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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 November 12, 2004 was 5,259,178.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The financial statements noted in Item 1 below relate to Safety Components
International, Inc. and its subsidiaries.
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for
the three month periods ended September 30, 2004 and September
27, 2003 4
Unaudited Condensed Consolidated Statements of Operations for the
nine month periods ended September 30, 2004 and September 27, 2003 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 2004 and September 27, 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 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II OTHER INFORMATION 20
ITEM 6. EXHIBITS 20
SIGNATURES 21
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)
September 30, 2004 December 31, 2003
------------------ -----------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 7,152 $ 4,376
Accounts receivable, net ......................................... 40,921 37,109
Inventories, net ................................................. 26,044 23,552
Prepaid and other ................................................ 2,073 2,476
---------- ----------
Total current assets .......................................... 76,190 67,513
Property, plant and equipment, net .................................... 45,865 50,428
Identifiable intangible assets, net ................................... 1,037 1,172
Other assets .......................................................... 4,478 4,213
---------- ----------
Total assets .................................................. $ 127,570 $ 123,326
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 17,333 $ 24,419
Accrued and other current liabilities ............................ 9,628 7,750
Income taxes payable ............................................. 5,047 4,477
Current portion of long-term debt ................................ 3,777 4,214
---------- ----------
Total current liabilities ..................................... 35,785 40,860
Long-term debt ........................................................ 10,420 11,817
Deferred income taxes ................................................. 3,625 3,511
Other long-term liabilities ........................................... 3,584 3,109
---------- ----------
Total liabilities ............................................. 53,414 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 September 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 ................................................ 11,543 2,656
Accumulated other comprehensive income ........................... 8,758 8,868
---------- ----------
Total stockholders' equity .................................... 74,156 64,029
---------- ----------
Total liabilities and stockholders' equity .................... $ 127,570 $ 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
September 30, 2004 September 27, 2003
------------------ ------------------
Net sales ......................................................... $ 56,172 $ 52,747
Cost of sales, excluding depreciation ............................. 44,857 44,984
Depreciation ...................................................... 2,842 2,735
---------- ----------
Gross profit .............................................. 8,473 5,028
Selling and marketing expenses .................................... 618 679
General and administrative expenses ............................... 4,921 2,421
Expenses associated with change of control ........................ -- 2,758
Research and development expenses ................................. 436 390
Amortization of intangible assets ................................. 38 35
---------- ----------
Income (loss) from operations ............................. 2,460 (1,255)
Other (income) expense, net ....................................... (380) 259
Interest expense, net ............................................. 186 579
---------- ----------
2,654 (2,093)
Provision for (benefit from) income taxes ......................... 732 (602)
---------- ----------
Net income (loss) ................................................. $ 1,922 $ (1,491)
========== ==========
Net income (loss) per common share - basic ........................ $ 0.37 $ (0.30)
========== ==========
Net income (loss) per common share - diluted ...................... $ 0.36 $ (0.30)
========== ==========
Weighted average number of common shares outstanding - basic ...... 5,259 4,960
========== ==========
Weighted average number of common shares outstanding - diluted .... 5,353 4,960
========== ==========
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)
Nine Months Ended Nine Months Ended
September 30, 2004 September 27, 2003
------------------ ------------------
Net sales ................................................................ $ 191,261 $ 183,639
Cost of sales, excluding depreciation .................................... 152,511 151,229
Depreciation ............................................................. 8,550 8,144
--------- ---------
Gross profit ..................................................... 30,200 24,266
Selling and marketing expenses ........................................... 2,155 2,048
General and administrative expenses ...................................... 12,459 8,603
Expenses associated with change of control ............................... -- 2,758
Research and development expenses ........................................ 1,475 1,187
Amortization of intangible assets ........................................ 114 104
--------- ---------
Income from operations ........................................... 13,997 9,566
Other (income), net ...................................................... (258) (1,874)
Interest expense, net .................................................... 608 2,085
--------- ---------
Income from continuing operations before income tax provision .... 13,647 9,355
Provision for income taxes ............................................... 4,760 3,706
--------- ---------
Income from continuing operations ................................ 8,887 5,649
Loss on disposition of discontinued operations ........................... -- 660
--------- ---------
Net income ............................................................... $ 8,887 $ 4,989
========= =========
Net income per common share - basic:
Income from continuing operations ................................ $ 1.71 $ 1.14
Loss on disposition of discontinued operations ................... -- (0.13)
--------- ---------
Net income per common share - basic ...................................... $ 1.71 $ 1.01
========= =========
Net income per common share - diluted:
Income from continuing operations ................................ $ 1.68 $ 1.12
Loss on disposition of discontinued operations ................... -- (0.13)
--------- ---------
Net income per common share - diluted .................................... $ 1.68 $ 0.99
========= =========
Weighted average number of common shares outstanding - basic ............. 5,183 4,960
========= =========
Weighted average number of common shares outstanding - diluted ........... 5,281 5,050
========= =========
See notes to unaudited condensed consolidated financial statements.
5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended Nine Months Ended
September 30, 2004 September 27, 2003
------------------ ------------------
Cash Flows From Operating Activities:
Net income ............................................................. $ 8,887 $ 4,989
Loss on disposition of discontinued operations ......................... -- 660
--------- ---------
Income from continuing operations ...................................... 8,887 5,649
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation ........................................................ 8,550 8,144
Amortization of intangible assets ................................... 114 104
Loss on disposition of assets ....................................... 213 427
Deferred taxes ...................................................... 346 511
Tax benefit from exercise of stock options .......................... 369 --
Non-cash charge associated with change of control ................... -- 1,404
Changes in operating assets and liabilities:
Accounts receivable ................................................. (3,812) 8,988
Inventories ......................................................... (2,491) 2,928
Prepaid and other current assets .................................... 216 (694)
Other non-current assets ............................................ (310) 2,208
Accounts payable .................................................... (7,084) (5,301)
Accrued and other current liabilities ............................... 3,298 566
--------- ---------
Net cash provided by operating activities ....................... 8,296 24,934
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ............................. (4,706) (4,805)
--------- ---------
Net cash used in investing activities ........................... (4,706) (4,805)
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note .................... -- (6,533)
Repayment of Congress Subordinated term note ........................... (1,060) (757)
Net borrowings (repayments) on Congress revolving credit facility ...... 1,132 (8,314)
Repayments of other debt and long term obligations ..................... (1,913) (1,739)
Proceeds from exercise of stock options ................................ 981 --
--------- ---------
Net cash used in financing activities ........................... (860) (17,343)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ................ 46 513
--------- ---------
Increase in cash and cash equivalents ....................................... 2,776 3,299
Cash and cash equivalents, beginning of period .............................. 4,376 2,498
--------- ---------
Cash and cash equivalents, end of period .................................... $ 7,152 $ 5,797
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 492 $ 1,674
Income taxes .................................................... 2,943 3,863
Non-cash investing and financing activities:
Equipment acquired under capital lease obligation ............... $ 553 $ --
Foreign currency translation adjustment ......................... 48 2,209
Unrealized (loss) gain on hedging transactions, net of taxes .... 23 326
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 United States 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 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 September 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 the change in 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
producing 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
8
in exercise price. According to the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," the Company is required
to disclose the compensation expense included in net income based on APB No. 25
and the related pro forma cost measured by the fair value method under SFAS No.
123, net of tax effects. Additionally, the modification resulted in an increased
value for the modified options (the "incremental fair value") that 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 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 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 Nine months ended Nine months ended
September 30, 2004 September 27, 2003 September 30, 2004 September 27, 2003
-------------------------------------------------------------------------------
Net income (loss), as reported: $ 1,922 $ (1,491) $ 8,887 $ 4,989
Add: Total stock-based
employee compensation
expense included in reported
net income, net of tax -- 823 -- 823
Deduct: Total stock-based
employee compensation
expense determined under
fair value method, net of tax -- 1,406 -- 1,650
----------------------------------------------------------------------
Pro forma net income (loss): $ 1,922 $ (2,074) $ 8,887 $ 4,162
======================================================================
Net income (loss) per share:
Basic - as reported: $ 0.37 $ (0.30) $ 1.71 $ 1.01
Basic - pro forma: $ 0.37 $ (0.42) $ 1.71 $ 0.84
Diluted - as reported: $ 0.36 $ (0.30) $ 1.68 $ 0.99
Diluted - pro forma: $ 0.36 $ (0.42) $ 1.68 $ 0.82
There were 390,800 and 612,500 options outstanding as of September 30,
2004 and December 31, 2003, respectively. During the quarter ended September 30,
2004, there were no exercises of options, and no options were forfeited, granted
or expired. Of the 390,800 options outstanding at September 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 6.09 years. All options outstanding became
fully vested upon the Change of Control and are currently exercisable.
9
Note 2 Discontinued Operations
As previously reported, 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):
September 30, 2004 December 31, 2003
--------------------------------------
(unaudited)
Raw materials $ 5,743 $ 6,273
Work-in-process 8,209 7,089
Finished goods 12,092 10,190
----------------------------
Total $ 26,044 $ 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 September 30, 2004 was $5.8 million. The Congress Revolver also includes a
$5.0 million letter of credit facility, which was unutilized at September 30,
2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $3.1 million was outstanding as of September 30, 2004.
The Congress Term A loan is payable in equal monthly installments of
approximately $64,000, 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 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 $3.75 million is
currently available. At September 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 $33.0 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 September 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% per
annum 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 September 30, 2004, the Company was in
compliance with all financial covenants. At September 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.
In July 2004, the Company and Congress entered into an amendment to the
Congress Facilities which, among other things, allows the Company to include its
Romanian subsidiary and entities formed in connection with a proposed joint
venture in China within the group of affiliates to which the Company is
permitted to make loans up to an aggregate specified amount. In October 2004,
the Company and Congress entered into an amendment and consent to the Congress
Facilities pursuant to which Congress consented to certain actions by the
Company, and the Company and Congress agreed to certain amendments to the
Congress Facilities, in each case in order to permit the Company to enter into a
proposed joint venture in South Africa with another third party. This amendment
also, among other things, allows the Company to include the entity formed to
conduct this joint venture within the group of affiliates to which the Company
is permitted to make loans up to an aggregate specified amount.
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 Nine months ended Nine months ended
September 30, 2004 September 27, 2003 September 30, 2004 September 27, 2003
-------------------------------------------------------------------------------
Weighted average number of common shares used
in basic earnings per share 5,259 4,960 5,183 4,960
Effect of dilutive stock options 94 * 98 90
--------- --------- --------- ---------
Weighted average number of common shares and
potentially dilutive common shares outstanding
used in diluted earnings per share 5,353 4,960 5,281 5,050
========= ========= ========= =========
* Effect was anti-dilutive.
Options on 686,900 shares of common stock were considered anti-dilutive and
therefore were excluded in computing diluted earnings per share for the quarter
ended September 27, 2003.
11
Note 6 Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
Quarter ended Quarter ended Nine months ended Nine months ended
September 30, 2004 September 27, 2003 September 30, 2004 September 27, 2003
------------------------------------------------------------------------------
Net income (loss) $ 1,922 $ (1,491) $ 8,887 $ 4,989
Foreign currency
translation adjustment 545 85 (155) 2,461
Unrealized gain (loss) on
hedging transactions,
net of taxes 39 (533) 23 (326)
Reclassification adjustment
for losses in net income 16 -- 22 32
---------------------------------------------------------------------
Comprehensive income
(loss) $ 2,522 $ (1,939) $ 8,777 $ 7,156
=====================================================================
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 costs 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
September 30, 2004, the Company had outstanding forward exchange contracts that
mature between October 2004 and December 2004 to purchase Mexican pesos with an
aggregate notional amount of approximately $801,000. The fair values of these
contracts at September 30, 2004 totaled approximately $23,000 which is recorded
as an asset on the Company's balance sheet in other current assets. 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 $22,000 of previously recorded derivative fair values in AOCI into
earnings for the nine months ended September 30, 2004 as a credit to cost of
goods sold.
Note 9 Guarantees
FASB Interpretation No. 45 provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has issued
and specific disclosures related to product warranties. As of September 30,
2004, the Company and various consolidated subsidiaries of the Company are
borrowers under the Congress Facilities (as defined above) and a note payable to
a bank in the Czech Republic (together, the "Facilities"). The Facilities are
guaranteed by either the Company and/or various consolidated subsidiaries of the
Company in the event that the borrower(s) default under the provisions of the
Facilities. The guarantees are in effect for the duration of the related
Facilities. The Company does not provide product warranties within the
disclosure provisions of Interpretation No. 45.
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 operations for the Company for the
quarter and nine months ended September 30, 2004 and September 27, 2003.
(In thousands)
Quarter ended Quarter ended Nine months ended Nine months ended
September 30, 2004 September 27, 2003 September 30, 2004 September 27, 2003
--------------------------------------------------------------------------------------
Net sales $ 56,172 $ 52,747 $ 191,261 $ 183,639
Gross profit 8,473 5,028 30,200 24,266
Income (loss) from operations 2,460 (1,255) 13,997 9,566
Other (income) expense, net (380) 259 (258) (1,874)
Interest expense, net 186 579 608 2,085
Provision for (benefit from)
income taxes 732 (602) 4,760 3,706
Loss on disposition of
discontinued operations -- -- -- 660
Net income (loss) 1,922 (1,491) 8,887 4,989
On September 29, 2003, Zapata Corporation ("Zapata", NYSE: "ZAP") filed a
Schedule 13D with the United States Securities and Exchange Commission (the
"SEC") indicating that as of September 18, 2003 it had acquired 2,663,905 shares
of the Company's common stock which then constituted approximately 53.7% of the
issued and outstanding shares of such common stock. As a result, a change of
control of the Company (the "Change of Control") occurred. On October 6, 2003,
Zapata filed an amendment to its Schedule 13D with the SEC, indicating that it
had acquired an additional 1,498,489 shares of the Company's common stock which,
together with the shares previously acquired, then constituted approximately
83.9% of the issued and outstanding common stock of the Company. Following the
Change of Control, the Company's Audit Committee and Board of Directors
13
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.
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 North America airbag fabric weaving
facility. Management has estimated the impact on the cost of raw material
purchases to be approximately $2.0 million for the year ending December 31,
2004. The Company is currently in negotiations with its airbag cushion customers
in North America to pass along this increase. However, the outcome of such
negotiations cannot be determined at this time.
During the quarter ended September 30, 2004, the Audit Committee of the
Company's Board of Directors, with the assistance of special outside counsel and
a forensic accounting firm, completed an investigation begun in July 2004 based
upon issues raised by an employee who claimed improprieties in the Company's
operations in Mexico and California. The investigation of the issues raised did
not substantiate any of the concerns. Expenses related to the investigation were
approximately $550,000 for the three and nine months ended September 30, 2004
and are included in general and administrative expenses in the accompanying
condensed consolidated statements of operations.
Quarter Ended September 30, 2004 Compared to Quarter Ended September 27, 2003.
Net Sales. Net sales increased $3.4 million, or 6.5%, to $56.2 million for
the quarter ended September 30, 2004 compared to the quarter ended September 27,
2003. North American operations' net sales decreased approximately $400,000 or
1.5% compared to the quarter ended September 27, 2003, with the decrease
principally due to decreased demand in the North America automotive market. Net
sales for European operations increased $3.8 million, or 14.4%, compared to the
quarter ended September 27, 2003. Approximately $1.2 million of this increase is
due to increased volume over the prior year from additional programs awarded
early in 2004 and the balance is due to the effect of changes in foreign
currency exchange rates that increased net sales as expressed in U.S. dollars by
approximately $2.6 million over the amount that would have been reported based
on exchange rates in effect in the quarter ended September 27, 2003.
Gross Profit. Gross profit increased $3.4 million, or 68.5%, to $8.5
million for the quarter ended September 30, 2004 compared to the quarter ended
September 27, 2003. Gross profit as a percentage of net sales increased to 15.1%
for the quarter ended September 30, 2004 from 9.5% for the quarter ended
September 27, 2003. Gross profit in North America increased approximately
$350,000, or 8.1%, as a result of production efficiencies, favorable exchange
rates with the Mexican peso and an unanticipated employment tax recovery in
Mexico, offset by the adverse impact of the raw materials price increase
discussed above. Gross profit for European operations increased approximately
$3.1 million, due primarily to 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. The overall increase in gross profit
as a percentage of sales is a result of the items listed above.
Income (Loss) from Operations. The Company earned $2.5 million in
operating income for the quarter ended September 30, 2004 compared to an
operating loss of $1.3 million for the quarter ended September 27, 2003. Income
from operations as a percentage of net sales was 4.4% for the quarter ended
September 30, 2004. The operating loss during the quarter ended September 27,
2003 was a result of the Company's recognition of a charge of $2.8 million
associated with the Company's change of control. The increase in income from
operations is attributable to the increases in gross profit discussed above,
offset by the following costs included in general and administrative expenses:
approximately $900,000 in costs associated with activities regarding
Sarbanes-Oxley related and other compliance activities, including the
investigation discussed above; approximately $400,000 in costs for the
implementation of new information systems; and approximately $500,000 in
increases in wage and healthcare benefits costs resulting, principally, from a
credit of $500,000 taken in the prior year.
Other (Income) Expense, net. The Company recognized other income, net of
$380,000 for the quarter ended September 30, 2004 as compared to other expense,
net of $259,000 for the quarter ended September 27, 2003.
14
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 current year's foreign
transaction gains resulted from changes in foreign currency exchange rates of
approximately 1.6% from those at June 30, 2004.
Interest Expense, net. Interest expense, net decreased $393,000, or 67.9%,
to $186,000 for the quarter ended September 30, 2004 compared to the quarter
ended September 27, 2003. The decrease is primarily attributable to a decrease
in average outstanding debt to $16.1 million from $30.2 million in the quarter
ended September 30, 2004 as compared to the quarter ended September 27, 2003.
Provision for (Benefit from) Income Taxes. The provision for income taxes
for the quarter ended September 30, 2004 was approximately $732,000 compared to
a benefit of approximately $602,000 for the quarter ended September 27, 2003.
The Company's effective tax rate for the quarter ended September 30, 2004 was
27.6% compared to 28.8% for the quarter ended September 27, 2003. The lower rate
as compared to U.S. statutory rates for the quarter ended September 30, 2004 is
a result of lower effective foreign tax rates due to the existence of certain
net operating losses associated with the European operations.
Net Income (Loss). The Company's net income was $1.9 million for the
quarter ended September 30, 2004 compared to net loss of $1.5 million for the
quarter ended September 27, 2003. This change in net income resulted from the
items discussed above.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 27,
2003.
Net Sales. Net sales increased $7.6 million, or 4.2%, to $191.3 million
for the nine months ended September 30, 2004 compared to the nine months ended
September 27, 2003. North American operations' net sales decreased $2.7 million,
or 3.0%, compared to the nine months ended September 27, 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 $10.3
million, or 11.1%, compared to the nine months ended September 27, 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 $10.3 million over the amount that would have been reported based
on exchange rates in effect in the nine months ended September 27, 2003.
Gross Profit. Gross profit increased $5.9 million, or 24.5%, to $30.2
million for the nine months ended September 30, 2004 compared to the nine months
ended September 27, 2003. Gross profit as a percentage of net sales increased to
15.8% for the nine months ended September 30, 2004 from 13.2% for the nine
months ended September 27, 2003. The increase in gross profit is due primarily
to European operations, representing an increase of $6.1 million, or 78.2%,
compared to the prior year. This increase is primarily 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 operations remained
even in comparison with prior year.
Income from Operations. Income from operations increased $4.4 million, or
46.3% to $14.0 million for the nine months ended September 30, 2004 compared to
the nine months ended September 27, 2003. Income from operations as a percentage
of net sales increased to 7.3% for the nine months ended September 30, 2004 from
5.2% for the nine months ended September 27, 2003. During the nine months ended
September 27, 2003, the Company recognized a charge of $2.8 million associated
with the Company's change of control. The increase in income from operations is
attributable to the increases in gross profit discussed above, offset primarily
by the following costs included in general and administrative expenses:
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 $1.5 million in legal and consulting expenses regarding
Sarbanes-Oxley related and other compliance activities, including the
investigation discussed above; approximately $1.2 million in increased wage and
healthcare benefits costs; and approximately $500,000 in costs for
implementation of new information systems. With the possible exception of
15
healthcare benefit costs, the above items are not expected to continue at the
current rate of expense for subsequent years.
Other Income, net. The Company recognized other income, net of
approximately $258,000 for the nine months ended September 30, 2004 as compared
to other income, net of $1.9 million for the nine months ended September 27,
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 current year's foreign
transaction gains resulted from changes in foreign currency exchange rates of
approximately 0.6% from those at December 31, 2003.
Interest Expense, net. Interest expense decreased $1.5 million, or 70.8%,
to approximately $608,000 for the nine months ended September 30, 2004, compared
to the nine months ended September 27, 2003. The decrease is primarily
attributable to a decrease in average outstanding debt to $15.1 million from
$32.4 million in the nine months ended September 30, 2004 as compared to the
nine months ended September 27, 2003.
Provision for Income Taxes. The provision for income taxes for the nine
months ended September 30, 2004 increased $1.1 million, or 28.4%, to $4.8
million compared to the nine months ended September 27, 2003. The Company's
effective tax rate for the nine months ended September 30, 2004 was 34.9%
compared to 39.6% for the nine months ended September 27, 2003. The lower rate
for the nine months ended September 30, 2004 is a result of lower foreign tax
rates due to the existence of certain net operating losses associated with the
European operations.
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 nine months ended September 27, 2003 related to an
adjustment of the deferred tax liabilities of the discontinued operations.
Net Income. The Company's net income was $8.9 million for the nine months
ended September 30, 2004 compared to net income of $5.0 million for the nine
months ended September 27, 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 $8.3 million
for the nine months ended September 30, 2004, compared to cash provided by
operating activities of $24.9 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 inventories and a decrease in accounts
payable. The increase in accounts receivable is due primarily to 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 Company
is not aware of anything that will result in a change in the current terms with
customers and 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. The decrease in cash provided by operating
activities from 2003 to 2004 is primarily a result of the increases in the
Company's asset balances in 2004, whereas in 2003 there were decreases in asset
balances.
Net cash used in investing activities of continuing operations was $4.7
million for the nine months ended September 30, 2004, compared to net cash used
in investing activities of continuing operations of $4.8 million for the
comparable period in the prior year. Capital expenditures in the current and
prior years were necessitated primarily by new programs awarded by customers.
The Company has budgeted capital expenditures of approximately $3.3 million for
the remainder of fiscal 2004 although a portion of such spending may not occur
until early 2005. In calendar year 2003 the Company's capital expenditures were
approximately $5.1 million.
16
Net cash used in financing activities of continuing operations was
$860,000 for the nine months ended September 30, 2004, compared to net cash used
in financing activities of continuing operations of $17.3 million for the
comparable period in the prior year. Net cash used in financing activities of
continuing operations for the nine months ended September 30, 2004 is
attributable to the Company's net payments of its revolving credit facility,
offset by cash receipts on the exercise of stock options. Borrowings under
credit facilities in the nine months ended September 30, 2004 were used to fund
increases in working capital and to make payments on various long-term
obligations.
The Company's capital expenditure and working capital requirements are
expected to be funded through a combination of cash flows from operations,
equipment financing and borrowings under the Company's line of credit. These
sources are considered to be adequate to fund the Company's requirements for at
least the next twelve months.
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 September 30, 2004 was $5.8 million. The Congress Revolver also includes a
$5.0 million letter of credit facility, which was unutilized at September 30,
2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $3.1 million was outstanding as of September 30, 2004.
The Congress Term A loan is payable in equal monthly installments of
approximately $64,000, 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 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 $3.75 million is
currently available. At September 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 $33.0 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 September 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% per
annum 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
17
loans; acquire investments; declare or make dividends or other distributions;
merge, consolidate, liquidate or dispose of assets or indebtedness; incur liens;
issue capital stock; or change its business. At September 30, 2004, the Company
was in compliance with all financial covenants. At September 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.
In July 2004, the Company and Congress entered into an amendment to the
Congress Facilities which, among other things, allows the Company to include its
Romanian subsidiary and entities formed in connection with a proposed joint
venture in China within the group of affiliates to which the Company is
permitted to make loans up to an aggregate specified amount. In October 2004,
the Company and Congress entered into an amendment and consent to the Congress
Facilities pursuant to which Congress consented to certain actions by the
Company, and the Company and Congress agreed to certain amendments to the
Congress Facilities, in each case in order to permit the Company to enter into a
proposed joint venture in South Africa with another third party. This amendment
also, among other things, allows the Company to include the entity formed to
conduct this joint venture within the group of affiliates to which the Company
is permitted to make loans up to an aggregate specified amount.
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at September 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 $ 12,974 $ 3,277 $ 9,697 $ -- $ --
Capital lease obligations 1,224 500 724 -- --
Operating leases 829 433 363 33 --
Purchase obligations 801 801 -- -- --
--------------------------------------------------------
Total $ 15,828 $ 5,011 $ 10,784 $ 33 $ --
========================================================
Additionally, the Company has material commitments of approximately
$910,000 for capital expenditures as of September 30, 2004.
Off-Balance Sheet Arrangements
As of September 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.
Guarantees
FASB Interpretation No. 45 provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has issued
and specific disclosures related to product warranties. As of September 30,
2004, the Company and various consolidated subsidiaries of the Company are
borrowers under the Congress Facilities (as defined above) and a note payable to
a bank in the Czech Republic (together, the "Facilities"). The Facilities are
guaranteed by either the Company and/or various consolidated subsidiaries of the
Company in the event that the borrower(s) default under the provisions of the
Facilities. The guarantees are in effect for the duration of the related
Facilities. The Company does not provide product warranties within the
disclosure provisions of Interpretation No. 45.
18
Other
As discussed above regarding proposed joint ventures, the Company is
exploring opportunities for growth of its airbag cushion business, specifically
into the Asia and South Africa markets.
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 September 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 $100,000.
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 costs 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
September 30, 2004, the Company had outstanding forward exchange contracts that
mature between October 2004 and December 2004 to purchase Mexican pesos with an
aggregate notional amount of approximately $801,000. The fair values of these
contracts at September 30, 2004 totaled approximately $23,000 which is recorded
as an asset on the Company's balance sheet in other current assets. 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 $22,000 of previously recorded derivative fair values in AOCI into
earnings for the nine months ended September 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 last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibit No. Exhibits
----------- --------
10.29 Amendment No. 5 to Loan and Security Agreement, dated
October 1, 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
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
DATED: November 12, 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
21