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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 March 30, 2002
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 29605
Greenville, South Carolina (Zip Code)
(Address of principal
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 |X|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405) 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 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 |X|.
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of June 25, 2002, was approximately
$27,526,000.
The number of shares outstanding of the registrant's common stock, as of
June 25, 2002, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 4,959,678
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement to be filed in connection
with its 2002 annual meeting of shareholders (the "Proxy Statement") are
incorporated by reference into Part III.
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," and
"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 2003, 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: 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.
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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 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 ballistics material for luggage,
filtration, aircraft escape slides, military tents and fire service apparel. The
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows the Company to more
effectively utilize its manufacturing assets and lower per unit overhead costs.
Net sales of automotive airbag cushions, automotive fabrics and technical
fabrics products (the "automotive airbag and fabrics products" business) were
approximately $203.3 million, $201.2 million, and $194.7 million in fiscal 2002,
fiscal 2001 and fiscal 2000, respectively. For comparative purposes hereof,
fiscal 2002 is comprised of the fifty-two week period ended March 30, 2002,
fiscal 2001 is comprised of the fifty-three week period ended March 31, 2001,
and fiscal 2000 is comprised of the fifty-two week period ended March 25, 2000.
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 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 a 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. Immediately upon emergence, therefore, the Company had 5,000,000
shares of common stock issued and 4,960,381 shares outstanding and, other than
the warrants, no shares of common stock were reserved for issuance in respect of
claims and interests filed and allowed under the Plan. All other Safety Filing
Group trade suppliers and creditors were paid in full, pursuant to the terms of
the Plan, within 90 days of the Emergence Date.
Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited ("ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering and hereafter referred
to as "Woodville") of TISPP UK Limited, a subsidiary of Smiths Group PLC, to
expand its European operations. Pursuant to a purchase agreement dated November
2, 2001 between ASCIL and TISPP UK Limited, ASCIL purchased, for approximately
$4.8 million, including $400,000 in direct acquisition and exit costs associated
with the purchase (and with approximately $2.3 million to be paid in
installments due in six and twelve months after closing), substantially all of
the production assets and inventory of the airbag business of TISPP UK Limited.
The Company is currently transferring the production lines of Woodville to other
Company operations in lower labor cost facilities and countries.
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Disposition of Assets
On August 31, 2000, the Company finalized the sale of Valentec Systems,
Inc. ("VSI"), a systems integrator with the U.S. Army, which coordinated the
manufacture and assembly of components supplied by various subcontractors, and
part of the Company's non-core operations. Pursuant to a stock purchase
agreement dated July 21, 2000, the Company sold 100% of the shares of capital
stock of VSI to VTECH Corporation for approximately $2.9 million in cash.
Also during fiscal 2001, the Company determined to exit its remaining
metal and defense products businesses, consisting of Valentec Wells, LLC (metal
products) and Galion, Inc. (defense products). To enhance the value of these
businesses, the Company consolidated a considerable portion of its Valentec
Wells operations into its Galion, Ohio facility and relocated the remainder of
Valentec Wells' operations from its former California location to a lower cost
facility in Missouri, nearer to its primary customers.
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.
Galion, Inc. has not been sold as of March 30, 2002; however, management
is negotiating a sale which it expects to have completed by September 2002. The
net assets of discontinued operations of approximately $2.6 million at March 30,
2002 principally represent the net assets of Galion, Inc.
Automotive Airbag and Fabrics Products
Structure of the Automotive Airbag Industry
Airbag systems consist of an airbag module and an electronic control
module, which are currently integrated by automakers into their respective
vehicles. Airbag modules consist of inflators, cushions, and housing and trim
covers and are assembled by module integrators, most of whom produce most of the
components required for a complete module. However, as the industry has evolved,
module integrators have increasingly outsourced 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 significant portion of their cushion requirements as
they focus on the development of proprietary technologies. A majority of the
module integrators purchase fabric from airbag fabric producers such as the
Company.
Characteristic for the industry, the Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. While none of the module integrators produce airbag
cushions for third parties, the Company may compete with its customers who
supply their own internal cushion requirements. However, most of the Company's
customers do not produce 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
as long as two years. The Company believes that the existence of this
qualification process can result in significant switching costs for module
integrators that are required to assist the new supplier in meeting automakers'
requirements. Additionally, the Company believes module integrators are, like
their automaker customers, trying to reduce overall industry costs by limiting
the number of suppliers.
Products
The Company's automotive products include passenger, driver and side
impact airbag cushions and side protection curtains manufactured for
installation in over 200 car and truck models sold worldwide; airbag fabric for
sale to airbag manufacturers; and stamped and machined components used in airbag
modules, including passenger airbag
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retainers. Sales of airbag related products (inclusive of sales of airbag
fabric) accounted for approximately 89.4% of the Company's consolidated fiscal
2002 net sales. Sales of airbag related products accounted for approximately
88.0% and 87.3% of the Company's consolidated fiscal 2001 and 2000 net sales,
respectively.
In addition to the airbag fabric manufactured at its Safety Components
Fabrics Technology, Inc. ("SCFTI") subsidiary in Greenville, South Carolina, the
Company also manufactures at that location a wide array of specialty technical
fabrics for consumer and industrial uses. These fabrics include: (i) high-end
luggage fabrics, including "ballistics" fabric used in Hartman and Tumi brands
of luggage; (ii) filtration fabrics used in 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, aircraft escape slides and gas diaphragms; (v) release liners
used in tire manufacturing; and (vi) protective apparel worn by firefighters.
Sales are made against purchase orders, pursuant to releases on open purchase
orders, or pursuant to short-term supply contracts of up to twelve months. Sales
of technical related products accounted for approximately 10.6% of the Company's
consolidated fiscal 2002 net sales. Sales of technical related products
accounted for approximately 12.0% and 12.7% of the Company's consolidated fiscal
year 2001 and 2000 net sales, respectively. The market for the Company's
technical related products is highly segmented by product line. Marketing and
sales of the Company's technical related products is conducted by the Company's
marketing and sales staff based in Greenville, South Carolina. Manufacturing of
these products occurs at the South Carolina facility, using the same equipment
and manufacturing process that the Company uses to produce airbag fabric,
enabling the Company to take advantage of demand requirements for the various
products by leveraging its expenditures on production retooling costs. By
manufacturing technical products with 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 9 to the Consolidated Financial Statements for additional
financial information by product type.
Customers
The Company sells its airbag cushions to airbag module integrators 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 and
airbag fabric through its direct marketing and sales forces based in South
Carolina, California, Mexico and Germany.
The Company sells its fabric 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 permeability to facilitate more rapid inflation, and to
eliminate particulate burn-through caused by hot inflators, the fabric must be
coated before fabrication into airbags. The Company also sells fabric to coating
companies, which then resell the coated fabric to either an airbag fabricator or
module integrator. Coated cushions are becoming more common, particularly for
head protection, due to the longer bag-inflation period. 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 following describes the Company's contractual relationship with its
significant customers (listed in alphabetical order). The loss of any of these
customers could have a material adverse effect on the Company:
Autoliv. The Company supplies airbag cushions and airbag fabric to Autoliv
based upon releases from formal purchase orders, which typically cover a period
of twelve months and are negotiated prior to commitment with respect to price
and quantity.
Takata-Petri. The Company's agreement with Takata-Petri provides that,
prior to the commencement of each calendar year, the parties negotiate price,
quantity and other relevant terms of the airbag cushion supply contract for such
calendar year.
5
TRW. The Company supplies airbag cushions and airbag fabric to TRW based
upon releases from formal purchase orders, which typically cover a period of
twelve months and are negotiated prior to commitment with respect to price and
quantity. The price and quantity of airbag fabric has been agreed to through the
2003 calendar year end.
Suppliers
The Company's principal airbag cushion fabric customers generally 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 exist, a prolonged delay in the approval by the
Company's customers of any such alternative sources of supply could adversely
affect the Company's operating results.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by DuPont, Acordis, Honeywell, Unifi and KoSa, among
others. The primary yarns include nylon, polyester and Nomex. DuPont and Acordis
are the leading suppliers of airbag fabric yarn to both the market and the
Company. DuPont supplies a majority of the nylon yarn used in the Company's
airbag fabric operations pursuant to purchase orders or releases on open
purchase orders. The loss of DuPont as a supplier could have a material adverse
effect on the Company.
In addition, the Company's European operations 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 fixed price per unit
manufactured. Although the production volumes with the subcontractor for fiscal
2002 were negligible, volumes are anticipated to grow substantially in the next
fiscal year.
Significant problems with any key supplier or subcontractor (see also
"Risks Resulting from Foreign Operations" below for a description of possible
issues) may adversely affect the Company's operating results.
Capacity
The Company manufactured and shipped approximately 20.0 million airbag
cushions to the Company's North American and European customers during fiscal
2002. The Company believes it has adequate capacity to manufacture its fiscal
2003 budget requirements.
The Company's South Carolina facility has a current capacity to
manufacture approximately 30.0 million yards of fabric per year and manufactured
approximately 22.5 million yards of fabric in fiscal 2002. The Company utilizes
rapier-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, but do not generally manufacture airbag cushions for the same
vehicle models that the Company manufactures. Most airbag module integrators
subcontract a portion of their requirements for airbag cushions. The Company
believes that its good working relationship with its customers, along with the
Company's high volume and low-cost manufacturing capabilities, consistency and
level of quality products, the often lengthy process necessary to qualify as a
supplier to an automobile manufacturer and the industry-wide cost associated
with making any changes to the established supply chain provide a competitive
advantage for the Company in relation to other potential competitors.
The Company shares the North American airbag fabric market primarily with
Milliken, Takata-Petri, Breed and Autoliv. Takata-Petri, Breed and to a smaller
extent, Autoliv, all airbag module integrators, produce fabric for their own
airbag cushions. Requirements for entry into this market may include substantial
capital requirements and often-lengthy lead-times required for certification of
a new participant's fabrics by buyers.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, and
capability to produce a high
6
volume of many models of passenger, driver and side impact airbag cushions. In
addition, SCFTI has provided the Company with some measure of vertical
integration, enhancing its ability to compete in the automotive airbag industry.
Increased competition, as well as price reductions of airbag systems, would
adversely affect the Company's revenues and profitability.
Technical Center - Europe
During fiscal 2001, the Company's European operations reorganized its
engineering group. Engineers lead teams of Company personnel from various
departments and are responsible for product and customer relationships. Included
in each of these teams are technical specialists, quality engineers and
manufacturing engineers. This arrangement allows the same team to take
responsibility for the product from initial drafting to finish, assuring more
aggressive quotes, smoother launches and more efficient production. Management
believes that European operations continue to improve as a result of this
reorganization.
Additionally, the Company has formalized development initiatives by
creating a Technical Center in Hildesheim, Germany. The center has the ability
to conduct static and dynamic deployment testing and analysis using high-speed
video equipment. In January 2001, the Company added pendulum-testing capability.
There also exists a full 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 Technical Center
also has a complete materials laboratory, managed by an experienced materials
engineer. Additionally, the Technical Center has access to the services and
expertise of laboratory and textile personnel in Greenville, South Carolina.
There are also satellite-engineering functions in Wales, United Kingdom. The
Wales facility serves both customers and internal operations with equipment
design and manufacturing. It has a design group and tool room to develop and
manufacture specialized equipment and standard tooling.
Technical Center - North America
In North America, a comprehensive textile laboratory is located in
Greenville, South Carolina. The Company has the ability to fully test and
analyze numerous types of fabrics (airbag or other) including US-ASTM, Europe
DIN, Asian JIS and Underwriters NFPA. The laboratory is A2LA and QS9000
certified, which are the most important certifications for the industry. All
validation testing and analytical testing of fabric is performed in Greenville,
South Carolina. In North America, the module integrators perform the majority of
advanced cushion testing; therefore, the Company has not seen a need for an
advanced Technical Center for cushions. However, all necessary validation
testing and process development testing is performed in Ensenada, Mexico. North
American sales are supported and developed via Sales and Program Managers
dedicated to a particular account base of activity. Additionally, the Ensenada
facility has excellent prototype-manufacturing capabilities. The production
programs have high quality sewing machines, with quality focused sewing
operators.
Qualification and Quality Control
The Company is a fully qualified airbag supplier. Each of the Company's
customers requires 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 must be satisfied before the Company is
qualified to be a supplier.
The Company has extensive quality control and quality assurance systems in
its U.S. and European automotive facilities, including inspection and testing of
all products, and is QS 9000 and ISO 9002 certified. 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.
In addition, the Company's Technical Center located in Hildesheim, Germany
has the ability to conduct design and process testing.
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The Company's airbag fabric operations also maintain the highest level of
quality through each and every process. The fabric operations have been
certified as approved suppliers by all of the Company's automotive customers. In
addition, the fabric operations laboratories have ISO Guide 25, ASTM, DIN, JIS
and A2LA as well as UL accreditation. The Company was the first airbag fabric
manufacturer to have its entire business (not just its manufacturing facility)
certified under QS 9000.
Governmental Regulations
Airbag systems installed in automobiles sold in the United States must
comply with certain government regulations, including Federal Motor Vehicle
Safety Standard 208, promulgated by the United States Department of
Transportation. The Company's customers are required to self-certify that airbag
systems installed in vehicles sold in the United States satisfy these
requirements. The Company's operations are subject to various environmental,
employee safety and wage and transportation related statutes and regulations.
The Company believes that it is in substantial compliance with existing laws and
regulations and has obtained or applied for the necessary permits to conduct its
business operations.
Product Liability
The Company is engaged in a business that could expose it to possible
claims for injury resulting from the failure of products sold by it. In the
past, there has been increased public attention to injuries and deaths of
children and small adults due to the force of the inflation of airbags. To date,
however, the Company has not been named as a defendant in any automotive product
liability lawsuit, nor 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 final
judgment in excess of its insurance coverage could have a material adverse
effect on the Company.
Discontinued Operations
The Company, through operations it intends to sell, and which have been
classified as "discontinued operations", is a supplier of projectiles and other
metal components for medium caliber training and tactical ammunition used by the
United States Armed Forces. Additionally, the Company manufactures small
quantities of metal airbag module components for the automotive airbag industry.
The metal components manufactured by the Company are shipped to a loading
facility, operated either by the United States Government or a prime defense
contractor, which loads the explosives, assembles the rounds and packages the
ammunition for use. The Company primarily manufactures components that are used
in training rounds, which are similar to tactical rounds but do not contain the
same explosive or incendiary devices contained in tactical rounds. Because of
the continuous use of training ammunition, the majority of the rounds purchased
by the United States Armed Forces are training rounds. In the past the Company
has regularly received replenishment orders from the United States Armed Forces
for its inventory of training ammunition. Net sales of metal and defense related
products were approximately $10.5 million, $20.6 million, and $33.6 million in
fiscal 2002, fiscal 2001 and fiscal 2000, respectively, for the Galion, Valentec
Wells and VSI operations. See Note 3 to the Consolidated Financial Statements
for more information.
Disposition of Assets
On August 31, 2000, the Company finalized the sale of VSI, a systems
integrator with the U.S. Army, which coordinated the manufacture and assembly of
components supplied by various subcontractors, and part of the Company's
non-core operations. Pursuant to a stock purchase agreement dated July 21, 2000,
the Company sold 100% of the shares of capital stock of VSI to VTECH Corporation
for approximately $2.9 million in cash.
During fiscal 2001, the Company determined to exit its remaining metal and
defense products businesses, consisting of Valentec Wells, LLC (metal products)
and Galion, Inc. (defense products). To enhance the value of these businesses,
the Company consolidated a considerable portion of its Valentec Wells operations
into its Galion, Ohio facility and relocated the remainder of Valentec Wells'
operations from its former California location to a lower cost facility in
Missouri, nearer to its primary customers.
8
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.
Galion, Inc. has not been sold as of March 30, 2002; however, management
is negotiating a sale which it expects to have completed by September 2002. The
net assets of discontinued operations of approximately $2.6 million at March 30,
2002 principally represent the net assets of Galion, Inc.
Markets and Customers
The Company's defense related sales are made to the United States Armed
Forces, certain prime defense contractors for the United States Armed Forces and
foreign governments or contractors for foreign governments. The Company is a
principal or sole source supplier for many of the projectiles and other metal
components it manufactures. There can be no assurance, however, that other
companies will not begin to manufacture such products in the future and replace
part or all of the sales by the Company of these products.
Manufacturing and Production
The Company's Galion operation manufactures projectiles and other metal
components for inclusion in small to medium caliber ammunition utilizing
primarily multi-spindle screw machines at its manufacturing facility in Galion,
Ohio. The manufacturing process includes the impact extrusion of steel bars to
form the blank or rough form shape of the metal components, the machining of the
inside and outside of the metal components to form their final shape, various
heat and phosphate treatments and painting. The Company believes that its
manufacturing equipment, machinery and processes are sufficient for its current
needs and for its needs in the foreseeable future. In addition, the Galion
operation manufactures metal airbag module components for the automotive airbag
industry.
Suppliers
The Company believes that adequate supplies of the raw materials used in
the manufacture of its small to medium caliber products are available from
existing and, in most cases, alternative sources, although the Company is
frequently limited to procuring such materials and components from sources
approved by the United States Government.
Quality Control
The Company's defense operations employ Statistical Process Controls
extensively throughout its manufacturing process to ensure that required quality
levels are maintained and that products are manufactured in accordance with
specifications. The Company satisfies the United States Government quality
control standard Million-Q-9858A and ISO 9002.
Competition
The Company competes for contracts with other potential suppliers based on
price and the ability to manufacture superior quality products to required
specifications and tolerances. The Company believes that it has certain
competitive advantages including its high volume, cost-efficient manufacturing
capability, its co-development of new products with its customers, and the
United States Government's apparent preference to remain with long-term reliable
suppliers. Since the Company's processes do not include a significant amount of
proprietary information, however, there can be no assurance that other companies
will not, in time, be able to duplicate the Company's manufacturing processes.
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United States Government Contracts
Virtually all of the Company's defense related contracts are negotiated as
firm, fixed price contracts with the United States Government or certain of the
United States Government's prime contractors. These contracts are subject to
audit and may be adjusted accordingly.
A majority of the Company's manufacturing agreements with its prime
defense contractors are for the supply of components for a one year term,
subject, in certain cases, to the right of the United States Government to renew
the contract for an additional term. Renewals of United States Government
contracts depend upon annual Congressional appropriations and the current
requirements of the United States Armed Forces. United States Government
contracts and contracts with defense contractors are, by their terms, subject to
termination by the United States Government for its convenience. Fixed price
contracts provide for payment upon termination for items delivered to and
accepted by the United States Government, and, if the termination is for
convenience, for payment of the contractor's costs incurred through the date of
termination, plus the costs of settling and paying claims by terminated
subcontractors, other settlement expenses and a reasonable profit on the costs
incurred.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry, in which generally there
are seasonal plant shutdowns in the third and fourth quarters of each calendar
year.
Backlog
The Company does not reflect an order for airbag cushions or airbag fabric
in backlog until it has received a purchase order and a material procurement
release that specifies the quantity ordered and specific delivery dates.
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
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 significant 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 have historically not been significant, and such changes in the
future are not expected to have a material impact on the Company's results of
operations or cash flows.
10
See Note 9 to the Consolidated Financial Statements for financial
information by geographic area.
Employees
At March 30, 2002, the Company employed approximately 2,754 employees in
its continuing operations and approximately 94 employees in its discontinued
operations. The Company's hourly employees in Mexico are entitled to a federally
regulated minimum wage, which is adjusted, at minimum, every two years. 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. A workers' council and a union represents the employees at the
Company's facilities in the U.K. The Company has not experienced any work
stoppages related to its work force and considers its relations with its
employees and all unions currently representing its employees to be good.
Environmental Matters
Like similar companies, the Company's operations and properties are
subject to a wide variety of increasingly complex and stringent federal, state,
local and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws may impose joint and several
liability and may apply to conditions at properties presently or formerly owned
or operated by an entity or its predecessor as well as to conditions of
properties at which wastes or other contamination attributable to an entity or
its predecessor have been sent or otherwise come to be located. The nature of
the Company's operations exposes it to the risk of claims with respect to such
matters and there can be no assurance that violations of such laws have not
occurred or will not occur or that material costs or liabilities will not be
incurred in connection with such claims. Based upon its experience to date, the
Company believes that the future cost of compliance with existing Environmental
Laws and liability for known environmental claims pursuant to such Environmental
Laws, will not have a material adverse effect on the Company's financial
position, results of operations or cash flows. However, future events, such as
new information, changes in existing Environmental Laws or their interpretation,
and more vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material.
Low levels of contaminants were found at the SCFTI facility in Greenville,
South Carolina during groundwater sampling in 1998. In February 1999, the
facility received a notice letter from the South Carolina Department of Health
and Environmental Control ("DHEC") regarding the groundwater contamination.
While DHEC acknowledged that there does not appear to be an active source for
groundwater impact at the facility, it required the facility to perform sampling
of two existing monitoring wells located on the property for contaminants. Low
levels of contaminants again were detected. DHEC has requested that the Company
(i) confirm that no residential wells exist in the area, (ii) perform additional
sampling and monitoring, and (iii) propose a program for in-site remediation of
the groundwater, involving injection of nutrients to biodegrade the organic
compounds in the groundwater. The Company is performing these monitoring and
in-site remediation actions and does not believe that these costs, which are
included in the amounts accrued in the Company's financial statements, will be
material. In addition, SCFTI has been identified along with numerous other
parties as a Potentially Responsible Party at the Aquatech Environmental, Inc.
Superfund Site. The Company believes that it is a de minimis party with respect
to the site and that future clean-up costs incurred by the Company will not be
material.
The Company has identified two areas of underground contamination at the
Company's facility in Galion, Ohio. One area involves a localized plating
solution spill. The second area involves a chlorinated solvent spill in the
vicinity of a former above ground storage area. The Company has retained
environmental consultants to quantify the extent of this problem. Such
environmental consultants estimate that the Company's voluntary plan of
remediation could take three to five years to implement, followed by annual
maintenance. The Company does not believe that these costs, which are included
in the amounts accrued in the Company's financial statements, will be material.
Additionally, an underground contamination involving machinery fluids
existed at the former Valentec Wells facility in Costa Mesa, California, and the
local Regional Water Quality Control Board (the "Board") approved a site
remediation plan for cleanup. The remediation plan involved the simultaneous
operation of a groundwater and vapor extraction system over the past five years.
This plan is completed and a final Closure Monitoring Report has been filed with
the Board. It is expected that the Board will approve the final Closure
Monitoring Report and issue a "no further
11
action" letter, bringing the underground contamination issue to closure. Any
additional future costs to complete closure are not expected to be significant.
In the opinion of management, no material expenditures beyond those
accrued, approximately $750,000 at March 30, 2002, will be required for the
Company's environmental control efforts and the final outcome of these matters
will not have a material adverse effect on the Company's financial position or
results of future operations. The Company believes that it currently is in
compliance with applicable environmental regulations in all material respects.
Management's opinion is based on the advice of independent consultants on
environmental matters.
Patents
The Company holds eleven patents and seven additional patents are pending.
All patents relate to technical improvements for enhancement of product
performance with respect to the Company's airbag, fabric and technical related
products. Provided that all requisite maintenance fees are paid, the patents
held by the Company will expire between the years 2014 and 2020.
Engineering, Research & Development
The Company's fabric and airbag cushions operations have maintained an
active design and development effort focused toward new and enhanced products
and manufacturing processes. The Company designs and engineers its fabrics to
meet its customers' specific applications and needs. While the component
manufacturer originates most design requirements, the Company is dedicated to
improving the quality of existing products, as well as developing new products
for all applications. Costs associated with design and development for fabric
and airbag cushions were approximately $899,000, $688,000 and $665,000 during
fiscal 2002, fiscal 2001 and fiscal 2000, respectively.
Related Parties
The Company, in years prior to fiscal 1999, performed certain services for
an affiliated company, Valentec International Limited ("VIL"), a U.K. company
majority owned by Robert A. Zummo, the former Chief Executive Officer and
Chairman of the Board of the Company. During fiscal 2000, the Company
established a $600,000 reserve against its receivable of $1.2 million from VIL
due to uncertainty about VIL's ability to repay such amount. In connection with
the restructuring discussed in Note 1 to the Consolidated Financial Statements
elsewhere herein, Mr. Zummo agreed that the Company could reduce future payments
to him under his employment agreement to cover such receivable in the event that
the Company was not repaid by VIL. During fiscal 2002, VIL did not repay the
Company and, accordingly, the Company offset the net receivable in its entirety
with the amount owed to Mr. Zummo under his employment agreement.
12
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Greenville, South
Carolina in a facility owned by the Company, adjacent to its 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 (excluding its temporary occupancy of the
Woodville facility for which the lease expires on July 31, 2002) and its metal
and defense facilities (discontinued operations) as of June 25, 2002.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Airbag and Technical Fabrics Related Products
Ensenada, Mexico (airbag cushion) 97,000 Leased 2003 (1)(2)
Greenville, South Carolina (airbag and technical fabrics) 826,000 Owned N/A (1)(3)
Hildesheim, Germany (airbag cushions) 70,000 Owned N/A (1)
Jevicko, Czech Republic (airbag cushions) 100,000 Owned N/A (4)
Crumlin, Wales (airbag cushions) 60,000 Leased 2008 (1)
Otay Mesa, California (warehouse) 16,000 Leased 2003 (5)
Metal and Defense (Discontinued Operations)
Galion, Ohio (defense products and metal components) 97,000 Owned N/A (4)
- ----------
(1) Manufacturing, research and development and office space
(2) Lease also provides for two one-year renewal options
(3) Corporate office
(4) Manufacturing and office space
(5) Finished goods distribution center; lease provides for a two year renewal
option
ITEM 3. LEGAL PROCEEDINGS
As described in the "2001 Restructuring", the Company emerged from
bankruptcy on October 11, 2000. However, the Chapter 11 case remains open until
all claims, disputes and pleadings are resolved before the Bankruptcy Court. At
March 30, 2002 the Company has no material disputes before the Court. The
Company is in the process of closing the Chapter 11 proceedings.
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 March 30, 2002.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pursuant to the Plan discussed in Item 1, the claims of the holders of the
Notes were converted into the right to receive 4,840,774 shares of the Company's
common stock on the Emergence Date (4,816,574 shares to the Noteholders and
24,200 shares to the financial advisors of the Noteholders). 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. All other options and
warrants were cancelled on the Emergence Date.
The Company's common stock is not listed on any exchange, but rather
trades on the Over-The-Counter Bulletin Board. The following table sets forth
the range of high and low prices for reported sales of the common stock since
its distribution after the Emergence Date. Share information is not meaningful
prior to the Emergence Date due to the significant change in capital structure
that resulted from the Plan.
High Low
---- ---
Year Ended March 31, 2001
Fourth Quarter (A) $ 4.25 $ 0.12
Year Ended March 30, 2002
First Quarter $16.00 $ 3.65
Second Quarter 10.05 5.00
Third Quarter 10.00 4.50
Fourth Quarter 8.75 5.50
(A) There were no trades of record of the Company's common stock noted to have
occurred on the Over-The-Counter Bulletin Board from the Emergence Date
until February 5, 2001.
As of June 25, 2002, there were approximately 149 holders of record of the
Company's Common Stock.
To date, the Company has not paid any cash dividends to its stockholders
and presently intends to continue its policy of retaining its earnings to
support the growth and development of its business. Further, the Company's
existing credit agreement restricts the Company's ability to pay dividends.
14
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 year ended March 30, 2002, the period
from October 11, 2000 to March 31, 2001, the period from March 26, 2000 to
October 10, 2000, the fiscal years ended March 25, 2000, March 27, 1999 and
March 28, 1998, has 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 year
ended March 30, 2002 and the period from October 11, 2000 to March 31, 2001
reflect the Company's emergence from Chapter 11 and were prepared utilizing the
principles of fresh start accounting contained in the American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). As a
result of the implementation of fresh start accounting, certain of the selected
financial data for the year ended March 30, 2002 and for the period from October
11, 2000 to March 31, 2001 is not comparable to the selected financial data of
prior periods. See Note 1 to the Consolidated Financial Statements of the
Company for further discussion of the effects of fresh start accounting on the
Company's Consolidated Financial Statements. As a result of differences in
comparability, selected financial data for the "Reorganized Company" has been
separately identified from that of the "Predecessor Company." The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the Notes thereto, included elsewhere in
this report.
In thousands, except per share data and footnotes Reorganized Company | Predecessor Company
---------------------------|---------------------------------------------------
Fiscal Year Period from | Period from Fiscal Year Ended
Ended 10/11/00 to | 3/26/00 to ------------------------------------
3/30/02 3/31/01 | 10/10/00 3/25/00 3/27/99 3/28/98
(52 Weeks) (25 Weeks) | (28 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
---------------------------|---------------------------------------------------
INCOME STATEMENT DATA (1): |
Net sales (2) $ 203,323 $ 92,052 | $ 109,139 $ 194,667 $ 178,348 $ 130,154
Cost of sales, including depreciation 176,817 79,337 | 93,307 168,249 158,806 107,908
---------------------------|---------------------------------------------------
Gross profit 26,506 12,715 | 15,832 26,418 19,542 22,246
Selling, general and administrative expenses 11,595 5,235 | 5,941 13,443 10,487 8,550
Research and development expenses 899 335 | 353 665 1,090 357
Amortization of intangible assets 900 448 | 675 1,486 1,528 1,147
Restructuring and restatement (3) -- -- | -- 3,969 -- --
Relocation and reorganization costs (4) -- -- | -- -- 3,238 1,789
Terminated investment agreement costs (5) -- -- | -- -- 2,500 --
---------------------------|---------------------------------------------------
Operating income 13,112 6,697 | 8,863 6,855 699 10,403
Other expense (income) (1,001) (280) | 878 1,729 766 (42)
Interest expense, net (6) 4,110 2,514 | 3,833 13,975 12,566 7,540
---------------------------|---------------------------------------------------
Income (loss) from continuing operations before |
reorganization items 10,003 4,463 | 4,152 (8,849) (12,633) 2,905
Reorganization items (7) -- -- | 41,740 -- -- --
---------------------------|---------------------------------------------------
Income (loss) from continuing operations before |
income taxes 10,003 4,463 | (37,588) (8,849) (12,633) 2,905
Income tax provision (benefit) 3,397 1,769 | (17,511) 6,154 (3,321) 1,927
---------------------------|---------------------------------------------------
Income (loss) from continuing operations 6,606 2,694 | (20,077) (15,003) (9,312) 978
Discontinued operations, net of taxes: |
Loss (gain) from discontinued operations -- -- | 1,440 20,142 4,351 (2,368)
Loss (gain) on disposition of discontinued |
operations 2,517 1,444 | (214) -- -- --
Extraordinary gain, net of taxes (8) -- -- | 29,370 -- -- --
---------------------------|---------------------------------------------------
Net income (loss) $ 4,089 $ 1,250 | $ 8,067 $ (35,145) $ (13,663) $ 3,346
===========================|===================================================
PER SHARE DATA, BASIC AND DILUTED (9): |
Income from continuing operations $ 1.33 $ 0.54 |
Loss from discontinued operations (0.51) (0.29) |
------------------------- |
Net income per common share $ 0.82 $ 0.25 |
========================= |
|
Weighted average number of shares outstanding, basic |
and diluted 4,960 4,960 |
========================= |
15
Reorganized Company | Predecessor Company
------------------------|--------------------------------------
|
3/30/02 3/31/01 | 3/25/00 3/27/99 3/28/98
------------------------|--------------------------------------
BALANCE SHEET DATA: |
Working capital (10), (11) $ 3,711 $ 27,079 | $(103,105) $ 31,404 $ 26,617
Total assets (2) 125,271 130,683 | 168,695 206,748 180,134
Senior subordinated notes -- -- | 90,000 90,000 90,000
Long term debt, net of current portion (11) 12,182 43,541 | 15,145 53,109 22,954
Stockholders' equity (deficit) 55,838 51,943 | (14,440) 22,456 36,532
- ----------
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 and total assets between fiscal years 1998 and
1999 is attributable to the acquisition of the SCFTI facility in
Greenville, South Carolina on July 24, 1997.
(3) During fiscal 2000, the Company incurred approximately $4.0 million of
costs associated with the investigation and restatement of the Company's
financial statements for fiscal 1999 and 1998, and the restructuring of
the Company's balance sheet.
(4) During fiscal 1999 and fiscal 1998, the Company incurred approximately
$3.2 million and $1.8 million, respectively, of pre-tax charges associated
with the reorganization and relocation of certain of its foreign and
domestic operations. These costs were incurred to consolidate production
within the Company's foreign operations to lower cost facilities located
within the foreign market (1999 and 1998), close the Company's China
facility (1999) and relocate the corporate headquarters to the Company's
Greenville, South Carolina facility (1999).
(5) During fiscal 1999, after exploring a variety of strategic alternatives,
the Company entered into an investment agreement with a third party. The
Company and the third party subsequently reached a mutual agreement to
terminate such agreement. The Company incurred approximately $2.5 million
of fees and expenses during fiscal 1999 related to the investment
agreement and its termination. This charge included a reimbursement to the
third party for fees and expenses incurred by it.
(6) Contractual interest for the period from March 26, 2000 to October 10,
2000, was $8.5 million. Interest expense on the Company's Notes was
reported to the Petition Date (April 10, 2000). Such interest expense was
not reported subsequent to that date because it was not required to be
paid during the bankruptcy proceedings and was not an allowed claim under
the Plan. The difference between reported interest expense and stated
contractual interest expense of the Predecessor Company was approximately
$4.7 million for the period from March 26, 2000 to October 10, 2000.
(7) During the period from March 26, 2000 to October 10, 2000, the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7
resulted in a net charge of approximately $34.0 million. Professional fees
and expenses of $3.7 million included in Reorganization Items for the
period represent fees and expenses associated with the Company's financial
restructuring and Chapter 11 bankruptcy proceeding. The revaluation of the
Notes totaled $2.9 million, representing the write-off of related deferred
financing costs. Also included in this amount is $1.1 million of
restructuring charges that consist primarily of a charge for future
severance payments to the Company's former Chairman and Chief Executive
Officer.
(8) 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.
(9) 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.
(10) As of March 25, 2000, the working capital of the Company was in a negative
position due to the reclassification of the $90 million Notes to current
liabilities.
(11) The decrease in working capital and long-term debt, net of current
portion, at March 30, 2002 is principally due to the classification of the
Company's Subordinated Secured Note due October 11, 2002, with an
outstanding balance of $18.9 million at March 30, 2002, as a current
liability at March 30, 2002. The Company intends to refinance the
Subordinated Secured Note prior to its maturity on October 11, 2002.
16
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 Securities and Exchange Commission.
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
understand 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 does
business with generally 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, revalued its tangible assets at that time, has
positive cash flow and is expanding its business operations. Accordingly,
estimates of tangible asset impairment are not considered to be a critical
accounting policy or estimate. We believe the following critical accounting
policy contains the most significant judgments and estimates used in the
preparation of the Consolidated Financial Statements.
Discontinued Operations. As discussed in Notes 1 and 3, we have reported
the metal and defense businesses as discontinued operations in our Consolidated
Financial Statements as of October 10, 2000, or the measurement date, and
through March 30, 2002. The Company sold a portion of the discontinued
operations in September 2001, and at March 30, 2002, only Galion remains as a
discontinued operation. Continuing to report Galion as a discontinued operation
at March 30, 2002 required the Company to make estimates regarding (1) the
results of operations to the expected disposal date and (2) 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 period from March 26, 2000 to
October 10, 2000, the period from October 11, 2000 to March 31, 2001 and the
year ended March 30, 2002. Accordingly, the businesses' net losses during the
period from October 11, 2000 to March 31, 2001 and for the year ended March 30,
2002, which were incurred subsequent to the measurement date, have been applied
against the accrued losses and have not been recognized as losses as incurred in
our Consolidated Statements of Operations. For the year ended March 30, 2002,
the period from October 11, 2000 to March 31, 2001, the period from March 26,
2000 to October 10, 2000 and the year ended March 25, 2000, operating (losses)
gains of Galion were ($197,000), $140,000, $(200,000) and $(52,000),
respectively, and are deferred and included as a component of net assets held
for sale in the consolidated balance sheet and accordingly have not been
recognized as losses in the consolidated statements of operations. A reversal of
discontinued operations reporting resulting from, among other things, a failure
to consummate a sale of Galion, would require us to reverse the charges to
discontinued operations recorded in 2001 and 2002 and recognize the losses in
our Consolidated Statements of Operations as incurred. The
17
balance of "Net assets held for sale" of $2.6 million at March 30, 2002
principally represents management's best estimate, based on information
available to management at this time, of (1) the future operations of Galion and
(2) the expected proceeds to be received upon sale.
Results of Operations
On October 10, 2000, the Company consummated the Plan as discussed in the
Consolidated Financial Statements and the Notes thereto. Accordingly, the
Consolidated Financial Statements for the fifty-two weeks ended March 30, 2002
and the period from October 11, 2000 to March 31, 2001 reflect the Company's
emergence from Chapter 11 and were prepared utilizing the principles of fresh
start reporting contained in the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". As a result of the implementation of
fresh start accounting, the financial information for the fifty-two weeks ended
March 30, 2002 and the period from October 11, 2000 to March 31, 2001 are not
comparable to prior periods.
Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited, acquired the airbag business (operated under
the name of Woodville Airbag Engineering) of TISPP UK Limited, a subsidiary of
Smiths Group PLC, to expand its European operations. Such acquisition
contributed $7.8 million in sales and had a negative impact of $1.1 million on
gross profit and $1.5 million on operating income for the period from November
3, 2001 to March 30, 2002.
The following table summarizes operating results of the Company for fiscal
2002, 2001 and 2000 (in thousands):
Combined
Reorganized and
Reorganized Predecessor Reorganized
Company Company Company Predecessor Company
-------------------------------------------|----------------------------
Fifty-two Fifty-three Period from | Period from Fifty-two
Weeks Ended Weeks Ended 10/11/00 | 3/26/00 Weeks Ended
3/30/02 3/31/01 to 3/31/01 | to 10/10/00 3/25/00
-------------------------------------------|----------------------------
Net sales $ 203,323 $ 201,191 $ 92,052 | $ 109,139 $ 194,667
Gross profit 26,506 28,547 12,715 | 15,832 26,418
Income from operations 13,112 15,560 6,697 | 8,863 6,855
Other (income) expense, net (1,001) 598 (280) | 878 1,729
Interest expense, net 4,110 6,347 2,514 | 3,833 13,975
Reorganization items -- 41,740 -- | 41,740 --
Income tax provision (benefit) 3,397 (15,742) 1,769 | (17,511) 6,154
Loss on discontinued operations, net of |
taxes (2,517) (2,670) (1,444) | (1,226) (20,142)
Extraordinary gain, net of taxes -- 29,370 -- | 29,370 --
Net income (loss) $ 4,089 $ 9,317 $ 1,250 | $ 8,067 $ (35,145)
Results of operations for the fifty-two week period ended March 30, 2002
and March 25, 2000 contain one less week of operations as compared to the
fifty-three week period ended March 31, 2001 as a result of the Company's fiscal
year ending on the Saturday closest to March 31. The Consolidated Financial
Statements for all periods presented above have been reclassified to reflect the
Company's non-core businesses as discontinued operations. See Note 3 to the
Consolidated Financial Statements for further information on the discontinued
operations.
18
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
Combined
Reorganized and
Reorganized Predecessor Predecessor
Company Company Company
---------------------------------------------
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
3/30/02 3/31/01 3/25/00
---------------------------------------------
Net sales 100.0% 100.0% 100.0%
Gross profit 13.0 14.2 13.6
Income from operations 6.4 7.7 3.5
Interest expense, net 2.0 3.2 7.2
Income tax provision (benefit) 1.7 (7.8) 3.2
Net income (loss) 2.0 4.6 (18.1)
The Consolidated Financial Statements for the period subsequent to the
consummation of the Plan (fifty-two weeks ended March 30, 2002 and period from
October 11, 2000 to March 31, 2001) were prepared under the principles of fresh
start reporting for companies emerging from a plan of reorganization and are not
comparable to prior periods. The Company believes that the most meaningful
comparisons are made using the combined financial information of the Reorganized
and Predecessor Company for the period from March 26, 2000 to March 31, 2001
(fiscal 2001) above and therefore this discussion addresses such combined
information.
Fifty-two Weeks Ended March 30, 2002 Compared to Fifty-three Weeks Ended March
31, 2001
Net Sales. Net sales increased by $2.1 million or 1.1% to $203.3 million
in fiscal 2002 compared to fiscal 2001. The increase is attributable to the
acquisition of Woodville, offset by one less week of operations compared to the
prior year and a decrease in sales of technical fabric products. North American
operations showed decreased sales of $3.9 million or 3.0% for airbag cushions
and airbag and technical fabrics products over the prior fiscal year. One less
week of operations resulted in a reduction of $2.4 million in net sales. The
remaining $1.5 million decrease is attributed to the weaker demand for technical
fabrics products. European operations experienced increased net sales of $6.0
million or 8.3% over the prior fiscal year. The increase in European operations
includes $7.8 million in net sales from the acquisition of Woodville, offset by
one less week of operations, representing $1.4 million in decreased net sales.
The remaining decrease of approximately $400,000 is due to the postponement of
new programs replacing expired product lines. Such programs were in production
at the beginning of fiscal 2003.
Gross Profit. Gross profit decreased by $2.0 million or 7.2% to $26.5
million in fiscal 2002 compared to fiscal 2001. The decrease in gross profit is
attributed to $1.1 million in losses associated with the initial ramp up of new
programs at Woodville, price adjustments on existing product lines of our
customers of $1.3 million and an approximate $300,000 decline due to one less
week of operations. Fiscal 2001 included a charge of $710,000 resulting from the
application of fresh start accounting to record inventory at its fair value.
Gross profit as a percentage of net sales decreased to approximately 13.0% from
14.2% for the prior fiscal year. The decrease as a percentage of net sales was
due to the items discussed above.
Income from Operations. Income from operations decreased by $2.4 million
or 15.7% to $13.1 million in fiscal 2002 compared to fiscal 2001. The decrease
is attributable to the $2.0 million decrease in gross profit discussed above in
addition to approximately $400,000 of re-qualification and other costs incurred
in preparation of the relocation of the Woodville operation to other Company
facilities. The relocation of the Woodville operations is expected to reduce
future production costs. Income from operations as a percentage of net sales
decreased to 6.4% for fiscal 2002 from 7.7% for fiscal 2001. The decrease as a
percentage of net sales was primarily a result of the items discussed above.
Other (Income) Expense, net. The Company recorded other income of $1.0
million for fiscal year 2002 as compared to other expense of $598,000 for fiscal
year 2001. The Company recorded net foreign transaction gains of $756,000 during
the year, while net foreign transaction losses of $639,000 were recorded in the
prior year.
19
Interest Expense, net. Interest expense decreased $2.2 million or 35.2% to
$4.1 million in fiscal 2002 compared to fiscal 2001. The decrease is
attributable to the Company's lower average outstanding balances on its
revolving credit facility and other long-term debt during the year, as well as
lower interest rates.
Reorganization Items. In fiscal 2001, professional fees and expenses were
included in Reorganization Items totaling $3.7 million. Such expenses represent
fees and expenses of the Company's various legal and financial advisors, the
financial and legal advisors for the Company's senior lenders and Noteholders
and other professionals 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 Reorganization Items in fiscal 2001 are restructuring charges that
consist primarily of a charge for future severance payments to the Company's
former Chairman and Chief Executive Officer. 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.
Provision for Income Taxes. The provision for income taxes primarily
represents taxes on results of continuing operations in the United States. The
Company's effective tax rate for fiscal 2002 was 34%. This overall effective tax
rate is favorably impacted by the utilization of certain net operating loss
carryforward credits at certain of the Company's foreign operating subsidiaries
during fiscal 2002. Income taxes for fiscal 2001 reflect a benefit principally
due to fresh start and other reorganization adjustments and adjustments for
deferred tax valuation allowances previously established against deferred tax
assets.
Discontinued Operations. The fiscal 2002 loss of $4.2 million (before
income tax benefit of $1.7 million) is principally the result of additional
reserves for discontinued operations due to a $6.6 million operating loss on
Valentec Wells, LLC (including approximately $1.7 million for its relocation)
prior to its sale in September 2001, a $2.9 million gain on the sale of Valentec
Wells, LLC, and an approximate $200,000 operating loss on Galion, Inc. during
the year. See Note 3 to the Consolidated Financial Statements for further
information concerning discontinued operations.
Extraordinary Gain. In fiscal 2001, 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 for the write-off of deferred financing costs associated
with the early termination of a prior credit facility.
Net Income. Net income was $4.1 million in fiscal 2002 compared to a net
income of $9.3 million in fiscal 2001. This decrease in earnings resulted from
the items discussed above.
Fifty-three Weeks Ended March 31, 2001 Compared to Fifty-two Weeks Ended March
25, 2000
Net Sales. Net sales increased by $6.5 million or 3.4% to $201.2 million
in fiscal 2001 compared to fiscal 2000. While the additional week of operations
in the year resulted in greater than half of the increased net sales, the
balance of the increase is attributable primarily to increased sales volume from
new sales contracts with existing airbag cushions customers in the U.S. and
Europe. North American operations showed increased sales of $11.6 million or
9.9% for airbag cushions and airbag and technical fabrics products over the
prior fiscal year. Within North American operations, airbag cushions net sales
increased by $14.2 million or 30.5% while airbag and technical fabrics net sales
decreased $2.6 million or 3.7% over the prior fiscal year. The decrease in net
sales of airbag and technical fabrics is a result of reallocation of loom
capacity away from externally sold fabrics to airbag fabric weaving for internal
use by the Company's North American airbag cushions manufacturing facility in
Ensenada, Mexico. European operations experienced decreased net sales of $5.1
million or 6.6% over the prior fiscal year, due to the adverse impact of foreign
currency translation rates approximating 10.1%. The European operations net
sales increased in local currency by $2.5 million (using current year rates),
but the adverse effect of lower foreign currency translation rates resulted in a
decrease of approximately $7.6 million.
Gross Profit. Gross profit increased by $2.1 million or 8.1% to $28.5
million in fiscal 2001 compared to the prior fiscal year. North American
operations experienced an increase in gross profit of approximately $4.1 million
resulting from increased net sales and efficiency gains, offset partially by a
charge of $710,000 resulting from the application of fresh start accounting to
record inventory at its fair value, as well as a decrease in gross profit in the
European operations of $2.0 million due to the adverse impact of foreign
exchange rates and unfavorable product mix. Gross profit improvements also
resulted from a decrease in depreciation expense as a result of the decreased
cost basis
20
of fixed assets resulting from the adoption of fresh start accounting at the
Emergence Date. Gross profit as a percentage of net sales increased to
approximately 14.2% from 13.6% for the prior fiscal year. The increase as a
percentage of net sales was due to the items discussed above.
Income from Operations. Income from operations increased by $8.7 million
or 127.0% to $15.6 million in fiscal 2001 compared to the prior fiscal year. The
increase is attributable to the $2.1 million increase in gross profit discussed
above, and decreases in the Company's selling, general and administrative
("SG&A") and amortization expenses. SG&A and amortization expenses decreased
$2.6 million primarily from efficiencies gained and cost savings arising from
the Company's cost controls and restructuring efforts. These SG&A expenses were
impacted favorably by a $740,000 reversal of a Chapter 11-related reserve
following proceedings that were settled in the Company's favor. Additionally, in
fiscal 2000, the Company incurred approximately $4.0 million of legal,
professional and re-financing related costs associated with the investigation
and restatement of its financial statements for fiscal years 1999 and 1998, and
its restructuring efforts leading up to its filing under Chapter 11 on April 10,
2000. Income from operations as a percentage of net sales increased to 7.7% for
fiscal 2001 from 3.5% for fiscal 2000. The increase as a percentage of net sales
was primarily a result of the items discussed above.
Other Expense, net. Other expense decreased by $1.1 million or 65.4% to
$598,000 in fiscal 2001 compared to the prior fiscal year. The decrease from
prior year is attributable primarily to decreased realized exchange losses and
other expenses.
Interest Expense, net. Interest expense decreased $7.6 million or 54.6% to
$6.3 million in fiscal 2001 compared to the prior fiscal year. The decrease is
attributable to the Company not being required to recognize interest expense of
$8.7 million after April 10, 2000 on its Notes pursuant to the Company's
restructuring agreement in the Chapter 11 bankruptcy proceeding, and the
offsetting effect of interest on higher revolving credit balances that were
incurred due to the funding of reorganization expenses versus the prior year.
Reorganization Items. Professional fees and expenses included in
Reorganization Items totaled $3.7 million for fiscal 2001, and such expenses
represent fees and expenses of the Company's various legal and financial
advisors, the financial and legal advisors for the Company's senior lenders and
Noteholders, and other professionals 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 Reorganization Items in fiscal 2001 are restructuring
charges that consist primarily of a charge for future severance payments to the
Company's former Chairman and Chief Executive Officer. 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.
Provision for Income Taxes. Income taxes for fiscal 2001 reflect a benefit
principally due to fresh start and other reorganization adjustments, offset by
current year tax liability relating to taxable income from operations and
certain adjustments for deferred tax valuation allowances previously established
against deferred tax assets.
Discontinued Operations. Loss from discontinued operations decreased $17.5
million or 86.7% to $2.7 million in fiscal 2001 compared to the prior fiscal
year. The decrease is primarily attributable to the prior year's inclusion of a
$17.7 million goodwill write-off due to impairment of goodwill related to the
Valentec Wells operations. The current year loss on discontinued operations
includes a $1.2 million realized gain on the sale of VSI offset by estimated
plant relocation expenses, interest costs, professional fees and estimated
losses until the expected disposition of the remaining defense businesses.
During the fourth quarter of fiscal 2001, the Company recorded an additional
charge of $1,444,000, net of income taxes of $848,000, for the estimated net
loss on the disposition of the non-core businesses.
Extraordinary Gain. 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 for the write-off of deferred financing costs associated with
the early termination of the KeyBank Credit Agreement during the current year.
Net Income. Net income was $9.3 million in fiscal 2001 compared to a net
loss of $35.1 million in fiscal 2000. This increase in earnings resulted from
the items discussed above.
21
Liquidity and Capital Resources
It is expected that the Company's equipment and working capital
requirements will continue to increase as a result of the anticipated growth of
its operations. The Company estimates that it will spend approximately $9.7
million for capital projects in fiscal 2003. This growth is expected to be
funded through a combination of cash flows from operations, equipment financing
and through the use of the Company's line of credit.
Credit Facilities
The Company has available a three-year, $35.0 million, revolving credit
facility with Congress Financial Corporation (Southern) (the "Congress
Facility"), expiring October 11, 2003. Under the Congress Facility, 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. Included within borrowings permitted under the Congress Facility (and
its borrowing limitations) are $4.9 million in term loans which are to be repaid
in equal monthly installments of approximately $112,000, with the unpaid
principal amount due on October 11, 2003, unless the Congress Facility is
renewed at that time. Also included within the borrowings permitted under the
Congress Facility is a $3.0 million letter of credit facility, through which the
Company had $0 and $350,000 of letters of credit outstanding at March 30, 2002
and March 31, 2001, respectively. At March 30, 2002, the Company's availability
for additional borrowings (under the maximum allowable limit) was approximately
$30.1 million.
The interest rate on the Congress Facility is variable, depending on the
amount of the Company's Excess Availability (as defined) at any particular time
and the Company's Fixed Charge Coverage Ratio (as defined). Under the terms of
the Congress Facility, the Company may make borrowings based on the prime rate
or LIBOR rate, in each case with an applicable margin applied to the rate. At
March 30, 2002, the margin on prime rate loans was 0.0% and the margin on LIBOR
rate loans was 2.0%. The Company is required to pay a monthly commitment fee of
0.375% on the unused portion of the Congress Facility.
The Company's $18.9 million subordinated secured note facility (the
"Subordinated Facility") with KeyBank National Association and Fleet Bank
expires on October 11, 2002; accordingly, such amount was classified in the
current portion of long term debt as of March 30, 2002. The Company has
commenced the process of negotiating a replacement for this facility and,
although no assurances can be given in this regard, believes that it will be
able to successfully negotiate a replacement for the facility prior to October
2002.
The Congress Facility and the Subordinated Facility both require the
Company to meet a minimum adjusted net worth (as defined) covenant. In addition,
the Subordinated Facility provides for mandatory prepayments of principal in the
event that the Company's Consolidated EBITDA (as defined) exceeds certain
specified levels following the Emergence Date. As of March 30, 2002, the Company
estimates $1.7 million in prepayments are required within 90 days following the
end of fiscal 2002. Additionally, both the Congress Facility and the
Subordinated Facility contain certain restrictive covenants that impose
limitations upon, among other things, the Company's ability to borrow monies
under the Congress Facility; incur indebtedness (including capitalized lease
arrangements); become or remain liable with respect to any guaranty; make loans;
acquire investments; declare or make dividends (no dividends are permitted to be
paid to holders of the Company's common stock) or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At March 30, 2002 the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facility and the Subordinated Facility.
Other Long-term Obligations
On March 28, 2002, the Company as guarantor, its Czech subsidiary and HVB
Bank Czech Republic, successor to Bank Austria, entered into an amendment to its
$7.5 million mortgage note facility dated June 4, 1997. This amendment extends
the mortgage facility for five years, bears interest at a rate of 1.7% over
EURIBOR (EURIBOR was 2.92% at March 30, 2002), requires monthly payments of
approximately $62,500 and is secured by the real estate assets of the Company's
subsidiary in the Czech Republic.
On November 2, 2001, pursuant to the Woodville purchase agreement between
ASCIL and TISPP UK Limited, ASCIL agreed to payments totaling approximately $2.3
million, with $846,000 paid on May 2, 2002 and $1.4
22
million to be paid on November 2, 2002, relating to the acquisition of
substantially all of the production assets and inventory of the airbag business
of TISPP UK Limited. The payments are non-interest bearing and were discounted
to present value using an imputed interest rate of 5.00%.
On April 1, 1999, the Company's German subsidiary secured a $2.9 million
mortgage note facility with Deutsche Bank to purchase a facility in Germany. The
note is secured by the real estate in Germany acquired through the mortgage. In
July 1999, the Company refinanced the note and reduced the outstanding
indebtedness to $2.1 million (currently $1.7 million) and subsequently supported
by a cash collateral deposit of approximately $891,000. The note consists of two
tranches. Tranche A totals approximately $1.0 million, bearing interest at
4.05%, and is payable in semi-annual installments of approximately $70,000
beginning on December 30, 2001 through June 30, 2009. Tranche B totals
approximately $674,000, bearing interest at 3.75%, and is payable in semi-annual
installments of approximately $19,000 also beginning on December 30, 2001
through June 30, 2019.
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 (3.86% at March 30, 2002), requires
monthly payments of approximately $150,000 and is secured by certain equipment
located at SCFTI.
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at March 30, 2002.
As of March 30, 2002
--------------------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
--------------------------------------------------------------------
Contractual obligations
Credit facility $ 4,919 $ 1,348 $1,348 $1,348 $ 875 $ -- $ --
Other long-term debt 32,001 23,600 2,516 2,628 1,517 933 807
Capital lease obligations 443 233 120 90 -- -- --
Operating lease commitments 2,910 1,192 446 340 318 310 304
--------------------------------------------------------------------
Total $40,273 $26,373 $4,430 $4,406 $2,710 $1,243 $1,111
====================================================================
The Company's SCFTI subsidiary had an operating lease for certain weaving
equipment that expired at the end of May 2002. On May 16, 2002, the Company
exercised its option under the lease to purchase the equipment for approximately
$1.0 million.
Cash Flows
During fiscal 2002, net cash provided by operating activities from
continuing operations was $23.3 million, arising from income from continuing
operations of $6.6 million, non-cash items of $9.8 million (principally
depreciation and amortization and changes in deferred taxes) and changes in
operating assets and liabilities of $6.9 million (principally an increase in
accounts payable due to better terms from creditors post-restructuring and the
Woodville acquisition). Net cash used by continuing operations for investing
activities was $7.3 million, of which $1.8 million was used for the acquisition
of Woodville. The remaining $5.5 million was used for the acquisition of
additional property, plant and equipment to expand the Company's production
capacity worldwide. Net cash used by continuing operations for financing
activities in fiscal 2002 was $17.1 million, principally reflecting payments on
the Congress Facility of $12.2 million. In addition, total payments on the
Subordinated Facility were $2.0 million, along with payments on various other
debt and long term obligations totaling $3.0 million. The above activities, in
conjunction with the unfavorable effects of foreign exchange rates of $509,000
and the cash used by discontinued operations of $675,000, resulted in a net
decrease in cash and cash equivalents of $2.3 million in fiscal year 2002.
23
New Accounting Pronouncements
Accounting Standard Adopted - In June 2001, the FASB issued SFAS 141,
"Business Combinations". SFAS 141 requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting. It
also specifies the types of acquired intangible assets that are required to be
recognized and reported separate from goodwill. This standard was applied to the
accounting and disclosure for the acquisition of Woodville.
Accounting Standards Adopted After Year End - In July 2001, the FASB
issued SFAS 142, "Goodwill and Other Intangible Assets". This new standard
requires that upon adoption, amortization of goodwill (in the Company's case,
primarily its "Reorganization value in excess of amounts allocable to
identifiable assets") and indefinite lived intangible assets will cease and
instead, the carrying value of such assets will be evaluated for impairment on
an annual basis. Identifiable intangible assets will continue to be amortized
over their useful lives and reviewed for impairment. The Company will adopt SFAS
142 on March 31, 2002, the beginning of fiscal year 2003. Based on the Company's
preliminary determination of the effect of adopting SFAS 142, management
believes that the unamortized balance of its excess reorganization value, $14.6
million at March 30, 2002 will be written off as a change in method of
accounting from adoption of a new accounting standard on March 31, 2002, the
first day of fiscal 2003.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. The Company will adopt SFAS 144 with the beginning of
fiscal year 2003. The Company is evaluating the impact of the adoption of SFAS
144 and has not yet determined the effect that the adoption of the standard will
have on the Company's financial position and results of operations.
Seasonality and Inflation
The automotive operations are 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. The Company does not
believe that its operations to date have been materially affected by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Company's revolving credit
facility are outstanding, the Company has market risk relating to such amounts
because the interest rates under the Congress Facility are variable. As of June
25, 2002, the Company's interest rates under its revolving credit facility
approximated 4.5%. 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 Facility would result in an addition to or reduction in interest
expense of approximately $100,000 on an annual basis.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks. Safety
Components 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 have
historically not been significant, and such changes in the future are not
expected to have a material impact on the Company's results of operations or
cash flows. If, however, there were a sustained decline of these currencies
versus the U.S. dollar, the Consolidated Financial Statements could be
materially adversely affected.
On December 18, 2001, the Company entered into two forward exchange
contracts with aggregate notional amounts totaling 1.5 million British pounds,
to buy British pounds for periods and amounts consistent with the related
underlying obligation of its U.K. subsidiary for the May 2, 2002 and the
November 2, 2002 scheduled payments on the note for the acquisition of
Woodville. The changes in fair value of these contracts are being recognized in
results of operations because the forward contracts did not qualify as a cash
flow hedge under SFAS 133. There was no significant impact on earnings resulting
from the forward contracts for the fifty-two weeks ended March 30, 2002 because
the fair value of the forward foreign exchange contracts was not significant at
March 30, 2002.
The Company does not enter into financial instruments for trading or
speculative purposes.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item appears in Item 14(a)(1) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
PART III
ITEMS 10, 11, 12 AND 13.
The information called for by Items 10, 11, 12 and 13 of this Form 10-K is
incorporated by reference to those respective portions of the Company's 2002
Annual Meeting Proxy Statement to be filed hereafter which contains such
information.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements, related notes thereto and reports of
independent accountants required by Item 8 are listed in the index
on page F-1 herein.
(2) Unless otherwise attached, all financial statement schedules are
omitted because they are not applicable or the required information
is shown in the Company's Consolidated Financial Statements or the
Notes thereto.
(3) Exhibits:
2.1 Joint Plan of Reorganization of Safety Components Debtors
Under Chapter 11 Bankruptcy Code dated June 12, 2000 (5)
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. (6)
3.1 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Safety Components
International, Inc. (7)
3.2 Amended Bylaws of Safety Components International, Inc. (8)
4.1 Restructuring Agreement dated April 6, 2000 between Safety
Components International, Inc., Robert A. Zummo and the
consenting holders signatory thereto (3)
4.2 First Amendment to Restructuring Agreement dated as of May 10,
2000 between Safety Components and the consenting holders
signatory thereto (4)
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. (1)
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) (9)
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 (10)
*10.4 Safety Components International, Inc. 2001 Stock Option Plan
(11)
*10.5 Employment agreement, effective May 18, 2001 between Safety
Components International, Inc. and John C. Corey (11)
*10.6 Employment agreement, effective May 18, 2001 between Safety
Components International, Inc. and Brian P. Menezes (11)
*10.7 Employment agreement, effective May 18, 2001 between Safety
Components International, Inc. and Stephen B Duerk (11)
*10.8 Form of Stock Option Agreement (11)
*10.9 Form of Severance Letter (11)
10.11 Warrant Agreement, dated as of October 11, 2000, by and
between Safety Components International, Inc. and Continental
Stock Transfer and Trust Company, acting solely in its
capacity as agent for each of the holders of Warrants issued
by the Company (11)
26
*10.12 Employment agreement, effective April 19, 1999, between Safety
Components International, Inc. and Robert A. Zummo (11)
*10.13 Employment agreement, effective March 29, 1999, between Safety
Components International, Inc. and John C. Corey (11)
*10.14 Employment agreement, effective August 23, 1999, between
Safety Components International, Inc. and Brian P. Menezes
(11)
*10.15 Employment agreement, dated as of June 1, 1998 between Safety
Components International, Inc. and Stephen Duerk (2)
*10.17 Safety Components International, Inc. Executive Deferral
Program (12)
*10.18 Amendment No. 1 to the Safety Components International, Inc.
Executive Deferral Program (12)
*10.19 Amendment dated June 27, 2001 to Employment Agreement, dated
May 18, 2001 between Safety Components International, Inc. and
John C. Corey (12)
*10.20 Amendment dated June 27, 2001 to Employment Agreement, dated
May 18, 2001 between Safety Components International, Inc. and
Brian P. Menezes (12)
10.21 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) (13)
*10.22 Safety Components International, Inc. 2002 Management
Incentive Bonus Program
10.23 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.
10.24 Letter of Guarantee, dated March 28, 2002, between Safety
Components International, Inc. and HVB Bank Czech Republic
a.s.
21.1 Subsidiaries of Safety Components
* Indicates exhibits relating to executive compensation
- ----------
Footnotes:
(1) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1998 (as exhibit 10.50).
(2) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1998 (as exhibit 10.49).
(3) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on April 13, 2000.
(4) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on May 19, 2000.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended March 25, 2000 (as exhibit 2.3).
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 2.4).
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 3.5).
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 3.6).
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 10.68).
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 10, 2000 (as exhibit 10.69).
(11) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended March 31, 2001.
(12) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 29, 2001.
(13) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 29, 2001.
27
(b) Reports on Form 8-K.
No reports on Form 8-K were required to be filed by the Company during the
fourth quarter of fiscal 2002.
28
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: June 25, 2002
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, June 25, 2002
- -------------------------- President and Director
John C. Corey
/s/ Carroll R. Wetzel, Jr. Director, Chairman of the Board June 25, 2002
- --------------------------
Carroll R. Wetzel, Jr.
/s/ Brian P. Menezes Vice President, Chief Financial June 25, 2002
- -------------------------- Officer (Principal Financial Officer)
Brian P. Menezes
/s/ William F. Nelli Corporate Controller June 25, 2002
- --------------------------
William F. Nelli
/s/ Ben E. Waide III Director June 25, 2002
- --------------------------
Ben E. Waide III
/s/ W. Allan Hopkins Director June 25, 2002
- --------------------------
W. Allan Hopkins
/s/ Andy Goldfarb Director June 25, 2002
- --------------------------
Andy Goldfarb
29
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
INDEPENDENT AUDITORS' REPORTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 30, 2002 and March 31, 2001 F-4
Consolidated Statements of Operations for the Year ended March 30, 2002,
the period from October 11, 2000 to March 31, 2001 (Reorganized
Company), the period from March 26, 2000 to October 10, 2000 and
the Year ended March 25, 2000 (Predecessor Company)