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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 333-11801
Commission File No. 333-11801-01
AETNA INDUSTRIES, INC.
MS ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
Delaware 38-200-7550 / 13-337-9803
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24331 Sherwood Avenue, P.O. Box 3067, Centerline, Michigan 48015-0067
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 759-2200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 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
-----
The registrant is a privately-held corporation. As such, there is no practicable
method to determine the aggregate market value of the voting stock held by
non-affiliates of the Registrant.
As of March 1, 1998, there were 1,000 shares of Aetna Industries, Inc. common
stock outstanding and 383,409 shares of MS Acquisition Corp. Class A common
stock and 516,590 shares of MS Acquisition Corp. Class B common stock
outstanding.
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TABLE OF ADDITIONAL REGISTRANTS
I.R.S. EMPLOYEE
EXACT NAME OF REGISTRANT AS JURISDICTION OF IDENTIFICATION
SPECIFIED IN ITS CHARTER INCORPORATION NUMBER
None.
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PART I
Item 1. Business
GENERAL
Aetna Industries, Inc. ("Aetna") is a wholly-owned indirect subsidiary of MS
Acquisition Corp. ("MS Acquisition") and is a wholly-owned direct subsidiary of
Aetna Holdings, Inc. ("Aetna Holdings") and has two wholly-owned subsidiaries,
Aetna Export Sales Corp. ("Export"), which does not have any significant
independent operations, and Aetna Manufacturing Canada Ltd ("Aetna Canada"). MS
Acquisition is a holding company that was formed for the sole purpose of
purchasing Aetna and does not have any significant assets or liabilities, other
than preferred stock, junior subordinated debentures and certain accruals. Aetna
is a leading Tier I or direct supplier of high-quality modules, welded
subassemblies and stampings used as original equipment components by original
equipment manufacturers ("OEMs") in the North American automobile industry.
Aetna's core products, which in 1997 represented over 85% of its net production
sales, are complex, high value-added modules and welded subassemblies. With
wide-bed press capabilities in excess of 150 inches, Aetna is one of a small
group of independent suppliers capable of producing large bed-size stampings and
assemblies. Aetna produces over 200 products that are used in the production of
52 different models (23 different platforms). 89% of Aetna's 1997 net production
sales were derived from sales of products manufactured for the light truck
sector (consisting of sport utility vehicles, mini-vans, utility vans and light
pick-up trucks), which has recently experienced stronger growth than the
passenger car sector. Aetna has been a direct supplier to Chrysler Corporation
("Chrysler") and General Motors Corporation ("GM") since 1941, with net
production sales to these customers in 1997 accounting for 66% and 25%,
respectively, of Aetna's and MS Acquisition's net production sales. Since 1991,
Aetna has implemented new manufacturing and marketing practices that management
believes have improved Aetna's manufacturing productivity and quality and have
enhanced and expanded Aetna's customer relationships.
The OEM Supplier Industry
Management believes that Aetna is benefiting from certain industry-wide
structural developments that are altering the competitive environment for parts
suppliers to OEMs, including cost-driven purchasing by OEMs of integrated
modules and subassemblies. Because of increasing global competition, OEMs have
been upgrading their supplier policies, reducing the number of strategic
suppliers that may bid for awards and outsourcing an increasing percentage of
their production requirements. As required by Chrysler and GM, Aetna has
obtained company-wide QS9000 certification by July 31, 1997 and December 31,
1997, respectively.
Strategic suppliers to OEMs for Chrysler and GM are invited to bid on the
manufacture and assembly of specific products to be incorporated in both new and
existing automotive platforms. If the model or platform already exists, the
current supplier may be favored by the OEM because of the supplier's familiarity
with the existing product as well as its existing investment in the
manufacturing process and tooling. As a result, it is considered unusual for
incumbent suppliers to be removed from existing contracts, particularly if they
have consistently been able to deliver the existing products on time, within
agreed quality levels and at competitive prices.
On new platforms, there has been an increasing trend toward involving potential
suppliers much earlier in the design and development process in order to
encourage the suppliers to share some of the design and development
responsibility. Management believes that early involvement in the design and
engineering of new components affords Aetna a competitive advantage in securing
new business and provides its customers with significant cost reduction
opportunities. Once selected, an OEM supplier generally manufactures and/or
purchases the necessary tooling and supplies the product on a sole-source basis
for the life of a vehicle model or platform, which typically ranges from five to
seven years. In most cases, it will be at least two years before a Tier I OEM
supplier sees its products incorporated into new models or platforms.
Consequently, the key success factors for suppliers to OEMs have changed from
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pure cost minimization to total program management that encompasses
state-of-the-art design, manufacture and delivery of high-quality products at
competitive prices.
Business Strategy
Aetna has developed and is implementing a business strategy to enhance the
effectiveness of its operating strengths, to respond to industry-wide structural
developments in the OEM parts supplier industry and to increase sales and
profitability. The Company's sales are separated into two distinct categories:
"net production sales" refers to its core business of stampings and welded
modules and assemblies; "net sales" include production parts plus tooling and
prototype sales. Key elements of Aetna's strategy with regards to its core
business are as follows:
- - FOCUS ON HIGH-GROWTH VEHICLE CATEGORIES. While Aetna's products are
generally used on a diverse group of automotive platforms (23) and models
(52), Aetna's sales and marketing efforts have been directed towards
sectors of the automotive market that have experienced strong consumer
demand and growth in sales. In 1997, 89% or $179.3 million of Aetna's and
MS Acquisition's net production sales were derived from sales of products
manufactured for sport utility vehicles, mini-vans, utility vans and light
pick-up trucks, versus 87% or $173.1 million in 1996. 57% of Aetna's and MS
Acquisition's net production sales in 1997 were derived from the sale of
products manufactured for sport utility vehicles as compared to 57% in
1996.
- - PRODUCTION OF MORE COMPLEX, HIGH VALUE-ADDED ASSEMBLIES. Aetna's business
strategy includes seeking awards for complex, high value-added modules and
welded subassemblies which typically generate higher dollar content per
vehicle for Aetna than individual stampings. In 1997, modules and welded
subassemblies accounted for approximately 85% of Aetna's and MS
Acquisition's total net production sales, versus 96% in 1996. Structural
changes within the automotive manufacturing industry have substantially
increased the reliance of OEMs on purchasing integrated modules and
subassemblies from independent suppliers such as Aetna. Management believes
that this continuing shift will create new opportunities for Aetna to
utilize its capability to produce large bed-size stampings and assemblies,
along with its broad range of services, including process and design
engineering capabilities and low-cost quality manufacturing. An example of
a complex module with sophisticated engineering requirements is the rear
underbody module for the new generation Chrysler Jeep Grand Cherokee due
out in model year 1999.
- - LOW-COST STRUCTURE. An integral part of Aetna's business strategy has been
to achieve a low-cost structure by maximizing asset utilization, reducing
manufacturing costs and rationalizing Aetna's component parts and services
supplier base. In 1997, Aetna's adjusted net production sales per employee
and per square foot of manufacturing space were $135,637 and $314,
respectively. Aetna's average labor rate for hourly employees of
approximately $15 per hour, inclusive of benefits, is substantially below
the comparable average labor rate of approximately $40 per hour of its OEM
customers. This low labor cost structure enables Aetna to provide its
customers with a cost-effective source of modules and welded subassemblies
and has enabled Aetna to participate in the OEMs' outsourcing of an
increasing percentage of their component needs. Aetna has also benefited
from steel purchasing arrangements with Chrysler and GM that allow Aetna to
pass through price changes to these customers. As a result of these
arrangements, the effect of changes in the cost of steel, which represented
35% of Aetna's and MS Acquisition's net production sales in 1997, has been
substantially mitigated. Moreover, Aetna purchases certain component parts
and services for its modules and subassemblies, which in 1997 represented
approximately 16% of net production sales. Aetna believes that it will be
able to achieve further cost reductions by implementing its strategy of
reducing its component parts and services supplier base to those suppliers
who are able to provide continuous quality improvement on a cost effective
basis. Similar to the way Aetna's customers have achieved cost reductions
by concentrating their purchases with larger, more cost-effective stamping
suppliers, Aetna plans to implement a program concentrating purchases of
small components (such as fasteners, small stampings, and weld supplies)
and outside services (such as
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painting, plating and heat treating) with a select number of suppliers. In
addition to pricing, these suppliers will be judged on overall quality,
stocking policies and delivery capabilities, ability to communicate data
electronically, and the ability to implement continuous cost reduction
programs.
- - AETNA PRODUCTION SYSTEM. Aetna has implemented the "Aetna Production
System", a production process which is based upon the "Total Elimination of
Waste" manufacturing philosophy. Aetna's manufacturing processes have been
realigned to streamline work flow, achieve flexibility, promote quality and
lower manufacturing costs. Aetna has developed a cellular manufacturing
strategy by producing and assembling in a single location all of the
stampings that comprise a module or subassembly. As a result of Aetna's
commitment to quality and its investment in quality assurance education and
control systems, none of Aetna's products has been subject to a recall. All
of Aetna's manufacturing facilities have achieved QS 9000 certification,
the standard recently adopted by AIAG (the "Automotive Industry Action
Group"). Chrysler and GM announced that beginning July 31, 1997 and
December 31, 1997, respectively, they would allow only Tier I suppliers
with QS 9000 certification to bid on new manufacturing business. As
required by Chrysler and GM, Aetna obtained company-wide QS9000
certification by July 31, 1997 and December 31, 1997, respectively.
Products
Aetna manufactures, assembles and assists in the design of its core products
which consist of a broad range of complex, high value-added modules and welded
subassemblies, including floor pans and ladders, radiator supports, frame
extensions, bumpers and crossmembers. In recent years, Aetna has focused on
producing modules and welded subassemblies as OEMs have increasingly relied on
outside suppliers of these components in order to contain rising labor and
production costs. 85% of Aetna's and MS Acquisition's 1997 net production sales,
compared to 96% in 1996, were generated by complex, high value-added modules and
welded subassemblies. Aetna produces over 200 products on 23 different platforms
(52 different models) in its nine plants at five manufacturing locations. 89% of
Aetna's and MS Acquisition's 1997 net production sales were derived from
products manufactured for sport utility vehicles, mini-vans, utility vans and
light pick-up trucks, showing an increase from the 87% in 1996.
Aetna's multiple press lines and flexible manufacturing capacity enable it to
produce a broad array of products, including smaller stampings, such as oil
pans, wheel retainers and headlight brackets, and intermediate-sized stampings,
such as crossmembers, rails, heat shields, wheelhouses and door hinge pillars.
Aetna's wide-bed presses (i.e., over 150 inches) make it one of approximately
six independent suppliers capable of producing large bed-size stampings and
assemblies. Aetna also has some roll-forming production capabilities which are
utilized in conjunction with the manufacture of complete modules and
subassemblies.
Customers
Management believes that Aetna's long-standing industry relationships are based
on its reputation for low cost, quality products and on-time service. Aetna's
primary customers are Chrysler and GM, which accounted for approximately 66% and
25% of 1997 net production sales, respectively. Aetna has been a direct supplier
to GM and Chrysler since 1941, and Aetna has long-standing relationships with
buying and engineering personnel at both companies. For both Chrysler and GM,
Aetna has been designated a "strategic supplier" for stamping and assembly work,
as part of a limited group of preferred suppliers invited to bid for platform
work. Aetna has been producing the rear floor pan module for the Jeep Grand
Cherokee underbody since the model's introduction in 1992, and produces modules
and subassemblies for Chrysler's standard Jeep Cherokee and other vehicles. More
recently, Aetna was also awarded the rear floor pan module for the new
generation Jeep Grand Cherokee due out in model year 1999. Aetna is also one of
GM's strategic stamping suppliers, and produces modules, subassemblies and
details for GM's passenger car, mini-van and light truck platforms.
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Sales and Marketing
Aetna's marketing efforts are currently concentrated on the light truck sector
(consisting of sport utility vehicles, mini-vans, utility vans and light pick-up
trucks), one of the fastest growing sectors in vehicle sales. Aetna's and MS
Acquisition's combined net production sales of products used in the light truck
sector increased from $173.4 million in 1996 to $179.8 million in 1997.
Aetna competes for work both at the beginning of the development of new model
platforms and upon the redesign of existing models. New model development
generally begins two to four years prior to the marketing of these models to the
public. Module, subassembly and stamping jobs are generally awarded one to three
years prior to the initial production period. Once a producer has been
designated to supply parts to a new program, it will generally continue to be a
sole source supplier for these parts for the life of the program. In the case of
Chrysler and GM, anticipated production volumes are generally confirmed three
months in advance, and releases are given to Aetna on a weekly basis. Typically,
these arrangements remain in place for the production life of a car or truck
platform and continue through a platform's redesign period. Production generally
runs five to seven years, but on occasion can be substantially longer or
shorter, and then ceases with the discontinuance of the respective model.
Aetna has increasingly been partnering with OEMs during the early stages of
platform development. OEMs have focused on shortening design cycles and reducing
design and production costs, and have involved component suppliers earlier in
the process of designing a vehicle. Aetna has been increasingly given the
opportunity to participate in the design of subassemblies, such as the floor pan
and ladder subassembly, radiator supports and crossmember assemblies, which are
designed at an early stage in the development of new vehicles or model
revisions. This has resulted in opportunities to add additional value by
furnishing engineering and process design services and managing the subassembly
process for the manufacturer. It also creates opportunities for early
identification of a broad range of components and related subassemblies which
could be manufactured by Aetna. Partnering also involves sharing with the OEMs
tooling, design and other start-up costs.
Aetna also seeks work producing components of existing vehicle models previously
made by an OEM in-house. Production by outside suppliers allows OEMs to free-up
critical capacity which can be redeployed in other areas, in particular during
the final years of model production when additional in-house capacity is
required for the try-out of an OEM's new vehicle models. Aetna's sales of
value-added modules and subassemblies have increased in part as a result of its
availability for and successful completion of this type of "factory assist"
work. For example, Aetna's factory assist work on the standard Chrysler Jeep
Cherokee led to its selection for subsequent platform work in connection with
the Chrysler Jeep Grand Cherokee and the redesigned Chrysler Jeep Grand Cherokee
platforms. Aetna does not issue express warranties to the purchasers of its
products. However, Aetna may be subject to warranty obligations as part of
standard purchasing terms and conditions used by its OEM customers. For example,
Chrysler's Facilities and Materials Purchasing General Terms and Conditions
provide that suppliers to Chrysler are to indemnify and hold Chrysler harmless
against all claims and liabilities resulting from negligence of the supplier,
its employees or its subcontractors. None of Aetna's products has ever been
subject to a recall.
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Manufacturing
Aetna has supported its "Total Elimination of Waste" philosophy by instituting
the "Aetna Production System", a closed loop production planning methodology
based on QS 9000 quality standards, and by realigning its manufacturing
processes in order to monitor more effectively and control labor and overhead
costs and to ensure the maximum utilization of production resources. In
addition, Aetna has introduced a cellular manufacturing strategy which has
consisted of consolidating all detailed stampings that comprise a module or
subassembly into a single production location. For example, Aetna relocated its
roll-forming equipment from separate locations, allowing Aetna to increase its
production capacity while reducing production space. Aetna believes these
changes in its production system have improved scheduling flexibility, lowered
inventory carrying costs, increased the utilization of manufacturing floor
space, improved scheduling efficiencies and productivity and reduced fixed costs
and product costs. Three key programs have been instituted as part of the Aetna
Production System:
- - JUST-IN-TIME MANUFACTURING. Aetna has a progressive production strategy
based on a just-in-time ("Just-in-Time" or "JIT") manufacturing process
specifically designed to promote efficient production and eliminate
various unnecessary costs. Just-in-Time manufacturing is characterized by
flexible work center scheduling as well as vendor scheduling, quality "in
place" as opposed to inspection of vendor deliveries and reduced work
queues and inventory levels. These productivity improvements in the
manufacturing process have helped lower indirect labor costs associated
with setup time.
- - CERTIFIED QUALITY STANDARDS. As a result of Aetna's commitment to quality
and its investment in quality assurance education and control systems,
none of Aetna's products has been subject to a recall. All of Aetna's
manufacturing facilities have achieved the QS 9000 certification, the
standard recently adopted by the AIAG. As required by Chrysler and GM,
Aetna had obtained company-wide QS9000 certification by July 31, 1997 and
December 31, 1997, respectively.
- - MANUFACTURING RESOURCE PLANNING II. As OEMs continue to rely on outside
suppliers for modules and subassemblies, production planning and inventory
management have become increasingly important factors in Aetna's
competitiveness. In order to control costs, respond to shifting OEM
production demands and develop a more efficient inventory management and
production planning process, Aetna has instituted a closed-loop
manufacturing resource planning program which uses OEM releases to
generate forecasts and assign the material and labor required for
production on a weekly basis.
Suppliers and Raw Materials
Since 1994, Aetna has participated in Chrysler's "Extended Enterprise" program,
a collaborative program undertaken by Chrysler with its Tier I suppliers
designed to promote, between such Tier I suppliers and their respective Tier II
suppliers, production and sales practices which are comparable to those required
by Chrysler of its Tier I suppliers. As a result, Aetna continues to rationalize
its component parts and services supplier base. Aetna believes that it will be
able to maintain and achieve further cost reduction by continuing its strategy
of reducing its supplier base to those suppliers who are able to provide
continuous quality improvement on a cost-effective basis.
Aetna's principal raw material is steel, which represented 35% of Aetna's and MS
Acquisition's net production sales in 1997. Aetna's purchasing department
typically buys approximately 15,000 tons per month of flat-rolled steel. Steel
coil purchases include quantities of hot-rolled, cold-rolled, high strength
galvanized, aluminized and stainless, depending upon production requirements.
Aetna currently participates in steel buying programs with both Chrysler and GM
under which Aetna has substantially mitigated the effects of steel price
volatility and is provided a steady source of steel. Aetna
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believes that on a going forward basis, both Chrysler and GM will continue these
arrangements so that Aetna will not recognize a steel price increase unless it
receives a matching sales price increase from the OEM.
Competition
Aetna currently competes for large-scale production work with a limited group of
approximately five independent suppliers that have the physical assets and
technical skills to produce large bed-size stampings and assemblies. Competitors
with wide bed-size presses (i.e., over 150 inches) and substantial technical
resources include The Budd Company, Oxford Automotive, Magna International Inc.,
Active Tool & Manufacturing Co., Inc. and Mayflower, plc. Moreover, Aetna
believes that the high fixed asset and set-up costs associated with production
of large-sized metal stamping and subassemblies are likely to limit the number
of OEM parts suppliers entering the large-scale stampings market.
Employees
As of December 28, 1997, Aetna's workforce included 1,483 employees of which 291
were salaried workers and 1,192 were hourly paid employees. Aetna believes that
relations with its employees are good. Aetna's hourly employees are covered by
six collective bargaining agreements with two locals of the United Auto Workers
(the "UAW"). Of the six collective bargaining agreements, two will expire within
one year and are thus subject to re-negotiation at the option of Aetna or the
UAW. The collective bargaining agreement covering 40 hourly employees of Aetna's
PJ division expired on February 9, 1998 and was successfully re-negotiated to
expire on February 9, 1999.
Environmental Matters
Aetna is subject to a wide range of evolving federal, state and local
environmental laws and regulations relating to the protection of the
environment, worker health and safety and the emission, discharge, storage,
treatment and disposal of hazardous materials. The laws include the Clean Air
Act, the Resource Conservation and Recovery Act, the Federal Water Pollution
Control Act and the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund" or "CERCLA").
Aetna believes that it is in material compliance with applicable federal, state
and local environmental laws and regulations. Compliance with these laws and
regulations has not in the past had any material adverse effect on Aetna's
financial condition or results of operations, however, the effect of such
compliance in the future cannot be determined.
CERCLA imposes strict, joint and several liability upon owners or operators of
facilities at, from or to which a release of hazardous substances has occurred,
upon parties who generated hazardous substances that were released at such
facilities and upon parties who arranged for the transportation or disposal of
hazardous substances to such facilities. A majority of states have adopted
"Superfund" statutes similar to and, in some cases, more stringent than CERCLA.
Due to Aetna's current and historic use, generation and disposal of hazardous
substances and petroleum products, the possibility exists that spills and
releases of such substances may have occurred at certain of Aetna's facilities
with respect to which Aetna could incur liability under CERCLA or similar state
laws. Aetna could also be subject to liability under CERCLA or similar state
laws as a result of its generation and off-site disposal of such substances. To
date, Aetna's liability under CERCLA and similar state laws has not had a
material adverse effect on Aetna's financial condition or results of operations;
however, the effect of any such liabilities on Aetna in the future cannot be
determined.
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Item 2. Properties
Aetna and MS Acquisition are headquartered in Centerline, Michigan, a suburb of
Detroit. Aetna currently owns or leases a total of approximately seventeen
properties, including four parcels of land housing its blanking, stamping,
roll-forming and assembly operations, as well as its warehousing and shipping
functions and administrative offices for various functional departments. All but
one of Aetna's manufacturing facilities are located within one mile of its
headquarters, while the remaining manufacturing facility and the product
development center are located within eight miles of its headquarters. Aetna
continually seeks to reduce its costs and increase the efficiency of its
operations through maximizing utilization of its facilities. Management believes
that its facilities and equipment are in good condition and are adequate for
present and anticipated future operations.
Item 3. Legal Proceedings
Aetna is from time to time involved in routine litigation incident to its
operations. Aetna believes that the litigation currently pending or threatened
against it will not have a material adverse effect on its consolidated financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholders
Matters
There is no established trading market for the common stock of Aetna or MS
Acquisition.
As of December 28, 1997, Aetna Holdings was the only holder of the common stock
of Aetna. Aetna Holdings in turn is a wholly-owned subsidiary of MS Acquisition,
a privately owned company, the capital stock of which is held by Citicorp
Venture Capital, Ltd. ("CVC"), members of management and other private
investors. There have been no dividends declared on the stock.
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Item 6. Selected Financial Data
The following table sets forth selected historical financial data of Aetna and
MS Acquisition for the five years ended December 28, 1997.
<TABLE>
<CAPTION>
AETNA MS ACQUISITION AETNA MS ACQUISITION AETNA AND MS ACQUISITION
----- -------------- ----- -------------- -------------------------------
FISCAL YEAR
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1997 1997 1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 205,741 $ 205,741 $ 211,462 $ 211,462 $ 211,905 $ 204,850 $ 162,908
Cost of sales 181,336 181,336 180,998 180,998 183,542 172,428 139,499
Gross profit 24,405 24,405 30,464 30,464 28,363 32,422 23,409
Selling, general and
administrative expenses 17,602 17,615 15,644 15,650 13,331 12,898 12,544
Operating profit 6,803 6,790 14,820 14,814 15,032 19,524 10,864
Interest expense, net 10,263 11,148 9,022 9,406 8,579 8,929 9,020
Income (loss) before effect of
accounting changes and
extraordinary item(a) (2,361) (2,974) 3,693 3,436 4,576 6,595 915
Net income (loss) (2,361) (2,974) 2,540 2,283 4,576 6,595 (3,856)
OTHER FINANCIAL DATA
Depreciation and
amortization 9,917 9,917 7,965 7,965 6,579 6,150 6,009
Capital expenditures 10,725 10,725 7,023 7,023 10,103 6,125 3,474
Cash flows from operating
activities (4,207) (5,151) 1,893 1,893 14,564 22,040 13,156
Cash flows from investing
activities (10,603) (10,603) (6,447) (6,447) (10,252) (6,454) (4,337)
Cash flows from financing
activities 10,822 11,766 8,274 8,274 (4,184) (15,433) (9,401)
Ratio of earnings to fixed
charges (b) -- -- 1.5 1.5 1.7 2.1 1.2
</TABLE>
<TABLE>
<CAPTION>
AETNA AND MS ACQUISITION
FISCAL YEAR END
------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA- AETNA
Total assets $ 143,069 $ 129,058 $ 118,242 $ 113,331 $ 109,587
Long-term debt 85,000 85,000 57,741 57,744 69,238
Stockholder's equity (deficit) (5,886) (1,140) 7,402 2,827 (3,768)
BALANCE SHEET DATA- MS ACQUISITION
Total assets $ 142,843 $ 128,418 $ 118,242 $ 113,331 $ 109,587
Long-term debt 85,000 85,000 57,741 57,744 69,238
Stockholders' equity (deficit) (27,569) (23,245) 4,994 728 (5,597)
</TABLE>
(a) Effective December 28, 1992, Aetna and MS Acquisition adopted SFAS No.
109, "Accounting for Income Taxes", which resulted in a one-time,
non-cash, after tax charge of $4,771. During the third quarter of 1996,
Aetna and MS Acquisition prepaid existing subordinated debt resulting
in an after-tax charge of $1,153.
(b) For purposes of the ratio of earnings to fixed charges, (i) earnings
include earnings before income taxes, the effect of changes in
accounting and fixed charges and (ii) fixed charges include interest on
all indebtedness, amortization of deferred financing costs and the
portion of rental expense (one-third) that Aetna and MS Acquisition
believe to be representative of interest. Aetna's and MS Acquisition
earnings were insufficient to cover fixed charges by $3.5 million and
$4.4 million, respectively for the year ended December 28, 1997.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Aetna is a wholly-owned indirect subsidiary of MS Acquisition and is a
wholly-owned, direct subsidiary of Aetna Holdings and has two wholly-owned
subsidiaries, Export and Aetna Canada. MS Acquisition is a holding company that
was formed for the sole purpose of purchasing Aetna and does not have any
significant operations, other than its investment in its subsidiaries, assets or
liabilities, other than preferred stock, junior subordinated debentures and
certain accruals. Aetna is a leading Tier I supplier of high-quality modules,
welded subassemblies and stampings used as original equipment components by OEMs
in the production of sport utility vehicles, mini-vans, utility vans, light
pick-up trucks and passenger cars. Aetna's core products include complex, high
value-added modules and welded subassemblies, such as rear floor pan modules
that form a section of a vehicle underbody, and individual stampings, such as
oil pans, wheel retainers, headlight brackets, crossmembers, rails, heat shields
and door hinge pillars. Aetna's manufacturing processes include roll forming,
blanking and stamping and, since 1991, Aetna has implemented new manufacturing
processes including a cellular manufacturing strategy that has increased
production capacity and labor efficiency. Aetna regularly pursues and receives
long-term OEM factory assist jobs, producing components of existing vehicle
models previously made by an OEM in-house. OEM factory assist jobs can be the
result of (i) short term production requirements prior to or during model
change-overs which allow the OEMs to retool their plants, (ii) cost reduction
initiatives resulting in increased outsourcing by OEMs or (iii) capacity
constraints after the introduction of a new platform. Aetna also participates
with its OEM customers in process engineering activities.
On August 13, 1996, Aetna issued $85 million of 11-7/8% Senior Notes due 2006
(the "Notes"). The proceeds of this issuance were used to (a) repay all of the
outstanding indebtedness, accrued interest and prepayment penalties of Aetna (b)
to fund $11.1 million payable to former stockholders of MS Acquisition in
connection with a recapitalization of MS Acquisition, (c) to pay approximately
$651,000 to terminate certain outstanding employee options, (d) to pay fees and
expenses of approximately $5 million in connection with the foregoing
recapitalization and financing transactions, (e) to pay approximately $570,000
of bonuses and accrued compensation to certain directors and officers of Aetna,
(f) to pay $250,000 in accrued management fees and (g) for general corporate
purposes.
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<PAGE> 12
Results of Operations
The following table sets forth, for the periods indicated, Aetna's and MS
Acquisition's statement of operations expressed as a percentage of net sales.
This table and subsequent discussions should be read in conjunction with the
consolidated financial statements and related notes thereto of Aetna and MS
Acquisition.
<TABLE>
<CAPTION>
AETNA AND MS
AETNA MS ACQUISITION AETNA MS ACQUISITION ACQUISITION
1997 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.1 88.1 85.6 85.6 86.6
Gross profit 11.9 11.9 14.4 14.4 13.4
Selling, general &
administrative expenses 8.6 8.6 7.4 7.4 6.3
Operating profit 3.3 3.3 7.0 7.0 7.1
Interest expense 5.0 5.4 4.3 4.4 4.0
Income (loss) before income taxes
and extraordinary item (1.7) (2.1) 2.7 2.6 3.1
Income tax provision (credit) (0.5) (0.7) 1.0 1.0 0.9
Extraordinary item 0.5 0.5
Net income (loss) (1.2) (1.4)% 1.2% 1.1% 2.2%
</TABLE>
TWELVE MONTHS ENDED DECEMBER 28, 1997 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 29, 1996
NET SALES: Net sales for Aetna and MS Acquisition for the twelve months ended
December 28, 1997 were $205.7 million, down slightly from net sales of $211.5
million for the same period in 1996. Production sales increased $1.8 million
while tooling sales decreased $7.5 million. The increase in production sales was
principally due to increased Chrysler mini-van sales and factory assist work.
Partially offsetting this increase was the planned phase out of two programs in
1996: a cargo van floor pan and side rail assemblies and a small truck door beam
program during the second quarter of 1996. Tooling sales in 1996 were favorably
impacted by prototypes and tooling for Jeep Grand Cherokee work.
GROSS PROFIT: Aetna's and MS Acquisition's gross profit was $24.4 million or
11.9% of net sales, for the twelve months ended December 28, 1997, compared to
$30.5 million or 14.4% of net sales, for the twelve months ended December 29,
1996. The decrease in gross profit from the prior year was due to inefficiencies
related to short-term factory assist work.
SELLING GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: For the twelve months
ended December 28, 1997, Aetna's and MS Acquisition's SG&A expenses were $17.6
million, or 8.6% of sales, compared to $15.6 million, or 7.4% of net sales, for
the same period in 1996. As a percentage of sales, the increase was due to
additional engineering and quality assurance staff in support of new platforms.
INTEREST EXPENSE: Aetna's interest expense for the twelve months ended December
28, 1997 was $10.3 million, or 5.0% of net sales, compared to $9.0 million, or
4.3% of net sales, for the twelve months ended December 29, 1996. MS Acquisition
also had additional interest expense of $0.9 million, or 0.4% of net sales which
is attributed to the 11% junior subordinated debentures of Aetna Holdings due
2007 (the "Junior Subordinated Debentures"). The increase in both Aetna's and MS
Acquisition's interest expense is attributable to increased levels of debt
outstanding in 1997 as compared to the prior year.
12
<PAGE> 13
INCOME TAXES: The credits for income taxes for Aetna and MS Acquisition for the
twelve months ended December 28, 1997 were $1.1 million and $1.4 million,
respectively, with effective rates of 31.8%, as compared to provisions of $2.1
million and $2.0 million, for Aetna and MS Acquisition, respectively, with
effective tax rates of 36.3% in the same period of the prior year. The effective
tax rates in both periods and for both Aetna and MS Acquisition differed from
the statutory rate due principally to the effect of non-deductible amortization
of cost in excess of assets acquired. In addition, the prior year effective tax
rates include research and development tax credits.
EXTRAORDINARY ITEM: During the third quarter of 1996, Aetna and MS Acquisition
prepaid the existing subordinated debt. The resulting prepayment penalty has
been shown as an extraordinary item in the accompanying statement of operations.
TWELVE MONTHS ENDED DECEMBER 29, 1996 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1995
NET SALES: Net sales for Aetna and MS Acquisition for the twelve months ended
December 29, 1996 were $211.5 million, down slightly from net sales of $211.9
million for the same period in 1995. Production sales decreased $8.0 million
while tooling sales increased $7.6 million. The decrease in production sales was
principally due to the planned successful completion of a factory assist job
which ran for 16 months from early 1994 to mid-1995. Partially offsetting this
decrease was an increase of 10.8% in net sales to Chrysler (excluding factory
assist work). Net sales to GM decreased 12% in 1996 compared to 1995 as a result
of the planned phase out of the cargo van program offset by higher sales on two
new passenger car platforms. The decrease in total sales was also offset by two
factory assist jobs awarded in the fourth quarter of 1996.
GROSS PROFIT: Aetna's and MS Acquisition's gross profit was $30.5 million, or
14.4% of net sales, for the twelve months ended December 29, 1996, compared to
$28.4 million or 13.4% of net sales, for the twelve months ended December 31,
1995. Cost reduction programs implemented in the fourth quarter of 1995 resulted
in a 1.1% reduction of manufacturing labor and overhead costs as a percentage of
sales in 1996.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES: For the twelve months ended
December 29, 1996, Aetna's and MS Acquisition's SG&A expenses were $15.6
million, or 7.4% of net sales, up 17.3% from $13.3 million, or 6.3% of net
sales, for the same period of the prior year. SG&A expenses were negatively
impacted by $0.6 million of non-recurring costs associated with the issuance of
$85.0 million in Senior Notes and other related costs, $0.4 million of bad debt
expense and additional engineering expenses of $1.2 million to support new
platform awards.
INTEREST EXPENSE: Aetna's interest expense for the twelve months ended December
29, 1996 was $9.0 million, or 4.3% of net sales, compared to $8.6 million, or
4.0% of net sales, for the twelve months ended December 31, 1995. MS Acquisition
also had additional interest expense of $0.4 million, or 0.1% of net sales,
which is attributed to the Junior Subordinated Debentures. The increase in both
Aetna's and MS Acquisition's interest expense is attributable to increased
levels of debt outstanding in 1996 as compared to the prior year.
INCOME TAXES: The provision for income taxes for Aetna and MS Acquisition for
the twelve months ended December 29, 1996 were $2.1 million and $2.0 million,
respectively, with effective rates of 36.3% and 36.5%, respectively, as compared
to tax provisions of 1.9 million for Aetna and MS Acquisition with effective tax
rates of (29.0%) in the same period of the prior year. The prior year effective
tax rate was lower than the statutory rate primarily as a result of the effect
of the graduated rates on the deferred tax balances and the reversal of reserves
no longer required, offset by the impact of non-deductible amortization of cost
in excess of assets acquired. The current year effective tax rate primarily
reflects the impact of non-deductible amortization of cost in excess of assets
acquired.
13
<PAGE> 14
EXTRAORDINARY ITEM: During the third quarter of 1996, Aetna and MS Acquisition
prepaid the existing subordinated debt. The resulting prepayment penalty has
been shown as an extraordinary item in the accompanying statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
Aetna's principal capital requirements are to fund working capital needs, to
meet required debt payments and to complete planned maintenance and expansion
expenditures. At December 28, 1997, Aetna had $20.2 million available under its
Credit Agreement dated as of May 2, 1996 among Aetna, MS Acquisition, Aetna
Holdings, Export and NBD Bank, as amended (the "Senior Revolving Credit
Facility"). Management currently anticipates that operating cash flow, together
with available borrowings under the Senior Revolving Credit Facility, will be
sufficient to meet working capital requirements, capital expenditure
requirements, and interest requirements on its debt obligations through June 30,
1999 the current term of the Senior Revolving Credit Facility. During 1998, the
Company anticipates securing an additional $20.0 million to its existing
revolving credit facility to support Saturn tooling expenditure requirements.
Net cash flow used for operations for Aetna and MS Acquisition aggregated $4.2
million and $5.2 million, respectively, for the twelve months ended December 28,
1997 as compared to net cash provided by operations of $1.9 million for the same
period in the prior year. The decrease for 1997 as compared to 1996 was
attributable to a decrease in net income and an increase in tooling inventory
for new Mitsubishi and Saturn platforms as well as the new Jeep Grand Cherokee
("WJ") prototypes at December 28, 1997. The decrease was partially offset by an
increase in accounts payable due to the construction of Plant 10 which will be
used in the production of the (WJ).
Aetna's and MS Acquisition's net cash flow from investing activities consisted
principally of capital expenditures of $10.7 million for the twelve months ended
December 28, 1997 as compared to $7.0 million for the same period in the prior
year. Major capital projects for 1997 were the completion of Plant 10 and the
renovation of Plant 7 which will be used to stamp the majority of the new Saturn
Innovate. Major capital projects during 1996 included construction of a new
facility for $2.9 million, the completion of the rear suspension weld assembly
line for approximately $0.8 million, die tables installed in Plant 2 of $0.5
million, automation of the mini-van production line for $0.2 million and various
other additions and improvements aggregating $2.6 million.
Net cash flows used by Aetna and MS Acquisition for financing activities totaled
$10.8 million and $11.8 million, respectively, for the twelve months ended
December 28, 1997 as compared $8.3 million for the same period in 1996. Cash
provided by financing activities in 1997 consisted primarily of increases in the
Senior Revolving Credit Facility. Cash flows in 1996 represent principally the
net cash outflows for the repayment of long-term debt of $49.2 million and
dividends of $11.1 million, offset by the proceeds of the issuance of Notes
aggregating $85.0 million.
To the extent dividends to Aetna Holdings, which fund cash interest payments on
the Junior Subordinated, Debentures and cash payments on the unfunded
contractual obligations to former option holders, are permitted under the
Indenture dated as of August 1, 1996 among Aetna, MS Acquisition, Aetna
Holdings, Export and Norwest Bank of Minnesota National Association, as trustee,
pursuant to which the Notes were issued (the "Indenture") and the Senior
Revolving Credit Facility, interest on the Junior Subordinated Debentures and
the contractual obligations will be funded by cash dividends by Aetna to Aetna
Holdings. Such dividends would be approximately $1.0 million annually.
Additionally, up to $2.5 million in aggregate principal amount of the Junior
Subordinated Debentures will be required to be redeemed by Aetna Holdings from
time to time to the extent dividends to Aetna Holdings are permitted to be paid
under the Indenture and the Senior Revolving Credit Facility. The Indenture
relative to the Notes restricts the ability for Aetna or Export to make
distributions to MS Acquisition or Aetna Holdings. Such distributions are not
permitted if (i) Aetna is in default under the Indenture, (ii) Aetna is not
permitted to incur additional indebtedness as set forth in the Indenture, or
(iii) the
14
<PAGE> 15
aggregated amount of the distributions (including the proposed distribution)
made subsequent to August 13, 1996 exceed the sum of 50% of the cumulative
consolidated net income (or if cumulative consolidated net income is a loss,
minus 100% of such loss) of Aetna earned subsequent to August 13, 1996 plus 100%
of any aggregate net cash proceeds received subsequent to August 13, 1996
relating to any sale of Aetna's capital stock. In 1997, Aetna declared dividends
to Aetna Holdings which then paid $2.4 million of cash in pre-payments of
principal on these debentures and obligations on behalf of Aetna Holdings.
Aetna's liquidity is affected by both the cyclical nature of its business and
levels of net sales with its two major customers. The ability to meet working
capital requirements and capital expenditure requirements and service debt
obligations will depend upon future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond control.
Inflation
Aetna and MS Acquisition do not believe that inflation has had any material
effect on their business over the past three years.
Aetna currently participates in steel buying programs with both Chrysler and GM
under which Aetna has substantially mitigated the effects of steel price
volatility and is provided a steady source of steel. Aetna believes that on a
going forward basis, both Chrysler and GM will continue these arrangements so
that Aetna will not recognize a steel price increase unless it receives a
matching sales price increase from the OEM.
Year 2000
Aetna has conducted a review of its computer systems to identify those areas
that could be affected by the "Year 2000" issue and is developing a plan to
resolve the issue. Aetna believes that, by modifying existing software and
obtaining new releases of licensed software, the Year 2000 problem can be
resolved without significant operational difficulties. The financial impact is
not anticipated to be material to the results of operations, financial position
or cash flows or Aetna or MS Acquisition.
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted. The Act contains amendments to the Securities Act of 1933
and the Securities Exchange Act of 1934 which provide protection from liability
in private lawsuits for "forward-looking" statements made by persons specified
in the Act. Aetna and MS Acquisition desire to take advantage of the "safe
harbor" provisions of the Act.
Aetna and MS Acquisition wish to caution readers that with the exception of
historical matters, the matters discussed in this Annual Report are
forward-looking statements that involve risks and uncertainties, including but
not limited to factors related to the highly competitive nature of the
automotive supplier industry and its sensitivity to changes in general economic
conditions, the results of financing efforts and other factors discussed in
Aetna's and MS Acquisition's filings with the Securities and Exchange
Commission. Such factors could affect Aetna's and MS Acquisition's actual
results and could cause their actual results during 1998 and beyond to differ
materially from those represented in any forward-looking statement made by or on
behalf of Aetna or MS Acquisition.
15
<PAGE> 16
Item 7A. Disclosure of Quantitative and Qualitative Information About Market
Risks
Not applicable.
Item 8. Financial Statements
The consolidated financial statements (together with independent accountants'
report) of Aetna and MS Acquisition are included on pages F-2 through F-30 of
this report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information and ages as of March 1, 1998
for each of the directors and executive officers of Aetna and MS Acquisition.
Each individual serves in the same capacities with Aetna, MS Acquisition and
Aetna Holdings. There are no arrangements or understandings between any officer
and any other person pursuant to which the officer was or is to be selected.
NAME AND AGE POSITION WITH AETNA AND MS ACQUISITION
Ueli Spring, 47 Director, President and Chief Executive Officer
Harold Brown, 48 Director, Chief Financial Officer, Vice President,
Finance and Secretary
Gary Easterly, 49 Executive Vice President and Chief Operating Officer
Daniel Pierce, 55 Vice President, Human Resources
Edward Lawson, 43 Vice President, Quality Assurance
David Thal, 39 Vice President, Product Development
Ralph Bredenbeck, 57 Vice President, Tool and Assembly
Richard Chatterton, 66 Vice President, Manufacturing
Michael Delaney, 43 Director
David Howe, 33 Director
Richard Puricelli, 60 Director
The Board of Directors of Aetna, Aetna Holdings and MS Acquisition each consists
of five directors who serve until the next annual meeting of stockholders or
until a successor is duly elected. Executive officers of Aetna, Aetna Holdings
and MS Acquisition serve at the discretion of the Board of Directors.
The Board of Directors of Export consists of four directors who serve until the
next annual meeting of stockholders or until a successor is duly elected. The
current directors of Export are David Howe, Harold Brown, Graham Dunn, age 50,
and Edward Rogers, age 38. They have been directors of Export since August 13,
1996, August 13, 1996, March 9, 1993 and August 15, 1991, respectively. Mr.
Howe is the President of Export. Mr. Brown is Treasurer and Secretary of
Export. Each of Mr. Dunn and Mr. Rogers serves as an Assistant Secretary of
Export. Executive Officers of Export serve at the discretion of its Board of
Directors.
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<PAGE> 17
Mr. Ueli Spring has served as Chief Executive Officer and President of Aetna
since 1994. From 1990 to 1994, Mr. Spring served as Executive Vice President and
Chief Operating Officer of Aetna. Mr. Spring has been a director of Aetna since
September 1990. From 1986 to 1987, he served as President of the Cosma
International Group of Magna International Inc. ("Magna") and then served as
Chief Operating Officer of the group from 1987 to 1990. From 1984 to 1986, he
served as Director of Manufacturing with Magna. In 1972, Mr. Spring joined the
Oetiker operations and later became Vice President from 1980 to 1984. Mr. Spring
received his degree in Tool & Die Engineering from the University Ticinese di
Trevano, Switzerland.
Mr. Harold Brown has served as Vice President of Finance of Aetna since joining
Aetna in 1992. Mr. Brown has been a director of Aetna since August 1996. From
1990 to 1992, he was Controller in charge of U.S. operations at AVX Kyocera
Corp. From 1985 to 1989, Mr. Brown served as Vice President of Finance at APV
Baker Perkins plc after serving as Manager of Financial Analysis from 1982 to
1985. From 1977 to 1982, Mr. Brown held various planning, marketing and sales
positions with Cooper Industries Inc. Mr. Brown received an AB in Economics from
the University of North Carolina and an MBA from Duke University. From 1972 to
1975, he served as a Lieutenant, Supply Corps in the United States Naval
Reserve.
Mr. Gary Easterly has served as Executive Vice President and Chief Operating
Officer of Aetna since March 1997. He served as Vice President of Manufacturing
of Aetna from 1988 to 1997 and has been employed by Aetna since 1987. From 1966
to 1987, Mr. Easterly served as Director of Quality Assurance, Quality
Engineering and Production Superintendent for GM's Buick Motor Division. Mr.
Easterly received a BS degree in Industrial Engineering from GMI Institute and
an MA degree in Administration from Central Michigan University.
Mr. Daniel Pierce has served as Vice President of Human Resources of Aetna since
1987 and has been employed by Aetna since 1973. From 1968 to 1973, Mr. Pierce
was Employee Relations Manager at the Demco Division of Indianhead Corp. Mr.
Pierce holds an MA degree in Industrial Relations from the University of
Michigan.
Mr. Edward Lawson has served as Vice President of Quality Assurance of Aetna
since 1989 and has been employed by Aetna since 1986. From 1980 to 1985, Mr.
Lawson was Director of Quality Assurance at Regal Stamping Co. He received a BS
degree in Mechanical Engineering from Mid-Warwickshire College in England.
Mr. David Thal has served as Vice President of Product Development of Aetna
since 1995. From 1993 to 1995, Mr. Thal served as Project Manager of Aetna's
Production System and has been employed by Aetna since 1980 serving as Sherwood
Plant Manager, Quality Assurance Manager, Manufacturing Project Engineer,
Engineering Manager and Sales Manager. Mr. Thal received a BGS degree in
Psychology and Computer Science from the University of Michigan.
Mr. Ralph Bredenbeck has served as Vice President of Tool and Assembly
Engineering of Aetna since 1995. From 1989 to 1995, Mr. Bredenbeck served as
Chief Die Engineer of Aetna. Before joining Aetna, Mr. Bredenbeck served in
various positions at Spartanburg Steel Products Inc. (formerly, Firestone Steel
Products Inc.) from 1967 to 1989, including Director of Engineering and Manager
of Production Engineering. Mr. Bredenbeck received a BS degree in Mechanical
Engineering from Ohio University and is a registered Professional Engineer.
Mr. Richard Chatterton has served as Vice President of Manufacturing of Aetna
since May of 1997. Mr. Chatterton was Vice-President of Operations for FKI PLC,
from 1993 to 1997. His career has spanned 45 years in various manufacturing
positions including Manufacturing Director of Automobile Assembly Plants for
AMC/Jeep Corp. and President of BJC joint venture between Beijing Auto-Works
China and Jeep Corporation. Mr. Chatterton has a BS degree in Mechanical
Engineering from Milwaukee School of Engineering and a MBA from the University
of Chicago and is also a registered Tool and Die Maker.
17
<PAGE> 18
Mr. Michael Delaney has been a director of Aetna and MS Acquisition since August
1993. Since 1989, Mr. Delaney has been a Vice President of CVC. From 1986
through 1989 he was Vice President of Citicorp Mergers and Acquisitions. Mr.
Delaney serves on the board of directors of Delco Remy International, Inc., JAC
Holdings, Sybron Chemicals, Inc., Palomar Technologies, Inc., Farm Fresh Inc.,
AmeriSource Health Corporation, GVC Holdings, Cort Business Services, Inc.,
Enterprise Media Inc., FF Holdings Corporation, SC Processing, Inc. and Triumph
Holdings, Inc. Mr. Delaney is a graduate of Penn State University and The
Wharton School.
Mr. David Howe has been a director of Aetna and MS Acquisition since August
1993. Since 1993, Mr. Howe has been an investment professional with CVC. From
1990 through 1993 he was employed at Butler Capital Corp. as an investment
professional. He serves on the board of directors of Copes-Vulcan Inc., Cable
Systems International Inc., Sinter Metals Inc., Milk Specialties Company,
America-Italian Pasta Company and Brake-Pro Inc. He also represents Citicorp at
the board of directors of Del Monte Foods Company. Mr. Howe is a graduate of
Harvard College and Harvard Business School.
Mr. Richard Puricelli has been a director of Aetna since January 1998. Since
March, 1997, Mr. Puricelli has been Chairman of JAC Products. He joined JAC
Products in 1995 as an outside director. Prior to joining JAC Products, Mr.
Puricelli served as President of Modern Engineering from 1995 through 1997. He
also serves on the board of directors of IKS Corporation. Mr. Puricelli is a
graduate of St. Louis University and Washington University.
Mr. Graham Dunn currently serves as an Assistant Secretary and a director of
Export. Mr. Dunn has been an Administration Manager and Financial Controller of
Trident Trust Company (V.I.) Ltd. since July 1992. Prior to joining Trident
Trust Company, Mr. Dunn was self-employed.
Mr. Edward Rogers currently serves as an Assistant Secretary and a director of
Export. Mr. Rogers has been a Manager and Vice President of Trident Trust
Company (V.I.) Ltd. Since August 1991. Prior to joining Trident Trust Company,
Mr. Rogers was employed as an offshore company trust administrator in the
Isle-of-Man.
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<PAGE> 19
Item 11. Executive Compensation
DIRECTOR COMPENSATION
Directors do not receive compensation other than reimbursement of expenses for
attending meetings of the Board of Directors or committee meetings.
The table below shows information concerning cash and noncash compensation for
Aetna and MS Acquisition's Chief Executive Officer and their four most highly
compensated executive officers (other than the Chief Executive Officer) in
office on December 28, 1997 (collectively, the "Named Executive Officers") for
each of the last three fiscal years.
AETNA INDUSTRIES, INC.
MS ACQUISITION CORP.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
RESTRICTED SECURITIES LONG-TERM
NAME AND OTHER ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARSPLAN PAYOUTS COMP
POSITION YEAR ($) ($) ($) ($) (#)(1) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ueli Spring, 1997 $225,002 $135,000 $ $ $ $ $
President and 1996 225,976 274,000 - - - - -
Chief Executive 1995 222,117 200,000 - - - - -
Officer
Harold Brown, 1997 133,147 32,000
VP Finance 1996 113,355 169,000 - - - - -
Chief Financial 1995 104,755 65,000 - - - - -
Officer
Gary Easterly, 1997 125,276 35,000
Chief Operating 1996 108,411 92,800 - - - - -
Officer 1995 100,172 65,000 - - - - -
Daniel Pierce, 1997 114,669 24,000
VP Human 1996 95,526 25,200 - - - - -
Resources 1995 87,735 40,000 - - - - -
David Thal, 1997 110,776 24,000
VP Product 1996 90,235 25,200 - - - - -
Engineering 1995 72,402 40,000 - - - - -
</TABLE>
(1) Shares of Class A Common Stock of MS Acquisition.
BONUS PROGRAM
Aetna maintains a Quality Assurance Bonus Program under which Production
Managers and Plant Floor Managers are eligible to receive an annual bonus of up
to $20,000 each (the "Maximum Amount"). Pursuant to this program, each manager
will receive a bonus in the Maximum Amount in respect of services rendered in
any year in which no Qualified Customer Complaint is made with respect to his or
her unit. A "Qualified Customer Complaint" is a customer complaint that has been
reviewed, and found to be accurate by Aetna's Vice President of Quality
Assurance with respect to the quality of any product manufactured by such
manager's production unit. The bonus amount that each manager is eligible to
receive in any year will be reduced by $5,000 for each Qualified Customer
Complaint made with respect to his or her unit.
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<PAGE> 20
In addition to the Quality Assurance Bonus Program, Aetna annually awards
discretionary bonuses to members of its management and certain of its salaried
employees. Such bonuses, which are typically paid in February of each year in
respect of services rendered by recipients during the preceding year, are
awarded based on a variety of factors, including individual and Aetna / MS
Acquisition performance.
STOCK OPTION PLAN
Executive officers, directors, employees and other key persons are eligible to
participate in the MS Acquisition Corp. Executive Stock Option Plan (the
"Plan"). Options granted under the Plan may be either incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
nonqualified stock options. Options to purchase an aggregate of 110,000 shares
of Class A Common Stock, par value $.01 per share, of MS Acquisition Corp. (the
"Class A Common Stock") may be issued under the Plan. The Plan is administered
by a committee (the "Option Committee") of not less than three directors
appointed by the Board of Directors of MS Acquisition.
All options granted under the Plan are granted pursuant to individual stock
option agreements executed by MS Acquisition and each option recipient. In
general, options granted under the Plan are exercisable in such installments
(which need not be equal) and at such times as are designated by the Option
Committee, but in no event may the term of the option exceed the tenth
anniversary of the date on which the option was granted. No option may be
granted under the Plan after the tenth anniversary of the effective date of the
Plan, March 3, 1989.
The purchase price per share of Class A Common Stock subject to incentive
options must equal or exceed the fair value market value of the Class A Common
Stock on the date such options are granted. The aggregate fair market value of
the Class A Common Stock with respect to the Incentive Options are exercisable
for the first time by the optionee during any calendar year shall not exceed
$100,000. The purchase price per share of Class A Common stock subject to a
nonqualified option shall be determined by the Option Committee. Options granted
under the Plan may not be transferred other than by will or by the laws of
descent.
OPTION GRANTS IN THE LAST FISCAL YEAR
On August 13, 1996, certain employees were granted options under the Plan to
purchase shares of Common Stock that in the aggregate represent up to 10% of the
total number of shares of Common Stock, on a fully diluted basis. These options
have an exercise price of $0.75 per underlying share and become exercisable in
equal installments over five years of continued employment, subject to
acceleration upon a change in control of Aetna. There were no options granted
under the Plan during fiscal year 1997.
EXECUTIVE EMPLOYMENT AGREEMENTS
Aetna and MS Acquisition have jointly entered into employment agreements with
each of Messrs. Brown, Easterly, and Spring (the "Employment Agreements") (each
of Messrs. Brown, Easterly and Spring, an Executive). The Employment Agreements
set forth the basic terms of employment for each Executive, including base
salary, bonus and benefits, as well as the benefits to which each Executive will
be entitled if his employment is terminated for various reasons.
The Employment Agreement with Mr. Spring has an initial term of three years
commencing August 13, 1996 and provides for a base salary of $225,000 and a
discretionary annual bonus of up to 100% of Mr. Spring's annual salary. The
discretionary bonus is to be determined based upon the achievement of annual
company and individual performance goals. The Employment Agreement provides that
Mr. Spring is entitled to a one time termination payment equal to the remaining
payments of base salary (and in no event less than twelve months) and additional
payment equal to the greater of (x) the bonus received by Mr. Spring for the
prior fiscal year and (y) 50% of his base salary for the fiscal year in which
the termination occurs, if his employment is terminated by Aetna and MS
Acquisition without cause or if he voluntarily terminates his employment with
Aetna and MS Acquisition for good reason.
20
<PAGE> 21
The Employment Agreements with Messrs. Brown and Easterly have initial terms of
three years commencing August 13, 1996 and provide for base salaries of $115,000
and $105,000 respectively. Messrs. Brown and Easterly are also entitled to a
discretionary bonus of up to 60% of their annual base salary. The Employment
Agreements provide severance payments through the end of the term (and in no
event for a period of less than 12 months) if employment is terminated by Aetna
and MS Acquisition without cause or if Messrs. Brown or Easterly terminates his
employment with Aetna and MS Acquisition for good reason.
Each Employment Agreement contains non-competition, non-solicitation and
confidentiality provisions.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning stock options
exercised during the year ended December 28, 1997 and the number and value of
unexercised stock options held by each of the Named Executive Officers as of
December 28, 1997.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES (1)
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
EXERCISE REALIZED (#) ($)
---------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Ueli Spring 0 0 8,500 34,000 5,691 22,763
Harold Brown 0 0 5,000 20,000 3,348 13,390
Gary Easterly 0 0 2,000 8,000 1,339 5,356
David Thal 0 0 1,500 6,000 1,004 4,017
Daniel Pierce 0 0 1,000 4,000 670 2,678
</TABLE>
(1) Options are for shares of Class A Common Stock of MS Acquisition Corp.
(2) Year-end value based on the consideration paid for a share of Common Stock
in connection with the August 1996 recapitalization and financing
transactions (which Aetna believes approximates the fair market value of
Class A Common Stock as of December 28, 1997) less the option exercise
price of $.75 per share.
(3) Options are currently exercisable and vest over five years of continued
employment commencing August 13, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation of executive officers has historically been determined by the Board
of Directors. Ueli Spring is the only employee or present or former officer who
participated in deliberations of the Board concerning executive officer
compensation during the last completed fiscal year. In August 1996, Aetna and MS
Acquisition established a compensation committee consisting of three members
during fiscal 1997: Michael Delaney, Ueli Spring and Richard Puricelli served on
such committee.
There are no interlocks between Aetna and other entities involving Aetna's
executive officers and board members who serve as executive officers or board
members of other entities, except with respect to Export, Aetna Holdings and MS
Acquisition. The officers and directors of Aetna also serve as officers and
directors of Aetna Holdings and MS Acquisition. Mr. Spring and Mr. Brown, who
are officers and directors of Aetna, Aetna Holdings and MS Acquisition, also
serve as officers and directors of Export.
21
<PAGE> 22
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of the outstanding capital stock of Aetna is currently owned by Aetna
Holdings, and all of the outstanding capital stock of Aetna Holdings is
currently owned by MS Acquisition. The following table sets forth certain
information regarding the equity ownership of MS Acquisition as of March 1, 1998
by (i) each person or entity who owns five percent or more of any class of
voting securities of MS Acquisition, (ii) each director of Aetna and MS
Acquisition, (iii) the Named Executive Officers as of December 28, 1997, and
(iv) the directors and executive officers of Aetna and MS Acquisition as a
group. Beneficial ownership of less than one percent is indicated by an
asterisk. Except as otherwise indicated below, each of the persons named in the
table has sole voting and investment power with respect to all shares of Class A
Common Stock and investment power with respect to Class B Common Stock
beneficially owned by such person as set forth opposite such person's name, and
the address of each of the persons named in the table is Aetna's address. Shares
of Class B Common Stock are non-voting. Each share of Class A Common Stock is
convertible into one share of Class B Common Stock at the option of the holder,
if the holder determines that its holding of Class A Common Stock might violate
any law or regulation. Each share of Class B Common Stock is convertible into
one share of Class A Common Stock at the option of the holder, so long as the
holder determines that no law or regulation will be violated as a result of its
holding of shares of Class A Common Stock.
22
<PAGE> 23
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
OWNERSHIP (1) CLASS (2) OWNERSHIP CLASS (2)
<S> <C> <C> <C> <C>
Citicorp Venture Capital, Ltd. (3) 187,871 49.0% 516,590 100.0%
399 Park Avenue
New York, NY 10043
David Howe (4) 187,871 49.0 516,590 100.0
Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, NY 10043
Michael Delaney (4) 187,871 49.0 516,590 100.0
Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, NY 10043
The Prudential Life Insurance Company of
America, as Asset Manager for The
Gateway Recovery Trust (5) 65,175 17.0 -- --
c/o Financial Restructuring Group
Gateway Center Four
100 Mulberry Street
Newark, NJ 07102
The Berkshire Fund (6) 59,636 15.6 -- --
One Boston Place
Suite 3425
Boston, MA 02108
State Treasurer of the State of Michigan,
Custodian of the Public School Employees'
Retirement System; State Employees'
Retirement System; Michigan State Police
Retirement System; Judges' Retirement
System; and Probate Judges' Retirement
system 27,077 7.1 -- --
c/o Michigan Department of Treasury
430 West Allegan
Lansing, MI 48922
Ueli Spring (7) 13,593 3.5 -- --
Harold A. Brown (8) 6,834 1.8 -- --
Gary Easterly (9) 2,984 *** -- --
Daniel Pierce (10) 1,000 *** -- --
David Thal (11) 1,500 *** -- --
Richard Puricelli -- -- -- --
------- ------ ---------- ------
All directors and executive officers
as a group (11 persons) (12) $215,282 53.4% $516,590 100.0%
======== ==== ======== =====
</TABLE>
(1) Does not include shares of Class B Common Stock convertible into Class A
Common Stock. Does include shares of Class A Common Stock subject to
options which are exercisable within 60 days of March 1, 1998.
23
<PAGE> 24
(2) Based on 383,409 shares of Class A Common Stock and 516,950 shares of
Class B Common Stock outstanding as of March 1, 1998. Shares subject to
options exercisable within 60 days of March 1, 1998 are considered for
purposes of determining the percent of the class held by the holder of
such option, but not for the purpose of computing the percentage held by
others.
(3) Taking into account the shares of Class A Common Stock and Class B Common
Stock (the "Common Stock") owned by CVC and the officers referred to in
the next sentence, the collective ownership of CVC and such officers
represents 78.3% of the Common Stock. CVC has transferred beneficial
ownership of a portion of its Class A Common Stock and Class B Common
Stock set forth above to a group comprised of certain individual officers
of CVC (including Michael Delaney and David Howe), which shares are
included in the aggregate total shown.
(4) Consists of shares held by CVC, which may be deemed to be beneficially
owned by Messrs. Delaney and Howe and 657 shares of Class A Common Stock
and 1,808 shares of Class B Common Stock owned by Mr. Delaney and 1,127
shares of Class A Common Stock and 3,100 shares of Class B Common Stock
owned by Mr. Howe. Messrs. Delaney and Howe disclaim beneficial ownership
of such shares (except for the 657 and 1,127 shares of Class A Common
Stock and for the 1,808 and 3,100 shares of Class B Common Stock).
(5) The Prudential Life Insurance Company of America, as Asset Manager for
The Gateway Recovery Trust, has voting and dispositive power with respect
to all 65,175 shares of Class A Common Stock and, accordingly, may be
deemed to be the beneficial owner thereof.
(6) Berkshire Capital Associates Limited Partnership ("BCALP") is the General
Partner of The Berkshire Fund and, consequently, has the power to control
the exercise of votes with respect to the shares of Class A Common Stock
held by The Berkshire Fund. Each of Carl Freenback, Bradley M. Bloom,
James Christopher Clifford, Russell L. Epker and Richard K. Lubin is a
General Partner of BCALP and thereby has the ability to control the
activities of BCALP. Each of them, therefore, has the power to control
the exercise of votes with respect to the shares of Class A Common Stock
held by The Berkshire Fund. Each of them also owns directly 478 shares of
Class A Common Stock and therefore has the power to control the exercise
of votes with respect to 60,114 shares of MS Acquisition, constituting
15.7% of the aggregate outstanding shares of Class A Common Stock. Each
of the general partners of BCALP disclaims beneficial ownership of the
59,636 shares of Class A Common Stock held by The Berkshire Fund.
(7) Includes options to purchase 8,500 shares of Class A Common Stock issued
to Mr. Spring.
(8) Includes options to purchase 5,000 shares of Class A Common Stock issued
to Mr. Brown.
(9) Includes options to purchase 2,000 shares of Class A Common Stock issued
to Mr. Easterly pursuant to the Plan.
(10) Includes options to purchase 1,000 shares of Class A Common Stock issued
to Mr. Pierce.
(11) Includes options to purchase 1,500 shares of Class A Common Stock issued
to Mr. Thal.
(12) Includes options to purchase 19,500 shares of Class A Common Stock.
Includes shares held by CVC, which may be deemed to be beneficially owned
by Messrs. Delaney and Howe. Messrs. Delaney and Howe disclaim beneficial
ownership of shares held by CVC.
24
<PAGE> 25
Item 13. Certain Relationships and Related Transactions
Pursuant to a promissory note, Aetna has outstanding from Ueli Spring, President
of Aetna, a demand loan in the aggregate principal amount of $75,000, plus
accumulated interest. The loan bears interest at the prime rate plus 1.0%. As of
December 28, 1997, the aggregate amount owed to Aetna by Mr. Spring in respect
of the loan was $123,450.
In connection with the August 13, 1996 recapitalization and financing
transactions, Aetna entered into a management agreement with MS Acquisition
(the "Management Agreement") pursuant to which MS Acquisition has agreed to
provide to Aetna and any of its subsidiaries certain management and
administrative services. The initial term of the Management Agreement extends
through December 1997. In consideration for services provided thereunder, Aetna
has agreed to reimburse MS Acquisition for the actual cost of the services
rendered. Aetna is also responsible for contributing to the general operating
costs of MS Acquisition. Aetna's obligations to reimburse MS Acquisition
may be deferred, without interest, if payment of such reimbursement obligations
would be restricted by the Indenture or the Senior Revolving Credit Facility.
PART IV
Item 14. Exhibits, Financial statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. The financial statements listed in the "Index to Financial Statements."
2. The exhibits listed in the "Index to Exhibits."
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(b) Reports on Form 8-K
Neither Aetna nor MS Acquisition filed any Reports on Form 8-K during
the quarter ended December 28, 1997.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized on March l, 1998.
AETNA INDUSTRIES, INC.
MS ACQUISITION CORP.
By: /s/ Ueli Spring
---------------
Ueli Spring
Chief Executive Officer of
Aetna Industries, Inc. and
MS Acquisition Corp.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrants in
the capacities indicated on March 1, 1998.
Signature Capacity
--------- --------
/s/ Harold A. Brown Vice President - Finance, Secretary of
- --------------------------- Aetna Industries, Inc. and MS Acquisition Corp.
Harold A. Brown (Principal Financial and Accounting Officer)
/s/ Ueli Spring Chief Executive Officer of Aetna Industries, Inc.
- --------------------------- and MS Acquisition Corp.
Ueli Spring (Principal Executive Officer)
/s/ David Howe Director
- ---------------------------
David Howe
/s/ Michael Delaney Director
- ---------------------------
Michael Delaney
/s/ Richard Puricelli Director
- ---------------------------
Richard Puricelli
26
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF AETNA INDUSTRIES, INC.
Report of Independent
Accountants.................................................................F-2
Consolidated Balance Sheets - As of December 28, 1997 and December 29, 1996.F-3
Consolidated Statement of Operations - For the Year Ended
December 28, 1997, December 29, 1996 and December 31, 1995..................F-5
Consolidated Statement of Cash Flows - For the Year Ended
December 28, 1997, December 29, 1996 and December 31, 1995..................F-6
Notes to the Consolidated Financial
Statements..................................................................F-7
FINANCIAL STATEMENTS OF MS ACQUISITION CORP.
Report of Independent
Accountants.................................................................F-16
Consolidated Balance Sheets - As of December 28, 1997 and
December 29, 1996...........................................................F-17
Consolidated Statement of Operations - For the Year Ended
December 28, 1997, December 29, 1996 and December 31, 1995.................F-19
Consolidated Statement of Cash Flows - For the Year Ended
December 28, 1997, December 29, 1996 and December 31, 1995..................F-20
Notes to the Consolidated Financial
Statements..................................................................F-21
27
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
February 6, 1998
To the Board of Directors
and Stockholders of
Aetna Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Aetna Industries, Inc. and its
subsidiaries at December 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
<PAGE> 29
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets
Cash $ 23 $ 4,011
Accounts receivable (less allowance for doubtful accounts of
$359 and $510 resp 40,665 32,753
Inventories 7,276 8,756
Tooling 11,410 1,592
Prepaid expenses, including income taxes 446 651
Deferred income taxes 1,215 318
--------- ---------
Total current assets 61,035 48,081
--------- ---------
Property, plant and equipment
Land 2,405 2,104
Buildings and improvements 13,556 12,548
Machinery and equipment 66,765 63,906
Construction-in-progress 10,211 3,944
--------- ---------
Total property, plant and equipment 92,937 82,502
Less - accumulated depreciation (41,365) (33,068)
--------- ---------
Net property, plant and equipment 51,572 49,434
--------- ---------
Other assets
Deferred costs and other assets 5,489 5,769
Cost in excess of net assets acquired 24,973 25,774
--------- ---------
Total other assets 30,462 31,543
--------- ---------
$ 143,069 $ 129,058
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 30
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
------------ ------------
<S> <C> <C>
Current liabilities
Accounts payable $ 33,485 $ 24,958
Accrued expenses 9,508 12,104
Short-term borrowings 13,530
--------- ---------
Total current liabilities 56,523 37,062
--------- ---------
Long-term debt, less current portion 85,000 85,000
--------- ---------
Deferred income taxes 7,432 8,136
--------- ---------
Commitments and contingencies (Note 9)
Stockholder's equity (deficit)
Common stock - $.01 par value; 1,000 shares issued and
outstanding
Contributed capital 9,024 9,024
Accumulated deficit (14,910) (10,164)
--------- ---------
(5,886) (1,140)
--------- ---------
$ 143,069 $ 129,058
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE> 31
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 205,741 $ 211,462 $ 211,905
Cost of sales 181,336 180,998 183,542
Selling, general and administrative expenses 17,602 15,644 13,331
--------- --------- ---------
Operating income 6,803 14,820 15,032
--------- --------- ---------
Interest expense, net 10,263 9,022 8,579
--------- --------- ---------
Income (loss) before extraordinary item and
income taxes (3,460) 5,798 6,453
Income tax provision (credit) (1,099) 2,105 1,877
--------- --------- ---------
Income (loss) before extraordinary item (2,361) 3,693 4,576
--------- --------- ---------
Extraordinary item (net of income taxes of $594) 1,153
--------- --------- ---------
Net income (loss) $ (2,361) $ 2,540 $ 4,576
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE> 32
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,361) $ 2,540 $ 4,576
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities -
Depreciation and amortization 9,917 7,965 6,579
Deferred interest 1,281
Deferred income taxes (705) (588) (860)
Changes in assets and liabilities
Accounts receivable (7,912) (4,231) 116
Inventories 1,480 (97) 750
Tooling (9,818) 1,066 (1,790)
Prepaid expenses (739) (149) 54
Accounts payable 8,527 (6,608) 2,954
Accrued expenses (2,596) 1,995 904
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (4,207) 1,893 14,564
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (10,725) (7,023) (10,103)
Disposals of property, plant and equipment 79 493
Other, net 43 83 (149)
-------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES (10,603) (6,447) (10,252)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 85,000
Dividends paid (2,385) (11,082)
Debt issuance costs (323) (5,403)
Principal payments on long-term debt (49,192) (5,400)
Net change in line of credit 13,530 (11,049) 1,216
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 10,822 8,274 (4,184)
-------- -------- --------
Net increase (decrease) in cash (3,988) 3,720 128
Cash - beginning of year 4,011 291 163
-------- -------- --------
Cash - end of year $ 23 $ 4,011 $ 291
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 12,037 $ 19,475 $ 4,480
======== ======== ========
Cash paid during the year for income taxes $ 1,209 $ 1,959 $ 2,750
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE> 33
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Aetna Industries, Inc. ("Aetna" or the "Company") is a wholly-owned
indirect subsidiary of MS Acquisition Corp. ("MS Acquisition") and is a
wholly-owned direct subsidiary of Aetna Holdings, Inc. ("Aetna Holdings")
and has two wholly-owned subsidiaries Aetna Export Sales Corp. ("Export")
and Aetna Manufacturing Canada Ltd ("Aetna Canada"). MS Acquisition is a
holding company that was formed for the sole purpose of purchasing Aetna
and does not have any significant operations, other than its investments
in its subsidiaries assets or liabilities, other than preferred stock,
junior subordinated debentures and accruals resulting from the
transactions described below. MS Acquisition does not have any other
direct or indirect subsidiaries other than Aetna, Aetna Holdings, Export
or Aetna Canada.
TRANSACTIONS
On August 13, 1996, MS Acquisition completed a recapitalization. MS
Acquisition amended its charter to provide for the reclassification of its
capital stock into two new classes of common stock (voting and non-voting)
(together, New Common) and two new classes of preferred stock (New
Preferred). Existing MS Acquisition stockholders exchanged their existing
MS Acquisition shares, pro rata, for New Preferred and New Common.
Citicorp Venture Capital, Ltd. and related parties purchased shares of New
Common and New Preferred for $10,000 in cash from the existing MS
Acquisition stockholders. MS Acquisition formed Aetna Holdings and
contributed to Aetna Holdings all of the capital stock of the Company.
Aetna Holdings then purchased from existing stockholders approximately 61%
of their existing MS Acquisition stock in exchange for (i) $11,082 in cash
(Holdings consideration) and (ii) $8,731 in principal amount of 11.0%
junior subordinated debentures of Aetna Holdings due in 2007. The former
stockholders retained (i) $2.36 million in stated value of New Preferred
and (ii) shares of New Common representing 20.6% of the New Common on a
fully-diluted basis.
Also, on August 13, 1996, Aetna issued $85,000 of 11-7/8% Senior Notes due
2006 (the Notes) in a private placement. The Notes have been fully and
unconditionally guaranteed by MS Acquisition, Aetna Holdings and Export,
on a joint and several basis. The proceeds of this issuance were used (i)
to repay all of the outstanding indebtedness, accrued interest and
prepayment penalties of Aetna, (ii) to fund the $11,082 cash component of
the Holdings consideration, (iii) to pay approximately $651 to terminate
certain outstanding employee options, (iv) to pay fees and expenses of
approximately $5,000 in connection with the transactions, (v) to pay
approximately $570 of bonuses and accrued compensation to certain
directors and officers of Aetna, (vi) to pay $250 in accrued management
fees and (vii) for general corporate purposes.
The prepayment penalty relating to Aetna's subordinated debt, which
aggregated $1,153 (net of $594 of taxes), has been shown as an
extraordinary item in the statement of operations.
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to December 31.
Fiscal years 1997, 1996 and 1995 consisted of 52 weeks and ended on
December 28, 1997, December 29, 1996 and December 31, 1995, respectively.
F - 7
<PAGE> 34
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF OPERATIONS AND MAJOR CUSTOMERS
The Company's primary business operations are the manufacture of
automotive stampings and assemblies used as original equipment components
by North American automotive manufacturers in the production of sport
utility vehicles, mini-vans, other light trucks and passenger cars.
The Company's financial condition and results of operations depend
significantly on two major automotive manufacturers, Chrysler Corporation
(Chrysler) and General Motors Corporation (GM). Following is a summary of
net production sales to such key customers, as a percentage of net
production sales:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Chrysler 66% 61% 60%
GM 25 33 36
Other 9 6 4
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and a foreign sales corporation (Export) which is a wholly-owned
subsidiary of Aetna. The financial condition and results of operations of
Export are not significant and, accordingly, have not been presented. All
significant intercompany transactions and account balances have been
eliminated in consolidation. In addition, management of the Company and MS
Acquisition have determined that the separate financial statements and
other disclosures relative to Aetna Holdings are not material to investors
and accordingly, have not presented such information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks and short-term
marketable securities with maturities of 90 days or less as cash and cash
equivalents for the purpose of the statement of cash flows.
FINANCIAL INSTRUMENTS
The Company records all financial instruments, including accounts
receivable and accounts payable, at cost, which approximates market value.
REVENUE RECOGNITION
Revenue from sales and the corresponding receivables are recorded upon
shipment of product to the customer.
F - 8
<PAGE> 35
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories of stampings and assemblies are valued at the lower of cost,
determined by the last-in, first-out (LIFO) method, or market. Inventories
of purchased parts and purchased labor are valued at the lower of cost, as
determined by the first-in, first-out (FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less any impairment
loss. The Company provides for depreciation principally using the
straight-line method over the following estimated useful lives:
YEARS
Buildings and improvements 20 - 30
Machinery and equipment 5 - 15
Upon retirement or disposal, the asset cost and related accumulated
depreciation is removed from the accounts and the net amount, less
proceeds, is charged or credited to income. Expenditures for renewals and
betterments are capitalized. Expenditures for maintenance and repairs are
charged against income as incurred.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is being amortized over forty years
using the straight-line method. Accumulated amortization aggregated $7,077
and $6,276 at December 28, 1997 and December 29, 1996, respectively. The
Company periodically evaluates the eventual recoverability of the cost in
excess of net assets acquired based on estimated future operating results
and cash flows.
INCOME TAXES
Deferred tax assets and liabilities are provided for the expected future
tax consequence of temporary differences between the carrying amounts and
the tax basis of the Company's assets and liabilities.
F - 9
<PAGE> 36
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
Inventories valued at LIFO
Raw materials $ 483 $ 1,758
Work-in-process 3,134 3,458
Finished goods 1,500 2,195
-------- -------
5,117 7,411
LIFO reserve (200) (335)
--------- -------
4,917 7,076
-------- -------
Inventories valued at FIFO
Purchased parts and purchased labor 2,359 1,680
-------- -------
Total inventories $ 7,276 $ 8,756
======== =======
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
Accrued workers' compensation expense $ 3,770 $ 3,155
Accrued interest 2,578 4,018
Taxes other than income 1,809 2,357
Other 1,351 2,574
-------- ----------
$ 9,508 $ 12,104
======== ==========
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company leases certain real property from a stockholder at less than
fair market value rates under lease agreements expiring in 2006.
Approximately $2,425, which represents the present value at the date of
acquisition of the favorable lease terms using a 13.0% interest rate, has
been recorded as property, plant and equipment and is being amortized on a
straight-line basis over the lease terms. Rent expense under these lease
agreements aggregated $1,061, $1,013, and $965 during 1997, 1996, and
1995, respectively. Future minimum rental payments due under these lease
agreements are as follows:
F - 10
<PAGE> 37
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
<S> <C>
1998 $ 1,114
1999 1,170
2000 1,163
2001 1,085
2002 1,139
Thereafter 5,154
--------
$ 10,825
========
</TABLE>
The Company had a management agreement with a related party whereby it
was charged an annual fee of $250 for management services during 1995.
During 1996, the Company incurred $154 of management fees. Such fees were
eliminated in connection with the recapitalization of the Company's
parent, MS Acquisition, discussed in Note 1.
6. STOCKHOLDER'S EQUITY
The changes in stockholder's equity were as follows:
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED ACCUMULATED STOCKHOLDER'S
CAPITAL DEFICIT EQUITY
------- ------- ------
<S> <C> <C> <C>
Balance at January 1, 1995 $ 9,024 $ (6,198) $ 2,826
---------- --------- ----------
Net income 4,576 4,576
---------- --------- ----------
Balance at December 31, 1995 9,024 (1,622) 7,402
Net income 2,540 2,540
Dividends paid to MS Acquisition (11,082) (11,082)
---------- --------- ----------
Balance at December 29, 1996 9,024 (10,164) (1,140)
Net loss (2,361) (2,361)
Dividends paid to Aetna Holdings (2,385) (2,385)
---------- --------- ----------
Balance at December 28, 1997 $ 9,024 $ (14,910) $ (5,886)
========== ========= ==========
</TABLE>
Aetna Holdings has issued $9,229 of junior subordinated debentures and unfunded
contractual obligations to certain former option holders. To the extent cash
interest and pre-payments of such debentures are permitted under the Company's
11-7/8% Senior Notes Indenture and the revolving credit facility, Aetna may pay
dividends to Aetna Holdings to fund such payments. Aetna paid $2,385 of cash and
pre-payments of principal on these debentures and obligations in 1997. The
Company is prohibited from making distributions to either Aetna Holdings or MS
Acquisition if (i) it is in default under its Note Indenture, (ii) the total of
the distributions would exceed 50% of the cumulative net income (or if there is
a cumulative net loss, minus 100% of the cumulative net loss) that the Company
earned subsequent to the issuance of the 11-7/8% Senior Notes (August 13, 1996),
adjusted for the sale of any capital stock and under certain circumstances.
F - 11
<PAGE> 38
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS
The Company has four defined benefit pension plans covering the majority
of its hourly employees. The Company's funding policy is to fund costs as
required under the Employee Retirement Income Security Act of 1974, as
amended. The plans' assets are invested in a master trust.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at December 28,
1997 and December 29, 1996:
<TABLE>
<CAPTION>
DECEMBER 28, 1997 DECEMBER 29, 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$ 1,223 and $1,400
respectively $1,572 $1,528
====== ======
Plan assets at fair value $2,047 $1,709
Projected benefit obligation for
service rendered to date 1,572 1,528
Plan assets in excess of ------ ------
projected benefit obligation 475 181
Unrecognized loss from prior
experience 142 419
------ ------
Prepaid pension cost included
in deferred costs and other assets $ 617 $ 600
====== ======
Weighted average discount rate 7.25% 7.50%
====== ======
Estimated long-term rate of return
on assets 9.50% 9.50%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pension cost includes:
Service cost $ 198 $ 158 $ 102
Interest cost 100 102 88
Actual return on assets (313) (217) (262)
Net amortization 156 100 164
------ ------ ------
$ 141 $ 143 92
====== ====== ======
</TABLE>
F - 12
<PAGE> 39
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company also maintains a 401(k) plan for all eligible nonunion
employees, and a 401(k) plan for certain union employees not covered by
the defined benefit plans above. For fiscal 1997, 1996 and 1995, the
Company incurred $153, $140 and $130, respectively, of expense related to
401(k) plans.
8. INCOME TAXES
The Company is included in the consolidated United States federal income
tax return filed by MS Acquisition. Accordingly, the provision for federal
income taxes and the related payments or refunds of tax are determined on
a consolidated basis. The Company's income tax provisions compiled on a
separate return basis would have been consistent with those recorded in
its financial statements.
The income tax provision comprises the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current income taxes $ 588 $ 2,804 $ 2,782
Deferred income taxes (1,687) (699) (905)
--------- ---------- ---------
$(1,099) $ 2,105 $ 1,877
========= ========= =========
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS
Workers' compensation $ 1,255 $ 1,046
Other 1,499 896
--------- --------
Gross deferred tax assets 2,754 1,942
--------- --------
DEFERRED TAX LIABILITIES
Depreciation 7,590 7,999
Inventory 1,243 1,647
Deferred costs and other 521 114
--------- --------
Gross deferred tax liabilities 9,354 9,760
--------- --------
Net deferred tax liability $ 6,600 $ 7,818
========= ========
</TABLE>
F - 13
<PAGE> 40
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
8. INCOME TAXES (CONTINUED)
A reconciliation of the U.S. federal statutory rate to the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. federal statutory rate (35.0%) 35.0% 35.0%
Effect of graduated rate 1.0 (1.0) (1.0)
Non-deductible goodwill 7.9 7.2 4.2
Reversal of tax reserves no longer required (2.7)
Effect of 1% increase (decrease) in federal
rate on deferred tax balances (3.9)
Research and development credit refunds (1.0) (3.0)
FSC commission (1.4)
Other (3.3) (1.9) (2.6)
----- ---- ----
(31.8%) 36.3% 29.0%
===== ==== ====
</TABLE>
9. CONTINGENCIES AND LEASE COMMITMENT
The Company leases a production facility under a lease agreement accounted
for as an operating lease. The lease agreement calls for annual rent of
approximately $593 through December 1998 and annual rent of approximately
$495 through October 1999 and provides for three five-year renewal
options. Additionally, the Company leases certain machinery and equipment
under operating leases. Future minimum rental payments on the machinery
and equipment are as follows: 1998 - $337; 1999 - $208; 2000 - $137, 2001
- $36.
F - 14
<PAGE> 41
AETNA INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MS
ACQUISITION CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
10. LONG-TERM DEBT
On August 13, 1996, the Company issued $85,000 of its 11-7/8% Senior
Notes due 2006 (Old Notes) in a private placement offering. On December
13, 1996, the Old Notes were exchanged for new $85,000, 11-7/8% Senior
Notes due 2006 (New Notes). The New Notes have substantially the same
terms as the Old Notes except with respect to certain transfer
restrictions and registration rights relating to the Old Notes. The New
Notes have been fully and unconditionally guaranteed by MS Acquisition,
Aetna Holdings, and Export. These notes also have certain restrictive
covenants including limitations on the following matters: (i) the
incurrence of additional indebtedness, (ii) the issuance of preferred
stock by subsidiaries, (iii) the creation of liens, (iv) sale and
leaseback transactions, (v) restricted payments, (vi) the sales of
assets and subsidiary stock, (vii) mergers and consolidations, (viii)
payment restrictions affecting subsidiaries and (ix) transactions with
affiliates. At December 28, 1997, the fair market value of the Senior
Notes approximated its carrying value.
In May 1996, the Company executed a new credit agreement whereby it may
borrow, based upon available collateral as defined in the agreement
(principally inventory, tooling, and accounts receivable), up to $35,000
at either (i) a Floating Rate, defined as the greater of the Prime Rate
or the sum of 1% plus the Federal Funds Rate, or (ii) a Eurodollar Rate
plus a margin agreed to by the banks. The Company is also charged a
monthly fee equal to 0.5% per annum of the daily average unused amount
of the credit agreement.
The new credit agreement contains, among other provisions, covenants
relating to the ratios of (i) debt to earnings before income taxes,
interest and depreciation and amortization (EBITDA) and (ii) interest
expense to EBITDA.
In August 1996, in connection with the recapitalization of its parent
(see Note 1), the Company amended and restated this working credit
facility. The terms and covenants remained substantially unchanged.
Debt issuance costs related to the issuance of the 11-7/8% Senior Notes
aggregated $5,204, and are being amortized over the term of the notes.
Costs associated with the new credit agreement totaled $199 and are
being amortized over the five year term. Accumulated amortization for
these costs aggregated $853 at December 28, 1997.
F - 15
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
February 6, 1998
To the Board of Directors
and Stockholders of
MS Acquisition Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of MS Acquisition Corp. and its
subsidiaries at December 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
F - 16
<PAGE> 43
MS ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets
Cash $ 23 $ 4,011
Accounts receivable (less allowance for
doubtful accounts of $359 and $510, respectively) 40,439 32,113
Inventories 7,276 8,756
Tooling 11,410 1,592
Prepaid expenses 446 651
Deferred income taxes 1,215 318
--------- ---------
Total current assets 60,809 47,441
--------- ---------
Property, plant and equipment
Land 2,405 2,104
Buildings and improvements 13,556 12,548
Machinery and equipment 66,765 63,906
Construction-in-progress 10,211 3,944
--------- ---------
Total property, plant and equipment 92,937 82,502
Less - accumulated depreciation (41,365) (33,068)
--------- ---------
Net property, plant and equipment 51,572 49,434
--------- ---------
Other assets
Deferred costs and other assets 5,489 5,769
Cost in excess of net assets acquired 24,973 25,774
--------- ---------
Total other assets 30,462 31,543
--------- ---------
$ 142,843 $ 128,418
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 17
<PAGE> 44
MS ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 33,485 $ 24,958
Accrued expenses 9,848 12,361
Short-term borrowings 13,530 2,427
--------- ---------
Current portion of long-term debt
Total current liabilities 56,863 39,746
--------- ---------
Long-term debt, less current portion 85,000 85,000
--------- ---------
Junior subordinated debentures 7,789 6,802
--------- ---------
Deferred income taxes 7,432 8,136
--------- ---------
Commitments and contingencies (Note 11)
Redeemable preferred stock
Series A - $100 stated value; 292,123 shares authorized;
127,962 and 114,967 shares issued and outstanding, 13,328 11,979
Series B - $100 stated value and $.01 par value;
2,000,000 shares authorized
Additional paid-in capital
Stockholders' equity (deficit)
Class A, common stock - $.01 par value; 5,000,000
shares authorized; 383,409 shares issued and outstanding 4 4
Class B, common stock - $.01 par value; 5,000,000
shares authorized: 516,590 shares issued and outstanding 5 5
Additional paid-in capital 14,159 15,509
Accumulated deficit (34,461) (31,487)
Fair market value in excess of historical cost of net
assets acquired from entities partially under common control (7,276) (7,276)
--------- ---------
(27,569) (23,245)
--------- ---------
$ 142,843 $ 128,418
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 18
<PAGE> 45
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 205,741 $ 211,462 $ 211,905
Cost of sales 181,336 180,998 183,542
Selling, general and administrative expenses 17,615 15,650 13,331
------------ ----------- -----------
Operating income 6,790 14,814 15,032
------------ ----------- -----------
Interest expense, net 11,148 9,406 8,579
------------ ----------- -----------
Income (loss) before extraordinary item and
income taxes (4,358) 5,408 6,453
Income tax provision (credit) (1,384) 1,972 1,877
------------- ----------- -----------
Income (loss) before extraordinary item (2,974) 3,436 4,576
Extraordinary item (net of income taxes of $594) 1,153
------------ ----------- -----------
Net income (loss) before preferred stock dividend (2,974) 2,283 $ 4,576
------------ ----------- ===========
Preferred stock dividend requirements (1,350) (482)
------------ -----------
Net income (loss) available for common stockholders $ (4,324) $ 1,801
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 19
<PAGE> 46
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,974) $ 2,283 $ 4,576
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities -
Depreciation and amortization 9,917 7,965 6,579
Deferred interest 1,281
Deferred income taxes (705) (588) (860)
Changes in assets and liabilities
Accounts receivable (8,326) (4,231) 116
Inventories 1,480 (97) 750
Tooling (9,818) 1,066 (1,790)
Prepaid expenses (739) (149) 54
Accounts payable 8,527 (6,608) 2,954
Accrued expenses (2,513) 2,252 904
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (5,151) 1,893 14,564
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (10,725) (7,023) (10,103)
Disposals of property, plant and equipment 79 493
Other, net 43 83 (149)
-------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES (10,603) (6,447) (10,252)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 85,000
Dividends paid (21,082)
Debt issuance costs (323) (5,403)
Equity contributions 10,000
Principal payments on long-term debt (1,441) (49,192) (5,400)
Net change in line of credit 13,530 (11,049) 1,216
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 11,766 8,274 (4,184)
-------- -------- --------
Net increase (decrease) in cash (3,988) 3,720 128
Cash - beginning of year 4,011 291 163
-------- -------- --------
Cash - end of year $ 23 $ 4,011 $ 291
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 12,984 $ 19,475 $ 4,480
======== ======== ========
Cash paid during the year for income taxes $ 1,209 $ 1,959 $ 2,750
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 20
<PAGE> 47
MS ACQUISITION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
MS Acquisition Corp. ("MS Acquisition" or the "Company") is a holding
company that was formed for the sole purpose of purchasing Aetna
Industries, Inc. ("Aetna") and does not have any significant operations,
other than its investment in its subsidiaries, assets or liabilities,
other than preferred stock, junior subordinated debentures and accruals
resulting from the transactions described below. The Company has four
direct and indirect subsidiaries, Aetna, Aetna Holdings, Inc. ("Aetna
Holdings"), Aetna Export Sales Corp. ("Export") and Aetna Manufacturing
Canada Ltd ("Aetna Canada"). It does not have any other direct or indirect
subsidiaries. The Company has not presented separate financial statements
or other disclosures relative to Aetna Holdings or Export as management
has determined that such information is not material to investors.
TRANSACTIONS
On August 13, 1996, the Company completed a recapitalization. MS
Acquisition amended its charter to provide for the reclassification of its
capital stock into two new classes of common stock (voting and non-voting)
(together, New Common) and two new classes of preferred stock (New
Preferred). Existing MS Acquisition stockholders exchanged their existing
MS Acquisition shares, pro rata, for New Preferred and New Common.
Citicorp Venture Capital, Ltd. and related parties purchased shares of New
Common and New Preferred for $10,000 in cash from the existing MS
Acquisition stockholders. MS Acquisition formed Aetna Holdings, and
contributed to Aetna Holdings all of the capital stock of Aetna. Aetna
Holdings then purchased from existing stockholders approximately 61% of
their existing MS Acquisition stock in exchange for (i) $11,082 in cash
(Holdings consideration) and (ii) $8,731 in principal amount of 11.0%
junior subordinated debentures of Aetna Holdings due in 2007. The former
stockholders retained (i) $2.36 million in stated value of new Preferred
and (ii) shares of New Common representing 20.6% of the New Common on a
fully diluted basis.
Also, on August 13, 1996, Aetna issued $85,000 of 11-7/8% Senior Notes due
2006 (the Notes) in a private placement. The Notes have been fully and
unconditionally guaranteed by MS Acquisition, Aetna Holdings and Export,
on a joint and several basis. The proceeds of this issuance were used (i)
to repay all of the outstanding indebtedness, accrued interest and
prepayment penalties of Aetna, (ii) to fund the $11,082 cash component of
the Holdings consideration, (iii) to pay approximately $651 to terminate
certain outstanding employee options, (iv) to pay fees and expenses of
approximately $5,000 in connection with the transactions, (v) to pay
approximately $570 of bonuses and accrued compensation to certain
directors and officers of Aetna, (vi) to pay $250 in accrued management
fees and (vii) for general corporate purposes.
The prepayment penalty relating to Aetna's subordinated debt, which
aggregated $1,153 (net of $594 of taxes), has been shown as an
extraordinary item in the statement of operations.
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to December 31.
Fiscal years 1997, 1996 and 1995 consisted of 52 weeks and ended on
December 28, 1997, December 29, 1996 and December 31, 1995, respectively.
F - 21
<PAGE> 48
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF OPERATIONS AND MAJOR CUSTOMERS
The Company's primary business operations are, through its wholly owned
subsidiary Aetna, the manufacture of automotive stampings and assemblies
used as original equipment components by North American automotive
manufacturers in the production of sport utility vehicles, mini-vans,
other light trucks and passenger cars.
The Company's financial condition and results of operations depend
significantly on two major automotive manufacturers, Chrysler Corporation
(Chrysler) and General Motors Corporation (GM). Following is a summary of
net production sales to such key customers, as a percentage of net
production sales:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Chrysler 66% 61% 60%
GM 25 33 36
Other 9 6 4
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
Aetna Holdings, Aetna and Export The financial condition and results of
operations of Export and Aetna Holdings are not significant. All
significant intercompany transactions and account balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks and short-term
marketable securities with maturities of 90 days or less as cash and cash
equivalents for the purpose of the statement of cash flows.
FINANCIAL INSTRUMENTS
The Company records all financial instruments, including accounts
receivable and accounts payable, at cost, which approximates market value.
REVENUE RECOGNITION
Revenue from sales and the corresponding receivables are recorded upon
shipment of product to the customer.
F - 22
<PAGE> 49
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
2. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories of stampings and assemblies are valued at the lower of cost,
determined by the last-in, first-out (LIFO) method, or market. Inventories
of purchased parts and purchased labor are valued at the lower of cost, as
determined by the first-in, first-out (FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less any impairment
loss. The Company provides for depreciation principally using the
straight-line method over the following estimated useful lives:
YEARS
Buildings and improvements 20 - 30
Machinery and equipment 5 - 15
Upon retirement or disposal, the asset cost and related accumulated
depreciation is removed from the accounts and the net amount, less
proceeds, is charged or credited to income. Expenditures for renewals and
betterments are capitalized. Expenditures for maintenance and repairs are
charged against income as incurred.
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (FAS 121) in the first quarter of 1996. The
adoption of this new standard did not have a material impact on the
Company's financial statements for the year ended December 29, 1996.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is being amortized over forty years
using the straight-line method. Accumulated amortization aggregated $7,077
and $6,276 at December 28, 1997 and December 29, 1996, respectively. The
Company periodically evaluates the eventual recoverability of the cost in
excess of net assets acquired based on estimated future operating results
and cash flows.
INCOME TAXES
Deferred tax assets and liabilities are provided for the expected future
tax consequence of temporary differences between the carrying amounts and
the tax basis of the Company's assets and liabilities.
F - 23
<PAGE> 50
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
Inventories valued at LIFO
Raw materials $ 483 $ 1,758
Work-in-process 3,134 3,458
Finished goods 1,500 2,195
--------- ----------
5,117 7,411
LIFO reserve (200) (335)
--------- ----------
4,917 7,076
--------- ----------
Inventories valued at FIFO
Purchased parts and purchased labor 2,359 1,680
--------- ----------
Total inventories $ 7,276 $ 8,756
========= ==========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
Accrued workers' compensation expense $ 3,770 $ 3,155
Accrued interest 2,900 4,271
Taxes other than income 1,809 2,357
Other 1,369 2,578
---------- ---------
$ 9,848 $ 12,361
========== =========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Aetna leases certain real property from a stockholder at less than fair
market value rates under lease agreements expiring in 2006. Approximately
$2,425, which represents the present value at the date of acquisition of
the favorable lease terms using a 13.0% interest rate, has been recorded
as property, plant and equipment and is being amortized on a straight-line
basis over the lease terms. Rent expense under these lease agreements
aggregated $1,061, $1,013 and $965 during 1997, 1996 and 1995,
respectively. Future minimum rental payments due under these lease
agreements are as follows:
F - 24
<PAGE> 51
MS ACQUISITION CORP.
NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
<S> <C>
1998 $ 1,114
1999 1,170
2000 1,163
2001 1,085
2002 1,139
Thereafter 5,154
--------
$ 10,825
========
</TABLE>
The Company had a management agreement with a related party whereby it was
received an annual fee of $250 for management services during 1995. During
1996, the Company received $154 of management fees. Such fees were
eliminated in connection with the recapitalization of the Company (see
Note 1).
6. STOCKHOLDERS' EQUITY
The changes in stockholders' equity were as follows:
<TABLE>
<CAPTION>
FAIR MARKET
RETAINED EXCESS OF
EARNINGS HISTORICAL TOTAL
CLASS A CLASS B CAPITAL (ACCUM- COST STOCK-
COMMON COMMON IN EXCESS ULATED OF NET HOLDERS'
STOCK STOCK OF PAR DEFICIT) ASSETS EQUITY
------- ------ --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 5 $ 4 $ 14,991 $ (6,996) $ (7,276) $ 728
Net income 4,576 4,576
Preferred dividends (310) (310)
-------- -------- --------- -------- --------- ----------
Balance at December 31, 1995 5 4 14,991 (2,730) (7,276) 4,994
Net income 2,283 2,283
Dividends (21,082) (21,082)
Capital contribution 1,000 1,000
Issuance of junior subordi-
nated debentures (9,229) (9,229)
Exercise of stock options
and exchange of old
common stock to new
common (1) 1 (729) (729)
Preferred dividends (482) (482)
-------- -------- --------- -------- --------- ----------
Balance at December 29, 1996 4 5 15,509 (31,487) (7,276) (23,245)
Net loss (2,974) (2,974)
Preferred dividends (1,350) (1,350)
-------- -------- --------- -------- --------- ----------
Balance at December 28, 1997 $ 4 $ 5 $ 14,159 $(34,461) $ (7,276) $ (27,569)
======== ======== ========= ======== ========= ==========
</TABLE>
F - 25
<PAGE> 52
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Certain stockholders of the Aetna were also stockholders of the
predecessor company prior to the acquisition by MS Acquisition Corp. Due
to this partial continuation of control, the acquisition was recorded by
the Company using a combination of (1) the historical basis to the extent
of continuing ownership and (2) the purchase method of accounting for the
remaining portion of assets and liabilities. The purchase method requires
that assets and the liabilities be recorded at their estimated fair market
value. The amount by which the fair market value exceeded this historical
cost of the net assets acquired attributable to the stockholders with
continuing interests of $7,276 is recorded as a reduction of stockholders'
equity in the accompanying consolidated balance sheets.
STOCK OPTION PLAN
Executive officers, directors, employees and other key persons of the
Company are eligible to participate in the MS Acquisition Corp. Executive
Stock Option Plan (the Plan). Options granted under the Plan are
nonqualified stock options. Options to purchase an aggregate of 100,000
shares of Class A Common Stock of MS Acquisition may be issued under the
Plan. The Plan is administered by a committee of not less than three
directors appointed by the Board of Directors of MS Acquisition.
All options granted under the Plan are granted pursuant to individual
stock option agreements executed by MS Acquisition and each option
recipient. In general, options granted under the Plan are exercised in
such installments and at such times as are designated by the Option
Committee, but in no event may the term of an option exceed the tenth
anniversary of the date on which the option was granted. No option may be
granted under the Plan after the tenth anniversary of the effective date
of the Plan, August 13, 1996.
The purchase price per share of Class A Common Stock subject to options is
determined by the Board of Directors on the date such options are granted.
Options granted under the Plan may not be transferred.
Immediately after the consummation of the Transactions discussed in Note
1, certain employees were granted new options under the Plan to purchase
shares that in the aggregate represent up to 10% of the total number of
shares on a fully diluted basis. These options have an exercise price of
$0.75 per underlying share and become exercisable in equal installments
over five years of continued employment, subject to acceleration upon a
change in control of the Company. At December 28, 1997, 100,000 options
have been granted. None of the shares were exercisable at December 29,
1996 and all of the options expire in 2006.
The Company has elected to account for its stock-based compensation under
the guidance provided by APB No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. The effect on net income for
the difference between compensation cost determined based on APB No. 25
and the fair value method determined in accordance with Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" is not material to the financial statements.
F - 26
<PAGE> 53
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
7. PREFERRED STOCK
The authorized preferred stock of MS Acquisition consists of 293,123
authorized shares of Series A Preferred Stock of which 127,962 are
outstanding, 198,292 are held by Aetna Holdings, and 2,000,000 additional
shares of authorized preferred stock which may be issued in one or more
series.
Each share of Series A Preferred Stock has a stated value of $100 per
share. Dividends accrue on each share at a rate per annum equal to 11% of
the stated value thereof and are payable, when declared by the Board and
to the extent funds are legally available, semi-annually on the 13th of
February and August of each year. Dividends are cumulative from August 13,
1996, the date of issuance. At December 28, 1997 and December 29, 1996,
the Company has accrued $532 and $482 for preferred dividends.
Each Preferred Share is entitled to liquidation preference over all other
classes of MS Acquisition Capital Stock. Series A Preferred Stock are
non-voting and are redeemable by both the Company and the holder under
certain circumstances.
8. JUNIOR SUBORDINATED DEBENTURES
As part of the transactions discussed in Note 1, Aetna Holdings issued
Junior Subordinated Debentures due August 13, 2007 in the aggregate
principal amount of $8,731 and $498 as unfunded contractual obligations to
certain former option holders. The Junior Subordinated Debentures accrue
interest at the rate of 11% per annum and interest is payable
semi-annually on February 13 and August 13 of each year, commencing on
February 13, 1997.
The Company, at its option, may prepay all or a portion of the outstanding
principal amount of the Junior Subordinated Debentures and unfunded
contractual obligations, provided such payments are permitted under the
Company's Senior Notes Indenture and working capital facility.
Additionally, cash interest payments to Junior Subordinated Debentures
holders are permitted under certain circumstances. To the extent such
payments are permitted, they will be funded by dividends from Aetna to
Aetna Holdings. Aetna is prohibited from making distributions to either
Aetna Holdings or MS Acquisition if (i) it is in default under its Note
Indenture, (ii) the total of the distributions would exceed 50% of the
cumulative net income (or if there is a cumulative net loss, minus 100% of
the cumulative net loss) that Aetna earned subsequent to the issuance of
the Notes on August 13, 1996, adjusted for the sale of any capital stock
of Aetna and, (iii) under certain other circumstances.
There were no amounts accrued as of December 28, 1997 for expected
payments to holders of Junior Subordinated Debentures and unfunded
contractual obligations during 1998
9. EMPLOYEE BENEFIT PLANS
Aetna has four defined benefit pension plans covering the majority of its
hourly employees. Aetna's funding policy is to fund costs as required
under the Employee Retirement Income Security Act of 1974, as amended. The
plans' assets are invested in a master trust.
F - 27
<PAGE> 54
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at December 28,
1997 and December 29, 1996:
<TABLE>
<CAPTION>
DECEMBER 28, 1997 DECEMBER 29, 1996
----------------- -----------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$1,223 and $1,400,
respectively $ 1,572 $ 1,528
======= =======
Plan assets at fair value $ 2,047 $ 1,709
Projected benefit obligation for
service rendered to date 1,572 1,528
Plan assets in excess of ------- -------
projected benefit obligation 475 181
Unrecognized loss from prior
experience 142 419
------- -------
Prepaid pension cost included
in deferred costs and other assets $ 617 $ 600
======= =======
Weighted average discount rate 7.25% 7.50%
======= =======
Estimated long-term rate of return
on assets 9.50% 9.50%
======= =======
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Pension cost includes:
Service cost $ 198 $ 158 $ 102
Interest cost 100 102 88
Actual return on assets (313) (217) (262)
Net amortization 156 100 164
------- ------- -----
$ 141 $ 143 $ 92
======= ======= =====
</TABLE>
Aetna also maintains a 401(k) plan for all eligible nonunion employees,
and a 401(k) plan for certain union employees not covered by the defined
benefit plans above. During fiscal years 1997, 1996 and 1995, the Company
incurred $153, $140 and $130, respectively, of expense related to 401(k)
plans.
F - 28
<PAGE> 55
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
10. INCOME TAXES
The income tax provision comprises the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current income taxes payable $ 314 $ 2,671 $ 2,782
Deferred income taxes (1,698) (699) (905)
-------- ------- -------
$ (1,384) $ 1,972 $ 1,877
======== ======= =======
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS
Workers' compensation $ 1,255 $ 1,046
Other 1,513 896
--------- ---------
Gross deferred tax assets 2,768 1,942
--------- ---------
DEFERRED TAX LIABILITIES
Depreciation 7,590 7,999
Inventory 1,243 1,647
Deferred costs and other 521 114
--------- ---------
Gross deferred tax liabilities 9,354 9,760
--------- ---------
Net deferred tax liability $ 6,586 $ 7,818
========= =========
</TABLE>
A reconciliation of the U.S. federal statutory rate to the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. federal statutory rate (35.0%) 35.0% 35.0%
Effect of graduated rates 1.0 (1.0) (1.0)
Non-deductible goodwill 5.9 7.2 4.2
Reversal of tax reserves no longer required (2.7)
Effect of 1% increase (decrease) in federal rate (3.9)
Research and development credit refunds (3.0)
FSC commission (1.0)
Other (2.7) (1.7) (2.6)
------ ------ ------
(31.8)% 36.5% 29.0%
====== ====== ======
</TABLE>
F - 29
<PAGE> 56
MS ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
11. CONTINGENCIES AND LEASE COMMITMENT
Aetna leases a production facility under a lease agreement accounted for
as an operating lease. The lease agreement calls for annual rent of
approximately $593 through December 1998 and annual rent of approximately
$495 through October 1999 and provides for three five-year renewal
options. Additionally, Aetna leases certain machinery and equipment under
operating leases. Future minimum rental payments on the machinery and
equipment are as follows: 1998 - $337; 1999 - $208; 2000 - $137; 2001 -
$36.
12. LONG-TERM DEBT
On August 13, 1996, Aetna issued $85,000 of its 11-7/8% Senior Notes due
2006 (Old Notes) in a private placement offering. On December 13, 1996,
the Old Notes were exchanged for new $85,000 11-7/8% Senior Notes due 2006
(New Notes). The New Notes have substantially the same terms as the Old
Notes except with respect to certain transfer restrictions and
registration rights relating to the Old Notes. The New Notes have been
fully and unconditionally guaranteed by MS Acquisition, Aetna Holdings and
Export, on a joint and several basis. These notes also have certain
restrictive covenants including limitations on the following matters: (i)
the incurrence of additional indebtedness, (ii) the issuance of preferred
stock by subsidiaries, (iii) the creation of liens, (iv) sale and
leaseback transactions, (v) restricted payments, (vi) the sales of assets
and subsidiary stock, (vii) mergers and consolidations (viii) payment
restrictions affecting subsidiaries and (ix) transactions with affiliates.
At December 28, 1997, the fair market value of Senior Notes approximated
its carrying value.
In May 1996, Aetna executed a new credit agreement whereby it may borrow,
based upon available collateral as defined in the agreement (principally
inventory, tooling, and accounts receivable), up to $35,000 at either (i)
a Floating Rate, defined as the greater of the Prime Rate or the sum of 1%
plus the Federal Funds Rate, or (ii) a Eurodollar Rate plus a margin
agreed to by the banks. The Company is also charged a monthly fee equal to
0.5% per annum of the daily average unused amount of the credit agreement.
The new credit agreement contains, among other provisions, covenants
relating to the ratios of (i) debt to earnings before income taxes,
interest and depreciation and amortization (EBITDA) and (ii) interest
expense to EBITDA.
In August 1996, in connection with the recapitalization of MS Acquisition
its parent (see Note 1), Aetna amended and restated this working credit
facility. The terms and covenants remained substantially unchanged.
Debt issuance costs related to the issuance of the 11-7/8% Senior Notes
aggregated $5,204, and are being amortized over the term of the notes.
Costs associated with the new credit agreement totaled $199 and are being
amortized over the five year term. Accumulated amortization for these
costs aggregated $853 at December 28, 1997.
F - 30
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit Numbered
- ------ ------- Page*
<S> <C> <C>
3.1 Certificate of Incorporation of Aetna Industries, Inc. ("Aetna") (1)
3.2 Amended and Restated Certificate of Incorporation of MS Acquisition (1)
Corp. ("MS Acquisition")
3.3 Certificate of Incorporation of Aetna Holdings, Inc. ("Aetna Holdings") (1)
3.4 Certificate of Incorporation of Aetna Export Sales Corp. ("Export") (1)
3.5 By-laws of Aetna (1)
3.6 By-laws of MS Acquisition (1)
3.7 By-laws of Aetna Holdings (1)
3.8 By-laws of Export (1)
4 Indenture dated as of August 1, 1996 by and among Aetna, Aetna (1)
Holdings, MS Acquisition, Export and Norwest Bank Minnesota, National
Association, as Trustee
10.1 Recapitalization and Stock Purchase Agreement dated as of August 13, (1)
1996 among Citicorp Venture Capital, Ltd., MS Acquisition and the
stockholders listed therein
10.2 Stock Purchase Agreement dated as of August 13, 1996 among MS (1)
Acquisition, Aetna Holdings and the stockholders and optionees listed
therein
10.3 Credit Agreement dated as of May 2, 1996 among MS Acquisition, Aetna (1)
and NBD Bank, as Lender and Agent (the "Credit Agreement")
10.4 First Amendment to Credit Agreement dated as of August 13, 1996 (1)
10.5 Security Agreement dated as of May 2, 1996 by Aetna in favor of NBD (1)
Bank, as Lender and Agent
10.6 Security Agreement dated as of May 2, 1996 by Export in favor of NBD (1)
Bank, as Lender and Agent
10.7 Pledge Agreement and Irrevocable Proxy dated as of May 2, 1996 by Aetna (1)
in favor of NBD Bank, as Lender and Agent
10.8 Registration Rights Agreement dated as of August 13, 1996 by and among (1)
Aetna, MS Acquisition, Aetna Holdings, Export and the Initial
Purchasers named therein
10.9 Stockholders Agreement dated as of August 13, 1996 among MS Acquisition (1)
and its stockholders named therein
</TABLE>
<PAGE> 58
<TABLE>
<S> <C> <C>
10.10 Registration Rights Agreement dated as of August 13, 1996 among MS (1)
Acquisition and its stockholders named therein
10.11 Management Agreement dated as of August 13, 1996 by and between MS (1)
Acquisition and Aetna**
10.12 Form of 11% Junior Subordinated Promissory Notes Due 2007 of Aetna (1)
Holdings dated August 13, 1996
10.13 Agreement to Indemnify dated as of August 13, 1996 between Aetna and (1)
each of R. Epker, R. Small, J. Bakken, D. Thal and J. Singer
10.14 Amended and Restated Executive Stock Option Plan of MS Acquisition** (1)
10.15 Form of Stock Option Agreement** (1)
10.16 Form of Employment Agreement dated as of August 13, 1996 among Aetna, (1)
MS Acquisition and Ueli Spring**
10.17 Employment Agreement dated as of August 13, 1996 among Aetna, MS (1)
Acquisition and Harold Brown**
10.18 Employment Agreement dated as of August 13, 1996 among Aetna, MS (1)
Acquisition and Gary Easterly**
10.19 Form of Purchase Order with General Motors Corporation
10.20 Form of Purchase Order with Chrysler Corporation (1)
12.1 Statement Regarding Computation of Ratios - Aetna
12.2 Statement Regarding Computation of Ratios - MS Acquisition
21 Subsidiaries of Aetna and MS Acquisition (1)
25 Statement of Eligibility and Qualification, Form T-1, of Norwest Bank (1)
Minnesota, National Association
27.1 Financial Data Schedule - Aetna (1)
27.2 Financial Data Schedule - MS Acquisition
</TABLE>
* This information appears only in the manually signed original copies of
this report.
** Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to Aetna's
Registration Statement No. 333-11801
<PAGE> 1
EXHIBIT 12.1
AETNA INDUSTRIES, INC.
INFORMATION ON RATIO OF EARNINGS
TO FIXED CHARGES COMPUTATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net income (loss) before the effect
of accounting changes $ (2,361) $ 3,693 $ 4,576 $ 6,595 $ 915
Income taxes (1,099) 2,105 1,877 4,000 930
---------- --------- --------- --------- --------
Pre-tax income (loss) (3,460) 5,798 6,453 10,595 1,845
Fixed charges per below 11,776 10,629 9,795 9,800 9,659
---------- --------- --------- --------- --------
Earnings (losses) from operations 8,316 16,427 16,248 20,395 11,504
---------- --------- --------- --------- --------
Fixed charges:
Interest expense 10,263 9,022 8,579 8,929 9,020
Debt amortization 607 763 442 198 99
Rent expense - portion of operating
rentals representative of the interest factor 906 844 774 673 540
---------- --------- --------- --------- --------
Total fixed charges 11,776 10,629 9,795 9,800 9,659
---------- --------- --------- --------- --------
Ratio of income to fixed charges (1) 1.5 1.7 2.1 1.2
</TABLE>
(1) The deficiency of earnings from operations versus fixed charges was
$3.5 million for the year ended December 28, 1997.
<PAGE> 1
EXHIBIT 12.2
MS ACQUISITION CORP.
INFORMATION ON RATIO OF EARNINGS
TO FIXED CHARGES COMPUTATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net income (loss) before the effect
of accounting changes $ (2,974) $ 3,436 $ 4,576 $ 6,595 $ 915
Income taxes (1,384) 1,972 1,877 4,000 930
---------- --------- --------- --------- --------
Pre-tax income (loss) (4,358) 5,408 6,453 10,595 1,845
Fixed charges per below 12,661 11,013 9,795 9,800 9,659
---------- --------- --------- --------- --------
Earnings (losses) from operations 8,303 16,421 16,248 20,395 11,504
---------- --------- --------- --------- --------
Fixed charges:
Interest expense 11,148 9,406 8,579 8,929 9,020
Debt amortization 607 763 442 198 99
Rent expense - portion of operating
rentals representative of the interest factor 906 844 774 673 540
---------- --------- --------- --------- --------
Total fixed charges 12,661 11,013 9,795 9,800 9,659
---------- --------- --------- --------- --------
Ratio of income to fixed charges (1) 1.5 1.7 2.1 1.2
</TABLE>
(1) The deficiency of earnings from operations versus fixed charges was $4.4
million for the year ended December 28, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001022657
<NAME> AETNA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 41,024
<ALLOWANCES> 359
<INVENTORY> 18,686
<CURRENT-ASSETS> 61,035
<PP&E> 92,937
<DEPRECIATION> 41,365
<TOTAL-ASSETS> 143,069
<CURRENT-LIABILITIES> 56,523
<BONDS> 85,000
0
0
<COMMON> 0
<OTHER-SE> (5,886)
<TOTAL-LIABILITY-AND-EQUITY> 143,069
<SALES> 205,741
<TOTAL-REVENUES> 205,741
<CGS> 181,336
<TOTAL-COSTS> 181,336
<OTHER-EXPENSES> 17,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,263
<INCOME-PRETAX> (3,460)
<INCOME-TAX> (1,099)
<INCOME-CONTINUING> (2,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,361)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001021907
<NAME> MS ACQUISITION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 40,798
<ALLOWANCES> 359
<INVENTORY> 18,686
<CURRENT-ASSETS> 60,809
<PP&E> 92,937
<DEPRECIATION> 41,365
<TOTAL-ASSETS> 142,843
<CURRENT-LIABILITIES> 56,863
<BONDS> 92,789
13,328
0
<COMMON> 9
<OTHER-SE> (23,254)
<TOTAL-LIABILITY-AND-EQUITY> 142,843
<SALES> 205,741
<TOTAL-REVENUES> 205,741
<CGS> 181,336
<TOTAL-COSTS> 181,336
<OTHER-EXPENSES> 17,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,148
<INCOME-PRETAX> (4,358)
<INCOME-TAX> (1,384)
<INCOME-CONTINUING> (2,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,974)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
