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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 28, 1998
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
(State or other jurisdiction of
incorporation or organization)
33-0596831
(I.R.S. Employer Identification No.)
2160 North Central Road
Fort Lee, New Jersey
(Address of principal executive offices)
07024
(Zip Code)
Registrant's telephone number, including area code (201) 592-0008
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 June 22, 1998, was approximately
$67,619,281.
The number of shares outstanding of the registrant's common stock, as of
June 22, 1998, is as follows:
Class Number of Shares
- -----------------------------------------------------------------------
Common Stock, par value $.01 per share 5,084,216
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement in connection with its 1998
annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference into Part III.
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 ("Valentec"), is a leading, low-cost independent supplier of
automotive airbag fabric and cushions, with operations in North America, Europe
and Asia. 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 49% of all
outsourced airbag cushions in North America.
The Company believes the JPS Acquisition (as defined herein) represents
an important step in its airbag growth strategy because it has and will continue
to enable the Company to combine SCFTI's (as defined herein) low-cost operations
and strong market position in airbag fabric with its low-cost operations and
strong market position in airbag cushions to exploit worldwide growth in demand
for airbag module systems ("airbags" or "airbag modules"). According to the
automotive research firm, Tier One, the worldwide market for automotive airbag
modules has grown from approximately 3.6 million installed airbag modules in
1991 to approximately 87.7 million in 1997. According to the same source,
installed airbag modules are projected to more than double to approximately
158.0 million by the year 2000 as a result of increasing usage of airbags in
Europe and Asia and growth in demand for side-impact airbags. EBITDA represents
income from operations before interest, taxes, depreciation and amortization and
excludes the current year's impact of reorganization and relocation expenses.
The Company's consolidated fiscal 1998 net sales and EBITDA were $170.3 million
and $26.0 million, respectively.
As part of its airbag growth strategy, the Company has recently
commenced manufacturing and supplying metal airbag module components to its
customers, further increasing the content per airbag module supplied by the
Company. Sales of airbag fabric, cushions and related metal components accounted
for approximately $125.8 million or 73.9% of consolidated fiscal 1998 net sales.
Sales of airbag cushions accounted for approximately $68.8 million or 82.0% and
approximately $49.1 million or 51.7% of the Company's fiscal 1997 and 1996 net
sales, respectively. The Company believes that it is also, as a result of the
JPS Acquisition, 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
certain technical apparel. Such fabrics accounted for $17.4 million or 10.2% of
consolidated fiscal 1998 net sales and are produced using the same machinery
that produces airbag fabric. The unique ability to interchange airbag and
specialty technical fabrics using the same equipment and similar manufacturing
processes allows the Company to effectively utilize its manufacturing assets and
lower per unit overhead costs. The Company also produces defense related
products, primarily projectiles and other metal components for small to medium
caliber training and tactical ammunition and continues as a systems integrator
and manufacturer for ordnance programs, which accounted for $27.2 million or
15.9% of the Company's consolidated fiscal 1998 net sales and $19.7 million or
11.4%, and $45.9 million or 48.3% of the Company's fiscal 1997 and 1996 net
sales, respectively.
Significant Transactions
The JPS Acquisition. On July 24, 1997, the Company, through a
newly-formed, wholly-owned subsidiary, Safety Components Fabric Technologies,
Inc., acquired (the "JPS Acquisition") all of the assets and assumed certain
liabilities of the Air Restraint/Technical Fabrics Division (the "Division") of
JPS Automotive L.P. ("JPS Automotive"), a subsidiary of Collins & Aikman
Corporation, for approximately $58.8 million after giving effect to post-closing
adjustments. The purchase price included the repayment of approximately $650,000
of capital lease obligations, direct acquisition costs of approximately $900,000
and approximately $1.2 million for the purchase of a building in conjunction
with the JPS Acquisition (the Division is sometimes hereinafter referred to as
"JPS" or "SCFTI"). The Debt Offering (as defined herein) was conditioned upon,
and a significant portion of the proceeds thereof were used to finance, the JPS
Acquisition. SCFTI is a leading, low-cost supplier of airbag fabric in North
America and is also a leading manufacturer of value-added technical fabrics used
in a variety of niche industrial and commercial applications. The Company
believes the JPS Acquisition represents an important step in its airbag growth
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strategy because it has enabled, and will continue to enable, the Company to:
(i) combine strong market positions in airbag fabric and cushions; (ii)
integrate low-cost manufacturing capabilities in airbag fabric and cushions to
exploit the worldwide growth in demand for airbag modules; (iii) interchange
airbag and specialty technical fabrics using the same equipment and
manufacturing processes thereby allowing the Company to effectively utilize its
manufacturing assets; and (iv) enhance and expand its customer base.
The Debt Offering. On July 24, 1997, the Company issued $90,000,000
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. (collectively, the "Initial
Purchasers") in a transaction not registered under the Securities Act of 1933,
as amended (the "Securities Act"), in reliance upon an exemption thereunder (the
"Debt Offering"). The Debt Offering was conditioned upon, and a significant
portion of the proceeds thereof was used to finance, the JPS Acquisition. On
September 2, 1997, the Company commenced an offer to exchange (the "Exchange
Offer") the Old Notes for $90,000,000 aggregate principal amount of its 10 1/8%
Senior Subordinated Notes due 2007, Series B (the "Exchange Notes," together
with the Old Notes, the "Notes"). All of the Old Notes were exchanged for
Exchange Notes pursuant to the terms of the Exchange Offer, which expired on
October 1, 1997. The Exchange Notes evidence the same debt as the Old Notes
(which they replaced). However the issuance of the Exchange Notes has been
registered under the Securities Act, and therefore the Exchange Notes do not
bear legends restricting the transfer thereof.
The Valentec Acquisition. Pursuant to a definitive Stock Purchase
Agreement, effective as of May 22, 1997, the Company acquired in a tax-free
stock for stock transaction all of the outstanding capital stock of Valentec
(the "Valentec Acquisition"). Valentec was the Company's largest shareholder
immediately prior to the Valentec Acquisition owning approximately 27% or
1,379,200 shares of Common Stock. Immediately prior to the Valentec Acquisition,
Robert A. Zummo, the President, Chief Executive Officer and a director of the
Company, was also the President, Chief Executive Officer, a director and
majority shareholder approximately (74.2%) of Valentec, Francis X. Suozzi, a
consultant to and director of Valentec and a director of the Company, was a
minority shareholder approximately (21.2%) of Valentec, and the Valentec
International Corporation Employee Stock Ownership Plan (the "ESOP") was a
minority shareholder approximately (4.6%) of Valentec. The Company issued an
aggregate of 1,369,200 newly issued shares of Common Stock to the shareholders
of Valentec. The purchase price aggregated approximately $15.1 million,
including estimated direct acquisition costs of approximately $1.3 million.
Valentec is a high-volume manufacturer of stamped and precision machined
products for the automotive, commercial and defense industries. Valentec's
machining capabilities and relationships with airbag module integrators has
enabled the Company to increase the amount of content per airbag module supplied
by the Company. Pursuant to this strategy, the Company has begun producing end
caps and retainer brackets for two of its larger airbag module customers.
Airbag Related Products
Structure of the Airbag Industry
Airbag systems consist of an airbag module and an electronic control
module, which are currently integrated by automakers 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.
3
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 three 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 automakers' requirements. Additionally, the Company believes
module integrators are, like their automaker customers, trying to limit the
number of suppliers.
Products
The Company's automotive products include passenger, driver side and
side impact airbag cushions manufactured for installation in over 40 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 1998 accounted for approximately 73.9% of the Company's consolidated
fiscal 1998 net sales. Sales of airbag related products for fiscal years 1997
and 1996 accounted for approximately 82.0% and 51.7%, respectively, of the
Company's consolidated fiscal 1997 and 1996 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 the 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, gas diaphragms; and (v) release liners used in
tire manufacturing. Sales are made against purchase orders, 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 $17.4
million or 10.2% of the Company's consolidated fiscal 1998 net sales and are
produced using the same equipment and manufacturing process that the Company
uses to produce airbag fabric. 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 the same machines that weave the
airbag fabrics which enables the Company to take advantage of demand
requirements for the various products with minimal expenditure on production
retooling costs. By manufacturing technical products with the same machines that
weave airbag 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 and Petri accounted for
approximately 36.1% and 15.6%, respectively, of the Company's consolidated
fiscal 1998 net sales. See Note 9 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 fabric customers include TRW, Breed
Technologies (as successor in interest to AlliedSignal) ("Breed"), AutoLiv and
Delphi and the Company also sells 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.
TRW. The Company has one requirements contract with TRW with respect to
TRW's North American airbag cushion requirements and another requirements
contract with respect to TRW's European airbag cushion requirements. Under these
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contracts, TRW has agreed to purchase its requirements for airbag cushions for
specific models of automobiles at prices to be agreed upon prior to the
beginning of each model year. Each agreement provides that cost reductions
provided to the Company will result in price reductions to TRW. Neither
agreement requires the customer to purchase a specified number of airbag
cushions. Each agreement is terminable by the customer on 90 days' prior written
notice. The North American requirements agreement is for driver and passenger
side airbag cushions for specified models in model years 1996 through 1999 and
requires the Company to maintain capacity to manufacture and ship 25.0% more
airbag cushions than actual quantity estimates provided by TRW. The European
requirements agreement contains penalty payments in the event that the Company
is delayed in delivering the airbag cushion quantities required.
The Company also has a one-year supply agreement with TRW, terminating
January 1, 1999, for the supply of airbag fabric, which has been in the past and
can be in the future renewed on an annual basis.
Petri. The Company's "evergreen" agreement with Petri provides that
prior to 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. The Company's current agreement with
Petri provides for the supply of all of Petri's airbag cushion requirements,
which are expected to be approximately 5.3 million airbag cushions during fiscal
year 1999.
AutoLiv. The Company has also entered into requirements contracts with
AutoLiv. This agreement is substantially similar to the Petri contract. Pursuant
to the AutoLiv contract, the Company has agreed to manufacture 390,000 airbag
cushions for model year 1999. In addition, the Company was recently awarded
significant airbag cushion orders from AutoLiv, pursuant to which the Company is
expected to manufacture an additional 3.1 million airbag cushions on an annual
basis, representing an additional $39.0 million in annual revenues. The approval
of the automobile manufacturers is required prior to commencement of production
of such airbag cushions by the Company.
Breed. Breed's supply agreement has a duration of three years,
terminating in November 1998 for the supply of all airbag fabric outsourced by
Breed. The Company cannot predict what the actual quantity requirements will be
under this agreement.
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 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 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 AZKO, DuPont, 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. There is no underlying supply agreement with DuPont.
Capacity
The Company's Mexican facility has the capacity to manufacture 5.0
million airbag cushions per year and manufactured 2.3 million passenger side and
driver side airbag cushions in fiscal year 1998. The Company has budgeted
approximately $13.0 of capital expenditures required to manufacture airbag
cushions currently in backlog. The Company's United Kingdom facility has the
current capacity to manufacture approximately 2.3 million airbag cushions per
year and manufactured approximately 100,000 driver side airbag cushions in
fiscal 1998. The Company's
5
German facility manufactured approximately 3.6 million driver side and side
impact airbag cushions in fiscal 1998 and has the current capacity to
manufacture approximately 2.8 million airbag cushions per year. The Company
intends to relocate such facility and expects to move certain operations from
such facility to its facility in the Czech Republic and its facility in the
United Kingdom by early fiscal year 2000. The Company's Czech Republic facility,
which began production in 1997, produced approximately 850,000 passenger side
and driver side airbag cushions in fiscal 1998, and has a current capacity to
manufacture approximately 3.5 million airbag cushions per year. The Company
believes that its present capacity is sufficient to meet its currently
forecasted expansion in production for the foreseeable future.
The Company entered into a joint venture agreement during fiscal year 1997,
which establishes a joint venture, based in Hong Kong, for the production of
airbag cushions in China. The Company owns an 80% interest in the joint venture.
The plant and labor for the joint venture is provided by a separate company
owned by the Company's joint venture partner. The joint venture has the capacity
to produce approximately 2.0 million airbag cushions per year, and expects to
begin production in fiscal year 1999. The Company is contemplating the
introduction of weaving capabilities at this facility through its operations at
its South Carolina facility.
The Company's South Carolina facility has a current capacity to
manufacture approximately 30.0 million yards of fabric per year and manufactured
17.4 million yards of fabric in fiscal year 1998. The Company utilizes rapier
weaving machines that are highly 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 specified by airbag module integrators. 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.
Since 1993, the Company has invested $34.5 million in capacity
expansion, significant modernization of its manufacturing facilities and
equipment upgrades.
Sales and Marketing
The Company markets and sells airbag cushions and airbag fabric through its
direct marketing and sales forces based in Greenville, 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 have
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 $2,960,000 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 has 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 Champion Transaction includes, and the Put Transaction (as a
condition to its exercise) will 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, at its sole discretion, to extend the non-competition period for three
successive five year periods, upon payment of a nominal extension fee. See Notes
1 and 8 to the Company's Notes to Consolidated Financial Statements included
elsewhere in this Report.
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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 TRW and AutoLiv, each of which are airbag module
integrators that produce a substantial portion of their own airbag cushions for
their own consumption. While TRW does not generally manufacture airbag cushions
for the same vehicle models that the Company manufactures for TRW, AutoLiv
manufactures airbag cushions for the same models that the Company manufactures
for AutoLiv. 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 with TRW, 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 1997, the total North American airbag fabric market totaled
approximately $151.0 million, up from $148.0 million in the prior year. 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. Increased competition, as well as price reductions of airbag
systems, would adversely affect the Company's revenues and profitability. In
addition, the Company believes that SCFTI will provide it with some measure of
vertical integration, enhancing its ability to compete in the automotive airbag
industry.
Qualification and Quality Control
The Company successfully completed the rigorous process of qualifying
as an airbag supplier to TRW in 1992. Each of the Company's airbag cushions
manufactured for TRW is required to pass design validation and process
validation tests established by the automobile manufacturers and supervised by
TRW relating to the product's design and manufacture. TRW participates in these
design and process validations and must be satisfied with the product's
reliability and performance prior to awarding a production order. The Company
satisfies the QPS-0100 standard set by TRW for design and process validation,
which qualifies it to be a supplier to TRW. The Company underwent similar,
rigorous design validation and process validation tests in order to qualify as a
supplier to AutoLiv, which recently granted a purchase order to the Company for
airbag cushions.
The Company has extensive quality control systems in its airbag related
manufacturing facilities, including the inspection and testing of all products
and is QS9000 certified. The Company also undertakes process capability studies
to determine that the Company's manufacturing processes have the capability of
producing at the quality levels required by its customers.
The Company's United Kingdom facility operates under TRW's quality
system which meets or exceeds ISO 9000, an international standard for quality.
The Company's German facility also satisfies ISO 9000 standards. This
qualification has enabled the Company's European operations to manufacture
airbag cushions under the Company's agreement with TRW. As is the case in the
United States, however, the automobile manufacturers may conduct their own
design and process validation tests of the Company's operations.
The Company's airbag fabric operations also seek to maintain a high
level of quality throughout the manufacturing process. The airbag fabric
operations have been certified as a Quality Assurance Approved Supplier by each
of Breed, TRW, AutoLiv and Mexican Industries. In addition, the airbag fabric
operations' laboratory has obtained Accreditation Against ISO-Guide 25 to ASTM
and DIN Test Methods from the American Association of Laboratory Accreditation
and GP-10 certification from General Motors. Moreover, the Company is the only
airbag fabric manufacturer to have its entire business (not just its
manufacturing facility) certified under QS9000.
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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. Recently,
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.
Defense Related Products
The Company is a supplier 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 defense related
products accounted for $27.2 million or 15.9% of the Company's consolidated
fiscal 1998 net sales and $19.7 million or 11.4%, and $45.9 million or 48.3% of
the Company's fiscal 1997 and 1996 net sales, respectively. See Note 9 to the
Company's Notes to Consolidated Financial Statements included elsewhere in this
Report for certain disclosure regarding the Company's industry segments.
Systems Contract
In September 1994, the Company was awarded a contract by the United
States Army (the "Systems Contract"). The Systems Contract backlog was $14.5
million at March 28, 1998, and the Company expects to reduce such backlog to
$2.6 million by late fiscal 1999. 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. Accordingly, the Systems
Contract has not necessitated a significant investment in capital equipment. As
the prime contractor, the Company is responsible for conducting quality control
inspections and ensuring that the contract is 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 has extended the time for delivery under the Systems
Contract. The Company resumed shipments in February 1998 and expects to be
completed with all deliveries under the Systems Contract in early fiscal 2000.
In connection with the delays, the Company, after consultation with legal
counsel, has filed a claim with the Government of approximately $5.6 million, of
which the Company has recognized, based upon its assessment of the likelihood of
success, approximately $3.8 million in net sales in fiscal year 1998 on the
percentage of completion basis, proportionate to the Systems Contract.
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Other
The Company manufactures 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 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
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.
9
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. See "-- Markets and Customers."
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 automotive products 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 Defense Operation's 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 airbags 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.
As of March 28, 1998, the Company had a defense-related backlog of
approximately $23.2 million of which $20.6 million is expected to be completed
before the end of fiscal year 1999. As of March 31, 1997, the Company had a
defense-related backlog of approximately $24.4 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.
10
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 28, 1998, the Company employed approximately 2,365 employees.
The Company's hourly employees in Mexico are entitled to a federally-regulated
minimum wage, which is adjusted, at minimum, every two years. None of the
Company's employees are unionized. The Company has not experienced any work
stoppages related to its work force and considers its relations with 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 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. 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. Such plan will take
approximately five years to implement at an estimated cost of approximately
$368,000. To date, the Company has spent approximately $244,000 on implementing
such plan. The remediation plan currently includes the simultaneous operation of
a groundwater and vapor extraction system. In addition, the Division 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. 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. See Note 8 to the Company's Notes to Consolidated
Financial Statements included elsewhere in this Report.
Patents
The Company holds four patents and three additional patents are
pending. All of such patents relate to technical improvements for enhancement of
product performance with respect to the Company's airbag, fabric and technical
11
related products. Provided that all requisite maintenance fees are paid, two of
the patents held by the Company expire in 2013 and the third and fourth patents
held by the Company expire in 2014 and 2017, respectively.
Engineering, Research & Development
The Company's fabric 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 were not material to
the Company's financial statements.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Fort Lee, New Jersey.
The Company manufactures automotive and industrial products in six locations,
with total plant area of approximately 1,382,025 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 March 28, 1998. See Note 6 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 1998(2)
Greenville, South Carolina (airbag and
technical related fabrics; warehouse)............. 820,040(1)(6) Owned NA
Germany (airbag cushions)........................... 55,000(3) Leased 1998(4)
Czech Republic (airbag cushions).................... 100,000(5) Owned NA
Gwent, Wales (airbag cushions)...................... 60,000(5) Leased 2003
Costa Mesa, California (metal airbag
components and defense products).................. 129,000(6)(7) Leased 1999
Otay Mesa, California (warehouse)(8)................ 15,700 Leased 1998
Fort Lee, New Jersey (10)........................... 4,685 Leased 2007
Defense(9)
Mount Arlington, New Jersey (defense
systems).......................................... 3,600(10) Leased 2000
Galion, Ohio (defense products)..................... 97,000(6) Owned NA
(1) Office, manufacturing and research and development space.
(2) Lease is subject to two one-year renewal options.
(3) Manufacturing, sales and administration space.
(4) The lease with respect to the 40,000 square feet comprising manufacturing
space expires in 1998. The lease with respect to the 15,000 square feet
comprising sales and administrative space expires in 2001.
(5) Manufacturing and office space.
(6) Manufacturing and administrative space.
(7) Consists of two facilities.
(8) Finished goods distribution center.
(9) Defense related products are also manufactured at the Costa Mesa facility
listed above.
(10) Office space.
12
ITEM 3. LEGAL PROCEEDINGS
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 contracts. The Government has contended that
Valentec is liable for the acts of its predecessors on a theory of successor
corporate criminal liability. The Government contends that the alleged kickbacks
were made through the former Valentec Kisco and Valentec Galion operations while
those operations were owned and operated by the former Valentec from the late
1980's through 1992, prior to Mr. Zummo's 1993 leveraged buy-out of Valentec. No
officer or director of the Company or its subsidiaries is alleged to have
participated in, or known about, such conduct. The Company has no recourse
against the entity which owned Valentec during the operative time period due to
contractual restrictions in the purchase agreement between Mr. Zummo and such
entity. The Company has determined that it is in its best interest to settle
such matter in order to avoid the costs and distractions associated with
contesting the Department of Justice's legal theories on successor liability.
Therefore, a plea agreement has been negotiated with the Antitrust Division of
the Department of Justice (the "Plea Agreement"). Among other things, the terms
of the Plea Agreement provide for the entry of a guilty plea by Valentec to a
one-count criminal violation of participating in a combination and conspiracy to
suppress competition in violation of the Sherman Antitrust Act, 15 U.S.C.ss.1,
the payment by Valentec of a $500,000 fine and an agreement by the Government to
not further criminally prosecute the Company, its subsidiaries, or any of their
respective officers, directors or employees as to the alleged bid-rigging and
kickback scheme. The Plea Agreement will remain subject to the approval of the
United States District Court for the Western District of Tennessee, Eastern
Division (the "Court"). The Plea Agreement, if approved by the Court, would not
release Valentec or its affiliates from potential civil claims that might be
asserted by the United States Department of Justice Civil Division against
Valentec or its affiliates arising out of the Government's investigation of
conduct that is alleged to have occurred in the time frame prior to Mr. Zummo's
1993 leveraged buy-out of Valentec. The Company has had preliminary discussions
with the Civil Division regarding the resolution of such potential civil claims.
As of March 28, 1998 no understanding has been reached as to such potential
civil claims. See Note 8 to the Company's Notes to Consolidated Financial
Statements included elsewhere in this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq National Market (Nasdaq
symbol: ABAG). The following table sets forth the range of high and low bid
information for the Common Stock for each full quarterly period within the two
most fiscal years.
High Low
Year Ended March 28, 1998
First Quarter $ 11 1/4 $ 8 5/8
Second Quarter $ 17 1/8 $ 9 3/4
Third Quarter $ 17 1/2 $ 10 1/2
Fourth Quarter $ 15 1/4 $ 11 3/4
Year Ended March 31, 1997
First Quarter $ 14 3/4 $ 9 1/4
Second Quarter $ 13 3/4 $ 9 1/2
Third Quarter $ 13 $ 8 3/4
Fourth Quarter $ 13 $ 9 1/4
As of June 24, 1998 there were approximately 61 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.
As of July 1, 1997, the Company entered into a one year Agreement (the
"Market Pathways Agreement") for Financial Public Relations Services with Market
Pathways Financial Relations Incorporated ("Market Pathways"), pursuant to which
the Company issued to Market Pathways, in exchange for certain financial and
public relations services, options to purchase 15,000 shares of Common Stock at
an exercise price per share of $9.75, the closing bid price of the Common Stock,
as quoted by the NASDAQ Stock Market on July 1, 1997. Such options were
exercisable immediately after the issuance thereof and expire on the date that
is twelve months from the date of the Market Pathways Agreement. In addition,
the Company agreed to register, at the Company's expense, the shares of Common
Stock underlying such options upon the written request of Market Pathways.
Pursuant to each the of Company's Agreements with Corporate Relations
Group, an affiliate of Market Pathways ("CRG"), dated as of July 1, 1996 and
1995, the Company issued to CRG 3,500 shares of Common Stock in exchange for
certain financial and public relations services rendered thereunder.
The issuance of the Company's securities under its agreements with
Market Pathways and CRG were issued in reliance upon the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended.
Effective as of May 22, 1997, the Company acquired in a tax-free stock
for stock transaction all of the outstanding capital stock of Valentec in
consideration for the issuance to the stockholders of Valentec of an aggregate
of 1,369,200 newly issued shares of Common Stock. Such transaction was not
registered under the Securities Act in reliance upon the exemption under Section
4(2) thereof. See "Business - Significant Transactions".
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data as of and for the fiscal years ended March
28, 1998, March 31, 1997, 1996 and 1995 and for the period from April 28, 1993
through March 31, 1994 are derived from the combined and consolidated financial
statements of the Company and the Automotive and Galion divisions of Valentec
(the "Valentec Divisions"). The consolidated financial statements of the Company
as of and for the year ended March 28, 1998 has been audited by Arthur Andersen
LLP, independent accountants. The combined and consolidated financial statements
of the Company and the Valentec Divisions, for the fiscal years ended March 31,
1997, 1996 and 1995 and for the period from April 28, 1993 through March 31,
1994 have been audited by Price Waterhouse LLP, independent accountants.
During the 1998 fiscal year, the Company incurred approximately $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. These costs are
investments toward consolidating production within the Company's foreign
operations to its low-cost facilities located within the foreign market.
During the 1997 fiscal year, 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.
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.
(in thousands, except per share data and footnotes)
INCOME STATEMENT DATA
Eleven
Months
April 28,
1993
Year Ended Through
March 28, Years Ended March 31, March 31,
------------------------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 (1) 1994
------------------------------------------------------------------
Net Sales $170,310 $ 83,958 $ 94,942 $ 51,779 $ 22,444
Cost of Goods Sold 138,573 67,934 81,908 44,553 18,895
Gross Profit 31,737 16,204 13,304 7,226 3,549
Selling, general and administrative
Expenses 10,729 7,072 5,430 4,050 2,738
Relocation and reorganization costs 1,789 - - - -
Amortization 1,742 348 - - -
Non-recurring consulting charge - - - - 1,250 (2)
Operating income (loss) 17,477 8,604 7,604 3,176 (439)
Other expense (income) 33 208 (807) (484) (83)
Interest expense 7,747 1,555 381 244 235
Income (loss) before income taxes 9,697 6,841 8,030 3,416 (591)
Income tax provision (benefit) 3,689 2,995 3,116 1,283 (207)
Income (loss) before extraordinary
Item and cumulative effect of
Accounting change 6,008 3,846 4,914 2,133 (384)
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 Income (loss) $ 6,008 $ 2,204 $ 4,914 $ 2,133 $ (384)
15
PER SHARE DATA (3)
Eleven
Months
April 28,
1993
Year Ended Through
March 28, Years Ended March 31, March 31,
------------------------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 (1) 1994
------------------------------------------------------------------
Basic per share data:
Income before extraordinary item and
cumulative effect of accounting change $1.20 $0.77 $0.99 $0.53 -
Extraordinary item - (0.08) - - -
Cumulative effect of change in accounting
for deferred product launch costs - (0.25) - - -
----- ----- ----- ----- -----
Net income per share, basic $1.20 $0.44 $0.99 $0.53 -
===== ===== ===== ===== =====
Diluted per share data:
Income before extraordinary item and
cumulative effect of accounting change $1.17 $0.76 $0.97 $0.52 -
Extraordinary item - (0.08) - - -
Cumulative effect of change in accounting
for deferred product launch costs - (0.25) - - -
----- ----- ----- ----- -----
Net income per share, assuming dilution $1.17 $0.43 $0.97 $0.52 -
===== ===== ===== ===== =====
Income before extraordinary item - $3,846 - - -
===== ===== ===== ===== =====
Earnings per common share - $ 0.77 - - -
===== ===== ===== ===== =====
Net income $6,008 $3,463 $5,017 $ 950 -
===== ===== ===== ===== =====
Net income per share, basic $ 1.20 $ 0.69 $ 1.01 $0.24 -
===== ===== ===== ===== =====
Net income per share, assuming dilution $ 1.17 $ 0.69 $ .99 $0.23 -
===== ===== ===== ===== =====
Weighted average common shares
outstanding, basic 5,027 5,027 4,981 4,031 -
===== ===== ===== =====
Weighted average common shares
outstanding, assuming dilution 5,147 5,050 5,083 4,112 -
===== ===== ===== =====
16
BALANCE SHEET DATA
(in thousands)
March 28, March 31,
--------- --------------------------------------------------
1998 1997 1996 1995 1994
--------- --------------------------------------------------
Working capital $ 29,488 $ 11,755 $ 25,067 $ 8,206 $ 1,504
Total assets 198,897 73,407 49,831 28,311 12,837
Long-term debt, net of current portion 24,739 21,296 3,087 2,043 4,760
Senior subordinated debt 90,000 - - - -
Stockholders' equity 39,194 35,274 35,344 15,971 -
Division equity - - - - 866
- ----------------------------------------------
Notes to Selected Financial Data:
(1) The Company did not declare dividends during fiscal year 1998, 1997,
1996 or 1995.
(2) The Valentec Divisions incurred a $1.3 million non-recurring, non-cash
expense related to the issuance of shares of Common Stock to certain
stockholders and affiliates of Champion. In September 1993, in order to
recognize these key sales and marketing representatives' contribution
to the growth of the Company's Automotive Division and to incentivize
them to continue serving in that capacity, the Valentec division agreed
to issue common stock in the company at an aggregate price lower than
fair market value of the shares at the time (as determined by an
independent appraiser) by $1.3 million. The aggregate number of shares
of stock issued was 268,800, representing a fair market value of $4.65
per share, as determined by the independent appraiser. Accordingly,
this amount was recorded as an expense in the period from April 28,
1993 through March 31, 1994. The shares of common stock were issued
during the period from April 28, 1993 through March 31, 1994.
(3) The weighted average number of common shares outstanding as of March
31, 1996 and 1995 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. The
Valentec Divisions did not have a defined capital structure and, as a
result, earnings per share amounts are not presented for the period
prior to the fiscal year ended March 31, 1995.
17
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, Europe and Asia.
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.
During fiscal year 1997, the Company expanded its production and sales
in Europe through its acquisition of Phoenix Airbag GmbH ("Phoenix Airbag") in
Germany and construction of its manufacturing facility in the Czech Republic.
The acquisition of Phoenix Airbag was accounted for as a purchase and,
accordingly, the operations of Phoenix Airbag are included in the historical
consolidated financial statements of the Company from August 6, 1996.
During fiscal year 1998, the Company further expanded its operations in
the automotive sector with strategic acquisitions. Effective May 1997, the
Company acquired all of the outstanding capital stock of Valentec International
Corporation ("Valentec") in a stock for stock exchange (the "Valentec
Acquisition"), enabling the Company to manufacture and supply additional airbag
system components. Immediately prior to the Valentec Acquisition, Robert A.
Zummo, the President, Chief Executive Officer, and a director of the Company,
was also the President, Chief Executive Officer, a director and majority
shareholder approximately (74.2%) of Valentec, Francis X. Suozzi, a consultant
to and director of Valentec and a director of the Company, was a minority
shareholder approximately (21.2%) of Valentec, and the Valentec International
Corporation Employee Stock Ownership Plan (the "ESOP") was a minority
shareholder approximately (4.6%) of Valentec. The acquisition of Valentec was
accounted for as a purchase and, accordingly, is included in the Company's
accounts beginning May 22, 1997. Currently, Valentec manufactures metal airbag
components using machining and stamping processes, among other commercial and
defense products.
Additionally, on July 24, 1997, the Company purchased all of the assets
and assumed certain liabilities of the Air Restraint and Industrial Fabrics
Division of JPS Automotive L.P., now referred to as SCFTI. SCFTI is a leading,
low-cost supplier of airbag fabric in North America and is also a leading
manufacturer of value-added technical fabrics used in a variety of niche
industrial and commercial applications. The acquisition was accounted for as a
purchase and, accordingly, is included in the Company's accounts beginning on
July 24, 1997.
During the 1998 fiscal year, the Company incurred approximately $1.8
million ($1.2 million net of tax benefit of $600,000, or $.23 per share) of
costs associated with the reorganization and relocation of its foreign
operations. These costs are investments toward consolidating production within
the Company's foreign operations to its low-cost facilities located within the
foreign market.
Change in Accounting Principle and Extraordinary Item
During the 1997 fiscal year, 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 $2.0 million effective April 1, 1996, in accordance
with Accounting Principles Board Opinion No. 20. The fiscal 1997 deferred
product launch costs of $1.8 million would have been capitalized under the
previously used accounting method rather than expensed as part of costs of goods
sold. Total product launch costs expensed in fiscal year 1997 was $2.3 million
after income taxes, or $.46 per share. These product launch costs are included
in cost of sales. Management believes its new method is considered the
preferable method of accounting.
Additionally, in connection with a loan agreement in August 1996 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 benefit for income taxes of $255,000), or $0.08 per
share, related to the write-off of deferred financing costs incurred for the
previous credit facility.
18
Results of Operations
The following table sets forth certain operating results as a
percentage of net sales for the periods indicated:
Years Ended
--------------------------------------------------
March 28, March 31, March 31,
1998 1997 1996
--------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 81.4 80.9 86.3
Gross profit 18.6 19.1 13.7
Selling, general and administrative expense 6.3 8.4 5.7
Income from operations 10.3 10.3 8.0
Interest expense (income), net 4.6 1.6 (0.2)
Income before extraordinary item and
cumulative effect of change in accounting 3.5 4.6 5.2
Net income 3.5 2.6 5.2
Year Ended March 28, 1998 Compared to Year Ended March 31, 1997
Net Sales. Net sales increased by $86.4 million or 102.9% to $170.3
million in fiscal year 1998 compared to fiscal year 1997. The increase was
primarily attributable to the acquisition of SCFTI and Valentec, which
contributed approximately $75.1 million on a combined basis. The remaining
increase was primarily attributable to the European operations. During the
fourth quarter of fiscal year 1998, the Company resumed shipment to the U.S.
Army under the Systems Contract, which had previously been delayed due to the
failure of one of the Company's subcontractors to meet the U.S. Army's revised
engineering standards and obtain government process approval for final load,
assembly and pack. In connection therewith, the Company, after consultation with
legal counsel, has filed a claim related to the delay of approximately $5.6
million, of which the Company has recognized, based upon its assessment of the
likelihood of success, approximately $3.8 million in net sales during fiscal
year 1998 on the percentage of completion basis, proportionate to the Systems
Contract. Additionally, the German mark has devalued approximately 13% in
comparison to fiscal year 1997, which impacts the comparability of results
throughout this discussion. The impact on net sales was a decrease of $3.0
million or 1.8%.
Gross Profit. Gross profit increased by $15.7 million or 98.1% to $31.7
million in fiscal year 1998 compared to fiscal year 1997. The increase was
primarily attributable to the acquisition of SCFTI and Valentec, which
contributed approximately $12.0 million on a combined basis, the remaining
increase was primarily attributable to the Defense Operation which completed
certain programs and resumed shipments on the Systems Contract.
Gross profit as a percentage of sales decreased to approximately 18.6%
for fiscal year 1998 from 19.1% for fiscal year 1997. The decrease as a
percentage was due to the inclusion of SCFTI, which has historically lower gross
margins compounded by the price reductions at Phoenix Airbag, partially offset
by an increase in Defense Operations. The textile industry generally produces
margins in the range of 13% to 14% due to the capital intensive production
process. In accordance with the Phoenix Airbag relocation strategy, production
is currently being shifted from Germany to the Company's Czech Republic and
Wales facilities. The Company expects margins to improve in Europe in fiscal
year 1999 upon the completion of the wind down of the Phoenix Airbag operations
in Germany. The devaluation of the German mark impacted gross profit unfavorably
by $665,000 or 2.1%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.7 million or 51.7% to $10.7 million in
fiscal year 1998 compared to fiscal year 1997. The increase was primarily
attributable to the acquisitions of SCFTI and Valentec. However, selling,
general and administrative expenses as a percentage of sales decreased to 6.3%
in fiscal year 1998 from 8.4% in fiscal year 1997.
19
Reorganization and Relocation Costs. In fiscal year 1998 the Company
incurred approximately $1.8 million of costs associated with the reorganization
and relocation of its foreign operations. These costs are investments toward
consolidating production within the Company's foreign operations to its low-cost
facilities located within the foreign market.
Operating Income. Operating income increased by $8.9 million or 103.1%
to $17.5 million in fiscal year 1998 compared to fiscal year 1997. Operating
income increased primarily due to the acquisitions of SCFTI and Valentec and by
the improved results of the Defense Operation. This was partially offset by the
Company's North American (exclusive of SCFTI and Valentec) which yielded lower
operating income compared to fiscal year 1997 primarily as a result of price
reductions. Operating income was also partially offset by price reductions and
reorganization and relocation costs in Europe as well as the devaluation of the
German mark. The devaluation of the German mark impacted operating income
unfavorably by approximately $492,000 or 2.8%.
Interest Expense. Interest expense increased $6.2 million to $7.7
million in fiscal year 1998 compared to fiscal year 1997. This increase was
attributable to the issuance of the 10 1/8% Senior Subordinated Notes (the
"Notes"), the proceeds of which were used primarily to acquire SCFTI and repay
amounts then outstanding under the Company's credit facilities with KeyBank.
Income Taxes. The effective tax rate on pre-tax income was 38.0% in
fiscal year 1998 compared to 43.7% in fiscal year 1997. The tax rate decreased
compared to the prior year due to the increasing percentage of income generated
from domestic operations, primarily SCFTI, which have lower tax rates than the
European operations and the reversal of foreign tax reserves no longer needed.
Net Income. Net income increased to $6.0 million in fiscal year 1998
from $2.2 million in fiscal year 1997. This increase was a result of the factors
identified above. The devaluation of the German mark impacted net income
unfavorably by approximately $208,000 or 3.5%.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Net Sales. Net sales decreased by $11.0 million or 11.6% to $84.0
million in fiscal year 1997 compared to fiscal year 1996. The decrease was
primarily attributable to lower revenues in the Company's defense operation
("Defense Operation") partially offset by an increase in the Company's
automotive operation ("Automotive Operation"). The decrease in the Defense
Operation of $30.7 million reflects the inability to ship the Systems Contract
which had been delayed as a result of the failure of one of the Company's
subcontractors to meet the U.S. Army's revised engineering standards and obtain
government process approval for final load, assembly and pack. The reduced sales
under the Systems Contract were partially offset by the increased sales of metal
ordnance products. The increase in the Automotive Operation of $19.7 million was
primarily attributable to the acquisition of Phoenix Airbag, which contributed
approximately $25.4 million, partially offset by lower sales to TRW under the
European requirements agreement. Sales to TRW under the European requirements
agreement decreased as a result of lower unit prices reflecting redesigned
products and lower fabric prices. The Company's sales of passenger and driver
side airbags produced for the North American market decreased by approximately
$242,000, primarily as a result of increased sales to Delphi and increased sales
of driver side airbags to TRW under the North American requirements contract,
partially offset by lower sales of passenger side airbags to TRW under the North
American requirements contract.
Gross Profit. Gross profit increased by $3.0 million or 22.9% to $16.0
million in fiscal year 1997 compared to fiscal year 1996. The increase was
primarily attributable to the Automotive Operation, the gross profits of which
increased by $5.8 million. The increase was primarily attributable to increased
sales volume in Europe due to the acquisition of Phoenix Airbag, which
contributed approximately $6.9 million to gross profit. This increase was offset
by lower margins in North America and the Defense Operation. The decrease of
approximately $996,000 in North America was primarily the result of the change
in accounting principle discussed above, offset by lower costs due to ongoing
cost reduction programs. The impact of the change in accounting principle was to
currently expense product launch costs, previously deferrable, of $1.8 million.
The decrease in the Defense Operation of $2.8 million was primarily a result of
the delays due to the Systems Contract discussed earlier. See "Defense Related
Products - Systems Contract."
20
Gross profit as a percentage of sales increased to approximately 19.1%
for fiscal year 1997 from 13.7% for fiscal year 1996. Exclusive of the impact of
the change in accounting principle, gross profit as a percentage of sales would
have been approximately 21.2% for fiscal year 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.6 million or 30.2% to $7.1 million in
fiscal year 1997 compared to fiscal year 1996. The increase was primarily
attributable to the Automotive Operation, specifically from the costs of the
acquisition of Phoenix Airbag, which was approximately $1.9 million, partially
offset by lower costs in the U.K. due to lower sales. Selling, general and
administrative expenses as a percentage of sales increased slightly to 8.4% for
fiscal year 1997 from 5.7% for fiscal year 1996. The increase related to the
continued expansion of the Automotive Operation, including additional support
personnel and marketing.
Operating Income. Operating income increased by $1.0 million or 13.2%
to $8.6 million in fiscal year 1997 compared to fiscal year 1996. Operating
income in the Automotive Operation increased by $3.6 million primarily
attributable to the acquisition of Phoenix Airbag, which contributed
approximately $4.8 million. This increase in European Operations was partially
offset by lower operating income in North America. The decrease of approximately
$876,000 in North America was primarily the result of the change in accounting
principle discussed above, offset by lower costs due to ongoing cost reduction
programs. The impact of the change in accounting principle was to currently
expense product launch costs, which were previously deferred in the comparable
period. The increase in the Automotive Operation was partially offset by a
decrease in the Defense Operation of $2.6 million which reflected lower sales
due to delays in shipments of the Systems Contract, partially offset by improved
margins on metal ordnance products, resulting from increased sales volumes,
improved overhead absorption and a change in product mix.
Interest Expense. Interest expense increased $1.2 million or 308.1% to
$1.6 million for fiscal year 1997 compared to fiscal year 1996. This increase
was a direct result of the $20.0 million term loan used for the acquisition of
Phoenix Airbag. The increase of other expense is primarily attributable to
losses on foreign currency transactions.
Income Taxes. The effective tax rate applied on pre-tax income was
43.7% for fiscal year 1997 compared to 38.8% for fiscal year 1996. The tax rate
increased as compared to the prior year due to the increasing percentage of
income generated from European operations, which have higher tax rates than U.S.
operations.
Net Income. Net income decreased to $2.2 million for fiscal year 1997
compared to $4.9 million in fiscal year 1996. Net income decreased due to the
impact of the extraordinary item and the cumulative effect of accounting change
as discussed above. Income before extraordinary item and cumulative effect of
accounting change was $3.8 million for fiscal year 1997 compared to $4.9 million
for fiscal year 1996. The decrease was primarily the impact of the change in
accounting principle for product launch costs during fiscal year 1997. These
costs, which were previously deferrable, are currently expensed as incurred. The
impact on fiscal year 1997 was to expense $1.8 million ($1.1 million net of tax
benefit of $704,000) of product launch costs.
Liquidity and Capital Resources
As the Company's business grows, its equipment and working capital
requirements will also continue to increase as a result of the anticipated
growth of the Automotive Operations. This growth is expected to be funded
through a combination of cash flows from operations, equipment financing,
revolving credit borrowings and the proceeds from potential future Company
public offerings.
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. (collectively, the "Initial Purchasers") in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon an exemption thereunder (the "Debt
Offering"). On September 2, 1997, the Company commenced an offer to exchange
(the "Exchange Offer", together with the Debt Offering, the "Offering") the Old
Notes for $90.0 million aggregate principal amount of its 10 1/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes", together with the
Old Notes, the "Notes"). All of the Old Notes were exchanged for Exchange Notes
pursuant to the terms of the Exchange Offer, which expired on October 1, 1997.
Interest on the Notes accrues from July 24, 1997 and is payable semi-annually in
arrears on each of January 15 and July 15 of each year, commencing January 15,
1998. The Notes are general unsecured obligations of the Company and are
21
subordinated in right of payment to all existing and future senior indebtedness
and to all existing and future indebtedness of the Company's subsidiaries that
are not guarantors. All of the Company's direct and indirect wholly-owned
domestic subsidiaries are guarantors. The Indenture with respect to the Notes
contains certain restrictive covenants that impose limitations upon, among other
things, the Company's ability to incur additional indebtedness.
As of May 21, 1997, the Company, Phoenix Airbag and Automotive
Safety Components International Limited ("ASCIL" and collectively, the
"Borrowers") entered into the Credit Agreement with KeyBank National
Association, as administrative agent ("KeyBank"), and the lending institutions
named therein (the "Credit Agreement"). Prior to the consummation of the
Offering, the Credit Agreement provided for (i) a term loan in the principal
amount of $15.0 million (the "Term Loan") and (ii) a revolving credit facility
(the "Revolving Credit Facility") in the aggregate principal amount of $12.0
million (including letter of credit facilities). The indebtedness under the
Credit Agreement bore interest at a rate equal to either (i) the greater of
KeyBank's prime rate or (ii) the sum of LIBOR plus 1.00% for term loans (and
1.25% for revolving loans, subject to reduction to 1.00% upon consummation of
the Offering so long as no default or event of default shall have occurred and
be continuing). Upon the consummation of the Offering, the Company used the
proceeds thereof to repay the Term Loan and amounts then outstanding under the
Revolving Credit Facility. In connection therewith, the Company's credit
facility with KeyBank was converted into a $27.0 million Revolving Credit
Facility, bearing interest at LIBOR plus 1.00% with a commitment fee of 0.25% on
any unused portion, with the remaining terms and conditions being similar to the
previous Revolving Credit Facility. Any indebtedness under the Credit Agreement
will be secured by substantially all the assets of the Company. As of March 28,
1998, total borrowings under the Credit Agreement were $14.2 million bearing
interest at LIBOR (5.68750% as of March 28, 1998) plus 1.00%. 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.
Net cash generated from operations was approximately $600,000
during fiscal year 1998. Cash used in investing activities in fiscal year 1998
was $80.9 million. Net cash provided by financing activities in fiscal year 1998
was $78.4 million. The Company's operations provided an unusually low source of
funds due to the extraordinary growth the Company experienced, primarily related
to the recent acquisitions, and the relocation and reorganization costs
associated with foreign operations. The Company paid additional costs and
consideration in connection with the acquisition of Phoenix Airbag, primarily
the $2.2 million earn-out accrued at the end of fiscal year 1997 during fiscal
year 1998. In addition, the annual performance targets for 1997 were met and
approximately $2.0 million of additional purchase price is accrued at March 28,
1998, and paid subsequently, in connection with the acquisition of Phoenix
Airbag. The Company incurred certain costs in connection with the acquisition of
Valentec of approximately $2.5 million. Included in these costs were advances to
Valentec prior to the Valentec Acquisition for the purpose of funding
operations. The Company used approximately $58.8 million to purchase SCFTI, (see
discussion below). Cash proceeds from financing activities were used to purchase
SCFTI, repay the Term Loan and Revolving Credit Facility with KeyBank, and repay
certain liabilities of Valentec in connection with the Valentec Acquisition.
These activities resulted in a net decrease in cash of $2.3 for fiscal year
1998.
Capital expenditures were $13.8 million in fiscal year 1998.
Capital expenditures in fiscal year 1998 were used to complete the construction
of the new facility in the Czech Republic and the acquisition of additional
equipment to expand the Company's production capacity worldwide to fulfill new
orders from new and existing customers in fiscal year 1999 and beyond. Capital
expenditures for fiscal year 1999 are anticipated to be approximately $13.0
million.
Pursuant to a definitive Stock Purchase Agreement, effective as of May
22, 1997, the Company acquired all of the outstanding common stock of Valentec.
Valentec was the Company's largest shareholder immediately prior to the Valentec
Acquisition owning approximately 27%, or 1,379,200 shares of the issued and
outstanding shares of the Company's Common Stock to the shareholders of
Valentec. The Company issued an aggregate of 1,369,200 newly issued shares of
Common Stock to the shareholders of Valentec. The acquisition was accounted for
as a purchase. The purchase price aggregated approximately $15.1 million,
including estimated direct acquisition costs of approximately $1.3 million. In
addition, the Company advanced Valentec approximately $1.3 million for the
purpose of funding operations prior to the Valentec Acquisition.
22
Pursuant to a definitive Asset Purchase Agreement, on July 24, 1997,
the Company purchased all of the assets and assumed certain liabilities of the
Division. The acquisition was accounted for as a purchase. The purchase price
aggregated approximately $58.8 million. The purchase price included the
repayment of approximately $650,000 of capital lease obligations, direct
acquisition costs of approximately $900,000, and approximately $1.2 million for
the purchase of a building in conjunction with the Asset Purchase Agreement. The
Company funded the purchase of the Division out of the proceeds from the
issuance of the Notes.
The above discussion may contain forward-looking statements
that involve risks and uncertainties, including, but not limited to, the impact
of competitive products and pricing, product demand and market condition risks,
the ability of Safety Components to realize anticipated cost savings and
earnings projections by the Valentec division; the ability of the Company to
realize the proceeds of the delay claim against the Government related to the
Systems Contract; the continued performance by SCFTI at or above historical
levels; world-wide economic conditions; dependence of revenues upon several
major module suppliers and pricing pressures.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"). FAS 128 establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15. The Company adopted
the statement effective December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income
Summary" ("FAS 130"). FAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general- purpose financial statements. It also requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
statement is effective for the Company's annual and interim financial reports
beginning in the fiscal year ending March 27, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments to be
reported in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for the Company's annual and interim financial
reports beginning in the fiscal year ending March 27, 1999.
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 date have been materially affected by inflation.
23
Year 2000
The Year 2000 issue is the result of computer programs written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company does not believe that the future costs relating to the Year
2000 issues will have a material impact on the Company's consolidated financial
position, results of operations or cash flows. The Company is not yet in a
position to assess whether its customers will attain Year 2000 compliance in a
timely manner or the impact of any such non-compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item appears in Item 14(a)(1) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
24
PART III
ITEMS 10, 11, 12 AND 13.
The information called for by Items 10, 11, 12 and 13 of this Form
10-K is incorporated by reference to those portions of the Company's 1998 Proxy
Statement which contains such information.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements, related notes thereto and report of
independent accountants required by Item 8 are listed on page F-1
herein.
(2) All financial statement schedules are omitted because they are not
applicable or the required information is shown in the Company's
consolidated financial statements or the notes thereto.
(3) Exhibits:
2.1(12) Agreement, dated June 6, 1996, among AB 9607 Verwaltungs GmbH & Co.
KG., Phoenix Aktiengesellschaft and Phoenix Airbag GmbH (the
"Phoenix Purcahse Agreement") (confidential treatment requested as
to part)
2.2(12) Amendment Agreement, dated June 28, 1996, to the Phoenix Purchase
Agreement
3.1(1) Certificate of Incorporation of Safety Systems International, Inc.
3.2(1) Amended and Restated Certificate of Incorporation of Safety Systems
International, Inc.
3.3(1) Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Safety Systems International, Inc.
3.4(11) Certificate of Amendment to the Amended and Restated Certificate of
Safety Components International, Inc. ("Safety Components")
3.5(1) By-laws of Safety Components
3.6(18) Certificate of Incorporation of Automotive Safety Components
International,Inc.(f/k/a Automotive Safety Systems International,
Inc.)
3.7(18) Certificate of Amendment to the Certificate of Incorporation of
Automotive Safety Components International, Inc. ("Automotive
Safety")
3.8(18) Bylaws of Automotive Safety
3.9(18) Certificate of Incorporation of ASCI Holdings Germany (DE), Inc.
("Holdings Germany")
3.10(18) Bylaws of Holdings Germany
3.11(18) Certificate of Incorporation of ASCI Holdings UK (DE), Inc.
("Holdings UK")
3.12(18) Bylaws of Holdings UK
3.13(18) Certificate of Incorporation of ASCI Holdings Mexico (DE), Inc.
("Holdings Mexico")
3.14(18) Bylaws of Holdings Mexico
3.15(18) Certificate of Incorporation of ASCI Holdings Czech (DE), Inc.
("Holdings Czech")
3.16(18) Bylaws of Holdings Czech
3.17(18) Certificate of Incorporation of ASCI Holdings Asia (DE), Inc.
("Holdings Asia")
3.18(18) Bylaws of Holdings Asia
3.19(18) Certificate of Incorporation of Valentec International Corporation
(f/k/a RAZ Acquisition Corporation) ("Valentec")
3.20(18) Certificate of Amendment to the Certificate of Incorporation of
Valentec
3.21(18) Bylaws of Valentec
3.22(18) Certificate of Incorporation of Galion, Inc. ("Galion")
3.23(18) Bylaws of Galion
3.24(18) Certificate of Incorporation of Valentec Systems, Inc. ("Valentec
Systems")
3.25(18) Bylaws of Valentec Systems
3.26(18) Certificate of Incorporation of Safety Components Fabric
Technologies, Inc.
25
3.27(18) Bylaws of Safety Components Fabric Technologies, Inc.
4.1(2) Warrant Agreement, dated as of May 13, 1994 between Hampshire
Securities Corporation and Safety Components
4.2(15) Registration Rights Agreement, dated as of May 22, 1997, by and
among Safety Components, Robert A. Zummo, Francis X. Suozzi and the
Valentec International Corporation Employee Stock Ownership Plan
4.3(16) Form of Pledge Agreement, dated as of May 21, 1997, made by the
Pledgors named therein in favor of KeyBank National Association, as
collateral agent for the benefit of the Secured Creditors (as
defined therein)
4.4(18) Form of Indenture, dated as of July 24, 1997, by and among Safety
Components, the Subsidiary Guarantors named therein and IBJ Schroder
Bank & Trust Company.
4.5(18) Registration Rights Agreement, dated as of July 24, 1997 by and
among Safety Components, the guarantors named therein, BT Securities
Corporation, Alex Brown & Sons Incorporated and BancAmerica
Securities, Inc.
4.6(18) Form of 101/8% Senior Subordinated Note Due 2007, Series A,
including Form of Guarantee
4.7(18) Form of 101/8 % Senior Subordinated Note Due 2007, Series B,
including Form of Guarantee
4.8(18) Form of Amendment No. 2 to Pledge Agreement, dated as of July 15,
1997, made by the Pledgors named therein in favor of KeyBank
National Association, as collateral agent for the benefit of the
Secured Creditors (as defined therein)
10.2(3) Airbag Purchase Agreement by and between TRW Vehicle Safety Systems,
Inc. and Valentec International Corporation ("Valentec") dated March
31, 1993 (confidential treatment granted as to part)
10.3(3) Long-Term Contract for the Supply of Airbags by and between TRW REPA
GmbH and Valentec International Limited ("VIL"), dated September 20,
1993 (confidential treatment granted as to part)
10.4(2) Representation Agreement, effective as of May 13, 1994, by and
between Automotive Safety Components International, Inc.
("Automotive Safety") and Champion Sales and Service Co.
("Champion")
*10.5(4) Employment Agreement, effective as of May 13, 1994, between Safety
Components and Robert A. Zummo
*10.6(4) Employment Agreement, effective as of May 13, 1994, between Safety
Components and W. Hardy Myers
*10.7(4) Stock Option Plan of Safety Components
10.8(2) Master Asset Transfer Agreement, dated May 13, 1994, among Valentec,
Safety Components, Galion and Automotive Safety
10.9(2) Asset Purchase Agreement, dated May 13, 1994, between VIL and
Automotive Safety Components International Limited ("Automotive
Limited")
10.10(9) Corporate Services Agreement, dated as of April 1, 1995, between
Valentec and Safety Components
10.11(2) Facility Agreement, dated May 13, 1994, between Valentec and
Automotive Safety
10.12(2) Facility Agreement, dated May 13, 1994, between VIL and Automotive
Limited
10.13(2) Representation Agreement, effective as of May 13, 1994, by and
between Automotive Limited and Champion
10.14(5) Form of Sublease Agreement, dated May 13, 1994, between VIL and
Automotive Limited
*10.15(6) Employment Agreement, dated as of September 29, 1994 by and between
Safety Components and Paul L. Sullivan
10.16(7) Contract DAAA09-94-C-0532 between Safety Components and the U.S.
Army (the "Systems Contract")
*10.17(8) Employment Agreement, effective as of September 19, 1994, between
Safety Components and Victor Guadagno
10.18(8) Lease Agreement, dated February 15, 1995 between Inmobiliara
Calibert, S.A. de C.V. and Automotive Safety Components
International SA. de C.V.
10.19(16) Credit Agreement, dated as of March 15, 1996, among Safety
Components, Automotive Safety, Galion, Valentec Systems, Inc. and
CUSA
10.20(16) Pledge and Security Agreement, dated as of March 15, 1996, made by
Safety Components, Automotive Safety, Galion and Valentec Systems in
favor of CUSA
26
*10.21(10) Employment Agreement, dated June 1, 1995, between Automotive Limited
and John Laurence Hakes
10.22(10) Underwriting Agreement, dated June 15, 1995, among BT Securities
Corporation, Prime Charter Ltd., Safety Components, Valentec and the
other selling stockholders named therein
10.23(13) Loan Agreement between the Company, Automotive Safety and Holdings
Germany and Bank of America National Trust and Savings Association
("BANT & SA") dated August 1, 1996
10.24(14) TRW/SCI Multi Year Agreement dated as of April 1, 1996 among TRW
Vehicle Safety Systems, Inc., TRW, Inc. and Safety Components.
Confidential treatment requested as to certain portions of this
exhibit. Such portions have been redacted
10.25(14) Exhibits to Credit Agreement dated as of March 15, 1996 among Safety
Components, Automotive Safety, Galion, Valentec Systems and Citicorp
USA, Inc.
10.26(14) Amendment No. 1 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and BANT & SA dated as of
September 30, 1996
10.27(14) Amendment No. 2 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and BANT & SA dated as of
October 31, 1996
10.28(14) Amendment No. 3 to Loan Agreement among Safety Components,
Automotive Safety, Holdings Germany and BANT & SA dated as of
December 31, 1996
10.29(15) Stock Purchase Agreement, dated as of May 22, 1997, by and among
Robert A. Zummo, Francis X. Suozzi, the Valentec International
Corporation Employee Stock Ownership Plan and Safety Components
*10.30(16) Employment Agreement, dated as of February 15, 1997, between Safety
Components and Jeffrey J. Kaplan
*10.31(16) Employment Agreement, dated as of May 19, 1997, between Safety
Components and Thomas W. Cresante
10.32(16) Consulting Agreement, dated as of May 31, 1997, between Safety
Components and W. Hardy Myers
10.33(16) Credit Agreement (the "Credit Agreement"), dated as of May 21, 1997,
by and among Safety Components, Phoenix Airbag and Automotive
Limited, as borrowers and KeyBank National Association, as
administrative agent, and the lending institutions named therein
10.34(16) Form of Subsidiary Guaranty, dated as of May 21, 1997, among the
guarantors named therein, KeyBank National Association, as
administrative agent for itself and the other Lenders (as defined in
the Credit Agreement)
10.35(16) Form of Security Agreement, dated as of May 21, 1997, among the
assignors named therein and KeyBank National Association, as
collateral agent for the benefit of the Secured Creditors (as
defined therein)
10.36(17) Asset Purchase Agreement, dated as of June 30, 1997, between Safety
Components and