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
For the fiscal year ended March 29, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Stevens Street
Greenville, South Carolina
(Address of principal 29605
executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
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 |X|.
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 |X|.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 |X|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) |_|.
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of September 28, 2002, was approximately
$34,221,000.
The number of shares outstanding of the registrant's common stock, as of
June 23, 2003, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 4,959,678
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed in connection
with its 2003 annual meeting of shareholders (the "Proxy Statement") are
incorporated by reference into Part III.
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere herein. Statements in this Annual Report on Form 10-K that reflect
projections or expectations of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for future
operations, including those contained in "Business," "Legal Proceedings," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Quantitative and Qualitative Disclosure about Market Risk," or
relating to the Company's outlook for fiscal year 2004, overall volume and
pricing trends or strategies and their anticipated results, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "approximates," "believes,"
"estimates," "intends," and "hopes" and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to the other factors noted with such forward-looking
statements, include: general economic conditions in the Company's market,
including inflation, recession, interest rates and other economic factors;
casualty to or other disruption of the Company's facilities and equipment; and
other factors that generally affect the automotive industry.
2
PART I
ITEM 1. BUSINESS
The Company
Safety Components International, Inc. (including, when the context
requires, its consolidated subsidiaries, the "Company" or "Safety Components")
was incorporated in Delaware in 1994. It is a leading, low-cost, independent
supplier of automotive airbag fabric and cushions and technical fabrics with
operations in North America and Europe. The Company sells airbag fabric
domestically and cushions worldwide to the major airbag module integrators that
outsource such products. The Company believes that it is also a leading
manufacturer of value-added technical fabrics used in a variety of niche
industrial and commercial applications such as ballistics material for luggage,
filtration, military tents and fire service apparel. The ability to interchange
airbag and specialty technical fabrics using the same equipment and similar
manufacturing processes allows the Company to more effectively utilize its
manufacturing assets and lower per unit overhead costs.
Net sales of automotive airbag cushions, automotive fabrics and technical
fabrics products (the "automotive airbag and fabrics products" business) were
approximately $244.3 million, $203.3 million and $201.2 million in fiscal 2003,
fiscal 2002 and fiscal 2001, respectively. For comparative purposes, fiscal 2003
is comprised of the fifty-two week period ended March 29, 2003, fiscal 2002 is
comprised of the fifty-two week period ended March 30, 2002 and fiscal 2001 is
comprised of the fifty-three week period ended March 31, 2001.
The 2001 Restructuring
On April 10, 2000 (the "Petition Date"), the Company and certain of its
U.S. subsidiaries (collectively, the "Safety Filing Group"), filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On October 11, 2000 (the "Emergence Date"), the Safety
Filing Group emerged from Chapter 11 pursuant to a plan of reorganization (the
"Plan") confirmed by the Bankruptcy Court. Pursuant to the Plan, upon emergence,
all of the Company's 10-1/8% Senior Notes due 2007 (the "Notes") (an aggregate
of approximately $96.8 million, including accrued interest to the Petition Date)
were converted into 4,840,774 shares of the Company's post-bankruptcy common
stock, and the pre-bankruptcy common stock, excluding stock held by Robert A.
Zummo (former Chairman and Chief Executive Officer of the Company), was
converted into 159,226 shares of the Company's post-bankruptcy common stock,
including 39,619 shares of treasury stock, and warrants to acquire an additional
681,818 shares of such common stock. Immediately upon emergence, therefore, the
Company had 5,000,000 shares of common stock issued and 4,960,381 shares
outstanding and, other than shares underlying the warrants, no shares of common
stock were reserved for issuance in respect of claims and interests filed and
allowed under the Plan. All other Safety Filing Group trade suppliers and
creditors were paid in full, pursuant to the terms of the Plan, within 90 days
of the Emergence Date.
The Woodville Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited ("ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering and hereafter referred
to as "Woodville") of TISPP UK Limited, a subsidiary of Smiths Group PLC, to
expand its European operations. Pursuant to a purchase agreement dated November
2, 2001 between ASCIL and TISPP UK Limited, ASCIL purchased, for approximately
$4.8 million, including $400,000 in direct acquisition and exit costs associated
with the purchase (and including approximately $2.4 million paid in installments
six and twelve months after closing), substantially all of the production assets
and inventory of the airbag business of TISPP UK Limited. During fiscal 2003,
the Company completed the transfer of the Woodville production lines to other
Company operations primarily in lower labor cost facilities and countries.
3
Automotive Airbag and Fabrics Products
Structure of the Automotive Airbag Industry
Airbag systems consist of various airbag modules and an electronic control
module, which are currently integrated by automakers into their respective
vehicles. Airbag modules generally consist of inflators, cushions, housing and
possibly trim covers and are assembled by module integrators, most of whom
produce a majority of the components required for a complete module. As the
industry has evolved, module integrators have outsourced significant portions of
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 a portion of their cushion
requirements as they focus on the development of proprietary technologies. A
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company.
Characteristic for the industry, the Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. As a result, the Company may compete with its customers
who supply their own internal cushion requirements. However, in most cases the
Company's customers do not produce the same cushions for the same car/truck
models for which the Company produces cushions.
Another characteristic of the airbag industry is the qualification process
for new suppliers. New suppliers that wish to produce and supply airbag cushions
or airbag fabric must undergo a rigorous qualification process, which can take
in excess of a year. The Company believes that the existence of this
qualification process can result in significant re-qualification 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 reduce overall industry costs by
limiting the number of suppliers.
Products
The Company's automotive products include passenger, driver and side
impact airbag cushions and side protection curtains manufactured for
installation in over 200 car and truck models sold worldwide and airbag fabric
for sale to airbag manufacturers. Sales of airbag related products (inclusive of
sales of airbag fabric) accounted for approximately 90.8% of the Company's
consolidated fiscal 2003 net sales. Sales of airbag related products accounted
for approximately 89.4% and 88.0% of the Company's consolidated fiscal 2002 and
2001 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 fuel cells, bomb and cargo chutes, oil
containment booms and gas diaphragms; (v) release liners used in tire
manufacturing; and (vi) protective apparel worn by firefighters. Sales of
technical related products accounted for approximately 9.2% of the Company's
consolidated fiscal 2003 net sales. Sales of technical related products
accounted for approximately 10.6% and 12.0% of the Company's consolidated fiscal
2002 and 2001 net sales, respectively. The market for the Company's technical
related products is highly segmented by product line. Marketing and sales of the
Company's technical related products is conducted by the Company's marketing and
sales staff based in Greenville, South Carolina. Manufacturing of these products
occurs at the South Carolina facility, using the same equipment and
manufacturing process that the Company uses to produce airbag fabric, enabling
the Company to take advantage of demand requirements for the various products by
leveraging its expenditures 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.
See Note 8 to the Consolidated Financial Statements for additional
financial information by product type.
4
Customers
The Company sells its airbag cushions to airbag module integrators in
North America and Europe for inclusion in specified model cars, generally
pursuant to contract requirements. Certain of these customers also manufacture
airbag cushions to be used in their production of airbag modules. The Company
markets and sells airbag cushions through its direct marketing and sales forces
based in South Carolina, California, Mexico, the United Kingdom and Germany.
The Company sells its fabric in North America either directly to a module
integrator or, in some cases, to a fabricator (such as the Company's own
operations), which sells a sewn airbag to the module integrator. In some cases,
particularly when the cushion requires lower air permeability to facilitate more
rapid inflation, and to eliminate particulate burn-through caused by hot
inflators, the fabric must be coated 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 durations of up to
twelve months.
The Company has three significant customers - Autoliv, Takata-Petri and
TRW, listed in alphabetical order - with which it has contractual relationships.
The Company supplies airbag cushions and/or airbag fabric to each of these
customers based upon releases from formal purchase orders, which typically cover
periods of up to twelve months and are subject to periodic negotiation with
respect to price and quantity. The loss of any of these customers could have a
material adverse effect on the Company.
Suppliers
The Company's principal customers generally require that they approve all
suppliers of major airbag components or airbag fabric raw materials, as the case
may be. These suppliers are approved after undergoing a rigorous qualification
process on their products and manufacturing capabilities. In many cases, only
one approved source of supply exists for certain airbag components. In the event
that a sole source supplier experiences prolonged delays in product shipments or
no longer qualifies as a supplier, the Company would work together with its
customers to identify another qualified source of supply. Although alternative
sources of supply generally 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.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by DuPont, Acordis, Unifi and KoSa, among others. The
primary yarns include nylon, polyester and Nomex. DuPont and Acordis are the
leading suppliers of airbag fabric yarn to both the market and the Company.
DuPont supplies a majority of the nylon yarn used in the Company's airbag fabric
operations pursuant to purchase orders or releases on open purchase orders. The
loss of DuPont as a supplier could have a material adverse effect on the
Company.
In addition, in connection with its European operations, the Company has
entered into an agreement with a German industrial sewing company and its
Romanian subsidiary under which the Romanian subsidiary serves as a
manufacturing subcontractor for airbag cushions. Under the terms of this
agreement, the Company provides and retains control of the manufacturing
equipment, processes and production materials and the subcontractor provides
sewing services for a price per standard minute of acceptable units basis.
Significant problems with, or the loss of any key supplier or
subcontractor (see also "Risks Resulting from Foreign Operations" below for
further information) may adversely affect the Company's operating results and
ability to meet customer contracts.
Capacity
The Company manufactured and shipped over 26 million airbag cushions to
the Company's North American and European customers during fiscal 2003. The
Company believes it has adequate capacity to manufacture for the anticipated
customer requirements of fiscal 2004.
5
The Company's South Carolina facility produced approximately 24 million
yards of fabric in fiscal 2003. The Company believes it has adequate capacity to
manufacture for the anticipated customer requirements of fiscal 2004. The
Company utilizes rapier and jet weaving machines that are versatile in their
ability to produce a broad array of air restraint and specialty technical
fabrics for use in a large number of applications. The ability to interchange
the machines between air restraint fabric and other specialty technical fabrics
allows the Company to leverage its utilization of plant assets.
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 plants owned by its airbag module integrator
customers, which produce a substantial portion of airbag cushions for their own
consumption, although they do not generally manufacture the same airbag cushions
for the same vehicle models that the Company manufactures. Most airbag module
integrators subcontract a portion of their requirements for airbag cushions. The
Company believes that it has good working relationships with its customers due
to its high volume and low-cost manufacturing capabilities and consistency of
quality products and service.
The Company shares the North American airbag fabric market primarily with
Milliken, Takata-Highland, Mastex, Breed and Autoliv. Takata-Highland, Breed and
Autoliv, all airbag module integrators, produce fabric for use in their own
airbag cushions.
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 wide range of models of passenger, driver and side
impact airbag cushions. In addition, the Company's weaving plant in South
Carolina has provided it with some measure of vertical integration, enhancing
its ability to compete in the automotive airbag industry. Increased competition,
as well as price reductions of airbag systems, would adversely affect the
Company's revenues and profitability.
Technical Centers
The Company has technical centers in Greenville, South Carolina and
Hildesheim, Germany. The center in Hildesheim, Germany has the ability to
conduct static and dynamic deployment testing and analysis using high-speed
video equipment and includes pendulum-testing capability, a sample shop with
manual and CNC sewing equipment, a production-style laser cutter, volumetric
measurement and analysis equipment, textile welding and other non-sewn fastening
equipment. The center also has a materials laboratory, and can access the
services of laboratory and textile personnel at the Company's facility in
Greenville, South Carolina. There are also satellite-engineering functions in
Wales, United Kingdom. The Wales facility serves both customers and internal
operations with equipment design and manufacturing and includes a design group
and tool room to develop and manufacture specialized equipment and standard
tooling.
Through its textile laboratory located in Greenville, South Carolina, the
Company has the ability to test and analyze a wide range of fabrics (airbag or
other) under internationally accepted testing standards, including US-ASTM,
Europe-DIN and ISO, Asian-JIS and Underwriters NFPA. The laboratory is A2LA and
QS9000 certified, the most important certifications for the industry. All
validation testing and analytical testing of fabric is performed at this
laboratory. In North America, the module integrators customarily perform the
majority of advanced cushion testing; therefore, the Company has not seen a need
for an advanced technical center for cushions in North America. However, all
necessary validation testing and process development testing is performed in
Ensenada, Mexico. Additionally, the Ensenada and Greenville facilities have
prototype-manufacturing capabilities.
6
Qualification and Quality Control
The Company's customers require the Company to meet specific requirements
for design validation. The Company and its customers jointly participate in
design and process validations and customers must be satisfied with the
reliability and performance prior to awarding a purchase order. All standards
and requirements relating to product performance are satisfied before the
Company is qualified as a supplier by its customers.
The Company maintains extensive quality control and quality assurance
systems in its U.S. and European automotive facilities, including inspection and
testing of all products, and is QS 9000 and ISO 9001 or ISO9002 certified. The
Company also performs process capability studies and design of experiments to
determine that the manufacturing processes meet or exceed the quality levels
required by each customer.
The fabric operation's laboratories have ISO 17025, ASTM, DIN, JIS and
A2LA, as well as UL, accreditation. The Company's fabric operation is also
certified under the environmental quality program ISO 14001. The Company was the
first airbag fabric manufacturer to have its entire business (not just its
manufacturing facility) certified under QS 9000.
Governmental Regulations
Airbag systems installed in automobiles sold in the United States must
comply with certain government regulations, including Federal Motor Vehicle
Safety Standard 208, promulgated by the United States Department of
Transportation. The Company's customers are required to self-certify that airbag
systems installed in vehicles sold in the United States satisfy these
requirements. The Company's operations are subject to various environmental,
employee safety and wage and transportation related statutes and regulations.
The Company believes that it is in substantial compliance with existing laws and
regulations and has obtained or applied for the necessary permits to conduct its
business operations.
Product Liability
The Company is engaged in a business that could expose it to possible
claims for injury resulting from the failure of products sold by it. In the
past, there has been increased public attention to injuries and deaths of
children and small adults due to the force of the inflation of airbags. To date,
however, the Company has not been named as a defendant in any automotive 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 product
recall program or a final judgment in excess of its insurance coverage could
have a material adverse effect on the Company.
Discontinued Operations
On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". The Company's discontinued
operations supplied projectiles and other metal components for medium caliber
training and tactical ammunition used by the United States Armed Forces. The
metal components manufactured by the Company were shipped to a loading facility,
operated either by the United States government or a prime defense contractor,
which loaded the explosives, assembled the rounds and packaged the ammunition
for use. Additionally, the Company manufactured small quantities of metal airbag
module components for the automotive airbag industry. Net sales of metal and
defense related products were approximately $5.4 million, $10.5 million, and
$20.6 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively, for the
Galion, Valentec Wells and VSI operations. See Note 3 to the Consolidated
Financial Statements for more information.
Disposition of Businesses
On August 31, 2000, the Company finalized the sale of Valentec Systems,
Inc. ("VSI"), a systems integrator for the U.S. Army, which coordinated the
manufacture and assembly of components supplied by various subcontractors, and
part of the Company's non-core operations. Pursuant to a stock purchase
agreement dated July 21,
7
2000, the Company sold 100% of the shares of capital stock of VSI to VTECH
Corporation for approximately $2.9 million in cash.
During fiscal 2001, the Company determined to exit its remaining metal and
defense products businesses, consisting of Valentec Wells, LLC (metal products)
and Galion, Inc. (defense products). To enhance the value of these businesses,
the Company consolidated a considerable portion of its Valentec Wells operations
into its Galion, Ohio facility and relocated the remainder of Valentec Wells'
operations from its former California location to a lower cost facility in
Missouri, nearer to its primary customers.
On September 27, 2001, the Company finalized the sale of the metallic belt
links business of Valentec Wells, LLC. Pursuant to an asset purchase agreement
dated September 16, 2001 between Valentec Wells, LLC and Alliant Lake City Small
Caliber Ammunition Company LLC, the Company sold the metallic belt links
production assets and inventory of Valentec Wells, LLC for approximately $4.8
million in cash.
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 Acquistion, LLC, an
affiliate of The Diversified Group Incorporated. The Company sold all its stock
in Galion for an adjusted purchase price of $454,000 in cash.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry, in which, generally, there
are seasonal plant shutdowns in the third and fourth quarters of each calendar
year.
Backlog
The Company does not reflect an order for airbag cushions or airbag fabric
in backlog until it has received a purchase order and a material procurement
release that specifies the quantity ordered and specific delivery dates.
Generally, these orders are shipped within two to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
its backlog is a reliable measure of future airbag sales.
Risks Resulting from Foreign Operations
Certain of the Company's consolidated net sales are generated outside 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
and 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 future results of operations.
In addition, the Company has a significant portion of its manufacturing
operations in foreign countries and purchases a portion of its raw materials
from foreign suppliers. The production costs, profit margins and competitive
position of the Company are affected by the strength of the currencies in
countries where it manufactures or purchases goods relative to the strength of
the currencies in countries where its products are sold.
Certain of the Company's operations generate net sales and incur expenses
in foreign currencies. The Company's financial results from international
operations may be affected by fluctuations in currency exchange rates. Future
fluctuations in certain currency exchange rates could adversely affect the
Company's financial results. The Company monitors its risk associated with the
volatility of certain foreign currencies against its functional currency, the
U.S. dollar. The impact of changes in the relationship of other currencies to
the U.S. dollar in fiscal 2003 has resulted
8
in the recognition of other income of approximately $3.5 million. However, it is
unknown what the effect of foreign currency rate fluctuations will have on the
Company's financial position or results of operations in the future. In certain
situations, the Company utilizes derivative financial instruments designated as
cash flow hedges to reduce exposures to volatility of foreign currencies
impacting the operation of its business. See Note 11 to the Consolidated
Financial Statements for information regarding derivatives and hedging.
See Note 8 to the Consolidated Financial Statements for additional
financial information by geographic area.
Employees
At March 29, 2003, the Company employed approximately 3,000 employees. The
Company's hourly employees in Mexico are entitled to a federally regulated
minimum wage, which is adjusted annually. The Company's employees at its Mexican
facility are unionized. In addition, Automotive Safety Components International
GmbH & Co. KG, the Company's wholly owned German subsidiary, has a workers'
council pursuant to German statutory labor law. The Company has not experienced
any work stoppages related to its work force and considers its relations with
its employees and all unions currently representing 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 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, results of operations or 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.
Low levels of contaminants were found at the Company's facility in
Greenville, South Carolina, (the "Greenville facility") during groundwater
sampling in 1998. In February 1999, the facility received a notice letter from
the South Carolina Department of Health and Environmental Control ("DHEC")
regarding the groundwater contamination. Over the past four years the Company
has performed groundwater monitoring and implemented a program for in-site
remediation of the groundwater. As a result, the Company received a "no further
action" letter from DHEC in fiscal 2003, ending the DHEC investigation. The
Company also had a reserve of $277,000 at March 29, 2003 for potential future
environmental expenditures related to the Greenville facility for conditions
existing prior to the Company's ownership of the Greenville facility (1997). The
Greenville facility has also 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.
The Company had identified two areas of underground contamination at the
Company's facility in Galion, Ohio. Any future environmental liabilities or
costs at this facility were contractually transferred to the purchaser pursuant
to the sale of Galion in fiscal 2003. See Note 3 to the Consolidated Financial
Statements for further discussion on the sale of this facility.
Additionally, an underground contamination involving machinery fluids
existed at the former Valentec Wells facility in Costa Mesa, California, and the
local Regional Water Quality Control Board (the "Board") had approved a
9
site remediation plan for cleanup. The remediation plan involved the
simultaneous operation of a groundwater and vapor extraction system over the
past five years. This plan has been completed and a final Closure Monitoring
Report has been filed with the Board. In fiscal 2003, the Board approved the
final Closure Monitoring Report and issued a "no further action" letter, ending
the Board's regulatory oversight.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued, approximately
$277,000 at March 29, 2003, will be required for the Company's environmental
control efforts and the final outcome of these matters will not have a material
adverse effect on the Company's financial position or results of future
operations. The Company believes that it currently is in compliance with
applicable environmental regulations in all material respects. Management's
opinion is based on the advice of independent consultants on environmental
matters.
Patents
The Company holds fourteen patents and approval for two additional patents
are pending. All patents relate to technical improvements for enhancement of
product performance with respect to the Company's airbag, fabric and technical
related products. Provided that all requisite maintenance fees are paid, the
patents held by the Company will expire between the years 2014 and 2020.
Engineering, Research & Development
The Company's fabric and airbag cushions operations have maintained an
active design and development effort focused toward new and enhanced products
and manufacturing processes. The Company designs and engineers its fabrics to
meet its customers' specific applications and needs. While the component
manufacturer originates most design requirements, the Company is dedicated to
improving the quality of existing products, as well as developing new products
for all applications. Costs associated with design and development for fabric
and airbag cushions were approximately $1.2 million, $899,000 and $688,000
during fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
10
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Greenville, South
Carolina in a facility owned by the Company, adjacent to its SCFTI manufacturing
facility. The Company owns or leases five facilities in which it manufactures
airbag and technical fabrics related products, with total plant area of
approximately 1.2 million square feet (including administrative, warehouse,
engineering and research and development areas housed at Company locations).
Below is an overview of the Company's properties at its airbag and technical
fabrics related products facilities as of March 29, 2003.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Airbag and Technical Fabrics Related Products
Ensenada, Mexico (airbag cushions) 97,000 Leased 2004 (1)
Ensenada, Mexico (airbag cushions) 43,000 Leased 2007 (1)(2)(7)
Greenville, South Carolina (airbag and technical fabrics) 826,000 Owned N/A (1)(3)(7)
Hildesheim, Germany (airbag cushions) 70,000 Owned N/A (1)(7)
Jevicko, Czech Republic (airbag cushions) 100,000 Owned N/A (4)
Otay Mesa, California (airbag cushions) 16,000 Leased 2006 (5)(7)
Crumlin, Wales (airbag cushions) 60,000 Leased 2008 (6)(7)
- ----------
(1) Manufacturing, research and development and office space
(2) Lease also provides for five-year renewal option
(3) Location of corporate offices
(4) Manufacturing and office space
(5) Finished goods distribution center and office space
(6) Research and development and office space
(7) Location of marketing and sales offices
ITEM 3. LEGAL PROCEEDINGS
As described in the "The Company - The 2001 Restructuring" in Item 1, the
Company emerged from bankruptcy on October 11, 2000. However, the Chapter 11
case remains open until all claims, disputes and pleadings are resolved before
the Bankruptcy Court. At March 29, 2003, the Company has no material disputes
before the Court. The Company is in the process of closing the Chapter 11
proceedings.
See "Environmental Matters" in Item 1 with respect to certain
environmental proceedings involving the Company.
The Company, from time to time, becomes 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended March 29, 2003.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pursuant to the Plan discussed in Item 1, the claims of the holders of the
Notes were converted into the right to receive 4,840,774 shares of the Company's
common stock on the Emergence Date (4,816,574 shares to the Noteholders and
24,200 shares to the financial advisors of the Noteholders). The pre-bankruptcy
common stock, excluding stock held by Robert A. Zummo, the Company's former
Chairman and Chief Executive Officer, was converted into 159,226 shares of the
Company's post-bankruptcy common stock, including 39,619 shares of treasury
stock (for an aggregate of 5,000,000 shares issued and 4,960,381 shares
outstanding post-bankruptcy) and warrants to acquire an additional 681,818
shares of such common stock on the Emergence Date. All other options and
warrants were cancelled on the Emergence Date.
The Company's common stock is not listed on any exchange, but rather
trades on the Over-The-Counter Bulletin Board. The following table sets forth
the range of high and low prices for reported sales of the common stock during
the fiscal years ended March 29, 2003 and March 30, 2002.
High Low
---- ---
Year Ended March 30, 2002
First Quarter $ 16.00 $ 3.65
Second Quarter 10.05 5.00
Third Quarter 10.00 4.50
Fourth Quarter 8.75 5.50
Year Ended March 29, 2003
First Quarter $ 7.95 $ 5.35
Second Quarter 8.70 5.40
Third Quarter 7.60 6.90
Fourth Quarter 9.00 5.00
As of June 23, 2003, there were approximately 149 holders of record of the
Company's common stock. The warrants to acquire 681,818 shares of common stock
issued by the Company, pursuant to the Plan, on the Emergence Date, expired as
of April 10, 2003.
To date, the Company has not paid any cash dividends to its stockholders
and does not expect to do so in the future. Further, the Company's existing
credit agreement restricts the Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated historical financial
data for the Company as of the dates and for the fiscal periods indicated. The
selected historical financial data for the fiscal years ended March 29, 2003 and
March 30, 2002, the period from October 11, 2000 to March 31, 2001, the period
from March 26, 2000 to October 10, 2000, and the fiscal years ended March 25,
2000 and March 27, 1999 have been derived from the audited Consolidated
Financial Statements of the Company for such periods. The presentation of
certain previously reported amounts has been reclassified to conform to the
current presentation and to reflect discontinued operations of the non-core
businesses (metal and defense) as discussed in Note 3 to the Consolidated
Financial Statements of the Company. The Consolidated Financial Statements for
the fiscal years ended March 29, 2003 and March 30, 2002 and the period from
October 11, 2000 to March 31, 2001 reflect the Company's emergence from Chapter
11 and were prepared utilizing the principles of fresh start accounting
contained in the American Institute of Certified Public Accountants' Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). As a result of the implementation of fresh start
accounting, certain of the selected financial data for the fiscal years ended
March 29, 2003 and March 30, 2002 and for the period from October 11, 2000 to
March 31, 2001 is not comparable to the selected financial data of prior
periods. See Note 1 to the Consolidated Financial Statements of the Company for
12
further discussion of the effects of fresh start accounting on the Company's
Consolidated Financial Statements. As a result of differences in comparability,
selected financial data for the "Reorganized Company" has been separately
identified from that of the "Predecessor Company." The following information
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 Reorganized Company | Predecessor Company
--------------------------------------|--------------------------------------
Fiscal Year Fiscal Year Period from | Period from Fiscal Year Fiscal Year
Ended Ended 10/11/00 to | 3/26/00 to Ended Ended
3/29/03 3/30/02 3/31/01 | 10/10/00 3/25/00 3/27/99
(52 Weeks) (52 Weeks) (25 Weeks) | (28 Weeks) (52 Weeks) (52 Weeks)
--------------------------------------|--------------------------------------
INCOME STATEMENT DATA (1): |
Net sales (2) $ 244,338 $ 203,323 $ 92,052 | $ 109,139 $ 194,667 $ 178,348
Cost of sales, including depreciation 214,318 176,817 79,337 | 93,307 168,249 158,806
------------------------------------|--------------------------------------
Gross profit 30,020 26,506 12,715 | 15,832 26,418 19,542
Selling, general and administrative expenses 14,475 11,595 5,235 | 5,941 13,443 10,487
Research and development expenses 1,242 899 335 | 353 665 1,090
Amortization of intangible assets (3) 124 900 448 | 675 1,486 1,528
Restructuring and restatement (4) -- -- -- | -- 3,969 --
Relocation and reorganization costs (5) -- -- -- | -- -- 3,238
Terminated investment agreement costs (6) -- -- -- | -- -- 2,500
------------------------------------|--------------------------------------
Operating income 14,179 13,112 6,697 | 8,863 6,855 699
Other expense (income) (3,426) (1,001) (280) | 878 1,729 766
Interest expense, net (7) 3,596 4,110 2,514 | 3,833 13,975 12,566
------------------------------------|--------------------------------------
Income (loss) from continuing operations before |
reorganization items 14,009 10,003 4,463 | 4,152 (8,849) (12,633)
Reorganization items (8) -- -- -- | 41,740 -- --
------------------------------------|--------------------------------------
Income (loss) from continuing operations |
before income taxes 14,009 10,003 4,463 | (37,588) (8,849) (12,633)
Income tax provision (benefit) 6,120 3,397 1,769 | (17,511) 6,154 (3,321)
------------------------------------|--------------------------------------
Income (loss) from continuing operations 7,889 6,606 2,694 | (20,077) (15,003) (9,312)
Discontinued operations, net of taxes: |
Loss from discontinued operations -- -- -- | 1,440 20,142 4,351
Loss (gain) on disposition of discontinued
operations 2,023 2,517 1,444 | (214) -- --
Extraordinary gain, net of taxes (9) -- -- -- | 29,370 -- --
Cumulative effect of change in accounting method (10) (14,651) -- -- | -- -- --
------------------------------------|--------------------------------------
Net (loss) income $ (8,785) $ 4,089 $ 1,250 | $ 8,067 $ (35,145) $ (13,663)
====================================|=====================================
|
PER SHARE DATA, BASIC AND DILUTED (11): |
Income from continuing operations $ 1.59 $ 1.33 $ 0.54 |
Loss from discontinued operations (0.41) (0.51) (0.29) |
Cumulative effect of change in accounting method (2.95) -- -- |
---------------------------------- |
Net (loss) income per common share $ (1.77) $ 0.82 $ 0.25 |
================================== |
|
Weighted average number of shares outstanding, basic |
and diluted 4,960 4,960 4,960 |
================================== |
BALANCE SHEET DATA: Reorganized Company | Predecessor Company
------------------------------------|------------------------
3/29/03 3/30/02 3/31/01 | 3/25/00 3/27/99
------------------------------------|------------------------
Working capital (12) (13) $ 8,016 $ 3,711 $ 27,079 | $(103,105) $ 31,404
Total assets 134,064 125,271 130,683 | 168,695 206,748
Senior subordinated notes -- -- -- | 90,000 90,000
Long term debt, net of current portion (13) 7,363 12,182 43,541 | 15,145 53,109
Stockholders' (deficit) equity 51,913 55,838 51,943 | (14,440) 22,456
- ----------
See Notes to Selected Financial Data
13
Notes to Selected Financial Data:
(1) The Company did not declare dividends during any of the periods or fiscal
years presented.
(2) The growth in net sales between fiscal years 2002 and 2003 is attributable
in part to the Woodville acquisition on November 2, 2001.
(3) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", as
of March 31, 2002, the beginning of fiscal 2003, required the Company to
cease amortization of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" and goodwill, resulting in the
reduction of approximately $791,000 in amortization costs from fiscal
2002. Amortization expense in fiscal 2002 and the period from October 11,
2000 to March 31, 2001 was approximately $791,000 and $395,000,
respectively.
(4) During fiscal 2000, the Company incurred approximately $4.0 million of
costs associated with the investigation and restatement of the Company's
financial statements for fiscal 1999 and 1998, and the restructuring of
the Company's balance sheet.
(5) During fiscal 1999, the Company incurred approximately $3.2 million of
pre-tax charges associated with the reorganization and relocation of
certain of its foreign and domestic operations. These costs were incurred
to consolidate production within the Company's foreign operations to lower
cost facilities located within the foreign market, close the Company's
China facility and relocate the corporate headquarters to the Company's
Greenville, South Carolina facility.
(6) During fiscal 1999, after exploring a variety of strategic alternatives,
the Company entered into an investment agreement with a third party. The
Company and the third party subsequently reached a mutual agreement to
terminate the investment agreement. The Company incurred approximately
$2.5 million of fees and expenses during fiscal 1999 related to the
investment agreement and its termination. This charge included a
reimbursement to the third party for fees and expenses incurred by it.
(7) Contractual interest for the period from March 26, 2000 to October 10,
2000, was $8.5 million. Interest expense on the Company's Notes was
reported to the Petition Date (April 10, 2000). Such interest expense was
not reported subsequent to that date because it was not required to be
paid during the bankruptcy proceedings and was not an allowed claim under
the Plan. The difference between reported interest expense and stated
contractual interest expense of the Predecessor Company was approximately
$4.7 million for the period from March 26, 2000 to October 10, 2000.
(8) During the period from March 26, 2000 to October 10, 2000, the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7
resulted in a net charge of approximately $34.0 million. Professional fees
and expenses of $3.7 million included in Reorganization Items for the
period represent fees and expenses associated with the Company's financial
restructuring and Chapter 11 bankruptcy proceeding. The revaluation of the
Notes totaled $2.9 million, representing the write-off of related deferred
financing costs. Also included in this amount is $1.1 million of
restructuring charges that consist primarily of a charge for future
severance payments to the Company's former Chairman and Chief Executive
Officer.
(9) During the period from March 26, 2000 to October 10, 2000, the early
extinguishment of the Notes and related accrued interest resulted in an
extraordinary gain of $29.9 million, net of income taxes of $17.5 million.
This was offset by a loss recognized in the amount of $573,000 related to
deferred financing costs associated with the early termination of the
Company's prior credit facility during the period. The Company is in the
process of reviewing the effect, if any, that the adoption of recently
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections", will have
on its financial position, results of operations and presentation of its
statements of operations. Adoption of SFAS No. 145 may result in a change
in the presentation of the extraordinary gain recognized in the period
from March 26, 2000 to October 10, 2000.
(10) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to assess its "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation
performed upon its emergence from Chapter 11 in October 2000, and goodwill
as of March 31, 2002, the beginning of fiscal 2003. The excess
reorganization value and goodwill were determined to be impaired and,
under the transition guidance of SFAS No. 142, the impairment was charged
to earnings as the cumulative effect of a change in method of accounting.
No tax effect was recognized, as these items were not deductible for
income tax purposes. See Note 2 to the Consolidated Financial Statements.
(11) Share and per share data are not meaningful on or prior to October 10,
2000 due to the significant change in the capital structure that resulted
from the Plan.
(12) As of March 25, 2000, the working capital of the Company was in a negative
position due to the reclassification of the $90 million in Notes to
current liabilities.
(13) The decrease in working capital and long-term debt, net of current
portion, at March 29, 2003 and March 30, 2002 is principally due to the
classification of the Company's Congress Facility and/or its Subordinated
Secured Note, due October 9 and 10, 2003, respectively, with an
outstanding balance of $28.5 and $18.9 million at March 29, 2003 and March
30, 2002, respectively, as a current liability at March 29, 2003 and March
30, 2002, respectively. The Company intends to refinance the Congress
Facility and the Subordinated Secured Note prior to their respective
maturities on October 9 and 10, 2003.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading low-cost independent supplier of automotive
airbag fabric and cushions, with operations in North America and Europe. The
following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
report. Except for the historical information contained herein, the discussions
in this document contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. The Company's actual results could differ materially from those
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995" regarding forward-looking information at the
beginning of this Form 10-K and, from time to time, in the Company's other
filings with the Securities and Exchange Commission.
Critical Accounting Policies
The following discussion and analysis of financial condition and results
of operations are based on the Company's Consolidated Financial Statements. A
summary of significant accounting policies is disclosed in Note 2 to the
Consolidated Financial Statements.
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 Consolidated Financial
Statements. It is important that the reader of the financial statements
understand that actual results could differ from these estimates, assumptions
and judgments.
In addition, judgment is involved in determining which accounting policies
and estimates would be considered as "critical". Because the Company generally
does business with large, well-established customers, the Company has not
historically been, nor is it expected in the future to be, exposed to
significant bad debt or inventory losses. Accordingly, the estimates of the
allowance for bad debts and of inventory reserves are not considered to be
critical accounting policies or estimates. In addition, the Company emerged from
bankruptcy in October 2000 and revalued its tangible assets at that time.
Accordingly, estimates of tangible asset impairment are not considered to be a
critical accounting policy or estimate. We believe the following critical
accounting policies contain the most significant judgments and estimates used in
the preparation of the Consolidated Financial Statements.
Discontinued Operations. As discussed in Notes 1 and 3 to the Consolidated
Financial Statements, we have reported the metal and defense businesses as
discontinued operations in our Consolidated Financial Statements as of October
10, 2000, or the measurement date, through the sale of the final discontinued
operation, Galion, Inc., on December 23, 2002. To report the metal and defense
businesses as discontinued operations required the Company to make estimates
regarding (i) the results of operations to the expected disposal date and (ii)
the expected proceeds to be received upon sale. Based on the Company's
determination that losses were expected both from operations and upon disposal,
the Company accrued substantial charges for future losses in the period from
March 26, 2000 to October 10, 2000, the period from October 11, 2000 to March
31, 2001 and the fiscal year ended March 30, 2002. Accordingly, the businesses'
net losses during the period from October 11, 2000 to March 31, 2001 and for the
fiscal years ended March 30, 2002 and March 29, 2003, which were incurred
subsequent to the measurement date, have been applied against the accrued losses
and have not been recognized as losses as incurred in the Consolidated
Statements of Operations.
Goodwill Impairment. As discussed in Note 2 to the Consolidated Financial
Statements, the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets", required the Company to perform an assessment for impairment of the
Company's "reorganization value in excess of amounts allocable to identifiable
assets" arising from the valuation
15
performed upon its emergence from Chapter 11 in October 2000 ("excess
reorganization value"), and goodwill, 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.
Foreign Currency Translation. Financial statements of substantially all of
the Company's foreign operations are prepared using the local currency as the
functional currency. In accordance with SFAS No. 52, "Foreign Currency
Translation," translation of these foreign operations to United States dollars
occurs using the current exchange rate for balance sheet accounts and a weighted
average exchange rate for results of foreign operations. Translation gains or
losses are recognized in "accumulated other comprehensive income (loss)" as a
component of stockholders' equity in the accompanying consolidated balance
sheets. For the Company's subsidiary in Mexico, whose financial statements are
prepared using the United States dollar as the functional currency, the
translation effects of the financial statements are included in the results of
operations.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks associated
with the volatility of certain foreign currencies against its functional
currency, the U.S. dollar. In prior years, the relationship of other currencies
to the U.S. dollar has not had a material effect on the Company's Consolidated
Financial Statements. However, in fiscal 2003 the impact of changes in the
relationship of other currencies to the U.S. dollar resulted in the recognition
of other income of approximately $3.5 million. It is unknown what effect foreign
currency rate fluctuations will have on the Company's financial position or
results of operations in the future. If, however, there were a sustained decline
of these currencies versus the U.S. dollar, the Consolidated Financial
Statements could be materially adversely affected.
Results of Operations
On October 10, 2000, the Company consummated the Plan as confirmed by the
United States Bankruptcy Court for the District of Delaware, as discussed in the
Consolidated Financial Statements and the Notes thereto. Accordingly, the
Consolidated Financial Statements for the fiscal years ended March 29, 2003 and
March 30, 2002 and the period from October 11, 2000 to March 31, 2001 reflect
the Company's emergence from Chapter 11 and were prepared utilizing the
principles of fresh start reporting contained in the American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code". As a result of the
implementation of fresh start accounting, the financial information for the
fiscal years ended March 29, 2003 and March 30, 2002 and the period from October
11, 2000 to March 31, 2001 are not comparable to prior periods.
The Woodville Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited (or "ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering) of TISPP UK Limited, a
subsidiary of Smiths Group PLC, to expand its European operations. Such
acquisition contributed approximately $7.8 million in sales and had a negative
impact of approximately $1.1 million on gross profit and approximately $1.5
million on operating income for the period from November 3, 2001 to March 30,
2002. The management and business activities of the Woodville operation were
consolidated into the ASCIL operation during the first quarter of fiscal 2003,
and the Woodville identity ceased to exist. The manufacturing process and
production assets were transferred to other European operations of the Company
primarily in lower labor cost facilities and countries.
16
The following table summarizes operating results of the Company for fiscal
years 2003, 2002 and 2001 (in thousands):
Combined
Reorganized and
Predecessor Reorganized | Predecessor
Reorganized Company Company Company | Company
------------------------------------------------------------|------------
Fifty-two Fifty-two Fifty-three Period from | Period from
Weeks Ended Weeks Ended Weeks Ended 10/11/00 | 3/26/00
3/29/03 3/30/02 3/31/01 to 3/31/01 | to 10/10/00
------------------------------------------------------------|------------
Net sales $ 244,338 $ 203,323 $ 201,191 $ 92,052 | $ 109,139
Gross profit 30,020 26,506 28,547 12,715 | 15,832
Income from operations 14,179 13,112 15,560 6,697 | 8,863
Other (income) expense, net (3,426) (1,001) 598 (280) | 878
Interest expense, net 3,596 4,110 6,347 2,514 | 3,833
Reorganization items -- -- 41,740 -- | 41,740
Income tax provision (benefit) 6,120 3,397 (15,742) 1,769 | (17,511)
Loss on discontinued operations, net of |
taxes 2,023 2,517 2,670 1,444 | 1,226
Extraordinary gain, net of taxes -- -- (29,370) -- | (29,370)
Cumulative effect of change in method of |
accounting (14,651) -- -- -- | --
Net (loss) income (8,785) 4,089 9,317 1,250 | 8,067
Results of operations for the years ended March 29, 2003 and March 30,
2002 contain one less week of operations as compared to the fifty-three week
period ended March 31, 2001 as a result of the Company's fiscal year ending on
the Saturday closest to March 31. The Consolidated Financial Statements for all
periods presented above have been reclassified to reflect the Company's non-core
businesses as discontinued operations. See Note 3 to the Consolidated Financial
Statements for further information on the discontinued operations.
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
Combined
Reorganized and
Reorganized Reorganized Predecessor
Company Company Company
-----------------------------------------------------
Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended
3/29/03 3/30/02 3/31/01
-----------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Gross profit 12.3 13.0 14.2
Income from operations 5.8 6.4 7.7
Interest expense, net 1.5 2.0 3.2
Income tax provision (benefit) 2.5 1.7 (7.8)
Net income (loss) (3.6) 2.0 4.6
The Consolidated Financial Statements for the period subsequent to the
consummation of the Plan (fiscal years ended March 29, 2003 and March 30, 2002
and period from October 11, 2000 to March 31, 2001) were prepared under the
principles of fresh start reporting for companies emerging from a plan of
reorganization and are not comparable to prior periods. The Company believes
that the most meaningful comparisons are made using the combined financial
information of the Reorganized and Predecessor Company for the period from March
26, 2000 to March 31, 2001 (fiscal 2001) above; accordingly, this discussion
addresses such combined information.
17
Fifty-two Weeks Ended March 29, 2003 Compared to Fifty-two Weeks Ended March 30,
2002
Net Sales. Net sales increased $41.0 million, or 20.2%, to $244.3 million
for the year ended March 29, 2003 compared to the year ended March 30, 2002.
North American operations' net sales increased $5.5 million or 4.4% compared to
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 $35.5 million or 45.5% compared to the prior year. The
increase in Europe is due primarily to the increased volumes resulting from new
programs representing an increase of $13.8 million, the effect of the Woodville
acquisition, which accounted for $9.9 million of the increase, and the favorable
effect of changes in foreign currency exchange rates in Europe, representing an
increase in net sales of approximately $11.8 million.
Gross Profit. Gross profit increased $3.5 million, or 13.3%, to $30.0
million for the year ended March 29, 2003 compared to the prior year. 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 the Woodville production lines and the
ramp-up of programs at other European facilities. Additionally, selling price
decreases and increased shipping and other manufacturing costs contributed to
the decrease in gross margin. Accordingly, gross profit as a percentage of net
sales decreased to 12.3% for the year ended March 29, 2003 from 13.0% for the
year ended March 30, 2002.
Income from Operations. Income from operations increased $1.1 million, or
8.1%, to $14.2 million for the year ended March 29, 2003 compared to the year
ended March 30, 2002. The increase is directly related to the increase in net
sales discussed above and a reduction of $776,000 in amortization costs
resulting from the adoption of SFAS No. 142 (see Note 2 of the Consolidated
Financial Statements). This increase was 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 European production facilities. The relocation of
the Woodville operations to other European locations was completed in July 2002.
Additionally, higher sales commissions, travel and research and development
costs of approximately $1.1 million were incurred. Income from operations as a
percentage of net sales decreased to 5.8% for the year ended March 29, 2003 from
6.4% 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 $3.4
million for the year ended March 29, 2003, as compared to other income, net of
$1.0 for the year ended March 30, 2002. Other income, net is realized primarily
from net foreign transaction gains resulting from the revaluation of
intercompany balances between the European subsidiaries and the U.S. parent
company. The Company recorded net foreign transaction gains of $3.5 million for
the year ended March 29, 2003, compared to net foreign transaction gains of
$756,000 during the comparable period in the prior year. The fiscal 2003 foreign
transaction gains resulted from significant favorable changes in foreign
currency exchange rates of approximately 18.7% in the March 29, 2003 exchange
rates as compared to those at March 30, 2002.
Interest Expense, net. Interest expense decreased $514,000, or 12.5%, to
$3.6 million for the year ended March 29, 2003 compared to the year ended March
30, 2002. The decrease is attributable both to a decrease in average interest
rates from 6.7% to 5.6% and a decrease in average outstanding debt from $44.7
million to $38.2 million for the period as compared to the prior year.
Provision for Income Taxes. The provision for income taxes increased $2.7
million for the year ended March 29, 2003 compared to the prior year due to (i)
an increase of $3.4 million in pre-tax income from North American operations
compared to the prior year, (ii) the recording of tax provisions of
approximately $1.3 million for the Company's German and Czech Republic
subsidiaries in fiscal 2003 as certain of the 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 reserved $350,000 for the tax liability arising from this tax examination.
The Company's effective tax rates for the years ended March 29, 2003 and March
30, 2002 was 43.7% and 34.0%, respectively. The effective tax rate for the year
ended March 29, 2003 is higher than the statutory tax rate due to the tax
examination noted above and foreign earnings taxed at different rates.
18
Discontinued Operations. Loss on disposition of discontinued operations
was $2.0 million for the year ended March 29, 2003. The loss was principally due
to the sale of Galion on December 23, 2002 and included the recognition of a tax
provision of approximately $660,000 related to an adjustment of the deferred tax
liabilities of the discontinued operations. Loss on disposition of discontinued
operations was $2.5 million for the year ended March 30, 2002, net of income tax
benefit of $1.7 million, arising primarily from the relocation of, and other
costs associated with, the former Valentec Wells operations, during the first
quarter of fiscal 2002. Valentec Wells was sold in September 2001. At March 29,
2003, 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 the Company's fair value, the
Company's "Reorganization value in excess of identifiable assets" and goodwill
were determined to be impaired and, accordingly, the total amount of those
assets (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 $8.8 million for the year ended March
29, 2003, compared to net income of $4.1 million for the year ended March 30,
2002. The net loss resulted primarily from the write-off of $14.7 million of
reorganization value in excess of identifiable assets and goodwill, as discussed
above, recognized as a cumulative effect of a change in method of accounting
resulting from the adoption of SFAS No. 142 and other matters discussed above.
Fifty-two Weeks Ended March 30, 2002 Compared to Combined Fifty-three Weeks
Ended March 31, 2001
Net Sales. Net sales increased by $2.1 million, or 1.1%, to $203.3 million
in fiscal 2002 compared to fiscal 2001. The increase is attributable to the
acquisition of Woodville, offset by one less week of operations compared to the
prior year and a decrease in sales of technical fabric products. North American
operations showed decreased sales of $3.9 million, or 3.0%, for airbag cushions
and airbag and technical fabrics products over the prior fiscal year. One less
week of operations resulted in a reduction of $2.4 million in net sales. The
remaining $1.5 million decrease is attributed to the weaker demand for technical
fabrics products. European operations experienced increased net sales of $6.0
million, or 8.3%, over the prior fiscal year. The increase in European
operations includes $7.8 million in net sales from the acquisition of Woodville,
offset by one less week of operations, representing $1.4 million in decreased
net sales. The remaining decrease of approximately $400,000 is due to the
postponement of new programs replacing expired product lines. Such programs were
in production at the beginning of fiscal 2003.
Gross Profit. Gross profit decreased by $2.0 million, or 7.2%, to $26.5
million in fiscal 2002 compared to fiscal 2001. The decrease in gross profit is
attributed to $1.1 million in losses associated with the initial ramp-up of new
programs at Woodville, price adjustments on existing product lines of our
customers of $1.3 million and an approximate $300,000 decline due to one less
week of operations. Fiscal 2001 included a charge of $710,000 resulting from the
application of fresh start accounting to record inventory at its fair value.
Gross profit as a percentage of net sales decreased to approximately 13.0%, from
14.2% for the prior fiscal year. The decrease as a percentage of net sales was
due to the items discussed above.
Income from Operations. Income from operations decreased by $2.4 million,
or 15.7%, to $13.1 million in fiscal 2002 compared to fiscal 2001. The decrease
is attributable to the $2.0 million decrease in gross profit discussed above in
addition to approximately $400,000 of re-qualification and other costs incurred
in preparation of the relocation of the Woodville operation to other Company
facilities. Income from operations as a percentage of net sales decreased to
6.4% for fiscal 2002 from 7.7% for fiscal 2001. The decrease as a percentage of
net sales was primarily a result of the items discussed above.
Other (Income) Expense, net. The Company recognized other income of $1.0
million for fiscal year 2002 as compared to other expense of $598,000 for fiscal
year 2001. The Company recorded net foreign transaction gains of $756,000 during
the year, while net foreign transaction losses of $639,000 were recorded in the
prior year.
19
Interest Expense, net. Interest expense decreased $2.2 million, or 35.2%,
to $4.1 million in fiscal 2002 compared to fiscal 2001. The decrease is
attributable to the Company's lower average outstanding balances on its
revolving credit facility and other long-term debt during the year, as well as
lower interest rates.
Reorganization Items. In fiscal 2001, professional fees and expenses were
included in Reorganization Items totaling $3.7 million. Such expenses represent
fees and expenses of the Company's various legal and financial advisors, the
financial and legal advisors for the Company's senior lenders and Noteholders
and other professionals associated with the Company's financial restructuring
and Chapter 11 bankruptcy proceeding. The revaluation of the Notes totaled $2.9
million, representing the write-off of related deferred financing costs. Also
included in Reorganization Items in fiscal 2001 are restructuring charges that
consist primarily of a charge for future severance payments to the Company's
former Chairman and Chief Executive Officer. The impact of adjusting assets and
liabilities to fair value in accordance with SOP 90-7 resulted in a net charge
of approximately $34.0 million.
Provision for Income Taxes. The provision for income taxes primarily
represents taxes on results of continuing operations in the United States. The
Company's effective tax rate for fiscal 2002 was 34%. This overall effective tax
rate is favorably impacted by the utilization of certain net operating loss
carryforwards and credits at certain of the Company's foreign operating
subsidiaries during fiscal 2002. Income taxes for fiscal 2001 reflect a benefit
principally due to fresh start and other reorganization adjustments and
adjustments for deferred tax valuation allowances previously established against
deferred tax assets.
Discontinued Operations. The fiscal 2002 loss of $4.2 million (before
income tax benefit of $1.7 million) is principally the result of additional
reserves for discontinued operations due to a $6.6 million operating loss on
Valentec Wells (including approximately $1.7 million for its relocation) prior
to its sale in September 2001, a $2.9 million gain on the sale of Valentec
Wells, and an approximate $200,000 operating loss on Galion during the year. See
Note 3 to the Consolidated Financial Statements for further information
concerning discontinued operations.
Extraordinary Gain. In fiscal 2001, the early extinguishment of the Notes
and related accrued interest resulted in an extraordinary gain of $29.9 million,
net of income taxes of $17.5 million. This was offset by a loss recognized in
the amount of $573,000 for the write-off of deferred financing costs associated
with the early termination of a prior credit facility.
Net Income. Net income was $4.1 million in fiscal 2002 compared to a net
income of $9.3 million in fiscal 2001. This decrease in earnings resulted from
the items discussed above.
Liquidity and Capital Resources
It is expected that the Company's equipment and working capital
requirements will continue to increase in order to sustain its growth of
operations. The Company estimates that it will spend over $6.0 million for
capital projects in fiscal 2004. This growth is expected to be funded through a
combination of cash flows from operations, equipment financing and the use of
the Company's line of credit.
Credit Facilities
The Company has 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 under the Congress Facility in the current portion of long-term debt
as of March 29, 2003. 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 $2.6 million in term loans that are to be repaid in equal monthly
installments of approximately $84,000, with the unpaid principal amount due on
October 9, 2003. The amount outstanding under the facility at March 29, 2003 and
March 30, 2002 (including term loans) was $19.7 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 $424,000
outstanding pursuant to letters of credit at March 29, 2003 (none outstanding at
March 30, 2002). At March 29, 2003, the Company's availability for additional
borrowings (under the maximum allowable limit) was approximately $13.3 million.
20
The interest rate on the Congress Facility is variable, depending on the
amount of the Company's Excess Availability (as defined) at any particular time
and the Company's Fixed Charge Coverage Ratio (as defined). Under the terms of
the Congress Facility, the Company may make borrowings based on the Prime Rate
(as defined) or the LIBOR rate, in each case with an applicable margin applied
to the rate. At March 29, 2003, the margin on Prime Rate loans was 0.0% and the
margin on LIBOR rate loans was 2.0%. The Company is required to pay a monthly
commitment fee of 0.375% on the unused portion of the Congress Facility.
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. That payment was funded by borrowings under the
Congress Facility. The amount outstanding under the Subordinated Facility at
March 29, 2003 and March 30, 2002 was $9.2 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. In addition,
the Subordinated Facility provides for mandatory prepayments of principal in the
event that the Company's Consolidated EBITDA (as defined) exceeds certain
specified levels following the Emergence Date. As of March 29, 2003, the Company
estimates $1.9 million in prepayments are required within 90 days following the
end of fiscal 2003. Additionally, both the Congress Facility and the
Subordinated Facility contain certain restrictive covenants that impose
limitations upon, among other things, the Company's ability to borrow monies
under the Congress Facility; incur indebtedness (including capitalized lease
arrangements); become or remain liable with respect to any guaranty; make loans;
acquire investments; declare or make dividends (no dividends are permitted to be
paid to holders of the Company's common stock) or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At March 29, 2003, 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 prior to the time 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 prior to their maturity with amended or new facilities on comparable
terms.
Other Long-term Obligations
On March 28, 2002, the Company and HVB Bank Czech Republic, successor to
Bank Austria, entered into an amendment of its $7.5 million mortgage note
facility dated June 4, 1997. This amendment extends the mortgage facility for
five years, establishes an interest rate of 1.7% over EURIBOR (EURIBOR was 2.57%
at March 29, 2003), requires monthly payments of approximately $62,500 and is
secured by the real estate assets of the Company's subsidiary in the Czech
Republic.
On April 1, 1999, the Company's German subsidiary secured a $2.9 million
mortgage note facility with Deutsche Bank to purchase a facility in Germany. The
note was secured by the real estate in Germany acquired through the mortgage. In
July 1999, the Company refinanced the note and reduced the outstanding
indebtedness to $2.1 million (currently $1.9 million). The note is secured by a
cash collateral deposit of approximately $1.4 million (see Note 2 to the
Consolidated Financial Statements for discussion of restricted cash). The note
consists of two tranches. Tranche A totals approximately $1.2 million bearing
interest at 4.05% and is payable in semi-annual installments of approximately
$70,000 beginning on December 30, 2001 through June 30, 2009. Tranche B totals
approximately $694,000 bearing interest at 3.75% and is payable in semi-annual
installments of approximately $19,000 also beginning on December 30, 2001
through June 30, 2019.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The KeyCorp financing agreement has a seven-year term, bears
interest at a rate of 1.25% over LIBOR (1.31% at March 29, 2003), requires
monthly payments of approximately $150,000 and is secured by certain equipment
located at the Company's Greenville, South Carolina facility.
21
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at March 29, 2003.
As of March 29, 2003
----------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
----------------------------------------------------------------------------
Contractual obligations
Credit facility $16,714 $16,714 $ -- $ -- $ -- $ -- $ --
Other long-term debt 21,322 14,585 2,652 1,572 1,013 721 779
Capital lease obligations 1,037 411 365 234 15 12 --
Operating lease commitments 2,482 795 595 454 334 304 --
----------------------------------------------------------------------------
Total $41,555 $32,505 $3,612 $2,260 $1,362 $1,037 $779
============================================================================
Cash Flows
During fiscal 2003, net cash provided by operating activities from
continuing operations was $12.1 million, arising from income from continuing
operations of $7.9 million, increases for non-cash items of $11.7 million
(principally depreciation and amortization and changes in deferred taxes) and
reductions in operating assets and liabilities of $7.5 million (principally an
increase in accounts receivable and inventories due to increased sales and
production). Net cash used in continuing operations for investing activities was
$7.4 million, principally for the acquisition of additional property, plant and
equipment to support the Company's production capacity worldwide. Net cash used
in continuing operations for financing activities in fiscal 2003 was $659,000,
due principally from borrowings on the Congress Facility of $16.7 million offset
by payments on various other debt and long-term obligations totaling $17.4
million. The above activities, in conjunction with the favorable effects of
foreign exchange rates of $47,000 and the cash provided by discontinued
operations of $838,000, resulted in a net increase in cash and cash equivalents
of $4.9 million in fiscal year 2003.
New Accounting Pronouncements
Accounting Standards Adopted -The adoption of Statement of Financial
Accounting Standards ("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, 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 October 2001, the Financial Accounting Standards Board ("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 Accounting Principles Board ("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
22
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 of Certain Employee Termination Benefits and Other Costs to Exit and
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 adoption of SFAS No. 146 had no
effect on the Company's financial position and results of operations.
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 adoption of
Interpretation No. 45 had no effect on the Company's 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
and specific disclosures related to product warranties. The disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. As of March 29, 2003, 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 periods of the related Facilities. The Company
does not provide product warranties within the disclosure provisions of
Interpretation No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," to
require more prominent disclosure in both interim and annual financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002. The Company has complied with the disclosure provisions of SFAS No.
148 in the Notes to the Consolidated Financial Statements for the years ended
March 29, 2003 and March 30, 2002.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities", was issued which, among other things, provides guidance on
identifying variable interest entities ("VIE") and determining when assets,
liabilities, non-controlling interest and operating results of a VIE should be
included in a company's consolidated financial statements, and also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. Certain disclosure requirements of Interpretation No. 46, if
applicable, are required for financial statements initially issued after January
31, 2003. Companies with variable interest in variable interest entities created
after January 31, 2003 shall apply the provisions of Interpretation No. 46
immediately. Public entities with a variable interest in a variable interest
entity shall apply the provisions of Interpretation No. 46 no later than the
first interim or annual reporting period beginning after June 15, 2003.
Interpretation No. 46 is not expected to have an impact to the Company's
financial statements or future results of operations.
Accounting Standard Not Yet Adopted - In April 2003, SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
was issued which amends and clarifies the accounting for derivative
instrument's, including certain derivative instruments embedded in other
contracts, and hedging activities under SFAS No. 133. It requires, among other
things, that contracts with comparable characteristics be accounted for
similarly and clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is effective generally for contracts entered into
and modified after June 30, 2003. The Company is in the
23
process of reviewing the effect, if any, that the adoption of SFAS No. 149 will
have on its financial position and results of operations.
Seasonality and Inflation
The automotive operations are subject to the seasonal characteristics of
the automotive industry in which there are generally seasonal plant shutdowns in
the third and fourth quarters of each calendar year. The Company does not
believe that its operations to date have been materially affected by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Congress Facility and
certain other facilities are outstanding, the Company has market risk relating
to such amounts because the interest rates under the Congress Facility and those
certain other facilities are variable. As of June 23, 2003, the Company's
interest rate, inclusive of credit fees under the Congress Facility approximated
4.25%. Due to the variability of the interest rates, a hypothetical increase or
decrease in the interest rates of 100 basis points relating to the Congress
Facility may result in an addition to or reduction in interest expense of
approximately $150,000 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. The Company
monitors its risk associated with the volatility of certain foreign currencies
against its functional currency, the U.S. dollar. The impact of changes in the
relationship of other currencies to the U.S. dollar in fiscal 2003 has resulted
in the recognition of other income of approximately $3.5 million. It is unknown
what the effect of foreign currency rate fluctuations will have on the Company's
financial position or results of operations in the future. If, however, there
were a sustained decline of these currencies versus the U.S. dollar, the
Consolidated Financial Statements could be materially adversely affected.
Derivative financial instruments are utilized by the Company to reduce
exposures to volatility of foreign currencies impacting the operations of its
business. The Company does not enter into financial instruments for trading or
speculative purposes.
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 net gain of $35,000 for the year ended March 29, 2003, included in "other
income". There was no significant impact on earnings for the year ended March
30, 2002. The Company did not have any remaining British pound forward exchange
contracts at March 29, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item appears in Item 15(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 respective portions of the Company's 2003
Annual Meeting Proxy Statement to be filed hereafter which contains such
information.
ITEM 14. 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, principal
financial officer and principal accounting 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements, related notes thereto and reports of
independent accountants required by Item 8 are listed in the index
on page F-1 herein.
(2) Unless otherwise attached, 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 Joint Plan of Reorganization of Safety Components Debtors
Under Chapter 11 Bankruptcy Code dated June 12, 2000 (1)
2.2 First Amended Joint Plan of Reorganization of Safety
Components International, Inc., Safety Components Fabric
Technologies, Inc., Automotive Safety Components
International, Inc., ASCI Holdings Germany (DE) Inc., ASCI
Holdings UK (DE) Inc., ASCI Holdings Mexico (DE) Inc., and
ASCI Holdings Czech (DE) Inc. (2)
3.1 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Components
International, Inc. (3)
3.2 Amended Bylaws of Safety Components International, Inc.
(4)
4.1 Restructuring Agreement dated April 6, 2000 between Safety
Components International, Inc., Robert A. Zummo and the
consenting holders signatory thereto (5)
4.2 First Amendment to Restructuring Agreement dated as of May
10, 2000 between Safety Components and the consenting
holders signatory thereto (6)
10.1 Form of Master Equipment Lease Agreement, dated as of July
10, 1998, between KeyCorp Leasing, a division of Key
Corporate Capital Inc. and Safety Components
International, Inc. (7)
10.2 Loan and Security Agreement dated as of October 11, 2000,
by and among Safety Components International, Inc., the
subsidiaries named therein as Borrowers and Guarantors and
Congress Financial Corporation (Southern) (8)
10.3 Subordinated Secured Credit Agreement dated as of October
11, 2000, 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 (9)
25
*10.4 Safety Components International, Inc. 2001 Stock Option
Plan (10)
*10.5 Employment agreement, effective May 18, 2001 between
Safety Components International, Inc. and John C. Corey
(10)
*10.6 Employment agreement, effective May 18, 2001 between
Safety Components International, Inc. and Brian P. Menezes
(10)
*10.7 Employment agreement, effective May 18, 2001 between
Safety Components International, Inc. and Stephen B Duerk
(10)
*10.8 Form of Stock Option Agreement (10)
*10.9 Form of Severance Letter (10)
10.11 Warrant Agreement, dated as of October 11, 2000, by and
between Safety Components International, Inc. and
Continental Stock Transfer and Trust Company, acting
solely in its capacity as agent for each of the holders of
Warrants issued by the Company (10)
*10.13 Employment agreement, effective March 29, 1999, between
Safety Components International, Inc. and John C. Corey
(10)
*10.14 Employment agreement, effective August 23, 1999, between
Safety Components International, Inc. and Brian P. Menezes
(10)
*10.15 Employment agreement, dated as of June 1, 1998 between
Safety Components International, Inc. and Stephen Duerk
(11)
*10.17 Safety Components International, Inc. Executive Deferral
Program (12)
*10.18 Amendment No. 1 to the Safety Components International,
Inc. Executive Deferral Program (12)
*10.19 Amendment dated June 27, 2001 to Employment Agreement,
dated May 18, 2001 between Safety Components
International, Inc. and John C. Corey (12)
*10.20 Amendment dated June 27, 2001 to Employment Agreement,
dated May 18, 2001 between Safety Components
International, Inc. and Brian P. Menezes (12)
10.21 Amendment No. 1 and Consent to Loan and Security
Agreement, dated November 2, 2001, by and among Safety
Components International, Inc., the subsidiaries named
therein as Borrowers and Guarantors and Congress Financial
Corporation (Southern) (13)
10.23 Amendment No.1, dated March 28, 2002, to the Credit
Facility Agreement dated May 29, 1997 between Automotive
Safety Components International s.r.o. and HVB Bank Czech
Republic a.s. (14)
10.24 Letter of Guarantee, dated March 28, 2002, between Safety
Components International, Inc. and HVB Bank Czech Republic
a.s. (14)
*10.25 Form of Stock Option Agreement - Class C (15)
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 and Fleet
Bank, as lenders, and KeyBank as administrative agent.
(16)
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). (16)
*10.28 Safety Components International, Inc. 2003 Management
Incentive Bonus Program
21.1 Subsidiaries of Safety Components
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
* Indicates exhibits relating to executive compensation
26
Footnotes:
(1) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended March 25, 2000 (as exhibit 2.3).
(2) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 2.4).
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 3.5).
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 3.6).
(5) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on April 13, 2000 (as exhibit 99.1).
(6) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on May 19, 2000 (as exhibit 99.1).
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1998 (as exhibit 10.50).
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 10.68).
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 10.69).
(10) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended March 31, 2001 (with same exhibit
reference number noted therein).
(11) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1998 (as exhibit 10.49).
(12) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 29, 2001 (with same exhibit
reference number noted therein).
(13) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 29, 2001 (with same exhibit
reference number noted therein).
(14) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended March 30, 2002 (with same exhibit
reference number noted therein).
(15) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 29, 2002 (with same exhibit
reference number noted therein).
(16) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 28, 2002 (with same exhibit
reference number noted therein).
(b) Reports on Form 8-K:
No reports on Form 8-K were required to be filed by the Company during the
fourth quarter of fiscal 2003.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
By: /s/ John C. Corey
-----------------
John C. Corey
Chief Executive Officer
and President
Date: June 23, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Signature Title Date
- ------------------ ----- ----
/s/ John C. Corey Chief Executive Officer, June 23, 2003
- --------------------------
John C. Corey President and Director
/s/ Carroll R. Wetzel, Jr. Director, Chairman of the Board June 23, 2003
- --------------------------
Carroll R. Wetzel, Jr.
/s/ Brian P. Menezes Vice President, Chief Financial June 23, 2003
- -------------------------- Officer (Principal Financial Officer)
Brian P. Menezes
/s/ William F. Nelli Corporate Controller June 23, 2003
- -------------------------- (Principal Accounting Officer)
William F. Nelli
/s/ Ben E. Waide III Director June 23, 2003
- --------------------------
Ben E. Waide III
/s/ W. Allan Hopkins Director June 23, 2003
- --------------------------
W. Allan Hopkins
/s/ Andy Goldfarb Director June 23, 2003
- --------------------------
Andy Goldfarb
28
CERTIFICATIONS
I, John C. Corey, certify that:
1. I have reviewed this annual report on Form 10-K of Safety Components
International, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual
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 annual report
(the "Evaluation Date"); and
c. presented in this annual 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 annual report whether 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: June 23, 2003 By: \s\ John C. Corey
-----------------------
John C. Corey
President and
Chief Executive Officer
29
I, Brian P. Menezes, certify that:
1. I have reviewed this annual report on Form 10-K of Safety Components
International, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual
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 annual report
(the "Evaluation Date"); and
c. presented in this annual 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 annual report whether 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: June 23, 2003 By: \s\ Brian P. Menezes
------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
30
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 29, 2003 and March 30, 2002 F-3
Consolidated Statements of Operations for the Years ended March 29, 2003
and March 30, 2002, the period from October 11, 2000 to March 31, 2001
(Reorganized Company) and the period from March 26, 2000
to October 10, 2000 (Predecessor Company) F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
ended March 29, 2003 and March 30, 2002, the period from October 11, 2000
to March 31, 2001 (Reorganized Company) and the period from March 26,
2000 to October 10, 2000 (Predecessor Company) F-5
Consolidated Statements of Cash Flows for the Years ended March 29, 2003
and March 30, 2002, the period from October 11, 2000 to March 31, 2001
(Reorganized Company), the period from March 26, 2000
to October 10, 2000 (Predecessor Company) F-6
Notes to Consolidated Financial Statements F-7
SUPPLEMENTAL SCHEDULE:
II Valuation and Qualifying Accounts
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Safety Components International, Inc.
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Safety
Components International, Inc. and subsidiaries (the "Company") as of March 29,
2003 and March 30, 2002 (Reorganized Company balance sheets), and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended March 29, 2003 and March 30, 2002 (Reorganized Company
operations), the period from October 11, 2000 to March 31, 2001 (Reorganized
Company operations) and the period from March 26, 2000 to October 10, 2000
(Predecessor Company operations). Our audits also included the consolidated
financial statement schedule for the years ended March 29, 2003 and March 30,
2002 (Reorganized Company), the period from October 11, 2000 to March 31, 2001
(Reorganized Company) and the period from March 26, 2000 to October 10, 2000
(Predecessor Company) listed in the Index as Supplemental Schedule II. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on August 31,
2000, the United States Bankruptcy Court signed an order confirming the
Company's plan of reorganization which became effective after the close of
business on October 10, 2000. Accordingly, the accompanying consolidated
financial statements subsequent to October 10, 2000 have been prepared in
conformity with AICPA Statement of Position 90-7, "Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code," for the Reorganized
Company as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods as described in Note 1.
In our opinion, such Reorganized Company consolidated financial statements
present fairly, in all material respects, the financial position of the Company
at March 29, 2003 and March 30, 2002, and the results of its operations and its
cash flows for the years ended March 29, 2003 and March 29, 2002, and the period
from October 11, 2000 to March 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Further, in our
opinion, such Predecessor Company consolidated financial statements referred to
above present fairly, in all material respects, the Predecessor Company's
results of operations and cash flows for the period from March 26, 2000 to
October 10, 2000, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule for the years ended March 29, 2003 and March 30, 2002 (Reorganized
Company), the period from October 11, 2000 to March 31, 2001 (Reorganized
Company), and the period from March 26, 2000 to October 10, 2000 (Predecessor
Company), when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on March 31,
2002, the Company changed its method of accounting for goodwill (including
reorganization value in excess of amounts allocable to identifiable assets) to
conform to Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets".
DELOITTE & TOUCHE LLP
Greenville, South Carolina
June 6, 2003
F-2
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 29, March 30,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 7,564 $ 2,692
Accounts receivable, net .................................................................. 43,882 35,056
Inventories, net .......................................................................... 24,000 16,774
Prepaid and other ......................................................................... 1,949 2,521
--------- ---------
Total current assets ................................................................ 77,395 57,043
Property, plant and equipment, net ............................................................. 52,622 48,044
Reorganization value in excess of amounts allocable to identifiable assets, net ................ -- 14,576
Identifiable intangible assets, net ............................................................ 1,106 1,071
Other assets ................................................................................... 2,941 1,900
Net assets held for sale ....................................................................... -- 2,637
--------- ---------
Total assets ........................................................................ $ 134,064 $ 125,271
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................................... $ 26,713 $ 18,516
Accrued and other current liabilities ..................................................... 10,956 9,635
Current portion of long-term debt ......................................................... 31,710 25,181
--------- ---------
Total current liabilities ........................................................... 69,379 53,332
Long-term debt ................................................................................. 7,363 12,182
Other long-term liabilities .................................................................... 5,409 3,919
--------- ---------
Total liabilities ................................................................... 82,151 69,433
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ................................. -- --
Common stock: $.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) ................................................... (3,446) 5,339
Accumulated other comprehensive income (loss) ............................................. 4,770 (90)
--------- ---------
Total stockholders' equity .......................................................... 51,913 55,838
--------- ---------
Total liabilities and stockholders' equity .......................................... $ 134,064 $ 125,271
========= =========
See notes to consolidated financial statements.
F-3
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Predecessor
Reorganized Company | Company
------------------------------------------------- | ----------------
Period from | Period from
October 11, 2000 | March 26, 2000
Year ended Year ended to | to
March 29, 2003 March 30, 2002 March 31, 2001 | October 10, 2000
-------------- -------------- -------------- | ----------------
Net sales ................................................ $ 244,338 $ 203,323 $ 92,052 | $ 109,139
Cost of sales, excluding depreciation .................... 204,656 169,527 76,201 | 89,406
Depreciation ............................................. 9,662 7,290 3,136 | 3,901
--------- --------- -------- | ---------
Gross profit ...................................... 30,020 26,506 12,715 | 15,832
|
Selling and marketing expenses ........................... 2,176 1,784 931 | 1,074
General and administrative expenses ...................... 12,299 9,811 4,304 | 4,867
Research and development expenses ........................ 1,242 899 335 | 353
Amortization of intangible assets ........................ 124 900 448 | 675
--------- --------- -------- | ---------
Income from operations ............................ 14,179 13,112 6,697 | 8,863
|
Other (income) expense, net .............................. (3,426) (1,001) (280) | 878
Interest expense, net (contractual interest of $8,486 |
during the period from March 26, 2000 to |
October 10, 2000) ................................... 3,596 4,110 2,514 | 3,833
--------- --------- -------- | ---------
Income from continuing operations before |
reorganization items ............................ 14,009 10,003 4,463 | 4,152
|
Reorganization items: |
Fair value adjustments ................................. -- -- -- | 34,013
Restructuring charges .................................. -- -- -- | 1,125
Professional fees and expenses ......................... -- -- -- | 3,729
Loss on revaluation of senior subordinated notes ....... -- -- -- | 2,902
Interest earned on accumulated cash .................... -- -- -- | (29)
--------- --------- -------- | ---------
Income (loss) from continuing operations before |
income tax provision (benefit) .................. 14,009 10,003 4,463 | (37,588)
|
Provision (benefit) for income taxes ..................... 6,120 3,397 1,769 | (17,511)
--------- --------- -------- | ---------
Income (loss) from continuing operations .......... 7,889 6,606 2,694 | (20,077)
|
Discontinued operations: |
Loss from discontinued operations, net of income tax |
benefit of $847 for the period from |
March 26, 2000 to October 10, 2000 .................. -- -- -- | 1,440
Loss (gain) on disposition of discontinued operations, |
net of income tax provision (benefit) of $660, |
($1,661), ($848), and $125, respectively ............ 2,023 2,517 1,444 | (214)
--------- --------- -------- | ---------
Income (loss) before extraordinary gain ........... 5,866 4,089 1,250 | (21,303)
|
Extraordinary gain on early extinguishment of debt, |
net of income taxes of $17,473 ...................... -- -- -- | 29,370
|
Cumulative effect of change in method of accounting ...... (14,651) -- -- | --
--------- --------- -------- | ---------
Net (loss) income ........................................ $ (8,785) $ 4,089 $ 1,250 | $ 8,067
========= ========= ======== | =========
|
Net (loss) income per common share, basic and diluted: (A) |
Income from continuing operations ................. $ 1.59 $ 1.33 $ 0.54 |
Loss on disposition of discontinued operations .... (0.41) (0.51) (0.29) |
Cumulative effect of change in method of |
accounting ...................................... (2.95) -- -- |
--------- --------- -------- |
Net (loss) income per common share, basic and diluted .... $ (1.77) $ 0.82 $ 0.25 |
========= ========= ======== |
|
Weighted average number of shares outstanding, basic and |
diluted (A) ....................................... 4,960 4,960 4,960 |
========= ========= ======== |
(A) Share and per share data are not meaningful prior to October 10, 2000 due
to the significant change in capital structure in connection with the Plan
of Reorganization.
See notes to consolidated financial statements.
F-4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except shares)
Common Common Common Additional
Stock Stock Stock Paid-in
Shares Amount Warrants Capital
---------- ---------- ---------- ----------
Predecessor Company
Balance at March 25, 2000 ................................................ 5,136,316 $ 66 $ 51 $ 45,168
Comprehensive income for the period from
March 26, 2000 to October 10, 2000:
Net income .................................................... -- -- -- --
Foreign currency translation adjustment ....................... -- -- -- --
Net comprehensive income ............................................. -- -- -- --
Fresh start adjustments .............................................. (5,136,316) (66) (51) --
Issuance of common stock and warrants ................................ 5,000,000 50 34 5,748
Treasury stock held by subsidiary .................................... (39,619) -- -- --
---------- ---------- ---------- ----------
Balance at October 10, 2000 .............................................. 4,960,381 50 34 50,916
Reorganized Company
Comprehensive income for the period from October 11, 2000 to March 31,
2001:
Net income .................................................... -- -- -- --
Foreign currency translation adjustment ....................... -- -- -- --
Net comprehensive income ............................................. -- -- -- --
---------- ---------- ---------- ----------
Balance at March 31, 2001 ................................................ 4,960,381 50 34 50,916
Comprehensive income for the year ended March 30, 2002:
Net income .................................................... -- -- -- --
Foreign currency translation adjustment ....................... -- -- -- --
Net comprehensive income ............................................. -- -- -- --
Treasury stock purchased by the Company .............................. (703) -- -- --
---------- ---------- ---------- ----------
Balance at March 30, 2002 ................................................ 4,959,678 50 34 50,916
Comprehensive loss for the year ended March 29, 2003:
Net loss ...................................................... -- -- -- --
Foreign currency translation adjustment ....................... -- -- -- --
Net comprehensive loss ............................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at March 29, 2003 ................................................ 4,959,678 $ 50 $ 34 $ 50,916
========== ========== ========== ==========
Accumulated
Treasury Retained Other
Stock Earnings Comprehensive
Amount (Deficit) (Loss) income Total
---------- ----------- -------------- ----------
Predecessor Company
Balance at March 25, 2000 ................................................ $ (15,439) $ (36,279) $ (8,007) $ (14,440)
Comprehensive income for the period from
March 26, 2000 to October 10, 2000:
Net income .................................................... -- 8,067 -- 8,067
Foreign currency translation adjustment ....................... -- -- (3,707) (3,707)
----------
Net comprehensive income ............................................. -- -- -- 4,360
Fresh start adjustments .............................................. 15,439 28,212 11,714 55,248
Issuance of common stock and warrants ................................ -- -- -- 5,832
Treasury stock held by subsidiary .................................... (404) -- -- (404)
---------- ---------- ---------- ----------
Balance at October 10, 2000 .............................................. (404) -- -- 50,596
Reorganized Company
Comprehensive income for the period from October 11, 2000 to March 31,
2001:
Net income .................................................... -- 1,250 -- 1,250
Foreign currency translation adjustment ....................... -- -- 97 97
----------
Net comprehensive income ............................................. -- -- -- 1,347
---------- ---------- ---------- ----------
Balance at March 31, 2001 ................................................ (404) 1,250 97 51,943
Comprehensive income for the year ended March 30, 2002:
Net income .................................................... -- 4,089 -- 4,089
Foreign currency translation adjustment ....................... -- -- (187) (187)
----------
Net comprehensive income ............................................. -- -- -- 3,902
Treasury stock purchased by the Company .............................. (7) -- -- (7)
---------- ---------- ---------- ----------
Balance at March 30, 2002 ................................................ (411) 5,339 (90) 55,838
Comprehensive loss for the year ended March 29, 2003:
Net loss ...................................................... -- (8,785) -- (8,785)
Foreign currency translation adjustment ....................... -- -- 4,860 4,860
----------
Net comprehensive loss ............................................... -- -- -- (3,925)
---------- ---------- ---------- ----------
Balance at March 29, 2003 ................................................ $ (411) $ (3,446) $ 4,770 $ 51,913
========== ========== ========== ==========
See notes to consolidated financial statements.
F-5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Reorganized Company |
---------------------------------------------------|
Period from |
Year ended Year ended October 11, 2000 |
March 29, 2003 March 30, 2002 to March 31, 2001|
--------------- -------------- -----------------|
Cash Flows From Operating Activities: |
Net (loss) income .......................................................... $ (8,785) $ 4,089 $ 1,250 |
Loss from discontinued operations .......................................... -- -- -- |
Loss (gain) on disposition of discontinued operations ...................... 2,023 2,517 1,444 |
Extraordinary gain on early extinguishment of debt ......................... -- -- -- |
Cumulative effect of accounting change ..................................... 14,651 -- -- |
-------- -------- -------- |
Income (loss) from continuing operations ................................... 7,889 6,606 2,694 |
Adjustments to reconcile income (loss) from continuing |
operations to net cash provided by (used in) operating activities: |
Reorganization items: |
Fair value adjustments .................................................. -- -- -- |
Loss on revaluation of senior subordinated notes ........................ -- -- -- |
Interest received on accumulated cash due to Chapter 11 proceeding ...... -- -- -- |
Depreciation ............................................................. 9,662 7,290 3,136 |
Amortization ............................................................. 124 900 448 |
Provision for bad debts .................................................. 295 144 608 |
Loss (gain) on disposal and write-off of fixed assets and investments .... 271 174 (34) |
Deferred taxes ........................................................... 1,591 1,399 -- |
Accretion of interest on current obligations ............................. 81 60 -- |
Changes in operating assets and liabilities: |
Accounts receivable .................................................. (9,121) (1,718) (1,285) |
Inventories .......................................................... (7,225) 501 2,104 |
Prepaid and other current assets ..................................... 97 1,539 1,218 |
Other assets ......................................................... (677) 110 (927) |
Accounts payable ..................................................... 8,196 6,434 (6,382) |
Accrued liabilities .................................................. 925 (127) (2,068) |
-------- -------- -------- |
Net cash provided by (used in) continuing operations ................. 12,108 23,312 (488) |
Net cash provided by (used in) discontinued operations ............... 812 (3,752) (178) |
-------- -------- -------- |
Net cash provided by (used in) operating activities .................. 12,920 19,560 (666) |
-------- -------- -------- |
|
Cash Flows From Investing Activities: |
Purchases of property, plant and equipment ............................... (7,916) (5,488) (2,112) |
Proceeds on disposition of assets ........................................ 454 -- 176 |
Costs for acquisitions ................................................... -- (1,845) -- |
-------- -------- -------- |
Net cash used in continuing operations .................................. (7,462) (7,333) (1,936) |
Net cash provided by (used in) discontinued operations .................. 26 3,626 (40) |
-------- -------- -------- |
Net cash (used in) provided by investing activities ..................... (7,436) (3,707) (1,976) |
-------- -------- -------- |
|
Cash Flows From Financing Activities: |
Net repayment on KeyBank revolving credit facility ....................... -- -- -- |
Proceeds from (repayment of) KeyBank Subordinated DIP term note .......... -- -- (20,900) |
Proceeds from (repayment of) KeyBank Subordinated Secured term note ...... (9,731) (1,967) 20,900 |
Proceeds from (repayment of) Congress term note .......................... (2,347) (2,161) 7,080 |
Net borrowings (repayment) on Congress revolving credit facility ......... 16,713 (10,002) 10,002 |
Proceeds from (repayment of) Bank of America DIP revolving credit facility -- -- (8,986) |
Proceeds from (repayment of) Bank of America DIP term note ............... -- -- (2,244) |
Repayment of Deutsche Bank Mortgage ...................................... (209) (200) -- |
Payment to former owner of acquired business ............................. (2,327) -- -- |
Repayment of other debt and long term obligations ........................ (2,758) (2,760) (1,865) |
Acquisition of treasury stock ............................................ -- (7) -- |
-------- -------- -------- |
Net cash provided by (used in) continuing operations .................... (659) (17,097) 3,987 |
Net cash used in discontinued operations ................................ -- (549) (224) |
-------- -------- -------- |
Net cash provided by (used in) financing activities ..................... (659) (17,646) 3,763 |
-------- -------- -------- |
Effect of exchange rate changes on cash and cash equivalents ................... 47 (509) (101) |
-------- -------- -------- |
Change in cash and cash equivalents ............................................ 4,872 (2,302) 1,020 |
Cash and cash equivalents, beginning of period ................................. 2,692 4,994 3,974 |
-------- -------- -------- |
Cash and cash equivalents, end of period ....................................... $ 7,564 $ 2,692 $ 4,994 |
======== ======== ======== |
|
Supplemental disclosure of cash flow information: |
Cash paid during the period for: |
Interest ................................................................. $ 3,056 $ 3,418 $ 3,714 |
Income taxes ............................................................. 3,732 236 -- |
|
Supplemental disclosure of non-cash investing and financing activities: |
Deferred purchase price of acquisition ..................................... $ -- $ 2,915 $ -- |
Offset of receivable from affiliate against deferred compensation liability |
to former officer ..................................................... -- 564 -- |
Equipment acquired under capital lease obligations ......................... 1,086 -- -- |
Elimination of 10 1/8% Senior Subordinated Notes, including accrued interest -- -- -- |
Write off of common stock of Predecessor Company ........................... -- -- -- |
Write off of common stock warrants of Predecessor Company .................. -- -- -- |
Elimination of treasury stock of Predecessor Company ....................... -- -- -- |
Issuance of common stock of Reorganized Company ............................ -- -- -- |
Issuance of common stock warrants of Reorganized Company ................... -- -- -- |
Acquisition of treasury stock of Reorganized Company ....................... -- -- -- |
Predecessor Company
-------------------
Period from
March 26, 2000
to October 10, 2000
-------------------
Cash Flows From Operating Activities:
Net (loss) income .......................................................... $ 8,067
Loss from discontinued operations .......................................... 1,440
Loss (gain) on disposition of discontinued operations ...................... (214)
Extraordinary gain on early extinguishment of debt ......................... (29,370)
Cumulative effect of accounting change ..................................... --
--------
Income (loss) from continuing operations ................................... (20,077)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Reorganization items:
Fair value adjustments .................................................. 34,013
Loss on revaluation of senior subordinated notes ........................ 2,902
Interest received on accumulated cash due to Chapter 11 proceeding ...... (29)
Depreciation ............................................................. 3,901
Amortization ............................................................. 675
Provision for bad debts .................................................. 1,081
Loss (gain) on disposal and write-off of fixed assets and investments .... (39)
Deferred taxes ........................................................... (17,511)
Accretion of interest on current obligations ............................. --
Changes in operating assets and liabilities:
Accounts receivable .................................................. 250
Inventories .......................................................... (4,714)
Prepaid and other current assets ..................................... 1,278
Other assets ......................................................... 2,086
Accounts payable ..................................................... (1,061)
Accrued liabilities .................................................. (202)
--------
Net cash provided by (used in) continuing operations ................. 2,553
Net cash provided by (used in) discontinued operations ............... (1,733)
--------
Net cash provided by (used in) operating activities .................. 820
--------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ............................... (1,812)
Proceeds on disposition of assets ........................................ 13
Costs for acquisitions ................................................... --
--------
Net cash used in continuing operations .................................. (1,799)
Net cash provided by (used in) discontinued operations .................. 2,863
--------
Net cash (used in) provided by investing activities ..................... 1,064
--------
Cash Flows From Financing Activities:
Net repayment on KeyBank revolving credit facility ....................... (37,900)
Proceeds from (repayment of) KeyBank Subordinated DIP term note .......... 20,900
Proceeds from (repayment of) KeyBank Subordinated Secured term note ...... --
Proceeds from (repayment of) Congress term note .......................... --
Net borrowings (repayment) on Congress revolving credit facility ......... --
Proceeds from (repayment of) Bank of America DIP revolving credit facility 8,986
Proceeds from (repayment of) Bank of America DIP term note ............... 2,244
Repayment of Deutsche Bank Mortgage ...................................... --
Payment to former owner of acquired business ............................. --
Repayment of other debt and long term obligations ........................ (1,816)
Acquisition of treasury stock ............................................ --
--------
Net cash provided by (used in) continuing operations .................... (7,586)
Net cash used in discontinued operations ................................ (298)
--------
Net cash provided by (used in) financing activities ..................... (7,884)
--------
Effect of exchange rate changes on cash and cash equivalents ................... (290)
--------
Change in cash and cash equivalents ............................................ (6,290)
Cash and cash equivalents, beginning of period ................................. 10,264
--------
Cash and cash equivalents, end of period ....................................... $ 3,974
========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 1,197
Income taxes ............................................................. --
Supplemental disclosure of non-cash investing and financing activities:
Deferred purchase price of acquisition ..................................... $ --
Offset of receivable from affiliate against deferred compensation liability
to former officer ..................................................... --
Equipment acquired under capital lease obligations ......................... --
Elimination of 10 1/8% Senior Subordinated Notes, including accrued interest (96,784)
Write off of common stock of Predecessor Company ........................... (66)
Write off of common stock warrants of Predecessor Company .................. (51)
Elimination of treasury stock of Predecessor Company ....................... (15,439)
Issuance of common stock of Reorganized Company ............................ 5,798
Issuance of common stock warrants of Reorganized Company ................... 34
Acquisition of treasury stock of Reorganized Company ....................... 404
See notes to consolidated financial statements.
F-6
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business and Basis of Presentation
Safety Components International, Inc. (including, when context requires,
its consolidated subsidiaries, the "Company" or "SCI") operates in a single
segment as a supplier of automotive airbag fabric and cushions and technical
fabrics with operations in North America and Europe.
The 2001 Restructuring
On April 10, 2000 (the "Petition Date"), the Company and certain of its
U.S. subsidiaries (collectively, the "Safety Filing Group"), filed a voluntary
petition under Chapter 11 of the Bankruptcy Code ("Chapter 11") with the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
On October 11, 2000 (the "Emergence Date"), the Safety Filing Group emerged from
Chapter 11 pursuant to the Plan of Reorganization (the "Plan"), confirmed by the
Bankruptcy Court. Pursuant to the Plan, upon emergence, all of the Company's
10-1/8% Senior Notes due 2007 (the "Notes") (an aggregate of approximately $96.8
million, including accrued interest to the Petition Date) were converted into
4,840,774 shares of the Company's post-bankruptcy common stock, and the
pre-bankruptcy common stock, excluding stock held by Robert A. Zummo (former
Chairman and Chief Executive Officer of the Company), was converted into 159,226
shares of the Company's post-bankruptcy common stock, including 39,619 shares of
treasury stock, and warrants to acquire an additional 681,818 shares of such
common stock. Immediately upon emergence, the Company had 5,000,000 shares of
common stock issued and 4,960,381 shares outstanding and, other than the
warrants, no shares of common stock were reserved for issuance in respect of
claims and interests filed and allowed under the Plan. In addition, the Safety
Filing Group's trade suppliers and other creditors were paid in full, pursuant
to the terms of the Plan, within 90 days of the Emergence Date.
The Plan was accounted for pursuant to Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), issued by the American Institute of Certified Public Accountants.
The accompanying consolidated financial statements for periods subsequent to
October 10, 2000 reflect the use of "fresh start" reporting as required by SOP
90-7. Under "fresh start" reporting, the Company's assets and liabilities were
adjusted to estimated fair values and resulted in the creation of a new
reporting entity (the "Reorganized Company" or the "Company") with no retained
earnings or accumulated deficit as of October 11, 2000. Accordingly, the
consolidated financial statements for periods prior to October 11, 2000 (the
"Predecessor Company") are not comparable to consolidated financial statements
for periods subsequent to October 10, 2000. A black line has been drawn on the
accompanying consolidated financial statements and notes thereto to distinguish
between financial information of the Reorganized Company and the Predecessor
Company. In conjunction with the revaluation of the assets and liabilities, a
reorganization value for the entity was determined based upon the approximate
fair value of the entity before considering debt requirements. Under "fresh
start" reporting, the reorganization value of the entity is allocated to the
entity's assets and liabilities. The portion of the reorganization value that
cannot be attributed to specific tangible or identified intangible assets of the
Reorganized Company is reported as "reorganization value in excess of amount
allocable to identifiable assets."
The total reorganization value assigned to the Company's net assets was
determined by independent valuation, using the going concern enterprise
approach. Such valuation resulted in an estimated reorganization value
attributable to the Company's issued common stock of approximately $51.0
million, of which approximately $15.4 million was determined to be the excess of
the reorganization value over the fair value of the net assets ("Excess
Reorganization Value"). The Excess Reorganization Value was amortized over a
twenty-year period up to March 30, 2002. Upon adoption of Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" on
March 31, 2002, the beginning of the current fiscal year, the Company was
required to perform an assessment for impairment of the Company's Excess
Reorganization Value. As a result, the Excess Reorganization Value was
determined to be impaired and accordingly the carrying value of such
Reorganization Value was charged to earnings as the cumulative effect of a
change in accounting principle. See Note 2 for further discussion.
The results of operations in the accompanying consolidated statements of
operations of the Predecessor Company for the period from March 26, 2000 to
October 10, 2000 reflect the operations prior to the Company's emergence from
bankruptcy, including the effects of fresh start reporting adjustments. In this
regard, the consolidated statement of operations of the Predecessor Company for
the period from March 26, 2000 to October 10, 2000 reflects
F-7
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an extraordinary gain of $29.9 million, net of tax of $17.5 million related to
the discharge of the Notes. This was offset by a loss recognized in the amount
of $573,000 for the write-off of deferred financing costs associated with the
early termination of the KeyBank Credit Agreement during the period.
Additionally, the consolidated statement of operations of the Predecessor
Company for the period from March 26, 2000 to October 10, 2000 reflects $41.7
million of Reorganization items, consisting primarily of gains and losses
related to the adjustments of assets and liabilities to fair value, professional
fees and expenses associated with the Company's financial restructuring and
Chapter 11 bankruptcy proceeding, a charge for the revaluation of the Notes
(representing the write-off of related deferred financing costs) and
restructuring charges that consisted primarily of a charge for future severance
payments to the Company's former chairman and chief executive officer.
During the period from October 11, 2000 to March 31, 2001, the Company
recorded certain transactions through continuing operations that related to the
Reorganization items recorded in the period from March 26, 2000 to October 10,
2000. Income from operations for the period from October 11, 2000 to March 31,
2001 was impacted favorably by a $740,000 reversal of a reserve recorded
originally through Reorganization items in the period from March 26, 2000 to
October 10, 2000. Such reserve was related to a disputed claim filed with the
Court in the Company's Chapter 11 proceedings, which was settled subsequently in
the Company's favor.
The accompanying consolidated statement of operations for the period March
26, 2000 to October 10, 2000 reflects certain restructuring fees and expenses,
including professional fees and expenses, directly related to the debt
restructuring and reorganization. Interest expense on the Company's senior
subordinated notes was reported to the Petition Date. Such interest expense was
not reported subsequent to that date because it was not required to be paid
during the bankruptcy case and was not an allowed claim under the Plan. The
difference between reported interest expense and stated contractual interest
expense of the Predecessor Company was approximately $4.7 million for the period
from March 26, 2000 to October 10, 2000.
Current Maturity of Credit Facilities
The Company has an aggregate, $35.0 million, revolving credit facility
with Congress Financial Corporation (Southern) (the "Congress Facility")
expiring October 9, 2003. The total outstanding principal balance of the
Congress Facility at March 29, 2003 was $19.7 million, including $2.6 million in
term loans and a $3.0 million letter of credit facility, under which the Company
had $424,000 outstanding. The Company also has a subordinated secured note
facility with Key Bank National Association and Fleet Bank (the "Subordinated
Facility") with an outstanding principal balance of $9.2 million due October 10,
2003. Accordingly, the Company has classified the amount outstanding for the
Congress Facility and the Subordinated Facility in the current portion of
long-term debt as of March 29, 2003. The ability of the Company to maintain
continuity of operations is dependent on the renewal or replacement of these
facilities. The Company intends to renegotiate or replace the Congress Facility
and the Subordinated Facility prior to maturity in October 2003 and is currently
evaluating a renewal proposal from the current lenders and other proposals to
replace the existing facilities. Although no assurances can be provided in this
regard, management believes that it will be able to renegotiate or replace these
facilities prior to their maturity with amended or new facilities on comparable
terms.
The Woodville Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited ("ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering and hereafter referred
to as "Woodville") of TISPP UK Limited, a subsidiary of Smiths Group PLC, to
expand its European operations. Pursuant to a purchase agreement dated November
2, 2001 between ASCIL and TISPP UK Limited, ASCIL purchased, for approximately
$4.8 million, including $400,000 in direct acquisition and exit costs associated
with the purchase, substantially all of the production assets and inventory of
the airbag business of TISPP UK Limited. Approximately $2.4 million (net of
redundancy payments of approximately $500,000 paid by the Company associated
with the relocation of the Woodville operation to other Company facilities) of
the purchase price was paid in installments of $846,000 and $1.5 million at six
and twelve months, respectively, after closing. The Company has accounted for
the acquisition under the purchase method of accounting according to SFAS No.
141, "Business Combinations", with its operations included in the Company's
consolidated financial information commencing
F-8
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 3, 2001. Management of the Company allocated the purchase consideration
for Woodville's assets based on estimated fair market values, with an
insignificant amount of excess of cost over fair value allocated to goodwill.
The following is a condensed balance sheet (unaudited) at the November 2,
2001 acquisition date (in thousands):
November 2, 2001
----------------
Inventory $ 649
Property, plant and equipment 4,039
Goodwill 72
------
Total assets $4,760
======
Accrued liabilities 726
Note payable to former owner 2,289
Due to parent 1,745
------
Total liabilities $4,760
======
The unaudited pro forma net sales, net income and net income per common
share, assuming the acquisition of Woodville was consummated on March 26, 2000
are as follows (in thousands):
Unaudited Pro Forma Information
---------------------------------
Year Ended Year Ended
March 30, 2002 March 31, 2001
-------------- --------------
Net sales $214,066 $ 220,597
Income (loss) before extraordinary item 3,495 (21,181)
Net income 3,495 8,189
Net income per common share, basic and diluted 0.70 -- (a)
(a) Per share data for the year ended March 31, 2001 is not meaningful due
to the significant change in capital structure that occurred in connection with
the Plan.
Note 2 Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include Safety
Components International, Inc. and its subsidiaries, all of which are wholly
owned. Significant intercompany transactions and accounts have been eliminated.
Reclassifications of prior period amounts for discontinued operations
As discussed in Note 3, effective October 10, 2000, the Company concluded
to sell its non-core (metal and defense) operations. Accordingly, all amounts
prior to October 11, 2000 have been reclassified so that the net assets of the
non-core metal and defense businesses are presented as "net assets held for
sale" in the accompanying consolidated balance sheets and the operating results
of the non-core businesses have been presented as "discontinued operations" in
the accompanying consolidated statements of operations. The Company's
discontinued operations were accounted for under previous accounting guidance
(Accounting Principles Board No. 30) since the measurement date occurred prior
to the effective date of Statement of Financial Accounting Standards ("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.
F-9
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal year
The Company's operations are based on a fifty-two or fifty-three week
fiscal year ending on the Saturday closest to March 31. Fiscal years 2003 and
2002 each consisted of fifty-two weeks (ended March 29, 2003 and March 30, 2002,
respectively) (Reorganized Company) and fiscal year 2001 consisted of
fifty-three weeks, including the period from March 26, 2000 to October 10, 2000
(Predecessor Company) and the period from October 11, 2000 to March 31, 2001
(Reorganized Company).
Use of estimates
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which require management to make estimates and assumptions that affect the
amounts and disclosures reported in the financial statements and accompanying
notes. Significant estimates made by management include allowances for doubtful
accounts receivable, reserves for inventories, allowances for deferred tax
assets, reserves for discontinued operations and assessment of asset impairment.
Management believes that its estimates included in the financial statements,
including for these matters, are reasonable. However, actual results could
differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Restricted cash
Cash and cash equivalents totaling $1.4 million and $891,000 at March 29,
2003 and March 30, 2002, respectively, were restricted for use and accordingly,
such amount has been included in "other assets" in the accompanying consolidated
balance sheets.
Derivative financial instruments
Derivative financial instruments are utilized by the Company to reduce
exposures to volatility of foreign currencies impacting the operations of its
business. The Company does not enter into financial instruments for trading or
speculative purposes.
Effective April 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. It
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The accounting treatment of changes in fair value is
dependent upon whether or not a derivative instrument is designated as a hedge
and, if so, the type of hedge. For derivatives designated as cash flow hedges,
to the extent effective, changes in fair value are recognized in accumulated
other comprehensive income until the hedged item is recognized in earnings.
Ineffectiveness is recognized immediately in earnings. For derivatives
designated as fair value hedges, changes in fair value are recognized in
earnings.
The adoption of SFAS No. 133 on April 1, 2001 did not result in a
transition adjustment, as the Company was not engaged in any derivative or
hedging activities at that date. At March 29, 2003, the Company did not have any
derivative instruments that met the requirements of SFAS No. 133 to be accounted
for as a qualifying hedge. However, see Note 11 for further information
regarding derivative instruments entered into and completed during fiscal 2003.
F-10
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of credit risk
The Company is subject to a concentration of credit risk consisting of its
trade receivables. At March 29, 2003, three customers accounted for
approximately 31%, 28% and 16% of its trade receivables. At March 30, 2002,
these same three customers accounted for approximately 33%, 24% and 12% of its
trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company evaluates
potential losses for uncollectible accounts and such losses have historically
been immaterial and within management's expectations.
Inventories
Inventories represent direct materials, labor and overhead costs incurred
for products not yet delivered and are stated at the lower of cost (first-in,
first-out) or market.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the term of the underlying lease.
Estimated useful lives by class of assets are as follows:
Machinery and equipment .......... 4 - 10 years
Furniture and fixtures ........... 3 - 5 years
Buildings ........................ 25 - 40 years
Leasehold improvements ........... Lesser of useful life or lease term
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of significant items are capitalized.
Tangible asset impairment
The Company continually monitors conditions that may affect the carrying
value of its tangible assets. When conditions indicate potential impairment of
such assets, the Company evaluates the fair value of the assets. When the fair
value of an asset is less than the carrying value of the asset, the impaired
asset is written down to its estimated fair value, and is charged to operations
in the period in which impairment is determined.
See "New Accounting Standards" below regarding the Company's adoption of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
which was adopted on March 31, 2002, the first day of fiscal 2003.
Reorganization value in excess of amounts allocable to identifiable assets
Reorganization value in excess of amounts allocable to identifiable assets
resulted from the application of "fresh start" reporting as discussed in Note 1,
which requires the Predecessor Company's recorded intangibles, net of
amortization, to be reduced to zero and a new amount to be recorded equaling the
excess of the fair value of the Company over the fair value allocated to its
identifiable assets. This excess is classified as reorganization value in excess
of amounts allocable to identifiable assets and was amortized over a twenty-year
period up to March 30, 2002. For the year ended March 30, 2002 and for the
period from October 11, 2000 to March 31, 2001, amortization totaled
approximately $791,000 and $396,000, respectively. See "New Accounting
Standards" below regarding the Company's adoption of SFAS No. 142, "Goodwill and
Intangible Assets", in fiscal 2003.
F-11
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets
At March 29, 2003, intangible assets consist of certain Company patents
revalued at the "fresh start" date which are stated at cost less accumulated
amortization. Such patents are amortized over estimated lives between 15 and 20
years. Accumulated amortization at March 29, 2003 and March 30, 2002 was
approximately $285,000 and $161,000, respectively. Amortization of patents is
expected to approximate $125,000 per year for each of the five succeeding years.
Deferred financing costs
Costs incurred in connection with financing activities are deferred and
amortized over the lives of the respective debt instruments using the
straight-line method (which approximates the effective interest method), and are
charged to interest expense in the accompanying consolidated statements of
operations. Total costs deferred and included in "other assets" in the
accompanying consolidated balance sheets at March 29, 2003 and March 30, 2002
were $482,000 and $647,000, respectively.
Income taxes
Income taxes are recognized for financial reporting purposes during the
year in which transactions enter into the determination of income, with deferred
taxes being provided for temporary differences between the basis for financial
reporting purposes and the basis for income tax reporting purposes. A valuation
allowance is provided for deferred tax assets when, in the opinion of
management, it is more likely than not that the deferred tax assets will not be
realized.
Revenue recognition
The Company recognizes revenue from product sales when it has shipped the
goods and the risk of loss has passed. Additionally, the Company accrues for
sales returns and other allowances at the time of shipment based upon historical
experience.
Annual revenues from major customers
The Company's net sales to three customers in fiscal 2003 aggregated
approximately 32%, 21% and 19% of net sales. The Company's net sales to these
same three customers in fiscal 2002 aggregated approximately 31%, 28% and 17% of
net sales. The Company's net sales to these same three customers in the period
from October 11, 2000 to March 31, 2001 and the period from March 26, 2000 to
October 10, 2000 aggregated approximately 31%, 26%, 16%, and 30%, 28%, 13% of
net sales, respectively.
Environmental expenditures
Environmental expenditures that result from the remediation of an existing
condition caused by past operations that will not contribute to current or
future revenues are expensed. Expenditures that extend the life of the related
property or prevent future environmental contamination are capitalized.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
costs were approximately $117,000, $60,000, $40,000, and $35,000 during the
years ended March 29, 2003 and March 30, 2002, the period from October 11, 2000
to March 31, 2001 and the period from March 26, 2000 to October 10, 2000,
respectively, and were recorded as a component of selling and marketing expenses
in the accompanying consolidated statements of operations.
F-12
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shipping costs
The costs to ship products to customers of approximately $2.9 million,
$1.6 million, $830,000 and $930,000, during the years ended March 29, 2003 and
March 30, 2002, the period from October 11, 2000 to March 31, 2001 and the
period from March 26, 2000 to October 10, 2000, respectively, are included as a
component of cost of sales in the accompanying consolidated statements of
operations.
Research and development expenses
Research and development costs are charged to operations when incurred and
are included in operating expenses. The amounts charged for the years ended
March 29, 2003 and March 30, 2002, the period from October 11, 2000 to March 31,
2001 and the period from March 26, 2000 to October 10, 2000, were $1.2 million,
$899,000, $335,000 and $353,000, respectively.
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company currently has one item,
unrealized gain or loss on foreign currency translation, which is a component of
other comprehensive income. Unrealized gains or losses on foreign currency
translation are not shown net of income taxes because the earnings of foreign
subsidiaries are considered by Company management to be permanently reinvested.
Earnings per share
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed using the weighted average
number of common shares and potentially dilutive common shares outstanding for
the period. For the years ended March 29, 2003 and March 30, 2002 and the period
from October 11, 2000 to March 31, 2001, there were no dilutive equity
instruments and accordingly, basic and diluted EPS for those periods are the
same. For the period prior to October 11, 2000, share and per share data is not
shown as it is not meaningful due to the significant change in capital structure
in connection with the reorganization under bankruptcy discussed in Note 1.
Stock Based Compensation
On May 18, 2001, the Safety Components International, Inc. 2001 Stock
Option Plan ("Stock Option Plan") became effective pursuant to shareholder
approval. The Stock Option Plan provides for the issuance of options to purchase
up to an aggregate of 900,000 shares of SCI's Common Stock to key officers,
employees, directors and consultants of SCI or its affiliates. Unless designated
otherwise by the Compensation Committee of the Board of Directors, options
granted pursuant to the Stock Option Plan are intended to be nonstatutory stock
options. The Compensation Committee determines the exercise price and the term
of options granted pursuant to the Stock Option Plan at the time of grant. Each
award is determined by the Compensation Committee on an individual basis.
Options to purchase a total of 510,100 shares of common stock at a fair market
price of $8.75 per share (subject to adjustment in certain circumstances), to
vest ratably over a period of three years from the date of grant on May 18,
2001, were granted by the Compensation Committee to 22 employee participants and
to the outside directors under the Stock Option Plan. Additional options to
purchase 190,000 shares of common stock at a fair market price of $6.71 per
share, to vest ratably over a period of three years from the date of grant on
April 1, 2002, were granted by the Compensation Committee to employees and
outside directors. All options expire on October 31, 2010.
The Company accounts for this plan under the recognition and measurement
principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. Such options were not included in computing
diluted earnings per share for the years ended March 29, 2003 and March 30, 2002
because the effect would have been anti-dilutive.
F-13
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock Based Compensation", to
stock-based employee compensation (in thousands, except per share data):
Year Ended Year Ended
March 29, 2003 March 30, 2002
------------------------------
Net (loss) income, as reported: $(8,785) $4,089
Deduct: Total stock-based employee compensation expense
determined under fair value, net of tax 419 494
----------------------
Pro forma net (loss) income: $(9,204) $3,595
======================
Net (loss) income per share:
Basic and diluted - as reported: $ (1.77) $ 0.82
Basic and diluted - pro forma: $ (1.86) $ 0.72
Of the 700,100 options outstanding at March 29, 2003, 510,100 have an
exercise price of $8.75 and 190,000 have an exercise price of $6.71, with a
weighted average remaining contractual life of 7.60 years; 341,767 of these
options are currently exercisable with an exercise price of $8.75. The fair
value of the options granted during the years ended March 29, 2003 and March 30,
2002 was $6.44 and $4.26 per share, respectively. The fair values are estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in fiscal years 2003 and 2002,
respectively: risk free interest rate of 4.79 and 5.45 percent; zero percent
dividends; expected lives of 6.0 years for each grant; and expected volatility
of 80.9 and 188.0 percent.
Foreign currency translation
Financial statements of substantially all of the Company's foreign
operations are prepared using the local currency as the functional currency.
Translation of these foreign operations to United States dollars occurs using
the current exchange rate for balance sheet accounts and a weighted average
exchange rate for results of foreign operations. Translation gains or losses are
recognized in "accumulated other comprehensive income (loss)" as a component of
stockholders' equity in the accompanying consolidated balance sheets.
For the Company's subsidiary in Mexico, whose financial statements are
prepared using the United States dollar as the functional currency, the
translation effects of the financial statements are included in the results of
operations. During the periods presented herein, such amounts were not
significant.
Foreign currency transaction gains (losses) are reflected in operations.
During the year ended March 29, 2003, March 30, 2002, the period from October
11, 2000 to March 31, 2001 and the period from March 26, 2000 to October 10,
2000, transaction gains (losses) included in operations amounted to $3.5
million, $756,000, $222,000 and $(861,000), respectively.
Fair value of financial instruments
The consolidated financial statements include financial instruments
whereby the fair market value of such instruments may differ from amounts
reflected on a historical basis. Financial instruments of the Company consist of
cash deposits, accounts receivable, advances to affiliates, accounts payable,
certain accrued liabilities and long-term debt. The carrying amount of the
Company's long-term debt at March 29, 2003 and March 30, 2002 approximated fair
market value based on prevailing market rates. The Company's other financial
instruments generally approximate their fair values based on the short-term
nature of these instruments.
F-14
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
As discussed in Note 3, the Company has reported its metal and defense
businesses as discontinued operations in the consolidated financial statements
from October 11, 2000, the measurement date, through March 29, 2003. Prior to
March 29, 2003, the Company had disposed of all discontinued operations with the
sale of Galion, Inc. on December 23, 2002. Accordingly, the businesses' net
losses during the period from October 11, 2000 to March 31, 2001 and for the
years ended March 30, 2002 and March 29, 2003, which were incurred subsequent to
the measurement date, have been applied against the accrued losses and have not
been recognized as losses as incurred in the Consolidated Statements of
Operations.
Segment Information
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company sells similar
products (airbag cushions, airbag fabric and technical fabrics), uses similar
processes in selling the products and sells the products to similar classes of
customers. As a result of these similar economic characteristics and the way the
business is managed, the Company has aggregated the results into a single
segment for purposes of reporting financial condition and results of operations.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the March 29, 2003 presentation.
New Accounting Standards
Accounting Standards Adopted -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,
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 (in thousands):
March 29, 2003 March 30, 2002
---------------------------------
Excess reorganization value $ -- $ 15,762
Goodwill -- 71
Identifiable intangible assets with definite lives:
Patents 2,507 2,123
---------------------------
Gross carrying amount 2,507 17,956
Accumulated amortization (1,401) (2,309)
---------------------------
Net carrying amount $ 1,106 $ 15,647
===========================
F-15
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense for the years ended March 29, 2003 and March 20, 2002
was $124,000 and $900,000, respectively. Amortization expense for the Company's
patents is estimated at approximately $125,000 for each of the next five fiscal
years.
The following table summarizes and reconciles the reported net (loss)
income and net (loss) income per common share, basic and diluted, for the years
ended March 29, 2003 and March 30, 2002, the period from October 11, 2000 to
March 31, 2001 and the period from March 26, 2000 to October 10, 2000, to
adjusted net (loss) income and net (loss) income per common share, basic and
diluted, as if the amortization expense related to excess reorganization value
and goodwill for the year March 30, 2002, and the period from October 11, 2000
to March 31, 2001, had not been recorded (in thousands):
Reorganized Company | Predecessor Company
--------------------------------------------------------|---------------------
Year Ended Year Ended October 11, 2000 | March 26, 2000 to
March 29, 2003 March 30, 2002 to March 31, 2001 | October 10, 2001
--------------------------------------------------------|---------------------
Reported net (loss) income $ (8,785) $ 4,089 $ 1,250 | $ 8,067
Add: amortization of excess |
reorganization value and |
goodwill -- 791 395 | --
------------------------------------------------------|------------------
Adjusted net (loss) income $ (8,785) $ 4,880 $ 1,645 | $ 8,067
======================================================|==================
|
Reported net (loss) income per |
common share, basic and diluted: (A) |
Income from continuing |
operations $ 1.59 $ 1.33 $ 0.54 |
Loss on disposition of |
discontinued operations (0.41) (0.51) (0.29) |
Cumulative effect of change in |
method of accounting (2.95) -- -- |
------------------------------------------------------|------------------
(1.77) 0.82 0.25 |
Add: amortization of excess |
reorganization value and |
goodwill -- 0.16 0.08 |
------------------------------------------------------|------------------
Adjusted net (loss) income per |
common share, basic and diluted: (A) $ (1.77) $ 0.98 $ 0.33 |
======================================================|==================
(A) Share and per share data are not meaningful prior to October 10, 2000 due
to the significant change in capital structure in connection with the Plan
of Reorganization.
In October 2001, the Financial Accounting Standards Board ("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 of 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 adoption of SFAS No. 146 had no
effect on the Company's financial position and results of operations.
F-16
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 adoption of
Interpretation No. 45 had no effect on the Company's 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
and specific disclosures related to product warranties. The disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. As of March 29, 2003, 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 periods of the related Facilities. The Company
does not provide product warranties within the disclosure provisions of
Interpretation No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," to
require more prominent disclosure in both interim and annual financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002. The Company has applied the disclosure provisions of SFAS No. 148 in
the Notes to the Consolidated Financial Statements for the years ended March 29,
2003 and March 30, 2002.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities", was issued which, among other things, provides guidance on
identifying variable interest entities ("VIE") and determining when assets,
liabilities, non-controlling interest and operating results of a VIE should be
included in a company's consolidated financial statements, and also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. Certain disclosure requirements of Interpretation No. 46, if
applicable, are required for financial statements initially issued after January
31, 2003. Companies with variable interest in variable interest entities created
after January 31, 2003 shall apply the provision of Interpretation No. 46
immediately. Public entities with a variable interest in a variable interest
entity shall apply the provisions of Interpretation No. 46 no later than the
first interim or annual reporting period beginning after June 15, 2003.
Interpretation No. 46 is not expected to have an impact to the Company's
financial statements or future results of operations.
Accounting Standard Not Yet Adopted - In April 2003, SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
was issued which amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities under SFAS No. 133. It requires, among other things, that
contracts with comparable characteristics be accounted for similarly and
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective generally for contracts entered into and
modified after June 30, 2003. The Company is in the process of reviewing the
effect, if any, that the adoption of SFAS No. 149 will have on its financial
position and results of operations.
Note 3 Discontinued Operations
On August 31, 2000, the Company finalized the sale of Valentec Systems,
Inc. ("VSI"). Pursuant to a stock purchase agreement dated July 21, 2000, the
Company sold 100% of the shares of capital stock of VSI to VTECH Corporation for
approximately $2.9 million in cash. The sale of VSI resulted in an approximate
$1.2 million gain that was included in the gain on disposition of discontinued
operations in the accompanying consolidated statements of
F-17
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operations of the Predecessor Company for the period from March 26, 2000 to
October 10, 2000. VSI accounted for $3.9 million of consolidated net sales for
the Predecessor Company's period from March 26, 2000 to October 10, 2000.
As previously discussed, 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.
On September 27, 2001, the Company finalized the sale of the metallic belt
links business of Valentec Wells, LLC. Pursuant to an asset purchase agreement
dated September 16, 2001 between Valentec Wells, LLC and Alliant Lake City Small
Caliber Ammunition Company LLC, the Company sold the metallic belt links
production assets and inventory of Valentec Wells, LLC for approximately $4.8
million in cash. The resulting gain on this sale was substantially offset by
additional provisions for losses and asset write-downs at Galion, Inc. in fiscal
2002.
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 an adjusted purchase price of $454,000 in cash, resulting in a
loss on disposition of discontinued operations of approximately $2.0 million,
including the recognition of a tax provision of approximately $660,000 related
to an adjustment of the deferred tax liabilities of the 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 being a capital loss.
Following is a summary of financial information for the Company's
discontinued metal and defense operations (in thousands):
Reorganized Company | Predecessor Company
----------------------------------------------------------|----------------------
Period from | Period from
Year Ended Year Ended October 11, 2000 | March 26, 2000
March 29, 2003 March 30, 2002 to March 31, 2001 | to October 10, 2000
----------------------------------------------------------|----------------------
Net sales $5,435 $10,516 $9,563 | $ 11,026
Discontinued operations: |
Loss from operations, net |
of income taxes -- -- -- | 1,440(d)
Loss (gain) on |
disposition, net of |
income taxes 2,023(a) 2,517(b) 1,444(c) | (214)(d)
(a) During fiscal year 2003, the Company recorded a loss on disposition
of discontinued operations due to the sale of Galion, Inc in
December 2002.
(b) During fiscal year 2002, the Company recorded an additional charge
of $4.2 million ($2.5 million after income tax benefit of $1.7
million), principally resulting from a $6.6 million operating loss
on Valentec Wells, LLC and a $200,000 operating loss at Galion,
Inc., offset by a $2.9 million gain on the sale of Valentec Wells,
LLC, in September 2001.
(c) During fiscal year 2001, the Company recorded a charge of $1.4
million, net of income tax benefit of $848,000, for the estimated
net loss on the disposition of the discontinued operations.
(d) The Company reported the results of operations of the metal and
defense businesses as a loss on discontinued operations that totaled
$1.4 million, net of income tax benefit of $847,000. Additionally,
the Company recorded $214,000, net of income taxes of $125,000, for
the estimated gain on the disposition of the discontinued
operations, including the realized gain on the sale of VSI.
F-18
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net assets of discontinued operations at March 29, 2003 and March 30, 2002
were as follows (in thousands):
March 29, 2003 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)
Note payable and other liabilities -- (242)
--------------------------
Net assets held for sale $ -- $ 2,637
==========================
Note 4 Composition of Certain Consolidated Balance Sheet Accounts (in thousands)
March 29, 2003 March 30, 2002
---------------------------------
Accounts receivable:
Trade receivables, net of allowances of $416 and $228 at
March 29, 2003 and March 30, 2002, respectively $ 41,766 $ 33,808
Other 2,117 1,248
---------------------------
Total $ 43,882 $ 35,056
===========================
Inventories:
Raw materials $ 7,023 $ 5,493
Work-in-process 7,684 5,922
Finished goods 9,293 5,359
---------------------------
Total $ 24,000 $ 16,774
===========================
Property, plant and equipment:
Land and buildings $ 16,939 $ 14,801
Machinery and equipment 54,050 40,690
Furniture and fixtures 1,102 584
Construction in process 985 1,698
---------------------------
73,076 57,773
Less - accumulated depreciation and amortization (20,454) (9,729)
---------------------------
Total $ 52,622 $ 48,044
===========================
F-19
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Long-Term Debt (in thousands)
March 29, 2003 March 30, 2002
---------------------------------
KeyBank subordinated secured note due October 10, 2003,
bearing interest at 11% $ 9,202 $ 18,933
Congress revolving credit facility due on October 9, 2003, bearing a
variable interest rate (4.25% at March 29, 2003) 16,714 --
Congress term note due on October 9, 2003, bearing a variable interest
rate (4.25% at March 29, 2003) 2,572 4,919
KeyCorp equipment note due August, 2005 3,870 5,352
HVB Bank Czech Republic mortgage note due March, 2007 3,801 3,754
Deutsche Bank mortgage note with separate tranches due
in 2009 and 2019 1,877 1,694
Note payable to TISPP UK Limited, paid in May 2002 and November 2002 -- 2,269
Capital equipment notes payable, with various interest rates ranging
from 7.55% to 10.0%, maturing at various dates through March 2008 1,037 442
--------------------------
Total long-term debt 39,073 37,363
Less - current portion of long-term debt (31,710) (25,181)
--------------------------
Total long-term portion of debt $ 7,363 $ 12,182
==========================
Credit Facilities
The Company has 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 under the Congress Facility in the current portion of long-term debt
as of March 29, 2003. 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 $2.6 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. The amount outstanding under the facility at March 29, 2003 and
March 30, 2002 (including term loans) was $19.7 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 $424,000
outstanding pursuant to letters of credit at March 29, 2003 (none outstanding at
March 30, 2002). At March 29, 2003, the Company's availability for additional
borrowings (under the maximum allowable limit) was approximately $13.3 million.
The interest rate on the Congress Facility is variable, depending on the
amount of the Company's Excess Availability (as defined) at any particular time
and the Company's Fixed Charge Coverage Ratio (as defined). Under the terms of
the Congress Facility, the Company may make borrowings based on the Prime Rate
(as defined) or the LIBOR rate, in each case with an applicable margin applied
to the rate. At March 29, 2003, the margin on Prime Rate loans was 0.0% and the
margin on LIBOR rate loans was 2.0%. The Company is required to pay a monthly
commitment fee of 0.375% on the unused portion of the Congress Facility.
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. That payment was funded by borrowings under the
Congress Facility. The amount outstanding under the Subordinated Facility at
March 29, 2003 and March 30, 2002 was $9.2 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. In addition,
the Subordinated Facility provides for mandatory prepayments of principal in the
event that the Company's Consolidated EBITDA (as defined) exceeds certain
specified levels following
F-20
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Emergence Date. As of March 29, 2003, the Company estimates $1.9 million in
prepayments are required within 90 days following the end of fiscal 2003.
Additionally, both the Congress Facility and the Subordinated Facility contain
certain restrictive covenants that impose limitations upon, among other things,
the Company's ability to borrow monies under the Congress Facility; incur
indebtedness (including capitalized lease arrangements); become or remain liable
with respect to any guaranty; make loans; acquire investments; declare or make
dividends (no dividends are permitted to be paid to holders of the Company's
common stock) or other distributions; merge, consolidate, liquidate or dispose
of assets or indebtedness; incur liens; issue capital stock; or change its
business. At March 29, 2003, 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 prior to the time 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 prior to their maturity with amended or new facilities on comparable
terms.
Other Long-term Obligations
On March 28, 2002, the Company and HVB Bank Czech Republic, successor to
Bank Austria, entered into an amendment to its $7.5 million mortgage note
facility dated June 4, 1997. This amendment extends the mortgage facility for
five years, establishes an interest rate of 1.7% over EURIBOR (EURIBOR was 4.27%
at March 29, 2003), requires monthly payments of approximately $62,500 and is
secured by the real estate assets of the Company's subsidiary in the Czech
Republic.
On April 1, 1999, the Company's German subsidiary secured a $2.9 million
mortgage note facility with Deutsche Bank to purchase a facility in Germany. The
note was secured by the real estate in Germany acquired through the mortgage. In
July 1999, the Company refinanced the note and reduced the outstanding
indebtedness to $2.1 million (currently $1.9 million). The note is secured by a
cash collateral deposit of approximately $1.4 million (see Note 2 for discussion
of restricted cash). The note consists of two tranches. Tranche A totals
approximately $1.2 million bearing interest at 4.05% and is payable in
semi-annual installments of approximately $70,000 beginning on December 30, 2001
through June 30, 2009. Tranche B totals approximately $694,000 bearing interest
at 3.75% and is payable in semi-annual installments of approximately $19,000
also beginning on December 30, 2001 through June 30, 2019.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The KeyCorp financing agreement has a seven-year term, bears
interest at a rate of 1.25% over LIBOR (2.56% at March 29, 2003), requires
monthly payments of approximately $150,000 and is secured by certain equipment
located at the Company's Greenville, South Carolina facility.
Future annual minimum principal payments of long-term debt and capital
lease obligations at March 29, 2003 are due in the following fiscal years (in
thousands):
2004 $31,710
2005 3,017
2006 1,806
2007 1,028
2008 733
Thereafter 779
-------
$39,073
=======
F-21
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 Income Taxes
The provision (benefit) for income taxes from continuing operations is
comprised of the following (in thousands):
Reorganized Company | Predecessor Company
---------------------------------------------------------|---------------------
Period from | Period from
Year Ended Year Ended October 11, 2000 to | March 26, 2000 to
March 29, 2003 March 30, 2002 March 31, 2001 | October 10, 2000
---------------------------------------------------------|---------------------
Current taxes: |
Federal $ 3,529 $ 1,519 $ 1,965 | --
State 633 168 220 | --
Foreign 1,593 311 (416) | --
|
Deferred taxes: |
Federal 378 1,211 -- | $(15,266)
State (38) 188 -- | (2,245)
Foreign 25 -- -- | --
-----------------------------------------------------|-----------------
$ 6,120 $ 3,397 $ 1,769 | $(17,511)
=====================================================|=================
The provision (benefit) for income taxes differs from the amount computed
by applying the federal income tax rate to income (loss) from continuing
operations before income taxes as follows:
| Predecessor
Reorganized Company | Company
------------------------------------------------------|-------------------
Period from | Period from
Year Ended Year Ended October 11, 2000 to | March 26, 2000 to
March 29, 2003 March 30, 2002 March 31, 2001 | October 10, 2000
------------------------------------------------------|-------------------
Expected taxes at federal statutory rate 34% 34% 34% | (34%)
State income taxes, net of federal benefits 3 1 3 | (1)
Foreign earnings taxed at different rates 6 -- 3 | --
Valuation allowance on deferred tax assets -- -- -- | (30)
Recovery of non-taxable bankruptcy expense -- -- (5) | --
Non-deductible intangibles and other, net 1 (1) 5 | 18
------------------------------------------------------|-------------------
44% 34% 40% | (47)%
======================================================|===================
Net operating loss ("NOL") carryforwards from years prior to fiscal 2001
were utilized to offset the cancellation of indebtedness ("COD") income in
connection with the Company's reorganization under Chapter 11 during fiscal
2001. COD income for fiscal 2001 was $45.8 million, the amount by which the
indebtedness discharged (approximately $96.8 million) exceeded the consideration
given in exchange (approximately $51 million in equity value). After first
applying NOL carryforwards to offset COD income, the excess COD income was
offset against the tax basis of assets until all tax attributes of the parent
level of the Company were eliminated.
F-22
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the deferred tax assets (liabilities) recognized
in the accompanying consolidated balance sheets (in thousands):
March 29, 2003 March 30, 2002
--------------------------------
Deferred tax assets (liabilities):
Accrued liabilities $ 1,017 $ 1,314
Inventory and receivables 275 790
Property, plant and equipment (4,656) (5,002)
Accruals for discontinued operations -- 1,271
Intangibles -- (390)
Capital loss carryforward 703 --
Foreign deferred tax liabilities (25) --
Foreign net operating loss carryforwards 1,612 1,285
Other 399 618
-------------------------
Net deferred tax liabilities before valuation allowances (675) (114)
Valuation allowance on capital loss carryforwards and foreign net
operating loss (2,315) (1,285)
-------------------------
Net deferred tax liabilities $(2,990) $(1,399)
=========================
Recognized as follows in the accompanying consolidated balance sheets:
Current deferred tax assets $ 1,292 $ 1,729
Long-term deferred tax liabilities (4,282) (3,128)
-------------------------
Net deferred tax liabilities $(2,990) $(1,399)
=========================
Current deferred tax assets are included in "prepaid and other" assets and
long-term deferred tax liabilities are included in "other long-term" liabilities
in the accompanying consolidated balance sheets.
Foreign net operating losses can be carried forward indefinitely to offset
future trading profits.
No taxes have been provided relating to the possible distribution of
approximately $15.9 million of undistributed earnings considered to be
permanently reinvested in foreign operations.
Note 7 Commitments and Contingencies
Legal proceedings
The Company emerged from bankruptcy on October 11, 2000; however, the
Chapter 11 case remains open until all claims, disputes and pleadings are
resolved before the Bankruptcy Court. At March 29, 2003 the Company has no
material disputes before the Court. The Company is in the process of closing the
Chapter 11 proceedings.
From time to time, the Company is a defendant in legal actions involving
claims arising in the normal course of business. The Company believes that as a
result of its legal defenses none of these actions presently pending would have
a material adverse effect on its financial position, results of operations or
cash flows.
Leases
The Company has non-cancelable leases for equipment and office space that
expire at various dates through 2008. The net present value of the capital lease
obligations is included as part of the Company's total long-term debt described
above in Note 5. Certain of the lease payments are subject to adjustment for
inflation. The Company incurred rent expense of $2.0 million, $1.8 million, $1.4
million and $1.5 million for the years ended March 29, 2003 and March 30, 2002,
the period from October 11, 2000 to March 31, 2001 and the period from March 26,
2000 to October 10, 2000, respectively.
F-23
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future annual minimum lease payments for all non-cancelable leases as of
March 29, 2003 are as follows (in thousands):
Capital Operating
---------------------
2004 $ 466 $ 795
2005 401 595
2006 247 454
2007 19 334
2008 14 304
---------------------
Total minimum lease payments 1,147 $ 2,482
=======
Amount representing interest (110)
-------
Net present value of minimum lease payments $ 1,037
=======
Environmental issues
Low levels of contaminants were found at the Company's facility in
Greenville, South Carolina, (the "Greenville facility") during groundwater
sampling in 1998. In February 1999, the facility received a notice letter from
the South Carolina Department of Health and Environmental Control ("DHEC")
regarding the groundwater contamination. Over the past four years the Company
has performed groundwater monitoring and implemented a program for in-site
remediation of the groundwater. As a result, the Company received a "no further
action" letter from DHEC in fiscal 2003, ending the DHEC investigation. The
Company also had a reserve of $277,000 at March 29, 2003 for potential future
environmental expenditures related to the Greenville facility for conditions
existing prior to the Company's ownership of the Greenville facility (1997). The
Greenville facility has also 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.
The Company had identified two areas of underground contamination at the
Company's facility in Galion, Ohio. Any future environmental liabilities or
costs at this facility were contractually transferred to the purchaser pursuant
to the sale of Galion in fiscal 2003. See Note 3 for further discussion on the
sale of this facility.
Additionally, an underground contamination involving machinery fluids
existed at the former Valentec Wells facility in Costa Mesa, California, and the
local Regional Water Quality Control Board (the "Board") had approved a site
remediation plan for cleanup. The remediation plan involved the simultaneous
operation of a groundwater and vapor extraction system over the past five years.
This plan has been completed and a final Closure Monitoring Report has been
filed with the Board. In fiscal 2003, the Board approved the final Closure
Monitoring Report and issued a "no further action" letter, ending the Board's
regulatory oversight.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued, approximately
$277,000 at March 29, 2003, will be required for the Company's environmental
control efforts and the final outcome of these matters will not have a material
adverse effect on the Company's financial position or results of future
operations. The Company believes that it currently is in compliance with
applicable environmental regulations in all material respects. Management's
opinion is based on the advice of independent consultants on environmental
matters.
F-24
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 Product and Geographic Information
The Company attributes its revenues from external customers based on the
location of its sale contracts and long-lived assets to a particular country
based on the geographic location of each of the Company's production facilities.
Summarized financial information by product type and geographic area is as
follows:
Revenues from External Customers:
| Predecessor
Reorganized Company | Company
------------------------------------------------------|-------------------
Year ended Year ended October 11, 2000 | March 26, 2000 to
March 29, 2003 March 30, 2002 to March 31, 2001 | October 10, 2000
------------------------------------------------------|-------------------
United States |
Airbag Cushions $ 68,022 $ 59,697 $ 27,180 | $ 33,703
Airbag Fabric 40,235 44,016 17,883 | 26,288
Technical Fabric 22,471 21,537 11,488 | 12,576
|
Germany |
Airbag Cushions 72,811 46,544 21,679 | 22,409
|
United Kingdom |
Airbag Cushions 40,799 31,529 13,822 | 14,163
---------------------------------------------------|--------------
|
Total Net Sales $244,338 $203,323 $ 92,052 | $109,139
===================================================|==============
Long-lived Assets at Fiscal Year End:
March 29, 2003 March 30, 2002
-----------------------------------
United States $ 17,478 $ 32,457
Mexico 5,412 4,238
Germany 14,335 9,350
Czech Republic 14,430 12,546
Other European Countries 2,300 5,164
----------------------------
Total Long-lived Assets $ 53,955 $ 63,755
============================
Long-lived assets includes property, plant and equipment, intangible
assets and contain other specified assets.
Note 9 Employee Benefit Plans
The Company has a defined contribution plan qualified under Section 401(k)
of the Internal Revenue Code for eligible employees. The Safety Components
International, Inc. 401(k) Plan (the "401(k) Plan") provides for discretionary
employer contributions. The 401(k) Plan provides for a Company match equal to
50% of the employee's contribution up to 6% of the employee's salary. Employer
contributions become 100% vested after two years of service. The Company
contributed approximately $254,000, $261,000, $156,000 and $175,000 during the
years ended March 29, 2003 and March 30, 2002, the period from October 11, 2000
to March 31, 2001 and the period from March 26, 2000 to October 10, 2000,
respectively, to the 401(k) Plan.
The Company established the Safety Components International, Inc.
Executive Deferral Program (the "Deferral Program") in fiscal year 2002 for the
benefit of certain key executive employees. The Deferral Program provides for
participants to defer any portion of their cash compensation until some future
point in time. The participants' contributions to the Deferral Program are
immediately 100% vested. Due to the nature of the Deferral
F-25
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Program, a trust was established to maintain the amounts deferred by the
participants. Along with the participant contributions, beginning in fiscal year
2003, the Company also contributes an amount equal to the exercise price of the
options associated with the deferred compensation under the provisions of the
Deferral Program. The assets of the trust are included in "other assets" and the
related amounts due to the participants are included in "other long-term
liabilities" in the accompanying consolidated balance sheets. The amounts
included in "other assets" were $742,000 and $299,000 and included in "other
long-term liabilities" were $600,000 and $299,000 at March 29, 2003 and March
30, 2002, respectively.
Note 10 Equity Securities
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized and no
shares issued at March 29, 2003 and March 30, 2002. The Company's board of
directors is authorized to provide for the issuance of the preferred stock in
the future, with voting powers, dividend rate, redemption terms, repayment,
conversion terms, restrictions, rights and with such other preferences and
qualifications as shall be stated in the resolutions adopted by the board of
directors at time of issuance.
Common Stock and Warrants
The Company currently has 5,000,000 shares of common stock issued,
4,959,678 shares of common stock outstanding, and 40,322 shares of treasury
stock at March 29, 2003 and March 30, 2002. Warrants were granted pursuant to
the Restructuring Agreement to purchase 681,818 shares of the Company's common
stock. These warrants had an exercise price of $19.99 per share and expired on
April 10, 2003. Such warrants were not included in computing diluted earnings
per share for the year ended March 29, 2003 or the year ended March 30, 2002
because the effect would have been anti-dilutive.
Note 11 Derivatives and Hedging
The Company monitors its risk associated with the volatility of certain
foreign currencies against its functional currency, the U.S. dollar. The Company
used 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 facilities in Mexico 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 through March 27, 2003 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 monitored for effectiveness
on a routine basis. At March 29, 2003 the Company had completed all outstanding
forward exchange contracts to purchase Mexican pesos and amounts previously
recorded in "accumulated other comprehensive income," approximately $170,000,
were charged to cost of sales for the year ending March 29, 2003.
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 net gain of $35,000 for the year ended March 29, 2003, included in "other
income". There was no significant impact on earnings for the year ended March
30, 2002. The Company did not have any remaining British pound forward exchange
contracts at March 29, 2003.
F-26
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 Unaudited Quarterly Results
Unaudited quarterly financial information for fiscal years 2003 and 2002
is set forth below (in thousands, except per share data).
Quarter Ended
----------------------------------------------------------
June 29, September 28, December 28, March 29,
2002 2002 2002 2003
----------------------------------------------------------
Fiscal 2003
Net sales $ 61,448 $ 57,537 $ 61,877 $ 63,476
Gross profit 8,789 5,834 6,745 8,652
Income from operations 4,217 2,267 2,999 4,526
Income before accounting change 2,709 705 352 2,100
Net (loss) income (11,942) 705 352 2,100
Income before accounting change per share,
basic and diluted 0.55 0.14 0.07 0.42
Net (loss) income per share, basic and diluted (2.41) 0.14 0.07 0.42
Quarter Ended
----------------------------------------------------------
June 30, September 29, December 29, March 30,
2001 2001 2001 2002
----------------------------------------------------------
Fiscal 2002
Net sales $ 50,291 $ 46,229 $ 50,051 $ 56,752
Gross profit 7,639 6,635 5,021 7,211
Income from operations 4,414 3,012 1,918 3,768
Net income (loss) (341) 2,064 54 2,312
Net income (loss) per share, basic and diluted (0.07) 0.42 0.01 0.46
F-27
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts (in thousands)
Additions
Charged to
Beginning Costs and Deductions/ Ending
Balance Expenses Write-Offs Balance
----------------------------------------------------------
Predecessor Company
- -------------------
For the period from March 26, 2000 to October 10, 2000:
Allowance for doubtful accounts $ 206 $ 1,081 $ -- $ 1,287
Relocation and reorganization reserve 376 -- (376) --
Reserve for receivable from affiliate 600 -- -- 600
Reserve on deferred tax assets 11,797 -- (10,898) 899
----------------------------------------------------------
$ 12,979 $ 1,081 $(11,274) $ 2,786
==========================================================
Reorganized Company
- -------------------
For the period from October 11, 2000 to March 31, 2001:
Allowance for doubtful accounts $ 1,287 $ 608 $ (944) $ 951
Reserve for receivable from affiliate 600 -- -- 600
Reserve on deferred tax assets 899 1,578 -- 2,477
----------------------------------------------------------
$ 2,786 $ 2,186 $ (944) $ 4,028
==========================================================
For the year ended March 30, 2002:
Allowance for doubtful accounts $ 951 $ 144 $ (867) $ 228
Reserve for receivable from affiliate 600 -- (600) --
Reserve on deferred tax assets 2,477 -- (1,192) 1,285
----------------------------------------------------------
$ 4,028 $ 144 $ (2,659) $ 1,513
==========================================================
For the year ended March 29, 2003:
Allowance for doubtful accounts $ 228 $ 295 $ (107) $ 416
Reserve on deferred tax assets 1,285 1,030 -- 2,315
----------------------------------------------------------
$ 1,513 $ 1,325 $ (107) $ 2,731
==========================================================