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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from March 30, 2003 to December 31, 2003
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Stevens Street
Greenville, South Carolina 29605
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court Yes |X| No |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|.
The aggregate market value of the common stock held by persons other than
affiliates of the registrant (based upon the assumption, for purposes of this
computation only, that Zapata Corporation and all of the registrant's directors
and executive officers were affiliates), as of September 26, 2003, was
approximately $9,323,000.
The number of shares outstanding of the registrant's common stock, as of
February 27, 2004, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,037,478
- --------------------------------------------------------------------------------
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 Transition Report on Form 10-K that reflect
projections or expectations of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for future
operations, including those contained in "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Quantitative and Qualitative Disclosure about Market Risk," or
relating to the Company's outlook for fiscal year 2004, overall volume and
pricing trends or strategies and their anticipated results, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "approximates," "believes,"
"estimates," "intends," and "hopes" and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to the other factors noted with such forward-looking
statements, include (but are not limited to): general economic conditions in the
Company's market, including inflation, recession, interest rates and other
economic factors; casualty to or other disruption of the Company's facilities
and equipment; and other factors that generally affect the automotive industry.
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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 fire service apparel, ballistics
material for luggage, filtration and military tents. The ability to interchange
airbag and specialty technical fabrics using the same equipment and similar
manufacturing processes allows the Company to more effectively utilize its
manufacturing assets and lower 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 $183.7 million, $244.3 million and $203.3 million in the nine
month period from March 30, 2003 to December 31, 2003, and the years ended March
29, 2003 and March 30, 2002, respectively. Subsequent to the Change of Control
(described below), the Company has changed its fiscal year to a calendar year
end to coincide with Zapata's fiscal year end. The Company's operations were
previously based on a fifty-two or fifty-three week fiscal year ending on the
Saturday closest to March 31. As such, the period from March 30, 2003 to
December 31, 2003 consists of nine months of operations. The years ended March
29, 2003 and March 30, 2002 each consisted of twelve months of operations.
Change of Control
On September 29, 2003, Zapata Corporation ("Zapata", NYSE: "ZAP") filed a
Schedule 13D with the Securities and Exchange Commission (the "SEC") indicating
that as of September 18, 2003 it had acquired 2,663,905 shares of the Company's
common stock which then constituted approximately 53.7% of the issued and
outstanding shares of such common stock. As a result, a change of control of the
Company (the "Change of Control") occurred. On October 6, 2003, Zapata filed an
amendment to its Schedule 13D with the SEC, indicating that it had acquired an
additional 1,498,489 shares of the Company's common stock which, together with
the shares previously acquired, then constituted approximately 83.9% of the
issued and outstanding common stock of the Company. Zapata's Schedule 13D states
that the shares purchased as of September 18, 2003 were purchased in privately
negotiated block purchases for a total of approximately $30.9 million, or an
average price per share of $11.59, in cash, the source of which was Zapata's
working capital. This amendment to Zapata's Schedule 13D states that the
additional shares purchased on October 2, 2003 were purchased in a privately
negotiated transaction for $16.9 million, or $11.30 per share, in cash, the
source of which was Zapata's working capital.
On October 14, 2003, Zapata filed another amendment to its Schedule 13D,
in which it stated that its Chairman and Chief Executive Officer, Avram Glazer,
together with another Zapata representative met with the Company's management to
discuss Zapata's investment in the Company. This amendment further stated that
during those discussions, Mr. Glazer requested that the Company's Board of
Directors nominate individuals selected by Zapata to serve on the Company's
Board of Directors and to have such persons constitute a majority of the
Company's Board of Directors and that the Company's management agreed to
consider the request and pursue appropriate actions. In addition, this Amendment
states that on October 13, 2003, Zapata wrote a letter to the Company's
corporate secretary advising him that Zapata's shares of common stock would not
be present at the Company's Annual Meeting of Stockholders scheduled for October
14, 2003.
On November 12, 2003, the Company's Audit Committee and Board of Directors
determined that it was in the Company's best interest to change the Company's
fiscal year end from the last Saturday in the month of March to December 31 of
each year. The Audit Committee also determined to notify Deloitte & Touche LLP
that it would not be retained to perform the audit of the financial statements
of the Company for the fiscal year ending March 27, 2004 or any transition
period and determined to engage the accounting firm of PricewaterhouseCoopers
LLP as independent accountants to audit the Company's financial statements for
the fiscal period ended December 31, 2003, the Company's
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new fiscal year end. The Board of Directors of the Company ratified and approved
such decision. As a result of the foregoing, the Company's fiscal year end and
independent accountants are the same as those of Zapata.
On November 14, 2003, Zapata filed another amendment to its Schedule 13D
in which it stated that after considering Zapata's request that the Company's
Board of Directors elect individuals selected by Zapata to serve on the Board of
Directors and that those persons constitute a majority of the Board of
Directors, the Company invited Zapata to submit to it a proposal pursuant to
which Zapata would acquire the outstanding shares of the Company's common stock
not already owned by Zapata. This amendment also stated that Zapata advised the
Company that it was prepared to proceed with such a transaction, provided that
it received appropriate Board representation. The amendment stated that the
Company had indicated that it was prepared to elect two Zapata designees to the
Company's Board of Directors as soon as practical. At a meeting on January 26,
2004, the Company's Board of Directors appointed two designees of Zapata, Mr.
Glazer and Leonard DiSalvo, as members of the Company's Board of Directors.
Zapata's November 14, 2003 amendment further stated that Zapata had
submitted to the Company's Board of Directors a letter containing its
preliminary, non-binding indication of interest in acquiring the shares of
common stock not currently held by it at a price of $11.49 per share. Following
receipt of this letter, the Company's Board of Directors established a Special
Committee to evaluate the proposal. Following such evaluation, which included
consideration of the adequacy of the proposed per share price for the Company's
remaining public shares, the Special Committee determined that it could not
approve or recommend the proposed transaction to the Company's remaining
shareholders. Following further discussions with representatives of Zapata, the
Special Committee and Zapata mutually determined not to proceed with a
transaction at this time.
Zapata is a holding company that has one other operating company, Omega
Protein Corporation (NYSE: "OME"), in which it has a 59% ownership interest.
Omega Protein is one of the nation's largest marine protein companies. In
addition, Zapata owns 98% of its subsidiary, Zap.Com Corporation (OTCBB:
"ZPCM"), which is a public shell corporation.
The Woodville Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited ("ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering and hereafter referred
to as "Woodville") of TISPP UK Limited, a subsidiary of Smiths Group PLC, to
expand its European operations. Such acquisition contributed approximately $7.8
million in sales and had a negative impact of approximately $1.1 million on
gross profit and approximately $1.5 million on operating income for the period
from November 3, 2001 to March 30, 2002. The management and business activities
of the Woodville operation were consolidated into the ASCIL operation during the
first quarter of fiscal 2003. The manufacturing process and production assets
were transferred to other European operations of the Company primarily in lower
labor cost facilities and countries.
The 2001 Restructuring
On April 10, 2000 (the "Petition Date"), the Company and certain of its
U.S. subsidiaries (collectively, the "Safety Filing Group"), filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On October 11, 2000 (the "Emergence Date"), the Safety
Filing Group emerged from Chapter 11 pursuant to the Plan of Reorganization (the
"Plan") confirmed by the Bankruptcy Court. Pursuant to the Plan, upon emergence,
all of the Company's 10-1/8% Senior Notes due 2007 (the "Notes") (an aggregate
of approximately $96.8 million, including accrued interest to the Petition Date)
were converted into 4,840,774 shares of the Company's post-bankruptcy common
stock, and the pre-bankruptcy common stock, excluding stock held by Robert A.
Zummo (former Chairman and Chief Executive Officer of the Company), was
converted into 159,226 shares of the Company's post-bankruptcy common stock,
including 39,619 shares of treasury stock, and warrants to acquire an additional
681,818 shares of such common stock (these warrants expired as of April 10,
2003). Immediately upon emergence, the Company had 5,000,000 shares of common
stock issued and 4,960,381 shares outstanding and, other than shares underlying
the warrants, no shares of common stock were reserved for issuance in respect of
claims and interests filed and allowed under the Plan. In addition, the Safety
Filing Group's trade suppliers and other creditors were paid in full, pursuant
to the terms of the Plan, within 90 days of the Emergence Date.
4
Automotive Airbag and Fabrics Products
Structure of the Automotive Airbag Industry
Airbag systems consist of various airbag modules and an electronic control
module, which are currently integrated by automakers into their respective
vehicles. Airbag modules generally consist of inflators, cushions, housing and
possibly trim covers and are assembled by module integrators, most of whom
produce a majority of the components required for a complete module. As the
industry has evolved, module integrators have outsourced varying portions of
non-proprietary components, such as cushions, to those companies specializing in
the production of individual components. The Company believes that its module
integrator customers will continue to outsource a portion of their cushion
requirements as they focus on the development of proprietary technologies. A
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company.
Characteristic for the industry, the Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. As a result, the Company may compete with its customers
who supply their own internal cushion requirements. However, in most cases the
Company's customers do not produce the same cushions for the same car/truck
models for which the Company produces cushions.
Another characteristic of the airbag industry is the qualification process
for new suppliers. New suppliers that wish to produce and supply airbag cushions
or airbag fabric must undergo a rigorous qualification process, which can take
in excess of a year. The Company believes that the existence of this
qualification process can result in significant re-qualification costs for
module integrators that are required to assist the new supplier in meeting
automakers' requirements. Additionally, the Company believes module integrators
are, like their automaker customers, trying to reduce overall industry costs by
limiting the number of suppliers.
Products
The Company's automotive products include passenger, driver and side
(thorax) impact airbag cushions, side protection curtains and knee protection
cushions manufactured for installation in over 200 car and truck models sold
worldwide and airbag fabric for sale to airbag manufacturers. Sales of airbag
related products (inclusive of sales of airbag fabric) accounted for
approximately 89.8% of the Company's consolidated net sales in the nine month
period from March 30, 2003 to December 31, 2003. Sales of airbag related
products (inclusive of sales of airbag fabric) accounted for approximately 90.8%
and 89.4% of the Company's consolidated net sales in the fiscal years ended
March 29, 2003 and March 30, 2002, respectively.
The Company also manufactures a wide array of specialty technical fabrics
for consumer and industrial uses. These fabrics include: (i) protective apparel
worn by firefighters; (ii) filtration fabrics used in the aluminum, coal, steel,
cement, clay and brewing industries; (iii) woven fabrics for use by
manufacturers of coated products; (iv) specialty fabrics used in fuel cells,
bomb and cargo chutes, oil containment booms and gas diaphragms; (v) release
liners used in tire manufacturing; and (vi) protective high-end luggage fabrics,
including "ballistics" fabric used in Hartman and Tumi brands of luggage. Sales
of technical related products accounted for approximately 10.2% of the Company's
consolidated net sales in the nine month period from March 30, 2003 to December
31, 2003. Sales of technical related products accounted for approximately 9.2%
and 10.6% of the Company's consolidated net sales in the fiscal years ended
March 29, 2003 and March 30, 2002, 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 much of the same
equipment and manufacturing processes that the Company uses to produce airbag
fabric, enabling the Company to take advantage of demand requirements for the
various products by leveraging its expenditures on production retooling costs.
By manufacturing technical products with much of the same machines that weave
airbag fabric, the Company is able to more effectively utilize capacity at its
South Carolina plant and lower per unit overhead costs.
See Note 8 to the Consolidated Financial Statements for additional
financial information by product type.
5
Customers
The Company sells its airbag cushions to airbag module integrators in
North America and Europe for inclusion in specified model cars, generally
pursuant to contract requirements. Certain of these customers also manufacture
airbag cushions to be used in their production of airbag modules. The Company
markets and sells airbag cushions through its direct marketing and sales forces
based in South Carolina, California, Mexico, the United Kingdom and Germany.
The Company sells its fabric in North America either directly to a module
integrator or, in some cases, to a fabricator (such as the Company's own
operations), which sells a sewn airbag to the module integrator. In some cases,
particularly when the cushion requires lower air permeability to facilitate more
rapid or prolonged inflation, and to eliminate particulate burn-through caused
by hot inflators, the fabric must be coated before fabrication into airbags. The
Company also sells fabric to coating companies, which then resell the coated
fabric to either an airbag fabricator or module integrator. Sales are either
made against purchase orders, pursuant to releases on open purchase orders, or
pursuant to short-term supply contracts generally having durations of up to
twelve months.
The Company has three significant customers - Autoliv, Takata-Petri and
TRW, listed in alphabetical order - with which it has contractual relationships.
The Company supplies airbag cushions and/or airbag fabric to each of these
customers based upon releases from formal purchase orders, which typically cover
periods of up to twelve months and are subject to periodic negotiation with
respect to price and quantity. The loss of any of these customers could have a
material adverse effect on the Company.
Suppliers
The Company's principal customers generally require that they approve all
suppliers of major airbag components or airbag fabric raw materials, as the case
may be. These suppliers are approved after undergoing a rigorous qualification
process on their products and manufacturing capabilities. In many cases, only
one approved source of supply exists for certain airbag components. In the event
that a sole source supplier experiences prolonged delays in product shipments or
no longer qualifies as a supplier, the Company would work together with its
customers to identify another qualified source of supply. Although alternative
sources of supply generally exist, a prolonged delay in 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, 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, in connection with its European operations, the Company has
entered into an agreement with a German industrial sewing company and its
Romanian subsidiary under which the Romanian subsidiary serves as a
manufacturing subcontractor for airbag cushions. Under the terms of this
agreement, the Company provides and retains control of the manufacturing
equipment, processes and production materials and the subcontractor provides
sewing services for a price per standard minute of acceptable units basis.
Significant problems with, or the loss of, any key supplier or
subcontractor (see also "Risks Resulting from Foreign Operations" below for
further information) may adversely affect the Company's operating results and
ability to meet customer contracts.
Capacity
The Company manufactured and shipped over 18.4 million airbag cushions to
the Company's North American and European customers during the nine month period
from March 30, 2003 to December 31, 2003. The Company believes it has adequate
capacity to manufacture for the anticipated customer requirements of its 2004
fiscal year.
6
The Company's South Carolina facility produced approximately 16.2 million
yards of fabric in the nine month period from March 30, 2003 to December 31,
2003. The Company believes it has adequate capacity to manufacture for the
anticipated customer requirements of fiscal 2004. The Company utilizes weaving
machines that are versatile in their ability to produce a broad array of air
restraint and specialty technical fabrics for use in a large number of
applications. The ability to interchange the machines between air restraint
fabric and other specialty technical fabrics allows the Company to leverage its
utilization of plant assets.
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with plants owned by its airbag module integrator
customers, which produce a substantial portion of airbag cushions for their own
consumption, although they do not generally manufacture the same airbag cushions
for the same vehicle models that the Company manufactures. Most airbag module
integrators subcontract a portion of their requirements for airbag cushions. The
Company believes that it has good working relationships with its customers due
to its high volume and low-cost manufacturing capabilities and consistency of
quality products and service.
The Company shares the North American airbag fabric market primarily with
Milliken, Takata-Highland, Mastex, Breed and Autoliv. Takata-Highland, Breed and
Autoliv, all airbag module integrators, produce fabric for use in their own
airbag cushions.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, and
capability to produce a wide range of models of passenger, driver and side
impact airbag cushions. In addition, the Company's weaving plant in South
Carolina has provided it with some measure of vertical integration, enhancing
its ability to compete in the automotive airbag industry. Increased competition,
as well as price reductions of airbag systems, would adversely affect the
Company's revenues and profitability.
Technical Centers
The Company has technical centers in Greenville, South Carolina, Ensenada,
Mexico and Hildesheim, Germany. The center in Hildesheim, Germany has the
ability to conduct static and dynamic deployment testing and analysis using
high-speed video equipment and includes pendulum-testing capability, a sample
shop with manual and CNC sewing equipment, a production-style laser cutter,
volumetric measurement and analysis equipment, textile welding and other
non-sewn fastening equipment. The center also has a materials laboratory, and
can access the services of laboratory and textile personnel at the Company's
facility in Greenville, South Carolina. In North America, the module integrators
customarily perform the majority of advanced cushion testing; therefore, the
Company has not seen a need for an advanced technical center for cushions in
North America. However, all necessary validation testing and process development
testing is performed in Ensenada, Mexico. The Ensenada, Mexico technical center
consists of a testing laboratory and a dedicated prototype cell, complete with a
separate staff and equipment.
Through its textile laboratory located in Greenville, South Carolina, the
Company has the ability to test and analyze a wide range of fabrics (airbag or
other) under internationally accepted testing standards, including US-ASTM,
Europe-DIN and ISO, Asian-JIS and Underwriters NFPA. The laboratory is A2LA and
QS 9000 certified, the most important certifications for the industry. All
validation testing and analytical testing of fabric is performed at this
laboratory. Additionally, the Greenville facility has prototype-manufacturing
capabilities.
Qualification and Quality Control
The Company's customers require the Company to meet specific requirements
for design validation. The Company and its customers jointly participate in
design and process validations and customers must be satisfied with the
reliability and performance prior to awarding a purchase order. All standards
and requirements relating to product performance are required to be satisfied
before the Company is qualified as a supplier by its customers.
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The Company maintains extensive quality control and quality assurance
systems in its North American and European automotive facilities, including
inspection and testing of all products, and is QS 9000 and ISO 9001 or ISO 9002
certified. The Company is currently in the process of certification for TS16949
in its various locations. The Greenville facility has completed TS16949
certification and all other locations are expected to be certified by December
2004. The Company also performs process capability studies and design of
experiments to determine that the manufacturing processes meet or exceed the
quality levels required by each customer.
The fabric operation's laboratories have ISO 17025, ASTM, DIN, JIS and
A2LA, as well as UL, accreditation. The Company's fabric operation is also
certified under the environmental and energy quality program ISO 14001. The
Company was the first airbag fabric manufacturer to have its entire business
(not just its manufacturing facility) certified under QS 9000.
Governmental Regulations
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 been threatened with any such lawsuit. The Company
maintains product liability insurance coverage, which management believes to be
adequate. However, a successful claim brought against the Company resulting in a
product recall program or a final judgment in excess of its insurance coverage
could have a material adverse effect on the Company.
Discontinued Operations
On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". The Company's discontinued
operations supplied projectiles and other metal components for medium caliber
training and tactical ammunition used by the United States Armed Forces. The
metal components manufactured by the Company were shipped to a loading facility,
operated either by the United States government or a prime defense contractor,
which loaded the explosives, assembled the rounds and packaged the ammunition
for use. Additionally, the Company manufactured small quantities of metal airbag
module components for the automotive airbag industry. Net sales of metal and
defense related products were approximately $0, $5.4 million and $10.5 million
in the nine month period from March 30, 2003 to December 31, 2003 and the years
ended March 29, 2003 and March 30, 2002, respectively, for the Galion and
Valentec Wells operations. See Note 3 to the Consolidated Financial Statements
for more information.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry, in which, generally, there
are seasonal plant shutdowns in the third and fourth quarters of each calendar
year.
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.
8
Generally, these orders are shipped within two to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
its backlog is a reliable measure of future airbag sales.
Risks Resulting from Foreign Operations
Certain of the Company's consolidated net sales are generated outside the
United States. Foreign operations and exports to foreign markets are subject to
a number of special risks including, but not limited to, risks with respect to
fluctuations in currency exchange rates, economic and political destabilization
and other disruption of markets, restrictive actions by foreign governments
(such as restrictions on transfer of funds, export duties and quotas, foreign
customs and tariffs and unexpected changes in regulatory environments), changes
in foreign laws regarding trade and investment, difficulty in obtaining
distribution and support, nationalization, the laws and policies of the United
States affecting trade, foreign investment and loans and foreign tax laws. There
can be no assurance that one or a combination of these factors will not have a
material adverse effect on the Company's ability to increase or maintain its
foreign sales or on its future results of operations.
In addition, the Company has a significant portion of its manufacturing
operations in foreign countries and purchases a portion of its raw materials
from foreign suppliers. The production costs, profit margins and competitive
position of the Company are affected by the strength of the currencies in
countries where it manufactures or purchases goods relative to the strength of
the currencies in countries where its products are sold.
Certain of the Company's operations generate net sales and incur expenses
in foreign currencies. The Company's financial results from international
operations may be affected by fluctuations in currency exchange rates. Future
fluctuations in certain currency exchange rates could adversely affect the
Company's financial results. The Company monitors its risk associated with the
volatility of certain foreign currencies against its functional currency, the
U.S. dollar. The impact of changes in the relationship of other currencies to
the U.S. dollar in the nine month period from March 30, 2003 to December 31,
2003 has resulted in the recognition of other income of approximately $2.0
million. However, it is unknown what the effect of foreign currency rate
fluctuations will have on the Company's financial position or results of
operations in the future. In certain situations, the Company utilizes derivative
financial instruments designated as cash flow hedges to reduce exposures to
volatility of foreign currencies impacting the operation of its business. See
Note 12 to the Consolidated Financial Statements for information regarding
derivatives and hedging.
See Note 8 to the Consolidated Financial Statements for additional
financial information by geographic area.
Employees
At December 31, 2003, the Company employed approximately 2,800 employees.
The Company's hourly employees in Mexico are entitled to a federally regulated
minimum wage, which is adjusted annually. The Company's employees at its Mexican
facility are unionized. In addition, Automotive Safety Components International
GmbH & Co. KG, the Company's wholly owned German subsidiary, has a workers'
council pursuant to German statutory labor law. The Company has not experienced
any work stoppages related to its work force and considers its relations with
its employees and all unions currently representing its employees to be good.
Environmental Matters
Like similar companies, the Company's operations and properties are
subject to a wide variety of increasingly complex and stringent federal, state,
local and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws may impose joint and several
liability and may apply to conditions at properties presently or formerly owned
or operated by an entity or its predecessor as well as to conditions of
properties at which wastes or other contamination attributable to an entity or
its predecessor have been sent or otherwise come to be 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
9
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 Company's facility in
Greenville, South Carolina (the "Greenville facility") 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. Over the past four years the Company
has performed groundwater monitoring and implemented a program for in-site
remediation of the groundwater. As a result, the Company received a "no further
action" letter from DHEC in the fiscal year ended March 29, 2003, ending the
DHEC investigation. An undiscounted reserve of $277,000 has been included in
"other long-term liabilities" on the accompanying consolidated balance sheets
for estimated future environmental expenditures related to the Greenville
facility for conditions existing prior to the Company's ownership of the
facility. Such reserve was established at the time the Company acquired the
facility, and the amount was determined by reference to the results of a Phase
II study performed at the Greenville facility. The Greenville facility has also
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.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued 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 twenty-four patents and approval for nine 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 $1.2 million, $1.2 million and $899,000
in the nine month period from March 30, 2003 to December 31, 2003 and the years
ended March 29, 2003 and March 30, 2002, respectively.
10
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Greenville, South
Carolina in a facility owned by the Company, adjacent to its Safety Components
Fabric Technologies, Inc. ("SCFTI") manufacturing facility. The Company owns or
leases five facilities in which it manufactures airbag and technical fabrics
related products, with total plant area of approximately 1.2 million square feet
(including administrative, warehouse, engineering and research and development
areas housed at Company locations). Below is an overview of the Company's
properties at its airbag and technical fabrics related products facilities as of
December 31, 2003.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Ensenada, Mexico (airbag cushions) 97,000 Leased 2005 (1)
Ensenada, Mexico (airbag cushions) 43,000 Leased 2007 (1)(2)(7)
Greenville, South Carolina (airbag and technical fabrics) 826,000 Owned N/A (1)(3)(7)
Hildesheim, Germany (airbag cushions) 70,000 Owned N/A (1)(7)
Jevicko, Czech Republic (airbag cushions) 100,000 Owned N/A (4)
Otay Mesa, California (airbag cushions) 16,000 Leased 2006 (5)(7)
Crumlin, Wales (airbag cushions) 60,000 Leased 2008 (6)(7)
- ----------
(1) Manufacturing, research and development and office space
(2) Lease also provides for five-year renewal option
(3) Location of corporate offices
(4) Manufacturing and office space
(5) Finished goods distribution center and office space
(6) Research and development and office space
(7) Location of marketing and sales offices
ITEM 3. LEGAL PROCEEDINGS
As described in "The Company - The 2001 Restructuring" in Item 1, the
Company emerged from bankruptcy on October 11, 2000, and an order entering the
final decree and closing the Chapter 11 cases was signed on November 21, 2003.
The final decree is subject to a "Limited Reservation of Jurisdiction" for a
"Reporting/Fee Dispute" with the U.S. Trustee Office over administrative matters
associated with the cases. The Company has reserved $275,000 for any potential
exposure associated with the Reporting/Fee Dispute. Although no assurances can
be given in this regard, management does not expect that the Company will incur
material expenditures in addition to those reserved with respect to the
Reporting/Fee Dispute.
See "Environmental Matters" in Item 1 with respect to certain
environmental proceedings involving the Company.
The Company, from time to time, becomes party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 31, 2003. The Company adjourned its 2003 Annual Meeting
of Stockholders noticed for Tuesday, October 14, 2003, due to the absence of a
quorum for the transaction of business.
11
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 holders of the Notes
and 24,200 shares to the financial advisors of the holders of the Notes). The
pre-bankruptcy common stock, excluding stock held by Robert A. Zummo, the
Company's former Chairman and Chief Executive Officer, was converted into
159,226 shares of the Company's post-bankruptcy common stock, including 39,619
shares of treasury stock (for an aggregate of 5,000,000 shares issued and
4,960,381 shares outstanding post-bankruptcy) and warrants to acquire an
additional 681,818 shares of such common stock on the Emergence Date (these
warrants expired as of April 10, 2003). All other options and warrants were
cancelled on the Emergence Date.
The Company's common stock is not listed on any exchange, but rather
trades on the Over-The-Counter Bulletin Board. The following table sets forth
the range of high and low prices for reported sales of the common stock during
the nine and twelve month periods ended December 31, 2003 and March 29, 2003,
respectively. The prices quoted for the Over-The-Counter Bulletin Board reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
High Low
---- ---
Year Ended March 29, 2003
First Quarter $ 7.95 $ 5.35
Second Quarter 8.70 5.40
Third Quarter 7.60 6.90
Fourth Quarter 9.00 5.00
Period from March 30, 2003 to December 31, 2003
First Quarter $ 9.00 $ 5.00
Second Quarter 11.00 7.50
Third Quarter 15.00 10.99
As of February 27, 2004, there were approximately 154 holders of record of
the Company's common stock. The warrants to acquire 681,818 shares of common
stock issued by the Company, pursuant to the Plan, on the Emergence Date,
expired as of April 10, 2003.
To date, the Company has not paid any cash dividends to its stockholders
and does not have plans to do so in the future. Further, the Amended Congress
Facilities (as defined below) restrict the Company's ability to pay dividends.
See the discussion of the Amended Congress Facilities under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" below.
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 nine month period from March 30, 2003
to December 31, 2003, the fiscal years ended March 29, 2003 and March 30, 2002,
the period from October 11, 2000 to March 31, 2001, the period from March 26,
2000 to October 10, 2000, and the fiscal year ended March 25, 2000 have been
derived from the audited Consolidated Financial Statements of the Company for
such periods. The presentation of certain previously reported amounts has been
reclassified to conform to the current presentation and to reflect discontinued
operations of the non-core businesses (metal and defense) as discussed in Note 3
to the Consolidated Financial Statements of the Company. The Consolidated
Financial Statements for the nine month period from March 30, 2003 to December
31, 2003 and fiscal years March 29, 2003 and 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
12
result of the implementation of fresh start accounting, certain of the selected
financial data for the period from March 30, 2003 to December 31, 2003 and
fiscal years ended March 29, 2003 and March 30, 2002 and for the period from
October 11, 2000 to March 31, 2001 is not comparable to the selected financial
data of prior periods. See Note 1 to the Consolidated Financial Statements of
the Company for further discussion of the effects of fresh start accounting on
the Company's Consolidated Financial Statements. As a result of differences in
comparability, selected financial data for the "Reorganized Company" 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
-----------------------------------------------------------------
Period from Fiscal Year Fiscal Year Period from
3/30/03 to Ended Ended 10/11/00 to
12/31/03 3/29/03 3/30/02 3/31/01
(9 Months) (12 Months) (12 Months) (6 Months)
-----------------------------------------------------------------
INCOME STATEMENT DATA (1):
Net sales (2) $ 183,666 $ 244,338 $ 203,323 $ 92,052
Cost of sales, including depreciation 157,568 214,318 176,817 79,337
-----------------------------------------------------------------
Gross profit 26,098 30,020 26,506 12,715
Selling, general and administrative expenses 12,671 14,475 11,595 5,235
Research and development expenses 1,225 1,242 899 335
Compensation expense associated with change of control (3) 2,797 -- -- --
Amortization of intangible assets (4) 106 124 900 448
Restructuring and restatement (5) -- -- -- --
-----------------------------------------------------------------
Operating income 9,299 14,179 13,112 6,697
Other expense (income) (2,268) (3,426) (1,001) (280)
Interest expense, net (6) 1,657 3,596 4,110 2,514
-----------------------------------------------------------------
Income (loss) from continuing operations before
reorganization items 9,910 14,009 10,003 4,463
Reorganization items (7) -- -- -- --
-----------------------------------------------------------------
Income (loss) from continuing operations before income taxes 9,910 14,009 10,003 4,463
Income tax provision (benefit) 3,808 6,120 3,397 1,769
-----------------------------------------------------------------
Income (loss) from continuing operations 6,102 7,889 6,606 2,694
Discontinued operations, net of taxes:
Loss from discontinued operations -- -- -- --
Loss (gain) on disposition of discontinued operations (8) -- 2,023 2,517 1,444
Extraordinary gain, net of taxes (9) -- -- -- --
Cumulative effect of change in accounting method (10) -- (14,651) -- --
-----------------------------------------------------------------
Net (loss) income $ 6,102 $ (8,785) $ 4,089 $ 1,250
=================================================================
PER SHARE DATA, BASIC (11):
Income from continuing operations $ 1.23 $ 1.59 $ 1.33 $ 0.54
Loss from discontinued operations -- (0.41) (0.51) (0.29)
Cumulative effect of change in accounting method -- (2.95) -- --
-----------------------------------------------------------------
Net (loss) income per common share $ 1.23 $ (1.77) $ 0.82 $ 0.25
=================================================================
PER SHARE DATA, DILUTED (11):
Income from continuing operations $ 1.19 $ 1.59 $ 1.33 $ 0.54
Loss from discontinued operations -- (0.41) (0.51) (0.29)
Cumulative effect of change in accounting method -- (2.95) -- --
Net (loss) income per common share $ 1.19 $ (1.77) $ 0.82 $ 0.25
=================================================================
Weighted average number of shares outstanding, basic 4,973 4,960 4,960 4,960
=================================================================
Weighted average number of shares outstanding, diluted 5,119 4,960 4,960 4,960
=================================================================
BALANCE SHEET DATA: Reorganized Company
-----------------------------------------------------------------
12/31/03 3/29/03 3/30/02 3/31/01
-----------------------------------------------------------------
Working capital (12) (13) $ 26,653 $ 8,016 $ 3,711 $ 27,079
Total assets 123,326 134,064 125,271 130,683
Senior subordinated notes -- -- -- --
Long term debt, net of current portion (13) 11,817 7,363 12,182 43,541
Stockholders' equity (deficit) 64,029 51,913 55,838 51,943
In thousands, except per share data and footnotes Predecessor Company
-----------------------------
Period from Fiscal Year
3/26/00 to Ended
10/10/00 3/25/00
(6 Months) (12 Months)
-----------------------------
INCOME STATEMENT DATA (1):
Net sales (2) $ 109,139 $ 194,667
Cost of sales, including depreciation 93,307 168,249
-----------------------------
Gross profit 15,832 26,418
Selling, general and administrative expenses 5,941 13,443
Research and development expenses 353 665
Compensation expense associated with change of control (3) -- --
Amortization of intangible assets (4) 675 1,486
Restructuring and restatement (5) -- 3,969
-----------------------------
Operating income 8,863 6,855
Other expense (income) 878 1,729
Interest expense, net (6) 3,833 13,975
-----------------------------
Income (loss) from continuing operations before
reorganization items 4,152 (8,849)
Reorganization items (7) 41,740 --
-----------------------------
Income (loss) from continuing operations before income taxes (37,588) (8,849)
Income tax provision (benefit) (17,511) 6,154
-----------------------------
Income (loss) from continuing operations (20,077) (15,003)
Discontinued operations, net of taxes:
Loss from discontinued operations 1,440 20,142
Loss (gain) on disposition of discontinued operations (8) (214) --
Extraordinary gain, net of taxes (9) 29,370 --
Cumulative effect of change in accounting method (10) -- --
-----------------------------
Net (loss) income $ 8,067 $ (35,145)
=============================
PER SHARE DATA, BASIC (11):
Income from continuing operations
Loss from discontinued operations
Cumulative effect of change in accounting method
Net (loss) income per common share
PER SHARE DATA, DILUTED (11):
Income from continuing operations
Loss from discontinued operations
Cumulative effect of change in accounting method
Net (loss) income per common share
Weighted average number of shares outstanding, basic
Weighted average number of shares outstanding, diluted
Predecessor
BALANCE SHEET DATA: Company
-----------
3/25/00
-----------
Working capital (12) (13) $(103,105)
Total assets 168,695
Senior subordinated notes 90,000
Long term debt, net of current portion (13) 15,145
Stockholders' equity (deficit) (14,440)
- ----------
See Notes to Selected Financial Data
13
Notes to Selected Financial Data:
(1) The Company did not declare dividends during any of the periods or fiscal
years presented.
(2) The growth in net sales between fiscal years 2002 and 2003 is attributable
in part to the Woodville acquisition on November 2, 2001.
(3) During the nine months ended December 31, 2003, Zapata Corporation
acquired approximately 82.6% of the outstanding shares of the Company's
common stock as of February 27, 2004 (giving effect to option exercises
since the Change of Control), resulting in the Change of Control described
above in "The Company - Change of Control" in Item 1. The Change of
Control triggered certain provisions of the Company's Stock Option Plan,
including immediate vesting of all options and an automatic change in the
exercise price of a portion of the options. This change in exercise price
constituted a modification of the Stock Option Plan and the Company was
required to recognize a one-time, non-recurring compensation cost of $1.4
million for the modified options. Additionally, the employment agreements
of certain key executives included a provision for a one-time,
non-recurring bonus payable in the event of a change of control. The
aggregate bonus, payable following the Change of Control, was $1.4
million.
(4) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", as
of March 31, 2002, the beginning of fiscal 2003, required the Company to
cease amortization of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" and goodwill, resulting in the
reduction of approximately $791,000 in amortization costs from fiscal
2002. Amortization expense for the fiscal year ended March 30, 2002 and
the period from October 11, 2000 to March 31, 2001 was approximately
$791,000 and $395,000, respectively.
(5) During the fiscal year ended March 25, 2000, the Company incurred
approximately $4.0 million of costs associated with the investigation and
restatement of the Company's financial statements for prior years, and the
restructuring of the Company's balance sheet.
(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) On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". Net Sales of metal
and defense related products were approximately $0, $5.4 million and $10.5
million in the period from March 30, 2003 to December 31, 2003 and the
years ended March 29, 2003 and March 30, 2002, respectively, for the
Galion and Valentec Wells.
(9) During the period from March 26, 2000 to October 10, 2000, the early
extinguishment of the Notes and related accrued interest resulted in an
extraordinary gain of $29.9 million, net of income taxes of $17.5 million.
This was offset by a loss recognized in the amount of $573,000 related to
deferred financing costs associated with the early termination of the
Company's prior credit facility during the period. The Company is in the
process of reviewing the effect, if any, that the adoption of recently
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections", will have
on its financial position, results of operations and presentation of its
statements of operations. Adoption of SFAS No. 145 may result in a change
in the presentation of the extraordinary gain recognized in the period
from March 26, 2000 to October 10, 2000.
(10) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to assess its "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation
performed upon its emergence from Chapter 11 in October 2000, and goodwill
as of March 31, 2002. The excess reorganization value and goodwill were
determined to be impaired and, under the transition guidance of SFAS No.
142, the impairment was charged to earnings as the cumulative effect of a
change in method of accounting. No tax effect was recognized, as these
items were not deductible for income tax purposes. See Note 2 to the
Consolidated Financial Statements.
(11) Share and per share data are not meaningful on or prior to October 10,
2000 due to the significant change in the capital structure that resulted
from the Plan.
(12) As of March 25, 2000, the working capital of the Company was in a negative
position due to the reclassification of the $90 million in Notes to
current liabilities.
(13) The decrease in working capital and long-term debt, net of current
portion, at March 29, 2003 and March 30, 2002 was principally due to the
classification of the Congress Facility (as defined below) and/or a
subordinated secured note, each due October 2003, with an outstanding
balance of $28.5 and $18.9 million at March 29, 2003 and March 30, 2002,
respectively, as a current liability at March 29, 2003 and March 30, 2002,
respectively. The Company refinanced the Congress Facility and repaid the
subordinated secured note prior to their maturity in October 2003. See
Note 5 to the Consolidated Financial Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading low-cost independent supplier of automotive
airbag fabric and cushions, with operations in North America and Europe. The
following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
report. Except for the historical information contained herein, the discussions
in this document contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. The Company's actual results could differ materially from those
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995" regarding forward-looking information at the
beginning of this Form 10-K and, from time to time, in the Company's other
filings with the SEC.
Critical Accounting Policies
The following discussion and analysis of financial condition and results
of operations are based on the Company's Consolidated Financial Statements. A
summary of significant accounting policies is disclosed in Note 2 to the
Consolidated Financial Statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the Consolidated Financial
Statements. It is important that the reader of the financial statements
understands that actual results could differ from these estimates, assumptions
and judgments.
In addition, judgment is involved in determining which accounting policies
and estimates would be considered as "critical". Because the Company generally
does business with large, well-established customers, the Company has not
historically been, nor is it expected in the future to be, exposed to
significant bad debt or inventory losses. Accordingly, the estimates of the
allowance for bad debts and of inventory reserves are not considered to be
critical accounting policies or estimates. In addition, the Company emerged from
bankruptcy in October 2000 and revalued its tangible assets at that time.
Accordingly, estimates of tangible asset impairment are not considered to be a
critical accounting policy or estimate. We believe the following critical
accounting policies contain the most significant judgments and estimates used in
the preparation of the Consolidated Financial Statements.
Foreign Currency Translation. Financial statements of substantially all of
the Company's foreign operations are prepared using the local currency as the
functional currency. In accordance with SFAS No. 52, "Foreign Currency
Translation," translation of these foreign operations to United States dollars
occurs using the current exchange rate for balance sheet accounts and a weighted
average exchange rate for results of foreign operations. Translation gains or
losses are recognized in "accumulated other comprehensive income (loss)" as a
component of stockholders' equity in the accompanying consolidated balance
sheets. The Company's subsidiary in Mexico prepares its financial statements
using the United States dollar as the functional currency. Since the Mexico
subsidiary does not have external sales and does not own significant amounts of
inventory or fixed assets, the Company has determined that the United States
dollar is the appropriate functional currency. Accordingly, the translation
effects of the financial statements are included in the results of operations.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks associated
with the volatility of certain foreign currencies against its functional
currency, the U.S. dollar. In the nine month period from March 30, 2003 to
December 31, 2003 and the year ended March 29, 2003 the impact of changes in the
relationship of other currencies to the U.S. dollar resulted in the recognition
of other income of approximately $2.0 million and $3.5 million, respectively. In
prior years, the
15
relationship of other currencies to the U.S. dollar has not had a material
effect on the Company's Consolidated Financial Statements. It is unknown what
effect foreign currency rate fluctuations will have on the Company's financial
position or results of operations in the future. If, however, there were a
sustained decline of these currencies versus the U.S. dollar, the Consolidated
Financial Statements could be materially adversely affected.
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Management estimates the
Company's tax assets and liabilities on a periodic basis and adjusts these
balances on a timely basis as appropriate. Management believes that it has
adequately provided for its future tax consequences based upon current facts and
circumstances and current tax law. However, should management's tax positions be
challenged and not prevail, different outcomes could result and have a
significant impact on the amounts reported in the Consolidated Statement of
Operations.
Discontinued Operations. On December 23, 2002, the Company completed the
disposal of all operations that it had classified as "discontinued operations."
As discussed in Note 3 to the Consolidated Financial Statements, the Company
reported the metal and defense businesses as discontinued operations in its
Consolidated Financial Statements as of October 10, 2000, or the measurement
date, through the sale of the final discontinued operation, Galion, Inc., on
December 23, 2002. To report the metal and defense businesses as discontinued
operations required the Company to make estimates regarding (i) the results of
operations to the expected disposal date and (ii) the expected proceeds to be
received upon sale. Based on the Company's determination that losses were
expected both from operations and upon disposal, the Company accrued substantial
charges for future losses in the years ended March 29, 2003 and March 30, 2002.
Accordingly, the businesses' net losses for the years ended March 29, 2003 and
March 30, 2002, which were incurred subsequent to the measurement date, were
applied against the accrued losses and were not recognized as losses as incurred
in the Consolidated Statements of Operations.
Goodwill Impairment. As discussed in Note 2 to the Consolidated Financial
Statements, the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", required the Company to perform
an assessment for impairment of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation performed
upon its emergence from Chapter 11 in October 2000 ("excess reorganization
value"), and goodwill, as of March 31, 2002. Under the transition guidance of
SFAS No. 142, the Company was required to perform its initial impairment
evaluation within six months of adopting the new standard, and any impairment
charges were to be retroactively recorded in the first quarter of the Company's
fiscal year. Other identifiable intangible assets of the Company consist of
patents that continue to be amortized over their estimated useful lives. In
accordance with SFAS No. 142, the Company compared the book value of the
Company's net assets, including the excess reorganization value and goodwill, to
the Company's fair value as of March 31, 2002. Because the fair value was lower
than the book value of the Company's net assets, excess reorganization value and
goodwill were determined to be impaired and accordingly, the carrying value of
such assets (approximately $14.7 million at March 31, 2002) was charged to
earnings as the cumulative effect of a change in method of accounting effective
March 31, 2002. There was no tax effect of the change in accounting principle,
as the excess reorganization value and goodwill were not deductible for income
tax purposes.
Outlook
As the automotive airbag industry has evolved, module integrators have
outsourced varying portions of non-proprietary components, such as cushions, to
companies such as the Company specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource a portion of their cushion requirements as they focus on
the development of proprietary technologies. The Company also believes that a
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company. Like the automotive supply industry generally, the Company
continues to experience significant competitive pressure. For example, the
Company supplies airbag cushions and/or airbag fabric to its three most
significant customers based upon releases from formal purchase orders, which are
subject to periodic negotiation with respect to price and quantity. The Company
expects that it will continue to experience competitive pricing pressures and
although it believes that it has good working relationships with its customers
due to its manufacturing capabilities, quality products and service, it cannot
give assurances that purchases by its module integrator customers will continue
at their current levels.
16
Results of Operations
The following table summarizes operating results of the Company for the
nine month period from March 30, 2003 to December 31, 2003 and the years ended
March 29, 2003 and March 30, 2002 (in thousands):
-----------------------------------------------------------------
Period from Period from
3/30/03 to 3/31/02 to Year Ended Year Ended
12/31/03 12/28/02 3/29/03 3/30/02
(9 Months) (9 Months) (12 Months) (12 Months)
-----------------------------------------------------------------
Net sales $ 183,666 $ 180,863 $ 244,338 $ 203,323
Gross profit 26,098 21,369 30,020 26,506
Income from operations 9,299 9,484 14,179 13,112
Other income, net (2,268) (2,857) (3,426) (1,001)
Interest expense, net 1,657 2,757 3,596 4,110
Income tax provision 3,808 4,456 6,120 3,397
Loss on discontinued operations, net of taxes -- 1,363 2,023 2,517
Cumulative effect of change in method of accounting -- (14,651) (14,651) --
Net income (loss) 6,102 (10,886) (8,785) 4,089
Following the Change of Control, the Company changed its fiscal year to a
calendar year end to coincide with Zapata's fiscal year end. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 consists of nine months of operations. The years ended
March 29, 2003 and March 30, 2002 each consisted of twelve months of operations.
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
---------------------------------------------------------------
Period from Period from
3/30/03 to 3/31/02 to Year Ended Year Ended
12/31/03 12/28/02 3/29/03 3/30/02
(9 Months) (9 Months) (12 Months) (12 Months)
---------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 14.2 11.8 12.3 13.0
Income from operations 5.1 5.2 5.8 6.4
Interest expense, net 0.9 1.5 1.5 2.0
Income tax provision 2.1 2.5 2.5 1.7
Net income (loss) 3.3 (6.0) (3.6) 2.0
Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 28,
2002
Net Sales. Net sales increased $2.8 million, or 1.5%, to $183.7 million
for the nine months ended December 31, 2003 compared to the nine months ended
December 28, 2002. North American operations' net sales decreased $8.1 million
or 8.1% compared to the prior period, with the decrease principally due to
decreased demand in the North American automotive market. Net sales for European
operations increased $10.9 million or 13.5% compared to the prior period. The
increase in European net sales is due principally to the effect of changes in
foreign currency exchange rates that increased sales as expressed in U.S.
dollars by approximately $11.9 million over the amount that would have been
reported based on exchange rates in effect in the nine months ended December 28,
2002. The favorable effect of exchange rates was offset by a reduction in volume
of approximately $1.0 million due to decreased demand in the European automotive
market.
Gross Profit. Gross profit increased $4.7 million, or 22.1%, to $26.1
million for the nine months ended December 31, 2003 compared to the nine months
ended December 31, 2002. The European operations experienced an improvement of
$5.2 million or 146.1% due to improvements in operating efficiencies and cost
savings of approximately $4.2 million and the favorable effect of exchange rates
of approximately $1 million. With respect to the
17
European operations, the prior period's results reflect losses at the Woodville
operations of approximately $1.5 million and costs of approximately $1.7 million
associated with the move of the Woodville production lines and the ramp-up of
programs at other European facilities. Gross profit for North American
operations decreased approximately $403,000 or 2.2% due, in part, to the sales
decline. Gross profit as a percentage of net sales increased to 14.2% for the
nine months ended December 31, 2003 from 11.8% for the nine months ended
December 28, 2002.
Income from Operations. Income from operations decreased $185,000, or
2.0%, to $9.3 million for the nine months ended December 31, 2003 compared to
the nine months ended December 28, 2002. The decrease is due to a higher selling
and administrative costs including non-recurring costs of approximately $2.8
million associated with a $1.4 million stock compensation charge and $1.4
million in executive bonuses resulting from the Change of Control, along with
other increases in general and administrative expenses. Income from operations
as a percentage of net sales decreased to 5.1% for the nine months ended
December 31, 2003 from 5.2% in the prior period. The decrease as a percentage of
net sales was due to the items discussed above.
Other Income, net. The Company recognized other income, net of $2.3
million for the nine months ended December 31, 2003, as compared to other
income, net of $2.9 million for the nine months ended December 28, 2002. Other
income, net is realized primarily from net foreign transaction gains resulting
from the revaluation of intercompany balances between the European subsidiaries
and the U.S. parent company. The Company recorded net foreign transaction gains
of $2.0 million for the nine months ended December 31, 2003, compared to net
foreign transaction gains of $800,000 during the comparable period in the prior
period. The foreign transaction gains resulted from favorable changes in foreign
currency exchange rates of approximately 15.3% in the December 31, 2003 exchange
rates as compared to those at December 28, 2002.
Interest Expense, net. Interest expense decreased $1.1 million, or 39.9%,
to $1.7 million for the nine months ended December 31, 2003 compared to the nine
months ended December 28, 2002. The decrease is attributable both to a decrease
in average interest rates from 5.8% to 5.4% and a decrease in average
outstanding debt from $44.6 million to $26.8 million for the current period as
compared to the prior period.
Provision for Income Taxes. The provision for income taxes decreased
$648,000 for the nine months ended December 31, 2003 compared to the nine months
ended December 28, 2002 due primarily to the following reasons: (i) the
recording in the prior period of a $350,000 provision for income taxes for the
Company's German subsidiary resulting from an examination performed by the
German taxing authorities covering years 1997 through 1999 and (ii) the
reduction of $200,000 in income taxes in Mexico from lower pre-tax income for
the nine months ended December 31, 2003 as compared to the prior period. The
Company's effective tax rates for the nine months ended December 31, 2003
compared to the nine months ended December 28, 2002 were 38.4% and 43.7%,
respectively. The effective tax rate for the nine months ended December 28, 2002
is higher than the statutory tax rate due to the tax examination related reserve
noted above and foreign earnings taxed at different rates.
Discontinued Operations. No impacts from discontinued operations were
recorded during the nine month period ended December 31, 2003 as the Company had
sold all remaining discontinued operations in the nine months ended December 28,
2002. Loss on disposition of discontinued operations was $1.4 million for the
nine months ended December 28, 2002. The loss was principally due to the sale of
Galion on December 23, 2002 and included the recognition of a tax provision of
approximately $660,000 related to an adjustment of the deferred tax liabilities
of the discontinued operations.
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of the Company's fair value, the
Company's "Reorganization value in excess of identifiable assets" and goodwill
were determined to be impaired and, accordingly, the total amount of those
assets (approximately $14.7 million) was written off as the cumulative effect of
a change in method of accounting in the nine months ended December 28, 2002 (see
further discussion under "New Accounting Standards"). There was no tax effect of
the change in accounting principle, as the excess reorganization value and
goodwill were not deductible for income tax purposes.
Net Income. The Company's net income was $6.1 million for the nine months
ended December 31, 2003, compared to net loss of $10.9 million for the nine
months ended December 28, 2002. The current period earnings were a result of the
items discussed above. The net loss in the prior period was primarily a result
of the write-off of $14.7
18
million of reorganization value in excess of identifiable assets and goodwill,
as discussed above, recognized as a cumulative effect of a change in method of
accounting resulting from the adoption of SFAS No. 142.
Twelve Months Ended March 29, 2003 Compared to Twelve Months Ended March 30,
2002
Net Sales. Net sales increased $41.0 million, or 20.2%, to $244.3 million
for the year ended March 29, 2003 compared to the year ended March 30, 2002.
North American operations' net sales increased $5.5 million or 4.4% compared to
the prior year, with the increase principally due to greater demand and new
programs in the North American automotive market. Net sales for European
operations increased $35.5 million or 45.5% compared to the prior year. The
increase in Europe is due primarily to the increased volumes resulting from new
programs representing an increase of $13.8 million, the effect of the Woodville
acquisition, which accounted for $9.9 million of the increase, and the favorable
effect of changes in foreign currency exchange rates in Europe, representing an
increase in net sales of approximately $11.8 million.
Gross Profit. Gross profit increased $3.5 million, or 13.3%, to $30.0
million for the year ended March 29, 2003 compared to the prior year. The
increase in gross profit did not correspond with the increase in net sales due
to losses at Woodville of approximately $1.5 million and costs of approximately
$1.7 million associated with the move of the Woodville production lines and the
ramp-up of programs at other European facilities. Additionally, selling price
decreases and increased shipping and other manufacturing costs contributed to
the decrease in gross margin. Accordingly, gross profit as a percentage of net
sales decreased to 12.3% for the year ended March 29, 2003 from 13.0% for the
year ended March 30, 2002.
Income from Operations. Income from operations increased $1.1 million, or
8.1%, to $14.2 million for the year ended March 29, 2003 compared to the year
ended March 30, 2002. The increase is directly related to the increase in net
sales discussed above and a reduction of $776,000 in amortization costs
resulting from the adoption of SFAS No. 142 (see Note 2 of the Consolidated
Financial Statements). This increase was offset by an increase in general and
administrative expenses, reflecting approximately $1.1 million of production
re-qualification and other related costs incurred for the relocation of the
Woodville operations to other European production facilities. The relocation of
the Woodville operations to other European locations was completed in July 2002.
Additionally, higher sales commissions, travel and research and development
costs of approximately $1.1 million were incurred during the year ended March
29, 2003. Income from operations as a percentage of net sales decreased to 5.8%
for the year ended March 29, 2003 from 6.4% in the prior year. The decrease as a
percentage of net sales was due to the items discussed above.
Other Income, net. The Company recognized other income, net of $3.4
million for the year ended March 29, 2003, as compared to other income, net of
$1.0 million for the year ended March 30, 2002. Other income, net is realized
primarily from net foreign transaction gains resulting from the revaluation of
intercompany balances between the European subsidiaries and the U.S. parent
company. The Company recorded net foreign transaction gains of $3.5 million for
the year ended March 29, 2003, compared to net foreign transaction gains of
$756,000 during the comparable period in the prior year. The fiscal 2003 foreign
transaction gains resulted from significant favorable changes in foreign
currency exchange rates of approximately 18.7% in the March 29, 2003 exchange
rates as compared to those at March 30, 2002.
Interest Expense, net. Interest expense decreased $514,000, or 12.5%, to
$3.6 million for the year ended March 29, 2003 compared to the year ended March
30, 2002. The decrease is attributable both to a decrease in average interest
rates from 6.7% to 5.6% and a decrease in average outstanding debt from $44.7
million to $38.2 million for the period as compared to the prior year.
Provision for Income Taxes. The provision for income taxes increased $2.7
million for the year ended March 29, 2003 compared to the prior year due to (i)
an increase of $3.4 million in pre-tax income from North American operations
compared to the prior year, (ii) the recording of tax provisions of
approximately $1.3 million for the Company's German and Czech Republic
subsidiaries in fiscal 2003 as certain of the net operating losses of those
subsidiaries had then been fully utilized, and (iii) the recording of a $350,000
provision for income taxes for the German subsidiary. German taxing authorities
have performed an examination covering years 1997 through 1999, and during the
year ended March 29, 2003 the Company reserved $350,000 for the tax liability
arising from this tax examination. The Company's effective tax rates for the
years ended March 29, 2003 and March 30, 2002 were 43.7%
19
and 34.0%, respectively. The effective tax rate for the year ended March 29,
2003 is higher than the statutory tax rate due to the tax examination noted
above and foreign earnings taxed at different rates.
Discontinued Operations. Loss on disposition of discontinued operations
was $2.0 million for the year ended March 29, 2003. The loss was principally due
to the sale of Galion on December 23, 2002 and included the recognition of a tax
provision of approximately $660,000 related to an adjustment of the deferred tax
liabilities of the discontinued operations. Loss on disposition of discontinued
operations was $2.5 million for the year ended March 30, 2002, net of income tax
benefit of $1.7 million, arising primarily from the relocation of, and other
costs associated with, the former Valentec Wells operations, during the first
quarter of fiscal 2002. Valentec Wells was sold in September 2001. At March 29,
2003, the Company had completed its disposition of all discontinued operations.
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of the Company's fair value, the
Company's "Reorganization value in excess of identifiable assets" and goodwill
were determined to be impaired and, accordingly, the total amount of those
assets (approximately $14.7 million) was written off as the cumulative effect of
a change in method of accounting at March 31, 2002 (see further discussion under
"New Accounting Standards"). There was no tax effect of the change in accounting
principle, as the excess reorganization value and goodwill were not deductible
for income tax purposes.
Net Loss. The Company's net loss was $8.8 million for the year ended March
29, 2003, compared to net income of $4.1 million for the year ended March 30,
2002. The net loss resulted primarily from the write-off of $14.7 million of
reorganization value in excess of identifiable assets and goodwill, as discussed
above, recognized as a cumulative effect of a change in method of accounting
resulting from the adoption of SFAS No. 142 and other matters discussed above.
Seasonality and Inflation
The automotive operations are subject to the seasonal characteristics of
the automotive industry in which there are generally seasonal plant shutdowns in
the third and fourth quarters of each calendar year. The Company does not
believe that its operations to date have been materially affected by inflation.
Liquidity and Capital Resources
It is expected that the Company's equipment and working capital
requirements will continue to increase in order to sustain its growth of
operations. The Company anticipates that it will spend approximately $8.3
million for capital projects in 2004. This growth is expected to be funded
through a combination of cash flows from operations, equipment financing and the
use of the Company's line of credit.
Credit Facilities
On October 8, 2003, the Company executed an amendment to its credit
facility (the "Congress Facility") with Congress Financial Corporation
(Southern), a subsidiary of Wachovia Bank, National Association ("Congress"). As
amended, the Company has an aggregate, $35.0 million revolving credit facility
with Congress (the "Congress Revolver") expiring October 8, 2006. Under the
Congress Revolver, the Company may borrow up to the lesser of (a) $35.0 million
or (b) 85% of eligible accounts receivable, plus 60% of eligible finished goods,
plus 50% of eligible raw materials. The amount borrowed under the Congress
Revolver at December 31, 2003 was $4.6 million. The Congress Revolver also
includes a $5.0 million letter of credit facility, under which the Company had
$497,000 outstanding pursuant to letters of credit at December 31, 2003.
In addition, the amendment provided for a term facility (the "Congress
Term A loan") under which $4.2 million was borrowed at December 31, 2003. The
Congress Term A loan is payable in equal monthly installments of approximately
$72,000, with the unpaid principal amount due on October 8, 2006. Additional
amounts are not available for borrowing under the Congress Term A loan. In
addition to the Congress Revolver and Congress Term A, the amendment also
provided for an additional $4.5 million term loan (the "Congress Term B loan"
and, collectively with the Congress Revolver and the Congress Term A loan, the
"Amended Congress Facilities") which is undrawn and is currently fully
available. At December 31, 2003, the Company's availability for additional
borrowings (based on the
20
maximum allowable limit) under the Congress Revolver and the Congress Term B
loan was approximately $34.9 million.
The interest rate on the Congress Revolver and Congress Term A loan is
variable, depending on the amount of the Company's Excess Availability (as
defined in the Amended Congress Facilities) at any particular time and the ratio
of the Company's EBITDA, less certain capital expenditures made by the Company,
to certain fixed charges of the Company (the "Fixed Charge Coverage Ratio". The
Company may make borrowings based on the prime rate as described in the Amended
Congress Facilities (the "Prime Rate") or the LIBOR rate as described in the
Amended Congress Facilities, in each case with an applicable margin applied to
the rate. The Congress Term B loan bears interest at the Prime Rate plus 3%. At
December 31, 2003, the margin on Prime Rate loans was 0.0% and the margin on
LIBOR rate loans was 2.0%. The Company is required to pay a monthly unused line
fee of 0.25% on the unutilized portion of the Congress Revolver and a monthly
fee equal to 1.75% of the amount of any outstanding letters of credit.
Under the Congress Revolver and Congress Term A loan, the Company is
subject to a covenant that requires it to maintain a certain tangible net worth.
To the extent that the Company has borrowings outstanding under the Congress
Term B loan, it is subject to additional financial covenants that require the
Company: (i) to maintain EBITDA of no less than certain specified amounts, (ii)
to maintain a Fixed Charge Coverage Ratio of no less than a specified amount,
(iii) to maintain a ratio of certain indebtedness to EBITDA not in excess of a
specified amount, and (iv) not to make capital expenditures in excess of
specified amounts. In addition, the Company would be required to repay the
Congress Term B loan to the extent of certain excess cash flow.
The Amended Congress Facilities also impose limitations upon the Company's
ability to, among other things, incur indebtedness (including capitalized lease
arrangements); become or remain liable with respect to any guaranty; make loans;
acquire investments; declare or make dividends or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At December 31, 2003, 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
Amended Congress Facilities.
The Company's subordinated secured note facility with KeyBank National
Association and Fleet Bank was paid in full on October 8, 2003 with proceeds
from the Amended Congress Facilities.
Other Long-term Obligations
On March 28, 2002, the Company's Czech Republic subsidiary and HVB Bank
Czech Republic, successor to Bank Austria, entered into an amendment to its $7.5
million mortgage note facility dated June 4, 1997. This amendment extends the
mortgage facility for five years, establishes an interest rate of 1.7% over
EURIBOR (EURIBOR was 2.31% at December 31, 2003), requires monthly payments of
approximately $89,000 and is secured by the real estate assets of the Company's
subsidiary in the Czech Republic. The Company has guaranteed the repayment of up
to $500,000 of the obligations of this subsidiary with respect to this facility.
On 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 was secured by the real estate in Germany acquired through the mortgage. On
October 31, 2003, the mortgage was paid in full.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The KeyCorp financing agreement has a seven-year term, bears
interest at a rate of 1.25% over LIBOR (LIBOR was 2.56% at December 31, 2003),
requires monthly payments of approximately $150,000 and is secured by certain
equipment located at the Company's Greenville, South Carolina facility.
21
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at December 31, 2003.
Payments due by Period
---------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Contractual obligations Total 1 year years years 5 years
---------------------------------------------------------
Long term debt $15,003 $ 3,741 $10,362 $ 900 --
Capital lease obligations 1,028 473 538 17 --
Operating leases 3,563 1,352 1,600 608 3
Purchase obligations 4,845 4,845 -- -- --
------------------------------------------------------
Total $24,439 $10,411 $12,500 $1,525 $ 3
======================================================
Additionally, the Company does not have any material commitments for
capital expenditures as of December 31, 2003.
Cash Flows
During the nine month period from March 30, 2003 to December 31, 2003, net
cash provided by operating activities from continuing operations was $21.9
million, arising from income from continuing operations of $6.1 million,
increases for non-cash items of $9.2 million (principally depreciation and
changes associated with the Change of Control) and a net decrease in operating
assets and a net increase in operating liabilities of $6.6 million. These
changes in operating assets and liabilities can primarily be attributed to
improved collections on accounts receivable principally in the European
operations representing a net increase in cash of $6.8 million and a decrease in
payments for income taxes and interest and offset by payments to trade
creditors. Net cash used in continuing operations for investing activities was
$2.6 million, principally for the acquisition of additional property, plant and
equipment to support the Company's production capacity worldwide. Net cash used
in continuing operations for financing activities in the nine month period from
March 30, 2003 to December 31, 2003 was $23.2 million due principally to net
repayments on the KeyBank subordinated secured term note and the Congress
Facility of $19.7 million combined with payments on various other debt and
long-term obligations totaling $4.0 million. The above activities, in
conjunction with the favorable effects of foreign exchange rates of $669,000,
resulted in a net decrease in cash and cash equivalents of $3.2 million in the
nine month period from March 30, 2003 to December 31, 2003.
Off-Balance Sheet Arrangements
As of December 31, 2003, the Company does not have any off-balance sheet
arrangements that are material to its financial condition, results of operations
or cash flows as defined by Item 303(a)(4) of Regulation S-K promulgated by the
SEC. The Company enters into derivative foreign contracts as noted and included
below in "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A
of this report.
New Accounting Pronouncements
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued which amends and clarifies the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities under SFAS No. 133. It
requires, among other things, that contracts with comparable characteristics be
accounted for similarly and clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is effective generally for contracts
entered into and modified after June 30, 2003. The adoption of this Statement
did not have any effect on the Company's financial position or statement of
operations.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. This statement
establishes new standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have any effect on
the Company's financial position or statement of operations.
22
The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to perform an impairment assessment of the Company's
"reorganization value in excess of amounts allocable to identifiable assets"
arising from the valuation performed upon its emergence from Chapter 11 in
October 2000 ("excess reorganization value"), and goodwill, as of March 31,
2002. Under the transition guidance of SFAS No. 142, the Company was required to
perform its initial impairment evaluation within six months of adopting the new
standard, and any impairment charges were to be retroactively recorded in the
first quarter of the Company's fiscal year. Other identifiable intangible assets
of the Company consist of patents that continue to be amortized over their
estimated useful lives. In accordance with SFAS No. 142, the Company compared
the book value of the Company's net assets, including the excess reorganization
value and goodwill, to the Company's fair value as of March 31, 2002. The
Company estimated its fair value using the following methodologies: a discounted
cash flows approach, relative market multiples for comparable businesses and a
market approach based on the Company's total market capitalization. Because the
fair value was lower than the book value of the Company's net assets, excess
reorganization value and goodwill were determined to be impaired and
accordingly, the carrying value of such assets (approximately $14.7 million at
March 31, 2002) was charged to earnings as the cumulative effect of a change in
method of accounting effective March 31, 2002. There was no tax effect of the
change in accounting principle, as the excess reorganization value and goodwill
were not deductible for income tax purposes.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 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 No. 144 supersedes SFAS No. 121 and the accounting and reporting
provisions of Accounting Principles Board ("APB") 30 related to the disposal of
a segment of a business. The Company adopted SFAS No. 144 on March 31, 2002. The
adoption of SFAS No. 144 had no effect on the Company's financial position and
results of operations, including the Company's reporting of discontinued
operations as the Company's discontinued operations were accounted for under
previous accounting guidance since the measurement date occurred prior to the
effective date of SFAS No. 144.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of Interpretation No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
Interpretation No. 45 had no effect on the Company's financial position and
results of operations.
Interpretation No. 45 also provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has issued
and specific disclosures related to product warranties. The disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. As of December 31, 2003, the Company and various consolidated
subsidiaries of the Company are borrowers under the Amended Congress Facilities
and a note payable to a bank in the Czech Republic (together, the "Facilities").
The Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Facilities. The guarantees are in effect for the periods of
the related Facilities. The Company does not provide product warranties within
the disclosure provisions of Interpretation No. 45.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities", was issued which, among other things, provides guidance on
identifying variable interest entities ("VIE") and determining when assets,
liabilities, non-controlling interest and operating results of a VIE should be
included in a company's consolidated financial statements, and also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. Certain disclosure requirements of Interpretation No. 46, if
applicable, are required for financial statements initially issued after January
31, 2003. Companies with variable interest in variable interest entities created
after January 31, 2003 were required to apply the provision of Interpretation
No. 46 immediately. Public entities with a variable interest in a variable
interest entity were required to apply the provisions of Interpretation No. 46
no later than the first interim or annual reporting period beginning after June
15, 2003. The adoption of this interpretation did not have any effect on the
Company's financial position or results of operations.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Amended Congress Facilities
and certain other facilities are outstanding, the Company has market risk
relating to such amounts because the interest rates under the Amended Congress
Facilities and those certain other facilities are variable. As of December 31,
2003, the Company's interest rate, inclusive of credit fees under the Amended
Congress Facilities approximated 4.00%. Due to the variability of the interest
rates, a hypothetical increase or decrease in the interest rates of 100 basis
points relating to the Amended Congress Facilities may result in an addition to
or reduction in interest expense of approximately $200,000 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. The Company
monitors its risk associated with the volatility of certain foreign currencies
against its functional currency, the U.S. dollar. The impact of changes in the
relationship of other currencies to the U.S. dollar in the period from March 30,
2003 to December 31, 2003 has resulted in the recognition of other income of
approximately $2.0 million. It is unknown what the effect of foreign currency
rate fluctuations will have on the Company's financial position or results of
operations in the future. If, however, there were a sustained decline of these
currencies versus the U.S. dollar, the Consolidated Financial Statements could
be materially adversely affected.
Derivative financial instruments are utilized by the Company to reduce
exposures to volatility of foreign currencies impacting the operations of its
business. The Company does not enter into financial instruments for trading or
speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company periodically enters into forward contracts to
buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts are designated as hedges at
inception and are monitored for effectiveness on a routine basis. At December
31, 2003, the Company had outstanding forward exchange contracts that mature
between January and March 2004 to purchase Mexican pesos with an aggregate
notional amount of approximately $2.7 million. The fair values of these
contracts at December 31, 2003 totaled approximately $52,000, which is recorded
as a liability on the Company's balance sheet in "other current liabilities."
The Company recorded a credit to earnings of approximately $47,000 for the nine
month period from March 30, 2003 to December 31, 2003 and the unrealized loss on
these forward contracts of approximately $52,000 was included in "accumulated
other comprehensive income" at December 31, 2003.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company periodically enters into forward contracts to
buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts are designated as hedges at inception and are monitored for
effectiveness on a routine basis. At December 31, 2003, the Company h