SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
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 such
filing requirements for 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 5, 1998, was 5,136,316.
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION
The unaudited consolidated financial information at December 26, 1998 and
for the thirteen and thirty-nine week period ended December 26, 1998 and the
audited consolidated financial information at March 28, 1998 relate to Safety
Components International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets as of December 26, 1998
and March 28, 1998 3
Consolidated Statements of Operations for the
thirteen weeks ended December 26, 1998 and the
three months ended December 31, 1997 4
Consolidated Statements of Operations for the
thirty-nine weeks ended December 26, 1998 and the
six months ended December 31, 1997 5
Consolidated Statements of Cash Flows for the
thirty-nine weeks ended December 26, 1998 and the
six months ended December 31, 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTATIVE AND QUALATATIVE DISCLOSURES
ABOUT MARKET RISK 21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
2
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 26, March 28,
1998 1998
------------ --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 1,437 $ 6,049
Accounts receivable, net ................................... 52,492 39,208
Inventories ................................................ 25,077 19,935
Receivable from affiliate................................... 2,726 -
Prepaid and other .......................................... 4,296 4,196
-------- --------
Total current assets .......................... 86,028 69,388
Property, plant and equipment, net ...................................... 72,276 66,279
Receivable from affiliate ............................................... - 1,206
Intangible assets, net .................................................. 59,675 55,923
Other assets ............................................................ 5,006 6,101
-------- --------
Total assets .................................. $222,985 $198,897
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $28,523 $23,009
Earnout payable ............................................ 2,279 1,958
Accrued liabilities ........................................ 12,600 12,558
Current portion of long-term obligations ................... 4,043 2,375
-------- --------
Total current liabilities ..................... 47,445 39,900
Long-term obligations ................................................... 39,690 24,739
Senior subordinated debt ................................................ 90,000 90,000
Other long-term liabilities ............................................. 5,455 5,064
-------- --------
Total liabilities ............................. 182,590 159,703
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.10 par value per share - 2,000,000 shares
authorized; no shares outstanding at
December 26, 1998 and March 28, 1998, respectively... - -
Common stock: $.01 par value per share - 10,000,000 shares
authorized; 6,626,508 and 6,538,075 shares issued and
5,133,816 and 5,045,383 shares outstanding at
December 26, 1998 and March 28, 1998, respectively... 66 65
Common stock warrants ...................................... 1 1
Additional paid-in-capital ................................. 45,221 44,040
Treasury stock, 1,492,692 shares at December 26, 1998
and March 28, 1998, at cost ......................... (15,439) (15,439)
Retained earnings .......................................... 13,121 15,191
Cumulative translation adjustment .......................... (2,575) (4,664)
-------- --------
Total stockholders' equity .................... 40,395 39,194
-------- --------
Total liabilities and stockholders' equity .... $222,985 $198,897
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Thirteen Three
Weeks Ended Months Ended
December 26, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Net sales ...................................................... $61,056 $47,370
Cost of sales, excluding depreciation .......................... 54,356 38,370
Depreciation ................................................... 2,049 1,517
------- -------
Gross profit ...................................... 4,651 7,483
Selling and marketing expenses ................................. 1,005 357
General and administrative expenses ............................ 4,752 1,927
Amortization of goodwill ....................................... 612 474
------- -------
Income (loss) from operations ..................... (1,718) 4,725
Other expense(income), net...................................... 1,136 (10)
Interest expense ............................................... 3,192 2,726
------- -------
Income (loss) before income taxes ................. (6,046) 2,009
Provision (benefit) for income taxes ........................... (2,274) 623
------- -------
Net income (loss)............................................... $(3,772) $ 1,386
======= =======
Net income (loss) per share, basic ............................. $ (0.74) $ 0.28
======= =======
Net income (loss) per share, assuming dilution ................. $ (0.73) $ 0.27
======= =======
Weighted average number of shares outstanding, basic ........... 5,127 5,031
======= =======
Weighted average number of shares outstanding, assuming dilution 5,200 5,188
======= =======
</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>
Thirty-nine Six
Weeks Ended Months Ended
December 26, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Net sales ...................................................... $165,564 $117,727
Cost of sales, excluding depreciation .......................... 138,614 93,632
Depreciation ................................................... 5,726 3,655
------- -------
Gross profit ...................................... 21,224 20,440
Selling and marketing expenses ................................. 2,480 1,268
General and administrative expenses ............................ 9,691 6,223
Amortization of goodwill ....................................... 1,747 1,063
------- -------
Income from operations ............................ 7,306 11,886
Other expense, net.............................................. 1,213 79
Interest expense ............................................... 8,989 5,373
------- -------
Income (loss) before income taxes ................. (2,896) 6,434
Provision (benefit) for income taxes ........................... (826) 2,331
------- -------
Net income (loss)............................................... $(2,070) $ 4,103
======= =======
Net income (loss) per share, basic ............................. $ (0.41) $ 0.82
======= =======
Net income (loss) per share, assuming dilution ................. $ (0.40) $ 0.80
======= =======
Weighted average number of shares outstanding, basic ........... 5,104 5,024
======= =======
Weighted average number of shares outstanding, assuming dilution 5,206 5,125
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine Nine
Weeks Ended Months Ended
December 26, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Net cash (used in) provided by operating activities ............. $ (7,365) $ 7,529
-------- --------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............. (11,686) (8,966)
Acquisition and costs of Phoenix Airbag ................ (1,958) (2,455)
Acquisition costs for Valentec ......................... (502) (1,021)
Advances to Valentec prior to acquisition .............. - (1,215)
Acquisition costs of SCFT .............................. (242) (58,905)
-------- -------
Net cash used in investing activities ............. (14,388) (72,562)
-------- -------
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)
Proceeds of KeyBank equipment note...................... 10,000 -
Excersise of stock options.............................. 1,056 90
Repayments of debt and long-term obligations............ (2,406) (9,998)
Net(repayments) borrowing on revolving credit facility.. 9,024 (2,931)
-------- -------
Net cash provided by financing activities.......... 17,674 66,114
-------- -------
Effect of exchange rate changes on cash ......................... (533) (409)
-------- -------
Change in cash and cash equivalents ............................. (4,612) 672
Cash and cash equivalents, beginning of period .................. 6,049 8,320
-------- -------
Cash and cash equivalents, end of period ........................ $ 1,437 $ 8,992
======== =======
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest .............................................. $ 6,575 $ 1,285
Income taxes .......................................... 391 $ 376
</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 28, 1998. 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 ASCI GmbH & Co. KG (formerly known as Phoenix Airbag GmbH & Co. KG "
ASCI GmbH"). ASCI GmbH 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 ASCI GmbH meets certain annual performance targets for
calendar years 1996, 1997 and 1998. The final annual performance targets for
1998 were met and approximately $2.3 million of additional purchase price is
included in accrued liabilities at December 26, 1998, which is payable on or
before April 30, 1999. During the third quarter of fiscal year 1999 the Company
reevaluated its strategic decision to exit the manufacturing of airbags within
Hildesheim, Germany. The original plan called for the closure and move of the
entire manufacturing operation to the Company's Czech Republic and United
Kingdom production facilities. While the Company accomplished the move of
substantially all of the labor-intensive passenger airbags, the Company has now
decided not to move the remaining automated airbags, primarily driver and side
impact bags. The Company has identified a new facility within Germany near the
existing facility. The decision to remain in Germany is based on current and
anticipated program delivery commitments. The Company believes this new facility
will be more cost effective than its existing German facility.
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 (the "Valentec Acquisition"). 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 Valentec Acquisition owning approximately
7
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
27%, or 1,379,200 shares of the issued and outstanding shares of common stock,
$.01 par value per share, of the Company (the "Common Stock"). In connection
with the Valentec Acquisition, the Company issued an aggregate of 1,369,200
newly issued shares of Common Stock to the shareholders of Valentec. The
Valentec Acquisition was accounted for as a purchase. The purchase price
aggregated approximately $15.2 million, including estimated direct acquisition
costs of approximately $1.4 million. In addition, the Company advanced Valentec
approximately $1.3 million for the purpose of funding operations prior to the
Valentec Acquisition. The operations of Valentec are included in the accounts of
the Company for the entire thirty-nine week period ended December 26, 1998 and
beginning on May 22, 1997 for the nine-month period ended December 31, 1997.
Management of the Company allocated the purchase consideration for Valentec
assets, net of liabilities assumed, at fair market value, with the excess
allocated to goodwill. Goodwill of $19.9 million will be amortized over
twenty-five years on a straight-line basis.
On July 24, 1997, the Company, through a newly-formed, wholly-owned subsidiary,
Safety Components Fabric Technologies, Inc. ("SCFTI"), acquired ("the JPS
Acquisition") all of the assets and assumed certain liabilities of the Air
Restraint/Technical Fabrics Division of JPS Automotive L.P. SCFTI is a leading,
low-cost supplier of airbag fabric in North America and is also a leading
manufacturer of value-added technical fabrics used in a variety of niche
industrial and commercial applications. The JPS Acquisition was accounted for as
a purchase. The purchase price aggregated approximately $58.9 million, after
giving effect to post-closing adjustments. The purchase price also included the
repayment of approximately $650,000 of capital lease obligations, direct
acquisition costs of approximately $1.0 million, and approximately $1.2 million
for the purchase of a building in conjunction with the JPS Acquisition. The
operations of SCFTI are included in the accounts of the Company for the entire
thirteen and thirty-nine week periods ended December 26, 1998 and beginning on
July 24, 1997 for the three and nine-month periods ended December 31, 1997.
Management of the Company allocated the purchase consideration for SCFTI assets,
net of liabilities assumed, at fair market value, with the excess allocated to
goodwill. Goodwill of $19.2 million will be amortized over forty years based on
a straight-line method.
Additionally, on December 22, 1997, the Company acquired all of the issued and
outstanding capital stock of CSSC, Inc. (formerly known as Champion Sales and
Service Company) ("Champion") for an aggregate amount of $3.4 million, including
direct acquisition costs of approximately $125,000 (the "Champion Transaction").
In conjunction with the Champion Transaction, the Company entered into a
management services agreement with the former shareholders of Champion. The
terms of such management services agreement prohibit the Champion shareholders
from competing with certain businesses of the Company for a period of five
years. Each such management services agreement also provides that the Company
has the option, in its sole discretion, to extend the non-competition period for
three successive five-year periods, upon payment of a nominal extension fee.
Accordingly, the Company has allocated the purchase consideration to these
non-compete agreements. In connection with the Champion Transaction, the Company
also entered into a definitive Put Agreement (the "Put Transaction")
8
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
with an associate of Champion (the "Associate") who had the right to a portion
of any of the sales commissions actually received by Champion. Pursuant to the
Put Transaction, the Associate had 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 Put
Transaction included (as a condition to its exercise), a twenty year management
services agreement and non-compete agreement between the Company and the
Associate. At December 26, 1998, the Company anticipated that the Put
Transaction would be exercised, and accordingly, recorded $740,000 as an
intangible asset and accrued for the Put Transaction as part of accrued
liabilities, during fiscal year 1998. The Associate exercised his put option on
January 13, 1999.
NOTE 2 COMPOSITION OF CERTAIN CONSOLIDATED BALANCE SHEET COMPONENTS
(in thousands)
<TABLE>
<CAPTION>
December 26, 1998 March 28, 1998
------------------ --------------
<S> <C> <C>
Accounts receivable:
Billed receivables $ 43,741 $29,034
Unbilled receivables (net of unliquidated progress
payments of $12,1666 and $12,795 at December 26, 1998 and
March 28, 1998, respectively) 7,410 8,759
Other 1,341 1,415
------- -------
$52,492 $39,208
======= =======
Inventories:
Raw materials $ 8,822 $ 6,072
Work-in-process 9,850 6,743
Finished goods 6,405 7,120
------- -------
$25,077 $19,935
======= =======
Property, plant and equipment:
Land and building $11,373 $ 9,134
Machinery and equipment 75,294 65,846
------- -------
86,667 74,980
Less - accumulated depreciation and amortization (14,391) (8,701)
------- -------
$72,276 $66,279
======= =======
</TABLE>
9
<PAGE>
NOTE 3 LONG-TERM OBLIGATIONS (in thousands)
<TABLE>
<CAPTION>
December 26, 1998 March 28, 1997
------------------ --------------
<S> <C> <C>
Senior Subordinated Notes due July 15, 2007, bearing
interest at 10 1/8% $90,000 $ 90,000
KeyBank and Fleet Bank revolving credit facility due
May 5, 2002, bearing interest at 1.0% over LIBOR 23,200 14,176
KeyCorp equipment note due July 10, 2005, bearing interest
at 7.09% 9,505 -
Bank Austria mortgage note, due March 31, 2007, bearing
interest at 1.0% over LIBOR 6,375 7,125
Note payable, principal due in annual installments of $212
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 836 847
Capital equipment notes payable, due in monthly installment
with interest at 8.53% to 16.0% maturing at various rates
through June 2002, secured by machinery and equipment 3,817 4,966
-------- --------
133,733 117,114
Less - current portion (4,043) (2,375)
-------- --------
$129,690 $114,739
======== ========
</TABLE>
On July 24, 1997, the Company issued $90.0 million aggregate principal amount of
its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old Notes") to BT
Securities Corporation, Alex. Brown & Sons Incorporated and BancAmerica
Securities, Inc. in a transaction not registered under the Securities Act of
1933, as amended, in reliance upon an exemption thereunder (the "Debt
Offering"). On September 2, 1997, the Company commenced an offer to exchange
(the "Exchange Offer", together with the Debt Offering, the "Offering") the Old
Notes for $90.0 million aggregate principal amount of its 10 1/8% 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 Exchange Notes
pursuant to the terms of the Exchange Offer, which expired on October 1, 1997.
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. The Company made a
semi-annual interest payment on July 15, 1998 to the holders for an aggregate of
$4.6 million. The Company had also accrued through December 26, 1998, as part of
10
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
accrued liabilities, approximately $4.1 million of interest, which was paid on
January 15, 1999 as part of the next semi-annual payment. The Company incurred
approximately $3.9 million of fees and expenses related to the Offering. Such
fees have been deferred and will be charged to operations over the expected term
of the Notes, not to exceed 10 years. The Notes are general unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future Senior Indebtedness (as defined in the Indenture pursuant to
which the Notes were issued) and to all existing and future indebtedness of the
Company's subsidiaries that are not Guarantors (as defined herein). All of the
Company's direct and indirect wholly owned domestic subsidiaries are Guarantors.
The Company, ASCI GmbH and Automotive Safety Components International Limited, a
wholly-owned subsidiary of the Company organized under the laws of the United
Kingdom, entered into an agreement with KeyBank National Association, as
administrative agent ("KeyBank"), dated as of May 21, 1997 as amended to date
(the "Credit Agreement"). The Credit Agreement, as amended, consists of a $40.0
million revolving credit facility for a five year term ($23.2 million
outstanding as of December 26, 1998), bearing interest at LIBOR (5.62875% as of
December 26, 1998) plus 1.00% with a commitment fee of 0.25% per annum for any
unused portion. The initial proceeds from KeyBank were used to repay the Bank of
America NT&SA term loan and revolving credit facility. KeyBank was subsequently
repaid with the proceeds from the Offering. The Company incurred approximately
$470,000 of financing fees and related costs. These costs have been deferred and
will be charged to operations over the expected term of the Credit Agreement not
to exceed 5 years. On July 30, 1998, the Company and KeyBank entered into
Amendment No. 3 to the Credit Agreement to increase the limits on certain
capital expenditures and lease covenants. On October 9, 1998, the Company
entered into Amendment No. 4 to the Credit Agreement, which increased the
revolving credit facility from $27.0 million to $40.0 million, and added Fleet
Bank as a member of the bank syndicate. KeyBank and Fleet Bank each provide
fifty percent of the financing available under the Credit Agreement and KeyBank
will remain as acting agent. In February 1999, the Credit Agreement was amended
to reduce the required ratio of Total Senior Funded Debt to EBITDA (as each such
term is defined in the Credit Agreement) from 1.5 to 1.0 for the period from
October 1, 1998 through May 31, 2002 to 2.4 to 1.0 for the period from October
1, 1998 through December 31, 1998 and 1.5 to 1.0 for the period from January 1,
1999 through May 31, 2002. The Company has used and will continue to use the
revolving credit facility to fund working capital. Letters of credit outstanding
were $4.1 million and $3.4 million at December 26, 1998 and March 28, 1998,
respectively. 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.
On July 10, 1998, the Company entered into a $10.0 million financing arrangement
with KeyCorp Leasing, a division of Key Corporate Capital Inc. ("KeyCorp"). The
Company applied the entire proceeds to satisfy outstanding indebtedness under
the KeyBank revolving credit facility, thereby increasing the availability under
the revolving credit facility. The KeyCorp financing agreement has a seven-year
term, bears interest at 7.09%, and requires monthly payments of $150,469,
secured by certain equipment located at SCFTI.
11
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 4, 1997, the Company secured a $7.5 million mortgage note facility with
Bank of Austria. The note is payable in semi-annual installments of $375,000
through March 31, 2007 and bears interest at 1.0% over LIBOR. The note is
secured by the assets of the Company's Czech Republic facility. The Company
incurred approximately $437,000 of financing fees and related costs. These costs
have been deferred and will be charged to operations over the expected term of
the note not to exceed 5 years.
During fiscal year 1997, the Company entered into a sale-leaseback of certain
equipment, which is accounted for as a capital lease. The Company received
proceeds (which approximated the carrying value of the asset at the time of
sale) of approximately $1.5 million; no gain or loss was recorded in connection
with this transaction. The agreement requires that specified machinery and
equipment used in the Company's operations be pledged as collateral, among other
criteria. The Company imputed interest at 9% per annum.
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>
Thirteen Three Months Thirty-nine Six Months
Weeks Ended Ended Weeks Ended Ended
December 26, 1998 December 31, 1997 December 26, 1998 December 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Income $(3,772) $1,386 $(2,070) $4,103
======= ====== ====== ======
Weighted average number of
common shares used in basic
earnings per share 5,127 5,031 5,104 5,024
Effect of dilutive securities:
Stock options 69 152 95 98
Warrants 4 5 7 3
----- ----- ----- -----
Weighted average number of
common shares and dilutive
potential common stock used
in diluted earnings per share 5,200 5,188 5,206 5,125
===== ===== ===== =====
</TABLE>
Options on approximately 306,000 and 99,000 shares of common stock were not
included in computing diluted earnings per share as of December 26, 1998 and
December 31, 1997, respectively, because their effects were antidilutive.
12
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - COMPREHENSIVE INCOME (in thousands)
During the first quarter of fiscal year 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which became effective for fiscal years
beginning after December 15, 1997. This Statement requires disclosure of
comprehensive income, defined as the total of net income and all other non-owner
changes in equity, which under generally accepted accounting principles, are
recorded directly to the stockholders' equity section of the consolidated
balance sheet and, therefore bypass net income. In SCI's case, the non-owner
changes in equity relate to the tax benefit from stock options exercised and the
foreign currency translation adjustment. Comprehensive income is as follows:
<TABLE>
<CAPTION>
Thirteen Three Months Thirty-nine Six Months
Weeks Ended Ended Weeks Ended Ended
December 26, 1998 December 31, 1997 December 26, 1998 December 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Income $(3,772) $1,386 $(2,070) $4,103
Tax benefit from stock
options exercised 24 11 161 21
Foreign currency
translation adjustment (670) 311 2,089 (593)
------ ------ ------ ------
Comprehensive income $(4,418) $1,708 $ 180 $3,531
====== ====== ====== ======
</TABLE>
NOTE 6 - UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma revenues, net income and net income per common share,
assuming that each of: (i) the Valentec Acquisition; (ii) the JPS Acquisition;
(iii) the completion of the debt offering (Note 3) and application of the
proceeds therefrom; and (iv) the Champion Transaction was consummated on April
1, 1997 are as follows below, in thousands, except per share data. The unaudited
pro forma information 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.
Pro Forma Pro Forma
December 31, March 28,
1998 1998
------------- --------------
(unaudited) (unaudited)
Revenues $142,231 $194,635
Net sales $ 3,547 $ 5,420
Net income per common share, basic $ 0.71 $ 1.08
Net income per common share, assuming dilution $ 0.69 $ 1.05
13
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - 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 26, 1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets................ $ 60,152 $ 23,168 $ 2,708 $ - $ 86,028
======= ======= ======= ====== =======
Total assets.................. $151,506 $ 68,987 $ 11,012 $(8,520) $222,985
======= ======= ======= ====== =======
Current liabilities........... $ 37,074 $ 25,289 $(14,918) $ - $ 47,445
======= ======= ======= ====== =======
Total liabilities............. $129,705 $ 55,993 $ (3,108) $ - $182,590
======= ======= ======= ====== =======
Revenues...................... $114,153 $ 56,616 $ - $(5,205) $165,564
======= ======= ======= ====== =======
Gross profit.................. $ 15,588 $ 5,636 $ - $ - $ 21,224
======= ======= ======= ====== =======
Income from operations........ $ 7,291 $ 3,978 $ (3,963) $ - $ 7,306
======= ======= ======= ====== =======
Income (loss) before taxes.... $ 7,390 $ 2,225 $(12,511) $ - $ (2,896)
======= ======= ======= ====== =======
Net income (loss)............. $ 4,235 $ 1,335 $ (7,640) $ - $ (2,070)
======= ======= ======= ====== =======
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
During the third quarter of fiscal year 1999 the Company reevaluated its
strategic decision to exit the manufacturing of airbags within Hildesheim,
Germany. The original plan called for the closure and move of the entire
manufacturing operation to the Company's Czech Republic and United Kingdom
production facilities. While the Company accomplished the move of substantially
all of the labor-intensive passenger airbags, the Company has now decided not to
move the remaining automated airbags, primarily driver and side impact bags. The
Company has identified a new facility within Germany near the existing facility.
The decision to remain in Germany is based on current and anticipated program
delivery commitments. In association with this decision, the Company reviewed
the costs charged to the established reserves for the exit plan and decided it
more appropriate to charge $1.2 million of these costs, previously charged to
the reserve, to the second quarter operations of fiscal year 1999. The Company
believes this new facility will be more cost effective than its existing German
facility, and the Company will be able to retain a majority of its employees
thereby leaving intact a knowledge base for the future manufacture of airbags.
The decision to remain in Germany is based on current and anticipated program
delivery commitments. The Company also plans to commence construction of a new
facility in Poland in addition to expanding its existing facilities in Europe to
meet the future requirements of its customers.
THIRD QUARTER ENDED December 26, 1998 COMPARED TO THIRD QUARTER ENDED
December 31, 1997
Net Sales. Net sales increased by $13.7 million or 28.9% to $61.1 million
for the third quarter of fiscal year 1999 compared to the third quarter of
fiscal year 1998. The increase was primarily attributable to increased sales
volumes of $11.2 million in the European automotive operations, principally ASCI
GmbH. The European operations sales volumes for the third quarter of fiscal year
1999 grew 25% as compared to the second quarter of fiscal year 1999, and 115% as
compared to the third quarter of fiscal year 1998. The remaining increase in
sales during the third quarter of fiscal year 1999 was due to an increase in
sales of $5.9 million in the defense operations resulting from the resumption in
delivery under the Company's 120 millimeter mortar systems contract with the
U.S. Army. This increase was offset by lower sales of $3.4 million in the
Company's automotive metal components operations at Valentec, due to contract
disputes and subsequent loss of such contracts.
Gross Profit. Gross profit decreased by $2.8 million or 37.9% to $4.7
million for the third quarter of fiscal year 1999 compared to the third quarter
of fiscal year 1998. The decrease was primarily attributable to the European
operations, Valentec, SCFTI and to a lesser extent North American airbag
operations. The Company incurred $1.2 million of one-time costs associated with
the move of labor intensive passenger airbag lines from its German facility to
its lower labor cost Czech Republic facility. These costs primarily included,
but are not limited to, duplicate personnel, increased scrap costs and excessive
freight costs between the facilities. The European operating margins also
suffered during the third quarter of fiscal year 1999 due to the initial ramp up
phase of new programs and increased volumes. The decrease in gross profit at
Valentec in the third quarter of fiscal 1999 compared to the third quarter of
1998 was approximately $1.2 million such decrease resulted from lost margin on
lost sales. Gross profit at SCFTI for third quarter of fiscal 1999, was
approximately $1.2 million lower than the third quarter of fiscal year 1998
primarily due to product mix and reduced shipments as a result of certain
customers reassessing inventory levels. Gross profit at the North American
airbag operations for third quarter of fiscal 1999 was approximately $0.3
million less
15
<PAGE>
than the third quarter of fiscal year 1998 as a result of ramp up costs
associated with new programs.
Gross profit as a percentage of sales decreased to approximately 7.6% for
the third quarter of fiscal year 1999 from 15.8% for the third quarter of fiscal
year 1998. The decrease as a percentage of sales was due to the items discussed
above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.5 million or 152.1% to $5.8 million for
the third quarter of fiscal year 1999 compared to the third quarter of fiscal
year 1998. The Company wrote off $1.4 million of receivables associated with a
contract dispute at Valentec. A majority of this receivable was from revenues
recognized during fiscal year 1998. Selling costs increased $0.6 million due to
increased commissions in the North American airbag operations and additional
sales persons at SCFTI and Valentec. Selling, general and administrative
expenses as a percentage of sales increased to 9.4% for the third quarter of
fiscal year 1999 from 4.8% for the third quarter of fiscal year 1998 due to the
above items.
Operating Income. Operating income decreased by $6.4 million or 136.4% to a
loss of $1.7 million for the third quarter of fiscal year 1999 compared to the
third quarter of fiscal year 1998. The decrease was primarily attributable to
the items discussed above.
Other Expense. Other expenses during the third quarter of fiscal year 1999
primarily consisted of a write-off of an investment of approximately $0.5
million and write-down of fixed assets held for sale of approximately $0.7
million. The investment, made in early fiscal year 1997 in an unaffiliated
company, related to a specific type of airbag fabric, which the Company no
longer believes will yield any future benefits. The write-down of an asset held
for sale, purchased in fiscal year 1998, related to a specific line of business
at Valentec where sales did not materialize and accordingly the Company has
decided to sell the related assets.
Interest Expense. Interest expense increased $0.5 million to $3.2 million
for the third quarter of fiscal year 1999 compared to the third quarter of
fiscal year 1998. This increase was primarily attributable to the increase in
debt under the Company's revolving credit facility and the KeyCorp financing
agreement, defined herein.
Income Taxes. The effective income tax rate on pre-tax loss was 37.6% for
the third quarter of fiscal year 1999 compared to a 31.0% effective tax rate on
pre-tax income for the third quarter of fiscal year 1998. The tax rate was lower
during the third quarter of fiscal year 1998 due to the reversal of foreign tax
reserves no longer needed during that period.
Net Income. Net income decreased to a loss of $3.8 million for the third
quarter of fiscal year 1999 compared to income of $1.4 million for the third
quarter of fiscal year 1998. This decrease resulted from the items discussed
above.
Thirty-nine Weeks Ended December 26, 1998 Compared to Nine months Ended
December 31, 1997
Net Sales. Net sales increased by $47.8 million or 40.6% to $165.6 million
for the first thirty-nine weeks of fiscal year 1999 compared to the first nine
months of fiscal year 1998. The increase was primarily attributable to the
inclusion of the operations of SCFTI for the full thirty-nine week period,
increased sales volume in Europe, and increased sales in the defense operations,
offset by lower sales at Valentec. SCFTI was acquired on July 24, 1997 and
included in the Company's entire first thirty-nine weeks of fiscal year
16
<PAGE>
1999, whereas SCFTI was only included for approximately five of the first nine
months of fiscal year 1998. Sales at SCFTI were approximately $22.6 million
higher for the first thirty-nine weeks of fiscal year 1999 compared to the first
nine months of fiscal year 1998. Valentec was acquired effective as of May 22,
1997 and included in the Company's entire thirty-nine weeks of fiscal year 1999,
whereas Valentec was included for only approximately seven of the first nine
months of fiscal year 1998. Sales at Valentec decreased approximately $1.3
million for the first thirty-nine weeks of fiscal year 1999 as compared to the
first nine months of fiscal year 1998. European automotive operations sales
increased approximately $17.1 million during the first thirty-nine weeks of
fiscal year 1999 due to increased volumes. The European operations grew 25%
during the third quarter of fiscal year 1999, and 50% during the first
thirty-nine weeks of fiscal year 1999 as compared to the third quarter of fiscal
year 1998 and the first nine months of fiscal year 1998, respectively. Defense
sales increased approximately $11.1 million for first thirty-nine weeks of
fiscal year 1999 compared to the first nine months of fiscal year 1998 due to
the resumption in delivery under the Company's 120 millimeter mortar systems
contract with the U.S. Army. The decrease in sales at Valentec was primarily the
result of the contract disputes and subsequent loss of such contracts, offset by
the inclusion of Valentec for the additional two months. The increase in sales
was also offset in part by the effects of the General Motors strike and price
decreases to the Company's customers. Sales of airbag fabric, cushions and metal
components to suppliers of General Motors were significantly reduced during the
first thirty-nine weeks of fiscal year 1999. The total impact on sales of the GM
strike during the first thirty-nine weeks of fiscal year 1999 was approximately
$4.5 million.
Gross Profit. Gross profit increased by $0.8 million or 3.8% to $21.2
million for the first thirty-nine weeks of fiscal year 1999 compared to the
first nine months of fiscal year 1998. The increase was primarily attributable
to the inclusion of the operations of SCFTI for the entire first thirty-nine
weeks of fiscal year 1999, which contributed approximately an additional $2.5
million to gross profit, net of gross profit reductions of approximately $1.2
million during the third quarter of fiscal year 1999. The decrease in gross
profit at SCFTI during the third quarter of fiscal year 1999 was primarily due
to product mix and reduced shipments as a result of certain customers
reassessing inventory levels. Gross profit in the Defense operations increased
approximately $1.5 million for first thirty-nine weeks of fiscal year 1999
compared to the first nine months of fiscal year 1998 primarily due to the
resumption in delivery under the Company's 120 millimeter mortar systems
contract with the U.S. Army. These increases were offset by decreases in the
gross profit in the European operations of approximately $1.8 million, in
Valentec of approximately $1.0 million and in North American airbag operations
of approximately $0.3 million. Within the European operations, the Company
incurred approximately $2.4 million of costs associated with the move of labor
intensive passenger airbag lines from the German facility to its lower labor
cost Czech Republic facility, partially offset by the increase in sales volume.
These costs included, but were not limited to, contract laborers, duplicate
personnel, increased scrap costs and excessive freight costs between the
facilities. The European operating margins also suffered during the first
thirty-nine weeks of fiscal year 1999 due to the initial ramp up phase of new
programs. Gross profit also decreased at Valentec primarily as a result of lost
margin on lost sales during the third quarter of fiscal year 1999 of
approximately $1.2 million. Gross profit in the North American airbag operations
was approximately $0.3 million less than the first nine months of fiscal year
1998 as a result of ramp up costs associated with new programs. Additionally,
the impact of the General Motors strike on gross profit of the Company was
approximately $1.3 million during the first thirty-nine weeks of fiscal year
1999. The strike resulted in the loss of gross margin from lost sales during the
period, and the incurrence of costs of additional personnel hired for the ramp
up of certain programs that were delayed. These newly trained employees were not
laid because the Company anticipated a timely ending to the strike.
Gross profit as a percentage of sales decreased to approximately 12.8% for
the first thirty-nine weeks of fiscal year 1999 from 17.4% for the first nine
months of fiscal year 1998.
17
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.7 million or 62.5% to $12.2 million for
the first thirty-nine weeks of fiscal year 1999 compared to the first nine
months of fiscal year 1998. Increased selling, general and administrative
expenses resulted primarily from the inclusion of SCFTI and Valentec for the
entire period during fiscal year 1999. The Company also wrote off $1.4 million
of receivables associated with a contract dispute at Valentec. Selling, general
and administrative expenses as a percentage of sales increased to 7.4% for the
first thirty-nine weeks of fiscal year 1999 from 6.4% for the first nine months
of fiscal year 1998 primarily due to the $1.4 million write off of receivables.
Operating Income. Operating income decreased by $4.6 million or 38.5% to
$7.3 million for the first thirty-nine weeks of fiscal year 1999 compared to the
first nine months of fiscal year 1998. The decrease was primarily attributable
to the items discussed above.
Other Expense. Other expenses during the first thirty-nine weeks of
fiscal year 1999 primarily consisted of a write-off of an investment of
approximately $0.5 million and write-down of fixed assets held for sale of
approximately $0.7 million during the third quarter. The investment, made in
early fiscal year 1997 in an unaffiliated company, related to a specific type of
airbag fabric, which the Company no longer believes will yield any future
benefits. The write-down of an asset held for sale, purchased in fiscal year
1998, related to a specific line of business at Valentec where sales did not
materialize and accordingly the Company has decided to sell the related assets.
Interest Expense. Interest expense increased $3.6 million to $9.0 million
for the first thirty-nine weeks of fiscal year 1999 compared to the first nine
months of fiscal year 1998. This increase was primarily attributable to the
issuance of the Notes, the proceeds of which were used primarily to acquire
SCFTI, and an increase in debt under the Company's revolving credit facility and
the KeyCorp financing agreement.
Income Taxes. The effective income tax rate on pre-tax loss was 28.5% for
the first thirty-nine weeks of fiscal year 1999 compared to an effective income
tax rate of 36.2% on pre-tax income for the first nine months of fiscal year
1998. The tax benefit rate was lower during the first thirty-nine weeks of
fiscal year 1999 due to income at higher foreign tax rates and the majority of
losses at lower domestic rates. Additionally, the tax rate was impacted by the
non-deductible goodwill amortization at Valentec.
Net Income. Net income decreased to a loss of $2.1 million for the first
thirty-nine weeks of fiscal year 1999 compared to a gain of $4.1 million for the
first nine months of fiscal year 1998. This decrease resulted from items
discussed above.
Liquidity and Capital Resources
As the Company's business continues to grow, its equipment and working
capital requirements are also expected to continue to increase. The Company
expects to fund this growth through a combination of cash flow from operations,
equipment financing, revolving credit borrowings and the proceeds from potential
future Company public offerings and/or private placements.
The Company's investment banker, BT Wolfensohn, a division of BT Alex
Brown, Inc., has been reviewing strategic alternatives for the Company,
18
<PAGE>
including the possible sale of the Company or the placement of additional equity
and debt capital. A special committee of the Company's Board of Directors has
been formed to review all such alternatives. There can be no assurance that any
transaction will be consummated.
The Company, ASCI GmbH and Automotive Safety Components International
entered into an agreement with KeyBank National Association, as administrative
agent ("KeyBank"), dated as of May 21, 1997 as amended to date (the "Credit
Agreement"). The Credit Agreement, as amended, consists of a $40.0 million
revolving credit facility for a five year term ($23.2 million outstanding as of
December 26, 1998), bearing interest at LIBOR (5.62875% as of December 26, 1998)
plus 1.00% with a commitment fee of 0.25% per annum for any unused portion. The
Company incurred approximately $470,000 of financing fees and related costs.
These costs have been deferred and will be charged to operations over the
expected term of the Credit Agreement not to exceed 5 years. On July 30, 1998,
the Company and KeyBank entered into Amendment No. 3 to the Credit Agreement to
increase the limits on certain capital expenditures and lease covenants. On
October 9, 1998, the Company entered into Amendment No. 4 to the Credit
Agreement, which increased the revolving credit facility from $27.0 million to
$40.0 million, and added Fleet Bank as a member of the bank syndicate. KeyBank
and Fleet Bank each provide fifty percent of the financing available under the
Credit Agreement and KeyBank will remain as acting agent. In February 1999, the
Credit Agreement was amended to reduce the required ratio of Total Senior Funded
Debt to EBITDA (as each such term is defined in the Credit Agreement) from 1.5
to 1.0 for the period from October 1, 1998 through May 31, 2002 to 2.4 to 1.0
for the period from October 1, 1998 through December 31, 1998 and 1.5 to 1.0 for
the period from January 1, 1999 through May 31, 2002. The Company has used and
expects to continue to use the revolving credit facility to fund working
capital. Letters of credit outstanding were $4.1 million at December 26, 1998.
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.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The Company applied the entire proceeds to satisfy outstanding
indebtedness under the KeyBank revolving credit facility, thereby increasing the
availability under the revolving credit facility. The KeyCorp financing
agreement has a seven-year term, bears interest at 7.09%, and requires monthly
payments of $150,469, secured by certain equipment located at SCFTI.
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old
Notes") to BT Securities Corporation, Alex. Brown & Sons Incorporated and
BancAmerica Securities, Inc. in a transaction not registered under the
Securities Act of 1933, as amended, in reliance upon an exemption thereunder
(the "Debt Offering"). On September 2, 1997, the Company commenced an offer to
exchange (the "Exchange Offer", together with the Debt Offering, the "Offering")
the Old Notes for $90.0 million aggregate principal amount of its 10 1/8% 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 Exchange Notes
pursuant to the terms of the Exchange Offer, which expired on October 1, 1997.
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. The Company made a
semi-annual interest payment on July 15, 1998 to the holders for an aggregate of
$4.6 million. The Company has also accrued through December 26, 1998, as part of
accrued liabilities, approximately $4.1 million of interest, which was paid on
January 15, 1999 as part of the next semi-annual payment. The Company incurred
approximately $3.9 million of fees and expenses related to the Offering. Such
fees have been deferred and will be charged to operations over the expected term
of the Notes, not to exceed 10 years. The Notes are general unsecured
19
<PAGE>
obligations of the Company and are subordinated in right of payment to all
existing and future Senior Indebtedness (as defined in the Indenture pursuant to
which the Notes were issued) 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 Indenture
pursuant to which the notes were issued contains certain restrictive covenants,
including a limitation upon the Company's ability to incur Additional
Indebtedness. Subject to exceptions for specified Permitted Indebtedness, the
Company may not incur Additional Indebtedness under the terms of such Indenture
unless certain conditions are met, including without limitation, that the
Consolidated Fixed Charge Coverage Ratio (as such terms are defined in the
Indenture) of the Company being greater than 2.25 to 1.0. At December 26, 1998,
such ratio was 2.36 to 1.0.
During the first thirty-nine weeks of fiscal year 1999, net cash used by
operations was $7.4 million. Such cash used was substantially for the payments
of interest related to the Notes and income taxes. Cash used by investing
activities was $14.4 million, of which $11.7 million was used for the
acquisition of additional equipment to expand the Company's production capacity
worldwide. The Company also paid additional consideration in connection with the
acquisition of ASCI GmbH, which consisted of a $2.0 million earn-out accrued at
the end of fiscal year 1998. Additionally, ASCI GmbH attained the sales targets
for calendar year 1998 and accordingly the Company has accrued approximately
$2.3 million of additional consideration as earn-out payable as of December 26,
1998. The Company will be required to make the final earn-out payment on or
before April 30, 1999. In addition, the Company incurred certain costs in
connection with the acquisitions of Valentec and SCFTI of approximately $502,000
and $242,000, respectively. Net cash provided by financing activities in the
first thirty-nine weeks of fiscal year 1999 was $17.7 million. Additionally, the
Company has experienced increases in accounts receivable and inventories as the
Company has increased revenues for new airbag cushion programs recently awarded
and set into production. These activities resulted in a net decrease in cash of
$4.6 million in the first thirty-nine weeks of fiscal year 1999.
The Company's capital budget for the following twelve months is
approximately $19.4 million. These capital expenditures are anticipated to be
used to (i) construct a new facility in Eastern Europe for approximately $6.5
million, (ii) purchase a building in Germany for approximately $3.5 million and
(iii) purchase additional machinery and equipment worldwide of approximately
$9.4 million.
Year 2000 Compliance
The year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
State of Readiness and Cost
The Company relies on systems developed by other parties in regard to its
business, accounting and operational software. The Company believes that its
significant business, accounting and operations software is year 2000 compliant.
Additionally, the Company is currently assessing the impact of this issue on its
manufacturing equipment.
The Company is currently evaluating its management information systems
including information technology ("IT") and non-IT computerized systems and has
prepared a plan for year 2000 compliance. This evaluation is expected to be
completed by March 1999. The Company is currently in the process of upgrading
its accounting and manufacturing software systems. The Company expects that the
new systems will be year 2000 compliant. The costs of achieving year 2000
compliance are not expected to exceed $300,000, of which $25,000 has already
been incurred.
20
<PAGE>
Risk
The Company relies on third party suppliers for raw materials, utilities,
and other critical services. The Company's operations could be affected by the
interruption of significant suppliers. The Company is in the process of
evaluating the status of suppliers' compliance with year 2000 issues and is in
the process of determining alternatives and contingency plan requirements. The
cost of this evaluation is expected to be nominal, however, there can be no
assurance that such cost will not be material. In the event that its current
vendors are unable to certify that they will be year 2000 compliant by the
middle of calendar 1999 or if such suppliers are unable to certify that their
failure to be year 2000 compliant will not adversely affect the Company, the
Company will be reviewing its alternatives with respect to other vendors. There
can be no assurance that the Company will be able to find suppliers which are
acceptable to the Company and its customers.
The Company also is dependent on customers for sales and for cash flow.
Interruptions in customers' operations due to year 2000 problems could result in
decreased revenue, increased inventory and cash flow reductions. The Company has
initiated efforts to evaluate its customers' year 2000 risks, as well as
developing alternative sales strategies. The cost of this evaluation is expected
to be nominal, however, there can be no assurance that such cost will not be
material.
Based on information known to date, the Company believes that the most
reasonably likely worst-case year 2000 scenario would entail a significant
interruption in its business, including disruption in the manufacturing and
delivery of its products due to the inability to obtain critical raw materials
and supplies, and loss of revenue due to disruptions in its customers'
operations. The Company could also be significantly affected by the failure of
infrastructure services such as electricity and telephone service. Despite the
Company's efforts in regard to the year 2000 issue, the Company is unable to
quantify the effect of any such failure or the year 2000 scenario referenced
above and no assurance can be given that the Company's business, financial
condition or results of operations will not be materially adversely affected by
the failure of its systems and applications or those operated by other parties
to properly manage dates beyond 1999.
Contingency Plans
Given that the upgrading of its accounting and manufacturing software
systems is expected to be completed by the middle of calendar 1999, the Company
has not prepared a contingency plan pertaining to its information systems and
does not currently believe that a contingency plan is necessary. The Company is
in the process of developing a contingency plan based on its evaluation of
significant suppliers and customers in regard to year 2000 compliance. The
contingency plan includes the identification of backup suppliers, broadening the
customer base and stockpiling raw materials in the months before year 2000.
The above discussion may contain forward-looking statements that involve
risks and uncertainties, including, but not limited to, the ability of the
Company to obtain financing for working capital and to fund capital
expenditures; the impact of competitive products and pricing, product demand and
market condition risks, the marketplace for airbag related products; the ability
of the Company to effectively control costs and to satisfy customers on
timeliness and quality; approval of automobile manufacturers of airbag cushions
currently in production; pricing pressures; labor strikes; the ability of the
Company to realize the remaining proceeds under the Systems Contract; the
continued performance by SCFTI at or above historical levels; world-wide
economic conditions; automotive industry trends and dependence of revenues upon
several major module suppliers.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not Applicable.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
----------- ------------------------------------------------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
-------------------
None
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 9, 1999 BY: /s/ JEFFREY J. KAPLAN
----------------------------
Jeffrey J. Kaplan
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
INCOME.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-27-1999
<PERIOD-END> Dec-26-1998
<CASH> 1,437
<SECURITIES> 0
<RECEIVABLES> 52,768
<ALLOWANCES> 276
<INVENTORY> 25,077
<CURRENT-ASSETS> 86,028
<PP&E> 86,667
<DEPRECIATION> 14,391
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0
0
<COMMON> 66
<OTHER-SE> 40,329
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<SALES> 165,564
<TOTAL-REVENUES> 165,564
<CGS> 138,614
<TOTAL-COSTS> 138,614
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<INCOME-PRETAX> (2,896)
<INCOME-TAX> 826
<INCOME-CONTINUING> (2,070)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,070)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.40)
</TABLE>
