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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
-------- --------
COMMISSION FILE NUMBER 333-56461
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TALON AUTOMOTIVE GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-3382174
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
900 WILSHIRE DRIVE, SUITE 203, TROY, MICHIGAN 48084
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 362-7600
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
As of December 31, 1998, 4,074 shares of Class A Voting Common Stock
and 158,853 shares of Class B Non-Voting Common Stock of the Registrant were
outstanding. There is no public trading market for the Common Stock.
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TALON AUTOMOTIVE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item 1. Business........................................................... 3
Item 2. Properties......................................................... 10
Item 3. Legal Proceedings.................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders................ 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................ 11
Item 6. Selected Financial Data............................................ 11
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition.............................. 13
Item 8. Financial Statements and Supplementary Data........................ 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 18
PART III
Item 10. Directors and Executive Officers of the Registrant................ 18
Item 11. Executive Compensation............................................ 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 20
Item 13. Certain Relationships and Related Transactions.................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 24
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Talon Automotive Group, Inc. and its subsidiaries (collectively
referred to as 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 that constitute major structural
components of passenger cars, light trucks, and vans. The Company's products
include frame rails, inner quarter panels, crossmembers, cowls, bumpers, rear
back panels and trailer hitch assemblies.
The Company's four largest OEM customers, DaimlerChrysler Corporation
("DaimlerChrysler"), General Motors Corporation ("General Motors"), Ford Motor
Company ("Ford") and Honda Motor Co., Ltd. ("Honda") accounted for approximately
46%, 23%, 10% and 4%, respectively, of the Company's net sales for the year
ended December 31, 1998. The Company also sells its products to targeted Tier 1
suppliers. Platforms on which the Company had its most significant content in
1998 included:
Customer Platform
-------- --------
DaimlerChrysler LH Concorde/Intrepid, NS Minivan and AB Ram Van
General Motors GMT 400 and 800 Full-size Pickup/Tahoe/Suburban
GMT 325/330 Blazer/Jimmy and M-Van/Astro/Safari
Ford Explorer and Lincoln Continental
Honda LS Accord, BM Minivan and VC Civic
The Company has grown rapidly through a combination of strategic
acquisitions and new customer platform awards. As a result of these efforts, net
sales have increased at a compound annual growth rate of 63.8% from
approximately $56.8 million in 1995 to $249.8 million in 1998. 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 that can strengthen the Company's position as a
Tier 1 supplier and allow it to further capitalize on industry trends.
Consistent with this strategy, the Company's management team has completed three
acquisitions since the beginning of 1996 which include:
PRODUCTION STAMPING, INC. In December 1997, the Company acquired
Production Stamping, Inc. ("PSI"), a supplier of automotive stampings and
finished assemblies, including trailer hitches, airbag canisters, crossmembers
and other welded assemblies. Through this acquisition, the Company added
progressive and line die manufacturing capabilities and 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 and
significantly increased sales to General Motors.
VELTRI INTERNATIONAL. In November 1996, the Company acquired Veltri
International ("Veltri Group"), a manufacturer of high value-added assemblies
and detailed stampings. 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 DaimlerChrysler, and added new
customers, including Honda.
J&R MANUFACTURING. In September 1996, the Company acquired J&R
Manufacturing ("J&R"), a manufacturer of stamped metal prototype parts and
short-run production stampings, weldings and assemblies. 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.
On April 28, 1998, the Company completed a reorganization. As used in
this report on form 10-K, unless the context indicates otherwise, the "Company"
means (i) for periods prior to April 28, 1998, the business and operations 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 April 28, 1998, 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 are the same shareholders that owned each of the
Talon Entities and their respective ownership percentages
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did not change as a result of the mergers (see also Note 17 to the Company's
consolidated financial statements).
BUSINESS STRATEGY
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 OEM's are focusing their in-house stamping
operations on the outside 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 and modules. Since the
1980's, OEM's have reduced the number of their stamping suppliers by focusing on
companies that can manufacture high value-added assemblies and modules. 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 overall North American market for body and chassis stampings 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) full truck frames and engine cradles; and
(v) powertrain and other functional/mechanical 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. Key elements of the Company's strategy include the
following:
SUPPLY COMPLEX HIGH VALUE-ADDED MODULES AND SYSTEMS
Value-added assemblies represented approximately 75% of the Company's
1998 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 certain systems, including multiple assemblies and
integrated modules, such as:
System Components
- ------ ----------
Front-end Frame rails, bumpers, radiator supports, wheel house
inner panels and control arm assemblies
Front floor pan Floor pans, crossmembers and tunnel reinforcement
assemblies
Rear/back panel Back panels, quarter panels, rear frame rails, rear
wheel houses and rear floor pan assemblies.
As an example of the Company's progress in this area, the Company
increased its dollar content on the 1998 LH Concorde/Intrepid platform to $180
per vehicle from $115 per vehicle on the 1993 platform. This was achieved
primarily through stamping and welding additional components, thereby producing
a higher value-added assembly.
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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 and modules to fewer suppliers, the
Company believes Tier 1 suppliers with proven full-service capabilities will be
better positioned to secure such business. The Company believes its ability to
successfully manage all aspects of new business is a core competitive advantage
and the Company has established a program management methodology that has been
used by DaimlerChrysler as a benchmark for other suppliers.
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 that 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 DaimlerChrysler helping to complete the design of
the front-end system assemblies for the 2001.5 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, the Company believes its products are
present on every General Motors truck platform, and also believes it is
DaimlerChrysler'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;
(ii) expand core product lines;
(iv) enhance its full-service capabilities; and
(v) expand globally.
QUALITY COMMITMENT
The Company believes its quality performance in 1998 is a significant
competitive advantage. The OEM's largely evaluate supplier quality by the number
of defective parts per million supplied ("PPM"). The Company's 1999 model year
PPM performance with DaimlerChrysler through December 1998 was 20 PPM, which is
below DaimlerChrysler's benchmark of 25 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 DaimlerChrysler's Platinum
Pentastar Award in 1997 and Gold Pentastar Award in 1998.
PRODUCTS
The Company manufactures a broad range of complex, high value-added
stamped assemblies with underbody/chassis and unexposed body structures as its
core products. Approximately 75% of the Company's 1998 net sales were from
value-added assemblies which constitute major structural components of passenger
cars, light trucks, and vans. The Company produces over 500 products on over 40
different platforms, including frame rails, trailer hitches, cowls, bumpers,
inner quarter panels, wheelhouse inner panels, crossmembers, airbag canisters,
rear back panels, suspension braces, body sills, pillars, heat shields, battery
trays, and roof bow assemblies.
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In addition, the Company has the capability to produce prototype or
pre-production stamped assemblies. These 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 and also include full truck frames and
engine cradles. In addition, the Company has the capability to manufacture
prototype parts using a hydroforming process developed by the Company. 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.
The following chart lists significant parts on major platforms that
are currently supplied by the Company.
<TABLE>
<CAPTION>
CUSTOMER PART/ASSEMBLY VEHICLE TYPE MODEL/PLATFORM
- -------- ------------- ------------ --------------
<S> <C> <C> <C>
DAIMLERCHRYSLER..... 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
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 Bracket Passenger Car LH Concorde/Intrepid
Deck Closure Panel Passenger Car NPL Neon
Center Pillar Reinforcement
Assembly Passenger Car NPL Neon
Windshield Frame Side Panel Passenger Car NPL Neon
Body Hinge Pillar Passenger Car NPL Neon
Rear Quarter Inner Panel Passenger Car NPL Neon
Body Side Belt Reinforcement Passenger Car NPL 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
</TABLE>
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<TABLE>
<CAPTION>
CUSTOMER PART/ASSEMBLY VEHICLE TYPE MODEL/PLATFORM
- -------- ------------- ------------ --------------
<S> <C> <C> <C>
Suspension Tie Bar SUV/Light Truck/Van GMT 800 Full-size Pickup/
Tahoe/Suburban
Trailer Hitch SUV/Light Truck/Van GMT 800 Full-size Pickup/
Tahoe/Suburban
Body Mount Bracket SUV/Light Truck/Van GMT 800 Full-size Pickup/
Tahoe/Suburban
Tail Lamp Bracket SUV/Light Truck/Van GMT 800 Full-size Pickup/
Tahoe/Suburban
Rail Side Header SUV/Light Truck/Van GMT 800 Full-size Pickup/
Tahoe/Suburban
Seat Plate Assembly SUV/Light Truck/Van GMT 800 Full-size Pickup/
Tahoe/Suburban
Heat Shield Passenger Car Chevrolet J Cavalier
Heat Shield Passenger Car LeSabre/Bonneville
Front & Rear Bumper
Fascia Reinforcement Passenger Car LeSabre/Bonneville
Dash Panel Reinforcement Passenger Car LeSabre/Bonneville
Frame Reinforcement Passenger Car LeSabre/Bonneville
Crossmember Passenger Car Grand Prix/Lumina
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>
DESIGN AND ADVANCED 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 DaimlerChrysler
and General Motors language formats, structural and fatigue (finite element or
"FEA") analysis, computer simulated analysis of the metal forming process and
weld process simulation analysis. These capabilities enable the Company to
provide creative product design and manufacturing services that result in cost
and quality improvements. The Company's objective is to maintain a competitive
advantage through its product design, engineering and development capabilities.
CUSTOMERS AND MARKETING
The Company serves automotive OEMs in the North American market. The
Company's four largest OEM customers, DaimlerChrysler, General Motors, Ford and
Honda accounted for approximately 46%, 23%, 10% and 4%, respectively, of the
Company's 1998 net sales. The Company also sells its products to targeted Tier 1
suppliers that in turn supply OEMs in the North American market.
DAIMLERCHRYSLER. The Company first developed its expertise in frame
rail assemblies on the 1993 LH Concord/Intrepid and AB Ram Van vehicles. The
Company believes that in part due to its success with the 1993 LH
Concord/Intrepid program, it was awarded increased content on the 1998 LH
Concord/Intrepid from approximately $115 per vehicle in 1993 to $180 on the 1998
model. In addition, the Company has been awarded new business on the 2000 NPL
Neon, the 2000 RS Minivan and the 2001.5 KJ Jeep Cherokee. The Company believes
it is DaimlerChrysler's largest independent supplier of front frame rail
assemblies for passenger cars, vans and sport utility vehicles.
GENERAL MOTORS. The Company has recently launched several assemblies
for General Motors, including the GMT 800 Series Full-size Pickup, 325/330
Blazer/Jimmy, GM M-Van/Astro/Safari and Chevrolet J Cavalier platforms, which
include trailer hitches, crossmembers, bumpers, heat shields, suspension spring
hangers and floor panel reinforcement assemblies. During 1999, the Company plans
to launch new business on the GMT 800 Series Tahoe/Suburban platform, including
trailer hitches, suspension tie bars and floor pan reinforcement assemblies. The
Company also plans to launch new business on the 2000 model GMX 220/310
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LeSabre/Bonneville platform including heat shields, dash panel reinforcements
and frame rail reinforcements.
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
the Company continues to support Ford as a full-service stamping supplier for
certain current and carryover parts. Ford is not currently requiring the Company
to expend technical resources on gaining incremental business with Ford.
HONDA. The Company believes that in the 1999 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 13 parts on
the BM Minivan. The Company expects that its business with Honda will increase
as Honda increases its export volumes and expands capacity in North America.
BACKLOG
In general, the Company does not manufacture its products against a
backlog of orders. Production and inventory levels are geared primarily to
projections of future demand and the level of incoming orders.
RAW MATERIALS
The Company's principal raw material is steel, which represented
approximately 87% of the Company's raw material cost for 1998. The remaining
13% of raw material purchases represents various purchased parts such as tubular
products, sealers, corrosion resistant coating, and various fasteners. The
Company participates in steel purchase programs through DaimlerChrysler, 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 OEM. These purchase programs
neutralize the Company's exposure to steel price increases or decreases, as
price changes from the steel mills are absorbed by the OEM prior to the
Company's purchase of the steel.
COMPETITION
The market for the Company's products is characterized by strong
competition from both captive OEM suppliers and external, non-captive suppliers.
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. 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; MS Acquisition Corp. (Aetna/Sofedit); The Narmco Group;
and divisions of OEMs with internal stamping and assembly operations.
Competitive factors in the market for the Company's products include quality,
cost, delivery, technical expertise, engineering capability and customer
service.
EMPLOYEES
As of December 31, 1998, the Company had 1,894 employees, including 364
salaried and 1,530 hourly employees. Included in the hourly total are 400
employees represented by the United Auto Workers union, 464 employees
represented by the Canadian Auto Workers union, and 459 represented by the
United Steel Workers of America union. The remaining 207 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 collective bargaining agreements with
the above unions expire at various times at each production facility. At the
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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.
FORWARD LOOKING STATEMENTS
Forward-looking statements included in this Form 10-K are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Statements which address activities, events or developments that the
Company expects or anticipates may occur, including future acquisitions,
business strategy, expansion and growth of the Company's business and
operations, and other similar matters, are forward looking statements. The
Company does not intend to update these forward-looking statements.
RELIANCE ON MAJOR CUSTOMERS AND SELECTED MODELS. The Company's primary
customers are DaimlerChrysler, General Motors, Ford and Honda. 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. The
Company currently expects to derive a substantial portion of its 1999 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.
INDUSTRY CYCLICALITY AND SEASONALITY. The automobile industry is highly
cyclical and is 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.
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. 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.
INCREASING CUSTOMER REQUIREMENTS. 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 suppliers to provide more design and
engineering input at earlier stages of product development, including the
building and financing of new tools. Costs related to these requirements have in
some cases 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 such customer requirements will not have a material adverse effect on
the business.
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 Senior Subordinated Notes. In addition, 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.
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. 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. The Company believes that it is
currently in substantial compliance with applicable environmental laws,
regulations and ordinances.
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Item 2. PROPERTIES
The Company conducts operations in 15 facilities in 9 locations, as
summarized below:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION SQUARE FOOTAGE OWNED/LEASED
- -------- ----------- -------------- ------------
<S> <C> <C> <C>
Celina, Tennessee............ Manufacturing 96,000 Leased
Glencoe, Ontario............ Manufacturing/Robotics 51,000 Owned
Harrison Township, Michigan.. Manufacturing/Prototyping 86,000 Leased
New Baltimore, Michigan.......Manufacturing/Office 105,000 Leased
Rochester, Hills, Michigan....Sales and Engineering 9,480 Leased
Oxford, Michigan..............Manufacturing 62,000 Leased
Royal Oak, Michigan...........Manufacturing/Office 250,000 Owned
Troy, Michigan................Corporate Headquarters, 18,000 Leased
Design 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 on the Company's facilities have expiration dates
ranging from 2001 through 2006, except for the Windsor, Ontario Tooling facility
lease which expires on July 31, 1999 and is expected to be renewed. Certain
Windsor, Ontario, Canada facilities are leased from affiliated parties (see
"Certain Relationships and Related Transactions").
Item 3. 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There is no public trading market for the Company's Common Stock. As of
March 31, 1999, there were 12 holders of record of the Company's Common Stock.
The Company paid cash dividends of $10,475 in 1998, including $10,000
in connection with the issuance of the Company's Senior Subordinated Notes. The
Company's ability to make dividends were restricted at December 31, 1998 under
the terms of its Senior Credit Facility. In addition, there are certain dividend
restrictions on the Company's wholly-owned subsidiaries (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources").
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the Company
for the five years ended December 31, 1998. Selected historical financial data
for the three years ended December 31, 1998 are derived from the audited
consolidated financial statements of the Company included elsewhere in this
Report. The selected financial data for the two year period ended December 31,
1995 are derived from audited combined financial statements of the Company
incorporated by reference in this Report. The following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company and the related notes presented elsewhere in this Report.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales . . . . . . . . . . . . . . . . $43,035 $56,835 $71,029 $158,718 $ 249,821
Gross profit. . . . . . . . . . . . . . . 5,735 9,935 12,909 22,555 31,018
Selling, general and administrative
expenses(a) . . . . . . . . . . . . . . 4,699 6,041 8,375 13,788 18,614
Amortization expense. . . . . . . . . . . -- -- 115 587 1,417
Special compensation(b) . . . . . . . . . -- -- -- 1,343 1,359
Income from operations. . . . . . . . . . 1,036 3,894 4,419 6,837 9,628
Interest. . . . . . . . . . . . . . . . . 714 1,192 1,754 4,599 12,293
Income (loss) before income taxes(c). . . 610 2,702 2,363 2,121 (3,235)
Net income (loss) . . . . . . . . . . . . 610 2,702 2,269 796 (7,146)
BALANCE SHEET DATA (END OF PERIOD)
Cash and cash equivalents . . . . . . . . $ 6 $ 18 $ 1,090 $ 1,233 $ 9,412
Total assets. . . . . . . . . . . . . . . 33,618 37,206 91,110 166,494 200,220
Total debt. . . . . . . . . . . . . . . . 14,089 17,555 49,468 107,315 147,693
Shareholders' equity. . . . . . . . . . . 10,786 12,736 14,401 14,601 (7,045)
OTHER FINANCIAL DATA
Cash flows from (used in) operating
activities. . . . . . . . . . . . . . . . $ 2,110 $ 2,288 $ 6,317 $ 6,166 $ 10,191
EBITDA(d) . . . . . . . . . . . . . . . . 3,963 6,801 7,536 12,999 20,171
Depreciation and amortization . . . . . . 2,639 2,907 3,419 6,279 11,113
Capital expenditures. . . . . . . . . . . 5,494 5,009 3,942 9,389 12,901
</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 $645,
$1,150, and $850 for 1998, 1997, and 1996, respectively. Effective April
1, 1998, such fees were reduced to $500 annually. In addition, certain items
in the Company's 1997 financial statements have been reclassified to conform
with the presentation used in 1998.
(b) Certain members of the Company's management team participate in deferred
compensation agreements which award the employee for increases in share value.
Approximately $1,343 was recorded in 1997 under these agreements. An additional
amount of $1,359 was recorded upon the issuance of Senior Subordinated Notes on
April 28, 1998. Effective on this date, all future contributions under these
agreements were discontinued, excluding up to $300 in additional deferred
compensation which can be earned by one participant, and annual increases on all
vested amounts at the rate of 6% per year.
(c) The shareholders have elected under the provisions of the Internal Revenue
Code to be treated as S Corporations, except for the Company's Canadian
subsidiary. As a result, the taxable income of the Company is included in the
taxable income of the individual shareholders, and no provision for federal
income taxes has been included in income. The Company's Canadian subsidiary is
subject to Canadian income tax.
11
<PAGE> 12
(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.
In 1998, EBITDA included $1,964 of non-recurring charges associated with the
issuance of the Company's Senior Subordinated Notes (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Extraordinary Expenses and Refinancing Charges").
12
<PAGE> 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this section, the words
"anticipate", "believe", "estimate" and "expect" and similar expressions are
generally intended to identify forward-looking statements. Readers are cautioned
that any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to: (i)
general economic conditions in the markets in which the Company operates; (ii)
fluctuations in worldwide or regional automobile and light and heavy truck
production; (iii) labor disputes involving the Company or its significant
customers; (iv) changes in practices and/or policies of the Company's
significant customers toward outsourcing automotive components and systems; (v)
foreign currency and exchange fluctuations; (vi) factors affecting the ability
of the Company or its key suppliers to resolve Year 2000 issues in a timely
manner; and (vii) other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission. The Company does not intend
to update these forward-looking statements.
RESULTS OF CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Net Sales - Net sales for the year ended December 31, 1998 were $249.8
million. This was an increase of $91.1 million, or 57%, as compared to the year
ended December 31, 1997. Approximately 72% of this increase is attributable to
the acquisition of PSI in December 1997. The remaining 28% of the increase was
due to new business awards, including business related to the DaimlerChrysler LH
Concord/Intrepid and NS Minivan programs and additional factory assist work.
Gross Profit - Gross profit was $31.0 million or 12.4% of net sales for
1998 as compared to $22.6 million or 14.2% of net sales for 1997. This
represents an increase of $8.4 million or 38% as compared to the prior year and
was primarily related to incremental sales. Incremental gross profit related to
the acquisition of PSI in December 1997 was largely offset from a strike at a
major customer that resulted in unabsorbed overhead (see "Effect of Strike at
General Motors"). The decrease in gross profit as a percentage of net sales was
primarily due to the impact of the General Motors strike, and certain launch
costs associated with new General Motors programs in 1998.
Selling, General and Administrative Expenses ("SG&A") - SG&A expenses
for 1998 were $18.6 million or 7.5% of net sales, compared to $13.8 million or
8.7% of net sales for 1997. This represents an increase of $4.8 million or 35%
as compared to the prior year. Approximately 49% of this increase is
attributable to the Company's acquisition of PSI. The remaining 51% of the
increase is related to increased engineering and support costs related to new
business awards. The decrease in SG&A, as a percentage of net sales, was a
result of a larger sales base to which corporate expenses were allocated.
Amortization expense - Amortization expense for 1998 was $1.4 million
compared to $0.6 million for 1997. The increase was primarily attributable to
additional goodwill amortization related to the acquisition of PSI in December
1997.
Special compensation - Special compensation expense for 1998 was $1.4
million compared to $1.3 million for 1997. Special compensation expense relates
to deferred compensation agreements with certain members of the Company's
management team (see Note 10 to the Company's Consolidated Financial
Statements).
Interest Expense - Interest expense for 1998 was $12.3 million or 4.9%
of net sales, compared to $4.6 million or 2.9% of net sales for 1997. The
increase was attributable to additional borrowings related to the acquisition of
PSI in December 1997 and the issuance of $120.0 million of 9 5/8% Senior
Subordinated Notes on April 28, 1998. The Notes represent both an increased
amount of borrowings and an increased interest rate as compared to the
outstanding debt of the prior period.
Foreign Currency - Foreign currency gains and losses are all
attributable to the Company's Canadian operation. The foreign currency loss
for 1998 was $0.6 million and included a $0.6 million non-recurring loss on the
early retirement of Canadian denominated debt using proceeds from the Senior
Subordinated Notes. Excluding this non-recurring loss, the foreign currency
loss in 1998 was $0.0 million compared to $0.1 million for 1997.
13
<PAGE> 14
Income Taxes - The Company's income taxes relate solely to its
Canadian operations. The provision for income taxes for 1998 was $3.4 million
with an effective tax rate of 41.5% compared to $1.3 million with an effective
tax rate of 43.6% for 1997. The effective tax rates differed from the statutory
tax rates primarily as a result of non-deductible goodwill amortization.
Extraordinary Expense - Extraordinary expense of $0.6 million was
recorded for the write-off of certain deferred financing costs on debt that was
retired using proceeds from the issuance of Senior Subordinated Notes. There was
no extraordinary expense in 1997.
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% as compared to net sales for 1996 of
$71.0 million. Approximately 85% of this increase is attributable to the
acquisitions of J&R, Veltri and PSI. The remaining 15% of the net sales
increase was due to new business awards, including business related to the
Chrysler NS Minivan and additional factory assist work.
Gross Profit: Gross profit was $22.6 million or 14.2% of net sales for
1997 as compared to $12.9 million or 18.2% of net sales for 1996. This
represents an increase of $9.7 million or 75% 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 $13.8 million or 8.7% of net sales for 1997 as compared to $8.4 million or
11.8% 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.
Amortization Expense: Amortization expense was $0.6 million in 1997 as
compared to $0.1 million in 1996. The increase in 1997 was primarily due to
additional goodwill amortization related to the Company's acquisition of the
Veltri Group in November 1996 and J&R in September 1996.
Special Compensation Expense: Included in 1997 results was special
compensation expense of $1.3 million. There was no special compensation expense
in 1996.
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% 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 was due primarily to
non-deductible amortization of cost in excess of assets acquired.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital,
servicing the Company's indebtedness, capital expenditures and acquisitions.
Management believes that cash generated from operations, together with
borrowings available under the Company's Senior Credit Facility, will be
sufficient to meet the Company's working capital, debt service, capital
expenditure and acquisition needs for at least the next twelve months.
On April 28, 1998, the Company received gross proceeds of $120.0
million from the private placement of its 9 5/8% Senior Subordinated Notes, due
2008, and incurred approximately $4.0 million of issuance costs. On October 15,
1998, the Company completed an offer to exchange the private Notes for up to
$120.0 million of identical except registered Notes. All private Notes were
exchanged for registered Notes. The Company used the net proceeds from the sale
of the private Notes primarily to retire existing indebtedness and believes its
application of the proceeds has enhanced its ability to pursue its growth and
business objectives. However, interest payments on the registered Notes will
represent a significant liquidity requirement for the Company. The Company will
be required to make scheduled semi-annual interest payments on the Notes of
approximately $5.8 million on May 1 and November 1 each year until the
registered Notes mature on May 1, 2008 or unless the registered Notes are
redeemed earlier.
14
<PAGE> 15
Veltri Metal Products Co., Veltri Holdings, Inc. and Veltri Holdings
USA, Inc. (collectively the "Veltri Group") are wholly owned subsidiaries of the
Company and constitute all of the direct and indirect subsidiaries of the
Company. All members of the Veltri Group have fully and unconditionally
guaranteed, on a joint and several basis, the obligation to pay principal,
premium, if any, and interest with respect to the Senior Subordinated Notes. In
addition, there are no restrictions on the ability of the Veltri Group to
transfer funds to the Company in the form of cash dividends, loans or advances,
except as follows: (i) pursuant to the Veltri Group purchase agreements among
the Veltri Group and its former owners, the Veltri Group agreed not to make any
loans or advances to any person (including the Company) until certain earn-out
provisions for the former owners have been satisfied; (ii) pursuant to the
Senior Credit Facility, the Veltri Group agreed not to (a) declare or pay any
dividends on, or make any other distribution with respect to any shares of
capital stock; or (b) make loans, advances or extensions of credit to any person
(except for credit sales in the ordinary course of business and loans to
affiliates in an aggregate amount not to exceed $15 million at any time
outstanding); and (iii) pursuant to the indenture agreement governing the Senior
Subordinated Notes, the Veltri Group is prohibited from making loans or advances
to the Company if a default or event of default shall have occurred under the
indenture.
In April 1998, the Company established a revolving Senior Credit
Facility, due April 2003, that provides for borrowings of up to $100.0 million
subject to certain limitations on both leverage and interest coverage, as
defined in the Senior Credit Facility. At December 31, 1998, interest on the
Senior Credit Facility was at the prime rate plus a margin ranging from 0 to 75
basis points or at a eurodollar rate plus a margin ranging 117.5 to 200.0 basis
points, depending on the Company's leverage ratio as defined in the Senior
Credit Facility. The weighted average interest rate for borrowings was
approximately 7.3% at December 31, 1998. At December 31, 1998, the Company had
$22.0 million outstanding under the Senior Credit Facility, $9.4 million in cash
and approximately $10.0 million of additional borrowing availability on the
Senior Credit Facility.
In July 1998 and March 1999, the Senior Credit Facility was amended to
revise certain definitions pertaining to financial covenants. The amendments
provided for the allowance of certain adjustments to the calculation of EBITDA,
as that term is defined in the Senior Credit Facility, to offset among other
things, the effect of the General Motors strike (see "Effect of Strike at
General Motors"). In addition, the Senior Credit Facility was amended to change
the definition of net worth to exclude accumulated foreign currency translation
and change the net worth floor, as defined. As a result of the General Motors
strike, the Company was in default of a net worth covenant at December 31, 1998.
The default was waived as part of the March 1999 amendment by Comerica Bank on
behalf of itself and as agent for the lenders.
For the year ended December 31, 1998, net cash provided by operating
activities was approximately $10.2 million as compared to $6.2 million for the
year ended December 31, 1997. The increase, as compared to the prior year, was
primarily related to an increase in non-cash expenses and a net favorable change
in working capital.
For the year ended December 31, 1998, EBITDA was $20.2 million as
compared to $13.0 million for the year ended December 31, 1997. The increase, as
compared to the prior year, was primarily due to incremental gross profit on
increased sales. In 1998, the Company's EBITDA was reduced by $6.8 million due
to certain uncontrollable and non-recurring events as noted below:
(i) $4.8 million as a result of the General Motors strike (see "Effect of
Strike at General Motors") and,
(ii) $2.0 million as a result of certain charges associated with the
issuance of the Company's Senior Subordinated Notes and the
establishment of the Company's Senior Credit Facility (see
"Extraordinary Expenses and Refinancing Charges").
EBITDA is defined as income from continuing operations before the
effect of changes in accounting principles and extraordinary expenses plus
interest, income taxes, depreciation and amortization. EBITDA is presented
because it is a widely accepted non-GAAP 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.
The Company's liquidity is affected by both the cyclical nature of its
business and levels of net sales to its major customers. The Company's ability
to meet its working capital and capital expenditure requirements and debt
obligations will depend on 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. However, the Company believes
that its existing borrowing ability and cash flow from operations will be
sufficient to meet its liquidity requirements in the foreseeable future.
15
<PAGE> 16
Capital expenditures for year ended December 31, 1998 were $12.9
million, as compared to $9.4 million for the year ended December 31, 1997.
Capital expenditures primarily related to various investments in machinery and
equipment for new and replacement programs. The Company believes its capital
expenditures, exclusive of any potential acquisitions, will be approximately
$28.0 million in 1999, $16.0 million in 2000 and $12.0 million in 2001. However,
the Company's capital expenditures may be greater than currently anticipated as
the result of new business opportunities. Capital requirements for 1999 and 2000
include significant expenditures for new DaimlerChrysler programs, including the
2000 model year NS minivan and 2001.5 model year KJ Jeep Cherokee.
The Company expects to make new tooling expenditures of approximately
$24.0 million in 1999 in connection with the DaimlerChrysler 2000 model year NS
minivan and 2001.5 model year KJ Jeep Cherokee programs. Tooling expenditures
may be greater or less than currently anticipated as the result of changes in
DaimlerChrysler's tooling requirements. These expenditures represent costs
incurred by the Company in the development of new tooling used in the
manufacture of the Company's products. Once customer approval is obtained for
the manufacture of these products, the Company will be reimbursed for these
costs by DaimlerChrysler and the tooling will become the property of
DaimlerChrysler. The Company expects to be fully reimbursed for these tooling
expenditures by January 2001.
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, however, the Company did not achieve pre-strike sales volumes until
late September 1998 due to production delays at General Motors on certain
programs that Company supplies parts. As a result of the strike, the Company's
sales and gross profit for the year ended December 31, 1998 were reduced by
approximately $10.8 million and $4.8 million, respectively.
EXTRAORDINARY EXPENSES AND REFINANCING CHARGES
On April 28, 1998, the Company completed a refinancing and retired
substantially all long-term debt that was outstanding prior to the issuance of
$120.0 million of Senior Subordinated Notes. The Company recorded an
extraordinary loss of $0.5 million, net of $0.1 tax benefit on the early
extinguishment of debt. The Company also recorded non-recurring expenses
totaling $2.0 million as a result of the refinancing on April 28, 1998. These
expenses were comprised of (i) a $0.6 million non-recurring loss on foreign
exchange associated with the retirement of indebtedness and (ii) a $1.4 million
non-recurring expense under deferred compensation agreements.
FOREIGN CURRENCY
The results of operations of one of the Company's subsidiaries are
reported in Canadian currency and then translated into U.S. dollars at the
applicable exchange rate for inclusion in the Company's consolidated financial
statements. This subsidiary accounted for approximately 40% of the Company's net
sales in 1998. The appreciation of the U.S. dollar against this foreign currency
will have a negative impact on the reported sales and operating income of this
subsidiary as consolidated into the Company and will increase the accumulated
translation adjustment in the Company's consolidated balance sheet. The Company
believes the relative weakening of the Canadian dollar in 1998 reduced the
Company's reported sales and operating income by approximately $6.5 million and
$1.0 million, respectively, as compared to 1997. This has no impact on cash flow
and the Company did not incur any material foreign currency gains or losses as a
result of operations during 1998 or 1997.
SCRAP STEEL PRICES
The Company has agreements to sell scrap metal that results when a
steel blank is not entirely used in its manufacturing processes. Prices
for scrap metal are based on the prevailing market rate and this revenue is
recorded as a reduction to the Company's cost of sales. Market prices for scrap
metal declined significantly during 1998 and the Company believes that this
trend is related to increased foreign imports of steel which have lowered steel
production requirements for U.S. mills and the demand for scrap metal. At
December 31, 1998, the Company believes the average market price for scrap steel
had fallen to approximately $60 per ton compared to $150 per ton at December 31,
1997 and if this market trend continues, it could have an material adverse
effect on the Company's financial condition and results of operations.
16
<PAGE> 17
YEAR 2000 COMPLIANCE
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS
OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS. The Company
has determined that it will be required to modify or replace certain portions of
its software and hardware so that those systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with modifications
or replacements of existing software and certain hardware, the Year 2000 Issue
can be mitigated. However, if such modifications and replacements are not made,
or are not completed timely, the Year 2000 Issue could have a material impact on
the operations of the Company. The Company's plan to resolve the Year 2000 Issue
involves the following four phases: assessment, remediation, testing, and
implementation. To date, the Company has completed its assessment of all systems
that could be significantly affected by the Year 2000. The assessment indicated
that most of the Company's significant information technology systems could be
affected, particularly the general ledger, billing, and inventory systems. That
assessment also indicated that certain software and hardware used in production
and manufacturing systems (hereafter also referred to as operating equipment) is
at risk. Affected systems include automated assembly lines and related robotic
technologies used in various aspects of the manufacturing process. In addition,
the Company has gathered information about the Year 2000 compliance status of
its significant suppliers and subcontractors and continues to monitor their
compliance.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE
FOR COMPLETION OF EACH REMAINING PHASE. For its information technology
exposures, the Company expects to fully complete software replacement, including
testing and implementation, no later than June 30, 1999. Once replacements or
modifications for certain affected software are selected and tailored for the
Company's use, the Company begins testing and implementation. These phases run
concurrently for different systems. To date, the Company has completed
approximately 80% of its remediation and testing and has implemented
approximately 50% of its remediated systems. Completion of the testing for all
significant systems is expected by June 30, 1999 and the company expects that
all remediated systems fully tested and implemented by September 30, 1999. The
remediation of operating equipment is approximately 60% complete and the Company
expects to complete its remediation efforts for operating equipment by June 30,
1999. Once testing is complete, the operating equipment will be ready for
immediate use. The testing and implementation of operating equipment is expected
to be fully completed by September 30, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO
THE YEAR 2000. The Company is in the process of working with its key customers
and suppliers to ensure that the Company's systems that interface directly with
such third parties are Year 2000 compliant by June 30, 1999. The Company has
completed approximately 70% of its remediation and testing efforts on these
systems and expects this to be completed by June 30, 1999. Implementation
efforts are approximately 50% complete and are expected to be fully completed by
September 30, 1999. The Company understands that key customers are in the
process of making their accounts payable systems Year 2000 compliant and that
this will be completed prior to December 31, 1999. The Company has queried its
significant suppliers and subcontractors that do not share information systems
with the Company (external agents). To date, the Company is not aware of any
external agent with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources. However, the Company has
no means of ensuring that external agents will be Year 2000 ready. The inability
of external agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
COSTS. The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $1.8 million, and is being funded through operating cash flows. To
date, the Company has incurred approximately $1.5 million ($0.2 million expensed
and $1.3 million capitalized for new systems and equipment) related to both its
Year 2000 project and ordinary business expenditures that also addressed the
Year 2000 Issue. Of the total remaining costs, approximately $0.1 million is
attributable to the purchase of new software and operating equipment, which will
be capitalized. The remaining $0.2 million relates to repair of hardware and
software, and implementation consulting fees which will be expensed as incurred.
RISKS. The Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company would be
unable to effectively manufacture and ship certain products. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
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<PAGE> 18
CONTINGENCY PLAN. The Company has contingency plans for certain
critical applications, and is working on such plans for others. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies. The Company expects to have
these contingency plans formally documented by September 30, 1999.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK QUANTITATIVE AND QUALITATIVE ANALYSIS.
The Company's Canadian subsidiary manufactures and sells certain
products in Canada. This Canadian subsidiary also operates in the Canadian
dollar and its functional currency is the Canadian dollar. As a result, the
Company's net assets in Canada (defined as total Canadian assets less total
Canadian liabilities) are exposed to exchange rate changes between the U.S.
dollar and the Canadian dollar which can result in foreign currency translation
adjustments. As of December 31, 1998, the Company's net assets subject to
foreign currency translation totaled $9.0 million and the potential loss from a
hypothetical 10% adverse change in the foreign exchange rate would be
approximately $0.9 million.
INTEREST RATE RISK QUALITATIVE AND QUANTITATIVE ANALYSIS.
Borrowings on the Company's $100.0 million revolving Senior Credit
Facility, due April 2003, are at variable interest rates and therefore related
interest expense is sensitive to changes in the general level of U.S. interest
rates. The Company had $22.0 million outstanding on the Senior Credit Facility
at December 31, 1998 with a weighted average interest rate of 7.3%. A
significant portion of the Company's interest expense has been fixed through
long-term borrowings on the Company's $120.0 million of Senior Subordinated
Notes, due May 2008. The fixed interest rate on the Senior Subordinated Notes is
9.625%. Borrowings on both the Senior Credit Facility and the Senior
Subordinated Notes approximated fair market value at December 31, 1998.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all executive officers and directors of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Delmar O. Stanley......................... 58 President, Chief Executive Officer and Director
David J. Woodward......................... 41 Vice President of Finance, Chief Financial Officer,
Treasurer and Director
Randolph J. Agley......................... 56 Chairman of the Board
Michael T. Timmis......................... 59 Vice Chairman of the Board
Wayne C. Inman............................ 52 Secretary and Director
Michael T.J. Veltri....................... 42 Vice President
Kris R. Pfaehler.......................... 43 Vice President of Business Development
</TABLE>
Directors of the Company are elected each year at the Annual Meeting of
Stockholders to serve for the ensuing year or until their successors are elected
and qualified. The officers of the Company are elected each year at the Annual
Meeting of the Board of Directors to serve for the ensuing year or until their
successors are elected and qualified.
18
<PAGE> 19
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid each of the Company's
four highest paid executive officers and significant employees for fiscal year
1998.
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,............................ 1998 $400,000 $ 94,500 $ 7,025 $ 793,848
President & Chief Executive Officer(2) 1997 250,000 95,650 8,108 663,338
1996 250,000 -- 13,072 145,000
David J. Woodward,............................ 1998 220,000 51,303 4,077 248,077
Vice President of Finance, Chief Financial 1997 174,300 47,000 3,101 353,621
Officer & Treasurer 1996 162,000 44,000 10,293 --
Michael T.J. Veltri,.......................... 1998 420,000 230,000 41,999 248,077
Vice President(3) 1997 380,000 -- 39,726 36,375
1996 55,178 -- 5,331 --
Kris R. Pfaehler,............................. 1998 147,500 39,700 4,966 208,385
Vice President of Business Development 1997 137,500 37,000 4,977 274,423
1996 125,000 25,000 10,019 --
</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.
19
<PAGE> 20
Item 12. Security Ownership of Certain Beneficial Owners and Management
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
March 30, 1999, and 250,000 shares of Class B Non-voting Common Stock, of which
158,853 were issued and outstanding as of March 30, 1999. 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 March 30, 1999 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
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>
20
<PAGE> 21
- ---------------------------
* Percentage calculations based on 4,074 shares of Class A Voting Common
Stock outstanding as of March 30, 1999.
+ 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 March 30, 1999 and stock options granted as of
March 30, 1999 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.
21
<PAGE> 22
Item 13. 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 certain information for these leases:
<TABLE>
<CAPTION>
AFFILIATED LEASE LEASE ANNUAL BASE
PERSON LOCATION COMMENCEMENT TERMINATION RENT
---------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Maria Veltri........... Windsor, Ontario, Canada 1994 2002 $ 75,772
Maria Veltri........... Windsor, Ontario, Canada 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 shareholders of the Company, 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 shareholders of the Company. Services provided include
accounting/financial assistance, information systems support services,
acquisition assistance, and marketing and business development support services.
During 1998, 1997 and 1996, the Company received fees of approximately $250,000,
$1,600,000 and $1,950,000, respectively, for such services. Effective January 1,
1998, all G&L sales, engineering and program management personnel, previously
located at the Company, were transferred to G&L. Effective July 1, 1998, the
Company discontinued fees under the agreement with G&L. The Company will
continue to provide limited services to G&L on a year-to-year basis, subject to
termination of the agreement by either party.
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.
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. 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 (Canadian). The 1998 earn-out amount of $12,470,000
(Canadian) is expected to be paid in April 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 addition, the Veltri
Group repaid an outstanding promissory note in 1998 totaling $748,746,
including interest of $90,421, to Mr. Veltri in connection with the stock
purchase agreement.
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 the current policy year ending April 1, 1999, the aggregate
annual loss retention for the group plans is $3,500,181 for automobile,
general/products liability and for workers' compensation. At December 31, 1998,
the self-insurance liability estimate for prior years, based upon
insurance carrier case reserves and internal loss development projections,
was $1,082,422. The Company's share of this liability estimate was $468,184
and this amount was fully accrued by the Company at December 31, 1998.
One hundred percent of each retained loss is allocated to the responsible
22
<PAGE> 23
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 $118,247,000 for the calendar year 1998 and a
combined book net worth of approximately $8,287,000 at December 31, 1998. 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.
23
<PAGE> 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
The following consolidated financial statements and notes of
Talon Automotive Group, Inc. and subsidiaries are filed herewith.
Consolidated Balance Sheets at December 31, 1998 and December 31,
1997.
Consolidated Statements of Operations for each of the years in
the three-year period ended December 31, 1998.
Consolidated Statements of Comprehensive Income (Loss) and
Stockholders' Equity for each of the years in the three-year
period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1998.
Notes to Consolidated Financial Statements.
Report of Independent Auditor
All Schedules have been omitted because they are not applicable
or are not required or the information to be set forth therein is
included in the Consolidated Financial Statements or Notes
thereto.
2. Financial Statement Schedules
None.
All financial statement schedules have been omitted since the
required information is not present, is not present in amounts
sufficient to require submission of the schedule or because the
required information is included in the financial statements or
notes thereto.
3. Exhibits
Exhibits marked with one asterisk below were filed as Exhibits to
the Company's Registration Statement on Form S-4 (No. 333-56461);
the Exhibit marked with two asterisks below was filed as an
Exhibit to the Company's Form 10-Q dated October 3, 1998, and are
incorporated herein by reference.
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
3.1 Articles of Incorporation of Talon Automotive Group, Inc. (the
"Company"), as amended, including Certificate of Merger dated as of
November 27, 1997, Certificate of Assumed name dated as of April 9,
1998, Certificate of Merger/Consolidation dated as of April 28, 1998,
and Certificates of Share Exchange dated as of April 28, 1998 *
3.2 Articles of Incorporation of VS Holdings, Inc. ("VS Holdings"), as
amended, including Certificate of Merger/Consolidation dated as of
April 28, 1998, Certificate of Share Exchange dated as of April 28,
1998, and Articles of Share Exchange dated as of April 28, 1998 *
3.3 Articles of Incorporation of Veltri Holdings USA, Inc.
("Veltri Holdings"), including Certificate of Share Exchange
24
<PAGE> 25
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
dated as of April 28, 1998 *
3.4 Certificate of Status and Order of Amalgamation of Veltri
Metal Products Co. ("Veltri Metal Products") *
3.5 By-laws of the Company *
3.6 By-laws of VS Holdings *
3.7 By-laws of Veltri Holdings *
3.8 Articles of Association of Veltri Metal Products Co. *
3.9 Agreement and Plan of Merger dated as of April 28, 1998 by
and between VS Holdings and VS Holdings No. 2, Inc. *
3.10 Agreement and Plan of Merger dated as of April 28, 1998 by
and between Production Stamping, Inc. ("PSI"), Hawthorne
Metal Products Company ("Hawthorne"), and J&R Manufacturing
Inc. ("J&R") *
3.11 Agreement and Plan of Merger dated as of April 28, 1998 by
and between the Company and TAG L.L.C. *
3.12 Agreement and Plan of Share Exchange dated as of April 28, 1998 by and
between the Company and VS Holdings *
3.13 Agreement and Plan of Share Exchange dated as of April 28, 1998 by and
between the Company and Veltri Holdings *
4 Indenture dated as of April 28, 1998 by and among the
Company, as Issuer, VS Holdings, Veltri Holdings, and Veltri
Metal Products, as Guarantors, and U.S. Bank Trust National
Association, as Trustee *
4.1 Form of 9 5/8% Senior Subordinated Note Due 2008, Series B *
4.2 Form of Guarantee *
10.1 (a) Credit Agreement dated as of April 28, 1998 by and between the
Company, as Borrower, and Comerica Bank, as Agent for the Lenders *
10.1 (b) First Amendment to Credit Agreement dated as of April 28, 1998 by and
between the Company, as Borrower, and Comerica Bank, as Agent for the
Lenders **
10.2 Pledge Agreement dated as of April 28, 1998 by and between
the Company and Comerica Bank *
10.3 Mortgage Agreement dated as of April 28, 1998 by and between
the Company and Comerica Bank *
10.4 Security Agreements dated as of April 28, 1998 between each of the
Company, VS Holdings, and Veltri Holdings and Comerica Bank *
10.5 Guaranty Agreements dated as of April 28, 1998 between each of the
Company, VS Holdings, Veltri Metal Products and Veltri Holdings and
Comerica Bank *
10.6 Debenture Agreement dated as of April 28, 1998 by and between Veltri
Metal Products and Comerica Bank *
10.7 Debenture Pledge Agreement dated as of April 28, 1998 by and between
Veltri Metal Products and Comerica Bank *
10.8 Agreement dated as of April 28, 1998 by and among Michael T.
J. Veltri ("Mr. Veltri"), Veltri Metal Products, VS
Holdings, Veltri Holdings and the Company *
10.9 Amended and Restated Promissory Note dated as of April 28,
1998 by Veltri Metal Products in favor of Mr. Veltri *
10.10 Unconditional Guaranty dated as of April 28, 1998 by the Company, VS
Holdings, and Veltri Holdings in favor of Mr.
Veltri *
10.11 Security Agreement dated as of April 28, 1998 by the Company, its
subsidiaries, VS Holdings and Veltri Holdings in favor of Mr. Veltri *
10.12 Mortgage dated as of April 28, 1998 by and between the
Company, as mortgagor, and Mr. Veltri, as mortgagee *
10.13 First Amendment to Stock Purchase Agreement dated as of
April 28, 1998 by and among Mr. Veltri, Veltri Metal
Products, VS Holdings and Veltri Holdings *
10.14 Intercreditor Agreement dated as of April 28, 1998 between
and among Mr. Veltri and Comerica Bank
10.15 Registration Rights Agreement dated as of April 28, 1998 by and among
the Company, VS Holdings, Veltri Holdings, and Veltri Metal Products,
Salomon Brothers Inc and Credit Suisse First Boston Corporation *
25
<PAGE> 26
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
10.16 Stock Purchase Agreement dated as of November 8, 1996 by and
among Mr. Veltri, Maria Veltri and the Company *
10.17 Stock Purchase Agreement dated as of October 17, 1997, as amended, by
and among the former shareholders of PSI and the Company *
10.18 Purchase Agreement dated as of September 30, 1996 by and among the
former shareholders of J&R and the Company *
10.19 Employment Agreement dated as of November 27, 1995, as
amended on January 1, 1998, by and between the Company and
Delmar O. Stanley ("Mr. Stanley") *
10.20 Employment Agreement dated as of November 8, 1996 by and
between the Company and Mr. Veltri *
10.21 Non-Compete Agreement dated as of November 8, 1996 by and
between the Company and Mr. Veltri *
10.22 Severance Agreement dated as of February 6, 1996 by and
between the Company and David Woodward ("Mr. Woodward") *
10.23 Severance Agreement dated as of February 7, 1996 by and
between the Company and Kris Pfaehler *
10.24 Consolidated Equity Ownership Plan and Agreements thereunder
by and between the Company and each of Mr. Stanley, Mr.
Woodward, Mr. Pfaehler, and Wayne C. Inman ("Mr. Inman") *
10.25 Deferred Compensation Agreements by and between the Company
and each of Mr. Stanley, Mr. Woodward, and Mr. Pfaehler *
10.26 Talon L.L.C. 401(k) Plan, as amended *
10.27 Veltri Holdings 401(k) Plan *
10.28 Executive Bonus Program of the Company *
10.29 Lease Agreement by and between the Company and Maria Veltri
dated August 1, 1994 *
10.30 Lease Agreement by and between the Company and Maria Veltri
dated July 1, 1993 *
10.31 Amended and Restated Agreement dated as of April 28, 1998,
by and between the Company and Talon L.L.C. *
10.32 Loan and Facility Agreements dated as of April, 1997 between and among
Veltri Metal Products and Export Development Corporation *
21 Subsidiaries and Affiliates of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company for the year ended
December 31, 1998.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Troy,
State of Michigan on the 31st day of March, 1999.
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 Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated and on March 31, 1999.
SIGNATURE TITLE
- --------- -----
/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
27
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Talon Automotive Group, Inc.
We have audited the accompanying consolidated balance sheets of Talon
Automotive Group, Inc. and its subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 consolidated financial position of Talon
Automotive Group, Inc. and its subsidiaries at December 31, 1998 and 1997, and
the consolidated results of operations and cash flows for each of the three
years ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Detroit, Michigan
March 12, 1999
except for Note 18, as to which the date is March 26, 1999
28
<PAGE> 29
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales ............................................... $ 249,821 $ 158,718 $ 71,029
Cost of sales ........................................... 218,803 136,163 58,120
--------- --------- ---------
Gross profit .......................................... 31,018 22,555 12,909
Operating expenses
Selling, general and administrative expenses .......... 18,614 13,788 8,375
Amortization expense .................................. 1,417 587 115
Special compensation .................................. 1,359 1,343 --
--------- --------- ---------
Income from operations ............................. 9,628 6,837 4,419
Other expenses
Interest .............................................. 12,293 4,599 1,754
Foreign currency ...................................... 570 117 302
--------- --------- ---------
12,863 4,716 2,056
--------- --------- ---------
Income (loss) before income taxes and extraordinary
items.................................................... (3,235) 2,121 2,363
Provision for income taxes .............................. 3,358 1,325 94
--------- --------- ---------
Income (loss) before extraordinary items ................ (6,593) 796 2,969
--------- --------- ---------
Extraordinary items (loss on early retirement of debt),
net of applicable income tax benefit .................... 553 -- --
--------- --------- ---------
Net income (loss) ....................................... $ (7,146) $ 796 $ 2,269
========= ========= =========
</TABLE>
See accompanying notes.
29
<PAGE> 30
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................... $ 9,412 $ 1,233
Accounts receivable ................................. 42,580 36,021
Inventory ........................................... 16,003 13,019
Reimbursable tooling ................................ 6,618 6,328
Prepaid expenses .................................... 2,266 2,765
--------- ---------
Total current assets ............................. 76,879 59,366
Property, plant and equipment ......................... 104,036 94,194
Less accumulated depreciation ....................... 38,814 31,723
--------- ---------
Net property, plant and equipment ................... 65,222 62,471
Goodwill, less amortization of $1,611 ($465 in 1997) .. 52,490 43,298
Deferred financing costs, less amortization of $462
($187 in 1997) ........................................ 5,209 680
Other ................................................. 420 679
--------- ---------
$ 200,220 $ 166,494
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit ................................. $ -- $ 2,651
Accounts payable .................................... 33,333 31,043
Accrued liabilities ................................. 24,527 9,472
Deferred tooling revenue ............................ -- 1,423
Current portion of capital leases ................... 869 720
Current portion of long term debt ................... 994 33,463
--------- ---------
Total current liabilities ........................ 59,723 78,772
Long term debt ........................................ 143,648 67,844
Capital leases ........................................ 2,182 2,637
Other liabilities ..................................... -- 1,276
Deferred income taxes ................................. 1,712 1,364
SHAREHOLDERS' EQUITY
Common stock .......................................... 1,250 1,250
Paid-in capital ....................................... 1,413 1,413
Retained earnings ..................................... (7,015) 12,168
Accumulated other comprehensive income
(translation adjustment) .............................. (2,693) (230)
--------- ---------
(7,045) 14,601
--------- ---------
$ 200,220 $ 166,494
========= =========
</TABLE>
See accompanying notes.
30
<PAGE> 31
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
------ ---------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996................... $ 2 $ 636 $ 12,098 $ -- $ 12,736
Comprehensive income:
Net Income for 1996..................... -- -- 2,269 -- 2,269
Currency translation adjustment......... -- -- -- (76) (76)
--------
Comprehensive income.................... 2,193
Recapitalization............................. 98 (98) -- -- --
Capital contribution......................... 1,050 -- -- -- 1,050
Distribution to shareholders................. -- -- (1,578) -- (1,578)
------ ---------- -------- ------------- --------
Balance at December 31, 1996................. 1,150 538 12,789 (76) 14,401
Comprehensive income:
Net income for 1997..................... -- -- 796 -- 796
Currency translation adjustment......... -- -- -- (154) (154)
--------
Comprehensive income.................... 642
Capital contribution......................... 100 875 -- -- 975
Distribution to shareholders................. -- -- (1,417) -- (1,417)
------ ---------- -------- ------------- --------
Balance at December 31, 1997................. 1,250 1,413 12,168 (230) 14,601
Comprehensive income:
Net loss for 1998....................... -- -- (7,146) -- (7,146)
Currency translation adjustment......... -- -- -- (2,463) (2,463)
--------
Comprehensive income.................... (9,609)
Distribution to shareholders................. -- -- (12,037) -- (12,037)
------ ---------- -------- ------------- --------
Balance at December 31, 1998................. $1,250 $ 1,413 $ (7,015) $ (2,693) $ (7,045)
====== ========== ======== ============= ========
</TABLE>
See accompanying notes.
31
<PAGE> 32
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ......................................... $ (7,146) $ 796 $ 2,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 11,113 6,279 3,419
Deferred taxes and other non-cash items ................. 650 465 93
Changes in operating asset and liabilities:
Accounts receivable ..................................... (6,559) (1,507) (2,715)
Inventories ............................................. (2,984) (4,779) 1,339
Prepaid expenses ........................................ (955) (1,574) 1,427
Accounts payable ........................................ 2,290 3,287 485
Accrued liabilities ..................................... 15,058 3,602 --
Other liabilities ....................................... (1,276) (403) --
--------- --------- ---------
Net cash provided by operating activities ................. 10,191 6,166 6,317
INVESTING ACTIVITIES
Additions to property and equipment ....................... (12,901) (9,389) (3,942)
Proceeds from sale of equipment ........................... 573 (43) 2
Acquisitions, less cash acquired .......................... (10,727) (51,739) (5,462)
--------- --------- ---------
Net cash used in investing activities ..................... (23,055) (61,171) (9,402)
FINANCING ACTIVITIES
Net increase (decrease) in short term borrowings .......... (2,651) 295 (15,769)
Proceeds from long term borrowings ........................ 143,950 63,345 45,271
Payments on long term debt ................................ (100,922) (7,792) (24,053)
Capital contribution ...................................... -- 975 1,050
Deferred financing costs .................................. (4,834) (104) (688)
Distributions to shareholders ............................. (12,037) (1,417) (1,578)
--------- --------- ---------
Net cash provided by financing activities ............... 23,506 55,302 4,233
Translation adjustment .................................... (2,463) (154) (76)
--------- --------- ---------
NET INCREASE IN CASH ...................................... 8,179 143 1,072
Cash at of beginning of year .............................. 1,233 1,090 18
--------- --------- ---------
Cash at end of year ....................................... $ 9,412 $ 1,233 $ 1,090
========= ========= =========
</TABLE>
See accompanying notes.
32
<PAGE> 33
TALON AUTOMOTIVE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of the Company include the
accounts of Talon Automotive Group, Inc. and its domestic and foreign
subsidiaries which include Veltri Metal Products Co., VS Holdings, Inc., and
Veltri Holdings USA, Inc. (collectively the "Veltri Group"), all of which are
wholly-owned by the Company. All significant intercompany transactions and
account balances have been eliminated in consolidation.
2. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
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 Company primarily operates from
fifteen facilities in the United States and Canada. The hourly employees of the
Company are represented by various union locals of the United Auto Workers,
Canadian Auto Workers and United Steel Workers.
USE OF ESTIMATES
The preparation of the consolidated 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 and assumptions.
RECLASSIFICATIONS
Certain items in the Company's 1997 financial statements have been
reclassified to conform with the presentation used in 1998.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks and short-term
marketable securities with maturities of 90 days or less as cash and cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value. The fair value of the Company's bank lines of credit and long-term
debt approximates the recorded amounts at December 31, 1998 since their
respective interest rates approximate the December 31, 1998 market rates for
similar debt instruments.
REIMBURSABLE TOOLING
Reimbursable tooling represents costs incurred by the Company in the
development of new tooling used in the manufacture of the Company's products.
Once customer approval is obtained for the manufacture of a new product, the
Company is reimbursed by the 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 determinable.
INVENTORIES
Inventories are stated at the lower of cost or market.
33
<PAGE> 34
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company provides
for depreciation, principally using the straight-line method, over 30 years for
building improvements and over 5 to 20 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 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 tangible
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
Revenue from sales is recorded upon shipment of product to the
customer. The Company recognizes revenue with respect to reimbursable tooling
contracts on the completed contract basis. Provisions are made for losses in the
year in which the losses are first determinable. At December 31, 1997, deferred
tooling revenue included progress billings of $1,659, net of pre-production
tooling costs of $236. The Company had no deferred tooling revenue recorded at
December 31, 1998.
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. For revenues, expenses, gains
and losses, an appropriately weighted average exchange rate for the respective
periods is used.
COMPREHENSIVE INCOME
Comprehensive income is presented as part of the Company's consolidated
statement of changes in shareholders' equity. The earnings associated with the
Company's investment in its foreign subsidiary are considered to be permanent
investments and no provision for U.S. federal or state income tax benefits on
the related translation adjustments has been provided.
IMPACT OF ACCOUNTING STANDARDS ADOPTED IN YEAR ENDED DECEMBER 31, 1998
The Company has adopted Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." SOP 98-5 requires that costs of start-up
activities be expensed as incurred. The SOP broadly defines start-up activities
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing some new operation. The adoption of SOP
98-5 did not materially affect the results of operations or financial position
of the Company.
In 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosure about Segments of an Enterprise and Related Information. The
Company has adopted this Statement and there was no impact on the Company as it
operates in only one segment.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is required to be adopted
in years beginning after June 15, 1999, with earlier adoption encouraged. At
this time, the Company has not adopted Statement 133 but has not entered into
any derivative or hedging activity and accordingly does not anticipate the
provisions of Statement 133 will affect future results of operations or
financial position.
34
<PAGE> 35
3. ACQUISITIONS
The following acquisitions have been completed since 1996:
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED AGGREGATE PURCHASE PRICE
------- ------------- ------------------------
<S> <C> <C>
J&R.................................. September 30, 1996 $ 6,278
Veltri Group......................... November 8, 1996 $33,961
PSI.................................. December 8, 1997 $52,323
</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 a period
of 40 years. The accompanying consolidated 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 approximately $8,117 and $700 in
1998 and 1997, respectively.
The following information represents the results of operations on a pro
forma basis for the year ended December 31, 1997, as if the acquisitions
referred to above had occurred at the beginning of the year of acquisition, and
after giving effect to certain adjustments including increased depreciation and
amortization of property and equipment and increased 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>
Year ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Proforma net sales............... $229,417 $219,205
Proforma net income.............. 2,124 1,955
</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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
DaimlerChrysler..................................... 45.6% 45.8% 21.3%
General Motors...................................... 23.3% 8.8% 15.4%
Ford................................................ 10.4% 18.1% 47.3%
Other............................................... 20.7% 27.3% 16.0%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Accounts receivable from these customers at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
DaimlerChrysler............................................ $18,253 $17,749
General Motors............................................. 6,683 5,202
Ford....................................................... 3,271 3,533
Other...................................................... 14,373 9,537
------- -------
$42,580 $36,021
======= =======
</TABLE>
35
<PAGE> 36
5. INVENTORIES
Inventory is comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw material................................................ $ 4,935 $ 5,031
Work in process............................................. 6,084 3,996
Finished goods.............................................. 4,984 3,992
------- -------
$16,003 $13,019
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Land and improvements....................................... $ 1,424 $ 1,414
Buildings and improvements.................................. 19,240 16,834
Machinery and equipment..................................... 81,399 74,120
Furniture and fixtures...................................... 1,973 1,826
-------- -------
104,036 94,194
Less accumulated depreciation............................... 38,814 31,723
-------- -------
Net carrying amount......................................... $ 65,222 $62,471
======== =======
</TABLE>
The Company recorded depreciation expense of $9,696 and $5,692 in 1998 and 1997,
respectively.
7. SELF-INSURANCE
The Company participates 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 Company provided $723, $928, and $592 in 1998, 1997 and 1996,
respectively, for claims reported and claims incurred but not reported. The
Company's self-insurance reserves totaled $980, $1,221 and $610 at December 31,
1998, 1997 and 1996, respectively. These amounts are included in accrued
liabilities in the balance sheets.
The Company is also self-insured for health care. Insurance is carried
to limit self-insurance per occurrence to $150. The companies provided $1,541,
$1,633, and $961 in 1998, 1997, and 1996, respectively, for employee group
health insurance.
8. BANK LINE OF CREDIT
At December 31, 1997, J&R Manufacturing, had a $4,000 short-term
secured bank line of credit, with interest at 0.50% 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 on this line of credit were repaid in
1998 and it was terminated in connection with the Company's issuance of Senior
Subordinated Notes.
The Veltri Group, has a $3,254 credit facility through the Export
Development Corporation (the "EDC Facility"). Funds under the EDC Facility are
available only to support tooling programs. At December 31, 1998 and 1997,
outstanding borrowings were $1,949 and $0, respectively.
36
<PAGE> 37
9. LONG TERM DEBT
The Company completed a reorganization and refinancing on April 28, 1998
(see Note 17). As a result of these events, substantially all debt outstanding
at December 31, 1997 was retired and consolidated by the Company in 1998. The
components of long term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
TALON AUTOMOTIVE GROUP, INC. -------- --------
<S> <C> <C>
Senior subordinated notes, semiannual interest payments
at 9.625%, principal due May 2008....................... $120,000 $ --
Revolving senior credit facility, due April 2003,
interest at the prime rate plus a margin ranging 0 to
75 basis points or Eurodollar plus a margin ranging
117.5 to 200 basis points (weighted average of 7.3%
at December 31, 1998) ................................... 22,000 --
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
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
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
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
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
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
$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
$3,254 tooling facility with EDC, payable quarterly, including
interest based on a Eurodollar rate less an applicable margin,
as defined in the agreement ( % at December 31, 1998).... 1,949 --
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
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
Employment obligation to former owners payable monthly
through September 2001, discounted at 8.5%. The obligation
is guaranteed by Hawthorne................................ 693 945
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
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........................................ $144,642 $101,307
Less current portion........................................ (994) (33,463)
-------- --------
$143,648 $ 67,844
======== ========
</TABLE>
Long term debt is secured by substantially all assets of the Company.
The Senior Credit Facility and Senior Subordinated Notes contain certain
covenants, the more restrictive of which require the maintenance of leverage and
debt service coverage ratios. The agreements also place limits on the purchase
or sale of property and equipment, and restrict distributions of earnings to
shareholders. Retained earnings at December 31, 1998 were restricted under the
Senior Credit Facility.
Scheduled maturities of long term debt for the companies are as follows:
<TABLE>
<CAPTION>
TOTAL
-------
<C> <C>
1999........................................................ $ 994
2000........................................................ 1,648
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 142,000
--------
Total....................................................... $144,642
========
</TABLE>
The Company paid interest of approximately $9,527, $3,152, $1,614 in
1998, 1997 and 1996, respectively, of which $0, $0 and $54 was capitalized as
construction in progress in 1998, 1997 and 1996, respectively.
38
<PAGE> 39
10. EMPLOYEE BENEFIT ARRANGEMENTS
DEFINED BENEFIT PLANS
The Company's Hawthorne division 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
Company's 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.
The following table sets forth the certain information for the plan as of
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost 108 93 85
Interest cost 169 154 148
Expected return on assets (186) (148) (121)
Amortization of unrecognized transition obligation/(asset) (5) (5) (5)
Amortization of unrecognized prior service cost 12 12 (9)
------ ------ ------
Net periodic pension cost 98 106 98
====== ====== ======
Changes in benefit obligation:
Benefit obligation at beginning of year 2,465 2,100
Service cost 108 93
Interest cost 169 154
Benefits paid (112) (112)
Changes in liability due to reduction in interest rate
and census experience -- 230
------ ------
Benefit obligation at end of year 2,630 2,465
====== ======
Change in plan assets:
Fair value of assets at beginning of year 2,046 1,714
Actual return on assets 186 363
Contributions 214 81
Benefits paid (112) (112)
------ ------
Fair value of assets at end of year 2,334 2,046
====== ======
Funded status of the plan:
Funded status as of the end of the year (296) (419)
Unrecognized net (asset)/obligation at transition (38) (44)
Unrecognized prior service cost 172 184
Unrecognized net (gain)/loss (146) (145)
------ ------
(Accrued)/prepaid pension cost (308) (424)
====== ======
</TABLE>
The weighted average discount rate used to determine the actuarial
present value of the projected benefit obligations was 7.0% in 1998, 7.5% in
1997 and 1996. The expected long-term rate of return on plan assets was 8.5% in
1998, 1997 and 1996.
The Company's PSI division has a noncontributory defined benefit
retirement plan covering substantially all hourly employees. The plan was frozen
as of June 30, 1997 and was terminated in 1998. The Company expects to
distribute all benefits under this plan to participants in 1999.
As of December 31, 1998, the projected benefit obligation for the PSI
plan was $2,338 and the value of the PSI plan assets was $1,903.
39
<PAGE> 40
PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan covering
substantially all salaried employees. The plan allows eligible employees to make
voluntary, tax-deferred contributions of up to 7.5% of compensation not to
exceed statutory limits. The Company matches up to 50% of the employees'
contributions, limited to 3% of each participant's compensation. In addition,
the plan provides for discretionary contributions by the Company as determined
by the Board of Directors. The Company's contributions to the plan amounted to
approximately $457, $115 and $147 in 1998, 1997 and 1996, respectively.
DEFERRED COMPENSATION
Effective January 1, 1997, the Company entered into agreements with
certain key employees that provide for deferred compensation. Deferred
compensation benefits were determined based on increases in the value of the
Company, as defined, through December 31, 1996 and based on a percentage of
shareholder distributions, as defined, made during 1997 and 1998. The Company
accrues deferred compensation as amounts are allocated to the accounts of
participants under the terms of the agreements. As a result of the issuance of
Senior Subordinated Notes in 1998, vesting of deferred compensation allocations
was accelerated subject to a forfeiture of 33% percent per year during 1999 and
2000. Deferred compensation expense charged to operations amounted to $1,359 in
1998, $1,343 in 1997, and $0 in 1996.
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>
Year Ended December 31:
-----------------------
1998 1997 1996
<S> <C> <C> <C>
Pro forma net income (loss)..................($7,160) $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, 1998. As of December 31, 1998, 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, 1998 and 1997 ranged from $183 to $288 per share.
12. INCOME TAXES
The Company's shareholders have elected under the provisions of the
Internal Revenue Code to be treated as an S Corporation for federal income tax
purposes, except for the Company's Canadian subsidiaries (the "Veltri Group").
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, 1998 the carrying
amount of the Veltri Group's net assets exceeded the tax basis by approximately
$3,200. The Veltri Group is subject to Canadian income tax.
The components of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ------ ------
<S> <C> <C> <C>
Current................................................... $2,943 $ 143 $ --
Deferred.................................................. 415 1,182 94
------ ------ ------
$3,358 $1,325 $ 94
====== ====== ======
</TABLE>
The components of deferred income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Liabilities:
Depreciation.............................................. $1,575 $1,585 $1,393
Other..................................................... 298 176 100
------ ------ ------
1,873 1,761 1,493
Assets:
Loss carry forward........................................ -- 246 1,029
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
Product warranty.......................................... 125 146 189
Other..................................................... 36 5 --
------ ------ -------
161 397 1,218
------ ------ -------
Net deferred tax liability.................................. $1,712 $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>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Taxes at statutory rates............................... $ 2,888 $ 997 $ 850
Income not subject to corporate tax.................... -- (4) (846)
Effect of foreign tax.................................. -- 152 --
Non-deductible items................................... 124 121 90
Other.................................................. 346 59 --
-------- ------ -----
$ 3,358 $1,325 $ 94
======== ====== =====
</TABLE>
Veltri Group paid income taxes of $128, $94, and $183 in 1998, 1997 and
1996, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain warehouse space, automobiles, trucks and
trailers and machinery and equipment under operating and capital leases expiring
on various dates through December 1, 2000. As of December 31, 1998, minimum
lease rental payments due under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- ---------
<C> <C> <C>
1999....................................................... 4,060 1,149
2000....................................................... 3,650 893
2001....................................................... 3,183 599
2002....................................................... 2,052 468
2003....................................................... 1,506 381
Thereafter................................................. 2,078 440
--------- ---------
Total minimum lease payments.......................... $ 16,529 3,930
=========
Amount representing interest............................... (879)
---------
Present value of net minimum lease payments................ $ 3,051
=========
</TABLE>
The Company incurred rent expense for all operating leases of
approximately $3,192, $1,565 and $874 in 1998, 1997 and 1996, respectively. The
Company had outstanding letters of credit amounting to $1,867, $1,615 and $1,075
in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had entered into commitments to
purchase approximately $4,700 of new machinery and tooling equipment.
14. CAPITAL STRUCTURE
The authorized capital stock of the Company consist of 25,000 shares of
Class A Voting Common Stock of which 4,074 were issued and outstanding as of
December 31, 1998 in an amount of $925, and 250,000 shares of Class B
Non-voting Common Stock, of which 158,853 were issued and outstanding in an
amount of $325.
41
<PAGE> 42
15. RELATED PARTY TRANSACTIONS
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 certain information for these leases:
<TABLE>
<CAPTION>
AFFILIATED LEASE LEASE ANNUAL BASE
PERSON LOCATION COMMENCEMENT TERMINATION RENT
---------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Maria Veltri........... Windsor, Ontario, Canada 1994 2002 $ 75,772
Maria Veltri........... Windsor, Ontario, Canada 1993 2002 37,368
</TABLE>
The Company has a business services agreement with Talon L.L.C., an
affiliated company owned by the shareholders of the Company, under which the
Company receives services of risk management, benefits management, tax
preparation and other services from Talon L.L.C. Fees incurred under the
agreement aggregated $645, $1,150 and $850 in 1998, 1997 and 1996, respectively.
In connection with the issuance of the Company's Senior Subordinated Notes in
April 1998, fees under this agreement were limited to $500 per year.
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 shareholders. The Company received fees of approximately
$250, $1,600, and $1,950 in 1998, 1997 and 1996, respectively for such services
which are included as an offset against selling, general and administrative
expenses. The Company discontinued charging G&L fees under this agreement in
July 1998.
16. SUPPLEMENTAL GUARANTOR INFORMATION
Veltri Metal Products Co., VS Holdings, Inc. and Veltri Holdings USA,
Inc. (collectively the "Veltri Group") are wholly owned subsidiaries of the
Company and constitute all of the direct and indirect subsidiaries of the
Company. All members of the Veltri Group have fully and unconditionally
guaranteed, on a joint and several basis, the obligation to pay principal,
premium, if any, and interest with respect to the Senior Subordinated Notes. In
addition, there are no restrictions on the ability of the Veltri Group to
transfer funds to the Company in the form of cash dividends, loans or advances,
except as follows: (i) pursuant to the Veltri Group purchase agreements among
the Veltri Group and its former owners, the Veltri Group agreed not to make any
loans or advances to any person (including the Company) until certain earn-out
provisions for the former owners have been satisfied; and (ii) pursuant to the
Senior Credit Facility agreement the Veltri Group agreed not to (a) declare or
pay any dividends on, or make any other distribution with respect to any shares
of capital stock; or (b) make loans, advances or extensions of credit to any
person (except for credit sales in the ordinary course of business and loans to
affiliates in an aggregate amount not to exceed $15 million U.S. dollars at any
time outstanding); and (iii) pursuant to the indenture agreement for the
Company's Senior Subordinated Notes, the Veltri Group is prohibited from making
loans or advances to the Company if a default or event of default shall have
occurred under the indenture.
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, and in lieu thereof, summarized financial
information relating to the Veltri Group is shown as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31:
1998 1997
-------- --------
<S> <C> <C>
Current assets $ 33,990 $ 25,886
Non-current assets 34,510 26,937
Current liabilities 17,290 17,456
Non-current liabilities 42,137 33,727
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
1998 1997
-------- --------
<S> <C> <C>
Net sales $100,512 $ 75,710
Gross profit 20,022 13,813
Net income 2,293 1,362
</TABLE>
42
<PAGE> 43
17. REORGANIZATION, REFINANCING AND SHAREHOLDER DISTRIBUTION
In April 1998, the Company issued $120,000 of 9.625% Senior
Subordinated Notes and received net proceeds of approximately $116,000 after
issuance costs. The Company used the net proceeds to retire existing
indebtedness. The Company is required to make scheduled semi-annual interest
payments on the Notes of approximately $5.8 million on May 1 and November 1 each
year until their maturity on May 1, 2008 or unless the Notes are redeemed
earlier.
In connection with the issuance of the Notes, the Company was
reorganized and a special shareholder distribution of $10,000 was made
concurrent with the issuance of the Notes. To effect the reorganization, the
combined capital stock of Talon Automotive Group, LLC, Hawthorne Metal Products,
Co., J&R Manufacturing, Inc. and Production Stamping, Inc. (collectively the
"Talon Entities"), were merged into the Company. The Veltri Group became wholly
owned subsidiaries of the Company. 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.
The equity ownership agreements of the Talon Entities were restated
such that the resultant stock options in the Company were equivalent to those
previously existing in each of the Talon Entities. The deferred compensation
agreements of the Talon Entities were amended to discontinue future
contributions under these agreements, excluding up to $300 in additional
deferred compensation which can be earned by one participant, and annual
increases on all vested amounts at the rate of 6% per year
The Company recorded extraordinary and non-recurring expenses totaling
$2.5 million as a result of the refinancing on April 28, 1998. These expenses
were comprised of (i) a $0.5 non-recurring extraordinary loss, net of $0.1 tax
benefit, on the early extinguishment of debt, (ii) a $0.6 non-recurring loss on
foreign exchange associated with the retirement of indebtedness and (iii) a $1.4
non-recurring expense under deferred compensation agreements.
18. SUBSEQUENT EVENTS
In March 1999, the Company's Senior Credit Facility agreement was
amended to revise certain definitions pertaining to financial covenants. The
amendments provided for the allowance of certain adjustments to the calculation
of EBITDA, as that term is defined in the agreement, to offset among other
things, the effect of the General Motors strike. In addition, the definition of
net worth was amended to exclude the full impact of the General Motors strike.
The Company was in default of a net worth covenant under the senior credit
facility at December 31, 1998 and this was waived by the banks as part of this
amendment.
43
<PAGE> 44
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
3.1 Articles of Incorporation of Talon Automotive Group, Inc. (the
"Company"), as amended, including Certificate of Merger dated as of
November 27, 1997, Certificate of Assumed name dated as of April 9,
1998, Certificate of Merger/Consolidation dated as of April 28, 1998,
and Certificates of Share Exchange dated as of April 28, 1998 *
3.2 Articles of Incorporation of VS Holdings, Inc. ("VS Holdings"), as
amended, including Certificate of Merger/Consolidation dated as of
April 28, 1998, Certificate of Share Exchange dated as of April 28,
1998, and Articles of Share Exchange dated as of April 28, 1998 *
3.3 Articles of Incorporation of Veltri Holdings USA, Inc.
("Veltri Holdings"), including Certificate of Share Exchange
dated as of April 28, 1998 *
3.4 Certificate of Status and Order of Amalgamation of Veltri
Metal Products Co. ("Veltri Metal Products") *
3.5 By-laws of the Company *
3.6 By-laws of VS Holdings *
3.7 By-laws of Veltri Holdings *
3.8 Articles of Association of Veltri Metal Products Co. *
3.9 Agreement and Plan of Merger dated as of April 28, 1998 by
and between VS Holdings and VS Holdings No. 2, Inc. *
3.10 Agreement and Plan of Merger dated as of April 28, 1998 by
and between Production Stamping, Inc. ("PSI"), Hawthorne
Metal Products Company ("Hawthorne"), and J&R Manufacturing
Inc. ("J&R") *
3.11 Agreement and Plan of Merger dated as of April 28, 1998 by
and between the Company and TAG L.L.C. *
3.12 Agreement and Plan of Share Exchange dated as of April 28, 1998 by and
between the Company and VS Holdings *
3.13 Agreement and Plan of Share Exchange dated as of April 28, 1998 by and
between the Company and Veltri Holdings *
4 Indenture dated as of April 28, 1998 by and among the
Company, as Issuer, VS Holdings, Veltri Holdings, and Veltri
Metal Products, as Guarantors, and U.S. Bank Trust National
Association, as Trustee *
4.1 Form of 9 5/8% Senior Subordinated Note Due 2008, Series B *
4.2 Form of Guarantee *
10.1 (a) Credit Agreement dated as of April 28, 1998 by and between the
Company, as Borrower, and Comerica Bank, as Agent for the Lenders *
10.1 (b) First Amendment to Credit Agreement dated as of April 28, 1998 by and
between the Company, as Borrower, and Comerica Bank, as Agent for the
Lenders **
10.2 Pledge Agreement dated as of April 28, 1998 by and between
the Company and Comerica Bank *
10.3 Mortgage Agreement dated as of April 28, 1998 by and between
the Company and Comerica Bank *
10.4 Security Agreements dated as of April 28, 1998 between each of the
Company, VS Holdings, and Veltri Holdings and Comerica Bank *
10.5 Guaranty Agreements dated as of April 28, 1998 between each of the
Company, VS Holdings, Veltri Metal Products and Veltri Holdings and
Comerica Bank *
10.6 Debenture Agreement dated as of April 28, 1998 by and between Veltri
Metal Products and Comerica Bank *
10.7 Debenture Pledge Agreement dated as of April 28, 1998 by and between
Veltri Metal Products and Comerica Bank *
10.8 Agreement dated as of April 28, 1998 by and among Michael T.
J. Veltri ("Mr. Veltri"), Veltri Metal Products, VS
Holdings, Veltri Holdings and the Company *
10.9 Amended and Restated Promissory Note dated as of April 28,
1998 by Veltri Metal Products in favor of Mr. Veltri *
10.10 Unconditional Guaranty dated as of April 28, 1998 by the Company, VS
Holdings, and Veltri Holdings in favor of Mr.
Veltri *
10.11 Security Agreement dated as of April 28, 1998 by the Company, its
subsidiaries, VS Holdings and Veltri Holdings in favor of Mr. Veltri *
10.12 Mortgage dated as of April 28, 1998 by and between the
Company, as mortgagor, and Mr. Veltri, as mortgagee *
10.13 First Amendment to Stock Purchase Agreement dated as of
April 28, 1998 by and among Mr. Veltri, Veltri Metal
Products, VS Holdings and Veltri Holdings *
10.14 Intercreditor Agreement dated as of April 28, 1998 between
and among Mr. Veltri and Comerica Bank *
10.15 Registration Rights Agreement dated as of April 28, 1998 by and among
the Company, VS Holdings, Veltri Holdings, and Veltri Metal Products,
Salomon Brothers Inc and Credit Suisse First Boston Corporation *
<PAGE> 45
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
10.16 Stock Purchase Agreement dated as of November 8, 1996 by and
among Mr. Veltri, Maria Veltri and the Company *
10.17 Stock Purchase Agreement dated as of October 17, 1997, as amended, by
and among the former shareholders of PSI and the Company *
10.18 Purchase Agreement dated as of September 30, 1996 by and among the
former shareholders of J&R and the Company *
10.19 Employment Agreement dated as of November 27, 1995, as
amended on January 1, 1998, by and between the Company and
Delmar O. Stanley ("Mr. Stanley") *
10.20 Employment Agreement dated as of November 8, 1996 by and
between the Company and Mr. Veltri *
10.21 Non-Compete Agreement dated as of November 8, 1996 by and
between the Company and Mr. Veltri *
10.22 Severance Agreement dated as of February 6, 1996 by and
between the Company and David Woodward ("Mr. Woodward") *
10.23 Severance Agreement dated as of February 7, 1996 by and
between the Company and Kris Pfaehler *
10.24 Consolidated Equity Ownership Plan and Agreements thereunder
by and between the Company and each of Mr. Stanley, Mr.
Woodward, Mr. Pfaehler, and Wayne C. Inman ("Mr. Inman") *
10.25 Deferred Compensation Agreements by and between the Company
and each of Mr. Stanley, Mr. Woodward, and Mr. Pfaehler *
10.26 Talon L.L.C. 401(k) Plan, as amended *
10.27 Veltri Holdings 401(k) Plan *
10.28 Executive Bonus Program of the Company *
10.29 Lease Agreement by and between the Company and Maria Veltri
dated August 1, 1994 *
10.30 Lease Agreement by and between the Company and Maria Veltri
dated July 1, 1993 *
10.31 Amended and Restated Agreement dated as of April 28, 1998,
by and between the Company and Talon L.L.C. *
10.32 Loan and Facility Agreements dated as of April, 1997 between and among
Veltri Metal Products and Export Development Corporation *
21 Subsidiaries and Affiliates of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company for the year ended
December 31, 1998.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES AND AFFILIATES
<TABLE>
<CAPTION>
NAME OWNED BY AND NAME
INCORPORATION PERCENTAGE OWNED JURISDICTION
- ------------- ---------------- ------------
<S> <C> <C>
SUBSIDIARIES
VS Holdings, Inc. Talon Automotive Group, Inc. (100%) Michigan
corporation
Veltri Holdings USA, Inc. Talon Automotive Group, Inc. (100%) Indiana
corporation
Veltri Metal Products Co. VS Holdings, Inc. (100%) Nova Scotia
unlimited liability company
</TABLE>
AFFILIATES
None
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 333-56461), and related Prospectus of Talon Automotive Group, Inc. of
our report dated March 12, 1999, except for Note 18 as to which the date is
March 26, 1999, with respect to the consolidated financial statements of Talon
Automotive Group, Inc., included in the Annual Report on Form 10-K for the year
ended December 31, 1998 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Detroit, Michigan
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 202,029
<SECURITIES> 143,444
<RECEIVABLES> 104,315
<ALLOWANCES> 207,634
<INVENTORY> 15,144
<CURRENT-ASSETS> 341,261
<PP&E> 2,414,051
<DEPRECIATION> 640,659
<TOTAL-ASSETS> 2,286,506
<CURRENT-LIABILITIES> 204,008
<BONDS> 1,723,960
0
0
<COMMON> 0
<OTHER-SE> 357,548
<TOTAL-LIABILITY-AND-EQUITY> 2,286,506
<SALES> 0
<TOTAL-REVENUES> 627,054
<CGS> 0
<TOTAL-COSTS> 404,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,226
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,327
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
