year from the date of grant.
(5) Represents only options which are not currently exercisable (or exercisable
within 60 days) to purchase shares of Common Stock. On September 17, 1997,
the vesting schedule of such options was accelerated. Such options now vest
in three equal annual installments (rather than four equal annual
installments) commencing one year from the date of grant.
(6) Represents the 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.
(7) 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 C ommon
Stock outstanding of the Company as a result of acting as investment
adviser to various investment companies registered under Section 8 of th e
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 5.5% 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 4 9% 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.
(8) Represents only options which are currently exercisable (or exercisable
within 60 days) to purchase shares of Common Stock. On September 17, 1997,
the vesting schedule of such options was accelerated. Such options now vest
in three equal annual installments (rather than four equal annual
installments) commencing one year from the date of grant.
(9) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 66,000 shares of Common Stock.
(10) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 26,000 shares of Common Stock. On September 17, 1997, the
vesting schedule of such options was accelerated. Such options now vest in
three equal annual installments (rather than four equal annual
installments) commencing one year from the date of grant.
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<PAGE>
(11) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 4,833 shares of Common Stock. On September 17, 1997, the
vesting schedule of such options was accelerated. Such options now vest in
three equal annual installments (rather than four equal annual
installments) commencing one year from the date of grant.
(12) Includes Mr. Myers who is a Named Executive but departed from the Company
in May 1997.
(13) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 298,833 shares of Common Stock. On September 17, 1997,
the vesting schedule of such options was accelerated. Such options now vest
in three equal annual installments (rather than four equal annual
installments) commencing one year from the date of grant.
61
<PAGE>
SELLING STOCKHOLDERS
The following securities are covered by this Prospectus:
1. The resale by Robert A. Zummo, the Chairman of the Board, President and
Chief Executive Officer of the Company, of up to 75,000 shares of Common Stock
that may be acquired upon the exercise of certain options granted by the Company
to Mr. Zummo under the Company's 1994 Stock Option Plan, as amended.
2. The resale by Francis X. Suozzi, a non-employee director of the Company,
of up to 325,801 shares of Common Stock (the "Suozzi Shares") which were issued
by the Company to Mr. Suozzi in connection with the Valentec Acquisition. See
"Business--Significant Transactions--The Valentec Acquisition". The resale of
the Suozzi Shares offered hereby has been included in the Registration
Statement, of which this Prospectus forms a part, pursuant to the exercise by
Mr. Suozzi of registration rights granted to him by the Company in connection
with the Valentec Acquisition.
The shares of Common Stock offered hereby are being sold by the Selling
Stockholders. The table below sets forth, as of the date hereof and as adjusted
to reflect the sale of such shares of Common Stock, certain information
regarding the ownership of the Common Stock by the Selling Stockholders. Shares
of Common Stock beneficially owned, as set forth in the table below, are
expressed as a percentage of the shares of Common Stock outstanding as of
December 5, 1997, net of treasury shares. See "Plan of Distribution" for
information regarding the payment by the Company of the expenses incident to the
filing of Registration Statement and the sale of the shares of Common Stock
offered hereby and certain indemnification arrangements between the Company and
the Selling Stockholders.
<TABLE>
<CAPTION>
Beneficial Ownership Prior to Offering Beneficial Ownership After Offering
Common Stock Common Stock
-------------------------------------- -----------------------------------
Stockholder Number Percent Number(1) Percent
- --------------- ----------- ------- --------- -------
<S> <C> <C> <C> <C>
Robert A. Zummo 1,036,576(3) 20.4% 976,576 19.4%
(2)
Francis X. Suozzi 330,634(4) 6.6% 4,833 *
(2)
</TABLE>
- -----------------
* Less than 1%.
(1) Assumes the sale by such Selling Stockholder of all shares of Common Stock
offered hereby.
(2) 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 a
member of 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.
(3) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 60,000 shares of Common Stock.
(4) Includes options which are currently exercisable (or exercisable within 60
days) to purchase 4,833 shares of Common Stock.
(5) Excludes 15,000 shares of Common Stock offered hereby which are issuable
upon the exercise of certain options granted to Mr. Zummo that are not
currently exercisable (or exercisable within 60 days).
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The following description of the capital stock of the Company is qualified
in its entirety by and subject to the Delaware General Corporation Law ("DGCL")
and the Company's Amended and Restated Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), and Bylaws (the "Bylaws"). Copies of the
Certificate of Incorporation and Bylaws have been filed or incorporated by
reference as exhibits to the public filings of the Company.
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $0.01 par value and 2,000,000 shares of Preferred Stock, par
value $0.10 per share. As of December 5, 1997, 5,031,383 shares of Common Stock
and no shares of Preferred Stock were outstanding.
Common Stock
The holders of the Common Stock are entitled to receive dividends when and
as directed by the Board of Directors, out of funds legally available therefor,
subject to the rights of the holders of shares of preferred stock. The Company
has not paid cash dividends on the Common Stock in the past and does not expect
to pay any cash dividends on the Common Stock within the foreseeable future
since earnings are expected to be reinvested in the Company. The Credit
Agreement and the Indenture restrict the Company's ability to pay dividends. See
"Dividends."
All of the issued and outstanding shares of Common Stock are fully paid and
non-assessable and the Common Stock offered hereby issuable upon the exercise of
options will be fully paid and non-assessable. The holders of shares of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to vote of stockholders, including the election of directors. There
are no cumulative voting rights. The Board of Directors may issue previously
authorized but unissued shares of Common Stock without further stockholder
action. Holders of shares of Common Stock are not entitled to preemptive rights.
Upon liquidation, the holders of shares of Common Stock are entitled to receive
pro rata all of the assets of the Company available for distribution to such
holders.
Preferred Stock
The Preferred Stock may be issued from time to time in one or more series,
and the Board of Directors is authorized to fix the dividend rights and terms,
any conversion rights, any voting rights, any redemption rights and terms
(including sinking fund provisions), the rights in the event of liquidation and
any other rights, preferences, privileges and restrictions of any series of
Preferred Stock, as well as the number of shares constituting such series and
the designation thereof. The Preferred Stock, if issued, will rank senior to the
Common Stock as to dividends and as to liquidation preference. Holders of
Preferred Stock will have no preemptive rights. The issuance of shares of
Preferred Stock could have an anti-takeover effect under certain circumstances.
The issuance of shares of Preferred Stock could enable the Board of Directors to
render more difficult or discourage an attempt to obtain control of the Company
by means of a merger, tender offer or other business combination transaction
directed at the Company by, among other things, placing shares of Preferred
Stock with investors who might align themselves with the Board of Directors,
issuing new shares to dilute stock ownership of a person or entity seeking
control of the Company or creating a class or series of Preferred Stock with
class voting rights. The issuance of shares of the Preferred Stock as an
anti-takeover device might preclude stockholders from taking advantage of a
situation which they believed could be favorable to their interests. No shares
of Preferred Stock are outstanding, and the Company has no present plans to
issue any shares of Preferred Stock.
Stockholder Meetings
Except as otherwise required by law and subject to the rights of holders of
Preferred Stock, only a majority of the Company's Board of Directors, the
Chairman of the Board of Directors, the President or the Chief Executive officer
is able to call an annual or special meeting of stockholders. In addition,
subject only to the rights of holders of Preferred Stock, stockholders may not
take any action by written consent. These provisions may have the effect of
delaying a contest for the election of directors and making more difficult the
acquisition of control of the Company by means of a hostile tender offer, open
market purchases, a proxy contest or otherwise. Mr. Zummo beneficially owns
63
<PAGE>
approximately 20.4% of the outstanding Common Stock and may, in certain
circumstances, direct the manner in which Mr. Suozzi votes any Common Stock
beneficially owned by him in accordance with the terms of an agreement entered
into between Messrs. Zummo and Suozzi in connection with the Valentec
Acquisition for a period of three years from the date thereof. See "Security
Ownership of Certain Beneficial Owners and Management." 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.
Classified Board of Directors
The Board is divided into three classes of directors serving staggered
terms. One class of directors will be elected at each annual meeting of
stockholders for a three-year term. At least two annual meetings of
stockholders, instead of one, generally will be required to change a majority of
the Board. This may have the effect of making it more difficult to acquire
control of the Company by means of a hostile tender offer, open market
purchases, a proxy contest or otherwise.
Restrictions on Certain Business Combinations
The Certificate of Incorporation provides that certain business
combinations, such as mergers and stock and asset sales, with an interested
stockholder (typically a beneficial owner of more than 15% of the outstanding
voting shares of the Company's capital stock) (x) be approved by the affirmative
vote of the holders of record of outstanding shares representing (i) at least
eighty percent (80%) of the voting power of the then outstanding voting shares,
voting together as a single class, and (ii) at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of the then outstanding voting shares,
voting as a single class, which are not owned beneficially, directly or
indirectly, by the interested stockholder, unless the transaction is approved by
a majority of certain directors and (y) either (A) meet certain criteria set
forth in the Certificate of Incorporation or (B) if such criteria are not met,
the Company shall, prior to the Company's stockholders approving such
transaction, obtain the advice of a financial adviser to the effect that such
transaction is fair to the holders of voting shares other than the interested
stockholder.
Section 203 of the Delaware General Corporation Law
The Company is subject to the provisions of Section 203 of the DGCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding certain employee stock ownership plans);
or (iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (i)
the owner of 15% or more of the outstanding voting stock of the corporation or
(ii) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
Limitation of Liability and Indemnification of Directors
The indemnification of officers and directors of the Company is governed by
Section 145 of the DGCL and the Certificate of Incorporation. 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
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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 of Incorporation 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 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 of Incorporation 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.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer and Trust Company.
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CERTAIN TRANSACTIONS
Pursuant to a definitive Stock Purchase Agreement, dated as of May 22,
1997, the Company acquired all of the outstanding capital stock of Valentec from
Robert A. Zummo, Francis X. Suozzi and the Valentec International Corporation
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 20.4% and 6.6%, respectively, of the outstanding Common Stock of
the Company, including the shares of Common Stock offered hereby. In addition,
Messrs. Zummo and Suozzi and the ESOP received demand and piggyback registration
rights in connection with the Valentec Acquisition. The resale of the Suozzi
Shares offered hereby has been included in the Registration Statement, of which
this Prospectus forms a part, pursuant to such piggyback registration rights
granted to Mr. Suozzi. 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 (which has been paid in full) and $2.0 million is
evidenced by a five year note payable in monthly installments of approximately
$39,600. Both such notes bear interest at 7% per annum. Subsequent to the
closing of the Valentec Acquisition through September 30, 1997, an aggregate of
approximately $113,000 in principal and $46,000 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.
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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 sub lease agreement and facility usage
agreement in the U.K. In addition to the lease payments of approximately
(pound)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 operations 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 years 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.
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PLAN OF DISTRIBUTION
The 400,801 shares of Common Stock being sold hereby may be offered to
purchasers directly by any of the Selling Stockholders. Alternatively, the
Selling Stockholders may from time to time offer the shares of Common Stock
offered hereby through underwriters, dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of such shares for whom they may act
as agent. The Selling Stockholders and any underwriters, dealers or agents that
participate in the distribution of the securities offered hereby may be deemed
to be underwriters under the Securities Act, and any profit on the sale of such
securities by them and any discounts, commissions, or concessions received by
any such underwriters, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act.
The securities offered hereby may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. The distribution
of the securities offered hereby by the Selling Stockholders may be effected in
one or more transactions that may take place on Nasdaq, including ordinary
broker's transactions, privately-negotiated transactions or through sales to one
or more broker-dealers for resale of such securities as principals, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees, discounts and commissions may be paid by the Selling
Stockholders in connection with such sales of securities.
At the time a particular offer of the securities offered hereby is made, to
the extent required, a supplement to this Prospectus will be distributed (or, if
required, a post-effective amendment to the Registration Statement of which this
Prospectus forms a part will be filed) which will identify the specific
securities being offered and set forth the aggregate amount of securities being
offered, the purchase price and the terms of the offering, including the name or
names of the Selling Stockholders and of any underwriters, dealers or agents,
the purchase price paid by any underwriter for securities purchased from the
Selling Stockholders, any discounts, commissions and other items constituting
compensation from the Selling Stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, including the proposed
selling price to the public. In addition, an underwritten offering will require
clearance by the National Association of Securities Dealers, Inc. of the
underwriter's compensation arrangements. The Company will not receive any of the
proceeds from the resale by the Selling Stockholders of the securities offered
hereby. Substantially all of the expenses incident to the Registration Statement
and the resale of the shares of Common Stock offered hereby to the public will
be borne by the Company, including without limitation, all registration and
filing fees, any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities, but excluding fees of counsel to the Selling
Stockholders and any other underwriting fees, discounts or commissions.
The Suozzi Shares offered hereby have been included in the Registration
Statement pursuant to certain piggyback registration rights granted to Mr.
Suozzi under that certain Registration Rights Agreement (the "Registration
Rights Agreement") granting registration rights to the Selling Stockholders and
the ESOP, which was executed in connection with the Valentec Acquisition.
Pursuant to the Registration Rights Agreement, the Company will use its best
efforts to keep the Registration Statement continuously effective under the
Securities Act until the completion of the distribution or until all of the
Registrable Securities (as defined in the Registration Rights Agreement) covered
by the Registration Statement cease to be Registrable Securities. The
Registration Rights Agreement also requires that the Company pay substantially
all of the expenses incident to the Registration Statement and the resale of any
Registrable Securities offered hereby to the public, including without
limitation, all registration and filing fees, any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
fees of counsel to Mr. Suozzi and any other underwriting fees, discounts or
commissions. The Registration Rights Agreement provides that the Company will
indemnify and hold harmless Mr. Suozzi and his agents from and against any loss,
claim, damage, liability, reasonable attorneys' fees, cost or expense and costs
and expenses of investigating and defending any such claim, joint or several,
and any action in respect thereof. The Registration Rights Agreement also
provides that Mr. Suozzi will indemnify and hold harmless the Company, its
officers, directors, employees and agents and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, together with the partners, officers, directors, employees
and agents of such controlling person, to the same extent as provided with
respect to indemnification of Mr. Suozzi but only with reference to
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information related to Mr Suozzi, or his plan of distribution, furnished in
writing by Mr. Suozzi or on such Mr. Suozzi's behalf expressly for use in any
registration statement or prospectus relating to the Registrable Securities, or
any amendment or supplement thereto, or any preliminary prospectus and the
aggregate amount which may be recovered from Mr. Suozzi pursuant to such
indemnification in connection with any registration and sale of Registrable
Securities is limited to the total proceeds received by Mr. Suozzi from the sale
of such Registrable Securities.
In order to comply with certain states securities laws, if applicable, the
shares of Common Stock offered hereby will be sold in such jurisdictions only
through registered or licensed brokers or dealers. In certain states the shares
of Common Stock offered hereby may not be sold unless such shares have been
registered or qualified for sale in such state, or unless an exemption from
registration or qualification is available and is obtained.
In addition to sales pursuant to the Registration Statement, of which this
Prospectus forms a part, the shares of Common Stock offered hereby may be sold
in accordance with Rule 144 promulgated under the Securities Act.
The Selling Stockholders will be subject to applicable provisions of the
Exchange Act and rules and regulations thereunder, including without limitation
Rules 101, 102 and 104 of Regulation M which provisions may limit the timing of
purchases and sales of any of the shares of Common Stock offered hereby by the
Selling Stockholders. All of the foregoing may effect the marketability of the
shares of Common Stock offered hereby.
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 the Company as of March 31, 1997
and March 31, 1996, and for each of the three years in the period 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 Automotive L.P. 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/Industrial
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 and for the year ended 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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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 [LOGO] BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
400,801 Shares TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO Safety Components International, Inc. MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS COMMON STOCK 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.
---------------------------
400,801 Shares
Safety Components International, Inc.
COMMON STOCK
---------------------------
PROSPECTUS
JANUARY 6, 1998
---------------------------
TABLE OF CONTENTS Page
Prospectus Summary.......................................1
Risk Factors.............................................7
Use of Proceeds.........................................12
Price Ranges of Common Stock............................13
Capitalization..........................................14
Unaudited Pro Forma Financial Data......................15
Selected Historical and Unaudited Pro Forma
Financial Data........................................26
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................29
Business................................................37
Management..............................................49
Security Ownership by Certain Beneficial
Owners and Management.................................58
Selling Stockholders....................................61
Description of Capital Stock............................62
Certain Transactions....................................65
Plan of Distribution....................................67
Legal Matters...........................................68
Experts.................................................68
Index to Financial Statements .........................F-1
UNTIL ___________, 1998 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS AN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
Securities and Exchange Commission Registration Fee................ $ 1,617.00
Nasdaq Listing Fee................................................. 6,516.00
Legal Fees and Expenses............................................ 10,000.00
Accounting Fees and Expenses....................................... 15,000.00
Miscellaneous...................................................... 3,867.00
----------
Total .................................................... $37,000.00
==========
All of the above items, except the registration fee and the Nasdaq listing
fee, are estimated. Substantially all expenses incurred in connection with this
Offering will be borne by the Company, excluding without limitation, any fees
and disbursements of underwriters customarily paid by issuers or sellers of
securities, but excluding fees of counsel to the Selling Stockholders and any
other underwriting fees, discounts or commissions.
Item 14. Indemnification of Directors and Officers
The indemnification of officers and directors of the Company is governed by
Section 145 of the DGCL and the Certificate of Incorporation. 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
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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 of Incorporation 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 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 of Incorporation 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 covering
certain liabilities incurred by the directors and officers of the Company in
connection with the performance of their duties.
Item 15. Recent Sales of Unregistered Securities
Effective as of May 22, 1997, the Company acquired in a tax-free stock for
stock transaction all of the outstanding capital stock of Valentec in
consideration for the issuance to the stockholders of Valentec of an aggregate
of 1,369,200 newly issued shares of Common Stock. Such transaction was not
registered under the Securities Act in reliance upon an exemption under Section
4(2) thereof. See "Business -Significant Transactions".
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
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.
</TABLE>
II-2
<PAGE>
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
4.1(2) Warrant Agreement, dated as of May 13, 1994, between Hampshire
Securities Corporation and Safety Components
4.2(15) Registration Rights Agreement, dated as of May 22, 1997, by
and among Safety Components, Robert A. Zummo, Francis X.
Suozzi and the Valentec International Corporation Employee
Stock Ownership Plan
4.3(16) Form of Pledge Agreement, dated as of May 21, 1997, made by
the Pledgors named therein in favor of KeyBank National
Association, as collateral agent for the benefit of the
Secured Creditors (as defined therein) 4.4(18) Form of
Indenture, dated as of July 24, 1997, by and among Safety
Components, the Subsidiary Guarantors named therein and IBJ
Schroder Bank & Trust Company. 4.5(18) Registration Rights
Agreement, dated as of July 24, 1997 by and among Safety
Components, the guarantors named therein, BT Securities
Corporation, Alex Brown & Sons Incorporated and BancAmerica
Securities, Inc.
4.6(18) Form of 101/8% Senior Subordinated Note Due 2007, Series A,
including Form of Guarantee
4.7(18) Form of 101/8 % Senior Subordinated Note Due 2007, Series B,
including Form of Guarantee
4.8(18) Form of Amendment No. 2 to Pledge Agreement, dated as of July
15, 1997, made by the Pledgors named therein in favor of
KeyBank National Association, as collateral agent for the
benefit of the Secured Creditors (as defined therein)
5.1 (20) 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 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
II-3
<PAGE>
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.
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
II-4
<PAGE>
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(20) Statement re computation of ratios
21.1(19) Subsidiaries of Safety Components
23.1(20) Consents of Price Waterhouse LLP
23.2(20) Consent of Arthur Andersen LLP
23.3(20) Consent of Coopers & Lybrand LLP
23.4(20) Consent of BDO Deutsche Warentreuhand Aktiengesellschaft 24.1
24.1(20) Power of Attorney of officers and directors of the Company
(see Page II-8 )
* Indicates exhibits relating to executive compensation.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (the "1994 Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") on February 11, 1994.
(2) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1994, filed with the Commission.
(3) Incorporated by reference to Amendment No. 2 to the 1994 Registration
Statement, filed with the Commission on March 18, 1994.
(4) Incorporated by reference to Amendment No. 3 to the 1994 Registration
Statement, filed with the Commission on April 20, 1994.
(5) Incorporated by reference to Amendment No. 4 to the 1994 Registration
Statement, filed with the Commission on May 3, 1994.
(6) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1994 filed with the Commission.
(7) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended December 31, 1994, filed with the Commission.
(8) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1995.
(9) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-1, filed with the Commission on May 19, 1995.
(10) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1995.
(11) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1995.
(12) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996.
II-5
<PAGE>
(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.
(19) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4, filed with the Commission on August 29, 1997.
(20) Incorporated by reference to Amendement No.1 to the Company's Registration
Statement on Form S-1, filed with the Commission on December 11, 1997.
(b) Financial Statement Schedules
None.
Item 17. 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.
(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.
II-6
<PAGE>
(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) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared 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 registrant
has 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>
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-1 and has
duly caused this Amendment No. 1 to the 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 6th day of January, 1998.
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, this
Registration Statement has been signed below by the following persons on behalf
of the registrant in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert A. Zummo
- ------------------- Chairman of the Board, President January 6, 1998
Robert A. Zummo and Chief Executive Officer
(Principal Executive Officer)
/s/ Jeffrey J. Kaplan
- --------------------- Director, Executive Vice President January 6, 1998
Jeffrey J. Kaplan and Chief Financial Officer.
(Principal Financial Officer)
/s/ George D. Papadopoulos
- -------------------------- Corporate Controller and Secretary January 6, 1998
George D. Papadopoulos (Chief Accounting Officer)
*
- -----------------------
Joseph J. DioGuardi Director January 6, 1998
/s/ Francis X. Suozzi
- ---------------------
Francis X. Suozzi Director January 6, 1998
*
- -------------------
Robert J. Torok Director January 6, 1998
</TABLE>
II-8
