UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
41 Stevens Street, Greenville, South Carolina 29605
(Address and zip code of principal executive offices)
(864) 240-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |X| No |_|
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of November 3, 2003, was 4,975,678.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The unaudited condensed consolidated financial information at September 27, 2003
and for the thirteen and twenty-six week periods then ended, unaudited condensed
consolidated statements of operations and of cash flows for the thirteen and
twenty-six weeks ended September 28, 2002 and the audited condensed consolidated
balance sheet at March 29, 2003 relate to Safety Components International, Inc.
and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Consolidated Balance Sheets as of September 27, 2003
(unaudited) and March 29, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the
thirteen weeks ended September 27, 2003 and September 28, 2002 4
Unaudited Condensed Consolidated Statements of Operations for the
twenty-six weeks ended September 27, 2003 and September 28, 2002 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended September 27, 2003 and September 28, 2002 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 21
PART II OTHER INFORMATION 22
ITEM 5. OTHER INFORMATION 22
SIGNATURES 24
Private Securities Litigation Reform Act of 1995
The discussion in this report contains forward-looking statements that
involve risks and uncertainties, including, but not limited to, those relating
to the impact of competitive products and pricing, dependence of revenues upon
several major module suppliers; worldwide economic conditions; the results of
cost savings programs being implemented; domestic and international automotive
industry trends, including the marketplace for airbag related products; the
ability of Safety Components to effectively control costs and to satisfy
customers on timeliness and quality; approval by automobile manufacturers of
airbag cushions currently in production; pricing pressures and labor strikes.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
September 27, 2003 March 29, 2003
------------------ --------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 5,797 $ 7,564
Accounts receivable, net .............................................................. 37,486 43,882
Inventories, net ...................................................................... 20,983 24,000
Prepaid and other ..................................................................... 3,268 1,949
--------- ---------
Total current assets ............................................................... 67,534 77,395
Property, plant and equipment, net ......................................................... 50,650 52,622
Identifiable intangible assets, net ........................................................ 1,107 1,106
Other assets ............................................................................... 3,049 2,941
--------- ---------
Total assets ....................................................................... $ 122,340 $ 134,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 20,210 $ 26,713
Accrued and other current liabilities ................................................. 13,052 10,956
Current portion of long-term debt ..................................................... 7,533 31,710
--------- ---------
Total current liabilities .......................................................... 40,795 69,379
Long-term debt ............................................................................. 18,141 7,363
Other long-term liabilities ................................................................ 5,898 5,409
--------- ---------
Total liabilities .................................................................. 64,834 82,151
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ............................. -- --
Common stock: $0.01 par value per share - 20,000,000 shares authorized;
5,000,000 shares issued and 4,959,678 shares outstanding .......................... 50 50
Common stock warrants ................................................................. -- 34
Additional paid-in-capital ............................................................ 52,353 50,916
Treasury stock: 40,322 shares at cost ................................................. (411) (411)
Accumulated deficit ................................................................... (557) (3,446)
Accumulated other comprehensive income ................................................ 6,071 4,770
--------- ---------
Total stockholders' equity ......................................................... 57,506 51,913
--------- ---------
Total liabilities and stockholders' equity ......................................... $ 122,340 $ 134,064
========= =========
(1) Derived from the audited consolidated balance sheet as of March 29, 2003.
See notes to unaudited condensed consolidated financial statements.
3
SAFETY COMPONENTS INTERNATIONAL , INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Thirteen Thirteen
Weeks Ended Weeks Ended
September 27, 2003 September 28, 2002
------------------ ------------------
Net sales ............................................................... $ 52,747 $ 57,537
Cost of sales, excluding depreciation ................................... 44,984 49,351
Depreciation ............................................................ 2,735 2,352
----------- -----------
Gross profit ..................................................... 5,028 5,834
Selling and marketing expenses .......................................... 679 503
General and administrative expenses ..................................... 2,421 2,805
Expenses associated with change of control .............................. 2,758 --
Research and development expenses ....................................... 390 229
Amortization of intangible assets ....................................... 35 30
----------- -----------
(Loss) income from operations .................................... (1,255) 2,267
Other expense (income), net ............................................. 259 (43)
Interest expense, net ................................................... 579 894
----------- -----------
(Loss) income before income tax provision ........................ (2,093) 1,416
Provision (benefit) for income taxes .................................... (602) 711
----------- -----------
Net (loss) income ....................................................... $ (1,491) $ 705
=========== ===========
Net (loss) income per common share - basic and diluted .................. $ (0.30) $ 0.14
=========== ===========
Weighted average number of common shares outstanding - basic ............ 4,960 4,960
=========== ===========
Weighted average number of common shares outstanding - diluted .......... 4,960 4,965
=========== ===========
See notes to unaudited condensed consolidated financial statements.
4
SAFETY COMPONENTS INTERNATIONAL , INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Twenty-six Twenty-six
Weeks Ended Weeks Ended
September 27, 2003 September 28, 2002
------------------ ------------------
Net sales ................................................................. $ 120,163 $ 118,985
Cost of sales, excluding depreciation ..................................... 98,778 99,814
Depreciation .............................................................. 5,466 4,548
----------- -----------
Gross profit ....................................................... 15,919 14,623
Selling and marketing expenses ............................................ 1,452 1,055
General and administrative expenses ....................................... 5,880 6,603
Expenses associated with change in ownership .............................. 2,758 --
Research and development expenses ......................................... 720 423
Amortization of intangible assets ......................................... 70 58
----------- -----------
Income from operations ............................................. 5,039 6,484
Other income, net ......................................................... (1,139) (2,108)
Interest expense, net ..................................................... 1,247 1,916
----------- -----------
Income before income tax provision and cumulative effect of
change in method of accounting ................................. 4,931 6,676
Provision for income taxes ................................................ 2,042 3,264
----------- -----------
Income before cumulative effect of change in method of accounting .. 2,889 3,412
Cumulative effect of change in method of accounting ....................... -- (14,652)
----------- -----------
Net income (loss) ......................................................... $ 2,889 $ (11,240)
=========== ===========
Net income (loss) per common share - basic:
Income before cumulative effect of change in method of accounting .. $ 0.58 $ 0.69
Cumulative effect of change in method of accounting ................ -- (2.96)
----------- -----------
Net income (loss) per common share - basic ................................ $ 0.58 $ (2.27)
=========== ===========
Net income (loss) per common share - diluted:
Income before cumulative effect of change in method of accounting .. $ 0.57 $ 0.69
Cumulative effect of change in method of accounting ................ -- (2.96)
----------- -----------
Net income (loss) per common share - diluted .............................. $ 0.57 $ (2.27)
=========== ===========
Weighted average number of common shares outstanding - basic .............. 4,960 4,960
=========== ===========
Weighted average number of common shares outstanding - diluted ............ 5,059 4,960
=========== ===========
See notes to unaudited condensed consolidated financial statements.
5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Twenty-six Twenty-six
Weeks Ended Weeks Ended
September 27, 2003 September 28, 2002
------------------ ------------------
Cash Flows From Operating Activities:
Net income (loss) ........................................................ $ 2,889 $ (11,240)
Cumulative effect of change in method of accounting ...................... -- 14,652
---------- ----------
Income from continuing operations ........................................ 2,889 3,412
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation .................................................. 5,466 4,548
Amortization .................................................. 70 58
Loss on disposition of assets ................................. 408 16
Deferred Taxes ................................................ 1,050 --
Accrual of interest on current obligation ..................... -- 81
Non-cash charge associated with change of control ............. 1,404 --
Net changes in operating assets and liabilities ............... 3,158 (7,355)
---------- ----------
Net cash provided by continuing operations ................ 14,445 760
Net cash provided by discontinued operations .............. -- 661
---------- ----------
Net cash provided by operating activities ................. 14,445 1,421
---------- ----------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ............................... (2,319) (5,816)
---------- ----------
Net cash used in continuing operations .................... (2,319) (5,816)
Net cash used in discontinued operations .................. -- (34)
---------- ----------
Net cash used in investing activities ..................... (2,319) (5,850)
---------- ----------
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note ...................... (5,452) (3,072)
Repayment of Congress Subordinated term note ............................. (505) (674)
Net (repayments) borrowings on Congress revolving credit facility ........ (6,359) 14,996
Payment to former owner of acquired business ............................. -- (955)
Repayments of other debt and long term obligations ....................... (1,539) (1,411)
---------- ----------
Net cash (used in) provided by financing activities ....... (13,855) 8,884
---------- ----------
Effect of exchange rate changes on cash and cash equivalents .................. (38) 40
---------- ----------
(Decrease) increase in cash and cash equivalents .............................. (1,767) 4,495
Cash and cash equivalents, beginning of period ................................ 7,564 2,692
---------- ----------
Cash and cash equivalents, end of period ...................................... $ 5,797 $ 7,187
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................. $ 888 $ 1,644
Income taxes .............................................. 3,033 1,603
Non-cash investing and financing activities:
Foreign currency translation adjustment ................... $ 1,627 $ 2,814
Unrealized loss on hedging transactions, net of taxes ..... 326 100
See notes to unaudited condensed consolidated financial statements.
6
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Safety Components International, Inc. and its subsidiaries
("Safety Components" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted from this report, as is permitted by such
rules and regulations; however, Safety Components believes that the disclosures
are adequate to make the information presented not misleading. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Form 10-K for
the year ended March 29, 2003. The Company has experienced, and expects to
continue to experience, variability in net sales and net income from quarter to
quarter. Therefore, the results of the interim periods presented herein are not
necessarily indicative of the results to be expected for any other interim
period or the full year. In the opinion of management, the information furnished
reflects all adjustments necessary for a fair presentation of the results for
the reported interim periods, including those of a normal recurring nature, as
well as adjustments for the cumulative effect in change in method of accounting.
Discontinued Operations
As discussed in Note 2, the Company has reported its metal and defense
businesses as discontinued operations in the consolidated financial statements
from October 11, 2000, the measurement date, through March 29, 2003. Prior to
March 29, 2003, the Company had disposed of the last of its discontinued
operations with the sale of Galion, Inc. on December 23, 2002. Accordingly, the
businesses' net losses during the quarter ended September 28, 2002, which were
incurred subsequent to the measurement date, were applied against the accrued
losses recorded at that date.
Segment Information
The Company has adopted the provisions of Statement of Financial
Accounting Standard ("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.
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. On May
18, 2001, 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) 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 were granted by the Compensation Committee to employees
and outside directors on April 1, 2002. All options expire on October 31, 2010.
7
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company applies the principles of Accounting Principles Board Opinion
("APB") No. 25 in accounting for employee stock option plans (the intrinsic
value method). All stock options granted had an exercise price equal to the fair
market value of the underlying common stock at the date of grant. Accordingly,
under APB 25, no compensation cost was recognized in the Company's financial
statements in prior periods. During the quarter ended September 27, 2003 the
Company experienced a change of control and as a result under the provisions of
the Safety Components International, Inc. 2001 Stock Option Plan ("Stock Option
Plan") all options vested immediately and a certain subset of the options were
re-priced to $0.01 (the "modified options"). The re-pricing constituted a
modification of the Stock Option Plan and under APB No. 25 and Financial
Interpretation Number ("FIN") 44, "Accounting for Certain Transactions involving
Stock Compensation," the Company was required to recognize compensation cost of
$1.4 million ($823,000 net of tax) for the modified options, representing
126,900 options, for the quarter ended September 27, 2003. No expense was
recognized on the remaining 567,800 options that did not have the re-pricing
provision. According to the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," the Company is required
to disclose the compensation expense included in net income based on APB No. 25
and the related pro-forma cost measured by the fair value method under SFAS No.
123, net of tax effects. Additionally, the modification resulted in an increased
value for the modified options (the "incremental fair value") that is disclosed
as part of the pro-forma expense measured by the fair value method.
The fair value of the original options are based upon the Black-Scholes
option-pricing model, and are estimated on the date of grant 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. The fair values of the options granted at May 18, 2001 and April 1,
2002, were $4.26 and $6.44 per share, respectively. Prior to the modification,
the Company's SFAS No. 123 pro-forma compensation expense would have been
$872,000 and $0 for the quarters ended September 27, 2003 and September 28,
2002, respectively, and $1,116,000 and $0 for the twenty-six weeks ended
September 27, 2003 and September 28, 2002, respectively
As a result of the modification, the incremental fair value of the
modified options are to be estimated immediately before its terms are modified
and on the date of modification. The fair values for the modified options were
also based on the Black-Scholes option-pricing model, with the following
assumptions used: risk free interest rate of 0.99 percent; zero percent
dividends; expected life of 0.5 years; expected volatility of 83.7 percent; and
an exercise price of $0.01 and $8.75. The incremental fair value of the modified
options was $7.38. As a result, the incremental pro-forma compensation expense
was $534,000 and $0 for the quarters ended September 27, 2003 and September 28,
2002, respectively.
8
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Had compensation cost for the Company's stock option plans been determined
based on the estimated fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123 (as amended), the Company's
compensation cost (net of tax), net income (loss) and net income (loss) per
common share, basic and diluted, would have been affected as indicated in the
pro-forma amounts below (unaudited) (in thousands, except per share data):
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
September 27, 2003 September 28, 2002 September 27, 2003 September 28, 2002
----------------------------------------------------------------------------------
Net income (loss), as reported: $ (1,491) $ 705 $ 2,889 $ (11,240)
Add: Total stock-based
employee compensation
expense included in reported
net income (loss), net of tax 823 -- 823 --
Deduct: Total stock-based
employee compensation
expense determined under
fair value method, net of tax 1,406 -- 1,650 --
----------------------------------------------------------------------------------
Pro forma net income (loss): $ (2,074) $ 705 $ 2,062 $ (11,240)
==================================================================================
Net income (loss) per share:
Basic - as reported: $ (.30) $ 0.14 $ 0.58 $ (2.27)
Basic - pro forma: $ (.42) $ 0.14 $ 0.42 $ (2.27)
Diluted - as reported: $ (.30) $ 0.14 $ 0.57 $ (2.27)
Diluted - pro forma: $ (.42) $ 0.14 $ 0.41 $ (2.27)
There were 700,100 and 694,700 options outstanding as of March 29, 2003
and September 27, 2003, respectively. During the period ended September 27,
2003, there were forfeitures of 4,000 and 1,400 options with an exercise price
of $8.75 and $6.71, respectively, and no options were granted, exercised or
expired. Of the 694,700 options outstanding at September 27, 2003, 379,200 have
an exercise price of $8.75, 126,900 have an exercise price of $0.01 and 188,600
have an exercise price of $6.71, with all options having a weighted average
remaining contractual life of 7.10 years. All options outstanding became fully
vested upon the change of control and are currently exercisable.
Note 2 Discontinued Operations
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. Net sales for the Company's
discontinued metal and defense operations were $1,470,000 and $3,606,000 for the
thirteen and twenty-six weeks ended September 28, 2002 and, as discussed in Note
1, no gain or loss was recognized in these periods.
9
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 Inventories
Inventories reported on the Company's balance sheets were as follows
(unaudited) (in thousands):
September 27, 2003 March 29, 2003
-------------------------------------
Raw materials $ 4,734 $ 7,023
Work-in-process 6,593 7,684
Finished goods 9,656 9,293
------------------------------------
Total $ 20,983 $ 24,000
====================================
Note 4 Long-Term Debt
At September 27, 2003, the Company had an aggregate $35.0 million
revolving credit facility, with Congress Financial Corporation (Southern) (the
"Congress Facility") expiring October 9, 2003 and currently bearing interest at
4.00%. 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 $2.1
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
(as discussed below, the Congress Facility was amended and extended on October
8, 2003). The amount outstanding under the Congress Facility at September 27,
2003 and March 29, 2003 (including term loans) was $12.4 million and $19.3
million, respectively. Also included within the borrowings under the Congress
Facility is a $3.0 million letter of credit facility, under which the Company
had exposure of $497,000 and $424,000 pursuant to letters of credit outstanding
at September 27, 2003 and March 29, 2003, respectively. At September 27, 2003,
the Company's availability for additional borrowings (under the maximum
allowable limit) was approximately $13.9 million.
At September 27, 2003, the Company's subordinated secured note facility
(the "Subordinated Facility"), bearing interest at 11%, with KeyBank National
Association and Fleet Bank was set to mature on October 10, 2003. The amount
outstanding under the Subordinated Facility at September 27, 2003 and March 29,
2003 was $3.8 million and $9.2 million, respectively. The Subordinated Facility
was repaid in full on October 8, 2003 with proceeds from the amended Congress
facilities discussed below.
On October 8, 2003, the Company executed an amendment to its credit
facility with Congress Financial Corporation (Southern), a subsidiary of
Wachovia Bank, National Association ("Congress"). As amended, the Company has an
aggregate, $35.0 million revolving credit facility with Congress Financial
Corporation (Southern) (the "Congress Revolver") expiring October 8, 2006. Under
the Congress Revolver, 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. The amount borrowed under
the Congress Revolver at October 8, 2003 was $6.4 million. The Congress Revolver
also provides for a $5.0 million letter of credit facility, under which the
Company had $497,000 outstanding pursuant to letters of credit at October 8,
2003. At October 8, 2003, the Company's availability for additional borrowings
(under the maximum allowable limit) was approximately $33.1 million.
In addition, the amendment provided for a term facility (the "Congress
Term A") under which $4.3 million was borrowed at October 8, 2003. The Congress
Term Loan A is payable in equal monthly installments of approximately $125,000,
with the unpaid principal amount due on October 8, 2006. In addition to the
Congress Revolver and Congress Term A, the amendment also provided for an
additional $4.5 million term loan (the "Congress Term B") which is undrawn and
is currently fully available. The Congress Term B loan bears interest at Prime
(as defined under the facility) plus 3%.
The interest rate on the Congress Revolver and Congress Term A 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
10
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Ratio (as defined). 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 October 8, 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 0.25% on the unused portion of the Congress Revolver.
Under the Congress Revolver and Congress Term A facilities, the Company is
subject to a minimum Tangible Net Worth financial covenant (as defined). To the
extent that the Company has borrowings outstanding under the Congress Term B
facility, it is subject to certain additional financial covenants including
minimum EBITDA, minimum Fixed Charge Coverage Ratio, maximum Leverage Ratio, and
maximum Capital Expenditures (all as defined under the facility). The Congress
facilities also impose limitations upon the Company's ability to, among other
things, incur indebtedness (including capitalized lease arrangements); become or
remain liable with respect to any guaranty; make loans; acquire investments;
declare or make dividends or other distributions; merge, consolidate, liquidate
or dispose of assets or indebtedness; incur liens; issue capital stock; or
change its business. At September 27, 2003 and October 8, 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 facilities.
Note 5 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. Potentially dilutive common shares consist of shares under option. A
reconciliation of basic and diluted weighted average shares outstanding is
presented below (unaudited):
------------------------------------------------------------------------------------
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
September 27, 2003 September 28, 2002 September 27, 2003 September 28, 2002
------------------------------------------------------------------------------------
Weighted average number
of common shares
outstanding - basic 4,959,678 4,959,678 4,959,678 4,959,678
Net effect of dilutive stock
options - based on the
treasury stock method
using the average
market price * 5,700 99,558 *
------------------------------------------------------------------------------------
Weighted average number
of common shares
outstanding - diluted 4,959,678 4,965,378 5,059,236 4,959,678
====================================================================================
* Effect is anti-dilutive for these periods (all options were
anti-dilutive).
11
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 Comprehensive Income (loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
------------------------------------------------------------------------------------
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
September 27, 2003 September 28, 2002 September 27, 2003 September 28, 2002
------------------------------------------------------------------------------------
Net income (loss) $ (1,491) $ 705 $ 2,889 $(11,240)
Foreign currency
translation adjustment 85 (871) 1,627 2,814
Unrealized gain (loss) on
hedging transactions,
net of taxes (533) (11) (326) (100)
------------------------------------------------------------------------------------
Comprehensive income
(loss) $ (1,939) $ (177) $ 4,190 $ (8,526)
====================================================================================
Note 7 Contingencies
The Company, from time to time, is a party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
Note 8 Derivatives and Hedging
Safety Components monitors its risk associated with the volatility of
certain foreign currencies against its functional currency, the U.S. dollar. The
Company uses certain derivative financial instruments to reduce exposure to
volatility of foreign currencies. The Company has formally documented all
relationships between hedging instruments and hedged items, as well as risk
management objectives and strategies for undertaking various hedge transactions.
Derivative financial instruments are not entered into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on April 10,
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 are being monitored for effectiveness on a routine basis. At
September 27, 2003, the Company had outstanding forward exchange contracts that
mature between October 2003 and March 2004 to purchase Mexican pesos with an
aggregate notional amount of approximately $5.3 million. The fair values of
these contracts at September 27, 2003, totaled approximately $180,000, which is
recorded as a liability on the Company's balance sheet in other current
liabilities. The Company recorded a credit to earnings of approximately $43,000
and $101,000 for the thirteen and twenty-six week periods ended September 27,
2003 and the unrealized loss on these forward contracts of approximately
$179,000 was included in "accumulated other comprehensive income" at September
27, 2003.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company entered into forward contracts on June 23,
2003 to buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts were designated as hedges at inception and are being monitored for
effectiveness on a routine basis. At September 27, 2003, the Company had
outstanding forward exchange contracts that mature between October 2003 and
March 2004 to purchase Czech Korunas with an aggregate notional amount of
approximately $4.0 million. The fair values of these contracts at
12
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2003 totaled approximately $147,000, which is recorded as a
liability on the Company's balance sheet in other current liabilities. The
Company recorded a charge to earnings of approximately $53,000 for both the
thirteen and twenty-six week periods ended September 27, 2003 and the unrealized
loss on these forward contracts of approximately $147,000 was included in
"accumulated other comprehensive income" at September 27, 2003.
Note 9 New Accounting Standards
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 adoption of this Statement
did not have any effect on the Company's financial position or statement of
operations.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. This statement
establishes new standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have any effect on
the Company's financial position or statement of operations.
Note 10 Change of Control
On September 23, 2003, based on filings with the SEC, Zapata Corporation
("Zapata", NYSE: "ZAP") acquired 2,663,905 shares of the Company's common stock
constituting approximately 53.7% of the outstanding shares of such common stock
in privately negotiated transactions at a purchase price of $30.9 million or
$11.59 per share (including brokerage commissions). On October 2, 2003, based on
filings with the SEC, Zapata acquired an additional 1,498,489 shares of the
Company's common stock in two privately negotiated transactions for an aggregate
$16.9 million or $11.30 per share (including brokerage commissions). As a result
of these transactions, Zapata owns approximately 83.9% of Safety Components'
outstanding shares.
Zapata Corporation is a holding company that has one other operating
company, Omega Protein Corporation (NYSE: "OME"), in which it has a 60%
ownership interest. Omega Protein is the nation's largest marine protein
company. In addition, Zapata owns 98% of its subsidiary, Zap.Com Corporation
(OTCBB: "ZPCM"), which is a public shell corporation.
This change of control event triggered certain provisions of the Company's
Stock Option Plan, including that all options vest immediately and that a
certain subset of the options be re-priced to $0.01. The re-pricing constituted
a modification of the Stock Option Plan and the Company was required to
recognize a one-time, non-recurring compensation cost of $1.4 million for the
modified options, representing 126,900 options, for the quarter ended September
27, 2003. Additionally, in lieu of repricing their Class A stock options, the
employment agreements of certain key executives included a provision for a
one-time, non-recurring bonus payable in the event of a change of control. The
aggregate bonus was $1.4 million and was recognized as an expense in the quarter
ended September 27, 2003.
13
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 Cumulative Effect of Change in Method of Accounting
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
effective March 31, 2002. As a result of management's assessment of fair value,
the Company's "Reorganization value in excess of identifiable assets" and
goodwill were determined to be impaired and, accordingly, the total amount of
approximately $14.7 million was written off as the cumulative effect of a change
in method of accounting at March 31, 2002. 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
The following discussion and analysis of the Company's financial condition
and results of operations are based on the Company's unaudited condensed
Consolidated Financial Statements. A summary of significant accounting policies
is disclosed in Note 2 to the Consolidated Financial Statements included in the
Annual Report on Form 10-K for the year ended March 29, 2003. The Company's
critical accounting policies are further described under the caption "Critical
Accounting Policies" in Management's Discussion and Analysis in the Annual
Report on Form 10-K for the year ended March 29, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the unaudited condensed
Consolidated Financial Statements. It is important that the reader of the
unaudited financial statements understand that actual results could differ from
these estimates, assumptions and judgments.
There have been no changes in the nature of the Company's critical
accounting policies or the application of those policies since March 29, 2003.
Results of Operations
The Company has reported its metal and defense businesses as discontinued
operations in the consolidated financial statements from October 10, 2000, the
measurement date, through disposal of the final discontinued business on
December 23, 2002. The following summarizes the results of continuing operations
for the Company for the thirteen week and twenty-six week periods ended
September 27, 2003 and September 28, 2002.
(In thousands)
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
September 27, 2003 September 28, 2002 September 27, 2003 September 28, 2002
------------------------------------------------------------------------------------
Net sales $ 52,747 $ 57,537 $ 120,163 $ 118,985
Gross profit 5,028 5,834 15,919 14,623
Income (loss) from operations (1,255) 2,267 5,039 6,484
Other expense (income), net 259 (43) (1,139) (2,108)
Interest expense, net 579 894 1,247 1,916
Provision (benefit) for income
taxes (602) 711 2,042 3,264
Cumulative effect of change in
method of accounting -- -- -- (14,652)
Net income (loss) (1,491) 705 2,889 (11,240)
15
Second Quarter (Thirteen Weeks) Ended September 27, 2003 Compared to Second
Quarter (Thirteen Weeks) Ended September 28, 2002.
Net Sales. Net sales decreased $4.8 million, or 8.3%, to $52.7 million for
the second quarter ended September 27, 2003 compared to the second quarter ended
September 28, 2002. North American operations' net sales decreased $6.5 million
or 19.9% compared to the second quarter ended September 28, 2002, with the
decrease principally due to decreased demand in the North American automotive
market. Net sales for European operations increased $1.7 million or 7.0%
compared to the second quarter ended September 28, 2002. The increase in
European net sales is due principally to the effect of changes in foreign
currency exchange rates that increased net sales as expressed in U.S. dollars by
approximately $3.8 million over the amount that would have been reported based
on exchange rates in effect in the second quarter ended September 28, 2002. The
favorable effect of exchange rates was offset by a reduction in volume of
approximately $2.1 million due to decreased demand in the European automotive
market.
Gross Profit. Gross profit decreased $806,000, or 13.8%, to $5.0 million
for the second quarter ended September 27, 2003 compared to the second quarter
ended September 28, 2002. The decrease in gross profit is due primarily to North
American operations, representing a decrease of $1.4 million or 24.8% compared
to the prior year. This decrease can be attributed to the decrease in net sales
combined with increased depreciation costs associated with newly acquired
capital assets. Gross profit for European operations increased $600,000 as a
result of improvements in operating efficiencies and cost savings resulting from
the Company's transfer of production lines within Europe in the prior year.
Gross profit as a percentage of net sales decreased to 9.5% for the second
quarter ended September 27, 2003 from 10.1% for the second quarter ended
September 28, 2002.
(Loss)/Income from Operations. The Company experienced an operating loss
of $1.3 million for the second quarter ended September 27, 2003 compared to
operating income of $2.3 million for the second quarter ended September 28,
2002. The decrease is primarily due to the recognition of a one-time,
non-recurring charge of approximately $2.8 million associated with stock
compensation and executive bonuses resulting from the Company's change of
control, as well as the items discussed above.
Other Expense, net. The Company recognized other expense, net of $259,000
for the second quarter ended September 27, 2003 as compared to other income, net
of $43,000 for the second quarter ended September 28, 2002. Other expense, net
is realized primarily from 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 losses of
$139,000 during the second quarter ended September 27, 2003, compared to net
foreign transaction gains of $52,000 recorded in the second quarter ended
September 28, 2002. The current year's foreign transaction losses resulted from
changes in foreign currency exchange rates of approximately 0.4% from those at
June 28, 2003.
Interest Expense, net. Interest expense decreased $315,000, or 35.2%, to
$579,000 for the second quarter ended September 27, 2003, compared to the second
quarter ended September 28, 2002. The decrease is attributable primarily to a
decrease in average levels of outstanding debt from $46.7 million to $25.9
million in the second quarter ended September 27, 2003 as compared to the second
quarter ended September 28, 2002.
Provision (Benefit) for Income Taxes. The provision for income taxes for
the second quarter ended September 27, 2003 decreased $1.3 million from a
provision of $711,000 for the second quarter ended September 28, 2002, to a
benefit of $602,000 for the second quarter ended September 27, 2003. The
decrease is due to the Company's recognition of a tax benefit due to the loss
incurred during the second quarter ended September 27, 2003. The Company's
effective tax rate for the second quarter ended September 27, 2003 was 28.8%
compared to 50.2% for the second quarter ended September 28, 2002. The effective
tax rate for the second quarter ended September 27, 2003 is a result of the
higher European tax rate, offset by a U.S. benefit recognized for the quarter.
The effective tax rate for the second quarter ended September 28, 2002 was
substantially higher due to tax benefits on pre-tax losses incurred at certain
of the Company's European subsidiaries for the quarter being fully reserved
under SFAS No. 109.
Net Income/(Loss). The Company's net loss was $1.5 million for the second
quarter ended September 27,
16
2003 compared to net income of $705,000 for the second quarter ended September
28, 2002. This change in net income resulted from the items discussed above.
Twenty-six Weeks Ended September 27, 2003 Compared to Twenty-six Weeks Ended
September 28, 2002.
Net Sales. Net sales increased $1.2 million, or 1.0%, to $120.2 million
for the twenty-six weeks ended September 27, 2003 compared to the twenty-six
weeks ended September 28, 2002. North American operations' net sales decreased
$7.6 million, or 11.2%, compared to the twenty-six weeks ended September 28,
2002, with the decrease principally due to decreased demand in the North
American automotive market. Net sales for European operations increased $8.7
million, or 16.9%, compared to the twenty-six weeks ended September 28, 2002.
The increase in the European operations' net sales is due primarily to the
effect of changes in foreign currency exchange rates that increased net sales as
expressed in U.S. dollars by approximately $7.5 million over the amount that
would have been reported based on exchange rates in effect for the twenty-six
weeks ended September 28, 2002, and additional volumes resulting from new
programs at the European operations.
Gross Profit. Gross profit increased $1.3 million, or 8.9%, to $15.9
million for the twenty-six weeks ended September 27, 2003 compared to the
twenty-six weeks ended September 28, 2002. The increase in gross profit is due
primarily to European operations, representing an increase of $2.5 million or
89.8% over the prior year. This increase can be attributed to the increase in
net sales as well as improved operating efficiencies and cost savings in
operations resulting from the Company's prior year transfer of production lines
within Europe. Gross profit decreased slightly in North America due to decreased
sales as well as increased depreciation. Gross profit as a percentage of net
sales increased to 13.2% for the twenty-six weeks ended September 27, 2003 from
12.3% for the twenty-six weeks ended September 28, 2002.
Income from Operations. Income from operations decreased $1.4 million, or
22.3%, to $5.0 million for the twenty-six weeks ended September 27, 2003
compared to the twenty-six weeks ended September 28, 2002. The decrease is
attributable to the recognition of a one-time, non-recurring charge of
approximately $2.8 million associated with stock compensation and executive
bonuses resulting from the Company's change of control, offset by the increase
in gross profit discussed above. Income from operations as a percentage of net
sales decreased to 4.2% for the twenty-six weeks ended September 27, 2003 from
5.4% for the twenty-six weeks ended September 28, 2002.
Other Income, net. The Company recognized other income, net of $1.1
million for the twenty-six weeks ended September 27, 2003, as compared to other
income, net of $2.1 million for the twenty-six weeks ended September 28, 2002.
Other income, net is realized primarily from 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 $1.3 million during the twenty-six weeks ended September 27, 2003, compared
to net foreign transaction gains of $2.0 million recorded in the twenty-six
weeks ended September 28, 2002. The current year's foreign transaction gains
resulted from significant favorable changes in foreign currency exchange rates
of approximately 6.4% from those at March 29, 2003.
Interest Expense, net. Interest expense decreased $669,000, or 34.9%, to
$1.3 million for the twenty-six weeks ended September 27, 2003, compared to the
twenty-six weeks ended September 28, 2002. The decrease is attributable
primarily to a decrease in average levels of outstanding debt from $45.5 million
in the twenty-six weeks ended September 28, 2002, to $30.4 million in the
twenty-six weeks ended September 27, 2003.
Provision for Income Taxes. The provision for income taxes for the
twenty-six weeks ended September 27, 2003 decreased $1.3 million to $2.0 million
for the twenty-six weeks ended September 27, 2003 from $3.3 million for the
twenty-six weeks ended September 28, 2002. The Company's effective tax rate for
the twenty-six weeks ended September 27, 2003 was 41.4% compared to 48.9% for
the twenty-six weeks ended September 28, 2002. The effective tax rate for the
twenty-six weeks ended September 27, 2003 is lower due to higher tax rates at
certain of the Company's European subsidiaries. The effective tax rate for the
twenty-six weeks ended September 28, 2002 was higher because of the recognition
of tax provisions for the Company's German subsidiary at higher local rates and
the recording of an additional provision for income taxes resulting from an
examination by German taxing authorities.
17
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of fair value, the Company's
"Reorganization value in excess of identifiable assets" and goodwill were
determined to be impaired and, accordingly, the total amount of approximately
$14.7 million was written off as the cumulative effect of a change in method of
accounting at March 31, 2002. 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 Income. The Company's net income was $2.9 million for the twenty-six
weeks ended September 27, 2003 compared to net loss of $11.2 million for the
twenty-six weeks ended September 28, 2002. This change in net income resulted
from the items discussed above, in large part, the cumulative effect of change
in method of accounting.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities of continuing operations was
$14.4 million for the twenty-six weeks ended September 27, 2003, compared to
cash provided by operating activities of continuing operations of $760,000 in
the comparable period in the prior year. The cash provided by operating
activities of continuing operations was generated principally from the income of
the continuing operations and the favorable effects of reductions in inventory
levels and receivables, offset by a reduction in accounts payable. The cash
provided by operating activities in the comparable period of the prior year was
primarily due to the increased inventory levels associated with the move of
production lines and the ramp-up of programs in Europe.
Net cash used in investing activities of continuing operations was $2.3
million for the twenty-six weeks ended September 27, 2003, compared to net cash
used in investing activities of continuing operations of $5.8 million for the
comparable period in the prior year. Capital expenditures in the prior year were
higher than in the current year due to capacity increases necessitated by new
programs awarded by customers.
Net cash used in financing activities of continuing operations was $13.9
million for the twenty-six weeks ended September 27, 2003, compared to net cash
provided by financing activities of continuing operations of $8.9 million for
the comparable period in the prior year. Net cash used in financing activities
of continuing operations for the twenty-six weeks ended September 27, 2003 is
attributable to the Company's repayments on its revolving credit facility and
payments on various other long-term obligations. Borrowings under credit
facilities in the twenty-six weeks ended September 27, 2003 were used to fund
increases in working capital as well as increased levels of capital
expenditures, offset by payments on various long-term obligations.
Credit Facilities
At September 27, 2003, the Company had an aggregate, $35.0 million
revolving credit facility, with Congress Financial Corporation (Southern) (the
"Congress Facility") expiring October 9, 2003 and bearing interest at 4.00%.
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 $2.1 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 (as discussed
below, the Congress Facility was amended and extended on October 8, 2003). The
amount outstanding under the facility at September 27, 2003 and March 29, 2003
(including term loans) was $12.4 million and $19.7 million, respectively. Also
included within the borrowings under the Congress Facility is a $3.0 million
letter of credit facility, under which the Company had exposure of $497,000 and
$424,000 pursuant to letters of credit outstanding at September 27, 2003 and
March 29, 2003, respectively. At September 27, 2003, the Company's availability
for additional borrowings (under the maximum allowable limit) was approximately
$13.9 million.
At September 27, 2003, the Company's subordinated secured note facility
(the "Subordinated Facility"),
18
bearing interest at 11%, with KeyBank National Association and Fleet Bank was
set to mature on October 10, 2003. The amount outstanding under the Subordinated
Facility at September 27, 2003 and March 29, 2003 was $3.8 million and $9.2
million, respectively. On October 8, 2003 the Subordinated Facility was repaid
in full with proceeds from the amended Congress facilities as discussed below.
On October 8, 2003, the Company executed an amendment to its credit
facility with Congress Financial Corporation (Southern), a subsidiary of
Wachovia Bank, National Association ("Congress"). As amended, the Company has an
aggregate, $35.0 million, revolving credit facility with Congress Financial
Corporation (Southern) (the "Congress Revolver") expiring October 8, 2006. Under
the Congress Revolver, 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. The amount borrowed under
the Congress Revolver at October 8, 2003 was $6.4 million. The Congress Revolver
also provides for a $5.0 million letter of credit facility, under which the
Company had $497,000 outstanding pursuant to letters of credit at October 8,
2003. At October 8, 2003, the Company's availability for additional borrowings
(under the maximum allowable limit) was approximately $33.1 million.
In addition, the amendment provided for a term facility (the "Congress
Term A") under which $4.3 million was borrowed at October 8, 2003. The Congress
Term Loan A is payable in equal monthly installments of approximately $125,000,
with the unpaid principal amount due on October 8, 2006. In addition to the
Congress Revolver and Congress Term A, the amendment also provided for an
additional $4.5 million term loan (the "Congress Term B") which is undrawn and
is currently fully available. The Congress Term B loan bears interest at Prime
(as defined under the facility) plus 3%.
The interest rate on the Congress Revolver and Congress Term A 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). 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 October 8, 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 0.25% on the unused portion of the Congress Revolver.
Under the Congress Revolver and Congress Term A facilities, the Company is
subject to a minimum Tangible Net Worth financial covenant (as defined). To the
extent that the Company has borrowings outstanding under the Congress Term B
facility, it is subject to certain additional financial covenants including
minimum EBITDA, minimum Fixed Charge Coverage Ratio, maximum Leverage Ratio, and
maximum Capital Expenditures (all as defined under the facility). The Congress
facilities also impose limitations upon the Company's ability to, among other
things, incur indebtedness (including capitalized lease arrangements); become or
remain liable with respect to any guaranty; make loans; acquire investments;
declare or make dividends or other distributions; merge, consolidate, liquidate
or dispose of assets or indebtedness; incur liens; issue capital stock; or
change its business. At October 8, 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 facilities.
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 September 27, 2003.
As of September 27, 2003
-------------------------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
-------------------------------------------------------------------------------------------
Contractual obligations
Credit facility $12,422 $ 1,000 $ 1,000 $10,422 $ -- $ -- $ --
Other long-term debt 12,275 6,155 2,297 746 709 1,536 832
Capital lease obligations 977 377 318 261 14 7 --
Operating lease commitments 2,532 846 596 453 333 304 --
-------------------------------------------------------------------------------------------
Total $28,206 $ 8,378 $ 4,211 $11,882 $ 1,056 $ 1,847 $ 832
===========================================================================================
19
Recent Development
In transactions occurring between September 23, 2003 and October 2, 2003,
Zapata Corporation ("Zapata," NYSE: "ZAP") acquired approximately 83.9% of the
Company's issued and outstanding shares of common stock. For information
regarding this development, see "Note 10 - Change of Control" to the Company's
condensed Consolidated Financial Statements contained herein and Part II - Item
5 "Other Information" of this report, which information is incorporated herein
by reference.
New Accounting Standards
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 adoption of this Statement
did not have any effect on the Company's financial position or statement of
operations.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. This statement
establishes new standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have any effect on
the Company's financial position or statement of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Company's revolving credit
facility are outstanding, the Company has market risk relating to such amounts
because the interest rates under the Congress Facility are variable. As of
September 27, 2003, the Company's interest rates under its revolving credit
facility approximated 4.0%. A hypothetical increase or decrease in interest
rates of 100 basis points relating to the Congress Facility would result in an
addition to or reduction in annual interest expense of approximately $200,000.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks. Safety
Components monitors its risk associated with the volatility of certain foreign
currencies against its functional currency, the U.S. dollar. The Company uses
certain derivative financial instruments to reduce exposure to volatility of
foreign currencies. However, the changes in the relationship of other currencies
to the U.S. dollar could have a materially adverse effect on the consolidated
financial statements if there were a sustained decline of these currencies
versus the U.S. dollar. The Company has formally documented all relationships
between hedging instruments and hedged items, as well as risk management
objectives and strategies for undertaking various hedge transactions. Derivative
financial instruments are not entered into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on April 10,
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 are being monitored for effectiveness on a routine basis. At
September 27, 2003, the Company had outstanding forward exchange contracts that
mature between October 2003 and March 2004 to purchase Mexican pesos with an
aggregate notional amount of approximately $5.3 million. The fair values of
these contracts at September 27, 2003, totaled approximately $180,000, which is
recorded as a liability on the Company's balance sheet in other current
liabilities. The Company recorded a credit to earnings of approximately $43,000
and $101,000 for the thirteen and twenty-six week periods
20
ended September 27, 2003 and the unrealized loss on these forward contracts of
approximately $179,000 was included in "accumulated other comprehensive income"
at September 27, 2003.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company entered into forward contracts on June 23,
2003 to buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts were designated as hedges at inception and are being monitored for
effectiveness on a routine basis. At September 27, 2003, the Company had
outstanding forward exchange contracts that mature between October 2003 and
March 2004 to purchase Czech Korunas with an aggregate notional amount of
approximately $4.0 million. The fair values of these contracts at June 28, 2003
totaled approximately $147,000, which is recorded as a liability on the
Company's balance sheet in other current liabilities. The Company recorded a
charge to earnings of approximately $53,000 for both the thirteen and twenty-six
week periods ended September 27, 2003 and the unrealized loss on these forward
contracts of approximately $147,000 was included in "accumulated other
comprehensive income" at September 27, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's
management (with the participation of the Company's principal executive and
principal financial officers, Messrs. Corey and Menezes, respectively) carried
out an evaluation of the effectiveness and design of the Company's disclosure
controls and procedures. Based on this evaluation, each of Messrs. Corey and
Menezes 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.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On September 23, 2003, based on filings with the SEC, Zapata
Corporation ("Zapata," NYSE: "ZAP") acquired 2,663,905 shares of the
common stock of Safety Components International, Inc. (the "Company"),
constituting approximately 53.7% of the issued and outstanding shares of
such common stock, in privately negotiated transactions at a purchase
price of $30.9 million or $11.59 per share. On October 2, 2003, based on
filings with the SEC, Zapata executed a transaction to acquire an
additional 1,498,489 shares of the Company's common stock in two privately
negotiated transactions aggregating $16.9 million or $11.30 per share. As
a result of these recent purchases, Zapata now holds approximately 83.9%
of the Company's issued and outstanding shares. For additional information
regarding Zapata and its investment in the Company (including information
regarding the "purpose of the transaction" and "contracts, arrangements,
understandings or relationships with respect to securities of the
issuer"), see the Schedule 13D filed by Zapata on September 29, 2003, as
amended on October 6, 2003, October 9, 2003 and October 14, 2003, and as
may be subsequently amended. See also "Note 10 - Change of Control" to our
condensed Consolidated Financial Statements contained elsewhere herein.
Zapata is a holding company that has one other operating company,
Omega Protein Corporation (NYSE: "OME"), in which it has a 60% ownership
interest. Omega Protein is the nation's largest marine protein company. In
addition, Zapata owns 98% of its subsidiary, Zap.Com Corporation (OTCBB:
"ZPCM"), which is a public shell corporation.
On October 16, 2003, the Company issued a press release announcing
the adjournment of its 2003 Annual Meeting of Shareholders, previously
noticed for Tuesday, October 14, 2003, due to the absence of a quorum for
the transaction of business, and indicating that a new date for the 2003
annual meeting will be established and announced thereafter.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
--- ----------- --------
10.29 Amendment No. 3 and Consent to Loan and Security
Agreement, dated October 8, 2003 by and among
Safety Components International, Inc., the
subsidiaries named therein as Borrowers and
Guarantors and Congress Financial Corporation
(Southern).
10.30 Form of Indemnification Agreement by and between
Safety Components International, Inc., Automotive
Safety Components International, Inc., Safety
Components Fabric Technologies, Inc., and certain
officers and directors.
31.1 Certification of CEO as required by Rule
13a-14(a), as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of CFO as required by Rule
13a-14(a), as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of CEO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended September
27, 2003.
23
SIGNATURES
Pursuant to the requirements 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.
DATED: November 3, 2003 By: \s\ Brian P. Menezes
-------------------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: \s\ William F. Nelli
-------------------------------------
William F. Nelli
Controller
(Principal Accounting Officer)
24