UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to ___________.
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Stevens Street
Greenville, South Carolina 29605
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|.
The aggregate market value of the common stock held by persons other than
affiliates of the registrant (based upon the assumption, for purposes of this
computation only, that Zapata Corporation and all of the registrant's directors
and executive officers were affiliates), as of June 30, 2004, was approximately
$6,554,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court Yes |X| No |_|.
The number of shares outstanding of the registrant's common stock, as of
March 1, 2005, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,320,147
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
NONE
1
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere herein. Statements in this Annual Report on Form 10-K that reflect
projections or expectations of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for future
operations, including those contained in "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Quantitative and Qualitative Disclosure about Market Risk," or
relating to the Company's outlook for fiscal year 2005, overall volume and
pricing trends or strategies and their anticipated results, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "approximates," "believes,"
"estimates," "intends," and "hopes" and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to the other factors noted with such forward-looking
statements, include (but are not limited to): general economic conditions in the
Company's market, including inflation, recession, interest rates and other
economic factors; casualty to or other disruption of the Company's facilities
and equipment; and other factors that generally affect the automotive industry.
Except as may be required by law, the Company expressly disclaims any obligation
to update these forward-looking statements to reflect events or circumstances
after the date of this Annual Report on Form 10-K or to reflect the occurrence
of unanticipated events.
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PART I
ITEM 1. BUSINESS
The Company
Safety Components International, Inc. (including, when the context
requires, its consolidated subsidiaries, the "Company" or "Safety Components")
was incorporated in Delaware in 1994. It is a leading low-cost, independent
supplier of automotive airbag fabric and cushions and technical fabrics with
operations in North America and Europe. The Company has recently entered into
joint ventures to produce products in China and South Africa, although
commercial production has not yet commenced in either of these locations. The
Company sells airbag fabric domestically and cushions worldwide to the major
airbag module integrators that outsource such products. The Company believes
that it is also a leading manufacturer of value-added technical fabrics used in
a variety of niche industrial and commercial applications such as fire service
apparel, ballistics material for luggage, filtration and military tents. The
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows the Company to more
effectively utilize its manufacturing assets and lower its per unit overhead
costs.
Net sales of automotive airbag cushions, automotive fabrics and technical
fabrics products (the "automotive airbag and fabrics products" business) were
approximately $247.9 million, $183.7 million and $244.3 million in the year
ended December 31, 2004, the nine month period from March 30, 2003 to December
31, 2003, and the year ended March 29, 2003, respectively. Subsequent to the
Change of Control (described below), the Company has changed its fiscal year to
a calendar year end to coincide with the fiscal year end of Zapata Corporation
("Zapata", NYSE: "ZAP"). The Company's operations were previously based on a
fifty-two or fifty-three week fiscal year ending on the Saturday closest to
March 31. As such, the period from March 30, 2003 to December 31, 2003 consists
of nine months of operations. The years ended December 31, 2004 and March 29,
2003 each consisted of twelve months of operations.
Change of Control
On September 29, 2003, Zapata filed a Schedule 13D with the Securities and
Exchange Commission (the "SEC") indicating that as of September 18, 2003 it had
acquired 2,663,905 shares of the Company's common stock which then constituted
approximately 53.7% of the issued and outstanding shares of such common stock.
As a result, a change of control of the Company (the "Change of Control")
occurred. On October 6, 2003, Zapata filed an amendment to its Schedule 13D with
the SEC, indicating that it had acquired an additional 1,498,489 shares of the
Company's common stock which, together with the shares previously acquired, then
constituted approximately 83.9% of the issued and outstanding common stock of
the Company.
The Change of Control triggered certain provisions of the Company's Stock
Option Plan, including immediate vesting of all options and an automatic change
in the exercise price of a portion of the options to $0.01. This change in
exercise price constituted a modification of the Stock Option Plan and the
Company was required to recognize a one-time, non-recurring compensation cost of
$1.4 million for the modified options, representing 126,900 options, for the
nine months ended December 31, 2003. Additionally, in lieu of re-pricing their
Class A stock options, the employment agreements of certain key executives
included a provision for a one-time, non-recurring bonus payable in the event of
a change of control. The aggregate bonus was $1.4 million and was also
recognized as an expense in 2003.
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. 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.
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. In the first quarter of 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
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taxable periods attributable to the filing of consolidated or combined income
tax returns as part of the Zapata consolidated federal income tax group.
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%. As a result
of Zapata's ownership of the company's outstanding common stock falling below
80%, Zapata will not consolidate the Company into Zapata's consolidated income
tax returns for periods subsequent to the first quarter of 2004. Under The Tax
Sharing and Indemnity Agreement, the Company will be consolidated into Zapata's
tax filing group for the fourth calendar quarter of 2003 and the first calendar
quarter of 2004. On January 4, 2005, the Company received notification from the
Internal Revenue Service that its plan to return to the taxpayer status
consistent to the periods prior to the Change of Control has been approved. The
Company does not expect any material financial impact to result from the change
in its tax filing status.
The Woodville Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited ("ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering and hereafter referred
to as "Woodville") of TISPP UK Limited, a subsidiary of Smiths Group PLC, to
expand its European operations. Such acquisition contributed approximately $7.8
million in sales and had a negative impact of approximately $1.1 million on
gross profit and approximately $1.5 million on operating income for the period
from November 3, 2001 to March 30, 2002. The management and business activities
of the Woodville operation were consolidated into the ASCIL operation during the
quarter ended June 28, 2003. The manufacturing process and production assets
were transferred to other European operations of the Company primarily in lower
labor cost facilities and countries.
The 2001 Restructuring
On April 10, 2000 (the "Petition Date"), the Company and certain of its
U.S. subsidiaries (collectively, the "Safety Filing Group"), filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On October 11, 2000 (the "Emergence Date"), the Safety
Filing Group emerged from Chapter 11 pursuant to the Plan of Reorganization (the
"Plan") confirmed by the Bankruptcy Court. Pursuant to the Plan, upon emergence,
all of the Company's 10-1/8% Senior Notes due 2007 (the "Notes") (an aggregate
of approximately $96.8 million, including accrued interest to the Petition Date)
were converted into 4,840,774 shares of the Company's post-bankruptcy common
stock, and the pre-bankruptcy common stock, excluding stock held by Robert A.
Zummo (former Chairman and Chief Executive Officer of the Company), was
converted into 159,226 shares of the Company's post-bankruptcy common stock,
including 39,619 shares of treasury stock, and warrants to acquire an additional
681,818 shares of such common stock (these warrants expired as of April 10,
2003). Immediately upon emergence, the Company had 5,000,000 shares of common
stock issued and 4,960,381 shares outstanding and, other than shares underlying
the warrants, no shares of common stock were reserved for issuance in respect of
claims and interests filed and allowed under the Plan. In addition, the Safety
Filing Group's trade suppliers and other creditors were paid in full, pursuant
to the terms of the Plan, within 90 days of the Emergence Date.
Automotive Airbag and Fabrics Products
Structure of the Automotive Airbag Industry
Airbag systems consist of various airbag modules and an electronic control
module, which are currently integrated by automakers into their respective
vehicles. Airbag modules generally consist of inflators, cushions, housing and
possibly trim covers and are assembled by module integrators, most of whom
produce a majority of the components required for a complete module. As the
industry has evolved, module integrators have outsourced varying portions of
non-proprietary components, such as cushions, to those companies specializing in
the production of individual components. The Company believes that its module
integrator customers will continue to outsource a portion of their cushion
requirements as they focus on the development of proprietary technologies. A
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company.
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Characteristic of the industry, the Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. As a result, the Company may compete with its customers
who supply their own internal cushion requirements. However, in most cases the
Company's customers do not produce the same cushions for the same car/truck
models for which the Company produces cushions.
Another characteristic of the airbag industry is the qualification process
for new suppliers. New suppliers that wish to produce and supply airbag cushions
or airbag fabric must undergo a rigorous qualification process, which can take
in excess of a year. The Company believes that the existence of this
qualification process can result in significant re-qualification costs for
module integrators that are required to assist the new supplier in meeting
automakers' requirements. Additionally, the Company believes module integrators
are, like their automaker customers, trying to reduce overall industry costs by
limiting the number of suppliers.
Establishment of Joint Ventures
On November 30, 2004, the Company announced that it had signed an
agreement to form a joint venture with KAP Textile Holdings SA Ltd. ("Gelvenor")
which, through its Gelvenor textiles divisions produces high technology
industrial, technical and specialized fabrics, in South Africa (the "South
Africa Joint Venture"). The Company anticipates that the South Africa Joint
Venture, which has not yet commenced commercial production, will produce
automotive airbag cushions in South Africa utilizing the fabrics produced by
Gelvenor. The initial production will be intended to satisfy the South African
domestic market, with additional production capacity available to support the
Company's growing worldwide customer base by the end of 2005. The Company owns
75% of the entity formed to conduct the operations of the South Africa Joint
Venture.
On January 4, 2005, the Company announced it had signed an agreement to
form a joint venture with Kingsway International Limited, an entity associated
with Huamao (Xiamen) Technical Textile Co., Ltd. ("Huamao") which manufactures
airbag fabrics, in China (the "China Joint Venture"). The Company anticipates
that the China Joint Venture, which has not yet commenced commercial production,
will produce automotive airbag cushions in China utilizing the fabrics produced
by Huamao. Pursuant to a technology transfer and joint venture agreement, the
Company will provide technical assistance to its partner in the development of
airbag fabrics. Production is intended to satisfy the Chinese domestic market.
The Company owns 65% of the entity formed to conduct the operations of the China
Joint Venture.
The Company has certain financial commitments related to these joint
ventures as described in "Liquidity and Capital Resources - Contractual
Obligations" below.
Products
The Company's automotive products include passenger, driver and side
(thorax) impact airbag cushions, side protection curtains, knee protection
cushions and related parts and accessory components manufactured for
installation in over 200 car and truck models sold worldwide and airbag fabric
for sale to airbag manufacturers. Sales of airbag related products (inclusive of
sales of airbag fabric) accounted for approximately 88.5% of the Company's
consolidated net sales in the fiscal year ended December 31, 2004, approximately
89.8% of the Company's consolidated net sales in the nine month period from
March 30, 2003 to December 31, 2003 and approximately 90.8% of the Company's
consolidated net sales in the fiscal year ended March 29, 2003.
The Company also manufactures a wide array of specialty technical fabrics
for consumer and industrial uses. These fabrics include: (i) protective apparel
worn by firefighters; (ii) filtration fabrics used in the aluminum, coal, steel,
cement, clay and brewing industries; (iii) woven fabrics for use by
manufacturers of coated products; (iv) specialty fabrics used in fuel cells,
bomb and cargo chutes, oil containment booms and gas diaphragms, among other
uses; (v) release liners used in tire manufacturing; and (vi) high-end luggage
fabrics, including "ballistics" fabric used in Hartman and Tumi brands of
luggage. Sales of technical related products accounted for approximately 11.5%
of the Company's consolidated net sales in the fiscal year ended December 31,
2004, approximately 10.2% of the Company's consolidated net sales in the nine
month period from March 30, 2003 to December 31, 2003 and approximately 9.2% of
the Company's consolidated net sales in the fiscal year ended March 29, 2003.
The market for the Company's technical related products is highly segmented by
product line. Marketing and sales of the Company's technical related products is
conducted by the Company's marketing and sales staff based in Greenville, South
Carolina. Manufacturing
5
of these products occurs at the South Carolina facility, using much of the same
equipment and manufacturing processes that the Company uses to produce airbag
fabric, enabling the Company to take advantage of demand requirements for the
various products by leveraging its expenditures on production retooling costs.
By manufacturing technical products using many of the same machines that weave
airbag fabric, the Company is able to more effectively utilize capacity at its
South Carolina plant and lower per unit overhead costs.
See Note 8 to the Consolidated Financial Statements for additional
financial information by product type.
Customers
The Company sells its airbag cushions to airbag module integrators in
North America and Europe for inclusion in specified model cars, generally
pursuant to contract requirements. Certain of these customers also manufacture
airbag cushions to be used in their production of airbag modules. The Company
markets and sells airbag cushions through its direct marketing and sales forces
based in South Carolina, California, Mexico, the United Kingdom and Germany.
The Company sells its fabric in North America either directly to a module
integrator or, in some cases, to a fabricator (such as the Company's own
operations), which sells a sewn airbag to the module integrator. In some cases,
particularly when the cushion requires lower air permeability to facilitate more
rapid or prolonged inflation, and to eliminate particulate burn-through caused
by hot inflators, the fabric must be coated before fabrication into airbags. The
Company also sells fabric to coating companies, which then resell the coated
fabric to either an airbag cushion fabricator (including the Company) or module
integrator. Sales are either made against purchase orders, pursuant to releases
on open purchase orders, or pursuant to short-term supply contracts generally
having durations of up to twelve months.
The Company has contractual relationships with several large module
integrators, the most significant being Autoliv, Takata and TRW, listed in
alphabetical order. The Company supplies airbag cushions and/or airbag fabric to
each of these customers based upon releases from formal purchase orders, which
typically cover periods of up to twelve months and are subject to periodic
negotiation with respect to price and quantity. The loss of any of its largest
customers could have a material adverse effect on the Company. See Note 2 of the
Consolidated Financial Statements for further information regarding the
Company's customers.
Suppliers
The Company's principal customers generally require that they approve all
suppliers of major airbag components or airbag fabric raw materials, as the case
may be. These suppliers are approved after undergoing a rigorous qualification
process on their products and manufacturing capabilities. In many cases, only
one approved source of supply exists for certain airbag components. In the event
that a sole source supplier experiences prolonged delays in product shipments or
no longer qualifies as a supplier, the Company would work together with its
customers to identify another qualified source of supply. Although alternative
sources of supply generally exist, a prolonged delay in securing an alternative
supply or in obtaining the approval by the Company's customers of any such
alternative sources of supply could adversely affect the Company's operating
results.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by Invista, Pharr Yarns, DuPont, Polymide High
Performance ("PHP"), and Unifi, among others. The primary yarns include nylon,
polyester and Nomex. Invista and PHP are the leading suppliers of airbag fabric
yarn to both the market and the Company. Invista supplies a majority of the
nylon yarn used in the Company's airbag fabric operations pursuant to purchase
orders or releases on open purchase orders. The loss of Invista as a supplier
could have a material adverse effect on the Company.
In addition, in connection with its European operations, the Company has
entered into an agreement with a German industrial sewing company and its
Romanian subsidiary under which the Romanian subsidiary serves as a
manufacturing subcontractor for airbag cushions. Under the terms of this
agreement, the Company provides and retains control of the manufacturing
equipment, processes and production materials and the subcontractor provides
sewing services for a price per standard minute of acceptable units basis.
6
Significant problems with, or the loss of, any key supplier or
subcontractor (see also "Risks Resulting from Foreign Operations" below for
further information) may adversely affect the Company's operating results and
ability to meet customer contracts.
Capacity
The Company manufactured and shipped over 28.8 million airbag cushions and
related components to the Company's North American and European customers during
the fiscal year ended December 31, 2004. The Company believes it has adequate
capacity to manufacture for the anticipated customer requirements of its 2005
fiscal year.
The Company's South Carolina facility produced approximately 18.5 million
yards of fabric in the fiscal year ended December 31, 2004. The Company believes
it has adequate capacity to manufacture for the anticipated customer
requirements of fiscal 2005. The Company utilizes weaving machines that are
versatile in their ability to produce a broad array of air restraint and
specialty technical fabrics for use in a large number of applications. The
ability to interchange the machines between air restraint fabric and other
specialty technical fabrics allows the Company to leverage its utilization of
plant assets.
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with plants owned by its airbag module integrator
customers, which produce a substantial portion of airbag cushions for their own
consumption, although they do not generally manufacture the same airbag cushions
for the same vehicle models for which the Company manufactures. Most airbag
module integrators subcontract a portion of their requirements for airbag
cushions. The Company believes that it has good working relationships with its
customers due to its high volume and low-cost manufacturing capabilities and
consistency of quality products and service.
The Company shares the North American airbag fabric market primarily with
Milliken, Takata-Highland, Mastex, Key Safety and Autoliv. Takata-Highland, Key
Safety and Autoliv, all airbag module integrators, produce a portion or all of
their airbag fabric for use in their own airbag cushions.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, flexibility
and capability to produce a wide range of models of passenger and driver airbag
cushions and side impact airbag curtains and cushions. In addition, the
Company's weaving plant in South Carolina has provided it with some measure of
vertical integration, enhancing its ability to compete in the automotive airbag
industry. Increased competition, as well as price reductions of airbag systems,
could adversely affect the Company's revenues and profitability.
Technical Centers
The Company has technical centers in Greenville, South Carolina; Ensenada,
Mexico; and Hildesheim, Germany. The center in Hildesheim, Germany has the
ability to conduct static and dynamic deployment testing and analysis using
high-speed video equipment and includes pendulum-testing capability, a sample
shop with manual and CNC sewing equipment, a production-style laser cutter,
volumetric measurement and analysis equipment, textile welding and other
non-sewn fastening equipment. The center also has a materials laboratory, and
can access the services of laboratory and textile personnel at the Company's
facility in Greenville, South Carolina. In North America, the module integrators
customarily perform the majority of advanced cushion testing; therefore, the
Company has not seen a need for an advanced technical center for cushions in
North America. However, all necessary validation testing and process development
testing is performed in Ensenada, Mexico. The Ensenada, Mexico technical center
consists of a testing laboratory and a dedicated prototype cell, complete with a
separate staff and equipment.
Through its textile laboratory located in Greenville, South Carolina, the
Company has the ability to test and analyze a wide range of fabrics (airbag or
other) under internationally accepted testing standards, including US-ASTM,
Europe-DIN and ISO, Asian-JIS and Underwriters NFPA. The laboratory is A2LA
accredited (ISO 17025) and certified with ISO/TS 16949 - the most important
certifications for the industry. All validation testing and analytical
7
testing of fabric is performed at this laboratory. Additionally, the Greenville
facility has prototype-manufacturing capabilities.
Qualification and Quality Control
The Company's customers require the Company to meet specific requirements
for design validation. The Company and its customers jointly participate in
design and process validations and customers must be satisfied with the
reliability and performance prior to awarding a purchase order. All standards
and requirements relating to product performance are required to be satisfied
before the Company is qualified as a supplier by its customers.
The Company maintains extensive quality control and quality assurance
systems in its North American and European automotive facilities, including
inspection and testing of all products, and is TS 16949, ISO 9001 and/or ISO
9002 certified. The more stringent TS 16949 replaces the Company's previous QS
9000 certification. The Company is currently in the process of certification for
TS 16949 for the South Africa Joint Venture and the China Joint Venture,
expecting completion by December 2005 and July 2006, respectively. The Company
also performs process capability studies and design of experiments to determine
that the manufacturing processes meet or exceed the quality levels required by
each customer.
The fabric operation's laboratories have ISO 17025 and A2LA, as well as
UL, accreditation. The Company's fabric operation is also certified under the
environmental and energy quality system ISO 14001. The Company was the first
airbag fabric manufacturer to have its entire business (not just its
manufacturing facility) certified under QS 9000.
Governmental Regulations
The Company's operations are subject to various product safety,
environmental, employee safety and wage and transportation related statutes and
regulations. The Company believes that it is in substantial compliance with
existing laws and regulations and has obtained or applied for the necessary
permits to conduct its business operations.
Product Liability
The Company is engaged in a business that could expose it to possible
claims for injury resulting from the failure of products sold by it. In the
past, there has been increased public attention to injuries and deaths of
children and small adults due to the force of the inflation of airbags. To date,
however, the Company has not been named as a defendant in any automotive product
liability lawsuit, nor been threatened with any such lawsuit. The Company
maintains product liability insurance coverage, which management believes to be
adequate. However, a successful claim brought against the Company resulting in a
product recall program or a final judgment in excess of its insurance coverage
could have a material adverse effect on the Company.
Discontinued Operations
On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". The Company's discontinued
operations supplied projectiles and other metal components for medium caliber
training and tactical ammunition used by the United States Armed Forces. The
metal components manufactured by the Company were shipped to a loading facility,
operated either by the United States government or a prime defense contractor,
which loaded the explosives, assembled the rounds and packaged the ammunition
for use. Additionally, the Company's discontinued operations manufactured small
quantities of metal airbag module components for the automotive airbag industry.
Net sales of metal and defense related products were $0 for both the fiscal year
ended December 31, 2004 and the nine month period from March 30, 2003 to
December 31, 2003 and were approximately $5.4 million in the fiscal year ended
March 29, 2003 for the discontinued operations. See Note 3 to the Consolidated
Financial Statements for more information.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry, in which, generally, there
are seasonal plant shutdowns in the third and fourth quarters of each calendar
year.
8
Backlog
The Company does not reflect an order for airbag cushions or airbag fabric
in backlog until it has received a purchase order and a material procurement
release that specifies the quantity ordered and specific delivery dates.
Generally, these orders are shipped within two to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
its backlog is a reliable measure of future airbag sales.
Risks Resulting from Foreign Operations
Certain of the Company's consolidated net sales are generated outside the
United States. Foreign operations and exports to foreign markets are subject to
a number of special risks including, but not limited to, risks with respect to
fluctuations in currency exchange rates, economic and political destabilization
and other disruption of markets, restrictive actions by foreign governments
(such as restrictions on transfer of funds, export duties and quotas, foreign
customs and tariffs and unexpected changes in regulatory environments), changes
in foreign laws regarding trade and investment, difficulty in obtaining
distribution and support, nationalization, the laws and policies of the United
States affecting trade, foreign investment and loans and foreign tax laws. There
can be no assurance that one or a combination of these factors will not have a
material adverse effect on the Company's ability to increase or maintain its
foreign sales or on its future results of operations.
In addition, the Company has a significant portion of its manufacturing
operations in foreign countries and purchases a portion of its raw materials
from foreign suppliers. The production costs, profit margins and competitive
position of the Company are affected by the strength of the currencies in
countries where it manufactures or purchases goods relative to the strength of
the currencies in countries where its products are sold.
Certain of the Company's operations generate net sales and incur expenses
in foreign currencies. The Company's financial results from international
operations may be affected by fluctuations in currency exchange rates. Future
fluctuations in certain currency exchange rates could adversely affect the
Company's financial results. The Company monitors its risk associated with the
volatility of certain foreign currencies against its functional currency, the
U.S. dollar. The impact of changes in the relationship of other currencies to
the U.S. dollar in the fiscal year ended December 31, 2004 has resulted in the
recognition of other income of approximately $677,000. However, it is unknown
what the effect of foreign currency rate fluctuations will have on the Company's
financial position or results of operations in the future. In certain
situations, the Company utilizes derivative financial instruments designated as
cash flow hedges to reduce exposures to volatility of foreign currencies
impacting the operation of its business. See Note 12 to the Consolidated
Financial Statements for information regarding derivatives and hedging.
See Note 8 to the Consolidated Financial Statements for additional
financial information by geographic area.
Employees
At December 31, 2004, the Company employed approximately 2,800 employees.
The Company's hourly employees in Mexico, Czech Republic and South Africa are
entitled to a federally regulated minimum wage, which is adjusted annually. The
Company's employees at its Mexican facility are unionized. In addition,
Automotive Safety Components International GmbH & Co. KG, the Company's wholly
owned German subsidiary, has a workers' council pursuant to German statutory
labor law. The Company has not experienced any work stoppages related to its
work force and considers its relations with its employees and all unions
currently representing its employees to be good.
Environmental Matters
Like similar companies, the Company's operations and properties are
subject to a wide variety of increasingly complex and stringent federal, state,
local and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws may impose joint and several
liability and may apply to conditions at properties presently or formerly owned
or operated by an entity or its predecessor as well as to conditions of
properties at which wastes or other contamination attributable to an entity or
its predecessor have been sent or otherwise come to be
9
located. The nature of the Company's operations exposes it to the risk of claims
with respect to such matters and there can be no assurance that violations of
such laws have not occurred or will not occur or that material costs or
liabilities will not be incurred in connection with such claims. Based upon its
experience to date, the Company believes that the future cost of compliance with
existing Environmental Laws and liability for known environmental claims
pursuant to such Environmental Laws, will not have a material adverse effect on
the Company's financial position, results of operations or cash flows. However,
future events, such as new information, changes in existing Environmental Laws
or their interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
material.
An undiscounted reserve of $277,000 has been included in "other long-term
liabilities" on the accompanying consolidated balance sheets for estimated
future environmental expenditures related to the Company's facility in
Greenville, South Carolina (the "Greenville facility") for conditions existing
prior to the Company's ownership of the facility. Such reserve was established
at the time the Company acquired the facility, and the amount was determined by
reference to the results of a Phase II study performed at the Greenville
facility. In addition, the Greenville facility has been identified along with
numerous other parties as a Potentially Responsible Party ("PRP") at the
Aquatech Environmental, Inc. Superfund Site. The Company believes that it is a
de minimis party with respect to the site and that future clean-up costs
incurred by the Company will not be material.
The Company has received a General Notice of Potential Liability letter
from the U.S. Environmental Protection Agency ("EPA"), dated November 22, 2004,
addressed to Valentec Wells, LLC, an inactive subsidiary ("Valentec Wells") of
the Company, regarding the RRGClayton Chemical Site (the "Site"). The EPA Notice
states that the agency has received information indicating that Valentec Wells
is a PRP for the Site pursuant to the Comprehensive Environmental Response
Compensation and Liability Act. The EPA letter indicates that Valentec Wells is
one of 73 PRPs that were selected to receive this Notice as the alleged largest
contributors of waste to the Site. The EPA Notice invited Valentec Wells to
attend PRP meetings in early December 2004 and to respond indicating the
company's willingness to perform or finance remedial response activities at the
Site. In subsequent communications, EPA has alleged that Valentec Wells may be
connected to the Site through another corporation. The Company has requested
that EPA provide any information in its possession related to the alleged
successor relationship between Valentec Wells and the other company. As of the
date of this Annual Report on Form 10-K, no information has been provided by the
EPA and the Company's inquiry into this matter has not confirmed any corporate
relationship between Valentec Wells and the other company, nor has it revealed
any information to indicate that Valentec Wells ever sent wastes to the Site.
The Company will continue to review this matter. At this time, the Company is
unable to predict the outcome or reasonably estimate a range of possible loss.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued are expected to be
required for the Company's environmental control efforts and the final outcomes
of these matters are not expected to have a material adverse effect on the
Company's financial position or results of future operations. The Company
believes that it currently is in compliance with applicable environmental
regulations in all material respects. Management's opinion is based on the
advice of independent consultants on environmental matters.
Intellectual Property
The Company holds thirty-five patents and approval for five additional
patents are pending. All patents relate to technical improvements for
enhancement of product performance with respect to the Company's airbag, fabric
and technical related products. Provided that all requisite maintenance fees are
paid, the patents held by the Company will expire between the years 2011 and
2021.
Engineering, Research & Development
The Company's fabric and airbag cushions operations have maintained an
active design and development effort focused toward new and enhanced products
and manufacturing processes. The Company designs and engineers its fabrics to
meet its customers' specific applications and needs. While the component
manufacturer originates most design requirements, the Company remains dedicated
to improving the quality of existing products, as well as developing new
products for all applications. Costs associated with design and development for
fabric and airbag
10
cushions were approximately $1.5 million, $1.2 million and $1.2 million in the
year ended December 31, 2004, the nine month period from March 30, 2003 to
December 31, 2003 and the year ended March 29, 2003, respectively.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Greenville, South
Carolina in a facility owned by the Company, adjacent to its Safety Components
Fabric Technologies, Inc. ("SCFTI") manufacturing facility. The Company owns or
leases five facilities in which it manufactures airbag and technical fabrics
related products, with total plant area of approximately 1.2 million square feet
(including administrative, warehouse, engineering and research and development
areas housed at Company locations). Below is an overview of the Company's
properties at its airbag and technical fabrics related products facilities as of
December 31, 2004.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Ensenada, Mexico (airbag cushions) 97,000 Leased 2005 (1)
Ensenada, Mexico (airbag cushions) 43,000 Leased 2007 (1)(2)(6)
Greenville, South Carolina (airbag and technical fabrics) 826,000 Owned N/A (1)(3)(6)
Hildesheim, Germany (airbag cushions) 70,000 Owned N/A (1)(6)
Jevicko, Czech Republic (airbag cushions) 100,000 Owned N/A (4)
Otay Mesa, California (airbag cushions) 16,000 Leased 2006 (5)(6)
Newport, Wales (European sales offices) 500 Leased (7)(6)
- ---------
(1) Manufacturing, research and development and office space
(2) Lease also provides for five-year renewal option
(3) Location of corporate offices
(4) Manufacturing and office space
(5) Finished goods distribution center and office space
(6) Location of marketing and sales offices
(7) Facility is leased on a month-to-month basis
ITEM 3. LEGAL PROCEEDINGS
As described in "The Company - The 2001 Restructuring" in Item 1, the
Company emerged from bankruptcy on October 11, 2000, and an order entering the
final decree and closing the Chapter 11 cases was signed on November 21, 2003.
The final decree is subject to a "Limited Reservation of Jurisdiction" for a
"Reporting/Fee Dispute" with the U.S. Trustee Office over administrative matters
associated with the cases. The Company has reserved $275,000 for any potential
exposure associated with the Reporting/Fee Dispute. Although no assurances can
be given in this regard, management does not expect that the Company will incur
material expenditures in addition to those reserved with respect to the
Reporting/Fee Dispute.
By letter dated November 2, 2004, a division employee, at the time a
controller for the Company's North American Automotive Group, filed a complaint
with the U.S. Department of Labor, Occupational Safety & Health Administration
("OSHA"), pursuant to Section 806 of the Corporate and Criminal Fraud
Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002 (the
"Act"), alleging that a change in his duties in September 2004 resulted from his
allegations of improprieties in the Company's operations in Mexico and
California. Neither the internal investigation conducted by management nor the
ensuing external investigation led by the Audit Committee following notification
by management of the issues raised substantiated any of the allegations. Due to
circumstances unrelated to the investigation or the complaint, the Company
terminated the employee on December 15, 2004. By letter dated December 15, 2004,
the employee amended his complaint to allege that his termination was also in
retaliation for his allegations. By letter dated February 14, 2005, the Company
was notified by OSHA that it had completed its investigation and found that
there is no reasonable cause to believe that the Company violated the Act, and
that the employee has 30 days from his receipt of such notification to request a
hearing before an Administrative Law Judge. As of the date of this Annual Report
on Form 10-K, the employee has not yet sought such a hearing to the Company's
knowledge.
11
See "Environmental Matters" in Item 1 with respect to certain
environmental proceedings involving the Company.
The Company, from time to time, becomes party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 31, 2004.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Pursuant to the Plan discussed in Item 1, the claims of the holders of the
Notes were converted into the right to receive 4,840,774 shares of the Company's
common stock on the Emergence Date (4,816,574 shares to the holders of the Notes
and 24,200 shares to the financial advisors of the holders of the Notes). The
pre-bankruptcy common stock, excluding stock held by Robert A. Zummo, the
Company's former Chairman and Chief Executive Officer, was converted into
159,226 shares of the Company's post-bankruptcy common stock, including 39,619
shares of treasury stock (for an aggregate of 5,000,000 shares issued and
4,960,381 shares outstanding post-bankruptcy) and warrants to acquire an
additional 681,818 shares of such common stock on the Emergence Date (such
warrants expired on April 10, 2003). All other options and warrants were
cancelled on the Emergence Date.
The Company's common stock is not listed on any exchange, but rather
trades on the Over-The-Counter Bulletin Board. The following table sets forth
the range of high and low prices for reported bids of the common stock during
the twelve and nine month periods ended December 31, 2004 and December 31, 2003,
respectively (the Company's two most recent fiscal years). The prices quoted for
the Over-The-Counter Bulletin Board reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
High Low
---- ---
Period from March 30, 2003 to December 31, 2003
First Quarter $ 7.50 $ 5.75
Second Quarter 11.00 7.50
Third Quarter 14.00 10.05
Year Ended December 31, 2004
First Quarter $ 17.00 $ 12.00
Second Quarter 13.50 12.00
Third Quarter 13.40 12.75
Fourth Quarter 14.00 12.75
As of March 1, 2005, there were approximately 158 holders of record of the
Company's common stock. The warrants to acquire 681,818 shares of common stock
issued by the Company, pursuant to the Plan, on the Emergence Date, expired as
of April 10, 2003.
To date, the Company has not paid any cash dividends to its stockholders
and does not currently have plans to do so in the future. Further, the Congress
Facilities (as defined below) restrict the Company's ability to pay dividends.
See the discussion of the Congress Facilities under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" below. During the three months ended December 31, 2004 the
Company did not repurchase any equity securities that were registered by the
Company pursuant to Section 12 of the Exchange Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated historical financial
data for the Company as of the dates and for the fiscal periods indicated. The
selected historical financial data for the fiscal year ended December 31, 2004,
the nine month period from March 30, 2003 to December 31, 2003, the fiscal years
ended March 29, 2003 and March 30, 2002, the period from October 11, 2000 to
March 31, 2001, and the period from March 26, 2000 to October 10, 2000 have been
derived from the audited Consolidated Financial Statements of the Company for
such periods. The presentation of certain previously reported amounts has been
reclassified to conform to the current presentation and to reflect discontinued
operations of the non-core businesses (metal and defense) as discussed in Note 3
to the Consolidated Financial Statements of the Company. The Consolidated
Financial Statements for the fiscal year ended December 31, 2004, the nine month
period from March 30, 2003 to December 31, 2003, fiscal years ended March 29,
2003 and March 30, 2002 and the period from October 11, 2000 to March 31, 2001
reflect the Company's emergence
13
from Chapter 11 and were prepared utilizing the principles of fresh start
accounting contained in the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). As a result of the implementation of
fresh start accounting, certain of the selected financial data for the fiscal
year ended December 31, 2004, the period from March 30, 2003 to December 31,
2003, fiscal years ended March 29, 2003 and March 30, 2002 and for the period
from October 11, 2000 to March 31, 2001 is not comparable to the selected
financial data of prior periods. See Note 1 to the Consolidated Financial
Statements of the Company for further discussion of the effects of fresh start
accounting on the Company's Consolidated Financial Statements. As a result of
differences in comparability, selected financial data for the "Reorganized
Company" have been separately identified from that of the "Predecessor Company."
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto, included
elsewhere in this report.
--------------------------------------------------------------------------------
In thousands, except per share data and footnotes | Predecessor
(see Notes to Selected Financial Data) Reorganized Company | Company
--------------------------------------------------------------------------------
Fiscal Year Period from Fiscal Year Fiscal Year Period from | Period from
Ended 3/30/03 to Ended Ended 10/11/00 to | 3/26/00 to
12/31/04 12/31/03 3/29/03 3/30/02 3/31/01 | 10/10/00
(12 Months) (9 Months) (12 Months) (12 Months) (6 Months) | (6 Months)
-------------------------------------------------------------------------------
INCOME STATEMENT DATA (1): |
Net sales (2) $ 247,883 $ 183,666 $ 244,338 $ 203,323 $ 92,052 | $ 109,139
Cost of sales, including depreciation 211,137 157,568 214,318 176,817 79,337 | 93,307
-------------------------------------------------------------------------------
Gross profit 36,746 26,098 30,020 26,506 12,715 | 15,832
Selling, general and administrative |
expenses 19,594 12,671 14,475 11,595 5,235 | 5,941
Research and development expenses 1,540 1,225 1,242 899 335 | 353
Compensation expense associated |
with change of control (3) -- 2,797 -- -- -- | --
Amortization of intangible assets (4) 153 106 124 900 448 | 675
-------------------------------------------------------------------------------
Operating income 15,459 9,299 14,179 13,112 6,697 | 8,863
Other (income) expense, net (1,467) (2,275) (3,446) (1,034) (327) | 828
Interest expense (5) 946 1,664 3,616 4,143 2,561 | 3,883
-------------------------------------------------------------------------------
Income from continuing operations |
before reorganization items, income |
taxes and minority interest 15,980 9,910 14,009 10,003 4,463 | 4,152
Reorganization items (6) -- -- -- -- -- | 41,740
-------------------------------------------------------------------------------
Income (loss) from continuing |
operations before income taxes |
and minority interest 15,980 9,910 14,009 10,003 4,463 | (37,588)
Income tax provision (benefit) 5,771 3,808 6,120 3,397 1,769 | (17,511)
Minority interest in loss of |
consolidated subsidiary (7) (39) -- -- -- -- | --
-------------------------------------------------------------------------------
Income (loss) from continuing operations 10,248 6,102 7,889 6,606 2,694 | (20,077)
Discontinued operations, net of taxes: |
Loss from discontinued operations -- -- -- -- -- | 1,440
Loss (gain) on disposition of |
discontinued operations (8) -- -- 2,023 2,517 1,444 | (214)
Extraordinary gain, net of taxes (9) -- -- -- -- -- | 29,370
Cumulative effect of change in accounting |
method (10) -- -- (14,651) -- -- | --
-------------------------------------------------------------------------------
Net income (loss) $ 10,248 $ 6,102 $ (8,785) $ 4,089 $ 1,250 | $ 8,067
===============================================================================
PER SHARE DATA, BASIC (11):
Income from continuing operations $ 1.97 $ 1.23 $ 1.59 $ 1.33 $ 0.54
Loss from discontinued operations -- -- (0.41) (0.51) (0.29)
Cumulative effect of change in accounting
method -- -- (2.95) -- --
----------------------------------------------------------------
Net income (loss) per common share $ 1.97 $ 1.23 $ (1.77) $ 0.82 $ 0.25
================================================================
PER SHARE DATA, DILUTED (11):
Income from continuing operations $ 1.94 $ 1.19 $ 1.59 $ 1.33 $ 0.54
Loss from discontinued operations -- -- (0.41) (0.51) (0.29)
Cumulative effect of change in accounting
method -- -- (2.95) -- --
----------------------------------------------------------------
Net income (loss) per common share $ 1.94 $ 1.19 $ (1.77) $ 0.82 $ 0.25
================================================================
Weighted average number of shares outstanding,
basic 5,206 4,973 4,960 4,960 4,960
================================================================
Weighted average number of shares outstanding,
diluted 5,294 5,119 4,960 4,960 4,960
================================================================
BALANCE SHEET DATA: Reorganized Company
12/31/04 12/31/03 3/29/03 3/30/02 3/31/01
----------------------------------------------------------------
Working capital (12) $ 37,429 $ 26,653 $ 8,016 $ 3,711 $ 27,079
Total assets 127,526 123,326 134,064 125,271 130,683
Long term debt, net of current maturities (12) 3,729 11,817 7,363 12,182 43,541
Stockholders' equity 80,524 64,029 51,913 55,838 51,943
14
Notes to Selected Financial Data:
(1) The Company did not declare dividends during any of the periods or fiscal
years presented.
(2) The growth in net sales between fiscal years 2002 and 2003 is attributable
in part to the Woodville acquisition on November 2, 2001.
(3) During the nine months ended December 31, 2003, Zapata Corporation
acquired shares of the Company's common stock that at the time of such
acquisition represented approximately 83.9% of the outstanding shares of
the Company's common stock, resulting in the Change of Control described
above in "The Company - Change of Control" in Item 1. The Change of
Control triggered certain provisions of the Company's Stock Option Plan,
including immediate vesting of all options and an automatic change in the
exercise price of a portion of the options. This change in exercise price
constituted a modification of the Stock Option Plan and the Company was
required to recognize a one-time, non-recurring non-cash compensation cost
of $1.4 million for the modified options. Additionally, the employment
agreements of certain key executives included a provision for a one-time,
non-recurring bonus payable in the event of a change of control. The
aggregate bonus, payable following the Change of Control, was $1.4
million.
(4) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", as
of March 31, 2002, the beginning of fiscal 2003, required the Company to
cease amortization of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" and goodwill, resulting in the
reduction of approximately $791,000 in amortization costs from fiscal
2002. Amortization expense for the fiscal year ended March 30, 2002 and
the period from October 11, 2000 to March 31, 2001 was approximately
$791,000 and $395,000, respectively.
(5) Contractual interest for the period from March 26, 2000 to October 10,
2000, was $8.5 million. Interest expense on the Company's Notes was
reported to the Petition Date (April 10, 2000). Such interest expense was
not reported subsequent to that date because it was not required to be
paid during the bankruptcy proceedings and was not an allowed claim under
the Plan. The difference between reported interest expense and stated
contractual interest expense of the Predecessor Company was approximately
$4.7 million for the period from March 26, 2000 to October 10, 2000.
(6) During the period from March 26, 2000 to October 10, 2000, the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7
resulted in a net charge of approximately $34.0 million. Professional fees
and expenses of $3.7 million included in Reorganization Items for the
period represent fees and expenses associated with the Company's financial
restructuring and Chapter 11 bankruptcy proceeding. The revaluation of the
Notes totaled $2.9 million, representing the write-off of related deferred
financing costs. Also included in this amount is $1.1 million of
restructuring charges that consist primarily of a charge for future
severance payments to the Company's former Chairman and Chief Executive
Officer.
(7) On November 30, 2004, the Company announced that it had signed an
agreement to form the South Africa Joint Venture for the production in
South Africa of automotive airbag cushions, utilizing the fabrics produced
by its joint venture partner. As of December 31, 2004, the South Africa
Joint Venture had not begun commercial production. Minority interest
represents the amount of loss attributable to the Company's unaffiliated
joint venture partner.
(8) On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". Net Sales of metal
and defense related products were approximately $0, $0, $5.4 million,
$10.5 million, 8.4 million and 12.2 million in the year ended December 31,
2004, the period from March 30, 2003 to December 31, 2003 and the years
ended March 29, 2003 and March 30, 2002, the period from October 11, 2000
to March 31, 2001, and the period from March 26, 2000 to October 10, 2000,
respectively, for the discontinued operations.
(9) During the period from March 26, 2000 to October 10, 2000, the early
extinguishment of the Notes and related accrued interest resulted in an
extraordinary gain of $29.9 million, net of income taxes of $17.5 million.
This was offset by a loss recognized in the amount of $573,000 related to
deferred financing costs associated with the early termination of the
Company's prior credit facility during the period.
(10) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to assess its "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation
performed upon its emergence from Chapter 11 in October 2000, and goodwill
as of March 31, 2002. The excess reorganization value and goodwill were
determined to be impaired and, under the transition guidance of SFAS No.
142, the impairment was charged to earnings as the cumulative effect of a
change in method of accounting. No tax effect was recognized, as these
items were not deductible for income tax purposes. See Note 2 to the
Consolidated Financial Statements.
(11) Share and per share data are not meaningful on or prior to October 10,
2000 due to the significant change in the capital structure that resulted
from the Plan.
(12) The decrease in working capital and long-term debt, net of current
portion, at March 29, 2003 and March 30, 2002 was principally due to the
classification of the Congress Facility (as defined below) and/or a
subordinated secured note, each due October 2003, with an outstanding
balance of $28.5 and $18.9 million at March 29, 2003 and March 30, 2002,
respectively, as a current liability at March 29, 2003 and March 30, 2002,
respectively. The Company refinanced the Congress Facility and repaid the
subordinated secured note prior to their maturity in October 2003. See
Note 5 to the Consolidated Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading low-cost independent supplier of automotive
airbag fabric and cushions, with operations in North America and Europe. The
following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
report. Except for the historical information contained herein, the discussions
in this document contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. The Company's actual results could differ materially from those
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995" regarding forward-looking information at the
beginning of this Form 10-K and, from time to time, in the Company's other
filings with the SEC.
Critical Accounting Policies
The following discussion and analysis of financial condition and results
of operations are based on the Company's Consolidated Financial Statements. A
summary of significant accounting policies is disclosed in Note 2 to the
Consolidated Financial Statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the Consolidated Financial
Statements. It is important that the reader of the financial statements
understands that actual results could differ from these estimates, assumptions
and judgments.
In addition, judgment is involved in determining which accounting policies
and estimates would be considered as "critical". Because the Company generally
does business with large, well-established customers, the Company has not
historically been, nor is it expected in the future to be, exposed to
significant bad debt or inventory losses. Accordingly, the estimates of the
allowance for bad debts and of inventory reserves are not considered to be
critical accounting policies or estimates. In addition, the Company emerged from
bankruptcy in October 2000 and revalued its tangible assets at that time.
Accordingly, estimates of tangible asset impairment are not considered to be a
critical accounting policy or estimate. We believe the following critical
accounting policies contain the most significant judgments and estimates used in
the preparation of the Consolidated Financial Statements.
Foreign Currency Translation. Financial statements of substantially all of
the Company's foreign operations are prepared using the local currency as the
functional currency. In accordance with SFAS No. 52, "Foreign Currency
Translation," translation of these foreign operations to United States dollars
occurs using the current exchange rate for balance sheet accounts and a weighted
average exchange rate for results of foreign operations. Translation gains or
losses are recognized in "accumulated other comprehensive income (loss)" as a
component of stockholders' equity in the accompanying consolidated balance
sheets. The Company's subsidiary in Mexico prepares its financial statements
using the United States dollar as the functional currency. Since the Mexico
subsidiary does not have external sales and does not own significant amounts of
inventory or fixed assets, the Company has determined that the United States
dollar is the appropriate functional currency. Accordingly, the translation
effects of the financial statements are included in the results of operations.
The Company's operations in Mexico, Germany, the United Kingdom, the Czech
Republic, China and South Africa expose the Company to currency exchange rate
risks associated with the volatility of certain foreign currencies against its
functional currency, the U.S. dollar. In the fiscal year ended December 31,
2004, the nine month period from March 30, 2003 to December 31, 2003 and the
year ended March 29, 2003, the impact of changes in the relationship of other
currencies to the U.S. dollar resulted in the recognition of other income of
approximately
16
$677,000, $2.0 million and $3.5 million, respectively. It is unknown what effect
foreign currency rate fluctuations will have on the Company's financial position
or results of operations in the future. If, however, there were a sustained
decline of these currencies versus the U.S. dollar, the Consolidated Financial
Statements could be materially adversely affected.
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Management estimates the
Company's tax assets and liabilities on a periodic basis and adjusts these
balances on a timely basis as appropriate. Management believes that it has
adequately provided for its future tax consequences based upon current facts and
circumstances and current tax law. However, should management's tax positions be
challenged and not prevail, different outcomes could result and have a
significant impact on the amounts reported in the Consolidated Statement of
Operations.
Discontinued Operations. On December 23, 2002, the Company completed the
disposal of all operations that it had classified as "discontinued operations."
As discussed in Note 3 to the Consolidated Financial Statements, the Company
reported the metal and defense businesses as discontinued operations in its
Consolidated Financial Statements as of October 10, 2000, or the measurement
date, through the sale of the final discontinued operation, Galion, Inc., on
December 23, 2002. To report the metal and defense businesses as discontinued
operations required the Company to make estimates regarding (i) the results of
operations to the expected disposal date and (ii) the expected proceeds to be
received upon sale. Based on the Company's determination that losses were
expected both from operations and upon disposal, the Company accrued substantial
charges for future losses in the years ended March 29, 2003 and March 30, 2002.
Accordingly, the businesses' net losses for the years ended March 29, 2003 and
March 30, 2002, which were incurred subsequent to the measurement date, were
applied against the accrued losses and were not recognized as losses as incurred
in the Consolidated Statements of Operations.
Goodwill Impairment. As discussed in Note 2 to the Consolidated Financial
Statements, the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", required the Company to perform
an assessment for impairment of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation performed
upon its emergence from Chapter 11 in October 2000 ("excess reorganization
value"), and goodwill, as of March 31, 2002. Under the transition guidance of
SFAS No. 142, the Company was required to perform its initial impairment
evaluation within six months of adopting the new standard, and any impairment
charges were to be retroactively recorded in the first quarter of the Company's
fiscal year. Other identifiable intangible assets of the Company consist of
patents that continue to be amortized over their estimated useful lives. In
accordance with SFAS No. 142, the Company compared the book value of the
Company's net assets, including the excess reorganization value and goodwill, to
the Company's fair value as of March 31, 2002. Because the fair value was lower
than the book value of the Company's net assets, excess reorganization value and
goodwill were determined to be impaired and accordingly, the carrying value of
such assets (approximately $14.7 million at March 31, 2002) was charged to
earnings as the cumulative effect of a change in method of accounting effective
March 31, 2002. There was no tax effect of the change in accounting principle,
as the excess reorganization value and goodwill were not deductible for income
tax purposes.
Outlook
As the automotive airbag industry has evolved, module integrators have
outsourced varying portions of non-proprietary components, such as cushions, to
companies such as the Company specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource a portion of their cushion requirements as they focus on
the development of proprietary technologies. The Company also believes that a
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company. Like the automotive supply industry generally, the Company
continues to experience significant competitive pressure. For example, the
Company supplies airbag cushions and/or airbag fabric to its three most
significant customers based upon releases from formal purchase orders, which are
subject to periodic negotiation with respect to price and quantity.
Additionally, the ability of the Company to pass along raw material price
increases will be imperative for it to maintain its levels of profitability. The
Company expects that it will continue to experience competitive pricing
pressures and although it believes that it has good working relationships with
its customers due to its manufacturing capabilities, quality products and
service, it cannot give assurances that purchases by its module integrator
customers will continue at their current levels.
17
On November 30, 2004, the Company announced that it had signed an
agreement to form the South Africa Joint Venture with Gelvenor. The Company
anticipates that the South Africa Joint Venture, which has not yet commenced
commercial production, will produce automotive airbag cushions in South Africa
utilizing the fabrics produced by Gelvenor. The initial production will be
intended to satisfy the South African domestic market, with additional
production capacity available to support the Company's growing worldwide
customer base by the end of 2005. The Company owns 75% of the entity formed to
conduct the operations of the South Africa Joint Venture.
On January 4, 2005, the Company announced it had signed an agreement to
form the China Joint Venture with Kingsway International Limited, an entity
associated with Huamao. The Company anticipates that the China Joint Venture,
which has not yet commenced commercial production, will produce automotive
airbag cushions in China utilizing the fabrics produced by Huamao. Pursuant to a
technology transfer and joint venture agreement, the Company will provide
technical assistance to its partner in the development of airbag fabrics.
Production is intended to satisfy the Chinese domestic market. The Company owns
65% of the entity formed to conduct the operations of the China Joint Venture.
Results of Operations
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. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 consists of nine months of operations. To enhance
comparability, the following table summarizes operating results of the Company
for the years ended December 31, 2004 and December 31, 2003 (unaudited) and the
nine month periods from March 30, 2003 to December 31, 2003 and from March 31,
2002 to December 28, 2002 (unaudited) (in thousands):
---------------------------------------------------------------
Period from Period from
Period from 12/29/02 to Period from 3/31/02 to
1/1/04 to 12/31/03 3/30/03 to 12/28/02
12/31/04 (12 months) 12/31/03 (9 Months)
(12 months) (unaudited) (9 Months) (unaudited)
---------------------------------------------------------------
Net sales $ 247,883 $ 247,142 $ 183,666 $ 180,863
Gross profit 36,746 34,750 26,098 21,369
Income from operations 15,459 13,825 9,299 9,484
Other income, net (1,467) (3,024) (2,275) (2,822)
Interest expense 946 2,515 1,664 2,772
Income tax provision 5,771 5,472 3,808 4,456
Loss on discontinued operations, net of taxes -- 660 -- 1,363
Cumulative effect of change in method of accounting -- -- -- (14,651)
Net income (loss) 10,248 8,202 6,102 (10,886)
18
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
---------------------------------------------------------------------
Period from Period from
Period from 12/29/02 to Period from 3/31/02 to
1/1/04 to 12/31/03 3/30/03 to 12/28/02
12/31/04 (12 months) 12/31/03 (9 Months)
(12 months) (unaudited) (9 Months) (unaudited)
---------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 14.8 14.1 14.2 11.8
Income from operations 6.2 5.6 5.1 5.2
Interest expense 0.4 1.0 0.9 1.5
Income tax provision 2.3 2.2 2.1 2.5
Net income (loss) 4.1 3.3 3.3 (6.0)
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 $1.4 million for the year ended December 31, 2004.
The Company has not, as yet, been successful in passing along most of this
increase to its airbag cushion customers in North America and continues in its
efforts to do so, although no assurances can be given in the Company maintaining
such price levels.
During the third quarter of 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 after
notification by management, 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 this matter approximated $1 million for the twelve months
ended December 31, 2004 and are included in general and administrative expenses
in the accompanying condensed consolidated statements of operations.
Twelve Months Ended December 31, 2004 Compared to Twelve Months Ended December
31, 2003 (Unaudited)
Net Sales. Net sales increased $700,000, or 0.3%, to $247.9 million for
the twelve months ended December 31, 2004 compared to the twelve months ended
December 31, 2003. North American operations' net sales decreased $8.4 million
or 6.9% compared to the prior period, with the decrease principally due to
decreased demand in the North American automotive market. Net sales for European
operations increased $9.1 million or 7.4% compared to the prior period. The
increase in European net sales is due principally to the effect of changes in
foreign currency exchange rates that increased sales as expressed in U.S.
dollars by approximately $12.5 million over the amount that would have been
reported based on exchange rates in effect in the twelve months ended December
31, 2003. The favorable effect of exchange rates was offset by a reduction in
volume of approximately $3.3 million due to decreased demand in the European
automotive market.
Gross Profit. Gross profit increased $2.0 million, or 5.7%, to $36.7
million for the twelve months ended December 31, 2004 compared to the twelve
months ended December 31, 2003. Gross profit as a percentage of net sales
increased to 14.8% for the twelve months ended December 31, 2004 from 14.1% for
the twelve months ended December 31, 2003. The European operations experienced
an improvement of $4.7 million or 39.8% due to improvements in operating
efficiencies and cost savings resulting from, among other things, the Company's
closure of the Company's United Kingdom facility and transfer of production
lines to lower labor cost areas within Europe in the prior year, as well as the
favorable effect of exchange rates of approximately $1.3 million, net of
one-time lease termination costs of approximately $400,000 associated with the
closure of the Company's United Kingdom facility. The closure of the United
Kingdom facility contributed approximately $1.7 million to increased gross
profit compared to the prior year. Gross profit for North American operations
decreased approximately $2.7 million or 12.0% due primarily to price increases
on raw material of approximately $1.4 million and the sales decline noted above.
Income from Operations. Income from operations increased $1.6 million, or
11.8%, to $15.5 million for the twelve months ended December 31, 2004 compared
to the twelve months ended December 31, 2003. Income from
19
operations as a percentage of net sales increased to 6.2% for the twelve months
ended December 31, 2004 from 5.6% in the prior period. During the prior twelve
months ended December 31, 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 increase in gross profit discussed above,
savings of $1.2 million associated with the closure of the Company's United
Kingdom facility and the effect of the prior year's charge, offset by the
following costs included in selling, general and administrative expenses:
approximately $300,000 in one-time charges associated with the closure of the
Company's United Kingdom manufacturing facility which includes redundancy
charges and moving expenses; costs approximating $2.4 million in legal,
professional and consulting expenses regarding company financing, Sarbanes-Oxley
related and other compliance activities, including the investigation previously
discussed; approximately $566,000 in expense from the increased liability
associated with recognized gains on its deferred compensation plan assets;
approximately $440,000 in increased wage and employee benefits costs; and
approximately $600,000 in costs for implementation of new information systems.
With the possible exception of employee benefit and information systems 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 $1.5
million for the twelve months ended December 31, 2004, as compared to other
income, net of $3.0 million for the twelve months ended December 31, 2003. Other
income, net is realized primarily from net foreign transaction gains resulting
from the revaluation of intercompany balances between the European subsidiaries
and the U.S. parent company. The Company recorded net foreign transaction gains
of approximately $677,000 for the twelve months ended December 31, 2004,
compared to net foreign transaction gains of $2.5 million during the comparable
period in the prior period. Additionally, the Company recognized unrealized
gains on its deferred compensation plan assets of approximately $566,000. The
foreign transaction gains for the twelve months ended December 31, 2004 resulted
from favorable changes in foreign currency exchange rates of approximately 10.7%
in the December 31, 2004 exchange rates as compared to those at December 31,
2003.
Interest expense. Interest expense decreased $1.6 million, or 64.6%, to
$946,000 for the twelve months ended December 31, 2004 compared to the twelve
months ended December 31, 2003. The decrease is attributable both to a decrease
in average interest rates from 5.4% to 4.0% and a decrease in average
outstanding debt from $29.1 million to $11.5 million for the current period as
compared to the prior period.
Provision for Income Taxes. The provision for income taxes increased
$299,000 for the twelve months ended December 31, 2004 compared to the twelve
months ended December 31, 2003 due in part from an increase of $1.6 million in
pre-tax income compared to the prior year. The Company's effective tax rates for
the twelve months ended December 31, 2004 and December 31, 2003 were 36.0% and
38.2%, respectively. The lower effective tax rate for the year ended December
31, 2004 is a result of the payment of deductible foreign taxes in that year.
Discontinued Operations. No impacts from discontinued operations were
recorded during the twelve month period ended December 31, 2004 as the Company
had sold all remaining discontinued operations before December 28, 2002. Loss on
disposition of discontinued operations was $660,000 for the twelve months ended
December 31, 2003. The loss was principally due to the sale of Galion on
December 23, 2002 and included the recognition of a tax provision of
approximately $660,000 related to an adjustment of the deferred tax liabilities
of the discontinued operations.
Net Income. The Company's net income was $10.2 million for the twelve
months ended December 31, 2004, compared to net income of $8.2 million for the
twelve months ended December 31, 2003. Earnings in the current and prior periods
were a result of the items discussed above.
Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 28,
2002 (Unaudited)
Net Sales. Net sales increased $2.8 million, or 1.5%, to $183.7 million
for the nine months ended December 31, 2003 compared to the nine months ended
December 28, 2002. North American operations' net sales decreased $8.1 million
or 8.1% compared to the prior period, with the decrease principally due to
decreased demand in the North American automotive market. Net sales for European
operations increased $10.9 million or 13.5% compared to the prior period. The
increase in European net sales is due principally to the effect of changes in
foreign currency exchange rates that increased sales as expressed in U.S.
dollars by approximately $11.9 million over the amount that would have been
reported based on exchange rates in effect in the nine months ended December 28,
2002. The
20
favorable effect of exchange rates was offset by a reduction in volume of
approximately $1.0 million due to decreased demand in the European automotive
market.
Gross Profit. Gross profit increased $4.7 million, or 22.1%, to $26.1
million for the nine months ended December 31, 2003 compared to the nine months
ended December 31, 2002. The European operations experienced an improvement of
$5.2 million or 146.1% due to improvements in operating efficiencies and cost
savings of approximately $4.2 million and the favorable effect of exchange rates
of approximately $1 million. With respect to the European operations, the prior
period's results reflect losses at the Woodville operations of approximately
$1.5 million and costs of approximately $1.7 million associated with the move of
the Woodville production lines and the ramp-up of programs at other European
facilities. Gross profit for North American operations decreased approximately
$403,000 or 2.2% due, in part, to the sales decline. Gross profit as a
percentage of net sales increased to 14.2% for the nine months ended December
31, 2003 from 11.8% for the nine months ended December 28, 2002.
Income from Operations. Income from operations decreased $185,000, or
2.0%, to $9.3 million for the nine months ended December 31, 2003 compared to
the nine months ended December 28, 2002. The decrease is due to a higher selling
and administrative costs including non-recurring costs of approximately $2.8
million associated with a $1.4 million stock compensation charge and $1.4
million in executive bonuses resulting from the Change of Control, along with
other increases in general and administrative expenses. Income from operations
as a percentage of net sales decreased to 5.1% for the nine months ended
December 31, 2003 from 5.2% in the prior period. The decrease as a percentage of
net sales was due to the items discussed above.
Other Income, net. The Company recognized other income, net of $2.3
million for the nine months ended December 31, 2003, as compared to other
income, net of $2.8 million for the nine months ended December 28, 2002. Other
income, net is realized primarily from net foreign transaction gains resulting
from the revaluation of intercompany balances between the European subsidiaries
and the U.S. parent company. The Company recorded net foreign transaction gains
of $2.0 million for the nine months ended December 31, 2003, compared to net
foreign transaction gains of $800,000 during the comparable period in the prior
period. The foreign transaction gains resulted from favorable changes in foreign
currency exchange rates of approximately 15.3% in the December 31, 2003 exchange
rates as compared to those at December 28, 2002.
Interest expense. Interest expense decreased $1.1 million, or 39.9%, to
$1.7 million for the nine months ended December 31, 2003 compared to the nine
months ended December 28, 2002. The decrease is attributable both to a decrease
in average interest rates from 5.8% to 5.4% and a decrease in average
outstanding debt from $44.6 million to $26.8 million for the current period as
compared to the prior period.
Provision for Income Taxes. The provision for income taxes decreased
$648,000 for the nine months ended December 31, 2003 compared to the nine months
ended December 28, 2002 due primarily to the following reasons: (i) the
recording in the prior period of a $350,000 provision for income taxes for the
Company's German subsidiary resulting from an examination performed by the
German taxing authorities covering years 1997 through 1999 and (ii) the
reduction of $200,000 in income taxes in Mexico from lower pre-tax income for
the nine months ended December 31, 2003 as compared to the prior period. The
Company's effective tax rates for the nine months ended December 31, 2003
compared to the nine months ended December 28, 2002 were 38.4% and 43.7%,
respectively. The effective tax rate for the nine months ended December 28, 2002
is higher than the statutory tax rate due to the tax examination related reserve
noted above and foreign earnings taxed at different rates.
Discontinued Operations. No impacts from discontinued operations were
recorded during the nine month period ended December 31, 2003 as the Company had
sold all remaining discontinued operations in the nine months ended December 28,
2002. Loss on disposition of discontinued operations was $1.4 million for the
nine months ended December 28, 2002. The loss was principally due to the sale of
Galion on December 23, 2002 and included the recognition of a tax provision of
approximately $660,000 related to an adjustment of the deferred tax liabilities
of the discontinued operations.
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of the Company's fair value, the
Company's "Reorganization value in excess of identifiable assets" and goodwill
were determined to be impaired and, accordingly, the total amount of those
assets (approximately $14.7 million) was written off as the
21
cumulative effect of a change in method of accounting in the nine months ended
December 28, 2002 (see further discussion under "New Accounting Standards").
There was no tax effect of the change in accounting principle, as the excess
reorganization value and goodwill were not deductible for income tax purposes.
Net Income. The Company's net income was $6.1 million for the nine months
ended December 31, 2003, compared to net loss of $10.9 million for the nine
months ended December 28, 2002. The current period earnings were a result of the
items discussed above. The net loss in the prior period was primarily a result
of the write-off of $14.7 million of reorganization value in excess of
identifiable assets and goodwill, as discussed above, recognized as a cumulative
effect of a change in method of accounting resulting from the adoption of SFAS
No. 142.
Seasonality and Inflation
The automotive operations are subject to the seasonal characteristics of
the automotive industry in which there are generally seasonal plant shutdowns in
the third and fourth quarters of each calendar year. Excluding the impact of the
increase in raw material cost noted above, the Company does not believe that its
operations to date have been materially affected by inflation.
Liquidity and Capital Resources
It is expected that the Company's equipment and working capital
requirements will continue to increase in order to sustain its growth of
operations. The Company expects to fund its liquidity requirements through a
combination of cash flows from operations, equipment financing and the use of
the Company's line of credit.
Cash Flows
Net cash provided by operating activities was approximately $13.4 million
for the twelve months ended December 31, 2004. The cash provided by operating
activities resulted principally from income from operations combined with
non-cash additions of depreciation offset by increases 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 currently aware of other
factors that will result in a change in its current terms with customers and
suppliers. The decrease from 2003 to 2004 in cash provided by operating
activities 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 continuing operations for investing activities was $6.5
million for the twelve months ended December 31, 2004. Capital expenditures in
2004 and 2003 were necessitated primarily by new programs awarded by the
Company's customers. The Company expects to incur capital expenditures of
approximately $12.0 million in 2005 to support new programs from the Company's
customers and to invest in new technology and its joint venture operations.
Net cash used in continuing operations for financing activities in the
twelve month period ended December 31, 2004 was $8.8 million due principally to
net repayments on the Congress Facilities and payments on various other debt and
long-term obligations of $10.1 million offset in part by proceeds from the
exercise of the Company's stock options of $1.3 million.
The activities discussed above in conjunction with the favorable effects
of foreign exchange rates of $1.8 million, resulted in a net decrease in cash
and cash equivalents of approximately $192,000 in the year ended December 31,
2004.
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
22
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 outstanding under the Congress Revolver at December 31,
2004 was $105,000. The Congress Revolver also includes a $5.0 million letter of
credit facility, which was unutilized at December 31, 2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $2.0 million was outstanding as of December 31, 2004.
The Congress Term A loan is payable in equal monthly installments of
approximately $45,000, 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 $3.5 million was
available as of December 31, 2004. At December 31, 2004, the Company's
availability for additional borrowings (based on the maximum allowable limit)
under the Congress Revolver and the Congress Term B loan was approximately $38.4
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 December 31,
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 loans;
acquire investments; declare or make dividends or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At December 31, 2004, the Company was in
compliance with all financial covenants. At December 31, 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 the China Joint
Venture 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 the South Africa Joint
Venture. 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.
Other Long-term Obligations
On March 28, 2002, the Company's Czech Republic subsidiary and HVB Bank
Czech Republic, successor to Bank Austria, entered into an amendment to its $7.5
million mortgage note facility dated June 4, 1997. This
23
amendment extended the mortgage facility for five years, established an interest
rate of 1.7% over EURIBOR (EURIBOR was 2.42% at December 31, 2004), requires
monthly payments of approximately $89,000 and is secured by the real estate
assets of the Company's subsidiary in the Czech Republic. The Company has
guaranteed the repayment of up to $500,000 of the obligations of this subsidiary
with respect to this facility. At December 31, 2004, approximately $2.6 million
was outstanding under the HVB facility.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The KeyCorp financing agreement has a seven-year term, bears
interest at a rate of 1.25% over LIBOR (LIBOR was 2.42% at December 31, 2004),
requires monthly payments of approximately $150,000 and is secured by certain
equipment located at the Company's Greenville, South Carolina facility. At
December 31, 2004, approximately $1.0 million was outstanding under the KeyCorp
facility.
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at December 31, 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 $ 6,268 $ 2,870 $ 3,398 -- --
Capital lease obligations 1,244 561 683 -- --
Operating leases 1,340 660 609 64 7
-----------------------------------------------------------
Total $ 8,852 $ 4,091 $ 4,690 $ 64 $ 7
===========================================================
The amounts of contractual obligations set forth above include an assumed annual
interest rate of 5% for long term debt and an assumed range of interest rates of
between 6% and 8.5% for capital lease obligations.
Additionally, the Company has material commitments for funding of the
South Africa Joint Venture through the combination of machinery and equipment
and related in-kind services of $1.2 million and the intention, but not an
obligation, for funding of its China Joint Venture through potential loan or
capital contributions of up to $6.5 million as of December 31, 2004.
Off-Balance Sheet Arrangements
As of December 31, 2004, the Company does not have any off-balance sheet
arrangements that are material to its financial condition, results of operations
or cash flows as defined by Item 303(a) (4) of Regulation S-K promulgated by the
SEC. The Company enters into derivative foreign contracts as noted and included
below in "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A
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 December 31, 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.
24
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs,
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is in the process of evaluating the effect, if any, that the adoption of
SFAS No. 151 will have on its financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is in the process of evaluating the effect, if
any, that the adoption of SFAS No. 153 will have on its financial position and
results of operations.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company is in the process of evaluating the effect, if any, that the adoption of
SFAS No. 123(R) will have on its financial position and results of operations.
ITEM 7A. 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 and
those certain other facilities are variable. As of December 31, 2004, the
Company's interest rate, inclusive of credit fees under the Congress Facilities,
approximated 5.00%. Due to the variability of the interest rates, a hypothetical
increase or decrease in the interest rates of 100 basis points relating to the
Congress Facilities may result in an addition to or reduction in interest
expense of approximately $75,000 on an annual basis. As of December 31, 2003,
the Company's interest rate, inclusive of credit fees under the Congress
Facilities, approximated 4.00%.
The Company's operations in Mexico, Germany, the United Kingdom, the Czech
Republic, China and South Africa expose the Company to currency exchange rate
risks. The Company monitors its risk associated with the volatility of certain
foreign currencies against its functional currency, the U.S. dollar. The impact
of changes in the relationship of other currencies to the U.S. dollar in the
twelve months ended December 31, 2004 has resulted in the recognition of other
income of approximately $677,000 compared to the recognition of other income of
$2.0 million in the nine months ended December 31, 2003. It is unknown what the
effect of foreign currency rate fluctuations will have on the Company's
financial position or results of operations in the future. If, however, there
were a sustained decline of these currencies versus the U.S. dollar, the
Consolidated Financial Statements could be materially adversely affected.
Derivative financial instruments are utilized from time to time by the
Company to reduce exposures to volatility of foreign currencies impacting the
operations of its business. The Company does not enter into financial
instruments for trading or speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company periodically enters into forward contracts to
buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts are designated as hedges at
inception and are monitored for effectiveness on a routine basis. The Company
recorded a credit to net earnings of approximately $80,000 for the twelve months
ended December 31, 2004 on these forward contracts. At December 31, 2004, the
Company had no such outstanding forward exchange contracts. At December 31,
2003, the Company had outstanding forward exchange contracts that matured
between January and March 2004 to purchase Mexican pesos with an aggregate
notional amount of approximately $2.7 million. The fair values of these
contracts at December 31, 2003 totaled approximately $52,000, which was recorded
as a
25
liability on the Company's Consolidated Balance Sheets in "other current
liabilities." The Company recorded a credit to earnings of approximately $47,000
for the nine months ended December 31, 2003 and the unrealized loss on these
forward contracts of approximately $52,000 was included in "accumulated other
comprehensive income" at December 31, 2003.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company periodically enters into forward contracts to
buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts are designated as hedges at inception and are monitored for
effectiveness on a routine basis. The Company recorded a charge to net earnings
of approximately $141,000 for the twelve months ended December 31, 2004 on these
forward contracts. At December 31, 2004, the Company had no such outstanding
forward exchange contracts. At December 31, 2003, the Company had outstanding
forward exchange contracts that matured between January and March 2004 to
purchase Czech Korunas with an aggregate notional amount of approximately $2.1
million. The fair values of these contracts at December 31, 2003 totaled
approximately $100,000, which was recorded as a liability on the Company's
balance sheet in "other current liabilities." The Company recorded a charge to
earnings of approximately $47,000 for the nine months ended December 31, 2003
and the unrealized loss on these forward contracts of approximately $89,000 was
included in "accumulated other comprehensive income" at December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item appears in Item 15(a)(1) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), 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.
The report of management on internal control over financial reporting is
included at page F-2 of the Consolidated Financial Statements.
ITEM 9B. OTHER INFORMATION
On March 7, 2005, the Compensation Committee of the Company's Board of
Directors finalized cash bonuses to the Company's Chief Executive Officer and
other Named Executives (as defined below) from a bonus plan established under
the Company's Management Incentive Plan. The Compensation Committee evaluated
the performance of the Company and the Named Executives for the year ending
December 31, 2004 against the performance targets set forth in the Management
Incentive Plan. Based on this evaluation, the Compensation Committee authorized
both formula-based and nonformula-based cash bonuses for 2004. These 2004
bonuses are reflected in the "Bonus" column of the Summary Compensation Table
included in Item 10 of this Annual Report on Form 10-K.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The Board of Directors is divided into three classes, one of which
currently has three directors and two of which currently have two directors. The
terms of two of the three Class II Directors, Ben E. Waide III and Carroll R.
Wetzel, Jr., were to expire at the Company's 2003 Annual Meeting of
Stockholders. The Company adjourned its 2003 Annual Meeting of Stockholders
previously noticed for Tuesday, October 14, 2003, due to the absence of a quorum
for the transaction of business. Prior to that meeting, the Company received a
letter from Zapata that its shares of the Company's common stock would not be
present at the meeting. In light of Zapata's letter and other communications
from Zapata subsequently received by the Company, the Company has not yet set a
new date for this meeting or noticed a subsequent meeting. Mr. Waide and Mr.
Wetzel, together with the third Class II Director, Leonard DiSalvo, who joined
the Board on January 26, 2004, will continue to hold office until their
successors have been duly elected and qualified or until their earlier
resignation or removal. The terms of the Class III Directors, John C. Corey and
Avram A. Glazer, were to expire at the Company's 2004 Annual Meeting of
Stockholders; no meeting was held in 2004. Mr. Corey and Mr. Glazer will
continue to hold office until their successors have been duly elected and
qualified or until their earlier resignation or removal. The terms of the Class
I Directors, Andy Goldfarb and W. Allan Hopkins, are to expire at the Company's
2005 Annual Meeting of Stockholders.
Each of Messrs. Corey, Goldfarb, Hopkins, Waide and Wetzel has been
serving as a director of the Company since the Emergence Date pursuant to the
Plan. Mr. DiSalvo and Mr. Glazer, designees of Zapata, were appointed by the
Board pursuant to the Company's bylaws as of January 26, 2004.
The names, ages, and principal occupations of the Class I, Class II and
Class III Directors are provided below.
Class I Directors
ANDY GOLDFARB. Age 57. Mr. Goldfarb has served as a Director of the
Company since the Emergence Date. From 1985 until March 2000, Mr. Goldfarb
served as Chairman, President and Chief Executive Officer of HCC Industries, the
world's largest independent hermetic sealing operation. From 1976 to 1985, Mr.
Goldfarb served HCC Industries in various operational and financial positions,
including Chief Operating Officer.
W. ALLAN HOPKINS. Age 66. Mr. Hopkins has served as a Director of the
Company since the Emergence Date. From 1998 until August 2000, Mr. Hopkins
served as President and Chief Executive Officer of Atlas Steels Inc., a producer
and seller of stainless and specialty steel products. From 1993 to 1996, Mr.
Hopkins served as President and Chief Executive Officer of Algoma Steel Inc., a
manufacturer and marketer of steel products. From 1984 to 1992, Mr. Hopkins
served in various capacities including Senior Vice President, Vice President of
Sales and Vice President and General Manager of Stelpipe, Inc., a subsidiary of
Stelco, Inc., Canada's largest steel producer.
Class II Directors
LEONARD DISALVO. Age 46. Mr. DiSalvo has served as a Director of the
Company since January 2004. Mr. DiSalvo joined Zapata in September 1998 and
currently serves as its Vice President - Finance and Chief Financial Officer.
Mr. DiSalvo also currently serves as Vice President - Finance and Chief
Financial Officer of Zap.Com, Corporation ("Zap.Com"), a subsidiary of Zapata
(which until December 2000 was an internet advertising and e-commerce network
company, and is currently a public shell company), a position he has held since
April 1999. Mr. DiSalvo has over 20 years of experience in the areas of finance
and accounting. Mr. DiSalvo served as a finance manager for Constellation
Brands, Inc., a national manufacturer and distributor of wine, spirits and beer,
from 1996 until September 1998. Prior to that position, Mr. DiSalvo held various
management positions in the areas of finance and accounting in the Contact Lens
Division of Bausch & Lomb Incorporated. Mr. DiSalvo is a Certified Public
Accountant.
27
BEN E. WAIDE III. Age 66. Mr. Waide has served as a Director of the
Company since the Emergence Date. Since 1998, Mr. Waide has served as an
Executive Consultant to E.I. du Pont de Nemours and Company - DuPont Safety
Resources, a global workplace consulting firm. From 1995 to 1998, Mr. Waide was
Chairman and Chief Executive Officer of Atlantic Aviation Corporation, an
aircraft maintenance management services company. Mr. Waide served as General
Manager of the Films Division of E.I. du Pont de Nemours and Company from 1990
to 1995.
CARROLL R. WETZEL, JR. Age 61. Mr. Wetzel has served as Chairman of the
Board of the Company since the Emergence Date. From 1988 to 1996, Mr. Wetzel was
a Managing Director with the Mergers and Acquisition Group of Chemical
Bank/Chase Manhattan. Prior to that, from 1981 to 1988, he was a Managing
Director in Smith Barney's Mergers and Acquisitions Group. From 1976 to 1981, he
worked as an investment banker with Dillon, Read & Co. Inc. Mr. Wetzel also
serves on the Board of Directors of Laidlaw International, Inc., a publicly
traded company.
Class III Directors
JOHN C. COREY. Age 57. Mr. Corey has served as President, Chief Executive
Officer and Director of the Company since the Emergence Date. Prior to that, he
had served as President, Chief Operating Officer and Director of the Company
since March 1999. Mr. Corey served as President of Stanley Mechanics Tools,
Inc., a division of The Stanley Works, a company engaged in the business of
manufacturing and distributing mechanics hand tools, from September 1996 to
March 1999, where he was responsible for worldwide operations. Mr. Corey is also
a director of Stoneridge, Inc., a publicly traded company and manufacturer of
electronic parts and accessories for motor vehicles.
AVRAM A. GLAZER. Age 44. Mr. Glazer has served as a Director of the
Company since January 2004. Mr. Glazer has been President and Chief Executive
Officer of Zapata since March 1995, Chairman of the Board of Zapata since March
2002 and a director of Zapata since July 1993. He also serves as a director and
as the President and Chief Executive Officer of Zap.Com. Mr. Glazer is also
Chairman of the Board and a director of Omega Protein Corporation, a marine
protein company and majority-owned subsidiary of Zapata.
Audit Committee Financial Expert
The Company's Board of Directors has determined that the Company does not
have an audit committee financial expert serving on its audit committee. Since
the Company's stock is not currently traded on a securities exchange, but rather
on the Over-The-Counter Bulletin Board, the Company is not required to have an
audit committee financial expert. The Board of Directors has determined that it
is not necessary to appoint an audit committee financial expert at this time
because the Board believes that the members of the audit committee possess
sufficient experience and expertise with respect to all relevant audit and
financial matters.
Executive Officers
The following table sets forth the names, ages and all positions and
offices with the Company held by the Company's present executive officers.
Name Age Positions and Offices Presently Held
- ---------------------------------------------------------------------------------------
John C. Corey 57 Director, President and Chief Executive Officer
Brian P. Menezes 52 Vice President and Chief Financial Officer
Stephen B. Duerk 63 Vice President; President, North American Automotive
Vick Crowley 38 Treasurer
Executive officers are appointed by the Board and serve at the discretion
of the Board. Following is information with respect to the Company's executive
officers who are not also directors of the Company:
BRIAN P. MENEZES. Mr. Menezes has served as Vice President and Chief
Financial Officer of the Company since September 1999. From October 1997 to
September 1999, Mr. Menezes served as Vice President and General Manager of
Odyssey Knowledge Solutions, Inc., a Canadian software and systems development
company focused on web-based e-commerce and enterprise solutions. From January
1993 to June 1997, Mr. Menezes served as
28
Vice President of Operations for Cooper Industries (Canada) Inc. Automotive
Products ("Cooper"), the largest supplier in the Canadian automotive replacement
parts market. From January 1993 to June 1995, Mr. Menezes also served as the
Vice President of Finance of Cooper.
STEPHEN B. DUERK. Mr. Duerk has served as a Vice President of the Company
since June 1998, as President of the Company's North American Automotive Group
since April 1998 and as President of Safety Components Fabric Technologies,
Inc., a wholly-owned subsidiary of the Company, since January 1998. From July
1997 to January 1998, Mr. Duerk served the Company as Co-Managing Director of
SCFTI. Prior to the Company's acquisition of the Air Restraint and Technical
Fabrics Division of JPS Automotive L.P. in July 1997, Mr. Duerk had served JPS
Automotive, L.P., a tier one supplier to the automotive industry of carpet and
knit fabrics for headliner and body cloth, as Vice President of Air Restraint
Fabrics in the Greenville, South Carolina facility, from October 1988. From 1965
to October 1988, Mr. Duerk served in various positions for JP Stevens & Co.,
Inc., a company engaged in the business of manufacturing industrial textiles, of
which JPS Automotive, L.P. was a part until its restructuring in May 1998, most
recently as the Vice President of the Industrial Synthetic Group.
VICK CROWLEY. Mr. Crowley has served as Treasurer of the Company since
August 2000. Prior to that, he had served as Assistant Treasurer with HomeGold
Financial, Inc., of Greenville, South Carolina, a financial services firm, since
1995.
Code of Ethics and Business Conduct
The Company has adopted a Code of Ethics and Business Conduct that applies
to all of the Company's directors and key employees, including the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions (collectively, the
"Selected Officers"). The Code of Business Conduct and Ethics has been filed as
Exhibit 14 to this Annual Report on Form 10-K. The Company intends to post any
amendments to or waivers from a provision of the Code of Ethics and Business
Conduct applicable to any Selected Officer on its website at
http://www.safetycomponents.com, or to file a Form 8-K to disclose any such
amendments or waivers.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's executive officers, directors and 10% stockholders are
required under the Exchange Act and regulations thereunder to file reports of
ownership and changes in ownership with the SEC. Copies of those reports must
also be furnished to the Company. To the Company's knowledge, based on the
Company's review of the copies of such reports furnished to it during or with
respect to the fiscal year ended December 31, 2004, all of our directors and
officers subject to the reporting requirements and each beneficial owner of more
than 10% of our common stock satisfied all applicable filing requirements.
29
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Chief
Executive Officer of the Company and the other most highly compensated executive
officers of the Company (each person appearing in the table is referred to as a
"Named Executive"). As a result of the Change of Control, a change of control
occurred for purposes of all contractual change of control provisions discussed
herein.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
Underlying All Other
Name and Fiscal Salary Bonus Options/SARs Compensation
Principal Position Year ($) ($) (#) (1) ($)
- -----------------------------------------------------------------------------------------------------------------------
John C. Corey 2004 $353,210 $356,680 -- $ 49,748(2)
President and Chief Dec 2003 (3) 239,444 256,890 -- 995,888(4)(5)
Executive Officer 2003 325,000 265,425 46,800 41,978(6)
2002 316,040 231,675 173,200 62,013(7)
Brian P. Menezes 2004 $214,755 $178,207 -- $ 25,931(8)
Vice President and Chief Dec 2003 (3) 156,375 128,015 -- 408,340(4)(9)
Financial Officer 2003 200,450 129,920 27,000 28,125(10)
2002 191,824 123,985 75,000 32,969(11)
Stephen B. Duerk 2004 $193,130 $ 88,037 -- $ 19,488(12)
Vice President; Dec 2003 (3) 144,847 82,724 -- 14,002(13)
President North American 2003 187,500 102,988 21,500 20,036(14)
Automotive Group 2002 182,000 80,223 71,000 12,495(15)
Vick Crowley 2004 $113,875 $ 50,888 -- $ 6,450(16)
Treasurer Dec 2003 (3) 82,688 41,705 -- 2,848(17)
2003 105,000 45,723 2,000 12,667(18)
2002 100,471 39,250 5,800 5,674(19)
- ----------
(1) Grants reflected for 2002 and 2003 are options under the Company's 2001
Stock Option Plan (the "Option Plan"). As a result of the Change of Control, all
such options became immediately vested.
(2) Amount reflects $14,056 of life insurance premiums, a $14,400 automobile
allowance, a $5,781 matching contribution under the Company's 401(k) plan,
$1,290 of group life insurance premiums, $10,708 of supplemental medical
reimbursements, and $3,513 of membership dues.
(3) Following the Change of Control, the Company changed its fiscal year to a
calendar year end to coincide with Zapata's fiscal year end. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 (referred to in this table as "Dec 2003") consists of
nine months of operations. The years ended December 31, 2004, March 29, 2003 and
March 30, 2002 each consisted of twelve months of operations.
(4) Includes $961,400 and $393,300, respectively, paid to each of Mr. Corey and
Mr. Menezes in accordance with the terms of the Company's employment agreements
with them, upon the occurrence of the Change of Control. See "Employment
Agreements - Corey Agreement" and "Employment Agreements - Menezes Agreement"
below.
30
(5) Includes $14,056 of life insurance premiums, a $10,800 automobile allowance,
$968 of group life insurance premiums, $6,029 of supplemental medical
reimbursements, and $2,635 of membership dues.
(6) Amount reflects $14,056 of life insurance premiums, a $14,400 automobile
allowance, a $5,161 matching contribution under the Company's 401(k) plan, $690
of group life insurance premiums, $4,158 of supplemental medical reimbursements,
and $3,513 of membership dues.
(7) Amount reflects $12,476 of life insurance premiums, a $14,400 automobile
allowance, a $5,312 matching contribution under the Company's 401(k) plan, $570
of long-term disability insurance premiums, $690 of group life insurance
premiums, $9,516 of supplemental medical reimbursements, and $19,049 of
membership dues.
(8) Amount reflects a $14,400 automobile allowance, a $5,781 matching
contribution under the Company's 401(k) plan, $417 of group life insurance
premiums, and $5,333 of supplemental medical reimbursements.
(9) Includes a $10,800 automobile allowance, $330 of group life insurance
premiums, and $3,910 of supplemental medical reimbursements.
(10) Amount reflects a $14,400 automobile allowance, a $4,706 matching
contribution under the Company's 401(k) plan, $269 of group life insurance
premiums, and $8,750 of supplemental medical reimbursements.
(11) Amount reflects $5,394 of life insurance premiums, a $13,500 automobile
allowance, a $5,312 matching contribution under the Company's 401(k) plan, $516
of long-term disability insurance premiums, $255 of group life insurance
premiums, and $7,992 of supplemental medical reimbursements.
(12) Amount reflects a $6,000 automobile allowance, a $5,598 matching
contribution under the Company's 401(k) plan, $1,140 group life insurance
premiums, $2,266 of supplemental medical reimbursements and $4,484 of membership
dues.
(13) Amount reflects a $4,500 automobile allowance, a $3,874 matching
contribution under the Company's 401(k) plan, $843 group life insurance
premiums, $2,067 of supplemental medical reimbursements and $2,718 of membership
dues.
(14) Amount reflects a $6,000 automobile allowance, a $5,463 matching
contribution under the Company's 401(k) plan, $791 group life insurance
premiums, $4,679 of supplemental medical reimbursements and $3,103 of membership
dues.
(15) Amount reflects a $6,000 automobile allowance, a $3,760 matching
contribution under the Company's 401(k) plan, $681 of group life insurance
premiums, $1,356 of supplemental medical reimbursements, and $698 of membership
dues.
(16) Amount reflects a $4,667 matching contribution under the Company's 401(k)
plan, $59 of group life insurance premiums, and $1,724 of supplemental medical
reimbursements.
(17) Amount reflects a $2,481 matching contribution under the Company's 401(k)
plan, $44 of group life insurance premiums, and $323 of supplemental medical
reimbursements.
(18) Amount reflects a $2,363 matching contribution under the Company's 401(k)
plan, $53 of group life insurance premiums, and $10,251 of supplemental medical
reimbursements.
(19) Amount reflects a $3,920 matching contribution under the Company's 401(k)
plan, $199 of long-term disability premiums, $49 of group life insurance
premiums, and $1,506 of supplemental medical reimbursements.
Option Grants in Last Fiscal Year
There were no options to purchase our common stock granted during the
fiscal year ended December 31, 2004 to the Named Executives.
31
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information with respect to the Named
Executives concerning exercisable and unexercisable options held as of December
31, 2004. The value of unexercised, in-the-money options at December 31, 2004 is
the difference between the exercise price and the fair market value of the
underlying stock on December 30, 2004 (the last trading day of the fiscal year).
All options were in-the-money as of December 31, 2004, based on the closing
sales price of the Company's common stock at December 30, 2004, of $13.75 per
share.
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Value December 31, 2004 December 31, 2004
Acquired on Realized --------------------------- ------------------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable ($) Unexercisable ($)
- ---------------- ------------ ------ ----------- ------------- --------------- -----------------
John C. Corey 7,100 51,759 212,900 -- $1,188,068 $ --
Brian P. Menezes -- -- 102,000 -- 585,480 --
Stephen B. Duerk 92,500 752,355 -- -- -- --
Vick Crowley 7,800 74,766 -- -- -- --
- ----------
(1) The value realized is calculated based on the amount by which the
aggregate market price, on the date of exercise, of the shares received
exceeded the aggregate exercise price paid, regardless of whether such
shares were sold or retained by the option holder on that date.
Employment Agreements
Corey Agreement
Mr. Corey currently serves as President and Chief Executive Officer
pursuant to an employment agreement with the Company which became effective May
18, 2001 (with subsequent amendments) and replaced all prior agreements with Mr.
Corey. The employment agreement provides for a base salary of $315,000
(increased to $358,280 in April 2004), subject to increases at the discretion of
the Board and the recommendations of the Compensation Committee. In addition to
base salary, the employment agreement provides for an annual incentive bonus
under the Company's Management Incentive Plan or in accordance with a formula or
other bonus plan to be established by the Compensation Committee for each fiscal
year. It also provides, in the event of a change of control (as defined) while
he is still employed with the Company or under certain circumstances following
his termination of employment other than for Cause (as defined) or by reason of
a Constructive Termination (as defined), he will be entitled to a one-time bonus
of $961,400 at the time the Change of Control is consummated, provided it occurs
within ten years following termination of his employment. As a result of the
Change of Control, a change of control occurred for purposes of the employment
agreement and this bonus was paid to Mr. Corey in 2003.
Pursuant to the employment agreement, Mr. Corey received, upon execution,
options to purchase 173,200 shares of the Company's common stock under the
Option Plan. Such grant consisted of (i) Class A Options to purchase 110,000
shares at an exercise price equal to fair market value on the date of grant
($8.75 per share), two-thirds of which immediately vested, and the final third
of which vested on October 31, 2003, and (ii) Class B Options to purchase 63,200
shares of common stock at an exercise price equal to fair market value on the
date of grant ($8.75 per share), vesting one-third on October 31, 2001, an
additional one-third on October 31, 2002, and the final one-third on October 31,
2003. Because a change of control of the Company had not occurred by April 1,
2002, Mr. Corey received, pursuant to the employment agreement, a grant of Class
C Options to purchase 36,800 additional shares of common stock (together with an
additional grant of Class C Options to purchase another 10,000 shares of common
stock not provided in the employment agreement) vesting over the next three
anniversary dates of such grant. The exercise price for such Class C Options is
the per share price determined to be the fair market value for the shares as of
the date of the grant ($6.71 per share).
32
If Mr. Corey's employment is terminated by the Company other than by
reason of death or Disability (as defined) or for Cause or if the employment
agreement is terminated by him by reason of a Constructive Termination, the
Company shall pay Mr. Corey a severance and non-competition payment equal to two
times his base salary at the time of termination, payable in equal monthly
installments over the next succeeding 24 months, plus 18 months of health care
continuation payments; in the event such termination had occurred before October
31, 2001, then the foregoing 24 month period and corresponding dollar amount of
severance and non-competition payment would have been increased by one month for
each calendar month by which such termination preceded November 1, 2001. If Mr.
Corey's employment agreement is terminated by the Company in connection with a
change of control and he is not offered a position with the acquirer with
similar responsibilities or if he is initially offered and accepts the position
with the acquirer, but is terminated without Cause within 12 months after
accepting such position, then, in lieu of any other severance payment under his
employment agreement, the Company shall pay Mr. Corey a severance and
non-competition payment equal to two times his base salary at the time of
termination in 24 equal monthly installments, plus 18 months of health care
continuation payments; in the event such termination had occurred on or before
October 31, 2001, then the foregoing 24 month period and corresponding dollar
amount of severance and non-competition payment would have been increased by one
month for each calendar month by which such termination preceded November 1,
2001. All cash payments and health care continuation payments shall cease in the
event of competitive employment. Such payments shall be mitigated by 50% of
"severance period earnings" in the event of non-competitive employment with
annual compensation up to $100,000 and shall cease altogether in the event of
such annual compensation exceeding $100,000.
Menezes Agreement
Mr. Menezes currently serves as Vice President and Chief Financial Officer
pursuant to an employment agreement with the Company which became effective on
May 18, 2001 (with subsequent amendments) and replaced all prior agreements with
Mr. Menezes. The employment agreement provides for a base salary of $190,000
(increased to $216,840 in April 2004), subject to increases at the discretion of
the Board and the recommendations of the Compensation Committee. In addition to
base salary, the employment agreement provides for an annual incentive bonus
under the Company's Management Incentive Plan or in accordance with a formula or
other bonus plan to be established by the Compensation Committee for each fiscal
year. It also provides that, in the event of a change of control (as defined)
while he is still employed by the Company or under certain circumstances
following his termination of employment other than for Cause (as defined) or by
reason of a Constructive Termination (as defined), he will be entitled to a
one-time bonus of $393,300 at the time the change of control is consummated,
provided it occurs within ten years following termination of his employment. As
a result of the Change of Control, a change of control occurred for purposes of
the employment agreement and this bonus was paid to Mr. Menezes in 2003.
Pursuant to the employment agreement, Mr. Menezes received, upon
execution, options to purchase 75,000 shares of the Company's common stock under
the Company's Option Plan. Such grant consisted of (i) Class A Options to
purchase 45,000 shares at an exercise price equal to fair market value on the
date of grant ($8.75 per share), two-thirds of which immediately vested, and the
final third of which vested on October 31, 2003, and (ii) Class B Options to
purchase 30,000 shares of common stock at an exercise price equal to fair market
value on the date of grant ($8.75 per share), vesting one-third on October 31,
2001, an additional one-third on October 31, 2002, and the final one-third on
October 31, 2003.
If Mr. Menezes' employment is terminated by the Company other than by
reason of death or Disability (as defined) or for Cause or if the employment
agreement is terminated by him by reason of a Constructive Termination, the
Company shall pay Mr. Menezes a severance and non-competition payment equal to
one and one half times his base salary at the time of termination, payable in
equal monthly installments over the next 18 months, plus 18 months of health
care continuation payments. If Mr. Menezes' employment agreement is terminated
by the Company in connection with a change of control and he is not offered a
position with the acquirer with similar responsibilities or if he initially is
offered and accepts a position with the acquirer, but is terminated without
Cause within 12 months after accepting such position, then, in lieu of any other
severance payment under this employment agreement, the Company shall pay Mr.
Menezes a severance and non-competition payment equal to one and one half times
his base salary at the time of termination in 18 equal monthly installments,
plus 18 months of health care continuation payments. All cash payments and
health care continuation payments shall cease in the event of competitive
employment. Such payments shall be mitigated by 50% of "severance period
earnings" in the event of non-competitive employment with annual compensation up
to $50,000 and shall cease altogether in the event of such annual compensation
exceeding $50,000.
33
Duerk Agreement
Mr. Duerk currently serves as Vice President of the Company and President
of the North American Automotive Group pursuant to an employment agreement which
became effective May 18, 2001 (with subsequent amendment) and replaced all prior
agreements with Mr. Duerk. The employment agreement provided for an original
base salary of $182,000 (increased to $193,130 in April 2003), subject to
increases at the discretion of the Board and the recommendations of the
Compensation Committee. In addition to base salary, the employment agreement
provides for an annual incentive bonus under the Company's Management Incentive
Plan or in accordance with a formula or other bonus plan to be established by
the Compensation Committee in advance of each fiscal year.
If Mr. Duerk's employment is terminated by the Company other than by
reason of death or Disability (as defined) or for Cause (as defined) or if the
employment agreement is terminated by him by reason of a Constructive
Termination (as defined), the Company will pay Mr. Duerk a severance and
non-competition payment equal to one and one half times his base salary at the
time of termination, payable in equal monthly installments over the next
succeeding 18 months, plus 18 months of health care continuation payments. If
Mr. Duerk's employment agreement is terminated by the Company in connection with
a change of control (as defined) and he is not offered a position with the
acquirer with similar responsibilities or if he initially is offered and accepts
a position with the acquirer but is terminated without Cause within 12 months
after accepting such position, then, in lieu of any other severance payment
under his employment agreement, the Company shall pay Mr. Duerk a severance and
non-competition payment equal to one and one half times his base salary at the
time of termination in 18 equal monthly installments, plus 18 months of health
care continuation payments. All cash payments and health care continuation
payments shall cease in the event of competitive employment. Such payments shall
be mitigated by 50% of "severance period earnings" in the event of
non-competitive employment with annual compensation up to $50,000 and shall
cease altogether in the event of such annual compensation exceeding $50,000.
Crowley Agreement
Under his severance agreement with the Company, if Mr. Crowley is
terminated by the Company other than for Cause, death or Disability within 24
months following a change of control (including a termination by Mr. Crowley by
reason of a Constructive Termination) (all the foregoing capitalized terms as
defined in Mr. Crowley's severance agreement), Mr. Crowley is entitled to a
severance payment equal to his annual base salary in effect at the effective
date of termination, payable in twelve equal monthly installments following
termination.
Management Incentive Plan
Messrs. Corey, Menezes, Duerk and Crowley each received bonuses for the
year ended December 31, 2004 under the Management Incentive Plan. See the
Summary Compensation Table and " - Employment Agreements" above for additional
information concerning the Management Incentive Plan.
Severance Program
See " - Employment Agreements" above for additional information concerning
severance arrangements applicable to the Named Executives.
Director Compensation
Directors who are employees of the Company receive no compensation, as
such, for service as members of the Board. Directors who are not employees of
the Company receive an annual retainer of $20,000, plus an additional $10,000
for Mr. Wetzel as Board Chairman and an additional $5,000 each for committee
chairmen. They also each receive attendance fees ranging from $500 to $1,250 for
attendance at Board and committee meetings attended by telephone or in person.
Finally, directors receive additional compensation at a rate of $1,750 per day
for special assignments, not including attendance at Board and committee
meetings. All directors are reimbursed for expenses incurred in connection with
attendance at meetings.
34
Each non-employee director then holding office received an option grant
under the Option Plan immediately following its approval by the stockholders on
April 27, 2001 (for 10,000 shares to Mr. Wetzel, as Chairman, and 7,500 shares
to each of the other non-employee directors who received grants). The exercise
price for the shares of common stock subject to these options is the fair market
value of the shares on the date of grant ($8.75 per share), subject to
adjustment to $.01 per share in the event of a change of control as described in
the option agreements. In April 2002, each non-employee director then holding
office received an additional option grant (for 10,000 shares to Mr. Wetzel, as
Chairman, and 7,500 shares to each of the other non-employee directors who
received grants). The exercise price for the shares of common stock subject to
these options is the per share price determined to be their fair market value as
of the date of grant ($6.71 per share). As a result of the Change of Control, a
change of control occurred for purposes of these option agreements and the
options granted to each of the non-employee directors were immediately vested.
Compensation Committee Interlocks and Insider Participation
During the last completed fiscal year, Messrs. DiSalvo, Goldfarb, Waide
and Wetzel served as the Company's Compensation Committee. No interlocking
relationship exists between the Company's Board of Directors or Compensation
Committee and the board of directors or compensation committee of any other
company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except as otherwise indicated, the following table and notes set forth
certain information, to the knowledge of the Company, regarding the beneficial
ownership of the Company's common stock as of March 1, 2005, by all persons
known by the Company to be the beneficial owner of more than 5% of the common
stock, by each director of the Company, by each of the Named Executives and by
all directors and executive officers of the Company as a group. Except as
otherwise indicated, to the knowledge of the Company, each beneficial owner has
the sole power to vote and to dispose of all shares of common stock owned by
such beneficial owner.
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Common Stock (1)
- -----------------------------------------------------------------------------------------------------
Zapata Corporation 4,162,394 78.2%
100 Meridian Centre, Suite 350
Rochester, New York 14618
Ramius Capital Group, LLC and related parties (2) 309,380 5.8%
666 Third Avenue, 26th Floor
New York, New York 10017
Officers and Directors
John C. Corey (3)(4) 212,900 3.8%
Leonard DiSalvo (5) -- *
Avram A. Glazer (5) -- *
Andy Goldfarb (3) 15,000 *
W. Allan Hopkins (3) 15,000 *
Ben E. Waide III (3)(4) 15,000 *
Carroll R. Wetzel, Jr. (3) 20,014 *
Brian P. Menezes (3)(4) 102,000 1.9%
Stephen B. Duerk (3) 3 *
Vick Crowley (3) -- *
All executive officers and directors as a group 379,917 6.7%
(consisting of 10 individuals)
- ----------
*Less than 1%.
(1) Shares beneficially owned, as recorded in this table, expressed as a
percentage of the 5,320,147 shares of common stock outstanding on March 1, 2005
35
(2) The information shown is as of March 29, 2004 and is based upon information
disclosed by Ramius Capital Group, LLC, RCG Carpathia Master Fund, Ltd.
("Carpathia"), SPhinX Distressed (RCG Carpathia), Segregated Portfolio
("SPhinX"), Ramius Securities, L.L.C., ("Ramius Securities"). C4S & Co., L.L.C.,
("C4S"), Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M.
Solomon in a Schedule 13G filed with the SEC on April 6, 2004 (the "Ramius
13G"), which indicates that each of these reporting persons has shared power to
vote and to dispose, or direct the disposition of, these shares. The Ramius 13G
also indicates that as of the date of its filing, each of these reporting person
may be deemed the beneficial owner of (i) 278,509 shares of common stock owned
by Carpathia, (ii) 10,871 shares of common stock owned by SPhinX, a segregated
account of SPhinX Distressed Fund SPC, (the "Fund"), and (iii) 20,000 shares of
common stock owned by Ramius Securities. The Ramius 13G filing further states
that: (i) the Fund is an index fund which invests in various securities, (ii)
SPhinX is managed by Ramius, (iii) Ramius is the investment advisor of SPhinX
and Carpathia and has the power to direct some of the affairs of SPhinX and
Carpathia, including decisions respecting the disposition of the proceeds from
the sale of shares of the common stock, (iv) Ramius Securities is a broker
dealer affiliated with Ramius, (v) C4S is the managing member of Ramius and in
that capacity directs its operations, and (vi) Peter A. Cohen, Morgan B. Stark,
Thomas W. Strauss and Jeffrey M. Solomon are the managing members of C4S and in
that capacity direct its operations.
(3) The address of each of these persons is c/o Safety Components International,
Inc., 41 Stevens Street, Greenville, South Carolina 29605.
(4) Includes 212,900 shares for Mr. Corey, 15,000 shares for Mr. Waide, and
102,000 shares for Mr. Menezes underlying currently exercisable stock options
under the Option Plan.
(5) Mr. Glazer is the Chairman of the Board of Zapata and its President and
Chief Executive Officer. Mr. DiSalvo is Zapata's Vice President - Finance and
Chief Financial Officer. Each of Mr. Glazer and Mr. DiSalvo disclaims beneficial
ownership of all shares held by Zapata. The address of each of these persons is
c/o Zapata Corporation, 100 Meridian Centre, Suite 350, Rochester, New York
14618.
Equity Compensation Plan Information
The Company has one equity compensation plan, the Option Plan, which is a
shareholder approved plan. As of December 31, 2004, the number of options
outstanding and remaining available under the Option Plan was as follows:
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
Plan category of outstanding options outstanding options future issuance
- ----------------------- ------------------------- ------------------- -----------------------
Equity compensation
plans approved by
security holders 354,200 $ 8.14 209,700
Equity compensation
plans not approved
by security holders -- -- --
------- -------
Total 354,200 209,700
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the beginning of the Company's last fiscal year, except as may
otherwise be described herein, there were no transactions occurring or
relationships that existed between the Company and its officers, directors or 5%
stockholders that require disclosure under SEC regulations.
36
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. Accordingly, the Company paid approximately $675,000 to Zapata in
2004 for taxes related to 2003. 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%. As a result of Zapata's ownership of the company's outstanding
common stock falling below 80%, Zapata will not consolidate the Company into
Zapata's consolidated income tax returns for periods subsequent to the first
quarter of 2004. Under The Tax Sharing and Indemnity Agreement, the Company will
be consolidated into Zapata's tax filing group for the fourth calendar quarter
of 2003 and the first calendar quarter of 2004. Information regarding other
transactions that have occurred involving Zapata can be found under "The Company
- - Change of Control" in Item 1 above. One of our directors, Mr. Glazer, is
President and Chief Executive Officer of Zapata and the Chairman of its Board of
Directors. Another director, Mr. DiSalvo, is Vice President-Chief Financial
Officer of Zapata.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The fees billed in the transition period consisting of the nine months
ended December 31, 2003 and in the fiscal year ended December 31, 2004 for
PricewaterhouseCoopers LLP's services to the Company were:
Nine Month Period Year ended
ended December 31, 2003 December 31, 2004
----------------------- -----------------
Audit Fees ............. $324,000 $749,000
Audit-Related Fees ..... 54,000 45,000
Tax Fees ............... -- 2,500
All Other Fees ......... -- --
Total Fees ............. $378,000 $796,500
In the above table, in accordance with applicable SEC rules:
o "audit fees" are fees billed by the independent registered
public accounting firm for professional services for the audit
of the consolidated financial statements included in the
Company's Form 10-K, including audits of the foreign
subsidiary statutory reports of the Company's foreign
subsidiaries for their respective fiscal years, and review of
financial statements included in the Company's Form 10-Qs, or
for services that are normally provided by auditors in
connection with statutory and regulatory filings or
engagements;
o "audit-related fees" are fees billed by the independent
registered public accounting firm for assurance and related
services that are reasonably related to the performance of the
audit or review of the financial statements, and include fees
related to services provided in connection with the Change of
Control;
o "tax fees" are fees billed by the independent registered
public accounting firm for professional services for tax
compliance, tax advice, and tax planning; and includes tax
advice.
o "all other fees" are fees billed by the independent registered
public accounting firm to the Company for any services not
included in the first three, and include fees related to
assistance with non-financial systems.
The Audit Committee of the Company's Board of Directors has established a policy
requiring its pre-approval of all audit and non-audit services provided by its
independent registered public accounting firm. The policy requires the
37
general pre-approval of annual audit services, general pre-approval of all other
permitted services up to specified dollar limits and specific pre-approval of
all other permitted services. In determining whether to pre-approve permitted
services, the Audit Committee considers whether such services are consistent
with SEC rules and regulations. Furthermore, requests for pre-approval for
services that are eligible for general pre-approval must be detailed as to the
services to be provided. To ensure prompt handling of unexpected matters, our
Audit Committee has delegated to its chairperson the authority to pre-approve
permissible non-audit services and fees and to amend or modify pre-approvals
that have been granted by the entire Audit Committee. A report of any such
actions taken by the committee chairperson is provided to the Audit Committee at
the following Audit Committee meeting. None of the services described above were
approved by the Audit Committee under the exception provided by Rule 2-01(c) (7)
(i) (C) of Regulation S-X of the SEC.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) The financial statements, related notes thereto and reports of our
independent registered public accounting firm required by Item 8 are
listed in the index on page F-1 herein.
(2) Unless otherwise attached, all financial statement schedules are
omitted because they are not applicable or the required information
is shown in the Company's Consolidated Financial Statements or the
Notes thereto.
(3) Exhibits:
2.1 Joint Plan of Reorganization of Safety Components Debtors
Under Chapter 11 Bankruptcy Code dated June 12, 2000
(incorporated by reference to Exhibit 2.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
25, 2000)
2.2 First Amended Joint Plan of Reorganization of Safety
Components International, Inc., Safety Components Fabric
Technologies, Inc., Automotive Safety Components
International, Inc., ASCI Holdings Germany (DE) Inc., ASCI
Holdings UK (DE) Inc., ASCI Holdings Mexico (DE) Inc., and
ASCI Holdings Czech (DE) Inc. (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed with the Commission on September 13, 2000)
3.1 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Components
International, Inc. (incorporated by reference to Exhibit
3.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 10, 2000)
3.2 Amended Bylaws of Safety Components International, Inc.
(incorporated by reference to Exhibit 3.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October
10, 2000)
4.1 Restructuring Agreement dated April 6, 2000 between Safety
Components International, Inc., Robert A. Zummo and the
consenting holders signatory thereto (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K filed with the Commission on April 13, 2000)
4.2 First Amendment to Restructuring Agreement dated as of May
10, 2000 between Safety Components and the consenting
holders signatory thereto (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed with the Commission on May 19, 2000)
10.1 Form of Master Equipment Lease Agreement, dated as of July
10, 1998, between KeyCorp Leasing, a division of Key
Corporate Capital Inc. and Safety Components International,
Inc., including Security Agreement dated July 10, 1998 by
and between Safety Components International, Inc. and
KeyCorp Leasing (incorporated by reference to Exhibit 10.7
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 26, 1998)
10.2 Loan and Security Agreement dated as of October 11, 2000, by
and among Safety Components International, Inc., the
subsidiaries named therein as Borrowers and Guarantors and
Congress Financial Corporation (Southern) (incorporated by
reference to Exhibit 10.68 to the Company's Quarterly Report
on Form 10-Q for the quarter ended October 10, 2000)
10.3 Subordinated Secured Credit Agreement dated as of October
11, 2000, by and among Safety Components International,
Inc., the subsidiaries named therein as Borrowers and
Guarantors, KeyBank National Association ("KeyBank") and
Fleet Bank, as lenders, and KeyBank as administrative agent
(incorporated by reference to Exhibit 10.69 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October
10, 2000)
*10.4 Safety Components International, Inc. 2001 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 2001)
*10.5 Employment agreement, effective May 18, 2001 between Safety
Components International, Inc. and John C. Corey
(incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on
39
Form 10-K for the fiscal year ended March 31, 2001)
*10.6 Employment agreement, effective May 18, 2001 between Safety
Components International, Inc. and Brian P. Menezes
(incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K, for the fiscal year ended March
31, 2001)
*10.7 Employment agreement, effective May 18, 2001 between Safety
Components International, Inc. and Stephen B. Duerk
(incorporated by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 2001)
*10.8 Form of Stock Option Agreement - Class A and B (incorporated
by reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2001)
*10.9 Form of Severance Letter (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2001)
*10.10 Safety Components International, Inc. Executive Deferral
Program (incorporated by reference to Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 29, 2001)
*10.11 Amendment No. 1 to the Safety Components International, Inc.
Executive Deferral Program (incorporated by reference to
Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 29, 2001)
*10.12 Amendment dated June 27, 2001 to Employment Agreement, dated
May 18, 2001 between Safety Components International, Inc.
and John C. Corey (incorporated by reference to Exhibit
10.19 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 29, 2001)
*10.13 Amendment dated June 27, 2001 to Employment Agreement, dated
May 18, 2001 between Safety Components International, Inc.
and Brian P. Menezes (incorporated by reference to Exhibit
10.20 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 29, 2001)
10.14 Amendment No. 1 and Consent to Loan and Security Agreement,
dated November 2, 2001, by and among Safety Components
International, Inc., the subsidiaries named therein as
Borrowers and Guarantors and Congress Financial Corporation
(Southern) (incorporated by reference to Exhibit 10.14 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 29, 2001)
10.15 Amendment No. 1, dated March 28, 2002, to the Credit
Facility Agreement dated May 29, 1997 between Automotive
Safety Components International s.r.o. and HVB Bank Czech
Republic a.s. (incorporated by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 30, 2002)
10.16 Letter of Guarantee, dated March 28, 2002, between Safety
Components International, Inc. and HVB Bank Czech Republic
a.s. (incorporated by reference to Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 30, 2002)
*10.17 Form of Stock Option Agreement - Class C (incorporated by
reference to Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 29, 2002)
10.18 Amendment No. 1 to Subordinated Secured Credit Agreement
dated as of October 11, 2002, by and among Safety Components
International, Inc., the subsidiaries named therein as
Borrowers and Guarantors, KeyBank and Fleet Bank, as
lenders, and KeyBank as administrative agent. (incorporated
by reference to Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 28,
2002)
10.19 Amendment No. 2 to Loan and Security Agreement, dated
October 11, 2002, by and among Safety Components
International, Inc., the subsidiaries named therein as
Borrowers and Guarantors and Congress Financial Corporation
(Southern) (incorporated by reference to Exhibit 10.27 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 28, 2002)
40
10.20 Amendment No. 3 and Consent to Loan and Security Agreement,
dated October 8, 2003 by and among Safety Components
International, Inc., the subsidiaries named therein as
Borrowers and Guarantors and Congress Financial Corporation
(Southern) (incorporated by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 27, 2003)
10.21 Form of Indemnification Agreement by and between Safety
Components International, Inc., Automotive Safety Components
International, Inc., Safety Components Fabric Technologies,
Inc., and certain officers and directors (incorporated by
reference to Exhibit 10.30 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 27, 2003)
*10.22 Safety Components International, Inc. Nine Months Ending
December 31, 2003 Management Incentive Bonus Program
(incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003)
*10.23 Amendment No. 2 dated September 22, 2003 to Employment
Agreement, dated May 18, 2001 between Safety Components
International, Inc. and John C. Corey (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003)
*10.24 Amendment No. 2 dated September 22, 2003 to Employment
Agreement, dated May 18, 2001 between Safety Components
International, Inc. and Brian P. Menezes (incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003)
*10.25 Amendment dated September 29, 2003 to Employment Agreement,
dated May 18, 2001 between Safety Components International,
Inc. and Stephen B. Duerk (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003)
10.26 Amendment No. 1, dated October 8, 2003, to Security
Agreement dated July 10, 1998, by and between Safety
Components International, Inc. and KeyCorp Leasing
(incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003)
10.27 Tax sharing and indemnity agreement dated as of March 19,
2004 between Zapata Corporation and Safety Components
International, Inc. (incorporated by reference to Exhibit
10.27 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003)
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) (incorporated
by reference to Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004)
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) (incorporated by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004)
14.1 Safety Components International, Inc. and Subsidiaries Code
of Ethics and Business Conduct (incorporated by reference to
Exhibit 14.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2003)
21.1 Subsidiaries of Safety Components International, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
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
41
Sarbanes-Oxley Act of 2002
32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
* Indicates exhibits relating to executive compensation
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
By: /s/ John C. Corey
-----------------
John C. Corey
Chief Executive Officer
and President
Date: March 10, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Signature Title Date
- ------------------ ----- ----
/s/ John C. Corey Chief Executive Officer, March 10, 2005
- --------------------------- President and Director
John C. Corey
/s/ Carroll R. Wetzel, Jr. Director, Chairman of the Board March 10, 2005
- ---------------------------
Carroll R. Wetzel, Jr.
/s/ Brian P. Menezes Vice President, Chief Financial March 10, 2005
- --------------------------- Officer
Brian P. Menezes
/s/ William F. Nelli Controller March 10, 2005
- ---------------------------
William F. Nelli
/s/ Ben E. Waide III Director March 10, 2005
- ---------------------------
Ben E. Waide III
/s/ W. Allan Hopkins Director March 10, 2005
- ---------------------------
W. Allan Hopkins
/s/ Andy Goldfarb Director March 10, 2005
- ---------------------------
Andy Goldfarb
/s/ Leonard DiSalvo Director March 10, 2005
- ---------------------------
Leonard DiSalvo
/s/ Avram A. Glazer Director March 10, 2005
- ---------------------------
Avram A. Glazer
43
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING F-2
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS:
PRICEWATERHOUSECOOPERS LLP F-3
DELOITTE & TOUCHE LLP F-5
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003 F-6
Consolidated Statements of Operations for the Year ended December 31, 2004,
the period from March 30, 2003 to December 31, 2003, and
the Year ended March 29, 2003 F-7
Consolidated Statements of Stockholders' Equity for the Year ended
December 31, 2004, the period from March 30, 2003 to December 31, 2003, and
the Year ended March 29, 2003 F-8
Consolidated Statements of Cash Flows for the Year ended December 31, 2004,
the period from March 30, 2003 to December 31, 2003, and
the Year ended March 29, 2003 F-9
Notes to Consolidated Financial Statements F-10
SUPPLEMENTAL SCHEDULE:
II Valuation and Qualifying Accounts
F-1
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Safety Components International, Inc. (the "Company') is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on our assessment, management concludes that, as of December 31,
2004, the Company's internal control over financial reporting is effective based
on those criteria.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Safety Components International, Inc.:
We have completed an integrated audit of Safety Components International, Inc.'s
2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and an audit of its 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 15 present fairly, in all material respects, the
financial position of Safety Components International, Inc. and its subsidiaries
at December 31, 2004 and 2003, and the results of their operations and their
cash flows for the year ended December 31, 2004 and the nine-month period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15 and presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Report of Management
on Internal Control over Financial Reporting appearing above on page F-2, that
the Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
F-3
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Spartanburg, South Carolina
March 10, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Safety Components International, Inc.
Greenville, South Carolina
We have audited the accompanying consolidated statements of operations of Safety
Components International, Inc. and subsidiaries (the "Company), for the year
ended March 29, 2003 and the related consolidated statements of stockholders'
equity and cash flows for the year then ended. Our audit also included the
consolidated financial statement schedule for the year ended March 29, 2003
listed in the Index as Supplemental Schedule II. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and cash flows for
the year ended March 29, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule for the year ended March 29, 2003, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on March 31,
2002, the Company changed its method of accounting for goodwill (including
reorganization value in excess of amounts allocable to identifiable assets) to
conform to Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets".
DELOITTE & TOUCHE LLP
Greenville, South Carolina
June 6, 2003
F-5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 4,184 $ 4,376
Accounts receivable, net ................................................................ 39,272 37,109
Inventories, net ........................................................................ 26,882 23,552
Assets held in deferred compensation plan ............................................... 4,361 3,345
Prepaid and other ....................................................................... 2,653 2,476
------------ ------------
Total current assets ............................................................... 77,352 70,858
Property, plant and equipment, net ........................................................... 48,449 50,428
Identifiable intangible assets, net .......................................................... 1,108 1,172
Other assets ................................................................................. 617 868
------------ ------------
Total assets ....................................................................... $ 127,526 $ 123,326
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 16,828 $ 24,419
Accrued salaries and benefits ........................................................... 4,270 3,505
Deferred compensation ................................................................... 3,666 2,832
Accrued and other current liabilities ................................................... 4,486 4,245
Income taxes payable .................................................................... 6,715 4,477
Current portion of long-term debt ....................................................... 3,263 4,214
------------ ------------
Total current liabilities .......................................................... 39,228 43,692
Long-term debt, net of current maturities .................................................... 3,729 11,817
Deferred income taxes ........................................................................ 3,635 3,511
Other long-term liabilities .................................................................. 277 277
------------ ------------
Total liabilities .................................................................. 46,869 59,297
------------ ------------
Commitments and contingencies
Minority interest ............................................................................ 133 --
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ............................... -- --
Common stock: $.01 par value per share - 20,000,000 shares authorized; 5,295,778 and
5,037,478 shares outstanding at December 31, 2004 and December 31, 2003, respectively 53 51
Additional paid-in-capital .............................................................. 54,660 52,865
Treasury stock: 40,322 shares at cost .................................................. (411) (411)
Retained earnings ....................................................................... 12,904 2,656
Accumulated other comprehensive income .................................................. 13,318 8,868
------------ ------------
Total stockholders' equity ......................................................... 80,524 64,029
------------ ------------
Total liabilities and stockholders' equity ......................................... $ 127,526 $ 123,326
============ ============
See notes to consolidated financial statements
F-6
SAFETY COMPONENTS INTERNATIONAL , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Period from
Year Ended March 30, 2003 to Year Ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
----------------- ----------------- --------------
Net sales .................................................................. $ 247,883 $ 183,666 $ 244,338
Cost of sales, excluding depreciation ...................................... 199,841 149,479 204,656
Depreciation ............................................................... 11,296 8,089 9,662
------------ ------------ ------------
Gross profit ....................................................... 36,746 26,098 30,020
Selling and marketing expenses ............................................. 3,156 2,239 2,176
General and administrative expenses ........................................ 16,438 10,432 12,299
Research and development expenses .......................................... 1,540 1,225 1,242
Amortization of intangible assets .......................................... 153 106 124
Compensation expense associated with change of control ..................... -- 2,797 --
------------ ------------ ------------
Income from operations ............................................. 15,459 9,299 14,179
Other income, net .......................................................... (1,467) (2,275) (3,446)
Interest expense ........................................................... 946 1,664 3,616
------------ ------------ ------------
Income from continuing operations before income taxes
and minority interest ............................................. 15,980 9,910 14,009
Provision for income taxes ................................................. 5,771 3,808 6,120
Minority interest in loss of consolidated subsidiary ....................... (39) -- --
------------ ------------ ------------
Income from continuing operations ................................. 10,248 6,102 7,889
Loss on disposition of discontinued operations, net of income tax
provision of $0, $0 and $660, respectively ............................... -- -- 2,023
------------ ------------ ------------
Income before cumulative effect of change in method of accounting .. 10,248 6,102 5,866
Cumulative effect of change in method of accounting ........................ -- -- (14,651)
------------ ------------ ------------
Net income (loss) .......................................................... $ 10,248 $ 6,102 $ (8,785)
============ ============ ============
Net income (loss) per common share, basic:
Income from continuing operations .................................. $ 1.97 $ 1.23 $ 1.59
Loss on disposition of discontinued operations ..................... -- -- (0.41)
Cumulative effect of change in method of accounting ................ -- -- (2.95)
------------ ------------ ------------
Net income (loss) per common share, basic .................................. $ 1.97 $ 1.23 $ (1.77)
============ ============ ============
Net income (loss) per common share, diluted:
Income from continuing operations .................................. $ 1.94 $ 1.19 $ 1.59
Loss on disposition of discontinued operations ..................... -- -- (0.41)
Cumulative effect of change in method of accounting ................ -- -- (2.95)
------------ ------------ ------------
Net income (loss) per common share, diluted ................................ $ 1.94 $ 1.19 $ (1.77)
============ ============ ============
Weighted average number of shares outstanding, basic ....................... 5,206 4,973 4,960
============ ============ ============
Weighted average number of shares outstanding, diluted ..................... 5,294 5,119 4,960
============ ============ ============
See notes to consolidated financial statements.
F-7
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
Common Common Common Additional
Stock Stock Stock Paid-in
Shares Amount Warrants Capital
--------- --------- --------- ----------
Balance at March 30, 2002 ...................................................... 4,959,678 50 34 50,916
Comprehensive income for the year ended March 29, 2003:
Net loss ................................................................ -- -- -- --
Foreign currency translation adjustment ................................. -- -- -- --
Net comprehensive loss ...................................................... -- -- -- --
--------- --------- --------- ---------
Balance at March 29, 2003 ...................................................... 4,959,678 50 34 50,916
Comprehensive income for the period from March 30, 2003 to December 31, 2003:
Net income .............................................................. -- -- -- --
Foreign currency translation adjustment ................................. -- -- -- --
Unrealized loss on derivatives .......................................... -- -- -- --
Net comprehensive income .................................................... -- -- -- --
Expiration of warrants ...................................................... -- -- (34) 34
Issuance of common stock .................................................... 77,800 1 -- 1,915
--------- --------- --------- ---------
Balance at December 31, 2003 ................................................... 5,037,478 $ 51 $ -- $ 52,865
========= ========= ========= =========
Comprehensive income for the year ended December 31, 2004:
Net income .............................................................. -- -- -- --
Foreign currency translation adjustment ................................. -- -- -- --
Reclassification adjustment for derivatives ............................. -- -- -- --
Net comprehensive income .................................................... -- -- -- --
Issuance of common stock .................................................... 258,300 2 -- 1,795
--------- --------- --------- ---------
Balance at December 31, 2004 ................................................... 5,295,778 $ 53 $ -- $ 54,660
========= ========= ========= =========
Retained Accumulated
Treasury Earnings Other
Stock (Accumulated Comprehensive
Amount Deficit) (Loss) Income Total
--------- ------------ ------------- ---------
Balance at March 30, 2002 ...................................................... (411) 5,339 (90) 55,838
Comprehensive income for the year ended March 29, 2003:
Net loss ................................................................ -- (8,785) -- (8,785)
Foreign currency translation adjustment ................................. -- -- 4,860 4,860
---------
Net comprehensive loss ...................................................... -- -- -- (3,925)
--------- --------- --------- ---------
Balance at March 29, 2003 ...................................................... (411) (3,446) 4,770 51,913
Comprehensive income for the period from March 30, 2003 to December 31, 2003:
Net income .............................................................. -- 6,102 -- 6,102
Foreign currency translation adjustment ................................. -- -- 4,250 4,250
Unrealized loss on derivatives .......................................... -- -- (152) (152)
---------
Net comprehensive income .................................................... -- -- -- 10,200
Expiration of warrants ...................................................... -- -- -- --
Issuance of common stock .................................................... -- -- -- 1,916
--------- --------- --------- ---------
Balance at December 31, 2003 ................................................... $ (411) $ 2,656 $ 8,868 $ 64,029
========= ========= ========= =========
Comprehensive income for the year ended December 31, 2004:
Net income .............................................................. -- 10,248 -- 10,248
Foreign currency translation adjustment ................................. -- -- 4,298 4,298
Reclassification adjustment for derivatives ............................. -- -- 152 152
---------
Net comprehensive income .................................................... -- -- -- 14,698
Issuance of common stock .................................................... -- -- -- 1,797
--------- --------- --------- ---------
Balance at December 31, 2004 ................................................... $ (411) $ 12,904 $ 13,318 $ 80,524
========= ========= ========= =========
See notes to consolidated financial statements.
F-8
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Period from
Year Ended March 30, 2003 to Year Ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
----------------- ----------------- --------------
Cash Flows From Operating Activities:
Net income (loss) ................................................... $ 10,248 $ 6,102 $ (8,785)
Loss on disposition of discontinued operations ...................... -- -- 2,023
Cumulative effect of accounting change .............................. -- -- 14,651
---------- ---------- ----------
Income from continuing operations ................................... 10,248 6,102 7,889
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation .................................................... 11,296 8,089 9,662
Amortization of intangible assets ............................... 153 106 124
Provision for bad debts ......................................... 447 29 295
Loss on disposition of assets ................................... 283 541 271
Minority interest ............................................... 133 -- --
Deferred taxes .................................................. (277) (931) 1,591
Tax benefit from exercise of stock options ...................... 525 76 --
Accretion of interest on current obligations .................... -- -- 81
Non-cash charge associated with change of control ............... -- 1,404 --
Changes in operating assets and liabilities:
Accounts receivable ............................................ (2,610) 6,744 (9,121)
Inventories .................................................... (3,329) 446 (7,225)
Prepaid and other current assets ............................... 93 (480) 97
Other non-current assets ....................................... (634) (1,319) (677)
Accounts payable ............................................... (7,591) (2,294) 8,196
Income taxes payable ........................................... 2,238 1,874 1,198
Deferred compensation .......................................... 834 2,099 268
Accrued and other liabilities .................................. 1,561 (540) (541)
---------- ---------- ----------
Net cash provided by continuing operations ..................... 13,370 21,946 12,108
Net cash provided by discontinued operations ................... -- -- 812
---------- ---------- ----------
Net cash provided by operating activities ...................... 13,370 21,946 12,920
---------- ---------- ----------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ...................... (6,547) (2,594) (7,916)
Proceeds on disposition of assets ............................... -- -- 454
---------- ---------- ----------
Net cash used in continuing operations ......................... (6,547) (2,594) (7,462)
Net cash provided by discontinued operations ................... -- -- 26
---------- ---------- ----------
Net cash used in investing activities .......................... (6,547) (2,594) (7,436)
---------- ---------- ----------
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note ............. -- (9,202) (9,731)
(Repayment of) proceeds from Congress term note ................. (2,127) 1,604 (2,347)
Net (repayments) borrowings on Congress revolving
credit facility ............................................... (4,523) (12,085) 16,713
Repayment of Deutsche Bank Mortgage ............................. -- (2,014) (209)
Payment to former owner of acquired business .................... -- -- (2,327)
Repayments of other debt and long term obligations .............. (3,400) (2,023) (2,758)
Proceeds from issuance of common stock .......................... 1,270 511 --
---------- ---------- ----------
Net cash used in continuing operations ......................... (8,780) (23,209) (659)
Net cash used in discontinued operations ....................... -- -- --
---------- ---------- ----------
Net cash used in financing activities .......................... (8,780) (23,209) (659)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents .......... 1,765 669 47
---------- ---------- ----------
Change in cash and cash equivalents ................................... (192) (3,188) 4,872
Cash and cash equivalents, beginning of period ........................ 4,376 7,564 2,692
---------- ---------- ----------
Cash and cash equivalents, end of period .............................. $ 4,184 $ 4,376 $ 7,564
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 547 $ 1,305 $ 3,056
Income taxes .................................................... 2,908 2,877 3,732
Supplemental disclosure of non-cash investing activity:
Equipment acquired under capital lease obligations .................. 553 -- 1,086
See notes to consolidated financial statements.
F-9
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business and Basis of Presentation
Safety Components International, Inc. (including, when context requires,
its consolidated subsidiaries, the "Company" or "SCI") operates in a single
segment as a manufacturer of automotive airbag fabric and cushions and technical
fabrics with operations principally in North America and Europe.
The 2001 Restructuring
On April 10, 2000 (the "Petition Date"), the Company and certain of its
U.S. subsidiaries (collectively, the "Safety Filing Group"), filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On October 11, 2000 (the "Emergence Date"), the Safety
Filing Group emerged from Chapter 11 pursuant to the Plan of Reorganization (the
"Plan") confirmed by the Bankruptcy Court. Pursuant to the Plan, upon emergence,
all of the Company's 10-1/8% Senior Notes due 2007 (the "Notes") (an aggregate
of approximately $96.8 million, including accrued interest to the Petition Date)
were converted into 4,840,774 shares of the Company's post-bankruptcy common
stock, and the pre-bankruptcy common stock, excluding stock held by Robert A.
Zummo (former Chairman and Chief Executive Officer of the Company), was
converted into 159,226 shares of the Company's post-bankruptcy common stock,
including 39,619 shares of treasury stock, and warrants to acquire an additional
681,818 shares of such common stock (these warrants expired as of April 10,
2003). Immediately upon emergence, the Company had 5,000,000 shares of common
stock issued and 4,960,381 shares outstanding and, other than shares underlying
the warrants, no shares of common stock were reserved for issuance in respect of
claims and interests filed and allowed under the Plan. In addition, the Safety
Filing Group's trade suppliers and other creditors were paid in full, pursuant
to the terms of the Plan, within 90 days of the Emergence Date.
The Plan was accounted for pursuant to Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), issued by the American Institute of Certified Public Accountants.
The accompanying consolidated financial statements reflect the use of "fresh
start" reporting as required by SOP 90-7. Under "fresh start" reporting, the
Company's assets and liabilities were adjusted to estimated fair values and
resulted in the creation of a new reporting entity (the "Reorganized Company" or
the "Company") with no retained earnings or accumulated deficit as of October
11, 2000. In conjunction with the revaluation of the assets and liabilities, a
reorganization value for the entity was determined based upon the approximate
fair value of the entity before considering debt requirements. Under "fresh
start" reporting, the reorganization value of the entity is allocated to the
entity's assets and liabilities. The portion of the reorganization value that
cannot be attributed to specific tangible or identified intangible assets of the
Reorganized Company is reported as "reorganization value in excess of amount
allocable to identifiable assets."
Change of Control
On September 29, 2003, Zapata Corporation ("Zapata", NYSE: "ZAP") filed a
Schedule 13D with the Securities and Exchange Commission (the "SEC") indicating
that as of September 18, 2003 it had acquired 2,663,905 shares of the Company's
common stock which then constituted approximately 53.7% of the issued and
outstanding shares of such common stock. As a result, a change of control of the
Company (the "Change of Control") occurred. On October 6, 2003, Zapata filed an
amendment to its Schedule 13D with the SEC, indicating that it had acquired an
additional 1,498,489 shares of the Company's common stock which, together with
the shares previously acquired, then constituted approximately 83.9% of the
issued and outstanding common stock of the Company.
The Change of Control triggered certain provisions of the Company's Stock
Option Plan, including immediate vesting of all options and an automatic change
in the exercise price of a portion of the options to $0.01. This change in
exercise price constituted a modification of the Stock Option Plan and the
Company was required to recognize a one-time, non-recurring compensation cost of
$1.4 million for the modified options, representing 126,900 options, for the
nine months ended December 31, 2003. Additionally, in lieu of re-pricing their
Class A stock options, the employment agreements of certain key executives
included a provision for a one-time, non-recurring bonus payable in the event of
a change of control. The aggregate bonus was $1.4 million and was also
recognized as an expense in 2003.
F-10
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
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. In the first quarter of 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.
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%. As a result
of Zapata's ownership of the company's outstanding common stock falling below
80%, Zapata will not consolidate the Company into Zapata's consolidated income
tax returns for periods subsequent to the first quarter of 2004. Under The Tax
Sharing and Indemnity Agreement, the Company will be consolidated into Zapata's
tax filing group for the fourth calendar quarter of 2003 and the first calendar
quarter of 2004. On January 4, 2005, the Company received notification from the
Internal Revenue Service that its plan to return to the taxpayer status
consistent to the periods prior to the Change of Control has been approved. The
Company does not expect any material financial impact to result from the change
in its tax filing status.
Note 2 Summary of Significant Accounting Policies
Principles of consolidation
The Company's consolidated financial statements include the assets,
liabilities and operating results of majority-owned subsidiaries and other
subsidiaries controlled by the Company. The ownership of the other interest
holders of consolidated subsidiaries is reflected as minority interest and is
not significant. All significant intercompany accounts and transactions have
been eliminated.
Effective as of March 31, 2004, the Company adopted the revised
interpretation of Financial Accounting Standards Board (FASB) Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities," (FIN 46-R). FIN 46-R
requires that certain variable interest entities be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company does not have any
investments in entities it believes are variable interest entities for which the
Company is the primary beneficiary.
Financial Statement Preparation
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which require management to make estimates and assumptions that affect the
amounts and disclosures reported in the financial statements and accompanying
notes. Significant estimates made by management include allowances for doubtful
accounts receivable, reserves for inventories, contingencies and other reserves,
allowances for deferred tax assets, reserves for discontinued operations and
assessment of asset impairment. Management believes that its estimates included
in the financial statements, including for these matters, are reasonable.
However, actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform to the current year presentation.
F-11
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal year
Following the Change of Control, the Company changed its fiscal year to a
calendar year end to coincide with Zapata's fiscal year end. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 consists of nine months of operations. The fiscal
years from January 1, 2004 to December 31, 2004 and March 31, 2002 to March 29,
2003 each consisted of twelve months of operations.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Derivative financial instruments
Derivative financial instruments are utilized by the Company to reduce
exposures to volatility of foreign currencies impacting the operations of its
business. The Company does not enter into financial instruments for trading or
speculative purposes.
The Company uses SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. It requires the recognition
of all derivative instruments as either assets or liabilities in the statement
of financial position and measurement of those instruments at fair value. The
accounting treatment of changes in fair value is dependent upon whether or not a
derivative instrument is designated as a hedge and, if so, the type of hedge.
For derivatives designated as cash flow hedges, to the extent effective, changes
in fair value are recognized in accumulated other comprehensive income (loss)
until the hedged item is recognized in earnings. Ineffectiveness is recognized
immediately in earnings. For derivatives designated as fair value hedges,
changes in fair value are recognized in earnings.
On December 31, 2004, the Company had no outstanding forward exchange
contracts. On December 31, 2003 the Company had outstanding forward exchange
contracts to purchase Mexican Pesos and Czech Korunas that met the requirements
of SFAS No. 133 and were accounted for as qualifying hedges. See Note 12 for
further information regarding derivative instruments entered into and executed
during the twelve months ended December 31, 2004 and nine months ended December
31, 2003.
Concentration of credit risk
The Company is subject to a concentration of credit risk relating to its
trade receivables. At December 31, 2004, three customers accounted for
approximately 36%, 11% and 10% of its trade receivables. At December 31, 2003,
these same three customers accounted for approximately 36%, 15% and 5% of its
trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company evaluates
potential losses for uncollectible accounts and such losses have historically
been immaterial and within management's expectations.
Inventories
Inventories represent direct materials, labor and overhead costs incurred
for products not yet delivered and are stated at the lower of cost (first-in,
first-out) or market.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over
F-12
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the estimated useful lives of the assets. Leasehold improvements are amortized
over the shorter of their estimated useful lives or the term of the underlying
lease. Estimated useful lives by class of assets are as follows:
Machinery and equipment .......................... 4 - 10 years
Furniture and fixtures ........................... 3 - 5 years
Buildings ........................................ 25 - 40 years
Leasehold improvements ........................... Lesser of useful life or lease term
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals or betterments of significant items are capitalized.
Tangible asset impairment
The Company continually monitors conditions that may affect the carrying
value of its tangible assets. When conditions indicate potential impairment of
such assets, the Company evaluates the fair value of the assets. When the fair
value of an asset is less than the carrying value of the asset, the impaired
asset is written down to its estimated fair value, and is charged to operations
in the period in which impairment is determined. Management is not aware of any
events that would indicate potential impairment of its tangible assets.
Intangible assets
At December 31, 2004, intangible assets consist of certain Company patents
revalued at the "fresh start" date to fair value. Such patents are amortized
over estimated lives between 15 and 20 years. Accumulated amortization at
December 31, 2004 and December 31, 2003 was approximately $544,000 and $391,000,
respectively. Amortization of patents is expected to approximate $155,000 per
year for each of the five succeeding years. The Company continually monitors
conditions that may affect the carrying value of its intangible assets. When
conditions indicate potential impairment of such assets, the Company evaluates
the fair value of the assets. When the fair value of an asset is less than the
carrying value of the asset, the impaired asset is written down to its estimated
fair value, and is charged to operations in the period in which impairment is
determined. Management is not aware of any events that would indicate potential
impairment of its intangible assets.
The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to perform an impairment assessment of the Company's
"reorganization value in excess of amounts allocable to identifiable assets"
arising from the valuation performed upon its emergence from Chapter 11 in
October 2000 ("excess reorganization value"), and goodwill, as of March 31,
2002. Under the transition guidance of SFAS No. 142, the Company was required to
perform its initial impairment evaluation within six months of adopting the new
standard, and any impairment charges were to be retroactively recorded in the
first quarter of the Company's fiscal year. Other identifiable intangible assets
of the Company consist of patents that continue to be amortized over their
estimated useful lives. In accordance with SFAS No. 142, the Company compared
the book value of the Company's net assets, including the excess reorganization
value and goodwill, to the Company's fair value as of March 31, 2002. The
Company estimated its fair value using the following methodologies: a discounted
cash flows approach, relative market multiples for comparable businesses and a
market approach based on the Company's total market capitalization. Because the
fair value was lower than the book value of the Company's net assets, excess
reorganization value and goodwill were determined to be impaired and
accordingly, the carrying value of such assets (approximately $14.7 million at
March 31, 2002) was charged to earnings as the cumulative effect of a change in
method of accounting effective March 31, 2002. There was no tax effect of the
change in accounting principle, as the excess reorganization value and goodwill
were not deductible for income tax purposes.
F-13
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of intangible assets (in thousands):
December 31, 2004 December 31, 2003
----------------- -----------------
Identifiable intangible assets - patents:
Gross carrying amount $ 1,652 $ 1,563
Accumulated amortization (544) (391)
---------------------------------
Net carrying amount $ 1,108 $ 1,172
=================================
Amortization expense for the year ended December 31, 2004, the nine months
ended December 31, 2003 and the years ended March 29, 2003 was $153,000,
$106,000 and $124,000, respectively.
Deferred financing costs
Costs incurred in connection with financing activities are deferred and
amortized over the lives of the respective debt instruments using the
straight-line method (which approximates the effective interest method), and are
charged to interest expense in the accompanying consolidated statements of
operations. Total costs deferred and included in "other assets" in the
accompanying consolidated balance sheets at December 31, 2004 and December 31,
2003 were $349,000 and $401,000, respectively.
Income taxes
Income taxes are recognized for financial reporting purposes during the
year in which transactions enter into the determination of income, with deferred
taxes being provided for temporary differences between the basis for financial
reporting purposes and the basis for income tax reporting purposes. A valuation
allowance is provided for deferred tax assets when, in the opinion of
management, it is more likely than not that the deferred tax assets will not be
realized.
Revenue recognition
The Company recognizes revenue from product sales when it has shipped the
goods and title and the risk of loss has passed. Additionally, the Company
accrues for estimated sales returns and other allowances at the time of shipment
based upon historical experience. Actual sales returns and other allowances have
not differed materially from such estimates.
Annual revenues from major customers
The Company's net sales to three customers in the year ended December 31,
2004 aggregated approximately 30%, 24% and 8% of net sales. The Company's net
sales to these same three customers in the nine months ended December 31, 2003
aggregated approximately 32%, 23% and 13% of net sales. The Company's net sales
to these same three customers in the year ended March 29, 2003 aggregated
approximately 32%, 21% and 19% of net sales, respectively.
Environmental expenditures
Environmental expenditures that result from the remediation of an existing
condition caused by past operations that will not contribute to current or
future revenues are expensed. Expenditures that extend the life of the related
property or prevent future environmental contamination are capitalized. The
Company's environmental expenditures for the year ended December 31, 2004, the
nine months ended December 31, 2003 and the year ended March 29, 2003 were
insignificant. Undiscounted liabilities are recognized for remedial activities
when the cleanup is probable and the cost can be reasonably estimated. See Note
7 for further information regarding environmental reserves.
F-14
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
costs were approximately $195,000, $81,000 and $117,000 during the year ended
December 31, 2004, the nine months ended December 31, 2003 and the year ended
March 29, 2003, respectively, and were recorded as a component of selling and
marketing expenses in the accompanying consolidated statements of operations.
Shipping costs
The costs to ship products to customers of approximately $3.7 million,
$2.9 million and $2.9 million during the year ended December 31, 2004, the nine
months ended December 31, 2003 and the year ended March 29, 2003, respectively,
are included as a component of cost of sales in the accompanying consolidated
statements of operations.
Research and development expenses
Research and development costs are charged to operations when incurred and
are included in operating expenses. Costs associated with design and development
for fabric and airbag cushions for the year ended December 31, 2004, the nine
months ended December 31, 2003 and the year ended March 29, 2003, were $1.5
million, $1.2 million and $1.2 million, respectively.
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company currently has two items,
unrealized gain or loss on foreign currency translation and gain or loss on
derivatives, which are components of other comprehensive income. Unrealized
gains or losses on foreign currency translation are not shown net of income
taxes because the earnings of foreign subsidiaries are considered by Company
management to be permanently reinvested.
Earnings per share
Earnings per share amounts have been computed using Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS includes unexercised stock options
using the treasury stock method. (See Note 11).
Stock Based Compensation
On May 18, 2001, the Safety Components International, Inc. 2001 Stock
Option Plan ("Stock Option Plan") became effective pursuant to shareholder
approval. The Stock Option Plan provides for the issuance of options to purchase
up to an aggregate of 900,000 shares of SCI's common stock to key officers,
employees, directors and consultants of SCI or its affiliates. Unless designated
otherwise by the Compensation Committee of the Board of Directors, options
granted pursuant to the Stock Option Plan are intended to be non-statutory stock
options. The Compensation Committee determines the exercise price and the term
of options granted pursuant to the Stock Option Plan at the time of grant. Each
award is determined by the Compensation Committee on an individual basis.
Options to purchase a total of 510,100 shares of common stock at a fair market
price of $8.75 per share (subject to adjustment in certain circumstances), to
vest ratably over a period of three years from the date of grant on May 18,
2001, were granted by the Compensation Committee to 22 employee participants and
to the outside directors under the Stock Option Plan. Additional options to
purchase 190,000 shares of common stock at a fair market price of $6.71 per
share, to vest ratably over a period of three years from the date of grant on
April 1, 2002, were granted by the Compensation Committee to employees and
outside directors. All options expire on October 31, 2010.
F-15
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies the principles of Accounting Principles Board Opinion
("APB") No. 25 in accounting for employee stock option plans (the intrinsic
value method). All stock options granted had an exercise price equal to the fair
market value of the underlying common stock at the date of grant. Accordingly,
under APB No. 25, no compensation cost was recognized in the Company's financial
statements in prior periods. During the quarter ended September 27, 2003, the
Change of Control occurred and as a result under the provisions of the Stock
Option Plan all options vested immediately and the exercise prices of a certain
subset of the options were automatically changed to $0.01 (the "modified
options"). This change in exercise price constituted a modification of the Stock
Option Plan and under APB No. 25 and Financial Interpretation Number ("FIN") 44,
"Accounting for Certain Transactions involving Stock Compensation," the Company
was required to recognize compensation cost of $1.4 million ($823,000 net of
tax) for the modified options, representing 126,900 options, for the quarter
ended September 27, 2003. No expense was recognized on the remaining 567,800
options that were not subject to the automatic change in exercise price.
According to the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the Company is required to disclose
the compensation expense included in net income based on APB No. 25 and the
related pro-forma cost measured by the fair value method under SFAS No. 123, net
of tax effects. Additionally, the modification resulted in an increased value
for the modified options (the "incremental fair value") that is disclosed as
part of the pro-forma expense measured by the fair value method.
The fair 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. Prior to the modification,
the Company's SFAS No. 123 pro-forma compensation expense would have been $1.1
million and $419,000 for the nine months ended December 31, 2003 and for the
twelve months ended March 29, 2003, respectively.
As a result of the modification, the incremental fair value of the
modified options is to be estimated immediately before their terms are modified
and on the date of modification. The fair values for the modified options were
also based on the Black-Scholes option-pricing model, with the following
assumptions used: risk free interest rate of 0.99 percent; zero percent
dividends; expected life of 0.5 years; expected volatility of 83.7 percent; and
an exercise price of $0.01 and $8.75. The incremental fair value of the modified
options was $7.38. As a result, the incremental pro-forma compensation expense
was $534,000 and $0 for the nine months ended December 31, 2003 and for the
twelve months ended March 29, 2003, respectively.
F-16
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Had compensation cost for the Company's stock option plans been determined
based on the estimated fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123 (as amended), the Company's
compensation cost (net of tax), net income (loss) and net income (loss) per
common share, basic and diluted, would have been affected as indicated in the
pro-forma amounts below (in thousands, except per share data):
Period from
Year Ended March 30, 2003 to Year Ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
---------------------------------------------------------
Net income (loss), as reported: $ 10,248 $ 6,102 $ (8,785)
Add: Total stock-based
employee compensation
expense included in reported
net income (loss), net of tax -- 823 --
Deduct: Total stock-based
employee compensation
expense determined under
fair value method, net of tax -- 1,650 419
--------------------------------------------------
Pro forma net income (loss): $ 10,248 $ 5,275 $ (9,204)
==================================================
Net income (loss) per share:
Basic - as reported: $ 1.97 $ 1.23 $ (1.77)
Basic - pro forma: $ 1.97 $ 1.06 $ (1.86)
Diluted - as reported: $ 1.94 $ 1.19 $ (1.77)
Diluted - pro forma: $ 1.94 $ 1.03 $ (1.86)
There were 354,200 options outstanding as of December 31, 2004. During the
year ended December 31, 2004, there were 258,300 exercised options, no
forfeitures and no options were granted or expired. Of the 354,200 options
outstanding at December 31, 2004, 272,500 have an exercise price of $8.75,
74,200 have an exercise price of $6.71 and 7,500 have an exercise price of
$0.01, with all options having a weighted average remaining contractual life of
5.84 years. All options outstanding became fully vested upon the Change of
Control and are currently exercisable.
There were 612,500 options outstanding as of December 31, 2003. During the
nine months ended December 31, 2003, there were 77,800 exercised options,
forfeitures of 6,400 and 3,400 options with an exercise price of $8.75 and
$6.71, respectively, and no options were granted or expired. Of the 612,500
options outstanding at December 31, 2003, 350,400 had an exercise price of
$8.75, 100,300 had an exercise price of $0.01 and 161,800 had an exercise price
of $6.71, with all options having a weighted average remaining contractual life
of 7.10 years. All options outstanding became fully vested upon the Change of
Control and are currently exercisable.
There were 700,100 options outstanding at March 29, 2003, of which 510,100
had an exercise price of $8.75 and 190,000 had an exercise price of $6.71, with
a weighted average remaining contractual life of 7.60 years; 341,767 of these
options were currently exercisable with an exercise price of $8.75. 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. There were no options exercised, forfeited or expired for the
year ended March 29, 2003.
See "New Accounting Standards" below for further information on the
potential impact of new accounting guidance on stock based compensation.
F-17
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign currency translation
Financial statements of substantially all of the Company's foreign
operations are prepared using the local currency as the functional currency.
Translation of these foreign operations to United States dollars occurs using
the current exchange rate for balance sheet accounts and a weighted average
exchange rate for results of foreign operations. Translation gains or losses are
recognized in "accumulated other comprehensive income (loss)" as a component of
stockholders' equity in the accompanying consolidated balance sheets.
The Company's subsidiary in Mexico prepares its financial statements using
the United States dollar as the functional currency. Since the Mexico subsidiary
does not have external sales and does not own significant amounts of inventory
or fixed assets, the Company has determined that the United States dollar is the
appropriate functional currency. Accordingly, the translation effects of the
financial statements are included in the results of operations. During the
periods presented herein, such amounts were not significant.
Foreign currency transaction gains are reflected in operations in "other
income, net." During the year ended December 31, 2004, the nine months ended
December 31, 2003 and the year ended March 29, 2003, transaction gains included
in operations amounted to $677,000, $2.0 million and $3.5 million, respectively.
Fair value of financial instruments
The consolidated financial statements include financial instruments
whereby the fair market value of such instruments may differ from amounts
reflected on a historical basis. Financial instruments of the Company consist of
cash deposits, accounts receivable, advances to affiliates, accounts payable,
certain accrued liabilities and long-term debt. The carrying amount of the
Company's long-term debt at December 31, 2004 and December 31, 2003 approximated
fair market value based on prevailing market rates. The Company's other
financial instruments generally approximate their fair values based on the
short-term nature of these instruments.
Discontinued Operations
As discussed in Note 3, the Company has reported its metal and defense
businesses as discontinued operations in the consolidated financial statements
from October 11, 2000, the measurement date, through March 29, 2003. Prior to
March 29, 2003, the Company had disposed of all discontinued operations with the
sale of Galion, Inc. on December 23, 2002. Accordingly, the businesses' net
losses during the years ended March 30, 2002 and March 29, 2003, which were
incurred subsequent to the measurement date, were applied against the accrued
losses recorded during those periods as incurred in the consolidated statements
of operations.
Segment Information
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company sells similar
products (airbag cushions, airbag fabric and technical fabrics), uses similar
processes in selling the products and sells the products to similar classes of
customers. As a result of these similar economic characteristics and the way the
business is managed, the Company has aggregated the results into a single
segment for purposes of reporting financial condition and results of operations.
See Note 8 for product revenue and geographic information.
New Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs,
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is in the process of evaluating the effect, if any, that the adoption of
SFAS No. 151 will have on its financial position and results of operations.
F-18
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is in the process of evaluating the effect, if
any, that the adoption of SFAS No. 153 will have on its financial position and
results of operations.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company is in the process of evaluating the effect, if any, that the adoption of
SFAS No. 123(R) will have on its financial position and results of operations.
Note 3 Discontinued Operations
As previously discussed, on October 10, 2000, the Company concluded to
exit and sell its metal and defense businesses consisting of Valentec Wells,
LLC, the metallic belt links business located in Missouri (relocated from Costa
Mesa, CA) and Galion, Inc., the defense systems and products divisions located
in Ohio.
On September 27, 2001, the Company finalized the sale of the metallic belt
links business of Valentec Wells, LLC. Pursuant to an asset purchase agreement
dated September 16, 2001 between Valentec Wells, LLC and Alliant Lake City Small
Caliber Ammunition Company LLC, the Company sold the metallic belt links
production assets and inventory of Valentec Wells, LLC for approximately $4.8
million in cash. The resulting gain on this sale was substantially offset by
additional provisions for losses and an asset write-down at Galion, Inc. in
fiscal 2002.
On December 23, 2002, the Company completed the disposal of its
discontinued operations with the sale of Galion, Inc. ("Galion") pursuant to a
stock purchase agreement between the Company and Galion Acquisition, LLC, an
affiliate of The Diversified Group Incorporated. The Company sold all its stock
in Galion for an adjusted purchase price of $454,000 in cash, resulting in a
loss on disposition of discontinued operations of approximately $2.0 million,
including the recognition of a tax provision of approximately $660,000 related
to an adjustment of the deferred tax liabilities of the discontinued operations.
There was no tax effect on the loss on disposition as the Company recorded a
deferred tax asset and a concurrent reserve on the tax asset as a result of the
loss being a capital loss.
Following is a summary of financial information for the Company's
discontinued metal and defense operations (in thousands):
Period From
Year Ended March 30, 2003 to Year Ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
----------------------------------------------------------
Net sales $ -- $ -- $5,435
Discontinued operations:
Loss on disposition, net
of income taxes -- -- 2,023(a)
(a) During fiscal year 2003, the Company recorded a loss on disposition
of discontinued operations due to the sale of Galion, Inc. in
December 2002.
F-19
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounted for its discontinued operations in accordance with
APB No. 30. Accordingly, the Company recognized an initial estimated loss at the
measurement date and additional losses subsequent to the measurement date under
the "net realizable value" principle. Continued, unforeseen losses at the
Valentec and Galion operations were the primary reason for additional losses
being recognized. Unanticipated costs related to the move of the Valentec
operation from California to Missouri; the unanticipated loss of major
contracts; changing market conditions resulting in additional pricing pressure;
a deferred tax provision adjustment associated with Galion; and a loss
recognized on the disposition of Galion were the primary contributors to these
additional losses.
Note 4 Composition of Certain Consolidated Balance Sheet Accounts (in thousands)
December 31, 2004 December 31, 2003
----------------------------------------
Accounts receivable:
Trade receivables, net of allowances of $892 and $445 at
December 31, 2004 and December 31, 2003, respectively $ 37,547 $ 35,361
Other 1,725 1,748
-------------------------------
Total $ 39,272 $ 37,109
===============================
Inventories:
Raw materials $ 7,153 $ 6,273
Work-in-process 8,073 7,089
Finished goods 11,656 10,190
-------------------------------
Total $ 26,882 $ 23,552
===============================
Property, plant and equipment:
Land and buildings $ 20,479 $ 18,757
Machinery and equipment 67,238 59,221
Furniture and fixtures 1,167 1,396
Construction in process 2,277 603
-------------------------------
91,161 79,977
Less - accumulated depreciation and amortization (42,712) (29,549)
-------------------------------
Total $ 48,449 $ 50,428
===============================
Note 5 Long-Term Debt (in thousands)
December 31, 2004 December 31, 2003
--------------------------------------
Congress revolving credit facility due on October 8, 2006, bearing a
variable interest rate (5.00% at December 31, 2004) $ 105 $ 4,628
Congress Term A loan due on October 8, 2006, bearing a variable interest
rate (5.00% at December 31, 2004) 2,048 4,176
KeyCorp equipment note due August, 2005 1,028 2,690
HVB Bank Czech Republic mortgage note due March, 2007 2,640 3,509
Capital equipment notes payable, with various interest rates ranging
from 6.42% to 8.36%, maturing at various dates through March 2007 1,171 1,028
----------------------------
Total debt 6,992 16,031
Less - current portion of long-term debt (3,263) (4,214)
----------------------------
Total long-term portion of debt $ 3,729 $ 11,817
============================
F-20
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 outstanding under the Congress
Revolver at December 31, 2004 was $105,000. The Congress Revolver also includes
a $5.0 million letter of credit facility, which was unutilized at December 31,
2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $2.0 million was outstanding as of December 31, 2004.
The Congress Term A loan is payable in equal monthly installments of
approximately $45,000, 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 $3.5 million was
available as of December 31, 2004. At December 31, 2004, the Company's
availability for additional borrowings (based on the maximum allowable limit)
under the Congress Revolver and the Congress Term B loan was approximately $38.4
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 December 31,
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 loans;
acquire investments; declare or make dividends or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At December 31, 2004, the Company was in
compliance with all financial covenants. At December 31, 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 its 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 its joint venture in
South Africa. This amendment also, among other things, allows the Company to
include the
F-21
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Other Long-term Obligations
On March 28, 2002, the Company's Czech Republic subsidiary and HVB Bank
Czech Republic, successor to Bank Austria, entered into an amendment to its $7.5
million mortgage note facility dated June 4, 1997. This amendment extended the
mortgage facility for five years, established an interest rate of 1.7% over
EURIBOR (EURIBOR was 2.42% at December 31, 2004), requires monthly payments of
approximately $89,000 and is secured by the real estate assets of the Company's
subsidiary in the Czech Republic. The Company has guaranteed the repayment of up
to $500,000 of the obligations of this subsidiary with respect to this facility.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The KeyCorp financing agreement has a seven-year term, bears
interest at a rate of 1.25% over LIBOR (LIBOR was 2.42% at December 31, 2004),
requires monthly payments of approximately $150,000 and is secured by certain
equipment located at the Company's Greenville, South Carolina facility.
Future annual minimum principal payments of long-term debt and capital
lease obligations at December 31, 2004 are due in the following fiscal years (in
thousands):
2005 $ 3,263
2006 3,284
2007 445
2008 --
2009 --
Thereafter --
------------
$ 6,992
============
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 December 31, 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.
F-22
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 Income Taxes
The provision (benefit) for income taxes from continuing operations is
comprised of the following (in thousands):
Period From
Year Ended March 30, 2003 to Year Ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
------------------------------------------------------------
Current taxes:
Federal $ 1,425 $ 2,392 $ 3,529
State 223 360 633
Foreign 3,798 1,987 1,593
Deferred taxes:
Federal 70 (885) 378
State 11 (135) (38)
Foreign 244 89 25
--------------------------------------------------
$ 5,771 $ 3,808 $ 6,120
==================================================
Income before income tax expense attributable to domestic operations is
approximately $6.8 million, $4.6 million, and $11.9 million during the year
ended December 31, 2004, the nine months ended December 31, 2003 and the year
ended March 29, 2003, respectively. Income before income tax expense
attributable to foreign operations is approximately $9.3 million, $5.3 million
and $2.1 million during the year ended December 31, 2004, the nine months ended
December 31, 2003 and the year ended March 29, 2003, respectively.
The provision for income taxes differs from the amount computed by
applying the federal income tax rate to income from continuing operations before
income taxes as follows:
Period From
Year Ended March 30, 2003 to Year Ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
-----------------------------------------------------------
Expected taxes at federal statutory rate 34% 34% 34%
State income taxes, net of federal benefits 1 2 3
Foreign earnings taxed at different rates 4 3 6
Deductible foreign taxes (3) -- --
Valuation allowance on deferred tax assets 1 1 --
Recovery of non-taxable bankruptcy expense -- 1 --
Other, net (1) (2) 1
-------------------------------------------------
36% 39% 44%
=================================================
F-23
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the deferred tax assets (liabilities) recognized
in the accompanying consolidated balance sheets (in thousands):
December 31, 2004 December 31, 2003
------------------------------------------
Deferred tax assets (liabilities):
Accrued compensation $ -- $ 212
Accrued insurance 204 234
Other accrued liabilities 556 290
Inventory 523 504
Receivables 327 99
Property, plant and equipment (4,703) (4,836)
Deferred compensation 1,371 1,060
Environmental reserves 103 103
Stock options 31 389
Capital loss carryforward 795 795
Foreign deferred tax assets (liabilities) - other 451 (114)
Foreign net operating loss carryforwards -- 550
--------------------------------
Net deferred tax liabilities before valuation allowances (342) (714)
Valuation allowance on capital loss and foreign net operating loss
carryforwards and foreign deferred tax assets (1,440) (1,345)
--------------------------------
Net deferred tax liabilities $ (1,782) $ (2,059)
================================
Recognized as follows in the accompanying consolidated balance sheets:
Current deferred tax assets $ 1,609 $ 1,340
Long-term deferred tax assets 244 112
Long-term deferred tax liabilities (3,635) (3,511)
--------------------------------
Net deferred tax liabilities $ (1,782) $ (2,059)
================================
Current deferred tax assets are included in "prepaid and other" assets and
long-term deferred tax assets are included in "other assets" in the accompanying
consolidated balance sheets.
The net valuation allowance on capital loss and foreign deferred tax
assets increased by approximately $95,000 due to the establishment of a
valuation allowance for foreign deferred tax assets attributable to the
Company's United Kingdom operations.
No taxes have been provided relating to the possible distribution of
approximately $26.3 million of undistributed earnings considered to be
permanently reinvested in foreign operations.
Significant judgment is required in evaluating the Company's federal,
state and foreign tax positions and in the determination of its tax provision.
Despite management's belief that the Company's tax return positions are fully
supportable, the Company may establish, and has established, reserves when it
believes that certain tax positions are likely to be challenged and it may not
fully prevail in overcoming these challenges. The Company may adjust these
reserves as relevant circumstances evolve, such as guidance from the relevant
tax authority, its tax advisors or resolution of issues. The Company's tax
expense includes the impact of reserve provisions and changes to reserves that
it considers appropriate. The Company is currently undergoing examinations of
its corporate income tax returns by tax authorities and it is possible that the
examination could result in assessment and payment of taxes related to these
positions during 2005. Therefore, the reserves for these positions are
classified as current in the accompanying consolidated balance sheet.
The Company does not expect any material impact on its financial
statements from the American Jobs Creation Act of 2004.
F-24
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Commitments and Contingencies
Legal proceedings
As described in Note 1, the Company emerged from bankruptcy on October 11,
2000, and an order entering the final decree and closing the Chapter 11 cases
was signed on November 21, 2003. The final decree is subject to a "Limited
Reservation of Jurisdiction" for a "Reporting/Fee Dispute" with the U.S. Trustee
Office over administrative matters associated with the cases. The Company has
reserved $275,000 for any potential exposure associated with the Reporting/Fee
Dispute. Although no assurances can be given in this regard, management does not
expect that the Company will incur material expenditures in addition to those
reserved with respect to the Reporting/Fee Dispute.
The Company, from time to time, becomes party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
Leases
The Company has non-cancelable leases for equipment and office space that
expire at various dates through 2010. The net present value of the capital lease
obligations is included as part of the Company's total long-term debt described
above in Note 5. Certain of the lease payments are subject to adjustment for
inflation. The Company incurred rent expense of $1.7 million, $1.3 million and
$2.0 million for the year ended December 31, 2004, the nine months ended
December 31, 2003 and the year ended March 29, 2003, respectively.
Future annual minimum lease payments for all non-cancelable leases as of
December 31, 2004 are as follows (in thousands):
Capital Operating
-------------------
2005 $ 561 $ 660
2006 529 384
2007 154 225
2008 -- 49
2009 -- 15
Thereafter -- 7
-------------------
Total minimum lease payments 1,244 $1,340
======
Amount representing interest 73
------
Net present value of minimum lease payments $1,171
======
Environmental issues
An undiscounted reserve of $277,000 has been included in "other
long-term liabilities" on the accompanying consolidated balance sheets for
estimated future environmental expenditures related to the Company's facility in
Greenville, South Carolina (the "Greenville facility") for conditions existing
prior to the Company's ownership of the facility. Such reserve was established
at the time the Company acquired the facility, and the amount was determined by
reference to the results of a Phase II study performed at the Greenville
facility. In addition, the Greenville facility has been identified along with
numerous other parties as a Potentially Responsible Party ("PRP") at the
Aquatech Environmental, Inc. Superfund Site. The Company believes that it is a
de minimis party with respect to the site and that future clean-up costs
incurred by the Company will not be material.
The Company has received a General Notice of Potential Liability letter
from the U.S. Environmental Protection Agency ("EPA"), dated November 22, 2004,
addressed to Valentec Wells, LLC, an inactive subsidiary ("Valentec Wells") of
the Company, regarding the RRGClayton Chemical Site (the "Site"). The EPA Notice
states that
F-25
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the agency has received information indicating that Valentec Wells is a PRP for
the Site pursuant to the Comprehensive Environmental Response Compensation and
Liability Act. The EPA letter indicates that Valentec Wells is one of 73 PRPs
that were selected to receive this Notice as the alleged largest contributors of
waste to the Site. The EPA Notice invited Valentec Wells to attend PRP meetings
in early December 2004 and to respond indicating the company's willingness to
perform or finance remedial response activities at the Site. In subsequent
communications, EPA has alleged that Valentec Wells may be connected to the Site
through another corporation. The Company has requested that EPA provide any
information in its possession related to the alleged successor relationship
between Valentec Wells and the other company. As of the date of this Annual
Report on Form 10-K, no information has been provided by the EPA and the
Company's inquiry into this matter has not confirmed any corporate relationship
between Valentec Wells and the other company, nor has it revealed any
information to indicate that Valentec Wells ever sent wastes to the Site. The
Company will continue to review this matter. At this time, the Company is unable
to predict the outcome or reasonably estimate a range of possible loss.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued are expected to be
required for the Company's environmental control efforts and the final outcomes
of these matters are not expected to have a material adverse effect on the
Company's financial position or results of future operations. The Company
believes that it currently is in compliance with applicable environmental
regulations in all material respects. Management's opinion is based on the
advice of independent consultants on environmental matters.
Note 8 Product and Geographic Information
The Company operates in a single segment as a manufacturer of automotive
airbag fabric and cushions and technical fabrics with operations principally in
North America and Europe. The Company attributes its revenues from external
customers based on the location of its sale contracts and long-lived assets to a
particular country based on the location of each of the Company's production
facilities. Summarized financial information by product type and geographic area
is as follows:
Revenues from External Customers:
Period From
Year ended March 30, 2003 to Year ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
---------------------------------------------------------
United States
Airbag Cushions $ 59,442 $ 47,899 $ 68,022
Airbag Fabric 26,221 25,321 40,235
Technical Fabric 28,552 18,669 22,471
Germany
Airbag Cushions 96,544 64,994 72,811
United Kingdom
Airbag Cushions 37,124 26,783 40,799
--------------------------------------------------
Total Net Sales $247,883 $183,666 $244,338
==================================================
F-26
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long Lived Assets:
December 31, 2004 December 31, 2003
---------------------------------------
United States $ 17,069 $ 16,141
Mexico 4,961 4,943
Germany 13,193 13,621
Czech Republic 14,357 15,654
Other European Countries -- 1,435
----------------------------------------
Total Long-lived Assets $ 49,580 $ 51,794
========================================
Long-lived assets include property, plant and equipment, intangible assets
and certain other specified assets.
Note 9 Employee Benefit Plans
The Company has a defined contribution plan for eligible employees which
provides for discretionary employer contributions. The Company expensed
approximately $224,000, $171,000 and $254,000 during the year ended December 31,
2004, the nine months ended December 31, 2003 and the year ended March 29, 2003,
respectively, to the 401(k) Plan.
The Company established the Safety Components International, Inc.
Executive Deferral Program (the "Deferral Program") for the benefit of certain
key executive employees. The Deferral Program provides for participants to defer
any portion of their cash compensation until some future point in time. The
participants' contributions to the Deferral Program are immediately 100% vested.
Under the provisions of the Deferral Program, a trust was established to
maintain the amounts deferred by the participants. Additionally, the Company
funds an amount equal to the exercise price of the options associated with the
deferred compensation, which is payable by the employee upon exercise. The
assets of the trust are included in "assets held in deferred compensation plan"
and the related amounts due to the participants are included in "deferred
compensation" in the accompanying consolidated balance sheets. The amounts
included in "assets held in deferred compensation plan" were $4.4 million and
$3.3 million, and included in "deferred compensation" were $3.7 million and $2.8
million at December 31, 2004 and December 31, 2003, respectively.
Note 10 Equity Securities
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized and no
shares issued at December 31, 2004 and December 31, 2003. The Company's board of
directors is authorized to provide for the issuance of the preferred stock in
the future, with voting powers, dividend rate, redemption terms, repayment,
conversion terms, restrictions, rights and with such other preferences and
qualifications as shall be stated in the resolutions adopted by the board of
directors at time of issuance.
Common Stock and Warrants
The Company has 5,336,100 and 5,077,800 shares of common stock issued,
5,295,778 and 5,037,478 shares of common stock outstanding, and 40,322 shares of
treasury stock at December 31, 2004 and December 31, 2003, respectively.
Warrants were granted pursuant to the Plan to purchase 681,818 shares of the
Company's common stock. These warrants had an exercise price of $19.99 per share
and expired on April 10, 2003.
F-27
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 Reconciliation to Diluted Earnings per Share (in thousands)
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of dilutive
potential common stock.
Period From
Year ended March 30, 2003 to Year ended
December 31, 2004 December 31, 2003 March 29, 2003
(Twelve Months) (Nine Months) (Twelve Months)
-------------------------------------------------------
Net income (loss) $10,248 $ 6,102 $(8,785)
======= ======= =======
Weighted average number of common shares used
in basic earnings per share 5,206 4,973 4,960
Effect of dilutive securities:
Stock options 88 146 --
------- ------- -------
Weighted average number of common shares and
Dilutive potential common stock used in diluted
earnings per share 5,294 5,119 4,960
======= ======= =======
At December 31, 2004 options on 354,200 shares of common were considered
dilutive and therefore were included in computing diluted earnings per share.
These constituted all common stock equivalents at year-end. Options on 700,100
shares of common stock were not included in computing diluted earnings per share
at March 29, 2003, because their effects were antidilutive.
Note 12 Derivatives and Hedging
The Company monitors its risk associated with the volatility of certain
foreign currencies against its functional currency, the U.S. dollar. The Company
uses certain derivative financial instruments to reduce exposure to volatility
of foreign currencies. The Company has formally documented all relationships
between hedging instruments and hedged items, as well as risk management
objectives and strategies for undertaking various hedge transactions. Derivative
financial instruments are not entered into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company periodically enters into forward contracts to
buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts are designated as hedges at
inception and are monitored for effectiveness on a routine basis. The Company
recorded a credit to net earnings of approximately $80,000 for the twelve months
ended December 31, 2004 on these forward contracts. At December 31, 2004, the
Company had no such outstanding forward exchange contracts. At December 31,
2003, the Company had outstanding forward exchange contracts that matured
between January and March 2004 to purchase Mexican pesos with an aggregate
notional amount of approximately $2.7 million. The fair values of these
contracts at December 31, 2003 totaled approximately $52,000, which was recorded
as a liability on the Company's Consolidated Balance Sheets in "other current
liabilities." The Company recorded a credit to earnings of approximately $47,000
for the nine months ended December 31, 2003 and the unrealized loss on these
forward contracts of approximately $52,000 was included in "accumulated other
comprehensive income" at December 31, 2003.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company periodically enters into forward contracts to
buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts are designated as hedges at inception and are monitored for
effectiveness on a routine basis. The Company recorded a charge to net earnings
of approximately $141,000 for the twelve months ended December 31, 2004 on these
forward contracts. At December 31, 2004, the Company had no such outstanding
forward exchange contracts. At December 31, 2003, the Company had outstanding
forward exchange contracts that matured between January and March 2004 to
purchase Czech Korunas with an aggregate notional amount
F-28
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of approximately $2.1 million. The fair values of these contracts at December
31, 2003 totaled approximately $100,000, which was recorded as a liability on
the Company's balance sheet in "other current liabilities." The Company recorded
a charge to earnings of approximately $47,000 for the nine months ended December
31, 2003 and the unrealized loss on these forward contracts of approximately
$89,000 was included in "accumulated other comprehensive income" at December 31,
2003.
Note 13 Related Party Transactions
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. Accordingly, the Company paid approximately $675,000 to Zapata in
2004 for taxes related to 2003. 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%. As a result of Zapata's ownership of the company's outstanding
common stock falling below 80%, Zapata will not consolidate the Company into
Zapata's consolidated income tax returns for periods subsequent to the first
quarter of 2004. Under The Tax Sharing and Indemnity Agreement, the Company will
be consolidated into Zapata's tax filing group for the fourth calendar quarter
of 2003 and the first calendar quarter of 2004.
Note 14 Transitional Period Operating Results
The following table compares the statement of operations data for the
twelve months ended December 31, 2004 with the twelve months ended December 31,
2003 for information purposes only (in thousands):
Twelve Months
Twelve Months Ended
Ended December 31, 2003
December 31, 2004 (Unaudited)
-----------------------------------------
Net sales $ 247,883 $ 247,142
Gross profit 36,746 34,750
Income from operations 15,459 13,825
Provision for income taxes 5,771 5,472
Income from continuing operations 10,248 8,862
Loss on disposition of discontinued operations -- (660)
---------------------------------
Net income $ 10,248 $ 8,202
=================================
Net income per common share, basic:
Income from continuing operations $ 1.97 $ 1.78
Loss on disposition of discontinued operations -- (0.13)
---------------------------------
Net income per common share, basic $ 1.97 $ 1.65
=================================
Net income per common share, diluted:
Income from continuing operations $ 1.94 $ 1.78
Loss on disposition of discontinued operations -- (0.13)
---------------------------------
Net income per common share, diluted $ 1.94 $ 1.65
=================================
Weighted average number of shares outstanding, basic 5,206 4,960
Weighted average number of shares outstanding, diluted 5,294 4,960
F-29
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 Unaudited Quarterly Results
Unaudited quarterly financial information for the year ended December 31,
2004 and the nine months ended December 31, 2003 is set forth below (in
thousands, except per share data).
Quarter Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
------------------------------------------------------
Year Ended December 31, 2004
Net sales $ 69,231 $ 65,858 $ 56,172 $ 56,622
Gross profit 11,203 10,524 8,473 6,546
Income from operations 5,932 5,605 2,460 1,462
Net income 3,123 3,843 1,922 1,360
Net income per share, basic 0.62 0.73 0.37 0.26
Net income per share, diluted 0.60 0.72 0.36 0.26
Quarter Ended
---------------------------------------
Nine Month Period from June 28, September 27, December 31,
March 30, 2003 to December 31, 2003 2003 2003 2003
---------------------------------------
Net sales $ 67,416 $ 52,747 $ 63,503
Gross profit 10,586 5,028 10,484
Income (loss) from operations 6,295 (1,255)* 4,259
Net income (loss) 4,380 (1,491) 3,213
Net income (loss) per share, basic 0.88 (0.30) 0.65
Net income (loss) per share, diluted 0.88 (0.30) 0.61
* - See Note 1 - "Change of Control" for impact of the Zapata purchase for
quarter ended September 27, 2003.
Note 16 Subsequent Events
On January 4, 2005, the Company announced it had signed an agreement to
form a joint venture with Kingsway International Limited, an entity associated
with Huamao (Xiamen) Technical Textile Co., Ltd. ("Huamao") which manufactures
airbag fabrics, in China (the "China Joint Venture"). The Company anticipates
that the China Joint Venture, which has not yet commenced commercial production,
will produce automotive airbag cushions in China utilizing the fabrics produced
by Huamao. Pursuant to a technology transfer and joint venture agreement, the
Company will provide technical assistance to its partner in the development of
airbag fabrics. Production is intended to satisfy the Chinese domestic market.
The Company owns 65% of the entity formed to conduct the operations of the China
Joint Venture. Pursuant to the joint venture agreement, the Company has the
intention, but not an obligation, for funding of its China Joint Venture through
potential loan or capital contributions of up to $6.5 million as of December 31,
2004.
F-30
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts (in thousands)
Additions
Charged to
Beginning Costs and Deductions/ Ending
Balance Expenses Write-Offs Balance
-----------------------------------------------------------
For the year ended March 29, 2003:
Allowance for doubtful accounts $ 228 $ 295 $ (107) $ 416
Valuation reserves on inventory 1,650 (574)(a) -- 1,076
Reserve on deferred tax assets 1,285 1,030 -- 2,315
-----------------------------------------------------------
$ 3,163 $ 751 $ (107) $ 3,807
===========================================================
For the period from March 30, 2003 to December 31, 2003:
Allowance for doubtful accounts $ 416 $ 622 $ (593) $ 445
Valuation reserves on inventory 1,076 600(a) -- 1,676
Reserve on deferred tax assets 2,315 92 (1,062) 1,345
-----------------------------------------------------------
$ 3,807 $ 1,314 $ (1,655) $ 3,466
===========================================================
For the year ended December 31, 2004:
Allowance for doubtful accounts $ 445 $ 469 $ (22) $ 892
Valuation reserves on inventory 1,676 (175)(a) -- 1,501
Reserve on deferred tax assets 1,345 645 (550) 1,440
-----------------------------------------------------------
$ 3,466 $ 939 $ (572) $ 3,833
===========================================================
(a) - Represents net change of inventory allowances