UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2002
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
41 Stevens Street, Greenville, South Carolina 29605
(Address and zip code of principal executive offices)
(864) 240-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |X| No |_|
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of February 10, 2003, was 4,959,678.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The unaudited condensed consolidated financial information at December 28, 2002
and for the thirteen week and thirty-nine week periods then ended, unaudited
condensed consolidated statements of operations and of cash flows for the
thirteen and thirty-nine weeks ended December 29, 2001 and the audited condensed
consolidated balance sheet at March 30, 2002 relate to Safety Components
International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Consolidated Balance Sheets as of December 28, 2002
(unaudited) and March 30, 2002 3
Unaudited Condensed Consolidated Statements of Operations for the
thirteen weeks ended December 28, 2002 and December 29, 2001 4
Unaudited Condensed Consolidated Statements of Operations for the
thirty-nine weeks ended December 28, 2002 and December 29, 2001 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended December 28, 2002 and December 29, 2001 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II OTHER INFORMATION 20
SIGNATURES 21
CERTIFICATIONS 22
Private Securities Litigation Reform Act of 1995
The discussion in this report may contain forward-looking statements that
involve risks and uncertainties, including, but not limited to, those relating
to the impact of competitive products and pricing, dependence of revenues upon
several major module suppliers; worldwide economic conditions; the results of
cost savings programs being implemented; domestic and international automotive
industry trends, including the marketplace for airbag related products; the
ability of the Company to effectively control costs and to satisfy customers on
timeliness and quality; approval by automobile manufacturers of airbag cushions
currently in production; pricing pressures; labor strikes and the results from
restructuring efforts.
2
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 28, March 30,
2002 2002
------------ ---------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 2,498 $ 2,692
Accounts receivable, net ................................................. 46,475 35,056
Inventories .............................................................. 23,718 16,774
Prepaid and other ........................................................ 3,011 2,521
--------- ---------
Total current assets .................................................. 75,702 57,043
Property, plant and equipment, net ............................................ 52,246 48,044
Reorganization value in excess of amounts allocable to identifiable assets, net -- 14,576
Identifiable intangible assets, net ........................................... 1,103 1,071
Other assets .................................................................. 3,154 1,900
Net assets held for sale ...................................................... -- 2,637
--------- ---------
Total assets .......................................................... $ 132,205 $ 125,271
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 25,888 $ 18,516
Accrued and other current liabilities .................................... 10,877 9,635
Current portion of long-term debt ........................................ 34,467 25,181
--------- ---------
Total current liabilities ............................................. 71,232 53,332
Long-term debt ................................................................ 7,694 12,182
Other long-term liabilities ................................................... 4,333 3,919
--------- ---------
Total liabilities ..................................................... 83,259 69,433
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ................ -- --
Common stock: $0.01 par value per share - 20,000,000 shares authorized;
5,000,000 shares issued and 4,959,678 shares outstanding ............. 50 50
Common stock warrants .................................................... 34 34
Additional paid-in-capital ............................................... 50,916 50,916
Treasury stock: 40,322 shares at cost .................................... (411) (411)
Retained earnings (accumulated deficit) .................................. (5,547) 5,339
Accumulated other comprehensive income (loss) ............................ 3,904 (90)
--------- ---------
Total stockholders' equity ............................................ 48,946 55,838
--------- ---------
Total liabilities and stockholders' equity ............................ $ 132,205 $ 125,271
========= =========
(1) Derived from the audited consolidated balance sheet as of March 30, 2002.
See notes to unaudited condensed consolidated financial statements.
3
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Thirteen Thirteen
Weeks Ended Weeks Ended
December 28, 2002 December 29, 2001
----------------- -----------------
Net sales ........................................................................... $ 61,877 $50,051
Cost of sales, excluding depreciation ............................................... 52,696 43,157
Depreciation ........................................................................ 2,436 1,873
-------- -------
Gross profit ................................................................ 6,745 5,021
Selling and marketing expenses ...................................................... 525 394
General and administrative expenses ................................................. 2,840 2,345
Research and development expenses ................................................... 350 139
Amortization of intangible assets ................................................... 31 225
-------- -------
Income from operations ...................................................... 2,999 1,918
Other (income) expense, net ......................................................... (750) 126
Interest expense, net ............................................................... 842 988
-------- -------
Income from continuing operations before income tax provision ............... 2,907 804
Provision for income taxes .......................................................... 1,192 750
-------- -------
Income from continuing operations ........................................... 1,715 54
Loss on disposition of discontinued operations, net of income tax benefit of $0 ..... 1,363 --
-------- -------
Net income .......................................................................... $ 352 $ 54
======== =======
Net income per common share - basic:
Income from continuing operations ........................................... $ 0.35 $ 0.01
Loss on disposition of discontinued operations .............................. (0.28) --
-------- -------
Net income per common share - basic ................................................. $ 0.07 $ 0.01
======== =======
Net income per common share - diluted:
Income from continuing operations ........................................... $ 0.35 $ 0.01
Loss on disposition of discontinued operations .............................. (0.28) --
-------- -------
Net income per common share - diluted ............................................... $ 0.07 $ 0.01
======== =======
Weighted average number of common shares outstanding - basic ........................ 4,960 4,960
======== =======
Weighted average number of common shares outstanding - diluted ...................... 4,967 4,960
======== =======
See notes to unaudited condensed consolidated financial statements.
4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
December 28, 2002 December 29, 2001
----------------- -----------------
Net sales ......................................................................... $ 180,863 $ 146,569
Cost of sales, excluding depreciation ............................................. 152,510 121,928
Depreciation ...................................................................... 6,984 5,237
--------- ---------
Gross profit .............................................................. 21,369 19,404
Selling and marketing expenses .................................................... 1,580 1,322
General and administrative expenses ............................................... 9,438 7,370
Research and development expenses ................................................. 777 694
Amortization of intangible assets ................................................. 90 675
--------- ---------
Income from operations .................................................... 9,484 9,343
Other income, net ................................................................. (2,857) (506)
Interest expense, net ............................................................. 2,757 3,303
--------- ---------
Income from continuing operations before income tax provision ............. 9,584 6,546
Provision for income taxes ........................................................ 4,456 2,500
--------- ---------
Income from continuing operations ......................................... 5,128 4,046
Loss on disposition of discontinued operations, net of income
tax benefit of $0 and $1,511, respectively ...................................... 1,363 2,267
Cumulative effect of change in method of accounting ............................... (14,651) --
--------- ---------
Net (loss) income ................................................................. $ (10,886) $ 1,779
========= =========
Net income (loss) per common share, basic and diluted:
Income from continuing operations ......................................... $ 1.04 $ 0.81
Loss on disposition of discontinued operations ............................ (0.28) (0.45)
Cumulative effect of change in method of accounting ....................... (2.95) --
--------- ---------
Net (loss) income per common share, basic and diluted ............................. $ (2.19) $ 0.36
========= =========
Weighted average number of shares outstanding - basic and diluted ................. 4,960 4,960
========= =========
See notes to unaudited condensed consolidated financial statements.
5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
December 28, 2002 December 29, 2001
----------------- -----------------
Cash Flows From Operating Activities:
Net (loss) income ........................................................ $(10,886) $ 1,779
Loss on disposition of discontinued operations ........................... 1,363 2,267
Cumulative effect of change in method of accounting ...................... 14,651 --
-------- --------
Income from continuing operations ........................................ 5,128 4,046
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation ........................................................... 6,984 5,237
Amortization ........................................................... 90 675
Loss on disposition of assets .......................................... 158 101
Deferred taxes ......................................................... -- 2,167
Accrual of interest on current obligation .............................. 81 24
Net changes in operating assets and liabilities ........................ (11,140) (573)
-------- --------
Net cash provided by continuing operations ......................... 1,301 11,677
Net cash provided by (used in) discontinued operations ............. 812 (3,799)
-------- --------
Net cash provided by operating activities .......................... 2,113 7,878
-------- --------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............................... (6,587) (3,071)
Proceeds from disposition of discontinued operations ..................... 500 --
Cost of acquisition ...................................................... -- (1,467)
-------- --------
Net cash used in continuing operations ............................. (6,087) (4,538)
Net cash provided by discontinued operations ....................... 26 3,667
-------- --------
Net cash used in investing activities .............................. (6,061) (871)
-------- --------
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note ...................... (8,650) (1,814)
Repayment of Congress Subordinated term note ............................. (2,095) (1,814)
Net borrowing on Congress revolving credit facility ...................... 18,668 674
Payment to former owner of acquired business ............................. (2,486) --
Repayments of other debt and long term obligations ....................... (1,921) (2,195)
Acquisition of treasury stock ............................................ -- (7)
-------- --------
Net cash provided by (used in) continuing operations ............... 3,516 (5,156)
Net cash used in discontinued operations ........................... -- (549)
-------- --------
Net cash provided by (used in) financing activities ................ 3,516 (5,705)
-------- --------
Effect of exchange rate changes on cash ....................................... 238 (416)
-------- --------
(Decrease) increase in cash and cash equivalents .............................. (194) 886
Cash and cash equivalents, beginning of period ................................ 2,692 4,994
-------- --------
Cash and cash equivalents, end of period ...................................... $ 2,498 $ 5,880
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................................... $ 2,271 $ 2,611
Income taxes ....................................................... 2,902 304
Non-cash investing and financing activities:
Foreign currency translation adjustment ............................ $ 4,045 $ 784
Unrealized loss on hedging transactions, net of taxes .............. (51) (1)
See notes to unaudited condensed consolidated financial statements.
6
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Safety Components International, Inc. and its subsidiaries
("Safety Components" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted from this report, as is permitted by such
rules and regulations; however, Safety Components believes that the disclosures
are adequate to make the information presented not misleading. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Form 10-K for
the year ended March 30, 2002. The Company has experienced, and expects to
continue to experience, variability in net sales and net income from quarter to
quarter. Therefore, the results of the interim periods presented herein are not
necessarily indicative of the results to be expected for any other interim
period or the full year. In the opinion of management, the information furnished
reflects all adjustments necessary for a fair presentation of the results for
the reported interim periods, including those of a normal recurring nature, as
well as adjustments for the cumulative effect in change in method of accounting
and the disposition of discontinued operations.
As discussed in Note 2, the Company has reported its metal and defense
businesses as discontinued operations in the consolidated financial statements
from October 11, 2000 through December 28, 2002. At December 28, 2002, the
Company had disposed of all discontinued operations.
The Company previously reported that it had aggregated its results into a
single segment for purposes of reporting financial condition and results of
operations under SFAS No. 131. The Company sells similar products (airbag
cushions, airbag fabric and technical fabrics), uses similar processes in
selling these products, sells the products to similar classes of customers, and
considering the manner in which the business is managed and evaluated by
management, concluded that it operates as a single operating segment.
Note 2 Discontinued Operations
On October 10, 2000, the Company concluded to exit and sell its metal and
defense businesses consisting of Valentec Wells, LLC, the metallic belt links
business located in Missouri (relocated from Costa Mesa, CA), and Galion, Inc.,
the defense systems and products divisions located in Ohio.
Valentec Wells, LLC was sold on September 27, 2001, and on December 23,
2002, the Company completed the disposal of its discontinued operations with the
sale of Galion, Inc. ("Galion") pursuant to a stock purchase agreement between
the Company and Galion Acquisition, LLC, an affiliate of The Diversified Group
Incorporated. The Company sold all its stock in Galion for a purchase price of
$500,000 in cash (subject to a working capital adjustment of $46,000 to be paid
by the Company subsequent to December 28, 2002), resulting in a loss on
disposition of discontinued operations of approximately $1.4 million. There was
no tax effect on the loss on disposition as the Company recorded a deferred tax
asset and a concurrent reserve on the tax asset as a result of the loss on
disposition being a capital loss.
7
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of financial information for the Company's
discontinued metal and defense operations (unaudited) (in thousands):
-----------------------------------------------------------------------------------
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
December 28, 2002 December 29, 2001 December 28, 2002 December 29, 2001
-----------------------------------------------------------------------------------
Net sales $1,830 $5,435 $8,186 $2,541
Discontinued Operations:
Loss on disposition 1,363 -- 1,363 2,267
Net assets of discontinued operations at March 30, 2002 were as follows
(in thousands):
March 30, 2002
--------------
Accounts receivable, net $ 1,630
Inventories, net 843
Property, plant and equipment, net 2,376
-------
Total assets 4,849
Current liabilities (1,970)
Other liabilities (242)
-------
Net assets held for sale $ 2,637
=======
Note 3 Inventories
Inventories reported on the Company's balance sheets were as follows
(unaudited) (in thousands):
December 28, 2002 March 30, 2002
----------------- --------------
Raw materials $ 8,662 $ 5,493
Work-in-process 8,557 5,922
Finished goods 6,499 5,359
------- -------
Total $23,718 $16,774
======= =======
Note 4 Long-Term Debt
The Company has available an aggregate, $35.0 million, revolving credit
facility with Congress Financial Corporation (Southern) (the "Congress
Facility"), expiring October 9, 2003. Accordingly, the Company has classified
the amount outstanding for the Congress Facility in the current portion of long
term debt as of December 28, 2002. Under the Congress Facility, the Company may
borrow up to the lesser of (a) $35.0 million or (b) 85% of eligible accounts
receivable, plus 60% of eligible finished goods, plus 50% of eligible raw
materials. Included within borrowings under the Congress Facility (and its
borrowing limitations) are $2.8 million in term loans which are to be repaid in
equal monthly installments of approximately $84,000, with the unpaid principal
amount due on October 9, 2003, unless the Congress Facility is renewed at that
time. The amount outstanding under the facility at December 28, 2002 and March
30, 2002 (including term loans) was $21.5 million and $4.9 million,
respectively. Also included within the borrowings under the Congress Facility is
a $3.0 million letter of credit facility, under which the Company had exposure
of $435,000 pursuant to letters of credit outstanding at December 28, 2002 (none
outstanding at March 30, 2002). At December 28, 2002, the Company's availability
for additional borrowings (under the maximum allowable limit) was approximately
$13.5 million.
The Company's subordinated secured note facility (the "Subordinated
Facility") with KeyBank National Association and Fleet Bank is due on October
10, 2003. Pursuant to the terms of an extension agreement entered into on
October 11, 2002, the Company repaid $5.0 million of the outstanding principal
balance on October 11, 2002. Such payment was funded by borrowings under the
Congress Facility. The amount outstanding under the
8
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subordinated Facility at December 28, 2002 and March 30, 2002 was $10.3 million
and $18.9 million, respectively.
The Congress Facility and the Subordinated Facility both require the
Company to meet a minimum adjusted net worth (as defined) covenant along with
other certain non-financial covenants. At December 28, 2002, the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facility and the Subordinated Facility.
The Company intends to renegotiate or replace the Congress Facility and
the Subordinated Facility when these facilities mature in October 2003. Although
no assurances can be provided in this regard, management currently believes that
it will be able to renegotiate or replace these facilities with amended or new
facilities on comparable terms.
Note 5 Earnings Per Share
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding. Diluted earnings per share are computed
based upon the weighted average number of common and potential common shares
outstanding. Potential common shares consist of shares under option and
warrants; the warrants are anti-dilutive for all periods presented. A
reconciliation of basic and diluted weighted average shares outstanding is
presented below:
-----------------------------------------------------------------------------------
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
December 28, 2002 December 29, 2001 December 28, 2002 December 29, 2001
-----------------------------------------------------------------------------------
Weighted average number
of common shares
outstanding - basic 4,959,678 4,959,678 4,959,678 4,959,678
Net effect of dilutive stock
options - based on the
treasury stock method
using the average
market price 7,323 * * *
--------------------------------------------------------------------------
Weighted average number
of common shares
outstanding - diluted 4,967,001 4,959,678 4,959,678 4,959,678
==========================================================================
* Effect is anti-dilutive for these periods.
Note 6 Comprehensive Income (loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
-----------------------------------------------------------------------------------
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
December 28, 2002 December 29, 2001 December 28, 2002 December 29, 2001
-----------------------------------------------------------------------------------
Net income (loss) $ 352 $ 54 $ (10,886) $ 1,779
Foreign currency
translation adjustment 1,231 65 4,045 784
Unrealized gain (loss) on
hedging transactions,
net of taxes 49 -- (51) (1)
--------------------------------------------------------------------------
Comprehensive income
(loss) $ 1,632 $ 119 $ (6,892) $ 2,562
==========================================================================
9
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Contingencies
The Company, from time to time, is a party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
Note 8 Derivatives and Hedging
Safety Components monitors its risk associated with the volatility of
certain foreign currencies against its functional currency, the U.S. dollar. The
Company uses certain derivative financial instruments to reduce exposure to
volatility of foreign currencies. The Company has formally documented all
relationships between hedging instruments and hedged items, as well as risk
management objectives and strategies for undertaking various hedge transactions.
Derivative financial instruments are not entered into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on May 31, 2002
to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are being monitored for effectiveness on a routine basis. At
December 28, 2002, the Company had outstanding forward exchange contracts that
mature between January 2003 and March 2003 to purchase Mexican pesos with an
aggregate notional amount of approximately $2.3 million. The fair values of
these contracts at December 28, 2002, totaled approximately $97,000, which is
recorded as a derivative liability on the Company's balance sheet in other
current liabilities. The Company recorded a net charge to earnings of
approximately $14,000 for the thirty-nine weeks ended December 28, 2002 and the
remainder of the loss on these forward contracts was included in "accumulated
other comprehensive income" at December 28, 2002.
On December 18, 2001, the Company entered into two forward exchange
contracts, with notional amounts totaling $2.2 million, to buy British pounds
for an amount consistent with the related underlying obligation of its U.K.
subsidiary for the May 2, 2002 and November 2, 2002 scheduled payments for the
acquisition of Woodville. The change in fair value of these contracts has been
recognized in income because the forward contracts did not qualify as cash flow
hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The impact on earnings from the completion of the forward contracts
was a loss of $115,000 and a net gain of $35,000 for the thirteen and
thirty-nine weeks ended December 28, 2002, respectively, included in "other
income". The Company did not have any remaining British pound forward exchange
contracts at December 28, 2002.
Note 9 New Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121 and the accounting and reporting provisions of APB 30
related to the disposal of a segment of a business. The Company adopted SFAS No.
144 on March 31, 2002, the beginning of fiscal year 2003. The adoption of SFAS
No. 144 had no effect on the Company's financial position and results of
operations, including the Company's reporting of discontinued operations as the
Company's discontinued operations were accounted for under previous accounting
guidance since the measurement date occurred prior to the effective date of SFAS
No. 144.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies the accounting and
reporting provisions of Emerging Issues Task Force ("EITF") 94-3,
10
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs in a Restructuring)." This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002, with earlier adoption encouraged. The Company is in the
process of reviewing the effect, if any, that the adoption of SFAS No. 146 will
have on its financial position and results of operations.
The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to perform an impairment assessment of the Company's
"reorganization value in excess of amounts allocable to identifiable assets"
arising from the valuation performed upon its emergence from Chapter 11 in
October 2000 ("excess reorganization value"), and goodwill from the Woodville
acquisition, as of March 31, 2002, the beginning of the current fiscal year.
Under the transition guidance of SFAS No. 142, the Company was required to
perform its initial impairment evaluation within six months of adopting the new
standard, and any impairment charges were to be retroactively recorded in the
first quarter of the Company's fiscal year. Other identifiable intangible assets
of the Company consist of patents that continue to be amortized over their
estimated useful lives. In accordance with SFAS No. 142, the Company compared
the book value of the Company's net assets, including the excess reorganization
value and goodwill, to the Company's fair value as of March 31, 2002. Because
the fair value was lower than the book value of the Company's net assets, excess
reorganization value and goodwill were determined to be impaired and
accordingly, the carrying value of such assets (approximately $14.7 million at
March 31, 2002) was charged to earnings as the cumulative effect of a change in
method of accounting effective March 31, 2002. There was no tax effect of the
change in accounting principle, as the excess reorganization value and goodwill
were not deductible for income tax purposes.
Following is a summary of excess reorganization value and other intangible
assets (unaudited) (in thousands):
December 28, 2002 March 30, 2002
Excess reorganization value $ -- $ 15,762
Goodwill -- 71
Identifiable intangible assets with definite lives:
Patents 2,470 2,123
----------------------------
Gross carrying amount 2,470 17,956
Accumulated amortization (1,367) (2,309)
----------------------------
Net carrying amount $ 1,103 $ 15,647
============================
Amortization expense for the thirteen and thirty-nine weeks ended December
28, 2002 was $31,000 and $90,000, respectively, and for the thirteen and
thirty-nine weeks ended December 29, 2001 was $225,000 and $675,000,
respectively.
Amortization expense for the Company's patents is estimated at
approximately $113,000 for each of the next five fiscal years.
11
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes and reconciles the reported net income
(loss) and net income (loss) per common share, basic and diluted, for the
thirteen and thirty-nine weeks ended December 28, 2002 and December 29, 2001, to
adjusted net income (loss) and net income (loss) per common share, basic and
diluted, as if the amortization expense related to excess reorganization value
in the thirteen and thirty-nine weeks ended December 29, 2001 had not been
recorded (unaudited) (in thousands):
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
December 28, 2002 December 29, 2001 December 28, 2002 December 29, 2001
----------------------------------------------------------------------------------
Reported net income (loss) $ 352 $ 54 $ (10,886) $ 1,779
Add: amortization of excess
reorganization value -- 198 -- 593
---------------------------------------------------------------------------
Adjusted net income (loss) $ 352 $ 252 $ (10,886) $ 2,372
===========================================================================
Reported net income (loss) per
common share, basic and diluted:
Income from continuing
operations $ 0.35 $ 0.01 $ 1.04 $ 0.81
Loss on disposition of
discontinued operations (0.28) -- (0.28) (0.45)
Cumulative effect of
change in method of
accounting -- -- (2.95) --
---------------------------------------------------------------------------
Reported net income (loss) per
common share, basic and diluted: 0.07 0.01 (2.19) 0.36
Add: amortization of excess
reorganization value -- 0.04 -- 0.12
---------------------------------------------------------------------------
Adjusted net income (loss) per
common share, basic and diluted: $ 0.07 $ 0.05 $ (2.19) $ 0.48
===========================================================================
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of Interpretation No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company is
in the process of reviewing the effect, if any, that the adoption of
Interpretation No. 45 will have on its financial position and results of
operations.
Interpretation No. 45 also provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has
issued. The disclosure requirements are effective for financial statements of
periods ending after December 15, 2002. As of December 28, 2002, the Company and
various consolidated subsidiaries of the Company are borrowers under the
Congress Facility, the Subordinated Facility and a note payable to a bank in the
Czech Republic (together, the "facilities"). The facilities are guaranteed by
either the Company and/or various consolidated subsidiaries of the Company in
the event that the borrower(s) default under the provisions of the facilities.
The guarantees are in effect for the period of the related facilities.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
The following discussion and analysis of financial condition and results
of operations are based on the Company's unaudited condensed Consolidated
Financial Statements. A summary of significant accounting policies is disclosed
in Note 2 to the Consolidated Financial Statements included in the Annual Report
on Form 10-K for the year ended March 30, 2002. The Company's critical
accounting policies are further described under the caption "Critical Accounting
Policies" in Management's Discussion and Analysis in the Annual Report on Form
10-K for the year ended March 30, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the unaudited condensed
Consolidated Financial Statements. It is important that the reader of the
unaudited financial statements understand that actual results could differ from
these estimates, assumptions and judgments.
There have been no changes in the nature of the Company's critical
accounting policies or the application of those policies since March 30, 2002.
Results of Operations
The Company has reported its metal and defense businesses as discontinued
operations in the consolidated financial statements from October 10, 2000, the
measurement date, through disposal of the final discontinued business on
December 23, 2002. Additionally, the Company acquired Woodville in the third
quarter of fiscal 2002 (November 2, 2001) and thus only eight weeks of
Woodville's operations are reflected in the thirteen and thirty-nine week
periods ended December 29, 2001. Results for the thirteen and thirty-nine week
periods ended December 28, 2002 include the full effect of the acquisition of
the Woodville airbag business. The following summarizes the results of
operations for the Company for the thirteen week and thirty-nine week periods
ended December 28, 2002 and December 29, 2001.
(In thousands)
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
December 28, 2002 December 29, 2001 December 28, 2002 December 29, 2001
-----------------------------------------------------------------------------------
Net sales $ 61,877 $50,051 $ 180,863 $ 146,569
Gross profit 6,745 5,021 21,369 19,404
Income from operations 2,999 1,918 9,484 9,343
Other (income) expense, net (750) 126 (2,857) (506)
Interest expense, net 842 988 2,757 3,303
Provision for income taxes 1,192 750 4,456 2,500
Loss from discontinued
operations, net of taxes 1,363 -- 1,363 2,267
Cumulative effect of change in
method of accounting -- -- (14,651) --
Net income (loss) 352 54 (10,886) 1,779
13
Third Quarter (Thirteen Weeks) Ended December 28, 2002 Compared to Third Quarter
(Thirteen Weeks) Ended December 29, 2001
Net Sales. Net sales increased $11.8 million, or 23.6%, to $61.9 million
for the third quarter of fiscal 2003 compared to the third quarter of fiscal
2002. North American operations' net sales increased $2.1 million or 6.8%
compared to the third quarter of fiscal 2002, with the increase principally due
to increased demand and new programs in the North American automotive market.
Net sales for European operations increased $9.7 million or 50.1% compared to
the third quarter of fiscal 2002. The increase in Europe is due primarily to 1)
additional volumes resulting from new programs at the European operations
representing an increase of $6.3 million, 2) the acquisition of Woodville, which
accounted for $1.4 million of the increase, and 3) the favorable effect of
changes in foreign currency exchange rates in Europe of 7.0%, representing an
increase in net sales of approximately $2.0 million.
Gross Profit. Gross profit increased $1.7 million, or 34.3%, to $6.7
million for the third quarter of fiscal 2003 compared to the third quarter of
fiscal 2002. The increase in gross profit is due primarily to North American
operations, representing an increase of $1.8 million or 42.3% over the prior
year. This increase can be attributed to the increase in net sales as well as
improved operating efficiencies and cost savings in manufacturing operations
from the Company's continued lean manufacturing program. The gross profit
decline in the European operations partially offset the increase in North
America due to the ramp-up of programs and increased freight costs associated
with the transfer of production lines to Romania. Gross profit as a percentage
of net sales increased to 10.9% for the third quarter of fiscal 2003 from 10.0%
for the third quarter of fiscal 2002.
Income from Operations. Income from operations increased $1.1 million, or
56.4%, to $3.0 million for the third quarter of fiscal 2003 compared to the
third quarter of fiscal 2002. The increase is primarily related to the increase
in gross profit discussed above, as well as a $194,000 reduction in amortization
costs resulting from the adoption of SFAS No 142 (see Note 9 of the Consolidated
Financial Statements). Increased operating expenses of approximately $837,000
due to increased commissions, professional, travel, research and development and
other costs partially offset the increase in gross profit. Income from
operations as a percentage of net sales increased to 4.8% for the third quarter
of fiscal 2003 from 3.8% for the third quarter of fiscal 2002.
Other Income, net. The Company recognized other income, net of $750,000
for the third quarter of fiscal 2003 as compared to other expense of $126,000
for the third quarter of fiscal 2002. Other income, net is realized primarily
from foreign transaction and translation activity in the European countries of
Germany, the United Kingdom and the Czech Republic resulting from the
revaluation of intercompany balances between the European subsidiaries and the
U.S. parent company. The Company recorded net foreign transaction and
translation gains of $805,000 during the third quarter of fiscal 2003, compared
to net foreign transaction and translation losses of $95,000 recorded in the
third quarter of fiscal 2002. The fiscal 2003 foreign transaction and
translation gains resulted from significant favorable foreign currency
translation rate fluctuations of approximately 6% in the December 28, 2002
exchange rates as compared to those at September 28, 2002.
Interest Expense, net. Interest expense decreased $146,000, or 14.8%, to
$842,000 for the third quarter of fiscal 2003 compared to the third quarter of
fiscal 2002. The decrease is attributable both to a decrease in average interest
rates from 6.8% to 5.5% and a decrease in average levels of outstanding debt
from $47.8 million to $42.8 million in the third quarter of fiscal 2003 as
compared to the third quarter of fiscal 2002.
Provision for Income Taxes. The provision for income taxes for the third
quarter of fiscal 2003 increased $442,000 compared to the third quarter of
fiscal 2002 due to the Company's increase in taxable income for North American
operations. The Company's effective tax rate for the thirteen weeks ended
December 28, 2002 was 41.0% compared to 93.3% for the thirteen weeks ended
December 29, 2001. The effective tax rate for the thirteen weeks ended December
28, 2002 is higher than the statutory tax rate due to tax benefits on pre-tax
losses incurred at certain of the Company's European subsidiaries for the
quarter being fully reserved under SFAS No. 109. The effective tax rate for the
thirteen weeks ended December 29, 2001 was substantially higher than the
statutory tax rate because 1) the Company's domestic subsidiaries operated at a
profit to which the federal and state statutory income tax rates were applied,
and 2) the Company's foreign subsidiaries operated at a loss (thus reducing the
consolidated income before income taxes). Due to the existence of foreign net
operating loss carryforwards, the Company did not further
14
recognize the income tax benefit of these foreign losses in the third quarter
ended December 29, 2001.
Discontinued Operations. Loss on disposition of discontinued operations
was $1.4 million for the thirteen weeks ended December 28, 2002. The loss was
due to the sale of Galion effective December 23, 2002, and the final disposition
of the Company's discontinued operations. There was no tax effect on the loss on
disposition as the Company recorded a deferred tax asset and a concurrent
reserve on the tax asset as a result of the loss on disposition being a capital
loss. See Note 2 of the accompanying consolidated financial statements.
Net Income. The Company's net income was $352,000 for the third quarter of
fiscal 2003 compared to net income of $54,000 for the third quarter of fiscal
2002. This change in net income resulted from the items discussed above.
Thirty-nine Weeks Ended December 28, 2002 Compared to Thirty-nine Weeks Ended
December 29, 2001
Net Sales. Net sales increased $34.3 million, or 23.4%, to $180.9 million
for the thirty-nine weeks ended December 28, 2002 compared to the thirty-nine
weeks ended December 29, 2001. North American operations' net sales increased
$6.4 million or 6.8% compared to the comparable period in the prior year, with
the increase principally due to greater demand and new programs in the North
American automotive market. Net sales for European operations increased $27.9
million or 52.7% compared to the prior year period. The increase in Europe is
due primarily to the increased volumes resulting from new programs at the
European operations representing an increase of $13.3 million, the Woodville
acquisition, which accounted for $8.3 million of the increase, and the favorable
effect of changes in foreign currency exchange rates in Europe of 7.8%,
representing an increase in net sales of approximately $6.3 million.
Gross Profit. Gross profit increased $2.0 million, or 10.1%, to $21.4
million for the thirty-nine weeks ended December 28, 2002 compared to the prior
year period. The increase in gross profit did not correspond with the increase
in net sales due to losses at Woodville of approximately $1.5 million and costs
of approximately $1.7 million associated with the move of production lines and
the ramp-up of programs at other European facilities. Additionally, increased
shipping costs and manufacturing inefficiencies associated with the transfer of
production lines resulted in approximately $1.8 million of incremental costs.
Accordingly, gross profit as a percentage of net sales decreased to 11.8% for
the thirty-nine weeks ended December 28, 2002 from 13.2% for the thirty-nine
weeks ended December 29, 2001.
Income from Operations. Income from operations increased $141,000, or
1.5%, to $9.5 million for the thirty-nine weeks ended December 28, 2002 compared
to the thirty-nine weeks ended December 29, 2001. The increase is directly
related to the increase in net sales discussed above offset by an increase in
general and administrative expenses, reflecting approximately $1.1 million of
production re-qualification and other related costs incurred for the relocation
of the Woodville operation to other production facilities. Additionally, higher
commissions, travel and research and development costs of approximately $750,000
were incurred. The relocation of the Woodville operations to other European
locations was completed in July 2002. Income from operations as a percentage of
net sales decreased to 5.2% for the thirty-nine weeks ended December 28, 2002
from 6.4% in the comparable period in the prior year. The decrease as a
percentage of net sales was due to the items discussed above.
Other Income, net. The Company recognized other income, net of $2.9
million for the thirty-nine weeks ended December 28, 2002 as compared to other
income of $506,000 for the thirty-nine weeks ended December 29, 2001. Other
income, net is realized primarily from foreign transaction and translation
activity in the European countries of Germany, the United Kingdom and the Czech
Republic resulting from the revaluation of intercompany balances between the
European subsidiaries and the U.S. parent company. The Company recorded net
foreign transaction and translation gains of $2.8 million for the thirty-nine
weeks ended December 28, 2002, compared to net foreign transaction and
translation gains of $521,000 during the comparable period in the prior year.
The fiscal 2003 foreign transaction and translation gains resulted from
significant favorable foreign currency translation rate fluctuations of
approximately 17% in the December 28, 2002 exchange rates as compared to those
at March 30, 2002.
15
Interest Expense, net. Interest expense decreased $546,000, or 16.5%, to
$2.8 million for the thirty-nine weeks ended December 28, 2002 compared to the
thirty-nine weeks ended December 29, 2001. The decrease is attributable both to
a decrease in average interest rates from 7.2% to 5.8% and a decrease in average
outstanding debt from $51.5 million to $42.0 million for the period as compared
to the prior year period.
Provision for Income Taxes. The provision for income taxes increased $2.0
million for the thirty-nine weeks ended December 28, 2002 compared to the prior
year period due to (i) an increase of $4.2 million in pre-tax income from North
American operations compared to the comparable period in the prior year, (ii)
the recording of tax provisions of approximately $629,000 for the Company's
German and Czech Republic subsidiaries in fiscal 2003 as net operating losses of
those subsidiaries have now been fully utilized, and (iii) the recording of a
$350,000 provision for income taxes for the German subsidiary. German taxing
authorities have performed an examination covering years 1997 through 1999, and
the Company has provided $350,000 for the tax liability arising from this tax
examination. The Company's effective tax rate for the thirty-nine weeks ended
December 28, 2002 and December 29, 2001 were 46.5% and 38.2%, respectively. The
increase in the effective tax rate for the current year-to-date period is due
primarily to the effects of the matters described above. The effective tax rate
for the thirty-nine weeks ended December 28, 2002 is higher than the statutory
tax rate due to tax on pre-tax losses incurred at certain of the Company's
European subsidiaries for the period being fully reserved under SFAS No. 109.
Discontinued Operations. Loss on disposition of discontinued operations
was $1.4 million for the thirty-nine weeks ended December 28, 2002. There was no
tax effect on the loss on disposition as the Company recorded a deferred tax
asset and a concurrent reserve on the tax asset as a result of the loss on
disposition being a capital loss. The loss was due to the sale of Galion Inc. on
December 23, 2002. Loss on disposition of discontinued operations was $2.3
million for the thirty-nine weeks ended December 29, 2001, net of income taxes
of $1.5 million, arising primarily from the relocation of, and other costs
associated with, the former Valentec Wells, LLC operations, during the first
quarter of fiscal 2002. Valentec Wells, LLC was sold in September 2001. At
December 28, 2002, the Company had completed its disposition of all discontinued
operations.
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of fair value, the Company's
"Reorganization value in excess of identifiable assets" and goodwill related to
the acquisition of Woodville were determined to be impaired and, accordingly,
the total amount of approximately $14.7 million was written off as the
cumulative effect of a change in method of accounting at March 31, 2002 (see
further discussion under "New Accounting Standards"). There was no tax effect of
the change in accounting principle, as the excess reorganization value and
goodwill were not deductible for income tax purposes.
Net Loss. The Company's net loss was $10.9 million for the thirty-nine
weeks ended December 28, 2002 compared to net income of $1.8 million for the
thirty-nine weeks ended December 29, 2001. This change to net loss resulted
primarily from the write-off of $14.7 million of reorganization value in excess
of identifiable assets and goodwill related to the acquisition of Woodville
recorded as a cumulative effect of a change in method of accounting resulting
from the adoption of SFAS No. 142 and other matters discussed above.
Liquidity and Capital Resources
Net cash provided by operating activities of continuing operations was
$1.3 million for the thirty-nine weeks ended December 28, 2002, compared to cash
provided of $11.7 million in the comparable period in the prior year. The
reduction in cash provided by operating activities of continuing operations was
principally due to an increase in accounts receivable arising from the increase
in sales and from a slight delay in the collection of certain accounts
receivable as well as a build up of inventory levels associated with the move of
production lines and the ramp-up of programs in Europe that did not occur in the
comparable period of fiscal 2002. Net cash provided by operating activities of
discontinued operations was $812,000 for the thirty-nine weeks ended December
28, 2002 compared to net cash used of $3.8 million in the comparable period in
the prior year. The cash provided by discontinued operations in the current year
was principally due to the collection of accounts receivable and a reduction in
inventory levels. The cash used in discontinued operations in the prior period
was
16
principally related to the former Valentec Wells, LLC operations, which, as
previously discussed, were sold in the second quarter of fiscal 2002.
Net cash used in investing activities of continuing operations was $6.1
million for the thirty-nine weeks ended December 28, 2002, compared to net cash
used in investing activities of continuing operations of $4.5 million for the
comparable period in the prior year. This increase in cash used in investing
activities of continuing operations is attributable to capital expenditures of
$6.6 million to increase the Company's operating capacity due to new programs
awarded to the Company by customers, offset by $500,000 in proceeds from the
disposition of discontinued operations. Net cash used in investing activities in
the prior year included $1.5 million used to acquire Woodville on November 2,
2001.
Net cash provided by financing activities of continuing operations was
$3.5 million for the thirty-nine weeks ended December 28, 2002, compared to net
cash used in financing activities of continuing operations of $5.2 million for
the comparable period in the prior year. Net cash provided by financing
activities of continuing operations for the thirty-nine weeks ended December 28,
2002 is attributable to the Company's borrowings under its revolving credit
facility, partially offset by principal payments on other various long-term
obligations. Borrowings under credit facilities in the thirty-nine weeks ended
December 28, 2002 were used to fund increases in working capital as well as
increased levels of capital expenditures. Net cash used by financing activities
of continuing operations for the thirty-nine weeks ended December 29, 2001 is
attributable to principal payments on various long-term obligations.
The Company's capital expenditure and working capital requirements are
expected to be funded through a combination of cash flows from operations,
equipment financings and borrowings under the Company's line of credit. These
sources are considered to be adequate to fund the Company's requirements for at
least the next twelve months. The Company has budgeted capital expenditures of
approximately $3.1 million for the remainder of fiscal 2003. See further
discussion below regarding the maturity of the Company's line of credit in
fiscal year 2004 and management's intent to renegotiate or replace the line of
credit.
The Company has available an aggregate, $35.0 million, revolving credit
facility with Congress Financial Corporation (Southern) (the "Congress
Facility"), expiring October 9, 2003. Accordingly, the Company has classified
the amount outstanding for the Congress Facility in the current portion of
long-term debt as of December 28, 2002. Under the Congress Facility, the Company
may borrow up to the lesser of (a) $35.0 million or (b) 85% of eligible accounts
receivable, plus 60% of eligible finished goods, plus 50% of eligible raw
materials. Included within borrowings under the Congress Facility (and its
borrowing limitations) are $2.8 million in term loans which are to be repaid in
equal monthly installments of approximately $84,000, with the unpaid principal
amount due on October 9, 2003, unless the Congress Facility is renewed at that
time. The amount outstanding under the facility at December 28, 2002 and March
30, 2002 (including term loans) was $21.5 million and $4.9 million,
respectively. Also included within the borrowings under the Congress Facility is
a $3.0 million letter of credit facility, under which the Company had exposure
of $435,000 pursuant to letters of credit outstanding at December 28, 2002 (none
outstanding at March 30, 2002). At December 28, 2002, the Company's availability
for additional borrowings (under the maximum allowable limit) was approximately
$13.5 million.
The Company's Subordinated Facility with KeyBank National Association and
Fleet Bank is due on October 10, 2003. Pursuant to the terms of an extension
agreement entered into on October 11, 2002, the Company repaid $5.0 million of
the outstanding principal balance on October 11, 2002. Such repayment was funded
by borrowings under the Congress Facility. The amount outstanding under the
Subordinated Facility at December 28, 2002 and March 30, 2002 was $10.3 million
and $18.9 million, respectively.
The Congress Facility and the Subordinated Facility both require the
Company to meet a minimum adjusted net worth (as defined) covenant along with
other certain non-financial covenants. At December 28, 2002, the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facility and the Subordinated Facility.
The Company intends to renegotiate or replace the Congress Facility and
the Subordinated Facility when
17
these facilities mature in October 2003. Although no assurances can be provided
in this regard, management currently believes that it will be able to
renegotiate or replace these facilities with amended or new facilities on
comparable terms.
New Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121 and the accounting and reporting provisions of APB 30
related to the disposal of a segment of a business. The Company adopted SFAS No.
144 on March 31, 2002, the beginning of fiscal year 2003. The adoption of SFAS
No. 144 had no effect on the Company's financial position and results of
operations, including the Company's reporting of discontinued operations, as the
Company's discontinued operations were accounted for under previous accounting
guidance since the measurement date occurred prior to the effective date of SFAS
No. 144.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which nullifies the accounting and
reporting provisions of Emerging Issues Task Force ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs in a Restructuring)." This statement is
effective for exit or disposal activities that are initiated after December 31,
2002, with earlier adoption encouraged. The Company is in the process of
reviewing the effect, if any, that the adoption of SFAS No. 146 will have on its
financial position and statement of operations.
The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to perform an impairment assessment of the Company's
"reorganization value in excess of amounts allocable to identifiable assets"
arising from the valuation performed upon its emergence from Chapter 11 in
October 2000 ("excess reorganization value"), and goodwill from the Woodville
acquisition, as of March 31, 2002, the beginning of the current fiscal year.
Under the transition guidance of SFAS No. 142, the Company was required to
perform its initial impairment evaluation within six months of adopting the new
standard, and any impairment charges were to be retroactively recorded in the
first quarter of the Company's fiscal year. Other identifiable intangible assets
of the Company consist of patents that continue to be amortized over their
estimated useful lives. In accordance with SFAS No. 142, the Company compared
the book value of the Company's net assets, including the excess reorganization
value and goodwill, to the Company's fair value as of March 31, 2002. Because
the fair value was lower than the book value of the Company's net assets, excess
reorganization value and goodwill were determined to be impaired and
accordingly, the carrying value of such assets (approximately $14.7 million at
March 31, 2002) was charged to earnings as the cumulative effect of a change in
method of accounting effective March 31, 2002. There was no tax effect of the
change in accounting principle, as the excess reorganization value and goodwill
were not deductible for income tax purposes.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of Interpretation No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company is
in the process of reviewing the effect, if any, that the adoption of
Interpretation No. 45 will have on its financial position and results of
operations.
Interpretation No. 45 also provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has
issued. The disclosure requirements are effective for financial statements of
periods ending after December 15, 2002. As of December 28, 2002, the Company and
various consolidated subsidiaries of the Company are borrowers under the
Congress Facility, the Subordinated Facility and a $3.9 million note payable to
a bank in the Czech Republic (together, the "facilities"). The facilities are
guaranteed by either the Company and/or various consolidated subsidiaries of the
Company in the event that the borrower(s) default under the provisions of the
facilities. The guarantees are in effect for the period of the related
facilities.
18
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Company's revolving credit
facility are outstanding, the Company has market risk relating to such amounts
because the interest rates under the Congress Facility are variable. As of
December 28, 2002, the Company's interest rates under its revolving credit
facility approximated 4.25%. A hypothetical increase or decrease in interest
rates of 100 basis points relating to the Congress Facility would result in an
addition to or reduction in interest expense of approximately $200,000 on an
annual basis.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks. Safety
Components monitors its risk associated with the volatility of certain foreign
currencies against its functional currency, the U.S. dollar. The Company uses
certain derivative financial instruments to reduce exposure to volatility of
foreign currencies. However, the changes in the relationship of other currencies
to the U.S. dollar could have a materially adverse affect to the consolidated
financial statements if there were a sustained decline of these currencies
versus the U.S. dollar. The Company has formally documented all relationships
between hedging instruments and hedged items, as well as risk management
objectives and strategies for undertaking various hedge transactions. Derivative
financial instruments are not entered into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on May 31, 2002
to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are being monitored for effectiveness on a routine basis. At
December 28, 2002, the Company had outstanding forward exchange contracts that
mature between January 2003 and March 2003 to purchase Mexican pesos with an
aggregate notional amount of approximately $2.3 million. The fair values of
these contracts at December 28, 2002, totaled approximately $97,000 which is
recorded as a derivative liability on the Company's balance sheet in other
current liabilities. The Company recorded a net charge to earnings of
approximately $14,000 for the thirty-nine weeks ended December 28, 2002 and the
remainder of the loss on these forward contracts was included in "accumulated
other comprehensive income" at December 28, 2002.
On December 18, 2001, the Company entered into two forward exchange
contracts, with notional amounts totaling $2.2 million, to buy British pounds
for an amount consistent with the related underlying obligation of its U.K.
subsidiary for the May 2, 2002 and November 2, 2002 scheduled payments for the
acquisition of Woodville. The change in fair value of these contracts has been
recognized in income because the forward contracts did not qualify as cash flow
hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The impact on earnings from the completion of the forward contracts
was a loss of $115,000 and a net gain of $35,000 for the thirteen and
thirty-nine weeks ended December 28, 2002, respectively, included in "other
income". The Company did not have any remaining British pound forward exchange
contracts at December 28, 2002.
ITEM 4 CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out
an evaluation of the effectiveness and design of the Company's disclosure
controls and procedures pursuant to Exchange Act Rules 13a-14 and 15d-14. Based
on this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic reports filed with the SEC.
In addition, the Company reviewed its internal controls, and there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
----------- --------
10.26 Amendment No. 1 to Subordinated Secured Credit
Agreement dated as of October 11, 2002, by and among
Safety Components International, Inc., the
subsidiaries named therein as Borrowers and
Guarantors, KeyBank National Association ("KeyBank")
and Fleet Bank, as lenders, and KeyBank as
administrative agent. (Incorporated by reference to
Exhibit 10.26 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 28, 2002)
10.27 Amendment No. 2 to Loan and Security Agreement, dated
October 11, 2002, by and among Safety Components
International, Inc., the subsidiaries named therein as
Borrowers and Guarantors and Congress Financial
Corporation (Southern). (Incorporated by reference to
Exhibit 10.27 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 28, 2002)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended December
28, 2002.
20
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
DATED: February 10, 2003 By: \s\ Brian P. Menezes
-------------------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: \s\ William F. Nelli
-------------------------------------
William F. Nelli
Controller
(Principal Accounting Officer)
21
CERTIFICATIONS
I, John C. Corey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Safety
Components International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATED: February 10, 2003 By: \s\ John C. Corey
-------------------------
John C. Corey
President and
Chief Executive Officer
22
I, Brian P. Menezes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Safety
Components International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATED: February 10, 2003 By: \s\ Brian P. Menezes
-----------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
23