<PAGE> 1
As filed with the Securities and Exchange Commission on September 3, 1998
REGISTRATION NO. 333-56461
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TALON AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MICHIGAN 3465 38-3382174
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
900 WILSHIRE DRIVE
SUITE 203
TROY, MICHIGAN 48084
(248) 362-7600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DAVID J. WOODWARD
VICE PRESIDENT OF FINANCE, CHIEF FINANCIAL OFFICER AND TREASURER
TALON AUTOMOTIVE GROUP, INC.
900 WILSHIRE DRIVE
SUITE 203
TROY, MICHIGAN 48084
(248) 362-7600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
WITH COPIES TO:
RICHARD M. BOLTON, ESQ.
MARK A. DENSMORE, ESQ.
DICKINSON WRIGHT PLLC
500 WOODWARD AVENUE
SUITE 4000
DETROIT, MICHIGAN 48226-3425
(313) 223-3500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 5/8% Senior Subordinated Notes due 2008,
Series B................................. $120,000,000 100% $120,000,000 $35,400.00
- -----------------------------------------------------------------------------------------------------------------------------
Guarantees of 9 5/8% Senior Subordinated
Notes due 2008........................... (2) (2) (2) (2)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for the purposes of calculating the
registration fee.
(2) Pursuant to Rule 457(n), no registration fee is required with respect to the
Guarantees of the Senior Subordinated Notes registered hereby.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
------------------------
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PRIMARY STANDARD
EXACT NAME OF GUARANTOR REGISTRANT AS I.R.S. EMPLOYER INDUSTRIAL
SPECIFIED IN ITS CHARTER JURISDICTION OF ORGANIZATION IDENTIFICATION NO. CLASSIFICATION CODE NO.
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VS Holdings, Inc........................ Michigan 38-3382174 3465
- ---------------------------------------------------------------------------------------------------------------------------
Veltri Holdings USA, Inc................ Indiana 35-1849474 3465
- ---------------------------------------------------------------------------------------------------------------------------
Veltri Metal Products Co................ Nova Scotia 38-3354143 3465
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
TALON AUTOMOTIVE GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER HEADING OR SUBHEADING IN PROSPECTUS
-------------------- -----------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1.
Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page of Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus.
2.
Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Page of Prospectus; Outside Back Cover
Page of Prospectus.
3.
Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information............ Prospectus Summary; Risk Factors; Selected Financial Data;
Unaudited Pro Forma Condensed Combined Financial
Information; Notes to Unaudited Pro Forma Condensed Combined
Financial Information; Unaudited Pro Forma Condensed
Combined Interim Financial Information; Notes to Unaudited
Pro Forma Condensed Combined Interim Financial Information
4.
Terms of the Transaction.................. Prospectus Summary; The Exchange Offer; Description of New
Notes; Federal Income Tax Consequences Relating to the
Exchange Offer; Description of Senior Debt; Old Notes;
Registration Rights; Book Entry; Delivery and Form; Plan of
Distribution.
5.
Pro Forma Financial Information........... Prospectus Summary; Unaudited Pro Forma Condensed Combined
Financial Information; Notes to Unaudited Pro Forma
Condensed Combined Financial Information; Unaudited Pro
Forma Condensed Combined Interim Financial Information;
Notes to Unaudited Pro Forma Condensed Combined Interim
Financial Information
6.
Material Contracts With the Company Being
Acquired.................................. Not Applicable.
7.
Additional Information Required For
Reoffering by Persons and Parties Deemed
to be Underwriters........................ Not Applicable.
8.
Interests of Named Experts and Counsel.... Legal Matters; Experts.
9.
Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities............................... Not Applicable.
B. INFORMATION ABOUT THE REGISTRANT
10.
Information With Respect to S-3
Registrants............................... Not Applicable.
11.
Incorporation of Certain Information by
Reference................................. Not Applicable.
12.
Information With Respect to S-2 or S-3
Registrants............................... Not Applicable.
13.
Incorporation of Certain Information by
Reference................................. Not Applicable.
14.
Information With Respect to Registrants
Other Than S-2 or S-3 Companies........... Prospectus Summary; Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial Condition
and Results of Operations; Unaudited Pro Forma Condensed
Combined Financial Information; Notes to Unaudited Pro Forma
Condensed Combined Financial Information; Unaudited Pro
Forma Condensed Combined Interim Financial Information;
Notes to Unaudited Pro Forma Condensed Combined Interim
Financial Information; Business; Certain Relationships and
Related Transactions; Description of New Notes; Combined
Financial Statements.
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15.
Information With Respect to S-3
Companies................................. Not Applicable.
16.
Information With Respect to S-2 or S-3
Companies................................. Not Applicable.
17.
Information With Respect to Companies
Other Than S-2 or S-3 Companies........... Not Applicable.
D. VOTING AND MANAGEMENT INFORMATION
18.
Information if Proxies, Consents or
Authorizations Are to be Solicited........ Not Applicable.
19.
Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or
in an Exchange Offer...................... Management.
</TABLE>
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998
PROSPECTUS
TALON AUTOMOTIVE GROUP, INC.
[TALON LOGO] OFFER TO EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B FOR ALL
OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED
THE NOTES ARE GUARANTEED BY VELTRI METAL PRODUCTS CO., VS HOLDINGS, INC.
AND VELTRI HOLDINGS USA, INC.
------------------
Talon Automotive Group, Inc., a Michigan corporation (the "Company"),
hereby offers, upon the terms and subject to conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal" together with the Prospectus constitute the "Exchange
Offer"), to exchange up to an aggregate principal amount of $120 million of its
9 5/8% Senior Subordinated Notes Due 2008, Series B (the "New Notes") for up to
an aggregate principal amount of $120 million of its outstanding 9 5/8% Senior
Subordinated Notes Due 2008, Series A (the "Old Notes"). The terms of the New
Notes are identical in all material respects to those of the Old Notes, except
for certain transfer restrictions and registration rights relating to the Old
Notes. The New Notes will be issued pursuant to, and entitled to the benefits
of, the Indenture (as defined herein) governing the Old Notes. The New Notes and
the Old Notes are sometimes referred to herein collectively as the "Notes".
The New Notes will be unsecured obligations of the Company ranking
subordinate in right of payment to all existing and future Senior Debt (as
defined) of the Company. The New Notes will be guaranteed (the "Guarantees"), on
a senior subordinated basis, jointly and severally, fully and unconditionally,
by each of the Company's existing subsidiaries identified above (the
"Guarantors"). The Guarantee of each Guarantor will be subordinate in right of
payment to all Guarantor Senior Debt (as defined) of such Guarantor.
The New Notes will be subordinated in right of payment to all existing and
future secured indebtedness of the Company and its subsidiaries. The New Notes
will rank pari passu in right of payment with the Old Notes.
As of December 31, 1997, on a pro forma basis after giving effect to the
offering of the Old Notes (the "Offering"), the Company and the Guarantors would
have had approximately $5.1 million of Senior Debt and Guarantor Senior Debt
outstanding, and, in addition, would have had no amounts outstanding under the
$100.0 million Senior Credit Facility (as defined).
The New Notes will bear interest at the rate of 9 5/8% per annum, payable
semiannually on May 1 and November 1, commencing November 1, 1998. Holders of
the New Notes will receive interest on November 1, 1998 from the date of initial
issuance of the New Notes, plus an amount equal to the accrued interest on the
Old Notes from the most recent date to which interest has been paid to the date
of exchange thereof. Interest on the Old Notes accepted for exchange will cease
to accrue upon issuance of the New Notes.
The New Notes are subject to redemption on or after May 1, 2003, at the
option of the Company, in whole or in part, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In addition,
prior to May 1, 2001, the Company may, at its option, redeem up to $35 million
aggregate principal amount of the Notes originally issued with the net proceeds
from one or more Public Equity Offerings (as defined) at the redemption price
set forth herein plus accrued and unpaid interest to the date of redemption;
provided that at least 65% of the principal amount of Notes originally issued
would remain outstanding after giving effect to any such redemption. In the
event of a Change of Control (as defined), the Company will be obligated to make
an offer to purchase all of the outstanding Notes at a purchase price equal to
101% of the principal amount thereof plus accrued and unpaid interest to the
date of purchase. In addition, the Company will be obligated to make an offer to
purchase the Notes at a purchase price equal to 100% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase in the event of
certain asset sales. See "Description of New Notes."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
HOLDERS OF THE OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is September , 1998.
<PAGE> 4
(Continued from Cover)
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on , 1998, unless extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Old Notes with respect to the Exchange Offer, the Company will promptly
return the Old Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions. The Old
Notes may be tendered only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors contained in the Registration
Rights Agreement dated April 28, 1998 (the "Registration Rights Agreement") by
and among the Company, the Guarantors, Salomon Smith Barney Inc and Credit
Suisse First Boston Corporation as the initial purchasers (the "Initial
Purchasers"), with respect to the initial sale of the Old Notes. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
respective holders thereof (other than any such holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act, without
compliance with the registration and prospectus delivery provisions of the
Securities Act of 1933, as amended (the "Securities Act"), provided that the New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes and is not engaged in and does not intend to
engage in a distribution of the New Notes. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of the New Notes received in exchange for Old Notes
if such New Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the New
Notes. There can be no assurance as to the liquidity of any markets that may
develop for the New Notes, the ability of holders to sell the New Notes, or the
price at which holders would be able to sell the New Notes. Future trading
prices of the New Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the New Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the New Notes, if such
market develops, will not be subject to similar disruptions. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the New Notes offered hereby. However, the Initial Purchasers are not
obligated to do so and any market making may be discontinued at any time without
notice.
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses incident to the Exchange Offer.
<PAGE> 5
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission a
registration statement on Form S-4 (the "Registration Statement," which term
shall include all amendments, exhibits, annexes and schedules thereto) pursuant
to the Securities Act, and the rules and regulations promulgated thereunder,
covering the New Notes being offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to in the Registration Statement
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement, including the exhibits thereto, may be inspected at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located
at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, 13th Floor, New York, New York 10007. Copies of
such material can be obtained from the Company or the Guarantors upon request.
In addition, the Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of such Web site is:
http://www.sec.gov.
As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information and documents specified in Sections 13
and 15(d) of the Exchange Act, so long as the New Notes are outstanding, whether
or not the Company is subject to such informational requirements of the Exchange
Act. While any New Notes remain outstanding, the Company will make available,
upon request, to any holder of the New Notes, the information required pursuant
to Rule 144A(d)(4) under the Securities Act during any period in which the
Company is not subject to Section 13 or 15(d) of the Exchange Act. Any such
request should be directed to the Company's principal executive offices located
at 900 Wilshire Drive, Suite 203, Troy, Michigan 48084 (telephone number
248-362-7600), Attention: David J. Woodward, Vice President of Finance, Chief
Financial Officer and Treasurer.
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on beliefs of the Company and/or
management as well as assumptions made by the Company based on information
currently available to the Company's management. When used in this Prospectus,
the words "anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company, its subsidiaries or management, are
intended to identify forward-looking statements. The Company cautions holders of
the Notes and prospective purchasers of the Notes that such statements are not
guarantees of future events. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including, but not limited to, those set forth
under "Risk Factors." Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially and adversely from those described in this Prospectus as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
Statements made concerning ongoing business strategies and possible future
action which the Company intends to pursue to achieve strategic objectives
constitute forward-looking information. The implementation of these strategies
and of such future action and the achievement of such financial performance are
each subject to numerous conditions, uncertainties, and risk factors.
Accordingly, no assurance can be given that the Company will be able to
successfully accomplish its strategic objectives or achieve such financial
performance. In addition to the specific risk factors described in this
Prospectus, other important risk factors which could cause actual performance
and future actions to differ materially from the forward-looking
2
<PAGE> 6
statements made in this Prospectus include domestic and international economic
conditions, product demand and market acceptance, government action,
competition, ability to achieve cost reductions and avoid cost increases in
supply and production, technological risk and interruptions to production
attributable to causes outside the Company's control.
In addition, market data used throughout this Prospectus were obtained from
industry publications and internal Company surveys. Industry publications
generally stated that the information contained therein has been obtained from
sources believed to be reliable. The Company has not independently verified
these market data. Similarly, internal Company surveys, while believed by the
Company to be reliable, have not been verified by any independent sources.
3
<PAGE> 7
PROSPECTUS SUMMARY
As used in this Prospectus, unless the context indicates otherwise, the
"Company" means (i) for periods prior to the Mergers (as defined), the business
and operations of each of Talon Automotive Group, L.L.C. ("Talon"), Hawthorne
Metal Products Company ("Hawthorne"), Production Stamping, Inc. ("PSI"), J&R
Manufacturing, Inc. ("J&R"), Veltri Metal Products Co. ("Veltri"), Veltri
Holdings USA, Inc., VS Holdings, Inc., and VS Holdings No. 2 Inc.,
(collectively, the "Talon Entities") and (ii) for periods after the Mergers,
Talon Automotive Group, Inc. and its subsidiaries, which collectively owns the
business and operations of the Talon Entities.
Immediately preceding the consummation of the Offering, Hawthorne and J&R
merged with and into PSI, which changed its name to Talon Automotive Group, Inc.
("TAG, Inc."). Immediately thereafter, Talon, which was owned by Hawthorne and
J&R, also merged with and into PSI. Hawthorne, J&R, and PSI each operate as
separate unincorporated divisions of TAG, Inc.
Simultaneously, VS Holdings No. 2 Inc. sold its 1% interest in Veltri Metal
Products Co. back to such company. VS Holdings No. 2 Inc. then merged with and
into VS Holdings, Inc., which owned all of the remaining outstanding stock of
Veltri Metal Products Co., such that, Veltri Metal Products Co. became a wholly
owned subsidiary of VS Holdings, Inc. The shareholders of VS Holdings, Inc. then
exchanged their shares in VS Holdings, Inc. for shares in TAG, Inc., and VS
Holdings, Inc. thereupon became a wholly owned subsidiary of TAG, Inc.
Accordingly, Veltri Metal Products Co. is an indirect, wholly owned subsidiary
of TAG, Inc. Also, immediately thereafter, the shareholders of Veltri Holdings
USA, Inc. exchanged their shares in Veltri Holdings USA, Inc. for shares in TAG,
Inc., and Veltri Holdings USA, Inc. also became a wholly owned subsidiary of
TAG, Inc. (VS Holdings, Inc., Veltri Holdings USA, Inc., and Veltri are
collectively referred to in this Prospectus as the "Veltri Group").
Collectively, the above actions are referred to in this Prospectus as the
"Mergers." See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Mergers."
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and combined financial
statements of the Company and notes thereto appearing elsewhere in this
Prospectus.
THE COMPANY
GENERAL
The Company is a leading full-service Tier 1 designer and manufacturer of
high-quality, stamped metal components and assemblies used by North American
automotive original equipment manufacturers ("OEMs"). The Company specializes
in, and derives the majority of its revenue from, underbody/chassis and
unexposed body structure assemblies which constitute major structural components
of passenger cars, light trucks, and vans. The Company's products include frame
rail, inner quarter panel, crossmember, cowl, bumper, rear back panel, and
trailer hitch assemblies. On a pro forma basis, assuming the acquisition of PSI
(the "PSI Acquisition") had occurred on January 1, 1997, the Company would have
had net sales of $229.4 million and Adjusted EBITDA (as defined herein) of $26.2
million for the year ended December 31, 1997.
The Company believes its focus on underbody/chassis and unexposed body
structure assemblies, full-service capabilities, commitment to quality, and key
customer relationships has positioned it well to benefit from current industry
trends. OEMs are focusing their in-house stamping operations on the production
of Class A exposed surface panels and are increasingly relying on outside
suppliers with full-service engineering and program management capabilities to
design, engineer and manufacture complex underbody/chassis and unexposed body
structure assemblies. In addition, OEMs are reducing the number of their
stamping suppliers by focusing on companies that can manufacture high
value-added assemblies. The Company believes that its ability to anticipate and
respond to these trends was a significant factor in the award of major
assemblies on the 1998 Chrysler LH Concorde/Intrepid and the 2001 Chrysler KJ
Jeep Cherokee programs. Based on internal Company surveys, the Company believes
the 1998 Chrysler LH Concorde/Intrepid award could
4
<PAGE> 8
generate approximately $50 to $55 million of sales by the Company during the
1999 model year, however, no assurance can be given that such sales will
actually be achieved. See "Forward-Looking Information."
Based on industry news publications available to the public, the Company
believes its products were used on nine of the ten best selling vehicles in
North America during 1997. The Company's four largest customers, General Motors
Corporation ("General Motors"), Chrysler Corporation ("Chrysler"), Ford Motor
Company ("Ford"), and Honda Motor Co., Ltd. ("Honda"), accounted for
approximately 33%, 32%, 11% and 3%, respectively, of the Company's pro forma net
sales for the year ended December 31, 1997 assuming the PSI Acquisition had
occurred on January 1, 1997. The Company also sells its products to targeted
Tier 1 suppliers. Platforms on which the Company had its most significant
content in 1997 included: Chrysler's LH Concorde/Intrepid, NS Minivan and AB Ram
Van, General Motors' GMT 400 Full-size Pickup/Tahoe/Suburban and GMT 325/330
Blazer/Jimmy, Ford's Explorer and Lincoln Continental, and Honda's LS Accord and
VC Civic. Based on internal Company surveys, the Company believes its products
are present on every General Motors truck platform, and also believes it is
Chrysler's largest independent supplier of front frame rail assemblies for
passenger cars, vans, and sport utility vehicles. The Company has received
quality and delivery awards from its customers, including, most recently,
Chrysler's Platinum Pentastar Award in 1997.
The Company has grown rapidly through a combination of strategic
acquisitions and new platform awards. As a result of these efforts, net sales
have increased at a compound annual growth rate ("CAGR") of 41.6% from
approximately $39.5 million in 1993 to $158.7 million in 1997. On a pro forma
basis assuming the PSI Acquisition had occurred on January 1, 1997, the Company
would have had net sales of $229.4 million. Since 1996, the Company's management
team has completed three strategic acquisitions which it believes have
strengthened the Company's market position with key customers, expanded its core
product lines and enhanced its design, engineering and manufacturing
capabilities. The Company's acquisition strategy focuses on companies with
strong management which can strengthen the Company's position as a Tier 1
supplier and allow it to further capitalize on industry trends.
The Company is a Michigan corporation. The principal executive offices of
the Company are located at 900 Wilshire Drive, Suite 203, Troy, Michigan 48084,
and its telephone number is (248) 362-7600.
BUSINESS STRATEGY
Based on pro forma 1997 net sales after giving effect to the PSI
Acquisition and internal Company surveys, the Company believes it is one of the
leading independent suppliers in its core product segment of underbody/chassis
and unexposed body structure assemblies. The Company's strategic objective is to
become one of the top two competitors in this market segment. The Company
believes it has developed a strategy to enhance its market position by
capitalizing on industry trends and leveraging its core competencies. Key
elements of the Company's strategy include the following:
Supply Complex High Value-Added Modules and Systems. In an effort to reduce
costs, OEMs are increasingly seeking suppliers capable of providing assemblies
and complete systems or modules, rather than suppliers which only provide
individual stampings. Typically, such complex products result in higher dollar
content per vehicle and generate higher margins as compared to simple,
individual stampings. After giving effect to the PSI Acquisition, value-added
assemblies represented approximately 75% of the Company's pro forma 1997 net
sales. The Company seeks to gain new business of modules and systems, which
typically include even greater content than assemblies. The Company believes its
capabilities and current industry trends have created an opportunity for it to
provide multiple assemblies and integrated modules such as front-end systems
(including frame rail, bumper, radiator support, wheel house inner panel, and
control arm assemblies), front floor pan systems (including floor pan,
crossmember, and tunnel reinforcement assemblies), and rear/back panel systems
(including back panel, quarter panel, rear frame rail, rear wheel house, and
rear floor pan assemblies). For example, the Company increased its dollar
content on the 1998 LH Concorde/Intrepid platform versus the 1993 platform from
approximately $115 per vehicle to $180 per vehicle. This was achieved primarily
through stamping and welding additional components, thereby producing a higher
value-added assembly.
5
<PAGE> 9
Enhance Full-Service Engineering and Program Management Capabilities. The
Company seeks to continuously enhance its design, engineering, prototyping,
testing, program management, product development and assembly capabilities to
further strengthen its preferred position with key customers. The Company
believes these capabilities enable it to participate in the product development
process during the concept and prototype development stages as well as
throughout the design and manufacturing stages. As OEMs continue to outsource
complex, unexposed stamped assemblies to fewer suppliers, the Company believes
Tier 1 suppliers with proven full-service capabilities will be better positioned
to secure such business. To capitalize on this trend, in 1996 the Company
acquired J&R which enabled the Company to become one of a limited number of
independent full-service stamping suppliers with prototyping capabilities. The
Company believes that further expanding its full-service capabilities will
enable it to better manage larger programs, reduce time to market and customer
costs, and improve the Company's margins.
Focus on Key Customers. As OEMs continue to consolidate their supplier
base, the Company believes that strong customer relationships are increasingly
important. As a result, the Company focuses on a limited number of customers
which the Company believes will enable it to anticipate and better service such
customers' needs. Furthermore, the Company anticipates the need to follow its
key customers as they move to globally source their stampings. As examples of
its close relationships with its key customers, members of the Company's design
team are currently working on-site at Chrysler helping to complete the design of
the front-end system assemblies for the 2001 KJ Jeep Cherokee. In addition, the
Company proposed the successful redesign of General Motors' 1999 GMT 800
Full-size Pickup/Tahoe/Suburban trailer hitch assembly. As further evidence of
the Company's key customer business and based, on internal Company surveys, the
Company believes its products are present on every General Motors truck
platform, and also believes it is Chrysler's largest independent supplier of
front frame rail assemblies for passenger cars, vans, and sport utility
vehicles.
Pursue Strategic Acquisitions. The Company intends to continue to seek
acquisitions of companies with strong management which will further improve the
Company's position as a Tier 1 supplier by creating opportunities for it to: (i)
strengthen its relationships with key customers; (ii) add new model platforms;
(iii) expand core product lines; (iv) enhance its full-service capabilities; and
(v) expand globally. Consistent with this strategy, the Company's management
team has completed three acquisitions since the beginning of 1996. See "--
Recent Acquisitions."
COMPETITIVE STRENGTHS
The Company believes it has the following competitive strengths:
Engineering and Product Expertise. The Company believes it has developed
expertise in the design, development, and production of underbody/chassis and
unexposed body structure assemblies, such as frame rail, inner quarter panel,
crossmember, cowl, bumper, rear back panel, and trailer hitch assemblies. This
expertise has contributed to its stature as a preferred full-service stamping
supplier to its key customers. For example, the Company's design involvement in
the 1998 Chrysler LH Concorde/Intrepid frame rail assembly produced significant
piece cost, tooling, and performance savings for Chrysler by eliminating twelve
part numbers. This was achieved by combining multiple parts and commonizing
right- and left-hand parts into identical stampings. The Company believes its
performance in producing complex frame rail assemblies for Chrysler's LH
Concorde/Intrepid vehicles and AB Ram Van, and its cooperative advance product
development efforts with Chrysler, contributed to the Company's award of frame
rail and other front-end system assemblies for the 2001 Chrysler KJ Jeep
Cherokee.
Successful Launch Performance Record. The Company has significant
experience in managing and executing new programs from the concept and prototype
development stages through the design and manufacturing stages. In 1997, the
Company successfully launched seven new programs comprising approximately 54
assemblies and 185 parts. These launches met all customer delivery requirements
and were within the Company's launch budget. The Company's most significant
launch, the 1998 Chrysler LH Concorde/ Intrepid, consisted of approximately 26
assemblies and 133 parts and had total defective parts per million ("PPM") of
only ten. Based on internal Company surveys, the Company believes that the
successful
6
<PAGE> 10
performance in the launch phase of a new platform is a critical factor in
satisfying its key customers and securing additional platform work. The
Company's program management organization and methodology is being benchmarked
by Chrysler.
Quality Commitment. The Company believes its quality performance in 1997 is
a significant competitive advantage. For example, the Company's 1998 model year
PPM performance with Chrysler through March 1998 was 26 PPM, which is below
Chrysler's benchmark of 50 PPM for world class suppliers. Partially as a result
of such performance, the Company has received certain quality and delivery
awards from its key OEM customers, including, most recently, Chrysler's Platinum
Pentastar Award in December 1997, awarded to only nine production suppliers.
Acquisition Track Record. Since 1996, the Company's management team has
completed three strategic acquisitions. The management team has a disciplined
approach to evaluating acquisition opportunities and believes that these
acquisitions have strengthened the Company's market position with its key
customers, expanded its core product lines and enhanced its design, engineering
and manufacturing capabilities. Through these acquisitions, the Company's
management team has gained experience in acquiring and integrating businesses
while incurring only minimal disruption in current operations.
RECENT ACQUISITIONS
In December 1997, the Company acquired PSI, a supplier of automotive
stampings and finished assemblies, including trailer hitch, airbag canister,
crossmember and other welded assemblies. For its fiscal year ended June 30,
1997, PSI reported net sales of $72.0 million. Through the PSI Acquisition, the
Company added progressive and line die manufacturing capabilities and
state-of-the-art welding capabilities. PSI's expertise in these areas is
expected to enhance the Company's presence as a manufacturer of
underbody/chassis and unexposed body structure assemblies. As a result of the
PSI Acquisition, sales to General Motors represented approximately 33% of pro
forma 1997 net sales, as compared to 9% of 1997 historical net sales.
In addition, the Company completed two other strategic acquisitions in
1996:
- In November 1996, the Company acquired the Veltri Group, a manufacturer
of high value-added assemblies and detailed stampings, which recorded net
sales of $79.5 million for the fiscal year ended December 31, 1996. The
acquisition of the Veltri Group expanded the Company's product offering of
underbody/chassis and unexposed body structure assemblies, increased its
product content at Chrysler, and added new customers, including Honda.
- In September 1996, the Company acquired J&R, a manufacturer of stamped
metal prototype parts and short-run production stampings, weldments and
assemblies which recorded net sales of $14.7 million for its fiscal year
ended October 31, 1996. J&R is an integrated prototyping company, capable
of managing a program from math data through soft tooling and production
of finished components and assemblies. The J&R acquisition enabled the
Company to become one of a limited number of independent full-service
stamping suppliers with in-house prototyping capabilities.
7
<PAGE> 11
THE EXCHANGE OFFER
THE NEW NOTES................. The forms and terms of the New Notes are
identical in all material respects to the terms
of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer,
except for certain transfer restrictions and
registration rights relating to the Old Notes
described under "--Terms of New Notes."
THE EXCHANGE OFFER............ The Company is offering to exchange up to $120
million aggregate principal amount of 9 5/8%
Senior Subordinated Notes due 2008, Series B
(the "New Notes") for up to $120 million
aggregate principal amount of its outstanding
9 5/8% Senior Subordinated Notes due 2008,
Series A (the "Old Notes"). Old Notes may be
exchanged only in integral multiples of $1,000.
EXPIRATION DATE; WITHDRAWAL OF
TENDER........................ The Exchange Offer will expire at 5:00 p.m.,
New York City time, on ,
1998, or such later date and time to which it
is extended by the Company (the "Expiration
Date"). The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder thereof as promptly as practicable after
the expiration or termination of the Exchange
Offer.
CERTAIN CONDITIONS TO THE NOTE
EXCHANGE OFFER................ The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer--Certain
Conditions to the Exchange Offer."
PROCEDURES FOR TENDERING OLD
NOTES......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes and any
other required documentation to the Exchange
Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal,
each holder will represent to the Company that,
among other things, (i) any New Notes to be
received by it will be acquired in the ordinary
course of its business, (ii) it has no
arrangement or understanding with any person to
participate in the distribution of the New
Notes and (iii) it is not an "affiliate," as
defined in Rule 405 of the Securities Act, of
the Company or, if it is an affiliate, it will
comply with the registration and prospectus
delivery requirements of the Securities Act to
the extent applicable. Each broker-dealer that
receives New Notes for its own account in
exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result
of market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes.
INTEREST ON THE NEW NOTES..... The New Notes will bear interest at the rate of
9 5/8% per annum, payable semiannually on May 1
and November 1, commencing November 1, 1998, to
holders of record on the immediately preceding
April 15 and October 15, respectively. Holders
of the
8
<PAGE> 12
New Notes will receive interest on November 1,
1998 from the date of initial issuance of the
New Notes, plus an amount equal to the accrued
interest on the Old Notes from the most recent
date to which interest has been paid to the
date of exchange thereof. Interest on the Old
Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date.
GUARANTEED DELIVERY
PROCEDURES.................... Holders of Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old
Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal
to the Exchange Agent, prior to the Expiration
Date, must tender their Old Notes according to
the guaranteed delivery procedures set forth in
"The Exchange Offer--Guaranteed Delivery
Procedures."
REGISTRATION REQUIREMENTS..... The Company has agreed to use its best efforts
to consummate by September 25, 1998 the
registered Exchange Offer pursuant to which
holders of the Old Notes will be offered an
opportunity to exchange their Old Notes for the
New Notes which will be issued without legends
restricting the transfer thereof. In the event
that applicable interpretations of the staff of
the Commission do not permit the Company to
effect the Exchange Offer or in certain other
circumstances, the Company has agreed to file a
Shelf Registration Statement covering resales
of the Old Notes and to use its best efforts to
cause such Shelf Registration Statement to be
declared effective under the Securities Act
and, subject to certain exceptions, keep such
Shelf Registration Statement effective until
three years after the effective date thereof.
FEDERAL INCOME TAX
CONSIDERATIONS................ For a summary of the material anticipated
federal income tax considerations relating to
the exchange of the New Notes for the Old
Notes, see "Federal Income Tax Considerations
Relating to the Exchange Offer."
USE OF PROCEEDS............... There will be no proceeds to the Company from
the exchange of Notes pursuant to the Exchange
Offer.
EXCHANGE AGENT................ U.S. Bank Trust National Association is the
Exchange Agent. The address and telephone
number of the Exchange Agent are set forth in
"The Exchange Offer--Exchange Agent."
9
<PAGE> 13
PARTICIPATION BY
BROKER-DEALERS................ Any broker-dealer that resells New Notes that
were received by it for its own account
pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution
of such New Notes may be deemed to be an
"underwriter" within the meaning of the
Securities Act and any profit on any such
resale of New Notes and any commissions or
concessions received by any such persons may be
deemed to be underwriting compensation under
the Securities Act.
10
<PAGE> 14
TERMS OF THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the New Notes are registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof. See
"Description of the New Notes."
New Notes..................... $120 million aggregate principal amount of
9 5/8% Senior Subordinated Notes due 2008,
Series B of the Company.
Maturity Date................. May 1, 2008.
Interest Payment Dates........ May 1 and November 1 of each year, commencing
November 1, 1998.
Ranking....................... The New Notes will be general unsecured
obligations of the Company ranking subordinate
in right of payment with all existing and
future Senior Debt (as defined). As of December
31, 1997, on a pro forma basis after giving
effect to the Offering, the Company and the
Guarantors would have had approximately $5.1
million of Senior Debt and Guarantor Senior
Debt outstanding. See "Description of Senior
Debt."
Guarantors.................... The New Notes will be guaranteed, on a senior
subordinated basis, jointly and severally,
fully and unconditionally, (each, a
"Guarantee") by each of the Company's existing
subsidiaries and by certain of the Company's
future subsidiaries (the "Guarantors"). The
Guarantees will be subordinate in right of
payment to all Guarantor Senior Debt (as
defined), including all indebtedness under the
Senior Credit Facility. The Senior Credit
Facility is secured by a first lien on
substantially all of the assets of the Company.
See "Description of New Notes -- Certain
Definitions -- Guarantors."
Optional Redemption........... Except as provided below, the New Notes are not
redeemable at the Company's option prior to May
1, 2003. Thereafter, the New Notes will be
redeemable, in whole or in part, at the option
of the Company, at the redemption prices set
forth herein plus accrued and unpaid interest
to the date of redemption. In addition, prior
to May 1, 2001, the Company may, at its option,
redeem up to an aggregate of 35% of the
principal amount of Notes originally issued
with the net proceeds from one or more Public
Equity Offerings (as defined herein) at the
redemption price set forth herein plus accrued
interest to the date of redemption. See
"Description of New Notes -- Redemption."
Change of Control............. In the event of a Change of Control (as
defined), the Company will be obligated to make
an offer to purchase all of the outstanding
Notes at a redemption price of 101% of the
principal amount thereof plus accrued and
unpaid interest to the date of purchase. In the
event a Change of Control were to occur, there
can be no assurance that the Company will have
available funds sufficient to repurchase all of
the Notes that holders elect to tender. See
"Description of New Notes -- Change of
Control."
Offer to Purchase............. The Company will be required in certain
circumstances to make an offer to purchase the
New Notes, at a purchase price equal to 100% of
the principal amount thereof plus accrued
interest to the date of purchase, with the net
cash proceeds of certain asset sales. See
11
<PAGE> 15
"Description of New Notes -- Certain Covenants
-- Limitation on Asset Sales."
Certain Covenants............. The indenture under which the Old Notes were
issued and the New Notes will be issued (the
"Indenture") contains covenants including, but
not limited to, covenants with respect to
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) restricted
payments, (v) the sales of assets and
subsidiary stock, (vi) incurrence of other
series subordinated indebtedness, (vii) mergers
and consolidations, (viii) payment restrictions
affecting subsidiaries and (ix) transactions
with affiliates. The covenants are subject to a
number of important exceptions and
qualifications. See "Description of New Notes
-- Certain Covenants."
Risk Factors.................. Holders of Old Notes should carefully consider
the matters set forth under the caption "Risk
Factors" prior to making a decision with
respect to the Exchange Offer. See "Risk
Factors."
12
<PAGE> 16
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth (i) summary historical financial data of the
Company for the five years ended December 31, 1997 and the six month periods
ended July 4, 1998 and 1997 and (ii) summary pro forma financial data for the
year ended December 31, 1997 and the six months ended July 4, 1998. The summary
historical financial data for the three year period ended December 31, 1997 and
the summary pro forma financial data for 1997 are derived from the audited
combined financial statements of the Company included elsewhere in this
Prospectus. The summary financial data for the two year period ended December
31, 1994 are derived from audited combined financial statements not included
herein. The summary financial data for the six month periods ended July 4, 1998
and 1997 are derived from the unaudited combined interim financial statements of
the Company included elsewhere in this Prospectus. The summary pro forma
statement of operations data and other financial data for the year ended
December 31, 1997 give effect to the Offering and the PSI Acquisition as if each
transaction had occurred on January 1, 1997, and the summary pro forma balance
sheet data at December 31, 1997 gives effect to the Offering as if it had
occurred on such date. The summary pro forma statement of operations data and
other financial data for the fiscal six month period ended July 4, 1998 give
effect to the Offering as if it had occurred on January 1, 1997 and the summary
pro forma balance sheet data at July 4, 1998 gives effect to the Offering as if
it had occurred on such date. The unaudited condensed pro forma summary
financial data does not purport to represent what the Company's results of
operations or financial position would have actually been had the transactions
occurred on the dates indicated above, or to project the Company's results of
operations or financial position for any future date or period. The following
table should be read in conjunction with "Selected Financial Data," "Unaudited
Pro Forma Condensed Combined Financial Information," "Unaudited Pro Forma
Condensed Combined Interim Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
combined financial statements of the Company, including the notes thereto,
presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JULY 4,
------------------------------------------------------------ -------------------------------
UNAUDITED
PRO UNAUDITED
AUDITED FORMA(H) HISTORICAL PRO FORMA
------------------------------------------------ --------- ------------------- ---------
1993 1994 1995 1996 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales...................... $39,467 $43,035 $56,835 $71,029 $158,718 $229,417 $ 84,206 $134,186 $134,186
Gross profit................... 7,144 5,735 9,935 12,909 24,421 33,383 13,815 20,195 20,195
Selling, general and
administrative expenses(a)... 4,259 4,699 6,041 8,490 16,241 22,956 8,438 13,240 13,077
Special compensation(b)........ -- -- -- -- 1,343 2,702 -- 1,359 1,359
Income from operations......... 2,886 1,036 3,894 4,419 6,837 7,725 5,377 5,596 5,596
Interest....................... 806 714 1,192 1,754 4,599 12,569 2,084 5,375 6,475
Income (loss) before
extraordinary expenses and
income taxes(c).............. 2,023 610 2,702 2,363 2,121 (4,638) 3,408 (368) (1,305)
Net income (loss).............. 2,023 610 2,702 2,269 796 (5,963) 2,522 (2,153) (3,090)
BALANCE SHEET DATA (END OF
PERIOD)
Cash and cash equivalents...... $ 5 $ 6 $ 18 $ 1,090 $ 1,233 $ 3,208 $ 1,605 $ 8,934 $ 8,934
Total assets................... 29,345 33,618 37,206 91,110 166,494 173,264 129,493 173,706 173,706
Total debt..................... 10,480 14,089 17,555 49,468 107,315 125,106 60,280 128,428 128,428
Shareholders' equity........... 10,511 10,786 12,736 14,401 14,601 3,921 17,448 (196) (196)
OTHER FINANCIAL DATA
Depreciation and
amortization................. $ 2,484 $ 2,639 $ 2,907 $ 3,419 $ 6,279 $ 10,586 $ 2,718 $ 5,534 $ 5,534
Capital expenditures........... 1,925 5,494 5,009 3,942 9,389 13,400 (3,231) (4,181) (4,181)
Cash provided by operating
activities................... 5,332 2,110 2,288 6,317 6,166 6,166 (2,765) 8,571 8,571
Cash used in investing
activities................... (1,878) (5,339) (4,980) (9,402) (61,171) (61,171) (3,231) (3,854) (3,854)
Cash provided by (used in)
financing activities......... (3,454) 3,230 2,704 4,233 55,302 57,277 5,091 3,590 3,590
EBITDA(d)...................... 5,313 3,963 6,801 7,536 12,999 18,517 8,210 9,988 10,151
Adjusted EBITDA(e)............. 21,219 11,510
Ratio of earnings to fixed
charges(f)................... 3.5x 1.9x 2.9x 2.2x 1.4x 0.9x 2.2x 0.7x 1.0x
</TABLE>
13
<PAGE> 17
- -------------------------
(a) Included in historical selling, general and administrative expenses are
business services fees paid to Talon L.L.C., an affiliate of the Company, of
$1,150, $850, and $717 for 1997, 1996 and 1995, respectively. Effective
April 1, 1998, such fees were reduced to $500 annually. See "Certain
Relationships and Related Transactions." Business services fees paid to
Talon L.L.C. totalled $413 and $575 for the six month periods ended July 4,
1998 and 1997, respectively.
(b) Certain members of the Company's management team participate in a deferred
compensation arrangement which awards the employee for increases in
shareholder value. Approximately $1,343 was recorded in 1997 under this
arrangement. An additional amount of $1,359 was recorded upon consummation
of the Offering on April 28, 1998. Effective with the Offering, all future
allocations under these agreements, were discontinued, excluding up to $300
in additional deferred compensation which can be earned by Delmar O.
Stanley, President and Chief Executive Officer of the Company, and annual
increases for interest on all vested amounts at the rate of 6% per year. See
"Management -- Deferred Compensation Agreements."
(c) Except for the Canadian subsidiary, the shareholders have elected under the
provisions of the Internal Revenue Code to be treated as S Corporations. As
a result, the taxable income of the companies is included in the taxable
income of the individual shareholders, and no provision for federal income
taxes has been included in income. The Canadian subsidiary is subject to
Canadian income tax.
(d) EBITDA is defined as income from continuing operations before the effect of
changes in accounting principles and extraordinary items plus interest,
income taxes, depreciation and amortization. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to incur and
service debt. However, EBITDA should not be considered in isolation as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. EBITDA measures presented may not be comparable
to similarly-titled measures of other companies. For the six month period
ended July 4, 1998, EBITDA includes a $198 gain on sale of assets and a
foreign currency exchange loss of $787.
(e) The Company's EBITDA has been adjusted for certain expenses that the Company
believes are non-recurring in nature as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1997 1998
--------- ---------
<S> <C> <C>
EBITDA...................................................... $18,517 $10,151
Special Compensation expenses under deferred compensation
arrangements. See "Management -- Deferred Compensation
Agreements.".............................................. 2,702 1,359
------- -------
Adjusted EBITDA............................................. $21,219 $11,510
======= =======
</TABLE>
Total expenses incurred under deferred compensation arrangements in 1997 and
1998, excluding interest, was $2,702. Adjusted EBITDA measures presented
will not be comparable to similarly-titled measures of other companies.
(f) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income (loss) before income taxes and fixed charges. Fixed
charges consist of interest expense, the interest component of capital
leases, and the portion of rental expense that the Company believes to be
representative of interest. For pro forma 1997, earnings were insufficient
to cover fixed charges by $1,936.
(g) As a result of the PSI acquisition in December 1997, the Company believes it
can achieve certain cost reductions that are not reflected in the Unaudited
Pro Forma Condensed Consolidated Statement of Operations. These anticipated
cost reductions total $3,589 on an annual basis and relate to (i) $1,227 of
annual sub-contracted manufacturing expenses to a related party that were
discontinued (ii) $1,200 of operating costs that were discontinued as a
result of closing certain warehouse facilities and (iii) the elimination of
$1,162 of former owner compensation and expenses. Of these anticipated cost
reductions, $2,427 relates to cost of sales and $1,162 relates to selling,
general and administration expenses.
14
<PAGE> 18
RISK FACTORS
This Prospectus contains statements which constitute forward-looking
statements. These statements appear in a number of places in this Prospectus and
include statements regarding intent, belief, outlook, estimates, anticipation or
expectations of the Company and management primarily with respect to future
events and actions of the Company. Holders of the Old Notes are cautioned that
any such forward-looking statements are not guarantees of future events or
performance and involve risks and uncertainties. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those described
in the forward-looking statements. In addition to other information included in
this Prospectus, Holders of the Old Notes should consider carefully the specific
considerations set forth below in connection with the Exchange Offer. For
information regarding forward-looking statements and information contained in
this Prospectus generally, see "Forward-Looking Information."
SUBSTANTIAL LEVERAGE
As of December 31, 1997, on a pro forma basis after giving effect to the
Offering, the Company would have had $125.1 million of combined indebtedness and
$3.9 million of combined shareholders' equity. The Company's annual debt service
requirements would have totalled $13.3 million and this would have constituted
approximately 60.1% of the Company's pro forma cash flow from operations of
approximately $6.2 million.
The Company's indebtedness will have several important consequences for the
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations must be used for
debt service requirements on its indebtedness and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in the
future for any purpose may be impaired; (iii) the Company's leverage may
increase its vulnerability to economic downturns and limit its ability to
withstand competitive pressures; and (iv) the Company's ability to capitalize on
business opportunities may be limited.
The Company's ability to make payments with respect to the Notes and to
satisfy its other debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, competition, cost, business and other factors, some of which are
beyond the Company's control. The Company believes, based on current
circumstances, that its operating cash flow, together with available borrowings
under the Senior Credit Facility, will be sufficient to permit the Company to
meet its operating expenses and to service its debt requirements as they become
due. Significant assumptions underlie this belief, including, among other
things, that the Company will succeed in implementing its business strategy and
there will be no material adverse developments in the business, financial
condition, results of operations, liquidity or capital requirements of the
Company. If the Company is unable to service its indebtedness, it will be forced
to adopt an alternative strategy that may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing its
indebtedness (including the Notes) or seeking additional equity capital. There
can be no assurance that any of these strategies could be effected on terms
satisfactory to the Company, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The indenture under which the Old Notes were issued and the New Notes will
be issued (the "Indenture") restricts the ability of the Company and its
Restricted Subsidiaries to, among other things, incur additional indebtedness,
pay dividends or make certain other restricted payments or investments,
consummate certain asset sales, enter into certain transactions with affiliates,
incur liens, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
their assets. In addition, the Senior Credit Facility contains other (and
sometimes more restrictive) covenants. The Senior
15
<PAGE> 19
Credit Facility requires the Company to maintain specified financial ratios and
satisfy certain financial tests. As of December 31, 1997, on a pro forma basis
after giving effect to the Offering, the Company would have had approximately
$125.1 million of debt outstanding. The Company would also have the ability to
borrow approximately an additional $74.2 million under the Senior Credit
Facility borrowing base and could actually borrow up to $20.7 million given
borrowing covenants. The Company's ability to meet such financial ratios and
tests may be affected by events beyond its control, and there can be no
assurance that the Company will meet such ratios and tests. A breach of any of
these covenants could result in an event of default under the Senior Credit
Facility. If an event of default under the Senior Credit Facility occurs, the
lenders thereunder could elect to declare all amounts borrowed, together with
accrued interest, to be immediately due and payable and the lenders under the
Senior Credit Facility could terminate all future commitments thereunder. If any
such indebtedness were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full such indebtedness and
the Notes. See "Description of Senior Debt" and "Description of New Notes --
Certain Covenants."
SUBORDINATION OF NOTES AND SUBSIDIARY GUARANTEES
The payment of principal and interest on, and any premium or other amounts
owing in respect of, the Notes will be subordinated to the prior payment in full
of all existing and future Senior Debt of the Company, including all amounts
owing or guaranteed under the Senior Credit Facility. The Guarantees will be
similarly subordinated to Guarantor Senior Debt. Consequently, in the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to the Company or a Guarantor, assets of the Company or such Guarantor
will be available to pay obligations on the Notes or Guarantees only after all
Senior Debt of the Company or Guarantor Senior Debt of such Guarantor, as
applicable, has been paid in full, and there can be no assurance that there will
be sufficient assets to pay amounts due on any or all of the Notes. In addition,
neither the Company nor any Guarantor may pay principal, premium, interest or
other amounts on account of the Notes or any Guarantee in the event of a payment
default (or, with respect to a non-payment default, on Designated Senior Debt
(as defined), for a specified period) in respect of Senior Debt or the Guarantor
Senior Debt. See "Description of Notes -- Subordination." As of December 31,
1997, on a pro forma basis after giving effect to the Offering, the Company and
the Guarantors would have had $5.1 million of Senior Debt and Guarantor Senior
Debt outstanding.
DEPENDENCE ON PRINCIPAL CUSTOMERS
The Company's primary customers are General Motors, Chrysler and Ford,
which accounted for approximately 33%, 32% and 11%, respectively, of the
Company's 1997 pro forma net sales assuming the PSI Acquisition had occurred on
January 1, 1997. The loss of any one of such customers, or an unanticipated
significant reduction in business generated by them, would have a material
adverse effect on the Company's business, financial condition or results of
operations. Due to changes in supply procurement policies at Ford, the Company
anticipates a gradual decline in its existing business with Ford over the next
five years. See "Business -- Customers and Marketing." The Company's
arrangements with the OEMs are typically in the form of purchase orders, which
are generally competitively awarded for specific projects in the case of both
platform and factory assist work and which may be canceled by the OEMs. However,
the Company believes that cancellation of purchase orders is rare, due, in part,
to the OEM production interruptions likely to be caused by changing suppliers.
Strong customer relationships are critical to platform revenues, which are
increasingly contingent on whether the Company is chosen by an OEM to
participate on a platform development team. There can be no assurance that
business from these OEMs will continue at comparable levels in the future or
that any one of such customers will not experience setbacks in their operations,
such as labor difficulties, unsuccessful vehicle models, loss of business due to
foreign or domestic competition, or other unforeseen developments. For example,
the Company expects that its earnings for the second and third fiscal quarters
of 1998 will be adversely affected by recent labor difficulties at General
Motors. See "Effect of Strike at General Motors -- Management's Discussion and
Analysis of Financial Condition and Results of Operations." Moreover, changing
consumer vehicle preferences could have a material adverse effect on the
Company's business, financial condition or results of operations.
16
<PAGE> 20
PLATFORM CONCENTRATION
The Company currently expects to derive a substantial portion of its 1998
net sales from the Chrysler LH platform. As a result, the Company's future
operating results are significantly dependent upon continued market acceptance
of the LH platform vehicles, namely the Concorde, Intrepid, 300M and LHS
vehicles. There can be no assurance that these vehicles will achieve continued
market acceptance. A declining demand for, or acceptance of, these vehicles as a
result of competition, technical change or other factors would have a material
adverse effect on the Company's business, results of operation and financial
position. Additionally, the OEM manufactures these vehicles in a single
facility. There can be no assurance such facility will not experience downturns
related to labor relations issues, problems with critical suppliers and other
factors. The occurrence of one or more of such events could have a material
adverse affect on the Company's business, financial condition or results of
operations. Moreover, changing consumer vehicle preferences could also have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Products."
CYCLICALITY; OEM SUPPLIERS
The automobile industry is highly cyclical, dependent on consumer spending
and subject to the impact of domestic and international economic conditions. In
addition, automotive production and sales can be affected by labor relations
issues, regulatory requirements, trade agreements and other factors. There can
be no assurance that the automotive industry for which the Company supplies
components will not experience downturns in the future. An economic recession
may impact substantially leveraged companies such as the Company more than
similarly situated companies with less leverage. A decline in automotive sales
or production could materially adversely affect the Company's business,
financial condition or results of operations.
SEASONALITY
The Company's business is subject to seasonal fluctuations in sales and
profitability due to the impact of plant shutdowns in July and December for OEM
holidays and model changeovers.
COMPETITION
The automotive component supply industry in which the Company operates is
highly fragmented and highly competitive. The Company's ability to compete is
dependent upon successful implementation of its current and future business
strategies and ability to successfully adopt new strategies in response to
changes in the marketplace. The Company's competitors include companies that are
larger and have substantially greater resources than the Company as well as
divisions of OEMs with internal stamping and assembly operations. There can be
no assurance that the Company's business will not be adversely affected by
increased competition in the market in which it operates or that the Company's
products will be able to compete successfully with those of its competitors.
The automotive industry is characterized by a small number of OEMs that are
able to exert considerable pressure on component suppliers to reduce costs and
improve quality. In the past, OEMs have generally demanded and received price
reductions and measurable increases in quality by implementing competitive
selection processes, rating programs and various other arrangements. Also,
through increased partnering on platform work, OEMs have generally required
component suppliers to provide more design and engineering input at earlier
stages of the product development process, the costs of which, in some cases,
have been absorbed by the suppliers. There can be no assurance that the Company
will be able to improve or maintain its profit margins on sales to OEMs or that
future price reductions, increased quality standards or additional design and
engineering capabilities required by OEMs will not have a material adverse
effect on the business, financial condition or results of operations of the
Company. The Company principally competes for new business both at the beginning
of the development of new models and upon the redesign of existing models by
17
<PAGE> 21
its major customers. New model development generally begins two to four years
prior to the marketing of such models to the public. Although the Company has
been successful in obtaining significant new business on new models, there can
be no assurance that the Company will continue to be able to obtain such new
business. Furthermore, although the general trend of the OEMs is to outsource
component manufacturing, OEMs have, from time to time, brought their stamping
work back in-house. There can be no assurance of the character and magnitude of
the OEM's stamping work which will be outsourced in the future. See "Business --
Competition."
CONTROL BY PRINCIPAL SHAREHOLDERS
Randolph J. Agley and Michael T. Timmis (the "Principal Shareholders"),
together with their family members, beneficially own or control approximately
98% of the Company's outstanding voting common stock. Circumstances may occur in
which the interests of the Principal Shareholders could be in conflict with the
interests of the holders of the Notes. For example, if the Company encounters
financial difficulties, or is unable to pay certain of its debts as they mature,
the interests of the Principal Shareholders might conflict with those of the
holders of the Notes. In addition, the Principal Shareholders may have an
interest in pursuing acquisitions, divestitures or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risks to the holders of the Notes. See "Principal
Securityholders" and "Certain Relationships and Related Transactions."
CONTINUING TRANSACTIONS WITH RELATED PARTIES
Following the Exchange Offer, the Company will continue to engage in
certain transactions with related parties and affiliates which include, among
other things, business and legal services arrangements, lease arrangements for
certain manufacturing facilities and offices, participation in insurance plans
and certain general contracting. While some of these current arrangements are
not the result of arms-length bargaining and may not reflect market prices, the
Company believes that transactions entered into in the future will be on terms
no less favorable to the Company than if such transactions were the result of
arms-length bargaining with non-affiliated persons. See "Certain Relationships
and Related Transactions."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company plans to continue to make selective strategic acquisitions to
further enhance its relationships with existing customers and augment its
product offerings with existing or new customers. There can be no assurance,
however, that the Company will be able to identify and complete additional
acquisitions that satisfy the Company's criteria or that, if identified and
completed, any anticipated benefits will be realized from such acquisitions. The
availability of additional acquisition financing cannot be assured and,
depending on the terms of such additional acquisitions, could be restricted by
the terms of the Senior Credit Facility and/or the Indenture. The process of
integrating acquired operations into the Company's existing operations may
result in unforeseen operating difficulties and may require significant
financial resources that would otherwise be available for the ongoing
development or expansion of the Company's existing operations. In addition,
successful completion of an acquisition may depend on consents from third
parties, including regulatory authorities and private parties, which consents
are beyond the control of the Company. Possible future acquisitions by the
Company could result in the incurrence of additional debt, costs, contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, all of which could materially adversely affect the Company's business,
financial condition, and results of operations.
UNIONIZED WORKFORCE
Substantially all of the Company's hourly employees are covered by
collective bargaining agreements ("CBA") with either the United Automobile,
Aerospace and Agricultural Workers of America Union ("UAW"), the International
Union of Automobile, Aerospace and Agricultural Implement Workers Union of
Canada ("CAW") or the United Steel Workers of America Union ("USWA"). At the
present time, the Company believes that its relationship with these unions and
employees are good; however, there can be no assurance that this will continue
to be the case. Strikes or work stoppages could lead to an adverse impact on
18
<PAGE> 22
the Company's relationship with customers which could in turn have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company's CBAs with the above unions expire at various dates
ranging from May, 1999 to September, 2002. There can be no assurance that the
Company will be able to negotiate CBAs acceptable to it in the future.
FOREIGN OPERATIONS
The Company derived approximately 32.9% of its 1997 pro forma net sales,
adjusted for the PSI Acquisition, from its indirect Canadian subsidiary, Veltri
Metal Products Co., a Nova Scotia unlimited liability company. The Company's
Canadian operations are subject to risks inherent in international business
activities, including, in particular, foreign currency exchange rate
fluctuations, compliance with a variety of foreign laws and regulations,
unexpected changes in regulatory requirements, overlap of different tax
structures, foreign currency exchange rate fluctuations and general economic
conditions. See "Notes to the Company's Combined Financial Statements -- Note
16, Foreign Operations."
ENVIRONMENTAL RISKS
The Company's operations and properties are subject to federal, state,
local and foreign laws, regulations and ordinances relating to the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials, substances and wastes. In many jurisdictions these laws are
complex and change frequently. Such laws, including but not limited to the
Comprehensive Environmental Response, Compensation & Liability Act ("CERCLA")
may impose joint and several liability and apply to remediation of contamination
at properties presently or formerly owned or operated by an entity or its
predecessors, as well as to conditions at properties at which wastes or other
contamination attributable to an entity or its predecessors have been sent or
otherwise come to be located. The nature of the Company's operations expose it
to the risk of liabilities or claims with respect to environmental matters,
including off-site disposal matters, and there can be no assurance that material
costs will not be incurred in connection with such liabilities or claims.
Based upon the Company's experience to date, the Company believes that the
future cost of compliance with existing environmental laws, regulations and
ordinances will not have a material adverse effect on the Company's business,
financial condition, results of operations or liquidity. However, future events,
such as changes in existing laws and regulations or their interpretation, may
give rise to additional compliance costs or liabilities that could have a
material adverse effect on the Company's business, financial condition or
results of operations. Compliance with more stringent laws or regulations, as
well as more vigorous enforcement policies of regulatory agencies or stricter or
different interpretations of existing laws, may require additional expenditures
that may materially adversely affect the Company, its business, financial
condition or results of operations. See "Business -- Regulatory Matters."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined), each holder of
Notes will have the right to require the Company to repurchase all or a portion
of such holder's Notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. However, the Company's ability to repurchase the Notes upon a
Change of Control may be limited by the terms of then existing contractual
obligations of the Company and its subsidiaries. In addition, the occurrence of
a Change of Control will constitute an Event of Default under the Senior Credit
Facility. The Senior Credit Facility will prohibit the purchase of the Notes
unless and until such time as the indebtedness under the Senior Credit Facility
is paid in full. There can be no assurance that the Company will have the
financial resources to repay amounts due under the Senior Credit Facility, or to
repurchase or redeem the Notes. If the Company fails to repurchase all of the
Notes tendered for purchase upon the occurrence of a Change of Control, such
failure will constitute an Event of Default under the Indenture. See "--
Substantial Leverage."
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under the relevant law and is subject to judicial
interpretation.
19
<PAGE> 23
Accordingly, in certain circumstances there may be a degree of uncertainty in
ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the assets of a person and therefore it may be
unclear whether a Change of Control has occurred and whether the Notes are
subject to an offer to purchase.
The Change of Control provision may not necessarily afford holders of the
Notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving the
Company that may materially adversely affect the holders, because such
transactions may not involve a shift in voting power or beneficial ownership or,
even if they do, may not involve a shift of the magnitude required under the
definition of Change of Control to trigger such provisions. Except as described
under "Description of New Notes -- Change of Control," the Indenture does not
contain provisions that permit the holders of the Notes to require the Company
to repurchase or redeem the Notes in the event of a takeover, recapitalization
or similar transaction.
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under the applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if any Guarantor, at the time it
incurs a Guarantee, (a)(i) was or is insolvent or rendered insolvent by reason
of such incurrence, (ii) was or is engaged in a business or transaction for
which the assets remaining with such Guarantor constituted unreasonably small
capital or (iii) intended or intends to incur, or believed or believes that it
would incur, debt beyond its ability to repay such debts as they mature and (b)
received or receives less than reasonably equivalent value or fair
consideration, the obligations of such Guarantor under its Guarantee could be
avoided or claims in respect of such Guarantee could be subordinated to all
other debts of such Guarantor. Among other things, a legal challenge of a
Guarantee on fraudulent conveyance grounds may focus on the benefits, if any,
realized by such Guarantor as a result of the issuance by the Company of the
Notes. To the extent that any Guarantee was a fraudulent conveyance or held
unenforceable for any other reason, the holders of the Notes would cease to have
any claim against a Guarantor and would be solely creditors of the Company and
any other Guarantors whose Guarantees were not avoided or held unenforceable. In
such event, the claims of the holders of the Notes would be subject to the prior
repayment of all liabilities of the Guarantor whose Guarantee was avoided or
held unenforceable. There can be no assurance that, after providing for all
prior claims, there would be sufficient assets to satisfy the claims of the
holders of the Notes relating to any avoided or unenforceable portion of a
Guarantee.
Each Guarantor will agree, jointly and severally with the other Guarantors,
to contribute to the obligations of any Guarantor under a Guarantee of the
Notes. Furthermore, the Guarantee of each Guarantor will provide that it is
limited to an amount that would not render the Guarantor thereunder insolvent.
The Company believes that the Guarantors will receive equivalent value at the
time the indebtedness is incurred under the Guarantees. In addition, the Company
believes that none of the Guarantors will be, at the time of or as a result of
the issuance of the Guarantees, insolvent, that none of the Guarantors is or
will be engaged in a business or transaction for which its remaining assets
constitute unreasonably small capital and that none of the Guarantors will have
intended or will intend to incur debts beyond its ability to repay such debts as
they mature. Since each of the components of the determination of whether a
Guarantee is a fraudulent conveyance is inherently fact based and fact specific,
there can be no assurance that a court passing on such questions would agree
with the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE; POSSIBLE ADVERSE EFFECT ON TRADING MARKET
FOR OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Notes as set forth in the legend thereon as a consequence of
the issuance of the Old Notes pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act and applicable state laws, or
pursuant to an exemption therefrom. Subject to the obligation by the Company to
file a Shelf Registration Statement covering resales of Old Notes in certain
circumstances, the Company does not intend to register the Old Notes under the
Securities Act and, after consummation of the Exchange Offer, will not be
obligated to
20
<PAGE> 24
do so. In addition, any holder of Old Notes who tenders in the Exchange Offer
for the purpose of participating in a distribution of the New Notes may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Additionally, as a
result of the Exchange Offer, it is expected that a substantial decrease in the
aggregate principal amount of Old Notes outstanding will occur. As a result, it
is unlikely that a liquid trading market will exist for the Old Notes at any
time. This lack of liquidity will make transactions more difficult and may
reduce the trading price of the Old Notes. See "The Exchange Offer" and "Old
Notes; Registration Rights."
ABSENCE OF PUBLIC MARKET
There is no existing market for the New Notes and, although the Notes have
been approved for trading in the PORTAL Market upon issuance to "qualified
institutional buyers" (as defined in Rule 144A), there can be no assurance as to
the liquidity of any markets that may develop for the Notes, the ability of
holders to sell the Notes or the price at which holders would be able to sell
the Notes. Future trading prices of the New Notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Historically, the
market for securities similar to the New Notes, including non-investment grade
debt, has been subject to disruptions that have caused substantial volatility in
the prices of such securities. There can be no assurance that any market for the
New Notes, if such market develops, will not be subject to similar disruptions.
The Initial Purchasers have advised the Company that they currently intend to
make a market in the New Notes offered hereby. However, the Initial Purchasers
are not obligated to do so and any market making may be discontinued at any time
without notice.
21
<PAGE> 25
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the New Notes offered hereby. In consideration
for issuing the New Notes as contemplated in this Prospectus, the Company will
receive, in exchange, Old Notes in like principal amount. The form and terms of
the New Notes are identical in all material respects to the form and terms of
the Old Notes, except as otherwise described herein under "The Exchange Offer --
Terms of the Exchange Offer." The Old Notes surrendered in exchange for the New
Notes will be retired and cancelled and cannot be reissued. Accordingly,
issuance of the New Notes will not result in any increase in the outstanding
debt of the Company.
The net proceeds from the sale of the Old Notes were used to retire certain
indebtedness, fund a distribution to shareholders, working capital and general
corporate purposes which may include future acquisitions, and to pay fees and
expenses as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Sources:
Offering proceeds......................................... $120,000
--------
Total sources.......................................... $120,000
========
Uses:
Retire certain existing credit facilities (a)............. $101,548
Shareholder Distribution.................................. 10,000
Estimated fees and expenses............................... 5,294
General corporate purposes................................ 3,158
--------
Total uses............................................. $120,000
========
</TABLE>
- -------------------------
(a) Initially, funds from the retired credit facilities were used to (i) finance
the acquisition of Hawthorne, historical capital expenditures and working
capital for a total of approximately $26,000 and (ii) finance approximately
$76,000 related to the acquisitions of J&R, Veltri Group and PSI.
22
<PAGE> 26
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company at July 4, 1998 after giving effect to the
Offering and the application of the net proceeds therefrom. This data should be
read in conjunction with "Unaudited Pro Forma Condensed Combined Financial
Information," "Unaudited Pro Forma Condensed Combined Interim Financial
Information," and the historical combined financial statements of the Company,
including the notes thereto, presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
JULY 4, 1998
------------
ACTUAL
------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 8,934
========
Long term debt, including current portion(1)................ $ 8,065
Senior Credit Facility(2)................................... $ 363
9 5/8% Senior Subordinated Notes due 2008................... $120,000
--------
Total long term debt, including current portion........ $128,428
Shareholders' equity........................................ $ (196)
--------
Total capitalization................................... $128,232
========
</TABLE>
- -------------------------
(1) Includes capital leases.
(2) The Senior Credit Facility provides for borrowings of up to $100,000 of
revolving loans for working capital and general corporate purposes, which
may include future acquisitions, including up to $15,000 of tooling loans,
and will be secured by liens on substantially all of the assets of the
Company. See "Description of Senior Debt -- Senior Credit Facility."
23
<PAGE> 27
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement by and among the Company, the
Guarantors and the Initial Purchasers, the Company has agreed (i) to file a
registration statement with respect to an offer to exchange the Old Notes for
New Notes of the Company with terms substantially identical to the Old Notes
(except that the New Notes will not contain terms with respect to transfer
restrictions) within 60 days after the date of original issuance of the Old
Notes and (ii) to use best efforts to cause such registration statement to
become effective under the Securities Act within 150 days after such issue date.
In the event that applicable law or interpretations of the staff of the
Commission do not permit the Company to file the registration statement
containing this Prospectus or to effect the Exchange Offer, or if certain
holders of the Old Notes notify the Company that they are not permitted to
participate in, or would not receive freely tradeable New Notes pursuant to, the
Exchange Offer, the Company will use its best efforts to cause to become
effective a Shelf Registration Statement with respect to the resale of the Old
Notes and to keep the Shelf Registration Statement effective until the second
anniversary of the date of original issuance of the Old Notes or such shorter
period that will terminate when all the Transfer Restricted Notes covered by the
Shelf Registration Statement have been sold pursuant thereto. The interest rate
on the Old Notes is subject to increase under certain circumstances if the
Company is not in compliance with its obligations under the Registration Rights
Agreement. See "Old Notes; Registration Rights."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company
or, if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. See "Old
Notes; Registration Rights."
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third-parties, the Company believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer with the
intention or for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K under the
Securities Act. This Prospectus may be used for an offer to resell, resale or
other retransfer of New Notes only as specifically set forth herein. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of
24
<PAGE> 28
New Notes in exchange for each $1,000 principal amount of outstanding Old Notes
surrendered pursuant to the Exchange Offer. Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the New Notes will be registered under the Securities
Act and hence will not bear legends restricting the transfer thereof. The New
Notes will evidence the same debt as the Old Notes. The New Notes will be issued
under and entitled to the benefits of the Indenture, which also authorized the
issuance of the Old Notes, such that both series will be treated as a single
class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $120 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will be
no fixed record date for determining registered holders of Old Notes entitled to
participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Old Notes which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Old Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the New Notes from the Company.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions specified below under "--
Certain Conditions to the Exchange Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under "--
Certain Conditions to the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of Old Notes. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
25
<PAGE> 29
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 9 5/8% per annum, payable
semiannually in cash, on each May 1 and November 1, commencing November 1, 1998.
Holders of New Notes will receive interest on November 1, 1998 from the date of
initial issuance of the New Notes, plus an amount equal to the accrued interest
on the Old Notes from the most recent date to which interest has been paid to
the date of exchange thereof for New Notes. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above under "-- Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent prior
to 5:00 p.m., New York City time, on the
26
<PAGE> 30
Expiration Date. In addition, either (i) Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at the
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth below under -- "Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Old Notes to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder of Old Notes. The transfer of registered
ownership may take considerable time and may not be able to be completed prior
to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
below) unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter Transmittal or a notice of withdrawal, as the case may be, are required
to be guaranteed, such guarantor must be a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which
27
<PAGE> 31
determination will be final and binding. The Company reserves the absolute right
to reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Notes or a timely Book-Entry Confirmation of such Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Old Notes are not accepted for exchange for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of the Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "-- Exchange Agent" on or prior to the Expiration Date or,
if the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
(3) New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the Old Notes or
a Book-Entry
28
<PAGE> 32
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes were registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
29
<PAGE> 33
EXCHANGE AGENT
U.S. Bank Trust National Association has been appointed as Exchange Agent
of the Exchange Offer. Questions and request for assistance, request for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
U.S. BANK TRUST NATIONAL ASSOCIATION
<TABLE>
<S> <C> <C>
By Registered/Certified
By First Class Mail: or Overnight Delivery: Hand Delivery:
U.S. Bank Trust N.A. U.S. Bank Trust N.A. U.S. Bank Trust N.A.
P.O. Box 64485 Attn: Specialized Finance 4th Floor Bond Drop Window
St. Paul, Minnesota 55164-9549 SPFT0414 180 East Fifth Street
180 East Fifth Street St. Paul, Minnesota 55101
St. Paul, Minnesota 55101
Telephone Number: Facsimile Number:
612-244-8161 612-244-1537
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Old Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of Notes tendered, or if tendered Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend
30
<PAGE> 34
thereon as a consequence of the issuance of the Old Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
does not currently anticipate that it will register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission, New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer. Any holder who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes (i) could not
rely on the applicable interpretations of the staff of the Commission and (ii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. In addition,
to comply with the securities laws of certain jurisdictions, if applicable, the
New Notes may not be offered or sold unless they have been registered or
complied with. The Company has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the New Notes for offer or sale under the securities or blue sky laws of
such jurisdictions as any holder of the New Notes reasonably requests in
writing.
31
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of
operations of the Company for the year ended December 31, 1997, gives effect to
the Offering and the PSI Acquisition as if each transaction had occurred on
January 1, 1997. The following unaudited pro forma condensed combined balance
sheet at December 31, 1997, gives effect to the Offering as if it had occurred
on such date. The unaudited pro forma condensed combined financial information
does not purport to represent what the Company's results of operations or
financial position would have actually been had the transactions occurred on the
dates indicated above, or to project the Company's results of operations or
financial condition for any future date or period. This unaudited pro forma
condensed combined financial information should be read in conjunction with the
accompanying notes and the historical combined financial statements of the
Company and PSI, including the notes thereto, and the information set forth in
"Summary Financial Data," "Selected Financial Data," and "Management's
Discussion and Analysis of Operations and Financial Condition," all presented
elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
HISTORICAL PSI OFFERING
COMPANY PSI(A) ADJUSTMENTS(H) ADJUSTMENTS PRO FORMA
------- ---------- -------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................ $158,718 $70,699 -- -- $229,417
Cost of sales............................ 134,297 61,737 -- -- 196,034
-------- ------- ------- ------- --------
Gross profit........................... 24,421 8,962 -- -- 33,383
Operating expenses
Selling, general and administrative
expenses............................ 16,241 6,493 872(d) $ (650)(f) 22,956
Special compensation(b)................ 1,343 -- -- 1,359 2,702
-------- ------- ------- ------- --------
Income from operations................. 6,837 2,469 (872) (709) 7,725
Other expenses (income)
Interest............................... 4,599 1,254 2,927(e) 3,789(g) 12,569
Foreign currency....................... 117 -- -- -- 117
Other income........................... -- (323) -- -- (323)
-------- ------- ------- ------- --------
4,716 931 2,927 3,789 12,363
-------- ------- ------- ------- --------
Income (loss) before income taxes........ 2,121 1,538 (3,799) (4,498) (4,638)
Provision for income taxes............... 1,325 -- -- -- 1,325
-------- ------- ------- ------- --------
Net income (loss)(c)..................... $ 796 $ 1,538 $(3,799) $(4,498) $ (5,963)
======== ======= ======= ======= ========
</TABLE>
(see notes beginning on page 33)
32
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
(a) The historical financial information of PSI covers the period from January
1, 1997 through and including December 7, 1997, the day preceding the
consummation of the PSI Acquisition. The PSI Acquisition was accounted for
by the purchase method of accounting.
(b) To reflect amounts allocated to certain members of the management team who
participated in deferred compensation agreements with the Company as a
result of the $10,000 dividend to shareholders and recorded upon
consummation of the Offering on April 28, 1998. Future allocations to these
accounts will be discontinued as a result of the Offering, excluding up to
$300 in additional deferred compensation which can be earned by Delmar O.
Stanley, President and Chief Executive Officer of the Company, and annual
increases for interest on all vested amounts at the rate of 6% per year. See
"Management -- Deferred Compensation Agreements."
(c) The Company incurred as a result of the Offering (i) a $553 non-recurring
extraordinary loss; net of a $122 tax benefit, resulting from the write-off
of deferred financing costs related to certain debt that was retired (ii) a
$605 non-recurring loss on deferred foreign exchange costs and (iii) $138 in
fees associated with the retirement of certain indebtedness. These
non-recurring items are not reflected in the Unaudited Pro Forma Condensed
Combined Statement of Operations.
(d) To reflect $872 of incremental goodwill amortization over a period of 40
years as a result of purchase method of accounting for the PSI Acquisition.
(e) Represents the incremental interest expense related to the PSI Acquisition,
using a weighted-average interest rate of 8.7%. The underlying debt used to
finance the PSI Acquisition was retired using Offering proceeds from the
issuance of the Old Notes bearing a fixed interest rate of 9.625%.
(f) To reflect the reduction of $650 in business services fees paid by the
Company to Talon L.L.C. This annual fee reduction was part of a new
contractual agreement between the Company and Talon L.L.C. in connection
with the Offering and Mergers.
(g) Represents the incremental interest expense, using an interest rate of
9.625%, on the Notes, interest on other indebtedness, and $585 in additional
amortization of deferred financing costs related to the Notes and Senior
Credit Facility fees and expenses.
(h) As a result of the PSI acquisition in December 1997, the Company believes it
can achieve certain cost reductions that are not reflected in the Unaudited
Pro Forma Condensed Consolidated Statement of Operations. These anticipated
cost reductions total $3,589 on an annual basis and relate to (i) $1,227 of
annual sub-contracted manufacturing expenses to a related party that were
discontinued (ii) $1,200 of operating costs that were discontinued as a
result of closing certain warehouse facilities and (iii) the elimination of
$1,162 of former owner compensation and expenses. Of these anticipated cost
reductions, $2,427 relates to cost of sales and $1,162 relates to selling,
general and administrative expenses.
33
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED COMBINED INTERIM FINANCIAL INFORMATION
The following unaudited pro forma condensed combined interim statement of
operations of the Company for the fiscal six month period ended July 4, 1998,
gives effect to the Offering as if it had occurred on January 1, 1997. The
unaudited pro forma condensed combined interim financial information does not
purport to represent what the Company's results of operations or financial
position would have actually been had the transactions occurred on the dates
indicated above, or to project the Company's results of operations or financial
condition for any future date or period. This unaudited pro forma condensed
combined interim financial information should be read in conjunction with the
accompanying notes and the unaudited combined interim financial statements of
the Company, including the notes thereto, and the information set forth in
"Summary Financial Data," "Selected Financial Data," and "Management's
Discussion and Analysis of Operations and Financial Condition," all presented
elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONDENSED COMBINED INTERIM
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JULY 4, 1998
--------------------------------------
OFFERING
COMPANY ADJUSTMENTS PRO FORMA
------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Sales.................................................. $134,186 -- $134,186
Cost of Sales.............................................. 113,991 -- 113,991
-------- ------ --------
Gross Profit............................................. 20,195 -- 20,195
Selling, general & administrative expenses................. 13,240 $ (163)(a) 13,077
Special compensation....................................... 1,359 -- 1,359
-------- ------ --------
Income from operations..................................... 5,596 (163) 5,759
Other expenses (income)
Interest................................................. 5,375 1,100(b) 6,475
Foreign currency......................................... 787 -- 787
Other.................................................... (198) -- (198)
-------- ------ --------
Income (loss) before income taxes and extraordinary
expenses................................................. (368) (937) (1,305)
Provision for income taxes................................. 1,232 -- 1,232
-------- ------ --------
Income (loss) before extraordinary expenses................ (1,600) (937) (2,537)
Extraordinary expenses..................................... 553 -- 553
-------- ------ --------
Net income (loss).......................................... $ (2,153) $ (937) $ (3,090)
======== ====== ========
</TABLE>
- -------------------------
(a) To reflect the reduction of $163 in business services fees paid by the
Company to Talon L.L.C.
(b) Represents the incremental interest expense, using an interest rate of
9.625% on the notes, interest on other indebtedness, and $144 in additional
amortization of deferred financing costs related to the Notes and Senior
Credit Facility fees and expenses.
34
<PAGE> 38
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth selected historical financial data of the
Company for the five years ended December 31, 1997 and the fiscal six month
periods ended July 4, 1998 and 1997. The selected financial data for the three
year period ended December 31, 1997 are derived from the audited combined
financial statements of the Company included elsewhere in this Prospectus. The
selected financial data for the two year period ended December 31, 1994 are
derived from the audited combined financial statements not included herein. The
selected financial data for the fiscal six month periods ended July 4, 1998 and
1997 were derived from the unaudited condensed combined interim financial
statements of the Company included elsewhere in this Prospectus. The following
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the historical combined
financial statements of the Company, including the notes thereto, presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JULY 4,
------------------------------------------------ -------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................................ $39,467 $43,035 $56,835 $71,029 $158,718 $ 84,206 $134,186
Gross profit............................. 7,144 5,735 9,935 12,909 24,421 13,815 20,195
Selling, general and administrative
expenses(a)............................ 4,259 4,699 6,041 8,490 16,241 8,438 13,240
Special compensation(b).................. -- -- -- -- 1,343 -- 1,359
Income from operations................... 2,886 1,036 3,894 4,419 6,837 5,377 5,596
Interest................................. 806 714 1,192 1,754 4,599 2,084 5,375
Income (loss) before extraordinary
expenses and income taxes(c)........... 2,023 610 2,702 2,363 2,121 3,408 (368)
Net income............................... 2,023 610 2,702 2,269 796 2,522 (2,153)
BALANCE SHEET DATA
Cash and cash equivalents................ $ 5 $ 6 $ 18 $ 1,090 $ 1,233 $ 1,605 $ 8,934
Total assets............................. 29,345 33,618 37,206 91,110 166,494 129,493 173,706
Total debt............................... 10,480 14,089 17,555 49,468 107,315 60,280 128,428
Shareholders' equity..................... 10,511 10,786 12,736 14,401 14,601 17,448 (196)
OTHER FINANCIAL DATA
Depreciation and amortization............ $ 2,484 $ 2,639 $ 2,907 $ 3,419 $ 6,279 $ 2,718 $ 5,534
Capital expenditures..................... 1,925 5,494 5,009 3,942 9,389 (3,231) (4,181)
Cash provided by (used in) operating
activities............................. 5,332 2,110 2,288 6,317 6,166 (2,765) 8,571
Cash used in investing activities........ (1,878) (5,339) (4,980) (9,402) (61,171) (3,231) (3,854)
Cash provided by (used in) financing
activities............................. (3,454) 3,230 2,704 4,233 55,302 5,091 3,590
EBITDA(d)................................ 5,313 3,963 6,801 7,536 12,999 8,210 9,988
</TABLE>
- -------------------------
(a) Included in selling, general and administrative expenses are business
services fees paid to Talon L.L.C., an affiliate of the Company, of $1,150,
$850, and $717 for 1997, 1996 and 1995, respectively. Effective April 1,
1998, such fees were reduced to $500 annually. See "Certain Relationships
and Related Transactions." Business services fees paid to Talon L.L.C.
totalled $413 and $575 for the fiscal six month periods ended July 4, 1998
and 1997, respectively.
(b) Certain members of the Company's management team participate in a deferred
compensation arrangement which awards the employee for increases in
shareholder value. Approximately $1,343 was recorded in 1997 under this
arrangement. An additional amount of $1,359 was recorded upon consummation
of the Offering on April 28, 1998. Effective with the Offering, all future
allocations under these agreements were discontinued, excluding up to $300
in additional deferred compensation which can be earned by Delmar O.
Stanley, President and Chief Executive Officer of the Company, and annual
increases for interest on all vested amounts at the rate of 6% per year. See
"Management -- Deferred Compensation Agreements."
(c) Except for the Canadian subsidiary, the shareholders have elected under the
provisions of the Internal Revenue Code to be treated as S Corporations. As
a result, the taxable income of the companies is included in the taxable
income of the individual shareholders, and no provision for federal income
taxes has been included in income. The Canadian subsidiary is subject to
Canadian income tax.
(d) EBITDA is defined as income from continuing operations before the effect of
changes in accounting principles and extraordinary items plus interest,
income taxes, depreciation and amortization. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to incur and
service debt. However, EBITDA should not be considered in isolation as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. EBITDA measures presented may not be comparable
to similarly-titled measures of other companies. For the fiscal six month
period ended July 4, 1998, EBITDA includes a $198 gain on sale of assets and
a foreign currency exchange loss of $787.
35
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and result of
operations contains forward-looking statements. Holders of the Notes are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events may differ
materially from those discussed in the forward-looking statements as a result of
various factors, including, without limitation, the risk factors set forth under
"Risk Factors," "Forward-Looking Information," and the matters generally set
forth in this Prospectus. The following discussion should be read in conjunction
with "Unaudited Pro Forma Condensed Combined Financial Information," "Unaudited
Pro Forma Condensed Combined Interim Financial Information," "Selected Financial
Data," and the historical combined financial statements of the Company,
including the notes thereto, presented elsewhere in this Prospectus.
GENERAL
The Company is a leading full-service Tier 1 designer and manufacturer of
high-quality, stamped metal components and assemblies used by North American
automotive original equipment manufacturers ("OEMs"). The Company specializes
in, and derives the majority of its revenue from, underbody/chassis and
unexposed body structure assemblies which constitute major structural components
of passenger cars, light trucks, and vans. The Company's products include frame
rail, inner quarter panel, crossmember, cowl, bumper, rear back panel, and
trailer hitch assemblies. Since 1996, the Company has completed three
acquisitions: J&R on September 30, 1996, Veltri Metal Products Co. on November
8, 1996 and PSI on December 8, 1997. On a pro forma basis, these acquisitions
have contributed to the increase in the Company's net sales from $56.8 million
in 1995 to $229.4 million in 1997.
36
<PAGE> 40
Talon Entities
(Before the Mergers)
<TABLE>
<S><C>
Hawthorne J & R Production VS Holdings, VS Holdings, Veltri Holdings
Metal Products Manufacturing, Stamping, Inc. Inc. No. 2, Inc. USA, Inc.
Company Inc. ("PSI") | |
("Hawthorne") ("J&R") | |
| | | |
| | | |
| | | |
Talon Automotive Group LLC Veltri Metal Products Co.,
("Talon") ("Veltri")
</TABLE>
Talon Automotive Group, Inc.
(After the Mergers)
Talon Automotive Group, Inc.
("TAG, Inc.") (Formerly named PSI)
| |
| |
| |
| |
VS Holdings, Inc. Veltri Holdings USA, Inc.
|
|
|
|
|
|
Veltri
37
<PAGE> 41
MERGERS
As used in this Prospectus, unless the context indicates otherwise, the
"Company" means (i) for periods prior to the Mergers (as defined), the business
and operations of each of Talon Automotive Group, L.L.C. ("Talon"), Hawthorne
Metal Products Company ("Hawthorne"), Production Stamping, Inc. ("PSI"), J&R
Manufacturing, Inc. ("J&R"), Veltri Metal Products Co. ("Veltri"), Veltri
Holdings USA, Inc., VS Holdings, Inc., and VS Holdings No. 2 Inc.,
(collectively, the "Talon Entities") and (ii) for periods after the Mergers,
Talon Automotive Group, Inc. and its subsidiaries, which collectively owns the
business and operations of the Talon Entities.
The Talon Entities were affiliated by common ownership. The shareholders of
the Company and its subsidiaries are the same shareholders that owned each of
the Talon Entities and their respective ownership percentages did not change as
a result of the Mergers. The following table indicates when each of the Talon
Entities was formed or acquired:
<TABLE>
<CAPTION>
DATE
TALON ENTITY FORMED/ACQUIRED
- ------------ ---------------
<S> <C>
Hawthorne*.................................................. July 25, 1985
J&R*........................................................ September 30, 1996
Veltri*..................................................... November 8, 1996
PSI*........................................................ December 8, 1997
Talon....................................................... December 16, 1994
Veltri Holdings USA, Inc. .................................. November 8, 1996
VS Holdings, Inc. .......................................... November 8, 1996
VS Holdings No. 2 Inc. ..................................... November 8, 1996
</TABLE>
- -------------------------
* Denotes acquisition, otherwise the entity was formed by the Company on the
date indicated. Each of the acquisitions was accounted for under the purchase
method of accounting pursuant to the provisions of Accounting Principles
Bulletin 16, Business Combinations.
Immediately preceding the consummation of the Offering, Hawthorne and J&R
merged with and into PSI, and PSI changed its name to Talon Automotive Group,
Inc. ("TAG, Inc."). Immediately thereafter, Talon, which was owned by Hawthorne
and J&R, also merged with and into PSI. Hawthorne, J&R, and PSI each operate as
separate unincorporated divisions of TAG, Inc.
Simultaneously, VS Holdings No. 2 Inc. sold its 1% interest in Veltri Metal
Products Co. back to such company. VS Holdings No. 2 Inc. then merged with and
into VS Holdings, Inc., which owned all of the remaining outstanding stock of
Veltri Metal Products Co., such that, Veltri Metal Products Co. became a wholly
owned subsidiary of VS Holdings, Inc. The shareholders of VS Holdings, Inc. then
exchanged their shares in VS Holdings, Inc. for shares in TAG, Inc., and VS
Holdings, Inc. thereupon became a wholly owned subsidiary of TAG, Inc.
Accordingly, Veltri Metal Products Co. is an indirect, wholly owned subsidiary
of TAG, Inc. (VS Holdings, Inc., Veltri Holdings USA, Inc., and Veltri are
collectively referred to in this Prospectus as the "Veltri Group").
Collectively, the above actions are referred to in this Prospectus as the
"Mergers."
Also, immediately thereafter, the shareholders of Veltri Holdings USA, Inc.
exchanged their shares in Veltri Holdings USA, Inc. for shares in TAG, Inc., and
Veltri Holdings USA, Inc. also became a wholly owned subsidiary of TAG, Inc. The
reorganization was accounted for retroactively as if it were a pooling of
interest with no change made to the carrying bases of the assets and liabilities
of the combined entities.
Collectively, the above actions are referred to in this Prospectus as the
"Mergers." As used in this Prospectus, unless the context indicates otherwise,
(a) the "Company" means (i) for periods prior to the Mergers, the business and
operations of the Talon Entities and (ii) for periods after the Mergers, TAG,
Inc. and its subsidiaries, which collectively owns the business and operations
of the Talon Entities, and (b) "Veltri Group" means VS Holdings, Inc., Veltri
Metal Products Co. and Veltri Holdings USA, Inc.
38
<PAGE> 42
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with the Company's
historical Combined Financial Statements (including the notes thereto) appearing
elsewhere in this Prospectus. The historical information for the year ended
December 31, 1997 includes the PSI results of operations for the period
subsequent to its acquisition. The historical information for the year ended
December 31, 1996 includes the J&R and Veltri results of operations for the
periods subsequent to each of their acquisition. Accordingly, the results of
operations for the year ended December 31, 1997 are not directly comparable to
the results of operations for the year ended December 31, 1996 and the results
of operations for the year ended December 31, 1996 are not directly comparable
to the results of operations for the year ended December 31, 1995 and the
results of operations for the six month period ended July 4, 1998 are not
directly comparable to the six month period ended July 4, 1997. The Company's
performance is expected to be dependent on automotive vehicle production. The
Company's business is subject to seasonal fluctuations in sales and
profitability due to the impact of OEM plant shutdowns in July and December for
OEM holidays and model changeovers. In addition to being awarded business for
new platforms, the Company has historically supplied its OEM customers with
components which were previously manufactured by such OEM or Tier 1 suppliers.
Factory-assist work approximated $14.7 million, $6.3 million and $1.5 million in
1997, 1996 and 1995, respectively. The shareholders of Hawthorne, J&R and PSI
have elected to treat these companies as S Corporations for federal income tax
purposes under the Internal Revenue Code of 1986, as amended, and for state
income tax purposes. Veltri is a Nova Scotia unlimited liability company and is
subject to Canadian income tax.
The following table sets forth, for the periods indicated, certain
operating data as a percentage of net sales (table will not total due to
rounding):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 4,
---------------------------------
YEAR ENDED DECEMBER 31, UNAUDITED
---------------------------------------------- ---------------------------------
1997 1996 1995 1998 1997
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $158.7 100.0% $71.0 100.0% $56.8 100.0% $134.2 100.0% $84.2 100.0%
Cost of sales.................... 134.3 84.6% 58.1 81.8% 46.9 82.5% 114.0 84.9% 70.4 83.6%
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Gross profit................... 24.4 15.4% 12.9 18.2% 9.9 17.5% 20.2 15.1% 13.8 16.4%
Operating expenses
Selling, general and
administrative expenses...... 16.2 10.2% 8.5 12.0% 6.0 10.6% 13.2 9.8% 8.4 10.0%
Special compensation........... 1.3 0.8% -- -- -- -- 1.4 1.1% -- --
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Income from operations....... 6.8 4.3% 4.4 6.2% 3.9 6.9% 5.6 4.2% 5.4 6.4%
Other income..................... -- -- -- -- -- -- (0.2) (0.2)% -- --
Other expenses
Interest....................... 4.6 2.9% 1.8 2.5% 1.2 2.1% 5.4 4.0% 2.1 2.5%
Foreign currency............... 0.1 0.1% 0.3 0.4% -- -- 0.8 0.6% (0.1) (0.1)%
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Income (loss) before income taxes
and extraordinary expenses..... 2.1 1.3% 2.4 3.3% 2.7 4.8% (0.4) (0.2)% 3.4 4.0%
Provision for income taxes....... 1.3 0.8% 0.1 0.1% -- -- 1.2 0.9% 0.9 1.1%
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Income (loss) before
extraordinary expenses......... 0.8 0.5% 2.3 3.2% 2.7 4.8% (1.6) (1.1)% 2.5 2.9%
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Extraordinary expenses........... -- -- -- -- -- -- 0.6 0.5% -- --
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Net income................... $ 0.8 0.5% $ 2.3 3.2% $ 2.7 4.8% $ (2.2) (1.6)% $ 2.5 2.9%
====== ===== ===== ===== ===== ===== ====== ===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales: Net sales for 1997 were $158.7 million. This was an increase of
approximately $87.7 million or 123.5% as compared to net sales for 1996 of $71.0
million. Approximately 85.0% of this increase is attributable to the
acquisitions of J&R, Veltri and PSI. The remaining 15.0% of the net sales
increase was due to new business awards, including business related to the
Chrysler NS Minivan and additional factory assist work.
39
<PAGE> 43
Gross Profit: Gross profit was $24.4 million or 15.4% of net sales for 1997
as compared to $12.9 million or 18.2% of net sales for 1996. This represents an
increase of $11.5 million or 89.2% as compared to the prior year. The decrease
as a percentage of net sales was due to lower gross margin rates at J&R and
start-up expenses related to the 1998 Chrysler LH Concorde/Intrepid program, as
well as factory assist work at Hawthorne.
Selling, General and Administrative Expenses ("SG&A"): SG&A expenses were
$16.2 million or 10.2% of net sales for 1997 as compared to $8.5 million or
12.0% of net sales for 1996. The decrease in SG&A, as a percentage of net sales,
was the result of leveraging SG&A expenses over a larger net sales base. This
decrease was partially offset by increased amortization expense of $0.5 million
related to the Company's acquisition of J&R and Veltri. Included in the
Company's SG&A expense are business services fees paid to Talon L.L.C., an
affiliate of the Company. The Company incurred a business services fee of $1.2
million in 1997 and $0.9 million in 1996. Effective with the Offering, such fees
will be $0.5 million annually.
Special Compensation Expense: Included in 1997 results was a special
compensation expense of $1.3 million or 0.8% of net sales. There was no special
compensation expense in 1996 or 1995. See "Management -- Deferred Compensation
Agreements" and Note 10 to the Company's Combined Financial Statements.
Interest Expense: Interest expense for 1997 was $4.6 million or 2.9% of net
sales as compared to $1.8 million or 2.5% of net sales for 1996. This was an
increase of $2.8 million or 162.2% as compared to the prior year. The increase
in interest expense as a percentage of net sales is attributable to additional
borrowings related to the acquisitions of J&R, Veltri and PSI, partially offset
by a lower weighted average interest rate. Weighted average interest rates were
8.2% and 8.4% in 1997 and 1996, respectively.
Income Taxes: The provision for income taxes for 1997 was $1.3 million with
an effective tax rate of 43.6%, compared to $0.1 million with an effective tax
rate of 35.8% in 1996. The Company's income taxes relate solely to its Canadian
operations. The increase in the effective rate is due primarily to
non-deductible amortization of cost in excess of assets acquired.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales: Net sales for 1996 were $71.0 million. This was an increase of
approximately $14.2 million or 25.0% as compared to net sales for 1995 of $56.8
million. Substantially all of this increase was attributable to the acquisitions
of J&R and Veltri.
Gross Profit: Gross profit was $12.9 million or 18.2% of net sales for 1996
as compared to $9.9 million or 17.5% of net sales for 1995. This represents an
increase of $3.0 million or 29.9% as compared to the prior year. The increase as
a percentage of net sales was primarily a result of higher gross profit at
Hawthorne as compared to the prior year, offset slightly by lower gross margin
rates at J&R and Veltri.
Selling, General and Administrative Expenses: SG&A expenses were $8.5
million or 12.0% of net sales for 1996 as compared to $6.0 million or 10.6% of
net sales for 1995. The increase in SG&A, as a percentage of net sales, was
primarily a result of J&R's and Veltri's SG&A expenses as a percentage of net
sales being higher than other TAG companies. This increase was partially offset
by a larger net sales base to which corporate expenses were allocated.
Interest Expense: Interest expense for 1996 was $1.8 million, an increase
of $0.6 million as compared to 1995. The increase in interest expense is
attributable to increased debt related to the acquisitions of J&R and Veltri.
Income Taxes: The provision for income taxes for 1996 was $0.1 million with
an effective tax rate of 35.8%, as compared to no provision for income taxes in
1995. The Company's income tax expense is solely related to its Canadian
operation.
SIX MONTH PERIOD ENDED JULY 4, 1998 COMPARED TO SIX MONTH PERIOD ENDED JULY 4,
1997
Net Sales: Net sales for the six month period ended July 4, 1998 ("first
six months of 1998") were $134.2 million. This was an increase of approximately
$50.0 million or 59.4% as compared to the six month period ended July 4, 1997
("first six months of 1997"). Approximately 41.0% of this increase is
attributable to the Company's acquisition of Production Stamping, Inc. ("PSI")
in December 1997. The remaining 18.4% of the net sales increase was due to new
factory-assist business that was awarded during the first six months of
40
<PAGE> 44
1998, including business related to the Chrysler NS Minivan and Dodge Neon, and
increased volumes and content related to the 1998 Chrysler LH Concord/Intrepid
program. The Company believes sales for the first six months of 1998 were
reduced by approximately $3.8 million as a result of a strike at General Motors.
Gross Profit: Gross profit for the first six months of 1998 was $20.2
million or 15.1% of net sales as compared to $13.8 million or 16.4% of net sales
for the first six months of 1997. This represents an increase of $6.4 million or
46.2% as compared to the prior year. The Company believes that gross profit for
the first six months of 1998 was reduced approximately $1.6 million as a result
of a strike at General Motors. The decrease in gross profit as a percentage of
net sales was due to the strike at General Motors, and short-term launch costs
associated with additional factory-assist business the Company received in the
first six months of 1998.
Selling, General and Administrative Expenses ("SG&A"): SG&A expenses for
the first six months of 1998 were $13.2 million or 9.8% of net sales, compared
to $8.4 million or 10.0% of net sales for the first six months of 1997. SG&A, as
a percentage of net sales, decreased for the first six months of 1998 as a
result of a larger net sales base to which corporate expenses were allocated.
Included in the Company's SG&A expense is a business services fee paid to Talon
L.L.C., an affiliate of the Company. The Company incurred business services fees
of $0.4 million in the first six months of 1998 compared to $0.6 million in the
first six months of 1997. The Company's business services agreement with Talon
L.L.C. was modified on April 1, 1998 to limit fees to $0.5 million per year.
Special Compensation Expense: Included in the first six months of 1998 was
a special compensation expense of $1.4 million or 1.1% of net sales. There was
no special compensation expense for the first six months of 1997.
Other Income: Other income for the first six months of 1998 was $0.2
million and related to a gain on the sale of assets. There were no such gains in
the first quarter of 1997.
Interest Expense: Interest expense for the first six months of 1998 was
$5.4 million or 4.0% of net sales, compared to $2.1 million or 2.5% of net sales
for the first six months of 1997. This was an increase of $3.3 million or 157%
as compared to the first six months of 1997. The increase in interest expense is
attributable to additional borrowings related to the acquisition of PSI in
December 1997 and the issuance of $120.0 million of senior subordinated notes on
April 28, 1998.
Foreign Currency: The foreign currency loss for the first six months of
1998 was $0.8 million compared to a foreign currency gain of $0.1 million for
the first six months of 1997. The change in foreign currency expense was $0.9
million as compared to the prior year. Foreign currency gains and losses are all
attributable to the Company's Canadian operation. The first six months of 1998
included a $0.6 million loss on deferred foreign exchange associated with
certain debt that was retired as a result of the issuance of the senior
subordinated notes.
Extraordinary Expenses: Included in the first six months of 1998 were $0.7
million of extraordinary expenses related to the write-off of certain deferred
financing costs on debt that was retired using proceeds from the issuance of
senior subordinated indebtedness. There were no extraordinary items in the first
six months of 1997.
Income Taxes: The provision for income taxes for the first six months of
1998 was $1.2 million or 0.9% of net sales compared to $0.9 million or 1.1% of
net sales for the first six months of 1997. The Company's income taxes relate
solely to its Canadian operation. The effective tax rate for the first six
months of 1998 was 43.5% compared to 41.0% for the first six months of 1997. The
increase in the effective tax rate was due to an increase in non-deductible
amortization expenses for the Canadian operation in the first six months of
1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operating activities totaled $6.2 million for 1997, as
compared to $6.3 million for 1996 and $2.3 million for 1995. For the first six
months of 1998, net cash flow from operating activities totaled $8.6 million as
compared to a $2.8 million cash deficit from operating activities for the first
six months of 1997. The increase, as compared to the prior year, was the result
of favorable changes in working capital between the two periods, including a
significant decrease in pre-production tooling inventory.
41
<PAGE> 45
Net cash used in investing activities totaled $61.2 million for 1997, as
compared to $9.4 million for 1996 and $5.0 million for 1995. Investing
activities in 1997 consisted of $9.4 million in capital expenditures and $51.7
million for the PSI Acquisition. Investing activities in 1996 consisted of $3.9
million in capital expenditures and $5.5 million for the J&R and Veltri
acquisitions. Investing activities in 1995 related primarily to capital
expenditures. Net cash used in investing activities totaled $3.9 million for the
first six months of 1998, as compared to $3.2 million for the first six months
of 1997. Investing activities for the first six months of 1998 and 1997 related
primarily to capital expenditures.
Cash provided by financing activities for 1997 was $55.3 million compared
to $4.2 million for 1996 and $2.7 million for 1995. In 1997, additional
borrowings, less principal payments, provided $55.8 million. Net cash
distributions of $0.4 million were paid in 1997. Net cash provided by financing
activities totaled $3.6 million for the first six months of 1998 compared to
$5.1 million for the first quarter of 1997. For the first six months of 1998,
proceeds from long-term debt totaled $121.2 million and included $120.0 million
from the issuance of senior subordinated notes. Principal repayments on
long-term debt totaled $101.3 million and primarily represented debt retired
using proceeds from the issuance of senior subordinated notes. Also during the
first six months of 1998, the Company incurred $4.3 million of deferred
financing costs related to the issuance of senior subordinated notes and made
net cash distributions of $12.0 million.
Capital expenditures for 1997 were $9.4 million, as compared to $3.9
million for 1996 and $5.0 million for 1995. In 1997, the Company completed four
significant projects that it commenced in 1996: (i) the refit of a 144 inch
press line ($2.3 million); (ii) the purchase of additional presses related to
the Company's involvement in the Honda BM Minivan and VC Civic programs ($1.2
million); (iii) the expansion of the Glencoe facility for the above programs
($0.6 million) and (iv) an automated die cart system ($0.9 million). Major
capital projects for 1996 included productivity improvement expenditures,
including a third five-axis cutter ($0.7 million), and the refit of the 144 inch
press line ($2.3 million). Major capital projects for 1995 related primarily to
various investments in machinery and equipment, including a transfer press
(approximately $5.0 million). Capital expenditures for the first six months of
1998 were $4.2 million, as compared to $3.2 million for the first six months of
1997. Capital expenditures for the first six months of 1998 and 1997 related to
various investments in machinery and equipment, including new press equipment.
The Company currently expects that its capital expenditures (inclusive of
maintenance amounts and exclusive of potential acquisitions) will be
approximately $9.5 million in 1998, $14.0 million in 1999, $25.0 million in 2000
and $15.0 million in 2001. Included in these figures, are capital expenditures
for the 2001 Chrysler KJ Jeep Cherokee launch and other potential business
awards of $4.0 million and $15.0 million in 1999 and 2000, respectively. The
Company believes that maintenance capital expenditures approximate $4.3 million
annually. However, the Company's capital expenditures will be affected by, and
may be greater or reflect different timing than currently anticipated depending
upon, the size and nature of new business opportunities and equipment
availability.
As of December 31, 1997, on a pro forma basis after giving effect to the
Offering, the Company would have had approximately $125.1 million of debt
outstanding. The Company would also have the ability to borrow approximately an
additional $74.2 million under the Senior Credit Facility borrowing base and
could actually borrow up to $20.7 million given borrowing covenants. The Company
believes that cash generated from operations, together with amounts available
under the Senior Credit Facility and unused portions of the proceeds from the
Offering, will be adequate to meet its debt service requirements, capital
expenditures and working capital needs for the foreseeable future, although no
assurance can be given in this regard. The Company's ability to meet its working
capital and capital expenditure requirements and service its debt obligations
will depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control.
PSI ACQUISITION
As a result of the PSI acquisition in December 1997, the Company believes
it can achieve certain cost reductions that are not reflected in the Unaudited
Pro Forma Condensed Consolidated Statement of Operations. These anticipated cost
reductions total $3,589 on an annual basis and relate to (i) $1,227 of annual
sub-contracted manufacturing expenses to a related party that were discontinued
(ii) $1,200 of
42
<PAGE> 46
operating costs that were discontinued as a result of closing certain warehouse
facilities and (iii) the elimination of $1,162 of former owner compensation and
expenses. Of these anticipated cost reductions, $2,427 relates to cost of sales
and $1,162 relates to selling, general and administrative expenses.
INFLATION
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. Management believes that inflation has not
significantly impacted the Company's business over the past twelve months.
However, because selling prices generally cannot be increased until a model
changeover, the effects of inflation must be offset by productivity improvements
and increased volumes from new business awards.
YEAR 2000 ISSUE
The Company completed a comprehensive review of its computer systems in
June 1998 and believes it has identified those systems that could be affected by
the "Year 2000" issue. The Company is implementing a plan to resolve these
issues and expects to complete such plan by June 1999. The Company believes
that, with modification of its existing computer systems, updates by vendors and
conversion to new software in the ordinary course of its business, the Year 2000
issue will not pose significant operational problems for the Company's computer
systems. However, if such modifications and conversions are not completed
properly or in a timely manner, the Year 2000 issue may have a material adverse
impact on the business, financial condition and results of operations of the
Company. The costs of modifications and conversions are not anticipated to be
material; however, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
EFFECT OF STRIKE AT GENERAL MOTORS
The United Auto Workers union began a strike at two General Motors' parts
plants in early June 1998. The strike caused a disruption of General Motors'
parts-supply chain and forced it to close nearly all of its North American
assembly plant operations until the strike was resolved in late July 1998. As a
result of the strike, the Company temporarily discontinued shipping parts to
General Motors. The Company resumed shipping to General Motors in August 1998.
As a result of the strike, the Company expects its earnings for the second
quarter of 1998 will be reduced by approximately $1.6 million and that earnings
for the third quarter of 1998 could be reduced by approximately $2.1 million.
See "Risk Factors -- Dependence on Principal Customers".
EFFECT OF ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. The Company has elected to adopt the
requirements of this standard effective December 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
Statement supersedes Statement 14 and establishes standards for the way public
business enterprises report selected information about operating segments in
annual reports and interim financial reports issued to debtholders. Statement
131 is effective for fiscal years beginning after December 15, 1997. The Company
is currently evaluating the proposed requirements of the Standard and has not
determined the impact of the Standard, if any.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's current minimal use of derivatives, management does not anticipate
that the adoption of the new statement will have a significant effect on
earnings or the financial position of the Company.
43
<PAGE> 47
BUSINESS
GENERAL
The Company is a leading full-service Tier 1 designer and manufacturer of
high-quality, stamped metal components and assemblies used by North American
automotive original equipment manufacturers ("OEMs"). The Company specializes
in, and derives the majority of its revenue from, underbody/chassis and
unexposed body structure assemblies which constitute major structural components
of passenger cars, light trucks, and vans. The Company's products include frame
rail, inner quarter panel, crossmember, cowl, bumper, rear back panel, and
trailer hitch assemblies. On a pro forma basis, assuming the PSI Acquisition had
occurred on January 1, 1997, the Company would have had net sales of $229.4
million and Adjusted EBITDA (as defined herein) of $26.2 million for the year
ended December 31, 1997.
The Company believes its focus on underbody/chassis and unexposed body
structure assemblies, full-service capabilities, commitment to quality, and key
customer relationships has positioned it well to benefit from current industry
trends. OEMs are focusing their in-house stamping operations on the production
of Class A exposed surface panels and are increasingly relying on outside
suppliers with full-service engineering and program management capabilities to
design, engineer and manufacture complex underbody/chassis and unexposed body
structure assemblies. In addition, OEMs are reducing the number of their
stamping suppliers by focusing on companies that can manufacture high
value-added assemblies. The Company believes that its ability to anticipate and
respond to these trends was a significant factor in the award of major
assemblies on the 1998 Chrysler LH Concorde/Intrepid and the 2001 Chrysler KJ
Jeep Cherokee programs. Based on internal Company surveys, the Company believes
the 1998 Chrysler LH Concorde/Intrepid award could generate approximately $50 to
$55 million of sales by the Company during the 1999 model year, however, no
assurance can be given that such sales will actually be achieved. See
"Forward-Looking Information."
Based on industry news publications available to the public, the Company
believes its products were used on nine of the ten best selling vehicles in
North America during 1997. The Company's four largest customers, General Motors
Corporation ("General Motors"), Chrysler Corporation ("Chrysler"), Ford Motor
Company ("Ford"), and Honda Motor Co., Ltd. ("Honda"), accounted for
approximately 33%, 32%, 11% and 3%, respectively, of the Company's pro forma net
sales for the year ended December 31, 1997 assuming the PSI Acquisition had
occurred on January 1, 1997. The Company also sells its products to targeted
Tier 1 suppliers. Platforms on which the Company had its most significant
content in 1997 included: Chrysler's LH Concorde/Intrepid, NS Minivan and AB Ram
Van, General Motors' GMT 400 Full-size Pickup/Tahoe/Suburban and GMT 325/330
Blazer/Jimmy, Ford's Explorer and Lincoln Continental, and Honda's LS Accord and
VC Civic. Based on internal Company surveys, the Company believes its products
are present on every General Motors truck platform, and also believes it is
Chrysler's largest independent supplier of front frame rail assemblies for
passenger cars, vans, and sport utility vehicles. The Company has received
quality and delivery awards from its customers, including, most recently,
Chrysler's Platinum Pentastar Award in 1997.
The Company has grown rapidly through a combination of strategic
acquisitions and new platform awards. As a result of these efforts, net sales
have increased at a compound annual growth rate ("CAGR") of 41.6% from
approximately $39.5 million in 1993 to $158.7 million in 1997. On a pro forma
basis assuming the PSI Acquisition had occurred on January 1, 1997, the Company
would have had net sales of $229.4 million. Since 1996, the Company's management
team has completed three strategic acquisitions which it believes have
strengthened the Company's market position with key customers, expanded its core
product lines and enhanced its design, engineering and manufacturing
capabilities. The Company's acquisition strategy focuses on companies with
strong management which can strengthen the Company's position as a Tier 1
supplier and allow it to further capitalize on industry trends.
BUSINESS STRATEGY
Based on pro forma 1997 net sales after giving effect to the PSI
Acquisition and internal Company surveys, the Company believes it is one of the
leading independent suppliers in its core product segment of
44
<PAGE> 48
underbody/chassis and unexposed body structure assemblies. The Company's
strategic objective is to become one of the top two competitors in this market
segment. The Company believes it has developed a strategy to enhance its market
position by capitalizing on industry trends and leveraging its core
competencies. Key elements of the Company's strategy include the following:
Supply Complex High Value-Added Modules and Systems. In an effort to reduce
costs, OEMs are increasingly seeking suppliers capable of providing assemblies
and complete systems or modules, rather than suppliers which only provide
individual stampings. Typically, such complex products result in higher dollar
content per vehicle and generate higher margins as compared to simple,
individual stampings. After giving effect to the PSI Acquisition, value-added
assemblies represented approximately 75% of the Company's pro forma 1997 net
sales. The Company seeks to gain new business of modules and systems, which
typically include even greater content than assemblies. The Company believes its
capabilities and current industry trends have created an opportunity for it to
provide multiple assemblies and integrated modules such as front-end systems
(including frame rail, bumper, radiator support, wheel house inner panel, and
control arm assemblies), front floor pan systems (including floor pan,
crossmember, and tunnel reinforcement assemblies), and rear/back panel systems
(including back panel, quarter panel, rear frame rail, rear wheel house, and
rear floor pan assemblies). For example, the Company increased its dollar
content on the 1998 LH Concorde/Intrepid platform versus the 1993 platform from
approximately $115 per vehicle to $180 per vehicle. This was achieved primarily
through stamping and welding additional components, thereby producing a higher
value-added assembly.
Enhance Full-Service Engineering and Program Management Capabilities. The
Company seeks to continuously enhance its design, engineering, prototyping,
testing, program management, product development and assembly capabilities to
further strengthen its preferred position with key customers. The Company
believes these capabilities enable it to participate in the product development
process during the concept and prototype development stages as well as
throughout the design and manufacturing stages. As OEMs continue to outsource
complex, unexposed stamped assemblies to fewer suppliers, the Company believes
Tier 1 suppliers with proven full-service capabilities will be better positioned
to secure such business. To capitalize on this trend, in 1996 the Company
acquired J&R which enabled the Company to become one of a limited number of
independent full-service stamping suppliers with prototyping capabilities. The
Company believes that further expanding its full-service capabilities will
enable it to better manage larger programs, reduce time to market and customer
costs, and improve the Company's margins.
Focus on Key Customers. As OEMs continue to consolidate their supplier
base, the Company believes that strong customer relationships are increasingly
important. As a result, the Company focuses on a limited number of customers
which the Company believes will enable it to anticipate and better service such
customers' needs. Furthermore, the Company anticipates the need to follow its
key customers as they move to globally source their stampings. As examples of
its close relationships with its key customers, members of the Company's design
team are currently working on-site at Chrysler helping to complete the design of
the front-end system assemblies for the 2001 KJ Jeep Cherokee. In addition, the
Company proposed the successful redesign of General Motors' 1999 GMT 800
Full-size Pickup/Tahoe/Suburban trailer hitch assembly. As further evidence of
the Company's key customer business, and based on internal Company surveys, the
Company believes its products are present on every General Motors truck
platform, and also believes it is Chrysler's largest independent supplier of
front frame rail assemblies for passenger cars, vans, and sport utility
vehicles.
Pursue Strategic Acquisitions. The Company intends to continue to seek
acquisitions of companies with strong management which will further improve the
Company's position as a Tier 1 supplier by creating opportunities for it to: (i)
strengthen its relationships with key customers; (ii) add new model platforms;
(iii) expand core product lines; (iv) enhance its full-service capabilities; and
(v) expand globally. Consistent with this strategy, the Company's management
team has completed three acquisitions since the beginning of 1996. See "--
Recent Acquisitions."
45
<PAGE> 49
COMPETITIVE STRENGTHS
The Company believes it has the following competitive strengths:
Engineering and Product Expertise. The Company believes it has developed
expertise in the design, development, and production of underbody/chassis and
unexposed body structure assemblies, such as frame rail, inner quarter panel,
crossmember, cowl, bumper, rear back panel, and trailer hitch assemblies. This
expertise has contributed to its stature as a preferred full-service stamping
supplier to its key customers. For example, the Company's design involvement in
the 1998 Chrysler LH Concorde/Intrepid frame rail assembly produced significant
piece cost, tooling, and performance savings for Chrysler by eliminating
multiple part numbers. This was achieved by combining multiple parts and
commonizing right- and left-hand parts into identical stampings. The Company
believes its performance in producing complex frame rail assemblies for
Chrysler's LH Concorde/Intrepid vehicles and AB Ram Van, and its cooperative
advance product development efforts with Chrysler, contributed to the Company's
award of frame rail and other front-end system assemblies for the 2001 Chrysler
KJ Jeep Cherokee.
Successful Launch Performance Record. The Company has significant
experience in managing and executing new programs from the concept and prototype
development stages through the design and manufacturing stages. In 1997, the
Company successfully launched seven new programs comprising approximately 54
assemblies and 185 parts. These launches met all customer delivery requirements
and were within the Company's launch budget. The Company's most significant
launch, the 1998 Chrysler LH Concorde/ Intrepid, consisted of approximately 26
assemblies and 133 parts and had total defective parts per million ("PPM") of
only ten. Based on internal Company surveys, the Company believes that the
successful performance in the launch phase of a new platform is a critical
factor in satisfying its key customers and securing additional platform work.
The Company's program management organization and methodology is being
benchmarked by Chrysler.
Quality Commitment. The Company believes its quality performance in 1997 is
a significant competitive advantage. For example, the Company's 1998 model year
PPM performance with Chrysler through March 1998 was 26 PPM, which is below
Chrysler's benchmark of 50 PPM for world class suppliers. Partially as a result
of such performance, the Company has received certain quality and delivery
awards from its key OEM customers, including, most recently, Chrysler's Platinum
Pentastar Award in December 1997, awarded to only nine production suppliers.
Acquisition Track Record. Since 1996, the Company's management team has
completed three strategic acquisitions. The management team has a disciplined
approach to evaluating acquisition opportunities and believes that these
acquisitions have strengthened the Company's market position with its key
customers, expanded its core product lines and enhanced its design, engineering
and manufacturing capabilities. Through these acquisitions, the Company's
management team has gained experience in acquiring and integrating businesses
while incurring only minimal disruption in current operations.
RECENT ACQUISITIONS
In December 1997, the Company acquired PSI, a supplier of automotive
stampings and finished assemblies, including trailer hitch, airbag canister,
crossmember and other welded assemblies. For its fiscal year ended June 30,
1997, PSI reported net sales of $72.0 million. Through the PSI Acquisition, the
Company added progressive and line die manufacturing capabilities and
state-of-the-art welding capabilities. PSI's expertise in these areas is
expected to enhance the Company's presence as a manufacturer of
underbody/chassis and unexposed body structure assemblies. As a result of the
PSI Acquisition, sales to General Motors represented approximately 33% of pro
forma 1997 net sales, as compared to 9% of 1997 historical net sales.
In addition, the Company completed two other strategic acquisitions in
1996:
- In November 1996, the Company acquired the Veltri Group, a manufacturer
of high value-added assemblies and detailed stampings, which recorded net
sales of $79.5 million for the fiscal year ended December 31, 1996. The
acquisition of the Veltri Group expanded the Company's product offering of
46
<PAGE> 50
underbody/chassis and unexposed body structure assemblies, increased its
product content at Chrysler, and added new customers, including Honda. See
Note 16, "Foreign Operations" of the Notes to the Company's Combined
Financial Statements.
- In September 1996, the Company acquired J&R, a manufacturer of stamped
metal prototype parts and short-run production stampings, weldments and
assemblies which recorded net sales of $14.7 million for its fiscal year
ended October 31, 1996. J&R is an integrated prototyping company, capable
of managing a program from math data through soft tooling and production
of finished components and assemblies. The J&R acquisition enabled the
Company to become one of a limited number of independent full-service
stamping suppliers with in-house prototyping capabilities.
AUTOMOTIVE INDUSTRY TRENDS
The Company's performance, growth and strategic plan are directly related
to current trends within the OEM market of the automotive industry. Since the
1980s, the Big Three have each been reducing their number of suppliers,
outsourcing an increasing percentage of their production requirements in certain
non-core product segments and sourcing increased value-added business to
suppliers capable of providing full-service capabilities. Tier 1 suppliers today
are expected to assume significant product management responsibility and to meet
increasingly expanded requirements. Suppliers are expected to control all
aspects of production and assembly, including not only manufacturing, but also
design, engineering, prototyping, component sourcing, quality assurance, testing
and delivery to the customer's assembly plant. The Company believes that these
requirements support the accelerating pace of consolidation of the OEM supplier
base as those suppliers that lack the full-service capabilities to meet the
OEMs' needs either cease to operate or are acquired by other suppliers.
Based on internal Company surveys, the Company believes the overall North
American market for body and chassis stampings is approximately $19.4 billion.
This market is dominated by the OEM captive suppliers, with approximately 20
major suppliers, including the Company, and more than 80 small- to medium-size
suppliers. The stamping segment of the automotive industry is highly fragmented
and undergoing accelerating consolidation.
Stamping parts are generally classified into five categories:
(i) unexposed body structure assemblies that comprise inner body
structure beneath the Class A surface panels;
(ii) unexposed underbody/chassis assemblies that make up the lower
vehicle structure;
(iii) Class A exposed surface panels;
(iv) truck frames and engine cradles; and
(v) powertrain and other functional components.
The Company has formulated its operating and acquisition growth strategy by
focusing on underbody/chassis and unexposed body structure assemblies
(categories (i) and (ii), above) which the OEMs are increasingly outsourcing due
to the complex design, engineering and labor requirements of producing these
parts. The Company believes considerable new business opportunities exist for
suppliers, such as the Company, which possess the considerable program
management, engineering, prototyping, tool development and testing expertise
required by OEM's to receive new business in the underbody/chassis and unexposed
body structure assembly areas. These new business opportunities include stamping
parts that were either formerly manufactured by the OEM's or by other automotive
suppliers that do not possess the Company's level of program management
expertise.
In contrast, category (iii), Class A surface panels, tend to be very large
stampings which have stringent surface quality standards and involve
significantly less assembly than underbody/chassis and unexposed body structure
assemblies. These products are considered core stampings by the OEMs, require
highly capital intensive automated press lines and are usually produced by
in-house stamping operations. Category (iv),
47
<PAGE> 51
truck frames and engine cradles, has significant barriers to entry, limited
outsourcing opportunities, and is dominated by three major OEM suppliers.
Category (v), powertrain and other functional components, is highly fragmented
and a relatively minor portion of the total stamping market, and does not offer
significant growth opportunities.
PRODUCTS
The Company manufactures a broad range of complex, high value-added stamped
assemblies, with underbody/chassis and unexposed body structure assemblies as
its core products. After giving effect to the PSI Acquisition, approximately 75%
of the Company's 1997 pro forma net sales were from value-added assemblies.
Underbody/chassis and unexposed body structure assemblies are integrated at the
OEM assembly plant and constitute major structural components of passenger cars,
light trucks, and vans. Typically, these assemblies and their components are
manufactured using various grades and thicknesses of steel, including
hot-rolled, cold-rolled, galvanized, and aluminized steel. The Company produces
over 500 products on 41 different platforms, including frame rail, trailer
hitch, cowl, bumper, inner quarter panel, wheelhouse inner panel, crossmember,
airbag canister, rear back panel, suspension brace, body sill, pillar, heat
shield, battery tray, and roof bow assemblies.
On a pro forma basis after giving effect to the PSI Acquisition, revenue
from each of the Chrysler LH Concorde/Intrepid, and NS Minivan, and General
Motors' GMT 400 Full-size Pickup/Tahoe/Suburban platforms exceeded 10% of the
Company's total pro forma revenue in fiscal year 1997. The business awarded on
these platforms was received and extends through the following time periods,
respectively: 1997 through 2002 for the Chrysler LH Concorde/Intrepid platform,
1996 through 2000 for the Chrysler NS platform, and 1993 through 1999 for the
General Motors' GMT 400 Full-size Pickup/Tahoe/Suburban platform. The Company
believes that it will be awarded business related to the next generation
platform because it is the incumbent supplier; however, there is no guarantee
that such business will be received.
The Company's press capabilities, including both small and extra-large
presses (up to 180 inches in width), allow it to produce not only small brackets
and supports, but also large underbody/chassis and body structure stampings such
as frame rail, quarter panel, bumper, inner door panel, and floor pan
assemblies. The Company believes it has the press capabilities to produce all
part sizes currently required by its customers. The Company's extra-large
presses also allow it to produce multiple parts at one time by combining, for
example, right and left hand parts into a single die set.
In addition to these high-volume production assemblies, the Company has the
capability to produce prototype, or pre-production, stamped assemblies. These
parts are made using soft, zinc-alloy tooling, and are used to confirm the
production process and design intent of both the sub-assemblies and final
vehicle. The Company believes it is one of a limited number of independent
full-service stamping suppliers with in-house prototyping capabilities. Such
prototyping capabilities include managing math data from the customer, building
soft tooling, stamping parts, laser trimming and piercing, and final
assembly/welding of all required components. The prototypes produced from this
operation are identical to those manufactured by the Company's production
operations. In addition, the Company has the capability to manufacture prototype
parts using a hydroforming process developed by the Company.
The following chart lists significant parts on major platforms supplied by
the Company in fiscal year 1997.
<TABLE>
<CAPTION>
CUSTOMER PART/ASSEMBLY VEHICLE TYPE MODEL/PLATFORM
-------- ------------- ------------ --------------
<S> <C> <C> <C>
CHRYSLER............ Front Frame Rail SUV/Light Truck/Van AB Ram Van
Underbody Rear Crossmember SUV/Light Truck/Van AB Ram Van
Side Step Sill SUV/Light Truck/Van AB Ram Van
Underbody Rear Support SUV/Light Truck/Van AB Ram Van
Roof Siderail Cover SUV/Light Truck/Van AB Ram Van
Front Frame Rail Passenger Car LH Concorde/Intrepid
Underbody Rear Crossmember Passenger Car LH Concorde/Intrepid
Bracket Strut Mounting Passenger Car LH Concorde/Intrepid
Body Side Sill Extension Passenger Car LH Concorde/Intrepid
Body Side Sill Passenger Car LH Concorde/Intrepid
</TABLE>
48
<PAGE> 52
<TABLE>
<CAPTION>
CUSTOMER PART/ASSEMBLY VEHICLE TYPE MODEL/PLATFORM
-------- ------------- ------------ --------------
<S> <C> <C> <C>
Heat Shield Passenger Car LH Concorde/Intrepid
Quarter Extension Passenger Car LH Concorde/Intrepid
Body Front Floor Pan
Reinforcement Passenger Car LH Concorde/Intrepid
Rear Deck Panel Passenger Car LH Concorde/Intrepid
Headlamp Passenger Car LH Concorde/Intrepid
Rear Quarter Inner Panel Passenger Car Neon
Body Side Belt Reinforcement Passenger Car Neon
Suspension Cradle SUV/Light Truck/Van NS Minivan
Rear Bumper SUV/Light Truck/Van NS Minivan
Floor Pan Support SUV/Light Truck/Van NS Minivan
Body Inner Panel-B Pillar SUV/Light Truck/Van NS Minivan
Door Inner Panel SUV/Light Truck/Van NS Minivan
Wheelhouse Lower Extension SUV/Light Truck/Van NS Minivan
FORD................ Cowl Inner SUV/Light Truck/Van Explorer
Cowl Outer SUV/Light Truck/Van Explorer
Brake Pedal Support SUV/Light Truck/Van Ranger
Quarter Inner Passenger Car Lincoln Continental
Floor Extension Passenger Car Lincoln Continental
Windshield Header Passenger Car Lincoln Continental
Package Tray Support Passenger Car Lincoln Continental
Lower Back Panel Passenger Car Lincoln Continental
Drain Trough Reinforcement Passenger Car Lincoln Continental
GENERAL MOTORS...... Battery Tray SUV/Light Truck/Van M-Van/Astro/Safari
Trailer Hitch SUV/Light Truck/Van M-Van/Astro/Safari
Suspension Spring Hanger SUV/Light Truck/Van M-Van/Astro/Safari
Rear Spring Hanger SUV/Light Truck/Van M-Van/Astro/Safari
Rear Bumper SUV/Light Truck/Van 330 Jimmy
Battery Tray SUV/Light Truck/Van 325/330 Blazer/Jimmy
Floor Pan Reinforcement SUV/Light Truck/Van 325/330 Blazer/Jimmy
Brake Pedal SUV/Light Truck/Van 325/330 Blazer/Jimmy
Suspension Shackle SUV/Light Truck/Van 325/330 Blazer/Jimmy
Trailer Hitch SUV/Light Truck/Van GMT 600 Express
Suspension Tie Bar SUV/Light Truck/Van GMT 400 Full-size Pickup/
Tahoe/Suburban
Trailer Hitch SUV/Light Truck/Van GMT 400 Full-size Pickup/
Tahoe/Suburban
Body Mount Bracket SUV/Light Truck/Van GMT 400 Full-size Pickup/
Tahoe/Suburban
Control Arm Passenger Car Camaro/Firebird
Heat Shield Passenger Car Chevrolet J Cavalier
Heat Shield Passenger Car LeSabre/Bonneville/DeVille
Crossmember Passenger Car Grand Prix/Lumina
Front & Rear Bumper
Reinforcement Passenger Car Bonneville/LeSabre
HONDA............... Extension -- Rear Body SUV/Light Truck/Van BM Minivan
Stiffener -- Door Inner SUV/Light Truck/Van BM Minivan
Reinforcement -- Tailgate SUV/Light Truck/Van BM Minivan
Brake Pedal SUV/Light Truck/Van BM Minivan
Roof Panel Reinforcement Passenger Car LS Accord
Suspension Arm Support Passenger Car LS Accord
Underbody Rear Beam Passenger Car LS Accord
Fender Reinforcement Passenger Car VC Civic
Clutch Cover Case Passenger Car VC Civic
Body Structure Panel
Stiffener Passenger Car VC Civic
Tailgate Reinforcement Passenger Car VC Civic
</TABLE>
49
<PAGE> 53
DESIGN AND ENGINEERING
OEMs have increasingly focused on shortening their design cycles and
reducing their design and production costs by involving component suppliers
earlier in the process of designing a vehicle. The Company has invested
substantial resources in developing engineering capabilities to meet these new
demands, including computer-aided design terminals that support Chrysler and
General Motors language formats, structural and fatigue (finite element or
"FEA") analysis and computer simulated analysis of the metal forming process.
The Company currently has over 30 engineers assigned to working on new advanced
programs. The Company continues to enhance its comprehensive and
customer-focused engineering department with capabilities in areas such as tool
and die processing, continuous cost reduction engineering, assembly and weld
engineering and simultaneous product engineering. These capabilities enable the
Company to provide the creative product design and manufacturing services that
result in cost and quality improvements. It is the objective of the Company to
maintain a competitive advantage through its product design, engineering and
development capabilities.
Recently, the Company, at its own initiative, performed significant
competitive benchmarking, product analysis, and metal forming simulation
analysis on frame rails for vehicles comparable to Chrysler's Jeep Cherokee. The
Company believes that the business award of the 2001 KJ Jeep Cherokee frame rail
assemblies to the Company was significantly aided by the comprehensive technical
study performed on this product. Presently, the Company has designers on-site at
Chrysler to assist in completing designs for the assemblies. Based on internal
Company surveys, the Company believes it is one of a select group of companies
with the technical resources to assist its customers in the design and
engineering of passenger car, SUV, and van frame rail assemblies at Chrysler,
and for trailer hitch assemblies at General Motors Truck Group.
The Company's prototype stamping operation greatly enhances its capability
to provide one-stop engineering solutions to its customers. Full-service
suppliers are responsible for managing not only the prototype manufacturing of
parts and assemblies, but also the tool development process that results in
improved competitive pricing and efficient part designs. Having this capability
in-house significantly improves the Company's ability to manage these activities
with the rapid response times required by the customer.
CUSTOMERS AND MARKETING
The Company serves automotive OEMs in the North American market. The
Company's four largest customers, General Motors, Chrysler, Ford and Honda,
accounted for approximately 33%, 32%, 11%, and 3%, respectively, of the
Company's pro forma net sales for the year ended December 31, 1997 after giving
effect to the PSI Acquisition. The Company also sells its products to targeted
Tier 1 suppliers which in turn supply OEMs in the North American market. The
Company's history with its two largest customers, General Motors and Chrysler,
spans over 50 years. On a pro forma basis for the PSI Acquisition, 82% of the
Company's 1997 net sales were to domestic and transplant OEMs and the remaining
sales to targeted Tier 1 suppliers. See "Risk Factors -- Dependence on Principal
Customers."
General Motors. The Company has recently launched several assemblies for
General Motors, including the GMT 325/330 Blazer/Jimmy, GM M-Van/Astro/Safari
and Chevrolet J Cavalier platform, including trailer hitch, crossmember, bumper,
heat shield, suspension spring hanger, and floor panel reinforcement assemblies.
In addition, during 1998 and 1999, the Company plans to launch new business on
General Motors' GMT 800 Full-size Pickup/Tahoe/Suburban platform, including
trailer hitch, suspension, tie bar and floor pan reinforcement assemblies. Given
this new major truck program participation, the Company believes it is one of
the largest independent full-service stamping suppliers of medium-sized
stampings to the General Motors Truck Group.
Chrysler. The launch of the 1993 Chrysler LH Concorde/Intrepid
significantly increased the Company's presence at Chrysler. Since then, the
Company has received additional platform business on the NS Minivan and AB Ram
Van. The Company first developed its expertise in frame rail assemblies on the
LH Concorde/Intrepid and AB Ram Van vehicles. Based, in part, on the success of
previous model platform participation, the Company was awarded increased
business on the 1998 LH Concorde/Intrepid platform, will
50
<PAGE> 54
continue to have significant participation on the 1998 AB Ram Van and 2001 RS
Minivan, and was awarded the frame rail and certain other front-end assemblies
for the 2001 KJ Jeep Cherokee.
Ford. It is widely known that Ford is insourcing a substantial portion of
its stamping needs and intends to further reduce the number of its outside
suppliers. Accordingly, Ford's future stamping strategy remains uncertain and,
although the Company continues to support Ford as a full-service stamping
supplier for certain current and carryover parts, Ford is not now requiring the
Company, and the Company does not expect, to expend technical resources on
gaining incremental business with Ford. The Company is anticipating a gradual
decline in its existing sales to Ford over the next five years but does not
believe this will have a material adverse effect on financial results.
Honda. The Company believes that in the 1998 model year, it will be one of
Honda's leading independent stamping suppliers. The Company currently supplies
nine parts on the VC Civic, 24 parts on the LS Accord, and will begin supplying
13 parts on the new BM Minivan that is expected to be launched in August 1998.
The Company expects that its business with Honda will increase as Honda
increases its export volumes and expands capacity in North America.
The following table sets forth the Company's net sales to General Motors,
Chrysler, Ford and Honda as a percentage of the Company's net sales for 1995,
1996, 1997 and on a pro form basis for 1997, after giving effect to the PSI
Acquisition:
<TABLE>
<CAPTION>
PRO FORMA
1995 1996 1997 1997
---- ---- ---- ---------
<S> <C> <C> <C> <C>
General Motors..................................... 15% 15% 9% 33%
Chrysler........................................... 19 21 46 32
Ford............................................... 60 47 18 11
Honda.............................................. -- -- 5 3
</TABLE>
The Company competes for new business both in the new model development
phase and in the redesign of older existing models. New model development
generally begins two to four years prior to the planned introduction of a model.
New programs are generally awarded one to three years prior to the initial
production period. Once a supplier has been designated to supply parts to a new
program, an OEM will generally continue to purchase those parts from the
designated supplier for the life of the program, which typically lasts four to
five years for passenger cars and up to ten years for trucks.
MANUFACTURING AND FACILITIES
The Company conducts operations in 14 facilities in 8 locations, as
summarized below:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION SQUARE FOOTAGE OWNED/LEASED
-------- ----------- -------------- ------------
<S> <C> <C> <C>
Celina, Tennessee............... Manufacturing 44,000 Leased
Glencoe, Ontario................ Manufacturing/Robotics 51,000 Owned
Harrison Township, Michigan..... Manufacturing/Prototyping 86,000 Leased
New Baltimore, Michigan......... Manufacturing/Office 105,000 Leased
Oxford, Michigan................ Manufacturing 62,000 Leased
Royal Oak, Michigan............. Manufacturing/Office 250,000 Owned
Troy, Michigan.................. Corporate Headquarters, Design 18,000 Leased
and Engineering
Windsor, Ontario, Canada........ Manufacturing/Robotics 105,000 Owned
Windsor, Ontario, Canada........ Manufacturing/Robotics 190,000 Leased
Windsor, Ontario, Canada........ Tooling 20,000 Leased
</TABLE>
The utilization and capacity of the Company's facilities fluctuates based
upon the mix of components the Company produces and the vehicle models for which
they are being produced. The Company believes that its facilities and equipment
are in good condition and are appropriate for present and anticipated future
operations. The leases expire at various times. The lease on the Company's
recently-acquired Celina,
51
<PAGE> 55
Tennessee facility, which has not yet commenced operations, expires on August
31, 1998. The Company is currently in negotiations to extend the lease term and
expand the square footage being leased in this facility, however no assurance
can be given that the Company will be able to reach satisfactory terms. The
Harrison Township, Michigan and certain Windsor, Ontario, Canada facilities are
leased from affiliated parties. See "Certain Relationships and Related
Transactions."
The Company's production processes use precision single-stage, progressive
and line die, tandem line and transfer presses in a variety of sizes and
configurations. Many of the Company's stamping lines are fitted with automated
material handling equipment to enhance press line throughput and product
quality. The Company operates approximately 190 presses ranging from under 100
ton to 3,500 ton capabilities. The capabilities of the Company's facilities and
equipment allow it to produce components and assemblies from the smallest
brackets to the largest stampings required by its customers. The Company's Royal
Oak, Michigan facility, for example, houses the largest of its press lines,
consisting of six tandem 1,100 ton presses, 180 inches in width and capable of
producing the largest underbody/chassis and body structure components required
by its customers. Based on internal Company surveys, the Company believes it is
one of a limited number of stampers with press sizes up to 180 inches in width.
As OEMs have increased quality standards and implemented just-in-time
management methods, consistency of quality and the timeliness and reliability of
shipments by OEM suppliers have become crucial in meeting logistical demands of
the OEMs. The Company has responded by employing a number of production systems
which utilize high-volume welding and fastening machines or flexible robotic
work cells. The Company's assembly operations include robotic spot and MIG wire
welding, automated turn-table welding and robotic sealer applications. The
Company designs many of its own welding and assembly systems in-house enabling
it to troubleshoot assembly problems and assess the manufacturability of
components.
QUALITY
The Company's operations are driven by a quality process that encompasses
the entire production cycle. First, the Company's design teams develop an
efficient manufacturing process. Next, extensive training is done at each work
cell to help develop lean manufacturing processing and part flow within that
cell. Finally, equipment is maintained on planned schedules, led by input from
the cell team members. Throughout the process, cell team members continue to
refine and improve all aspects of manufacturing and related equipment. An
example of this quality-driven process is the launch success of the Company's
1998 Chrysler LH Concorde/Intrepid. The Company believes that as a result of its
early involvement with part design and manufacturing process development, along
with its extensive training of all team members, the launch of the LH
Concorde/Intrepid occurred with only ten defective PPM. In partial recognition
of these practices, the Company has received the Chrysler Platinum Pentastar
Award in 1997, General Motors Metallic Supplier of the Year Award in 1996, Honda
Delivery Award in 1995 and achieved Ford's Q1 status initially in 1984.
Automotive suppliers are required to meet numerous quality standards to
qualify as a preferred and long-term supplier to the OEMs. For instance, the
QS-9000 standards were developed by international and domestic automobile and
truck OEMs to ensure that their suppliers would meet consistent quality
standards capable of independent audit. Four of the Company's six manufacturing
facilities eligible for QS-9000 certification are certified. The Company expects
the remaining two eligible facilities to be certified by mid-1998. The Company's
Tennessee facility will not be eligible for QS-9000 certification until
mid-1999. The Company's Harrison Township facility is ISO 9002 certified.
RAW MATERIALS
The Company's principal raw material is steel which represented
approximately 87% of the Company's raw material cost for 1997. The Company
expects to purchase approximately 270,000 tons of steel during 1998 for
production use. The remaining 13% of raw materials' purchases represents various
purchased parts such as tubular products, sealers, corrosion resistant coating,
and various fasteners.
The Company participates in steel purchase programs through Chrysler, Ford
and General Motors wherein the steel is purchased by the OEM from the steel mill
and sold to the Company at a price fixed by the
52
<PAGE> 56
OEM. These purchase programs neutralize the Company's exposure to steel price
increases, as price increases from the steel mills are either absorbed by the
OEM prior to the Company's purchase of the steel or such increases are borne by
the Company when it purchases steel and are subsequently passed back to the OEM
in higher product pricing.
COMPETITION
The market for the Company's products is characterized by strong
competition from both captive OEM suppliers and external, non-captive suppliers.
Based on internal Company surveys, the Company competes with a limited number of
competitors that have the physical assets and technical resources to produce
large bed stampings, complex parts and sub-assemblies. The number of the
Company's competitors has decreased in recent years and is expected to further
decrease as the OEM supplier industry continues to consolidate. Competitive
factors in the market for the Company's products include quality, cost,
delivery, technical expertise, engineering capability and customer service. The
Company's competitors include Cosma Body and Chassis Systems, a group within
Magna International Inc.; Tower Automotive, Inc.; A.G. Simpson Automotive, Inc.;
Oxford Automotive, Inc.; Active Tool & Manufacturing Co.; L&W Engineering; Aetna
Industries, Inc.; The Narmco Group; and divisions of OEMs with internal stamping
and assembly operations.
EMPLOYEES
As of December 31, 1997, the Company had 1,818 employees, including 351
salaried and 1,467 hourly employees. Included in the hourly total are 455
employees represented by the UAW, 389 employees represented by the CAW, and 512
represented by the USWA. The remaining 111 hourly workers are not unionized and
the Company is not aware of any current organizing activity at any of its
non-union locations. The Company's CBAs with the above unions expire at various
dates ranging from May, 1999 to September, 2002. In recent years, the Company
has not experienced significant work interruptions resulting from serious labor
disputes. At the present time, the Company believes that its relationship with
its employees is generally good, however there can be no assurance that this
will continue to be the case.
PATENTS
The Company owns no patents and does not believe patents have a significant
role in the Company's industry or its business.
REGULATORY MATTERS
The Company's operations are subject to increasingly stringent
environmental laws and regulations governing air emissions, waste water
discharges, the generation, treatment, storage, disposal and remediation of
hazardous substances and wastes, and employee health and safety. Certain of
these laws can impose joint and several liability for releases or threatened
releases of material upon certain statutorily defined parties, including the
Company, regardless of fault or the lawfulness of the original activity or
disposal.
The Company believes it is currently in material compliance with applicable
environmental laws and regulations. The Company's compliance with environmental
laws and regulations has not materially affected the results of its operations
or the conduct of its business; however, the Company cannot predict the future
effects of such laws and regulations.
LEGAL PROCEEDINGS
The Company is, from time to time, involved in ordinary routine litigation
arising out of the ordinary course of its business. In management's opinion,
after reviewing available information with respect to such matters and
consulting with legal counsel, pending or threatened litigation is not expected
to have a material adverse effect on the business, financial condition or
results of operations of the Company.
53
<PAGE> 57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Delmar O. Stanley......................... 57 President, Chief Executive Officer and Director
David J. Woodward......................... 40 Vice President of Finance, Chief Financial Officer,
Treasurer and Director
Randolph J. Agley......................... 55 Chairman of the Board
Michael T. Timmis......................... 58 Vice Chairman of the Board
Wayne C. Inman............................ 51 Secretary and Director
Michael T.J. Veltri....................... 42 Vice President and Director
Kris R. Pfaehler.......................... 42 Vice President of Business Development
</TABLE>
Delmar O. Stanley serves as President, Chief Executive Officer and a
Director of the Company. Since 1996 until the Mergers, Mr. Stanley was President
and Chief Executive Officer of Talon Automotive Group, L.L.C., a predecessor
entity of the Company. Mr. Stanley holds similar positions with G&L Industries,
Inc. ("G&L"), an affiliate of the Company. From 1992 until 1996, Mr. Stanley was
Vice President of Operations for the Wiring Systems division of United
Technologies Automotive ("UTA"). Prior to joining UTA, he served as President of
Takata, Inc. for three years, a manufacturer of automotive safety systems and
automotive trim. Before joining Takata, Inc., Mr. Stanley held several executive
positions with TRW, Inc. over the course of over 20 years.
David J. Woodward serves as Vice President of Finance, Chief Financial
Officer, Treasurer and a Director of the Company. Mr. Woodward is Vice President
of Finance and Chief Financial Officer of G&L, an affiliate of the Company. From
1995 until the Mergers, Mr. Woodward was employed as Vice President of Finance
and Chief Financial Officer for the Talon Entities. Prior to 1995, Mr. Woodward
served as Vice President of Finance/Manufacturing for Talon Inc. Prior to
joining the Company, Mr. Woodward held positions at American Cyanamid
Corporation, Union Carbide Corporation and KPMG Peat Marwick.
Randolph J. Agley is a Principal Shareholder and Chairman of the Board of
the Company. Since 1982, Mr. Agley has been Chairman of the Board of Talon Inc.,
and, more recently, Talon L.L.C., each a privately-held affiliate of the Company
in which Mr. Agley is a principal equity holder.
Michael T. Timmis is a Principal Shareholder and Vice Chairman of the Board
of the Company. Mr. Timmis has been a partner in the law firm of Timmis & Inman,
L.L.P. since 1971, which firm serves as general counsel to the Company. Since
1982, Mr. Timmis has been Vice Chairman of the Board of Talon Inc. and, more
recently, Talon L.L.C., each a privately-held affiliate of the Company in which
Mr. Timmis is a principal equity holder.
Wayne C. Inman is a Shareholder and serves as Secretary and Director of the
Company. Mr. Inman is Vice President, Secretary and Treasurer of G&L, an
affiliate of the Company. Since 1994, Mr. Inman served as Executive Vice
President of Talon Inc. and, more recently, as President of Talon L.L.C., each a
privately-held affiliate of the Company in which Mr. Inman is an equity holder.
Mr. Inman was formerly a senior partner and Of Counsel in the law firm of Timmis
& Inman L.L.P. which serves as general counsel of the Company.
Michael T.J. Veltri serves as Vice President and Director of the Company,
and President of the Veltri Group. Mr. Veltri joined the Company in 1996 when it
acquired Veltri International, several affiliated stamping companies owned and
operated by Mr. Veltri since 1983.
Kris R. Pfaehler is employed as Vice President of Business Development.
Since 1993, until the Mergers, Mr. Pfaehler was employed by Talon Automotive
Group L.L.C., a predecessor entity of the Company, in the same capacity. Prior
to 1994, Mr. Pfaehler was General Sales Manager of American Bumper &
Manufacturing, a Tier 1 supplier of bumper systems, for over 7 years.
54
<PAGE> 58
EXECUTIVE COMPENSATION
The following table sets forth certain information as to the compensation
paid to the Company's Chief Executive Officer and each of the three other
executive officers for the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND TITLE YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
-------------- ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Delmar O. Stanley,.......................... 1997 $250,000 $95,650 $ 8,108 $663,338
President & Chief Executive Officer(2) 1996 250,000 -- 13,072 145,000
1995 -- -- -- --
David J. Woodward,.......................... 1997 174,300 47,000 3,101 353,621
Vice President of Finance, Chief Financial 1996 162,000 44,000 10,293 --
Officer & Treasurer 1995 142,782 38,500 6,505 --
Michael T.J. Veltri,........................ 1997 380,000 -- 39,726 36,375
Vice President(3) 1996 55,178 -- 5,331 --
1995 -- -- -- --
Kris R. Pfaehler,........................... 1997 137,500 37,000 4,977 274,423
Vice President of Business Development 1996 125,000 25,000 10,019 --
1995 99,216 10,000 2,512 --
</TABLE>
- -------------------------
(1) Includes amounts earned under the Company's equity ownership plan, deferred
compensation agreements and profit sharing plans.
(2) Mr. Stanley's employment with the Company commenced on January 1, 1996.
(3) Mr. Veltri's employment with the Company commenced on November 8, 1996.
F&M DISTRIBUTORS BANKRUPTCY AND SECURITIES CLASS ACTION LAWSUIT
Messrs. Agley, Timmis and Inman, current shareholders and directors of the
Company also are or have been the principal shareholders and/or equity owners in
several other companies or business ventures. One such company, F&M
Distributors, Inc. ("F&M"), owned and operated a chain of deep discount retail
stores selling a variety of branded health and beauty aids and household supply
items.
In August, 1993, F&M issued approximately $75 million aggregate principal
amount of 11 1/2% senior subordinated notes ("F&M Notes") through an
underwritten public offering. As a result of adverse business developments, F&M
ultimately filed for voluntary bankruptcy protection in December, 1994, under
Chapter 11 of the United States Bankruptcy Code. A confirmed plan of
reorganization was approved in September, 1996. Under the confirmed plan of
reorganization, the holders of the F&M Notes received no distribution.
In April, 1995, an individual plaintiff on behalf of a class filed a
lawsuit seeking unspecified damages in the United States District Court for the
Eastern District of Michigan, Southern Division, In re F&M Distributors, Inc.
Securities Litigation, Case No. 95-CV-71778-DT, against Messrs. Agley, Timmis
and Inman and certain other former officers and/or directors of F&M, and the
underwriters. Subsequently, a similar lawsuit was filed in federal court and the
actions were later consolidated in federal court. The consolidated action was
characterized as a class action on behalf of persons who purchased F&M Notes and
alleges, among other things, that F&M's registration statement and prospectus
contained material misstatements and omissions and further alleges that the
defendants breached certain duties and obligations arising under federal and
state securities laws and common law. In December, 1996, a similar class action
was filed in Wayne County Circuit Court, State of Michigan, Acree, et al. v.
Talon Inc., et al., Case No. 96-648394-CZ, against Talon Inc., an affiliate of
the Company, also owned by Messrs. Agley, Timmis and Inman, and Timmis & Inman
L.L.P., a law firm affiliated with the Company which served as general counsel
to F&M, which alleged, among other things, violations of state securities laws.
The state action was voluntarily dismissed in
55
<PAGE> 59
June 1997 after the plaintiffs amended their complaint in the federal action to
assert claims substantially identical to those which were asserted in the state
action. This action, as consolidated, has been settled subject to court
approval.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Delmar O.
Stanley, President and Chief Executive Officer of the Company, dated November 27
1995, as amended January 1, 1998, pursuant to which Mr. Stanley is paid a base
annual salary of $400,000. Mr. Stanley is eligible for an annual bonus, not to
exceed 90.0% of his base annual salary. The amount of the bonus is determined by
the amount by which the Company's combined net income (as defined in the
agreement) meets or exceeds the Company's projected net income (as defined in
the agreement) and other non-financial objectives. Mr. Stanley has agreed in the
employment agreement not to compete with the Company anywhere within the United
States, Canada and Mexico for the period during which he is employed by the
Company or entitled to any payments from the Company, whichever is longer. The
agreement also provides that if the Company terminates Mr. Stanley's employment
without cause (as defined in the agreement) during the first three years of his
employment, the Company must pay Mr. Stanley $250,000 as severance pay, plus any
amounts owed to him under deferred compensation arrangements. Mr. Stanley is not
entitled to severance pay if his employment is terminated anytime after three
years or anytime for cause, or if he voluntarily terminates his employment at
any time.
The Company has entered into an employment agreement with Michael T. J.
Veltri, Vice President of the Company, dated November 8, 1996, pursuant to which
Mr. Veltri is paid an initial base annual salary of $380,000 (subject to
increase by the board of directors), plus a bonus pursuant to the Company's
Executive Bonus Program. The term of Mr. Veltri's employment agreement continues
through November 7, 2001, unless otherwise terminated in accordance with its
terms. Mr. Veltri receives additional amounts under the Earn-Out provisions of
the Company's Stock Purchase Agreement with the former shareholders of the
Veltri entities dated November 8, 1996. See "Certain Relationships and Related
Transactions." Mr. Veltri also entered into a non-compete Agreement with the
Company prohibiting him from competing with the Company anywhere within the
United States, Canada, and Mexico while employed by the Company and for 18
months thereafter or, if earlier, November 8, 2001. The agreement also provides
that if the Company or Mr. Veltri provides the other with a non-renewal notice
(as defined in the agreement), then Mr. Veltri is entitled to receive his base
salary for twelve months following the effective date of the termination, in
addition to any amounts owed to him under the deferred compensation, executive
bonus and stock option plans. If Mr. Veltri's employment is terminated by the
Company without just cause (as defined in the agreement), or in the event Mr.
Veltri terminates his employment pursuant to a default termination (as defined
in the agreement), then Mr. Veltri is entitled to receive his base salary for
the longer of eighteen months following the effective date of the termination or
November 8, 2001, in addition to any amounts due to Mr. Veltri under the
Company's deferred compensation, executive bonus and stock option plans.
Mr. Woodward and the Company are parties to a severance agreement dated
February 6, 1996, which provides that if Mr. Woodward is terminated without
cause, the Company will pay Mr. Woodward at least one year's base salary payable
in twelve equal, consecutive monthly installments. The payments are contingent
upon Mr. Woodward's executing a release of all claims for the benefit of the
Company. The amounts payable under the severance agreement are in addition to
any amounts owed Mr. Woodward under the Company's deferred compensation
arrangements.
Mr. Pfaehler and the Company are parties to a severance agreement dated
February 7, 1996, which provides that if Mr. Pfaehler is terminated without
cause, the Company will pay Mr. Pfaehler at least one year's base salary payable
in twelve equal, consecutive monthly installments. The payments are contingent
upon Mr. Pfaehler's executing a release of all claims for the benefit of the
Company. The amounts payable under the severance agreement are in addition to
any amounts owed Mr. Pfaehler under the Company's deferred compensation
arrangements.
See also "Certain Relationships and Related Transactions."
56
<PAGE> 60
EQUITY OWNERSHIP PLAN
Hawthorne, J&R and Veltri have each adopted an equity ownership plan (the
"Plans") in order to encourage certain executive employees to acquire an equity
interest in the companies and in order to provide additional incentives to such
executive employees to exert their best efforts on behalf of the companies.
Simultaneously with the Mergers, the Plans will be consolidated and outstanding
options will be converted to options to acquire shares of Class B Non-voting
Common Stock of the Company (the "Consolidated Plan").
The Consolidated Plan permits awards of incentive stock options,
non-qualified stock options, stock appreciation rights, stock awards, dividend
equivalent rights, performance unit awards or phantom share awards to eligible
employees, but only non-qualified stock options will have been awarded under the
Consolidated Plan. Non-qualified stock options have been awarded to the
following key management employees of the Company to purchase the number of
shares of Class B Non-voting Common Stock of the Company which are set forth
below opposite their respective names.
A maximum of 40,732 shares of Class B Non-voting Common Stock of the
Company are reserved for issuance under the Consolidated Plan. The number of
shares of Class B Non-voting Common Stock which are subject to options are as
follows:
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEE SHARES
-------- ---------
<S> <C>
Delmar O. Stanley........................................... 13,034
Wayne C. Inman.............................................. 8,146
David J. Woodward........................................... 4,073
Michael T. J. Veltri........................................ 4,073
Kris R. Pfaehler............................................ 3,421
------
Total.................................................. 32,747
======
</TABLE>
All of Mr. Inman's stock options were granted in one series, with an
exercise price equal to the fair market value at the time of the grant. All of
Mr. Inman's stock options are fully vested. The non-qualified stock options
which have been awarded under the Consolidated Plan to other employees were
granted in a series of six separate options, the first of which has an exercise
price equal to the fair market value of the Class B Non-voting Common Stock at
the time of the grant, and the remaining five series of which have higher
exercise prices. Upon certain conditions, the Company has the right to cause the
repurchase of such shares, in each case at the fair market value at the time of
repurchase.
Except for Mr. Inman, there is a six year vesting schedule for all options
granted under the Consolidated Plan, with immediate vesting upon the occurrence
of certain events such as death or disability of the employee or in the event of
a change of control of the Company.
DEFERRED COMPENSATION AGREEMENTS
The Company has entered into non-qualified deferred compensation agreements
with certain key executive employees of the Company to provide additional
incentives to such executive employees to exert their best efforts on behalf of
the Company. Deferred compensation agreements are in effect for the following
executive employees of the Company: Delmar O. Stanley, David J. Woodward,
Michael T. J. Veltri, and Kris R. Pfaehler.
The deferred compensation agreements allocate certain amounts to the
account of each such employee based upon, among other things, increase in the
value of the Company and its predecessors through the calendar year ending
December 31, 1996, the amount of dividends and distributions paid or payable to
shareholders of the Company in excess of certain thresholds, and the amount of
fees paid to Talon L.L.C. in excess of certain thresholds.
The agreements further provide that upon the earlier of a public stock or
debt offering, including the Offering ("Discontinuation Event"), that all future
allocations to the accounts will be discontinued excluding up to $300,000 in
additional deferred compensation which can be earned by Mr. Stanley as a result
of an amendment to Mr. Stanley's agreement. The agreements provide for immediate
vesting for participants in the
57
<PAGE> 61
event of a Discontinuation Event, subject to forfeiture under certain
conditions, as defined in the agreements. The agreements also provide for vested
amounts to increase for interest at 6% per annum until termination. The vested
amounts are paid upon a termination of employment, as defined in the agreements.
DEFINED BENEFIT PLANS
The Company maintains the Hawthorne Metal Products Company -- UAW
Retirement Income Plan, which is a collectively bargained defined benefit plan
for the Company's union employees working at its Hawthorne Metal Products
Division, which plan is administered by a committee consisting of
representatives of the UAW and the Company.
The Company has maintained the Production Stamping, Inc. Defined Benefit
Plan and Trust, which is a defined benefit plan for the Company's employees
working at its Production Stamping Division. Further accruals under the plan
were suspended on June 30, 1997, and the Company is in the process of
terminating such plan.
PROFIT SHARING PLANS
The Company participates in the Talon L.L.C. 401(k) Plan, which is a 401(k)
plan with discretionary profit sharing and matching components administered for
the benefit of the Company's non-union employees, together with non-union
employees of other affiliates of Talon L.L.C.
The Company maintains the Hawthorne Metal Products Company 401(k) Plan,
which is a collectively bargained 401(k) plan with a discretionary matching
component administered for the benefit of the Company's union employees working
at its Hawthorne Metal Products Division, together with union employees working
at Allen-Stevens Corp., an affiliate of the Company.
The Company maintains the Production Stamping, Inc. Salaried 401(k) Plan
which is a 401(k) plan administered for the benefit of the Company's non-union
employees working at its Production Stamping Division.
The Company maintains the Production Stamping, Inc. Hourly 401(k) Savings
Plan, which is a collectively bargained 401(k) plan with matching components
administered for the benefit of the Company's union employees working at its
Production Stamping Division.
Veltri Holdings USA, Inc., a subsidiary of the Company, maintains the
Veltri Holdings USA, Inc. 401(k) Plan which is a 401(k) plan with a profit
sharing component administered for the benefit of Veltri Holdings USA, Inc.'s
non-union employees.
EXECUTIVE BONUS PLAN
Certain executives of the Company participate in an executive bonus plan.
The participants receive awards under the program based on attaining certain
annual financial and non-financial objectives. Objectives are established on a
Company-wide as well as on an individual basis. Participants can receive awards
under the plan on an annual basis ranging anywhere from 25% to 90% of their
respective base pay. The plan provides that no awards will be paid out if
certain minimum financial objectives are not achieved.
58
<PAGE> 62
PRINCIPAL SECURITYHOLDERS
The authorized capital stock of the Company consists of 25,000 shares of
Class A Voting Common Stock, of which 4,074 were issued and outstanding as of
the effectiveness of the Mergers, and 250,000 shares of Class B Non-voting
Common Stock, of which 158,853 were issued and outstanding as of the
effectiveness of the Mergers. The holders of Class A Common Stock are entitled
to one vote per share on all matters to be voted upon by the shareholders
generally, including the election of directors. The holders of Class B non-
voting Common Stock are not entitled to vote.
The following table sets forth information regarding beneficial ownership
of the common stock of the Company as of the Offering by each person known by
the Company to be the beneficial owner of more than 5% of its stock, each
director of the Company, each named executive officer of the Company and all
executive officers and directors of the Company as a group. The number of shares
of Class B Non-voting Common Stock allocated to Messrs. Stanley, Woodward,
Veltri and Pfaehler represents options under the Company's Equity Ownership
Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF
CLASS A VOTING CLASS B NON-VOTING
COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER (% OF CLASS)* (% OF CLASS)+
------------------------------------ ------------------- -------------------
<S> <C> <C>
Randolph J. Agley........................................... 2,165(i)(ii) 33,540
c/o Talon L.L.C. (53.1%) (17.5%)
350 Talon Centre
Detroit, Michigan 48207
Judith A. Agley............................................. 1,328 24,227
c/o Talon L.L.C. (32.6%)(i) (12.6%)
350 Talon Centre
Detroit, Michigan 48207
James R. Agley.............................................. 354 10,585
c/o Talon L.L.C. (8.7%) (5.5%)
350 Talon Centre
Detroit, Michigan 48207
Joseph A. Agley............................................. 300(ii) 10,585
c/o Talon L.L.C. (7.4%) (5.5%)
350 Talon Centre
Detroit, Michigan 48207
Michael T. Timmis........................................... 1,473(iii) 679
c/o Talon L.L.C. (36.2%) (0.4%)
350 Talon Centre
Detroit, Michigan 48207
Nancy E. Timmis............................................. 1,428(iii) 41,214
c/o Talon L.L.C. (35.1%) (21.5%)
350 Talon Centre
Detroit, Michigan 48207
Wayne C. Inman.............................................. 41 9,735(iv)
c/o Talon L.L.C. (1.0%) (5.1%)
350 Talon Centre
Detroit, Michigan 48207
Delmar O. Stanley........................................... -- 13,034(v)
c/o Talon Automotive Group, Inc. (6.8%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
David J. Woodward........................................... -- 4,073(vi)
c/o Talon Automotive Group, Inc. (2.1%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
</TABLE>
59
<PAGE> 63
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF
CLASS A VOTING CLASS B NON-VOTING
COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER (% OF CLASS)* (% OF CLASS)+
------------------------------------ ------------------- -------------------
<S> <C> <C>
Michael T.J. Veltri......................................... -- 4,073(vii)
c/o Talon Automotive Group, Inc. (2.1%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
Kris R. Pfaehler............................................ -- 3,421(viii)
c/o Talon Automotive Group, Inc.
900 Wilshire Drive (1.8%)
Suite 203
Troy, Michigan 48084
All current Executive Officers and Directors as a Group..... 3,679 79,395
(90.3%) (41.4%)
</TABLE>
- -------------------------
* Percentage calculations based on 4,074 shares of Class A Voting Common
Stock outstanding as of the effectiveness of the Mergers.
+ Percentage calculations based on 191,600 shares of Class B Non-voting
Common Stock, which consists of 158,853 shares Class B Non-voting Common
Stock outstanding as of the effectiveness of the Mergers and stock
options granted as of the effectiveness of the Mergers to acquire an
additional 32,747 such shares.
(i) Includes 1,328 shares held in trust for Judith Agley and subject to a
voting trust agreement which irrevocably grants Mr. Agley the power to
vote such shares.
(ii) Includes 300 shares held in trust for Mr. Agley's son, Joseph A. Agley,
for which Mr. Agley shares in the voting power as co-trustee.
(iii) Includes 1,428 shares held in trust for Nancy Timmis and subject to a
voting trust agreement which irrevocably grants Mr. Timmis the power to
vote such shares.
(iv) Includes 8,146 shares of Class B Non-voting Common Stock Mr. Inman has
the right to acquire pursuant to the exercise of outstanding stock
options.
(v) Mr. Stanley has the right to acquire these shares of Class B Non-voting
Common Stock pursuant to the exercise of outstanding stock options.
(vi) Mr. Woodward has the right to acquire these shares of Class B Non-voting
Common Stock pursuant to the exercise of outstanding stock options.
(vii) Mr. Veltri has the right to acquire these shares of Class B Non-voting
Common Stock pursuant to the exercise of outstanding stock options.
(viii) Mr. Pfaehler has the right to acquire these shares of Class B Non-voting
Common Stock pursuant to the exercise of outstanding stock options.
60
<PAGE> 64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company uses the services of the law firm of Timmis & Inman L.L.P. as
general counsel. Michael T. Timmis is a senior partner in the firm, and Wayne C.
Inman was formerly a senior partner and Of Counsel. The Company believes that
its arrangements with Timmis & Inman L.L.P. for legal services are on terms at
least as favorable as could have been obtained from non-affiliated persons.
The Company leases certain of its manufacturing facilities from Maria
Veltri, the spouse of Michael T. J. Veltri, Vice President and Director of the
Company. The table below sets forth the locations, lease commencement dates,
lease termination dates and current annual base rental rates for such leases:
<TABLE>
<CAPTION>
AFFILIATED LEASE LEASE ANNUAL BASE
PERSON LOCATION COMMENCEMENT TERMINATION RENT
---------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Maria Veltri................ Windsor, Ontario 1994 2002 $ 75,772
Maria Veltri................ Windsor, Ontario 1993 2002 37,368
</TABLE>
Although the terms of these leases are not the result of arms-length
bargaining, the Company believes that such leases are on terms no less favorable
to the Company than would have been obtained if such transactions or
arrangements were arms-length transactions with non-affiliated persons.
Talon L.L.C., an affiliate of the Company beneficially owned and controlled
by the Principal Shareholders, has previously provided certain consulting and
administrative services to the Company, including benefit plan administration
assistance, accounting/financial assistance, tax assistance and acquisition
support pursuant to a service agreement dated July 1, 1997. In 1997, the Company
paid Talon L.L.C. an annual fee of $1,150,000 for such services. Effective April
1, 1998, the Company entered into an amended services agreement with Talon
L.L.C. to provide, among other things, for a continuation of such services on a
year-to-year basis, subject to termination by either party and a fee of $500,000
annually.
The Company provides certain consulting and administrative services to G&L
Industries, Inc. ("G&L"), an affiliate of the Company, beneficially owned and
controlled by the Principal Shareholders. Services provided include
insurance/benefit plan administration assistance, accounting/financial
assistance, information systems support services, acquisition assistance, and
marketing and business development support services. During 1997, 1996 and 1995,
the Company received fees of approximately $1,600,000, $1,950,000 and
$1,700,000, respectively, for such services. Effective May 1, 1998, the Company
entered into a written agreement with G&L pursuant to which the Company will
continue to provide such services on a year-to-year basis, subject to
termination by either party, for a services fee of $450,000 annually. Effective
January 1, 1998, all G&L sales, engineering and program management personnel and
related expenses were transferred to G&L.
Certain of the Company's officers (i.e., Delmar O. Stanley, David J.
Woodward and Wayne C. Inman) are also officers of G&L. In addition, certain of
the Company's officers (i.e., Delmar O. Stanley, David J. Woodward, Michael T.
J. Veltri and Kris R. Pfaehler) perform some limited services for G&L and are
entitled to receive deferred compensation from G&L based upon the increase in
value of G&L over a certain threshold. Additionally, under the terms of the
agreement, Delmar O. Stanley, David J. Woodward, Michael T.J. Veltri and Kris R.
Pfaehler will devote a portion of their time to the management and operations of
G&L. In addition, Messrs. Stanley, Woodward, Veltri and Pfaehler have entered
into Deferred Incentive Compensation Agreements with G&L.
For a description of certain transactions relating to the Company and
Michael T.J. Veltri, see "Description of Senior Debt -- Veltri Indebtedness."
The Company participates in several group casualty and property insurance
plans with affiliated companies. Such plans include workers' compensation,
general/products liability, automobile liability, fiduciary liability,
umbrella/excess liability, property insurance and crime insurance.
The casualty insurance plans for workers' compensation, general/products
liability and automobile liability provide for specific loss retention.
Insurance is carried to limit self-insurance per occurrence to $250,000 for
workers' compensation and general/products liability and $100,000 for automobile
liability. For
61
<PAGE> 65
the current policy year ending April 1, 1999, the aggregate annual loss
retention for the group plans is $3,500,000 for automobile, general/products
liability and for workers' compensation. At December 31, 1997, the
self-insurance liability estimate for prior years, based upon insurance carrier
case reserves and internal loss development projections, was $2,900,000. The
Company's share of this liability estimate was $1,221,000 and this amount was
fully accrued by the Company at December 31, 1997. One hundred percent of each
retained loss is allocated to the responsible affiliate company. The Company has
also caused letters of credit totaling $1,175,000 to be issued based upon the
Company's credit, which stand as sole security for such retention. The
affiliated companies in this program have, in the past, been financially able to
meet their commitments under the program but there can be no assurance that they
will continue to be able to do so in the future. The affiliated companies in
this program, excluding the Company, had annual sales of approximately
$82,000,000 for the calendar year 1997 and a combined book net worth of
approximately $6,200,000 at December 31, 1997. The Company believes it receives
substantial economic benefit as a result of participating in the group insurance
program. The Company will continue to review the cost of participation in the
group program on each renewal date to determine if its continued participation
in the group program is justified.
The Company insures a significant portion of its employee medical and
dental benefits. However, substantially all medical claims are self-funded and
paid out of the general assets of the Company. Insurance is carried to limit
self-insurance per occurrence to $150,000. Current claim experience indicates an
annual self-funded claim exposure of $1,600,000.
62
<PAGE> 66
DESCRIPTION OF SENIOR DEBT
SENIOR CREDIT FACILITY
Concurrently with the Offering, the Company will enter into a new senior
credit facility with Comerica Bank, on behalf of itself and as agent for a
syndicate of other lenders (the "Senior Credit Facility"). Funds under the
Senior Credit Facility will be available for working capital and general
corporate purposes, including future acquisitions. Consummation of the Offering
is conditioned upon implementation of the Senior Credit Facility.
Interest Rate. Interest on loans borrowed under the Senior Credit Facility
is payable quarterly or, if earlier, at the end of each interest period and
accrues at an annual rate equal to, at the option of the Company, (a) the US
Dollar Base Rate, which is the higher of (i) the prime rate of interest charged
by Comerica Bank plus the applicable margin, which is initially 0.25% and can
range from 0.00% to 0.75% based on the Company's ratio of funded debt to EBITDA
(as defined in the Senior Credit Facility), or (ii) the Federal Funds Rate plus
1.00%, or (b) the Canadian Dollar Base Rate, which is the higher of (i) the
Canadian Dollar prime rate or (ii) the Banker's Acceptance Rate plus 1.00%, or
(c) Comerica Bank's Eurocurrency Rate plus the applicable margin, which is
initially 2.00% and can range from 1.50% to 2.50% based on the Company's ratio
of funded debt to EBITDA (as defined in the Senior Credit Facility).
Borrowing Base. The Senior Credit Facility will provide the Company with
available credit of up to the lesser of (i) a certain percentage of eligible
accounts receivable, eligible inventory, fixed assets and tooling progress
payments or (ii) $100.0 million. Advances for tooling progress payments have a
sublimit of $15 million inclusive of advances under the EDC Facility.
Guarantee and Security Interest. The Senior Credit Facility is secured by a
first lien on substantially all of the assets of the Company. In addition, each
wholly owned domestic subsidiary and foreign subsidiary will guarantee all of
the Company's obligations under the Senior Credit Facility. The obligations of
the Company under the Senior Credit Facility rank senior to all other
indebtedness of the Company, including the Notes and the Veltri Indebtedness (as
defined).
Covenants. The Senior Credit Facility contains certain reporting covenants,
other customary affirmative covenants, and various negative covenants, including
but not limited to certain limitations on mergers, sales of assets,
acquisitions, liens, investments, indebtedness, contingent obligations,
dividends, leases, affiliate transactions and changes of business. The Senior
Credit Facility also contains certain financial covenants, including but not
limited to maintaining a ratio of total funded debt to EBITDA, a fixed charge
coverage ratio, and a minimum net worth requirement (each as defined in and
calculated pursuant to the Senior Credit Facility).
Events of Default. The Senior Credit Facility will contain customary events
of default including without limitation defaults for nonpayment of principal
when due, nonpayment of interest and fees within ten days when due, material
misrepresentations, default in the performance of any negative covenant, default
in performance of any other term or covenant, bankruptcy or insolvency, ERISA,
change of control, unstayed judgments in excess of a certain amount, and
cross-defaults to any indebtedness equal to or in excess of a certain amount in
the aggregate for the Company or any subsidiary, which default would permit the
holders of such indebtedness to cause such indebtedness to become due prior to
its stated maturity.
VELTRI INDEBTEDNESS
Michael T. J. Veltri, individually and/or as Trustee u/a/d December 17,
1992 ("Mr. Veltri"), is owed certain amounts by Veltri Metal Products Co., the
Company's Canadian Subsidiary, as follows:
On November 8, 1996, the Company purchased all of the outstanding capital
stock of several related companies constituting the Veltri Group, from Mr.
Veltri and Maria Veltri, his spouse, pursuant to a stock purchase agreement.
Pursuant to such stock purchase agreement, Mr. Veltri is to be paid certain
earn-out amounts, denominated in Canadian dollars, for each of the calendar
years 1998 and 1999, based upon the amount by which the combined EBIT (as
defined in the agreement) of the Veltri Group, exceeds a certain threshold. The
maximum aggregate earn-out amount payable to Mr. Veltri is not to exceed
$15,000,000
63
<PAGE> 67
(Canadian). The 1998 earn-out, if any, will be paid on March 31, 1999, including
interest at the prime rate from December 31, 1998. The 1999 earn-out, if any,
will be paid on March 31, 2000, including interest from December 31, 1999.
In connection with the stock purchase agreement, Veltri delivered to Mr.
Veltri a promissory note in the principal amount of $658,325, which is currently
outstanding. The principal amount, together with all accrued interest thereon,
is payable to Mr. Veltri on or before September 17, 1998.
In addition, pursuant to the stock purchase agreement, the Veltri Group
agreed not to engage in or take certain actions (without Mr. Veltri's consent
which shall not be unreasonably withheld), such as (a) amending each of their
articles of incorporation or similar charter documents, or by-laws, merging,
amalgamating, consolidating, entering into a share exchange, or being the
subject of any change in control, in each case in any manner which would
reasonably be expected to have a material adverse effect on the amount or
payment of the earn-out amounts to Mr. Veltri, or (b) conveying a significant
part of their assets to any person or entity, acquiring any material amount of
assets or stock of another person or entity, declaring or paying any dividends
or distributions on any stock, redeeming any stock, making any loans (including
the Offering and Senior Credit Facility) or advances to or becoming a guarantor,
surety or pledging its credit to become liable for the undertaking of any other
person or entity, or entering into any transactions with any affiliates.
The foregoing obligations to Mr. Veltri are guaranteed by the Company and
each Company within the Veltri Group and Mr. Veltri has been granted security
interests in all of the assets of such companies, including debentures on such
companies' real estate (which security interests are subordinated to the
Company's Senior Credit Facility), to secure the foregoing obligations, together
with certain obligations under his employment agreement, certain other
non-monetary obligations under the stock purchase agreement and the obligations
under such security agreements. In addition, such obligations contain customary
defaults, including cross-defaults to the Senior Credit Facility.
EXPORT DEVELOPMENT CORPORATION
The Company has a credit facility ("EDC Facility") through the Export
Development Corporation, a Canadian federal agency ("EDC"), to finance up to
$5.0 million (Canadian) of certain tooling costs. Pursuant to the EDC Facility
the Company has guaranteed up to $5.0 million (Canadian) of loans by the EDC to
manufacturers of tooling to be provided to the Company. The EDC Facility is
secured by a first priority security interest in the applicable tooling and
tooling receivables and is senior to the Senior Credit Facility and all other
indebtedness of the Company, including the Notes. As of December 31, 1997, funds
available under the EDC Facility were approximately $5.0 million (Canadian).
64
<PAGE> 68
DESCRIPTION OF NEW NOTES
The New Notes will be issued, and the Old Notes were issued, under an
indenture (the "Indenture") dated as of April 28, 1998 by and among the Company,
the Guarantors and U.S. Bank Trust National Association, as Trustee (the
"Trustee"). For purposes of the following summary, the Old Notes and the New
Notes shall be collectively referred to as the "Notes". The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. A copy of the Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The definitions of
certain capitalized terms used in the following summary are set forth below
under "-- Certain Definitions." For purposes of this section, references to the
"Company" include only Talon Automotive Group, Inc. and not its Subsidiaries.
The Notes will be unsecured obligations of the Company, ranking subordinate
in right of payment to all Senior Debt of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Notes that remain outstanding after
the completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
Any Old Notes that remain outstanding after completion of the Exchange
Offer, together with the New Notes issued in connection with the Exchange Offer,
will be treated as a single class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $170,000,000 of
which $120,000,000 were issued on the Issue Date, and will mature on May 1,
2008. Interest on the Notes will accrue at the rate of 9 5/8% per annum and will
be payable semiannually in cash on each May 1 and November 1 commencing on
November 1, 1998, to the persons who are registered Holders at the close of
business on the April 15 and October 15 immediately preceding the applicable
interest payment date. Interest on the Old Notes will accrue from and including
the most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance. Holders whose Old Notes are
accepted for exchange will receive accrued interest thereon to, but not
including, the date of issuance of the New Notes, such interest to be payable
with the first interest payment on the New Notes, but will not receive any
payment in respect of interest on the Old Notes accrued after the issuance of
the New Notes. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after May 1, 2003,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
65
<PAGE> 69
during the twelve-month period commencing on May 1 of the applicable year set
forth below, plus, in each case, accrued and unpaid interest, if any, thereon to
the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................ 104.813%
2004........................................................ 103.208%
2005........................................................ 101.604%
2006 and thereafter......................................... 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to May 1, 2001, the Company may, at its option, use the net
cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to 35% of the Notes issued at a redemption price equal to 109.625% of
the principal amount thereof plus accrued and unpaid interest, if any, thereon
to the date of redemption; provided that at least 65% of the principal amount of
Notes originally issued remains outstanding immediately after any such
redemption. In order to effect the foregoing redemption with the proceeds of any
Public Equity Offering, the Company shall make such redemption not more than 180
days after the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due upon all Senior Debt shall first be paid in
full in cash or Cash Equivalents, or such payment duly provided for to the
satisfaction of the holders of Senior Debt, before any payment or distribution
of any kind or character is made on account of any Obligations on the Notes, or
for the acquisition of any of the Notes for cash or property or otherwise. If
any default occurs and is continuing in the payment when due, whether at
maturity, upon any redemption, by declaration or otherwise, of any principal of,
interest on, unpaid drawings for letters of credit
66
<PAGE> 70
issued in respect of, or regularly accruing fees with respect to, any Senior
Debt, no payment of any kind or character shall be made by or on behalf of the
Company or any other Person on its behalf with respect to any Obligations on the
Notes or to acquire any of the Notes for cash or property or otherwise. In
addition, if any other event of default occurs and is continuing with respect to
any Designated Senior Debt, as such event of default is defined in the
instrument creating or evidencing such Designated Senior Debt, permitting the
holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for such Designated Senior Debt gives
written notice of the event of default to the Trustee (a "Default Notice"),
then, unless and until all events of default with respect to such Designated
Senior Debt have been cured or waived or have ceased to exist or the Trustee
receives notice from the Representative for such Designated Senior Debt
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither the Company
nor any other Person on its behalf shall (x) make any payment of any kind or
character with respect to any Obligations on the Notes or (y) acquire any of the
Notes for cash or property or otherwise. Notwithstanding anything herein to the
contrary, in no event will a Blockage Period extend beyond 180 days from the
date the Default Notice was delivered to the Trustee and only one such Blockage
Period may be commenced within any 360 consecutive days. No event of default
which existed or was continuing on the date of the commencement of any Blockage
Period with respect to the Designated Senior Debt shall be, or be made, the
basis for commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days (it being acknowledged that any subsequent action,
or any breach of any financial covenants for a period commencing after the date
of commencement of such Blockage Period that, in either case, would give rise to
an event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
GUARANTORS
VS Holdings, Inc., Veltri Holdings USA, Inc. and Veltri Metal Products Co.,
subsidiaries of the Company (and any additional Subsidiary Guarantors pursuant
to the covenant described under "-- Certain Covenants -- Issuance of Subsidiary
Guarantees") have fully and unconditionally guaranteed, jointly and severally,
to each Holder and the Trustee the payment of principal, premium, if any, and
interest on the Notes. The Guarantee of each Guarantor will be subordinated to
all Guarantor Senior Debt of such Guarantor to the same extent as the Notes are
subordinated to all Senior Debt. In the event all of the Capital Stock of a
Guarantor owned by the Company and/or the Restricted Subsidiaries is sold by the
Company and/or one or more Restricted Subsidiaries or all or substantially all
of the assets of a Guarantor are sold by such Guarantor and the sale complies
with the provisions set forth under "-- Certain Covenants -- Limitation on Asset
Sales," such Guarantor's Guarantee will be released.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest, if any, thereon to the date of purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement and
all other such Senior Debt and to repay the Indebtedness owed to each lender
which has accepted such offer or (ii) obtain the requisite consents under the
Credit Agreement and all other Senior Debt to permit the repurchase of the Notes
as provided below. The Company shall first
67
<PAGE> 71
comply with the covenant in the immediately preceding sentence before it shall
be required to repurchase Notes pursuant to the provisions described below.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to require the purchase of Notes upon a
Change of Control. Restrictions in the Indenture described herein on the ability
of the Company and the Restricted Subsidiaries to incur additional Indebtedness,
to grant liens on its property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain circumstances may require the purchase of the Notes,
and there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such purchase. Such restrictions and
the restrictions on transactions with Affiliates may, in certain circumstances,
make more difficult or discourage any leveraged buyout of the Company or any of
its Subsidiaries by the management of the Company. While such restrictions cover
a wide variety of arrangements which have traditionally been used to effect
highly leveraged transactions, the Indenture may not afford the Holders of Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and the
Restricted Subsidiaries may incur Acquired Indebtedness, in each case if on the
date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than (a) 2.0 to 1.0 if such incurrence occurs on or prior to May 1,
2001 or (b) 2.25 to 1.0, if such incurrence occurs after May 1, 2001.
68
<PAGE> 72
No Indebtedness incurred pursuant to the Consolidated Fixed Charge Coverage
Ratio test of the preceding paragraph (including, without limitation,
indebtedness under the Credit Agreement) shall reduce the amount of Indebtedness
which may be incurred pursuant to any clause of the definition of Permitted
Indebtedness (including without limitation, Indebtedness under the Credit
Agreement pursuant to clause (ii) of the definition of Permitted Indebtedness).
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions, payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock or (c) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses (a),
(b) and (c) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto, (i) a Default or
an Event of Default shall have occurred and be continuing or (ii) the Company is
not able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the covenant described under
"-- Limitation on Incurrence of Additional Indebtedness" or (iii) the aggregate
amount of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purpose, if other
than in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) shall
exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned subsequent to the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date" (treating such period as a
single accounting period); plus (x) 100% of the fair market value of the
aggregate net proceeds received by the Company from any Person (other than a
Subsidiary of the Company) from the issuance and sale subsequent to the Issue
Date and on or prior to the Reference Date of Qualified Capital Stock of the
Company; plus (y) without duplication of any amounts included in clause (iii)(x)
above, 100% of the fair market value of the aggregate net proceeds of any
contribution to the common equity capital of the Company received by the Company
from a holder of the Company's Capital Stock (excluding, in the case of clauses
(iii)(x) and (y), any net proceeds from a Public Equity Offering to the extent
used to redeem the Notes); plus (z) an amount equal to the lesser of (A) the sum
of the fair market value of the Capital Stock of an Unrestricted Subsidiary
owned by the Company and the Restricted Subsidiaries and the aggregate amount of
all Indebtedness of such Unrestricted Subsidiary owed to the Company, the
Guarantors and each Unleveraged Restricted Subsidiary on the date of Revocation
of such Unrestricted Subsidiary as an Unrestricted Subsidiary in accordance with
the covenant described under "-- Limitation on Designations of Unrestricted
Subsidiaries" or (B) the Designation Amount with respect to such Unrestricted
Subsidiary on the date of the Designation of such Subsidiary as an Unrestricted
Subsidiary in accordance with the covenant described under "-- Limitation on
Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) Permitted Tax
Payments; (4) so long as no Default or Event of Default shall have occurred and
be continuing, repurchases of Capital Stock of the Company from officers,
directors, employees or consultants pursuant to equity ownership or compensation
plans not to exceed $500,000 in any year; and (5) so long as no Default or Event
of Default shall have occurred and be continuing, other Restricted Payments in
an aggregate amount not to exceed $5.0 million. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, amounts expended
pursuant to clauses (1), (2), (4) and (5) shall be included in such calculation.
69
<PAGE> 73
Limitation on Asset Sales. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof
either (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case
of any Senior Debt or Guarantor Senior Debt under any revolving credit facility,
effect a permanent reduction in the availability under such revolving credit
facility, (B) to make an investment in properties and assets that will be used
in the business of the Company and its Restricted Subsidiaries as existing on
the Issue Date or in businesses reasonably related thereto, or (C) a combination
of prepayment and investment permitted by the foregoing clauses (iii)(A) and
(iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as
the Board of Directors of the Company or of such Restricted Subsidiary
determines not to apply the Net Cash Proceeds relating to such Asset Sale as set
forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence
(each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash
Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company to make an offer to purchase (the "Net Proceeds Offer") on a date (the
"Net Proceeds Offer Payment Date") not less than 30 nor more than 60 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on a
pro rata basis, that principal amount of Notes equal to the Net Proceeds Offer
Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest, if any, thereon to the date or
purchase; provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5,000,000 resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5,000,000 shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall
70
<PAGE> 74
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Asset Sale" provisions of the
Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary; or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reasons of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary; (4) any instrument
governing Acquired Indebtedness, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or the properties or assets of the Person so acquired; (5) agreements
existing on the Issue Date to the extent and in the manner such agreements are
in effect on the Issue Date; (6) any other agreement entered into after the
Issue Date which contains encumbrances and restrictions which are no more
restrictive with respect to any Restricted Subsidiary than those in effect with
respect to such Restricted Subsidiary pursuant to agreements as in effect on the
Issue Date; and (7) an agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (4) or (5) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any such
Refinancing Indebtedness are no more restrictive than the provisions relating to
such encumbrance or restriction contained in agreements referred to in such
clause (2), (4) or (5).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Restricted Subsidiary) or permit any Person
(other than the Company or a Restricted Subsidiary) to own any Preferred Stock
of any Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of the Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes are equally and ratably secured,
except for (A) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date; (B) Liens securing Senior
Debt and Liens securing Guarantor Senior Debt; (C) Liens securing the Notes and
any Guarantees; (D) Liens in favor of the Company, a Guarantor or an Unleveraged
Restricted Subsidiary; (E) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens do not extend to
or cover any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted
Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will
not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness
(other than Veltri Indebtedness) that is senior in right of payment to the Notes
or the Guarantee of such Guarantor and subordinate in right of payment to any
other Indebtedness of the Company or such Guarantor, as the case may be.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person
71
<PAGE> 75
(if other than the Company) formed by such consolidation or into which the
Company is merged or the Person which acquires by sale, assignment, transfer,
lease, conveyance or other disposition the properties and assets of the Company
and the Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity") (x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of Columbia and
(y) shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the due and
punctual payment of the principal of, and premium, if any, and interest on all
of the Notes and the performance of every covenant of the Notes, the Indenture
and the Registration Rights Agreement on the part of the Company to be performed
or observed; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, shall be able to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "-- Limitation on Incurrence of Additional
Indebtedness;" (iii) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (i)(2)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
No Guarantor (other than any Guarantor whose Guarantee is to be released in
accordance with the terms of the Guarantee and Indenture in connection with any
transaction complying with the provisions of the covenant described under "--
Limitation on Asset Sales") will, and the Company will not cause or permit any
Guarantor to, consolidate with or merge with or into any Person other than the
Company or any other Guarantor unless: (i) the entity formed by or surviving any
such consolidation or merger (if other than the Guarantor) is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such entity assumes by supplemental indenture
all of the obligations of the Guarantor under the Indenture, such Guarantor's
Guarantee and the Registration Rights Agreement; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; (iv) immediately after giving effect to such transaction and
the use of any net proceeds therefrom on a pro forma basis, the Company could
satisfy the provisions of clause (ii) of the first paragraph of this covenant;
and (v) the Company shall have delivered to the Trustee an officers' certificate
and Opinion of Counsel, each stating that such consolidation or merger and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the
72
<PAGE> 76
rendering of any service) with, or for the benefit of, any of its Affiliates
(each an "Affiliate Transaction"), other than (x) Affiliate Transactions
permitted under paragraph (b) below and (y) Affiliate Transactions on terms that
are no less favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate
Transactions (and each series of related Affiliate Transactions which are
similar or part of a common plan) involving aggregate payments or other property
with a fair market value in excess of $1.0 million shall be approved by the
Board of Directors of the Company or such Restricted Subsidiary, as the case may
be, such approval to be evidenced by a Board Resolution stating that such Board
of Directors has determined that such transaction complies with the foregoing
provisions. If the Company or any Restricted Subsidiary enters into an Affiliate
Transaction (or series of related Affiliate Transactions related to a common
plan) that involves an aggregate fair market value of more than $10.0 million,
the Company or such Restricted Subsidiary, as the case may be, shall, prior to
the consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view, from
an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
employment, consulting, option and compensation arrangements and agreements of
the Company as in effect on the Issue Date; (ii) reasonable fees and
compensation paid to and indemnity provided on behalf of, officers, directors,
employees or consultants of the Company or any Restricted Subsidiary as
determined in good faith by the Company's Board of Directors or senior
management; (iii) consulting fees paid by the Company consistent with past
practice; (iv) transactions exclusively between or among the Company and any of
the Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture; (v) transactions pursuant to the Existing Agreements; and (vi)
Restricted Payments permitted by the Indenture.
Issuance of Subsidiary Guarantees. If (a) any Domestic Wholly Owned
Restricted Subsidiary incurs any Indebtedness or (b) any Restricted Subsidiary
(whether or not a Domestic Wholly Owned Restricted Subsidiary) guarantees any
Indebtedness of the Company or any of its Restricted Subsidiaries (other than a
Subsidiary of such Restricted Subsidiary) then, in either case, the Company
shall cause such Domestic Wholly Owned Restricted Subsidiary or such Restricted
Subsidiary, as the case may be, to (i) execute and deliver to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Domestic Wholly Owned Restricted Subsidiary or such Restricted
Subsidiary, as the case may be, shall unconditionally guarantee (each, a
"Guarantee") all of the Company's obligations under the Notes and the Indenture
on the terms set forth in the Indenture and (ii) deliver to the Trustee an
opinion of counsel (which may contain customary exceptions) that such
supplemental indenture has been duly authorized, executed and delivered by such
Domestic Wholly Owned Restricted Subsidiary or such Restricted Subsidiary, as
the case may be, and constitutes a legal, valid, binding and enforceable
obligation of such Domestic Wholly Owned Restricted Subsidiary or such
Restricted Subsidiary, as the case may be. Thereafter, such Domestic Wholly
Owned Restricted Subsidiary or such Restricted Subsidiary, as the case may be,
shall be a Guarantor for all purposes of the Indenture. The Company may cause
any other Restricted Subsidiary of the Company to issue a Guarantee and become a
Guarantor.
Each Guarantee will be subordinated to Guarantor Senior Debt on the same
basis as the Notes are subordinated to Senior Debt. In the event all of the
Capital Stock of a Guarantor owned by the Company and the Restricted
Subsidiaries is sold by the Company and/or one or more of the Restricted
Subsidiaries and the sale complies with the provisions set forth under "--
Limitation on Asset Sales," such Guarantor's Guarantee will be released.
Conduct of Business. The Company and the Restricted Subsidiaries will not
engage in any businesses which are not either: (i) the same, similar or related
to the businesses in which the Company or any of the Restricted Subsidiaries are
engaged on the Issue Date; (ii) Permitted Investments; or (iii) businesses
acquired through an acquisition after the Issue Date which are not material to
the Company and the Restricted Subsidiaries, taken as a whole.
73
<PAGE> 77
Payments for Consent. The Company will not, and will not cause or permit
any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture, the Notes or the Guarantees unless
such consideration is offered to be paid to all Holders of the Notes who so
consent, waive or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of Indebtedness of such Subsidiary owed to the Company and the
Restricted Subsidiaries on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment in the Designation Amount
pursuant to the covenant described under "-- Limitation on Restricted Payments"
for all purposes of the Indenture. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including any undertaking agreement
or instrument evidencing such Indebtedness), (y) be directly or indirectly
liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or
indirectly liable for any Indebtedness which provides that the holder thereof
may (upon notice, lapse of time or both) declare a default thereon or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity upon the occurrence of a default with respect to any Indebtedness of
any Unrestricted Subsidiary (including any right to take enforcement action
against such Unrestricted Subsidiary), except, in the case of clause (x) or (y),
to the extent permitted under the covenant described under "-- Limitation on
Restricted Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary ("Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if
(a) no Default shall have occurred and be continuing at the time and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiaries
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Reports to Holders. The Indenture provides that the Company will deliver to
the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Sections 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual and quarterly reports and such information,
documents and other reports specified in
74
<PAGE> 78
Section 13 and 15(d) of the Exchange Act. The Company will also comply with the
other provisions of TIA sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default."
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination
provision of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days (with respect to the covenants described under "--
Certain Covenants -- Limitation on Incurrence of Additional Indebtedness,"
"-- Limitation on Restricted Payments," "-- Limitation on Asset Sales," and
"-- Limitation on Liens") or 60 days (with respect to the other covenants
set forth above under "-- Certain Covenants"), as the case may be, after
the Company receives written notice specifying the default (and demanding
that such default be remedied) from the Trustee or the Holders of at least
25% of the outstanding principal amount of the Notes (except in the case of
a default with respect to the covenant described under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets," which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Company or any Restricted Subsidiary),
whether such Indebtedness now exists or is created after the Issue Date,
which default (a) is caused by a failure to pay principal of such
Indebtedness after any applicable grace period provided in such
Indebtedness on the date of such default (a "payment default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity (and such acceleration is not rescinded, or such Indebtedness is
not repaid, within 30 days) and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity
of which has been so accelerated (and such acceleration is not rescinded,
or such Indebtedness is not repaid, within 30 days), aggregates $5.0
million;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and nonappealable;
(vi) certain events of bankruptcy affecting the Company or any of the
Restricted Subsidiaries; or
(vii) any Guarantee ceases to be in full force and effect or any
Guarantee declared to be null and void and unenforceable or any Guarantee
is found to be invalid or any of the Guarantors denies its liability under
its Guarantee (other than by reason of release of a Guarantor in accordance
with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal of,
premium, if any, and accrued interest on all the Notes to be due and payable by
notice in writing to the Company and the Trustee specifying the respective
Events of Default and that it is a "notice of acceleration," and the same shall
become immediately due and payable. If an Event of Default specified in clause
(vi) above occurs and is continuing, then all unpaid principal of, premium, if
any, and accrued and
75
<PAGE> 79
unpaid interest on all of the outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon the Company obtaining knowledge of any
Default or Event of Default (provided that the Company shall provide such
certification at least annually whether or not it knows of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission or failure to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "-- Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date of
payment thereof or on the applicable redemption date, as the case
76
<PAGE> 80
may be; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustees confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders will not recognize income gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize income
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Company with the intent of preferring the Holders over any
other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; (vii) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with; (viii) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that (A) the trust funds will not be subject to any rights
of holders of Senior Debt, including, without limitation, those arising under
the Indenture and (B) after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (ix)
certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation, or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
heretofore delivered to the Trustee for cancellation, for principal of, premium,
if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such charge does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other
77
<PAGE> 81
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
of repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment or principal of and
interest on such Notes on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; (vi) amend, change or modify in
any material respect the obligation of the Company to make and consummate a
Change of Control Offer after the occurrence of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect thereto;
(vii) modify or change any provision of the Indenture or the related definitions
affecting the subordination or ranking of the Notes or any Guarantee in a manner
which adversely affects the Holders; or (viii) release any Guarantor from any of
its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it, the Notes and any Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting
78
<PAGE> 82
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of (a) any Capital
Stock of any Restricted Subsidiary; or (b) any other property or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or the
Restricted Subsidiaries receive aggregate consideration of less than $1.0
million and (ii) the sale, lease, conveyance, disposition or other transfer of
all or substantially all of the assets of the Company as permitted by the
covenant described under "-- Certain Covenants -- Merger, Consolidation and Sale
of Assets."
"Blockage Period" has the meaning set forth under "-- Subordination."
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and
79
<PAGE> 83
(vi) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); or (iii) any Person or Group
(other than the Permitted Holder(s)) shall become the beneficial owner, directly
or indirectly, of shares representing more than 50% of the aggregate ordinary
voting power represented by the issued and outstanding Capital Stock of the
Company.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "-- Change
of Control."
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to the Company, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
and tax expense under the Michigan Single Business Tax of the Company and the
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sale or dispositions outside the
ordinary course of business), (B) Consolidated Interest Expense, (C)
Consolidated Non-cash Charges, (D) the amount of Permitted Tax Payments made
during such period and (E) compensation expense of the Company during fiscal
1998 under the Company's deferred compensation agreements not to exceed $1.4
million, less any non-cash items increasing Consolidated Net Income for such
period, all as determined on a consolidated basis for the Company and the
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
the Company for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter period and (ii) any
Asset Sales or other disposition or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (provided that such
Consolidated EBITDA shall be included only to the extent includable pursuant to
the definition of "Consolidated Net Income" attributable to the assets which are
the subject of the Asset Acquisition or Asset Sale or other disposition during
the Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date as if such
80
<PAGE> 84
Asset Sale or other disposition or Asset Acquisition (including the incurrence,
assumption or liability for any such Acquired Indebtedness) occurred on the
first day of the Four Quarter Period. For purposes of clause (ii) of the
immediately preceding sentence, in calculating the effect of any such Asset
Acquisition or Asset Sale or other disposition, the Company may include in any
such calculation reasonable cost savings which the Company believes in good
faith will be achieved as a result of any such Asset Acquisition or Asset Sale
or other disposition. If the Company or any of the Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if the Company or any Restricted Subsidiary had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on
outstanding Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of the Company, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount (other than any such
amortization relating to Indebtedness repaid on the Issue Date), (b) the net
costs under Interest Swap Obligations, (c) all capitalized interest and (d) the
interest portion of any deferred payment obligation; and (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
and losses from Asset Sales or abandonments or reserves relating thereto, (b)
extraordinary or nonrecurring gains, (c) the net income of any Person acquired
in a "pooling of interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary or is merged or consolidated with the Company or any
Restricted Subsidiary, (d) the net income (but not loss) of any Restricted
Subsidiary to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted by a
contract, operation of law or otherwise, (e) the net income of any Person, other
than a Restricted Subsidiary, except to the extent of cash dividends or
distributions paid to the Company or to a Restricted Subsidiary by such person,
(f) any restoration to income of any contingency reserve, except to the extent
that provision for such reserve was made out of Consolidated Net Income accrued
at any time following the Issue Date or to the extent that all such restorations
after the Issue Date do not exceed $250,000 in the aggregate, (g) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued), (h) the amount of Permitted Tax Payments made
during such period, (i) non-cash expenses relating to a conversion of the
Company to a subchapter C corporation for U.S. federal income tax purposes not
to exceed $4.0 million and (j) in the case
81
<PAGE> 85
of a successor to the Company by consolidation or merger or as a transferee of
the Company's assets, any earnings of the successor corporation prior to such
consolidation, merger or transfer of assets.
"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charge which requires an accrual of or a reserve
for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"Credit Agreement" means the Credit Agreement dated as of the Issue Date,
among the Company, the Guarantors, the lenders party thereto in their capacities
as lenders thereunder and Comerica Bank, as agent, together with the related
documents thereto (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness") or adding Restricted Subsidiaries as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice of both would be, an Event of Default.
"Default Notice" has the meaning set forth under "-- Subordination."
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$10,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"Designation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "-- Certain
Covenants -- Limitations on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is mandatorily exchangeable for Indebtedness, or is redeemable, or exchangeable
for Indebtedness, at the sole option of the holder thereof on or prior to the
final maturity date of the Notes.
"Domestic Wholly Owned Restricted Subsidiary" means a Wholly Owned
Restricted Subsidiary incorporated or otherwise organized or existing under the
laws of the United States, any state thereof or any territory or possession of
the United States.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Existing Agreements" means the following agreements as amended and in
effect on the Issue Date: (i) Agreement dated July 1, 1997 between the Company
and Talon L.L.C. pursuant to which Talon L.L.C.
82
<PAGE> 86
provides certain administrative and consulting services to the Company in
exchange for an annual fee equal to $500,000; (ii) Agreement dated the Issue
Date pursuant to which the Company provides certain administrative and
consulting services to G&L Industries, Inc.; (iii) Leases between the Company
and Dude Investments L.L.C. and Dude Investments dated September 30, 1996, as
amended; (iv) Leases between the Company and Maria Veltri dated August 1, 1994,
as amended, and July 1, 1993, as amended, including Option to Purchase dated
November 8, 1996; (v) Stock Purchase Agreement dated November 8, 1996 among
Veltri Metal Products Co., the Company's subsidiary, and Michael T.J. Veltri,
individually and as trustee u/a/d December 17, 1992, and Maria Veltri, and all
documents executed pursuant thereto, including, without limitation, that certain
Subordination Agreement, Memorandum of Agreement, Agreements Not to Compete,
Security Agreements, General Security Agreements, Debentures, Promissory Note by
Veltri Metal Products Co. in the amount of $658,325 in favor of Michael Veltri,
Unconditional Guaranty by Veltri Holdings USA, Inc.; and (vi) Purchase Agreement
dated September 30, 1996 among the Company, J&R Manufacturing, Inc., Roger H.
DuCoffre and Theodore H. Dezenski, and all documents executed pursuant thereto.
"Fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession
of the United States, which are in effect as of the Issue Date.
"Guarantee" has the meaning set forth under "-- Certain
Covenants -- Issuance of Subsidiary Guarantees."
"Guarantor" means (i) each Subsidiary of the Company as of the Issue Date
and (ii) each other Person that in the future executes a Guarantee pursuant to
the covenant described under "-- Certain Covenants -- Issuance of Subsidiary
Guarantees" or otherwise; provided that any Person constituting a Guarantor as
described above shall cease to constitute a Guarantor when its Guarantee is
released in accordance with the terms of the Indenture.
"Guarantor Senior Debt" means, with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of such Guarantor,
whether outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the Guarantee of such Guarantor. Without limiting the generality of
the foregoing, "Guarantor Senior Debt" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all Interest
Swap Obligations, (y) all obligations under Currency Agreements and (z) Veltri
Indebtedness, in each case whether outstanding on the Issue Date or thereafter
incurred. Notwithstanding the foregoing (except with respect to Veltri
Indebtedness), "Guarantor Senior Debt" shall not include (i) any Indebtedness of
such Guarantor owing to a Subsidiary of such Guarantor or any Affiliate of such
Guarantor or any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or
guaranteed on behalf of, any shareholder, director, officer or employee of such
Guarantor or any Subsidiary of such Guarantor (including, without limitation,
amounts owed for compensation), (iii) Indebtedness to trade creditors and other
amounts incurred in connection with obtaining goods, materials or services, (iv)
Indebtedness represented by Disqualified Capital Stock, (v) any liability for
federal, state, local or other taxes owed or owing by such Guarantor, (vi)
Indebtedness incurred in violation of the covenant described
83
<PAGE> 87
under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness", (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to such Guarantor, and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of such
Guarantor.
"incur" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence on Additional Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any Lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock. "Indebtedness," shall not be deemed to include
customary indemnity obligations of the Company or a Restricted Subsidiary
incurred in connection with an Asset Sale.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees and Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Initial Purchasers" means Salomon Brothers Inc and Credit Suisse First
Boston Corporation.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, (i) any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Capital Stock of any Restricted Subsidiary
(the "Referent Subsidiary") such that, after giving effect to any such sale or
disposition the Referent Subsidiary shall cease to
84
<PAGE> 88
be a Restricted Subsidiary, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Capital Stock of the Referent Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations, when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Company or any of the Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking into
account any reduction in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements, (c) repayments of Indebtedness
secured by the property or assets subject to such Asset Sale that is required to
be repaid in connection with such Asset Sale and (d) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Net Proceeds Offer" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holders" means (i) Randolph J. Agley, Judith A. Agley, James R.
Agley, Joseph A. Agley, James J. Agley, Michael T. Timmis, Nancy E. Timmis,
Michael T.O. Timmis, Wayne C. Inman or Amelia P. Inman, (ii) any relative,
family member or any Person controlled by any of the persons listed in
subparagraph (i) above, (iii) any trust including, without limitation, a
charitable remainder trust, created by or for the benefit of any of the persons
listed in subparagraphs (i) or (ii) above and (iv) any private foundation
created by any of the persons listed in subparagraphs (i) or (ii) above.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes, the Indenture and any Guarantees not
to exceed $120,000,000 in the aggregate;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the
greater of (x) $100,000,000, reduced by any required permanent repayments
with the proceeds of Asset Sales (which are accompanied by a corresponding
permanent commitment reduction) thereunder and (y) the sum of (a) 85% of
the net book value of accounts receivable of the Company and the Restricted
Subsidiaries, (b) 50% of the net book value of the
85
<PAGE> 89
inventory of the Company and the Restricted Subsidiaries, (c) 75% of the
fair market value of real estate and of the orderly liquidation value shown
in appraisals for fixed assets of the Company and the Restricted
Subsidiaries for which appraisals exist and (d) 65% of the net book value
of fixed assets of the Company and the Restricted Subsidiaries for which no
appraisals exist;
(iii) other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any Guarantor and Interest Swap Obligations of any
Restricted Subsidiary covering Indebtedness of such Restricted Subsidiary;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and the Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to
the extent the notional principal amount of such Interest Swap Obligations
does not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligations relates;
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary to the Company, a
Guarantor or an Unleveraged Restricted Subsidiary for so long as such
Indebtedness is held by the Company, a Guarantor or an Unleveraged
Restricted Subsidiary, in each case subject to no Lien held by a Person
other than the Company, a Guarantor or an Unleveraged Restricted
Subsidiary; provided that if as of any date any Person other than the
Company, a Guarantor or an Unleveraged Restricted Subsidiary owns or holds
any such Indebtedness or holds a Lien in respect of such Indebtedness, such
date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Guarantor or an Unleveraged
Restricted Subsidiary for so long as such Indebtedness is held by a
Guarantor or an Unleveraged Restricted Subsidiary, in each case subject to
no Lien; provided that (a) any Indebtedness of the Company to any Guarantor
or Unleveraged Restricted Subsidiary is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any person other than a
Guarantor or Unleveraged Restricted Subsidiary owns or holds any such
Indebtedness or any Person holds a Lien in respect of such Indebtedness,
such date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(ix) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) Tooling Indebtedness;
(xii) Veltri Indebtedness (and any Indebtedness incurred to Refinance
any Veltri Indebtedness) not to exceed $15.0 million at any one time
outstanding;
(xiii) additional Indebtedness of the Company and the Guarantors in an
aggregate principal amount not to exceed $10.0 million at any one time
outstanding;
86
<PAGE> 90
(xiv) Purchase Money Indebtedness and Capitalized Lease Obligations
(and any Indebtedness incurred to Refinance such Purchase Money
Indebtedness or Capitalized Lease Obligations) not to exceed $15.0 million
at any one time outstanding; and
(xv) Indebtedness of Restricted Subsidiaries that are not Guarantors
in an aggregate principal amount not to exceed $5.0 million at any one time
outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Guarantor or an Unleveraged Restricted Subsidiary or that will
merge or consolidate into the Company or a Guarantor or an Unleveraged
Restricted Subsidiary; (ii) investments in the Company by any Restricted
Subsidiary; provided that any Indebtedness evidencing such Investment is
unsecured and subordinated, pursuant to a written agreement, to the Company's
obligations under the Notes and the Indenture; (iii) investments in cash and
Cash Equivalents; (iv) loans and advances to employees and officers of the
Company and the Restricted Subsidiaries in the ordinary course of business for
bona fide business purposes not in excess of $1.0 million at any time
outstanding; (v) Currency Agreements and Interest Swap Obligations entered into
in the ordinary course of the Company's or a Restricted Subsidiary's businesses
and otherwise in compliance with the Indenture; (vi) Investments in Restricted
Subsidiaries that are not Guarantors or Unleveraged Restricted Subsidiaries not
to exceed $5.0 million at any one time outstanding; (vii) Investments in
securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers; (viii) Investments made by the Company or the
Restricted Subsidiaries as a result of consideration received in connection with
an Asset Sale made in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales"; and (ix) Investments in Persons,
including, without limitation, Unrestricted Subsidiaries and joint ventures,
engaged in a business similar or related to the businesses in which the Company
and the Restricted Subsidiaries are engaged on the Issue Date not to exceed
$10.0 million at any one time outstanding.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP, shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceeds which may
have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of the Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
87
<PAGE> 91
(vii) purchase money Liens securing Indebtedness to finance property
or assets of the Company or any Restricted Subsidiary acquired in the
ordinary course of business, and Liens securing Indebtedness which
Refinances any such Indebtedness; provided, however, that (A) the related
purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed
the cost of such property or assets and shall not be secured by any
property assets of the Company or any Restricted Subsidiary other than the
property and assets so acquired and (B) the Lien securing the purchase
money Indebtedness shall be created within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations related to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreement; and
(xiii) Liens securing Acquired Indebtedness (and any Indebtedness
which Refinances such Acquired Indebtedness) incurred in accordance with
the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness"; provided that (A) such Liens
secured the Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary and were not granted in connection with, or in anticipation of
the incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary and (B) such Liens do not extend to or cover any property or
assets of the Company or of any of the Restricted Subsidiaries other than
the property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary.
"Permitted Tax Payments" means distributions to the stockholders of the
Company to reimburse them for federal and state income taxes at the maximum
applicable individual tax rate attributable to the income of the Company for any
tax period during which the Company is not a taxable entity for federal or
state, as the case may be, income tax purposes.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Public Equity Offering" has the meaning set forth under "-- Redemption --
Optional Redemption upon Public Equity Offerings."
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the fair market value of such property or such purchase
price or cost.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain Covenants --
Limitation on Restricted Payments."
88
<PAGE> 92
"Refinance" means in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (xi), (xii), (xiii), (xiv) or (xv) of the definition of Permitted
Indebtedness), in each case that does not (1) result in an increase in the
aggregated principal amount of any Indebtedness of such Person as of the date of
such proposed Refinancing (plus the amount of any premium required to be paid
under the terms of the instrument governing such Indebtedness and plus the
amount of reasonable expenses incurred by the Company in connection with such
Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (B) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided that if such
Indebtedness being Refinanced is Indebtedness of the Company or a Guarantor,
then such Refinancing Indebtedness shall be Indebtedness solely of the Company
and/or Guarantors.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Issue Date among the Company, the Guarantors and the Initial
Purchasers.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt: provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
stockholders of a majority in outstanding principal amount of such Designated
Senior Debt in respect of any Designated Senior Debt.
"Restricted Payment" has the meaning set forth under "-- Certain Covenants
- -- Limitations on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Certain Covenants -- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"Revocation" has the meaning set forth under "-- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Debt" shall also include the principal of, premium, if
any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (w) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest
reimbursement obligations under letters of credit, fees, expenses and
indemnities, (x) all
89
<PAGE> 93
Interest Swap Obligations, (y) all obligations under Currency Agreements, and
(z) the Veltri Indebtedness, in each case whether outstanding on the Issue Date
or thereafter incurred. Notwithstanding the foregoing (except with respect to
Veltri Indebtedness), "Senior Debt" shall not include (i) any Indebtedness of
the Company to a Restricted Subsidiary or any Affiliate of the Company or any of
such Affiliate's Subsidiaries, (ii) Indebtedness to, or guaranteed on behalf of,
any shareholder, director, officer or employee of the Company or any Restricted
Subsidiary (including without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or other
taxes owned by the Company, (vi) Indebtedness incurred in violation of the
covenant described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness", (vii) Indebtedness which, when incurred and without
respect to any election under Section 1111(b) of Title 11, United States Code,
is without recourse to the Company and (viii) any Indebtedness which is, by its
express terms, subordinated in right of payment to any other Indebtedness of the
Company.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Tooling Indebtedness" means all present and future Indebtedness of the
Company and any Restricted Subsidiary the proceeds of which are utilized to
finance dies, molds, tooling and similar items (collectively, "Tooling") for
which sales of such Tooling is covered under specific written purchase orders or
agreements between the Company or any Restricted Subsidiary and the purchaser of
such Tooling.
"Surviving Entity" has the meaning set forth under "-- Certain Covenants --
Merger, Consolidation and Sale of Assets."
"Unleveraged Restricted Subsidiary" means a Restricted Subsidiary that has
no Indebtedness outstanding (other than Indebtedness owned to the Company, a
Guarantor or another Unleveraged Restricted Subsidiary).
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Veltri Indebtedness" means Indebtedness owing to Michael T.J. Veltri,
individually and/or as trustee u/a/d December 17, 1992, pursuant to (a) that
certain Stock Purchase Agreement dated November 8, 1996, (b) that certain
Employment Agreement dated November 8, 1996, (c) that certain Promissory Note
dated November 8, 1996 in the amount of $658,325, and (d) those certain Security
Agreements, General Security Agreements and Debentures dated November 8, 1996,
all as amended through the Issue Date.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other requirement payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date the making of such payment.
"Wholly Owned Restricted Subsidiary" of the Company means any Restricted
Subsidiary of which all the outstanding voting securities (other than in the
case of a foreign Restricted Subsidiary, directors' qualifying shares or an
immaterial amount of shares required to be owned by other Persons pursuant to
applicable law) are owned by the Company or any Wholly Owned Restricted
Subsidiary.
90
<PAGE> 94
FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO THE EXCHANGE OFFER
The following summary of the material anticipated federal income tax
consequences of the issuance of New Notes and the Exchange Offer is based upon
the provisions of the Internal Revenue Code of 1986, as amended, the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. The following
summary is not binding on the Internal Revenue Service ("IRS") and there can be
no assurance that the IRS will take a similar view with respect to the tax
consequences described below. No ruling has been or will be requested by the
Company from the IRS on any tax matters relating to the New Notes or the
Exchange Offer. This discussion is for general information only and does not
purport to address all of the possible federal income tax consequences or any
state, local or foreign tax consequences of the acquisition, ownership and
disposition of the Old Notes, the New Notes or the Exchange Offer. It is limited
to investors who will hold the Old Notes and the New Notes as capital assets and
does not address the federal income tax consequences that may be relevant to
particular investors in light of their unique circumstances or to certain types
of investors (such as dealers in securities; insurance companies; financial
institutions; foreign corporations; partnerships; trusts; nonresident
individuals; and tax-exempt entities) who may be subject to special treatment
under federal income tax laws.
INDEBTEDNESS
The Old Notes and the New Notes should be treated as indebtedness of the
Company. In the unlikely event the Old Notes or the New Notes were treated as
equity, the amount treated as a distribution on any such Old Note or New Note
would first be taxable to the holder as dividend income to the extent of the
Company's current and accumulated earnings and profits, and would next be
treated as a return of capital to the extent of the holder's tax basis in the
Old Notes or New Notes, with any remaining amount treated as a gain from the
sale of an Old Note or a New Note. In addition, in the event of equity
treatment, amounts received in retirement of an Old Note or a New Note might in
certain circumstances be treated as a dividend, and the Company could not deduct
amounts paid as interest on such Old Notes or New Notes. The remainder of this
discussion assumes that the Old Notes and the New Notes will constitute
indebtedness.
EXCHANGE OFFER
The exchange of the Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an "exchange" because the New Notes should not be
considered to differ materially in kind or extent from the Old Notes. Rather,
the New Notes received by a holder of the Old Notes should be treated as a
continuation of the Old Notes in the hands of such holder. As a result, there
should be no federal income tax consequences to holders exchanging the Old Notes
for the New Notes pursuant to the Exchange Offer.
INTEREST
A holder of an Old Note or a New Note will be required to report stated
interest on the Old Note and the New Note as interest income in accordance with
the holder's method of accounting for tax purposes. Because the Old Notes were
issued at 100.00% of par there is no original issue discount pursuant to the de
minimis exception to the "original issue discount" rules.
TAX BASIS IN OLD NOTES AND NEW NOTES
A holder's tax basis in an Old Note will be the holder's purchase price for
the Old Note. If a holder of an Old Note exchanges the Old Note for a New Note
pursuant to the Exchange Offer, the tax basis of the New Note immediately after
such exchange should equal the holder's tax basis in the Old Note immediately
prior to the exchange.
91
<PAGE> 95
DISPOSITION OF OLD NOTES OR NEW NOTES
The sale, exchange, redemption or other disposition of an Old Note or a New
Note, except in the case of an exchange pursuant to the Exchange Offer (see the
above discussion), generally will be a taxable event. A holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition of the Old Note or the New Note (except
to the extent attributable to accrued interest) and (ii) the holder's adjusted
tax basis in such debt instrument. Such gain or loss will be capital gain or
loss, and will be long term if the Old Notes have been held for more than one
year at the time of the sale or other disposition.
PURCHASERS OF OLD NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes other than at par, including those
provisions of the Internal Revenue Code relating to the treatment of "market
discount," and "amortizable bond premium." Any such purchaser should consult its
tax advisor as to the consequences to him of the acquisition, ownership, and
disposition of Old Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Old Notes and the
New Notes, and (2) proceeds of sale of the Old Notes and the New Notes, must be
withheld and remitted to the United States Treasury. Therefore, each holder
should complete and sign the Substitute Form W-9 included so as to provide the
information and certification necessary to avoid backup withholding. However,
certain holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a foreign
individual to qualify as an exempt foreign recipient, that exchanging holder
must submit a statement, signed under penalties of perjury, attesting to that
individual's exempt foreign status. Such statements can be obtained from the
Company. For further information concerning backup withholding and instructions
for completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if the Old Notes are held in more than one name), contact the Company
at 900 Wilshire Drive, Suite 203, Troy, Michigan 48084 or telephone number
248-362-7600.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of
taxes, a refund may be obtained from the IRS.
92
<PAGE> 96
OLD NOTES; REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission the Exchange Offer Registration Statement on the appropriate
form under the Securities Act with respect to an offer to exchange the Old Notes
for the New Notes. Upon the effectiveness of the Exchange Offer Registration
Statement, the Company will offer to the holders of Old Notes who are able to
make certain representations the opportunity to exchange their Old Notes for New
Notes. If (i) the Company is not permitted to file the Exchange Offer
Registration Statement or to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any holder
of Old Notes notifies the Company within the specified time period that (A) due
to a change in law or policy it is not entitled to participate in the Exchange
Offer, (B) due to a change in law or policy it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by such holder or (C)
it is a broker-dealer and owns Old Notes acquired directly from the Company or
an affiliate of the Company, the Company will file with the Commission the Shelf
Registration Statement to cover resales of the Transfer Restricted Notes (as
defined) by the holders thereof. The Company will use its best efforts to cause
the applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Notes" means each Old Note until (i) the date on which such Old Note has been
exchanged by a person other than a broker-dealer for a New Note in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of
an Old Note for a New Note, the date on which such New Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Old Note is distributed to
the public pursuant to Rule 144 under the Securities Act.
Under existing Commission interpretations, the New Notes would, in general,
be freely transferable after the Exchange Offer without further registration
under the Securities Act; provided that in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act will be delivered upon resale by such broker-dealer in
connection with resales of the New Notes. The Company has agreed, for a period
of 180 days after consummation of the Exchange Offer, to make available a
prospectus meeting the requirements of the Securities Act to any such
broker-dealer for use in connection with any resale of any New Notes acquired in
the Exchange Offer. A broker-dealer which delivers such a prospectus to
purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company
or, if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If the holder is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the Company
will file an Exchange Offer Registration Statement with the Commission on or
prior to 60 days after the date of original issuance of the Old Notes (the
"Issue Date"), (ii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
93
<PAGE> 97
Commission on or prior to 150 days after the Issue Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue,
on or prior to 20 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, New Notes in
exchange for all Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will file the
Shelf Registration Statement prior to the later of (w) 60 days after the Issue
Date or (x) 30 days after such filing obligation arises, and use its best
efforts to cause the Shelf Registration Statement to be declared effective by
the Commission prior to (y) the later of 150 days after the Issue Date or (z) 90
days after such obligation arises; provided that if the Company has not
consummated the Exchange Offer within 180 days of the Issue Date, then the
Company will, upon the request of any holder of Notes, file the Shelf
Registration Statement with the Commission on or prior to the 181st day after
the Issue Date. The Company shall use its best efforts to keep such Shelf
Registration Statement continuously effective, supplemented and amended until
the second anniversary of the Issue Date or such shorter period that will
terminate when all the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold pursuant thereto. If (a) the Company fails
to file any of the registration statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
registration statements are not declared effective by the Commission on or prior
to the date specified for such effectiveness (the "Effectiveness Target Date"),
(c) the Company fails to consummate the Exchange Offer within 20 business days
of the Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but, thereafter, subject to certain
exceptions, ceases to be effective or usable in connection with the Exchange
Offer or resales of Transfer Restricted Notes, as the case may be, during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses (a) through (d) above, a "Registration Default"), then the
interest rate on Transfer Restricted Notes will increase ("Additional
Interest"), with respect to the first 90-day period immediately following the
occurrence of such Registration Default by 0.50% per annum and will increase by
an additional 0.50% per annum with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of 1.50%
per annum. Following the cure of all Registration Defaults, the accrual of
Additional Interest will cease and the interest rate will revert to the original
rate.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
94
<PAGE> 98
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the New Note initially will be
represented by a single, permanent global certificate in definitive, fully
registered form (the "Global Note"). The Global Note will be deposited with, or
on behalf of, DTC and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to "foreign purchasers"
who are not QIBs or (ii) held by QIBs who elect to take physical delivery of
their certificates instead of holding their interest through the Global Note
(and which are thus ineligible to trade through DTC) (collectively referred to
herein as the "Non-Global Purchasers") will be issued in registered certificated
form ("Certificated Securities"). Upon the transfer to a QIB of any Certificated
Security initially issued to a Non-Global Purchaser, such Certificated Security
will, unless the transferee requests otherwise or the Global Note has previously
been exchanged in whole for Certificated Securities, be exchanged for an
interest in the Global Note.
THE GLOBAL NOTE
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the principal amount of Notes of the individual beneficial
interest represented by such Global Note to the respective accounts for persons
who have accounts with DTC and (ii) ownership of beneficial interest in the
Global Note will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Such accounts initially will be
designated by or on behalf of the Initial Purchasers and ownership of beneficial
interests in the Global Note will be limited to persons who have accounts with
DTC ("participants") or persons who hold interest through participants. QIBs
hold their interests in the Global Note directly through DTC, if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC or its nominee is the registered owner or holder of the New
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global Note for all
purposes under the Indenture. No beneficial owner of an interest in any Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any paying agent of the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Note as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interest in the Global Note held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell Notes to persons in states which require physical delivery of
the Certificated Securities, or to pledge such securities, such holder must
transfer its interest in the Global Note in accordance with the normal
procedures of DTC and with the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one
95
<PAGE> 99
or more participants to whose account the DTC interests in the Global Note are
credited and only in respect of such portion of the aggregate principal amount
of Notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Indenture, DTC
will exchange the Global Note for Certificated Securities, which it will
distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchasers or the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company
within 90 days, Certificated Securities will be issued in exchange for the
Global Note.
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Notes directly from the
Company or (iii) broker-dealers who acquired Notes as a result of market-making
or other trading activities) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business, and such
holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such New Notes; provided that broker-dealers ("Participating Broker-Dealers")
receiving New Notes in the Exchange Offer will be subject to a prospectus
delivery requirement with respect to resales of such New Notes. To date, the
Staff has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to transactions involving an
exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Old Notes to
the Initial Purchasers) with the Prospectus contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Company has agreed to permit Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use this Prospectus
in connection with the resale of such New Notes. The Company and the Guarantors
have agreed that, for a period of 180 days after the Expiration Date, they will
make this Prospectus, and any amendment or supplement to this Prospectus,
available to any broker-dealer that requests such documents in the Letter of
Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company as set forth in "The Exchange Offer -- Purpose and Effect of the
Exchange Offer." In addition, each holder who is a broker-dealer and who
receives New Notes for its own account in exchange for Old Notes that were
acquired by it as a result of
96
<PAGE> 100
market-making activities or other trading activities, will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such New Notes.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
LEGAL MATTERS
Certain legal matters with respect to the New Notes offered hereby will be
passed on by securities counsel to the Company, Dickinson Wright PLLC, Detroit,
Michigan, and by Timmis & Inman L.L.P., Detroit, Michigan, general counsel to
the Company..
EXPERTS
The combined financial statements of Talon Automotive Group as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997, the financial statements of Production Stamping, Inc. as of June 30,
1997 and 1996 and for each of the three years in the period ended June 30, 1997
and the combined financial statements of the Veltri Group as of November 8, 1996
and for the period from January 1, 1996 to November 8, 1996 included in this
Prospectus have been audited by Ernst & Young L.L.P., independent auditors, as
set forth in their reports thereon appearing elsewhere herein, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
The combined balance sheet of Veltri International as of December 31, 1995,
and the related combined statements of operations and accumulated deficit, and
cash flows for the year ended December 31, 1995, have been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
97
<PAGE> 101
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TALON AUTOMOTIVE GROUP, INC.
Report of Independent Auditors.............................. F-2
Combined Statements of Operations for the Three Years Ended
December 31, 1997......................................... F-3
Combined Balance Sheets at December 31, 1997 and 1996....... F-4
Combined Statement of Changes in Shareholders' Equity for
the Three Years Ended December 31, 1997................... F-5
Combined Statements of Cash Flows for the Three Years Ended
December 31, 1997......................................... F-6
Notes to the Combined Financial Statements.................. F-7
Condensed Consolidated Interim Statements of Operations for
the Six Month Period Ended July 4, 1998 and 1997
(Unaudited)............................................... F-19
Condensed Consolidated Interim Balance Sheets as of July 4,
1998 and December 31, 1997 (Unaudited).................... F-20
Condensed Consolidated Interim Statement of Cash Flows for
the Six Month Period Ended July 4, 1998 and 1997
(Unaudited)............................................... F-21
Condensed Consolidated Interim Statement of Changes in
Shareholders' Equity for the Six Month Period Ended July
4, 1998 and 1997 (Unaudited).............................. F-22
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)............................................... F-23
PRODUCTION STAMPING, INC.
Report of Independent Auditors.............................. F-26
Statements of Operations for the Three Years Ended June 30,
1997...................................................... F-27
Balance Sheets at June 30, 1997 and 1996.................... F-28
Statements of Changes in Stockholders' Equity for the Three
Years Ended June 30, 1997................................. F-29
Statements of Cash Flows for the Three Years Ended June 30,
1997...................................................... F-30
Notes to the Financial Statements........................... F-31
VELTRI GROUP
Report of Independent Auditors.............................. F-37
Combined Statement of Operations for the Period from January
1, 1996 to November 8, 1996............................... F-38
Combined Balance Sheet at November 8, 1996.................. F-39
Combined Statement of Changes in Net Capital Deficiency for
the Period from January 1, 1996 to November 8, 1996....... F-40
Combined Statement of Cash Flows for the Period from January
1, 1996 to November 8, 1996............................... F-41
Notes to Combined Financial Statements...................... F-42
VELTRI INTERNATIONAL
Independent Auditors' Report................................ F-47
Combined Balance Sheet as of December 31, 1995.............. F-48
Combined Statement of Operations and Accumulated Deficit for
the Year Ended December 31, 1995.......................... F-49
Combined Statement of Cash Flows for the Year Ended December
31, 1995.................................................. F-50
Notes to Combined Financial Statements for the Year Ended
December 31, 1995......................................... F-51
</TABLE>
F-1
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS
Boards of Directors and Shareholders
Talon Automotive Group
We have audited the accompanying combined balance sheets of Talon
Automotive Group as of December 31, 1997 and 1996, and the related combined
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Talon Automotive
Group at December 31, 1997 and 1996, and the combined results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
March 20, 1998
F-2
<PAGE> 103
TALON AUTOMOTIVE GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $158,718 $71,029 $56,835
Cost of sales............................................... 134,297 58,120 46,900
-------- ------- -------
Gross profit.............................................. 24,421 12,909 9,935
Operating expenses
Selling, general and administrative expenses.............. 16,241 8,490 6,041
Special compensation...................................... 1,343 -- --
-------- ------- -------
Income from operations................................. 6,837 4,419 3,894
Other expenses
Interest.................................................. 4,599 1,754 1,192
Foreign currency.......................................... 117 302 --
-------- ------- -------
4,716 2,056 1,192
-------- ------- -------
Income before income taxes.................................. 2,121 2,363 2,702
Provision for income taxes.................................. 1,325 94 --
-------- ------- -------
Net income............................................. $ 796 $ 2,269 $ 2,702
======== ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 104
TALON AUTOMOTIVE GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,233 $ 1,090
Accounts receivable, less allowance of $267 ($241 in
1996).................................................. 36,021 26,650
Inventory................................................. 19,347 7,012
Prepaid expenses.......................................... 2,765 2,188
-------- -------
Total current assets................................... 59,366 36,940
Property, plant and equipment............................... 94,194 70,114
Less accumulated depreciation............................. 31,723 29,178
-------- -------
Net property, plant and equipment......................... 62,471 40,936
Goodwill, less amortization of $465 ($115 in 1996).......... 43,298 11,631
Deferred financing costs, less amortization of $187 ($23 in
1996)..................................................... 680 665
Other....................................................... 679 938
-------- -------
$166,494 $91,110
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit....................................... $ 2,651 $ 2,355
Accounts payable.......................................... 31,043 17,609
Accrued liabilities....................................... 9,472 6,688
Deferred tooling revenue.................................. 1,423 2,122
Current portion of capital leases......................... 720 342
Current portion of long term debt......................... 33,463 5,176
-------- -------
Total current liabilities.............................. 78,772 34,292
Long term debt.............................................. 67,844 40,782
Capital leases.............................................. 2,637 813
Other liabilities........................................... 1,276 547
Deferred income taxes....................................... 1,364 275
SHAREHOLDERS' EQUITY
Common stock................................................ 1,250 1,150
Paid-in capital............................................. 1,413 538
Retained earnings........................................... 12,168 12,789
Accumulated translation adjustment.......................... (230) (76)
-------- -------
14,601 14,401
-------- -------
$166,494 $91,110
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 105
TALON AUTOMOTIVE GROUP
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID-IN RETAINED TRANSLATION COMPREHENSIVE
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
------ ---------- -------- ----------- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995...... $ 2 $ 498 $10,286 $ -- $10,786
Capital contribution............ -- 138 -- -- 138
Net income for 1995............. -- -- 2,702 -- 2,702 $2,702
Foreign currency translation.... -- -- -- -- -- --
Tax benefit..................... -- -- -- -- -- --
------
Comprehensive income............ -- -- -- -- -- $2,702
======
Distribution to shareholders.... -- -- (890) -- (890)
------ ------ ------- ----- -------
Balance at December 31, 1995.... 2 636 12,098 -- 12,736
Recapitalization................ 98 (98) -- -- --
Capital contribution............ 1,050 -- -- -- 1,050
Net Income for 1996............. -- -- 2,269 -- 2,269 $2,269
Foreign currency translation.... -- -- -- (76) (76) (76)
Tax benefit..................... -- 29
------
Comprehensive income............ -- $2,222
======
Distribution to shareholders.... -- -- (1,578) -- (1,578)
------ ------ ------- ----- -------
Balance at December 31, 1996.... 1,150 538 12,789 (76) 14,401
Capital contribution............ 100 875 -- -- 975
Net income for 1997............. -- -- 796 -- 796 $ 796
Foreign currency translation.... -- -- -- (154) (154) (154)
Tax benefit..................... -- -- -- -- -- 58
------
Comprehensive income............ -- -- -- -- -- $ 700
======
Distribution to shareholders.... -- -- (1,417) -- (1,417)
------ ------ ------- ----- -------
Balance at December 31, 1997.... $1,250 $1,413 $12,168 $(230) $14,601
====== ====== ======= ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 106
TALON AUTOMOTIVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 796 $ 2,269 $ 2,702
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,279 3,419 2,907
Deferred income tax....................................... 465 93 --
Changes in operating asset and liabilities:
Accounts receivable....................................... (1,507) (2,715) (460)
Inventories............................................... (6,477) 1,339 (72)
Prepaid expenses.......................................... 124 1,427 (858)
Accounts payable.......................................... 3,287 485 (2,074)
Accrued liabilities....................................... 3,602 -- 143
Other liabilities......................................... (403) -- --
-------- -------- -------
Net cash provided by operating activities................... 6,166 6,317 2,288
INVESTING ACTIVITIES
Acquisitions, less cash acquired............................ (51,739) (5,462) --
Additions to property and equipment......................... (9,389) (3,942) (5,009)
Proceeds from sale of equipment............................. (43) 2 29
-------- -------- -------
Net cash used in investing activities....................... (61,171) (9,402) (4,980)
FINANCING ACTIVITIES
Net increase (decrease) in short term borrowings............ 295 (15,769) 1,185
Proceeds from long term borrowings.......................... 63,345 45,271 3,646
Payments on long term debt.................................. (7,792) (24,053) (1,375)
Capital contribution........................................ 975 1,050 138
Deferred financing costs.................................... (104) (688) --
Distributions to shareholders............................... (1,417) (1,578) (890)
-------- -------- -------
Net cash provided by financing activities................. 55,302 4,233 2,704
Translation adjustment...................................... (154) (76) --
-------- -------- -------
NET INCREASE IN CASH........................................ 143 1,072 12
Cash as of beginning of year................................ 1,090 18 6
-------- -------- -------
Cash at end of year......................................... $ 1,233 $ 1,090 $ 18
======== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 107
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements of the Company include the accounts of
Talon Automotive Group, L.L.C. ("Talon"), Hawthorne Metal Products Company
("Hawthorne"), J&R Manufacturing, Inc. ("J&R"), Veltri Metal Products Company,
Veltri Holdings, Inc., Veltri Holdings No. 2 Inc., Veltri Holdings USA and
Production Stamping, Inc. ("PSI"). Veltri Metal Products Co., Veltri Holdings,
Inc. and Veltri Holdings USA, Inc. are collectively referred to as the "Veltri
Group" in these notes. The companies are affiliated through common ownership and
are collectively referred to herein as the "Company". All significant
intercompany transactions and account balances have been eliminated in
combination.
2. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
Talon functions as the group headquarters and was organized to coordinate
all sales, marketing, engineering and other administrative functions for
companies owned by the Shareholders.
The primary business of the Company is 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 companies primarily operate from
seven plants in the United States and Canada. The hourly employees of the
companies are represented by various locals of the United Auto Workers, Canadian
Auto Workers and United Steel Workers.
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 companies consider cash on hand, deposits in banks and short-term
marketable securities with maturities of 90 days or less as cash and cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the combined balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value. The fair value of the companies' bank lines of credit and long-term debt
approximates the reported amounts at December 31, 1997 since their respective
interest rates approximate the December 31, 1997 market rates for similar debt
instruments.
INVENTORIES
Inventories are stated at cost, not in excess of market, using the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The companies provide for
depreciation, principally using the straight-line method, over 30 years for
building improvements and over 5 to 15 years for machinery and equipment. 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
F-7
<PAGE> 108
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
renewals and betterments are capitalized. Expenditures for maintenance and
repairs are charged against income as incurred.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the debt.
GOODWILL
Goodwill represents the excess of cost over the fair value of identifiable
net assets acquired and is amortized over 40 years using the straight-line
method.
IMPAIRMENT OF ASSETS
Impairment losses related to long lived assets and goodwill related to
those assets, are recognized when expected future cash flows are less than the
carrying value of the assets. If indications of impairment are present, the
Company evaluates the carrying value of the assets in relationship to the future
undiscounted cash flows of the underlying operations. The Company adjusts the
net book value of the assets to fair value if the sum of the expected future
cash flows is less than book value.
REVENUE RECOGNITION AND PRE-PRODUCTION TOOLING
Revenue from sales is recorded upon shipment of product to the customer.
Pre-production tools used in Company operations are requisitioned by the
Company's customers and are purchased from tool builders who construct the tools
under Company supervision. Once customer approval is obtained for the
manufacture of a new product, the Company is reimbursed by its customers for the
cost of the tooling, at which time the tooling becomes the property of the
customer. Provisions are made for losses in the year in which the losses are
first determinable. Deferred tooling revenue includes progress billings of
$1,659 and $21,140, net of pre-production tooling costs of $236 and $19,018 at
December 31, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION
All balance sheet items denominated in a foreign currency (i.e. Canadian
dollars) are translated into United States dollars at the rate of exchange in
effect as of the balance sheet date. Translation adjustments related to the
Company's foreign subsidiary, for which the local currency is the functional
currency, are reflected in the consolidated financial statements as a separate
component of shareholders equity. For revenues, expenses, gains and losses, an
appropriately weighted average exchange rate for the respective periods is used.
The Company recorded a net foreign currency loss of $117 and $302 for the years
ended December 31, 1997 and 1996, respectively.
EFFECT OF ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. The Company has elected to adopt the
requirements of this standard effective December 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information. The
Statement supersedes Statement 14 and establishes standards for the way public
business enterprises report selected information about operating segments in
annual reports and interim financial reports issued to debtholders. Statement
131 is effective for fiscal years
F-8
<PAGE> 109
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
beginning after December 15, 1997. The Company is currently evaluating the
proposed requirements of the Standard and has not determined the impact of the
Standard, if any.
3. ACQUISITIONS
The following acquisitions were completed during 1996 and 1997:
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED AGGREGATE PURCHASE PRICE
------- ------------- ------------------------
<S> <C> <C>
J&R.................................. September 30, 1996 $ 6,278
Veltri Group......................... November 8, 1996 $25,844
PSI.................................. December 8, 1997 $49,713
</TABLE>
Acquisitions have historically been financed through bank lines of credit
and long-term borrowings. All acquisitions have been accounted for by the
purchase method of accounting. The purchase price, including acquisition costs,
is allocated to the assets and liabilities acquired based upon their respective
fair values. The excess of the purchase price over the fair value of the net
tangible assets acquired is classified as goodwill and amortized over 40 years.
The accompanying combined financial statements include the results of operations
for acquired entities from their respective dates of acquisition.
The Veltri Group purchase agreement provides for additional payments based
on the earnings of the Veltri Group, as defined, for 1997, 1998 and 1999. Such
additional consideration is accounted for as additional purchase price
(goodwill) and will be amortized over the then remaining goodwill amortization
period. Additional consideration amounted to $700 in 1997.
The purchase price for PSI will be finalized upon completion of a closing
balance sheet audit. The allocation of purchase price is preliminary and will be
finalized in 1998.
The following pro forma financial information represents the results of
operations on a pro forma basis, as if the acquisitions referred to above had
occurred at the beginning of the year of acquisition and the preceding year
after giving effect to certain adjustments including increased depreciation and
amortization of property and equipment and interest expense for acquisition
debt. These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which would
have been achieved had these acquisitions been completed as of these dates nor
are the results indicative of the Company's future results of operations.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales....................................... $229,417 $219,205 $139,870
Net income (loss)............................... 2,124 1,955 (759)
</TABLE>
4. MAJOR CUSTOMERS
Sales are made primarily to automotive original equipment manufacturers and
their suppliers. Following is a summary of net production sales to such key
customers as a percentage of total net production sales:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Chrysler............................................ 45.8% 21.3% 19.4%
General Motors...................................... 8.8% 15.4% 14.8%
Ford................................................ 18.1% 47.3% 60.3%
Other............................................... 27.3% 16.0% 5.5%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
F-9
<PAGE> 110
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Accounts receivable from these customers at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Chrysler................................................... $17,749 $12,892
General Motors............................................. 5,202 1,949
Ford....................................................... 3,533 4,484
Other...................................................... 9,537 7,325
------- -------
$36,021 $26,650
======= =======
</TABLE>
5. INVENTORIES
Inventory is comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw material................................................ $ 5,031 $2,821
Work in process............................................. 3,996 2,368
Finished goods.............................................. 3,992 1,637
Pre-production tooling...................................... 6,328 186
------- ------
$19,347 $7,012
======= ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at December 31:
<TABLE>
<S> <C> <C>
Land and improvements....................................... $ 1,414 $ 1,419
Buildings and improvements.................................. 16,834 13,534
Machinery and equipment..................................... 74,120 53,705
Furniture and fixtures...................................... 1,826 1,456
------- -------
94,194 70,114
Less accumulated depreciation............................... 31,723 29,178
------- -------
Net carrying amount......................................... $62,471 $40,936
======= =======
</TABLE>
7. SELF-INSURANCE
Certain of the companies participate in a self-insurance pool for workers'
compensation, general and automobile liability. Insurance is carried to limit
self-insurance per occurrence to $250 for workers' compensation, $250 for
general liability and $100 for automobile liability. Aggregate retention is
established by policy year to pool total loss experience with affiliated
companies. The companies provided $928, $592, and $515 in 1997, 1996, and 1995,
respectively, for claims reported and claims incurred but not reported. The
companies self-insurance reserves totaled $1,221 and $610 at December 31, 1997
and 1996, respectively. These amounts are included in accrued liabilities in the
balance sheets.
Certain of the companies are also self-insured for health care. Insurance
is carried to limit self-insurance per occurrence to $150. The companies
provided $1,633, $961, and $1,112 in 1997, 1996, and 1995, respectively, for
employee group health insurance.
F-10
<PAGE> 111
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
8. BANK LINE OF CREDIT
J&R has a $4,000 short-term secured bank line of credit, with interest at
.50% above the prime rate (9.0% at December 31, 1997) due April 1998. Borrowings
under the agreement amounted to $2,651 at December 31, 1997. Borrowings of up to
$500 are guaranteed by Hawthorne.
Veltri has a $5.0 million credit facility through the Export Development
Corporation (EDC Facility). Funds under the EDC Facility are available only to
support tooling programs. $0.0 are outstanding at December 31, 1997.
9. LONG TERM DEBT
Long term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
HAWTHORNE:
Term note payable in quarterly installments including
interest at 2.25% above the Eurodollar rate (8.4375% as of
December 31, 1997) due October 2003....................... $ 8,285 $ 9,785
Acquisition Loan payable in quarterly installments including
interest at 3.25% above the Eurodollar rate (9.4375% as of
December 31, 1997) due October 2003....................... 8,214 9,643
Mortgage note payable in quarterly installments including
interest at 2.25% above the Eurodollar rate (8.4375% as of
December 31, 1997) due October 2011....................... 4,247 4,441
Equipment term loan with a bank, payable quarterly,
including interest, at the Eurodollar rate plus the
applicable margin as defined by the agreement (8.4375% as
of December 31, 1997)..................................... 3,736 --
$8,500 line of credit agreement and a swing loan agreement
with maximum borrowings totaling the lesser of $500 and
the amount by which the maximum line of credit exceeds the
current outstanding line of credit balance. Borrowings for
the line of credit and the swing loan bear interest at the
Eurodollar rate plus 2.25% ($2,000 at 8.4375% at December
31, 1997) and at the prime rate plus .50% ($3,368 at 9.0%
at December 31, 1997). The loans are due in October 1999.
On a quarterly basis, the loans provide for a commitment
fee of 0.375% of the average amount by which the maximum
line of credit amount exceeds the daily amount of unused
credit and outstanding letters of credit.................. 5,368 --
VELTRI GROUP:
$17,326 line of credit agreement and a swing loan agreement
with maximum borrowings totaling the lesser of $500 and
the amount by which the line of credit maximum exceeds the
current outstanding line of credit balance. Borrowings
under the line of credit bear interest based on the prime
rate (ranging from 6.3% to 8.5% at December 31, 1997). The
loans are due in November 1999 and provides for a
commitment fee of 0.25% of the average daily amount of
unused credit and outstanding letters of credit........... 12,371 8,983
Bank term note payable in quarterly installments including
interest at 2.0% above the Eurodollar rate (6.71% as of
December 31, 1997) due November 2003...................... 8,175 10,076
Note payable to former owner of Veltri Group, due in monthly
installments including interest at the prime rate (8.5% at
December 31, 1997) commencing on March 1, 2001, due March
2004...................................................... 658 658
</TABLE>
F-11
<PAGE> 112
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
$4,954 equipment acquisition line of credit with a bank,
payable quarterly, including interest at the Eurodollar or
prime rate plus an applicable margin, as defined in the
agreement (8.0% at December 31, 1997)..................... $ 1,800 $ --
J&R:
Term note payable to bank in monthly installments plus
interest at 0.75% above the prime rate, (9.25% as of
December 31, 1997), due October 2001...................... 731 926
Employment obligation to former owners payable monthly
through September 2001, discounted at 8.5%. The obligation
is guaranteed by Hawthorne................................ 945 1,196
Promissory note payable to former owners in quarterly
installments plus interest at 2.0% above the prime rate,
(10.5% as of December 31, 1997) due September 1999........ 146 250
PSI:
Bank term note with interest at the Eurodollar or prime rate
(8.5% at December 31, 1997), payable quarterly beginning
March 1998 with final balance due December 2001........... 8,000 --
Equipment note payable to bank with interest at the
Eurodollar or prime rate (8.5% at December 31, 1997),
payable quarterly beginning March 1998 with final balance
due December 2004......................................... 6,775 --
Promissory notes payable to shareholders with interest of
1.0% above the prime rate (9.5% at December 31, 1997), due
July 1998................................................. 24,500 --
$11,500 revolving note payable to bank with interest at the
Eurodollar or prime rate (8.5% at December 31, 1997)
expiring December 1999.................................... 7,356 --
-------- -------
Total long term debt........................................ $101,307 $45,958
Less current portion........................................ (33,463) (5,176)
-------- -------
$ 67,844 $40,782
======== =======
</TABLE>
Long term debt is secured by substantially all assets of the respective
companies. The bank lines of credit and term note agreements contain certain
covenants, the more restrictive of which require the maintenance of leverage and
debt service coverage ratios. The agreements also places limits on the purchase
or sale of property and equipment, and restrict distributions of earnings to
shareholders. Retained earnings in the amount of $1,050 at December 31, 1997
were restricted.
Scheduled maturities of long term debt for the companies are as follows::
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
1998........................................................ $ 33,463
1999........................................................ 34,354
2000........................................................ 9,710
2001........................................................ 13,658
Thereafter.................................................. 10,122
--------
Total....................................................... $101,307
========
</TABLE>
The companies paid interest of $3,152, $1,614 and $1,459 in 1997, 1996 and
1995, respectively, of which $0, $54 and $275 was capitalized as construction in
progress in 1997, 1996 and 1995, respectively.
F-12
<PAGE> 113
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
10. EMPLOYEE BENEFIT ARRANGEMENTS
DEFINED BENEFIT PLANS
Hawthorne has a noncontributory defined benefit retirement plan covering
substantially all hourly employees. Benefits under the plan are based upon years
of service multiplied by a specified amount. The companies general funding
policy is to make contributions based on the plan's normal cost plus
amortization of prior service costs over a period not to exceed 30 years. Plan
assets are held in the Talon Group Profit Sharing Trust, which invests in
various debt and equity securities.
PSI has a noncontributory defined benefit retirement plan covering
substantially all hourly employees. The plan was frozen as of June 30, 1997 and
is expected to be terminated in 1998. All benefits under this plan are expected
to be distributed to participants by June 30, 1998.
The following table sets forth the funded status of the plans as of
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated and projected benefit obligation, including
vested benefits of $4,389 in 1997 and $1,899 in 1996...... $4,624 $2,072 $1,979
Plan assets at fair market value............................ 3,753 1,714 1,599
------ ------ ------
Unfunded projected benefit obligation....................... 871 358 380
Unrecognized net gain (loss) from past experience different
from that assumed......................................... 146 150 (15)
Unrecognized transition amount at the beginning of the year
resulting from initial application of SFAS No. 87......... 44 49 55
Unrecognized prior service cost............................. (184) (161) (34)
------ ------ ------
Accrued pension cost........................................ $ 877 $ 396 $ 386
====== ====== ======
Net pension expense includes the following components:
Service cost--benefits earned during the year............... $ 93 $ 85 $ 65
Interest cost on projected benefit obligation............... 154 148 138
Actual return on plan assets................................ (363) (121) (231)
Net amortization and deferral............................... 221 (14) 108
------ ------ ------
Pension expense............................................. $ 105 $ 98 $ 80
====== ====== ======
</TABLE>
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligations was 7.5% in 1997 and 1996, and 7.25%
in 1995. The expected long-term rate of return on plan assets was 8.5% in 1997,
1996 and 1995.
PROFIT SHARING PLAN
Hawthorne, J&R and Talon have defined contribution profit sharing plans
covering substantially all salaried employees. The Plans allow eligible
employees to make voluntary, tax-deferred contributions up to 7.5% of
compensation not to exceed statutory limits. The companies match up to 50% of
the employees' contributions, limited to $200 dollars annually per participant.
Additionally, the Plans provide for discretionary employer contributions as
determined by the applicable Board of Directors. Employer contributions to the
plans amounted to $115, $147 and $106 in 1997, 1996 and 1995, respectively.
F-13
<PAGE> 114
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
DEFERRED COMPENSATION
Effective January 1, 1997, Talon has agreements with certain key employees,
which provide for deferred compensation benefits based on increases in the value
of the companies, as defined, through December 31, 1996 and based on a
percentage of shareholder distributions, as defined, made during 1997 and
thereafter. The companies accrue deferred compensation as amounts are allocated
to the accounts of participants under the terms of the agreement. Balances in
the participants accounts are subject to forfeiture of 33% per year during 1998
and 1999 in the event of the employee's voluntary termination or termination for
cause. Amounts allocated to accounts in 1998 and thereafter are vested after
three years. Vesting of the 1998 allocation will be accelerated in the case of a
bond offering subject to a forfeiture of 33% percent per year during 1999 and
2000. Deferred compensation expense charged to operations amounted to $1,343 in
1997 (none in 1996 and 1995). Deferred compensation amounting to $1,359 is
expected to be incurred in 1998 in connection with the distribution to
shareholders expected to be made in April 1998 (See Note 17).
11. EQUITY OWNERSHIP PLAN
Under the equity ownership plan, the Company provides the opportunity for
certain executive employees to be granted the right to purchase shares of the
Company's common stock at pre-determined prices. These rights to purchase stock
are hereby referred to as "stock options" for purposes of this footnote.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock options because the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The employee stock options are subject to certain vesting periods and
employment requirements. All options expire on January 1, 2018. One stock option
was immediately vested and exercisable on December 31, 1996. All other stock
options begin vesting on January 1, 1999 and become fully vested and exercisable
on January 2, 2003.
Pro forma information regarding net income is required by Statement 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the minimal value method for
non-public companies with the following weighted-average assumptions; risk-free
interest rate of 6.0%, dividend yield of 0.0%, and a weighted-average expected
life of the options of 7 years.
For the purpose of pro forma disclosures, the estimated fair value of the
stock options is amortized to expense over the stock options' vesting period.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma net income........................................ $466 $2,269
</TABLE>
The Company granted stock options to purchase up to 32,747 shares of the
Company's common stock on December 31, 1996, and these options remained in
effect as of December 31, 1997. As of December 31, 1997 and 1996 the Company had
authorized 8,146 shares and no stock options had been exercised. The weighted
average fair value of the stock options granted on December 31, 1996 was $12.21
per share. The weighted average exercise price of the stock options at December
31, 1997 ranged from $183 to $288 per share.
F-14
<PAGE> 115
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
12. INCOME TAXES
The Shareholders of the companies, except the Canadian subsidiaries, have
elected under the provisions of the Internal Revenue Code to be treated as S
Corporations. As a result, the taxable income of these companies is included in
the taxable income of the individual shareholders, and no provision for federal
income taxes has been included in the statement of income. At December 31, 1997
the carrying amount of the companies' net assets exceeded the tax basis by
$5,452. The Canadian subsidiaries are subject to Canadian income tax.
The components of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current................................................... $ 143 $-- $--
Deferred.................................................. 1,182 94 --
------ --- --
$1,325 $94 $--
====== === ===
</TABLE>
The components of deferred income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Liabilities:
Depreciation.............................................. $1,585 $1,393
Other..................................................... 176 100
------ ------
1,761 1,493
Assets:
Loss carry forward........................................ 246 1,029
Product warranty.......................................... 146 189
Other..................................................... 5 --
------ ------
397 1,218
------ ------
Net deferred tax liability.................................. $1,364 $ 275
====== ======
</TABLE>
The reconciliation of income taxes computed at the statutory tax rates and
the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxes at statutory rates............................... $ 997 $ 850 $ 972
Income not subject to corporate tax.................... (4) (846) (972)
Effect of foreign tax.................................. 152 -- --
Non-deductible items................................... 121 90 --
Other.................................................. 59 -- --
------ ----- -----
$1,325 $ 94 $ --
====== ===== =====
</TABLE>
Veltri Group had income tax loss carry forwards of approximately $690 at
December 31, 1997, which expire in 2001.
Veltri Group paid income taxes of $94 and $183 in 1997 and 1996.
F-15
<PAGE> 116
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
13. CAPITAL STRUCTURE
The capitalization of the companies as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
CLASS A -- VOTING CLASS B -- NON-VOTING
------------------- --------------------- PAID-IN
COMPANY SHARES AMOUNT SHARES AMOUNT CAPITAL TOTAL
------- ------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Hawthorne......................... 50,000 $ 50 50,000 $ 50 $ 400 $ 500
J&R............................... 50,000 275 50,000 275 -- 550
PSI............................... 100,000 100 -- -- 900 1,000
Talon............................. -- -- -- -- 113 113
Veltri Group...................... 100,000 500 -- -- -- 500
------- ---- ------- ---- ------ ------
Total........................ 300,000 $925 100,000 $325 $1,413 $2,663
======= ==== ======= ==== ====== ======
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The companies lease certain warehouse space, automobiles, trucks and
trailers and machinery and equipment under operating and capital leases expiring
on various dates through December 1, 2002. As of December 31, 1997, minimum
lease rental payments due under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1998....................................................... $2,394 $ 1,080
1999....................................................... 2,006 779
2000....................................................... 1,012 665
2001....................................................... 710 502
Thereafter................................................. 495 1,357
------ -------
Total minimum lease payments.......................... $6,617 $ 4,383
======
Amount representing interest............................... (1,026)
-------
Present value of net minimum lease payments................ $ 3,357
=======
</TABLE>
The companies incurred rent expense for all operating leases of $1,565,
$874 and $617 in 1997, 1996 and 1995, respectively. The companies had
outstanding letters of credit amounting to $1,615 and $1,075 in 1997 and 1996,
respectively.
15. RELATED PARTY TRANSACTIONS
The companies have a business services agreement with Talon L.L.C., an
affiliated company owned by the Shareholders, under which the companies receive
services of risk management, benefits management, tax preparation and other
services from Talon L.L.C. Fees incurred under the agreement aggregated $1,150,
$850 and $717 in 1997, 1996 and 1995, respectively.
The Company provides certain consulting and administrative services to G&L
Industries, Inc., an affiliate of the Company, beneficially owned and controlled
by the shareholders. The Company received fees of approximately $1,600, $1,950
and $1,700 in 1997, 1996 and 1995, respectively for such services which are
included as an offset against selling, general and administrative expenses.
F-16
<PAGE> 117
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
16. FOREIGN OPERATIONS
The operations of Veltri Group are conducted in Canada. Information with
respect to such foreign operations, since the acquisition in November 1996, are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
As of December 31:
Current assets............................................ $25,886 $21,226
Non-current assets........................................ 26,937 24,787
Current liabilities....................................... 17,546 17,032
Non-current liabilities................................... 33,727 28,639
For the period ended December 31:
Net sales................................................. 75,710 11,808
Gross profit.............................................. 13,813 2,018
Net income (loss)......................................... 1,362 (83)
</TABLE>
The Veltri Group (consisting of Veltri Metal Products Co., Veltri Holdings,
Inc. and Veltri Holdings USA, Inc.) has fully and unconditionally guaranteed, on
a joint and several basis, the obligation to pay principal, premium, if any, and
interest with respect to the Company's issue of senior subordinated indebtedness
(see Note 17). Management does not believe that separate financial statements of
Veltri Group are material to investors. Therefore, separate financial statements
and other disclosures concerning the members Veltri Group have not presented.
17. SUBSEQUENT EVENTS -- REORGANIZATION, REFINANCING AND SHAREHOLDER
DISTRIBUTION
The companies were reorganized on April 28, 1998, in connection with the
issue of senior subordinated indebtedness in the amount of $120,000. A special
distribution aggregating $10,000 was made concurrent with the debt placement,
and deferred compensation amounting to $1,359 was incurred in connection with
the distribution to shareholders.
To effect the reorganization, Hawthorne and J&R merged with and into PSI,
and PSI changed its name to Talon Automotive Group, Inc. ("TAG, Inc.").
Immediately thereafter, Talon, which was owned by Hawthorne and J&R, then merged
with and into PSI.
Simultaneously, VS Holdings No. 2 Inc. sold its 1% interest in Veltri Metal
Products Co. back to such company. VS Holdings No. 2 Inc. then merged with and
into VS Holdings, Inc., which owned all of the remaining outstanding stock of
Veltri Metal Products Co., such that Veltri Metal Products Co. became a wholly
owned subsidiary of VS Holdings, Inc. The shareholders of VS Holdings, Inc. then
exchanged their shares in VS Holdings, Inc. for shares in TAG, Inc., and VS
Holdings, Inc. thereupon became a wholly owned subsidiary of TAG, Inc.
Accordingly, Veltri Metal Products Co. is an indirect, wholly owned subsidiary
of TAG, Inc.
Also, immediately thereafter, the shareholders of Veltri Holdings USA, Inc.
exchanged their shares in Veltri Holdings USA, Inc. for shares in TAG, Inc., and
Veltri Holdings USA, Inc. also became a wholly owned subsidiary of TAG, Inc. The
shareholders of TAG, Inc. and its subsidiaries are the same shareholders that
owned each of the entities that were merged to form TAG, Inc. The respective
ownership percentages of these shareholders did not change as a result of the
mergers. The reorganization was accounted for retroactively as if it were a
pooling of interest with no change made to the carrying bases of the assets and
liabilities of the combined entities.
F-17
<PAGE> 118
TALON AUTOMOTIVE GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
The equity ownership agreements of the companies (See Note 11) were
restated such that the resultant stock options in TAG, Inc. were equivalent to
those currently existing in each of the affiliated companies. The deferred
compensation agreements of the companies (See Note 10) were amended to
discontinue further allocations of deferred compensation to participants except
for one participant who may earn up to $300, as defined in an agreement. The
period, if and when this amount is earned, is currently undeterminable. When
determined this amount will be recorded when earned.
Subsequent to December 31, 1997, the Company made a $1,500 non-cash
dividend to the shareholders by distributing amounts due from an affiliate.
F-18
<PAGE> 119
TALON AUTOMOTIVE GROUP
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 4,
------------------------
1998 1997
---- ----
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $134,186 $84,206
Cost of sales............................................... 113,991 70,391
-------- -------
Gross profit.............................................. 20,195 13,815
Selling, general & administrative expenses.................. 13,240 8,438
Special compensation........................................ 1,359 --
Income from operations...................................... 5,596 5,377
Other expenses (income)
Interest.................................................. 5,375 2,084
Foreign currency.......................................... 787 (115)
Other..................................................... (198) --
-------- -------
Income (loss) before income taxes and extraordinary
expenses.................................................. (368) 3,408
Provision for income taxes.................................. 1,232 886
-------- -------
Income (loss) before extraordinary expenses................. (1,600) 2,522
Extraordinary expenses...................................... 553 --
-------- -------
Net income.................................................. $ (2,153) $ 2,522
======== =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 120
TALON AUTOMOTIVE GROUP
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 4, DECEMBER 31,
1998 1997
------- ------------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 8,934 $ 1,233
Accounts receivable, less allowance of $285 ($267 in
1997)..................................................... 33,298 36,021
Inventories................................................. 19,570 19,347
Prepaid expenses............................................ 2,510 2,765
-------- ---------
Total current assets................................... 64,312 59,366
Property, plant and equipment............................... 97,873 94,194
Less accumulated depreciation............................. 36,189 31,723
-------- ---------
Net property, plant and equipment......................... 61,684 62,471
Goodwill, less amortization of $1,071 ($463 in 1997)........ 42,293 43,298
Deferred financing costs, less amortization of $90 ($187 in
1997)..................................................... 4,946 680
Other assets................................................ 471 679
-------- ---------
$173,706 $ 166,494
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit....................................... $ -- $ 2,651
Accounts payable.......................................... 30,186 31,043
Accrued liabilities....................................... 13,356 9,472
Deferred tooling revenue.................................. 60 1,423
Current portion of capital leases......................... 792 720
Current portion of long term debt......................... -- 33,463
-------- ---------
Total current liabilities.............................. 44,394 78,772
Long term debt.............................................. 125,327 67,844
Capital leases.............................................. 2,309 2,637
Other liabilities........................................... 304 1,276
Deferred income taxes....................................... 1,568 1,364
SHAREHOLDER'S EQUITY
Common stock................................................ 1,250 1,250
Paid in capital............................................. 1,413 1,413
Retained earnings........................................... (2,022) 12,168
Accumulated translation adjustment.......................... (837) (230)
-------- ---------
(196) 14,601
-------- ---------
$173,706 $ 166,494
======== =========
</TABLE>
See accompanying notes.
F-20
<PAGE> 121
TALON AUTOMOTIVE GROUP
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 4,
--------------------
1998 1997
---- ----
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ (2,153) $ 2,522
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 4,750 2,501
Amortization.............................................. 784 217
Deferred income taxes..................................... 203 (2)
Gain on sale of assets.................................... (198) --
Change in operating assets and liabilities:
Accounts receivable....................................... 2,723 (5,362)
Inventories............................................... (223) (25,121)
Prepaids.................................................. 255 (3)
Other assets.............................................. 609 (612)
Accounts payable.......................................... (853) 5,923
Accrued liabilities....................................... 4,052 2,467
Other liabilities......................................... (1,378) 14,705
--------- --------
Net cash provided by (used in) operating activities......... 8,571 (2,765)
INVESTING ACTIVITIES
Additions to property and equipment....................... (4,181) (3,231)
Proceeds from sale of equipment........................... 327 --
--------- --------
Net cash used in investing activities..................... (3,854) (3,231)
FINANCING ACTIVITIES
Proceeds from long term debt.............................. 121,167 19,911
Payments on long term debt................................ (101,274) (13,401)
Deferred financing costs.................................. (4,266) (183)
Other..................................................... 0 (83)
Distributions............................................. (12,037) (1,153)
--------- --------
Net cash provided by financing activities................... 3,590 5,091
Translation adjustment...................................... (607) (185)
NET INCREASE (DECREASE) IN CASH............................. 7,700 (1,090)
Cash as of beginning of period.............................. 1,234 1,090
--------- --------
Cash at end of period....................................... $ 8,934 $ --
========= ========
</TABLE>
See accompanying notes.
F-21
<PAGE> 122
TALON AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 4, 1997
-------------------------------------------------------------------
UNAUDITED
(IN THOUSANDS)
ACCUMULATED
COMMON PAID-IN RETAINED TRANSLATION COMPREHENSIVE
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
------ ------- -------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997............ $1,150 $537 $12,790 $ (76) $14,401
Net income............................ 2,521 2,521 2,521
Foreign currency translation.......... (185) (185) (185)
Tax benefit........................... 67
------
Comprehensive income.................. $2,403
======
Distribution to shareholders.......... (1,153) (1,153)
------ ---- ------- ----- -------
Balance at July 4, 1997............... $1,150 $537 $14,158 $(261) $15,584
====== ==== ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 4, 1998
--------------------------------------------------------------------
UNAUDITED
(IN THOUSANDS)
ACCUMULATED
COMMON PAID-IN RETAINED TRANSLATION COMPREHENSIVE
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
------ ------- -------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998.......... $1,250 $1,413 $ 12,168 $(230) $ 14,601
Net income.......................... (2,153) (2,153) (2,153)
Foreign currency translation........ (607) (607) (607)
Tax benefit......................... 218
-------
Comprehensive income................ $(2,542)
=======
Distribution to shareholders........ (12,037) (12,037)
------ ------ -------- ----- --------
Balance at July 4, 1998............. $1,250 $1,413 $ (2,022) $(837) $ (196)
====== ====== ======== ===== ========
</TABLE>
See accompanying notes.
F-22
<PAGE> 123
TALON AUTOMOTIVE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Talon
Automotive Group, Inc. and its subsidiaries ("the Company"). All significant
intercompany transactions and account balances have been eliminated in
consolidation.
The six-month period ended July 4, 1998 consists of 185 days and is
consistent with the prior year. The Company reports quarterly financial
information in thirteen-week increments and ends each respective quarter on the
Saturday following the thirteenth week with the fiscal year ending December 31.
The accompanying unaudited combined financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended July 4, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. EFFECT OF ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement No. 130 is effective for
fiscal years beginning after December 31, 1997. The Company has elected to adopt
the requirements of this standard effective December 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information. The
Statement supersedes Statement No. 14 and establishes standards for the way
public business enterprises report selected information about operating segments
in annual reports and interim financial reports issued to debtholders. Statement
No. 131 is effective for fiscal years beginning after December 31, 1997. The
Company is currently evaluating and has not determined the impact of this
standard, if any.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's current minimal use of derivatives, management does not anticipate
that the adoption of the new statement will have a significant effect on
earnings or the financial position of the Company.
3. INVENTORIES
Inventory is comprised of the following at:
<TABLE>
<CAPTION>
JULY 4, DECEMBER 31,
1998 1997
------- ------------
<S> <C> <C>
Raw material............................................. $ 5,527 $5.,031
Work in process.......................................... 3,332 3,996
Finished goods........................................... 3,821 3,992
Pre-production tooling................................... 6,890 6,328
------- -------
Total Inventory.......................................... $19,570 $19,347
======= =======
</TABLE>
F-23
<PAGE> 124
TALON AUTOMOTIVE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
4. COMMITMENTS AND CONTINGENCIES
As of July 4, 1998, there were no significant changes to the status of
commitments and contingencies presented in the footnotes to the financial
statements for the fiscal year ended December 31, 1997.
5. REORGANIZATION
Prior to April 28, 1998 the Company had reported the combined financial
statements of Talon Automotive Group, LLC ("Talon"), Hawthorne Metal Products
Company ("Hawthorne"), J&R Manufacturing, Inc. ("J&R"), Veltri Metal Products,
Co., Veltri Holdings, Inc., Veltri Holdings, No. 2 Inc., Veltri Holdings USA,
Inc. and Production Stamping, Inc. ("PSI"). These companies were reorganized
into Talon Automotive Group, Inc. on April 28, 1998, in connection with the
issuance of senior subordinated indebtedness in the amount of $120,000.
To effect the reorganization, Hawthorne and J&R merged with and into PSI
and PSI changed its name to Talon Automotive Group, Inc. ("TAG, Inc.").
Immediately thereafter, Talon, which was owned by Hawthorne and J&R, merged up
and into PSI. Simultaneously, VS Holdings, No. 2 Inc. sold its 1% interest in
Veltri Metal Products Co. to Veltri Metal Products, Co. VS Holdings No. 2 Inc.
then merged with and into VS Holdings, Inc., which owned all of the became a
wholly owned subsidiary of TAG, Inc. The remaining outstanding stock of Veltri
Metal Products, Co., such that, Veltri Metal Products, Co. became a wholly owned
subsidiary of VS Holdings, Inc. The shareholders of VS Holdings, Inc. then
exchanged their shares in VS Holdings, Inc. for shares in TAG, Inc., and VS
Holdings, Inc. thereupon became a wholly owned subsidiary of TAG, Inc. Also,
immediately thereafter, the shareholders of Veltri Holdings USA, Inc. exchanged
their shares in Veltri Holdings USA, Inc. for shares in TAG, Inc., and Veltri
Holdings USA, Inc. also reorganization was accounted for retroactively as if it
were a pooling of interest with no change made to the carrying base of the
assets and liabilities of the combined entities.
The equity ownership agreement of the Company was restated such that the
resultant stock options in TAG, Inc. were equivalent to those currently existing
in each of the affiliated companies prior to the reorganization. The deferred
compensation agreements of the Company were amended to suspend future
allocations of deferred compensation to participants, except up to $300 in
additional deferred compensation which can be earned by one participant and
annual increases for interest on all vested amounts at the rate of 6% per year.
6. REFINANCING
On April 28, 1998, the Company completed a refinancing and retired
substantially all long-term debt that was outstanding using proceeds from the
issuance of the senior subordinated indebtedness (see Note 5). The senior
subordinated notes mature on May 1, 2008 and bear interest at the fixed rate of
9.625%.
7. EXTRAORDINARY EXPENSES AND REFINANCING EXPENSES
The Company recorded extraordinary and non-recurring expenses totaling
$2,517 as a result of a refinancing in April 1998. These expenses were comprised
of: (i) a $553 non-recurring extraordinary loss, net of a $122 tax benefit, on
the early extinguishment of debt, (ii) a $605 non-recurring loss on foreign
exchange associated with the retirement of indebtedness and (iii) a $1,359
non-recurring expense under deferred compensation agreements.
8. SUMMARIZED SUBSIDIARY INFORMATION
Veltri Metal Products, Co., Veltri Holdings, Inc. and Veltri Holdings USA,
Inc. (collectively the "Veltri Group") are wholly owned subsidiaries of the
Company. All members of the Veltri Group have fully and
F-24
<PAGE> 125
TALON AUTOMOTIVE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest with respect to the senior subordinated
indebtedness. Management does not believe that separate financial statements of
each of these members of the Veltri Group are material to investors. Therefore,
separate financial statements and other disclosures concerning members of the
Veltri Group have been omitted. Summarized financial information relating to the
Veltri Group is shown as follows:
<TABLE>
<CAPTION>
JULY 4, DECEMBER 31,
1998 1997
------- ------------
UNAUDITED
<S> <C> <C>
Current assets......................................... $24,635 $25,886
Non-current assets..................................... 25,648 26,937
Current liabilities.................................... 11,147 17,546
Non-current liabilities................................ 36,728 33,727
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 4,
1998 1997
---- ----
UNAUDITED
<S> <C> <C>
Net sales................................................ $53,272 $43,966
Gross profit............................................. 10,363 8,095
Net income............................................... 1,456 1,356
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company has a business services agreement with Talon L.L.C., an
affiliated company owned by the shareholders. For the six-month period ended
July 4, 1998 and 1997, total fees incurred under this agreement amounted to $413
and $575, respectively. Effective April 1, 1998, fees under this agreement were
reduced from $1,150 to $500 per year.
The Company also provides certain consulting and administrative services to
G&L Industries, Inc., an affiliate of the Company. For the six-month period
ended July 4, 1998 and 1997, total fees received under this agreement were $238
and $250, respectively. Effective May 1, 1998, fees under this consulting
agreement were reduced from $500 to $450 per year.
F-25
<PAGE> 126
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Production Stamping, Inc.
We have audited the accompanying balance sheets of Production Stamping,
Inc. as of June 30, 1997 and 1996 and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Production Stamping, Inc. as
of June 30, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
March 20, 1998
F-26
<PAGE> 127
PRODUCTION STAMPING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 1, 1997 JULY 1, 1996
YEAR ENDED JUNE 30, TO TO
----------------------------------------- DECEMBER 7, DECEMBER 31,
1997 1996 1995 1997 1996
---- ---- ---- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $72,032,412 $68,839,438 $69,593,662 $32,015,243 $33,315,411
Cost of sales................. 61,857,664 62,358,188 65,961,624 28,222,225 28,354,360
----------- ----------- ----------- ----------- -----------
Gross profit................ 10,174,748 6,481,250 3,632,038 3,793,018 4,961,051
General and administrative
expenses.................... 7,218,595 4,019,094 3,545,403 3,502,131 4,029,639
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............... 2,956,153 2,462,156 86,635 290,887 931,412
Other income (expense):
Interest expense............ (1,136,342) (1,244,822) (1,080,143) (703,025) (601,652)
Other income................ 643,620 211,463 406,865 25,441 8,250
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and cumulative effect
of change in accounting
principle................... 2,463,431 1,428,797 (586,643) (386,697) 338,010
Provision for income taxes:
Current..................... 550,000 380,000 10,000 5,957 123,000
Deferred.................... 309,771 220,068 (295,322) 185,090 --
----------- ----------- ----------- ----------- -----------
859,771 600,068 (285,322) 191,047 123,000
Income before cumulative
effect of change in
accounting principle........ 1,603,660 828,729 (301,321) (577,744) 215,010
Cumulative effect of change in
accounting principle, net of
income tax of $96,000....... -- -- 187,255 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ 1,603,660 $ 828,729 $ (114,066) $ (577,744) $ 215,010
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-27
<PAGE> 128
PRODUCTION STAMPING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 4,186 $ 2,699
Accounts receivable:
Trade.................................................. 7,557,809 7,700,733
Related party.......................................... 316,093 142,354
Inventories............................................... 5,410,885 4,019,647
Prepaid expenses.......................................... 337,725 89,865
Notes and accounts receivable from officers............... 66,918 98,564
Deferred income taxes..................................... 481,483 453,253
----------- -----------
Total current assets................................. 14,175,099 12,507,115
Property and equipment, net................................. 15,214,640 12,973,416
Other assets................................................ 47,176 41,223
----------- -----------
$29,436,915 $25,521,754
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit....................................... $ 6,211,508 $ 6,134,576
Accounts payable.......................................... 12,538,176 10,682,724
Accrued liabilities....................................... 1,067,671 1,285,692
Current portion of long term debt......................... 1,231,593 907,831
Current portion of capital leases......................... 176,902 163,299
----------- -----------
Total current liabilities............................ 21,225,850 19,174,122
Long term debt.............................................. 2,856,898 2,617,294
Capital leases.............................................. 158,127 211,560
Deferred income taxes....................................... 544,000 206,000
Other liabilities........................................... 11,502 245,900
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 50,000 shares authorized, 30,000
shares issued and outstanding............................. 30,000 30,000
Paid-in-capital............................................. 522,944 522,944
Retained earnings........................................... 4,087,594 2,513,934
----------- -----------
4,640,538 3,066,878
----------- -----------
$29,436,915 $25,521,754
=========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 129
PRODUCTION STAMPING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994.................. 30,000 $30,000 $522,944 $1,829,271 $2,382,215
Net loss.................................. (114,066) (114,066)
------ ------- -------- ---------- ----------
Balance at June 30, 1995.................. 30,000 30,000 522,944 1,715,205 2,268,149
Dividend.................................. (30,000) (30,000)
Net income................................ 828,729 828,729
------ ------- -------- ---------- ----------
Balance at June 30, 1996.................. 30,000 30,000 522,944 2,513,934 3,066,878
Dividend.................................. (30,000) (30,000)
Net income................................ 1,603,660 1,603,660
------ ------- -------- ---------- ----------
Balance at June 30, 1997.................. 30,000 $30,000 $522,944 $4,087,594 $4,640,538
====== ======= ======== ========== ==========
</TABLE>
See accompanying notes.
F-29
<PAGE> 130
PRODUCTION STAMPING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CONDENSED
------------------------------
JULY 1, 1997 JULY 1, 1996
YEAR ENDED JUNE 30, TO TO
----------------------------------------- DECEMBER 7, DECEMBER 31,
1997 1996 1995 1997 1996
---- ---- ---- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............. $ 1,603,660 $ 828,729 $ (114,066) $ (577,744) $ 215,010
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation................ 3,364,549 3,000,058 2,126,842
Gain on disposal of property
and equipment............ (354,427) (43,197) (29,334)
Deferred taxes.............. 309,770 220,069 (295,322)
Change in operating assets and
liabilities:
Accounts and notes
receivable............... 831 854,185 (2,608,000)
Inventories................. (1,391,238) 471,619 (254,478)
Prepaid expenses............ (247,860) (7,510) 31,123
Other assets................ (5,953) (5,923) 21,698
Accounts payable............ 1,855,452 (878,883) 3,496,756
Accrued liabilities......... (218,023) 386,047 128,134
Other liabilities........... (234,398) 12,311 32,035
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities........ 4,682,363 4,837,505 2,535,388 (4,194,600) 1,923,051
INVESTING ACTIVITIES
Purchase of property and
equipment................ (5,605,844) (4,856,749) (4,528,906) (3,086,949) (2,352,981)
Proceeds from the sale of
property and equipment... 354,500 105,202 53,500 76,961
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.................. (5,251,344) (4,751,547) (4,475,406) (3,009,988) (2,352,981)
FINANCING ACTIVITIES
Net borrowings (payments) on
line of credit........... 76,932 (1,009,800) 2,311,529 5,992,650 (304,479)
Issuance of term debt....... 4,861,007 1,531,295 1,163,816 1,869,470 714,044
Repayment of term debt...... (4,337,471) (768,986) (1,619,277) (495,734) (1,903,038)
Dividend.................... (30,000) (30,000) (15,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........ 570,468 (277,491) 1,841,068 7,204,295 (1,493,473)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS........ 1,487 (191,533) (98,950) (293) (176)
Cash and equivalents at
beginning of year........... 2,699 194,232 293,182 4,186 2,699
----------- ----------- ----------- ----------- -----------
Cash and equivalents at end of
year........................ $ 4,186 $ 2,699 $ 194,232 $ 3,893 $ 2,523
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid................. $ 1,142,825 $ 1,258,886 $ 1,033,691
=========== =========== ===========
Income taxes paid............. $ 865,123 $ 373,567 $ 148,091
=========== =========== ===========
</TABLE>
See accompanying notes.
F-30
<PAGE> 131
PRODUCTION STAMPING, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Production Stamping, Inc. is a manufacturer of metal stampings with
production facilities located in New Baltimore and Oxford, Michigan. The
company's primary customer is General Motors Corporation.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month periods ended December 31, 1997 and 1996 are
not necessarily indicative of the results that may be expected for a similar
period ending December 31, 1998. For further information, refer to the combined
financial statements of Talon Automotive Group and footnotes thereto included
elsewhere herein.
CASH AND CASH EQUIVALENTS
The company considers all short term investments with an original maturity
of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market (first-in, first-out
method), except for tooling in progress, which is determined on a specific
identification basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are determined by the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Machinery and equipment..................................... 3 - 20
Forklifts and shop vehicles................................. 1 - 7
Vehicles.................................................... 3 - 8
Furniture and fixtures...................................... 5 - 8
Leasehold improvements...................................... 3 - 40
Tools, dies and fixtures.................................... 3 - 10
</TABLE>
REVENUE RECOGNITION
Revenue from sales is recorded upon shipment of product to the customer.
The companies recognize revenue with respect to pre-production tooling contracts
on the completed contract basis. Provisions are made for losses in the year in
which the losses are first determinable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate fair value.
The fair value of the Company's bank line of credit and long term debt
approximates the reported amounts at June 30, 1997 since their respective
interest rates approximate the June 30, 1997 market rates for similar debt
instruments.
F-31
<PAGE> 132
PRODUCTION STAMPING, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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.
2. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $38,688 and $1,688 at June 30, 1997
and 1996, respectively.
3. NOTES AND ACCOUNTS RECEIVABLE -- OFFICERS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note receivable from officer/stockholder, payable in
monthly installments of $1,245 including interest at 10%,
due in 1997.............................................. $ 6,073 $19,659
Note receivable from officer/stockholder, payable in
monthly installments of $804 including interest at 9%,
due in 1998.............................................. 9,202 17,616
Loan from officer, payable in weekly installments of $200
with no interest, due in 1998............................ 31,643 41,289
Loan from officer, due on demand with no interest.......... 20,000 20,000
------- -------
$66,918 $98,564
======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw material and supplies............................. $2,324,869 $1,390,611
Work-in-process....................................... 644,300 743,758
Finished goods........................................ 1,495,389 1,319,515
Tooling in progress................................... 946,327 565,763
---------- ----------
$5,410,885 $4,019,647
========== ==========
</TABLE>
In 1995, the Company changed its method of accounting for supplies and
packaging inventories. The Company previously expensed supplies and packaging
materials as they were purchased.
F-32
<PAGE> 133
PRODUCTION STAMPING, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property, plant and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Property and equipment:
Machinery and equipment......................... $ 20,774,817 $ 17,111,495
Forklifts and shop vehicles..................... 593,896 589,184
Tools, dies and fixtures........................ 2,235,846 1,692,488
Leasehold improvements.......................... 3,278,794 2,816,075
Office furniture and fixtures................... 1,700,606 1,311,871
Vehicles........................................ 36,687 70,791
Construction in progress........................ 786,776 871,150
Property under capital leases................... 682,833 512,246
------------ ------------
30,090,255 24,975,300
Less: accumulated depreciation and
amortization................................. (14,875,615) (12,001,884)
------------ ------------
$ 15,214,640 $ 12,973,416
============ ============
</TABLE>
6. BANK LINE OF CREDIT
The Company's bank line of credit, which has a balance of $6,211,508 as of
June 30, 1997, provides for a maximum borrowing base of the lesser of (A)
$13,500,000 or (B) 85% of eligible accounts receivable plus 60% of the eligible
inventories (capping at $2,225,000), plus an additional borrowing base that
fluctuates during the year. The line of credit bears interest at 0.50% over
prime, and is secured by substantially all assets of the Company.
The line of credit agreement requires the company to maintain specified
current and long term debt to net worth ratios, and a minimum net worth. The
Company is in compliance with all covenants as of June 30, 1997.
7. LONG TERM DEBT
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable in monthly installments of $82,452 plus
interest at 0.75% over prime (9.25% at June 30, 1997),
secured by equipment, due in 2000......................... $ 3,113,870 $ --
Note payable in monthly installments of $12,561 plus
interest at 0.75% over prime (9.25% at June 30, 1997),
secured by equipment, due in 2001......................... 475,871 --
Note payable in monthly installments of $8,313 plus interest
at 0.75% over prime (9.25% at June 30, 1997), secured by
equipment, due in 2002.................................... 498,750 --
Note payables with monthly installments ranging from $3,583
to $32,898 through 2001, plus interest ranging from 0.25%
to 0.75% over prime, secured by equipment................. -- 3,525,125
----------- ----------
4,088,491 3,525,125
Less: current portion....................................... (1,231,593) (907,831)
----------- ----------
$ 2,856,898 $2,617,294
=========== ==========
</TABLE>
F-33
<PAGE> 134
PRODUCTION STAMPING, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Annual maturities of long term debt are as follows:
<TABLE>
<S> <C>
1998...................................................... $1,231,593
1999...................................................... 1,239,905
2000...................................................... 1,239,906
2001...................................................... 269,024
2002 and thereafter....................................... 108,063
----------
$4,088,491
==========
</TABLE>
8. CAPITAL LEASES
Property under capital leases is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment................................................. $ 682,833 $ 512,246
Less: accumulated depreciation............................ (343,959) (131,696)
--------- ---------
$ 338,874 $ 380,550
========= =========
</TABLE>
Future minimum lease payments under capital leases are as follows:
<TABLE>
<S> <C>
1998...................................................... $213,495
1999...................................................... 179,678
2000...................................................... 14,941
--------
Total minimum lease payments.............................. 408,114
Less: amounts representing interest....................... (73,085)
--------
Present value of net minimum lease payments............... $335,029
========
</TABLE>
9. INCOME TAXES
The components of deferred income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax asset:
Capitalized start-up costs................................ $ 312,493 $ 350,264 $453,322
AMT credit................................................ 163,000 126,000 2,000
Other..................................................... 5,990 (23,011) 86,600
--------- --------- --------
Total net deferred tax asset.............................. 481,483 453,253 541,922
Deferred tax liability:
Property and equipment.................................... (544,000) (206,000) (74,600)
--------- --------- --------
Net deferred tax liability................................ $ (62,517) $ 247,253 $467,322
========= ========= ========
</TABLE>
The reconciliation of income taxes computed at the statutory tax rates and
the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxes at statutory rates.................................... $ 837,507 $485,791 $(199,459)
Other....................................................... 22,204 114,277 (85,863)
--------- -------- ---------
$ 859,771 $600,068 $(285,322)
========= ======== =========
</TABLE>
F-34
<PAGE> 135
PRODUCTION STAMPING, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10. DEFINED BENEFIT PENSION PLAN
The Company has a defined benefit pension plan which covers all of its
employees not covered under the terms of a collective bargaining agreement and
who meet the minimum qualifications. The benefits are based on years of service
and the employee's compensation during employment. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions were intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future.
The pension plan was frozen as of June 30, 1997. At that date, all
participants became 100% vested in the accumulated benefits, but would not
accrue any future benefits based on increases in compensation or additional
years of service. The Company intends to terminate the plan and all benefits
under the plan are expected to be paid to participants by June 30, 1998.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation. (all vested).............. $1,718,743 $1,513,471
========== ==========
Projected benefit obligation for service rendered to date... $1,718,743 $1,918,268
Plan assets at fair value, primarily listed stocks and U.S.
bonds..................................................... 1,707,241 1,275,914
---------- ----------
Projected benefit obligation in excess of plan assets....... 11,502 642,354
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions........ -- (148,593)
Unrecognized net obligation at July 1, 1995 being recognized
over 15 years............................................. -- (247,861)
---------- ----------
Unfunded accrued pension cost............................... $ 11,502 $ 245,900
========== ==========
</TABLE>
Net pension expense includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the
period..................................... $ 179,412 $ 141,549 $ 143,616
Interest cost on projected benefit
obligation................................. 159,685 151,393 131,186
Actual return on plan assets................. (212,744) (180,226) (142,069)
Net amortization and deferral................ 131,999 92,580 75,533
--------- --------- ---------
Net period pension cost before curtailment... 258,352 205,296 208,266
Effect of curtailment........................ (242,480) -- --
--------- --------- ---------
Net period pension cost...................... $ 15,872 $ 205,296 $ 208,266
========= ========= =========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.0% and 6.0%, in 1997 and 1996. The expected
long term rate of return on plan assets was 8.0% in each year.
11. DEFINED CONTRIBUTION PLANS
The Company sponsors two defined contribution plans with deferred
compensation (401k) provisions, one covering union employees, and one covering
non-union employees. In May, 1996, the Company began matching 10% of certain
union employee contributions, up to a maximum of $20 per employee per month.
Total Company contributions for 1997, 1996 and 1995 aggregated $9,160, $2,900,
and $2,900, respectively. There is no matching provision in the non-union plan.
F-35
<PAGE> 136
PRODUCTION STAMPING, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12. LEASE COMMITMENTS
The Company leases two of its buildings from an officer of the Company. The
leases, which provide for monthly rents of $30,238 and $3,800 plus taxes and
insurance, expire November 1, 1998 and November 30, 2004, respectively. Rent
expense for the years ended June 30, 1997, 1996 and 1995 aggregated $408,456 for
each fiscal year.
The Company has also guaranteed the related mortgage and land contract
secured by the buildings it leases. Balances outstanding under these obligations
at June 30, 1997 amounted to $2,286,200.
The Company also leases two other facilities from unrelated parties. The
leases provide for monthly rents of $30,578 and $6,160, plus taxes and insurance
with provisions for annual increases. The leases expire on March 31, 2000 and
June 30, 1998, respectively. Rent expense for 1997, 1996 and 1995 aggregated
$426,980, $408,483, and $295,235, respectively.
The Company also leases a warehouse from a related corporation which
expires August 1, 1999 with a monthly rent of $12,000. Rent expense for 1997,
1996 and 1995 aggregated $144,000, $144,000, and $119,000, respectively.
Minimum rentals due under operating leases:
<TABLE>
<S> <C>
1998........................................................ $1,006,177
1999........................................................ 827,319
2000........................................................ 504,544
2001........................................................ 15,200
----------
$2,353,240
==========
</TABLE>
13. EQUIPMENT PURCHASE COMMITMENTS
The Company has committed to the purchase of two pieces of equipment for
$1,800,000 to be delivered in September, 1997.
14. CONCENTRATION OF CREDIT RISK
At June 30, 1997 and 1996, respectively, $4,652,000 and $6,007,000 of the
Company's accounts receivable were from General Motors Corporation.
15. RELATED PARTY TRANSACTIONS
The Company subcontracts certain painting, welding and stamping activities
to two entities owned by certain officers of the Company. The subcontract costs
amounted to $1,222,000, $434,000 and $0 for the years ended June 30, 1997, 1996
and 1995, respectively. The related accounts payable amounted to $69,000 and
$91,000 at June 30, 1997 and 1996, respectively. In addition, the Company has
made advances to the subcontractors which amounted to $316,093 and $142,354 as
of June 30, 1997 and 1996, respectively. The Company also leases two of its
buildings and a warehouse from an officer of the Company and a related
corporation, respectively (See Note 12).
F-36
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Veltri Group
We have audited the accompanying combined balance sheet of Veltri Group as
of November 8, 1996, and the related combined statements of operations, net
capital deficiency, and cash flows for the period from January 1, 1996 to
November 8, 1996. These financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Veltri Group at
November 8, 1996, and the results of its operations and its cash flows for the
period January 1, 1996 to November 8, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
March 17, 1998
F-37
<PAGE> 138
VELTRI GROUP
COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 8, 1996
<TABLE>
<S> <C>
Net sales................................................... $67,680,901
Cost of products sold....................................... 55,581,817
-----------
Gross profit........................................... 12,099,084
Selling, general and administrative expenses................ 7,128,377
-----------
Income from operations................................. 4,970,707
Other expenses (income):
Interest.................................................. 3,988,044
Foreign currency.......................................... (455,799)
Other..................................................... 563,344
-----------
Income before income taxes.................................. 875,118
Provision for income taxes -- deferred...................... 272,062
-----------
Net income............................................. $ 603,056
===========
</TABLE>
See accompanying notes.
F-38
<PAGE> 139
VELTRI GROUP
COMBINED BALANCE SHEET
NOVEMBER 8, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 10,337,972
Accounts receivable, less allowance of $167,300........... 13,463,360
Inventory................................................. 3,974,637
Income taxes receivable................................... 95,188
Prepaid expenses and other assets......................... 151,144
------------
Total current assets................................. 28,022,301
Property, plant and equipment............................... 23,924,965
Less accumulated depreciation............................. (11,379,627)
------------
12,545,338
------------
$ 40,567,639
============
LIABILITIES AND NET CAPITAL DEFICIENCY
CURRENT LIABILITIES
Note payable to bank...................................... $ 14,458,101
Accounts payable.......................................... 11,135,589
Deferred tooling revenue.................................. 2,045,946
Accrued liabilities....................................... 4,257,797
Current portion of long term debt......................... 1,445,243
------------
Total current liabilities............................ 33,342,676
Long term debt.............................................. 8,399,916
Deferred income tax......................................... 186,301
Due to shareholder.......................................... 186,145
NET CAPITAL DEFICIENCY
Common stock................................................ 144,867
Retained earnings (deficit)................................. (1,701,223)
Accumulated translation adjustment.......................... 8,957
------------
(1,547,399)
------------
$ 40,567,639
============
</TABLE>
See accompanying notes.
F-39
<PAGE> 140
VELTRI GROUP
COMBINED STATEMENT OF CHANGES IN NET CAPITAL DEFICIENCY
FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 8, 1996
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS TRANSLATION
STOCK (DEFICIT) ADJUSTMENT TOTAL
------ --------- ----------- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1996..................... $144,867 $(2,757,393) $12,799 $(2,599,727)
Capital contribution........................... -- 453,114 -- 453,114
Net income..................................... -- 603,056 -- 603,056
Foreign currency translation................... -- -- (3,842) (3,842)
-------- ----------- ------- -----------
Balance at November 8, 1996.................... $144,867 $(1,701,223) $ 8,957 $(1,547,399)
======== =========== ======= ===========
</TABLE>
See accompanying notes.
F-40
<PAGE> 141
VELTRI GROUP
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 8, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 603,056
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 1,309,254
Deferred taxes............................................ (13,102)
Changes in operating assets and liabilities:
Accounts receivable....................................... 2,668,122
Inventories............................................... 2,361,073
Prepaid expenses.......................................... 78,977
Income tax receivable..................................... 370,465
Accounts payable.......................................... (253,669)
Accrued liabilities....................................... 3,940,526
-----------
Net cash provided by operating activities................... 11,064,702
INVESTING ACTIVITIES
Additions to property and equipment....................... (1,111,228)
Proceeds from sale of equipment........................... 223,436
-----------
Net cash used in investing activities....................... (887,792)
FINANCING ACTIVITIES
Payments on long term borrowings.......................... (7,426,432)
Net increase in short term borrowings..................... 7,138,222
Capital contribution...................................... 453,114
-----------
Net cash provided by financing activities................... 164,904
-----------
Translation adjustment...................................... (3,842)
NET INCREASE IN CASH........................................ 10,337,972
Cash at beginning of period................................. --
-----------
Cash at end of period....................................... $10,337,972
===========
SUPPLEMENTAL CASH FLOW INFORMATION
Note receivable from shareholder contributed to capital..... $ 453,114
===========
</TABLE>
See accompanying notes.
F-41
<PAGE> 142
VELTRI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 8, 1996
1. BASIS OF ACCOUNTING
The combined financial statements of Veltri Group (the Group) are presented
in United States dollars and are prepared in accordance with accounting
principles generally accepted in the United States. The Group (formerly known as
Veltri International) conducts its operations in Canada and its functional
currency is the Canadian dollar. The Group includes the accounts of the
following companies, all of which are affiliated through common ownership:
- Veltri Holdings Limited, and its subsidiary companies Veltri
Stamping Corporation, Veltri Glencoe Ltd. and Talbot Assembly, Ltd.
- North American Precision Tool Ltd.
- Veltri Holdings U.S.A., Inc. (a U.S.A. Corporation)
- MTJ Enterprises Inc. (a U.S.A. Corporation)
- Andrea-Teresa-Frank, Inc. (a U.S.A. Corporation)
2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Group is a manufacturer of metal stampings that are sold primarily to
customers in the automotive industry. Sales to one customer accounted for
approximately 82% of sales for the period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, deposits in banks and
short-term marketable securities with maturities of 90 days or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the combined balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value. The fair value of the Group's bank line of credit and long-term debt
approximates the reported amounts at November 8, 1996 since their respective
interest rates approximate current market rates for similar debt instruments.
INVENTORIES
Inventories are stated at cost, not in excess of market, using the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. Straight-line and accelerated
methods of depreciation are used for both financial reporting and income tax
purposes.
REVENUE RECOGNITION AND PRE-PRODUCTION TOOLING
Revenue from sales is recorded upon shipment of product to the customer.
Pre-production tools used in Company operations are requisitioned by the
Company's customers and are purchased from tool builders who construct the tools
under Company supervision. Once customer approval is obtained for the
manufacture of a new product, the Company is reimbursed by its customer for the
cost of the tooling, at which time the tooling becomes the property of the
customer. Provisions are made for losses in the year in which the losses are
first
F-42
<PAGE> 143
VELTRI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 8, 1996
determinable. Deferred tooling revenue includes progress billings of $1,659 and
$21,140, net of pre-production tooling costs of $236 and $19,018 at December 31,
1996 and 1996, respectively. Deferred tooling revenue includes progress billings
of $18,841,015, net of pre-production tooling costs of $16,795,069 at November
8, 1996.
FOREIGN CURRENCY TRANSLATION
All balance sheet items have been translated from Canadian dollars into
United States dollars at the rate of exchange in effect as of the balance sheet
date. For revenues, expenses, gains and losses, an appropriate weighted average
exchange rate for the period was used.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. INVENTORY
Inventory consisted of the following at November 8 1996:
<TABLE>
<S> <C>
Raw materials............................................... $ 956,889
Work in process............................................. 1,003,592
Finished goods.............................................. 974,034
Pre-production tooling...................................... 1,040,122
----------
$3,974,637
==========
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<S> <C>
Land........................................................ $ 138,185
Buildings and leasehold improvements........................ 3,815,815
Machinery and equipment..................................... 19,576,953
Furniture and fixtures...................................... 394,012
-----------
23,924,965
Less accumulated depreciation............................... (11,379,627)
-----------
Net carrying amount......................................... $12,545,338
===========
</TABLE>
5. BANK LINE OF CREDIT AND LONG TERM DEBT
The Group has a $16,504,000 line of credit with a bank. The line of credit
is secured by substantially all assets of the Group and bears interest at a base
rate plus one percent (9.75% at November 8, 1996). The balance outstanding is
$14,458,101 at November 8, 1996.
F-43
<PAGE> 144
VELTRI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 8, 1996
Long term debt consisted of the following:
<TABLE>
<S> <C>
Equipment capital lease obligation, bearing interest at an
effective rate of 9.37% maturing in June, 1997. Interest
and principal are payable monthly......................... $ 145,256
Term notes secured by the assets of the Group maturing in
December 2000 and December 2001. The notes bear interest
at the prime rate plus 1.0% (9.75% on November 8,
1996)..................................................... 9,699,903
----------
9,845,159
Amounts due within one year................................. (1,445,243)
----------
Total long term debt........................................ $8,399,916
==========
</TABLE>
The amount due to shareholder bears interest at a Canadian chartered bank's
prime rate plus 2.0% and is payable on demand. The shareholder's intention is
not to seek repayment within the next fiscal period.
The aggregate annual maturities of long-term debt over the next five years,
are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,445,243
1998........................................................ 1,924,981
1999........................................................ 2,024,980
2000........................................................ 2,070,654
2001 and thereafter......................................... 2,379,301
----------
$9,845,159
==========
</TABLE>
6. COMMITMENTS
The Group leases facilities and equipment under operating leases with
minimum rental commitments as of November 8, 1996 as follows:
<TABLE>
<S> <C>
1997........................................................ $ 549,245
1998........................................................ 153,463
1999........................................................ 177,618
2000........................................................ 290,200
2001........................................................ 302,086
Thereafter.................................................. 402,781
----------
Total minimum lease payments................................ $1,875,393
==========
</TABLE>
Rent expense aggregated $229,393 for the period ended November 8, 1996.
F-44
<PAGE> 145
VELTRI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 8, 1996
7. CAPITAL STOCK
Capital Stock is comprised of the following:
<TABLE>
<S> <C>
Veltri Holdings Limited 6.0%, non-cumulative, non voting
redeemable Class A shares. Authorized 995,000 shares and
issued 187,292 shares -- stated value..................... $140,432
Veltri Holdings Limited variable rate to 12.0%, redeemable,
retractable, non-voting, non-cumulative Class B shares.
Authorized 1,000 shares and issued 1,000 shares -- stated
value..................................................... 1,312
Veltri Holdings Limited common shares. Authorized unlimited
number of shares and issued 100 shares -- stated value.... 75
North American Precision Tool Ltd. common shares. Authorized
unlimited number and issued 100 shares -- stated value.... 75
Veltri Holdings U.S.A., Inc. $0.75 par value common shares.
Authorized 1,000 shares and issued 1,000 shares........... 991
MTJ Enterprises, Inc. $0.75 par value common shares.
Authorized and issued 1,000 shares........................ 991
Andrea-Teresa-Frank, Inc. $0.75 par value common shares.
Authorized and issued 1,000 shares........................ 991
--------
$144,867
========
</TABLE>
The Veltri Holdings Limited Class B shares are redeemable by the Company at
a price of $5,400 per share and retractable at their stated value.
The Veltri Holdings Class A shares are redeemable by the Company at a price
of $0.75 per share.
There are no redemption or retraction requirements for Class A or Class B
shares.
8. INCOME TAXES
The shareholder of the U.S.A. corporations included in these financial
statements has elected to be treated under Subchapter S of the Internal Revenue
Code, whereby any tax liability or tax recovery is the responsibility of the
shareholder or is the shareholder's personal credit. The remainder of the Group
is incorporated as a C Corporation and is subject to Canadian income tax.
The components of deferred income taxes is as follows:
<TABLE>
<S> <C>
Liabilities:
Depreciation.............................................. $1,336,641
Other..................................................... 95,665
----------
1,432,306
Assets:
Loss carry forward........................................ 1,051,468
Product warranty.......................................... 194,537
----------
1,246,005
----------
Net deferred tax liability.................................. $ 186,301
==========
</TABLE>
F-45
<PAGE> 146
VELTRI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 8, 1996
The reconciliation of income taxes computed at the statutory tax rate and
the provision for income taxes is as follows:
<TABLE>
<S> <C>
Taxes at statutory rates.................................... $311,717
Income not subject to corporate tax......................... (39,655)
--------
$272,062
========
</TABLE>
The Group had income tax loss carry forwards of approximately $3,084,000 at
November 8, 1996, which expire in 2001.
9. SALE OF GROUP
On November 8, 1996, the outstanding capital stock of all the entities
constituting the Veltri Group, except MTJ Enterprises, Inc. ("MTJ") and
Andrea-Teresa-Frank, Inc. ("ATF"), was acquired by Talon Automotive Group. The
Group was amalgamated into Veltri Metal Products Co. An amalgamation is a
commonly used method of merging Canadian companies. The Company performed an
amalgamation to achieve certain tax benefits in Canada.
F-46
<PAGE> 147
INDEPENDENT AUDITORS' REPORT
The Shareholders
Veltri International:
We have audited the accompanying combined balance sheet of Veltri
International as of December 31, 1995, and the related combined statements of
operations and accumulated deficit, and cash flows for the year then ended.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Veltri International
as of December 31, 1995, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Detroit, Michigan
April 24, 1998
F-47
<PAGE> 148
VELTRI INTERNATIONAL
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS (NOTE 5)
Current assets:
Accounts receivable....................................... $16,131,481
Inventory (note 2)........................................ 4,289,765
Income taxes recoverable and deferred (note 8)............ 266,250
Prepaid expenses and other assets......................... 230,122
-----------
20,917,618
Property, plant and equipment, net (note 3)................. 12,966,800
-----------
$33,884,418
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank overdraft (note 5)................................... $ 7,319,879
Accounts payable.......................................... 8,178,315
Accrued liabilities....................................... 3,528,214
Current portion of long-term debt (note 5)................ 16,692,913
-----------
35,719,321
Long-term debt (note 5)..................................... 107,286
Due to shareholder (note 4)................................. 657,538
Shareholders' deficiency:
Capital stock (note 6).................................... 144,867
Accumulated deficit....................................... (2,757,393)
Currency translation adjustment........................... 12,799
-----------
(2,599,727)
Commitments (note 9)........................................
-----------
$33,884,418
===========
</TABLE>
See accompanying notes to combined financial statements.
F-48
<PAGE> 149
VELTRI INTERNATIONAL
COMBINED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net sales................................................... $70,331,139
Cost of goods sold.......................................... 59,227,501
-----------
Gross profit........................................... 11,103,638
Selling, general and administrative......................... 8,481,102
Restructuring (note 7)...................................... 3,840,740
-----------
Loss from operations........................................ (1,218,204)
Other expense (income):
Interest, net............................................. 2,630,530
Foreign exchange gain..................................... (458,917)
-----------
Loss before taxes........................................... (3,389,817)
Income tax benefit (note 8):
Current................................................... 67,960
Deferred.................................................. 846,630
-----------
914,590
-----------
Net loss.................................................... (2,475,227)
Accumulated deficit, beginning of year...................... (282,166)
-----------
Accumulated deficit, end of year............................ $(2,757,393)
===========
</TABLE>
See accompanying notes to combined financial statements.
F-49
<PAGE> 150
VELTRI INTERNATIONAL
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,475,227)
Adjustments of reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 2,152,773
Deferred income taxes.................................. (846,630)
Gain on sale of property, plant and equipment.......... (35,692)
Write down of property, plant and equipment............ 1,678,917
Foreign currency gain.................................. (307,764)
Net changes in non-cash operating working capital
balances:
Accounts receivable.................................. (750,764)
Inventory............................................ 5,727
Prepaid expenses and other assets.................... 7,240
Accounts payable and accrued liabilities............. 1,698,316
Income taxes recoverable............................. 324,967
-----------
Net cash provided by operating activities....... 1,451,863
Cash flows from investing activities:
Purchase of capital assets................................ (1,728,264)
Proceeds on disposal of capital assets.................... 194,153
-----------
Net cash used in investing activities........... (1,534,111)
Cash flows from financing activities:
Decrease in due to shareholder............................ (64,644)
Repayments of long-term debt.............................. (181,161)
-----------
Net cash used in financing activities........... (245,805)
-----------
Increase in bank overdraft.................................. (328,053)
Bank overdraft, beginning of year........................... (6,991,826)
-----------
Bank overdraft, end of year................................. $(7,319,879)
===========
</TABLE>
See accompanying notes to combined financial statements.
F-50
<PAGE> 151
VELTRI INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Business
Veltri International (the "Company") is primarily engaged in the
manufacture of metal stampings for the automotive industry. Sales to one
customer represented approximately 75% of sales for the year.
(b) Basis of Presentation
The combined financial statements include the accounts of the
following companies, all of which are affiliated through common ownership:
- Veltri Holdings Limited, and its subsidiary companies Veltri Stamping
Corporation, Veltri Glencoe Ltd. and Talbot Assembly, Ltd.
- North American Precision Tool Ltd.
- Veltri Holdings U.S.A., Inc. (a U.S.A. Corporation)
- MTJ Enterprises Inc. (a U.S.A. Corporation)
- Andrea-Teresa-Frank, Inc. (a U.S.A. Corporation)
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity of three months or less to be a cash equivalent.
(d) Inventory
Finished goods, work in process and pre-production tooling are valued
at the lower of cost or net realizable value. Raw materials are valued at
the lower of cost or replacement cost.
(e) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
calculated on a straight-line or accelerated basis over the estimated
useful lives of the assets.
(f) Revenue recognition
The company recognizes revenue with respect to pre-production tooling
contracts on the completed contract basis. A provision is made for the
amount of any losses on these contracts in the year in which the losses are
first determinable.
(g) Foreign Currency Translation
The functional currency of the Company's Canadian operations is the
Canadian dollar. Assets and liabilities of these entity's are translated at
the rates of exchange on the balance sheet data. Income and expense items
are translated at average monthly rates of exchange.
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-51
<PAGE> 152
VELTRI INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
2. INVENTORY
Inventory consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Raw materials............................................... $1,128,097
Work in process............................................. 788,490
Finished goods.............................................. 1,234,335
Pre-production tooling...................................... 933,685
Returnable containers....................................... 205,158
----------
$4,289,765
==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at December 31,
1995:
<TABLE>
<S> <C>
Land........................................................ $ 300,871
Buildings and leasehold improvements........................ 4,616,282
Machinery and equipment..................................... 17,848,853
Furniture and fixtures...................................... 398,665
------------
23,164,671
Less accumulated depreciation............................... (10,197,871)
------------
$ 12,966,800
============
</TABLE>
4. DUE TO SHAREHOLDER
The amount due to shareholder bears interest at a Canadian chartered bank's
prime rate plus 2% and is payable on demand. The shareholder's intention is not
to seek repayment within one year of the balance sheet date.
5. LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 1995:
<TABLE>
<S> <C>
Canadian currency 12.55% Bankers' Acceptance, due January
1996...................................................... $ 733,138
Canadian currency 14.32% Bankers' acceptance, due January
1996...................................................... 1,466,276
LIBOR loan bearing interest at the LIBOR rate plus 2.5%, due
February 1998............................................. 4,000,000
LIBOR loans bearing interest at the LIBOR rate plus 2.5%,
due March 1996............................................ 4,200,000
LIBOR loan bearing interest at the LIBOR rate plus 3%, due
January 1996.............................................. 5,000,000
10.5% demand mortgage payable............................... 1,094,233
Canadian currency equipment capital lease obligation,
bearing interest at an effective rate of 9.37%, repayable
monthly in blended payments of $25,062, due June 1997..... 306,552
------------
16,800,199
Less current portion of long-term debt...................... (16,692,913)
------------
Long term debt, excluding current portion................... $ 107,286
============
</TABLE>
At December 31, 1995 the Company was not in compliance with several
covenants in its banking agreement. As a result, all of the debt, excluding a
portion of the capital lease obligation, has been deemed to be on a demand basis
and is classified as a current liability on the balance sheet.
F-52
<PAGE> 153
VELTRI INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
5. LONG-TERM DEBT -- (CONTINUED)
The bankers' acceptances and LIBOR loans are secured by inventory, accounts
receivable, and certain real estate holdings. Operating advances made to the
Company from time to time, which are disclosed as part of cash overdraft on the
balance sheet, bear interest at a Canadian chartered bank's prime rate plus 1.5%
and are secured as previously described.
The mortgage payable is secured by real property in the United States and
the capital lease obligation is secured by the equipment to which it relates.
Principal repayments required over the next three years on all long-term
debt except the capital lease obligation are approximately as follows:
<TABLE>
<S> <C>
1996........................................................ $13,993,647
1997........................................................ 1,000,000
1998........................................................ 1,500,000
</TABLE>
The following is a schedule of future minimum lease payments under the
capital lease obligation expiring June 1997 together with the balance of the
obligation under capital lease.
<TABLE>
<S> <C>
1996........................................................ $220,487
1997........................................................ 110,243
--------
330,730
Less amount representing interest at 9.37%.................. (24,178)
--------
Balance of the obligation................................... $306,552
========
</TABLE>
6. CAPITAL STOCK
Capital stock is comprised of the following at December 31, 1995:
<TABLE>
<S> <C>
Veltri Holdings Limited 6%, non-cumulative, non-voting
redeemable Class A shares. Authorized 995,000 shares and
issued 187,292 shares -- stated value..................... $140,432
Veltri Holdings Limited variable rate to 12%, redeemable,
retractable, non-voting, non-cumulative Class B shares.
Authorized 1,000 shares and issued 1,000 shares -- stated
value..................................................... 1,312
Veltri Holdings Limited common shares. Authorized unlimited
number of shares and issued 100 shares -- stated value.... 75
North American Precision Tool Ltd. common shares. Authorized
an unlimited number and issued 100 shares -- stated
value..................................................... 75
Veltri Holdings U.S.A., Inc. $1 par value common shares.
Authorized 1,000 shares and issued 1,000 shares........... 991
MTJ Enterprises, Inc. $1 par value common shares. Authorized
and issued 1,000 shares................................... 991
Andrea-Teresa-Frank, Inc. $1 par value common shares.
Authorized and issued 1,000 shares........................ 991
--------
$144,867
========
</TABLE>
The Veltri Holdings Limited Class B shares are redeemable at a price of
$5,400 per share. The Veltri Holdings Limited Class A shares are redeemable at a
price of $0.75 per share.
F-53
<PAGE> 154
VELTRI INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
7. RESTRUCTURING
During 1995, the Company decided to cease operations at its plant in
Indianapolis, Indiana and relocate certain of its business activities to plants
in Windsor and Glencoe, Ontario. The restructuring costs associated with the
shut-down and relocation of these operations, aggregating $3,840,740 are
comprised of the following:
<TABLE>
<S> <C>
Contract settlement......................................... $1,070,004
Write down of property, plant and equipment to estimated net
realizable value.......................................... 1,678,917
Severance................................................... 237,008
Other closing costs......................................... 854,811
----------
$3,840,740
==========
</TABLE>
8. INCOME TAXES
The shareholder of the U.S.A. corporations included in these financial
statements has elected to be treated under Subchapter S of the Internal Revenue
Code, whereby any tax liability or tax recovery is the responsibility of the
shareholder.
The components of deferred income taxes are as follows:
<TABLE>
<S> <C>
Assets:
Loss carryforward......................................... $351,000
Restructuring reserve..................................... 466,000
--------
Less: valuation allowance................................... (66,000)
--------
751,000
--------
Liabilities:
Depreciation.............................................. 663,000
Other..................................................... 2,000
--------
665,000
--------
$ 86,000
========
</TABLE>
At December 31, 1995, the Company had income tax loss carryforwards of
approximately $975,000 which expire in 2000.
The reconciliation of income taxes computed at the statutory rate and the
provision for income taxes is as follows:
<TABLE>
<S> <C>
Tax benefit at statutory rates.............................. $1,207,000
Losses not subject to corporate tax......................... (292,000)
----------
$ 915,000
==========
</TABLE>
9. COMMITMENTS
The Company leases several premises and is committed to the following
approximate annual costs over the next three years:
<TABLE>
<S> <C>
1996........................................................ $422,000
1997........................................................ 276,000
1998........................................................ 67,000
--------
</TABLE>
F-54
<PAGE> 155
VELTRI INTERNATIONAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
10. SUBSEQUENT EVENT
On November 8, 1996, the outstanding capital stock of all the entities
comprising Veltri International, except MTJ Enterprises Inc. and
Andrea-Teresa-Frank, Inc., was acquired by Talon Automotive Group. The Company
was amalgamated into Veltri Metal Products Co.
F-55
<PAGE> 156
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................... 2
Forward-Looking Information................. 2
Prospectus Summary.......................... 4
Risk Factors................................ 15
Use of Proceeds............................. 22
Capitalization.............................. 23
The Exchange Offer.......................... 24
Unaudited Pro Forma Condensed Combined
Financial Information..................... 32
Notes to Unaudited Pro Forma Condensed
Combined Financial Information............ 33
Unaudited Pro Forma Condensed Combined
Interim Financial Information............. 34
Selected Financial Data..................... 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 36
Business.................................... 44
Management.................................. 54
Principal Securityholders................... 59
Certain Relationships and Related
Transactions.............................. 61
Description of Senior Debt.................. 63
Description of New Notes.................... 65
Federal Income Tax Considerations Relating
to the Exchange Offer..................... 91
Old Notes; Registration Rights.............. 93
Book Entry; Delivery and Form............... 95
Plan of Distribution........................ 96
Legal Matters............................... 97
Experts..................................... 97
Index to Financial Statements............... F-1
</TABLE>
UNTIL , 1998, (40 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$120,000,000
[TALON AUTOMOTIVE GROUP, INC. LOGO]
TALON AUTOMOTIVE GROUP, INC.
9 5/8% SENIOR SUBORDINATED NOTES DUE 2008
------------------
PROSPECTUS
------------------
OFFER TO EXCHANGE
9 5/8% SENIOR SUBORDINATED
NOTES DUE 2008, SERIES A
FOR 9 5/8% SENIOR SUBORDINATED
NOTES DUE 2008, SERIES B
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------- ----------------------- ----------
<C> <S> <C>
5.1 Opinion of Dickinson Wright PLLC*
5.2 Opinion of Timmis & Inman, L.L.P.*
12.2 Pro Forma Computation of Ratio of Earnings to Fixed Charges*
23.1 Consent of Dickinson Wright PLLC (included in Exhibit 5.1)*
23.4 Consent Timmins & Inman, L.L.P. (included in Exhibit 5.2)*
23.2 Consent of Ernst & Young for the Company*
</TABLE>
- -------------------------
* Filed with this amendment
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities act of 1933, unless the information required to be included
in such post-effective amendment is contained in a periodic report filed
with or furnished to the Securities and Exchange Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 and incorporated by reference in this Registration
Statement;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement, unless the information required to be
included in such post-effective amendment is contained in a periodic
report filed with or furnished to the Securities and Exchange Commission
by the registrant pursuant to section 13 or Section 15(d) of the
Securities and Exchange Act of 1934 and incorporated by reference in
this Registration Statement; provided, however, that any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
II-1
<PAGE> 158
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities act of 1933, each filing of the registrant's Form 10-K pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item
20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b) 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(7) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-2
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this registration statement or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Troy, State of Michigan on the 3rd day of September, 1998.
TALON AUTOMOTIVE GROUP, INC.
By: /s/ DAVID J. WOODWARD
------------------------------------
David J. Woodward
Vice President of Finance,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act, as amended, this
registration statement or amendment thereto has been signed below by the
following persons in the capacities indicated and on September 3, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DELMAR O. STANLEY President, Chief Executive Officer and Director
- --------------------------------------------- (Principal Executive Officer)
Delmar O. Stanley
/s/ DAVID J. WOODWARD Vice President of Finance, Chief Financial Officer,
- --------------------------------------------- Treasurer and Director
David J. Woodward (Principal Financial and Accounting Officer)
/s/ RANDOLPH J. AGLEY Chairman of the Board
- ---------------------------------------------
Randolph J. Agley
/s/ MICHAEL T. TIMMIS Vice Chairman of the Board
- ---------------------------------------------
Michael T. Timmis
/s/ WAYNE C. INMAN Secretary and Director
- ---------------------------------------------
Wayne C. Inman
/s/ MICHAEL T.J. VELTRI Director
- ---------------------------------------------
Michael T.J. Veltri
</TABLE>
II-3
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this registration statement or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Troy, State of Michigan on the 3rd day of September, 1998.
VELTRI METAL PRODUCTS CO.
By: /s/ DAVID J. WOODWARD
------------------------------------
David J. Woodward
Vice President of Finance
and Treasurer
Pursuant to the requirements of the Securities Act, as amended, this
registration statement or amendment thereto has been signed below by the
following persons in the capacities indicated and on September 3, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MICHAEL T. J. VELTRI President
- --------------------------------------------- (Principal Executive Officer)
Michael T. J. Veltri
/s/ DAVID J. WOODWARD Vice President of Finance and, Treasurer
- --------------------------------------------- (Principal Financial and Accounting Officer)
David J. Woodward
/s/ RANDOLPH J. AGLEY Director
- ---------------------------------------------
Randolph J. Agley
/s/ MICHAEL T. TIMMIS Director
- ---------------------------------------------
Michael T. Timmis
/s/ WAYNE C. INMAN Vice President, Secretary and Director
- ---------------------------------------------
Wayne C. Inman
</TABLE>
II-4
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this registration statement or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Troy, State of Michigan on the 3rd day of September, 1998.
VELTRI HOLDINGS USA, INC.
By: /s/ DAVID J. WOODWARD
------------------------------------
David J. Woodward
Vice President and Treasurer
Pursuant to the requirements of the Securities Act, as amended, this
registration statement or amendment thereto has been signed below by the
following persons in the capacities indicated and on September 3, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MICHAEL T. J. VELTRI President (Principal Executive Officer)
- ---------------------------------------------
Michael T. J. Veltri
/s/ DAVID J. WOODWARD Vice President, Treasurer and Director
- --------------------------------------------- (Principal Financial and Accounting Officer)
David J. Woodward
/s/ RANDOLPH J. AGLEY Director
- ---------------------------------------------
Randolph J. Agley
/s/ MICHAEL T. TIMMIS Director
- ---------------------------------------------
Michael T. Timmis
/s/ WAYNE C. INMAN Vice President, Secretary and Director
- ---------------------------------------------
Wayne C. Inman
/s/ DELMAR O. STANLEY Director
- ---------------------------------------------
Delmar O. Stanley
</TABLE>
II-5
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this registration statement or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Troy, State of Michigan on the 3rd day of September, 1998.
VS HOLDINGS, INC.
By: /s/ DAVID J. WOODWARD
------------------------------------
David J. Woodward
Vice President of Finance and
Treasurer
Pursuant to the requirements of the Securities Act, as amended, this
registration statement or amendment thereto has been signed below by the
following persons in the capacities indicated and on September 3, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DELMAR O. STANLEY President, Chief Executive Officer and Director
- --------------------------------------------- (Principal Executive Officer)
Delmar O. Stanley
/s/ DAVID J. WOODWARD Vice President of Finance, Treasurer and Director
- --------------------------------------------- (Principal Financial and Accounting Officer)
David J. Woodward
/s/ RANDOLPH J. AGLEY Director
- ---------------------------------------------
Randolph J. Agley
/s/ MICHAEL T. TIMMIS Director
- ---------------------------------------------
Michael T. Timmis
/s/ WAYNE C. INMAN Vice President, Secretary and Director
- ---------------------------------------------
Wayne C. Inman
</TABLE>
II-6
<PAGE> 163
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
5.1 Opinion of Dickinson Wright PLLC*
5.2 Opinion of Timmis & Inman, L.L.P.*
12.2 Pro Forma Computation of Ratio of Earnings to Fixed Charges*
23.1 Consent of Dickinson Wright PLLC (included in Exhibit 5.1)*
23.4 Consent Timmins & Inman, L.L.P. (included in Exhibit 5.2)*
23.2 Consent of Ernst & Young for the Company*
</TABLE>
- -------------------------
* Filed with this amendment
<PAGE> 1
EXHIBIT 5.1
August 26, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Talon Automotive Group, Inc.
Gentlemen:
We are acting as counsel to Talon Automotive Group, Inc., a Michigan
corporation (the "Company"), in connection with an exchange offer pursuant to
which the Company is offering to exchange up to an aggregate principal amount
of $120 million of its 9 5/8% Senior Subordinated Notes due 2008, Series B (the
"New Notes") for up to an aggregate principal amount of $120 million of its
outstanding 9 5/8% Senior Subordinated Notes due 2008, Series A (the "Old
Notes"). The New Notes are described in a Registration Statement on Form S-4
(the "Registration Statement") filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
We have relied upon certificates of public officials and officers of the
Company, and upon the representations and warranties of the Company in the
Purchase Agreement, the Indenture, and the Guarantees with respect to the
factual matters contained therein and have not independently undertaken to
investigate or verify the same. We have also relied upon the opinion of Timmis
& Inman L.L.P. with respect to (i) the due organization, valid existence, and
due corporate and legal authority of the Company, and (ii) the due
authorization, execution and delivery by the Company of the New Notes in
exchange for the Old Notes.
Based upon our examination of such corporate records and other documents
and certificates as we deemed it necessary to examine, it is our opinion that
the New Notes, when issued, authenticated and delivered, will constitute the
valid and binding obligation of the Company enforceable according to their
terms and the terms of the Indenture dated as of April 28, 1998 between the
Company and U.S. Bank Trust National Association, as Trustee (the "Indenture").
The foregoing opinion is limited solely to the Federal laws of the United
States, the laws of the State of Michigan, and, with respect to the above
paragraph, the laws of the State of New York. We are expressing no opinion as
to the effect of the laws of any other jurisdiction and we have, with your
consent, with respect to the laws of the State of New York, relied upon the
opinion of Cahill Gordon & Reindel, attached as Exhibit A hereto, as to the
matters set forth in the above paragraph.
The enforceability of the rights and remedies of the parties to the
New Notes and the Indenture are subject to (i) the effect of any applicable
bankruptcy, insolvency, moratorium,
<PAGE> 2
reorganization, fraudulent conveyance, or other similar laws affecting creditors
rights generally and subject to the applicability of general principles of
equity, including the discretionary nature of specific performance, injunctive
relief, or other equitable remedies and the appointment of a receiver, and (ii)
any limitation on rights of indemnity and contribution thereunder imposed by
federal or state securities laws or principles of public policy.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our firm name under the caption "Legal
Matters" in the related Prospectus.
Very truly yours,
Dickinson Wright PLLC
<PAGE> 3
EXHIBIT A
[CAHILL GORDON & REINDEL LETTERHEAD]
August 26, 1998
Dickinson Wright PLLC
500 Woodward Avenue
Suite 4000
Detroit, MI 48226
Re: Talon Automotive Group, Inc.
Gentlemen:
We are acting as New York special counsel to Talon Automotive Group,
Inc., a Michigan corporation (the "Company"), in connection with an exchange
offer pursuant to which the Company is offering to exchange up to an aggregate
principal amount of $120 million of its 9 5/8% Senior Subordinated Notes due
2008, Series B (the "New Notes") for up to an aggregate principal amount of
$120 million of its outstanding 9 5/8% Senior Subordinated Notes due 2008,
Series A. The New Notes are described in a Registration Statement on Form S-4
(the "Registration Statement") filed by the Company which the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act").
In rendering the opinions set forth herein, we have examined originals,
photocopies or conformed copies, certified to our satisfaction, of all such
corporate records, agreements, instruments or documents of the Company and have
made such other investigations, as we have deemed necessary, in connection with
the opinions set forth herein. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals and the conformity to originals of all documents submitted to
us as photocopies or conformed copies.
<PAGE> 4
CAHILL GORDON & REINDEL
-2-
Based on the foregoing, we are of the opinion that as of the date
hereof, assuming the New Notes are duly authorized, executed and issued by the
Company and assuming due authentication thereof by the Trustee, the New Notes,
when issued, authenticated and delivered, will constitute the valid and binding
obligations of the Company enforceable in accordance with their terms and the
terms of the Indenture dated as of April 28, 1998 between the Company and U.S.
Bank Trust National Association, as Trustee, except that (A) the enforceability
thereof may be subject to bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance, or other similar laws now or hereafter in effect relating
to or affecting creditors rights and remedies generally and (B) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought, and subject to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
We are members of the Bar of the State of New York and do not purport
to be experts in, or to express any opinion concerning the laws of any
jurisdiction other than the laws of the State of New York.
This opinion is solely for your benefit in connection with your acting
as counsel to the Company in connection with the Registration Statement and your
opinion included as Exhibit 5.1 thereto (and for purposes of your opinion, you
may rely upon, and make appropriate reference in the Registration Statement to,
this opinion). Except as provided in the immediately preceding sentence, this
opinion may not be delivered to, used or relied upon for any other purpose or by
any other person without our prior written consent.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. In giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required by Section 7 of the Act and the rules and regulations thereunder.
Very truly yours,
Cahill Gordon & Reindel
<PAGE> 1
EXHIBIT 5.2
[TIMMIS & INMAN L.L.P. LETTERHEAD]
August 26, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: TALON AUTOMOTIVE GROUP, INC.
Gentlemen:
We have acted as counsel to Talon Automotive Group, Inc., a Michigan
corporation (the "Company"), in connection with the exchange offer pursuant to
which the Company is offering to exchange up to an aggregate principal amount
of $120 million of its 9 5/8% Senior Subordinated Notes due 2008, Series B (the
"New Notes") for up to an aggregate principal amount of $120 million of its
outstanding 9 5/8% Senior Subordinated Notes due 2008, Series A (the "Old
Notes"). The New Notes are described in Registration Statement on Form S-4
(the "Registration Statement"), to be filed by the Company with the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
In connection with such representation, we have examined and are
familiar with the following:
1. Certified copies of the Articles of Incorporation of the
Company, as amended, and resolutions adopted by the Board of
Directors of the Company on April 28, 1998, relating to the
issuance and exchange of the New Notes for the Old Notes; and
2. Such other certificates of officers of the Company and public
officials and other documents and records as we have considered
necessary and appropriate for us to examine in connection with
the opinions set forth herein.
We have, with your permission, relied upon and assumed the accuracy of
all records of the Company made available to us, certificates of public
officials, certificates and statements of officers and representatives of the
Company, the conformity to original documents of all documents submitted to us
as certified or photostatic copies, the authenticity of all documents submitted
to us as originals, the completeness of such documents and the genuineness of
all signatures. We have also assumed, without independent verification, the
legal capacity of all natural persons. Except as otherwise expressly set
forth herein, we have not reviewed any files or records of the Company, made
any
<PAGE> 2
TIMMIS & INMAN L.L.P.
Securities and Exchange Commission 2
- --------------------------------------------------------------------------------
inquiries of the Company or any search of public records or conducted any other
investigation concerning the matters referred to herein.
Based upon the foregoing, and subject to the other qualifications set
forth herein, it is our opinion that the New Notes have been duly authorized by
the Company for issuance in exchange for the Old Notes.
Our opinions herein contained are subject to each of the following
additional qualifications:
(a) We are qualified to practice law only in the State of
Michigan and we express no opinion concerning the applicability or
effect of any laws other than the laws of the State of Michigan and
the federal law of the United States;
(b) We express no opinion as to the enforceability of the
obligations under any document or agreement, or the availability of
any right or remedy under any document or agreement; and
(c) We express no opinion with respect to the effect of any
state or federal securities laws or regulations which may be
applicable to this transaction.
This letter is effective only as of the date hereof and does not
contemplate, nor is any opinion given, with respect to a subsequent change in
law or fact. In this regard, we expressly decline any undertaking to advise
you of any matter arising subsequent to the date hereof (including, but not
limited to, the existence of any fact or circumstance, the enactment of any law
or regulation or the issuance of any other, writ, judgment or decree) which
would cause us to amend any portion of the foregoing in whole or in part. We
hereby consent to the use of this opinion as Exhibit 5.2 to the Registration
Statement and to the use of our firm name under the caption "Legal Matters" in
the related Prospectus.
Very truly yours,
TIMMIS & INMAN L.L.P.
Richard M. Miettinen
<PAGE> 1
EXHIBIT 12.2
TALON AUTOMOTIVE GROUP
PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
(In thousands except for ratios)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JULY 4, DECEMBER 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Fixed Charges:
Interest expense $ 6,475 $ 12,569
Estimated interest portion of rents $ 261 $ 522
---------------- ---------------
Total fixed charges $ 6,736 $ 13,091
Earnings:
Earnings before fixed charges $ 6,529 (a) $ 10,633 (b)
Estimated Interest portion of rents $ 261 $ 522
---------------- ---------------
Adjusted earnings $ 6,790 $ 11,155
Ratio of Earnings to Fixed Charges 1.008 0.852
================ ===============
</TABLE>
(a) Includes gain on sale of assets of $198, foreign currency exchange loss of
$787 and excludes extraordinary expenses of $553 and special compensation
expense of $1,359.
(b) Includes a foreign currency exchange loss of $117 and excludes special
compensation expense of $2,702.
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 20, 1998 on the combined financial statements
and schedule of Talon Automotive Group, and Production Stamping, Inc., and of
our report dated March 17, 1998 on the combined financial statements of Veltri
Group, in Amendment No. 2 to the Registration Statement (Form S-4 No.
333-56461), and related Prospectus of Talon Automotive Group, Inc. for the
registration of $120,000,000 principal amount of 9-5/8% Senior
Subordinated Notes due 2008, Series B.
/s/ Ernst & Young LLP
Detroit, Michigan
September 1, 1998
