UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to ___________.
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Stevens Street
Greenville, South Carolina 29605
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (864) 240-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|.
The aggregate market value of the common stock held by persons other than
affiliates of the registrant (based upon the assumption, for purposes of this
computation only, that Zapata Corporation and all of the registrant's directors
and executive officers were affiliates), as of June 30, 2004, was approximately
$6,554,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court Yes |X| No |_|.
The number of shares outstanding of the registrant's common stock, as of
March 1, 2005, is as follows:
- --------------------------------------------------------------------------------
Class Number of Shares
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 5,320,147
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
NONE
1
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere herein. Statements in this Annual Report on Form 10-K that reflect
projections or expectations of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for future
operations, including those contained in "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Quantitative and Qualitative Disclosure about Market Risk," or
relating to the Company's outlook for fiscal year 2005, overall volume and
pricing trends or strategies and their anticipated results, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "approximates," "believes,"
"estimates," "intends," and "hopes" and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to the other factors noted with such forward-looking
statements, include (but are not limited to): general economic conditions in the
Company's market, including inflation, recession, interest rates and other
economic factors; casualty to or other disruption of the Company's facilities
and equipment; and other factors that generally affect the automotive industry.
Except as may be required by law, the Company expressly disclaims any obligation
to update these forward-looking statements to reflect events or circumstances
after the date of this Annual Report on Form 10-K or to reflect the occurrence
of unanticipated events.
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PART I
ITEM 1. BUSINESS
The Company
Safety Components International, Inc. (including, when the context
requires, its consolidated subsidiaries, the "Company" or "Safety Components")
was incorporated in Delaware in 1994. It is a leading low-cost, independent
supplier of automotive airbag fabric and cushions and technical fabrics with
operations in North America and Europe. The Company has recently entered into
joint ventures to produce products in China and South Africa, although
commercial production has not yet commenced in either of these locations. The
Company sells airbag fabric domestically and cushions worldwide to the major
airbag module integrators that outsource such products. The Company believes
that it is also a leading manufacturer of value-added technical fabrics used in
a variety of niche industrial and commercial applications such as fire service
apparel, ballistics material for luggage, filtration and military tents. The
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows the Company to more
effectively utilize its manufacturing assets and lower its per unit overhead
costs.
Net sales of automotive airbag cushions, automotive fabrics and technical
fabrics products (the "automotive airbag and fabrics products" business) were
approximately $247.9 million, $183.7 million and $244.3 million in the year
ended December 31, 2004, the nine month period from March 30, 2003 to December
31, 2003, and the year ended March 29, 2003, respectively. Subsequent to the
Change of Control (described below), the Company has changed its fiscal year to
a calendar year end to coincide with the fiscal year end of Zapata Corporation
("Zapata", NYSE: "ZAP"). The Company's operations were previously based on a
fifty-two or fifty-three week fiscal year ending on the Saturday closest to
March 31. As such, the period from March 30, 2003 to December 31, 2003 consists
of nine months of operations. The years ended December 31, 2004 and March 29,
2003 each consisted of twelve months of operations.
Change of Control
On September 29, 2003, Zapata filed a Schedule 13D with the Securities and
Exchange Commission (the "SEC") indicating that as of September 18, 2003 it had
acquired 2,663,905 shares of the Company's common stock which then constituted
approximately 53.7% of the issued and outstanding shares of such common stock.
As a result, a change of control of the Company (the "Change of Control")
occurred. On October 6, 2003, Zapata filed an amendment to its Schedule 13D with
the SEC, indicating that it had acquired an additional 1,498,489 shares of the
Company's common stock which, together with the shares previously acquired, then
constituted approximately 83.9% of the issued and outstanding common stock of
the Company.
The Change of Control triggered certain provisions of the Company's Stock
Option Plan, including immediate vesting of all options and an automatic change
in the exercise price of a portion of the options to $0.01. This change in
exercise price constituted a modification of the Stock Option Plan and the
Company was required to recognize a one-time, non-recurring compensation cost of
$1.4 million for the modified options, representing 126,900 options, for the
nine months ended December 31, 2003. Additionally, in lieu of re-pricing their
Class A stock options, the employment agreements of certain key executives
included a provision for a one-time, non-recurring bonus payable in the event of
a change of control. The aggregate bonus was $1.4 million and was also
recognized as an expense in 2003.
Following the Change of Control, the Company's Audit Committee and Board
of Directors determined that it was in the Company's best interest to change the
Company's fiscal year end from the last Saturday in the month of March to a
calendar-based year ending December 31 to coincide with Zapata's year end. This
change was effective as of the quarter ended December 31, 2003. At a meeting on
January 26, 2004, the Company's Board of Directors appointed two designees of
Zapata, Avram Glazer and Leonard DiSalvo, as members of the Company's Board of
Directors.
As a result of the above transactions, the consolidated federal income tax
group of the Company that existed prior to these transactions terminated and
Safety Components and its subsidiaries became members of the consolidated
federal income tax group of Zapata. In the first quarter of 2004, Zapata and the
Company entered into a Tax Sharing and Indemnity Agreement to define their
respective rights and obligations relating to federal, state and other taxes for
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taxable periods attributable to the filing of consolidated or combined income
tax returns as part of the Zapata consolidated federal income tax group.
Due to exercises of options to purchase common stock of the Company, on or
about March 31, 2004, the number of shares of common stock outstanding increased
and, as a result, Zapata's ownership was reduced to less than 80%. As a result
of Zapata's ownership of the company's outstanding common stock falling below
80%, Zapata will not consolidate the Company into Zapata's consolidated income
tax returns for periods subsequent to the first quarter of 2004. Under The Tax
Sharing and Indemnity Agreement, the Company will be consolidated into Zapata's
tax filing group for the fourth calendar quarter of 2003 and the first calendar
quarter of 2004. On January 4, 2005, the Company received notification from the
Internal Revenue Service that its plan to return to the taxpayer status
consistent to the periods prior to the Change of Control has been approved. The
Company does not expect any material financial impact to result from the change
in its tax filing status.
The Woodville Acquisition
On November 2, 2001, the Company's U.K. subsidiary, Automotive Safety
Components International Limited ("ASCIL"), acquired the airbag business
(operated under the name of Woodville Airbag Engineering and hereafter referred
to as "Woodville") of TISPP UK Limited, a subsidiary of Smiths Group PLC, to
expand its European operations. Such acquisition contributed approximately $7.8
million in sales and had a negative impact of approximately $1.1 million on
gross profit and approximately $1.5 million on operating income for the period
from November 3, 2001 to March 30, 2002. The management and business activities
of the Woodville operation were consolidated into the ASCIL operation during the
quarter ended June 28, 2003. The manufacturing process and production assets
were transferred to other European operations of the Company primarily in lower
labor cost facilities and countries.
The 2001 Restructuring
On April 10, 2000 (the "Petition Date"), the Company and certain of its
U.S. subsidiaries (collectively, the "Safety Filing Group"), filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On October 11, 2000 (the "Emergence Date"), the Safety
Filing Group emerged from Chapter 11 pursuant to the Plan of Reorganization (the
"Plan") confirmed by the Bankruptcy Court. Pursuant to the Plan, upon emergence,
all of the Company's 10-1/8% Senior Notes due 2007 (the "Notes") (an aggregate
of approximately $96.8 million, including accrued interest to the Petition Date)
were converted into 4,840,774 shares of the Company's post-bankruptcy common
stock, and the pre-bankruptcy common stock, excluding stock held by Robert A.
Zummo (former Chairman and Chief Executive Officer of the Company), was
converted into 159,226 shares of the Company's post-bankruptcy common stock,
including 39,619 shares of treasury stock, and warrants to acquire an additional
681,818 shares of such common stock (these warrants expired as of April 10,
2003). Immediately upon emergence, the Company had 5,000,000 shares of common
stock issued and 4,960,381 shares outstanding and, other than shares underlying
the warrants, no shares of common stock were reserved for issuance in respect of
claims and interests filed and allowed under the Plan. In addition, the Safety
Filing Group's trade suppliers and other creditors were paid in full, pursuant
to the terms of the Plan, within 90 days of the Emergence Date.
Automotive Airbag and Fabrics Products
Structure of the Automotive Airbag Industry
Airbag systems consist of various airbag modules and an electronic control
module, which are currently integrated by automakers into their respective
vehicles. Airbag modules generally consist of inflators, cushions, housing and
possibly trim covers and are assembled by module integrators, most of whom
produce a majority of the components required for a complete module. As the
industry has evolved, module integrators have outsourced varying portions of
non-proprietary components, such as cushions, to those companies specializing in
the production of individual components. The Company believes that its module
integrator customers will continue to outsource a portion of their cushion
requirements as they focus on the development of proprietary technologies. A
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company.
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Characteristic of the industry, the Company supplies airbag cushions to
module integrators, most of which also produce a portion of their cushion
requirements internally. As a result, the Company may compete with its customers
who supply their own internal cushion requirements. However, in most cases the
Company's customers do not produce the same cushions for the same car/truck
models for which the Company produces cushions.
Another characteristic of the airbag industry is the qualification process
for new suppliers. New suppliers that wish to produce and supply airbag cushions
or airbag fabric must undergo a rigorous qualification process, which can take
in excess of a year. The Company believes that the existence of this
qualification process can result in significant re-qualification costs for
module integrators that are required to assist the new supplier in meeting
automakers' requirements. Additionally, the Company believes module integrators
are, like their automaker customers, trying to reduce overall industry costs by
limiting the number of suppliers.
Establishment of Joint Ventures
On November 30, 2004, the Company announced that it had signed an
agreement to form a joint venture with KAP Textile Holdings SA Ltd. ("Gelvenor")
which, through its Gelvenor textiles divisions produces high technology
industrial, technical and specialized fabrics, in South Africa (the "South
Africa Joint Venture"). The Company anticipates that the South Africa Joint
Venture, which has not yet commenced commercial production, will produce
automotive airbag cushions in South Africa utilizing the fabrics produced by
Gelvenor. The initial production will be intended to satisfy the South African
domestic market, with additional production capacity available to support the
Company's growing worldwide customer base by the end of 2005. The Company owns
75% of the entity formed to conduct the operations of the South Africa Joint
Venture.
On January 4, 2005, the Company announced it had signed an agreement to
form a joint venture with Kingsway International Limited, an entity associated
with Huamao (Xiamen) Technical Textile Co., Ltd. ("Huamao") which manufactures
airbag fabrics, in China (the "China Joint Venture"). The Company anticipates
that the China Joint Venture, which has not yet commenced commercial production,
will produce automotive airbag cushions in China utilizing the fabrics produced
by Huamao. Pursuant to a technology transfer and joint venture agreement, the
Company will provide technical assistance to its partner in the development of
airbag fabrics. Production is intended to satisfy the Chinese domestic market.
The Company owns 65% of the entity formed to conduct the operations of the China
Joint Venture.
The Company has certain financial commitments related to these joint
ventures as described in "Liquidity and Capital Resources - Contractual
Obligations" below.
Products
The Company's automotive products include passenger, driver and side
(thorax) impact airbag cushions, side protection curtains, knee protection
cushions and related parts and accessory components manufactured for
installation in over 200 car and truck models sold worldwide and airbag fabric
for sale to airbag manufacturers. Sales of airbag related products (inclusive of
sales of airbag fabric) accounted for approximately 88.5% of the Company's
consolidated net sales in the fiscal year ended December 31, 2004, approximately
89.8% of the Company's consolidated net sales in the nine month period from
March 30, 2003 to December 31, 2003 and approximately 90.8% of the Company's
consolidated net sales in the fiscal year ended March 29, 2003.
The Company also manufactures a wide array of specialty technical fabrics
for consumer and industrial uses. These fabrics include: (i) protective apparel
worn by firefighters; (ii) filtration fabrics used in the aluminum, coal, steel,
cement, clay and brewing industries; (iii) woven fabrics for use by
manufacturers of coated products; (iv) specialty fabrics used in fuel cells,
bomb and cargo chutes, oil containment booms and gas diaphragms, among other
uses; (v) release liners used in tire manufacturing; and (vi) high-end luggage
fabrics, including "ballistics" fabric used in Hartman and Tumi brands of
luggage. Sales of technical related products accounted for approximately 11.5%
of the Company's consolidated net sales in the fiscal year ended December 31,
2004, approximately 10.2% of the Company's consolidated net sales in the nine
month period from March 30, 2003 to December 31, 2003 and approximately 9.2% of
the Company's consolidated net sales in the fiscal year ended March 29, 2003.
The market for the Company's technical related products is highly segmented by
product line. Marketing and sales of the Company's technical related products is
conducted by the Company's marketing and sales staff based in Greenville, South
Carolina. Manufacturing
5
of these products occurs at the South Carolina facility, using much of the same
equipment and manufacturing processes that the Company uses to produce airbag
fabric, enabling the Company to take advantage of demand requirements for the
various products by leveraging its expenditures on production retooling costs.
By manufacturing technical products using many of the same machines that weave
airbag fabric, the Company is able to more effectively utilize capacity at its
South Carolina plant and lower per unit overhead costs.
See Note 8 to the Consolidated Financial Statements for additional
financial information by product type.
Customers
The Company sells its airbag cushions to airbag module integrators in
North America and Europe for inclusion in specified model cars, generally
pursuant to contract requirements. Certain of these customers also manufacture
airbag cushions to be used in their production of airbag modules. The Company
markets and sells airbag cushions through its direct marketing and sales forces
based in South Carolina, California, Mexico, the United Kingdom and Germany.
The Company sells its fabric in North America either directly to a module
integrator or, in some cases, to a fabricator (such as the Company's own
operations), which sells a sewn airbag to the module integrator. In some cases,
particularly when the cushion requires lower air permeability to facilitate more
rapid or prolonged inflation, and to eliminate particulate burn-through caused
by hot inflators, the fabric must be coated before fabrication into airbags. The
Company also sells fabric to coating companies, which then resell the coated
fabric to either an airbag cushion fabricator (including the Company) or module
integrator. Sales are either made against purchase orders, pursuant to releases
on open purchase orders, or pursuant to short-term supply contracts generally
having durations of up to twelve months.
The Company has contractual relationships with several large module
integrators, the most significant being Autoliv, Takata and TRW, listed in
alphabetical order. The Company supplies airbag cushions and/or airbag fabric to
each of these customers based upon releases from formal purchase orders, which
typically cover periods of up to twelve months and are subject to periodic
negotiation with respect to price and quantity. The loss of any of its largest
customers could have a material adverse effect on the Company. See Note 2 of the
Consolidated Financial Statements for further information regarding the
Company's customers.
Suppliers
The Company's principal customers generally require that they approve all
suppliers of major airbag components or airbag fabric raw materials, as the case
may be. These suppliers are approved after undergoing a rigorous qualification
process on their products and manufacturing capabilities. In many cases, only
one approved source of supply exists for certain airbag components. In the event
that a sole source supplier experiences prolonged delays in product shipments or
no longer qualifies as a supplier, the Company would work together with its
customers to identify another qualified source of supply. Although alternative
sources of supply generally exist, a prolonged delay in securing an alternative
supply or in obtaining the approval by the Company's customers of any such
alternative sources of supply could adversely affect the Company's operating
results.
The raw materials for the Company's fabric operations largely consist of
synthetic yarns provided by Invista, Pharr Yarns, DuPont, Polymide High
Performance ("PHP"), and Unifi, among others. The primary yarns include nylon,
polyester and Nomex. Invista and PHP are the leading suppliers of airbag fabric
yarn to both the market and the Company. Invista supplies a majority of the
nylon yarn used in the Company's airbag fabric operations pursuant to purchase
orders or releases on open purchase orders. The loss of Invista as a supplier
could have a material adverse effect on the Company.
In addition, in connection with its European operations, the Company has
entered into an agreement with a German industrial sewing company and its
Romanian subsidiary under which the Romanian subsidiary serves as a
manufacturing subcontractor for airbag cushions. Under the terms of this
agreement, the Company provides and retains control of the manufacturing
equipment, processes and production materials and the subcontractor provides
sewing services for a price per standard minute of acceptable units basis.
6
Significant problems with, or the loss of, any key supplier or
subcontractor (see also "Risks Resulting from Foreign Operations" below for
further information) may adversely affect the Company's operating results and
ability to meet customer contracts.
Capacity
The Company manufactured and shipped over 28.8 million airbag cushions and
related components to the Company's North American and European customers during
the fiscal year ended December 31, 2004. The Company believes it has adequate
capacity to manufacture for the anticipated customer requirements of its 2005
fiscal year.
The Company's South Carolina facility produced approximately 18.5 million
yards of fabric in the fiscal year ended December 31, 2004. The Company believes
it has adequate capacity to manufacture for the anticipated customer
requirements of fiscal 2005. The Company utilizes weaving machines that are
versatile in their ability to produce a broad array of air restraint and
specialty technical fabrics for use in a large number of applications. The
ability to interchange the machines between air restraint fabric and other
specialty technical fabrics allows the Company to leverage its utilization of
plant assets.
Competition
The Company competes with several independent suppliers of airbag cushions
in the United States and Europe for sales to airbag module integrators. The
Company also competes with plants owned by its airbag module integrator
customers, which produce a substantial portion of airbag cushions for their own
consumption, although they do not generally manufacture the same airbag cushions
for the same vehicle models for which the Company manufactures. Most airbag
module integrators subcontract a portion of their requirements for airbag
cushions. The Company believes that it has good working relationships with its
customers due to its high volume and low-cost manufacturing capabilities and
consistency of quality products and service.
The Company shares the North American airbag fabric market primarily with
Milliken, Takata-Highland, Mastex, Key Safety and Autoliv. Takata-Highland, Key
Safety and Autoliv, all airbag module integrators, produce a portion or all of
their airbag fabric for use in their own airbag cushions.
The automotive airbag cushion, airbag fabric and airbag module markets are
highly competitive. Some of the Company's current and potential competitors have
greater financial and other resources than the Company. The Company competes
primarily on the basis of its price, product quality, reliability, flexibility
and capability to produce a wide range of models of passenger and driver airbag
cushions and side impact airbag curtains and cushions. In addition, the
Company's weaving plant in South Carolina has provided it with some measure of
vertical integration, enhancing its ability to compete in the automotive airbag
industry. Increased competition, as well as price reductions of airbag systems,
could adversely affect the Company's revenues and profitability.
Technical Centers
The Company has technical centers in Greenville, South Carolina; Ensenada,
Mexico; and Hildesheim, Germany. The center in Hildesheim, Germany has the
ability to conduct static and dynamic deployment testing and analysis using
high-speed video equipment and includes pendulum-testing capability, a sample
shop with manual and CNC sewing equipment, a production-style laser cutter,
volumetric measurement and analysis equipment, textile welding and other
non-sewn fastening equipment. The center also has a materials laboratory, and
can access the services of laboratory and textile personnel at the Company's
facility in Greenville, South Carolina. In North America, the module integrators
customarily perform the majority of advanced cushion testing; therefore, the
Company has not seen a need for an advanced technical center for cushions in
North America. However, all necessary validation testing and process development
testing is performed in Ensenada, Mexico. The Ensenada, Mexico technical center
consists of a testing laboratory and a dedicated prototype cell, complete with a
separate staff and equipment.
Through its textile laboratory located in Greenville, South Carolina, the
Company has the ability to test and analyze a wide range of fabrics (airbag or
other) under internationally accepted testing standards, including US-ASTM,
Europe-DIN and ISO, Asian-JIS and Underwriters NFPA. The laboratory is A2LA
accredited (ISO 17025) and certified with ISO/TS 16949 - the most important
certifications for the industry. All validation testing and analytical
7
testing of fabric is performed at this laboratory. Additionally, the Greenville
facility has prototype-manufacturing capabilities.
Qualification and Quality Control
The Company's customers require the Company to meet specific requirements
for design validation. The Company and its customers jointly participate in
design and process validations and customers must be satisfied with the
reliability and performance prior to awarding a purchase order. All standards
and requirements relating to product performance are required to be satisfied
before the Company is qualified as a supplier by its customers.
The Company maintains extensive quality control and quality assurance
systems in its North American and European automotive facilities, including
inspection and testing of all products, and is TS 16949, ISO 9001 and/or ISO
9002 certified. The more stringent TS 16949 replaces the Company's previous QS
9000 certification. The Company is currently in the process of certification for
TS 16949 for the South Africa Joint Venture and the China Joint Venture,
expecting completion by December 2005 and July 2006, respectively. The Company
also performs process capability studies and design of experiments to determine
that the manufacturing processes meet or exceed the quality levels required by
each customer.
The fabric operation's laboratories have ISO 17025 and A2LA, as well as
UL, accreditation. The Company's fabric operation is also certified under the
environmental and energy quality system ISO 14001. The Company was the first
airbag fabric manufacturer to have its entire business (not just its
manufacturing facility) certified under QS 9000.
Governmental Regulations
The Company's operations are subject to various product safety,
environmental, employee safety and wage and transportation related statutes and
regulations. The Company believes that it is in substantial compliance with
existing laws and regulations and has obtained or applied for the necessary
permits to conduct its business operations.
Product Liability
The Company is engaged in a business that could expose it to possible
claims for injury resulting from the failure of products sold by it. In the
past, there has been increased public attention to injuries and deaths of
children and small adults due to the force of the inflation of airbags. To date,
however, the Company has not been named as a defendant in any automotive product
liability lawsuit, nor been threatened with any such lawsuit. The Company
maintains product liability insurance coverage, which management believes to be
adequate. However, a successful claim brought against the Company resulting in a
product recall program or a final judgment in excess of its insurance coverage
could have a material adverse effect on the Company.
Discontinued Operations
On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". The Company's discontinued
operations supplied projectiles and other metal components for medium caliber
training and tactical ammunition used by the United States Armed Forces. The
metal components manufactured by the Company were shipped to a loading facility,
operated either by the United States government or a prime defense contractor,
which loaded the explosives, assembled the rounds and packaged the ammunition
for use. Additionally, the Company's discontinued operations manufactured small
quantities of metal airbag module components for the automotive airbag industry.
Net sales of metal and defense related products were $0 for both the fiscal year
ended December 31, 2004 and the nine month period from March 30, 2003 to
December 31, 2003 and were approximately $5.4 million in the fiscal year ended
March 29, 2003 for the discontinued operations. See Note 3 to the Consolidated
Financial Statements for more information.
Seasonality
The Company's airbag cushions and airbag fabric business is subject to the
seasonal characteristics of the automotive industry, in which, generally, there
are seasonal plant shutdowns in the third and fourth quarters of each calendar
year.
8
Backlog
The Company does not reflect an order for airbag cushions or airbag fabric
in backlog until it has received a purchase order and a material procurement
release that specifies the quantity ordered and specific delivery dates.
Generally, these orders are shipped within two to eight weeks of receipt of the
purchase order and material release. As a result, the Company does not believe
its backlog is a reliable measure of future airbag sales.
Risks Resulting from Foreign Operations
Certain of the Company's consolidated net sales are generated outside the
United States. Foreign operations and exports to foreign markets are subject to
a number of special risks including, but not limited to, risks with respect to
fluctuations in currency exchange rates, economic and political destabilization
and other disruption of markets, restrictive actions by foreign governments
(such as restrictions on transfer of funds, export duties and quotas, foreign
customs and tariffs and unexpected changes in regulatory environments), changes
in foreign laws regarding trade and investment, difficulty in obtaining
distribution and support, nationalization, the laws and policies of the United
States affecting trade, foreign investment and loans and foreign tax laws. There
can be no assurance that one or a combination of these factors will not have a
material adverse effect on the Company's ability to increase or maintain its
foreign sales or on its future results of operations.
In addition, the Company has a significant portion of its manufacturing
operations in foreign countries and purchases a portion of its raw materials
from foreign suppliers. The production costs, profit margins and competitive
position of the Company are affected by the strength of the currencies in
countries where it manufactures or purchases goods relative to the strength of
the currencies in countries where its products are sold.
Certain of the Company's operations generate net sales and incur expenses
in foreign currencies. The Company's financial results from international
operations may be affected by fluctuations in currency exchange rates. Future
fluctuations in certain currency exchange rates could adversely affect the
Company's financial results. The Company monitors its risk associated with the
volatility of certain foreign currencies against its functional currency, the
U.S. dollar. The impact of changes in the relationship of other currencies to
the U.S. dollar in the fiscal year ended December 31, 2004 has resulted in the
recognition of other income of approximately $677,000. However, it is unknown
what the effect of foreign currency rate fluctuations will have on the Company's
financial position or results of operations in the future. In certain
situations, the Company utilizes derivative financial instruments designated as
cash flow hedges to reduce exposures to volatility of foreign currencies
impacting the operation of its business. See Note 12 to the Consolidated
Financial Statements for information regarding derivatives and hedging.
See Note 8 to the Consolidated Financial Statements for additional
financial information by geographic area.
Employees
At December 31, 2004, the Company employed approximately 2,800 employees.
The Company's hourly employees in Mexico, Czech Republic and South Africa are
entitled to a federally regulated minimum wage, which is adjusted annually. The
Company's employees at its Mexican facility are unionized. In addition,
Automotive Safety Components International GmbH & Co. KG, the Company's wholly
owned German subsidiary, has a workers' council pursuant to German statutory
labor law. The Company has not experienced any work stoppages related to its
work force and considers its relations with its employees and all unions
currently representing its employees to be good.
Environmental Matters
Like similar companies, the Company's operations and properties are
subject to a wide variety of increasingly complex and stringent federal, state,
local and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). Such laws may impose joint and several
liability and may apply to conditions at properties presently or formerly owned
or operated by an entity or its predecessor as well as to conditions of
properties at which wastes or other contamination attributable to an entity or
its predecessor have been sent or otherwise come to be
9
located. The nature of the Company's operations exposes it to the risk of claims
with respect to such matters and there can be no assurance that violations of
such laws have not occurred or will not occur or that material costs or
liabilities will not be incurred in connection with such claims. Based upon its
experience to date, the Company believes that the future cost of compliance with
existing Environmental Laws and liability for known environmental claims
pursuant to such Environmental Laws, will not have a material adverse effect on
the Company's financial position, results of operations or cash flows. However,
future events, such as new information, changes in existing Environmental Laws
or their interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
material.
An undiscounted reserve of $277,000 has been included in "other long-term
liabilities" on the accompanying consolidated balance sheets for estimated
future environmental expenditures related to the Company's facility in
Greenville, South Carolina (the "Greenville facility") for conditions existing
prior to the Company's ownership of the facility. Such reserve was established
at the time the Company acquired the facility, and the amount was determined by
reference to the results of a Phase II study performed at the Greenville
facility. In addition, the Greenville facility has been identified along with
numerous other parties as a Potentially Responsible Party ("PRP") at the
Aquatech Environmental, Inc. Superfund Site. The Company believes that it is a
de minimis party with respect to the site and that future clean-up costs
incurred by the Company will not be material.
The Company has received a General Notice of Potential Liability letter
from the U.S. Environmental Protection Agency ("EPA"), dated November 22, 2004,
addressed to Valentec Wells, LLC, an inactive subsidiary ("Valentec Wells") of
the Company, regarding the RRGClayton Chemical Site (the "Site"). The EPA Notice
states that the agency has received information indicating that Valentec Wells
is a PRP for the Site pursuant to the Comprehensive Environmental Response
Compensation and Liability Act. The EPA letter indicates that Valentec Wells is
one of 73 PRPs that were selected to receive this Notice as the alleged largest
contributors of waste to the Site. The EPA Notice invited Valentec Wells to
attend PRP meetings in early December 2004 and to respond indicating the
company's willingness to perform or finance remedial response activities at the
Site. In subsequent communications, EPA has alleged that Valentec Wells may be
connected to the Site through another corporation. The Company has requested
that EPA provide any information in its possession related to the alleged
successor relationship between Valentec Wells and the other company. As of the
date of this Annual Report on Form 10-K, no information has been provided by the
EPA and the Company's inquiry into this matter has not confirmed any corporate
relationship between Valentec Wells and the other company, nor has it revealed
any information to indicate that Valentec Wells ever sent wastes to the Site.
The Company will continue to review this matter. At this time, the Company is
unable to predict the outcome or reasonably estimate a range of possible loss.
Although no assurances can be given in this regard, in the opinion of
management, no material expenditures beyond those accrued are expected to be
required for the Company's environmental control efforts and the final outcomes
of these matters are not expected to have a material adverse effect on the
Company's financial position or results of future operations. The Company
believes that it currently is in compliance with applicable environmental
regulations in all material respects. Management's opinion is based on the
advice of independent consultants on environmental matters.
Intellectual Property
The Company holds thirty-five patents and approval for five additional
patents are pending. All patents relate to technical improvements for
enhancement of product performance with respect to the Company's airbag, fabric
and technical related products. Provided that all requisite maintenance fees are
paid, the patents held by the Company will expire between the years 2011 and
2021.
Engineering, Research & Development
The Company's fabric and airbag cushions operations have maintained an
active design and development effort focused toward new and enhanced products
and manufacturing processes. The Company designs and engineers its fabrics to
meet its customers' specific applications and needs. While the component
manufacturer originates most design requirements, the Company remains dedicated
to improving the quality of existing products, as well as developing new
products for all applications. Costs associated with design and development for
fabric and airbag
10
cushions were approximately $1.5 million, $1.2 million and $1.2 million in the
year ended December 31, 2004, the nine month period from March 30, 2003 to
December 31, 2003 and the year ended March 29, 2003, respectively.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Greenville, South
Carolina in a facility owned by the Company, adjacent to its Safety Components
Fabric Technologies, Inc. ("SCFTI") manufacturing facility. The Company owns or
leases five facilities in which it manufactures airbag and technical fabrics
related products, with total plant area of approximately 1.2 million square feet
(including administrative, warehouse, engineering and research and development
areas housed at Company locations). Below is an overview of the Company's
properties at its airbag and technical fabrics related products facilities as of
December 31, 2004.
Floor Area Owned/ Lease
Location (Sq. Ft.) Leased Expiration
-------- --------- ------ ----------
Ensenada, Mexico (airbag cushions) 97,000 Leased 2005 (1)
Ensenada, Mexico (airbag cushions) 43,000 Leased 2007 (1)(2)(6)
Greenville, South Carolina (airbag and technical fabrics) 826,000 Owned N/A (1)(3)(6)
Hildesheim, Germany (airbag cushions) 70,000 Owned N/A (1)(6)
Jevicko, Czech Republic (airbag cushions) 100,000 Owned N/A (4)
Otay Mesa, California (airbag cushions) 16,000 Leased 2006 (5)(6)
Newport, Wales (European sales offices) 500 Leased (7)(6)
- ---------
(1) Manufacturing, research and development and office space
(2) Lease also provides for five-year renewal option
(3) Location of corporate offices
(4) Manufacturing and office space
(5) Finished goods distribution center and office space
(6) Location of marketing and sales offices
(7) Facility is leased on a month-to-month basis
ITEM 3. LEGAL PROCEEDINGS
As described in "The Company - The 2001 Restructuring" in Item 1, the
Company emerged from bankruptcy on October 11, 2000, and an order entering the
final decree and closing the Chapter 11 cases was signed on November 21, 2003.
The final decree is subject to a "Limited Reservation of Jurisdiction" for a
"Reporting/Fee Dispute" with the U.S. Trustee Office over administrative matters
associated with the cases. The Company has reserved $275,000 for any potential
exposure associated with the Reporting/Fee Dispute. Although no assurances can
be given in this regard, management does not expect that the Company will incur
material expenditures in addition to those reserved with respect to the
Reporting/Fee Dispute.
By letter dated November 2, 2004, a division employee, at the time a
controller for the Company's North American Automotive Group, filed a complaint
with the U.S. Department of Labor, Occupational Safety & Health Administration
("OSHA"), pursuant to Section 806 of the Corporate and Criminal Fraud
Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002 (the
"Act"), alleging that a change in his duties in September 2004 resulted from his
allegations of improprieties in the Company's operations in Mexico and
California. Neither the internal investigation conducted by management nor the
ensuing external investigation led by the Audit Committee following notification
by management of the issues raised substantiated any of the allegations. Due to
circumstances unrelated to the investigation or the complaint, the Company
terminated the employee on December 15, 2004. By letter dated December 15, 2004,
the employee amended his complaint to allege that his termination was also in
retaliation for his allegations. By letter dated February 14, 2005, the Company
was notified by OSHA that it had completed its investigation and found that
there is no reasonable cause to believe that the Company violated the Act, and
that the employee has 30 days from his receipt of such notification to request a
hearing before an Administrative Law Judge. As of the date of this Annual Report
on Form 10-K, the employee has not yet sought such a hearing to the Company's
knowledge.
11
See "Environmental Matters" in Item 1 with respect to certain
environmental proceedings involving the Company.
The Company, from time to time, becomes party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 31, 2004.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Pursuant to the Plan discussed in Item 1, the claims of the holders of the
Notes were converted into the right to receive 4,840,774 shares of the Company's
common stock on the Emergence Date (4,816,574 shares to the holders of the Notes
and 24,200 shares to the financial advisors of the holders of the Notes). The
pre-bankruptcy common stock, excluding stock held by Robert A. Zummo, the
Company's former Chairman and Chief Executive Officer, was converted into
159,226 shares of the Company's post-bankruptcy common stock, including 39,619
shares of treasury stock (for an aggregate of 5,000,000 shares issued and
4,960,381 shares outstanding post-bankruptcy) and warrants to acquire an
additional 681,818 shares of such common stock on the Emergence Date (such
warrants expired on April 10, 2003). All other options and warrants were
cancelled on the Emergence Date.
The Company's common stock is not listed on any exchange, but rather
trades on the Over-The-Counter Bulletin Board. The following table sets forth
the range of high and low prices for reported bids of the common stock during
the twelve and nine month periods ended December 31, 2004 and December 31, 2003,
respectively (the Company's two most recent fiscal years). The prices quoted for
the Over-The-Counter Bulletin Board reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
High Low
---- ---
Period from March 30, 2003 to December 31, 2003
First Quarter $ 7.50 $ 5.75
Second Quarter 11.00 7.50
Third Quarter 14.00 10.05
Year Ended December 31, 2004
First Quarter $ 17.00 $ 12.00
Second Quarter 13.50 12.00
Third Quarter 13.40 12.75
Fourth Quarter 14.00 12.75
As of March 1, 2005, there were approximately 158 holders of record of the
Company's common stock. The warrants to acquire 681,818 shares of common stock
issued by the Company, pursuant to the Plan, on the Emergence Date, expired as
of April 10, 2003.
To date, the Company has not paid any cash dividends to its stockholders
and does not currently have plans to do so in the future. Further, the Congress
Facilities (as defined below) restrict the Company's ability to pay dividends.
See the discussion of the Congress Facilities under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" below. During the three months ended December 31, 2004 the
Company did not repurchase any equity securities that were registered by the
Company pursuant to Section 12 of the Exchange Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated historical financial
data for the Company as of the dates and for the fiscal periods indicated. The
selected historical financial data for the fiscal year ended December 31, 2004,
the nine month period from March 30, 2003 to December 31, 2003, the fiscal years
ended March 29, 2003 and March 30, 2002, the period from October 11, 2000 to
March 31, 2001, and the period from March 26, 2000 to October 10, 2000 have been
derived from the audited Consolidated Financial Statements of the Company for
such periods. The presentation of certain previously reported amounts has been
reclassified to conform to the current presentation and to reflect discontinued
operations of the non-core businesses (metal and defense) as discussed in Note 3
to the Consolidated Financial Statements of the Company. The Consolidated
Financial Statements for the fiscal year ended December 31, 2004, the nine month
period from March 30, 2003 to December 31, 2003, fiscal years ended March 29,
2003 and March 30, 2002 and the period from October 11, 2000 to March 31, 2001
reflect the Company's emergence
13
from Chapter 11 and were prepared utilizing the principles of fresh start
accounting contained in the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). As a result of the implementation of
fresh start accounting, certain of the selected financial data for the fiscal
year ended December 31, 2004, the period from March 30, 2003 to December 31,
2003, fiscal years ended March 29, 2003 and March 30, 2002 and for the period
from October 11, 2000 to March 31, 2001 is not comparable to the selected
financial data of prior periods. See Note 1 to the Consolidated Financial
Statements of the Company for further discussion of the effects of fresh start
accounting on the Company's Consolidated Financial Statements. As a result of
differences in comparability, selected financial data for the "Reorganized
Company" have been separately identified from that of the "Predecessor Company."
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto, included
elsewhere in this report.
--------------------------------------------------------------------------------
In thousands, except per share data and footnotes | Predecessor
(see Notes to Selected Financial Data) Reorganized Company | Company
--------------------------------------------------------------------------------
Fiscal Year Period from Fiscal Year Fiscal Year Period from | Period from
Ended 3/30/03 to Ended Ended 10/11/00 to | 3/26/00 to
12/31/04 12/31/03 3/29/03 3/30/02 3/31/01 | 10/10/00
(12 Months) (9 Months) (12 Months) (12 Months) (6 Months) | (6 Months)
-------------------------------------------------------------------------------
INCOME STATEMENT DATA (1): |
Net sales (2) $ 247,883 $ 183,666 $ 244,338 $ 203,323 $ 92,052 | $ 109,139
Cost of sales, including depreciation 211,137 157,568 214,318 176,817 79,337 | 93,307
-------------------------------------------------------------------------------
Gross profit 36,746 26,098 30,020 26,506 12,715 | 15,832
Selling, general and administrative |
expenses 19,594 12,671 14,475 11,595 5,235 | 5,941
Research and development expenses 1,540 1,225 1,242 899 335 | 353
Compensation expense associated |
with change of control (3) -- 2,797 -- -- -- | --
Amortization of intangible assets (4) 153 106 124 900 448 | 675
-------------------------------------------------------------------------------
Operating income 15,459 9,299 14,179 13,112 6,697 | 8,863
Other (income) expense, net (1,467) (2,275) (3,446) (1,034) (327) | 828
Interest expense (5) 946 1,664 3,616 4,143 2,561 | 3,883
-------------------------------------------------------------------------------
Income from continuing operations |
before reorganization items, income |
taxes and minority interest 15,980 9,910 14,009 10,003 4,463 | 4,152
Reorganization items (6) -- -- -- -- -- | 41,740
-------------------------------------------------------------------------------
Income (loss) from continuing |
operations before income taxes |
and minority interest 15,980 9,910 14,009 10,003 4,463 | (37,588)
Income tax provision (benefit) 5,771 3,808 6,120 3,397 1,769 | (17,511)
Minority interest in loss of |
consolidated subsidiary (7) (39) -- -- -- -- | --
-------------------------------------------------------------------------------
Income (loss) from continuing operations 10,248 6,102 7,889 6,606 2,694 | (20,077)
Discontinued operations, net of taxes: |
Loss from discontinued operations -- -- -- -- -- | 1,440
Loss (gain) on disposition of |
discontinued operations (8) -- -- 2,023 2,517 1,444 | (214)
Extraordinary gain, net of taxes (9) -- -- -- -- -- | 29,370
Cumulative effect of change in accounting |
method (10) -- -- (14,651) -- -- | --
-------------------------------------------------------------------------------
Net income (loss) $ 10,248 $ 6,102 $ (8,785) $ 4,089 $ 1,250 | $ 8,067
===============================================================================
PER SHARE DATA, BASIC (11):
Income from continuing operations $ 1.97 $ 1.23 $ 1.59 $ 1.33 $ 0.54
Loss from discontinued operations -- -- (0.41) (0.51) (0.29)
Cumulative effect of change in accounting
method -- -- (2.95) -- --
----------------------------------------------------------------
Net income (loss) per common share $ 1.97 $ 1.23 $ (1.77) $ 0.82 $ 0.25
================================================================
PER SHARE DATA, DILUTED (11):
Income from continuing operations $ 1.94 $ 1.19 $ 1.59 $ 1.33 $ 0.54
Loss from discontinued operations -- -- (0.41) (0.51) (0.29)
Cumulative effect of change in accounting
method -- -- (2.95) -- --
----------------------------------------------------------------
Net income (loss) per common share $ 1.94 $ 1.19 $ (1.77) $ 0.82 $ 0.25
================================================================
Weighted average number of shares outstanding,
basic 5,206 4,973 4,960 4,960 4,960
================================================================
Weighted average number of shares outstanding,
diluted 5,294 5,119 4,960 4,960 4,960
================================================================
BALANCE SHEET DATA: Reorganized Company
12/31/04 12/31/03 3/29/03 3/30/02 3/31/01
----------------------------------------------------------------
Working capital (12) $ 37,429 $ 26,653 $ 8,016 $ 3,711 $ 27,079
Total assets 127,526 123,326 134,064 125,271 130,683
Long term debt, net of current maturities (12) 3,729 11,817 7,363 12,182 43,541
Stockholders' equity 80,524 64,029 51,913 55,838 51,943
14
Notes to Selected Financial Data:
(1) The Company did not declare dividends during any of the periods or fiscal
years presented.
(2) The growth in net sales between fiscal years 2002 and 2003 is attributable
in part to the Woodville acquisition on November 2, 2001.
(3) During the nine months ended December 31, 2003, Zapata Corporation
acquired shares of the Company's common stock that at the time of such
acquisition represented approximately 83.9% of the outstanding shares of
the Company's common stock, resulting in the Change of Control described
above in "The Company - Change of Control" in Item 1. The Change of
Control triggered certain provisions of the Company's Stock Option Plan,
including immediate vesting of all options and an automatic change in the
exercise price of a portion of the options. This change in exercise price
constituted a modification of the Stock Option Plan and the Company was
required to recognize a one-time, non-recurring non-cash compensation cost
of $1.4 million for the modified options. Additionally, the employment
agreements of certain key executives included a provision for a one-time,
non-recurring bonus payable in the event of a change of control. The
aggregate bonus, payable following the Change of Control, was $1.4
million.
(4) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", as
of March 31, 2002, the beginning of fiscal 2003, required the Company to
cease amortization of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" and goodwill, resulting in the
reduction of approximately $791,000 in amortization costs from fiscal
2002. Amortization expense for the fiscal year ended March 30, 2002 and
the period from October 11, 2000 to March 31, 2001 was approximately
$791,000 and $395,000, respectively.
(5) Contractual interest for the period from March 26, 2000 to October 10,
2000, was $8.5 million. Interest expense on the Company's Notes was
reported to the Petition Date (April 10, 2000). Such interest expense was
not reported subsequent to that date because it was not required to be
paid during the bankruptcy proceedings and was not an allowed claim under
the Plan. The difference between reported interest expense and stated
contractual interest expense of the Predecessor Company was approximately
$4.7 million for the period from March 26, 2000 to October 10, 2000.
(6) During the period from March 26, 2000 to October 10, 2000, the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7
resulted in a net charge of approximately $34.0 million. Professional fees
and expenses of $3.7 million included in Reorganization Items for the
period represent fees and expenses associated with the Company's financial
restructuring and Chapter 11 bankruptcy proceeding. The revaluation of the
Notes totaled $2.9 million, representing the write-off of related deferred
financing costs. Also included in this amount is $1.1 million of
restructuring charges that consist primarily of a charge for future
severance payments to the Company's former Chairman and Chief Executive
Officer.
(7) On November 30, 2004, the Company announced that it had signed an
agreement to form the South Africa Joint Venture for the production in
South Africa of automotive airbag cushions, utilizing the fabrics produced
by its joint venture partner. As of December 31, 2004, the South Africa
Joint Venture had not begun commercial production. Minority interest
represents the amount of loss attributable to the Company's unaffiliated
joint venture partner.
(8) On December 23, 2002, the Company completed the disposal of all operations
that it had classified as "discontinued operations". Net Sales of metal
and defense related products were approximately $0, $0, $5.4 million,
$10.5 million, 8.4 million and 12.2 million in the year ended December 31,
2004, the period from March 30, 2003 to December 31, 2003 and the years
ended March 29, 2003 and March 30, 2002, the period from October 11, 2000
to March 31, 2001, and the period from March 26, 2000 to October 10, 2000,
respectively, for the discontinued operations.
(9) During the period from March 26, 2000 to October 10, 2000, the early
extinguishment of the Notes and related accrued interest resulted in an
extraordinary gain of $29.9 million, net of income taxes of $17.5 million.
This was offset by a loss recognized in the amount of $573,000 related to
deferred financing costs associated with the early termination of the
Company's prior credit facility during the period.
(10) The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
required the Company to assess its "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation
performed upon its emergence from Chapter 11 in October 2000, and goodwill
as of March 31, 2002. The excess reorganization value and goodwill were
determined to be impaired and, under the transition guidance of SFAS No.
142, the impairment was charged to earnings as the cumulative effect of a
change in method of accounting. No tax effect was recognized, as these
items were not deductible for income tax purposes. See Note 2 to the
Consolidated Financial Statements.
(11) Share and per share data are not meaningful on or prior to October 10,
2000 due to the significant change in the capital structure that resulted
from the Plan.
(12) The decrease in working capital and long-term debt, net of current
portion, at March 29, 2003 and March 30, 2002 was principally due to the
classification of the Congress Facility (as defined below) and/or a
subordinated secured note, each due October 2003, with an outstanding
balance of $28.5 and $18.9 million at March 29, 2003 and March 30, 2002,
respectively, as a current liability at March 29, 2003 and March 30, 2002,
respectively. The Company refinanced the Congress Facility and repaid the
subordinated secured note prior to their maturity in October 2003. See
Note 5 to the Consolidated Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading low-cost independent supplier of automotive
airbag fabric and cushions, with operations in North America and Europe. The
following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
report. Except for the historical information contained herein, the discussions
in this document contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. The Company's actual results could differ materially from those
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995" regarding forward-looking information at the
beginning of this Form 10-K and, from time to time, in the Company's other
filings with the SEC.
Critical Accounting Policies
The following discussion and analysis of financial condition and results
of operations are based on the Company's Consolidated Financial Statements. A
summary of significant accounting policies is disclosed in Note 2 to the
Consolidated Financial Statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the Consolidated Financial
Statements. It is important that the reader of the financial statements
understands that actual results could differ from these estimates, assumptions
and judgments.
In addition, judgment is involved in determining which accounting policies
and estimates would be considered as "critical". Because the Company generally
does business with large, well-established customers, the Company has not
historically been, nor is it expected in the future to be, exposed to
significant bad debt or inventory losses. Accordingly, the estimates of the
allowance for bad debts and of inventory reserves are not considered to be
critical accounting policies or estimates. In addition, the Company emerged from
bankruptcy in October 2000 and revalued its tangible assets at that time.
Accordingly, estimates of tangible asset impairment are not considered to be a
critical accounting policy or estimate. We believe the following critical
accounting policies contain the most significant judgments and estimates used in
the preparation of the Consolidated Financial Statements.
Foreign Currency Translation. Financial statements of substantially all of
the Company's foreign operations are prepared using the local currency as the
functional currency. In accordance with SFAS No. 52, "Foreign Currency
Translation," translation of these foreign operations to United States dollars
occurs using the current exchange rate for balance sheet accounts and a weighted
average exchange rate for results of foreign operations. Translation gains or
losses are recognized in "accumulated other comprehensive income (loss)" as a
component of stockholders' equity in the accompanying consolidated balance
sheets. The Company's subsidiary in Mexico prepares its financial statements
using the United States dollar as the functional currency. Since the Mexico
subsidiary does not have external sales and does not own significant amounts of
inventory or fixed assets, the Company has determined that the United States
dollar is the appropriate functional currency. Accordingly, the translation
effects of the financial statements are included in the results of operations.
The Company's operations in Mexico, Germany, the United Kingdom, the Czech
Republic, China and South Africa expose the Company to currency exchange rate
risks associated with the volatility of certain foreign currencies against its
functional currency, the U.S. dollar. In the fiscal year ended December 31,
2004, the nine month period from March 30, 2003 to December 31, 2003 and the
year ended March 29, 2003, the impact of changes in the relationship of other
currencies to the U.S. dollar resulted in the recognition of other income of
approximately
16
$677,000, $2.0 million and $3.5 million, respectively. It is unknown what effect
foreign currency rate fluctuations will have on the Company's financial position
or results of operations in the future. If, however, there were a sustained
decline of these currencies versus the U.S. dollar, the Consolidated Financial
Statements could be materially adversely affected.
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Management estimates the
Company's tax assets and liabilities on a periodic basis and adjusts these
balances on a timely basis as appropriate. Management believes that it has
adequately provided for its future tax consequences based upon current facts and
circumstances and current tax law. However, should management's tax positions be
challenged and not prevail, different outcomes could result and have a
significant impact on the amounts reported in the Consolidated Statement of
Operations.
Discontinued Operations. On December 23, 2002, the Company completed the
disposal of all operations that it had classified as "discontinued operations."
As discussed in Note 3 to the Consolidated Financial Statements, the Company
reported the metal and defense businesses as discontinued operations in its
Consolidated Financial Statements as of October 10, 2000, or the measurement
date, through the sale of the final discontinued operation, Galion, Inc., on
December 23, 2002. To report the metal and defense businesses as discontinued
operations required the Company to make estimates regarding (i) the results of
operations to the expected disposal date and (ii) the expected proceeds to be
received upon sale. Based on the Company's determination that losses were
expected both from operations and upon disposal, the Company accrued substantial
charges for future losses in the years ended March 29, 2003 and March 30, 2002.
Accordingly, the businesses' net losses for the years ended March 29, 2003 and
March 30, 2002, which were incurred subsequent to the measurement date, were
applied against the accrued losses and were not recognized as losses as incurred
in the Consolidated Statements of Operations.
Goodwill Impairment. As discussed in Note 2 to the Consolidated Financial
Statements, the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", required the Company to perform
an assessment for impairment of the Company's "reorganization value in excess of
amounts allocable to identifiable assets" arising from the valuation performed
upon its emergence from Chapter 11 in October 2000 ("excess reorganization
value"), and goodwill, as of March 31, 2002. Under the transition guidance of
SFAS No. 142, the Company was required to perform its initial impairment
evaluation within six months of adopting the new standard, and any impairment
charges were to be retroactively recorded in the first quarter of the Company's
fiscal year. Other identifiable intangible assets of the Company consist of
patents that continue to be amortized over their estimated useful lives. In
accordance with SFAS No. 142, the Company compared the book value of the
Company's net assets, including the excess reorganization value and goodwill, to
the Company's fair value as of March 31, 2002. Because the fair value was lower
than the book value of the Company's net assets, excess reorganization value and
goodwill were determined to be impaired and accordingly, the carrying value of
such assets (approximately $14.7 million at March 31, 2002) was charged to
earnings as the cumulative effect of a change in method of accounting effective
March 31, 2002. There was no tax effect of the change in accounting principle,
as the excess reorganization value and goodwill were not deductible for income
tax purposes.
Outlook
As the automotive airbag industry has evolved, module integrators have
outsourced varying portions of non-proprietary components, such as cushions, to
companies such as the Company specializing in the production of individual
components. The Company believes that its module integrator customers will
continue to outsource a portion of their cushion requirements as they focus on
the development of proprietary technologies. The Company also believes that a
majority of the module integrators purchase fabric from airbag fabric producers
such as the Company. Like the automotive supply industry generally, the Company
continues to experience significant competitive pressure. For example, the
Company supplies airbag cushions and/or airbag fabric to its three most
significant customers based upon releases from formal purchase orders, which are
subject to periodic negotiation with respect to price and quantity.
Additionally, the ability of the Company to pass along raw material price
increases will be imperative for it to maintain its levels of profitability. The
Company expects that it will continue to experience competitive pricing
pressures and although it believes that it has good working relationships with
its customers due to its manufacturing capabilities, quality products and
service, it cannot give assurances that purchases by its module integrator
customers will continue at their current levels.
17
On November 30, 2004, the Company announced that it had signed an
agreement to form the South Africa Joint Venture with Gelvenor. The Company
anticipates that the South Africa Joint Venture, which has not yet commenced
commercial production, will produce automotive airbag cushions in South Africa
utilizing the fabrics produced by Gelvenor. The initial production will be
intended to satisfy the South African domestic market, with additional
production capacity available to support the Company's growing worldwide
customer base by the end of 2005. The Company owns 75% of the entity formed to
conduct the operations of the South Africa Joint Venture.
On January 4, 2005, the Company announced it had signed an agreement to
form the China Joint Venture with Kingsway International Limited, an entity
associated with Huamao. The Company anticipates that the China Joint Venture,
which has not yet commenced commercial production, will produce automotive
airbag cushions in China utilizing the fabrics produced by Huamao. Pursuant to a
technology transfer and joint venture agreement, the Company will provide
technical assistance to its partner in the development of airbag fabrics.
Production is intended to satisfy the Chinese domestic market. The Company owns
65% of the entity formed to conduct the operations of the China Joint Venture.
Results of Operations
Following the Change of Control, the Company's Audit Committee and Board
of Directors determined that it was in the Company's best interest to change the
Company's fiscal year end from the last Saturday in the month of March to a
calendar-based year ending December 31 to coincide with Zapata's year end. This
change was effective as of the quarter ended December 31, 2003. The Company's
operations were previously based on a fifty-two or fifty-three week fiscal year
ending on the Saturday closest to March 31. As such, the period from March 30,
2003 to December 31, 2003 consists of nine months of operations. To enhance
comparability, the following table summarizes operating results of the Company
for the years ended December 31, 2004 and December 31, 2003 (unaudited) and the
nine month periods from March 30, 2003 to December 31, 2003 and from March 31,
2002 to December 28, 2002 (unaudited) (in thousands):
---------------------------------------------------------------
Period from Period from
Period from 12/29/02 to Period from 3/31/02 to
1/1/04 to 12/31/03 3/30/03 to 12/28/02
12/31/04 (12 months) 12/31/03 (9 Months)
(12 months) (unaudited) (9 Months) (unaudited)
---------------------------------------------------------------
Net sales $ 247,883 $ 247,142 $ 183,666 $ 180,863
Gross profit 36,746 34,750 26,098 21,369
Income from operations 15,459 13,825 9,299 9,484
Other income, net (1,467) (3,024) (2,275) (2,822)
Interest expense 946 2,515 1,664 2,772
Income tax provision 5,771 5,472 3,808 4,456
Loss on discontinued operations, net of taxes -- 660 -- 1,363
Cumulative effect of change in method of accounting -- -- -- (14,651)
Net income (loss) 10,248 8,202 6,102 (10,886)
18
The following table sets forth certain operating results as a percentage
of net sales for the periods indicated:
---------------------------------------------------------------------
Period from Period from
Period from 12/29/02 to Period from 3/31/02 to
1/1/04 to 12/31/03 3/30/03 to 12/28/02
12/31/04 (12 months) 12/31/03 (9 Months)
(12 months) (unaudited) (9 Months) (unaudited)
---------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 14.8 14.1 14.2 11.8
Income from operations 6.2 5.6 5.1 5.2
Interest expense 0.4 1.0 0.9 1.5
Income tax provision 2.3 2.2 2.1 2.5
Net income (loss) 4.1 3.3 3.3 (6.0)
During the second quarter of 2004, one of the Company's largest raw
materials suppliers implemented a price increase of approximately 11% on raw
material yarn purchased for the Company's North America airbag fabric weaving
facility. Management has estimated the impact on the cost of raw material
purchases to be approximately $1.4 million for the year ended December 31, 2004.
The Company has not, as yet, been successful in passing along most of this
increase to its airbag cushion customers in North America and continues in its
efforts to do so, although no assurances can be given in the Company maintaining
such price levels.
During the third quarter of 2004, the Audit Committee of the Company's
Board of Directors, with the assistance of special outside counsel and a
forensic accounting firm, completed an investigation begun in July 2004 after
notification by management, based upon issues raised by an employee who claimed
improprieties in the Company's operations in Mexico and California. The
investigation of the issues raised did not substantiate any of the concerns.
Expenses related to this matter approximated $1 million for the twelve months
ended December 31, 2004 and are included in general and administrative expenses
in the accompanying condensed consolidated statements of operations.
Twelve Months Ended December 31, 2004 Compared to Twelve Months Ended December
31, 2003 (Unaudited)
Net Sales. Net sales increased $700,000, or 0.3%, to $247.9 million for
the twelve months ended December 31, 2004 compared to the twelve months ended
December 31, 2003. North American operations' net sales decreased $8.4 million
or 6.9% compared to the prior period, with the decrease principally due to
decreased demand in the North American automotive market. Net sales for European
operations increased $9.1 million or 7.4% compared to the prior period. The
increase in European net sales is due principally to the effect of changes in
foreign currency exchange rates that increased sales as expressed in U.S.
dollars by approximately $12.5 million over the amount that would have been
reported based on exchange rates in effect in the twelve months ended December
31, 2003. The favorable effect of exchange rates was offset by a reduction in
volume of approximately $3.3 million due to decreased demand in the European
automotive market.
Gross Profit. Gross profit increased $2.0 million, or 5.7%, to $36.7
million for the twelve months ended December 31, 2004 compared to the twelve
months ended December 31, 2003. Gross profit as a percentage of net sales
increased to 14.8% for the twelve months ended December 31, 2004 from 14.1% for
the twelve months ended December 31, 2003. The European operations experienced
an improvement of $4.7 million or 39.8% due to improvements in operating
efficiencies and cost savings resulting from, among other things, the Company's
closure of the Company's United Kingdom facility and transfer of production
lines to lower labor cost areas within Europe in the prior year, as well as the
favorable effect of exchange rates of approximately $1.3 million, net of
one-time lease termination costs of approximately $400,000 associated with the
closure of the Company's United Kingdom facility. The closure of the United
Kingdom facility contributed approximately $1.7 million to increased gross
profit compared to the prior year. Gross profit for North American operations
decreased approximately $2.7 million or 12.0% due primarily to price increases
on raw material of approximately $1.4 million and the sales decline noted above.
Income from Operations. Income from operations increased $1.6 million, or
11.8%, to $15.5 million for the twelve months ended December 31, 2004 compared
to the twelve months ended December 31, 2003. Income from
19
operations as a percentage of net sales increased to 6.2% for the twelve months
ended December 31, 2004 from 5.6% in the prior period. During the prior twelve
months ended December 31, 2003, the Company recognized a charge of $2.8 million
associated with the Company's Change of Control. The increase in income from
operations is attributable to the increase in gross profit discussed above,
savings of $1.2 million associated with the closure of the Company's United
Kingdom facility and the effect of the prior year's charge, offset by the
following costs included in selling, general and administrative expenses:
approximately $300,000 in one-time charges associated with the closure of the
Company's United Kingdom manufacturing facility which includes redundancy
charges and moving expenses; costs approximating $2.4 million in legal,
professional and consulting expenses regarding company financing, Sarbanes-Oxley
related and other compliance activities, including the investigation previously
discussed; approximately $566,000 in expense from the increased liability
associated with recognized gains on its deferred compensation plan assets;
approximately $440,000 in increased wage and employee benefits costs; and
approximately $600,000 in costs for implementation of new information systems.
With the possible exception of employee benefit and information systems costs,
the above items are not expected to continue at the current rate of expense for
subsequent years.
Other Income, net. The Company recognized other income, net of $1.5
million for the twelve months ended December 31, 2004, as compared to other
income, net of $3.0 million for the twelve months ended December 31, 2003. Other
income, net is realized primarily from net foreign transaction gains resulting
from the revaluation of intercompany balances between the European subsidiaries
and the U.S. parent company. The Company recorded net foreign transaction gains
of approximately $677,000 for the twelve months ended December 31, 2004,
compared to net foreign transaction gains of $2.5 million during the comparable
period in the prior period. Additionally, the Company recognized unrealized
gains on its deferred compensation plan assets of approximately $566,000. The
foreign transaction gains for the twelve months ended December 31, 2004 resulted
from favorable changes in foreign currency exchange rates of approximately 10.7%
in the December 31, 2004 exchange rates as compared to those at December 31,
2003.
Interest expense. Interest expense decreased $1.6 million, or 64.6%, to
$946,000 for the twelve months ended December 31, 2004 compared to the twelve
months ended December 31, 2003. The decrease is attributable both to a decrease
in average interest rates from 5.4% to 4.0% and a decrease in average
outstanding debt from $29.1 million to $11.5 million for the current period as
compared to the prior period.
Provision for Income Taxes. The provision for income taxes increased
$299,000 for the twelve months ended December 31, 2004 compared to the twelve
months ended December 31, 2003 due in part from an increase of $1.6 million in
pre-tax income compared to the prior year. The Company's effective tax rates for
the twelve months ended December 31, 2004 and December 31, 2003 were 36.0% and
38.2%, respectively. The lower effective tax rate for the year ended December
31, 2004 is a result of the payment of deductible foreign taxes in that year.
Discontinued Operations. No impacts from discontinued operations were
recorded during the twelve month period ended December 31, 2004 as the Company
had sold all remaining discontinued operations before December 28, 2002. Loss on
disposition of discontinued operations was $660,000 for the twelve months ended
December 31, 2003. The loss was principally due to the sale of Galion on
December 23, 2002 and included the recognition of a tax provision of
approximately $660,000 related to an adjustment of the deferred tax liabilities
of the discontinued operations.
Net Income. The Company's net income was $10.2 million for the twelve
months ended December 31, 2004, compared to net income of $8.2 million for the
twelve months ended December 31, 2003. Earnings in the current and prior periods
were a result of the items discussed above.
Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 28,
2002 (Unaudited)
Net Sales. Net sales increased $2.8 million, or 1.5%, to $183.7 million
for the nine months ended December 31, 2003 compared to the nine months ended
December 28, 2002. North American operations' net sales decreased $8.1 million
or 8.1% compared to the prior period, with the decrease principally due to
decreased demand in the North American automotive market. Net sales for European
operations increased $10.9 million or 13.5% compared to the prior period. The
increase in European net sales is due principally to the effect of changes in
foreign currency exchange rates that increased sales as expressed in U.S.
dollars by approximately $11.9 million over the amount that would have been
reported based on exchange rates in effect in the nine months ended December 28,
2002. The
20
favorable effect of exchange rates was offset by a reduction in volume of
approximately $1.0 million due to decreased demand in the European automotive
market.
Gross Profit. Gross profit increased $4.7 million, or 22.1%, to $26.1
million for the nine months ended December 31, 2003 compared to the nine months
ended December 31, 2002. The European operations experienced an improvement of
$5.2 million or 146.1% due to improvements in operating efficiencies and cost
savings of approximately $4.2 million and the favorable effect of exchange rates
of approximately $1 million. With respect to the European operations, the prior
period's results reflect losses at the Woodville operations of approximately
$1.5 million and costs of approximately $1.7 million associated with the move of
the Woodville production lines and the ramp-up of programs at other European
facilities. Gross profit for North American operations decreased approximately
$403,000 or 2.2% due, in part, to the sales decline. Gross profit as a
percentage of net sales increased to 14.2% for the nine months ended December
31, 2003 from 11.8% for the nine months ended December 28, 2002.
Income from Operations. Income from operations decreased $185,000, or
2.0%, to $9.3 million for the nine months ended December 31, 2003 compared to
the nine months ended December 28, 2002. The decrease is due to a higher selling
and administrative costs including non-recurring costs of approximately $2.8
million associated with a $1.4 million stock compensation charge and $1.4
million in executive bonuses resulting from the Change of Control, along with
other increases in general and administrative expenses. Income from operations
as a percentage of net sales decreased to 5.1% for the nine months ended
December 31, 2003 from 5.2% in the prior period. The decrease as a percentage of
net sales was due to the items discussed above.
Other Income, net. The Company recognized other income, net of $2.3
million for the nine months ended December 31, 2003, as compared to other
income, net of $2.8 million for the nine months ended December 28, 2002. Other
income, net is realized primarily from net foreign transaction gains resulting
from the revaluation of intercompany balances between the European subsidiaries
and the U.S. parent company. The Company recorded net foreign transaction gains
of $2.0 million for the nine months ended December 31, 2003, compared to net
foreign transaction gains of $800,000 during the comparable period in the prior
period. The foreign transaction gains resulted from favorable changes in foreign
currency exchange rates of approximately 15.3% in the December 31, 2003 exchange
rates as compared to those at December 28, 2002.
Interest expense. Interest expense decreased $1.1 million, or 39.9%, to
$1.7 million for the nine months ended December 31, 2003 compared to the nine
months ended December 28, 2002. The decrease is attributable both to a decrease
in average interest rates from 5.8% to 5.4% and a decrease in average
outstanding debt from $44.6 million to $26.8 million for the current period as
compared to the prior period.
Provision for Income Taxes. The provision for income taxes decreased
$648,000 for the nine months ended December 31, 2003 compared to the nine months
ended December 28, 2002 due primarily to the following reasons: (i) the
recording in the prior period of a $350,000 provision for income taxes for the
Company's German subsidiary resulting from an examination performed by the
German taxing authorities covering years 1997 through 1999 and (ii) the
reduction of $200,000 in income taxes in Mexico from lower pre-tax income for
the nine months ended December 31, 2003 as compared to the prior period. The
Company's effective tax rates for the nine months ended December 31, 2003
compared to the nine months ended December 28, 2002 were 38.4% and 43.7%,
respectively. The effective tax rate for the nine months ended December 28, 2002
is higher than the statutory tax rate due to the tax examination related reserve
noted above and foreign earnings taxed at different rates.
Discontinued Operations. No impacts from discontinued operations were
recorded during the nine month period ended December 31, 2003 as the Company had
sold all remaining discontinued operations in the nine months ended December 28,
2002. Loss on disposition of discontinued operations was $1.4 million for the
nine months ended December 28, 2002. The loss was principally due to the sale of
Galion on December 23, 2002 and included the recognition of a tax provision of
approximately $660,000 related to an adjustment of the deferred tax liabilities
of the discontinued operations.
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of the Company's fair value, the
Company's "Reorganization value in excess of identifiable assets" and goodwill
were determined to be impaired and, accordingly, the total amount of those
assets (approximately $14.7 million) was written off as the
21
cumulative effect of a change in method of accounting in the nine months ended
December 28, 2002 (see further discussion under "New Accounting Standards").
There was no tax effect of the change in accounting principle, as the excess
reorganization value and goodwill were not deductible for income tax purposes.
Net Income. The Company's net income was $6.1 million for the nine months
ended December 31, 2003, compared to net loss of $10.9 million for the nine
months ended December 28, 2002. The current period earnings were a result of the
items discussed above. The net loss in the prior period was primarily a result
of the write-off of $14.7 million of reorganization value in excess of
identifiable assets and goodwill, as discussed above, recognized as a cumulative
effect of a change in method of accounting resulting from the adoption of SFAS
No. 142.
Seasonality and Inflation
The automotive operations are subject to the seasonal characteristics of
the automotive industry in which there are generally seasonal plant shutdowns in
the third and fourth quarters of each calendar year. Excluding the impact of the
increase in raw material cost noted above, the Company does not believe that its
operations to date have been materially affected by inflation.
Liquidity and Capital Resources
It is expected that the Company's equipment and working capital
requirements will continue to increase in order to sustain its growth of
operations. The Company expects to fund its liquidity requirements through a
combination of cash flows from operations, equipment financing and the use of
the Company's line of credit.
Cash Flows
Net cash provided by operating activities was approximately $13.4 million
for the twelve months ended December 31, 2004. The cash provided by operating
activities resulted principally from income from operations combined with
non-cash additions of depreciation offset by increases in accounts receivable
and inventories and a decrease in accounts payable. The increase in accounts
receivable is due primarily to a change in payment terms with a significant
customer in return for foregoing early payment discounts, and the decrease in
accounts payable resulted from a change in payment terms with a significant
supplier in return for prompt payment discounts and payments of trade balances
with certain significant suppliers. The Company is not currently aware of other
factors that will result in a change in its current terms with customers and
suppliers. The decrease from 2003 to 2004 in cash provided by operating
activities is primarily a result of the increases in the Company's asset
balances in 2004, whereas in 2003 there were decreases in asset balances.
Net cash used in continuing operations for investing activities was $6.5
million for the twelve months ended December 31, 2004. Capital expenditures in
2004 and 2003 were necessitated primarily by new programs awarded by the
Company's customers. The Company expects to incur capital expenditures of
approximately $12.0 million in 2005 to support new programs from the Company's
customers and to invest in new technology and its joint venture operations.
Net cash used in continuing operations for financing activities in the
twelve month period ended December 31, 2004 was $8.8 million due principally to
net repayments on the Congress Facilities and payments on various other debt and
long-term obligations of $10.1 million offset in part by proceeds from the
exercise of the Company's stock options of $1.3 million.
The activities discussed above in conjunction with the favorable effects
of foreign exchange rates of $1.8 million, resulted in a net decrease in cash
and cash equivalents of approximately $192,000 in the year ended December 31,
2004.
Credit Facilities
The Company has a credit facility with Congress Financial Corporation
(Southern), a subsidiary of Wachovia Bank, National Association ("Congress").
The Company has an aggregate $35.0 million revolving credit facility with
Congress (the "Congress Revolver") expiring October 8, 2006. Under the Congress
Revolver, the Company may
22
borrow up to the lesser of (a) $35.0 million or (b) 85% of eligible accounts
receivable, plus 60% of eligible finished goods, plus 50% of eligible raw
materials. The amount outstanding under the Congress Revolver at December 31,
2004 was $105,000. The Congress Revolver also includes a $5.0 million letter of
credit facility, which was unutilized at December 31, 2004.
In addition, the Company has a term facility with Congress (the "Congress
Term A loan") under which $2.0 million was outstanding as of December 31, 2004.
The Congress Term A loan is payable in equal monthly installments of
approximately $45,000, with the unpaid principal amount due on October 8, 2006.
Additional amounts are not available for borrowing under the Congress Term A
loan. In addition to the Congress Revolver and the Congress Term A loan, the
Company also has an additional term loan (the "Congress Term B loan" and,
collectively with the Congress Revolver and the Congress Term A loan, the
"Congress Facilities") which is undrawn and under which $3.5 million was
available as of December 31, 2004. At December 31, 2004, the Company's
availability for additional borrowings (based on the maximum allowable limit)
under the Congress Revolver and the Congress Term B loan was approximately $38.4
million.
The interest rate on the Congress Revolver and Congress Term A loan is
variable, depending on the amount of the Company's Excess Availability (as
defined in the Congress Facilities) at any particular time and the ratio of the
Company's EBITDA, less certain capital expenditures made by the Company, to
certain fixed charges of the Company (the "Fixed Charge Coverage Ratio"). The
Company may make borrowings based on the prime rate as described in the Congress
Facilities (the "Prime Rate") or the LIBOR rate as described in the Congress
Facilities, in each case with an applicable margin applied to the rate. The
Congress Term B loan bears interest at the Prime Rate plus 3%. At December 31,
2004, the margin on Prime Rate loans was 0.0% and the margin on LIBOR rate loans
was 1.75%. The Company is required to pay a monthly unused line fee of 0.25% per
annum on the unutilized portion of the Congress Revolver and a monthly fee equal
to 1.75% per annum of the amount of any outstanding letters of credit.
Under the Congress Revolver and Congress Term A loan, the Company is
subject to a covenant that requires it to maintain a certain tangible net worth.
To the extent that the Company has borrowings outstanding under the Congress
Term B loan, it is subject to additional financial covenants that require the
Company: (i) to maintain EBITDA of no less than certain specified amounts, (ii)
to maintain a Fixed Charge Coverage Ratio of no less than a specified amount,
(iii) to maintain a ratio of certain indebtedness to EBITDA not in excess of a
specified amount, and (iv) not to make capital expenditures in excess of
specified amounts. In addition, the Company would be required to repay the
Congress Term B loan to the extent of certain excess cash flow.
The Congress Facilities also impose limitations upon the Company's ability
to, among other things, incur indebtedness (including capitalized lease
arrangements); become or remain liable with respect to any guaranty; make loans;
acquire investments; declare or make dividends or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At December 31, 2004, the Company was in
compliance with all financial covenants. At December 31, 2004, the Company was
also in compliance with all non-financial covenants other than a covenant
requiring the Company to dissolve certain inactive subsidiaries. The
non-compliance under this covenant was waived by Congress. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facilities.
In July 2004, the Company and Congress entered into an amendment to the
Congress Facilities which, among other things, allows the Company to include its
Romanian subsidiary and entities formed in connection with the China Joint
Venture within the group of affiliates to which the Company is permitted to make
loans up to an aggregate specified amount. In October 2004, the Company and
Congress entered into an amendment and consent to the Congress Facilities
pursuant to which Congress consented to certain actions by the Company, and the
Company and Congress agreed to certain amendments to the Congress Facilities, in
each case in order to permit the Company to enter into the South Africa Joint
Venture. This amendment also, among other things, allows the Company to include
the entity formed to conduct this joint venture within the group of affiliates
to which the Company is permitted to make loans up to an aggregate specified
amount.
Other Long-term Obligations
On March 28, 2002, the Company's Czech Republic subsidiary and HVB Bank
Czech Republic, successor to Bank Austria, entered into an amendment to its $7.5
million mortgage note facility dated June 4, 1997. This
23
amendment extended the mortgage facility for five years, established an interest
rate of 1.7% over EURIBOR (EURIBOR was 2.42% at December 31, 2004), requires
monthly payments of approximately $89,000 and is secured by the real estate
assets of the Company's subsidiary in the Czech Republic. The Company has
guaranteed the repayment of up to $500,000 of the obligations of this subsidiary
with respect to this facility. At December 31, 2004, approximately $2.6 million
was outstanding under the HVB facility.
On July 10, 1998, the Company entered into a $10.0 million financing
arrangement with KeyCorp Leasing, a division of Key Corporate Capital Inc.
("KeyCorp"). The KeyCorp financing agreement has a seven-year term, bears
interest at a rate of 1.25% over LIBOR (LIBOR was 2.42% at December 31, 2004),
requires monthly payments of approximately $150,000 and is secured by certain
equipment located at the Company's Greenville, South Carolina facility. At
December 31, 2004, approximately $1.0 million was outstanding under the KeyCorp
facility.
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at December 31, 2004.
Payments due by Period (in thousands)
------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Contractual obligations Total 1 year years years 5 years
------------------------------------------------------------
Long term debt $ 6,268 $ 2,870 $ 3,398 -- --
Capital lease obligations 1,244 561 683 -- --
Operating leases 1,340 660 609 64 7
-----------------------------------------------------------
Total $ 8,852 $ 4,091 $ 4,690 $ 64 $ 7
===========================================================
The amounts of contractual obligations set forth above include an assumed annual
interest rate of 5% for long term debt and an assumed range of interest rates of
between 6% and 8.5% for capital lease obligations.
Additionally, the Company has material commitments for funding of the
South Africa Joint Venture through the combination of machinery and equipment
and related in-kind services of $1.2 million and the intention, but not an
obligation, for funding of its China Joint Venture through potential loan or
capital contributions of up to $6.5 million as of December 31, 2004.
Off-Balance Sheet Arrangements
As of December 31, 2004, the Company does not have any off-balance sheet
arrangements that are material to its financial condition, results of operations
or cash flows as defined by Item 303(a) (4) of Regulation S-K promulgated by the
SEC. The Company enters into derivative foreign contracts as noted and included
below in "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A
of this report.
Guarantees
FASB Interpretation No. 45 provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has issued
and specific disclosures related to product warranties. As of December 31, 2004,
the Company and various consolidated subsidiaries of the Company are borrowers
under the Congress Facilities (as defined above) and a note payable to a bank in
the Czech Republic (together, the "Facilities"). The Facilities are guaranteed
by either the Company and/or various consolidated subsidiaries of the Company in
the event that the borrower(s) default under the provisions of the Facilities.
The guarantees are in effect for the duration of the related Facilities. The
Company does not provide product warranties within the disclosure provisions of
Interpretation No. 45.
24
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs,
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is in the process of evaluating the effect, if any, that the adoption of
SFAS No. 151 will have on its financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is in the process of evaluating the effect, if
any, that the adoption of SFAS No. 153 will have on its financial position and
results of operations.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a p