UNITED STATES
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 June 24, 2000
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Debtor-in-Possession)
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Corporate Center, 40 Emery Street, Greenville, South Carolina 29605
(Address and zip code of principal executive offices)
(864) 240-2600
(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
-------- ----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
-------- ----
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of August 7, 2000 was 5,136,316.
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION
The unaudited consolidated financial information at June 24, 2000 and for the
thirteen week period ended June 24, 2000 and the audited consolidated financial
information at March 25, 2000 relate to Safety Components International, Inc.
and its subsidiaries.
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C> <C>
Consolidated Balance Sheets as of June 24, 2000 and
March 25, 2000 3
Consolidated Statements of Operations for the
thirteen weeks ended June 24, 2000 and
June 26, 1999, as restated 4
Consolidated Statements of Cash Flows for the
thirteen weeks ended June 24, 2000 and
June 26, 1999, as restated 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
</TABLE>
2
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 24, March 25,
2000 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 8,112 $ 10,264
Accounts receivable, net ............................................... 42,620 41,281
Receivable from affiliate, net ......................................... 564 564
Inventories, net (Note 4)............................................... 18,701 14,826
Prepaid and other ...................................................... 5,109 2,898
--------- ---------
Total current assets ....................................... 75,106 69,833
Property, plant and equipment, net ............................................... 63,354 65,779
Intangible assets, net ........................................................... 34,450 35,391
Other assets ..................................................................... 1,180 4,557
--------- ---------
Total assets ............................................... $ 174,090 $ 175,560
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise (Note 3):
Current liabilities:
Accounts payable ....................................................... $ 10,762 $ 22,373
Accrued liabilities .................................................... 10,807 16,023
Current portion of long-term obligations ............................... 22,592 131,587
--------- ---------
Total current liabilities .................................. 44,161 169,983
Long-term debt obligations .................................................. 34,537 15,736
Other long-term liabilities ................................................. 4,245 4,281
--------- ---------
Total liabilities not subject to compromise ................ 82,943 190,000
--------- ---------
Liabilities subject to compromise (Note 3) ....................................... 109,834 --
--------- ---------
Commitments and contingencies
Stockholders' deficit:
Preferred stock: $.10 par value per share -
2,000,000 shares authorized and unissued ....................... -- --
Common stock: $.01 par value per share -
10,000,000 shares authorized; 6,629,008
shares issued and 5,136,316 outstanding ........................ 66 66
Common stock warrants ................................................. 51 51
Additional paid-in-capital ............................................ 45,168 45,168
Treasury stock: 1,492,692 shares at cost ............................. (15,439) (15,439)
Accumulated deficit ................................................... (38,920) (36,279)
Cumulative translation adjustment ..................................... (9,613) (8,007)
--------- ---------
Total stockholders' deficit ................................ (18,687) (14,440)
--------- ---------
Total liabilities and stockholders' deficit ................ $ 174,090 $ 175,560
========= =========
</TABLE>
3
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Restated
Thirteen Thirteen
Weeks Ended Weeks Ended
June 24, 2000 June 26, 1999
-------------- -------------
<S> <C> <C>
Net sales ...................................................................... $ 58,034 $ 63,845
Cost of sales, excluding depreciation .......................................... 47,304 52,876
Depreciation ................................................................... 2,218 2,127
-------- --------
Gross profit ................................................ 8,512 8,842
Selling and marketing expenses ................................................. 636 759
General and administrative expenses ............................................ 2,999 2,789
Research and development expenses .............................................. 130 223
Amortization of intangible assets .............................................. 329 575
-------- --------
Income from operations ...................................... 4,418 4,496
Other expense, net ............................................................. 297 8
Interest expense, net (Contractual interest $3,744, net) (Note 1) .............. 1,862 3,459
-------- --------
Income before reorganization items,
tax provision and extraordinary item ..................... 2,259 1,029
Reorganization items (Note 1):
Professional fees and expenses ............................................ 1,200 --
Loss on revaluation of senior subordinated notes .......................... 2,902 --
Interest earned on accumulated cash ....................................... (29) --
-------- --------
(Loss) income before tax provision and extraordinary item ... (1,814) 1,029
Provision for income taxes ..................................................... 254 388
-------- --------
(Loss) income before extraordinary item ..................... (2,068) 641
Extraordinary item - Loss on early extinguishment of debt ...................... (573) --
-------- --------
Net (loss) income .............................................................. $ (2,641) $ 641
======== ========
Net (loss) income per common share, basic:
(Loss) income before extraordinary item ..................... $ (0.40) $ 0.12
Extraordinary item .......................................... $ (0.11) $ --
-------- --------
Net (loss) income per share, basic ............................................. $ (0.51) $ 0.12
======== ========
Weighted average number of shares outstanding, basic ........................... 5,136 5,136
======== ========
Net (loss) income per common share, assuming dilution:
(Loss) income before extraordinary item ..................... $ (0.40) $ 0.12
Extraordinary item .......................................... $ (0.11) $ --
-------- --------
Net (loss) income per share, assuming dilution ................................. $ (0.51) $ 0.12
======== ========
Weighted average number of shares outstanding, assuming dilution ............... 5,136 5,166
======== ========
</TABLE>
4
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Restated
Thirteen Thirteen
Weeks Ended Weeks Ended
June 24, 2000 June 26, 1999
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net cash (used in) provided by operating activities,
excluding reorganization items ..................................... $ (1,464) $ 9,982
Reorganization Items:
Interest received on accumulated cash due to
Chapter 11 proceeding ....................................... 29 --
-------- --------
Net cash (used in) provided by operating activities ... (1,435) 9,982
-------- --------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ........................... (704) (4,779)
Additional consideration and costs for Phoenix Airbag ................ -- (444)
-------- --------
Net cash used in investing activities ................. (704) (5,223)
-------- --------
Cash Flows From Financing Activities:
Repayment of KeyBank revolving credit facility ....................... (37,900) 700
Borrowing on Bank of America DIP revolving credit facility ........... 12,320 --
Proceeds from KeyBank Subordinated DIP term note ..................... 20,900 --
Proceeds from Bank of America DIP term note .......................... 5,600 --
Proceeds from Deutsche Bank mortgage ................................. -- 2,907
Repayments of debt, term notes and long-term obligations ............. (755) (1,128)
-------- --------
Net cash provided by financing activities ............. 165 2,479
-------- --------
Effect of exchange rate changes on cash ........................................ (178) (412)
-------- --------
Change in cash and cash equivalents ............................................ (2,152) 6,826
Cash and cash equivalents, beginning of period ................................. 10,264 10,607
-------- --------
Cash and cash equivalents, end of period ....................................... $ 8,112 $ 17,433
======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest .............................................. $ 700 $ 1,002
Income taxes .......................................... (126) --
</TABLE>
5
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Note 1 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 25, 2000. 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.
As discussed in Note 2, on April 10, 2000 (the "Petition Date"), the
Company and certain of its U.S subsidiaries (including Safety Components Fabric
Technologies, Inc. and Automotive Safety Components International, Inc., but
excluding Valentec International Corporation, LLC, Valentec Systems Inc. and
Galion, Inc.), collectively, "Safety Filing Group," filed a voluntary petition
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the District of Delaware (Case Nos. 00-1644(JJF) through 00-1650(JJF)).
The Company's financial statements as of June 24, 2000 have been prepared
in accordance with Statement of Position 90-7, "Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code", issued by the American Institute
of Certified Public Accountants ("SOP 90-7"). In accordance with SOP 90-7, all
pre-petition liabilities of SCI that are subject to compromise under the plan of
reorganization are segregated in the Company's condensed consolidated balance
sheet as liabilities subject to compromise. These liabilities are recorded at
the amounts expected to be allowed as claims in the Chapter 11 case rather than
as estimates of the amounts for which those allowed claims may be settled as a
result of the Plan of Reorganization (as defined In Note 2). As of the effective
date of the Plan of Reorganization, the Company will adopt "fresh start"
reporting as defined in SOP 90-7. In accordance with "fresh start" reporting,
the reorganization value of the company will be allocated to the emerging
entity's specific tangible and identified intangible assets. Excess
reorganization value, if any, will be reported as "reorganization value in
excess of amounts allocable to identifiable assets" and amortized over a period
of years as yet not determined. As a result of the adoption of such "fresh
start" reporting, the Company's post-emergence financial statements
("successor") will not be comparable with its pre-emergence financial statements
("predecessor"), including the historical financial statements included in this
quarterly report.
The accompanying statements of operations reflect certain restructuring
fees and expenses consisting of professional fees and expenses directly related
to the debt restructuring and reorganization. Interest expense on the Company's
senior subordinated notes has been reported to the Petition Date. Such interest
expense was not reported subsequent to that date because it will not be paid
during the bankruptcy case and will not be an allowed claim under the Plan of
Reorganization. The difference between reported interest expense and stated
contractual interest expense is approximately $1.9 million for this seventy-five
day period.
6
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
In accordance with SOP 90-7, a significant portion of the Company's
outstanding debt, related accrued interest and pre-petition accounts payable is
classified as "liabilities subject to compromise" at June 24, 2000. Comparable
items in the prior year have not been reclassified to the presentation required
by SOP 90-7. See Note 3 for a complete description of liabilities subject to
compromise.
The accompanying condensed consolidated financial statements include the
financial position and results of operations of those operating subsidiaries of
the Company which are not parties to the Chapter 11 filing. The following
condensed combined financial statements of the Safety Filing Group have been
prepared using the equity method of accounting for reporting the results of
operations of all wholly-owned subsidiaries of the Company which are not debtors
in the Chapter 11 case. The long-term intercompany balances include the Parent
company's investment in subsidiaries for those subsidiaries not included in
bankruptcy proceedings.
Safety Filing Group
Debtor-in-Possession
Condensed Combined Balance Sheet (Unaudited)
(In Thousands)
June 24, 2000
-------------
ASSETS
Current assets
Cash and cash equivalents $ 2,366
Accounts receivable, net 23,438
Receivable from affiliate, net 564
Inventories, net 13,357
Prepaid and other 2,529
--------
Total current assets 42,254
Property, plant and equipment, net 29,766
Intangible assets, net 20,865
Other assets 9,156
Intercompany balances with companies not
debtors in bankruptcy, net 50,243
--------
Total assets $152,284
========
7
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Safety Filing Group
Debtor-in-Possession
Condensed Combined Balance Sheet (Unaudited)
(In Thousands)
June 24, 2000
-------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise:
Current liabilities
Accounts payable $ 2,092
Accrued liabilities 5,357
Current portion of long-term
obligations 21,677
--------
Total current liabilities 29,126
Long-term debt obligations 31,326
Other long-term liabilities 685
--------
Total liabilities not
subject to compromise 61,137
Liabilities subject to compromise 109,834
Stockholders' deficit:
Preferred stock --
Common stock 66
Common stock warrants 51
Additional paid-in-capital 45,168
Treasury stock (15,439)
Accumulated deficit (38,920)
Cumulative translation adjustment (9,613)
--------
Total stockholders' deficit (18,687)
--------
Total liabilities and stockholders'
deficit $152,284
========
8
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Safety Filing Group
Debtor-in-Possession
Condensed Combined Statement of Operations (Unaudited)
(In Thousands)
Three Months Ended
June 24, 2000
------------------
Net sales $ 34,368
Cost of sales, excluding depreciation 28,007
Depreciation 1,043
--------
Gross profit 5,318
Selling and marketing expenses 527
General and administrative expenses 1,784
Research and development expenses 50
Amortization of goodwill 198
--------
Income from operations 2,759
Other expense, net 78
Interest expense, net 1,129
Equity in earnings of non-bankruptcy
subsidiaries, net of tax (558)
--------
Income before reorganization items,
tax provision and extraordinary item 994
Reorganization items, net 4,073
--------
Loss before tax provision and
extraordinary item (1,963)
Provision for income taxes 105
--------
Loss before extraordinary loss (2,068)
Extraordinary loss (573)
--------
Net loss $ (2,641)
========
9
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Restatement of Previously Issued Financial Statements
Subsequent to the issuance of the consolidated financial statements of SCI
for the fiscal years ended March 27, 1999 and March 28, 1998, the Company
determined that the reported results for those years were misstated. The
Company's audit committee with the assistance of independent counsel and an
independent public accounting firm conducted a thorough investigation and
determined that a restatement of the Company's financial statements would be
required for each of the fiscal years 1999 and 1998 and the twenty-six weeks
ended September 25, 1999, as well as applicable quarterly periods contained
within such years and twenty-six week period. The nature of the restatement is
discussed more fully in the Company's Form 10-K for the year ended March 25,
2000. The restatement adjustments impacting the thirteen weeks ended June 26,
1999 are summarized as follows (in thousands):
Thirteen weeks ended
June 26, 1999
---------------------------
Sales Net Income
---------------------------
Originally Filed $ 63,845 $ 620
Previously Reported Adjustments -- 29
-------- --------
Subtotal 649 63,845
Additional Adjustments -- (8)
-------- --------
As Restated $ 63,845 $ 641
======== ========
Note 2 Financial Restructuring and Chapter 11 Case
The deterioration in the Company's financial condition that became evident
in fiscal 1999, arising from a confluence of negative developments, particularly
in the non-core businesses, caused it to experience material liquidity
constraints in fiscal 2000. In addition, following the Company's restatement of
its earnings and a default with respect to obligations under its credit
agreement, KeyBank National Association, as administrative agent, and Fleet Bank
(collectively, the "Senior Lenders") notified the trustee for the Company's 10
1/8% senior subordinated notes (the "Notes") that they were exercising their
rights to block a scheduled interest payment due on January 18, 2000.
On February 18, 2000, the common stock of the Company was delisted from the
NASDAQ stock market.
The Company and an informal committee comprised of holders of over
two-thirds in aggregate dollar amount of the Notes began negotiations and in
early April 2000 reached an agreement (the "Restructuring Agreement") that would
be effected through a voluntary filing under Chapter 11 of the United States
Bankruptcy Code. Pursuant to the Restructuring Agreement, the claims of the
holders of the Company's senior subordinated notes ("Noteholders") will be
converted in the right to receive 96.8% of the Company's equity after it emerges
from Chapter 11. The current shareholders, excluding Robert Zummo, the Company's
Chairman and Chief Executive Officer, will receive 3.2% of the Company's post
bankruptcy equity and warrants to acquire 12% of such equity. In addition to the
Restructuring Agreement, the Company also reached an agreement with the Senior
Lenders subject to a paydown, to replace the KeyBank Credit Agreement (as
hereinafter defined) with a post-petition subordinated debtor-in-possession
("DIP") financing facility.
10
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
On the Petition Date, the Safety Filing Group filed a voluntary petition
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the District of Delaware (Case Nos. 00-1644(JJF) through 00-1650(JJF)). The
Chapter 11 cases of the Safety Filing Group were assigned to the United States
District Court for the District of Delaware (the "Court") before District Judge
Farnan.
On April 26, 2000, the Safety Filing Group received Court approval of a
$30.6 million senior DIP financing facility that it had executed with Bank of
America, N.A. The senior DIP financing is expected to provide adequate funding
for all post-petition trade and employee obligations, the partial paydown of the
pre-petition secured debt, as well as the Company's ongoing operating needs
during the restructuring process. In conjunction with the closing of the senior
DIP financing facility on May 9, 2000, the Senior Lenders received a principal
paydown of approximately $17 million and retained the remaining approximately
$20.9 million portion of their indebtedness as an 11% per annum post-petition
subordinated DIP facility as a replacement of their pre-petition credit
facility.
On May 19, 2000, Safety Filing Group filed its Statement of Financial
Affairs and Schedules of Assets and Liabilities and, on May 24, 2000, the Court
entered an order setting July 7, 2000 as the general filing deadline for
creditors to file their proof of claims.
On June 12, 2000, the Safety Filing Group filed with the United States
Bankruptcy Court its Joint Plan of Reorganization (the "First Plan") pursuant to
Rule 3016 (b), and the related disclosure statement pursuant to Section 1125 of
the Bankruptcy Code. The First Plan (as amended, the "Plan") and the related
disclosure statement (the "Disclosure Statement") were amended on July 18, 2000
and July 19, 2000. On July 19, 2000, the United States District Court for the
District of Delaware approved the Disclosure Statement and set August 30, 2000
as the date to consider confirmation of the Plan. The Court also set August 25,
2000 as the deadline for creditors and equity holders to vote to accept or
reject the Plan. The Plan seeks to implement the debt to equity conversion of
the claims of the Noteholders as set forth in the Restructuring Agreement. Under
the Plan, new shares of common and preferred stock would be authorized and new
common stock would be issued. All Noteholder claims in the aggregate amount of
approximately $96.8 million will be completely satisfied through the ratably
proportionate distribution of 96.8% of the new common stock (subject to dilution
through the exercise of warrants or other stock as may be issued under the
Plan). The holders of all other unsecured claims will receive a time-phased,
payout of 100% of the principal amount of their allowed pre-Petition Date
unsecured claims.
11
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Note 3 Liabilities Subject to Compromise
Liabilities included in the accompanying consolidated balance sheet at June
24, 2000, which are subject to compromise under the terms of the Plan are as
follows (in thousands):
Trade and other miscellaneous claims $ 13,050
10 1/8% Senior Subordinated Notes 90,000
Accrued interest 6,784
---------
Total liabilities subject to compromise $ 109,834
=========
See Note 2 for further discussion of the impact of the Plan on the above
liabilities subject to compromise.
Note 4 Composition of Certain Consolidated Balance Sheet Components
(in thousands)
June 24, 2000 March 25, 2000
------------- --------------
Inventories:
Raw materials $ 8,835 $ 6,189
Work-in-process 7,370 5,988
Finished goods 2,496 2,649
------- -------
$18,701 $14,826
======= =======
12
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Note 5 Long-Term Obligations (in thousands)
<TABLE>
<CAPTION>
June 24, 2000 March 25, 2000
------------- --------------
<S> <C> <C>
Senior Subordinated Notes due July 15, 2007, bearing
interest at 10 1/8% $ 90,000 $ 90,000
KeyBank Subordinated DIP term note due April 7, 2003,
bearing interest at 11% 20,900 0
KeyBank revolving credit facility, bearing interest at 3.0% over
LIBOR, refinanced on May 9, 2000 0 37,850
Bank of America DIP revolving credit facility due April 7, 2001,
bearing interest at 1.25% over Prime 12,320 0
Bank of America DIP term note, principal due in monthly
installments of $94 beginning June 1, 2000 to April 7, 2001,
at which time the balance is due, bearing interest at 1.25%
over Prime 5,506 0
KeyCorp equipment note due July 10, 2005, bearing
interest at 7.09% 7,969 8,074
Bank Austria mortgage note, due March 31, 2007, bearing
interest at 1.0% over LIBOR 5,250 5,625
Deutsche Bank mortgage note, $801 due June 30, 2009 and
$1,335 due June 30, 2019, bearing interest at 4.05% and
3.75%, respectively 1,915 2,136
Note payable, principal due in annual installments of $212
beginning January 12, 1999 to January 12, 2002, bearing
interest at 7.22% in semiannual installments 376 398
A.1 Credit Corp note, due in monthly installments of $29 until
November 3, 2001, bearing interest at 7.57% (See Note 1). 465 526
Capital equipment notes payable, due in monthly installments
with various interest rates of 8.02% to 16.0%, maturing at
various dates through June 2002 2,428 2,714
-------- ----------
Total Obligations 147,129 147,323
Less - Obligations subject to compromise (Note 3) (90,000) 0
Less - Current portion not subject to compromise (22,592) (131,587)
-------- ----------
Total Long-Term Obligations not subject to compromise $ 34,537 $ 15,736
======== ==========
</TABLE>
On April 26, 2000, the Safety Filing Group received Court approval of a
$30.6 million senior DIP financing facility that it had executed with Bank of
America, N.A. The senior DIP financing is expected to provide adequate funding
for all post petition trade and employee obligations, the partial paydown of the
pre-petition secured debt, as well as the Company's ongoing operating needs
during the restructuring process. In conjunction with the closing of the senior
DIP financing facility on May 9, 2000, the Senior Lenders received a principal
paydown of approximately $17 million and retained the remaining
13
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
approximately $20.9 million portion of their indebtedness as an 11% per annum
post-petition subordinated DIP facility as a replacement of their pre-petition
credit facility. The post-petition senior and subordinated DIP facilities
require the Company to meet certain crossover financial covenants. These
covenants include a minimum quarterly EBITDA and Fixed Charge Coverage Ratio (as
defined) and a minimum monthly EBITDA (as defined). For the quarter ending June
24, 2000 (and all related months thereof), the Company is in compliance of all
financial covenants. Additionally, the DIP facilities contain certain
restrictive covenants that impose limitations upon, among other things, the
Company's ability to borrow monies; become or remain liable with respect to any
guaranty; acquire investments; make capital expenditures; declare or make
dividends or other distributions; merge, consolidate or dispose of assets; incur
liens; enter into capitalized lease and operating lease agreements and engage
in sale and lease-back transactions.
See Form 10-K from the year ended March 25, 2000 for further discussion on
the various debt instruments noted above.
Note 6 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>
Restated
Thirteen weeks ended Thirteen weeks ended
June 24, 2000 June 26, 1999
-------------------- --------------------
<S> <C> <C>
Net (loss) income $ (2,641) $ 641
========= =======
Weighted average number of common
shares used in basic earnings per share 5,136 5,136
Effect of dilutive securities:
Stock options -- 29
Warrants -- 1
--------- -------
Weighted average number of common
shares and dilutive potential common
stock used in diluted earnings per share 5,136 5,166
========= =======
</TABLE>
Options on approximately 1,208,000 and 978,000 shares of common stock were
not included in computing diluted earnings per share as of June 24, 2000 and
June 26, 1999, respectively, because their effects were antidilutive. Warrants
for approximately 124,000 and 104,000 were not included in the computation of
diluted earnings per share at June 24, 2000 and June 26, 1999, respectively,
because their effects were antidilutive.
Pursuant to the Restructuring Agreement discussed in Note 2, the claims of
the Noteholders will be converted in the right to receive 96.8% of the Company's
equity after it emerges from Chapter 11. The current shareholders, excluding
Robert Zummo, the Company's Chairman and Chief Executive Officer, will receive
3.2% of the Company's post-bankruptcy equity and warrants to acquire 12% of such
equity.
14
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Note 7 Comprehensive Income (in thousands)
SFAS No. 130, "Reporting Comprehensive Income", 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 foreign currency translation adjustment.
Comprehensive loss is as follows:
<TABLE>
<CAPTION>
Restated
Thirteen weeks ended Thirteen weeks ended
June 24, 2000 June 26, 1999
-------------------- --------------------
<S> <C> <C>
Net (loss) income $(2,641) $ 641
Foreign currency translation adjustment (1,606) (1,007)
------- -------
Comprehensive loss $(4,247) $ (366)
======= =======
</TABLE>
Note 8 Contingencies
Net Operating Loss Carryforwards - At March 25, 2000, the Company estimates
it had regular net operating loss carryforwards for tax purposes of
approximately $50.0 million. However, these losses will be substantially reduced
and limited in use as a result of the implementation of the Company's Plan of
Reorganization (discussed in Note 2). In general, the Internal Revenue Code
provides that a debtor in a bankruptcy case, such as the Company's, must reduce
its tax attributes--such as its NOL carryforwards and current year NOLs, tax
credits, and tax basis in certain assets--by any cancellation of indebtedness
("COD"). COD is the amount by which the indebtedness discharged exceeds any
consideration given in exchange therefor. The Company anticipates that it will
recognize significant COD, which will result in significant attribute reduction
as a result of the exchanges occurring under the Plan of Reorganization. Such
attribute reduction will substantially reduce the NOL carryforwards that might
otherwise be available to offset future income.
In addition, any NOLs and carryforwards and certain other tax attributes
remaining after the attribute reduction outlined above will be subject to the
limitations imposed by Section 382 of the Internal Revenue Code. Such
limitations apply on certain changes in ownership, including changes such as
those occurring under the Plan of Reorganization. The effect of these
limitations is to limit the utilization of the net operating loss carryforwards
and certain built-in losses to an amount equal to the value of the company
multiplied by the Federal long-term tax exempt rate. Even before giving effect
to the limitations occurring under the Plan of Reorganization, due to the
Company's operating history, it is uncertain that it will be able to utilize all
deferred tax assets. Therefore, a valuation allowance has been provided equal to
the deferred tax assets remaining after deducting all deferred tax liabilities.
Environmental Issues and Legal Proceedings - See Form 10-K from the year
ended March 25, 2000 for further discussion on the various environmental issues
and legal proceedings.
15
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Note 9 Supplemental Guarantor Condensed Consolidating Financial Statements
(in thousands)
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 June 24, 2000.
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
-------------- ------------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Current assets.......................... $ 46,920 $23,939 $4,247 $0 $ 75,106
Total assets............................ 112,009 61,889 8,439 (8,247) 174,090
Current liabilities..................... 22,469 23,833 ( 2,144) 3 44,161
Total liabilities not subject to
compromise............................ 123,972 53,969 (95,001) 3 82,943
Liabilities subject to compromise... 11,972 0 97,862 0 109,834
Revenues............................... $ 40,355 $20,421 $0 $(2,742) $ 58,034
Gross profit (loss)...................... 5,729 3,045 (37) (225) 8,512
Income (loss) from operations....... 3,856 1,950 (1,358) (30) 4,418
Income (loss) before taxes and
extraordinary item..................... 4,151 1,029 (6,953) (41) (1,814)
Net income (loss)...................... 4,046 764 (7,527) 76 (2,641)
</TABLE>
Note 10 Business Segment Information
The Company's operations have been classified into two operating segments:
(i) Automotive and Fabric - The Company manufactures fabrics and automotive
airbags for several domestic and foreign automobile manufacturers under
contracts with major airbag systems integrators. Included in Automotive and
Fabric are technical fabric products, which are produced using similar
production processes as for airbag fabric; and (ii) Metal and Defense - The
Company acts as a systems integrator for the U.S. Army, coordinating the
manufacture and assembly of components supplied by various subcontractors. The
Company is also a manufacturer of projectiles and other metal components for
small to medium caliber training and tactical ammunition for the U.S. Armed
Forces and contractors within the defense business. Included in Metal and
Defense are metal components manufactured for commercial purposes, which are
produced using similar production processes as the defense-related metal
components.
In the second quarter of fiscal year 2000, management determined that the
Company's reportable operating segments, disclosed in previous filings, were no
longer consistent with the manner in which management reviews the Company's
business operations and assesses the performance of its various product lines.
Accordingly, the Company realigned its reportable operating segments to more
appropriately reflect management's current practice. The Company evaluates
performance and allocates resources based on earnings (operating income) before
interest, taxes, depreciation, and amortization ("EBITDA"). The Company's
reportable segments are differentiated by product and production process.
16
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
The reportable segments are each managed separately because they manufacture
distinct products with different production processes. Amounts for the first
quarter of fiscal year 2000 have been reclassified to conform with management's
revised approach to managing the business. Summarized financial information by
business segment is as follows (in thousands):
<TABLE>
<CAPTION>
Restated
Thirteen weeks Thirteen weeks
ended June 24, 2000 ended June 26, 1999
-------------------- -------------------
<S> <C> <C>
Revenues from external customers:
Airbag cushions $33,228 $33,187
Airbag fabric 12,952 12,741
Technical fabric 5,867 6,617
------- -------
Automotive and fabrics $52,047 $52,545
======= ========
Systems integrator $2,366 $ 6,312
Metal components 3,621 4,988
------- -------
Metal and defense $ 5,987 $11,300
======= =======
EBITDAR * :
Automotive and fabrics $ 8,113 $ 7,414
Metal and defense 95 1,004
Corporate (1,243) (1,220)
-------- -------
$ 6,965 $ 7,198
======= =======
* EBITDAR is defined as income from operations before depreciation, amortization
and reorganization items.
</TABLE>
Note 11 Subsequent Events
As of July 21, 2000, the Company entered into a definitive agreement to
sell its Valentec Systems, Inc. subsidiary ("Systems") to a management-led group
for $4.148 million in cash. The sale is subject to a number of conditions,
including approval by the Bankruptcy Court and the Company's Lenders. The
hearing before the Bankruptcy Court has been set for August 30, 2000.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarter Ended June 24, 2000, Compared to First Quarter June 26, 1999,
as restated
Net Sales. Net sales decreased by $5.8 million or 9.1% to $58.0 million for
the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000.
The decrease was primarily attributable to decreased sales volumes in the metal
and defense business (or the "non-core operations") of $5.3 million or 47.0% of
their business over prior year. European automotive operations decreased $3.6
million or 17.0% primarily due to adverse foreign currency translation rates
(approximately 11.7%) and lower volume. Technical fabrics sales decreased $0.8
million or 11.3% compared to the first quarter of fiscal 2000 due to a planned
reduction to make available weaving equipment to support the demand for airbag
fabric to the Company's North American automotive operations. North American
automotive operations increased $3.9 million or 10.0% compared to the first
quarter of fiscal 2000 due to stronger demand in airbag fabric and cushions. The
Company anticipates that results of its operations for its second quarter,
typically the Company's weakest fiscal quarter due to the customary shutdown of
the industry's automotive plants, will be negatively affected by expected
continued poor performance of its non-core operations. The Company continues to
consider its strategic alternatives regarding its non-core operations so that it
can focus on the profitable automotive and fabrics operations. See Note 11 to
Notes to Consolidated Financial Statements for further information regarding the
proposed disposition of Valentec Systems, Inc.
Gross Profit. Gross profit decreased by $330,000 or 3.7% for the first
quarter of fiscal 2001 compared to the first quarter of fiscal 2000. The
decrease was primarily attributable to decreased sales in the non-core
operations, technical fabrics and European automotive operations, partially
offset by increased sales and margin gains in North America automotive
operations arising from efficiency improvements, product mix, and related
success in the Lean Manufacturing program. Gross profit as a percentage of sales
increased to approximately 14.7% for the first quarter of fiscal 2001 from 13.8%
for the first quarter of fiscal 2000. The increase as a percentage of sales was
due to the items discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $87,000 or 2.9% to $3.6 million for the
first quarter of fiscal 2001 compared to the first quarter of fiscal 2000.
Selling, general and administrative expenses as a percentage of sales increased
to 6.3% for the first quarter of fiscal 2001 from 5.6% for the first quarter of
fiscal 2000. The increase as a percentage of sales was primarily a result of a
decline in sales in the non-core business.
Research and Development Expenses. Research and development expenses
decreased by $93,000 or 41.7% to $130,000 for the first quarter of fiscal 2001
compared to the first quarter of fiscal 2000. The research and development costs
were incurred at SCFTI in its technical fabrics business.
Operating Income. Operating income decreased by $78,000 or 1.7% to $4.4
million for the first quarter of fiscal 2001 compared to the first quarter of
fiscal 2000. The decrease was primarily attributable to the items discussed
above, and partially offset by reduced amortization of intangible assets.
18
<PAGE>
Other Expense. The Company recorded a foreign translation loss of $342,000
during the first quarter of fiscal 2001 as compared to an insignificant amount
in the first quarter of fiscal 2000.
Interest Expense. Interest expense decreased $1.6 million to $1.9 million
for the first quarter of fiscal 2001 compared to the first quarter of fiscal
2000. The decrease was attributable to the Company not recording interest
expense of $1.9 million after April 10, 2000 on its Notes because of the Chapter
11 bankruptcy proceeding.
Reorganization Items. Professional fees and expenses totaled $1.2 million
for the first quarter of fiscal 2001. Such expenses represent fees and expenses
of the Company's legal counsel, the financial and legal counsel for the Senior
Lenders and Noteholders, and other professionals associated with the Company's
financial restructuring and Chapter 11 bankruptcy proceeding. The revaluation of
the Notes totaled $2.9 million, representing the write-off of related deferred
financing costs.
Income Taxes. The income tax rate applied against pre-tax loss was 11.3%
for the first quarter of fiscal 2001 compared to 37.7% against pre-tax income
for the first quarter of fiscal 2000. The tax rate was lower during the first
quarter of fiscal year 2001 due to recognizing tax expense for only certain
foreign operations. See Note 8 to Notes to Consolidated Financial Statements for
further information regarding the Net Operating Loss Carryforwards.
Extraordinary Item. The write-off of the deferred financing costs
associated with the early termination of the KeyBank Credit Agreement totaled
$573,000.
Net (Loss) Income. The Company experienced a net loss of $2.6 million for
the first quarter of fiscal 2001 compared to net income of $641,000 for the
first quarter of fiscal 2000. This loss was a result of the items discussed
above.
Liquidity and Capital Resources
The Company's equipment and working capital requirements will continue to
increase as a result of the anticipated growth of the Automotive and Fabrics
operations. This growth is expected to be funded through a combination of cash
flows from operations, equipment financing and through the use of lines of
credit with the Company's Lenders, as discussed in the following paragraphs.
Through thirteen weeks of fiscal 2001, net cash used in operations was $1.4
million. This is the result of the increase of accounts receivable, inventories
and prepaid assets, offset by non-cash charges in the Company's net loss. Cash
used by investing activities was $704,000, which represents capital expenditures
for the Company. Net cash provided by financing activities through thirteen
weeks of fiscal 2001 was $165,000, representing primarily the net proceeds from
DIP financing, offset partially by payments for term notes, capital leases and
mortgages. All of the activities noted above resulted in a net decrease in cash
of $2.1 million in the first thirteen weeks of fiscal year 2001.
On April 26, 2000, in conjunction with the filing of the Chapter 11
petition, the Safety Filing Group received Court approval of a $30.6 million
senior DIP financing facility that it had executed with Bank of America, N.A.
The senior DIP financing is expected to provide adequate funding for all
post-petition trade and employee obligations, the partial paydown of the
pre-petition secured debt, as well as the
19
<PAGE>
Company's ongoing operating needs during the restructuring process. Upon closing
of the senior DIP financing facility on May 9, 2000, the Senior Lenders received
a principal paydown of approximately $17 million and retained the remaining
approximately $20.9 million portion of their indebtedness as an 11% per annum
post-petition subordinated DIP facility as a replacement of their KeyBank Credit
Agreement.
The Company is in the process of negotiating with potential exit financing
lenders to review its options of funding of post-bankruptcy needs, however no
commitment has been received to date. Although several lenders, having completed
their due diligence, have provided the Company with their strong expression to
provide such funding, no formal commitment has been solicited or received.
The Company and an informal committee comprised of holders of over
two-thirds in aggregate dollar amount of the Notes began negotiations and in
early April 2000 reached an agreement (the "Restructuring Agreement") that would
be effected through a voluntary filing under Chapter 11 of the United States
Bankruptcy Code. Pursuant to the Restructuring Agreement, the claims of the
holders of the Company's senior subordinated notes ("Noteholders") will be
converted in the right to receive 96.8% of the Company's equity after it emerges
from Chapter 11. The current shareholders, excluding Robert Zummo, the Company's
Chairman and Chief Executive Officer, will receive 3.2% of the Company's post
bankruptcy equity and warrants to acquire 12% of such equity.
Private Securities Litigation Reform Act of 1995
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 sufficient exit financing and emerge from bankruptcy in
accordance with the terms of the Plan; the impact of competitive products and
pricing, dependence of revenues upon several major module suppliers; worldwide
economic conditions; the results of cost savings programs being implemented;
domestic and international automotive industry trends; 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 continued performance by its core operations at or above
historical levels; the ability of the Company to consummate the proposed sale of
Systems; and the ability to successfully identify strategic alternatives for the
Company's other noncore operations or otherwise return such operations to
profitability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
To the extent that amounts borrowed under the DIP financing facility and
the KeyBank Credit Agreement are outstanding, the Company has market risk
relating to such amounts because the interest rates under the DIP financing
facility and the KeyBank Credit Agreement are variable.
The Company's operations in Germany, the UK and the Czech Republic expose
the Company to currency exchange rates risks. Currently, the Company does not
enter into any hedging arrangements to reduce this exposure. The Company is not
aware of any facts or circumstances that would significantly impact such
exposures in the near-term. If, however, there was a sustained decline of these
currencies versus the U.S. dollar, then the consolidated financial statements
could be materially adversely affected.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
After the Company's announcement of the restatements in November 1999, the
Company and several of its present or former officers and directors were named
defendants in a class action litigation commenced by shareholders of the Company
in the United States District Court for the District of New Jersey. Eight
separate lawsuits were filed, alleging violations of the federal securities
laws, and all have been consolidated into one action. The parties are currently
negotiating a settlement of the litigation, which will require approval by the
District Court, as well as the federal bankruptcy court in which the Company's
Chapter 11 petition is currently pending. Management does not presently believe
that a resolution consistent with present negotiations would have a material
effect on the financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Following the Company's restatement of its earnings and a default with
respect to obligations under the KeyBank Credit Agreement, the Senior Lenders
notified the trustee for the Notes that they were exercising their rights to
block a scheduled interest payment due on January 18, 2000.
The Company and an informal committee comprised of holders of over
two-thirds in aggregate dollar amount of the Notes began negotiations and in
early April 2000 reached an agreement (the "Restructuring Agreement") that would
be effected through a voluntary filing under Chapter 11 of the United States
Bankruptcy Code. Pursuant to the Restructuring Agreement, the claims of the
holders of the Company's senior subordinated notes will be converted in the
right to receive 96.8% of the Company's equity after it emerges from Chapter 11.
The current shareholders, excluding Robert Zummo, the Company's Chairman and
Chief Executive Officer, will receive 3.2% of the Company's post bankruptcy
equity and warrants to acquire 12% of such equity. In addition to the
Restructuring Agreement, the Company also reached an agreement with the Senior
Lenders subject to a paydown, to replace their credit agreement with a
post-petition subordinated debtor-in-possession financing facility.
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
submittede electronically to the
Securities and Exchange Commission
for information only and not filed.
(b) Reports on Form 8-K.
--------------------
Not applicable.
21
<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: August 8, 2000 BY: /s/ Brian P. Menezes
-----------------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
