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 December 25, 1999
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
----------------------------------------------------
(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, SC 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_____
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of February 8, 2000, was 5,136,316
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION
The unaudited consolidated financial information at December 25, 1999 and for
the thirteen week and thirty-nine week period ended December 25, 1999 and the
unaudited consolidated financial information at March 27, 1999, as restated,
relate to Safety Components International, Inc. and its subsidiaries. See Note 1
of the Notes to Consolidated Financial Statements for information on these
financial statements.
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 25, 1999 and 3
March 27, 1999, as restated
Consolidated Statements of Operations for the
thirteen weeks ended December 25, 1999 and
December 26, 1998, as restated 4
Consolidated Statements of Operations for the
thirty-nine weeks ended December 25, 1999 and
December 26, 1998, as restated 5
Consolidated Statements of Cash Flows for the
thirty-nine weeks ended December 25, 1999 and
December 26, 1998, as restated 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
2
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Restated
December 25, March 27,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 7,402 $ 10,607
Accounts receivable, net ............................................ 39,057 42,671
Receivable from affiliate, net ...................................... 582 4,554
Inventories ......................................................... 16,301 21,445
Prepaid and other ................................................... 6,575 6,296
--------- ---------
Total current assets ................................... 69,917 85,573
Property, plant and equipment, net ............................................. 69,241 68,697
Intangible assets, net ......................................................... 37,440 57,606
Other assets ................................................................... 11,896 6,094
--------- ---------
Total assets ........................................... $ 188,494 $ 217,970
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 18,268 $ 28,093
Earnout payable ..................................................... -- 2,111
Accrued liabilities ................................................. 19,300 16,107
Current portion of long-term obligations ............................ 41,576 3,988
Senior subordinated debt ............................................ 90,000 --
--------- ---------
Total current liabilities .............................. 169,144 50,299
Long-term debt obligations ..................................................... 16,823 53,700
Senior subordinated debt ....................................................... -- 90,000
Other long-term liabilities .................................................... 1,620 1,515
--------- ---------
Total liabilities ...................................... 187,587 195,514
--------- ---------
Commitments and contingencies
Stockholders' equity:
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 1
Additional paid-in-capital .......................................... 45,168 45,168
Treasury stock, 1,492,692 shares at cost ............................ (15,439) (15,439)
Accumulated deficit ................................................. (21,206) (1,134)
Accumulated other comprehensive income:
Cumulative translation adjustment ........................... (7,733) (6,206)
--------- ---------
Total stockholders' equity ............................. 907 22,456
--------- ---------
Total liabilities and stockholders' equity ............. $ 188,494 $ 217,970
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Restated
Thirteen Thirteen
Weeks Ended Weeks Ended
December 25, 1999 December 26, 1998
----------------- -----------------
<S> <C> <C>
Net sales ...................................................... $ 55,254 $ 60,900
Cost of sales, excluding depreciation .......................... 46,151 53,674
Depreciation ................................................... 2,231 2,049
----------------- -----------------
Gross profit ..................................... 6,872 5,177
Selling and marketing expenses ................................. 663 957
General and administrative expenses ............................ 4,267 4,924
Research and development expenses .............................. 97 283
Amortization of goodwill ....................................... 573 612
Goodwill impairment charge ..................................... 17,676 --
----------------- -----------------
Loss from operations ............................. (16,404) (1,599)
Other (income) expense, net .................................... (184) 1,136
Interest expense ............................................... 3,817 3,192
----------------- -----------------
Loss before income taxes ......................... (20,037) (5,927)
Benefit from income taxes ...................................... (799) (2,228)
----------------- -----------------
Net loss ....................................................... $ (19,238) $ (3,699)
================= =================
Net loss per share, basic ...................................... $ (3.75) $ (0.72)
================= =================
Net loss per share, assuming dilution .......................... $ (3.75) $ (0.72)
================= =================
Weighted average number of shares outstanding, basic ........... 5,136 5,127
================= =================
Weighted average number of shares outstanding, assuming dilution 5,136 5,127
================= =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Restated
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
December 25, 1999 December 26, 1998
----------------- -----------------
<S> <C> <C>
Net sales ...................................................................... $ 172,490 $ 164,266
Cost of sales, excluding depreciation .......................................... 143,696 138,594
Depreciation ................................................................... 6,476 5,726
----------------- -----------------
Gross profit ..................................................... 22,318 19,946
Selling and marketing expenses ................................................. 2,098 2,233
General and administrative expenses ............................................ 10,575 9,911
Research and development expenses .............................................. 744 478
Amortization of goodwill ....................................................... 1,722 1,747
Goodwill impairment charge ..................................................... 17,676 --
----------------- -----------------
(Loss) income from operations .................................... (10,497) 5,577
Other (income) expense, net .................................................... (56) 1,210
Interest expense ............................................................... 11,014 8,988
----------------- -----------------
Loss before income taxes ......................................... (21,455) (4,621)
Benefit from income taxes ...................................................... (1,429) (1,491)
----------------- -----------------
Net loss ....................................................................... $ (20,026) $ (3,130)
================= ===============
Net loss per share, basic ...................................................... $ (3.90) $ (0.61)
================= ===============
Net loss per share, assuming dilution .......................................... $ (3.90) $ (0.61)
================= ===============
Weighted average number of shares outstanding, basic ........................... 5,136 5,104
================= ===============
Weighted average number of shares outstanding, assuming dilution ............... 5,136 5,104
================= ===============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SAFETY COMPONENTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Restated
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
December 25, 1999 December 26, 1998
----------------- -----------------
<S> <C> <C>
Net cash provided by (used in) operating activities ............................ $ 9,121 $ (8,137)
----------------- -----------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ........................ (8,882) (11,686)
Additional consideration and costs for Phoenix Airbag ............. (2,061) (1,958)
Acquisition costs and advances to Valentec ........................ -- (502)
Acquisition costs of SCFTI ........................................ -- (242)
----------------- -----------------
Net cash used in investing activities ........................ (10,943) (14,388)
----------------- -----------------
Cash Flows From Financing Activities:
Proceeds from Deutsche Bank mortgage .............................. 2,907 --
Exercise of stock options ......................................... -- 1,056
Proceeds of A.I. Credit Corp. note ................................ -- 772
Repayments of debt and long-term obligations ...................... (4,163) (2,406)
Net borrowing on revolving credit facility ........................ 700 9,024
Proceeds from KeyBank equipment note .............................. -- 10,000
----------------- -----------------
Net cash (used in) provided by financing activities .......... (556) 18,446
----------------- -----------------
Effect of exchange rate changes on cash ........................................ (827) (533)
----------------- -----------------
Change in cash and cash equivalents ............................................ (3,205) (4,612)
Cash and cash equivalents, beginning of period ................................. 10,607 6,049
----------------- -----------------
Cash and cash equivalents, end of period ....................................... $ 7,402 $ 1,437
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 8,111 $ 6,575
Income taxes ...................................................... 34 391
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Note 1 - Organization and Basis of Presentation
Subsequent to the issuance of the consolidated financial statements of
Safety Components International, Inc. ("SCI" or the "Company") 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 restatement primarily relates to three items. First, a sale and
related receivable in the Company's defense operations in the aggregate amount
of $4.6 million (before a related tax provision of $1.8 million), which had been
appropriately recorded in fiscal years ended March 31, 1996, 1997 and March 28,
1998 at a subsidiary level, was also recorded in fiscal 1998 and 1999 at the
parent company level. Second, in fiscal 1999, certain items were recorded
incorrectly in income in connection with a loan transaction of $772,000 (before
a related tax provision of $297,000). On November 3, 1998, the Company entered
into an unsecured note facility with A.I. Credit Corp. of $772,000 (including
transaction and other fees), which requires monthly payments of $29,000 and
bears a stated interest rate of 7.57% per annum. Such transaction had originally
been recorded incorrectly as an insurance contract with the cash proceeds
reflected in income. Third, certain other quarter to quarter adjustments
required restatement of quarterly results for several quarters within the
restatement period.
Restated balance sheet data contained herein as well as the completion of
the audit of the Company's financial statements as restated for the fiscal years
1999 and 1998 are subject to the successful completion of the previously
announced efforts to restructure the Company's balance sheet (the
"Restructuring") and the completion of certain administrative audit procedures
by the auditors. In furtherance of the Restructuring, the Company is also
evaluating two preliminary proposals from prospective senior lenders with
respect to the refinancing of a significant portion of the Company's Credit
Agreement. There can be no assurance that either of these proposals will result
in a definitive agreement or that a consensual arrangement with Senior Lenders
and Note holders can be reached. It is anticipated that any consensual agreement
reached will result in a substantially deleveraged balance sheet. Any such
consensual arrangement is expected to result in very significant dilution to
existing holders of the Company's Common Stock. Management has been informed
that in the event the Company is unsuccessful in adequately restructuring its
balance sheet, the Company's independent public accountants anticipate issuing a
going concern opinion on the consolidated financial statements, as restated, as
of March 27, 1999 and March 25, 2000. The restatement adjustments are summarized
below.
<TABLE>
<CAPTION>
(In Thousands)
Sales FY 1998 Q1 1999 Q2 1999 Q3 1999 Q4 1999 FY 1999 Q1 2000 Q2 2000 YTD 2000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Originally Filed $ 170,310 $ 51,449 $ 53,059 $ 61,056 $ 55,715 $ 221,279 $ 63,845 $ 53,391 $ 117,236
Previously Reported
Adjustments (3,881) (84) (408) (556) -- (1,048) -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Subtotal 166,429 51,365 52,651 60,500 55,715 220,231 63,845 53,391 117,236
Additional Adjustments (355) (300) (350) 400 -- (250) -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
As Restated $ 166,074 $ 51,065 $ 52,301 $ 60,900 $ 55,715 $ 219,981 $ 63,845 $ 53,391 $ 117,236
Net Income FY1998 Q1 1999 Q2 1999 Q3 1999 Q4 1999 FY1999 Q1 2000 Q2 2000 YTD 2000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Originally Filed $ 6,008 $ 1,547 $ 158 $ (3,772) $ (10,799) $ (12,866) $ 620 $ (1,424) $ (804)
Previously Reported
Adjustments (2,328) (52) (251) (398) (199) (900) 29 -- 29
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Subtotal 3,680 1,495 (93) (4,170) (10,998) (13,766) 649 (1,424) (775)
Additional Adjustments (334) (606) (227) 471 465 103 (8) (7) (15)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
As Restated $ 3,346 $ 889 $ (320) $ (3,699) $ (10,533) $ (13,663) $ 641 $ (1,431) $ (790)
</TABLE>
7
<PAGE>
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The above mentioned restatements have been considered
and reflected in these financial statements. 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. 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
necessary for a fair presentation of the results for the reported interim
periods.
After the Company's announcement of the restatements in November 1999,
several class action suits have been filed against the Company and certain of
its current and former officers and directors, alleging, among other things,
that the Company and such individuals violated the Federal Securities laws by
issuing falsified accounting statements which artificially inflated the market
price of the Company's stock. The plaintiffs seek compensatory damages and/or
recission, cost and expenses, including attorney and experts' fees and other
relief. The Company intends to defend against these actions vigorously.
Management, after consultation with outside legal counsel, believes that, due to
the early stage of the litigation, it is unable to evaluate the likelihood of an
unfavorable outcome or to estimate the amount or range, if any, of any potential
loss.
Note 2 - Goodwill Impairment
Management of the Company continually evaluates the recoverability of its
long-lived assets. Among other factors considered in such evaluation are the
historical and projected operating performance of business operations. At
December 1999, the Company recognized a goodwill impairment charge of $17.7
million with no associated tax benefit, related to the 1997 acquisition of
Valentec International Corporation (now known as Valentec International
Corporation, LLC, "Valentec"). Operating results of Valentec deteriorated during
fiscal 2000 arising from the loss of business with a major customer. The
subsidiary has been unable to offset this loss with increased sales with other
customers. Accordingly, management has concluded that intangible assets in the
amount of $17.7 million are no longer recoverable through future operations and
such amount has been written-off in the Company's financial statements for the
quarter ended December 25, 1999. In determining the amount of the impairment
charge, the Company evaluated the recoverability of the long-lived assets
pursuant to SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". The Company determined that Valentec's
estimated future undiscounted cash flows were below the carrying value of
Valentec's goodwill. Accordingly, during the third quarter of Fiscal 2000, the
Company adjusted the carrying value of Valentec's goodwill to its estimated fair
value. The estimated fair value was based on anticipated future cash flows
discounted at a rate commensurate with the risk involved. The Company believes
that its projections, based on recent historical trends and current market
conditions, is its best estimate of Valentec's future performance, although
there can be no assurances that such estimates will be indicative of future
results.
8
<PAGE>
Note 3 - Composition of Certain Consolidated Balance Sheet Components
(in thousands)
<TABLE>
<CAPTION>
Restated *
December 25, 1999 March 27, 1999
----------------- --------------
<S> <C> <C>
Accounts receivable:
Billed receivables $ 34,297 $ 38,899
Unbilled receivables (net of unliquidated progress
payments of $165 and $472 at December 25, 1999
and March 27, 1999, respectively) 3,924 2,690
Other 836 1,082
-------- --------
$ 39,057 $ 42,671
======== ========
Inventories:
Raw materials $ 6,038 $ 6,805
Work-in-process 6,084 6,973
Finished goods 4,179 7,667
-------- --------
$ 16,301 $ 21,445
======== ========
Property, plant and equipment:
Land and building $ 13,952 $ 10,583
Machinery and equipment 70,714 66,507
Furniture and fixtures 3,107 2,608
Construction in progress 3,603 4,994
-------- --------
91,376 84,692
Less - accumulated depreciation and amortization (22,135) (15,995)
-------- --------
$ 69,241 $ 68,697
======== ========
</TABLE>
* Subject to completion of the Restructuring
The Company established a reserve in the amount of $600,000 in the second
quarter of the fiscal year ending March 25, 2000 against its receivable of $1.2
million from Valentec International Limited, an affiliated party, as a result of
uncertainty as to the affiliate's ability to generate sufficient cash to repay
such amount. An agreement has been signed in January 2000 between the Company
and Robert A. Zummo, the Chief Executive Officer of the Company, whereby Mr.
Zummo has pledged to the Company, on a nonrecourse basis, all of his common
stock in the Company as collateral for such indebtedness. Mr. Zummo is the
principal shareholder of the affiliate. Further, Mr. Zummo has agreed to direct
Valentec International Limited to remit to the Company in satisfaction of a
portion of the receivable cash expected to be received from a foreign customer.
9
<PAGE>
Note 4 - Long-Term Obligations (in thousands)
<TABLE>
<CAPTION>
Restated*
December 25, 1999 March 27, 1999
----------------- --------------
<S> <C> <C>
Senior Subordinated Notes due July 15, 2007, bearing
interest at 10.125% $ 90,000 $ 90,000
KeyBank revolving credit facility due May 05, 2002, bearing
interest at 5.0% over LIBOR 37,900 37,200
KeyCorp equipment note due July 10, 2005, bearing interest
at 7.09% 8,320 9,210
Bank Austria mortgage note, due March 31, 2007, bearing
interest at 1.0% over LIBOR 5,625 6,375
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 2,136 0
Note payable, principal due in annual installments of $205
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 606 608
Capital equipment notes payable, due in monthly installments
with interest at 5.99% to 16.0% maturing at various rates
through November 2004, secured by machinery and 3,248 3,571
equipment
A.I. Credit Corp. note, due in monthly
installments of $29 beginning January 3, 1999
to November 3, 2001, bearing interest at 7.57% 564 724
--------- ---------
148,399 147,688
Less - current portion (131,576) (3,988)
--------- ---------
$ 16,823 $ 143,700
========= =========
</TABLE>
* Subject to completion of the Restructuring
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10.125% 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 10.125% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for the Exchange
Notes pursuant to the terms of the Exchange Offer, which expired on October 1,
1997. 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 had
10
<PAGE>
also accrued as of December 25, 1999, as part of accrued liabilities,
approximately $4.2 million of interest, which was due to be paid January 18,
2000 as part of the second semi-annual payment. The Company's senior lenders
notified the trustee for the Notes that the lenders were exercising their rights
to block the January 15, 2000 interest payment as a result of certain covenant
defaults under the Company bank agreement (the "Interest Blockage"). The Company
did not make its second annual interest payment due January 18, 2000 and is
using the 30-day grace period for such interest payment contained in the Notes
Indenture (the "Indenture") for discussions with the Company's lenders with
regard to the Restructuring. 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. All of the Company's direct and indirect wholly-owned domestic
subsidiaries are Guarantors. 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. The Company intends to meet
its working capital needs and capital expenditures through a combination of
internally generated cash flows from operations, reduced debt service resulting
from the Restructuring and possible future public or private equity offerings.
The Company, ASCI GmbH and Automotive Safety Components International
Limited entered into an agreement with KeyBank National Association, as
administrative agent ("KeyBank"), dated as of May 21, 1997 and as amended to
date (the "Credit Agreement"). The Credit Agreement consists of a $40.0 million
revolving credit facility for a five year term, bearing interest at LIBOR (5.67%
as of December 25, 1999) plus 5.0% with a commitment fee of .375% per annum for
any unused portion. The indebtedness under the Credit Agreement is secured by
substantially all the assets of the Company. As of December 25, 1999 letters of
credit outstanding were $2.0 million and there was no availability under the
Credit Agreement. The Company incurred approximately $470,000 of financing fees
and related costs. These costs have been deferred and are being charged to
operations over the expected term of the Credit Agreement not to exceed 5 years.
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 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 remains as acting agent.
On June 24, 1999, the Company entered into Amendment No. 6 to the Credit
Agreement, which among other covenants requires the Company to earn $30.0
million of EBITDA (as such term is defined in the Credit Agreement) in fiscal
year 2000. Such covenant is tested monthly based upon cumulative targets for the
year. Covenants for Fixed Charge Coverage, Interest Coverage and Minimum Net
Income are also based on the $30.0 million EBITDA target. The Company failed to
meet its cumulative EBITDA target in November and December 1999. In addition,
the senior lenders have asserted that the restatement of prior period financial
statements has resulted in certain additional covenant defaults. The holders of
the Notes could also contend that such restatement resulted in one or more
defaults under the Indenture. These defaults could result in certain cross
defaults under other Company debt instruments. As a result of covenant defaults
under the Credit Agreement, the senior lenders have instituted the Interest
Blockage and the interest rate was increased to LIBOR plus 5.0% and the
commitment fee was increased to .375%. The Senior Lenders and the Company
continue to negotiate the terms of a forbearance agreement but no resolution has
yet been reached. In June 1999, the Company issued to the Lenders ten-year
warrants to acquire 20,000 shares of the Company's common stock at current
market value per share. The Company, using the Black-Sholes pricing model,
calculated the fair market value of the warrants at approximately $50,000.
Additionally, the Company will be subject, as of June 24, 2000, to a Senior
Funded Debt to
11
<PAGE>
EBITDA ratio covenant of 1.5 to 1.0 and a Minimum Consolidated Net Worth
covenant. In addition, under Amendment No. 6 to the Credit Agreement the Lenders
waived certain financial covenants for periods through the date of such
amendment. The interest rate will increase 1.0% on July 1, 2000 and an
additional 1.0% for each quarter thereafter if the Company does not refinance
the Credit Agreement by such dates. However, if the Company does not refinance
the Credit Agreement by July 1, 2000, the Company is required to issue an
additional 30,000 ten-year warrants to the Lenders at the then current market
value per share.
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 a fixed rate of 7.09% via an
interest swap agreement, requires monthly payments of $150,469, and is secured
by certain equipment located at Safety Components Fabric Technologies, Inc. The
rate swap is considered immaterial to the Company's financial position at
December 25, 1999.
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
assets of the Company's Czech Republic facility secure the note. 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.
On November 3, 1998, the Company obtained a $772,000 unsecured note
facility with A. I. Credit Corp, which requires monthly payments of $29,000 and
bears stated interest of 7.57%.
On April 1, 1999, the Company secured a $2.9 million mortgage note facility
with Deutsche Bank to purchase a facility in Bavendstedt, Germany. The note is
secured by the real estate in Germany acquired through the mortgage and is
further secured by a guarantee issued by the Company. In July, 1999 the Company
refinanced the note and reduced the outstanding indebtedness to $2.1 million.
On January 18, 2000, the Company did not make a scheduled interest payment
on its 10.125% Senior Subordinated Notes (the "Notes"). The senior lenders of
the Company had previously notified the trustee for the Company's Notes of the
Interest Blockage. The Company has engaged Bank of America Securities to assist
in the Restructuring of its balance sheet, including the refinancing of its
existing senior debt and Notes. The Company is currently engaged in negotiations
with its senior lenders and the Noteholders, in order to seek to reach a
consensual arrangement with respect to a Restructuring. In furtherance of the
Restructuring, the Company is also evaluating two preliminary proposals from
prospective senior lenders with respect to the refinancing of a significant
portion of the Company's Credit Agreement. There can be no assurance that either
of these proposals will result in a definitive agreement or that a consensual
arrangement with Senior Lenders and Note holders can be reached. It is
anticipated that any consensual agreement reached will result in a substantially
deleveraged balance sheet. Any such consensual arrangement is expected to result
in very significant dilution to existing holders of the Company's Common Stock.
Management has been informed that in the event the Company is unsuccessful in
adequately restructuring its balance sheet, the Company's independent public
accountants anticipate issuing a going concern opinion on the consolidated
financial statements, as restated, as of March 27, 1999 and March 25, 2000.
12
<PAGE>
Note 5 - Reconciliation to Diluted Earnings Per Share
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>
(In Thousands) Restated Restated
Thirteen Thirteen Weeks Thirty-Nine Thirty-Nine
Weeks Ended Ended Weeks Ended Weeks Ended
December 25, 1999 December 26, 1998 December 25, 1999 December 26, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Loss $(19,238) $ (3,699) $(20,026) $ (3,130)
======== ======== ======== ========
Weighted average number of
common shares used in
basic earnings per share 5,136 5,127 5,136 5,104
Effect of dilutive securities:
Stock options -- -- -- --
Warrants -- -- -- --
-------- -------- -------- --------
Weighted average number of
common shares and
dilutive potential common
stock used in diluted
earnings per share 5,136 5,127 5,136 5,104
======== ======== ======== ========
</TABLE>
Options on approximately 1,274,000 and 808,000 shares of common stock were not
included in computing diluted earnings per share as of December 25, 1999 and
December 26, 1998, respectively, because their effects were antidilutive.
Warrants to purchase 124,000 and 104,000 shares of Common Stock were not
included in computing diluted earnings per share as of December 25, 1999 and
December 26, 1998, respectively, because their effects were antidilutive.
Note 6 - Comprehensive Income
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 the Company's case, the
non-owner changes in equity relate to foreign currency translation adjustments.
Comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
(In Thousands) Restated Restated
Thirteen Thirteen Weeks Thirty-Nine Thirty-Nine
Weeks Ended Ended Weeks Ended Weeks Ended
December 25, 1999 December 26, 1998 December 25, 1999 December 26, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Loss $(19,238) $ (3,699) $(20,026) $ (3,130)
Foreign currency
translation adjustment (1,104) (670) (1,527) 2,089
-------- -------- -------- --------
Comprehensive Loss $(20,342) $ (4,369) $(21,553) $ (1,041)
======== ======== ======== ========
</TABLE>
13
<PAGE>
Note 7 - 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 December 25, 1999.
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $ 39,660 $ 22,185 $ 8,072 $ 0 $ 69,917
========= ========= ========= ========= =========
Total assets $ 108,318 $ 66,291 $ 22,291 $ (8,406) $ 188,494
========= ========= ========= ========= =========
Current liabilities $ 29,568 $ 25,811 $ 113,762 $ 3 $ 169,144
========= ========= ========= ========= =========
Total liabilities $ 120,594 $ 58,031 $ 8,959 $ 3 $ 187,587
========= ========= ========= ========= =========
Revenues $ 113,000 $ 65,649 $ 0 $ (6,159) $ 172,490
========= ========= ========= ========= =========
Gross profit $ 14,104 $ 8,230 $ (171) $ 155 $ 22,318
========= ========= ========= ========= =========
(Loss) income from operations $ (10,135) $ 4,684 $ (5,762) $ 716 $ (10,497)
========= ========= ========= ========= =========
(Loss) income before taxes $ (9,254) $ 2,722 $ (15,564) $ 641 $ (21,455)
========= ========= ========= ========= =========
Net (loss) income $ (12,425) $ 999 $ (9,590) $ 990 $ (20,026)
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
Note 8 Business Segment Information (in thousands)
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal year 1999. 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. Included in the Metal and Defense are metal
components manufactured for commercial purposes, which are produced using
similar production processes as other metal components. The Company's Defense
Operations also manufactures 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.
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 has 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. The
reportable segments are each managed separately because they manufacture
distinct products with different production processes. Summarized financial
information by business segment follows (in thousands). Amounts for fiscal year
1999 have been reclassified to conform with management's revised approach to
managing the business.
<TABLE>
<CAPTION>
Restated Restated
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 25, 1999 December 26, 1998 December 25, 1999 December 26, 1998
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues from external
customers:
Airbag cushions $ 30,529 $ 30,733 $ 92,737 $ 75,514
Airbag fabric 11,666 12,435 34,693 36,118
Technical fabric 5,521 5,813 18,872 18,016
--------- --------- --------- ---------
Automotive & Fabrics $ 47,716 $ 48,981 $ 146,302 $ 129,648
========= ========= ========= =========
Systems integrator $ 3,122 $ 7,834 $ 12,816 $ 19,562
Metal components 4,416 4,085 13,372 15,056
--------- --------- --------- ---------
Metal & Defense $ 7,538 $ 11,919 $ 26,188 $ 34,618
========= ========= ========= =========
EBITDA:
Automotive & Fabrics $ 6,015 $ 3,537 $ 19,185 $ 14,922
Metal & Defense 533 (682) 1,517 1,769
Corporate (2,472) (1,793) (5,325) (3,641)
--------- --------- --------- ---------
$ 4,076 $ 1,062 $ 15,377 13,050
========= ========= ========= =========
</TABLE>
Note:EBITDA for the thirteen weeks and the thirty-nine weeks ended December 25,
1999 does not include the goodwill impairment charge of $17.7 million.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview - Restatement of Previously Issued Financial Statements
Management discovered certain matters relating to the Company's financial
statements for fiscal years 1999 and 1998 which required further investigation
and restatement of the financial statements for those periods, as well as the
financial statements for the twenty-six weeks ended September 25, 1999. The
audit committee of Safety Components International, Inc. ("SCI" or the
"Company"), consisting only of outside members of the Board of Directors, with
the assistance of special counsel and an independent public accounting firm,
conducted a thorough investigation of these matters. Based upon the financials
currently available to management and subject only to completion of certain
administrative procedures related to the audit, the restatement for the fiscal
year ended March 28, 1998 reduces previously reported net sales by $4.2 million
to net sales of $166.1 million and previously reported net income by $2.7
million to a net income of $3.3 million. The restatement for the fiscal year
ended March 27, 1999 reduces previously reported net sales by $1.3 million to
net sales of $220.0 million and increases previously reported net loss by
$797,000 to a loss of $13.7 million. The restatement for the third quarter of
fiscal year 1999 reduces previously reported net sales by $156,000 to net sales
of $60.9 million and reduces previously reported net loss by $73,000 to net loss
of $3.7 million. The restatement for the thirty-nine weeks ending December 26,
1998 reduces previously reported net sales by $1.3 million to net sales of
$164.3 million and increases previously reported net loss by $1.1 million to net
loss of $3.1 million. The cumulative effect on retained earnings was $2.7
million, $3.5 million and $3.7 million as of March 28, 1998, March 27, 1999, and
December 26, 1998, respectively.
The principal components of the adjustments consist principally of three
items. The first item required the reversal of a duplicate booking of a sale and
the related receivable in the Company's defense operations and the second item
required the reversal of certain items incorrectly recorded in income in
connection with a loan transaction. Certain other quarter to quarter adjustments
required restatement of quarterly results for several quarters within the
restatement period. See Note 1 to notes to consolidated financial statements.
The Company expects to file amended annual reports on Form 10-K covering fiscal
1998 and 1999 and the applicable quarterly reports on Form 10-Q covering fiscal
1998, 1999 and the first and second quarters of fiscal 2000.
The Company is in discussions with its senior lenders and the holders of
its $90.0 million issuance of Senior Subordinated Notes with regard to the
restructuring of its balance sheet (the "Restructuring"). Restated balance sheet
data contained herein, as well as the completion of the audit of the Company's
financial statements, as restated, for its fiscal years 1999 and 1998, are
subject to the successful completion of the Restructuring and to the completion
of certain administrative procedures related to the audit.
Third Quarter Ended December 25, 1999 Compared to Restated Third Quarter Ended
December 26, 1998
Net Sales. Net sales for the quarter ended December 25, 1999 decreased $5.6
million or 9.2% to $55.3 million compared to $60.9 million for the quarter ended
December 26, 1998. The decrease was attributable primarily to decreased sales
volumes in the non-core operations. The North American core operations had
increased sales of 0.2% for air bag cushions and related fabric products over
the third quarter of fiscal year 1999. The European core operations had
decreased sales of 6.8% over the third quarter of fiscal year 1999, all of which
resulted from a foreign currency translation rate which reduced sales by 7.1%.
Within the core operations, airbag fabric sales have shifted by approximately
11.1% from external sales to its Ensenada, Mexico plant to support the demand
for Company air bag cushions. The non-core operations had decreased sales of
36.8% over the third quarter of fiscal year 1999; such decreases are
attributable primarily to lower volume at the Valentec operations. In addition,
current quarter sales for the M16 links and 120 MM mortar system were
significantly below the same period in the prior year due to the phase out of
those contracts. The Company is continuing to explore strategic alternatives for
its non-
16
<PAGE>
core operations and expects to conclude its evaluation of these alternatives by
the end of the current fiscal year. The Company received in January 2000 and is
evaluating an offer to purchase from a management lead group to purchase all of
the business that comprises the non-core operations. If any such offer is
accepted by the Company it would require the consent of the senior lenders and
Noteholders.
Gross Profit. Gross profit for the quarter ended December 25, 1999
increased $1.7 million or 32.7% to $6.9 million compared to $5.2 million for the
quarter ended December 26, 1998. The increase was attributable to increased
sales and favorable product mix in the core operations being offset by reduced
volume in the non-core operations and the elimination of one time adjustments
and ramp up costs that had occurred in the same period last year. Gross profit
as a percentage of sales was 12.4% for the third quarter of fiscal year 2000
compared to 8.5% for the third quarter of fiscal year 1999. The increase in
gross profit as a percentage of sales was due to the items discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended December 25, 1999 decreased $1.0
million or 16.9% to $4.9 million compared to $5.9 million for the quarter ended
December 26, 1998. Selling, general and administrative expenses as a percentage
of sales decreased to 8.9% for the third quarter of fiscal year 2000 compared to
9.7% for the second quarter of fiscal year 1999. The decrease was attributable
to significantly reduced expenses associated with the non-core operation due to
volume and the elimination of one time adjustments in this period as compared to
the same period last year. These reductions were partially offset by increased
legal and audit fees resulting from the investigation and refinancing efforts.
Research and Development Expenses. Research and development expenses for
the quarter ended December 25, 1999 decreased $0.2 million to $0.1 million
compared to $0.3 million for the quarter ended December 26, 1998. The majority
of the research and development costs were incurred at SCFTI in its technical
fabrics division and in Europe for airbag related products.
Operating Loss. Operating loss for the quarter ended December 25, 1999
increased $14.8 million to $16.4 million loss compared to a $1.6 million loss
for the quarter ended December 26, 1998. The operating income without the
write-off of the intangible asset would have been $1.3 million for the period as
compared to the $1.6 million loss for the period ending December 26, 1998. The
increase was attributable primarily to the items discussed above.
Interest Expense. Interest expense for the quarter ended December 25, 1999
increased $0.6 million or 18.8% to $3.8 million compared to $3.2 million for the
quarter ended December 26, 1998. This increase was attributable primarily to
increases in debt and interest rates under the Company's revolving credit
facility and the addition of the Deutsche Bank mortgage note.
Income Taxes. The income tax rate applied against pre-tax loss was a 4.0%
benefit for the third quarter of fiscal year 2000 compared to 37.6% against
pre-tax loss for the third quarter of fiscal year 1999. The tax rate was lower
during the third quarter of fiscal year 2000 due to the operating loss and the
foreign tax benefits recognized during that period. The effective tax rate
related to pre-tax earnings was higher during the third quarter of fiscal year
1999 due to non-deductible goodwill at Valentec, coupled with a greater
proportion of income from foreign sources, which are subject to higher tax
rates. At December 1999, the Company recognized a goodwill impairment charge of
$17.7 million with no associated tax benefit, related to the 1997 acquisition of
Valentec.
Net Loss. Net loss for the quarter ended December 25, 1999 was $19.2
million compared to net loss of $3.7 million for the quarter ended December 26,
1998. The net loss, without the write-off of the intangible asset, would have
been a $1.6 million net loss for the period as compared to the $3.7 million net
loss for the period ending December 26, 1998. The reduction in net loss, prior
to such write off, was attributable primarily to the items discussed above.
17
<PAGE>
Thirty-Nine Weeks Ended December 25, 1999 Compared to Restated Thirty-Nine Weeks
Ended December 26, 1998
Net Sales. Net sales for the thirty-nine weeks ended December 25, 1999
increased $8.2 million or 5.0% to $172.5 million compared to $164.3 million for
the thirty-nine weeks ended December 26, 1998. The increase was attributable
primarily to North American core operations which had increased sales of 12.8%
for air bag cushions and related fabric products over the third quarter of
fiscal year 1999. European core operations had increased sales of 15.7% over the
third quarter of fiscal year 1999, although such sales were impacted adversely
(approximately 4.1%) by foreign currency translation rates. The Technical
Fabrics sales increased $0.8 million or 4.5% over the thirty-nine weeks ended
December 26,1998. Within the core operations, airbag fabric sales have shifted
by approximately 11.4% from external sales to its Ensenada, Mexico plant to
support the demand for Company air bag cushions. These increases are offset
significantly by the metal and defense operations - the Company's non-core
operations. The non-core operations had decreased sales of 24.3% over the third
quarter of fiscal year 1999; such decreases are attributable primarily to lower
volume at the Valentec and Systems Integrator operations. Specifically, current
year sales for the M16 links and 120 MM mortar system were significantly below
the prior year due to the phase out of those contracts.
Gross Profit. Gross profit for the thirty-nine weeks ended December 25,
1999 increased $2.4 million or 12.0% to $22.3 million compared to $19.9 million
for the thirty-nine weeks ended December 26, 1998. Gross profit as a percentage
of sales was 12.9% for the thirty-nine weeks ended December 25, 1999 compared to
12.1% for the thirty-nine weeks ended December 26, 1998. The increase was
attributable to increased sales and favorable product mix in the core
operations, partially offset by reduced volume in the non-core operations and
the elimination of one time adjustments, ramp up cost and the GM strike that had
occurred during the same period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the thirty-nine weeks ended December 25, 1999
increased $0.6 million or 5.0% to $12.7 million compared to $12.1 million for
the thirty-nine weeks end December 26, 1998. The increase was attributable to
the increased legal and audit fees resulting from the investigation and
refinancing efforts. Selling, general and administrative expenses as a
percentage of sales decreased to 7.3% for the thirty-nine weeks ended December
25, 1999 compared to 7.4% for the thirty-nine weeks ended December 26, 1998.
This decrease as a percentage of sales is due to the increased sales over the
prior period.
Research and Development Expenses. Research and development expenses for
the thirty-nine weeks ended December 25, 1999 increased $0.2 million to $0.7
million compared to $0.5 million for the thirty-nine weeks ended December 26,
1998. The majority of the research and development costs were incurred at SCFTI
in its technical fabrics division, in Europe for airbag related products and at
Valentec in connection with the development of proprietary products for the
automotive industry.
Operating Loss. Operating loss for the thirty-nine weeks ended December 25,
1999 increased $16.1 million to a $10.5 million loss compared to $5.6 million
income for the thirty-nine weeks ended December 26, 1998. The operating income,
without the write-off of the intangible asset, would have been $7.2 million for
the period as compared to the $5.6 million for the period ending December 26,
1998. The increase was attributable primarily to the items discussed above.
Interest Expense. Interest expense for the thirty-nine weeks ended December
25, 1999 increased $2.0 million to $11.0 million compared to $9.0 million for
the thirty-nine weeks ended December 26, 1998. This increase was attributable
primarily to increases in debt under the Company's revolving credit facility,
additional capitalized lease financing and the addition of the Deutsche Bank
mortgage note.
Income Taxes. The income tax rate applied against pre-tax loss reflected a
6.7% benefit for the thirty-nine weeks ended December 25, 1999 compared to a
32.3% benefit against pre-tax loss for the thirty-nine weeks ended December 26,
1998. The tax rate was lower during the thirty-nine weeks ended
18
<PAGE>
December 25, 1999 due to the Company's recognition of a goodwill impairment
charge of $17.7 million with no associated tax benefit relating to the 1997
acquisition of Valentec International Corp, LLC.
Net Loss. Net loss was $20.0 million for the thirty-nine weeks ended
December 25, 1999 compared to a net loss of $3.1 million for the thirty-nine
weeks ended December 26, 1998. The net loss, without the write-off of the
intangible asset, would have been a $2.4 million net loss for the period as
compared to the $3.1 million net loss for the period ending December 26, 1998.
The reduction in net loss, prior to such write off, was attributable primarily
to the items discussed above.
Liquidity and Capital Resources
Through thirty-nine weeks of fiscal 2000, net cash provided by operations
was $9.1 million and cash used by investing activities was $10.9 million, of
which cash used for capital expenditures was $8.9 million. The Company also paid
approximately $2.1 million for additional consideration in connection with the
acquisition of ASCI GmbH, representing all of the $2.1 million earn-out accrual
at the end of fiscal year 1999. Net cash used in financing activities through
thirty-nine weeks of fiscal year 2000 was $0.6 million spent primarily on the
repayment of capital leases and mortgages. The proceeds of a mortgage agreement
with Deutsche Bank to finance the purchase of the Company's new facility located
in Bavendstedt, Germany were offset by required principal payments on various
debt instruments and capital lease obligations. All of the activities noted
above resulted in a net decrease in cash of $3.2 million in the first
thirty-nine weeks of fiscal year 2000.
The Company's capital budget for the remaining quarter of fiscal year 2000
is approximately $1.0 million. These capital expenditures, will be used
primarily to purchase additional machinery and equipment worldwide in order to
support new business awards.
The Company's principal credit facilities consist of senior subordinated
notes due 2007, a revolving credit facility to meet short-term liquidity needs,
two mortgage notes collateralized by the Company's assets in the Czech Republic
facility and the facility in Germany, and certain capital equipment notes
secured by the Company's machinery and equipment and other assets. These
facilities are summarized below.
The Company, ASCI GmbH and Automotive Safety Components International Limited
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 consists of a $40.0 million revolving credit
facility for a five year term, bearing interest at LIBOR (5.67% as of December
25, 1999) plus 5.0% with a commitment fee of .375% per annum for any unused
portion. 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 (collectively, the "Senior Lenders") each
provide fifty percent of the financing available under the Credit Agreement and
KeyBank remains as acting agent. On June 24, 1999, the Company entered into
Amendment No. 6 to the Credit Agreement, which among other covenants requires
the Company to earn $30.0 million of EBITDA (as such term is defined in the
Credit Agreement) in fiscal year 2000. Such covenant is tested monthly based
upon cumulative targets for the year. Covenants for Fixed Charge Coverage,
Interest Coverage and Minimum Net Income are also based on the $30.0 million
EBITDA target. During the current fiscal year to date, the Company has been
subject to four financial covenant tests under the Credit Agreement. The Company
failed to meet its cumulative EBITDA target in November and December 1999. In
addition, the Senior Lenders have asserted that the restatement of prior period
financial statements has resulted in certain additional covenant defaults. These
defaults could result in certain cross defaults under other Company debt
instruments. As a result of covenant defaults under the Credit Agreement, the
Senior Lenders have exercised their rights to block the January 18, 2000
interest payment (the "Interest Blockage") due on the Notes (as defined below).
The interest rate was increased to LIBOR plus 5.0% under the Credit Agreement.
The Company is utilizing the 30 day grace period for the interest payment under
the Notes for the discussions with the Senior Lenders with regard to a
forbearance
19
<PAGE>
agreement and with both the Senior lenders and Note Holders regarding the
Restructuring. The Company is also evaluating two proposals from prospective
lenders to refinance its existing bank credit facility and restructure its
subordinated indebtedness. Letters of credit outstanding were $2.0 million at
December 25, 1999. As of December 25, 1999, there was no availability under the
Credit Agreement. 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. See note 4 with respect to certain
warrant obligations to the Senior Lenders.
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 a fixed rate of 7.09% via an
interest swap agreement, requires monthly payments of $150,469 and is secured by
certain equipment located at SCFTI. The rate swap is considered immaterial to
the Company's financial position at December 25, 1999.
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10.125% 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 10.125% 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 has accrued
as of December 25, 1999, as part of accrued liabilities, approximately $4.2
million of interest, which was due to be paid January 18, 2000 as part of the
semi-annual payment. The Senior Lenders instituted the Interest Blockage and the
Company did not make its second annual interest payment due January 18, 2000.
The holders of the Notes could contend that the restatement of the Company's
financial statements resulted in one or more defaults under the Indenture. These
defaults could result in certain cross defaults under other Company debt
instruments. 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. 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 be greater
than 2.25 to 1.0. Funds available to the Company under Permitted Indebtedness
includes (i) Capitalized Lease Obligations and Purchase Money Indebtedness (as
such terms are defined in the Indenture), not to exceed $10.0 million at any one
time outstanding and (ii) additional Indebtedness (as defined in the Indenture),
in an aggregate principal amount not to exceed $5.0 million at any one time. The
Company has used $0.7 million of such $10.0 million allowance as of December 25,
1999. Changes in these covenants are likely to result from the Restructuring.
The Company intends to meet its working capital needs and capital expenditures
through a combination of reduced debt service requirements resulting from the
Restructuring, internally generated cash flows from operations, and/or possible
future public or private equity offerings.
20
<PAGE>
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.
On November 3, 1998, the Company obtained a $772,000 unsecured note
facility with A. I. Credit Corp and bears interest of 7.57%. The note requires
monthly payments of $29,000.
On April 1, 1999, the Company secured a $2.9 million mortgage note facility
with Deutsche Bank to purchase a facility in Bavendstedt, Germany. The note is
secured by the real estate in Germany acquired through the mortgage and is
further secured by a guarantee issued by Safety Components. In July, 1999 the
Company refinanced the note and reduced the outstanding indebtedness to $2.1
million.
On February 2, 2000, the Company's Common Stock was delisted from NASDAQ as
a result of noncompliance with NASDAQ's public float and minimum bid price
requirements as well as a delay in complying with NASDAQ's reporting obligations
pending the filing of restated financial statements. The Company anticipates
that its stock will be quoted on the NASD Bulletin Board as soon as its revised
Annual Reports on Form 10-K containing audited financial statements, as
restated, are filed with the Securities and Exchange Commission. Pending
quotation on the NASD Bulletin Board, quotations will be available on the pink
sheets through the National Quotation Bureau. Liquidity of the Common Stock
could be adversely affected by the absence of readily available quotations for
the stock.
If the Company is unable to reach agreement with the Senior Lenders and the
Note holders with respect to a Restructuring within the 30 day grace period for
the interest payment on the Notes, there could be significant deterioration in
the Company's relationships with customers and suppliers. In addition,
individual creditors, including the Senior Lenders and Note holders could seek
to institute proceedings to enforce their remedies. Management has been informed
that in the event the Company is unsuccessful in adequately restructuring its
balance sheet, the Company's independent public accountants anticipate issuing a
going concern opinion on the consolidated financial statements, as restated, as
of March 27, 1999 and March 25, 2000.
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. Based on its evaluation, the
Company believes that its significant business, accounting and operations
hardware and software are year 2000 compliant. To date, no problems have arisen,
and the Company expects none. There can be no assurance that future problems
will not arise.
21
<PAGE>
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: inability to reach
agreement on the Restructuring in a timely fashion; deterioration in
relationships with key customers and vendors as a result of the Company's
financial difficulties; dependence of revenues on several major module
suppliers; worldwide economic conditions; the results of cost-savings programs
being implemented; the ability to raise additional capital; the ability to
continue to obtain new awards; qualification of awarded programs; domestic and
international automotive industry trends; pricing pressures; the ability to
identify strategic alternatives for the Company's non-core operations or
otherwise return such operations to profitability; and the ability to satisfy
the Company's customers on timeliness and quality. Additional information on
these and other factors that could potentially affect the Company's financial
results may be found in the Company's filings with the Securities and Exchange
Commission.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To the extent that amounts borrowed under the Credit Agreement are
outstanding, the Company has market risk relating to such amounts because the
interest rates under the 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 effected.
23
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
After the Company's announcement of the restatements in November 1999,
several class action suits have been filed against the Company and certain of
its current and former officers and directors, alleging, among other things,
that the Company and such individuals violated the Federal Securities laws by
issuing falsified accounting statements which artificially inflated the market
price of the Company's stock. The plaintiffs seek compensatory damages and/or
recession, cost and expenses including attorney and experts' fees and other
relief. The Company intends to defend against these actions vigorously.
Management, after consultation with outside legal counsel, believes that due to
the early stage of the litigation it is unable to evaluate the likelihood of an
unfavorable outcome or to estimate the amount or range, if any, of any potential
loss.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company failed to meet its cumulative EBITDA target under the Credit
Agreement in November and December 1999. In addition, the Senior Lenders have
asserted that the restatement of prior period financial statements has resulted
in certain additional covenant defaults. As a result of such covenant defaults
under the Credit Agreement, the Senior Lenders have exercised their rights to
block the January 18, 2000 interest payment due on the Notes. The indenture with
respect to the Notes provides for a 30 day grace period for the payment of such
interest. The holders of the Notes could also contend that the restatement of
the Company's financial statements resulted in one or more defaults under the
Indenture. These defaults could result in certain cross defaults under other
Company debt instruments.
The Company is currently in discussions with the Senior Lenders and
representatives of the Noteholders in order to seek to reach agreement on a
Restructuring of the Company's balance sheet which would entail waivers of
outstanding defaults. There can be no assurance that any such agreement will be
reached.
24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders on December 13,
1999.
At the Annual Meeting, Joseph J. DioGuardi and John C. Corey were elected
Class I directors of the Company. The number of shares of the Company's common
stock voted in favor of the election of Messieurs DioGuardi and Corey were
3,056,139 and 3,388,390, respectively, and the number of such shares withheld
were 708,741 and 376,490. In addition, the following other directors continued
as such after the Annual Meeting: Robert J. Torok and Robert A. Zummo.
At the Annual Meeting, the Company's stockholders also voted in favor of
the approval of an amendment to the Company's 1994 Stock Option Plan (the
"Plan") to i) increase the number of shares of the Company's common stock
issuable under the Plan to officers, key employees and consultants from 935,000
shares in the aggregate to 1,375,000 shares in aggregate and ii) increase the
number of shares issuable to non-employee directors under the Plan from 75,000
shares in the aggregate to 125,000 shares in aggregate. The vote of approval for
such amendment was 1,340,671 FOR, 520,378 AGAINST, and 9,135 ABSTAINING.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
----------- ------------------------------------------------------------
10.65 Pledge Agreement, dated January 31, 2000 by and between
Safety Components International, Inc. and Robert A. Zummo.
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.
Not applicable.
25
<PAGE>
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
(Registrant)
DATED: February 8, 2000 BY:/S/ Brian P. Menezes
-----------------------
Brian P. Menezes
Vice President and Chief Financial Officer
(Principal Financial Officer)
26
Pledge Agreement dated January 31, 2000
Agreement, dated January 31, 2000, by and between Robert A. Zummo ("Zummo")
residing at 9475 Falls Creek Main, Durango CO 81301, and Safety Components
International, Inc. ("SCI"), a Delaware Corporation.
WHEREAS, Zummo is the principal shareholder of Valentec International
Limited ("VIL"), a United Kingdom corporation;
WHEREAS, VIL has an account payable (the "A/P") to SCI equal to one million
one hundred fifty one thousand three hundred fourteen dollars and eleven cents
($1,151,314.11);
WHEREAS, Zummo desires to provide certain collateral to secure such account
payable and to otherwise provide certain assurances to SCI relating to the
payment of such account payable;
NOW, THEREFORE, the parties agree as follows:
1. As collateral security for the A/P, Zummo hereby pledges and assigns to
SCI, and grants to SCI a continuing first priority security interest in, and
first priority lien on, all of Zummo's right, title and interest in and to the
following (the "Pledged Collateral"):
(a) the 976,576 shares of Common Stock of SCI owned by Zummo (the "Pledged
Shares"), any securities into which the Pledged Shares are or may become
exchangeable or convertible by merger, reorganization or otherwise, all other
rights, contractual or otherwise, in respect thereof and all dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the Pledged
Shares;
(b) all additional shares of stock, at any time and from time to time
acquired by the Pledgor, of SCI in connection with any stock dividend, stock
split, reclassification, recapitalization or other similar change relating to
the Pledged Shares, the certificates representing such additional shares, all
other rights, contractual or otherwise, in respect thereof and all dividends,
cash, instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
additional shares; and
(c) All proceeds of any and all of the foregoing.
2. Security for A/P. The security interest and lien created hereby in the
Pledged Collateral constitutes continuing collateral security for the full
payment by VIL of the A/P.
3. Delivery of the Pledged Collateral. All certificates currently
representing any Pledged Shares shall be delivered to SCI on or prior to the
execution and delivery of this Agreement. If Zummo shall receive, by virtue of
being an owner of the Pledged Collateral any stock certificate, promissory note
or other instrument, or dividend or other distribution, Zummo shall receive such
certificate, note, instrument, dividend or distribution in trust for the benefit
of SCI and shall deliver it
<PAGE>
forthwith to SCI in the exact form received, with any necessary indorsement or
stock powers duly executed in blank to be held by SCI as further security for
the A/P.
4. Representation of Zummo. Zummo owns the Pledged Collateral free and
clear of all liens, claims and encumbrances. This agreement creates a valid
security interest in favor of SCI.
5. Agreement Not To Sell. Zummo agrees not to sell or otherwise encumber
the Pledged Collateral during the term of this Agreement.
6. Cause VIL to Pay A/P out of proceeds of Saudi Receivable. Upon receipt
by VIL of payments under the existing contract between Saudi Arabia and VIL,
estimated to be approximately five hundred sixty four thousand dollars
($564,000), Zummo agrees to cause VIL to promptly deliver such payment or
payments to SCI to be applied against any amounts then owing to SCI under the
A/P.
7. Partial Release of Pledged Collateral. Upon receipt by SCI of any
partial payment of the A/P, whether from VIL or Zummo, or any cash dividend on
the Pledged Collateral (which dividend shall be applied as a payment against the
A/P), SCI shall promptly release a portion of the Pledged Collateral having a
value equal to such payment or payments. Such value shall be determined on the
basis of the closing sale price of the Pledged Collateral on NASDAQ or the OTC
Bulletin Board or comparable service on the day of such payment to SCI and if no
reliable quotation is then available, such value shall be determined by the
Board of Directors of SCI in good faith. Notwithstanding the foregoing, no
release of collateral shall be made if the remaining collateral has a value, as
determined in accordance with this paragraph, of less than the remaining amount
of the A/P.
8. Full Release of Pledged Collateral. If the A/P is paid in full on or
prior to January 17, 2001, all Pledged Collateral shall be promptly returned by
SCI to Zummo.
9. Retention of Collateral by SCI if Full Payment is Not Made. In the event
full payment of the A/P is not made by VIL and/or Zummo on or prior to January
17, 2001, SCI shall apply any Pledged Collateral then held by it under this
agreement against the then remaining amount of the A/P. The Pledged Collateral
shall be valued for such purposes as determined in accordance with paragraph 7.
Such valuation shall be made on January 17, 2001. SCI shall have the right after
January 17, 2001, to retain the remaining Pledged Collateral as treasury shares
or to sell the Pledged Collateral in satisfaction of all or a portion of the
A/P. If SCI sells the shares, it shall consummate such sale not later than May
17, 2001 and the value shall be redetermined based upon the net proceeds (i.e.
gross proceeds less expenses of sale, including brokerage or underwriting
commissions) received by SCI. Any excess Pledged Collateral shall be promptly
returned by SCI to Zummo.
10. Nonrecourse to Zummo. Nothing in this Agreement shall be construed as a
personal guaranty by Zummo of the payment of the A/P to SCI. In the event the
value of the
<PAGE>
Pledged Collateral is insufficient to satisfy the then remaining amount of the
A/P, Zummo shall not be personally liable for the deficiency. SCI shall have the
right to pursue remedies against VIL for such deficiency.
11. Duty of SCI. Other than the exercise of reasonable care to assure the
safe custody of the Pledged Collateral while held hereunder and except as
required by law, SCI shall have no duty or liability to preserve rights
pertaining thereto and shall be relieved of all responsibility for the Pledged
Collateral upon surrendering it or tendering surrender to Zummo.
12. Voting of Pledged Collateral. Zummo shall have the right to exercise
all voting, consensual and other similar rights associated with the Pledged
Collateral prior to January 17, 2001. After such date, Zummo shall exercise such
rights only in respect of the excess Pledged Collateral. The Board of Directors
shall determine the amount of such excess in good faith within ten business days
of such date.
13. Miscellaneous.
(a) No failure of SCI to exercise, and no delay in exercising any right
hereunder, shall operate as a waiver hereof, nor shall any single or partial
exercise preclude any other or future exercise thereof or the exercise of any
other right.
(b) Section headings are for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
(c) This Agreement shall be governed by the laws of the State of New York
without regard to any conflict of law provisions thereof.
(d) This Agreement shall be binding upon and shall inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including by merger), assigns, heirs and legal representatives.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
__________________________________
Robert A. Zummo
Safety Components International, Inc.
By: ______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations files 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
operations.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-27-1999
<PERIOD-END> DEC-25-1999
<CASH> 7,402
<SECURITIES> 0
<RECEIVABLES> 39,398
<ALLOWANCES> 341
<INVENTORY> 16,301
<CURRENT-ASSETS> 69,917
<PP&E> 91,376
<DEPRECIATION> 22,135
<TOTAL-ASSETS> 188,494
<CURRENT-LIABILITIES> 169,144
<BONDS> 90,000
0
0
<COMMON> 66
<OTHER-SE> 45,168
<TOTAL-LIABILITY-AND-EQUITY> 188,494
<SALES> 55,254
<TOTAL-REVENUES> 55,254
<CGS> 46,151
<TOTAL-COSTS> 48,382
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,817
<INCOME-PRETAX> (20,037)
<INCOME-TAX> (799)
<INCOME-CONTINUING> (19,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,238)
<EPS-BASIC> (3.75)
<EPS-DILUTED> (3.75)
</TABLE>
