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 June 30, 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 August 12, 2004 was 5,259,178.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The unaudited condensed consolidated balance sheet as of June 30, 2004 and the
audited condensed consolidated balance sheet as of December 31, 2003, the
unaudited condensed consolidated statements of operations for the three and six
month periods ended June 30, 2004 and June 28, 2003 and the unaudited condensed
consolidated statements of cash flows for the six month periods ended June 30,
2004 and June 28, 2003 relate to Safety Components International, Inc. and its
subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of June 30, 2004
(unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the
three month periods ended June 30, 2004 and June 28, 2003. 4
Unaudited Condensed Consolidated Statements of Operations for the
six month periods ended June 30, 2004 and June 28, 2003 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 2004 and June 28, 2003. 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
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)
June 30, 2004 December 31, 2003
--------------- -----------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 5,206 $ 4,376
Accounts receivable, net ............................................................. 42,739 37,109
Inventories, net ..................................................................... 23,310 23,552
Prepaid and other .................................................................... 2,459 2,476
--------- ---------
Total current assets .............................................................. 73,714 67,513
Property, plant and equipment, net ........................................................ 46,430 50,428
Identifiable intangible assets, net ....................................................... 1,054 1,172
Other assets .............................................................................. 4,659 4,213
--------- ---------
Total assets ...................................................................... $ 125,857 $ 123,326
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................................... $ 14,277 $ 24,419
Accrued and other current liabilities ................................................ 7,988 7,750
Income taxes payable ................................................................. 6,838 4,477
Current portion of long-term debt .................................................... 3,579 4,214
--------- ---------
Total current liabilities ......................................................... 32,682 40,860
Long-term debt ............................................................................ 14,480 11,817
Deferred income taxes ..................................................................... 3,501 3,511
Other long-term liabilities ............................................................... 3,559 3,109
--------- ---------
Total liabilities ................................................................. 54,222 59,297
--------- ---------
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ............................ -- --
Common stock: $0.01 par value per share - 20,000,000 shares authorized; 5,259,178 and
5,037,478 shares outstanding at June 30, 2004 and December 31, 2003, respectively 53 51
Additional paid-in-capital ........................................................... 54,213 52,865
Treasury stock: 40,322 shares at cost ................................................ (411) (411)
Retained earnings .................................................................... 9,621 2,656
Accumulated other comprehensive income ............................................... 8,159 8,868
--------- ---------
Total stockholders' equity ........................................................ 71,635 64,029
--------- ---------
Total liabilities and stockholders' equity ........................................ $ 125,857 $ 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
June 30, 2004 June 28, 2003
--------------- ---------------
Net sales ....................................................... $ 65,858 $ 67,416
Cost of sales, excluding depreciation ........................... 52,417 54,099
Depreciation .................................................... 2,917 2,731
-------- --------
Gross profit ............................................ 10,524 10,586
Selling and marketing expenses .................................. 721 773
General and administrative expenses ............................. 3,631 3,151
Research and development expenses ............................... 530 332
Amortization of intangible assets ............................... 37 35
-------- --------
Income from operations .................................. 5,605 6,295
Other income, net ............................................... (99) (1,397)
Interest expense, net ........................................... 215 668
-------- --------
Income before income tax provision ...................... 5,489 7,024
Provision for income taxes ...................................... 1,646 2,644
-------- --------
Net income ...................................................... $ 3,843 $ 4,380
======== ========
Net income per common share - basic ............................. $ 0.73 $ 0.88
======== ========
Net income per common share - diluted ........................... $ 0.72 $ 0.88
======== ========
Weighted average number of common shares outstanding - basic .... 5,245 4,960
======== ========
Weighted average number of common shares outstanding - diluted .. 5,341 4,970
======== ========
See notes to unaudited condensed consolidated financial statements.
4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Six Months Ended Six Months Ended
June 30, 2004 June 28, 2003
----------------- ----------------
Net sales ............................................................ $ 135,089 $ 130,892
Cost of sales, excluding depreciation ................................ 107,654 106,245
Depreciation ......................................................... 5,708 5,409
--------- ---------
Gross profit ................................................ 21,727 19,238
Selling and marketing expenses ....................................... 1,537 1,369
General and administrative expenses .................................. 7,538 6,182
Research and development expenses .................................... 1,039 797
Amortization of intangible assets .................................... 76 69
--------- ---------
Income from operations ...................................... 11,537 10,821
Other expense (income), net .......................................... 122 (2,133)
Interest expense, net ................................................ 422 1,506
--------- ---------
Income from continuing operations before income tax provision 10,993 11,448
Provision for income taxes ........................................... 4,028 4,308
--------- ---------
Income from continuing operations ........................... 6,965 7,140
Loss on disposition of discontinued operations ....................... -- 660
--------- ---------
Net income ........................................................... $ 6,965 $ 6,480
========= =========
Net income per common share - basic:
Income from continuing operations ........................... $ 1.35 $ 1.44
Loss on disposition of discontinued operations .............. -- (0.13)
--------- ---------
Net income per common share - basic .................................. $ 1.35 $ 1.31
========= =========
Net income per common share - diluted:
Income from continuing operations ........................... $ 1.33 $ 1.44
Loss on disposition of discontinued operations .............. -- (0.13)
--------- ---------
Net income per common share - diluted ................................ $ 1.33 $ 1.31
========= =========
Weighted average number of common shares outstanding - basic ......... 5,144 4,960
========= =========
Weighted average number of common shares outstanding - diluted ....... 5,244 4,970
========= =========
See notes to unaudited condensed consolidated financial statements.
5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended Six Months Ended
June 30, 2004 June 28, 2003
---------------- ----------------
Cash Flows From Operating Activities:
Net income ........................................................ $ 6,965 $ 6,480
Loss on disposition of discontinued operations .................... -- 660
-------- --------
Income from continuing operations ................................. 6,965 7,140
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation ................................................... 5,708 5,409
Amortization of intangible assets .............................. 76 69
Loss on disposition of assets .................................. 178 211
Deferred taxes ................................................. 222 1,561
Tax benefit from exercise of stock options ..................... 369 --
Changes in operating assets and liabilities:
Accounts receivable ............................................ (5,631) 1,118
Inventories .................................................... 242 31
Prepaid and other current assets ............................... (168) (217)
Other non-current assets ....................................... (491) 310
Accounts payable ............................................... (10,142) (1,767)
Accrued and other current liabilities .......................... 3,301 2,489
-------- --------
Net cash provided by operating activities .................. 629 16,354
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ........................ (2,872) (3,767)
-------- --------
Net cash used in investing activities ...................... (2,872) (3,767)
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note ............... -- (3,021)
Repayment of Congress Subordinated term note ...................... (402) (504)
Net borrowings (repayments) on Congress revolving credit facility . 3,410 (3,837)
Repayments of other debt and long term obligations ................ (902) (946)
Proceeds from exercise of stock options ........................... 981 --
-------- --------
Net cash provided by (used in) financing activities ........ 3,087 (8,308)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ........... (14) 427
-------- --------
Increase in cash and cash equivalents .................................. 830 4,706
Cash and cash equivalents, beginning of period ......................... 4,376 2,498
-------- --------
Cash and cash equivalents, end of period ............................... $ 5,206 $ 7,204
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................... $ 307 $ 1,314
Income taxes ............................................... 1,330 1,696
Non-cash investing and financing activities:
Equipment acquired under capital lease obligation .......... $ 553 $ --
Foreign currency translation adjustment .................... 400 2,124
Unrealized (loss) gain on hedging transactions, net of taxes (16) 207
See notes to unaudited condensed consolidated financial statements.
6
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. 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 statement 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. The 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 that existed prior to these transactions 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 increased and, as a result, Zapata's ownership was reduced to less
than 80% (Zapata's ownership was approximately 79.1% at June 30, 2004). As a
result, Zapata will no longer consolidate the Company and its subsidiaries in
its consolidated federal tax returns. Accordingly, subsequent to
7
March 31, 2004, the rights and obligations described in the aforementioned Tax
Sharing and Indemnity Agreement are no longer applicable. The Company is now
proceeding to take the necessary steps to comply with its tax filing status
separate from Zapata (and outside the Tax Sharing and Indemnification Agreement)
and is evaluating the impact of this status. The Company does not expect any
material financial impact to result from 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 former 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 Standards ("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
8
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 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 values 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 and net income 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 Six months ended Six months ended
June 30, 2004 June 28, 2003 June 30, 2004 June 28, 2003
-----------------------------------------------------------------
Net income, as reported: $ 3,843 $ 4,380 $ 6,965 $ 6,480
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 -- 244 -- 244
-----------------------------------------------------------
Pro forma net income: $ 3,843 $ 4,136 $ 6,965 $ 6,236
===========================================================
Net income per share:
Basic - as reported: $ 0.73 $ 0.88 $ 1.35 $ 1.31
Basic - pro forma: $ 0.73 $ 0.83 $ 1.35 $ 1.26
Diluted - as reported: $ 0.72 $ 0.88 $ 1.33 $ 1.30
Diluted - pro forma: $ 0.72 $ 0.83 $ 1.33 $ 1.25
There were 390,800 and 612,500 options outstanding as of June 30, 2004 and
December 31, 2003, respectively. During the quarter ended June 30, 2004, there
were exercises of 48,367 options, and no options were forfeited, granted or
expired. Of the 390,800 options outstanding at June 30, 2004, 293,700 have an
exercise price of $8.75, 7,500 have an exercise price of $0.01 and 89,600 have
an exercise price of $6.71, with all options having a weighted average remaining
contractual life of 6.34 years. All options outstanding became fully vested upon
the Change of Control and are currently exercisable.
9
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 (in
thousands):
June 30, 2004 December 31, 2003
--------------------------------
(unaudited)
Raw materials $ 5,619 $ 6,273
Work-in-process 7,173 7,089
Finished goods 10,518 10,190
------------------------
Total $23,310 $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 June 30, 2004 was $8.1 million. The Congress Revolver also includes a $5.0
million letter of credit facility, which was unutilized at June 30, 2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $3.7 million was borrowed at June 30, 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 the Congress Term A loan, 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 under which $4.25 million is
currently available. At June 30, 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 $26.9 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 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 June 30, 2004,
the margin on Prime Rate loans was 0.0% and the margin on LIBOR rate loans was
1.75%. 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
10
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 June 30, 2004, the Company was in
compliance with all financial covenants. At June 30, 2004, the Company was also
in compliance with all non-financial covenants other than a covenant requiring
the company to dissolve certain inactive subsidiaries. The non-compliance under
this covenant was waived by Congress. 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 Six months ended Six months ended
June 30, 2004 June 28, 2003 June 30, 2004 June 28, 2003
------------------------------------------------------------------
Net income $3,843 $4,380 $6,965 $6,480
====== ====== ====== ======
Weighted average number of common shares used
in basic earnings per share 5,245 4,960 5,144 4,960
Effect of dilutive stock options 96 10 100 10
------ ------ ------ ------
Weighted average number of common shares and
Potentially dilutive common shares outstanding
used in diluted earnings per share 5,341 4,970 5,244 4,970
====== ====== ====== ======
At June 30, 2004, options on 390,800 shares of common stock were
considered dilutive and therefore were included in computing diluted earnings
per share. These constituted all common stock equivalents at June 30, 2004.
Options on 700,100 shares of common stock were considered dilutive and therefore
were included in computing diluted earnings per share at June 28, 2003.
Note 6 Comprehensive Income (loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
Quarter ended Quarter ended Six months ended Six months ended
June 30, 2004 June 28, 2003 June 30, 2004 June 28, 2003
-----------------------------------------------------------------------
Net income $ 3,843 $ 4,380 $ 6,965 $ 6,480
Foreign currency
translation adjustment 31 1,510 (700) 2,376
Unrealized gain (loss) on
hedging transactions,
net of taxes (16) 207 (16) 207
Reclassification adjustment
for losses in net income 6 32 6 32
----------------------------------------------------------------
Comprehensive income $ 3,864 $ 6,129 $ 6,255 $ 9,095
================================================================
11
Note 7 Contingencies
The Company, from time to time, is a party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
Note 8 Derivatives and Hedging
Safety Components monitors its risk associated with the volatility of
certain foreign currencies against its functional currency, the U.S. dollar. The
Company uses certain derivative financial instruments to reduce exposure to
volatility of foreign currencies. The Company has formally documented all
relationships between hedging instruments and hedged items, as well as risk
management objectives and strategies for undertaking various hedge transactions.
Derivative financial instruments are not entered into for 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 May 11, 2004
to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are monitored for effectiveness on a routine basis. At June 30,
2004, the Company had outstanding forward exchange contracts that mature between
July 2004 and December 2004 to purchase Mexican pesos with an aggregate notional
amount of approximately $1.7 million. The fair values of these contracts at June
30, 2004 totaled approximately $16,000 which is recorded as a liability on the
Company's balance sheet in other current liabilities. 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 operations as cost of goods sold. The Company reclassified
approximately $6,000 of previously recorded derivative fair values in AOCI into
earnings as of June 30, 2004 as a credit to cost of goods sold.
12
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 quarter and six months ended June 30, 2004 and June 28, 2003.
(In thousands)
Quarter ended Quarter ended Six months ended Six months ended
June 30, 2004 June 28, 2003 June 30, 2004 June 28, 2003
-----------------------------------------------------------------------
Net sales $ 65,858 $ 67,416 $ 135,089 $ 130,892
Gross profit 10,524 10,586 21,727 19,238
Income from operations 5,605 6,295 11,537 10,821
Other (income) expense, net (99) (1,397) 122 (2,133)
Interest expense, net 215 668 422 1,506
Provision for income taxes 1,646 2,644 4,028 4,308
Loss on disposition of
discontinued operations -- -- -- 660
Net income 3,843 4,380 6,965 6,480
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
13
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.
During the second quarter of 2004 one of the Company's largest raw
materials suppliers implemented a price increase of approximately 11% on raw
material yarn purchased for the Company's airbag fabric weaving facility.
Management has estimated the impact on the cost of raw material purchases to be
approximately $2.1 million for the remaining six months of 2004. The Company is
currently in negotiations with its airbag cushion customers in North America to
pass along this increase. The outcome of such negotiations is unknown at this
time.
Quarter Ended June 30, 2004 Compared to Quarter Ended June 28, 2003.
Net Sales. Net sales decreased $1.6 million, or 2.3%, to $65.9 million for
the quarter ended June 30, 2004 compared to the quarter ended June 28, 2003.
North American operations' net sales decreased $2.9 million or 8.6% compared to
the quarter ended June 28, 2003, with the decrease principally due to decreased
demand in the North American automotive market. Net sales for European
operations increased $1.3 million, or 4.0%, compared to the quarter ended June
28, 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 $2.8 million over the amount that would have been
reported based on exchange rates in effect in the quarter ended June 28, 2003.
The exchange rate related gains were offset by a sales decrease of approximately
$1.5 million principally due to decreased demand in the European automotive
market.
Gross Profit. Gross profit remained relatively flat, decreasing
approximately $62,000, or 0.6%, to $10.5 million for the quarter ended June 30,
2004 compared to the quarter ended June 28, 2003. Gross profit as a percentage
of net sales increased to 16.0% for the quarter ended June 30, 2004 from 15.7%
for the quarter ended June 28, 2003. Gross profit in North America decreased
approximately $212,000, or 3.4%, as a direct result of the decrease in net
sales. Gross profit for European operations increased approximately $263,000, or
6.0%, due primarily to the favorable effect of currency exchange rates. The
overall increase in gross profit as a percentage of sales 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.
Income from Operations. Income from operations decreased $690,000, or
11.0%, to $5.6 million for the quarter ended June 30, 2004 compared to operating
income of $6.3 million for the quarter ended June 28, 2003. Income from
operations as a percentage of net sales decreased to 8.5% for the quarter ended
June 30, 2004 from 9.3% for the quarter ended June 28, 2003. The decrease is
attributable to approximately $400,000 in costs associated with activities
regarding Sarbanes-Oxley related compliance activities and the implementation of
new information systems and approximately $300,000 in increased wage and
healthcare benefits costs.
Other Income, net. The Company recognized other income, net of $99,000 for
the quarter ended June 30, 2004 as compared to other income, net of $1.4 million
for the quarter ended June 28, 2003. Other 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 gains of $73,000 during
the quarter ended June 30, 2004, compared to net foreign transaction gains of
$1.4 million recorded in the quarter ended June 28, 2003. The current year's
foreign transaction gains resulted from changes in foreign currency exchange
rates of approximately 0.3% from those at March 31, 2004.
Interest Expense, net. Interest expense decreased $453,000, or 67.8%, to
$215,000 for the quarter ended June 30, 2004 compared to the quarter ended June
28, 2003. The decrease is attributable to a decrease in average outstanding debt
to $17.9 million from $36.9 million in the quarter ended June 30, 2004 as
compared to the quarter ended June 28, 2003.
Provision for Income Taxes. The provision for income taxes for the quarter
ended June 30, 2004 decreased $998,000 from a provision of $2.6 million for the
quarter ended June 28, 2003, to a provision of $1.6 million for the quarter
ended June 30, 2004. The Company's effective tax rate for the quarter ended June
30, 2004 was 30.0% compared to 37.6% for the quarter ended June 28, 2003. The
lower rate for the quarter ended June 30, 2004 is a
14
result of lower effective foreign tax rates due to the existence of certain net
operating losses associated with the European operations.
Net Income. The Company's net income was $3.8 million for the quarter
ended June 30, 2004 compared to net income of $4.4 million for the quarter ended
June 28, 2003. This change in net income resulted from the items discussed
above.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003.
Net Sales. Net sales increased $4.2 million, or 3.2%, to $135.1 million
for the six months ended June 30, 2004 compared to the six months ended June 28,
2003. North American operations' net sales decreased $2.3 million, or 3.6%,
compared to the six months ended June 28, 2003, with the decrease principally
due to decreased demand in the second quarter of 2004 in the North American
automotive market. Net sales for European operations increased $6.5 million, or
9.8%, compared to the six months ended June 28, 2003. The increase in European
net sales is due primarily to the effect of changes in foreign currency exchange
rates that increased net sales as expressed in U.S. dollars by approximately
$7.9 million over the amount that would have been reported based on exchange
rates in effect in the six months ended June 28, 2003. The exchange rate related
gains were offset by a sales decrease of approximately $1.4 million principally
due to decreased demand in the second quarter of 2004 in the European automotive
market.
Gross Profit. Gross profit increased $2.5 million, or 12.9%, to $21.7
million for the six months ended June 30, 2004 compared to the six months ended
June 28, 2003. Gross profit as a percentage of net sales increased to 16.1% for
the six months ended June 30, 2004 from 14.7% for the six months ended June 28,
2003. The increase in gross profit is due primarily to European operations,
representing an increase of $2.6 million, or 35.0%, 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 UK facility.
Gross profit in North American remained even in comparison with prior year.
Income from Operations. Income from operations increased $716,000, or 6.6%
to $11.5 million for the six months ended June 30, 2004 compared to the six
months ended June 28, 2003. Income from operations as a percentage of net sales
increased to 8.5% for the six months ended June 30, 2004 from 8.3% for the six
months ended June 28, 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 $900,000 in legal and consulting expenses related to
Sarbanes-Oxley related compliance activities and implementation of new
information systems; and approximately $750,000 in increased wage and healthcare
benefits costs.
Other Expense (Income), net. The Company recognized other expense, net of
$122,000 for the six months ended June 30, 2004 as compared to other (income),
net of $2.1 million for the six months ended June 28, 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 approximately $400,000 offset by investment and
miscellaneous income of approximately $278,000 during the six months ended June
30, 2004, compared to net foreign transaction gains of $1.8 million recorded in
the six months ended June 28, 2003. The current year's foreign transaction
losses resulted from changes in foreign currency exchange rates of approximately
- -1.2% from those at December 31, 2003.
Interest Expense, net. Interest expense decreased $1.1 million, or 72.0%,
to $422,000 for the six months ended June 30, 2004, compared to the six months
ended June 28, 2003. The decrease is attributable to a decrease in average
outstanding debt from $38.4 million to $16.8 million in the six months ended
June 30, 2004 as compared to the six months ended June 28, 2003.
Provision for Income Taxes. The provision for income taxes for the six
months ended June 30, 2004
15
decreased $280,000, or 6.5%, to $4.0 million compared to the six months ended
June 28, 2003. The Company's effective tax rate for the six months ended June
30, 2004 was 36.6% compared to 37.6% for the six months ended June 28, 2003. The
lower rate for the six months ended June 30, 2004 is a result of lower foreign
tax rates.
Loss on Disposition of Discontinued Operations. The loss was principally
due to the sale of Galion which included the recognition of a tax provision of
approximately $660,000 in the six months ended June 28, 2003 related to an
adjustment of the deferred tax liabilities of the discontinued operations.
Net Income. The Company's net income was $7.0 million for the six months
ended June 30, 2004 compared to net income of $6.5 million for the six months
ended June 28, 2003. This change in net income resulted from the items discussed
above.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was approximately $629,000 for
the six months ended June 30, 2004, compared to cash provided by operating
activities of $16.4 million in the comparable period in the prior year. The cash
provided by operating activities resulted principally from income from
operations combined with non-cash additions of depreciation offset by an
increase in accounts receivable and a decrease in accounts payable. The increase
in accounts receivable is due primarily from a change in payment terms with a
significant customer in return for foregoing early payment discounts, and the
decrease in accounts payable resulted from a change in payment terms with a
significant supplier in return for prompt payment discounts and payments of
trade balances with certain significant suppliers. 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 and a reduction in accounts receivable.
Net cash used in investing activities of continuing operations was $2.9
million for the six months ended June 30, 2004, compared to net cash used in
investing activities of continuing operations of $3.8 million for the comparable
period in the prior year. Capital expenditures in the prior year were higher
than in the current year due to capacity-related increases necessitated by new
programs awarded by customers. The Company has budgeted capital expenditures of
approximately $5.1 million for the remainder of fiscal 2004. In calendar year
2003 the Company's capital expenditures were approximately $5.1 million.
Net cash provided by financing activities of continuing operations was
$3.1 million for the six months ended June 30, 2004, compared to net cash used
in financing activities of continuing operations of $8.3 million for the
comparable period in the prior year. Net cash provided by financing activities
of continuing operations for the six months ended June 30, 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 six
months ended June 30, 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 June 30, 2004 was $8.1 million. The Congress Revolver also includes a $5.0
million letter of credit facility, which was unutilized at June 30, 2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $3.7 million was borrowed at June 30, 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
16
available for borrowing under the Congress Term A loan. In addition to the
Congress Revolver and the Congress Term A loan, 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 under which $4.25 million is currently
available. At June 30, 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 $26.9 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 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 June 30, 2004,
the margin on Prime Rate loans was 0.0% and the margin on LIBOR rate loans was
1.75%. 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 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 June 30, 2004, the Company was in
compliance with all financial covenants. At June 30, 2004, the Company was also
in compliance with all non-financial covenants other than a covenant requiring
the company to dissolve certain inactive subsidiaries. The non-compliance under
this covenant was waived by Congress. 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 June 30, 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 $16,539 $ 3,055 $12,723 $ 761 $ --
Capital lease obligations 1,520 524 987 9 --
Operating leases 758 433 288 36 1
Purchase obligations 1,775 1,775 -- -- --
-----------------------------------------------------------
Total $20,592 $ 5,787 $13,998 $ 806 $ 1
============================================================
Additionally, the Company does not have any material commitments for
capital expenditures as of June 30, 2004.
17
Off-Balance Sheet Arrangements
As of June 30, 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 facilities are outstanding, the Company has market risk relating
to such amounts because the interest rates under the Congress Facilities are
variable. As of June 30, 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 of other currencies
to the U.S. dollar could have a material 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 May 11, 2004
to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are monitored for effectiveness on a routine basis. At June 30,
2004, the Company had outstanding forward exchange contracts that mature between
July 2004 and December 2004 to purchase Mexican pesos with an aggregate notional
amount of approximately $1.7 million. The fair values of these contracts at June
30, 2004 totaled approximately $16,000 which is recorded as a liability on the
Company's balance sheet in other current liabilities. 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 operations as cost of goods sold. The Company reclassified
approximately $6,000 of previously recorded derivative fair values in AOCI into
earnings as of June 30, 2004 as a credit to cost of goods sold.
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
18
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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
----------- --------
10.28 Amendment No. 4 to Loan and Security Agreement, dated
July 20, 2004 by and among Safety Components
International, Inc., the subsidiaries named therein
as Borrowers and Guarantors and Congress Financial
Corporation (Southern)
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.
The following Current Reports on Form 8-K were filed during the quarter
ended June 30, 2004:
o Current Report on Form 8-K, filed April 22, 2004, regarding the
cessation of status of the Company and its subsidiaries as members
of the consolidated tax group of the Company's majority
shareholder
o Current Report on Form 8-K, filed April 23, 2004, regarding stock
trading plans entered into by certain members of management of the
Company in accordance with the Securities and Exchange
Commission's Rule 10b5-1
19
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: August 16, 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
20