Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended March 25, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
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 (I.R.S. Employer
incorporation or organization) Identification No.)
Corporate Center, 40 Emery Street
Greenville, South Carolina 29605
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
10 1/8% Senior Subordinated Notes due 2007, Series B
(Title of Class)
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 12 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 at least the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of July 7, 2000, was approximately $250,000
The number of shares outstanding of the registrant's common stock, as of
July 7, 2000, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,136,316
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS
The Company
Safety Components International, Inc. (the "Company" or "Safety
Components"), a Delaware corporation which was formed on January 12, 1994 as a
wholly-owned subsidiary of Valentec International Corporation, a Delaware
corporation (currently known as Valentec International Corporation, LLC as
successor in interest by operation of law, "Valentec"), is a leading, low-cost,
independent supplier of automotive airbag fabric and cushions, with operations
in North America and Europe. The Company's 1997 acquisition, through Safety
Components Fabric Technologies, Inc., a wholly-owned subsidiary of the Company,
of all of the assets and assumption of certain liabilities of the Air
Restraint/Technical Fabrics Division (the "Division") of JPS Automotive L.P., a
subsidiary of Collins & Aikman Corporation (the Division is sometimes
hereinafter referred to as "SCFTI") was a further step in the Company's airbag
growth strategy because it has enabled the Company to combine SCFTI's weaving
operations and strong market position in airbag fabric with its cut and sew
operations and strong market position in airbag cushions to exploit worldwide
growth in demand for airbag module systems ("airbags" or "airbag modules").
The Company sells airbag fabric domestically and cushions worldwide to all
of the major airbag module integrators that outsource such products. The Company
believes it produces approximately 50% of all outsourced airbag fabric utilized
in North America, and that it manufactures approximately 50% of all outsourced
airbag cushions in North America and Europe. The Company believes that it is
also a leading manufacturer of value-added technical fabrics used in a variety
of niche industrial and commercial applications such as ballistics material for
luggage, filtration, aircraft escape slides, military tents and fire service
apparel.
Sales of automotive fabric, airbag cushions and technical fabric products
(the "automotive and fabrics" business or "core operations") accounted for
approximately $194.7 million or 85.3% of consolidated fiscal 2000 net sales. For
purposes hereof, fiscal 2000 means the fiscal year ended March 25, 2000, fiscal
1999 means the fiscal year ended March 27, 1999 and fiscal 1998 means the fiscal
year ended March 28, 1998. Sales of automotive and fabrics accounted for
approximately $178.3 million or 81.0% and approximately $129.7 million or 78.1%
of the Company's fiscal 1999 and 1998 net sales, respectively. The unique
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows the Company to more
effectively utilize its manufacturing assets and lower per unit overhead costs.
The Company also produces automotive metal components, defense related products,
primarily projectiles and other metal components (the "metal and defense"
business or "non-core operations") for small to medium caliber training and
tactical ammunition and continues as a systems integrator and manufacturer for
ordnance programs, which accounted for $33.6 million or 14.7% of the Company's
consolidated fiscal 2000 net sales and $41.6 million or 18.9% and $36.4 million
or 21.9% of the Company's fiscal 1999 and 1998 net sales, respectively.
The Company announced in November 1999 that management had identified
certain errors relating to the Company's previously issued consolidated
financial statements for fiscal 1999 and fiscal 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, 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 and
determined that the restatement related primarily to two items. The first item
required the reversal of a duplicate booking of a sale and the related
receivable in the Company's defense operations. It was determined that a sale
and related receivable in the Company's non-core defense operations in the
aggregate amount of $4.6 million (before a related tax provision of $1.8
million) had been recorded twice. The second item required the reversal of
certain items totaling $772,000 (before a related tax provision of $297,000)
incorrectly recorded in income in connection with a loan transaction. The
restatement for fiscal 1998, reduced 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
2
million. The restatement for fiscal 1999, reduced 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 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 addition, following the Company's restatement of its earnings
and a default with respect to obligations under its credit agreement, KeyBank
and Fleet Bank, the "Senior Lenders", notified the trustee for the Company's
10.125% 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 their credit
agreement with a post-petition subordinated debtor-in-possession ("DIP")
financing facility.
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 (the "Chapter 11 Bankruptcy Petition").
On April 26, 2000, in conjunction with the filing of the Chapter 11
Bankruptcy Petition, the Safety Filing Group received Bankruptcy 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. 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 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 "Plan") pursuant to Rule
3016 (b), and its Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code. A hearing will be held on July 19, 2000 to consider approval of
the Disclosure Statement. The Plan and the Disclosure Statement, both of which
are subject to revision by the Company prior to the Court hearing date, reflect
a time-phased, payout of 100% all pre-petition claims of all creditors. 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 approximately
aggregate amount of $96.4 million will be completely satisfied through the
ratably proportionate distribution of common stock.
On March 31, 1999, the Company entered into an Investment Agreement (the
"Brera Investment Agreement") with Brera Capital Partners, LLC, a Delaware
limited liability company, and Brera Capital Partners Limited Partnership, a
Delaware limited partnership, through a newly-formed Delaware limited liability
company, Brera SCI, LLC ("Brera"), which provided for, among other things, a
$28.0 million convertible preferred stock investment by
3
Brera in the Company. On May 4, 1999, the Company and Brera mutually agreed to
terminate the Brera Investment Agreement.
Core Operations
Structure of the Airbag Industry
Airbag systems consist of an airbag module and an electronic control
module, which are currently integrated by auto-makers into their respective
vehicles. Airbag modules consist of inflators, cushions, housing and trim covers
and are assembled by module integrators, most of whom produce most of the
components required for a complete module. However, as the industry has evolved,
module integrators have increasingly outsourced non-proprietary components such
as cushions to those companies specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource the majority of their cushion requirements as they focus
on the development of proprietary technologies such as inflators and sensors.
Only one of the module integrators currently weaves its own airbag fabric and
the remainder purchase fabric from airbag fabric producers such as the Company.
A characteristic of the industry is that certain customers of airbag
cushion suppliers are also competitors. The Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. While none of the module integrators produce airbag
cushions for third parties, the Company may compete with its customers to supply
their own internal cushion requirements. However, most of the Company's
suppliers do not produce cushions for the same car/truck model for which the
Company produces cushions.
Another characteristic of the airbag industry is the existence of potential
barriers to entry. New entrants that wish to produce and supply airbag cushions
or airbag fabric must undergo a rigorous qualification process, which can take
as long as two years. The Company believes that in addition to deterring new
entrants, the existence of this qualification process represents switching costs
for module integrators that are required to assist the new supplier in meeting
auto-makers' requirements. Additionally, the Company believes module integrators
are, like their auto-maker customers, trying to limit the number of suppliers.
Products
The Company's automotive products include passenger, driver side, head and
thorax protection curtains, side impact and knee airbag cushions manufactured
for installation in over 50 car and truck models sold worldwide; airbag fabric
for sale to airbag manufacturers; and stamped and machined components used in
airbag modules, including passenger airbag retainers that attach the airbag
cushion to the module's reaction can, as well as driver side module products and
components used in airbag inflators. Sales of airbag related products (inclusive
of sales of airbag fabric) for fiscal year 2000 accounted for approximately
74.5% of the Company's consolidated fiscal 2000 net sales. Sales of airbag
related products for fiscal years 1999 and 1998 accounted for approximately
70.2% and 67.6% of the Company's consolidated fiscal 1999 and 1998 net sales,
respectively.
The Company also manufactures a wide array of specialty technical fabrics
for consumer and industrial uses. These fabrics include: (i) high-end luggage
fabrics, including "ballistics" fabric used in Hartman and Tumi brands of
luggage; (ii) filtration fabrics used in aluminum, coal, steel, cement, clay and
brewing industries; (iii) woven fabrics for use by manufacturers of coated
products; (iv) specialty fabrics used in police jackets, protective apparel worn
by firefighters, fuel cells, bomb and cargo chutes, oil containment booms,
aircraft escape slides, and gas diaphragms; and (v) release liners used in tire
manufacturing. Sales are made against purchase orders, pursuant to releases on
open purchase orders, or pursuant to short-term supply contracts of up to twelve
months. Sales of technical related products accounted for approximately 10.8% of
the Company's consolidated fiscal 2000 net sales. Sales of technical related
products for fiscal years 1999 and 1998 accounted for approximately 10.9% and
10.5% of the Company's consolidated net sales, respectively. The market for the
Company's technical related products is highly segmented by product line.
Marketing and sales of the Company's technical related products is conducted by
the Company's marketing and sales staff based in Greenville, South Carolina.
Manufacturing of these products occurs at the South Carolina facility, using
4
the same equipment and manufacturing process that the Company uses to produce
airbag fabric which enables the Company to take advantage of demand requirements
for the various products with minimal expenditures on production retooling
costs. By manufacturing technical products with the same machines that weave
airbags fabric, the Company is able to more effectively utilize capacity at its
South Carolina plant and lower per unit overhead costs.
Customers
Sales of airbag related products to TRW, Autoliv and Petri accounted for
approximately 27%, 19% and 17%, respectively, of the Company's consolidated
fiscal 2000 net sales. The loss of any such customer could have a material
adverse effect on the Company. See Note 8 to the Company's Notes to Consolidated
Financial Statements included elsewhere in this Report for certain disclosure
regarding the Company's industry segments.
The Company sells its airbag cushions to airbag module integrators for
inclusion in specified model cars generally pursuant to requirements contracts.
Certain of these customers also manufacture airbag cushions to be used in their
production of airbag modules.
The Company's largest airbag cushion customers include TRW, Autoliv and
Petri and the Company's largest airbag fabric customers include TRW, Autoliv and
Delphi. The Company also sells airbag fabric to Reeves, Bradford, ABC and
Mexican Industries. The Company sells its fabric either directly to a module
integrator or, in some cases, to a fabricator (such as the Company), which sells
a sewn airbag to the module integrator. Because driver-side fabric historically
has been coated (to prevent the driver's exposure to high temperatures) before
fabrication into airbags, the Company also sells fabric to coating companies,
which then resell the coated fabric to either an airbag fabricator or module
integrator. Sales are either made against purchase orders, pursuant to releases
on open purchase orders, or pursuant to short-term supply contracts generally
having a duration of up to twelve months.
The following describes the Company's contractual relationship with its
significant customers, the loss of one or more of which could have a material
adverse effect on the Company.
TRW. The Company has a global supply agreement with TRW with respect to the
supply of airbag fabric, airbag cushions and airbag metal components. The global
supply agreement includes price and cost reduction targets by the Company, as
well as sales growth targets to the Company, although TRW is not obligated to
purchase such amounts under the global supply agreement. If price or cost
reduction targets or sales growth targets are not met, TRW and the Company have
agreed to renegotiate pricing or sales volume targets, as applicable.
Autoliv. The Company supplies airbag cushions and airbag fabric to Autoliv
based upon releases from formal purchase orders, which typically cover a period
of twelve months and are negotiated prior to commitment with respect to price
and quantity. No contractual obligation to enter into annual supply agreements
with the Company exists with this customer.
Petri. The Company's "evergreen" agreement with Petri provides that prior
to the commencement of each calendar year, the parties will negotiate price,
quantity and other relevant terms of the airbag cushion supply contract for such
calendar year. Petri is under no contractual obligation to enter into such
annual supply agreements with the Company.
Suppliers
The Company's principal airbag cushion fabric customers generally approve
all suppliers of major airbag components or airbag fabric raw materials, as the
case may be. These suppliers are approved after undergoing a rigorous
qualification process on their products and manufacturing capabilities. In many
cases, only one approved source of supply exists for certain airbag components.
In the event that a sole source supplier experiences prolonged delays in product
shipments or no longer qualifies as a supplier, the Company would work together
with its customers to identify another qualified source of supply. Although
alternative sources of supply exist, a prolonged delay in the approval by the
Company's customers of any such alternative sources of supply could adversely
affect the Company's
5
operating results. Under the Company's agreements with its customers, any
changes in the cost of major components are passed through to the customers.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by DuPont, AZKO, Breed, Unifi and Hoechst Celanese,
among others. The primary yarns include nylon, polyester and Nomex. DuPont is
the leading supplier of airbag fabric yarn to both the market and the Company.
Approximately 90.0% of the nylon yarn used in the Company's airbag fabric
operations is supplied by DuPont pursuant to purchase orders or releases on open
purchase orders. The loss of DuPont as a supplier could have a material adverse
affect on the Company.
Capacity
The Company's Mexican and European facilities manufactured and shipped over
14 million airbag cushions to the Company's North American and European
customers during fiscal 2000 and the Company believes it has adequate capacity
to manufacture its fiscal 2001 budget requirements.
The Company's South Carolina facility has a current capacity to manufacture
approximately 30.0 million yards of fabric per year and manufactured
approximately 26.4 million yards of fabric in fiscal year 2000. The Company
utilizes rapier weaving machines that are versatile in their ability to produce
a broad array of specialty technical fabrics for use in a large number of
applications. In addition, the Company's machinery and equipment have the
capability to weave all types of yarns and fabrics specified by airbag module
integrators as well as a broad variety of technical fabrics. The ability to
easily interchange the machines between air restraint fabric and other specialty
technical fabrics allows the Company to maximize returns on plant assets.
Sales and Marketing
The Company markets and sells airbag cushions and airbag fabric through its
direct marketing and sales forces based in Mexico, California, South Carolina
and Germany. Prior to fiscal year 1998, the Company conducted its airbag cushion
sales and marketing through the efforts of its management and through Champion
Sales & Service Co. ("Champion"), an outside marketing firm engaged by the
Company since May 1992. Champion and Mr. Zummo, the Company's Chairman of the
Board, President and Chief Executive Officer, were instrumental in establishing
the Company's relationship with TRW. The Company was obligated to pay Champion a
commission of 2% on all sales of airbag cushions and airbag related components
to TRW in North America. The Company and the shareholders of Champion entered
into a definitive agreement, dated as of December 22, 1997, pursuant to which,
the Company acquired all of the issued and outstanding capital stock of Champion
for an aggregate purchase price of $3.4 million plus certain amounts previously
paid to Champion and the shareholders of Champion (the "Champion Transaction").
In connection with the Champion Transaction, the Company also entered into a
definitive Put Agreement (the "Put Transaction") with an associate of Champion
(the "Associate") who had the right to a portion of any of the above-referenced
commissions actually received by Champion. Pursuant to the Put Transaction, the
Associate had the option to put to the Company, subject to certain conditions,
all of the issued and outstanding capital stock of Duchi & Associates, Inc., an
entity affiliated with Champion, for a put price of $740,000. The exercise of
such put option was consummated as of January 13, 1999. The Champion Transaction
and the Put Transaction include a twenty-year management services agreement
between the Company and each of the Champion shareholders and the Associate,
respectively. The terms of each such management services agreement prohibits the
Champion shareholders, or the Associate, as the case may be, from competing with
certain businesses of the Company for a period of five years. Each such
management services agreement also provides that the Company has the option, in
its sole discretion, to extend the non-competition period for three successive
five-year periods, upon payment of a nominal extension fee. See Note 1 to the
Company's Notes to Consolidated Financial Statements included elsewhere in this
report.
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with its airbag module integrator customers, which produce
a substantial portion of their own airbag cushions for their own consumption,
but do not generally manufacture
6
airbag cushions for the same vehicle models that the Company manufactures. Most
airbag module integrators subcontract a portion of their requirements for airbag
cushions. The Company believes that its good working relationship with its
customers, the Company's high volume and low-cost manufacturing capabilities,
consistency and level of quality products, the agreements or relationships with
its module integrator customers, the lengthy process necessary to qualify as a
supplier to an automobile manufacturer and the costs in the automotive industry
associated with changes in established suppliers create certain barriers to
entry for potential competitors.
In 1999, the total North American airbag fabric market totaled over $150.0
million. The Company shares this market with another major competitor, Milliken,
and three smaller fabric manufacturers. In addition, Takata, an airbag module
integrator, produces fabric for its airbag cushions. Barriers to entry into this
market include the substantial capital requirements and lengthy lead-times
required for certification of a new participant's fabrics by buyers.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, and
capability to produce a high volume of many models of passenger side and driver
side airbags. In addition, SCFTI has provided the Company with some measure of
vertical integration, enhancing its ability to compete in the automotive airbag
industry. Increased competition, as well as price reductions of airbag systems,
would adversely affect the Company's revenues and profitability.
Technical Center
The European Operations have recently restructured the Engineering Group.
Lead Engineers have been assigned as key customer manager, each engineer is
responsible for a given customer. Supporting each of these lead engineers are
technical specialist, quality engineers and manufacturing engineers. This
arrangement allows the same team to take responsibility for the product from
cradle to grave, assuring robust quotes, smooth launches and efficient
production.
Additionally, the Company has formalized development initiatives by
creating a Technical Center in Hildesheim, Germany. The center has the ability
to conduct static deployment and analysis using high speed video equipment. In
October 2000, the Company is scheduled to add pendulum test capability. There
also exists a full sample shop with manual and CNC sewing equipment,
production-style laser cutter, volume measurement and analysis, textile welding
and other non-sewn fastening equipment. The Technical Center also has a complete
materials laboratory, managed by an experienced materials engineer.
Additionally, the Technical Center utilizes the services and expertise of the
laboratory and textile experts in Greenville. There are also satellite
engineering functions in Wales, United Kingdom.
Qualification and Quality Control
The Company successfully completed the process of qualifying as an airbag
supplier, with the customer base now including Autoliv, Bradford, Dalphi,
Delphi, Petri, TG and TRW. Each of the customers requires the Company to meet
specific requirements for design validation. The customer participates in the
design and process validations and must be satisfied with the reliability and
performance prior to awarding a purchase order. The Company satisfies all
standards and requirements relating to product performance, which then qualifies
the Company to be a supplier.
The Company has extensive quality control and quality assurance systems in
its facilities including inspection and testing of all products and is QS 9000
and ISO 9002 certified. The Company also performs process capability studies and
design of experiments to determine that the manufacturing process's meet or
exceed the quality levels required by each customer.
The Company's overseas facilities also operate under similar quality
systems that meet ISO 9000, ISO 9001 and ISO 9002, which are the international
standards for quality. As is the case with U.S. customers the automobile
manufacturers may conduct their own design and process testing, however, the
Company is Technical Center located in Hildesheim, Germany has the ability to
conduct similar design and testing.
7
The Companies airbag fabric operations also maintain the highest level of
quality through each and every process. The fabric operations have been
certified as approved suppliers by all of its automotive customers. In addition
the fabric operations laboratories have obtained accreditation against ISO Guide
25, ASTM, DIN, JIS and A2LA as well as UL accreditation. The Company was the
first airbag fabric manufacture to have its entire business (not just its
manufacturing facility) certified under QS 9000.
Governmental Regulations
Airbag systems installed in automobiles sold in the United States must
comply with certain government regulations, including Federal Motor Vehicle
Safety Standard 208, promulgated by the United States Department of
Transportation. The Company's customers are required to self-certify that airbag
systems installed in vehicles sold in the United States satisfy these
requirements. The Company's operations are subject to various environmental,
employee safety and wage and transportation related statutes and regulations.
The Company believes that it is in substantial compliance with existing laws and
regulations and has obtained or applied for the necessary permits to conduct its
business operations.
Product Liability
The Company is engaged in a business which could expose it to possible
claims for injury resulting from the failure of products sold by it. In the
past, there has been increased public attention to injuries and deaths of
children and small adults due to the force of the inflation of airbags. To date,
however, the Company has not been named as a defendant in any product liability
lawsuit nor threatened with any such lawsuit. The Company maintains product
liability insurance coverage which management believes to be adequate. However,
a successful claim brought against the Company resulting in a final judgment in
excess of its insurance coverage could have a material adverse effect on the
Company.
Non-Core Operations
The Company is a supplier and systems integration of military ordnance and
other related products as well as of projectiles and other metal components for
small to medium caliber training and tactical ammunition. Sales of metal and
defense related products accounted for $33.6 million or 14.7% of the Company's
consolidated fiscal 2000 net sales and $41.6 million or 18.9%, and $36.4 million
or 21.9% of the Company's fiscal 1999 and 1998 net sales, respectively. See Note
8 to the Company's Notes to Consolidated Financial Statements included elsewhere
in this Report for certain disclosure regarding the Company's industry segments.
On June 27, 2000, Valentec Systems, Inc. received from the Department of
the Army a Notice of Partial Termination for Production of 120mm Fin Assemblies
(the "Partial Termination"). The Company has reserved an amount at March 25,
2000 that management believes is adequate based on the information available and
on advisement from legal counsel. The Company is reviewing the process to appeal
the Partial Termination, however, there can be no assurances as to the final
decision by the Department of the Army.
As discussed in Note 2 to the consolidated financial statements, 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. Operating results of
Valentec deteriorated during fiscal 2000 arising from the loss of business with
a major customer. Valentec was unable to offset this loss with increased sales
with other customers. Accordingly, management concluded that intangible assets
in the amount of $17.7 million were no longer recoverable through future
operations and such amount was written-off during fiscal 2000.
8
Systems Contract
In September 1994, the Company was awarded a contract by the United States
Army (the "Systems Contract"). The Systems Contract backlog was $5.1 million at
March 27, 1999, and the Company has eliminated such backlog at March 25, 2000.
The mortar cartridges sold by the Company to the United States Army pursuant to
the Systems Contract will be utilized in free standing, long-range artillery
weapons in support of infantry units. As a systems integrator, the Company does
not manufacture the mortar cartridges itself, but is a prime contractor,
coordinating the manufacture and assembly of the product components by various
subcontractors. As the prime contractor, the Company was responsible for
conducting quality control inspections and ensuring that the contract was
fulfilled in a timely and efficient manner.
The deliveries of completed mortar cartridges were initially expected to
begin in September 1995, and the Systems Contract was expected to be completed
by September 1996. Due to a delay by one of its subcontractors, the Company has
experienced delays in the shipment of mortar cartridges against the original
shipment schedule. The delay relates to matters between such subcontractor and
the United States Army. As a result of these issues, the United States Army had
extended the time for delivery under the Systems Contract. The Company resumed
shipments in February 1998 and such shipments have been completed during fiscal
2000.
Other
The Company manufactures metal airbag module components for the automotive
airbag industry, projectiles and other metal components primarily for 20
millimeter ammunition and to a lesser extent for 25 and 30 millimeter ammunition
used by the United States Armed Forces. This ammunition is fired from guns
mounted on aircraft, naval vessels and armored vehicles. The metal components
manufactured by the Company are shipped to a loading facility, operated either
by the United States Government or a prime defense contractor, which loads the
explosives, assembles the rounds and packages the ammunition for use. The
Company primarily manufactures components that are used in training rounds,
which are similar to tactical rounds but do not contain the same explosive or
incendiary devices contained in tactical rounds. Because of the continuous use
of training ammunition, the majority of the rounds purchased by the United
States Armed Forces are training rounds. In the past the Company has regularly
received replenishment orders from the United States Armed Forces for its
inventory of training ammunition.
Markets and Customers
The Company's defense related sales are made to the United States Armed
Forces, certain prime defense contractors for the United States Armed Forces and
foreign governments or contractors for foreign governments. The Company is a
principal or sole source supplier for many of the projectiles and other metal
components it manufactures. There can be no assurance, however, that other
companies will not begin to manufacture such products in the future and replace
part or all of the sales by the Company of these products.
Manufacturing and Production
The Company manufactures metal airbag module components for the automotive
airbag industry and other metal components at its Costa Mesa, California
operation and projectiles and other metal components for inclusion in small to
medium caliber ammunition utilizing primarily multi-spindle screw machines at
its manufacturing facility in Galion, Ohio. The manufacturing process includes
the impact extrusion of steel bars to form the blank or rough form shape of the
metal components, the machining of the inside and outside of the metal
components to form their final shape, various heat and phosphate treatments and
painting. The Company believes that its manufacturing equipment, machinery and
processes are sufficient for its current needs and for its needs in the
foreseeable future, with minimal preventive maintenance.
Suppliers
The Company believes that adequate supplies of the raw materials used in
the manufacture of its small to medium caliber products are available from
existing and, in most cases, alternative sources, although the Company is
9
frequently limited to procuring such materials and components from sources
approved by the United States Government.
Quality Control
The Company's defense operations employ Statistical Process Controls
extensively throughout its manufacturing process to ensure that required quality
levels are maintained and that products are manufactured in accordance with
specifications. The Company satisfies the United States Government quality
control standard Million-Q-9858A and ISO-9002. Under the Systems Contract, the
Company is responsible for conducting inspections of the subcontractors for the
program to ensure that they meet these same standards.
Competition
The Company competes for contracts with other potential suppliers based on
price and the ability to manufacture superior quality products to required
specifications and tolerances. The Company believes that it has certain
competitive advantages including its high volume, cost-efficient manufacturing
capability, its co-development of new products with its customers, and the
United States Government's inclination to remain with long-term reliable
suppliers. Since the Company's processes do not include a significant amount of
proprietary information, however, there can be no assurance that other companies
will not, in time, be able to duplicate the Company's manufacturing processes.
United States Government Contracts
Virtually all of the Company's defense related contracts, including the
Systems Contract, are negotiated as firm fixed price contracts with the United
States Government or certain of the United States Government's prime
contractors. These contracts are subject to audit and may be adjusted
accordingly.
A majority of the Company's manufacturing agreements with the United States
Armed Forces and its prime defense contractors are for the provision of
components for a one year term (two years in the case of the Systems Contract),
subject, in certain cases, to the right of the United States Government to renew
the contract for an additional term. Renewals of United States Government
contracts depend upon annual Congressional appropriations and the current
requirements of the United States Armed Forces. United States Government
contracts and contracts with defense contractors are, by their terms, subject to
termination by the United States Government for its convenience. Fixed price
contracts provide for payment upon termination for items delivered to and
accepted by the United States Government, and, if the termination is for
convenience, for payment of the contractor's costs incurred through the date of
termination plus the costs of settling and paying claims by terminated
subcontractors, other settlement expenses and a reasonable profit on the costs
incurred.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry in which there are seasonal
plant shutdowns in the third and fourth quarters of each calendar year. Although
the Systems Contract is not seasonal in nature, there have been and will
continue to be variations in revenues from the Systems Contract based upon costs
incurred by the Company in fulfilling the Systems Contract in each quarter. The
majority of the metal and defense ordnance manufacturing for United States
Government and prime defense contractors has historically occurred from January
through September and there is generally a lower level of manufacturing and
sales during the fourth quarter of the calendar year.
Backlog
The Company does not reflect an order for airbag cushions or airbag fabric
in backlog until it has received a purchase order and a material procurement
release which specifies the quantity ordered and specific delivery dates.
Generally, these orders are shipped within four to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
backlog is a reliable measure of future airbag sales.
10
As of March 25, 2000, the Company had a defense-related backlog of
approximately $11.3 million all of which is expected to be eliminated before the
end of fiscal year 2001. As of March 27, 1999, the Company had a defense-related
backlog of approximately $10.8 million.
Risks of Foreign Operations
Certain of the Company's consolidated sales are generated outside of the
United States. Foreign operations and exports to foreign markets are subject to
a number of special risks, including, but not limited to, risks with respect to
fluctuations in currency exchange rates, economic and political destabilization,
other disruption of markets, restrictive actions by foreign governments (such as
restrictions on transfer of funds, export duties and quotas, foreign customs and
tariffs and unexpected changes in regulatory environments), changes in foreign
laws regarding trade and investment, difficulty in obtaining distribution and
support, nationalization, the laws and policies of the United States affecting
trade, foreign investment and loans, and foreign tax laws. There can be no
assurance that one or a combination of these factors will not have a material
adverse effect on the Company's ability to increase or maintain its foreign
sales or on its results of operations.
In addition, the Company has significant manufacturing operations in
foreign countries and purchases a portion of its raw materials from foreign
suppliers. The production costs, profit margins and competitive position of the
Company are affected by the strength of the currencies in countries where it
manufactures or purchases goods relative to the strength of the currencies in
countries where its products are sold.
Certain of the Company's operations generate net sales and incur expenses
in foreign currencies. The Company's financial results from international
operations may be affected by fluctuations in currency exchange rates. Certain
exchange rate risks to the Company are limited by contractual clauses in the
Company's agreement with TRW for European supply of airbags. Future fluctuations
in certain currency exchange rates could adversely affect the Company's
financial results.
Employees
At March 25, 2000, the Company employed approximately 2,778 employees. The
Company's hourly employees in Mexico are entitled to a federally-regulated
minimum wage, which is adjusted, at minimum, every two years. The Company's
employees at its Mexican facility and certain employees of Valentec Systems are
unionized. In addition, Automotive Safety Components International GmbH & Co. KG
(formerly known as Phoenix Airbag GmbH & Co. KG "Phoenix Airbag"), the Company's
wholly-owned German subsidiary, has a workers' council pursuant to German
statutory labor law and a vast majority of the employees of Phoenix Airbag are
members of a labor union. The employees at the Company's facilities in the U.K.
are also represented by a workers' council. The Company has not experienced any
work stoppages related to its work force and considers its relations with its
employees and the unions currently representing any of its employees to be good.
Environmental Matters
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws, including but not limited to,
those under CERCLA may impose joint and several liability and may apply to
conditions at properties presently or formerly owned or operated by an entity or
its predecessor as well as to conditions of properties at which wastes or other
contamination attributable to an entity or its predecessor have been sent or
otherwise come to be located. The nature of the Company's operations exposes it
to the risk of claims with respect to such matters and there can be no assurance
that violations of such laws have not occurred or will not occur or that
material costs or liabilities will not be incurred in connection with such
claims. Based upon its experience to date, the Company believes that the future
cost of compliance with existing Environmental Laws and
11
liability for known environmental claims pursuant to such Environmental Laws,
will not have a material adverse effect on the Company's financial position or
results of operations and cash flows. However, future events, such as new
information, changes in existing Environmental Laws or their interpretation, and
more vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material.
The Company has identified two areas of underground contamination at the
Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed up by annual
maintenance. The consultants also estimate that remediation costs will be
approximately $250,000, for which the Company had accrued prior to fiscal year
1998 and is included in other long-term liabilities at March 25, 2000 and March
27, 1999. However, depending on the actual extent of impact to the Company or
more stringent regulatory criteria, these costs could be higher. Additionally,
an underground contamination involving machinery fluids exists at the Valentec
facility in Costa Mesa, California and a site remediation plan has been approved
by the Regional Water Quality Control Board. The remediation plan currently
involves the simultaneous operation of a groundwater and vapor extraction
system. Such plan will take approximately five years to implement at an
estimated cost of approximately $368,000, for which the Company had accrued as
part of accrued liabilities. To date, the Company has spent approximately
$325,000 on implementing such plan. In addition, SCFTI has been identified along
with numerous other parties as a Potentially Responsible Party at the Aquatech
Environmental, Inc. Superfund Site. The Company believes that it is a de minimis
party with respect to the site and that future clean-up costs incurred by the
Company will not be material.
A Phase II study revealed limited organic groundwater contamination at the
Company's converter facility in South Carolina. At the time of the Company's
purchase of such facility, $185,000 of the purchase price thereof was placed in
escrow to pay for, if necessary, environmental remediation and monitoring at
such facility. Based on the results of the groundwater monitoring that already
has been conducted, and on the Company's discussions with the South Carolina
Department of Health and Environmental Control ("DHEC"), it appears likely that
no further work will be required.
Low levels of VOCs were found at the Company's Automotive facility in South
Carolina during groundwater sampling. In February 1999, the facility received a
notice letter from DHEC regarding the groundwater contamination. While DHEC
acknowledges that there does not appear to be an active source for groundwater
impact at the facility, it required the facility to perform sampling of two
existing monitoring wells located on the Automotive parcel for VOCs. Low levels
of VOCs again were detected. A meeting was held with DHEC to discuss the
sampling results. DHEC has requested that the Company (i) confirm that no
residential wells exist in the area, (ii) perform additional sampling, and (iii)
propose a program in-site remediation of the groundwater, involving injection of
nutrients to biodegrade to organic compounds in the groundwater. The Company
does not at this time believe that these costs will be material. The Company
cannot evaluate the likelihood of further DHEC requirements at this time.
In the opinion of management, no material expenditures will be required for
its environmental control efforts and the final outcome of these matters will
not have a material adverse effect on the Company's results of operations or
financial position. The Company believes that it currently is in compliance with
applicable environmental regulations in all material respects. Management's
opinion is based on the advice of an independent consultant on environmental
matters.
Patents
The Company holds twelve patents and six additional patents are pending.
Sixteen of such patents relate to technical improvements for enhancement of
product performance with respect to the Company's airbag, fabric and technical
related products and two relate to automotive products at Valentec. Provided
that all requisite maintenance fees are paid, three of the patents held by the
company expire in 2014, two expire in 2016, one expires in 2017, three more
expire in 2018, one expires in 2019, and two expire in 2020.
12
Engineering, Research & Development
The Company's fabric and airbag cushions operations have maintained an
active design and development effort focused toward new and enhanced products
and manufacturing processes. The Company specifically designs and engineers its
fabrics to meet its customers' applications and needs. While most design
requirements are originated by the component manufacturer, the Company is
dedicated to improving the quality of existing products, as well as developing
new products for all applications. Costs associated with design and development
for fabric and airbag cushions were approximately $665,000 during fiscal 2000.
In addition, the Company incurred approximately $278,000 during fiscal 2000 in
connection with the development of proprietary products for the automotive
industry. Valentec has developed a high performance exhaust system, under its
Zummo Performance Products business unit, which is intended for sale through
retail and wholesale channels, although no formal marketing plans have yet been
developed.
Related Parties
The Company established a reserve in the amount of $0.6 million in the
second quarter of fiscal 2000 against its receivable of $1.2 million from
Valentec International Ltd. ("VIL"), an affiliated party, as a result of
uncertainty as to the affiliate's ability to generate sufficient cash to repay
such amount. An agreement was signed in January 2000 between the Company and
Robert A. Zummo, the Chief Executive Officer of the Company, whereby Mr. Zummo
pledged to the Company his stock in the Company as collateral against such
indebtedness. Mr. Zummo is the principal shareholder of VIL. Further, Mr. Zummo
agreed to direct VIL to remit to the Company, in satisfaction of a portion of
the receivable, $564,000 to be received from a foreign customer. In connection
with the restructuring agreement signed in April 2000, discussed below, the
pledged collateral has diminished in value, and Mr. Zummo has agreed to reduce
future payments to him under his employment agreement to cover such receivable
in the event the cash is not received from the foreign customer by July 1, 2001.
In addition, the Company has agreed to release VIL from any amounts due in
excess of such receivable.
13
ITEM 2. PROPERTIES
The Company relocated its corporate headquarters from Fort Lee, New Jersey
to Greenville, South Carolina during fiscal 2000. The Company manufactures
automotive and industrial products in seven locations, with total plant area of
approximately 1,373,000 square feet (including administrative, engineering and
research and development areas housed at plant sites). Below is an overview of
the Company's manufacturing and office facilities as of June 23, 2000. See Note
5 to the Company's Notes to Consolidated Financial Statements included elsewhere
in this Report for more information regarding certain of the Company's
obligations that are secured by certain assets of the Company, including its
owned facilities.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Airbag and Technical Fabrics Related Products
Ensenada, Mexico (airbag cushions) .............. 97,000(1) Leased 2003(2)
Greenville, South Carolina (airbag and
technical related fabrics; warehouse and ...... Owned NA
corporate offices) .............................. 826,040(1)
Bavendstedt, Germany (airbag cushions) .......... 70,000(1) Owned NA
Czech Republic (airbag cushions) ................ 100,000(3) Owned NA
Gwent, Wales (airbag cushions) .................. 60,000(3) Leased 2003
Carlsbad, California (airbag cushions) .......... 2,840(4) Leased 2004
Otay Mesa, California (warehouse) ............... 15,700(5) Leased 2003
Fort Lee, New Jersey (former corporate office) .. 4,685(4) Leased 2007
Metal and Defense
Costa Mesa, California (metal ................... 129,000(3)(6) Leased 2009
components and defense products)
Mount Arlington, New Jersey (defense
systems) ...................................... 3,600(4) Leased Sept. 2000
Galion, Ohio (defense products) ................. 97,000(3) Owned NA
- ----------
(1) Office, manufacturing and research and development space.
(2) Lease is subject to two one-year renewal options.
(3) Manufacturing and office space.
(4) Office space.
(5) Finished goods distribution center.
(6) Consists of two facilities.
14
ITEM 3. 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.
Valentec, which was acquired by the Company in May 1997, has been the
subject of an investigation by the Department of Justice regarding a bid-rigging
and kickbacks scheme alleged to have occurred between 1988 and 1992. The
Department of Justice Antitrust Division has contended that former subsidiaries
or divisions of the former Valentec participated in such misconduct in part
through the actions of a former marketing agent and former employees, in order
to obtain certain government subcontracts awarded by Martin Marietta Ordnance
Systems (the predecessor-in-interest to Lockheed Martin). The Government also
contended that Valentec was liable for the acts of its predecessors on a theory
of successor corporate criminal liability. The Government contended that the
alleged kickbacks were made through the former Valentec Kisco and Valentec
Galion operations while those operations were owned and operated by the former
Valentec from the late 1980's through 1992, prior to the 1993 leveraged buy-out
of Valentec by Robert A. Zummo, the President and Chief Executive Officer of the
Company. No officer or director of the Company or its subsidiaries was alleged
to have participated in, or known about, such conduct. The Company has no
recourse against the entity which owned Valentec during the operative time
period due to contractual restrictions in the purchase agreement between Mr.
Zummo and such entity. The Company determined that it was in its best interest
to settle such matter in order to avoid the costs and distractions associated
with contesting the Department of Justice's legal theories on successor
liability. Therefore, a plea agreement was negotiated with the Antitrust
Division of the Department of Justice (the "Plea Agreement"), pursuant to which
Valentec entered a plea, as the successor to the former Valentec Galion
division, to a one-count criminal information of participating in a combination
and conspiracy to suppress competition in violation of the Sherman Antitrust
Act, 15 U.S.C.ss.1, and agreed to pay a $500,000 fine, all of which was paid
during fiscal year 1999. The Plea Agreement also includes an agreement by the
Government not to further criminally prosecute the Company, its subsidiaries, or
any of their respective officers, directors or employees as to the alleged
bid-rigging and kickback scheme. The Plea Agreement does not release the Company
or Valentec from potential civil claims that might be asserted by the United
States Department of Justice Civil Division against Valentec arising out of the
Government's investigation of conduct that is alleged to have occurred in the
time frame prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. The Company
has had discussions with the Civil Division regarding the resolution of such
potential civil claims. As of the date hereof no understanding had been reached
with the Civil Division as to such potential civil claims. The Company denies
that it is liable for any such potential civil claims. In early 1999, Lockheed
Martin named Valentec as a defendant in a civil action already pending in the
United States District Court for the Western District of Tennessee ("the
Court"). Lockheed Martin asserts that Valentec, as the corporate
successor-in-interest to the former Valentec International Corporation, is
civilly liable to Lockheed Martin under antitrust, breach of contract and other
theories of liability for damages. Lockheed Martin claims that it sustained such
civil damages in part as a consequence of the bid-rigging and kickback scheme
said to have occurred in connection with subcontracts awarded to the former
Valentec Galion by Lockheed Martin's predecessor-in-interest, Martin Marietta
Ordnance Systems, Inc. between 1988 and 1992. Lockheed Martin also seeks a
declaratory judgment that Valentec and the other named defendants shall be held
liable and shall indemnify Lockheed Martin to the extent that the United States
Government makes and establishes civil claims against Lockheed Martin arising
out of such purported antitrust and bid-rigging scheme. Such civil claims have
been established at $270,000. Valentec denies that Valentec has any such
liability to Lockheed Martin and, accordingly, has moved to dismiss all such
claims. On February 29, 2000, the Court dismissed and otherwise entered
judgement in Valentec's favor in all causes of action of the Lockheed Martin
case. However, Lockheed Martin's claim for indemnification for civil claims of
the U.S. Government was not dismissed. Accordingly, Lockheed Martin has filed an
amended complaint against Valentec and the other defendants for $340,000,
representing $270,000 paid by Lockheed Martin to the U.S. Government and $70,000
in legal fees. A settlement offer has been proffered by Lockheed Martin at an
amount for which the Company is adequately reserved.
15
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 Messrs. 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 "1994
Plan") to i) increase the number of shares of the Company's common stock
issuable under the 1994 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 1994
Plan from 75,000 shares in the aggregate to 125,000 shares in the aggregate. The
vote of approval for such amendment was 1,340,671 FOR, 520,378 AGAINST, and
9,135 ABSTAINING
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock was listed on the Nasdaq National Market (Nasdaq symbol:
ABAGE) until February 18, 2000, at which time the common stock was delisted from
the Nasdaq Stock Market). The following table sets forth the range of high and
low bid information for reported sale prices of the Common Stock for each full
quarterly period within the two most recent fiscal years.
High Low
---- ---
Year Ended March 25, 2000
First Quarter $ 8.94 $ 4.50
Second Quarter $ 6.25 $ 2.69
Third Quarter $ 3.94 $ 1.00
Fourth Quarter $ 1.88 $ 0.50
Year Ended March 27, 1999
First Quarter $19.00 $13.63
Second Quarter $18.25 $ 9.38
Third Quarter $17.25 $10.00
Fourth Quarter $15.88 $ 5.50
As of July 7, 2000 there were approximately 131 holders of record of the
Common Stock.
The Company has, to date, not paid any cash dividends to its stockholders
and presently intends to continue its policy of retaining its earnings to
support the growth and development of its business. The Company's existing
credit agreement restricts the Company's ability to pay dividends.
17
Item 6. Selected Financial Data
The selected financial data as of and for the fiscal years ended March 25,
2000, March 27, 1999, March 28, 1998, and March 31, 1997 and 1996 are derived
from the consolidated financial statements of the Company. The consolidated
financial statements of the Company as of and for the years ended March 25,
2000, March 27, 1999 and March 28, 1998 have been audited by Arthur Andersen
LLP, independent accountants. The consolidated financial statements of the
Company for the fiscal years ended March 31, 1997 and 1996 have been audited by
PricewaterhouseCoopers LLP, independent accountants.
Management discovered certain matters relating to the Company's financial
statements for fiscal 1999 and fiscal 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 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 and determined that
the restatement related primarily to two 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. 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
cumulative effect on retained earnings was $2.7 million and $3.5 million as of
March 28, 1998 and March 27, 1999, respectively.
During fiscal 2000, the Company incurred approximately $4.0 million of
costs associated with the investigation and restatement of the Company's
financial statements for fiscal 1998 and 1999, and the restructuring of the
Company's balance sheet.
During the third quarter of fiscal 2000 the Company recognized a goodwill
impairment charge of $17.7 million, related to the Valentec acquisition. The
operating results of Valentec deteriorated during the year arising from the loss
of business with a major customer. Valentec was unable to offset this loss with
increased sales with other customers. Management concluded that the intangible
assets were no longer recoverable through operations and such amount was written
off in the financial statements during the third quarter of fiscal 2000.
During fiscal 1999, after exploring a variety of strategic alternatives,
the Company entered into the Brera Investment Agreement. The Company and Brera
subsequently reached a mutual agreement to terminate such agreement. The Company
incurred approximately $2.5 million of fees and expenses during fiscal 1999
related to the Brera Investment Agreement and its termination. This charge
included a reimbursement to Brera for fees and expenses incurred by it.
During fiscal 1999 and fiscal 1998, the Company incurred approximately $2.4
million ($1.2 million, net of tax benefit of $1.2 million) and $1.8 million
($1.2 million net of tax benefit of $600,000) of costs associated with the
reorganization and relocation of its foreign operations, respectively. These
costs were investments toward consolidating production within the Company's
foreign operations to its low-cost facilities located within the foreign market.
During fiscal 1997, the Company changed its accounting for product launch
costs from the deferral method to the expense as incurred method. The Company
recorded the cumulative effect of this change in accounting principle in the
amount of $1.3 million, net of income taxes, or $0.25 per share. During fiscal
year 1997, $1.8 million ($1.1 million net of tax benefit of $704,000) of product
launch costs were expensed. In addition, in connection with a new loan agreement
with Bank of America National Trust and Savings Association, which replaced the
revolving credit with Citicorp US, Inc., the Company recorded an extraordinary
loss of $383,000, net of income taxes, or $0.08 per share, relating to the
write-off of deferred financing costs incurred for the previous credit facility.
18
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto, included elsewhere in this Report.
INCOME STATEMENT DATA (in thousands, except per share data and footnotes)
Restated Restated
Year Ended Year Ended Year Ended Years Ended
March 25 March 27, March 28, March 31,
-------------------------------------------------------------------------
2000(1) 1999(1) 1998(1) 1997(1) 1996(1)
-------------------------------------------------------------------------
Net sales $ 228,266 $ 219,981 $ 166,074 $ 83,958 $ 94,942
Cost of goods sold 200,185 196,760 138,767 67,934 81,908
--------- --------- --------- --------- ---------
Gross profit 28,081 23,221 27,307 16,024 13,034
Selling, general and administrative
Expenses 16,353 16,030 10,796 7,072 5,430
Research and development expenses 943 1,090 357 -- --
Terminated investment agreement costs -- 2,500 -- -- --
Amortization 2,078 2,362 1,742 348 --
Relocation and reorganization costs -- 3,238 1,789 -- --
Goodwill impairment charge 17,676 -- -- -- --
Restructuring and restatement 3,969 -- -- -- --
--------- --------- --------- --------- ---------
Operating (loss) income (12,938) (1,999) 12,623 8,604 7,604
Other expense (income) 1,937 2,197 (397) 208 (807)
Interest expense 14,116 12,788 7,747 1,555 381
--------- --------- --------- --------- ---------
Income (loss) before income taxes (28,991) (16,984) 5,273 6,841 8,030
Income tax (benefit) provision 6,154 (3,321) 1,927 2,995 3,116
--------- --------- --------- --------- ---------
(Loss) income before extraordinary
item and cumulative effect of
accounting change (35,145) (13,663) 3,346 3,846 4,914
Extraordinary item-deferred
financing costs (less tax benefit of $225) -- -- -- (383) --
Cumulative effect of change in accounting
for deferred product launch costs (less
tax benefit of $718) -- -- -- (1,259) --
--------- --------- --------- --------- ---------
Net (loss) income $ (35,145) $ (13,663) $ 3,346 $ 2,204 $ 4,914
========= ========= ========= ========= =========
19
PER SHARE DATA(2)
Restated Restated
Year Ended Year Ended Year Ended Years Ended
March 25, March 27, March 28, March 31,
2000(1) 1999(1) 1998(1) 1997(1) 1996(1)
--------------------------------------------------------------------
Basic per share data:
Income (loss) before extraordinary item and
Cumulative effect of accounting change $ (6.84) $ (2.67) $ 0.67 $ 0.77 $ 0.99
Extraordinary item -- -- (0.08) --
Cumulative effect of change in accounting
for deferred product launch costs -- -- -- (0.25) --
--------- --------- --------- --------- ---------
Net income (loss) per share, basic $ (6.84) $ (2.67) $ 0.67 $ 0.44 $ 0.99
========= ========= ========= ========= =========
Diluted per share data:
Income (loss) before extraordinary item and
Cumulative effect of accounting change $ (6.84) $ (2.67) $ 0.65 $ 0.76 $ 0.97
Extraordinary item -- -- (0.08) --
Cumulative effect of change in accounting
for deferred product launch costs -- -- -- (0.25) --
--------- --------- --------- --------- ---------
Net income (loss) per share, assuming $ (6.84) $ (2.67) $ 0.65 $ 0.43 $ 0.97
========= ========= ========= ========= =========
dilution
Income before extraordinary item and
Cumulative effect of accounting change -- -- $ 3,846 --
=========
Earnings per common share -- -- $ 0.77 --
=========
Net (loss) income $ (35,145) $ (13,663) $ 3,346 $ 2,204 $ 4,914
========= ========= ========= ========= =========
Net (loss) income per share, basic $ (6.84) $ (2.67) $ 0.67 $ 0.44 $ 0.99
========= ========= ========= ========= =========
Net (loss) income per share, assuming $ (6.84) $ (2.67) $ 0.65 $ 0.43 $ 0.97
========= ========= ========= ========= =========
dilution
Weighted average common shares
Outstanding, basic 5,136 5,112 5,027 5,027 4,981
========= ========= ========= ========= =========
Weighted average common shares
Outstanding, assuming dilution 5,136 5,112 5,147 5,050 5,083
========= ========= ========= ========= =========
BALANCE SHEET DATA
(in thousands)
Restated Restated
March 25, March 27, March 28, March 31,
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Senior subordinated debt $ 90,000 $ 90,000 $ 90,000 $ -- $ --
Working capital (100,150) 35,274 25,304 11,755 25,050
Total assets 175,560 217,970 194,633 73,407 49,831
Long-term debt, net of current portion 15,736 53,700 24,739 21,296 3,087
Stockholders' (deficit) equity (14,440) 22,456 36,532 35,274 35,344
- ----------
Notes to Selected Financial Data:
(1) The Company did not declare dividends during fiscal years 2000, 1999, 1998,
1997 or 1996.
(2) The weighted average number of common shares outstanding as of March 31,
1996, includes the weighted average of the pro forma number of shares
assumed issued prior to the Company's initial public offering in May 1994
to retire inter-company and other indebtedness.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a leading low-cost independent supplier of automotive airbag
fabric and cushions, with operations in North America and Europe. Due to the
Company's historical and anticipated growth, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto, appearing herein.
Management discovered certain matters relating to the Company's financial
statements for fiscal 1999 and fiscal 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 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 and determined that
the restatement related primarily to two 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. 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
cumulative effect on retained earnings was $2.7 million and $3.5 million as of
March 28, 1998 and March 27, 1999, respectively.
During the third quarter of fiscal 2000 the Company recognized a goodwill
impairment charge of $17.7 million, related to the Valentec acquisition. The
operating results of Valentec deteriorated during the year arising from the loss
of business with a major customer. Valentec was unable to offset this loss with
increased sales with other customers. Management concluded that the intangible
assets were no longer recoverable through operations and such amount was written
off in the financial statements during the third quarter of fiscal 2000.
During fiscal 2000, the Company incurred approximately $4.0 million of
costs associated with the investigation and restatement of the Company's
financial statements for fiscal 1998 and 1999, and the restructuring of the
Company's balance sheet. Such costs were necessary for the financial stability
of the Company for the future.
During the third quarter of fiscal 1999 the Company reevaluated its
strategic decision to exit the manufacturing of airbags in Hildesheim, Germany.
The original plan developed in December 1996 called for the closure and move of
the entire manufacturing operation to the Company's Czech Republic and United
Kingdom production facilities. During fiscal 1999, the Company incurred
approximately $2.4 million ($1.2 million net of tax benefit of $1.2 million, or
$0.23 per share) of costs associated with the relocation of substantially all of
its labor-intensive passenger airbags operations to its lower labor cost Czech
Republic facility. During fiscal 1998, the Company incurred approximately $1.8
million ($1.2 million net of tax benefit of $600,000, or $0.23 per share) of
costs, which were charged to operations, associated with the reorganization and
relocation of its foreign operations. These costs were investments toward
consolidating labor-intensive production within the Company's foreign operations
to its lower cost facilities located within the foreign market. While the
Company accomplished the move of substantially all of its labor-intensive
passenger airbag operations, the Company decided not to move the remaining
automated airbag operations, primarily driver and side impact bags. The decision
to continue manufacturing in Germany was based on the existing and anticipated
program delivery commitments. The Company purchased a new facility in
Bavendstedt, Germany near the existing facility and completed its move into the
new facility during the second quarter of fiscal year 2000. The new German
facility has allowed the Company to conduct its operations in Germany in a more
efficient and cost effective manner.
21
Results of Operations
The following table sets forth certain operating results as a percentage of
net sales for the periods indicated:
Years Ended
------------------------------
Restated Restated
March 25, March 27, March 28,
2000 1999 1998
--------- --------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 87.7 89.4 83.6
Gross profit 12.3 10.6 16.4
Selling, general and administrative expense 7.2 7.3 6.5
Income (loss) from operations (5.7) (0.9) 7.6
Interest expense, net 6.2 5.8 4.7
Net income (loss) (15.4) (6.2) 2.0
Year Ended March 25, 2000, Compared to Year Ended March 27, 1999, as restated
Net Sales. Net sales increased by $8.3 million or 3.8% to $228.3 million in
fiscal 2000 compared to fiscal 1999. The increase was primarily attributable to
increased sales volume from new awards from existing customers in the U.S. and
European core operations, offset by lower sales in the non-core operations.
North American core operations showed increased sales of 11.3% for air bag
cushions and related fabric products over the prior fiscal year. European core
operations had increased sales of 6.1% over the prior fiscal year, despite such
sales having been adversely impacted (approximately 4.7%) by foreign currency
translation rates. With respect to fabric sales, technical fabrics increased $.7
million or 2.9% over the prior fiscal year, while airbag fabric sales decreased
by $1.5 million or 3.2% although the decrease in external sales volume was
accompanied by a much greater increase in internal sales volume to the Company's
Enseneda, Mexico airbag plant in support of their higher demand for airbag
cushions. The non-core operations had a decrease in sales of $8.0 million or
19.3% below the prior fiscal year; such decreases were attributable primarily to
lower volume at all of the non-core operations, including specifically lower
sales for the M16 links and 120 MM mortar system which were significantly below
the prior year due to the phase out of those contracts.
Gross Profit. Gross profit increased by $4.9 million or 21.1% to $28.1
million compared to the prior fiscal year. Approximately $6.9 million of the
increase was attributable to margin gains in the core operations arising from
efficiency improvements and related successes in the Lean Manufacturing program
which the Company began implementing since the beginning of fiscal 2000 and
favorable product mix. Non-core operations adversely impacted overall gross
profit by $2.0 million due to decreased sales volumes. Gross profit as a
percentage of sales increased to approximately 12.3% from 10.6% for the prior
fiscal year. The increase as a percentage of sales was due to the items
discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $16.4 million increased by $0.3 million or 2.0%
compared to the prior fiscal year. The prior fiscal year included the writeoff
of $1.5 million of receivables associated with a contract dispute with a
significant customer of Valentec. Selling, general and administrative expenses
as a percentage of sales decreased to 7.2% in the current fiscal year from 7.3%
for the prior fiscal year due to the above-referenced items.
Research and Development Expenses. Research and development expenses
decreased by $0.2 million or 13.5% to $0.9 million compared to the prior fiscal
year. 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.
Terminated Investment Agreement Costs. The Company expensed approximately
$2.5 million of fees and expenses during the fourth quarter of fiscal 1999
related to the Brera Investment Agreement and its termination.
Reorganization and Relocation Costs. Within the European operations, the
Company incurred approximately $2.4 million of costs associated with the move of
labor intensive passenger airbag lines from the Company's German facility to its
lower labor cost Czech Republic facility. These costs included, but were not
limited to, contract laborers, duplicate personnel, increased scrap costs and
freight costs. The Company also expensed approximately $0.3 million associated
with the closure of the China facility, as part of an effort to consolidate
manufacturing operations within Europe and maximize the capacity of the European
operations. During the fiscal 1998 the Company incurred approximately $1.8
million of costs associated with the reorganization and relocation of its
foreign operations. The Company also expensed approximately $0.5 million during
the fourth quarter of fiscal 1999 related to the anticipated relocation of its
corporate office into its South Carolina facility.
Goodwill Impairment Charge. The Company recognized a goodwill impairment
charge of $17.7 million with no associated tax benefit, related to the 1997
acquisition of Valentec. Operating results of Valentec deteriorated during
fiscal 2000 arising from the loss of business with a major customer. The
subsidiary was unable to offset this loss with increased sales with other
customers. Accordingly, management concluded that intangible assets in the
amount of
22
$17.7 million was no longer recoverable through future operations and such
amount was written-off in the Company's financial statements for the quarter
ended December 25, 1999.
Restatement and Restructuring Costs. The Company incurred approximately
$4.0 million of legal, professional and re-financing related costs associated
with the investigation and restatement of its financial statements for fiscal
years 1998 and 1999, and its restructuring efforts leading up to its filing
under Chapter 11 on April 10, 2000.
Operating Income/Loss. Operating loss increased by $11.0 million to $13.0
million or 550.0% compared to the prior fiscal year. The decrease was primarily
attributable to the items discussed above.
Other Expense. Other expense in fiscal 2000 consisted primarily of a
write-off of obsolete fixed assets of approximately $0.7 million and crystalized
and uncrystalized exchange losses of $0.8 million. Other expenses in fiscal 1999
consisted primarily of a write-off of investments of approximately $0.5 million
during the third quarter of fiscal 1999, a write-down of fixed assets held for
sale of approximately $0.7 million during the third quarter of fiscal 1999, and
a write-down of fixed assets held for sale or approximately $0.8 million during
the fourth quarter of fiscal 1999. The investment, made in early fiscal 1997 in
an unaffiliated company, related to a specific type of airbag fabric, which the
Company no longer believes will yield any future benefits. The write-down of an
asset held for sale, purchased in fiscal 1998, related to a specific line of
business at Valentec for which sales did not materialize resulting in a
determination by the Company to sell the related assets. The write-down during
the fourth quarter related to the disposal of China assets of approximately $0.2
million and revaluation of fixed assets held for sale at Valentec of
approximately $0.6 million.
Interest Expense. Interest expense increased $1.3 million to $14.1 as
compared to the prior year. The increase is primarily due to higher revolving
credit balances during the year and the mortgage for the new German facility.
Income Taxes. Income taxes for fiscal 2000 reflect adjustments for deferred
tax valuation allowances established against deferred tax assets and the
non-deductibility of the Valentec goodwill impairment charge discussed above.
Net Loss. Net loss of $35.1 million in fiscal 2000 compared to the loss of
$13.7 million for fiscal 1999. This decrease resulted from the items discussed
above.
Year Ended March 27, 1999, as restated, Compared to Year Ended March 28, 1998,
as restated
Net Sales. Net sales increased by $53.9 million or 32.5% to $220.0 million
in fiscal 1999 compared to fiscal 1998. The increase was primarily attributable
to the inclusion of the operations of SCFTI for the entire fiscal 1999,
increased sales volume in Europe, and increased sales in the defense operations,
offset by lower sales at Valentec. SCFTI was acquired on July 24, 1997 and
included in the Company's entire fiscal year 1999, whereas SCFTI was included
for approximately eight months during fiscal 1998. This resulted in an increase
in sales of approximately $22.3 in fiscal 1999 compared to fiscal 1998. Valentec
was acquired effective as of May 22, 1997 and included in the Company's entire
fiscal 1999, whereas Valentec was included for approximately ten months during
fiscal 1998. Sales at Valentec decreased approximately $3.8 million for the
entire fiscal 1999 as compared to the ten months of fiscal 1998. The decrease in
sales at Valentec was primarily the result of contract disputes and subsequent
loss of such contracts, offset by the inclusion of Valentec for the additional
two months. European automotive operations sales increased approximately $27.0
million in fiscal 1999 due to increased volumes. The European operations grew
59% during fiscal 1999 as compared to fiscal 1998 due to significant airbag
cushion awards from existing customers. Defense sales increased approximately
$12.9 million in fiscal 1999 compared to fiscal 1998, primarily due to the
resumption in delivery under the Company's 120 millimeter mortar systems
contract with the U.S. Army. The increase in airbag sales was offset in part by
the effects of the General Motors strike during fiscal 1999 and price decreases
to the Company's customers. Sales of airbag fabric, cushions and metal
components to suppliers of General Motors were significantly reduced during
fiscal 1999. The total impact on sales of the GM strike during fiscal 1999 was
approximately $4.5 million.
Gross Profit. Gross profit decreased by $4.1 million or 15% to $23.2
million in fiscal 1999 compared to fiscal 1998. Approximately $2.0 million of
the decrease was attributable to the European operations, and approximately $3.0
million to the decrease in sales at Valentec. The decrease was partially offset
by the inclusion of the operations of
23
SCFTI for the entire fiscal 1999. The European operating margins suffered during
fiscal 1999 due to the initial ramp up phase of new programs, compounded by one
of the Company's European customers experiencing internal production problems.
The production problem our customer experienced caused it to temporarily curtail
orders, while the Company maintained its facilities to enable it to produce at
historical production rates. Valentec's gross profit decreased primarily as a
result of lost margin on lost sales during fiscal 1999 due to certain contract
disputes and the loss of such contracts. The Company has implemented a
substantial cost reduction program to return Valentec to higher gross profit
margins. SCFTI contributed additional gross profit of approximately $2.4 million
in fiscal 1999 as compared to fiscal 1998. Additionally, the impact of the
General Motors strike on gross profit of the Company was approximately $1.3
million during fiscal 1999. The strike resulted in the loss of gross margin from
lost sales during the period, and the costs of additional personnel who had been
hired for the ramp up of certain programs that were delayed. These newly trained
employees were not laid off because the Company anticipated a timely ending to
the strike.
Gross profit as a percentage of sales decreased to approximately 10.6% for
fiscal 1999 from 16.4% for fiscal 1998. The decrease as a percentage of sales
was due to the items discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $5.2 million or 48.5% to $16.0 million in
fiscal 1999 compared to fiscal 1998. Increased selling, general and
administrative expenses resulted primarily from the inclusion of SCFTI and
Valentec for the entire period during fiscal 1999. The Company also wrote off
$1.5 million of receivables associated with a contract dispute with a
significant customer of Valentec. Selling, general and administrative expenses
as a percentage of sales increased to 7.3% in fiscal 1999 from 6.5% for fiscal
1998 due to the above-referenced items.
Research and Development Expenses. Research and development expenses
increased by $0.7 million or 205.3% to $1.1 million in fiscal 1999 compared to
fiscal 1998. Research and development costs at Valentec during fiscal 1999 of
approximately $0.6 million were incurred in connection with the development of
proprietary products for the automotive industry. Valentec has developed a high
performance exhaust system, under its Zummo Performance Products business line
anticipated to be sold through retail and wholesale channels. The Company
believes the margins for these products will be in excess of existing historical
margins at Valentec, although sales for fiscal 2000 are not expected to be
material. The remaining research and development costs were incurred at SCFTI in
its technical fabrics division.
Terminated Investment Agreement Costs. The Company expensed approximately
$2.5 million of fees and expenses during the fourth quarter of fiscal 1999
related to the Brera Investment Agreement and its termination.
Reorganization and Relocation Costs. Within the European operations, the
Company incurred approximately $2.4 million of costs associated with the move of
labor intensive passenger airbag lines from the Company's German facility to its
lower labor cost Czech Republic facility. These costs included, but were not
limited to, contract laborers, duplicate personnel, increased scrap costs and
freight costs. The Company also expensed approximately $0.3 million associated
with the closure of the China facility, as part of an effort to consolidate
manufacturing operations within Europe and maximize the capacity of the European
operations. During the fiscal 1998 the Company incurred approximately $1.8
million of costs associated with the reorganization and relocation of its
foreign operations. The Company also expensed approximately $0.5 million during
the fourth quarter of fiscal 1999 related to the anticipated relocation of its
corporate office into its South Carolina facility.
Operating Income/Loss. Operating income decreased by $14.6 million or
115.8% to a loss of $2.0 million in fiscal 1999 compared to fiscal 1998. The
decrease was primarily attributable to the items discussed above.
Other Expense. Other expenses in fiscal 1999 consisted primarily of a
write-off of investments of approximately $0.5 million during the third quarter
of fiscal 1999, a write-down of fixed assets held for sale of approximately $0.7
million during the third quarter of fiscal 1999, and a write-down of fixed
assets held for sale of approximately $0.8 million during the fourth quarter of
fiscal 1999. The investment, made in early fiscal 1997 in an unaffiliated
company, related to a specific type of airbag fabric, which the Company no
longer believed will yield any future benefits. The write-down of an asset held
for sale, purchased in fiscal 1998, related to a specific line of business at
Valentec for which sales did not materialize resulting in a determination by the
Company to sell the related assets. The write-down during the fourth quarter
related to the disposal of China assets of approximately $0.2 million and
revaluation of fixed assets held for sale at Valentec of approximately $0.6
million.
24
Interest Expense. Interest expense increased $5.0 million to $12.8 million
in fiscal 1999 compared to fiscal 1998. This increase was primarily attributable
to the issuance of the Company's 10 1/8% Senior Subordinated Notes, the proceeds
of which were used primarily for the acquisition of SCFTI, outstanding for an
additional four months during fiscal 1999. Debt also increased under the
Company's revolving credit facility to fund operations and the Master Equipment
Lease Agreement, dated as of July 10, 1998, between KeyCorp, a division of
KeyCorporate Capital Inc. and the Company.
Income Taxes. The effective income tax rate on pre-tax loss was 19.6% for
fiscal 1999 compared to an effective income tax rate of 36.5% on pre-tax income
for fiscal 1998. The tax benefit rate was lower during fiscal 1999 due to a
valuation reserve established against deferred tax assets of $1.7 million
related to Valentec net operating losses incurred prior to the Company's
acquisition of Valentec. Additionally, the Company had income at higher foreign
tax rates, while losses were at lower domestic rates. Lastly, the tax rate was
impacted by the non-deductible goodwill amortization at Valentec.
Net (Loss) Income Net income decreased to a loss of $13.7 million in fiscal
1999 compared to income of $3.3 million for fiscal 1998. This decrease resulted
from 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 amended lines
of credit with the Company's Senior Lenders, as discussed in the following
paragraphs.
On April 26, 2000, in conjunction with the filing of the Chapter 11
Bankruptcy Petition, the Safety Filing Group received Bankruptcy 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. 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 pre-petition credit
facility.
The Company is in the process of negotiating with potential exit financing
lenders to review its options of funding of Post Bankruptcy needs, although no
commitment has been received so far.
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.
Credit Agreement
The Company, ASCI GmbH and Automotive Safety Components International
Limited, a wholly-owned subsidiary of the Company organized under the laws of
the United Kingdom, entered into an agreement with KeyBank National Association,
as administrative agent ("KeyBank"), dated as of May 21, 1997 as amended to date
(the "Credit Agreement"). The Credit Agreement consists of a $40.0 million
revolving credit facility for a five year term ($37.9 million outstanding as of
March 25, 2000), bearing interest at LIBOR (6.13% as of March 25, 2000) plus
3.0% with a commitment fee of 1.0% per annum for any unused portion. The initial
proceeds from KeyBank were used to repay the Bank of America NT&SA term loan and
revolving credit facility. KeyBank was subsequently repaid with the proceeds
from the Offering. The Company incurred approximately $470,000 of financing fees
and related costs. These costs have been deferred and 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. In
25
addition, the interest rate was increased to LIBOR plus 3.0% and the commitment
fee was increased to 1.0%. 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. Additionally, the Company will be subject, as of June 24, 2000, to a
Senior Funded Debt to 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. As of March 25, 2000 there was no
availability under the Credit Agreement and the Company was in default of
certain financial covenants. Consequently, obligations outstanding under the
Credit Agreement are classified as current liabilities as of March 25, 2000 in
the consolidated balance sheet. The indebtedness under the Credit Agreement is
secured by substantially all the assets of the Company.
Senior Subordinated Notes
On July 24, 1997, the Company issued $90.0 million aggregate principal
amount of its 10 1/8% Senior Subordinated Notes due 2007, Series A (the "Old
Notes") to BT Securities Corporation, Alex. Brown & Sons Incorporated and
BancAmerica Securities, Inc. in a transaction not registered under the
Securities Act of 1933, as amended, in reliance upon an exemption thereunder
(the "Debt Offering"). On September 2, 1997, the Company commenced an offer to
exchange (the "Exchange Offer", together with the Debt Offering, the "Offering")
the Old Notes for $90.0 million aggregate principal amount of its 10 1/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for 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 has accrued as of March 25, 2000, as part of accrued liabilities,
approximately $6.5 million of interest. The Company incurred approximately $3.9
million of fees and expenses related to the Offering. Such fees have been
deferred and are being 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 (Note 14).
On January 18, 2000, the Company did not make a scheduled interest payment
on its 10.1/8% Senior Subordinated Notes (the "Notes"). The senior lenders of
the Company had previously notified the trustee for the Company's Notes that
they were exercising their rights to block such interest payment.
Other
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, and requires monthly payments of $150,469, secured by
certain equipment located at SCFTI. The rate swap is considered immaterial to
the Company's financial position at March 25, 2000.
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.
The new German facility has allowed the Company to conduct its operations in
Germany in a more efficient and cost effective manner.
During fiscal year 2000, net cash provided by operations was $11.2 million.
Such cash provided was primarily by the reduction of accounts receivable and
inventories from the prior year. Additionally, the Company incurred non-cash
charges of approximately $17.7 million, which related to the goodwill impairment
charge during the third quarter of fiscal year 2000 at Valentec and $8.8 million
of depreciation. Cash used by investing activities was $9.8 million, of which
$7.7 million was used for the acquisition of additional equipment to expand the
Company's production capacity worldwide. The Company also paid the final
consideration in connection with the acquisition of ASCI GmbH, which consisted
of a $2.0 million earn-out accrued at the end of fiscal year 1999. Net cash used
in financing activities in fiscal year 2000 was
26
$1.5 million, which was primarily from the Company's repayments on various debt
instruments. These repayments were offset by borrowings of $700,000 on the
Credit Agreement and a $2.9 million mortgage on the German facility. The above
activities, in conjunction with the effect of foreign exchange rates resulted in
a net decrease in cash of $343,000 in fiscal year 2000.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and
Hedging Activities," effective, as amended, for years beginning after June 15,
2000. This new standard requires recognition of all derivatives, including
certain derivative instruments embedded in other contracts, as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The Company is in the process of reviewing the
effect, if any, that SFAS 133 will have on the Company's consolidated financial
statements and disclosures.
Seasonality and Inflation
The Automotive Operation's business is subject to the seasonal
characteristics of the automotive industry in which there are seasonal plant
shutdowns in the third and fourth calendar quarters of each year. Although the
Systems Contract is not seasonal in nature, there will be variations in revenues
from the Systems Contract based upon costs incurred by the Company in fulfilling
the Systems Contract in each quarter. The majority of the Defense Operation's
ordnance manufacturing for U.S. Government and prime defense contractors occurs
from January through September and there is generally a lower level of
manufacturing and sales during the fourth calendar quarter. The Company does not
believe that its operations to dat