SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
2160 North Central Road, New Jersey, 07024
(Address and zip code of principal executive offices)
33-0596831
(IRS Employer Identification Number)
(201) 592-0008
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of February 17, 1998, was 5,037,383.
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION
The unaudited consolidated financial information at December 31, 1997 and
for the three and nine-month periods ended December 31, 1997 and the audited
consolidated financial information at March 31, 1997 relate to Safety Components
International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1997 3
Consolidated Statements of Operations for the
three months ended December 31, 1997 and 1996 4
Consolidated Statements of Operations for the
nine months ended December 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for
nine months ended December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
2
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and per share data)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 8,992 $ 8,320
Accounts receivable, net ................................... 29,458 11,751
Inventories ................................................ 18,532 6,378
Prepaid and other .......................................... 2,501 870
-------- -------
Total current assets .......................... 59,483 27,319
Property, plant and equipment, net ...................................... 64,220 28,295
Receivable from affiliate ............................................... - 4,348
Intangible assets, net ................................................. 53,532 10,991
Other assets ............................................................ 7,298 2,454
-------- -------
Total assets .................................. $184,533 $73,407
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $21,068 $ 7,792
Earnout payable ............................................ 1,962 2,211
Accrued liabilities ........................................ 13,895 2,476
Current portion of long-term obligations ................... 3,653 3,085
-------- -------
Total current liabilities ..................... 40,578 15,564
Long-term obligations ................................................... 10,926 21,296
Senior subordinated debt 90,000 -
Other long-term liabilities ............................................. 4,198 1,273
-------- -------
Total liabilities ............................. 145,702 38,133
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.10 par value per share - 2,000,000 shares
authorized; no shares outstanding at
December 31, 1997 and March 31, 1997 ................ - -
Common stock: $.01 par value per share - 10,000,000 shares
authorized; 5,031,383 and 5,025,383 shares issued and
outstanding at December 31, 1997 and
March 31, 1997, respectively ........................ 50 51
Common stock warrants ...................................... 1 1
Additional paid-in-capital ................................. 43,901 30,062
Treasury stock, 1,492,692 and 113,492 shares, at December 31,
1997 and March 31, 1997 respectively, at cost ....... (15,438) (1,647)
Retained earnings .......................................... 13,286 9,183
Cumulative translation adjustment .......................... (2,969) (2,376)
-------- -------
Total stockholders' equity .................... 38,831 35,274
-------- -------
Total liabilities and stockholders' equity .... $184,533 $73,407
======== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Net Sales ...................................................... $47,370 $24,662
Cost of sales, excluding depreciation .......................... 38,370 18,996
Depreciation ................................................... 1,517 386
------- -------
Gross profit ...................................... 7,483 5,280
Selling and marketing expenses ................................. 357 502
General and administrative expenses ............................ 1,927 1,396
Amortization of goodwill ....................................... 474 232
------- -------
Income from operations ............................ 4,725 3,150
Other expense (income), net .................................... (10) 119
Interest expense ............................................... 2,726 445
------- -------
Income before income taxes ........................ 2,009 2,586
Provision for income taxes ..................................... 623 1,166
------- -------
Net income ..................................................... $ 1,386 $ 1,420
======= =======
Net income per share ........................................... $ 0.28 $ 0.28
======= =======
Net income per share, assuming dilution ........................ $ 0.27 $ 0.28
======= =======
Weighted average number of shares outstanding .................. 5,031 5,053
======= =======
Weighted average number of shares outstanding, assuming dilution 5,188 5,079
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Net sales....................................................... $117,727 59,711
Cost of sales, excluding depreciation .......................... 93,632 46,818
Depreciation ................................................... 3,655 1,245
------- -------
Gross profit ...................................... 20,440 11,648
Selling and marketing expenses ................................. 1,268 1,199
General and administrative expenses ............................ 6,223 3,219
Amortization of goodwill ....................................... 1,063 386
------- -------
Income from operations ............................ 11,886 6,844
Other expense (income), net .................................... 79 192
Interest expense ............................................... 5,373 695
------- -------
Income before income taxes ........................ 6,434 5,957
Provision for income taxes ..................................... 2,331 2,536
------- -------
Net income ..................................................... $ 4,103 $ 3,421
======= =======
Net income per share ........................................... $ 0.82 $ 0.68
======= =======
Net income per share, assuming dilution ........................ $ 0.80 $ 0.67
======= =======
Weighted average number of shares outstanding .................. 5,024 5,057
======= =======
Weighted average number of shares outstanding, assuming dilution 5,125 5,087
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
December 31 December 31
1997 1996
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities ............. $ 7,529 $ 10,547
-------- --------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............. (8,966) (7,951)
Additional consideration and costs for Phoenix Airbag .. (2,455) (25,043)
Acquisition costs for Valentec ......................... (1,021) -
Advances to Valentec prior to acquisition .............. (1,215) -
Acquisition SCFT ....................................... (58,905) -
-------- -------
Net cash used in investing activities ............. (72,562) (32,994)
-------- -------
Cash Flows From Financing Activities:
Net proceeds from Notes ................................ 86,265
Proceeds from KeyBank term note ........................ 15,000 -
Proceeds from Bank Austria mortgage .................... 7,500 -
Proceeds from Transamerica financing ................... 2,000 -
Repayment of Bank of America NT&SA term note ........... (16,812) -
Repayment of KeyBank term note ......................... (15,000) -
Exercise of stock options .............................. 90 4
Purchase of treasury stock ............................. - (268)
(Repayments) borrowing of debt and long-term obligations (9,998) 20,087
Net (repayments) borrowing on revolving credit facility . (2,931) -
-------- -------
Net cash provided in financing activities ......... 66,114 19,823
-------- -------
Effect of exchange rate changes on cash ......................... (409) (361)
-------- -------
Change in cash and cash equivalents ............................. 672 (2,985)
Cash and cash equivalents, beginning of period .................. 8,320 13,045
-------- -------
Cash and cash equivalents, end of period ........................ $ 8,992 $10,060
======== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and Basis of Presentation
The consolidated financial statements included herein have been prepared by
Safety Components International, Inc. ("SCI" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from this report, as is permitted by such rules
and regulations; however, SCI believes that the disclosures are adequate to make
the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended March 31, 1997. The Company has experienced, and
expects to continue to experience, variability in net sales and net income from
quarter to quarter. Therefore, the results of the interim periods presented
herein are not necessarily indicative of the results to be expected for any
other interim period or the full year.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods.
On August 6, 1996, Automotive Safety Components International, Inc., a
wholly-owned subsidiary of the Company, acquired 80% of the outstanding capital
stock of Phoenix Airbag GmbH ("Phoenix Airbag"). Phoenix Airbag was a
corporation organized under the laws of the Republic of Germany, and at the time
of the acquisition, was a wholly-owned subsidiary of Phoenix Aktiengesellschaft
("Phoenix AG") in Hamburg, Germany. The purchase from Phoenix AG was made in
accordance with the terms and conditions of the Agreement Concerning the Sale
and Transfer of all the Shares in Phoenix Airbag GmbH dated June 6, 1996, as
amended (the "Agreement"). In accordance with the terms of the Agreement, the
Company is required to pay additional purchase price to Phoenix AG if Phoenix
Airbag meets certain annual performance targets for calendar year 1997. The
annual performance targets for 1997 were met and approximately $2.0 million of
additional purchase price is included in accrued liabilities at December 31,
1997.
Effective as of May 22, 1997, the Company acquired all of the outstanding
capital stock of Valentec International Corporation ("Valentec") in a
stock-for-stock exchange. Valentec is a high-volume manufacturer of stamped and
precision-machined products for the automotive, commercial and defense
industries. Valentec was the Company's largest shareholder immediately prior to
the acquisition owning approximately 27%, or 1,379,200 shares of the issued and
outstanding shares of the Company's common stock. The Company issued, to the
shareholders of Valentec, 1,369,200 newly issued shares of its common stock. The
acquisition was accounted for as a purchase. The purchase price aggregated
approximately $14.8 million, including estimated direct acquisition costs of
approximately $1.0 million. The operations of Valentec are included for the
entire three-month period ended December 31, 1997 and beginning on May 22, 1997
for the nine-month period ended December 31, 1997.
On July 24, 1997, the Company, through newly formed wholly-owned
subsidiary, Safety Components Fabric Technologies, Inc., purchased all of the
assets and assumed certain liabilities of the Air Restraint and Industrial
Fabrics Division of JPS Automotive L.P. ("SCFTI"). SCFTI 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
7
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
commercial applications. The acquisition was accounted for as a purchase. The
purchase price aggregated approximately $58.9 million, subject to post-closing
adjustments. The purchase price included the repayment of approximately $650,000
of capital lease obligations, direct acquisition costs of approximately
$700,000, and approximately $1.3 million for the purchase of a building in
conjunction with the Asset Purchase Agreement. The operations of SCFTI are
included for the entire three-month period ended December 31, 1997 and beginning
on July 24, 1997 for the nine-month period ended December 31, 1997.
Additionally, on July 24, 1997, the Company, issued $90.0 million of 10
1/8% Senior Subordinated Notes (the "Notes") due July 15, 2007 (see Note 3). A
substantial portion of the proceeds of the Notes were used by the Company to
purchase the Division, repay the term loan and amounts outstanding under the
revolving credit facility with KeyBank as of July 24, 1997 and pay certain fees
and expenses associated with the acquisition of the Division and the Notes.
NOTE 2 COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
----------------- --------------
<S> <C> <C>
Accounts receivable:
Billed receivables $ 24,958 $ 9,152
Unbilled receivables (net of unliquidated progress
payments of $14,550 and $9,846 at December 31, 1997 and
March 31, 1997, respectively) 3,474 1,834
Other 1,026 765
------- -------
$29,458 $11,751
======= =======
Inventories:
Raw materials $ 6,667 $ 3,339
Work-in-process 6,141 2,073
Finished goods 5,724 966
------- -------
$18,532 $ 6,378
======= =======
Property, plant and equipment:
Land and building $10,137 $ 8,435
Machinery and equipment 51,782 20,842
Construction in process 9,677 2,822
------- -------
71,596 32,099
Less - accumulated depreciation and amortization (7,376) (3,804)
------- -------
$64,220 $28,295
======= =======
</TABLE>
8
<PAGE>
NOTE 3 LONG-TERM OBLIGATIONS (in thousands)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Senior Subordinated Notes at 10 1/8% $ 90,000 $ -
KeyBank revolving credit facility - -
Bank of America NT&SA term loan and revolving credit facility,
bearing interest at 2.25% and 2.0% over LIBOR (6.54% at
March 31, 1997), respectively, refinanced May 21, 1997 - 20,192
Bank Austria mortgage note 7,125 -
Valentec International Limited note payable due MArch 31, 1998 1,384 -
Note payable, principal due in annual installments of
$205,000 beginning January 12, 1999 to January 12, 2002,
with interest at 7.22% in semiannual installments, secured
by assets of the Company's United Kingdom subsidiary 828 820
Capital equipment notes payable, due in monthly installments
with interest at 9.25% to 16.5% maturing at various rates
through June 2002, secured by machinery and equipment 5,242 3,369
------- -------
104,579 24,381
Less - current portion (3,653) (3,085)
------- -------
$100,926 $21,296
======= =======
</TABLE>
On July 24, 1997, the Company issued (the "Offering") $90.0 million of 10
1/8% Senior Subordinated Notes (the Notes) due July 15, 2007. Interest on the
Notes accrue from July 24, 1997 and is payable semi-annually in arrears on each
of January 15 and July 15 of each year, commencing January 15, 1998. The Notes
are general unsecured obligations of the Company and are subordinated in right
of payment to all existing and future Senior Indebtedness and to all existing
and future indebtedness of the Company's subsidiaries that are not Guarantors.
All of the Company's direct and indirect wholly-owned domestic subsidiaries are
Guarantors.
The Company, Phoenix Airbag and Automotive Safety Components International
Limited entered into an agreement with KeyBank National Association, as
administrative agent ("KeyBank"), and the lending institutions named therein,
dated as of May 21, 1997 as amended (the "Credit Agreement"). The Credit
Agreement consists of a $27.0 million revolving credit facility for a five year
term, bearing interest at LIBOR (5.72% as of December 31, 1997) plus 1.00% with
9
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
a commitment fee of 0.25% per annum for any unused portion. The indebtedness
under the Credit Agreement is secured by substantially all the assets of the
Company. The Credit Agreement contains certain restrictive covenants that impose
limitations upon, among other things, the Company's ability to change its
business; merge; consolidate or dispose of assets; incur liens; make loans and
investments; incur indebtedness; pay dividends and other distributions; engage
in certain transactions with affiliates; engage in sale and lease-back
transactions; enter into lease agreements; and make capital expenditures. The
Company will use the revolving credit facility to fund working capital.
Note 4 - Reconciliation to Diluted Earnings Per Share (in thousands)
The following data show the amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Income available to common
stockholders used in basic
earnings per share $1,386 $1,420 $4,103 $3,421
Effect of dilutive securities:
Stock options - - - -
------ ------ ------ ------
Income available to common
stockholders after assumed
conversion of dilutive
stock options $1,386 $1,420 $4,103 $3,421
====== ====== ====== ======
Weighted average number of
common shares used in basic
earnings per share 5,031 5,053 5,024 5,057
Effect of dilutive securities:
Stock options 157 26 101 30
------ ------ ----- -----
Weighted average number of
common shares and dilutive
potential common stock used
in diluted earnings per share 5,188 5,079 5,125 5,087
===== ===== ===== =====
</TABLE>
Options on 99,000 and 180,099 shares of common stock were not included in
computing diluted earnings per share as of December 31, 1997 and 1996,
respectively, because their effects were antidilutive.
10
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information for the nine months ended
December 31, 1996 and the year ended March 31, 1997 presents a summary of the
consolidated results of operations of the Company as if the acquisition of
Valentec, SCFTI and Phoenix Airbag, and the issuance of the Notes had occurred
on April 1, 1996, with pro forma adjustments to give effect to the amortization
of goodwill, interest charges and certain other adjustments, together with the
related income tax effect. The unaudited pro forma information for the nine
months ended December 31, 1997 presents a summary of the consolidated results of
operations of the Company as if the transactions had occurred on April 1, 1997.
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
December 31, 1997 December 31, 1996 March 31, 1997
----------------- ----------------- --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $ 142,231 $128,956 $173,208
Net income $ 3,547 $ 1,553 $ 940
Net income per share $ 0.71 $ 0.31 $ 0.19
</TABLE>
Note 6 - Supplemental Guarantor Condensed Consolidating Financial Statements
The Notes are guaranteed on a senior unsecured basis, jointly and severally by
each of the Company's principal wholly-owned domestic operating subsidiaries and
certain of its indirect domestic wholly-owned subsidiaries (the "Guarantors").
Certain condensed consolidating information of the Guarantors are presented
below as of December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets................ $ 42,101 $ 14,462 $ 2,920 $ - $ 59,483
======= ======= ======= ====== =======
Total assets.................. $125,248 $ 49,397 $ 18,748 $(8,860) $184,533
======= ======= ======= ====== =======
Current liabilities........... $ 27,370 $ 10,032 $ 3,176 $ - $ 40,578
======= ======= ======= ====== =======
Total liabilities............. $111,828 $ 38,157 $ (4,283) $ - $145,702
======= ======= ======= ====== =======
Revenues...................... $ 85,541 $ 39,562 $ - $(7,376) $117,727
======= ======= ======= ====== =======
Gross Profit.................. $ 12,934 $ 7,968 $ - $ (462) $ 20,440
======= ======= ======= ====== =======
Income from operations........ $ 9,127 $ 5,120 $ (2,361) $ - $ 11,886
======= ======= ======= ====== =======
Income before taxes........... $ 9,462 $ 3,334 $ (6,362) $ - $ 6,434
======= ======= ======= ====== =======
Net Income.................... $ 6,288 $ 1,680 $ (3,865) $ - $ 4,103
======= ======= ======= ====== =======
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
THIRD QUARTER ENDED DECEMBER 31, 1997 COMPARED TO THIRD QUARTER ENDED
DECEMBER 31, 1996
Net Sales. Net sales increased by $22.7 million or 92.1% to $47.4
million for the third quarter of fiscal year 1998 compared to the third quarter
of fiscal year 1997. The increase was primarily attributable to the acquisition
of SCFTI and Valentec, which contributed approximately $26.0 million on a
combined basis, primarily offset by lower net sales in the European operations
due primarily to price reductions. Additionally, the German mark has devalued
approximately 13% in comparison to the third quarter of fiscal year 1997, which
impacts the comparability of results throughout this discussion.
Gross Profit. Gross profit increased by $2.2 million or 41.7% to $7.5
million for the third quarter of fiscal year 1998 compared to the third quarter
of fiscal year 1997. The increase was primarily attributable to the acquisition
of SCFTI and Valentec, which contributed approximately $4.8 million on a
combined basis, partially offset by lower margins on North American and European
airbag sales due to lower revenues.
Gross profit as a percentage of sales decreased to approximately 15.8%
for the third quarter of fiscal year 1998 from 21.4% for the third quarter of
fiscal year 1997. The decrease as a percentage was due to the inclusion of
SCFTI, which has historically lower gross margins compounded by the price
reductions at Phoenix Airbag. The textile industry generally produces margins in
the range of 13% to 14% due to the capital intensive production process. In
accordance with the Phoenix Airbag relocation strategy, production is currently
being shifted from Germany to the Czech Republic and Wales facilities. The
Company expects margins to improve in Europe in fiscal year 1999 upon the
completion of the wind down of the Phoenix Airbag operations in Germany.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $386,000 or 20.3% to $2.3 million for the
third quarter of fiscal year 1998 compared to the third quarter of fiscal year
1997. The increase was primarily attributable to the acquisitions of SCFTI and
Valentec. Selling, general and administrative expenses as a percentage of sales
decreased, however, to 4.8% for the third quarter of fiscal year 1998 from 7.7%
for the third quarter of fiscal year 1997.
Operating Income. Operating income increased by $1.6 million or 50.0%
to $4.7 million for the third quarter of fiscal year 1998 compared to the third
quarter of fiscal year 1997. Operating income increased primarily due to the
acquisitions of SCFTI and Valentec, partially offset by lower operating income
at Phoenix Airbag.
Interest Expense. Interest expense increased $2.3 million to $2.7
million for the third quarter of fiscal year 1998 compared to the third quarter
of fiscal year 1997. This increase was attributable to the issuance of the 10
1/8% Senior Subordinated Notes (the "Notes"), the proceeds of which were used
primarily to acquire SCFTI and repay amounts then outstanding under the
Company's credit facilities with KeyBank.
Income Taxes. The income tax rate applied against pre-tax income was
31.0% for the third quarter of fiscal year 1998 compared to 45.1% for the third
12
<PAGE>
quarter of fiscal year 1997. The tax rate decreased as compared to the prior
year due to the increasing percentage of income generated from SCFTI and
Valentec, which have lower tax rates than the European operations, and the
smaller contribution of profits generated from Phoenix Airbag which historically
has a higher tax rate. Additionally, certain contingencies the Company
previously provided for have come to a resolution, which favorably impacted the
provision.
Net Income. Net income remained constant at $1.4 million for the third
quarter of fiscal year 1998 compared to the third quarter of fiscal year 1997.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER
31, 1996
Net Sales. Net sales increased by $58.1 million or 97.2% to $117.7
million for the first nine months of fiscal year 1998 compared to the first nine
months of fiscal year 1997. The increase was primarily attributable to the
acquisition of SCFTI and Valentec, which contributed approximately $47.5 million
on a combined basis. The remaining increase in sales volume was primarily
attributable to European operations, specifically Phoenix Airbag, which was
partially offset by lower revenues in North American airbag sales . Phoenix
Airbag was acquired on August 5, 1996 and included in the Company's entire first
nine months of fiscal year 1998 whereas in the first nine months of fiscal year
1997 Phoenix Airbag was included for approximately five months. Additionally,
the German mark has devalued approximately 14% in comparison to the five months
in fiscal year 1997, which impacts the comparability of results throughout this
discussion.
Gross Profit. Gross profit increased by $8.8 million or 75.5% to $20.4
million for the first nine months of fiscal year 1998 compared to the first nine
months of fiscal year 1997. The increase was primarily attributable to the
acquisition of SCFTI and Valentec, which contributed approximately $8.5 million
on a combined basis. The remaining increase was primarily attributable to the
inclusion of Phoenix Airbag for a full nine-month period, partially offset by
lower margins in the North American airbag sales due to lower sales.
Gross profit as a percentage of sales decreased to approximately 17.4%
for the first nine months of fiscal year 1998 from 19.5% for the first nine
months of fiscal year 1997. The decrease as a percentage was due to the
historically lower gross margins at SCFTI. The textile industry generally
produces margins in the range of 13% to 14% due to the capital intensive
production process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.1 million or 69.6% to $7.5 million for
the first nine months of fiscal year 1998 compared to the first nine months of
fiscal year 1997. The increase was primarily attributable to the acquisition of
SCFTI and Valentec, which contributed approximately $1.9 million of the increase
on a combined basis. Additionally, approximately $800,00 of the increase was due
to increased expenses of the European operations, which increased approximately
$800,000. Phoenix Airbag and the Czech Republic facility were in full production
during the first nine months of fiscal year 1998, compared to the first nine
months of fiscal year 1997, when Phoenix Airbag had only been included for
approximately five months and the Czech Republic facility had not yet been
operating. Selling, general and administrative expenses as a percentage of sales
decreased slightly to 6.4% for the first nine months of fiscal year 1998 from
7.4% for the first nine months of fiscal year 1997.
Operating Income. Operating income increased by $5.0 million or 73.7%
to $11.9 million for the first nine months of fiscal year 1998 compared to the
first nine months of fiscal year 1997. Operating income increased primarily due
to the acquisitions of SCFTI and Valentec, and the inclusion of Phoenix Airbag
for the full nine-month period, partially offset by lower operating income in
North American airbags.
13
<PAGE>
Interest Expense. Interest expense increased $4.7 million to $5.4
million for the first nine months of fiscal year 1998 compared to the first nine
months of fiscal year 1997. This increase was attributable to the issuance of
the Notes, the proceeds of which were used primarily to acquire SCFTI and repay
amounts then outstanding under the Company's credit facilities with KeyBank.
Income Taxes. The income tax rate applied against pre-tax income was
36.2% for the first nine months of fiscal year 1998 compared to 42.3% for the
first nine months of fiscal year 1997. The tax rate decreased as compared to
prior year due to the increasing percentage of income generated from SCFTI and
Valentec, which have lower tax rates than the European operations. Additionally,
certain contingencies the Company previously provided for have come to a
resolution, which favorably impacted the provision.
Net Income. Net income was relatively constant at $5.0 million for the
first nine months of fiscal year 1998 compared to $5.1 million for the first
nine months of fiscal year 1997. This change was a result of the items discussed
above.
Liquidity and Capital Resources
As the Company's business grows, its equipment and working capital
requirements will also continue to increase as a result of the anticipated
growth of the automotive operations. This growth will be funded through a
combination of cash flow from operations, equipment financing, revolving credit
borrowings and the proceeds from potential future Company public offerings.
On July 24, 1997, the Company issued (the "Offering") $90.0 million of
Notes due July 15, 2007. Interest on the Notes accrues from July 24, 1997 and is
payable semi-annually in arrears on each of January 15 and July 15 of each year,
commencing January 15, 1998. The Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future
Senior Indebtedness and to all existing and future indebtedness of the Company's
subsidiaries that are not Guarantors. The Company's principal direct and certain
indirect wholly-owned domestic subsidiaries are Guarantors. The Indenture with
respect to the Notes contains certain restrictive covenants that impose
limitations upon, among other things, the Company's ability to incur additional
indebtedness.
As of May 21, 1997, the Company, Phoenix Airbag and Automotive Safety
Components International Limited ("ASCIL" and collectively, the "Borrowers")
entered into the Credit Agreement with KeyBank National Association, as
administrative agent ("KeyBank"), and the lending institutions named therein
(the "Credit Agreement"). Prior to the consummation of the Offering, the Credit
Agreement provided for (i) a term loan in the principal amount of $15.0 million
(the "Term Loan") and (ii) a revolving credit facility (the "Revolving Credit
Facility") in the aggregate principal amount of $12.0 million (including letter
of credit facilities). The indebtedness under the Credit Agreement bore interest
at a rate equal to either (i) the greater of KeyBank's prime rate or (ii) the
sum of LIBOR plus 1.00% for term loans (and 1.25% for revolving loans, so long
as no default or event of default shall have occurred and be continuing). Upon
the consummation of the Offering, the Company used the proceeds thereof to repay
the Term Loan and amounts then outstanding under the Revolving Credit Facility.
In connection therewith, the Company's credit facility with KeyBank was
converted into a $27.0 million Revolving Credit Facility, bearing interest at
LIBOR plus 1.00% with a commitment fee of 0.25% on any unused portion, with the
remaining terms and conditions being similar to the previous Revolving Credit
Facility. Any indebtedness under the Credit Agreement will be secured by
substantially all the assets of the Company. 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.
14
<PAGE>
Net cash generated from operations was $7.5 million during the first
nine months of fiscal year 1998. Cash used in investing activities was $72.6
million. Cash used for capital expenditures was $9.0 million. Certain annual
performance targets for calendar year 1997, set forth in the acquisition
agreement for Phoenix Airbag, were met and require the Company to pay and
additional purchase price to Phoenix AG. The Company paid additional costs and
consideration in connection with the acquisition of Phoenix Airbag, primarily
the $2.2 million earn-out accrued at the end of fiscal year 1997. The Company
will pay additional consideration for Phoenix Airbag of approximately $2 million
in June 1998.. The Company incurred certain costs in connection with the
acquisition of Valentec of approximately $1.0 million. In addition, the Company
also made advances to Valentec prior to acquisition for the purpose of funding
operations. The Company used approximately $58.9 million to purchase SCFTI, (see
discussion below). Net cash provided by financing activities in the first nine
months of fiscal year 1998 was $66.1 million. Cash proceeds from financing
activities were used to purchase SCFTI, repay the Term Loan and Revolving Credit
Facility with KeyBank, and repay certain liabilities of the newly acquired
Valentec. These activities resulted in a net increase in cash of $670,000 in the
first nine months of fiscal year 1998.
Capital expenditures were $9.0 million in the first nine months of
fiscal year 1998. Capital expenditures in the first nine months of fiscal year
1998 were used to complete the construction of the new facility in the Czech
Republic and the acquisition of additional equipment to expand the Company's
production capacity worldwide.
Pursuant to a definitive Stock Purchase Agreement, effective as of May
22, 1997, the Company acquired all of the outstanding capital stock of Valentec
International Corporation ("Valentec") in a tax-free stock-for-stock exchange.
Valentec is a high-volume manufacturer of stamped and precision-machined
products for the automotive, commercial and defense industries. Valentec was the
Company's largest shareholder immediately prior to the acquisition owning
approximately 27%, or 1,379,200 shares of the issued and outstanding shares of
the Company's common stock. The Company issued, to the shareholders of Valentec,
1,369,200 newly issued shares of its common stock. The acquisition was accounted
for as a purchase. The purchase price aggregated approximately $14.8 million,
including estimated direct acquisition costs of approximately $1.0 million.
Pursuant to a definitive Asset Purchase Agreement, on July 24, 1997,
the Company purchased all of the assets and assumed certain liabilities of the
Air Restraint and Industrial Fabrics Division of JPS Automotive L.P., referred
to herein as SCFT. SCFT is a leading, low-cost supplier of airbag fabric in
North America and is also a leading manufacturer of value-added synthetic
fabrics used in a variety of niche industrial and commercial applications. The
acquisition was accounted for as a purchase. The purchase price aggregated
approximately $58.9 million, subject to post-closing adjustments. The purchase
price included the repayment of approximately $650,000 of capital lease
obligations, direct acquisition costs of approximately $700,000, and
approximately $1.3 million for the purchase of a building in conjunction with
the Asset Purchase Agreement. The Company funded the purchase of SCFT out of the
proceeds from the issuance of the Notes.
The above discussion may contain forward-looking statements that
involve risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market condition risks, the
ability of Safety Components to realize anticipated cost savings and earnings
projections by the Valentec division; the continued performance by the SCFTI at
or above historical levels; the ability to complete the wind down of operations
in Germany in a timely fashion and to efficiently transition production to the
Czech Republic and Wales facilities; world-wide economic conditions; dependence
of revenues upon several major module suppliers and pricing pressures.
15
<PAGE>
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"). FAS 128 establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15. The Company adopted
the statement effective December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments to be
reported in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for the Company's annual and interim financial
reports beginning in the fiscal year ending March 31, 1999.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. 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 provide 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.ss.1, the payment by Galion of a $500,000 fine and an agreement by
the Government to not further criminally prosecute the Company, its
subsidiaries, or any of their respective officers, directors or employees as to
the alleged bid-rigging and kickback scheme. As of the date hereof, 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 the date
hereof, no understanding has been reached as to such potential civil claims. .
17
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1997 Annual Meeting of Stockholders on
September 17, 1998.
At the Annual Meeting, Francis X. Suozzi and Robert J. Torok
were elected Class II directors of the Company. The number of shares of the
Company's common stock voted in favor of the election of Messre. Suozzi and
Torok were 4,445,670 and 4,444,870, respectively, and the number of such shares
withheld were 218,733 and 219,533, respectively. In addition, the following
other directors continued as such after the Annual Meeting: Joseph J. DioGuardi,
Jeffrey J. Kaplan and Robert A. Zummo.
At the Annual Meeting, the Company's stockholders also voted
upon the approval to amendments to the company's 1994 Stock Option Plan (the
"Plan") to i) increase the number of shares of the Company's common stock
subject to the Plan from 550,000 shares in the aggregate to 1,050,000 shares in
aggregate, ii) increase the number of Non-Qualified Stock Options ("NQSOs") that
a participant may be granted under the Plan in any one fiscal year from NQSOs to
purchase 100,000 shares of the Company's common stock to NQSOs to purchase
200,000 shares of the Company's common stock and iii) require that the Stock
Option Committee members be composed of "Non-Employee Directors" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended. The vote on the approval of such amendments was 2,641,187 FOR, 536,150
AGAINST, and 27,350 ABSTAINING.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
----------- ------------------------------------------------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K filed on January 16, 1998 relating to
change in independent accountants.
18
<PAGE>
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
(Registrant)
DATED: February 17, 1998 BY: /s/ JEFFREY J. KAPLAN
----------------------------
Jeffrey J. Kaplan
Executive Vice President and
Chief Financial Officer
19
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
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<PERIOD-END> DEC-31-1997
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<INVENTORY> 18,532
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