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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-------------------------------------------------
OR
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -------------------------
333-29727
(Commission File Number)
VIASYSTEMS, INC.
(Exact name of Registrant as specified in charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1777252
(I.R.S. Employer Identification No.)
101 SOUTH HANLEY ROAD
ST. LOUIS, MO 63105
(314) 727-2087
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Outstanding at
Class November 12, 1998
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<S> <C>
Viasystems, Inc.
Common Stock 1,000 shares
</TABLE>
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VIASYSTEMS, INC. & SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VIASYSTEMS, INC. & SUBSIDIARIES
Condensed Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999................................ 2
Condensed Consolidated Statements of Operations and Comprehensive Income
for the three and nine months ended September 30, 1998 and 1999.................................................. 3
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999...................................................................................... 4
Notes to Condensed Consolidated Financial Statements................................................................ 5
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 11
Item 3. - Quantitative and Qualitative Disclosures About Market Risk................................................ 16
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K........................................................................... 17
SIGNATURES.......................................................................................................... 18
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VIASYSTEMS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 9,335 $ 18,662
Accounts receivable, net............................................ 204,545 262,425
Inventories......................................................... 105,619 132,261
Prepaid expenses and other.......................................... 44,612 38,657
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Total current assets............................................. 364,111 452,005
Property, plant and equipment, net.................................. 580,204 680,098
Intangibles and other assets........................................ 510,388 660,329
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Total assets..................................................... $ 1,454,703 $ 1,792,432
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term obligations......................... $ 54,534 $ 25,214
Accounts payable.................................................... 133,725 157,480
Accrued and other liabilities....................................... 141,400 138,447
Income taxes payable................................................ 14,914 21,376
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Total current liabilities........................................ 344,573 342,517
Long-term obligations, less current maturities........................... 1,079,961 1,323,745
Other long-term liabilities.............................................. 143,655 149,994
Stockholder's equity (deficit):
Contributed capital................................................. 338,407 538,480
Accumulated deficit................................................. (461,013) (554,280)
Accumulated other comprehensive income (loss)....................... 9,120 (8,024)
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Total stockholder's equity (deficit)............................. (113,486) (23,824)
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Total liabilities and stockholder's equity....................... $ 1,454,703 $ 1,792,432
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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VIASYSTEMS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................ $ 262,989 $ 270,096 $ 767,307 $ 790,481
Operating expenses:
Cost of goods sold............................... 185,007 208,342 552,357 590,754
Selling, general and administrative.............. 25,247 29,015 81,655 78,052
Depreciation and amortization.................... 43,265 45,629 109,152 117,996
Write-off of acquired in-process R&D............. - 17,600 20,100 17,600
----------- ----------- ----------- -----------
Operating income (loss)...................... 9,470 (30,490) 4,043 (13,921)
Other expense:
Interest expense............................. 23,382 30,717 68,273 79,972
Amortization of deferred financing costs.... 2,383 2,637 6,789 7,552
Other, net................................... 502 2,164 2,659 3,730
----------- ----------- ----------- -----------
Loss before income tax provision and
cumulative effect of a change in accounting
principle................................. (16,797) (66,008) (73,678) (105,175)
Benefit for income taxes......................... (1,064) (17,822) (13,094) (28,850)
----------- ----------- ----------- -----------
Loss before cumulative effect of a change in
accounting principle...................... (15,733) (48,186) (60,584) (76,325)
Cumulative effect- write-off of start-up costs, net
of income tax benefit of $5,647.............. - - - 16,942
----------- ----------- ----------- -----------
Net loss ........................................ (15,733) (48,186) (60,584) (93,267)
----------- ----------- ----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustments.... 20,209 21,489 21,533 (17,144)
----------- ----------- ----------- -----------
Comprehensive income (loss)...................... $ 4,476 $ (26,697) $ (39,051) $ (110,411)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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VIASYSTEMS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1998 1999
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<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss.................................................................... $ (60,584) $ (93,267)
Adjustments to reconcile net loss to net cash from operating activities:
Write-off of acquired in-process research and development.............. 20,100 17,600
Depreciation........................................................... 59,125 80,678
Amortization of intangibles............................................ 50,027 37,318
Amortization of deferred financing costs............................... 6,789 7,552
Cumulative effect of a change in accounting principle - write-off
of start-up costs............................................... - 22,589
Deferred taxes......................................................... (10,709) (33,584)
Change in assets and liabilities, net of acquisitions:
Accounts receivable.................................................. (25,780) (25,516)
Inventories.......................................................... 3,581 (9,519)
Prepaid expenses and other........................................... (9,551) 1,609
Accounts payable and accrued and other liabilities................... (59,570) (10,217)
Income taxes payable................................................. - 1,218
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Net cash used in operating activities....................................... (26,572) (3,539)
------------ -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired..................................... (145,464) (313,843)
Capital expenditures................................................... (86,416) (77,388)
------------ --------------
Net cash from investing activities.......................................... (231,880) (391,231)
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Cash flows from financing activities:
Equity proceeds........................................................ 55,616 198,077
Proceeds from the issuance of Series B Senior Subordinated Notes
due 2007.......................................................... 104,500 -
Borrowings under the Term Facilities................................... 103,438 264,875
Net borrowings under the Revolvers..................................... 29,260 50,307
Repayment of the Chips Loan Notes liability............................ (33,938) -
Chips Term Loans - cash collateral..................................... - (89,875)
Repayments of other long-term obligations.............................. (7,817) (10,742)
Financing costs........................................................ (12,271) (7,706)
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Net cash from financing activities.......................................... 238,788 404,936
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Effect of exchange rate changes on cash..................................... 2,512 (839)
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Net change in cash and cash equivalents..................................... (17,152) 9,327
Cash and cash equivalents - beginning of the period......................... 27,538 9,335
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Cash and cash equivalents - end of the period............................... $ 10,386 $ 18,662
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
Unaudited Interim Condensed Consolidated Financial Statements
The unaudited interim condensed consolidated financial statements reflect
all adjustments consisting only of normal recurring adjustments that are, in the
opinion of management, necessary for a fair presentation of financial position
and results of operations. The results for the three and nine months ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for a full fiscal year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 1998.
Statement of Cash Flows
Interest paid for the nine months ended September 30, 1998 and 1999 was
approximately $55,803 and $58,935, respectively. Income taxes paid for the nine
months ended September 30, 1998, were approximately $20,176. Net income tax
refunds received for the nine months ended September 30, 1999, were
approximately $2,130.
2. INTANGIBLE ASSET
The Company's management is performing a comprehensive review of the
strategic position of its individual business units, which have resulted in
plant shutdowns, downsizing and consolidation of certain facilities. As a
result, the Company is assessing the carrying value of goodwill and other
acquired intangibles. While the Company has not yet completed this assessment, a
possible outcome may be a write-off of a portion of the goodwill and other
acquired intangible assets presently carried on the books. The Company expects
to conclude this matter in the near term, but not later than the filing of its
Form 10-K for the current fiscal year.
3. ACQUISITIONS
In August 1999, the Company acquired the printed circuit board ("PCB")
manufacturing division ("Kalex") of Termbray Industries International (Holdings)
Limited, a manufacturer of rigid PCBs located in the People's Republic of China,
for a net cash purchase price of approximately $301,000 plus acquisition costs
of approximately $8,500 (the "Kalex Acquisition"). Accordingly, the results of
operations of Kalex since acquisition are included in the results of operations
of the Company.
The Kalex Acquisition has been accounted for using the purchase method of
accounting whereby the total purchase price has been preliminarily allocated to
the assets and liabilities based on their estimated respective fair values. The
Company has allocated a portion of the purchase price, as described below, to
intangible assets, including in-process research and development ("in-process
R&D"). The portion of the purchase price allocated to in-process R&D projects
that did not have future alternative use totaled $17,600 and was charged to
expense as of the acquisition date. The other acquired intangibles include
developed technologies, assembled workforce and customer list. These intangibles
are being amortized over their estimated useful lives of 1-15 years. The
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remaining unidentified intangible asset has been allocated to goodwill and is
being amortized over its estimated useful life of 20 years.
Kalex's in-process research and development value is comprised of numerous
programs that should reach completion during periods ranging from October 1999
through September 2000. These projects will include the introduction of
important new technology that will, if successful, enable the advancement of
Kalex's PCB product line. At the acquisition date, research and development
programs ranged from 65% to 80% complete and total continuing research and
development commitments to complete the projects are expected to be
approximately $2.4 million. These estimates are subject to change, given the
uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur. Additionally, these projects
will require maintenance research and development after they have reached a
state of technological and commercial feasibility. In addition to usage of the
companies' internal cash flows, Viasystems will likely provide a substantial
amount of funding to complete the company's programs. Remaining development
efforts for the in-process research and development programs are complex and
include the development of next-generation technological solutions.
Certain projects within Kalex's in-process research and development programs
are anticipated to bear results in October 1999. As evidenced by their continued
support for these projects, management believes the Company is well positioned
to successfully complete each of the major in-process research and development
programs. Management believes other in-process projects are on track to be
completed and will continue to bear results in future periods. However, there is
risk associated with the completion of the projects and there is no assurance
that each will meet with either technological or commercial success. The
substantial delay or outright failure of the in-process research and development
related to Kalex would impact the Company's business, results of operations and
cash flows.
Kalex's total revenues are projected to increase over the next ten years,
assuming the successful completion and market acceptance of the in-process
research and development programs. Estimated revenue from existing technologies
of Kalex are expected to slowly decline over the next six years as the
in-process technologies are completed and existing processes and know-how
approach obsolescence. The estimated revenues for in-process projects related to
Kalex are expected to peak in 2002, and thereafter decline as other new products
and technologies are expected to enter the market.
The total purchase price including fees and expenses has been preliminarily
allocated to the acquired net assets as follows:
<TABLE>
<S> <C>
Current assets.............................................................. $ 63,997
Property, plant and equipment............................................... 101,728
Acquired intangibles........................................................ 89,400
In-process R&D.............................................................. 17,600
Goodwill.................................................................... 71,117
Other non-current assets.................................................... 699
Current liabilities......................................................... (32,997)
Non-current liabilities..................................................... (2,020)
----------
Total................................................................... $ 309,524
==========
</TABLE>
The Kalex Acquisition was funded with (i) an additional equity contribution
of $200,000 and (ii) a portion of a $291,000 term loan borrowing under the
Company's senior secured credit facility (see Note 6).
In April 1999, the Company acquired all of the outstanding shares of PAGG
Corporation ("PAGG") located in Milford, Massachusetts, for a cash purchase
price of approximately $9,300 plus the issuance of 1,639,344
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shares of Viasystems Group, Inc.'s $0.01 per share common stock valued at
$2,000. PAGG operates multiple surface mount production lines for printed
circuit board and backplane assembly and has full box build capabilities. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of PAGG since acquisition are included in the results of operations
of the Company.
Included below is unaudited pro forma financial data setting forth
condensed results of operations of the Company for the nine months ended
September 30, 1998 and 1999, as though the Kalex Acquisition and the related
financing and equity contribution had occurred at January 1, 1998 and January 1,
1999, respectively. In preparing this data, the financial data of Kalex for the
nine months ended September 30, 1998 has been translated at an exchange rate of
Hong Kong Dollars ("HK$") 7.7490=U.S.$1.00. The financial data of Kalex for the
pre acquisition period from January through July 1999 has been translated at an
exchange rate of HK$ 7.7621=U.S.$1.00. These exchange rates represent the rates
in effect at September 30, 1998 and July 31, 1999, respectively, which are not
materially different from the average exchange rates for the respective periods.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1999
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<S> <C> <C>
Net sales.......................................................... $ 898,162 $ 882,596
Net loss before extraordinary item................................. (61,003) (99,143)
Net loss........................................................... (61,003) (99,143)
</TABLE>
4. INVENTORIES
The composition of inventories at September 30, 1999, is as follows:
<TABLE>
<S> <C>
Raw materials................................................................ $ 48,326
Work-in-process.............................................................. 52,802
Finished goods............................................................... 31,133
----------
Total........................................................................ $ 132,261
==========
</TABLE>
5. PLANT SHUTDOWN, DOWNSIZING AND CONSOLIDATION ACCRUALS
Details of accrued liabilities follows:
<TABLE>
<S> <C>
Accrual balance, December 31, 1998.......................................... $ 39,620
Costs incurred:
Key personnel and severance costs........................................... 5,021
Equipment removal and disposal.............................................. 1,017
Idle plant costs............................................................ 6,028
Cleanup and restoration..................................................... 3,274
Lease commitment costs...................................................... --
----------
Accrual balance, September 30, 1999......................................... $ 24,280
==========
</TABLE>
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6. LONG-TERM OBLIGATIONS
The composition of long-term obligations at September 30, 1999, is as
follows:
<TABLE>
<S> <C>
Credit Agreement:
Term Facilities......................................................... $ 350,437
Revolvers............................................................... 167,551
Senior Subordinated Notes due 2007.......................................... 400,000
Series B Senior Subordinated Notes due 2007................................. 100,000
Series B Senior Subordinated Notes due 2007, premium........................ 3,952
Chips Loan Notes liability.................................................. 285,313
Other debt.................................................................. 41,706
------------
1,348,959
Less: current maturities.................................................... 25,214
------------
$ 1,323,745
============
</TABLE>
In connection with the Kalex Acquisition, the Company entered into a Third
Amended and Restated Credit Agreement (the "Credit Agreement") with terms
substantially similar to the Second Amended and Restated Credit Agreement. The
Credit Agreement was amended to, among other things, establish an additional
$291,000 term loan facility (the "New Tranche C Term Loan"), repay $10,125
outstanding under the Chips Term Loans and to cash collateralize future amounts
due under the Chips Term Loans by approximately $89,875. Additionally, the
company received an equity contribution of $200,000.
7. ACCOUNTING CHANGE
In April 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities and organization costs
to be expensed as incurred. Effective January 1, 1999, the Company adopted SOP
98-5 and accordingly recorded a cumulative effect of a change in accounting
principle for the write-off of the net book value of start-up costs as of
January 1, 1999. See the Condensed Consolidated Statement of Operations and
Comprehensive Income.
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8. BUSINESS SEGMENT INFORMATION
Pertinent financial data by major geographic segments is as follows:
<TABLE>
<CAPTION>
Operating
Net Sales Income/(Loss)
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<S> <C> <C>
NORTH AMERICA:
Nine months ended September 30, 1998............................ $ 388,874 $ 44,020
Nine months ended September 30, 1999............................ 435,459 47,878
EUROPE:
Nine months ended September 30, 1998............................ $ 378,433 $ (39,977)
Nine months ended September 30, 1999............................ 333,473 (45,655)
ASIA:
Nine months ended September 30, 1998............................ $ - $ -
Nine months ended September 30, 1999............................ 30,672 (16,144)
ELIMINATIONS:
Nine months ended September 30, 1998............................ $ - $ -
Nine months ended September 30, 1999............................ (9,123) -
TOTAL:
Nine months ended September 30, 1998............................ $ 767,307 $ 4,043
Nine months ended September 30, 1999............................ 790,481 (13,921)
Operating
Net Sales Income/(Loss)
------------ ------------
NORTH AMERICA:
Three months ended September 30, 1998........................... $ 135,577 $ 21,024
Three months ended September 30, 1999........................... 138,994 5,030
EUROPE:
Three months ended September 30, 1998........................... $ 127,412 $ (11,554)
Three months ended September 30, 1999........................... 103,575 (19,376)
ASIA:
Three months ended September 30, 1998........................... $ - $ -
Three months ended September 30, 1999........................... 30,672 (16,144)
ELIMINATIONS:
Three months ended September 30, 1998........................... $ - $ -
Three months ended September 30, 1999........................... (3,145) -
TOTAL:
Three months ended September 30, 1998........................... $ 262,989 $ 9,470
Three months ended September 30, 1999........................... 270,096 (30,490)
</TABLE>
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9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allow a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The Company has not yet quantified the impacts of
adopting SFAS No. 133 on its consolidated financial statements nor has it
determined the timing or method of its adoption of SFAS No. 133. However, SFAS
No. 133 could increase volatility in earnings and other comprehensive income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information presented herein includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. One
can identify these forward-looking statements by their use of words such as
"expects," "plans," "will," "intends," "anticipates," "estimates," "forecasts,"
"projects" and other words of similar meaning. These statements are likely to
address expected or possible future events, including statements of the plans
and objectives of management for future growth, operations, products and
services and statements relating to future economic performance. There can be no
assurance that the Company's actual results will not differ materially from its
expectations. One must carefully consider any such statement and should
understand that many factors could cause actual results to differ from the
Company's forward-looking statements. For those statements, the Company claims
protection of the safe harbor for forward-looking statements provided for by
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities and Exchange Act of 1934, as amended. These factors include
assumptions based on historic experiences that may not apply to future results
as well as a broad variety of other risks and uncertainties, including some that
are known and some that are not. No forward-looking statement can be guaranteed
and actual future results may vary materially. Although it is not possible to
predict or identify all such factors, they include the following:
o General competition in the markets and industries in which the Company
operates;
o Consequences of the Company's substantial leverage including: (i)
significant cash requirements to service indebtedness, reducing funds
available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (ii) possible limitations on its
ability to obtain additional financing for operations and
acquisitions; and (iii) restrictions placed on it by the agreements
setting forth the terms and conditions of such indebtedness;
o Uncertainties arising from the Company's limited history of
integrating the operations of separate and distinct businesses
acquired since August 1996;
o Uncertainties arising from the Company's ability to implement its
operating and acquisition strategies, including the ability to
identify, negotiate and consummate future acquisitions on terms
management considers favorable;
o Fluctuation in operating results arising from the variability in
timing and volume of customer orders compared to the Company's
capacity at the time of such orders, timing of expenditures in
anticipation of future sales, pricing pressures, variations in product
mix, start-up expenses relating to new facilities, economic conditions
in the electronics industry and adverse developments with respect to
significant customers, including Lucent Technologies, any or all of
which could have a material adverse effect on the Company and its
results of operations, financial condition, cash flows and its ability
to service debt;
o Uncertainties arising from the rapidly changing technology and
continually changing process developments characteristic of the market
for the Company's products and services;
o Uncertainties relating to the Company's significant operations in
international markets, including currency fluctuations and
restrictions, inflation, changes in political and economic conditions,
governmental regulation, changes in import duties, trade restrictions,
work stoppages and taxes;
o Changes in accounting standards promulgated by the American Institute
of Certified Public Accountants, the Financial Accounting Standards
Board or the SEC that are adverse to the Company; and
o Economic factors over which the Company has no control, including
inflation and interest rates.
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This list should not be considered an exhaustive statement of all potential
risks and uncertainties that may affect adversely the Company's business,
results of operations, financial condition, prospects and ability to service
debt.
GENERAL
Viasystems, Inc. (the "Company" or "Viasystems") was formed by Hicks, Muse,
Tate & Furst Incorporated ("HMTF") and Mills & Partners, Inc. ("M&P") in August
1996 to make acquisitions of PCB manufacturers and backplane assemblers
globally. Viasystems had no operations prior to the first acquisition completed
in October 1996. A total of seven acquired businesses include five previously
stand-alone companies and two previously captive divisions of electronic
manufacturing OEMs.
The four initial acquisitions included (i) an approximate $129.9 million
cash purchase price for Circo Craft Co. Inc. in Canada in October 1996, (ii) an
approximate $200.0 million cash purchase price for the Microelectronics Group,
Interconnection Technologies Unit of Lucent Technologies Inc. (the "Lucent
Division") in Richmond, Virginia in December 1996, (iii) an approximate $208.5
million cash purchase price for Forward Group, PLC in the United Kingdom in
April 1997, and (iv) an approximate $140.0 million cash purchase price, plus
assumption of debt, for Interconnection Systems (Holdings) Limited in the United
Kingdom in April 1997.
Four subsequent acquisitions included i) an approximate $7.1 million cash
purchase price for the PCB production facility of Ericsson Telecom AB in Sweden
in January 1998, ii) an approximate $59.4 million cash purchase price for Print
Service Holding N.V.A, the parent holding company of Mommers Print Service B.V.
in the Netherlands in February 1998, and iii) an approximate $85.0 million cash
purchase price, plus assumption of debt for Zincocelere S.p.A. in Italy in March
1998, and iv) an approximate $301.0 million cash purchase price for the PCB
manufacturing division of Termbray Industries International (Holdings) Limited
("Kalex") in the People's Republic of China in August 1999, (the "Kalex
Acquisition").
Assimilation of the eight acquired businesses into a single global operation
has included the closure of acquired manufacturing facilities, severance of
redundant production and administrative personnel, relocation of production
equipment, transfer of technology and customer-specific product capabilities
among Viasystems' sites, leverage of purchasing power of the larger combined
business and other similar activities. Management plans to continue such
activities related to the existing business and related to any subsequent
acquisitions.
In general, volume demand for Viasystems' products increases or decreases
consistent with demand trends in the electronics industry markets served by the
Company, predominantly telecommunications, computer, automotive, and industrial
and instrumentation. Demand trends for higher layer count PCBs and backplanes,
greater density of circuits and vias on PCBs and backplanes, and surface mount
and other developing interconnect technologies, among others, have also resulted
in increased demand for the Company's more complex product offerings. Management
expects increased demand for denser and increasingly complex products in most
industry markets.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales for the three months ended September 30, 1999, were $270.1
million, representing a $7.1 million, or 2.7% increase from the same period in
1998. The increase is primarily a result of the Kalex Acquisition offset by
volume decreases, industry-wide pricing pressures and contractual price
reductions.
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Cost of goods sold for the three months ended September 30, 1999, was
$208.3 million, or 77.1% of sales compared to $185.0 million, or 70.3% of sales
for the three months ended September 30, 1998. Cost of goods sold increased as a
percent of sales year over year as a result of volume decreases and price
reductions discussed above partially offset by cost containment activities.
Selling, general and administrative expenses for the three months ended
September 30, 1999, increased by $3.8 million versus the comparable period in
1998. These costs increased primarily due to the Kalex Acquisition in August
1999, offset by the cost containment efforts made by the Company.
Depreciation and amortization of $45.6 million increased $2.3 million for
the three months ended September 30, 1999 compared to $43.3 million for the same
period in 1998. This increase is primarily related to amortization of
intangibles from the Kalex Acquisition.
Other expense increased $9.2 million, from $26.3 million, for the three
months ended September 30, 1998 to $35.5 million for the three months ended
September 30, 1999. The increase was a result of higher interest expense and
amortization of deferred financing costs related to the debt financing incurred
to fund the Kalex Acquisition.
During the three months ended September 30, 1999, the Company recorded a
one-time non-cash write-off of $17.6 million related to in-process research and
development acquired in the Kalex Acquisition.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1999
Net sales for the nine months ended September 30, 1999, were $790.5
million, representing a $23.2 million, or 3.0% increase from the comparable
period in 1998. The increase is due primarily to the acquisitions of Mommers and
Zincocelere in 1998 and the acquisition of Kalex in 1999, partially offset by
industry-wide pricing pressures, contractual price reductions, and volume
decreases.
Cost of goods sold for the nine months ended September 30, 1999, was $590.8
million, or 74.7% of sales compared to $552.4 million, or 72.0% of sales for the
nine months ended September 30, 1998. Cost of goods sold as a percent of sales
increased year over year as a result of product mix changes from the 1998
acquisitions as well as the above mentioned currency-related and contractual
price reductions experienced by the Company, partially offset by cost
containment activities.
Selling, general and administrative expenses for the nine months ended
September 30, 1999, decreased by $3.6 million versus the comparable period in
1998. These costs decreased primarily due to cost containment efforts made by
the Company partially offset by increases in general and administrative expenses
related to the Kalex Acquisition.
Other expense increased $13.6 million, from $77.7 million for the nine
months ended September 30, 1998 to $91.3 million in the same period of 1999, due
primarily to increased interest expense and amortization of deferred financing
costs related to the debt financing incurred to fund the acquisitions of
Mommers and Zincocelere in the first quarter of 1998 and Kalex in August 1999.
Depreciation and amortization increased $8.8 million for the nine months
ended September 30, 1999, primarily as a result of the impact to depreciation of
acquired fixed assets and to amortization of acquired intangibles from the
acquisitions of Mommers and Zincocelere in the first quarter of 1998.
During the first nine months of 1999, the Company recorded a one-time
non-cash cumulative effect of a change in accounting principle of $16.9 million
(net of $5.6 million income tax benefit) related to the write-off of the net
book value of start-up costs as of January 1, 1999.
13
<PAGE> 15
During the first nine months of 1998, the Company recorded a one-time
non-cash write-off of $20.1 million related to in-process research and
development acquired in the acquisitions of Mommers and Zincocelere. During the
nine months ended September 30, 1999, the Company recorded a one-time non-cash
write-off of $17.6 million related to in-process research and development
acquired in the Kalex Acquisition.
The Company believes that the operating results of Viasystems are not
comparable to the operating results expected to be achieved in the future due
to, among other things, the acquisitions and the completed debt and equity
offerings in the first fiscal quarter of 1998 and in the third fiscal quarter of
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements will be for debt service
requirements, working capital needs and capital expenditures. In addition, the
potential for acquisitions of other businesses by the Company in the future
likely may require additional debt and/or equity financing.
In connection with the Kalex Acquisition, the Company entered into a Third
Amended and Restated Credit Agreement (the "Credit Agreement") with terms
substantially similar to the Second Amended and Restated Credit Agreement. The
Credit Agreement was amended to, among other things, establish an additional
$291 million term loan facility (the "New Tranche C Term Loan"), repay $10.1
million outstanding under the Chips Term Loans and to cash collateralize future
amounts due under the Chips Term Loans by approximately $89.9 million.
Additionally, the Company received an equity contribution of $200 million.
Net cash used in operating activities was $3.5 million for the nine months
ended September 30, 1999, compared to net cash used in operating activities of
$26.6 million for the same period in 1998. The increase in net cash provided by
operating activities relates primarily to timing of payments to certain vendors.
Net cash used in investing activities was $391.2 million for the nine
months ended September 30, 1999, compared to $231.9 million for the nine months
ended September 30, 1998. The net cash used in investing activities for the
first nine months of 1999 included $313.8 million related to the acquisitions of
Kalex and PAGG with the remainder related to capital expenditures. In 1998, net
cash used in investing activities included $145.5 million related to the 1998
acquisitions with the remainder related to capital expenditures.
During 1999, the acquisition of Kalex was funded primarily through an
additional $291.0 million term loan borrowing and an equity contribution of
$200.0 million. During 1998, the acquisitions of Mommers and Zincocelere were
funded primarily through the proceeds from the offering of $100.0 million
principal amount of 9 3/4% Series B Senior Subordinated Notes due 2007, an
equity contribution of $50.0 million and additional term loan borrowings of
$70.0 million.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
produce invoices, or engage in similar normal business activities.
Management has implemented a Company-wide initiative to ensure that both its
information technology systems and non-information technology systems
applications are capable of processing data and transactions pertaining to the
year 2000. The initiative utilizes both Company resources and external resources
to identify and assess systems and applications affected, to correct existing
systems or to acquire replacement systems, and
14
<PAGE> 16
to test the systems and applications for compliance with the requirements for
processing year 2000 information. The Company's information systems are
currently being upgraded and replaced as part of a strategy to implement
consistent systems worldwide. The new systems being installed are capable of
processing year 2000 information. All remaining systems will either be corrected
in order to enable them to process year 2000 information or, if necessary, will
be replaced with year 2000 compliant systems. The Company has, to the best of
its knowledge, achieved Year 2000 readiness in its mission critical business
applications, computers and communications, facilities and process equipment,
and does not anticipate any material disruption in its operations as the result
of any failure by the Company to be in compliance. However, there can be no
assurance that all issues have been identified or that the remediation process
will be fully effective. The Company will capitalize and depreciate the cost of
replacement systems consistent with its existing capital expenditures policies.
Costs incurred to modify and maintain existing systems will be expensed as
incurred. Management believes that a substantial portion of the costs for the
new systems and the modifications will not represent incremental costs to the
Company, but rather will represent the reallocation of existing and planned
information technology resources. The amounts expensed related to the year 2000
issue have been immaterial, and management expects that amounts required to be
expensed in future periods will not have a material effect on its financial
position or results of operations.
The Company is currently in the process of evaluating the external risk
associated with the year 2000 issue. All critical or significant suppliers have
been identified by the Company and have been surveyed regarding their year 2000
readiness. The Company has reviewed the results of those surveys and has
undertaken year 2000 risk assessment audits of each critical supplier. Although
the Company uses a select group of suppliers, the materials used in
manufacturing PCBs are generally readily available in the open market.
Therefore, the Company believes any costs associated with the anticipated effect
of third parties will be immaterial on its business, financial position or
results of operations. However, there can be no guarantee that the systems of
third parties on which the Company's systems rely will be converted timely or
that a failure of a third party to convert would not have a material adverse
effect on the Company.
The Company is currently developing contingency plans for all inventoried
business critical year 2000 equipment and significant third parties based on the
assessed level of risk known to date.
The failure to identify and remediate year 2000 issues or the failure of key
third parties who do business with the Company to timely remediate their year
2000 issues could cause systems failures or errors, business interruptions and
in a worst case scenario, the inability to engage in normal business practices
for an unknown length of time. Litigation could also ensue. The effect on the
Company's business, financial condition, results of operations and cash flows
could be materially adverse.
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Kalex Acquisition, the Company incurred a $17.6
million charge related to purchased in-process research and development. The
Company believes that efforts to complete the acquired in-process research and
development projects will consist primarily of internal engineering costs over
the next year. These costs are estimated to be approximately $2.4 million. Such
an estimate is subject to revision should there be any changes in the operating
environment or the technical knowledge available within the industry or the
Company. The Company, through its continued investment in research and
development, intends to achieve and sustain technical superiority in the design
and delivery of advanced PCB products, and believes, given its leadership
position in the industry, that it is well positioned to do so. The Company
believes that the new product and process technologies which result from ongoing
research and development will build on the existing core PCB technology and
contribute to an anticipated growth in the Company's sales and anticipated
improvements in the Company's cost of production in the future. If acceptable
advancements are not achieved, failed research and development projects could
have a material adverse effect on the Company's financial position or results of
operations. The Company is unable to accurately quantify the potential impact in
the future of the failure of any
15
<PAGE> 17
single project or multiple projects which were acquired as in-process research
and development in the acquisition. Although there can be no guarantee that the
acquired in-process research and development projects will achieve technological
feasibility, the Company believes that the likelihood of development is
reasonable for these projects. The Company does not believe that it is subject
to any greater risk of failure than its competitors, and, in fact, believes that
its size, access to financial resources and relationships with customers
contribute to a reduction of that risk which gives the Company a competitive
technical advantage.
CONVERSION TO THE EURO
On January 1, 1999, eleven participating countries of the European Union
converted to the Euro as their common national currency. The previous national
currencies of these countries will still be accepted as legal tender until at
least January 1, 2002. We do not expect the conversion to the Euro to have a
material effect on our results of operations, financial condition or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
At September 30, 1999, approximately $899,864 million of the Company's
long-term debt, specifically borrowings outstanding under the senior credit
facilities under the Credit Agreement and the Chips Loan Notes, bear interest at
variable rates. Accordingly, the Company's earnings and cash flow are affected
by changes in interest rates. Assuming the current level of borrowings at
variable rates and assuming a two percentage point change in the average
interest rate under these borrowings, it is estimated that the Company's
interest expense for the three months ended September 30, 1999, would have
increased by approximately $4,500 million. In the event of an adverse change in
interest rates, management would likely take actions that would mitigate the
Company's exposure to interest rate risk; however, due to the uncertainty of the
actions that would be taken and their possible effects, this analysis assumes no
such action. Further, this analysis does not consider the effects of the change
in the level of overall economic activity that could exist in such an
environment.
FOREIGN CURRENCY RISK
The Company manufactures PCBs and assembles backplanes in various regions of
the world, and exports and imports these products to and from several countries.
The Company's operations may therefore be subject to volatility because of
currency fluctuations, inflation and changes in political and economic
conditions in these countries. Sales and expenses are frequently denominated in
local currencies, and results of operations may be affected adversely as
currency fluctuations affect the Company's product prices and operating costs or
those of its competitors. The Company, from time to time, engages in hedging
operations, such as forward exchange contracts, to reduce its exposure to
foreign currency fluctuations. The Company does not engage in hedging
transactions for speculative investment reasons. Such hedging operations
historically have not been material and gains and losses from such operations
have not been significant. There can be no assurance that such hedging
operations will eliminate or substantially reduce risks associated with
fluctuating currencies.
16
<PAGE> 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
2.8 - Share Purchase Agreement, dated August 1, 1999,
among Termbray Electronics (B.V.I.) Limited, Termbray
Industries International (Holdings) Limited, Viasystems,
Inc. and Viasystems Group, Inc. (incorporated by
reference to exhibit 2.8 to the Form 8-K/A of the
Company filed on October 15, 1999).
3.1 - Certificate of Incorporation of Viasystems, Inc.
(incorporated by reference to exhibit 3.1 to the
Registration Statement filed by the Company on Form S-1,
Registration No. 333-29727).
3.2 - Bylaws of Viasystems, Inc. (incorporated by
reference to exhibit 3.2 to the Registration Statement
filed by the Company on Form S-1).
4.11 - Third Amended and Restated Credit Agreement, dated
August 5, 1999, among Viasystems Group, Inc.,
Viasystems, Inc., the Foreign Subsidiary Borrowers
parties thereto, the lenders parties thereto, The Chase
Manhattan Bank of Canada, Chase Manhattan International
Limited, The Chase Manhattan Bank and Chase Securities
Inc. (incorporated by reference to exhibit 4.11 to the
Form 8-K/A of the Company filed on October 15, 1999).
27.1 - Financial data schedule of Viasystems, Inc.
</TABLE>
(b) Reports on Form 8-K
Form 8-K filed by the Company on August 19, 1999.
Form 8-K/A filed by the Company on October 15, 1999.
17
<PAGE> 19
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VIASYSTEMS, INC.
Dated: November 12, 1999 By:
/s/ David M. Sindelar
-------------------------------
Name: David M. Sindelar
Title: Senior Vice President and
Chief Financial Officer
/s/ Joseph S. Catanzaro
-------------------------------
Name: Joseph S. Catanzaro
Title: Chief Accounting Officer
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.8 - Share Purchase Agreement, dated August 1, 1999,
among Termbray Electronics (B.V.I.) Limited, Termbray
Industries International (Holdings) Limited, Viasystems,
Inc. and Viasystems Group, Inc. (incorporated by
reference to exhibit 2.8 to the Form 8-K/A of the
Company filed on October 15, 1999).
3.1 - Certificate of Incorporation of Viasystems, Inc.
(incorporated by reference to exhibit 3.1 to the
Registration Statement filed by the Company on Form S-1,
Registration No. 333-29727).
3.2 - Bylaws of Viasystems, Inc. (incorporated by
reference to exhibit 3.2 to the Registration Statement
filed by the Company on Form S-1).
4.11 - Third Amended and Restated Credit Agreement, dated
August 5, 1999, among Viasystems Group, Inc.,
Viasystems, Inc., the Foreign Subsidiary Borrowers
parties thereto, the lenders parties thereto, The Chase
Manhattan Bank of Canada, Chase Manhattan International
Limited, The Chase Manhattan Bank and Chase Securities
Inc. (incorporated by reference to exhibit 4.11 to the
Form 8-K/A of the Company filed on October 15, 1999).
27.1 - Financial data schedule of Viasystems, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,662
<SECURITIES> 0
<RECEIVABLES> 268,946
<ALLOWANCES> (6,521)
<INVENTORY> 132,261
<CURRENT-ASSETS> 452,005
<PP&E> 898,882
<DEPRECIATION> (218,784)
<TOTAL-ASSETS> 1,792,432
<CURRENT-LIABILITIES> 342,517
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (23,824)
<TOTAL-LIABILITY-AND-EQUITY> 1,792,432
<SALES> 790,481
<TOTAL-REVENUES> 790,481
<CGS> 590,754
<TOTAL-COSTS> 590,754
<OTHER-EXPENSES> 139,326<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,524
<INCOME-PRETAX> (105,175)
<INCOME-TAX> (28,850)
<INCOME-CONTINUING> (76,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 16,942<F1>
<NET-INCOME> (93,267)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS CUMULATIVE EFFECT ON PRIOR YEARS DUE TO THE WRITE OFF OF START-UP
COSTS RESULTING FROM THE REQUIRED ADOPTION OF STATEMENT OF POSITION 98-5,
"REPORTING ON THE COSTS OF START-UP ACTIVITIES", NET OF TAX BENEFIT OF $5,647.
<F2>INCLUDES CHARGES OF $17,600 RELATING TO THE WRITE-OFF OF ACQUIRED IN-PROCESS
RESEARCH AND DEVELOPMENT COSTS ASSOCIATED WITH THE ACQUISITION OF KALEX. THE
WRITE-OFF RELATES TO ACQUIRED RESEARCH AND DEVELOPMENT PROJECTS THAT DO NOT
HAVE A FUTURE ALTERNATIVE USE.
</FN>
</TABLE>
