UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
41 Stevens Street, Greenville, South Carolina 29605
(Address and zip code of principal executive offices)
(864) 240-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |X| No |_|
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of May 3, 2004 was 5,219,178.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The unaudited condensed consolidated financial information at March 31, 2004 and
for the three month period then ended, unaudited condensed consolidated
statements of operations and of cash flows for the period ended March 29, 2003
and the audited condensed consolidated balance sheet at December 31, 2003 relate
to Safety Components International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Consolidated Balance Sheets as of March 31, 2004
(unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 2004 and March 29, 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 2004 and March 29, 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 15
ITEM 4. CONTROLS AND PROCEDURES 16
PART II OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
Private Securities Litigation Reform Act of 1995
The discussion in this report contains forward-looking statements that
involve risks and uncertainties, including, but not limited to, those relating
to the impact of competitive products and pricing, dependence of revenues upon
several major module suppliers; worldwide economic conditions; the results of
cost savings programs being implemented; domestic and international automotive
industry trends, including the marketplace for airbag related products; the
ability of Safety Components to effectively control costs and to satisfy
customers on timeliness and quality; approval by automobile manufacturers of
airbag cushions currently in production; pricing pressures and labor strikes.
2
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, 2004 December 31, 2003
-------------- -----------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 5,299 $ 4,376
Accounts receivable, net ................................................................ 47,641 37,109
Inventories, net ........................................................................ 23,034 23,552
Prepaid and other ....................................................................... 2,214 2,476
--------- ---------
Total current assets ................................................................. 78,188 67,513
Property, plant and equipment, net ........................................................... 47,510 50,428
Identifiable intangible assets, net .......................................................... 1,099 1,172
Other assets ................................................................................. 4,614 4,213
--------- ---------
Total assets ......................................................................... $ 131,411 $ 123,326
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 23,486 $ 24,419
Accrued and other current liabilities ................................................... 9,534 7,750
Income taxes payable .................................................................... 5,835 4,477
Current portion of long-term debt ....................................................... 3,749 4,214
--------- ---------
Total current liabilities ............................................................ 42,604 40,860
Long-term debt ............................................................................... 14,473 11,817
Deferred income taxes ........................................................................ 3,653 3,511
Other long-term liabilities .................................................................. 3,500 3,109
--------- ---------
Total liabilities .................................................................... 64,230 59,297
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ............................... -- --
Common stock: $0.01 par value per share - 20,000,000 shares authorized; 5,210,811 and
5,037,478 shares outstanding at March 31, 2004 and December 31, 2003, respectively .. 53 51
Additional paid-in-capital .............................................................. 53,623 52,865
Treasury stock: 40,322 shares at cost ................................................... (411) (411)
Retained earnings ....................................................................... 5,779 2,656
Accumulated other comprehensive income .................................................. 8,137 8,868
--------- ---------
Total stockholders' equity ........................................................... 67,181 64,029
--------- ---------
Total liabilities and stockholders' equity ........................................... $ 131,411 $ 123,326
========= =========
(1) Derived from the audited consolidated balance sheet as of December 31,
2003.
See notes to unaudited condensed consolidated financial statements.
3
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Quarter Ended Quarter Ended
March 31, 2004 March 29, 2003
-------------- --------------
Net sales ....................................................................... $ 69,231 $ 63,476
Cost of sales, excluding depreciation ........................................... 55,237 52,146
Depreciation .................................................................... 2,791 2,678
---------- ----------
Gross profit ............................................................ 11,203 8,652
Selling and marketing expenses .................................................. 816 596
General and administrative expenses ............................................. 3,903 3,031
Research and development expenses ............................................... 514 465
Amortization of intangible assets ............................................... 38 34
---------- ----------
Income from operations .................................................. 5,932 4,526
Other expense (income), net ..................................................... 220 (736)
Interest expense, net ........................................................... 207 838
---------- ----------
Income from operations before income tax provision ...................... 5,505 4,424
Provision for income taxes ...................................................... 2,382 1,664
---------- ----------
Income from operations .................................................. 3,123 2,760
Loss on disposition of discontinued operations .................................. -- 660
---------- ----------
Net income ...................................................................... $ 3,123 $ 2,100
========== ==========
Net income per common share - basic:
Income from continuing operations ....................................... $ 0.62 $ 0.56
Loss on disposition of discontinued operations .......................... -- (0.13)
---------- ----------
Net income per common share - basic ............................................. $ 0.62 $ 0.42
========== ==========
Net income per common share - diluted:
Income from continuing operations ....................................... $ 0.60 $ 0.56
Loss on disposition of discontinued operations .......................... -- (0.13)
---------- ----------
Net income per common share - diluted ........................................... $ 0.60 $ 0.42
========== ==========
Weighted average number of common shares outstanding - basic .................... 5,043 4,960
========== ==========
Weighted average number of common shares outstanding - diluted .................. 5,167 4,960
========== ==========
See notes to unaudited condensed consolidated financial statements.
4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Quarter Ended Quarter Ended
March 31, 2004 March 29, 2003
-------------- --------------
Cash Flows From Operating Activities:
Net income .......................................................................... $ 3,123 $ 2,100
Loss on disposition of discontinued operations ...................................... -- 660
---------- ----------
Income from continuing operations ................................................... 3,123 2,760
Adjustments to reconcile income from continuing operations to net
cash (used in) provided by operating activities:
Depreciation ...................................................................... 2,791 2,678
Amortization ...................................................................... 38 34
Loss on disposition of assets ..................................................... 33 19
Deferred taxes .................................................................... 378 1,561
Net changes in operating assets and liabilities ................................... (7,619) 3,437
---------- ----------
Net cash (used in) provided by operating activities ........................... (1,256) 10,489
Cash Flows From Investing Activities:
Purchases of property, plant and equipment .......................................... (869) (2,486)
---------- ----------
Net cash used in investing activities ......................................... (869) (2,486)
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note ................................. -- (1,081)
Repayment of Congress Subordinated term note ........................................ (216) (252)
Net borrowings (repayments) on Congress revolving credit facility ................... 3,222 (1,955)
Repayments of other debt and long term obligations .................................. (664) (200)
Proceeds from exercise of stock options ............................................. 760 --
---------- ----------
Net cash provided by (used in) financing activities ........................... 3,102 (3,488)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents ............................. (54) 551
---------- ----------
Increase in cash and cash equivalents .................................................... 923 5,066
Cash and cash equivalents, beginning of period ........................................... 4,376 2,498
---------- ----------
Cash and cash equivalents, end of period ................................................. $ 5,299 $ 7,564
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 145 $ 785
Income taxes .................................................................. 707 830
Non-cash investing and financing activities:
Foreign currency translation adjustment ....................................... $ (400) $ 582
See notes to unaudited condensed consolidated financial statements.
5
Note 1 Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Safety Components International, Inc. and its subsidiaries
("Safety Components" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted from this report, as is
permitted by such rules and regulations; however, Safety Components believes
that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Transition Report on Form 10-K for the nine months ended December 31,
2003. The Company has experienced, and expects to continue to experience,
variability in net sales and net income from quarter to quarter. Therefore, the
results of the interim periods presented herein are not necessarily indicative
of the results to be expected for any other interim period or the full year. In
the opinion of management, the information furnished reflects all adjustments
necessary for a fair presentation of the results for the reported interim
periods, including those of a normal recurring nature.
Change of Control
On September 29, 2003, Zapata Corporation ("Zapata", NYSE: "ZAP") filed a
Schedule 13D with 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.
At a meeting on January 26, 2004, the Company's Board of Directors
appointed two designees of Zapata, Avram Glazer and Leonard DiSalvo, as members
of the Company's Board of Directors. 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 believes that it 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.
As a result of the above transactions the consolidated federal income tax
group of the Company terminated and Safety Components and its subsidiaries
became members of the consolidated federal income tax group of Zapata. On March
19, 2004 Zapata and the Company entered into a Tax Sharing and Indemnity
Agreement to define their respective rights and obligations relating to federal,
state and other taxes for taxable periods attributable to the filing of
consolidated or combined income tax returns as part of the Zapata consolidated
federal income tax group. Pursuant to the Tax Sharing and Indemnity Agreement,
the Company is required to pay Zapata its share of federal income taxes, if any.
In addition, each party is required to reimburse the other party for its use of
either party's tax attributes. Similar provisions apply under the Tax Sharing
and Indemnity Agreement to other taxes, such as state and local income taxes.
Due to recent exercises of options to purchase common stock of the
Company, on or about March 31, 2004, the number of shares of common stock
outstanding has increased and Zapata's ownership has been reduced to less than
80% (approximately 79.9%). As a result, Zapata will no longer consolidate the
Company and its subsidiaries in its consolidated federal tax returns.
Accordingly, subsequent to March 31, 2004, the rights and obligations described
in the aforementioned Tax Sharing and Indemnity Agreement are no longer
applicable. The Company will now
6
proceed with taking the necessary steps regarding its tax filing status separate
from Zapata (and outside the Tax Sharing and Indemnification Agreement) and is
evaluating the impact of these developments in this regard. The Company does not
expect any material financial impacts with respect to its tax filing status.
Following the Change of Control, 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 a
calendar-based year ending December 31 to coincide with Zapata's year end. This
change was effective as of the quarter ended December 31, 2003.
Discontinued Operations
The Company has reported its metal and defense businesses as discontinued
operations in the consolidated financial statements from October 11, 2000, the
measurement date, through March 29, 2003. Prior to March 29, 2003, the Company
had disposed of the last of its discontinued operations with the sale of Galion,
Inc. to Galion Acquisition, LLC, an affiliate of The Diversified Group
Incorporated. See Note 2 for further information.
Segment Information
The Company has adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company sells similar products (airbag
cushions, airbag fabrics and technical fabrics), uses similar processes in
selling the products and sells the products to similar classes of customers. As
a result of these similar economic characteristics and the way the business is
managed, the Company has aggregated the results into a single segment for
purposes of reporting financial condition and results of operations.
Stock Based Compensation
On May 18, 2001, the Safety Components International, Inc. 2001 Stock
Option Plan ("Stock Option Plan") became effective pursuant to shareholder
approval. The Stock Option Plan provides for the issuance of options to purchase
up to an aggregate of 900,000 shares of SCI's common stock to key officers,
employees, directors and consultants of SCI or its affiliates. Unless designated
otherwise by the Compensation Committee of the Board of Directors, options
granted pursuant to the Stock Option Plan are intended to be 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
7
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 was disclosed as part of the pro-forma expense for the period ended
December 31, 2003, as 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.
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 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.
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):
Quarter ended Quarter ended
March 31, 2004 March 29, 2003
-------------- --------------
Net income, as reported: $ 3,123 $ 2,100
Add: Total stock-based
employee compensation
expense included in reported
net income, net of tax -- --
Deduct: Total stock-based
employee compensation
expense determined under
fair value method, net of tax -- --
----------------------------
Pro forma net income: $ 3,123 $ 2,100
============================
Net income per share:
Basic - as reported: $ 0.62 $ 0.42
Basic - pro forma: $ 0.62 $ 0.42
Diluted - as reported: $ 0.60 $ 0.42
Diluted - pro forma: $ 0.60 $ 0.42
There were 439,167 and 612,500 options outstanding as of March 31, 2004
and December 31, 2003, respectively. During the quarter ended March 31, 2004,
there were exercises of 173,333 options, and no options were forfeited, granted
or expired. Of the 439,167 options outstanding at March 31, 2004, 297,767 have
an exercise price of $8.75, 24,100 have an exercise price of $0.01 and 117,300
have an exercise price of $6.71, with all options having a weighted average
remaining contractual life of 6.60 years. All options outstanding became fully
vested upon the Change of Control and are currently exercisable.
8
Note 2 Discontinued Operations
Prior to the fiscal year ended March 29, 2003, 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. As a
result of this disposal, the Company incurred a charge for the loss on
disposition of approximately $660,000 during the quarter ended March 29, 2003.
Note 3 Inventories
Inventories reported on the Company's balance sheets were as follows
(unaudited) (in thousands):
March 31, 2004 December 31, 2003
--------------------------------------
Raw materials $ 5,104 $ 6,273
Work-in-process 7,198 7,089
Finished goods 10,732 10,190
------------------------------
Total $ 23,034 $ 23,552
==============================
Note 4 Long-Term Debt
The Company has a credit facility with Congress Financial Corporation
(Southern), a subsidiary of Wachovia Bank, National Association ("Congress").
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 March 31, 2004 was $7.9 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 March 31, 2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $4.0 million was borrowed at March 31, 2004. 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 Company also has 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 "Congress
Facilities") which is undrawn and is currently fully available. At March 31,
2004, 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 $27.2 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 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 Congress
Facilities (the "Prime Rate") or the LIBOR rate as described in the 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 March 31,
2004, 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%
per annum 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
9
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 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 March 31, 2004, the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facilities.
Note 5 Reconciliation to Diluted Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed using the weighted-average
number of common shares and potentially dilutive common shares outstanding for
the period. Potentially dilutive common shares consist of shares under option. A
reconciliation of basic and diluted weighted average shares outstanding is
presented below (unaudited):
Quarter ended Quarter ended
March 31, 2004 March 29, 2003
----------------------------------
Net income $ 3,123 $ 2,100
========= =========
Weighted average number of common shares used
in basic earnings per share 5,043 4,960
Effect of dilutive stock options 124 --
--------- ---------
Weighted average number of common shares and
Potentially dilutive common shares outstanding
used in diluted earnings per share 5,167 4,960
========= =========
At March 31, 2004, options on 439,167 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
shares of common stock were not included in computing diluted earnings per share
at March 29, 2003, because their effects were antidilutive.
Note 6 Comprehensive Income (loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
Quarter ended Quarter ended
March 31, 2004 March 29, 2003
---------------------------------
Net income $ 3,123 $ 2,100
Foreign currency
translation adjustment (883) 918
Unrealized gain (loss) on
hedging transactions,
net of taxes -- (52)
Reclassification adjustment
for losses in net income 152 --
--------------------------
Comprehensive income $ 2,392 $ 2,966
==========================
Note 7 Contingencies
The Company, from time to time, is a party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
10
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
Note 8 Derivatives and Hedging
Safety Components monitors its risk associated with the volatility of
certain foreign currencies against its functional currency, the U.S. dollar. The
Company uses certain derivative financial instruments to reduce exposure to
volatility of foreign currencies. The Company has formally documented all
relationships between hedging instruments and hedged items, as well as risk
management objectives and strategies for undertaking various hedge transactions.
Derivative financial instruments are not entered into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on April 10,
2003 to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and were monitored for effectiveness on a routine basis. At March
31, 2004, the Company had no remaining forward exchange contracts to purchase
Mexican pesos. Changes in the derivatives' fair values are deferred and recorded
in the balance sheet as a component of accumulated other comprehensive income
("AOCI"), until the underlying transaction is recorded in earnings. When the
hedged item affects earnings, gains or losses are reclassified from AOCI to the
consolidated statement of earnings as cost of goods sold. The Company
reclassified all previously recorded derivative fair values in AOCI into
earnings as of March 31, 2004. The net effect for the quarter ended March 31,
2004 is a credit to cost of goods sold of approximately $21,000.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company entered into forward contracts on June 23,
2003 to buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts were designated as hedges at inception and were monitored for
effectiveness on a routine basis. At March 31, 2004, the Company had no
remaining forward exchange contracts to purchase Czech Korunas. Changes in the
derivatives' fair values are deferred and recorded as a component of AOCI, until
the underlying transaction is recorded in earnings. When the hedged item affects
earnings, gains or losses are reclassified from AOCI to the consolidated
statement of earnings as a component of intercompany sales. The Company
reclassified all previously recorded derivative fair values in AOCI into
earnings as of March 31, 2004. The net effect for the quarter ended March 31,
2004 is a charge to cost of goods sold of approximately $141,000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
The following discussion and analysis of the Company's financial condition
and results of operations are based on the Company's unaudited condensed
Consolidated Financial Statements. A summary of significant accounting policies
is disclosed in Note 2 to the Consolidated Financial Statements included in the
Transition Report on Form 10-K for the nine months ended December 31, 2003. The
Company's critical accounting policies are further described under the caption
"Critical Accounting Policies" in Management's Discussion and Analysis in the
Transition Report on Form 10-K for the nine months ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the unaudited condensed
Consolidated Financial Statements. It is important that the reader of the
unaudited financial statements understand that actual results could differ from
these estimates, assumptions and judgments.
There have been no changes in the nature of the Company's critical
accounting policies or the application of those policies since December 31,
2003.
Results of Operations
The following summarizes the results of continuing operations for the
Company for the quarters ended March 31, 2004 and March 29, 2003.
(In thousands)
Quarter ended Quarter ended
March 31, 2004 March 29, 2003
-----------------------------------
Net sales $ 69,231 $ 63,476
Gross profit 11,203 8,652
Income from operations 5,932 4,526
Other expense (income), net 220 (736)
Interest expense, net 207 838
Provision for income taxes 2,382 1,664
Loss from disposition of
discontinued operations -- 660
Net income 3,123 2,100
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 commons stock of the Company. Following the Change of
Control, 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 a calendar-based year ending December
31 to coincide with Zapata's year end. This change was
12
effective as of the quarter ended December 31, 2003.
Quarter Ended March 31, 2004 Compared to Quarter Ended March 29, 2003.
Net Sales. Net sales increased $5.8 million, or 9.1%, to $69.2 million for
the quarter ended March 31, 2004 compared to the quarter ended March 29, 2003.
North American operations' net sales increased $602,000 or 2.0% compared to the
quarter ended March 29, 2003, with the increase principally due to increased net
sales of $3.2 million for industrial fabrics in the North American technical
fabrics market, offset by decreased demand in the North American automotive
market. Net sales for European operations increased $5.2 million or 15.7%
compared to the quarter ended March 29, 2003. The increase in European net sales
is due to the effect of changes in foreign currency exchange rates that
increased net sales as expressed in U.S. dollars by approximately $5.1 million
over the amount that would have been reported based on exchange rates in effect
in the quarter ended March 29, 2003.
Gross Profit. Gross profit increased $2.6 million, or 29.5%, to $11.2
million for the quarter ended March 31, 2004 compared to the quarter ended March
29, 2003. Gross profit as a percentage of net sales increased to 16.2% for
quarter ended March 31, 2004 from 13.6% for the quarter ended March 29, 2003.
The increase in gross profit is due primarily to European operations,
representing an increase of $2.3 million or 76.1% compared to the prior year.
This increase is a result of improvements in operating efficiencies and cost
savings resulting from the Company's transfer of production lines to lower labor
cost areas within Europe in the prior year, as well as the favorable effect of
currency exchange rates, net of one-time lease termination costs of
approximately $400,000 associated with the closure of the Company's U.K.
Facility. Gross profit in North American remained even in comparison with prior
year.
Income from Operations. Income from operations increased $1.4 million, or
31.1% to $5.9 million for the quarter ended March 31, 2004 compared to operating
income of $4.5 million for the quarter ended March 29, 2003. Income from
operations as a percentage of net sales increased to 8.6% for the quarter ended
March 31, 2004 from 7.1% for the quarter ended March 29, 2003. The increase is
attributable to the increases in gross profit discussed above, offset primarily
by the following: approximately $300,000 in one-time charges associated with the
closure of the Company's U.K. facility which includes redundancy charges and
moving expenses; costs approximating $500,000 in legal and consulting expenses
related to compliance activities and information systems; and approximately
$350,000 in wage and healthcare benefits.
Other Expense (Income), net. The Company recognized other expense, net of
$220,000 for the quarter ended March 31, 2004 as compared to other income, net
of $736,000 for the quarter ended March 29, 2003. Other expense (income), net is
realized primarily from foreign transaction gains and losses resulting from the
revaluation of intercompany balances between the European subsidiaries and the
U.S. parent company. The Company recorded net foreign transaction losses of
$400,000 during the quarter ended March 31, 2004, compared to net foreign
transaction gains of $691,000 recorded in the quarter ended March 29, 2003. The
current year's foreign transaction losses resulted from changes in foreign
currency exchange rates of approximately -1.4% from those at December 31, 2003.
Interest Expense, net. Interest expense decreased $631,000, or 75.3%, to
$207,000 for the quarter ended March 31, 2004, compared to the quarter ended
March 29, 2003. The decrease is attributable both to a decrease in average
interest rates from 5.6% to 4.9% and a decrease in average outstanding debt from
$39.7 million to $17.1 million in the quarter ended March 31, 2004 as compared
to the quarter ended March 29, 2003.
Provision for Income Taxes. The provision for income taxes for the quarter
ended March 31, 2004 increased $718,000 from a provision of $1.7 million for the
quarter ended March 29, 2003, to a provision of $2.4 million for the quarter
ended March 31, 2004. The Company's effective tax rate for the quarter ended
March 31, 2004 was 43.3% compared to 37.6% for the quarter ended March 29, 2003.
The higher rate for the quarter ended March 31, 2004 is a result of higher
foreign tax rates.
Net Income. The Company's net income was $3.1 million for the quarter
ended March 31, 2004 compared to net income of $2.1 million for the quarter
ended March 29, 2003. This change in net income resulted from the items
discussed above.
13
Liquidity and Capital Resources
Cash Flows
Net cash used in operating activities was $1.3 million for the quarter
ended March 31, 2004, compared to cash provided by operating activities of $10.5
million in the comparable period in the prior year. The cash used in operating
activities resulted principally from a significant increase in accounts
receivable primarily arising from a change in payment terms with a European
customer. The cash provided by operating activities in the comparable period of
the prior year was primarily due to income from operations combined with
non-cash additions of depreciation and deferred taxes, netted by a reduction in
accounts receivable.
Net cash used in investing activities of continuing operations was
$869,000 for the quarter ended March 31, 2004, compared to net cash used in
investing activities of continuing operations of $2.5 million for the comparable
period in the prior year. Capital expenditures in the prior year were higher
than in the current year due to capacity-related increases necessitated by new
programs awarded by customers. The Company has budgeted capital expenditures of
approximately $7.1 million for the remainder of fiscal 2004.
Net cash provided by financing activities of continuing operations was
$3.1 million for the quarter ended March 31, 2004, compared to net cash used in
financing activities of continuing operations of $3.5 million for the comparable
period in the prior year. Net cash provided by financing activities of
continuing operations for the quarter ended March 31, 2004 is attributable to
the Company's borrowings on its revolving credit facility and cash receipts on
the exercise of stock options. Borrowings under credit facilities in the quarter
ended March 31, 2004 were used to fund increases in working capital and to make
payments on various long-term obligations.
Credit Facilities
The Company has a credit facility with Congress Financial Corporation
(Southern), a subsidiary of Wachovia Bank, National Association ("Congress").
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 March 31, 2004 was $7.9 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 March 31, 2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $4.0 million was borrowed at March 31, 2004. 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 Company also has 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 "Congress
Facilities") which is undrawn and is currently fully available. At March 31,
2004, 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 $27.2 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 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 Congress
Facilities (the "Prime Rate") or the LIBOR rate as described in the 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 March 31,
2004, 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%
per annum 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
14
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 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 March 31, 2004, the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facilities.
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at March 31, 2004.
Payments due by Period
(in thousands)
-------------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Contractual obligations Total 1 year years years 5 years
-------------------------------------------------------------------
Long term debt $17,240 $ 3,298 $13,110 $ 832 $ --
Capital lease obligations 982 451 517 14 --
Operating leases 559 356 169 33 1
-------------------------------------------------------------------
Total $18,781 $ 4,105 $13,796 $ 879 $ 1
===================================================================
Additionally, the Company does not have any material commitments for
capital expenditures as of March 31, 2004.
Off-Balance Sheet Arrangements
As of March 31, 2004, 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 3
of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Congress Facilities and
certain other facilites are outstanding, the Company has market risk relating to
such amounts because the interest rates under the Congress Facilities are
variable. As of March 31, 2004, the Company's interest rates under the Congress
Facilities and those certain other facilities approximated 4.0%. A hypothetical
increase or decrease in interest rates of 100 basis points relating to the
Congress Facilities would result in an addition to or reduction in annual
interest expense of approximately $200,000.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks. Safety
Components monitors its risk associated with the volatility of certain foreign
currencies against its functional currency, the U.S. dollar. The Company uses
certain derivative financial instruments to reduce exposure to volatility of
foreign currencies. However, the changes in the relationship
15
of other currencies to the U.S. dollar could have a materially adverse effect on
the consolidated financial statements if there were a sustained decline of these
currencies versus the U.S. dollar. The Company has formally documented all
relationships between hedging instruments and hedged items, as well as risk
management objectives and strategies for undertaking various hedge transactions.
Derivative financial instruments are not entered into for 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 entered into forward contracts on April 10,
2003 to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and were monitored for effectiveness on a routine basis. At March
31, 2004, the Company had no remaining forward exchange contracts to purchase
Mexican pesos. Changes in the derivatives' fair values are deferred and recorded
in the balance sheet as a component of accumulated other comprehensive income
("AOCI"), until the underlying transaction is recorded in earnings. When the
hedged item affects earnings, gains or losses are reclassified from AOCI to the
consolidated statement of earnings as cost of goods sold. The Company
reclassified all previously recorded derivative fair values in AOCI into
earnings as of March 31, 2004. The net effect for the quarter ended March 31,
2004 is a credit to cost of goods sold of approximately $21,000.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company entered into forward contracts on June 23,
2003 to buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts were designated as hedges at inception and were monitored for
effectiveness on a routine basis. At March 31, 2004, the Company had no
remaining forward exchange contracts to purchase Czech Korunas. Changes in the
derivatives' fair values are deferred and recorded as a component of AOCI, until
the underlying transaction is recorded in earnings. When the hedged item affects
earnings, gains or losses are reclassified from AOCI to the consolidated
statement of earnings as a component of intercompany sales. The Company
reclassified all previously recorded derivative fair values in AOCI into
earnings as of March 31, 2004. The net effect for the quarter ended March 31,
2004 is a charge to cost of goods sold of approximately $141,000.
ITEM 4. 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.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
----------- --------
31.1 Certification of CEO as required by Rule 13a-14(a),
as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO as required by Rule 13a-14(a),
as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of CEO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended March 31,
2004.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
DATED: May 7, 2004 By: \s\ Brian P. Menezes
-------------------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: \s\ William F. Nelli
-------------------------------------
William F. Nelli
Controller
18