Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from March 30, 2003 to December 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
41 Stevens Street
Greenville, South Carolina 29605
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 |_|.
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 Yes |X| No |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|.
The aggregate market value of the common stock held by persons other than
affiliates of the registrant (based upon the assumption, for purposes of this
computation only, that Zapata Corporation and all of the registrant's directors
and executive officers were affiliates), as of September 26, 2003, was
approximately $9,323,000.
The number of shares outstanding of the registrant's common stock, as of
February 27, 2004, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,037,478
- --------------------------------------------------------------------------------
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 Transition 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,"
"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 (but are not limited to): 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 fire service apparel, ballistics
material for luggage, filtration and military tents. 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 $183.7 million, $244.3 million and $203.3 million in the nine
month period from March 30, 2003 to December 31, 2003, and the years ended March
29, 2003 and March 30, 2002, respectively. Subsequent to the Change of Control
(described below), the Company has changed its fiscal year to a calendar year
end to coincide with Zapata's fiscal year end. The Company's operations were
previously based on a fifty-two or fifty-three week fiscal year ending on the
Saturday closest to March 31. As such, the period from March 30, 2003 to
December 31, 2003 consists of nine months of operations. The years ended March
29, 2003 and March 30, 2002 each consisted of twelve months of operations.
Change of Control
On September 29, 2003, Zapata Corporation ("Zapata", NYSE: "ZAP") filed a
Schedule 13D with the Securities and Exchange Commission (the "SEC") indicating
that as of September 18, 2003 it had acquired 2,663,905 shares of the Company's
common stock which then constituted approximately 53.7% of the issued and
outstanding shares of such common stock. As a result, a change of control of the
Company (the "Change of Control") occurred. On October 6, 2003, Zapata filed an
amendment to its Schedule 13D with the SEC, indicating that it had acquired an
additional 1,498,489 shares of the Company's common stock which, together with
the shares previously acquired, then constituted approximately 83.9% of the
issued and outstanding common stock of the Company. Zapata's Schedule 13D states
that the shares purchased as of September 18, 2003 were purchased in privately
negotiated block purchases for a total of approximately $30.9 million, or an
average price per share of $11.59, in cash, the source of which was Zapata's
working capital. This amendment to Zapata's Schedule 13D states that the
additional shares purchased on October 2, 2003 were purchased in a privately
negotiated transaction for $16.9 million, or $11.30 per share, in cash, the
source of which was Zapata's working capital.
On October 14, 2003, Zapata filed another amendment to its Schedule 13D,
in which it stated that its Chairman and Chief Executive Officer, Avram Glazer,
together with another Zapata representative met with the Company's management to
discuss Zapata's investment in the Company. This amendment further stated that
during those discussions, Mr. Glazer requested that the Company's Board of
Directors nominate individuals selected by Zapata to serve on the Company's
Board of Directors and to have such persons constitute a majority of the
Company's Board of Directors and that the Company's management agreed to
consider the request and pursue appropriate actions. In addition, this Amendment
states that on October 13, 2003, Zapata wrote a letter to the Company's
corporate secretary advising him that Zapata's shares of common stock would not
be present at the Company's Annual Meeting of Stockholders scheduled for October
14, 2003.
On November 12, 2003, the Company's Audit Committee and Board of Directors
determined that it was in the Company's best interest to change the Company's
fiscal year end from the last Saturday in the month of March to December 31 of
each year. The Audit Committee also determined to notify Deloitte & Touche LLP
that it would not be retained to perform the audit of the financial statements
of the Company for the fiscal year ending March 27, 2004 or any transition
period and determined to engage the accounting firm of PricewaterhouseCoopers
LLP as independent accountants to audit the Company's financial statements for
the fiscal period ended December 31, 2003, the Company's
3
new fiscal year end. The Board of Directors of the Company ratified and approved
such decision. As a result of the foregoing, the Company's fiscal year end and
independent accountants are the same as those of Zapata.
On November 14, 2003, Zapata filed another amendment to its Schedule 13D
in which it stated that after considering Zapata's request that the Company's
Board of Directors elect individuals selected by Zapata to serve on the Board of
Directors and that those persons constitute a majority of the Board of
Directors, the Company invited Zapata to submit to it a proposal pursuant to
which Zapata would acquire the outstanding shares of the Company's common stock
not already owned by Zapata. This amendment also stated that Zapata advised the
Company that it was prepared to proceed with such a transaction, provided that
it received appropriate Board representation. The amendment stated that the
Company had indicated that it was prepared to elect two Zapata designees to the
Company's Board of Directors as soon as practical. At a meeting on January 26,
2004, the Company's Board of Directors appointed two designees of Zapata, Mr.
Glazer and Leonard DiSalvo, as members of the Company's Board of Directors.
Zapata's November 14, 2003 amendment further stated that Zapata had
submitted to the Company's Board of Directors a letter containing its
preliminary, non-binding indication of interest in acquiring the shares of
common stock not currently held by it at a price of $11.49 per share. Following
receipt of this letter, the Company's Board of Directors established a Special
Committee to evaluate the proposal. Following such evaluation, which included
consideration of the adequacy of the proposed per share price for the Company's
remaining public shares, the Special Committee determined that it could not
approve or recommend the proposed transaction to the Company's remaining
shareholders. Following further discussions with representatives of Zapata, the
Special Committee and Zapata mutually determined not to proceed with a
transaction at this time.
Zapata is a holding company that has one other operating company, Omega
Protein Corporation (NYSE: "OME"), in which it has a 59% ownership interest.
Omega Protein is one of the nation's largest marine protein companies. In
addition, Zapata owns 98% of its subsidiary, Zap.Com Corporation (OTCBB:
"ZPCM"), which is a public shell corporation.
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. 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. The manufacturing process and production assets
were transferred to other European operations of the Company primarily in lower
labor cost facilities and countries.
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 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 (these warrants expired as of April 10,
2003). Immediately upon emergence, 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. 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.
4
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 varying 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
(thorax) impact airbag cushions, side protection curtains and knee protection
cushions 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 89.8% of the Company's consolidated net sales in the nine month
period from March 30, 2003 to December 31, 2003. Sales of airbag related
products (inclusive of sales of airbag fabric) accounted for approximately 90.8%
and 89.4% of the Company's consolidated net sales in the fiscal years ended
March 29, 2003 and March 30, 2002, respectively.
The Company also manufactures a wide array of specialty technical fabrics
for consumer and industrial uses. These fabrics include: (i) protective apparel
worn by firefighters; (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 high-end luggage fabrics,
including "ballistics" fabric used in Hartman and Tumi brands of luggage. Sales
of technical related products accounted for approximately 10.2% of the Company's
consolidated net sales in the nine month period from March 30, 2003 to December
31, 2003. Sales of technical related products accounted for approximately 9.2%
and 10.6% of the Company's consolidated net sales in the fiscal years ended
March 29, 2003 and March 30, 2002, 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 much of the same
equipment and manufacturing processes 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 much of 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.
5
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 or prolonged 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 18.4 million airbag cushions to
the Company's North American and European customers during the nine month period
from March 30, 2003 to December 31, 2003. The Company believes it has adequate
capacity to manufacture for the anticipated customer requirements of its 2004
fiscal year.
6
The Company's South Carolina facility produced approximately 16.2 million
yards of fabric in the nine month period from March 30, 2003 to December 31,
2003. The Company believes it has adequate capacity to manufacture for the
anticipated customer requirements of fiscal 2004. The Company utilizes 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, Ensenada,
Mexico 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. 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. The Ensenada, Mexico technical center
consists of a testing laboratory and a dedicated prototype cell, complete with a
separate staff and equipment.
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
QS 9000 certified, the most important certifications for the industry. All
validation testing and analytical testing of fabric is performed at this
laboratory. Additionally, the Greenville facility has prototype-manufacturing
capabilities.
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 required to be satisfied
before the Company is qualified as a supplier by its customers.
7
The Company maintains extensive quality control and quality assurance
systems in its North American and European automotive facilities, including
inspection and testing of all products, and is QS 9000 and ISO 9001 or ISO 9002
certified. The Company is currently in the process of certification for TS16949
in its various locations. The Greenville facility has completed TS16949
certification and all other locations are expected to be certified by December
2004. 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 and energy 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 been 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 $0, $5.4 million and $10.5 million
in the nine month period from March 30, 2003 to December 31, 2003 and the years
ended March 29, 2003 and March 30, 2002, respectively, for the Galion and
Valentec Wells operations. See Note 3 to the Consolidated Financial Statements
for more information.
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.
8
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 the nine month period from March 30, 2003 to December 31,
2003 has resulted in the recognition of other income of approximately $2.0
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 12 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 December 31, 2003, the Company employed approximately 2,800 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
9
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 the fiscal year ended March 29, 2003, ending the
DHEC investigation. An undiscounted reserve of $277,000 has been included in
"other long-term liabilities" on the accompanying consolidated balance sheets
for estimated future environmental expenditures related to the Greenville
facility for conditions existing prior to the Company's ownership of the
facility. Such reserve was established at the time the Company acquired the
facility, and the amount was determined by reference to the results of a Phase
II study performed at the Greenville facility. 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.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued 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 twenty-four patents and approval for nine 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, $1.2 million and $899,000
in the nine month period from March 30, 2003 to December 31, 2003 and the years
ended March 29, 2003 and March 30, 2002, 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 Safety Components
Fabric Technologies, Inc. ("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
December 31, 2003.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Ensenada, Mexico (airbag cushions) 97,000 Leased 2005 (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 Company - The 2001 Restructuring" in Item 1, the
Company emerged from bankruptcy on October 11, 2000, and an order entering the
final decree and closing the Chapter 11 cases was signed on November 21, 2003.
The final decree is subject to a "Limited Reservation of Jurisdiction" for a
"Reporting/Fee Dispute" with the U.S. Trustee Office over administrative matters
associated with the cases. The Company has reserved $275,000 for any potential
exposure associated with the Reporting/Fee Dispute. Although no assurances can
be given in this regard, management does not expect that the Company will incur
material expenditures in addition to those reserved with respect to the
Reporting/Fee Dispute.
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 December 31, 2003. The Company adjourned its 2003 Annual Meeting
of Stockholders noticed for Tuesday, October 14, 2003, due to the absence of a
quorum for the transaction of business.
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 holders of the Notes
and 24,200 shares to the financial advisors of the holders of the Notes). 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 (these
warrants expired as of April 10, 2003). 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 nine and twelve month periods ended December 31, 2003 and March 29, 2003,
respectively. The prices quoted for the Over-The-Counter Bulletin Board reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
High Low
---- ---
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
Period from March 30, 2003 to December 31, 2003
First Quarter $ 9.00 $ 5.00
Second Quarter 11.00 7.50
Third Quarter 15.00 10.99
As of February 27, 2004, there were approximately 154 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 have plans to do so in the future. Further, the Amended Congress
Facilities (as defined below) restrict the Company's ability to pay dividends.
See the discussion of the Amended Congress Facilities under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" below.
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 nine month period from March 30, 2003
to December 31, 2003, 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 year ended March 25, 2000 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 nine month period from March 30, 2003 to December
31, 2003 and fiscal years 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
12
result of the implementation of fresh start accounting, certain of the selected
financial data for the period from March 30, 2003 to December 31, 2003 and
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 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
-----------------------------------------------------------------
Period from Fiscal Year Fiscal Year Period from
3/30/03 to Ended Ended 10/11/00 to
12/31/03 3/29/03 3/30/02 3/31/01
(9 Months) (12 Months) (12 Months) (6 Months)
-----------------------------------------------------------------
INCOME STATEMENT DATA (1):
Net sales (2) $ 183,666 $ 244,338 $ 203,323 $ 92,052
Cost of sales, including depreciation 157,568 214,318 176,817 79,337
-----------------------------------------------------------------
Gross profit 26,098 30,020 26,506 12,715
Selling, general and administrative expenses 12,671 14,475 11,595 5,235
Research and development expenses 1,225 1,242 899 335
Compensation expense associated with change of control (3) 2,797 -- -- --
Amortization of intangible assets (4) 106 124 900 448
Restructuring and restatement (5) -- -- -- --
-----------------------------------------------------------------
Operating income 9,299 14,179 13,112 6,697
Other expense (income) (2,268) (3,426) (1,001) (280)
Interest expense, net (6) 1,657 3,596 4,110 2,514
-----------------------------------------------------------------
Income (loss) from continuing operations before
reorganization items 9,910 14,009 10,003 4,463
Reorganization items (7) -- -- -- --
-----------------------------------------------------------------
Income (loss) from continuing operations before income taxes 9,910 14,009 10,003 4,463
Income tax provision (benefit) 3,808 6,120 3,397 1,769
-----------------------------------------------------------------
Income (loss) from continuing operations 6,102 7,889 6,606 2,694
Discontinued operations, net of taxes:
Loss from discontinued operations -- -- -- --
Loss (gain) on disposition of discontinued operations (8) -- 2,023 2,517 1,444
Extraordinary gain, net of taxes (9) -- -- -- --
Cumulative effect of change in accounting method (10) -- (14,651) -- --
-----------------------------------------------------------------
Net (loss) income $ 6,102 $ (8,785) $ 4,089 $ 1,250
=================================================================
PER SHARE DATA, BASIC (11):
Income from continuing operations $ 1.23 $ 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 $ 1.23 $ (1.77) $ 0.82 $ 0.25
=================================================================
PER SHARE DATA, DILUTED (11):
Income from continuing operations $ 1.19 $ 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 $ 1.19 $ (1.77) $ 0.82 $ 0.25
=================================================================
Weighted average number of shares outstanding, basic 4,973 4,960 4,960 4,960
=================================================================
Weighted average number of shares outstanding, diluted 5,119 4,960 4,960 4,960
=================================================================
BALANCE SHEET DATA: Reorganized Company
-----------------------------------------------------------------
12/31/03 3/29/03 3/30/02 3/31/01
-----------------------------------------------------------------
Working capital (12) (13) $ 26,653 $ 8,016 $ 3,711 $ 27,079
Total assets 123,326 134,064 125,271 130,683
Senior subordinated notes -- -- -- --
Long term debt, net of current portion (13) 11,817 7,363 12,182 43,541
Stockholders' equity (deficit) 64,029 51,913 55,838 51,943
In thousands, except per share data and footnotes Predecessor Company
-----------------------------
Period from Fiscal Year
3/26/00 to Ended
10/10/00 3/25/00
(6 Months) (12 Months)
-----------------------------
INCOME STATEMENT DATA (1):
Net sales (2) $ 109,139 $ 194,667
Cost of sales, including depreciation 93,307 168,249
-----------------------------
Gross profit 15,832 26,418
Selling, general and administrative expenses 5,941 13,443
Research and development expenses 353 665
Compensation expense associated with change of control (3) -- --
Amortization of intangible assets (4) 675 1,486
Restructuring and restatement (5) -- 3,969
-----------------------------
Operating income 8,863 6,855
Other expense (income) 878 1,729
Interest expense, net (6) 3,833 13,975
-----------------------------
Income (loss) from continuing operations before
reorganization items 4,152 (8,849)
Reorganization items (7) 41,740 --
-----------------------------
Income (loss) from continuing operations before income taxes (37,588) (8,849)
Income tax provision (benefit) (17,511) 6,154
-----------------------------
Income (loss) from continuing operations (20,077) (15,003)
Discontinued operations, net of taxes:
Loss from discontinued operations 1,440 20,142
Loss (gain) on disposition of discontinued operations (8) (214) --
Extraordinary gain, net of taxes (9) 29,370 --
Cumulative effect of change in accounting method (10) -- --
-----------------------------
Net (loss) income $ 8,067 $ (35,145)
=============================
PER SHARE DATA, BASIC (11):
Income from continuing operations
Loss from discontinued operations
Cumulative effect of change in accounting method
Net (loss) income per common share
PER SHARE DATA, DILUTED (11):
Income from continuing operations
Loss from discontinued operations
Cumulative effect of change in accounting method
Net (loss) income per common share
Weighted average number of shares outstanding, basic
Weighted average number of shares outstanding, diluted
Predecessor
BALANCE SHEET DATA: Company
-----------
3/25/00
-----------
Working capital (12) (13) $(103,105)
Total assets 168,695
Senior subordinated notes 90,000
Long term debt, net of current portion (13) 15,145
Stockholders' equity (deficit) (14,440)
- ----------
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) During the nine months ended December 31, 2003, Zapata Corporation
acquired approximately 82.6% of the outstanding shares of the Company's
common stock as of February 27, 2004 (giving effect to option exercises
since the Change of Control), resulting in the Change of Control described
above in "The Company - Change of Control" in Item 1. The Change of
Control triggered certain provisions of the Company's Stock Option Plan,
including immediate vesting of all options and an automatic change in the
exercise price of a portion of the options. This change in exercise price
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. Additionally, 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, payable following the Change of Control, was $1.4
million.
(4) 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 for the fiscal year ended March 30, 2002 and
the period from October 11, 2000 to March 31, 2001 was approximately
$791,000 and $395,000, respectively.
(5) During the fiscal year ended March 25, 2000, the Company incurred
approximately $4.0 million of costs associated with the investigation and
restatement of the Company's financial statements for prior years, and the
restructuring of the Company's balance sheet.
(6) 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.
(7) 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.
(8) On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". Net Sales of metal
and defense related products were approximately $0, $5.4 million and $10.5
million in the period from March 30, 2003 to December 31, 2003 and the
years ended March 29, 2003 and March 30, 2002, respectively, for the
Galion and Valentec Wells.
(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 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 was principally due to the
classification of the Congress Facility (as defined below) and/or a
subordinated secured note, each due October 2003, 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 refinanced the Congress Facility and repaid the
subordinated secured note prior to their maturity in October 2003. See
Note 5 to the Consolidated Financial Statements.
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 SEC.
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
understands 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.
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. The Company's subsidiary in Mexico prepares its financial statements
using the United States dollar as the functional currency. Since the Mexico
subsidiary does not have external sales and does not own significant amounts of
inventory or fixed assets, the Company has determined that the United States
dollar is the appropriate functional currency. Accordingly, 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 the nine month period from March 30, 2003 to
December 31, 2003 and the year ended March 29, 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 $2.0 million and $3.5 million, respectively. In
prior years, the
15
relationship of other currencies to the U.S. dollar has not had a material
effect on the Company's Consolidated Financial Statements. 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.
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Management estimates the
Company's tax assets and liabilities on a periodic basis and adjusts these
balances on a timely basis as appropriate. Management believes that it has
adequately provided for its future tax consequences based upon current facts and
circumstances and current tax law. However, should management's tax positions be
challenged and not prevail, different outcomes could result and have a
significant impact on the amounts reported in the Consolidated Statement of
Operations.
Discontinued Operations. On December 23, 2002, the Company completed the
disposal of all operations that it had classified as "discontinued operations."
As discussed in Note 3 to the Consolidated Financial Statements, the Company
reported the metal and defense businesses as discontinued operations in its
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 years ended March 29, 2003 and March 30, 2002.
Accordingly, the businesses' net losses for the years ended March 29, 2003 and
March 30, 2002, which were incurred subsequent to the measurement date, were
applied against the accrued losses and were not 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 Statement of Financial Accounting Standards ("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 performed
upon its emergence from Chapter 11 in October 2000 ("excess reorganization
value"), and goodwill, as of March 31, 2002. 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.
Outlook
As the automotive airbag industry has evolved, module integrators have
outsourced varying portions of non-proprietary components, such as cushions, to
companies such as the Company 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. The Company also believes that a
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company. Like the automotive supply industry generally, the Company
continues to experience significant competitive pressure. For example, the
Company supplies airbag cushions and/or airbag fabric to its three most
significant customers based upon releases from formal purchase orders, which are
subject to periodic negotiation with respect to price and quantity. The Company
expects that it will continue to experience competitive pricing pressures and
although it believes that it has good working relationships with its customers
due to its manufacturing capabilities, quality products and service, it cannot
give assurances that purchases by its module integrator customers will continue
at their current levels.
16
Results of Operations
The following table summarizes operating results of the Company for the
nine month period from March 30, 2003 to December 31, 2003 and the years ended
March 29, 2003 and March 30, 2002 (in thousands):
-----------------------------------------------------------------
Period from Period from
3/30/03 to 3/31/02 to Year Ended Year Ended
12/31/03 12/28/02 3/29/03 3/30/02
(9 Months) (9 Months) (12 Months) (12 Months)
-----------------------------------------------------------------
Net sales $ 183,666 $ 180,863 $ 244,338 $ 203,323
Gross profit 26,098 21,369 30,020 26,506
Income from operations 9,299 9,484 14,179 13,112
Other income, net (2,268) (2,857) (3,426) (1,001)
Interest expense, net 1,657 2,757 3,596 4,110
Income tax provision 3,808 4,456 6,120 3,397
Loss on discontinued operations, net of taxes -- 1,363 2,023 2,517
Cumulative effect of change in method of accounting -- (14,651) (14,651) --
Net income (loss) 6,102 (10,886) (8,785) 4,089
Following the Change of Control, the Company changed its fiscal year to a
calendar year end to coincide with Zapata's fiscal year end. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 consists of nine months of operations. The years ended
March 29, 2003 and March 30, 2002 each consisted of twelve months of operations.
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
---------------------------------------------------------------
Period from Period from
3/30/03 to 3/31/02 to Year Ended Year Ended
12/31/03 12/28/02 3/29/03 3/30/02
(9 Months) (9 Months) (12 Months) (12 Months)
---------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 14.2 11.8 12.3 13.0
Income from operations 5.1 5.2 5.8 6.4
Interest expense, net 0.9 1.5 1.5 2.0
Income tax provision 2.1 2.5 2.5 1.7
Net income (loss) 3.3 (6.0) (3.6) 2.0
Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 28,
2002
Net Sales. Net sales increased $2.8 million, or 1.5%, to $183.7 million
for the nine months ended December 31, 2003 compared to the nine months ended
December 28, 2002. North American operations' net sales decreased $8.1 million
or 8.1% compared to the prior period, with the decrease principally due to
decreased demand in the North American automotive market. Net sales for European
operations increased $10.9 million or 13.5% compared to the prior period. The
increase in European net sales is due principally to the effect of changes in
foreign currency exchange rates that increased sales as expressed in U.S.
dollars by approximately $11.9 million over the amount that would have been
reported based on exchange rates in effect in the nine months ended December 28,
2002. The favorable effect of exchange rates was offset by a reduction in volume
of approximately $1.0 million due to decreased demand in the European automotive
market.
Gross Profit. Gross profit increased $4.7 million, or 22.1%, to $26.1
million for the nine months ended December 31, 2003 compared to the nine months
ended December 31, 2002. The European operations experienced an improvement of
$5.2 million or 146.1% due to improvements in operating efficiencies and cost
savings of approximately $4.2 million and the favorable effect of exchange rates
of approximately $1 million. With respect to the
17
European operations, the prior period's results reflect losses at the Woodville
operations 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. Gross profit for North American
operations decreased approximately $403,000 or 2.2% due, in part, to the sales
decline. Gross profit as a percentage of net sales increased to 14.2% for the
nine months ended December 31, 2003 from 11.8% for the nine months ended
December 28, 2002.
Income from Operations. Income from operations decreased $185,000, or
2.0%, to $9.3 million for the nine months ended December 31, 2003 compared to
the nine months ended December 28, 2002. The decrease is due to a higher selling
and administrative costs including non-recurring costs of approximately $2.8
million associated with a $1.4 million stock compensation charge and $1.4
million in executive bonuses resulting from the Change of Control, along with
other increases in general and administrative expenses. Income from operations
as a percentage of net sales decreased to 5.1% for the nine months ended
December 31, 2003 from 5.2% in the prior period. The decrease as a percentage of
net sales was due to the items discussed above.
Other Income, net. The Company recognized other income, net of $2.3
million for the nine months ended December 31, 2003, as compared to other
income, net of $2.9 million for the nine months ended December 28, 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 $2.0 million for the nine months ended December 31, 2003, compared to net
foreign transaction gains of $800,000 during the comparable period in the prior
period. The foreign transaction gains resulted from favorable changes in foreign
currency exchange rates of approximately 15.3% in the December 31, 2003 exchange
rates as compared to those at December 28, 2002.
Interest Expense, net. Interest expense decreased $1.1 million, or 39.9%,
to $1.7 million for the nine months ended December 31, 2003 compared to the nine
months ended December 28, 2002. The decrease is attributable both to a decrease
in average interest rates from 5.8% to 5.4% and a decrease in average
outstanding debt from $44.6 million to $26.8 million for the current period as
compared to the prior period.
Provision for Income Taxes. The provision for income taxes decreased
$648,000 for the nine months ended December 31, 2003 compared to the nine months
ended December 28, 2002 due primarily to the following reasons: (i) the
recording in the prior period of a $350,000 provision for income taxes for the
Company's German subsidiary resulting from an examination performed by the
German taxing authorities covering years 1997 through 1999 and (ii) the
reduction of $200,000 in income taxes in Mexico from lower pre-tax income for
the nine months ended December 31, 2003 as compared to the prior period. The
Company's effective tax rates for the nine months ended December 31, 2003
compared to the nine months ended December 28, 2002 were 38.4% and 43.7%,
respectively. The effective tax rate for the nine months ended December 28, 2002
is higher than the statutory tax rate due to the tax examination related reserve
noted above and foreign earnings taxed at different rates.
Discontinued Operations. No impacts from discontinued operations were
recorded during the nine month period ended December 31, 2003 as the Company had
sold all remaining discontinued operations in the nine months ended December 28,
2002. Loss on disposition of discontinued operations was $1.4 million for the
nine months ended December 28, 2002. 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.
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 in the nine months ended December 28, 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 Income. The Company's net income was $6.1 million for the nine months
ended December 31, 2003, compared to net loss of $10.9 million for the nine
months ended December 28, 2002. The current period earnings were a result of the
items discussed above. The net loss in the prior period was primarily a result
of the write-off of $14.7
18
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.
Twelve Months Ended March 29, 2003 Compared to Twelve Months 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 operations 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 during the year ended March
29, 2003. 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 million 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 had then 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 during the
year ended March 29, 2003 the Company 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 were 43.7%
19
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.
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.
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.
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 anticipates that it will spend approximately $8.3
million for capital projects in 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
On October 8, 2003, the Company executed an amendment to its credit
facility (the "Congress 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 (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 December 31, 2003 was $4.6 million. The Congress Revolver also
includes a $5.0 million letter of credit facility, under which the Company had
$497,000 outstanding pursuant to letters of credit at December 31, 2003.
In addition, the amendment provided for a term facility (the "Congress
Term A loan") under which $4.2 million was borrowed at December 31, 2003. The
Congress Term A loan is payable in equal monthly installments of approximately
$72,000, with the unpaid principal amount due on October 8, 2006. Additional
amounts are not available for borrowing under the Congress Term A loan. 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 loan"
and, collectively with the Congress Revolver and the Congress Term A loan, the
"Amended Congress Facilities") which is undrawn and is currently fully
available. At December 31, 2003, the Company's availability for additional
borrowings (based on the
20
maximum allowable limit) under the Congress Revolver and the Congress Term B
loan was approximately $34.9 million.
The interest rate on the Congress Revolver and Congress Term A loan is
variable, depending on the amount of the Company's Excess Availability (as
defined in the Amended Congress Facilities) at any particular time and the ratio
of the Company's EBITDA, less certain capital expenditures made by the Company,
to certain fixed charges of the Company (the "Fixed Charge Coverage Ratio". The
Company may make borrowings based on the prime rate as described in the Amended
Congress Facilities (the "Prime Rate") or the LIBOR rate as described in the
Amended Congress Facilities, in each case with an applicable margin applied to
the rate. The Congress Term B loan bears interest at the Prime Rate plus 3%. At
December 31, 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 unused line
fee of 0.25% on the unutilized portion of the Congress Revolver and a monthly
fee equal to 1.75% of the amount of any outstanding letters of credit.
Under the Congress Revolver and Congress Term A loan, the Company is
subject to a covenant that requires it to maintain a certain tangible net worth.
To the extent that the Company has borrowings outstanding under the Congress
Term B loan, it is subject to additional financial covenants that require the
Company: (i) to maintain EBITDA of no less than certain specified amounts, (ii)
to maintain a Fixed Charge Coverage Ratio of no less than a specified amount,
(iii) to maintain a ratio of certain indebtedness to EBITDA not in excess of a
specified amount, and (iv) not to make capital expenditures in excess of
specified amounts. In addition, the Company would be required to repay the
Congress Term B loan to the extent of certain excess cash flow.
The Amended 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 December 31, 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
Amended Congress Facilities.
The Company's subordinated secured note facility with KeyBank National
Association and Fleet Bank was paid in full on October 8, 2003 with proceeds
from the Amended Congress Facilities.
Other Long-term Obligations
On March 28, 2002, the Company's Czech Republic subsidiary 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 2.31% at December 31, 2003), requires monthly payments of
approximately $89,000 and is secured by the real estate assets of the Company's
subsidiary in the Czech Republic. The Company has guaranteed the repayment of up
to $500,000 of the obligations of this subsidiary with respect to this facility.
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. On
October 31, 2003, the mortgage was paid in full.
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 (LIBOR was 2.56% at December 31, 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 December 31, 2003.
Payments due by Period
---------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Contractual obligations Total 1 year years years 5 years
---------------------------------------------------------
Long term debt $15,003 $ 3,741 $10,362 $ 900 --
Capital lease obligations 1,028 473 538 17 --
Operating leases 3,563 1,352 1,600 608 3
Purchase obligations 4,845 4,845 -- -- --
------------------------------------------------------
Total $24,439 $10,411 $12,500 $1,525 $ 3
======================================================
Additionally, the Company does not have any material commitments for
capital expenditures as of December 31, 2003.
Cash Flows
During the nine month period from March 30, 2003 to December 31, 2003, net
cash provided by operating activities from continuing operations was $21.9
million, arising from income from continuing operations of $6.1 million,
increases for non-cash items of $9.2 million (principally depreciation and
changes associated with the Change of Control) and a net decrease in operating
assets and a net increase in operating liabilities of $6.6 million. These
changes in operating assets and liabilities can primarily be attributed to
improved collections on accounts receivable principally in the European
operations representing a net increase in cash of $6.8 million and a decrease in
payments for income taxes and interest and offset by payments to trade
creditors. Net cash used in continuing operations for investing activities was
$2.6 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 the nine month period from
March 30, 2003 to December 31, 2003 was $23.2 million due principally to net
repayments on the KeyBank subordinated secured term note and the Congress
Facility of $19.7 million combined with payments on various other debt and
long-term obligations totaling $4.0 million. The above activities, in
conjunction with the favorable effects of foreign exchange rates of $669,000,
resulted in a net decrease in cash and cash equivalents of $3.2 million in the
nine month period from March 30, 2003 to December 31, 2003.
Off-Balance Sheet Arrangements
As of December 31, 2003, the Company does not have any off-balance sheet
arrangements that are material to its financial condition, results of operations
or cash flows as defined by Item 303(a)(4) of Regulation S-K promulgated by the
SEC. The Company enters into derivative foreign contracts as noted and included
below in "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A
of this report.
New Accounting Pronouncements
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.
22
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. 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. The
Company estimated its fair value using the following methodologies: a discounted
cash flows approach, relative market multiples for comparable businesses and a
market approach based on the Company's total market capitalization. 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
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 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 December 31, 2003, the Company and various consolidated
subsidiaries of the Company are borrowers under the Amended Congress Facilities
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 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 were required to apply the provision of Interpretation
No. 46 immediately. Public entities with a variable interest in a variable
interest entity were required to apply the provisions of Interpretation No. 46
no later than the first interim or annual reporting period beginning after June
15, 2003. The adoption of this interpretation did not have any effect on the
Company's financial position or results of operations.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Amended Congress Facilities
and certain other facilities are outstanding, the Company has market risk
relating to such amounts because the interest rates under the Amended Congress
Facilities and those certain other facilities are variable. As of December 31,
2003, the Company's interest rate, inclusive of credit fees under the Amended
Congress Facilities approximated 4.00%. Due to the variability of the interest
rates, a hypothetical increase or decrease in the interest rates of 100 basis
points relating to the Amended Congress Facilities may result in an addition to
or reduction in interest expense of approximately $200,000 on an annual basis.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks. 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 the period from March 30,
2003 to December 31, 2003 has resulted in the recognition of other income of
approximately $2.0 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.
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 periodically enters into forward contracts to
buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts are designated as hedges at
inception and are monitored for effectiveness on a routine basis. At December
31, 2003, the Company had outstanding forward exchange contracts that mature
between January and March 2004 to purchase Mexican pesos with an aggregate
notional amount of approximately $2.7 million. The fair values of these
contracts at December 31, 2003 totaled approximately $52,000, 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 $47,000 for the nine
month period from March 30, 2003 to December 31, 2003 and the unrealized loss on
these forward contracts of approximately $52,000 was included in "accumulated
other comprehensive income" at December 31, 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 periodically enters into forward contracts to
buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts are designated as hedges at inception and are monitored for
effectiveness on a routine basis. At December 31, 2003, the Company had
outstanding forward exchange contracts that mature between January and March
2004 to purchase Czech Korunas with an aggregate notional amount of
approximately $2.1 million. The fair values of these contracts at December 31,
2003 totaled approximately $100,000, 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 $47,000 for the nine month period from March
30, 2003 to December 31, 2003 and the unrealized loss on these forward contracts
of approximately $89,000 was included in "accumulated other comprehensive
income" at December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item appears in Item 15(a)(1) and (2) of this Report.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As discussed above and previously disclosed in accordance with the
requirements of Item 304 of Regulation S-K promulgated by the SEC, the Company's
Audit Committee and Board of Directors notified Deloitte & Touche LLP that it
would not be retained to perform the audit of the financial statements of the
Company for the fiscal year ending March 27, 2004 or any transition period and
determined to engage PricewaterhouseCoopers LLP as independent accountants to
audit the Company's financial statements for the fiscal period ended December
31, 2003, the Company's new fiscal year end, and the Board of Directors of the
Company ratified and approved that decision.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,
as amended, the Company's management, under the supervision and with the
participation of its principal executive and principal financial officers
(Messrs. Corey and Menezes, respectively), conducted an evaluation as of the end
of the period covered by this report, of the effectiveness of the Company's
disclosure controls and procedures as defined in Rule 13a-15(e) under the
Exchange Act. Based on that evaluation, each of Messrs. Corey and Menezes
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation required by
Rule 13a-15(d) of the Exchange Act that occurred during the Company's last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The Board of Directors is divided into three classes, one of which
currently has three directors and two of which currently have two directors. The
terms of two of the three Class II Directors, Ben E. Waide III and Carroll R.
Wetzel, Jr., were to expire at the Company's 2003 Annual Meeting of
Stockholders. The Company adjourned its 2003 Annual Meeting of Stockholders
previously noticed for Tuesday, October 14, 2003, due to the absence of a quorum
for the transaction of business. Prior to that meeting, the Company received a
letter from Zapata that its shares of the Company's common stock would not be
present at the meeting. In light of Zapata's letter and other communications
from Zapata subsequently received by the Company, the Company has not yet set a
new date for this meeting. Mr. Waide and Mr. Wetzel, together with the third
Class II Director, Leonard DiSalvo, who joined the Board on January 26, 2004,
will continue to hold office until their successors have been duly elected and
qualified or until their earlier resignation or removal.
The terms of the Class III Directors, John C. Corey and Avram A. Glazer,
are to expire at the Company's 2004 Annual Meeting of Stockholders, and the
terms of the Class I Directors, Andy Goldfarb and W. Allan Hopkins, are to
expire at the Company's 2005 Annual Meeting of Stockholders.
Each of Messrs. Corey, Goldfarb, Hopkins, Waide and Wetzel have been
serving as a director of the Company since the Emergence Date pursuant to the
Plan. As described in "The Company - Change of Control" in Item 1, Mr. DiSalvo
and Mr. Glazer, designees of Zapata, were appointed by the Board pursuant to the
Company's bylaws as of January 26, 2004.
25
The names, ages, and principal occupations of the Class I, Class II and
Class III Directors are provided below.
Class I Directors
ANDY GOLDFARB. Age 56. Mr. Goldfarb has served as a Director of the
Company since the Emergence Date. From 1985 until March 2000, Mr. Goldfarb
served as Chairman, President and Chief Executive Officer of HCC Industries, the
world's largest independent hermetic sealing operation. From 1976 to 1985, Mr.
Goldfarb served HCC Industries in various operational and financial positions,
including Chief Operating Officer.
W. ALLAN HOPKINS. Age 65. Mr. Hopkins has served as a Director of the
Company since the Emergence Date. From 1998 until August 2000, Mr. Hopkins
served as President and Chief Executive Officer of Atlas Steels Inc., a producer
and seller of stainless and specialty steel products. From 1993 to 1996, Mr.
Hopkins served as President and Chief Executive Officer of Algoma Steel Inc., a
manufacturer and marketer of steel products. From 1984 to 1992, Mr. Hopkins
served in various capacities including Senior Vice President, Vice President of
Sales and Vice President and General Manager of Stelpipe, Inc., a subsidiary of
Stelco, Inc., Canada's largest steel producer.
Class II Directors
LEONARD DISALVO. Age 45. Mr. DiSalvo has served as a Director of the
Company since January 2004. Mr. DiSalvo joined Zapata in September 1998 and
currently serves as its Vice President - Finance and Chief Financial Officer.
Mr. DiSalvo also currently serves as Vice President - Finance and Chief
Financial Officer of Zap.Com, Corporation ("Zap.Com"), a subsidiary of Zapata
(which until December 2000 was an internet advertising and e-commerce network
company, and is currently a public shell company), a position he has held since
April 1999. Mr. DiSalvo has over 20 years of experience in the areas of finance
and accounting. Mr. DiSalvo served as a finance manager for Constellation
Brands, Inc., a national manufacturer and distributor of wine, spirits and beer,
from 1996 until September 1998. Prior to that position, Mr. DiSalvo held various
management positions in the areas of finance and accounting in the Contact Lens
Division of Bausch & Lomb Incorporated. Mr. DiSalvo is a Certified Public
Accountant.
BEN E. WAIDE III. Age 65. Mr. Waide has served as a Director of the
Company since the Emergence Date. Since 1998, Mr. Waide has served as an
Executive Consultant to E.I. du Pont de Nemours and Company - DuPont Safety
Resources, a global workplace consulting firm. From 1995 to 1998, Mr. Waide was
Chairman and Chief Executive Officer of Atlantic Aviation Corporation, an
aircraft maintenance management services company. Mr. Waide served as General
Manager of the Films Division of E.I. du Pont de Nemours and Company from 1990
to 1995.
CARROLL R. WETZEL, JR. Age 60. Mr. Wetzel has served as Chairman of the
Board of the Company since the Emergence Date. From 1988 to 1996, Mr. Wetzel was
a Managing Director with the Mergers and Acquisition Group of Chemical
Bank/Chase Manhattan. Prior to that, from 1981 to 1988, he was a Managing
Director in Smith Barney's Mergers and Acquisitions Group. From 1976 to 1981, he
worked as an investment banker with Dillon, Read & Co. Inc. Mr. Wetzel also
serves on the Board of Directors of Laidlaw International, Inc., a publicly
traded company.
Class III Directors
JOHN C. COREY. Age 56. Mr. Corey has served as President, Chief Executive
Officer and Director of the Company since the Emergence Date. Prior to that, he
had served as President, Chief Operating Officer and Director of the Company
since March 1999. Mr. Corey served as President of Stanley Mechanics Tools,
Inc., a division of The Stanley Works, a company engaged in the business of
manufacturing and distributing mechanics hand tools, from September 1996 to
March 1999, where he was responsible for worldwide operations. Prior to that,
Mr. Corey served as an independent consultant while attending to personal
business from December 1995 to August 1996, and as President of Allied Signal
North American Aftermarket, a division of Allied Signal, Inc., a company engaged
in the business of automotive components, from September 1994 to November 1995.
From 1984 to 1994, Mr. Corey served in various positions for Moog Automotive,
Inc., a company engaged in the business of manufacturing and distributing
automotive steering and suspension parts, most recently as the President of the
Steering and Suspension Division. Mr. Corey has
26
over 15 years of experience in management and manufacturing in the automotive
industry. Mr. Corey is also a director of Stoneridge, Inc., a manufacturer of
electronic parts and accessories for motor vehicles.
AVRAM A. GLAZER. Age 43. Mr. Glazer has served as a Director of the
Company since January 2004. Mr. Glazer has been President and Chief Executive
Officer of Zapata since March 1995, Chairman of the Board of Zapata since March
2002 and a director of Zapata since July 1993. He also serves as a director and
as the President and Chief Executive Officer of Zap.Com. Mr. Glazer is also
Chairman of the Board and a director of Omega Protein Corporation, a marine
protein company and majority-owned subsidiary of Zapata.
Audit Committee Financial Expert
The Company's Board of Directors has determined that the Company does not
have an audit committee financial expert serving on its audit committee. Since
the Company's stock is not currently traded on a securities exchange, but rather
on the Over-The-Counter Bulletin Board, the Company is not required to have an
audit committee financial expert. The Board of Directors has determined that it
is not necessary to appoint an audit committee financial expert at this time
because the Board believes that the members of the audit committee possess
sufficient experience and expertise with respect to all relevant audit and
financial matters.
Executive Officers
The following table sets forth the names, ages and all positions and
offices with the Company held by the Company's present executive officers.
Name Age Positions and Offices Presently Held
- --------------------------------------------------------------------------------
John C. Corey 56 Director, President and Chief Executive Officer
Brian P. Menezes 51 Vice President and Chief Financial Officer
Stephen B. Duerk 62 Vice President; President, North American Automotive
Vick Crowley 37 Treasurer
Executive officers are appointed by the Board and serve at the discretion
of the Board. Following is information with respect to the Company's executive
officers who are not also directors of the Company:
BRIAN P. MENEZES. Mr. Menezes has served as Vice President and Chief
Financial Officer of the Company since September 1999. From October 1997 to
September 1999, Mr. Menezes served as Vice President and General Manager of
Odyssey Knowledge Solutions, Inc., a Canadian software and systems development
company focused on web-based e-commerce and enterprise solutions. From January
1993 to June 1997, Mr. Menezes served as Vice President of Operations for Cooper
Industries (Canada) Inc. Automotive Products ("Cooper"), the largest supplier in
the Canadian automotive replacement parts market. From January 1993 to June
1995, Mr. Menezes also served as the Vice President of Finance of Cooper.
STEPHEN B. DUERK. Mr. Duerk has served as President of the Company's North
American Automotive Group since April 1998 and as President of SCFTI, a
wholly-owned subsidiary of the Company, since January 1998. From July 1997 to
January 1998, Mr. Duerk served the Company as Co-Managing Director of SCFTI.
Prior to the Company's acquisition of the Air Restraint and Technical Fabrics
Division of JPS Automotive L.P. in July 1997, Mr. Duerk had served JPS
Automotive, L.P., a tier one supplier to the automotive industry of carpet and
knit fabrics for headliner and body cloth, as Vice President of Air Restraint
Fabrics in the Greenville, South Carolina facility, from October 1988. From 1965
to October 1988, Mr. Duerk served in various positions for JP Stevens & Co.,
Inc., a company engaged in the business of manufacturing industrial textiles, of
which JPS Automotive, L.P. was a part until its restructuring in May 1998, most
recently as the Vice President of the Industrial Synthetic Group.
VICK CROWLEY. Mr. Crowley has served as Treasurer of the Company since
August 2000. Prior to that, he had served as Assistant Treasurer with HomeGold
Financial, Inc., of Greenville, South Carolina, a financial services firm, since
1995.
27
Code of Ethics and Business Conduct
The Company has adopted a Code of Ethics and Business Conduct that applies
to all of the Company's directors and key employees, including the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions (collectively, the
"Selected Officers"). The Code of Business Conduct and Ethics has been filed as
Exhibit 14 to this Transition Report on Form 10-K. The Company intends to post
any amendments to or waivers from a provision of the Code of Ethics and Business
Conduct applicable to any Selected Officer on its website at
http://www.safetycomponents.com, or to file a Form 8-K to disclose any such
amendments or waivers.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's executive officers, directors and 10% stockholders are
required under the Securities Exchange Act of 1934, as amended, and regulations
thereunder, to file reports of ownership and changes in ownership with the SEC.
Copies of those reports must also be furnished to the Company. To the Company's
knowledge, based on the Company's review of the copies of such reports furnished
to it during or with respect to the period from March 30, 2003 to December 31,
2003, all of our directors and officers subject to the reporting requirements
and each beneficial owner of more than 10% of our common stock satisfied all
applicable filing requirements, except that Vick Crowley filed an amended Form 4
on March 19, 2004 reporting the grant of options to purchase an additional 100
shares of the Company's common stock that were inadvertently omitted from the
Form 4 that was previously filed with the SEC on July 23, 2003. To the Company's
knowledge, no Form 4 or Form 5 was filed by Putnam, LLC and related parties or
SunAmerica Investments and related parties, each formerly a beneficial owner of
more than 10% of the Company's common stock, in connection with sales of shares
and their status as 10% stockholders of the Company, although each has indicated
that such filings are not required.
28
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Chief
Executive Officer of the Company and the other most highly compensated executive
officers of the Company for the nine months ended December 31, 2003 (noted as
"Dec 2003" below) (each person appearing in the table is referred to as a "Named
Executive"). As a result of the Change of Control, a change of control occurred
for purposes of all contractual change of control provisions discussed herein.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
Underlying All Other
Name and Fiscal Salary Bonus Options/SARs Compensation
Principal Position Year ($) ($) (#)(1) ($)
- --------------------------------------------------------------------------------------------------------------------------
John C. Corey Dec 2003(2) $239,444 $256,890 0 $995,888(3)(4)
President and Chief 2003 325,000 265,425 46,800 41,978(5)
Executive Officer 2002 316,040 231,675 173,200 62,013(6)
2001 306,827 318,039 0 35,105(7)
Brian P. Menezes Dec 2003(2) $156,375 $128,015 0 $408,340(3)(8)
Vice President and Chief 2003 200,450 129,920 27,000 28,125(9)
Financial Officer 2002 191,824 123,985 75,000 32,969(10)
2001 185,380 188,903 0 17,085(11)
Stephen B. Duerk Dec 2003(2) $144,847 $ 82,724 0 $ 14,002(12)
Vice President; 2003 187,500 102,988 21,500 20,036(13)
President North American 2002 182,000 80,223 71,000 12,495(14)
Automotive Group 2001 177,917 63,700 0 15,777(15)
Vick Crowley Dec 2003(2) $ 82,688 $ 41,705 0 $ 2,848(17)
Treasurer (16) 2003 105,000 45,723 2,000 12,667(18)
2002 100,471 39,250 5,800 5,674(19)
2001 67,418 30,200 0 2,813(20)
- ----------
(1) Grants reflected for 2002 and 2003 are options under the Company's 2001
Stock Option Plan (the "Option Plan"). As a result of the Change of
Control, all such options became immediately vested.
(2) Following the Change of Control, the Company changed its fiscal year to a
calendar year end to coincide with Zapata's fiscal year end. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal
year ending on the Saturday closest to March 31. As such, the period from
March 30, 2003 to December 31, 2003 consists of nine months of operations.
The years ended March 29, 2003, March 30, 2002 and March 31, 2001 each
consisted of twelve months of operations.
(3) Includes $961,400 and $393,300, respectively, paid to each of Mr. Corey
and Mr. Menezes in accordance with the terms of the Company's employment
agreements with them, upon the occurrence of the Change of Control. See
"Employment Agreements - Corey Agreement" and "Employment Agreements -
Menezes Agreement" below.
(4) Includes $14,056 of life insurance premiums, a $10,800 automobile
allowance, $968 of group life insurance premiums, $6,029 of supplemental
medical reimbursements, and $2,635 of membership dues.
29
(5) Amount reflects $14,056 of life insurance premiums, a $14,400 automobile
allowance, a $5,161 matching contribution under the Company's 401(k) plan,
$690 of group life insurance premiums, $4,158 of supplemental medical
reimbursements, and $3,513 of membership dues.
(6) Amount reflects $12,476 of life insurance premiums, a $14,400 automobile
allowance, a $5,312 matching contribution under the Company's 401(k) plan,
$570 of long-term disability insurance premiums, $690 of group life
insurance premiums, $9,516 of supplemental medical reimbursements, and
$19,049 of membership dues.
(7) Amount reflects $11,632 of life insurance premiums, a $14,400 automobile
allowance, a $5,250 matching contribution under the Company's 401(k) plan,
$720 of long-term disability insurance premiums, $690 of group life
insurance premiums, and $2,413 of supplemental medical reimbursements.
(8) Includes a $10,800 automobile allowance, $330 of group life insurance
premiums, and $3,910 of supplemental medical reimbursements.
(9) Amount reflects a $14,400 automobile allowance, a $4,706 matching
contribution under the Company's 401(k) plan, $269 of group life insurance
premiums, and $8,750 of supplemental medical reimbursements.
(10) Amount reflects $5,394 of life insurance premiums, a $13,500 automobile
allowance, a $5,312 matching contribution under the Company's 401(k) plan,
$516 of long-term disability insurance premiums, $255 of group life
insurance premiums, and $7,992 of supplemental medical reimbursements.
(11) Amount reflects a $10,800 automobile allowance, a $5,250 matching
contribution under the Company's 401(k) plan, $666 of long-term disability
insurance premiums, $244 of group life insurance premiums, and $125 of
supplemental medical reimbursements.
(12) Amount reflects a $4,500 automobile allowance, a $3,874 matching
contribution under the Company's 401(k) plan, $843 group life insurance
premiums, $2,067 of supplemental medical reimbursements and $2,718 of
membership dues.
(13) Amount reflects a $6,000 automobile allowance, a $5,463 matching
contribution under the Company's 401(k) plan, $791 group life insurance
premiums, $4,679 of supplemental medical reimbursements and $3,103 of
membership dues.
(14) Amount reflects a $6,000 automobile allowance, a $3,760 matching
contribution under the Company's 401(k) plan, $681 of group life insurance
premiums, $1,356 of supplemental medical reimbursements, and $698 of
membership dues.
(15) Amount reflects a $6,000 automobile allowance, $3,876 of club dues, $659
of group insurance premiums, and $5,242 of supplemental medical
reimbursements.
(16) Mr. Crowley joined the Company in August 2000.
(17) Amount reflects a $2,481 matching contribution under the Company's 401(k)
plan, $44 of group life insurance premiums, and $323 of supplemental
medical reimbursements.
(18) Amount reflects a $2,363 matching contribution under the Company's 401(k)
plan, $53 of group life insurance premiums, and $10,251 of supplemental
medical reimbursements.
30
(19) Amount reflects a $3,920 matching contribution under the Company's 401(k)
plan, $199 of long-term disability premiums, $49 of group life insurance
premiums, and $1,506 of supplemental medical reimbursements.
(20) Amount reflects a $1,789 matching contribution under the Company's 401(k)
plan, $155 of long-term disability premiums, $29 of group life insurance
premiums, and $840 of supplemental medical reimbursements.
Option Grants in Last Fiscal Year
There were no options to purchase our common stock granted during the nine
months ended December 31, 2003 to the Named Executives.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information with respect to the Named
Executives concerning exercisable and unexercisable options held as of December
31, 2003. No options were exercised by the Named Executives during the nine
months ended December 31, 2003. The value of unexercised, in-the-money options
at December 31, 2003 is the difference between the exercise price and the fair
market value of the underlying stock on December 31, 2003. All options were
in-the-money as of December 31, 2003, based on the closing sales price of the
Company's common stock at December 31, 2003, of $12.25 per share.
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 2003 December 31, 2003
----------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable ($) Unexercisable ($)
- ---------------- ----------- ------------- --------------- -----------------
John C. Corey 220,000 -- $865,472 $ --
Brian P. Menezes 102,000 -- 412,080 --
Stephen B. Duerk 92,500 -- 590,480 --
Vick Crowley 7,800 -- 61,096 --
Employment Agreements
Corey Agreement
Mr. Corey currently serves as President and Chief Executive Officer
pursuant to an employment agreement with the Company which became effective May
18, 2001 (with subsequent amendments) and replaced all prior agreements with Mr.
Corey. The employment agreement provides for a base salary of $315,000
(increased to $338,000 in fiscal 2004), subject to increases at the discretion
of the Board and the recommendations of the Compensation Committee. In addition
to base salary, the employment agreement provides for an annual incentive bonus
under the Company's Management Incentive Plan or in accordance with a formula or
other bonus plan to be established by the Compensation Committee for each fiscal
year. It also provides, in the event of a change of control (as defined) while
he is still employed with the Company or under certain circumstances following
his termination of employment other than for Cause (as defined) or by reason of
a Constructive Termination (as defined), he will be entitled to a one-time bonus
of $961,400 at the time the Change of Control is consummated, provided it occurs
within ten years following termination of his employment. As a result of the
Change of Control, a change of control occurred for purposes of the employment
agreement and this bonus was paid to Mr. Corey.
Pursuant to the employment agreement, Mr. Corey received, upon execution,
options to purchase 173,200 shares of the Company's common stock under the
Option Plan. Such grant consisted of (i) Class A Options to purchase 110,000
shares at an exercise price equal to fair market value on the date of grant
($8.75 per share), two-thirds of which immediately vested, and the final third
of which vested on October 31, 2003, and (ii) Class B Options to purchase
31
63,200 shares of common stock at an exercise price equal to fair market value on
the date of grant ($8.75 per share), vesting one-third on October 31, 2001, an
additional one-third on October 31, 2002, and the final one-third on October 31,
2003. Because a change of control of the Company had not occurred by April 1,
2002, Mr. Corey received, pursuant to the employment agreement, a grant of Class
C Options to purchase 36,800 additional shares of common stock (together with an
additional grant of Class C Options to purchase another 10,000 shares of common
stock not provided in the employment agreement) vesting over the next three
anniversary dates of such grant. The exercise price for such Class C Options is
the per share price determined to be the fair market value for the shares as of
the date of the grant ($6.71 per share). All such options are subject to
accelerated vesting in certain cases upon a change of control of the Company.
If Mr. Corey's employment is terminated by the Company other than by
reason of death or Disability (as defined) or for Cause or if the employment
agreement is terminated by him by reason of a Constructive Termination, the
Company shall pay Mr. Corey a severance and non-competition payment equal to two
times his base salary at the time of termination, payable in equal monthly
installments over the next succeeding 24 months, plus 18 months of health care
continuation payments; in the event such termination had occurred before October
31, 2001, then the foregoing 24 month period and corresponding dollar amount of
severance and non-competition payment would have been increased by one month for
each calendar month by which such termination preceded November 1, 2001. If Mr.
Corey's employment agreement is terminated by the Company in connection with a
change of control and he is not offered a position with the acquirer with
similar responsibilities or if he is initially offered and accepts the position
with the acquirer, but is terminated without Cause within 12 months after
accepting such position, then, in lieu of any other severance payment under his
employment agreement, the Company shall pay Mr. Corey a severance and
non-competition payment equal to two times his base salary at the time of
termination in 24 equal monthly installments, plus 18 months of health care
continuation payments; in the event such termination had occurred on or before
October 31, 2001, then the foregoing 24 month period and corresponding dollar
amount of severance and non-competition payment would have been increased by one
month for each calendar month by which such termination preceded November 1,
2001. All cash payments and health care continuation payments shall cease in the
event of competitive employment. Such payments shall be mitigated by 50% of
"severance period earnings" in the event of non-competitive employment with
annual compensation up to $100,000 and shall cease altogether in the event of
such annual compensation exceeding $100,000.
Menezes Agreement
Mr. Menezes currently serves as Vice President and Chief Financial Officer
pursuant to an employment agreement with the Company which became effective on
May 18, 2001 (with subsequent amendments) and replaced all prior agreements with
Mr. Menezes. The employment agreement provides for a base salary of $190,000
(increased to $208,500 in fiscal 2004), subject to increases at the discretion
of the Board and the recommendations of the Compensation Committee. In addition
to base salary, the employment agreement provides for an annual incentive bonus
under the Company's Management Incentive Plan or in accordance with a formula or
other bonus plan to be established by the Compensation Committee for each fiscal
year. It also provides that, in the event of a change of control (as defined)
while he is still employed by the Company or under certain circumstances
following his termination of employment other than for Cause (as defined) or by
reason of a Constructive Termination (as defined), he will be entitled to a
one-time bonus of $393,300 at the time the change of control is consummated,
provided it occurs within ten years following termination of his employment. As
a result of the Change of Control, a change of control occurred for purposes of
the employment agreement and this bonus was paid to Mr. Menezes.
Pursuant to the employment agreement, Mr. Menezes received, upon
execution, options to purchase 75,000 shares of the Company's common stock under
the Company's Option Plan. Such grant consisted of (i) Class A Options to
purchase 45,000 shares at an exercise price equal to fair market value on the
date of grant ($8.75 per share), two-thirds of which immediately vested, and the
final third of which vested on October 31, 2003, and (ii) Class B Options to
purchase 30,000 shares of common stock at an exercise price equal to fair market
value on the date of grant ($8.75 per share), vesting one-third on October 31,
2001, an additional one-third on October 31, 2002, and the final one-third on
October 31, 2003.
If Mr. Menezes' employment is terminated by the Company other than by
reason of death or Disability (as defined) or for Cause or if the employment
agreement is terminated by him by reason of a Constructive Termination, the
Company shall pay Mr. Menezes a severance and non-competition payment equal to
one and one half times his
32
base salary at the time of termination, payable in equal monthly installments
over the next 18 months, plus 18 months of health care continuation payments. If
Mr. Menezes' employment agreement is terminated by the Company in connection
with a change of control and he is not offered a position with the acquirer with
similar responsibilities or if he initially is offered and accepts a position
with the acquirer, but is terminated without Cause within 12 months after
accepting such position, then, in lieu of any other severance payment under this
employment agreement, the Company shall pay Mr. Menezes a severance and
non-competition payment equal to one and one half times his base salary at the
time of termination in 18 equal monthly installments, plus 18 months of health
care continuation payments. All cash payments and health care continuation
payments shall cease in the event of competitive employment. Such payments shall
be mitigated by 50% of "severance period earnings" in the event of
non-competitive employment with annual compensation up to $50,000 and shall
cease altogether in the event of such annual compensation exceeding $50,000.
Duerk Agreement
Mr. Duerk currently serves as Vice President of the Company and President
of the North American Automotive Group pursuant to an employment agreement which
became effective May 18, 2001 (with subsequent amendment) and replaced all prior
agreements with Mr. Duerk. The employment agreement provided for an original
base salary of $182,000 (increased to $193,130 in fiscal 2004), subject to
increases at the discretion of the Board and the recommendations of the
Compensation Committee. In addition to base salary, the employment agreement
provides for an annual incentive bonus under the Company's Management Incentive
Plan or in accordance with a formula or other bonus plan to be established by
the Compensation Committee in advance of each fiscal year.
If Mr. Duerk's employment is terminated by the Company other than by
reason of death or Disability (as defined) or for Cause (as defined) or if the
employment agreement is terminated by him by reason of a Constructive
Termination (as defined), the Company will pay Mr. Duerk a severance and
non-competition payment equal to one and one half times his base salary at the
time of termination, payable in equal monthly installments over the next
succeeding 18 months, plus 18 months of health care continuation payments. If
Mr. Duerk's employment agreement is terminated by the Company in connection with
a change of control (as defined) and he is not offered a position with the
acquirer with similar responsibilities or if he initially is offered and accepts
a position with the acquirer but is terminated without Cause within 12 months
after accepting such position, then, in lieu of any other severance payment
under his employment agreement, the Company shall pay Mr. Duerk a severance and
non-competition payment equal to one and one half times his base salary at the
time of termination in 18 equal monthly installments, plus 18 months of health
care continuation payments. All cash payments and health care continuation
payments shall cease in the event of competitive employment. Such payments shall
be mitigated by 50% of "severance period earnings" in the event of
non-competitive employment with annual compensation up to $50,000 and shall
cease altogether in the event of such annual compensation exceeding $50,000.
Crowley Agreement
Under his severance agreement with the Company, if Mr. Crowley is
terminated by the Company other than for Cause, death or Disability within 24
months following a change of control (including a termination by Mr. Crowley by
reason of a Constructive Termination) (all the foregoing capitalized terms as
defined in Mr. Crowley's severance agreement), Mr. Crowley is entitled to a
severance payment equal to his annual base salary in effect at the effective
date of termination, payable in twelve equal monthly installments following
termination.
Management Incentive Plan
Messrs. Corey, Menezes, Duerk and Crowley each received bonuses for the
nine months ended December 31, 2003 under the Management Incentive Plan. See the
Summary Compensation Table and " - Employment Agreements" above for additional
information concerning the Management Incentive Plan.
Severance Program
See " - Employment Agreements" above for additional information concerning
severance arrangements applicable to the Named Executives.
33
Director Compensation
Directors who are employees of the Company receive no compensation, as
such, for service as members of the Board. Directors who are not employees of
the Company receive an annual retainer of $20,000, plus an additional $10,000
for Mr. Wetzel as Board Chairman and an additional $5,000 each for committee
chairmen. They also each receive attendance fees ranging from $500 to $1,250 for
attendance at Board and committee meetings attended by telephone or in person.
Finally, directors receive additional compensation at a rate of $1,750 per day
for special assignments, not including attendance at Board and committee
meetings. All directors are reimbursed for expenses incurred in connection with
attendance at meetings.
Each non-employee director then holding office received an option grant
under the Option Plan immediately following its approval by the stockholders on
April 27, 2002 (for 10,000 shares to Mr. Wetzel, as Chairman, and 7,500 shares
to each of the other non-employee directors who received grants). The exercise
price for the shares of common stock subject to these options is the fair market
value of the shares on the date of grant ($8.75 per share), subject to
adjustment to $.01 per share in the event of a change of control as described in
the option agreements. In April 2002, each non-employee director then holding
office received an additional option grant (for 10,000 shares to Mr. Wetzel, as
Chairman, and 7,500 shares to each of the other non-employee directors who
received grants). The exercise price for the shares of common stock subject to
these options is the per share price determined to be their fair market value as
of the date of grant ($6.71 per share). As a result of the Change of Control, a
change of control occurred for purposes of these option agreements and the
options granted to each of the non-employee directors were immediately vested.
Compensation Committee Interlocks and Insider Participation
From the Emergence Date through the nine months ended December 31, 2003,
Messrs. Goldfarb, Waide and Wetzel served as the Company's Compensation
Committee. No interlocking relationship exists between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except as otherwise indicated, the following table and notes set forth
certain information, to the knowledge of the Company, regarding the beneficial
ownership of the Company's common stock as of February 27, 2004, by all persons
known by the Company to be the beneficial owner of more than 5% of the common
stock, by each director of the Company, by each of the Named Executives (as
defined herein) and by all directors and executive officers of the Company as a
group. Except as otherwise indicated, to the knowledge of the Company, each
beneficial owner has the sole power to vote and to dispose of all shares of
common stock owned by such beneficial owner.
34
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Common Stock (1)
- ---------------------------------------------------------------------------------------------------
Zapata Corporation 4,162,394 82.6%
100 Meridian Centre, Suite 350
Rochester, New York 14618
FMR Corp.(2) 360,180 7.2%
82 Devonshire Street
Boston, Massachusetts 02109
Mellon HBV Alternative Investment Strategies LLC (3)
200 Park Avenue, Suite 3300
New York, New York 10166-3399 246,452 4.9%
Officers and Directors
John C. Corey (4) 220,115 4.2%
Leonard DiSalvo (5) 0 *
Avram A. Glazer (5) 0 *
Andy Goldfarb (4) 15,000 *
W. Allan Hopkins (4) 15,000 *
Ben E. Waide III (4) 15,000 *
Carroll R. Wetzel, Jr. (4) 20,014 *
Brian P. Menezes (4) 102,000 2.0%
Stephen B. Duerk (4) 92,503 1.8%
Vick Crowley (4) 7,800 *
All executive officers and directors as a group 487,432 8.8%
(consisting of 10 individuals)
- ----------
* Less than 1%.
(1) Shares beneficially owned, as recorded in this table, expressed as a
percentage of the shares of common stock outstanding.
(2) The information shown is as of December 31, 2003 and is based upon
information disclosed by FMR Corp., Edward C. Johnson, 3d, Abigail P.
Johnson, Fidelity Management & Research Company and Fidelity Leveraged
Company Stock Fund in a Schedule 13G filed with the SEC. Such persons
reported that FMR Corp. and the other members of the filing group have
sole power to dispose or to direct the disposition of 360,180 shares of
the Company's common stock. Sole power to vote these shares beneficially
owned by the filing group resides in the respective boards of trustees of
the funds that have invested in the shares. The interest of Fidelity
Leveraged Company Stock Fund, an investment company registered under the
Investment Company Act of 1940, amounted to 333,135 shares of the
Company's common stock as of December 31, 2003.
(3) The information shown is as of December 9, 2003 and is based upon
information disclosed by Mellon HBV Alternative Investment Strategies LLC
in a Schedule 13D filed with the SEC. Mellon HBV Alternative Investment
Strategies LLC has sole power to dispose or to direct the disposition of
and to vote these shares. The shares are owned by Mellon HBV Master
Rediscovered Opportunities Fund L.P., Mellon HBV Master Multi-Strategy
Fund L.P., Axis RDO Ltd. and HFR DS Performance Master Trust, for which
Mellon HBV Alternative Investment Strategies LLC serves as investment
advisor.
(4) Includes 220,000 shares for Mr. Corey, 15,000 shares each for Messrs.
Goldfarb, Hopkins and Waide, 20,000 shares for Mr. Wetzel, 102,000 shares
for Mr. Menezes, 92,500 shares for Mr. Duerk, and 7,800 shares for Mr.
Crowley underlying currently exercisable stock options under the Option
Plan. The address of each of these persons is c/o Safety Components
International, Inc., 41 Stevens Street, Greenville, South Carolina 29605.
(5) Mr. Glazer is the Chairman of the Board of Zapata and its President and
Chief Executive Officer. Mr. DiSalvo is Zapata's Vice President - Finance
and Chief Financial Officer. Each of Mr. Glazer and Mr. DiSalvo disclaims
beneficial ownership of all shares held by Zapata. The address of each of
these persons is c/o Zapata Corporation, 100 Meridian Centre, Suite 350,
Rochester, New York 14618.
35
Equity Compensation Plan Information
The Company has one equity compensation plan, the Option Plan, that is a
shareholder approved plan. As of December 31, 2003, the number of options
outstanding and remaining available under the Option Plan were as follows:
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
Plan category of outstanding options outstanding options future issuance
- ------------------------ ----------------------- ------------------- -----------------------
Equity compensation
plans approved by
security holders 612,500 $6.78 209,700
Equity compensation
plans not approved
by security holders -- -- --
------- -------
Total 612,500 209,700
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the beginning of the Company's last fiscal year, except as may
otherwise be described herein, there were no transactions occurring or
relationships that existed between the Company and its officers, directors or 5%
stockholders that require disclosure under SEC regulations.
The Company has entered into a tax sharing and indemnity agreement with
Zapata, included as Exhibit 10.27 to this report on Form 10-K. Because Zapata
now owns in excess of 80% of the voting interests of the Company, the Company
(beginning with the fourth quarter of 2003) will be included in Zapata's
consolidated U.S. federal income tax return.
Information regarding transactions that have occurred since the beginning
of the Company's fiscal year involving Zapata can be found under "The Company -
Change of Control" in Item 1 above.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche LLP served as the Company's principal independent
accountant to audit the Company's financial statements for the fiscal year ended
March 29, 2003. As discussed above and previously disclosed, the Company's Audit
Committee and Board of Directors notified Deloitte & Touche LLP that it would
not be retained to perform the audit of the financial statements of the Company
for the fiscal year ending March 27, 2004 or any transition period and
determined to engage PricewaterhouseCoopers LLP as independent accountants to
audit the Company's financial statements for the fiscal period ended December
31, 2003. The fees billed in the fiscal year ended March 29, 2003 and in the
period through November 12, 2003 for Deloitte & Touche LLP's services to the
Company and the fees billed in the fiscal period ended December 31, 2003 for
PricewaterhouseCoopers' services to the Company were:
Deloitte & Touche PricewaterhouseCoopers
------------------------------------ -----------------------
Year ended Interim Period ended Nine Month Period ended
March 29, 2003 November 12, 2002 Decemeber 31, 2003
-------------- -------------------- -----------------------
Audit Fees .............. $309,800 $ 39,000 $324,000
Audit-Related Fees ...... 66,000 36,900 54,000
Tax Fees ................ 337,100 278,400 --
All Other Fees .......... 72,600 110,300 --
Total Fees .............. $785,500 $464,600 $378,000
36
In the above table, in accordance with applicable SEC rules:
o "audit fees" are fees billed by the independent auditors for
professional services for the audit of the consolidated
financial statements included in the Company's Form 10-K,
including audits of the foreign subsidiary statutory reports
of the Company's foreign subsidiaries for their respective
fiscal years, and review of financial statements included in
the Company's Form 10-Qs, or for services that are normally
provided by the auditors in connection with statutory and
regulatory filings or engagements;
o "audit-related fees" are fees billed by the independent
auditors for assurance and related services that are
reasonably related to the performance of the audit or review
of the financial statements, and include fees related to the
audit of the Company's employee benefit plans and fees related
to services provided in connection with the Change of Control;
o "tax fees" are fees billed by the independent auditors for
professional services for tax compliance, tax advice, and tax
planning, and include, in the case of services provided by
Deloitte & Touche during the fiscal year ended March 29, 2003
and the interim ended November 12, 2003, fees for domestic and
international income tax services and consultation, including
$130,000 and $102,000, respectively, in connection with a
comprehensive analysis of the Company's international tax
structure and steps toward implementation of structural
changes approved by management; and
o "all other fees" are fees billed by the independent auditors
to the Company for any services not included in the first
three, and include fees related to assistance with
non-financial systems.
The Audit Committee of the Company's Board of Directors has established a
policy requiring its pre-approval of all audit and non-audit services provided
by its independent auditors. The policy requires the general pre-approval of
annual audit services, general pre-approval of all other permitted services up
to specified dollar limits and specific pre-approval of all other permitted
services. In determining whether to pre-approve permitted services, the Audit
Committee considers whether such services are consistent with SEC rules and
regulations. Furthermore, requests for pre-approval for services that are
eligible for general pre-approval must be detailed as to the services to be
provided. To ensure prompt handling of unexpected matters, our Audit Committee
has delegated to its chairperson the authority to pre-approve permissible non-
audit services and fees and to amend or modify pre-approvals that have been
granted by the entire Audit Committee. A report of any such actions taken by the
committee chairperson is provided to the Audit Committee at the following Audit
Committee meeting.
None of the audit and non-audit services described above were approved by
the Audit Committee pursuant to the waiver of pre-approval provisions set forth
in applicable rules of the SEC.
37
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 (incorporated by reference to Exhibit 2.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 25, 2000)
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. (incorporated by
reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed with the Commission on
September 13, 2000)
3.1 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Components
International, Inc. (incorporated by reference to
Exhibit 3.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000)
3.2 Amended Bylaws of Safety Components International, Inc.
(incorporated by reference to Exhibit 3.6 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended October 10, 2000)
4.1 Restructuring Agreement dated April 6, 2000 between
Safety Components International, Inc., Robert A. Zummo
and the consenting holders signatory thereto
(incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed with the
Commission on April 13, 2000)
4.2 First Amendment to Restructuring Agreement dated as of
May 10, 2000 between Safety Components and the
consenting holders signatory thereto (incorporated by
reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed with the Commission on May 19,
2000)
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., including Security Agreement dated
July 10, 1998 by and between Safety Components
International, Inc. and KeyCorp Leasing (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26,
1998)
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)
(incorporated by reference to Exhibit 10.68 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended October 10, 2000)
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 (incorporated by reference to
Exhibit 10.69 to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000)
*10.4 Safety Components International, Inc. 2001 Stock Option
Plan (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2001)
*10.5 Employment agreement, effective May 18, 2001 between
Safety Components International, Inc. and John C. Corey
(incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on
38
Form 10-K for the fiscal year ended March 31, 2001)
*10.6 Employment agreement, effective May 18, 2001 between
Safety Components International, Inc. and Brian P.
Menezes (incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K, for the fiscal
year ended March 31, 2001)
*10.7 Employment agreement, effective May 18, 2001 between
Safety Components International, Inc. and Stephen B.
Duerk (incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2001)
*10.8 Form of Stock Option Agreement - Class A and B
(incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2001)
*10.9 Form of Severance Letter (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2001)
*10.10 Safety Components International, Inc. Executive Deferral
Program (incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 29, 2001)
*10.11 Amendment No. 1 to the Safety Components International,
Inc. Executive Deferral Program (incorporated by
reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 29,
2001)
*10.12 Amendment dated June 27, 2001 to Employment Agreement,
dated May 18, 2001 between Safety Components
International, Inc. and John C. Corey (incorporated by
reference to Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 29,
2001)
*10.13 Amendment dated June 27, 2001 to Employment Agreement,
dated May 18, 2001 between Safety Components
International, Inc. and Brian P. Menezes (incorporated
by reference to Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 29,
2001)
10.14 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) (incorporated by
reference to Exhibit 10.14 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 29,
2001)
10.15 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. (incorporated by reference to
Exhibit 10.23 to the Company's Annual Report on Form
10-K for the fiscal year ended March 30, 2002)
10.16 Letter of Guarantee, dated March 28, 2002, between
Safety Components International, Inc. and HVB Bank Czech
Republic a.s. (incorporated by reference to Exhibit
10.24 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 30, 2002)
*10.17 Form of Stock Option Agreement - Class C (incorporated
by reference to Exhibit 10.25 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 29, 2002)
10.18 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.
(incorporated by reference to Exhibit 10.26 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 28, 2002)
10.19 Amendment No. 2 to Loan and Security Agreement, dated
October 11, 2002, by and among Safety Components
International, Inc., the subsidiaries named therein as
Borrowers and Guarantors and Congress Financial
Corporation (Southern) (incorporated by reference to
Exhibit 10.27 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 28, 2002)
39
10.20 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) (incorporated by
reference to Exhibit 10.29 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 27,
2003)
10.21 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
(incorporated by reference to Exhibit 10.30 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 27, 2003)
*10.22 Safety Components International, Inc. Nine Months Ending
December 31, 2003 Management Incentive Bonus Program
*10.23 Amendment No. 2 dated September 22, 2003 to Employment
Agreement, dated May 18, 2001 between Safety Components
International, Inc. and John C. Corey
*10.24 Amendment No. 2 dated September 22, 2003 to Employment
Agreement, dated May 18, 2001 between Safety Components
International, Inc. and Brian P. Menezes
*10.25 Amendment dated September 29, 2003 to Employment
Agreement, dated May 18, 2001 between Safety Components
International, Inc. and Stephen B. Duerk
10.26 Amendment No. 1, dated October 8, 2003, to Security
Agreement dated July 10, 1998, by and between Safety
Components International, Inc. and KeyCorp Leasing
10.27 Tax sharing and indemnity agreement dated as of March
19, 2004 between Zapata Corporation and Safety
Components International, Inc.
14.1 Safety Components International, Inc. and Subsidiaries
Code of Ethics and Business Conduct
21.1 Subsidiaries of Safety Components
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Auditors
23.2 Consent of Deloitte & Touche LLP, Independent Auditors
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
* Indicates exhibits relating to executive compensation
(b) Reports on Form 8-K:
During the last quarter of the nine month period ended
December 31, 2003, the Company filed the following Reports on Form
8-K:
o Report on Form 8-K filed on October 3, 2003 pursuant to
which it announced that Zapata had acquired
approximately 53.7% of the issued and outstanding shares
of common stock of the Company.
o Report on Form 8-K filed on October 8, 2003 pursuant to
which it announced that it had executed an amendment to
its credit facility with Congress Financial Corporation
(Southern).
40
o Report on Form 8-K filed on October 16, 2003 pursuant to
which it announced that its 2003 Annual Meeting of
Shareholders was adjourned due to the absence of a
quorum and that a new date for the 2003 annual meeting
would be established and announced thereafter.
o Report on Form 8-K filed on November 14, 2003 pursuant
to which it announced (i) that it had notified Deloitte
& Touche LLP that it would not be retained to perform
the audit of the financial statements of the Company for
the fiscal year ending March 27, 2004 or any transition
period, (ii) that it had determined to engaged
PricewaterhouseCoopers LLP as independent accountants to
audit its financial statements for the fiscal period
ended December 31, 2003, and (iii) that it had changed
its fiscal year end from the last Saturday in the month
of March to December 31 of each year.
41
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: March 8, 2004
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, March 8, 2004
- --------------------------- President and Director
John C. Corey
/s/ Carroll R. Wetzel, Jr. Director, Chairman of the Board March 8, 2004
- ---------------------------
Carroll R. Wetzel, Jr.
/s/ Brian P. Menezes Vice President, Chief Financial March 8, 2004
- --------------------------- Officer
Brian P. Menezes
/s/ William F. Nelli Controller March 8, 2004
- ---------------------------
William F. Nelli
/s/ Ben E. Waide III Director March 8, 2004
- ---------------------------
Ben E. Waide III
/s/ W. Allan Hopkins Director March 8, 2004
- ---------------------------
W. Allan Hopkins
/s/ Andy Goldfarb Director March 8, 2004
- ---------------------------
Andy Goldfarb
/s/ Leonard DiSalvo Director March 8, 2004
- ---------------------------
Leonard DiSalvo
/s/ Avram A. Glazer Director March 8, 2004
- ---------------------------
Avram A. Glazer
42
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
REPORTS OF INDEPENDENT AUDITORS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2003 and March 29, 2003 F-4
Consolidated Statements of Operations for the period from March 30, 2003
to December 31, 2003, and for the Years ended March 29, 2003
and March 30, 2002 F-5
Consolidated Statements of Stockholders' Equity for the period
from March 30, 2003 to December 31, 2003, and for the Years ended
March 29, 2003 and March 30, 2002 F-6
Consolidated Statements of Cash Flows for the period from March 30, 2003
to December 31, 2003, and for the Years ended March 29, 2003
and March 30, 2002 F-7
Notes to Consolidated Financial Statements F-8
SUPPLEMENTAL SCHEDULE:
II Valuation and Qualifying Accounts
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Safety Components International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Safety
Components International, Inc. and its subsidiaries at December 31, 2003, and
the results of their operations and their cash flows for the nine-month period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule of valuation and qualifying accounts presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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 audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Spartanburg, South Carolina
February 13, 2004
F-2
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 sheet of Safety Components
International, Inc. and subsidiaries (the "Company") as of March 29, 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years ended March 29, 2003 and March 30, 2002. Our audits also
included the consolidated financial statement schedule for the years ended March
29, 2003 and March 30, 2002 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.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 29, 2003, and
the results of its operations and its cash flows for the years ended March 29,
2003 and March 29, 2002, 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, 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-3
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2003 March 29, 2003
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 4,376 $ 7,564
Accounts receivable, net ................................................................ 37,109 43,882
Inventories, net ........................................................................ 23,552 24,000
Prepaid and other ....................................................................... 2,476 1,949
--------- ---------
Total current assets .................................................................. 67,513 77,395
Property, plant and equipment, net ........................................................ 50,428 52,622
Identifiable intangible assets, net ....................................................... 1,172 1,106
Other assets .............................................................................. 4,213 2,941
--------- ---------
Total assets .......................................................................... $ 123,326 $ 134,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 24,419 $ 26,713
Accrued and other current liabilities ................................................... 7,750 8,353
Income taxes payable .................................................................... 4,477 2,603
Current portion of long-term debt ....................................................... 4,214 31,710
--------- ---------
Total current liabilities ............................................................. 40,860 69,379
Long-term debt ............................................................................ 11,817 7,363
Deferred income taxes ..................................................................... 3,511 4,377
Other long-term liabilities ............................................................... 3,109 1,032
--------- ---------
Total liabilities ..................................................................... 59,297 82,151
--------- ---------
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; 5,037,478 and
4,959,678 shares outstanding at December 31, 2003 and March 29, 2003, respectively ..... 51 50
Common stock warrants ................................................................... -- 34
Additional paid-in-capital .............................................................. 52,865 50,916
Treasury stock: 40,322 shares at cost .................................................. (411) (411)
Retained earnings (accumulated deficit) ................................................. 2,656 (3,446)
Accumulated other comprehensive income .................................................. 8,868 4,770
--------- ---------
Total stockholders' equity ............................................................ 64,029 51,913
--------- ---------
Total liabilities and stockholders' equity ............................................ $ 123,326 $ 134,064
========= =========
See notes to consolidated financial statements.
F-4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Period from
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
----------------- --------------- ---------------
Net sales .............................................................. $ 183,666 $ 244,338 $ 203,323
Cost of sales, excluding depreciation .................................. 149,479 204,656 169,527
Depreciation ........................................................... 8,089 9,662 7,290
--------- --------- ---------
Gross profit ........................................................ 26,098 30,020 26,506
Selling and marketing expenses ......................................... 2,239 2,176 1,784
General and administrative expenses .................................... 10,432 12,299 9,811
Compensation expense associated with change of control ................. 2,797 -- --
Research and development expenses ...................................... 1,225 1,242 899
Amortization of intangible assets ...................................... 106 124 900
--------- --------- ---------
Income from operations .............................................. 9,299 14,179 13,112
Other income, net ...................................................... (2,268) (3,426) (1,001)
Interest expense, net .................................................. 1,657 3,596 4,110
--------- --------- ---------
Income from continuing operations before income tax provision ....... 9,910 14,009 10,003
Provision for income taxes ............................................. 3,808 6,120 3,397
--------- --------- ---------
Income from continuing operations ................................... 6,102 7,889 6,606
Loss on disposition of discontinued operations, net of income tax
provision (benefit) of $0, $660 and ($1,661), respectively ......... -- 2,023 2,517
--------- --------- ---------
Income before cumulative effect of change in method of accounting ... 6,102 5,866 4,089
Cumulative effect of change in method of accounting .................... -- (14,651) --
--------- --------- ---------
Net income (loss) ...................................................... $ 6,102 $ (8,785) $ 4,089
========= ========= =========
Net income (loss) per common share, basic:
Income from continuing operations ................................... $ 1.23 $ 1.59 $ 1.33
Loss on disposition of discontinued operations ...................... -- (0.41) (0.51)
Cumulative effect of change in method of accounting ................. -- (2.95) --
--------- --------- ---------
Net income (loss) per common share, basic .............................. $ 1.23 $ (1.77) $ 0.82
========= ========= =========
Net income (loss) per common share, diluted:
Income from continuing operations ................................... $ 1.19 $ 1.59 $ 1.33
Loss on disposition of discontinued operations ...................... -- (0.41) (0.51)
Cumulative effect of change in method of accounting ................. -- (2.95) --
--------- --------- ---------
Net income (loss) per common share, diluted ............................ $ 1.19 $ (1.77) $ 0.82
========= ========= =========
Weighted average number of shares outstanding, basic ................... 4,973 4,960 4,960
========= ========= =========
Weighted average number of shares outstanding, diluted ................. 5,119 4,960 4,960
========= ========= =========
See notes to consolidated financial statements.
F-5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
Common Common Common Additional
Stock Stock Stock Paid -in
Shares Amount Warrants Capital
---------- ---------- ---------- ----------
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 income 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
Comprehensive income for the period from
March 30, 2003 to December 31, 2003:
Net income ............................................. -- -- -- --
Foreign currency translation adjustment ................ -- -- -- --
(Loss) gain on derivatives ............................. -- -- -- --
Net comprehensive income ................................... -- -- -- --
Expiration of warrants ..................................... -- -- (34) 34
Issuance of common stock ................................... 77,800 1 -- 1,915
---------- ---------- ---------- ----------
Balance at December 31, 2003 ................................ 5,037,478 $ 51 $ -- $ 52,865
========== ========== ========== ==========
Retained Accumulated
Treasury Earnings Other
Stock (Accumulated Comprehensive
Amount Deficit) Income (Loss) Total
---------- ------------ ------------- ----------
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 income 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
Comprehensive income for the period from
March 30, 2003 to December 31, 2003:
Net income ............................................. -- 6,102 -- 6,102
Foreign currency translation adjustment ................ -- -- 4,239 4,239
(Loss) gain on derivatives ............................. -- -- (141) (141)
----------
Net comprehensive income ................................... -- -- -- 10,200
Expiration of warrants ..................................... -- -- -- --
Issuance of common stock ................................... -- -- -- 1,916
---------- ---------- ---------- ----------
Balance at December 31, 2003 ................................ $ (411) $ 2,656 $ 8,868 $ 64,029
========== ========== ========== ==========
See notes to consolidated financial statements.
F-6
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Period from
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
----------------- --------------- ---------------
Cash Flows From Operating Activities:
Net income (loss) ..................................................... $ 6,102 $ (8,785) $ 4,089
Loss on disposition of discontinued operations ........................ -- 2,023 2,517
Cumulative effect of accounting change ................................ -- 14,651 --
-------- -------- --------
Income from continuing operations ..................................... 6,102 7,889 6,606
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation ........................................................ 8,089 9,662 7,290
Amortization ........................................................ 106 124 900
Provision for bad debts ............................................. 29 295 144
Loss on disposition of assets ....................................... 541 271 174
Deferred taxes ...................................................... (931) 1,591 1,399
Accretion of interest on current obligations ........................ -- 81 60
Compensation expense associated with change of control .............. 1,404 -- --
Changes in operating assets and liabilities:
Accounts receivable ............................................... 6,744 (9,121) (1,718)
Inventories ....................................................... 446 (7,225) 501
Prepaid and other current assets .................................. (480) 97 1,539
Other assets ...................................................... (1,319) (677) 110
Accounts payable .................................................. (2,294) 8,196 6,434
Accrued liabilities ............................................... 3,509 925 (127)
-------- -------- --------
Net cash provided by continuing operations ........................ 21,946 12,108 23,312
Net cash provided by (used in) discontinued operations ............ -- 812 (3,752)
-------- -------- --------
Net cash provided by operating activities ......................... 21,946 12,920 19,560
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment .......................... (2,594) (7,916) (5,488)
Proceeds on disposition of assets ................................... -- 454 --
Costs for acquisitions .............................................. -- -- (1,845)
-------- -------- --------
Net cash used in continuing operations ............................ (2,594) (7,462) (7,333)
Net cash provided by discontinued operations ...................... -- 26 3,626
-------- -------- --------
Net cash used in investing activities ............................. (2,594) (7,436) (3,707)
-------- -------- --------
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note ................. (9,202) (9,731) (1,967)
Proceeds from (repayment of) Congress term note ..................... 1,604 (2,347) (2,161)
Net borrowings (repayment) on Congress revolving credit facility .... (12,085) 16,713 (10,002)
Repayment of Deutsche Bank Mortgage ................................. (2,014) (209) (200)
Payment to former owner of acquired business ........................ -- (2,327) --
Repayment of other debt and long term obligations ................... (2,023) (2,758) (2,760)
Proceeds from issuance of common stock .............................. 511 -- --
Acquisition of treasury stock ....................................... -- -- (7)
-------- -------- --------
Net cash used in continuing operations ............................ (23,209) (659) (17,097)
Net cash used in discontinued operations .......................... -- -- (549)
-------- -------- --------
Net cash used in financing activities ............................. (23,209) (659) (17,646)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents .............. 669 47 (509)
-------- -------- --------
Change in cash and cash equivalents ....................................... (3,188) 4,872 (2,302)
Cash and cash equivalents, beginning of period ............................ 7,564 2,692 4,994
-------- -------- --------
Cash and cash equivalents, end of period .................................. $ 4,376 $ 7,564 $ 2,692
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................ $ 1,305 $ 3,056 $ 3,418
Income taxes ........................................................ 2,877 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 ......................................... -- -- 222
Equipment acquired under capital lease obligations .................... -- 1,086 --
See notes to consolidated financial statements.
F-7
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 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 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 (these warrants expired as of
April 10, 2003). Immediately upon emergence, 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. 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 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. 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 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.
Change of Control
On September 29, 2003, Zapata Corporation ("Zapata", NYSE: "ZAP") filed a
Schedule 13D with the Securities and Exchange Commission (the "SEC") indicating
that as of September 18, 2003 it had acquired 2,663,905 shares of the Company's
common stock which then constituted approximately 53.7% of the issued and
outstanding shares of such common stock. As a result, a change of control of the
Company (the "Change of Control") occurred. On October 6, 2003, Zapata filed an
amendment to its Schedule 13D with the SEC, indicating that it had acquired an
F-8
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional 1,498,489 shares of the Company's common stock which, together with
the shares previously acquired, then constituted approximately 83.9% of the
issued and outstanding common stock of the Company. Zapata's Schedule 13D states
that the shares purchased as of September 18, 2003 were purchased in privately
negotiated block purchases for a total of approximately $30.9 million, or an
average price per share of $11.59, in cash, the source of which was Zapata's
working capital. This amendment to Zapata's Schedule 13D states that the
additional shares purchased on October 2, 2003 were purchased in a privately
negotiated transaction for $16.9 million, or $11.30 per share, in cash, the
source of which was Zapata's working capital.
On October 14, 2003, Zapata filed another amendment to its Schedule 13D,
in which it stated that its Chairman and Chief Executive Officer, Avram Glazer,
together with another Zapata representative met with the Company's management to
discuss Zapata's investment in the Company. This amendment further stated that
during those discussions, Mr. Glazer requested that the Company's Board of
Directors nominate individuals selected by Zapata to serve on the Company's
Board of Directors and to have such persons constitute a majority of the
Company's Board of Directors and that the Company's management agreed to
consider the request and pursue appropriate actions. In addition, this Amendment
states that on October 13, 2003, Zapata wrote a letter to the Company's
corporate secretary advising him that Zapata's shares of common stock would not
be present at the Company's Annual Meeting of Stockholders scheduled for October
14, 2003.
On November 12, 2003, the Company's Audit Committee and Board of Directors
determined that it was in the Company's best interest to change the Company's
fiscal year end from the last Saturday in the month of March to December 31 of
each year. The Audit Committee also determined to notify Deloitte & Touche LLP
that it would not be retained to perform the audit of the financial statements
of the Company for the fiscal year ending March 27, 2004 or any transition
period and determined to engage the accounting firm of PricewaterhouseCoopers
LLP as independent accountants to audit the Company's financial statements for
the fiscal period ended December 31, 2003, the Company's new fiscal year end.
The Board of Directors of the Company ratified and approved such decision. As a
result of the foregoing, the Company's fiscal year end and independent
accountants are the same as those of Zapata.
On November 14, 2003, Zapata filed another amendment to its Schedule 13D
in which it stated that after considering Zapata's request that the Company's
Board of Directors elect individuals selected by Zapata to serve on the Board of
Directors and that those persons constitute a majority of the Board of
Directors, the Company invited Zapata to submit to it a proposal pursuant to
which Zapata would acquire the outstanding shares of the Company's common stock
not already owned by Zapata. This amendment also stated that Zapata advised the
Company that it was prepared to proceed with such a transaction, provided that
it received appropriate Board representation. At a meeting on January 26, 2004,
the Company's Board of Directors appointed two designees of Zapata, Mr. Glazer
and Leonard DiSalvo, as members of the Company's Board of Directors.
Zapata's November 14, 2003 amendment further stated that Zapata had
submitted to the Company's Board of Directors a letter containing its
preliminary, non-binding indication of interest in acquiring the shares of
common stock not currently held by it at a price of $11.49 per share. Following
receipt of this letter, the Company's Board of Directors established a Special
Committee to evaluate the proposal. Following such evaluation, which included
consideration of the adequacy of the proposed per share price for the Company's
remaining public shares, the Special Committee determined that it could not
approve or recommend the proposed transaction to the Company's remaining
shareholders. Following further discussions with representatives of Zapata, the
Special Committee and Zapata mutually determined not to proceed with a
transaction at this time.
Zapata is a holding company that has one other operating company, Omega
Protein Corporation (NYSE: "OME"), in which it has a 59% ownership interest.
Omega Protein is one of the nation's largest marine protein companies. In
addition, Zapata owns 98% of its subsidiary, Zap.Com Corporation (OTCBB:
"ZPCM"), which is a public shell corporation.
The Change of Control triggered certain provisions of the Company's Stock
Option Plan, including immediate vesting of all options and an automatic change
in the exercise price of a portion of the options to $0.01. This change in
exercise price 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
nine months ended December 31, 2003. Additionally, in lieu of repricing their
Class A stock options, the employment
F-9
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 also recognized as an expense in 2003.
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 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 April 1, 2001
are as follows (in thousands):
Unaudited Pro
Forma Information
-------------------------
Year Ended March 30, 2002
-------------------------
Net sales $214,066
Net income 3,495
Net income per common share, basic and diluted 0.70
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.
Fiscal year
Following the Change of Control, the Company changed its fiscal year to a
calendar year end to coincide with Zapata's fiscal year end. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
F-10
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 consists of nine months of operations. The fiscal
years from March 31, 2002 to March 29, 2003 and April 1, 2001 to March 30, 2002
each consisted of twelve months of operations.
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 $0 and $1.4 million at December 31,
2003 and March 29, 2003, 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 (loss) 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 December 31, 2003 the Company had
outstanding forward exchange contracts to purchase Mexican Pesos and Czech
Korunas that met the requirements of SFAS No. 133 and are being accounted for as
qualifying hedges. See Note 12 for further information regarding derivative
instruments entered into and executed during the nine months ended December 31,
2003.
Concentration of credit risk
The Company is subject to a concentration of credit risk relating to its
trade receivables. At December 31, 2003, three customers accounted for
approximately 36%, 15% and 5% of its trade receivables. At March 29, 2003, these
same three customers accounted for approximately 31%, 28% and 16% of its trade
receivables. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company evaluates
F-11
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Intangible assets
At December 31, 2003, intangible assets consist of certain Company patents
revalued at the "fresh start" date to fair value. Such patents are amortized
over estimated lives between 15 and 20 years. Accumulated amortization at
December 31, 2003 and March 29, 2003 was approximately $391,000 and $285,000,
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 December 31, 2003 and March 29, 2003
were $401,000 and $482,000, 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.
F-12
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Actual sales returns and other allowances have not differed
materially from accrued estimated amounts.
Annual revenues from major customers
The Company's net sales to three customers in the nine months ended
December 31, 2003 aggregated approximately 32%, 23% and 13% of net sales. The
Company's net sales to these same three customers in the year ended March 29,
2003 aggregated approximately 32%, 21% and 19% of net sales. The Company's net
sales to these same three customers in the year ended March 30, 2002 aggregated
approximately 31%, 28% and 17% 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.
Undiscounted 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 $81,000, $117,000, and $60,000 during the nine months
ended December 31, 2003 and the years ended March 29, 2003 and March 30, 2002,
respectively, and were recorded as a component of selling and marketing expenses
in the accompanying consolidated statements of operations.
Shipping costs
The costs to ship products to customers of approximately $2.9 million,
$2.9 million and $1.6 million during the nine months ended December 31, 2003 and
the years ended March 29, 2003 and March 30, 2002, 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 nine months
ended December 31, 2003 and the years ended March 29, 2003 and March 30, 2002,
were $1.2 million, $1.2 million and $899,000, 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 two items,
unrealized gain or loss on foreign currency translation and gain or loss on
derivatives, which are components 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.
F-13
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share
Earnings per share amounts have been computed using Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS includes unexercised stock options
using the treasury stock method. (See Note 11).
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 non-statutory 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 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 No. 25, no compensation cost was recognized in the Company's financial
statements in prior periods. During the quarter ended September 27, 2003, the
Change of Control occurred and as a result under the provisions of the Stock
Option Plan all options vested immediately and the exercise prices of a certain
subset of the options were automatically changed to $0.01 (the "modified
options"). This change in exercise price 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 were not subject to the automatic change in exercise price.
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
$1,116,000 and $0 for the nine months ended December 31, 2003 and the year ended
March 29, 2003, respectively.
As a result of the modification, the incremental fair value of the
modified options is to be estimated immediately before their 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
F-14
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 nine
months ended December 31, 2003 and the year ended March 29, 2003, respectively.
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 (in thousands, except per share data):
Period from
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
--------------------------------------------------------
Net income (loss), as reported: $6,102 $(8,785) $4,089
Add: Total stock-based
employee compensation
expense included in reported
net income (loss), net of tax 823 -- --
Deduct: Total stock-based
employee compensation
expense determined under
fair value method, net of tax 1,650 419 494
--------------------------------------------------------
Pro forma net income (loss): $5,275 $(9,204) $3,595
========================================================
Net income (loss) per share:
Basic - as reported: $ 1.23 $(1.77) $ 0.82
Basic - pro forma: $ 1.06 $(1.86) $ 0.72
Diluted - as reported: $ 1.19 $(1.77) $ 0.82
Diluted - pro forma: $ 1.03 $(1.86) $ 0.72
There were 612,500 options outstanding as of December 31, 2003. During the
nine months ended December 31, 2003, there were 77,800 exercised options,
forfeitures of 6,400 and 3,400 options with an exercise price of $8.75 and
$6.71, respectively, and no options were granted or expired. Of the 612,500
options outstanding at December 31, 2003, 350,400 have an exercise price of
$8.75, 100,300 have an exercise price of $0.01 and 161,800 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.
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.
The Company's subsidiary in Mexico prepares its financial statements using
the United States dollar as the functional currency. Since the Mexico subsidiary
does not have external sales and does not own significant amounts of inventory
or fixed assets, the Company has determined that the United States dollar is the
appropriate functional currency. Accordingly, the translation effects of the
financial statements are included in the results of operations. During the
periods presented herein, such amounts were not significant.
F-15
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign currency transaction gains are reflected in operations in "other
income, net." During the nine months ended December 31, 2003 and the years ended
March 29, 2003 and March 30, 2002, transaction gains included in operations
amounted to $2.0 million, $3.5 million and $756,000, 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 December 31, 2003 and March 29, 2003 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.
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 years ended March 30, 2002 and March 29, 2003, which were
incurred subsequent to the measurement date, were applied against the accrued
losses recorded during those periods 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.
See Note 8 for product revenue and geographic information.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the December 31, 2003 presentation.
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
F-16
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. 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. The
Company estimated its fair value using the following methodologies: a discounted
cash flows approach, relative market multiples for comparable businesses and a
market approach based on the Company's total market capitalization. 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 intangible assets (in thousands):
December 31, 2003 March 29, 2003
----------------------------------
Identifiable intangible assets - patents:
Gross carrying amount $ 1,563 $ 1,391
Accumulated amortization (391) (285)
----------------------------------
Net carrying amount $ 1,172 $ 1,106
==================================
Amortization expense for the nine months ended December 31, 2003 and the
years ended March 29, 2003 and March 30,2002 was $106,000, $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.
F-17
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes and reconciles the reported net income
(loss) and net income (loss) per common share, basic and diluted, for the nine
months ended December 31, 2003 and the years ended March 29, 2003 and March 30,
2002 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 ended March 30, 2002 had not been recorded (in
thousands):
Period From
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
------------------------------------------------------------------
Reported net income (loss) $ 6,102 $ (8,785) $ 4,089
Add: amortization of excess
reorganization value and
goodwill -- -- 791
------------------------------------------------------------------
Adjusted net income (loss) $ 6,102 $ (8,785) $ 4,880
==================================================================
Reported net income (loss) per
common share, basic:
Income from continuing
operations $ 1.23 $ 1.59 $ 1.33
Loss on disposition of
discontinued operations -- (0.41) (0.51)
Cumulative effect of change in
method of accounting -- (2.95) --
------------------------------------------------------------------
1.23 (1.77) 0.82
Add: amortization of excess
reorganization value and
goodwill -- -- 0.16
------------------------------------------------------------------
Adjusted net income (loss) per
common share, basic: $ 1.23 $ (1.77) $ 0.98
==================================================================
Reported net income (loss) per
common share, diluted:
Income from continuing
operations $ 1.19 $ 1.59 $ 1.33
Loss on disposition of
discontinued operations -- (0.41) (0.51)
Cumulative effect of change in
method of accounting -- (2.95) --
------------------------------------------------------------------
1.19 (1.77) 0.82
Add: amortization of excess
reorganization value and
goodwill -- -- 0.16
------------------------------------------------------------------
Adjusted net income (loss) per
common share, diluted: $ 1.19 $ (1.77) $ 0.98
==================================================================
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") No. 30 related to the disposal
of a segment of a business. The Company adopted SFAS No. 144 on March 31, 2002.
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.
F-18
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 December 31, 2003, the Company and various consolidated
subsidiaries of the Company are borrowers under the Amended Congress Facilities
(as defined below) 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 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 were required to apply the provision of Interpretation
No. 46 immediately. Public entities with a variable interest in a variable
interest entity were required to apply the provisions of Interpretation No. 46
no later than the first interim or annual reporting period beginning after June
15, 2003. The adoption of this interpretation did not have any effect on the
Company's financial position or results of operations.
Note 3 Discontinued Operations
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 an asset write-down 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
F-19
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
Period From
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
------------------------------------------------------
Net sales $-- $5,435 $10,516
Discontinued operations:
Loss on disposition, net
of income taxes -- 2,023(a) 2,517(b)
(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.
The Company accounted for its discontinued operations in accordance with
APB No. 30. Accordingly, the Company recognized an initial estimated loss at the
measurement date and additional losses subsequent to the measurement date under
the "net realizable value" principle. Continued, unforeseen losses at the
Valentec and Galion operations were the primary reason for additional losses
being recognized. Unanticipated costs related to the move of the Valentec
operation from California to Missouri; the unanticipated loss of major
contracts; changing market conditions resulting in additional pricing pressure;
a deferred tax provision adjustment associated with Galion; and a loss
recognized on the disposition of Galion were the primary contributors to these
additional losses.
Note 4 Composition of Certain Consolidated Balance Sheet Accounts (in thousands)
December 31, 2003 March 29, 2003
--------------------------------------
Accounts receivable:
Trade receivables, net of allowances of $445 and $416 at
December 31, 2003 and March 29, 2003, respectively $ 35,361 $ 41,766
Other 1,748 2,117
--------------------------------------
Total $ 37,109 $ 43,882
======================================
Inventories:
Raw materials $ 6,273 $ 7,023
Work-in-process 7,089 7,118
Finished goods 10,190 9,859
--------------------------------------
Total $ 23,552 $ 24,000
======================================
Property, plant and equipment:
Land and buildings $ 18,757 $ 16,939
Machinery and equipment 59,221 54,050
Furniture and fixtures 1,396 1,102
Construction in process 603 985
--------------------------------------
79,977 73,076
Less - accumulated depreciation and amortization (29,549) (20,454)
--------------------------------------
Total $ 50,428 $ 52,622
======================================
F-20
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Long-Term Debt (in thousands)
December 31, 2003 March 29, 2003
--------------------------------------
KeyBank subordinated secured note, bearing interest at 11%, paid in full on
October 8, 2003 $ -- $ 9,202
Congress revolving credit facility due on October 8, 2006, bearing a
variable interest rate (4.00% at December 31, 2003) 4,628 16,714
Congress Term A loan due on October 8, 2006, bearing a variable interest
rate (4.00% at December 31, 2003) 4,176 2,572
KeyCorp equipment note due August, 2005 2,690 3,870
HVB Bank Czech Republic mortgage note due March, 2007 3,509 3,801
Deutsche Bank mortgage note with separate tranches, paid in full on
October 31, 2003 -- 1,877
Capital equipment notes payable, with various interest rates ranging
from 7.55% to 10.0%, maturing at various dates through March 2008 1,028 1,037
--------------------------------------
Total debt 16,031 39,073
Less - current portion of long-term debt (4,214) (31,710)
--------------------------------------
Total long-term portion of debt $ 11,817 $ 7,363
======================================
Credit Facilities
On October 8, 2003, the Company executed an amendment to its credit
facility (the "Congress 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 (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 December 31, 2003 was $4.6 million. The Congress Revolver also
includes a $5.0 million letter of credit facility, under which the Company had
$497,000 outstanding pursuant to letters of credit at December 31, 2003.
In addition, the amendment provided for a term facility (the "Congress
Term A loan") under which $4.2 million was borrowed at December 31, 2003. The
Congress Term A loan is payable in equal monthly installments of approximately
$72,000, with the unpaid principal amount due on October 8, 2006. Additional
amounts are not available for borrowing under the Congress Term A loan. 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 loan"
and, collectively with the Congress Revolver and the Congress Term A loan, the
"Amended Congress Facilities") which is undrawn and is currently fully
available. At December 31, 2003, the Company's availability for additional
borrowings (based on the maximum allowable limit) under the Congress Revolver
and the Congress Term B loan was approximately $34.9 million.
The interest rate on the Congress Revolver and Congress Term A loan is
variable, depending on the amount of the Company's Excess Availability (as
defined in the Amended Congress Facilities) at any particular time and the ratio
of the Company's EBITDA, less certain capital expenditures made by the Company,
to certain fixed charges of the Company (the "Fixed Charge Coverage Ratio". The
Company may make borrowings based on the prime rate as described in the Amended
Congress Facilities (the "Prime Rate") or the LIBOR rate as described in the
Amended Congress Facilities, in each case with an applicable margin applied to
the rate. The Congress Term B loan bears interest at the Prime Rate plus 3%. At
December 31, 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 unused line
fee of 0.25% on the unutilized portion of the Congress Revolver and a monthly
fee equal to 1.75% of the amount of any outstanding letters of credit.
F-21
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Congress Revolver and Congress Term A loan, the Company is
subject to a covenant that requires it to maintain a certain tangible net worth.
To the extent that the Company has borrowings outstanding under the Congress
Term B loan, it is subject to additional financial covenants that require the
Company: (i) to maintain EBITDA of no less than certain specified amounts, (ii)
to maintain a Fixed Charge Coverage Ratio of no less than a specified amount,
(iii) to maintain a ratio of certain indebtedness to EBITDA not in excess of a
specified amount, and (iv) not to make capital expenditures in excess of
specified amounts. In addition, the Company would be required to repay the
Congress Term B loan to the extent of certain excess cash flow.
The Amended 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 December 31, 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
Amended Congress Facilities.
The Company's subordinated secured note facility with KeyBank National
Association and Fleet Bank("KeyBank subordinated secured note") was paid in full
on October 8, 2003 with proceeds from the Amended Congress Facilities.
Other Long-term Obligations
On March 28, 2002, the Company's Czech Republic subsidiary 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 2.31% at December 31, 2003), requires monthly payments of
approximately $89,000 and is secured by the real estate assets of the Company's
subsidiary in the Czech Republic. The Company has guaranteed the repayment of up
to $500,000 of the obligations of this subsidiary with respect to this facility.
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. On
October 31, 2003, the mortgage was paid in full.
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 (LIBOR was 2.56% at December 31, 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 December 31, 2003 are due in the following fiscal years (in
thousands):
2004 $ 4,214
2005 3,063
2006 7,837
2007 830
2008 87
Thereafter --
-------
$16,031
=======
F-22
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):
Period From
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
--------------------------------------------------------
Current taxes:
Federal $ 2,392 $ 3,529 $1,519
State 360 633 168
Foreign 1,987 1,593 311
Deferred taxes:
Federal (885) 378 1,211
State (135) (38) 188
Foreign 89 25 --
--------------------------------------------------------
$ 3,808 $ 6,120 $3,397
========================================================
Income before income tax expense attributable to domestic operations is
approximately $4.6 million, $11.9 million and $7.4 million during the nine
months ended December 31, 2003 and the years ended March 29, 2003 and March 30,
2002, respectively. Income before income tax expense attributable to foreign
operations is approximately $5.3 million, $2.1 million and $2.6 million during
the nine months ended December 31, 2003 and the years ended March 29, 2003 and
March 30, 2002, respectively.
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:
Period From
March 30, 2003 to Year Ended Year Ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
--------------------------------------------------------
Expected taxes at federal statutory rate 34% 34% 34%
State income taxes, net of federal benefits 2 3 1
Foreign earnings taxed at different rates 3 6 --
Valuation allowance on deferred tax assets 1 -- --
Recovery of non-taxable bankruptcy expense 1 -- --
Non-deductible intangibles and other, net (2) 1 (1)
--------------------------------------------------------
39% 44% 34%
========================================================
F-23
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):
December 31, 2003 March 29, 2003
-------------------------------------
Deferred tax assets (liabilities):
Accrued compensation $ 212 $ --
Accrued insurance 234 --
Other accrued liabilities 290 1,017
Inventory 504 275
Receivables 99 --
Property, plant and equipment (4,836) (4,656)
Deferred compensation 1,060 --
Environmental reserves 103 --
Stock options 389 --
Capital loss carryforward 795 703
Foreign deferred tax liabilities, net (114) (25)
Foreign net operating loss carryforwards 550 1,612
Other -- 399
-------------------------------------
Net deferred tax liabilities before valuation allowances (714) (675)
Valuation allowance on capital loss and foreign net operating loss
carryforwards (1,345) (2,315)
-------------------------------------
Net deferred tax liabilities $(2,059) $(2,990)
=====================================
Recognized as follows in the accompanying consolidated balance sheets:
Current deferred tax assets $ 1,340 $ 1,292
Long-term deferred tax assets 112 95
Long-term deferred tax liabilities (3,511) (4,377)
-------------------------------------
Net deferred tax liabilities $(2,059) $(2,990)
=====================================
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.
Net valuation allowance on capital loss and foreign net operating loss
carryforwards decreased by approximately $970,000 due to the utilization of the
foreign net operating loss carryforwards attributable to the Company's German
operations.
No taxes have been provided relating to the possible distribution of
approximately $19.6 million of undistributed earnings considered to be
permanently reinvested in foreign operations.
Note 7 Commitments and Contingencies
Legal proceedings
As described in Note 1, the Company emerged from bankruptcy on October 11,
2000, and an order entering the final decree and closing the Chapter 11 cases
was signed on November 21, 2003. The final decree is subject to a "Limited
Reservation of Jurisdiction" for a "Reporting/Fee Dispute" with the U.S. Trustee
Office over administrative matters associated with the cases. The Company has
reserved $275,000 for any potential exposure associated with the Reporting/Fee
Dispute. Although no assurances can be given in this regard, management does not
expect that the Company will incur material expenditures in addition to those
reserved with respect to the Reporting/Fee Dispute.
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
F-24
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not, individually or in the aggregate, have a material adverse effect on the
Company's financial condition, operations or cash flow.
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 $1.3 million, $2.0 million and
$1.8 million for the nine months ended December 31, 2003 and the years ended
March 29, 2003 and March 30, 2002, respectively.
Future annual minimum lease payments for all non-cancelable leases as of
December 31, 2003 are as follows (in thousands):
Capital Operating
---------------------
2004 $ 537 $1,352
2005 310 954
2006 280 646
2007 18 508
2008 -- 100
Thereafter -- 3
---------------------
Total minimum lease payments 1,145 $3,563
======
Amount representing interest 117
-------
Net present value of minimum lease payments $1,028
=======
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 the fiscal year ended March 29, 2003, ending the
DHEC investigation. An undiscounted reserve of $277,000 has been included in
"other long-term liabilities" on the accompanying consolidated balance sheets
for estimated future environmental expenditures related to the Greenville
facility for conditions existing prior to the Company's ownership of the
facility. Such reserve was established at the time the Company acquired the
facility, and the amount was determined by reference to the results of a Phase
II study performed at the Greenville facility. 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.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued 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-25
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:
Period From
March 30, 2003 to Year ended Year ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
----------------------------------------------------------
United States
Airbag Cushions $ 47,899 $ 68,022 $ 59,697
Airbag Fabric 25,321 40,235 44,016
Technical Fabric 18,669 22,471 21,537
Germany
Airbag Cushions 64,994 72,811 46,544
United Kingdom
Airbag Cushions 26,783 40,799 31,529
----------------------------------------------------------
Total Net Sales $183,666 $244,338 $203,323
==========================================================
Long Lived Assets:
December 31, 2003 March 29, 2003
-----------------------------------
United States $19,486 $17,478
Mexico 4,943 5,412
Germany 13,621 14,335
Czech Republic 15,654 14,430
Other European Countries 1,435 2,300
-----------------------------------
Total Long-lived Assets $55,139 $53,955
===================================
Long-lived assets includes property, plant and equipment, intangible
assets and certain 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 $171,000, $254,000 and $261,000 during the nine months
ended December 31, 2003 and the years ended March 29, 2003 and March 30, 2002,
respectively, to the 401(k) Plan.
The Company established the Safety Components International, Inc.
Executive Deferral Program (the "Deferral Program") 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.
Under the provisions of the Deferral Program, a trust was established to
maintain the amounts deferred by the participants. Additionally, the Company
contributes an
F-26
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount equal to the exercise price of the options associated with the deferred
compensation. 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 $3.3 million and $742,000, and included in
"other long-term liabilities" were $2.8 million and $600,000 at December 31,
2003 and March 29, 2003, respectively.
Note 10 Equity Securities
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized and no
shares issued at December 31, 2003 and March 29, 2003. 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 has 5,077,800 and 5,000,000 shares of common stock issued,
5,037,478 and 4,959,678 shares of common stock outstanding, and 40,322 shares of
treasury stock at December 31, 2003 and March 29, 2003, respectively. Warrants
were granted pursuant to the Plan 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 30, 2002 because the effect would
have been anti-dilutive.
Note 11 - Reconciliation to Diluted Earnings Per Share (in thousands)
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of dilutive
potential common stock.
Period From
March 30, 2003 to Year ended Year ended
December 31, 2003 March 29, 2003 March 30, 2002
(Nine Months) (Twelve Months) (Twelve Months)
---------------------------------------------------------
Net income (loss) $6,102 $(8,785) $4,089
=========================================================
Weighted average number of common shares used
in basic earnings per share 4,973 4,960 4,960
Effect of dilutive securities:
Stock options 146 -- --
Warrants -- -- --
---------------------------------------------------------
Weighted average number of common shares and
Dilutive potential common stock used in diluted
earnings per share 5,119 4,960 4,960
=========================================================
At December 31, 2003 options on 612,500 shares of common were considered
dilutive and therefore were included in computing diluted earnings per share.
These constituted all common stock equivalents at year-end. Options on 700,100
and 510,100 shares of common stock were not included in computing diluted
earnings per share at March 29, 2003, and March 30, 2002, respectively, because
their effects were antidilutive.
Note 12 Derivatives and Hedging
SCI 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
F-27
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 periodically enters into forward contracts to
buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts are designated as hedges at
inception and are monitored for effectiveness on a routine basis. At December
31, 2003, the Company had outstanding forward exchange contracts that mature
between January and March 2004 to purchase Mexican pesos with an aggregate
notional amount of approximately $2.7 million. The fair values of these
contracts at December 31, 2003 totaled approximately $52,000, 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 $47,000 for the nine
months ended December 31, 2003 and the unrealized loss on these forward
contracts of approximately $52,000 was included in "accumulated other
comprehensive income" at December 31, 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 periodically enters into forward contracts to
buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts are designated as hedges at inception and are monitored for
effectiveness on a routine basis. At December 31, 2003, the Company had
outstanding forward exchange contracts that mature between January and March
2004 to purchase Czech Korunas with an aggregate notional amount of
approximately $2.1 million. The fair values of these contracts at December 31,
2003 totaled approximately $100,000, 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 $47,000 for the nine months ended December
31, 2003 and the unrealized loss on these forward contracts of approximately
$89,000 was included in "accumulated other comprehensive income" at December 31,
2003.
Note 13 Related Party Transactions
The Company, in years prior to the year ended March 27, 1999, performed
certain services for an affiliated company, Valentec International Limited
("VIL"), a U.K. company majority owned by Robert A. Zummo, the former Chief
Executive Officer and Chairman of the Board of the Company. During the year
ended March 25, 2000, the Company established a $600,000 reserve against its
receivable of $1.2 million from VIL due to uncertainty about VIL's ability to
repay such amount. In connection with the restructuring discussed in Note 1, Mr.
Zummo agreed that the Company could reduce future payments to him under his
employment agreement to cover such receivable in the event that the Company is
not repaid by VIL. During the year ended March 30, 2002, VIL did not repay the
Company and, accordingly, the Company offset the net receivable in its entirety
with the amount owed to Mr. Zummo under his employment agreement.
F-28
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 Unaudited Transitional Period Operating Results
The following table represents the statement of operations data for the
nine months ended December 28, 2002 for information purposes only (in
thousands):
Nine Months Ended Nine Months Ended
December 31, 2003 December 28, 2002
(Unaudited)
---------------------------------------
Net sales $183,666 $ 180,863
Gross profit 26,098 21,369
Income from continuing operations before income tax provision 9,910 9,584
Provision for income taxes 3,808 4,456
Income from continuing operations 6,102 5,128
Loss on disposition of discontinued operations -- (1,363)
Cumulative effect of change in method of accounting -- (14,651)
Net income (loss) $ 6,102 $ (10,886)
Net income (loss) per common share, basic:
Income from continuing operations $ 1.23 $ 1.04
Loss on disposition of discontinued operations -- (0.28)
Cumulative effect of change in method of accounting -- (2.95)
---------------------------------------
Net income (loss) per common share, basic $ 1.23 $ (2.19)
Net income (loss) per common share, diluted:
Income from continuing operations $ 1.19 $ 1.04
Loss on disposition of discontinued operations -- (0.28)
Cumulative effect of change in method of accounting -- (2.95)
---------------------------------------
Net income (loss) per common share, diluted $ 1.19 $ (2.19)
Weighted average number of shares outstanding, basic 4,973 4,960
Weighted average number of shares outstanding, diluted 5,119 4,960
F-29
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 Unaudited Quarterly Results
Unaudited quarterly financial information for the nine months ended
December 31, 2003 and the year ended March 29, 2003 is set forth below (in
thousands, except per share data).
Quarter Ended
------------------------------------------------
June 28, September 27, December 31,
Nine Month Period from 2003 2003 2003
------------------------------------------------
March 30, 2003 to December 31, 2003
Net sales $ 67,416 $ 52,747 $63,503
Gross profit 10,586 5,028 10,484
Income from operations 6,295 (1,255) 4,259
Net income (loss) 4,380 (1,491) 3,213
Net income (loss) per share, basic 0.88 (0.30) 0.65
Net income (loss) per share, diluted 0.88 (0.30) 0.61
Quarter Ended
---------------------------------------------------------------
June 29, September 28, December 28, March 29,
2002 2002 2002 2003
---------------------------------------------------------------
Year Ended March 29, 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 income (loss) per share, basic and
diluted (2.41) 0.14 0.07 0.42
F-30
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
-------------------------------------------------------------
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
=============================================================
For the period from March 30, 2003 to
December 31, 2003:
Allowance for doubtful accounts $ 416 $ 622 $ (593) $ 445
Reserve on deferred tax assets 2,315 92 (1,062) 1,345
-------------------------------------------------------------
$2,731 $ 714 $(1,655) $1,790
=============================================================