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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: Commission file number:
DECEMBER 31, 1997 1-12733
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TOWER AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1746238
(State of Incorporation) (I.R.S. Employer Identification No.)
4508 IDS CENTER
MINNEAPOLIS, MINNESOTA 55402
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (612) 342-2310
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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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.
As of March 23, 1998, 23,064,087 shares of Common Stock of the
Registrant were outstanding and the aggregate market value of the Common
Stock of the Registrant (based upon the last reported sale price of the
Common Stock at that date by the New York Stock Exchange), excluding shares
owned beneficially by affiliates, was approximately $1,014,407,000.
Information required by Items 5,6,7 and 8 of Part II of this Annual Report on
Form 10-K incorporates by reference information (to the extent specific
sections are referred to herein) from the Registrant's Annual Report to
Stockholders for the year ended December 31, 1997 (the "1997 Annual Report").
Information required by Items 10, 11, 12 and 13 of Part III of this Annual
Report on Form 10-K incorporates by reference information (to the extent
specific sections are referred to herein) from the Registrant's Proxy
Statement for its annual meeting to be held May 19, 1998 (the "1998 Proxy
Statement").
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TOWER AUTOMOTIVE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
MARKET DATA USED THROUGHOUT THIS FORM 10-K WERE OBTAINED FROM INDUSTRY
PUBLICATIONS AND INTERNAL COMPANY SURVEYS. INDUSTRY PUBLICATIONS GENERALLY
STATED THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES
BELIEVED TO BE RELIABLE. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED THESE
MARKET DATA. SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY THE
COMPANY TO BE RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
(a) GENERAL DEVELOPMENT OF BUSINESS
BACKGROUND OF COMPANY
Tower Automotive, Inc. and its subsidiaries (collectively referred to as
the "Company") is a leading designer and producer of high-quality body
structure components and assemblies used by the major North American
automotive original equipment manufacturers ("OEMs"), Ford, Chrysler and
General Motors, and certain foreign OEMs with manufacturing operations in
North America ("Transplants"), including Honda, Toyota, Nissan and Mazda.
The Company's current products range from large structural stampings and
assemblies, such as body pillars, chassis, suspension and floor pan
components and major housing assemblies, to engineered assemblies, such as
hood and deck lid hinges and brake components. Since its inception in April
1993, the Company's revenues have grown rapidly through a focused strategy of
internal growth and a highly disciplined acquisition program. During the
last four years, the Company has successfully completed six acquisitions and
acquired joint venture interests in Mexico and Brazil. As a result of such
acquisitions and internal growth, the Company's revenues have increased from
approximately $86 million in 1993 to approximately $1.2 billion in 1997,
representing a compound annual growth rate of approximately 95%. The
Company's North American content per vehicle has increased from $6.23 in 1993
to $91.14 in 1997.
The Company operates in the large and highly fragmented structural
segment of the automotive supply industry, which has recently begun to
undergo significant consolidation. In order to lower costs and improve
quality, OEMs are reducing their supplier base by awarding sole-source
contracts to full-service suppliers who are able to supply larger portions of
a vehicle on a global basis. OEMs' criteria for supplier selection include
not only cost, quality and responsiveness, but also full-service design,
engineering and program management capabilities. OEMs are increasingly
seeking suppliers capable of providing complete systems or modules rather
than suppliers who only provide separate component parts. In addition, OEMs
are increasingly requiring their suppliers to have the capability to design
and manufacture their products in multiple geographic markets. As a
full-service supplier with strong OEM relationships, the Company expects to
continue to benefit from these trends within the structural segment of the
automotive supply industry.
The Company was formed to acquire R.J. Tower Corporation (the
"Predecessor" or "R.J. Tower"), the acquisition of which was completed in
April 1993 for an aggregate cost of approximately $26 million. Since April
1993, the Company has successfully completed six strategic acquisitions and
acquired joint venture interests in Mexico and Brazil including:
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CATERINA. In March 1998, the Company acquired a 40 percent equity
interest in Metalurgica Caterina S.A. ("Caterina"), a supplier of structural
stampings and assemblies to the Brazilian automotive market. In addition,
the Company also has the right to acquire the remaining 60 percent of the
equity of Caterina in the future. The Company paid approximately $48 million
for its initial equity interest. This investment added Volkswagen and
Mercedes as new customers.
METALSA. In October 1997, the Company acquired a 40 percent equity
interest in Metalsa S. de R.L. ("Metalsa"). In addition, the Company has
entered into a technology sharing arrangement which will allow it to utilize
the latest available product and process technology. Metalsa is the largest
supplier of vehicle frames and structures in Mexico. The Company paid
approximately $120 million for its equity interest with an additional
amount of up to $45 million payable based upon Metalsa's future net earnings.
SIMES. In May 1997, the Company acquired Societa Industria Meccanica e
Stampaggio S.p.A. ("SIMES") for approximately $50.7 million in cash, plus up
to an additional $3.0 million if SIMES achieves certain operating targets
following the acquisition. The acquisition of SIMES (i) significantly
expanded the Company's global capabilities by providing the Company with a
manufacturing presence in Europe, (ii) added Fiat as a new customer and (iii)
enhanced the Company's design and engineering capabilities.
APC. In April 1997, the Company acquired Automotive Products Company
("APC"), a division of A.O. Smith, for approximately $700 million in cash.
APC is a leading designer and producer of structural and suspension
components for the automotive, light truck and heavy truck markets. The
acquisition of APC (i) expanded product offerings and modular product
opportunities; (ii) increased customer penetration within each of the three
major North American OEMs and within certain Transplants; (iii) increased
penetration in the light truck segment and other key models; (iv) added
complementary new technology; (v) provided opportunities to reduce costs and
improve operational efficiency; and (vi) provided an expanded presence in
China, Japan and South America, which complemented the Company's current
European initiatives to provide expanded global production capabilities for
both North American and international OEMs.
MSTI. In May 1996, the Company acquired MascoTech Stamping
Technologies, Inc. ("MSTI") from MascoTech, Inc. ("MascoTech") for
approximately $79 million (including the payment of related fees and
expenses), plus additional earn-out payments if certain operating targets are
achieved by the MSTI facilities in the first three years following the
acquisition. The MSTI acquisition: (i) expanded the Company's product
capabilities into chassis and suspension components; (ii) provided chassis
and suspension technology as well as value-added processing technologies
including assembling, painting and welding; and (iii) increased the Company's
content per vehicle on key light truck and sport utility vehicles such as the
Ford F-Series, Explorer and Windstar and the Chrysler Ram and Dakota as well
as on high volume passenger cars such as the Ford Taurus/Sable.
TRYLON. In January 1996, the Company acquired Trylon Corporation
("Trylon") from MascoTech for approximately $25 million in cash, including
transaction costs. The Trylon acquisition: (i) broadened the Company's
product offerings to include small, precision metal stampings and assemblies,
which were previously outsourced to third parties; (ii) established a
relationship between the Company and General Motors; and (iii) increased
content on Ford models, primarily the Villager.
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KALAMAZOO. In June 1994, the Company acquired Kalamazoo Stamping and
Die Company ("Kalamazoo"), a supplier of structural stampings and assemblies,
for approximately $12 million in cash. The acquisition of Kalamazoo added
additional structural components to the Company's product offerings and
increased model penetration with Ford.
EDGEWOOD. In May 1994, the Company acquired Edgewood Tool and
Manufacturing Company and its affiliate, Ann Arbor Assembly Corporation
(collectively, "Edgewood") for approximately $30 million in aggregate
consideration. Edgewood is a leading supplier of hood and deck lid hinges as
well as structural stampings and assemblies. The acquisition of Edgewood:
(i) added engineered mechanical stampings, primarily hood and deck lid
hinges, and additional structural components to the Company's product
offerings; (ii) increased model penetration with the Company's existing
customers; and (iii) provided the Company with a significant new customer,
Mazda.
The Company completed an initial public offering (the "IPO") of its
Common Stock in August 1994, the sale of an additional 2,232,900 shares in
June 1996 and an additional 8,500,000 shares in April 1997. The Company's
principal executive offices are located at 4508 IDS Center, Minneapolis,
Minnesota 55402, and its telephone number is (612) 342-2310.
BUSINESS STRATEGY
The Company's business objective is to capitalize upon the
consolidation, globalization and system/modular sourcing trends in the
automotive supply industry in order to be the leading provider of structural
and suspension components to OEMs on a worldwide basis. Key elements of the
Company's operating and growth strategies are outlined below:
OPERATING STRATEGY:
FULL-SERVICE TECHNICAL DESIGN, ENGINEERING AND PROGRAM MANAGEMENT
CAPABILITIES. The Company strives to maintain a competitive advantage
through investment in research and product development, advanced engineering
and program management. The Company works with OEMs throughout the product
development process from concept vehicle and prototype development through
the design and implementation of manufacturing processes to provide
full-service capabilities to its customers. In some cases, the Company
places design engineers at customer facilities to coordinate its product
design efforts with those of its OEM customers.
EFFICIENT MANUFACTURING/CONTINUOUS IMPROVEMENT PROGRAMS. In response to
OEMs' increasingly stringent demands, the Company has implemented
manufacturing practices designed to maximize product quality and timeliness
of delivery and eliminate waste and inefficiency. The Company has continued
to upgrade its manufacturing equipment and processes through substantial
investment in new equipment, maintenance of existing equipment and
utilization of manufacturing engineering personnel.
GLOBAL PRESENCE. The Company strives to offer manufacturing and support
services to its customers on a global basis through a combination of
international wholly owned facilities and by entering into joint ventures and
partnerships with foreign suppliers. Since 1993, in furtherance of its
global expansion strategy, the Company has opened a European sales and
engineering office to service U.K. and German OEM customers and has
established an industrial partnership with The Kirchhoff Group ("Kirchhoff")
in Germany. The Company also has relocated certain technical personnel
resources to locations where OEMs are developing "world cars."
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DECENTRALIZED, PARTICIPATIVE CULTURE. The Company's decentralized
approach to managing its manufacturing facilities encourages decision making
and employee participation in areas such as manufacturing processes and
customer service. The Company's leadership team meets frequently at various
Company locations in order to maintain a unified Company culture. To
increase employee productivity, the Company utilizes incentive programs for
all salaried and hourly employees and provides incentives for employees who
take advantage of its continuous improvement programs and who provide cost
savings ideas.
GROWTH STRATEGY:
STRATEGIC ACQUISITIONS. The Company continues to believe that
consolidation in the automotive supply industry will provide further
attractive opportunities to acquire high-quality companies that complement
its existing business. The Company seeks to make acquisitions that (i)
provide additional product, manufacturing and technical capabilities; (ii)
broaden the Company's geographic coverage domestically and strengthen its
ability to supply products on a global basis; (iii) increase the number of
models for which the Company supplies products and the content supplied for
existing models; and (iv) add new customers. The Company intends to seek
future acquisitions or develop strategic alliances that will strengthen the
Company's ability to supply its products on a global basis.
MODULAR PRODUCT OPPORTUNITIES. The Company has capitalized on the
system/modular sourcing trend among OEMs by offering customers higher
value-added supply capabilities through an increasing focus on the production
of assemblies consisting of multiple component parts that are welded or
otherwise fastened together by the Company. The Company has the ability to
supply OEMs with modules consisting of integrated assemblies and component
parts that can be installed as a unit in a vehicle at the OEM assembly plant.
INCREASE VEHICLE PENETRATION. The Company has developed strong
relationships with certain OEM engineering and purchasing personnel which
allow it to identify business opportunities and to react to customer needs in
the early stages of vehicle design. The Company believes that these
relationships give it a competitive advantage over smaller and less capable
suppliers in marketing its broad range of products and in developing new
product concepts, such as expanded use of modules, that complement its
existing product lines.
PURSUIT OF "WORLD CAR" OPPORTUNITIES. The Company has been working
closely with certain customers on the development of "world cars," which are
designed by OEMs in one vehicle center to a single global standard but
produced and sold in different geographic markets. Suppliers for a specific
"world car" are often required to provide their products on a worldwide
basis. The Company believes that it has a competitive advantage in
potentially supplying certain world cars given its international presence,
full-service capabilities and existing position as a leading supplier on the
Ford Escort and DEW98 luxury car, as well as on other existing vehicle
platforms which may eventually evolve into world cars.
INDUSTRY TRENDS
The Company's performance and growth is directly related to certain
trends within the automotive market, including the consolidation of the
component supply industry, the increase in global sourcing and the growth of
system/modular sourcing.
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SUPPLIER CONSOLIDATION. The automotive supply industry has begun to
undergo significant consolidation. In order to lower costs and improve
quality, OEMs are reducing their supplier base by awarding sole-source
contracts to full-service suppliers who are able to supply larger segments of
a vehicle. OEMs' criteria for supplier selection include not only cost,
quality and responsiveness, but also full-service design, engineering and
program management capabilities. For full-service suppliers such as the
Company, the new environment provides an opportunity to grow by obtaining
business previously provided by other non-full service suppliers and by
acquiring suppliers that further enhance product, manufacturing and service
capabilities. OEMs rigorously evaluate suppliers on the basis of product
quality, cost control, reliability of delivery, product design capability,
financial strength, new technology implementation, quality and condition of
facilities and overall management. Suppliers that obtain superior ratings
are considered for sourcing new business. Although these new supplier
policies have already resulted in significant consolidation of component
suppliers in certain segments, the Company believes that consolidation within
the structural and suspension component segments of the automotive industry
will continue to provide attractive opportunities to acquire high-quality
companies that complement its existing business.
GLOBAL SOURCING. Regions such as Asia, Latin America, Mexico and
Eastern Europe are expected to experience significant growth in vehicle
demand over the next ten years. OEMs are positioning themselves to reach
these emerging markets in a cost-effective manner by seeking to design and
produce "world cars" which can be designed in one vehicle center to a single
global standard but produced and sold in different geographic markets,
thereby allowing OEMs to reduce design costs, take advantage of low-cost
manufacturing locations and improve product quality and consistency. OEMs
increasingly are requiring their suppliers to have the capability to design
and manufacture their products in multiple geographic markets.
SYSTEM/MODULAR SOURCING. OEMs are increasingly seeking suppliers
capable of providing complete systems or modules rather than suppliers who
only provide separate component parts. A system is a group of component
parts which operate together to provide a specific engineering driven
functionality whereas a module is a group of systems and/or component parts
which are assembled and shipped to the OEM for installation in a vehicle as a
unit. By outsourcing complete systems or modules, OEMs are able to reduce
their costs associated with the design and integration of different
components and improve quality by enabling their suppliers to assemble and
test major portions of the vehicle prior to beginning production.
PRODUCTS
The Company produces a broad range of stamped and welded assemblies for
vehicle body structures and suspension systems, many of which are critical to
the structural integrity of a vehicle. These products include body
structural assemblies such as pillars and package trays, control arms,
suspension links, engine cradles and full frame assemblies. These stampings
and assemblies are attached directly to the frame of an automobile at the OEM
assembly plant and comprise the major structure of a vehicle. The Company's
products generally can be classified into the following categories:
Structural components, suspension components and engineered assemblies.
STRUCTURAL COMPONENTS. The Company's structural component products form
the basic upper body structure of the vehicle and include large metal
stampings such as body pillars, roofrails, side sills, parcel shelves and
intrusion beams. The Company expanded its product offerings to include
structural component products that form the basic lower body structure of
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the vehicle such as light truck frames, automotive engine cradles and heavy
truck frame rails. Critical to the strength and safety of vehicles,
structural products carry the load of the vehicle and provide crash integrity.
SUSPENSION COMPONENTS. The Company's current suspension component
products include stamped, formed and welded products such as control arms,
suspension links, track bars, spring/shock towers, control arms, suspension
links and trailing axles. Critical to the ride, handling and noise
characteristics of a vehicle, suspension components are a natural extension
of the Company's larger structural components.
ENGINEERED ASSEMBLIES. The Company's current engineered assemblies
include a broad array of highly engineered parts such as hood and deck lid
hinges, brake components and fuel filter assemblies. Such engineered
assemblies are a natural extension to the Company's other products in that
they are attached to both structural and suspension components.
OTHER. In addition to the Company's structural, suspension and
mechanical component products, the Company manufactures a variety of other
products, including heat shields and other precision stampings, for its OEM
customers.
Although a portion of the Company's products are sold directly to OEMs
as finished products, most are used by the Company to produce assemblies
consisting of multiple parts that are welded or otherwise fastened together
by the Company. Systems and assemblies currently produced by the Company
include front and rear structural suspension systems comprised of control
arms, suspension links and axle assemblies consisting of stamped metal
trailing axles, assembled brake shoes, hoses and tie rods.
CUSTOMERS AND MARKETING
The North American automotive market is dominated by General Motors,
Ford and Chrysler, with Transplants representing approximately 28% of this
market in 1997. The Company currently supplies its products primarily to
Ford, Chrysler, General Motors, Honda, Toyota, Nissan and Mazda.
OEMs typically award contracts that cover parts to be supplied for a
particular car model. Such contracts range from one year to over the life of
the model, which is generally three to ten years and do not require the
purchase by the customer of any minimum number of parts. The Company also
competes for new business to supply parts for successor models and therefore
is subject to the risk that the OEM will not select the Company to produce
parts on a successor model. The Company supplies parts for a broad
cross-section of both new and mature models, thereby reducing its reliance on
any particular model. For example, the Company supplies parts for
substantially all models produced by Ford, Honda and Chrysler and currently
supplies Chrysler with substantially all of its full frame requirements. The
following table presents an overview of the major models for which the
Company supplies products:
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CUSTOMER CAR MODELS TRUCK MODELS
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Ford Taurus/Sable, Contour/Mystique, Mustang, Explorer, Ranger, F-Series,
Escort, Crown Victoria, Grand Marquis, Econoline, Villager, Windstar,
Probe, Continental Medium Trucks, Expedition
Chrysler Concorde/Intrepid, Neon, Viper, Ram Pick-up, Dakota, Grand
Stratus/Cirrus/Breeze Cherokee, Voyager, Caravan,
Ram Van, Wrangler, Durango,
General Motors Cavalier, Sunfire, Grand Am, Lumina, Grand C/K Pick-up, Blazer, Chevy Van,
Prix Suburban, Tahoe, Yukon, Astro,
Safari
Honda Accord, Civic, Acura Integra
Mazda 626,MX6
Toyota Avalon, Camry Mini-van
Nissan Sentra Quest, Pick-up
Isuzu Rodeo, Amigo
Fiat Marea, Punto, Bravo
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Most of the parts the Company produces have a lead time of two to five
years from product development to production. See "Design and Engineering
Support." Since 1988, the Company has been the leading supplier for hood and
deck hinges at Ford and Chrysler and is responsible for the design and
production of such products. The selling prices of these products are
generally negotiated between the Company and its customers and are typically
not subject to a competitive bid process.
Sales of the Company's products to OEMs are made directly by the
Company's sales and engineering forces, located at its technical centers in
Farmington Hills, Michigan, Milwaukee, Wisconsin, Yokohama, Japan and Torino,
Italy. Through its technical centers, the Company services its OEM customers
and manages its continuing programs of product design improvement and
development. The Company periodically places engineering staff at various
customer facilities to facilitate the development of new programs.
DESIGN AND ENGINEERING SUPPORT
The Company strives to maintain a technological advantage through
investment in product development and advanced engineering capabilities. The
Company's manufacturing engineering capabilities enable it to design and
build high-quality and efficient manufacturing systems, processes and
equipment and to continually improve its production processes and equipment.
The Company's manufacturing engineers are located at each of its
manufacturing facilities. The Company's engineering staff currently consists
of approximately 400 full-time engineers, whose responsibilities range from
research and development, advanced product development, product design,
testing and initial prototype development to the design and implementation of
manufacturing processes.
Because assembled parts must be designed at an early stage in the
development of new vehicles or model revisions, the Company is increasingly
given the opportunity to utilize its product engineering resources early in
the planning process. Advanced development engineering resources create
original engineering designs, computer-aided designs, feasibility studies,
working prototypes and testing programs to meet customer specifications. The
Company's advanced development capabilities have resulted in several
innovations in hinge design that have provided significant benefits to the
Company's customers. The Company also has full-service design capability for
chassis components.
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GLOBAL INITIATIVES
The Company has formed, or is in the process of forming, strategic
alliances with other suppliers throughout the world, including those located
in Europe, Asia and Latin America. The Company has opened a European sales
and engineering office to service its U.K. and German OEM customers. As part
of its acquisition of APC, the Company acquired a 60% equity interest in a
joint venture that manufactures structural components in China. In addition
to the Company's equity interests in Metalsa and Caterina, the Company has a
joint manufacturing and marketing agreement with Kirchhoff, a German
automobile parts supplier, pursuant to which the Company and Kirchhoff have
agreed to provide manufacturing and marketing services to each other when and
as required by each company's OEM customers. A current focus of the
Company's acquisition strategy is to acquire foreign suppliers that would
provide the Company with a manufacturing presence in new geographic areas and
afford the Company access to new customer opportunities.
MANUFACTURING
The Company's manufacturing operations consist primarily of stamping
operations, system and modular assembly operations, roll-forming and
hydroforming operations and associated coating and other ancillary operations.
Stamping involves passing metal through dies in a stamping press to form
the metal into three-dimensional parts. The Company produces stamped parts
using over 640 precision single-stage, progressive and transfer presses,
ranging in size from 150 to 4,000 tons, which perform multiple functions as
raw material proceeds through the press and is converted into a finished
product. The Company continually invests in its press technology to increase
flexibility, improve safety and minimize die changeover time.
After forming is completed, stampings that are to be used in assemblies
are placed in work-in-progress staging areas from which they are fed into
cell-oriented assembly operations that produce complex, value-added
assemblies through the combination of multiple parts that are welded or
fastened together. The Company's assembly operations are performed on either
dedicated, high-volume welding/fastening machines or on flexible-cell
oriented robotic lines for units with lower volume production runs. The
assembly machines attach additional parts, fixtures or stampings to the
original metal stampings. In addition to standard production capabilities,
the Company's assembly machines are also able to perform various statistical
control functions and identify improper welds and attachments. The Company
continually works with manufacturers of fixed/robotic welding systems to
develop faster, more flexible machinery. Several of the Company's welding
systems were designed by the Company.
The products manufactured by the Company use various grades and
thicknesses of steel and aluminum, including hot and cold rolled, galvanized,
organically coated, stainless and aluminized steel. The Company does not
produce exposed sheet metal components, such as exterior body panels. See
"Suppliers and Raw Materials."
OEMs have established quality rating systems involving rigorous inspections
of suppliers' facilities and operations. OEMs' factory rating programs provide
a quantitative measure of a company's success in improving the quality of its
operations. The Company has received quality awards from Ford (Q1) and Chrysler
(Pentastar) and has consistently received one of Ford's highest commercial
ratings for suppliers in the stamping segment. The automotive
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industry adopted a quality rating system known as QS-9000. The Company has
received QS-9000 certification in compliance with the automotive industry
requirements.
COMPETITION
The Company operates in a highly competitive, fragmented market segment
of the automotive supply industry, with a limited number of competitors
generating revenues in excess of $200 million. The number of the Company's
competitors has decreased in recent years and is expected to continue to
decrease due to the supplier consolidation resulting from changing OEM
policies. The Company's largest competitors include The Budd Company, a
subsidiary of Thyssen AG ("Budd"), Magna International, Inc. ("Magna"), Dana
Corporation, Midway Products Corp., Modern Tool & Die Co., L&W Engineering,
Midland Corporation and divisions of OEMs with internal stamping and assembly
operations, all of which have substantial financial resources. The Company
competes with Magna across most of the Company's product lines, and with its
other significant competitors in various segments of its product lines. For
example, the Company competes with Budd for large stampings, while it
competes with ITT Automotive for hinge business. Aetna Industries, Active
Tool & Die Co., AG Simpson Ltd., Oxford Automotive, Inc. and L&W Engineering
compete with the Company for medium-size structural stampings.
The Company principally competes for new business both at the beginning
of the development of new models and upon the redesign of existing models.
New model development generally begins two to five years before the marketing
of such models to the public. Once a producer has been designated to supply
parts for a new program, an OEM usually will continue to purchase those parts
from the designated producer for the life of the program, although not
necessarily for a redesign. Competitive factors in the market for the
Company's products include product quality and reliability, cost and timely
delivery, technical expertise and development capability, new product
innovation and customer service.
SUPPLIERS AND RAW MATERIALS
The primary raw material used to produce the majority of the Company's
products is steel. The Company purchases hot and cold rolled, galvanized,
organically coated, stainless and aluminized steel from a variety of
suppliers. The Company employs just-in-time manufacturing and sourcing
systems enabling it to meet customer requirements for faster deliveries while
minimizing its need to carry significant inventory levels. The Company has
not experienced any significant shortages of raw materials and normally does
not carry inventories of raw materials or finished products in excess of
those reasonably required to meet production and shipping schedules. Raw
material costs represented approximately 47.9% of the Company's revenues in
1997.
Honda and Chrysler currently purchase all of the steel used by the
Company for their models directly from steel producers. Ford is in the
process of implementing a similar program. As a result, the Company will
have minimal exposure to changes in steel prices for parts supplied to Ford,
Honda and Chrysler, which collectively represented 70.7% of the Company's
revenues in 1997.
The Company expects that the content level of metal in cars and light
trucks will remain constant or increase slightly due to the trend toward
increased vehicle size and a greater emphasis on metal recycling. Although
the search for improved fuel economy and weight reduction has resulted in
attempts to reduce the sheet metal content of light vehicles, an efficient,
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cost-effective substitute for steel used in the Company's structural products
has not been found. While various polymers have been used recently for
fenders, hoods and decks, such products do not have the inherent strength or
structural integrity on a cost-effective basis to be used for structural
components. The Company is involved in ongoing evaluations of the potential
for the use of aluminum and of specialty steel in its products.
Other raw materials purchased by the Company include dies, fasteners,
tubing, springs, rivets and rubber products, all of which are available from
numerous sources.
EMPLOYEES
As of December 31, 1997, the Company had approximately 8,750 employees,
of whom approximately 4,000 are covered under collective bargaining
agreements. These collective bargaining agreements expire between 1998 and
2000. The Company believes that its future success will depend in part on
its ability to continue to recruit, retain and motivate qualified personnel
at all levels of the Company. The Company has instituted a large number of
employee programs to increase employee morale and expand the employees'
participation in the Company's business. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
(b) SAFE HARBOR PROVISIONS
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. There are certain important factors that could cause future results
to differ materially from those that might be anticipated based on some of
the statements made in this report. Investors are cautioned that all
forward-looking statements involve risks and uncertainty. Among the factors
that could cause actual results to differ materially are the following:
- RELIANCE ON MAJOR CUSTOMERS AND SELECTED MODELS. The Company's two
largest customers, Ford and Chrysler, represented approximately 48% and 19%,
respectively, of the Company's 1997 revenues. The loss of Ford, Chrysler or
any of the Company's other significant customers or a significant decrease in
demand for certain key models or a group of related models sold by any of
their major customers could have a material adverse effect on the Company.
- INDUSTRY CYCLICALITY AND SEASONALITY. The automotive market is highly
cyclical and is dependent on consumer spending. Economic factors adversely
affecting automotive production and consumer spending could adversely impact
the Company.
- FAILURE TO OBTAIN BUSINESS RELATED TO NEW AND REDESIGNED MODEL
INTRODUCTIONS. The failure of the Company to obtain new business on new
models or to retain or increase business on redesigned existing models could
adversely affect the Company.
ITEM 2. PROPERTIES
MANUFACTURING FACILITIES
The Company maintains several manufacturing facilities located in close
proximity to many of the high-volume vehicle assembly plants of its
customers. The Company's facilities are geographically located in such a way
as to enable the Company to optimize its management and logistical
capabilities on a regional basis.
-12-
<PAGE>
The following table provides information regarding the Company's
principal facilities:
<TABLE>
<CAPTION>
SQUARE TYPE OF DESCRIPTION
LOCATION FOOTAGE INTEREST OF USE
- ----------------------------------------- ------------ ------------ ----------------------------------
<S> <C> <C> <C>
Milwaukee, Wisconsin . . . . . . . . . . 3,527,000 Owned Manufacturing
Milan, Tennessee . . . . . . . . . . . . 533,000 Owned Manufacturing
Granite City, Illinois.. . . . . . . . . 458,000 Owned Manufacturing
Turin, Italy (2 locations) . . . . . . . 257,000 Owned Manufacturing
Bardstown, Kentucky. . . . . . . . . . . 240,000 Owned Manufacturing
Kalamazoo, Michigan
(2 locations). . . . . . . . . . . . . 222,000 Mixed Manufacturing/Warehouse/Office
Plymouth, Michigan.. . . . . . . . . . . 221,000 Leased Manufacturing
Traverse City, Michigan
(4 locations). . . . . . . . . . . . . 220,000 Owned Manufacturing
Roanoke, Virginia. . . . . . . . . . . . 185,000 Owned Manufacturing
Greenville, Michigan.. . . . . . . . . . 160,000 Owned Manufacturing/Office
Corydon, Indiana.. . . . . . . . . . . . 155,000 Leased Manufacturing
Rockford, Illinois.. . . . . . . . . . . 140,000 Leased Manufacturing
Auburn, Indiana. . . . . . . . . . . . . 132,000 Owned Manufacturing/Office
Kendallville, Indiana. . . . . . . . . . 132,000 Owned Manufacturing
Romulus, Michigan. . . . . . . . . . . . 115,000 Leased Manufacturing/Office
Bluffton, Ohio . . . . . . . . . . . . . 102,000 Owned Manufacturing
Rochester Hills, Michigan. . . . . . . . 89,000 Leased Office/Engineering/Design
Belcamp, Maryland. . . . . . . . . . . . 68,000 Owned Manufacturing
Bellevue, Ohio.. . . . . . . . . . . . . 66,000 Owned Manufacturing
Manchester, Michigan . . . . . . . . . . 61,000 Owned Manufacturing
Upper Sandusky, Ohio.. . . . . . . . . . 56,000 Owned Manufacturing
Farmington Hills, Michigan . . . . . . . 47,000 Leased Engineering/Design/Sales
Fenton, Missouri.. . . . . . . . . . . . 40,000 Leased Warehouse
Barrie, Ontario. . . . . . . . . . . . . 40,000 Leased Manufacturing
Bowling Green, Kentucky. . . . . . . . . 39,000 Owned Manufacturing
Grand Rapids, Michigan . . . . . . . . . 23,000 Leased Operating Headquarters
Minneapolis, Minnesota . . . . . . . . . 5,700 Leased Corporate Headquarters
Yokohama, Japan. . . . . . . . . . . . . 800 Leased Sales
Changchun, China.. . . . . . . . . . . . 140,500 Leased(1) Manufacturing
</TABLE>
- ------------------------
(1) Facility is leased by a joint venture in which the Company holds a
60% equity interest.
Management believes that substantially all of the Company's property and
equipment is in good condition. In order to increase efficiency, the Company
expects to continue to make capital expenditures for equipment upgrades at
its facilities as necessary.
The Company believes that its existing facilities will be adequate to
meet its production demands for the foreseeable future. The Company's
facilities were specifically designed for the manufacturing of the Company's
products. The utilization and capacity of such facilities are dependent upon
the mix of products being produced by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material lawsuits. The
Company believes it maintains adequate insurance, including product liability
coverage. The Company historically has not been required to pay any material
liability claims.
-13-
<PAGE>
ENVIRONMENTAL MATTERS
The Company believes it conducts its operations in substantial
compliance with applicable environmental and occupational health and safety
laws. The Company does not expect to incur material capital expenditures for
environmental compliance during its current or succeeding fiscal year.
However, as is the case with manufacturers in general, if a release of
hazardous substances occurs on or from the Company's properties or at any
associated offsite disposal location, if contamination from prior activities
is discovered at any of the Company's properties or if non-compliance with
environmental regulations or permits is discovered, the Company may be held
liable and the amount of such liability could be material. In connection
with the Trylon and MSTI acquisitions, MascoTech has agreed to indemnify the
Company for certain environmental matters, including replacement of
underground storage tanks at the Traverse City facilities and any remediation
that may be required at the Kendallville facility.
In connection with the acquisition of APC, A.O. Smith agreed, subject to
certain limitations, to indemnify the Company for environmental matters
relating to APC arising from events occurring, or conditions arising, prior
to the closing date of the acquisition of APC. In addition, A.O. Smith has
agreed to retain certain environmental liabilities for, among other things,
offsite disposal of hazardous substances prior to the acquisition of APC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Stockholders during the
fourth quarter of 1997.
ADDITIONAL INFORMATION - EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers as of March 23, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
S.A. Johnson . . . . . . . . . . . . 57 Chairman and Director
Adrian VanderStarre. . . . . . . . . 65 Vice Chairman and Director
Dugald K. Campbell . . . . . . . . . 51 President, Chief Executive Officer and
Director
James R. Lozelle . . . . . . . . . . 52 Executive Vice President and Director
Ronald E. Gavalis. . . . . . . . . . 60 Vice President
Anthony A. Barone. . . . . . . . . . 48 Vice President and Chief Financial Officer
Scott D. Rued. . . . . . . . . . . . 41 Vice President, Corporate Development
and Director
Paul D. Rysenga. . . . . . . . . . . 56 Vice President
Luigi Candusso . . . . . . . . . . . 48 Vice President
Tommy G. Pitser. . . . . . . . . . . 50 Vice President
Richard S. Burgess . . . . . . . . . 43 Vice President
</TABLE>
S.A. (TONY) JOHNSON has served as Chairman and a Director of the Company
since April 1993. Mr. Johnson is the founder, Chief Executive Officer and
President of Hidden Creek Industries ("Hidden Creek"), a private industrial
management company based in Minneapolis which has provided certain management
and other services to the Company. Mr. Johnson is also the managing partner
of J2R Partners ("J2R"), an investment partnership that participated in the
-14-
<PAGE>
acquisition of R.J. Tower. Prior to forming Hidden Creek, Mr. Johnson served
from 1985 to 1989 as Chief Operating Officer of Pentair, Inc., a diversified
industrial company. From 1981 to 1985, Mr. Johnson was President and Chief
Executive Officer of Onan Corp., a diversified manufacturer of electrical
generating equipment and engines for commercial, defense and industrial
markets. Mr. Johnson currently serves as Chairman and a director of Dura
Automotive Systems, Inc., a manufacturer of mechanical assemblies and
integrated systems for the automotive industry, and served as Chairman and a
director of Automotive Industries Holding, Inc., a supplier of automotive
interior trim components, from May 1990 until its sale to Lear Corporation in
August 1995.
ADRIAN VANDERSTARRE has served as Vice Chairman and a Director of the
Company since April 1993. Mr. VanderStarre served as President, Chief
Executive Officer and a director of the Predecessor from 1978 to 1993. Mr.
VanderStarre originally joined the Predecessor in 1965 as Controller and
later served as Treasurer from 1974 to 1978.
DUGALD K. CAMPBELL has served as President, Chief Executive Officer and
a Director of the Company since December 1993. From 1991 to 1993, Mr.
Campbell served as a consultant to Hidden Creek. From 1988 to 1991, he
served as Vice President and General Manager of the Sensor Systems Division
of Siemens Automotive, a manufacturer of engine management systems and
components. From 1972 to 1988, he held various executive, engineering and
marketing positions with Allied Automotive, a manufacturer of vehicle systems
and components and a subsidiary of AlliedSignal, Inc.
JAMES R. LOZELLE has served as Executive Vice President of the Company,
with responsibility for the Company's operations in Milwaukee, Wisconsin and
Roanoke, Virginia since April 1997. From the Company's acquisition of
Edgewood in May 1994 until March 1997, Mr. Lozelle served at the Tower
Automotive Technical Centers, with responsibility for advanced product
development and customer service. Mr. Lozelle has also served as a Director
of the Company since May 1994. Mr. Lozelle served as President of Edgewood
from 1982 until it was acquired by the Company. Mr. Lozelle joined Edgewood
in 1970 and served as Vice President from 1971 to 1982. Mr. Lozelle is
chairman of the Near Zero Stamping research project of the Autobody
Consortium.
RONALD E. GAVALIS has served as Vice President of the Company, with
responsibility for the Company's operations in Greenville, Kalamazoo and
Traverse City, Michigan since April 1997 and for capacity planning, quality
operating systems and QS-9000 certification, since April 1995. From June
1994 to April 1995, Mr. Gavalis had responsibility for the Company's
Greenville, Michigan operations. Mr. Gavalis joined the Predecessor in 1983
as Director of Manufacturing, and served as the Predecessor's Vice President,
Manufacturing, from 1985 until 1989 and as its Vice President, Operations,
from 1989 until June 1994.
ANTHONY A. BARONE has served as Vice President and Chief Financial
Officer of the Company since May 1995. From 1984 to 1995, Mr. Barone served
as Chief Financial Officer of O'Sullivan Corporation, a manufacturer of
interior trim components for the automotive industry.
SCOTT D. RUED has served as Vice President, Corporate Development, and a
Director of the Company since April 1993. Mr. Rued served as Vice President,
Chief Financial Officer and a director of Automotive Industries Holding, Inc.
from April 1990 until its sale to Lear Corporation in August 1995. Mr. Rued,
a partner of J2R, has also served as Executive Vice President and Chief
Financial Officer of Hidden Creek since January 1994 and served as its Vice
President - Finance and Corporate Development from June 1989 through 1993.
Mr. Rued is also
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<PAGE>
a director of The Rottlund Company, Inc., a corporation engaged in the
development and sale of residential real estate.
PAUL D. RYSENGA has served as Vice President of the Company, with
responsibility for the Company's joint venture investment in Metalsa since
October 1997, the Company's operations in Auburn, Indiana, Bellevue, Ohio,
Belcamp, Maryland and Rockford, Illinois since April 1997 and the Company's
operations in Kendallville, Indiana and Bluffton and Upper Sandusky, Ohio,
since August 1996. From August 1996 to April 1997, Mr. Rysenga had
responsibility for the Company's operations in Traverse City, Michigan. From
October 1995 to August 1996, Mr. Rysenga had responsibility for the Company's
operations in Greenville, Romulus, and Traverse City, Michigan. From June
1994 to October 1995, Mr. Rysenga had responsibility for the Company's
operations in Auburn, Indiana. From July 1991 to June 1994, Mr. Rysenga
served as Executive Vice President and General Manager at Kalamazoo. From
1988 to July 1991, Mr. Rysenga was Executive Director of Eastman Sterling
Pharmaceutical, a division of Eastman Kodak.
LUIGI CANDUSSO has served as Vice President of the Company, with
responsibility for the Company's operations in Bowling Green, Kentucky,
Corydon, Indiana, Granite City, Illinois and Milan, Tennessee since April
1997, Turin, Italy since May 1997 and Bardstown, Kentucky since April 1995.
From April 1995 to April 1997, Mr. Candusso had responsibility for the
Company's operations in Kalamazoo, Michigan. From August 1996 to April 1997,
Mr. Candusso had responsibility for the Company's operations in Romulus,
Michigan. From October 1995 to August 1996, Mr. Candusso also had
responsibility for the Company's operations in Auburn, Indiana. From 1990 to
April 1995, Mr. Candusso served as Vice President and General Manager of the
Sensor Systems Division of Siemens Automotive, a manufacturer of engine
management systems and components. From 1988 to 1990, Mr. Candusso served as
Vice President of Operations at Fabricated Steel Products (FABCO), a division
of Indal Canada.
TOMMY G. PITSER has served as Vice President, with responsibility for
the Company's joint venture investment in China and its operations in Barrie,
Ontario, Plymouth, Michigan and Yokohama, Japan and South America since April
1997 and Romulus, Manchester and Farmington Hills, Michigan, since May 1996.
Prior to joining the Company, Mr. Pitser served in various sales and
marketing capacities at MSTI. Prior to joining MSTI, Mr. Pitser served as
Market Director-Automotive at AE Goetze North America. From 1969 to 1992,
Mr. Pitser was an employee of Borg-Warner Corporation, most recently as
General Manager-Marine & Industrial Transmissions.
RICHARD S. BURGESS has served as Vice President of the Company with
responsibility for colleague growth and development since January 1996. From
June 1994 to January 1996, Mr. Burgess served as the colleague growth and
development leader for the Bardstown, Kentucky start-up facility. From
October 1991 to June 1994, Mr. Burgess filled various rolls in Colleague
growth and development at the Predecessor.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by Item 5 is incorporated herein by reference
to the section labeled "Stock Information" which appears in the Company's
1997 Annual Report.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference
to the section labeled "Selected Consolidated Financial Data" which appears
in the Company's 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information required by Item 7 is incorporated herein by reference
to the section labeled "Management's Discussion and Analysis of Results of
Operations and Financial Condition" which appears in the Company's 1997
Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference
to the consolidated financial statements, notes thereto and Report of
Independent Public Accountants thereon which appear in the Company's 1997
Annual Report.
Management of the Company is responsible for the financial information
and representations contained in the consolidated financial statements and
other sections of the 1997 Annual Report. The consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles and therefore include certain amounts based on
management's best estimates and judgments. The financial information
contained elsewhere in the 1997 Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains internal accounting control systems which
management believes provide reasonable assurance that the Company's assets
are properly safeguarded and accounted for, that the Company's books and
records properly reflect all transactions, and that the Company's policies
and procedures are implemented by qualified personnel. Reasonable assurance
is based upon the recognition that the cost of an internal control system
should not exceed the related benefits.
The Audit Committee of the Board of Directors meets with representatives
of management and Arthur Andersen LLP, the Company's independent public
accountants, on financial reporting matters and the evaluation of internal
accounting controls. The independent public accountants have free access to
meet with the Audit Committee, without the presence of management, to discuss
any appropriate matters.
Arthur Andersen LLP is engaged to express an opinion as to whether the
consolidated financial statements present fairly, in all material respects
and in accordance with generally accepted accounting principles, the
financial position, results of operations and cash flows of the Company.
Solely for purposes of planning and performing their audit of the Company's
1997 financial statements, Arthur Andersen LLP obtained an understanding of,
and selectively tested, certain aspects of the Company's system of internal
controls.
-17-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE REGISTRANT
The information required by Item 10 with respect to the directors is
incorporated herein by reference to the section labeled "Election of
Directors" which appears in the Company's 1998 Proxy Statement.
B. EXECUTIVE OFFICERS
The information required by Item 10 with respect to the Company's
executive officers is included above in Part I under the caption "Additional
Information - Executive Officers."
C. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by Item 10 with respect to compliance with
reporting requirements is incorporated herein by reference to the section
labeled "Section 16(a) Beneficial Ownership Reporting Compliance" which
appears in the Company's 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the sections labeled "Compensation of Directors" and "Executive
Compensation" which appear in the Company's 1998 Proxy Statement, excluding
information under the headings "Compensation Committee Report on Executive
Compensation" and "Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the section labeled "Security Ownership" which appears in the Company's
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section labeled "Certain Relationships and Related Transactions" which
appears in the Company's 1998 Proxy Statement.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS:
The following are incorporated herein by reference to the
Company's 1997 Annual Report:
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 1997 and 1996
- Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
- Consolidated Statements of Stockholders' Investment for the
Years Ended December 31, 1997, 1996 and 1995
- Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
(2) EXHIBITS: See "Exhibit Index" beginning on page 21.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
TOWER AUTOMOTIVE, INC.
Date: March 23, 1998 By /s/ S.A. Johnson
------------------------------------
S.A. Johnson, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ S.A. Johnson Chairman and Director March 23, 1998
- ----------------------------------
S.A. Johnson
/s/ Adrian VanderStarre Vice Chairman and March 23, 1998
- ---------------------------------- Director
Adrian VanderStarre
/s/ Dugald K. Campbell President, Chief Executive March 23, 1998
- ---------------------------------- Officer (Principal Executive
Dugald K. Campbell Officer) and Director
/s/ James R. Lozelle Executive Vice President March 23, 1998
- ---------------------------------- and Director
James R. Lozelle
/s/ Scott D. Rued Vice President, Corporate March 23, 1998
- ---------------------------------- Development and Director
Scott D. Rued
/s/ W.H. Clement Director March 23, 1998
- ----------------------------------
W.H. Clement
/s/ Eric J. Rosen Director March 23, 1998
- ----------------------------------
Eric J. Rosen
/s/ Matthew O. Diggs, Jr. Director March 23, 1998
- ----------------------------------
Matthew O. Diggs, Jr.
/s/ F.J. Loughrey Director March 23, 1998
- ----------------------------------
F.J. Loughrey
/s/ Kim B. Clark Director March 23, 1998
- ----------------------------------
Kim B. Clark
/s/ Enrique Zambrano Director March 23, 1998
- ----------------------------------
Enrique Zambrano
/s/ Anthony A. Barone Vice President and Chief March 23, 1998
- ---------------------------------- Financial Officer (Principal
Anthony A. Barone Accounting Officer)
</TABLE>
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<PAGE>
TOWER AUTOMOTIVE, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Page Number in
Sequential
Numbering
of all Form 10-K
Exhibit and Exhibit Pages
- ------- -----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant, *
incorporated by reference to Exhibit 3.1 of the Registrant's Form S-1,
Registration No. 33-80320 filed under the Securities Act of 1933
(the "S-1").
3.2 Amended and Restated By-laws of the Registrant, incorporated by *
reference to Exhibit 3.2 of the S-1.
4.1 Form of Common Stock Certificate, incorporated by reference to *
Exhibit 4.1 of the S-1.
10.1 Form of Stock Subscription Agreement between the Company and *
certain management employees, incorporated by reference to Exhibit
10.3 of the S-1.
10.2 Registration Agreement dated as of April 15, 1993 between the Registrant *
and certain investors; and First Amendment to Registration Agreement
dated as of May 4, 1994 by and among the Registrant and certain
investors, incorporated by reference to Exhibit 10.4 of the S-1.
10.3 Stock Option and Indemnification Agreement dated as of April 15, 1993 *
by and between the Registrant and Onex U.S. Investments, Inc.,
incorporated by reference to Exhibit 10.7 of the S-1.
10.4** Employment and Consulting Agreement dated as of April 15, 1993 between *
R.J. Tower Corporation and Adrian Vander Starre, incorporated by
reference to Exhibit 10.9 of the S-1.
10.5 Form of Management Stock Pledge Agreement, incorporated by reference *
to Exhibit 10.10 of the S-1.
10.6 Form of Convertible Promissory Note dated as of May 4, 1994 of the *
Registrant, incorporated by reference to Exhibit 10.12 of the S-1.
10.7** Employment Agreement dated as of May 4, 1994 among Edgewood *
Manufacturing Corp. and James R. Lozelle, incorporated by reference
to Exhibit 10.13 of the S-1.
10.8** Stock Option Agreement dated May 4, 1994 by and between the Registrant *
and James R. Lozelle incorporated by reference to Exhibit 10.14 of
the S-1.
10.9 Lease Agreement dated March 1, 1988 between 8900 Inkster Associates *
and Edgewood Tool and Manufacturing Company; and Amendment to Lease
dated as of March 1, 1994 between 8900 Inkster Associates and Edgewood
Tool and Manufacturing Company, incorporated by reference to Exhibit
10.16 of the S-1.
10.10 Amended and Restated Credit Agreement dated as of May 4, 1994 by and *
between R.J. Tower Corporation and Comerica Bank, incorporated by
reference to Exhibit 10.17 of the S-1.
10.11** 1994 Key Employee Stock Option Plan, incorporated by reference to Exhibit *
10.18 of the S-1.
10.12** Form of Salary Continuation Agreement between the Registrant and certain *
employees, incorporated by reference to Exhibit 10.19 of the S-1.
10.13 Form of Subscription Agreement between the Registrant and certain *
stockholders, incorporated by reference to Exhibit 10.20 of the S-1.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
10.14 Stock Purchase Agreement by and among the Registrant and certain other *
parties, dated June 10, 1994, incorporated by reference to Exhibit
10.21 of the S-1.
10.15 Second Amended and Restated Credit Agreement dated as of June 29, 1994 *
by and between R.J. Tower Corporation and Comerica Bank, incorporated
by reference to Exhibit 10.22 of the S-1.
10.16 Amended and Restated Investor Stockholders Agreement dated as of *
August 18, 1994 by and among the Registrant, Onex U.S. Investments,
Inc., J2R Partners and certain investors, incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994, filed under the Securities
Exchange Act of 1934, as amended (the "September 10-Q").
10.17 Second Amended and Restated Management Stockholders Agreement dated as *
of August 18, 1994 among the Registrant, Onex U.S. Investments, Inc.
and certain management stockholders, incorporated by reference to
Exhibit 10.2 of the September 10-Q.
10.18 Third Amended and Restated Credit Agreement dated as of January 16, 1996 *
by and between R.J. Tower Corporation and Comerica Bank, incorporated
by reference to Exhibit 10.24 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995, filed under the
Securities Exchange Act of 1934, as amended.
10.19 Stock Purchase Agreement dated as of May 31, 1996 among Tower *
Automotive, Inc., R.J. Tower Corporation and MascoTech, Inc.,
incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K
dated May 31, 1996, filed under the Securities Exchange Act of 1934
(the "May 8-K").
10.20 First Amendment to Third Amended and Restated Credit Agreement, dated *
as of May 31, 1996, by and among R.J. Tower Corporation, the financial
institutions parties thereto and Comerica Bank, as agent, incorporated
by reference to Exhibit 4.1 of the May 8-K.
10.21 $39,000,000 Revolving Credit Note, dated as of May 31, 1996, issued by *
R.J. Tower Corporation, a Michigan corporation, to Comerica Bank,
incorporated by reference to Exhibit 4.2 of the May 8-K.
10.22 $18,000,000 Revolving Credit Note, dated as of May 31, 1996, issued *
by R.J. Tower Corporation, a Michigan corporation, to Bank of America
Illinois, incorporated by reference to Exhibit 4.3 of the May 8-K.
10.23 $18,000,000 Revolving Credit Note, dated as of May 31, 1996, issued *
by R.J. Tower Corporation, a Michigan corporation, to First Bank
National Association, incorporated by reference to Exhibit 4.4 of the
May 8-K.
10.24 Joinder Agreement to Amended and Restated Guaranty (Tower Indiana Debt) *
made by MascoTech Stamping Technologies, Inc., a Delaware corporation,
in favor of Comerica Bank, as agent, incorporated by reference to
Exhibit 4.6 of the May 8-K.
10.25 Joinder Agreement to Amended and Restated Guaranty (Tower Kentucky Debt) *
made by MascoTech Stamping Technologies, Inc., a Delaware corporation,
in favor of Comerica Bank, as agent, incorporated by reference to
Exhibit 4.7 of the May 8-K.
10.26 Form of Second Amended and Restated Security Agreement, dated as of *
May 31, 1996, made by each of R.J. Tower Corporation, a Michigan
corporation, R.J. Tower Corporation, a Kentucky corporation, R.J.
Tower Corporation, an Indiana corporation, Kalamazoo Stamping and
Die Company, a Michigan corporation, Edgewood Manufacturing Corp.,
a Delaware corporation, in favor of Comerica Bank, as agent,
incorporated by reference to Exhibit 4.8 of the May 8-K.
10.27 Amended and Restated Security Agreement, dated as of May 31, 1996, *
made by Trylon Corporation, a Michigan corporation, in favor of
Comerica Bank, as agent, incorporated by reference to Exhibit 4.9 of
the May 8-K.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
10.28 Form of Second Amended and Restated Mortgage, dated as of May 31, 1996, *
made by each of R.J. Tower Corporation, a Michigan corporation, R.J.
Tower Corporation, an Indiana corporation, Kalamazoo Stamping and
Die Company, a Michigan corporation, Edgewood Manufacturing Corp.,
a Delaware corporation, in favor of Comerica Bank, as agent,
incorporated by reference to Exhibit 4.10 of the May 8-K.
10.29 Second Amended and Restated Security Agreement (Third Party Pledge), *
dated as of May 31, 1996, made by Tower Automotive, Inc., a
Delaware corporation, in favor of Comerica Bank, as agent, incorporated
by reference to Exhibit 4.11 of the May 8-K.
10.30 Intercreditor and Collateral Agency Agreement, dated as of May 31, 1996, *
among Comerica Bank, Bank of America Illinois, First Bank National
Association, Teachers Insurance and Annuity Association of America,
Northern Life Insurance Company, Northwestern National Life Insurance
Company, Bankers Security Life Insurance Society, Jefferson-Pilot Life
Insurance Company and Alexander Hamilton Life Insurance Company of
America, incorporated by reference to Exhibit 4.12 of the May 8-K.
10.31 Form of R.J. Tower Corporation Note Agreement, dated as of May 31, *
1996, between R.J. Tower Corporation and each of Teachers Insurance
and Annuity Association of America, Northern Life Insurance Company,
Northwestern National Life Insurance Company, Bankers Security Life
Insurance Society, Jefferson-Pilot Life Insurance Company and
Alexander Hamilton Life Insurance Company of America, incorporated
by reference to Exhibit 4.13 of the May 8-K.
10.32 Form of 7.65% Senior Secured Notes, Series A, due June 1, 2006, issued *
by R.J. Tower Corporation to (i) Teachers Insurance and Annuity
Association of America in the principal amount of $10 million, (ii)
Northern Life Insurance Company in the principal amount of $8.5
million, (iii) Northwestern National Life Insurance Company in the
principal amount of $4.0 million, (iv) Bankers Security Life Insurance
Society in the principal amount of $2.5 million, (v) Jefferson-Pilot
Life Insurance Company in the principal amount of $7.5 million and
(vi) Alexander Hamilton Life Insurance Company of America in the
principal amount of $7.5 million, incorporated by reference to Exhibit
4.14 of the May 8-K.
10.33 7.82% Senior Secured Note, Series B, due June 1, 2008, issued by R.J. *
Tower Corporation to Teachers Insurance and Annuity Association
of America in the principal amount of $25 million, incorporated by
reference to Exhibit 4.15 of the May 8-K.
10.34 Subsidiaries Guaranty, dated as of May 31, 1996, made by Trylon *
Corporation, a Michigan corporation, R.J. Tower Corporation, a Kentucky
corporation, R.J. Tower Corporation, an Indiana corporation, Kalamazoo
Stamping and Die Company, a Michigan corporation, Edgewood Manufacturing
Corp., a Delaware corporation and MascoTech Stamping Technologies, Inc.,
a Delaware corporation, in favor of Teachers Insurance and Annuity
Association of America, Northern Life Insurance Company, Northwestern
National Life Insurance Company, Bankers Security Life Insurance
Society, Jefferson-Pilot Life Insurance Company and Alexander
Hamilton Life Insurance Company of America, incorporated by
reference to Exhibit 4.16 of the May 8-K.
10.35 Registration Rights and Voting Agreement dated as of May 31, 1996, *
between Tower Automotive, Inc. and MascoTech, Inc., incorporated by
reference to Exhibit 4.17 of the May 8-K.
10.36 $5 million Promissory Note, dated as of May 31, 1996, issued by R.J. Tower *
Corporation to MascoTech, Inc., incorporated by reference to Exhibit 4.18
of the May 8-K.
10.37 Stock Purchase Warrant, dated as of May 31, 1996, issued by Tower *
Automotive, Inc. to MascoTech, Inc., incorporated by reference to
Exhibit 4.19 of the May 8-K.
</TABLE>
-23-
<PAGE>
<TABLE>
<S> <C> <C>
10.38 Second Amended and Restated Guaranty (Tower-Michigan Debt), dated *
as of May 30, 1996, made by R.J. Tower Corporation, an Indiana
corporation, Edgewood Manufacturing Corp., a Delaware corporation,
R.J. Tower Corporation, a Kentucky corporation, Kalamazoo Stamping
and Die Company, a Michigan corporation, Trylon Corporation, a
Michigan corporation and MascoTech Stamping Technologies, Inc., a
Delaware corporation, in favor of Comerica Bank, as agent,
incorporated by reference to Exhibit 4.5 of the Registrant's Form
8-K/A No. 1 dated June 4, 1996, filed under the Securities Exchange
Act of 1934.
10.39 Fourth Amended and Restated Credit Agreement dated as of September 6, 1996 *
by and between R.J. Tower Corporation and Comerica Bank, incorporated
by reference to Exhibit 10.1 of the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1996, filed
under the Securities Exchange Act of 1934, as amended.
13.1 Annual Report to Stockholders for the year ended December 31, 1997 __
filed herewith.
21.1 List of Subsidiaries filed herewith. __
23.1 Consent of Independent Public Accountants filed herewith. __
27.1 Financial Data Schedule filed herewith. __
27.2 Financial Data Schedule filed herewith. __
27.3 Financial Data Schedule filed herewith. __
</TABLE>
- -------------------
* Incorporated by reference.
** Indicates compensatory arrangement.
-24-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
REVENUES
Revenues for the year ended December 31, 1997 increased by $835.9 million to
$1.2 billion compared to $399.9 million for the year ended December 31, 1996.
Approximately $803.9 million of the increase in revenues over 1996 is
attributable to the acquisitions of MascoTech Stamping Technologies, Inc.
("MSTI") in May 1996, Automotive Products Company ("APC") in April 1997 and
Societa Meccanica e Stampaggio S.p.A. ("SIMES") in May 1997. The remaining
increase is due to new business awarded to the Company, including business
relating to the Ford Escort, Econoline and Expedition, Dodge Durango, Dakota
and Ram Club Cab pick-ups and Toyota Camry.
COST OF SALES
Cost of sales as a percentage of revenues for the year ended December 31,
1997 was 85.7 percent compared to 84.6 percent for the year ended December
31, 1996. The decrease in gross margin was due to a higher proportion of
components purchased from outside suppliers as a result of the MSTI and APC
acquisitions and launch costs associated with new business. These decreases
were partially offset by operating efficiencies and enhanced productivity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $57.9 million, or
4.7 percent of revenues, for the year ended December 31, 1997 compared to
$20.0 million, or 5.0 percent of revenues, for the year ended December 31,
1996. The increased expense was due primarily to incremental costs associated
with the Company's acquisitions of MSTI in 1996 and APC and SIMES in 1997.
AMORTIZATION EXPENSE
Amortization expense for the year ended December 31, 1997 was $9.5 million
compared to $2.2 million for the year ended December 31, 1996. The increase
was due to incremental goodwill amortization related to the acquisitions of
MSTI, APC and SIMES.
INTEREST EXPENSE
Net interest expense for the year ended December 31, 1997 was $29.0 million
and $5.1 million for the year ended December 31, 1996. Interest expense was
affected by increased borrowings incurred to fund the acquisitions of MSTI,
APC and SIMES, offset by more favorable terms related to the Company's
borrowings under the new credit agreement entered into in April 1997, the
application of the proceeds from the June 1996 offering of 2,232,900 shares
of common stock at $24.50 per share, the proceeds from the April 1997
offering of 8,500,000 shares of common stock at $35.00 per share and the
proceeds from the July 1997 offering of $200 million of 5 percent Convertible
Subordinated Notes. In addition, interest expense for the year ended December
31, 1997 includes a $2 million non-cash charge related to the recognition of
a loss position on an interest rate contract.
INCOME TAXES
The effective income tax rate was 39.9 percent for the years ended December
31, 1997 and 1996. The effective rates differed from the statutory rates
primarily as a result of state taxes and non-deductible goodwill amortization.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Revenues for the year ended December 31, 1996 increased by $177.1 million, or
79.5 percent, to $399.9 million compared to $222.8 million for the year ended
December 31, 1995. Approximately $134.3 million of the increase in revenues
over 1995 is attributable to the acquisitions of MSTI in May 1996 and Trylon
Corporation ("Trylon") in January 1996. The remaining increase is due to new
business awarded to the Company, including business relating to the Ford
Escort, Econoline and Expedition, Dodge Ram Club Cab pick-up and Toyota
Camry. These increases were partially offset by production decreases in the
first half of the year on key models served by the Company, including the
Ford Aerostar, Villager, Econoline and Chrysler Intrepid/Concorde/Vision.
COST OF SALES
Cost of sales as a percentage of revenues for the year ended December 31,
1996 was 84.6 percent compared to 83.2 percent for the year ended December
31, 1995. The decrease in gross margin was due to a higher proportion of
components purchased from outside suppliers as a result of the MSTI and
Trylon acquisitions and launch costs associated with new business. These
decreases were partially offset by operating efficiencies and enhanced
productivity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $20.0 million, or
5.0 percent of revenues, for the year ended December 31, 1996 compared to
$14.3 million, or 6.4 percent of revenues, for the year ended December 31,
1995. The per-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED
centage decrease related to revenues reflects the economies of scale of
higher gross sales. The increased expense was due primarily to incremental
costs associated with the Company's acquisitions of MSTI and Trylon in 1996.
AMORTIZATION EXPENSE
Amortization expense for the year ended December 31, 1996 was $2.2 million
compared to $1.2 million for the year ended December 31, 1995. The increase
was due to incremental goodwill amortization related to the acquisitions of
MSTI and Trylon.
INTEREST EXPENSE
Net interest expense for the year ended December 31, 1996 was $5.1 million
compared to $1.8 million for the year ended December 31, 1995. The increase
was due principally to increased borrowings incurred to fund the acquisitions
of MSTI and Trylon, partially offset by the application of the proceeds from
the June 1996 offering of 2,232,900 shares of common stock at $24.50 per
share, and the absence of capitalization of interest costs for the new
Bardstown, Kentucky plant that was under construction during 1995.
INCOME TAXES
The effective income tax rate was 39.9 percent for the year ended December
31, 1996 and 40.0 percent for the year ended December 31, 1995. The effective
rates differed from the statutory rates primarily as a result of state taxes
and nondeductible goodwill amortization.
SEASONALITY
The Company's performance is dependent on automotive vehicle production,
which is seasonal in nature. The third calendar quarter is historically the
weakest, due to the impact of OEM plant shutdowns in July for vacation and
model changeovers. Additionally, general industry levels are only a partial
explanation of volume changes throughout the year. Individual vehicle
platforms are also a cause of variations in revenues depending upon market
response and acceptance of the specific platform models.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the acquisition of APC, the Company entered into a
revolving credit facility that provides for borrowings of up to $750 million
on an unsecured basis. Under the terms of the credit facility, the equivalent
of up to $60 million in borrowings can be denominated in foreign currency. As
of December 31, 1997, approximately $51.4 million of the $465.6 million
outstanding borrowings are denominated in lira. The amount available under
the revolving credit facility reduces to $675 million in April 2000, $600
million in April 2001 and $500 million in April 2002. The credit facility has
a final maturity of April 2003. Interest on the credit facility is at the
prime rate or LIBOR plus a margin ranging from 17 to 50 basis points
depending upon the ratio of the consolidated indebtedness of the Company to
its total capitalization. The weighted average interest rate for such
borrowings was 6.5 percent for the year ended December 31, 1997.
In July 1997, the Company completed the offering of $200 million of
Convertible Subordinated Notes (the "Notes"). The Notes bear interest at 5
percent, are unsecured, due on August 1, 2004 and are convertible into Tower
Automotive common stock at a conversion price of $51.75 per share. The
Company may make optional redemptions of the Notes after August 1, 2000 at
amounts ranging from 102.857 percent to 100.714 percent of face value. In the
event of a change in control (as defined), the holders of the Notes may
require the Company to redeem the Notes at face value plus accrued interest.
Proceeds from the Notes were used to repay outstanding indebtedness under the
revolving credit facility.
Effective October 1997, the Company is party to interest rate swap
contracts to hedge against interest rate exposures on certain floating-rate
indebtedness. These contracts, which expire in November 2002, have the effect
of converting the floating-rate interest related to a notional amount of $300
million of borrowings outstanding under the revolving credit facility into a
fixed-rate of approximately 6.75 percent. This interest rate swap contract
was executed to balance the Company's fixed-rate and floating-rate debt
portfolios. Under the interest rate swaps, the Company agrees with the other
party to exchange, at specified intervals, the difference between fixed-rate
and floating-rate interest amounts calculated by reference to an agreed
notional principal amount.
The Company financed the cash portion of the MSTI acquisition through
the issuance of two series of Senior Notes having an aggregate principal
amount of $65 million, with interest rates of 7.65 percent and 7.82 percent
and final maturities of 2006 and 2008. The Senior Notes were retired in
connection with the April 1997 offering of 8,500,000 shares of common stock
at $35.00 per share (the "Offering") and the new revolving credit facility
described above. In connection with the retirement, the Company paid
prepayment penalties and wrote off deferred financing costs which resulted in
an extraordinary loss, net of income taxes, of approximately $2.4 million.
The debt agreements described above contain various restrictive
covenants which, among other matters, require the Company to maintain certain
financial ratios, including
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED
but not limited to interest coverage, debt to capital and total leverage. The
agreements also limit additional indebtedness, capital expenditures and cash
dividends. The Company was in compliance with all debt covenants as of
December 31, 1997 and 1996.
On April 19, 1997, the Company acquired APC, a division of A.O. Smith
Corporation. The aggregate purchase price was approximately $700 million and
was financed with the proceeds from the Offering and borrowings under the new
credit facility described above. APC, which has 15 facilities, designs and
manufactures frames, frame components, engine cradles, suspension components
and modules for the North American automotive and heavy truck industries.
On May 9, 1997, the Company acquired SIMES, headquartered in Turin,
Italy. SIMES designs and manufactures structural metal components in two
facilities in Italy, principally for Fiat. The purchase price was
approximately $50.7 million and was financed with borrowings under the
Company's revolving credit facility. The Company may pay an additional $3
million in the future if certain operating targets are met by SIMES.
On October 9, 1997, the Company completed an agreement to become a
partner in Metalsa S.A. de C.V. (Metalsa S. de R.L. as of January 1, 1998)
("Metalsa") with Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). Metalsa
is the largest supplier of vehicle frames and structures in Mexico. Under the
terms of the agreement, the Company acquired a 40 percent equity interest in
Metalsa. In addition, the parties have entered into a technology sharing
arrangement that will enable both companies to utilize the latest available
product and process technology. Metalsa is headquartered in Monterrey, Mexico
and has manufacturing facilities in Monterrey and San Luis Potosi, Mexico.
Metalsa's customers include Chrysler, General Motors, Ford, Nissan and
Mercedes. In connection with this agreement, the Company paid $120 million to
Proeza, with an additional amount of up to $45 million payable based upon the
net earnings of Metalsa in 1998, 1999 and 2000. The investment in Metalsa was
financed with proceeds from borrowings under the Company's revolving credit
facility.
During the year ended December 31, 1997, the Company generated $100.9
million of cash from operations, which was used to partially fund capital
expenditures.
The Company has made substantial investments in manufacturing
technology and product design capability to support its products. The Company
made capital expenditures of approximately $117.4 million during the year
ended December 31, 1997, primarily for equipment and dedicated tooling
purchases related to new or replacement programs.
The Company believes the borrowing availability under the new credit
agreement, together with funds generated by operations, should provide the
Company with the liquidity and capital resources to pursue its business
strategy through 1998, with respect to working capital, capital expenditures
and other operating needs. Under present conditions, management does not
believe access to funds will restrict its ability to pursue its acquisition
strategy.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the interest expense of
floating-rate indebtedness and by increasing the cost of labor, equipment and
raw materials. Management believes that inflation has not significantly
affected the Company's business over the past 12 months. However, because
selling prices generally cannot be increased until a model changeover, the
effects of inflation must be offset by productivity improvements and volume
from new business awards.
YEAR 2000
The Company is in the process of modifying its computer systems to
accommodate the year 2000 and currently expects to complete this modification
sufficiently in advance of the year 2000 so as not to adversely affect its
operations. The Company does not expect to incur more than $5 million of
total costs in connection with these year 2000 modifications. Failure of the
Company to make required modifications on a timely basis or the inability of
other companies with which the Company does business to complete their year
2000 modifications on a timely basis, could adversely effect the Company's
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board released SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and display in the financial statements of total net income and
the components of all other nonowner changes in equity, referred to as
comprehensive income. SFAS No. 131 requires disclosure of business and
geographic segments in the consolidated financial statements of the Company.
The Company will adopt SFAS No. 130 and SFAS No. 131 in 1998 and is currently
analyzing the impact it will have on the disclosures in its financial
statements.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) DEC. 31, 1997 DEC. 31, 1996
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ - $ 39,596
Accounts receivable.......................................................... 219,256 61,073
Inventories.................................................................. 73,809 21,864
Prepaid tooling and other.................................................... 78,217 18,421
------------------------------
Total current assets.................................................... 371,282 140,954
------------------------------
Property, Plant and Equipment, net........................................... 698,511 156,248
Restricted Cash.............................................................. 7,902 10,833
Deferred Income Taxes........................................................ 14,108 -
Investments in Joint Ventures................................................ 147,188 -
Goodwill, net of accumulated amortization of $11,837 and $3,791.............. 408,048 85,638
Other Assets, net of accumulated amortization of $4,512 and $585............. 33,049 8,922
------------------------------
$ 1,680,088 $ 402,595
------------------------------
------------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current maturities of long-term debt and capital lease obligations........... $ 5,004 $ 722
Accounts payable............................................................. 143,902 32,280
Accrued liabilities.......................................................... 81,784 22,429
------------------------------
Total current liabilities............................................... 230,690 55,431
------------------------------
Long-Term Debt, net of current maturities.................................... 513,653 113,460
Obligations Under Capital Leases, net of current maturities.................. 30,281 -
Convertible Subordinated Notes............................................... 200,000 -
Other Noncurrent Liabilities................................................. 190,185 51,827
------------------------------
Commitments and Contingencies (Notes 3, 4 and 8)
Stockholders' Investment:
Preferred stock, par value $1; 5,000,000 shares authorized; no shares
issued or outstanding................................................... - -
Common stock, par value $.01; 200,000,000 shares authorized;
22,987,745 and 14,283,793 issued and outstanding........................ 230 143
Warrants to acquire common stock............................................. 2,000 2,000
Additional paid-in capital................................................... 423,655 136,584
Retained earnings............................................................ 89,394 43,150
------------------------------
Total stockholders' investment.......................................... 515,279 181,877
------------------------------
$ 1,680,088 $ 402,595
------------------------------
------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Revenues........................................................... $ 1,235,829 $ 399,925 $ 222,801
Cost of sales...................................................... 1,058,720 338,290 185,388
---------------------------------------------
Gross profit................................................... 177,109 61,635 37,413
Selling, general and administrative expenses....................... 57,869 20,004 14,308
Amortization expense............................................... 9,537 2,191 1,185
---------------------------------------------
Operating income............................................... 109,703 39,440 21,920
Other (income) expense:
Interest expense............................................... 36,651 7,636 2,027
Interest income................................................ (7,689) (2,533) (228)
Equity in earnings of joint ventures........................... (227) - -
---------------------------------------------
28,735 5,103 1,799
---------------------------------------------
Income before provision for income taxes....................... 80,968 34,337 20,121
Provision for income taxes......................................... 32,290 13,700 8,050
---------------------------------------------
Income before extraordinary item............................... 48,678 20,637 12,071
Extraordinary item - loss on early extinguishment
of debt, net of income taxes................................... 2,434 - -
---------------------------------------------
Net income............................................... $ 46,244 $ 20,637 $ 12,071
---------------------------------------------
---------------------------------------------
Basic earnings per share (Note 4):
Income before extraordinary item............................... $ 2.39 $ 1.63 $ 1.11
Extraordinary item............................................. (.12) - -
---------------------------------------------
Net income............................................... $ 2.27 $ 1.63 $ 1.11
---------------------------------------------
---------------------------------------------
Diluted earnings per share (Note 4):
Income before extraordinary item............................... $ 2.28 $ 1.55 $ 1.05
Extraordinary item............................................. (.10) - -
---------------------------------------------
Net income............................................... $ 2.18 $ 1.55 $ 1.05
---------------------------------------------
---------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
16
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
---------------------------- ADDITIONAL RETAINED TO ACQUIRE
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT PAID-IN CAPITAL EARNINGS COMMON STOCK
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994........................ 10,826,246 $ 108 $ 62,589 $ 10,442 $ -
Sales of stock under Employee
Stock Discount Purchase Plan.................... 4,143 - 34 - -
Collection of common stock
subscriptions receivable........................ - - 341 - -
Net income........................................ - - - 12,071 -
-----------------------------------------------------------------------------------
Balance, December 31, 1995........................ 10,830,389 108 62,964 22,513 -
Conversion of Edgewood notes...................... 410,529 4 2,488 - -
Exercise of options............................... 6,625 - 48 - -
Sales of stock under Employee
Stock Discount Purchase Plan.................... 18,350 1 262 - -
Collection of common stock
subscriptions receivable........................ - - 322 - -
Public offering of common stock, net.............. 2,232,900 22 51,275 - -
Issuance of shares and warrants
in acquisition of MSTI.......................... 785,000 8 19,225 - 2,000
Net income........................................ - - - 20,637 -
-----------------------------------------------------------------------------------
Balance, December 31, 1996........................ 14,283,793 143 136,584 43,150 2,000
Conversion of Edgewood notes...................... 112,751 1 683 - -
Exercise of options............................... 26,300 - 235 - -
Sales of stock under Employee Stock
Discount Purchase Plan.......................... 64,901 1 1,575 - -
Collection of common stock
subscriptions receivable........................ - - 78 - -
Public offering of common stock, net.............. 8,500,000 85 284,478 - -
Cumulative translation adjustment................. - - 22 - -
Net income........................................ - - - 46,244 -
-----------------------------------------------------------------------------------
Balance, December 31, 1997........................ 22,987,745 $ 230 $ 423,655 $ 89,394 $ 2,000
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(AMOUNTS IN THOUSANDS) DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Operating Activities:
Net income........................................................ $ 46,244 $ 20,637 $ 12,071
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 47,966 12,754 6,549
Deferred income tax provision................................... 24,980 6,326 5,659
Extraordinary loss on extinguishment of debt.................... 2,434 - -
Changes in other operating items:
Accounts receivable......................................... (32,620) 5,967 (4,124)
Inventories................................................. 13,052 (693) 468
Prepaid tooling and other................................... (8,122) (1,091) (922)
Accounts payable and accrued liabilities.................... 31,765 (3,354) 2,323
Other assets and liabilities................................ (24,795) (10,497) (8,119)
---------------------------------------------------
Net cash provided by operating activities................... 100,904 30,049 13,905
---------------------------------------------------
Investing Activities:
Capital expenditures, net......................................... (117,379) (16,253) (26,148)
Acquisitions, net of cash acquired................................ (765,063) (76,223) -
Acquisition of joint venture interest and other................... (127,438) - -
Change in restricted cash......................................... 2,931 3,552 (7,906)
---------------------------------------------------
Net cash used for investing activities...................... (1,006,949) (88,924) (34,054)
---------------------------------------------------
Financing Activities:
Proceeds from borrowings.......................................... 1,122,044 197,813 183,103
Repayments of debt................................................ (733,873) (152,229) (162,427)
Net proceeds from issuance of common stock........................ 286,139 51,560 34
Net proceeds from issuance of convertible debt.................... 194,892 - -
Cash portion of extraordinary loss on extinguishment of debt...... (3,010) - -
Other, net........................................................ 257 370 341
---------------------------------------------------
Net cash provided by financing activities................... 866,449 97,514 21,051
---------------------------------------------------
Net Change in Cash and Cash Equivalents........................... (39,596) 38,639 902
Cash and Cash Equivalents:
Beginning of period............................................... 39,596 957 55
---------------------------------------------------
End of period..................................................... $ - $ 39,596 $ 957
---------------------------------------------------
---------------------------------------------------
Supplemental Cash Flow Information:
Cash paid for-
Interest, net of amounts capitalized............................ $ 25,394 $ 7,372 $ 2,993
---------------------------------------------------
---------------------------------------------------
Income taxes.................................................... $ 10,661 $ 6,091 $ 1,702
---------------------------------------------------
---------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Tower Automotive, Inc. (the Company) produces a broad range of stamped and
welded assemblies for vehicle body structures and suspension systems for the
global automotive industry. The Company has 35 locations in the United
States, Canada, Italy and Japan, a facility in China through its joint
venture investment in China (see Note 2) and two in Mexico through its joint
venture investment in Metalsa (see Note 3).
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Tower Automotive, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
As part of the acquisition of APC (see Note 3), the Company acquired a
60 percent joint venture interest to produce certain parts in China. This
investment is accounted for using the equity method as a result of the
Company's voting rights and general business restrictions within China. The
Company's investment in Metalsa (see Note 3) is also accounted for using the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less. Cash equivalents are stated at
cost which approximates fair value.
INVENTORIES
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
<S> <C> <C>
Raw materials........................................ $ 14,601 $ 9,517
Work in process...................................... 38,763 5,949
Finished goods....................................... 20,445 6,398
-----------------------
$ 73,809 $ 21,864
-----------------------
-----------------------
</TABLE>
CUSTOMER TOOLING AND OTHER DESIGN COSTS
Customer 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 its customers for the cost of certain of the
tooling, at which time the tooling becomes the property of the customers.
In addition, the Company has certain other tooling and design costs
related to previously proven product designs which are reimbursed by the
Company's customers as the related product is sold through an incremental
increase in each product's unit selling price. Such costs are capitalized and
amortized using the unit of production method over the life of the related
product. Amounts capitalized and included in other assets were $8.5 million
at December 31, 1997 and $3.7 million at December 31, 1996. If the Company
forecasts that the amount of capitalized tooling and design costs exceeds the
amount to be realized through the sale of product, a loss is recognized
currently.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
<S> <C> <C>
Land $ 5,696 $ 1,989
Buildings and improvements........................... 126,664 34,417
Machinery and equipment.............................. 548,304 118,567
Construction in progress............................. 81,929 21,839
-----------------------
762,593 176,812
Less-Accumulated depreciation........................ (64,082) (20,564)
-----------------------
Net property, plant and equipment.............. $ 698,511 $ 156,248
-----------------------
-----------------------
</TABLE>
Property, plant and equipment acquired in the acquisitions discussed in Note
3 was recorded at its fair value, determined based on appraisals, as of the
respective acquisition dates. Additions to property, plant and equipment
following the acquisitions are stated at cost. For financial reporting
purposes, depreciation and amortization are provided using the straight-line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements................................... 15 to 40 years
Machinery and equipment...................................... 3 to 20 years
</TABLE>
Accelerated depreciation methods are used for tax reporting purposes.
Interest is capitalized during the construction of major facilities and
is amortized over their estimated useful lives. Interest of $3.4 million was
capitalized during the year ended December 31, 1997 and $1.2 million was
capitalized during the year ended December 31, 1995. No interest was
capitalized during the year ended December 31, 1996.
Maintenance and repairs are charged to expense as incurred. Major
betterments and improvements which extend the useful life of the related item
are capitalized and depreciated. The cost and accumulated depreciation of
property, plant and equipment retired or otherwise disposed of are removed
from the related accounts, and any residual values after considering proceeds
are charged or credited to income.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER ASSETS
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired and is being amortized on a straight-line basis over
40 years. Debt issue costs are amortized on a straight-line basis over the
term of the related obligations.
The Company periodically evaluates whether events and circumstances
have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of its goodwill and other long-lived
assets. If such events or circumstances were to indicate that the carrying
amount of these assets were not recoverable, the Company would estimate the
future cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) were less than the carrying
amount of goodwill, the Company would recognize an impairment loss.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's borrowings under the outstanding
industrial development revenue bonds approximate fair value as the floating
rates applicable to these financial instruments reflect changes in the
overall market interest rates.
The Company is party to interest rate swap contracts to hedge against
interest rate exposures on certain floating-rate indebtedness. These
contracts, which expire in November 2002, have the effect of converting the
floating-rate interest related to a notional amount of $300 million of
borrowings outstanding under the revolving credit facility into a fixed-rate
of approximately 6.75 percent. This interest rate swap contract was executed
to balance the Company's fixed-rate and floating-rate debt portfolios. Under
the interest rate swaps, the Company agrees with the other party to exchange,
at specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to the agreed notional principal
amount. While the Company is exposed to credit loss on its interest rate swap
in the event of nonperformance by the counterparty to such swap, management
believes that such nonperformance is unlikely to occur given the financial
resources of the counterparty.
During the fourth quarter of 1997, the Company entered into an interest
rate contract in a notional amount of $75 million, which was not related to a
specific debt instrument. Accordingly, the Company adjusted the interest rate
contract to its market value as of December 31, 1997. The writedown to fair
value of approximately $2 million is included in interest expense in the
accompanying consolidated statements of operations.
REVENUE RECOGNITION AND SALES COMMITMENTS
The Company recognizes revenue as its products are shipped to its customers.
The Company enters into agreements with its customers at the beginning of a
given vehicle's life to produce products. Once such agreements are entered
into by the Company, fulfillment of the customers' purchasing requirements is
generally the obligation of the Company for the entire production life of the
vehicle, generally with terms of three to 10 years. In certain instances, the
Company may be committed under existing agreements to supply product to its
customers at selling prices which are not sufficient to cover the direct cost
to produce such product. In such situations, the Company records a liability
for the estimated future amount of such losses. Such losses are recognized at
the time that the loss is probable and reasonably estimable. Losses are
discounted at 4 percent and are estimated based upon information available at
the time of the estimate, including future production volume estimates,
length of the program and selling price and production cost information.
INCOME TAXES
The Company accounts for income taxes under the liability method, whereby
deferred income taxes are recognized at currently enacted income tax rates to
reflect the tax effect of temporary differences between the financial
reporting and tax bases of assets and liabilities.
STOCK OPTIONS
The Company accounts for stock options under the provisions of Accounting
Principles Board Opinion (APB) No. 25, under which no compensation expense is
recognized when the stock options are granted. The pro forma effects had the
Company followed the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 are included in Note 4.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
The ultimate results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated
using the year-end rates of exchange. Results
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
20
<PAGE>
of operations are translated using the average rates prevailing throughout
the period. Translation gains or losses, which are not material, are
accumulated as a component of stockholders' investment.
RECLASSIFICATIONS
Certain amounts previously reported in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation. These
reclassifications had no effect on previously reported net income or
stockholders' investment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for the reporting and display in the financial
statements of total net income and the components of all other nonowner
changes in equity, referred to as comprehensive income. The Company will
adopt SFAS No. 130 in 1998 and has not yet determined the impact it will have
on the disclosures in its financial statements.
During June 1997, the Financial Accounting Standards Board released
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 requires disclosure of business and geographic segments in the
consolidated financial statements of the Company. The Company will adopt SFAS
No. 131 in 1998 and is currently analyzing the impact it will have on the
disclosures in its financial statements.
NOTE 3. ACQUISITIONS AND INVESTMENT IN JOINT VENTURES
On January 16, 1996, the Company acquired all of the outstanding common stock
of Trylon Corporation (Trylon) for total consideration of approximately $25
million. The acquisition was financed with the proceeds of a $25 million term
loan. Trylon manufactures metal stampings and assemblies for the North
American automotive industry from four facilities in Traverse City, Michigan.
On May 31, 1996, the Company acquired all of the outstanding common
stock of MascoTech Stamping Technologies, Inc. (MSTI), a wholly owned
subsidiary of MascoTech, Inc. (MascoTech). Consideration consisted of $55
million in cash, 785,000 shares of the Company's Common Stock and warrants to
acquire 200,000 shares of the Company's Common Stock at an exercise price of
$18 per share. The Company may also make additional payments of up to $30
million to MascoTech if certain operating targets are achieved by the MSTI
facilities in the first three years following the acquisition. The amounts to
be paid to MascoTech are equal to two times the amount by which operating
profit, as defined, of the MSTI facilities exceeds $24 million each year.
Based on results of operations of the MSTI facilities through December 31,
1997, $4 million in contingent payments are due and have been accrued and
recorded as additional goodwill. MSTI manufactures metal chassis and
suspension components and assemblies for the North American automotive
industry from facilities in Ohio, Indiana and Michigan.
On April 18, 1997, the Company acquired and assumed substantially all
of the assets and liabilities of Automotive Products Company (APC), a
division of A.O. Smith Corporation. The aggregate purchase price consisted of
approximately $700 million in cash and was financed with the proceeds from
the Offering (see Note 4) and borrowings under the new credit facility (see
Note 5). APC, which has 15 facilities, designs and manufactures frames, frame
components, engine cradles, suspension components and modules for the North
American automotive and heavy truck industries.
On May 9, 1997, the Company acquired all of the outstanding common
stock of Societa Industria Meccanica e Stampaggio S.p.A. (SIMES). SIMES,
headquartered in Turin, Italy, designs and manufactures structural metal
components in two facilities in Italy, principally for Fiat. The purchase
price, which consisted of $50.7 million in cash, was financed with borrowings
under the Company's revolving credit facility. The Company may pay an
additional $3 million in the future if certain operating performance targets
are met by SIMES.
These acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at fair value as of the dates of the acquisitions. The assets
and liabilities of APC and SIMES have been recorded based upon preliminary
estimates of fair value as of the dates of acquisition. The Company does not
believe the final allocations of the purchase price will be materially
different than the preliminary allocations. The excess of the purchase price
over the fair value of the assets acquired and liabilities assumed has been
recorded as goodwill. Additional purchase liabilities recorded included
approximately $18.4 million for costs associated with the shutdown and
consolidation of certain acquired facilities and $8.9 million for severance
and related costs. At December 31, 1997, liabilities of approximately $16.9
million for facility-related costs and $7.5 million in severance costs remain
on the consolidated balance sheet. Results of operations for these
acquisitions have been included
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
in the accompanying consolidated financial statements since the dates of
acquisition.
On October 9, 1997, the Company completed an agreement to become a
partner in Metalsa S.A. de C.V. (Metalsa S. de R.L. as of January 1, 1998)
(Metalsa) with Promotora de Empresas Zano, S.A. de C.V. (Proeza). Metalsa is
the largest supplier of vehicle frames and structures in Mexico. Under the
terms of the agreement, the Company acquired a 40 percent equity interest in
Metalsa. In addition, the parties have entered into a technology sharing
arrangement that will enable both companies to utilize the latest available
product and process technology. Metalsa is headquartered in Monterrey, Mexico
and has manufacturing facilities in Monterrey and San Luis Potosi, Mexico.
Metalsa's customers include Chrysler, General Motors, Ford, Nissan and
Mercedes-Benz. In connection with this agreement, the Company paid
approximately $120 million to Proeza, with an additional amount of up to $45
million payable based upon the net earnings of Metalsa in 1998, 1999 and
2000. The investment in Metalsa was financed with proceeds from borrowings
under the Company's revolving credit facility.
The accompanying unaudited consolidated pro forma results of operations
for the year ended December 31, 1997 give effect to the following as if they
were completed at the beginning of the period: (i) the acquisitions of APC
and SIMES and the investment in Metalsa; (ii) the refinancing of the old
credit agreement and the redemption of the Senior Notes (see Note 5); (iii)
the Offering (as defined in Note 4); and (iv) the sale of the Notes (as
defined in Note 5). The results of operations of APC for the period prior to
its acquisition date, which are included in the unaudited pro forma financial
information, reflect pretax charges of $66.7 million relating to losses to be
incurred on certain future contracts, valuation reserves related to
capitalized tooling and other assets and the recognition of obligations to
certain APC customers. The unaudited pro forma financial information does not
purport to represent what the Company's results of operations would actually
have been if such transactions in fact had occurred at such date or to
project the Company's results of future operations (in thousands, except per
share data):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DEC. 31, 1997
<S> <C>
Revenues....................................................... $ 1,520,803
-------------
-------------
Net income..................................................... $ 29,389
-------------
-------------
Basic earnings per share....................................... $ 1.29
-------------
-------------
Basic shares outstanding....................................... 22,839
-------------
-------------
Diluted earnings per share..................................... $ 1.33
-------------
-------------
Diluted shares outstanding..................................... 27,335
-------------
-------------
</TABLE>
NOTE 4. STOCKHOLDERS' INVESTMENT
PUBLIC OFFERINGS OF COMMON STOCK
During 1996, the Company completed an offering of 2,232,900 shares of its
Common Stock at an offering price of $24.50 per share (the 1996 Offering)
resulting in net proceeds of approximately $51.3 million. Proceeds from the
1996 Offering were used by the Company to retire borrowings under its secured
credit agreement and for general corporate purposes.
During 1997, the Company issued 8,500,000 shares of Common Stock in a
public offering at an offering price of $35 per share (the Offering). Net
proceeds to the Company, after underwriting discounts and offering expenses,
were approximately $285 million. Proceeds from the Offering were used by the
Company to partially fund the acquisition of APC.
EARNINGS PER SHARE
Basic earnings per share were computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share were determined on the assumptions: (i) the Edgewood notes were
converted at the beginning of the respective periods, and (ii) the
Convertible Subordinated Notes were converted upon issuance on July 29, 1997
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Net income........................................... $ 46,244 $ 20,637 $ 12,071
Interest expense on Edgewood notes, net of tax....... 104 128 176
Interest expense on Convertible Subordinated Notes,
net of tax......................................... 2,834 - -
-------------------------------------------
Net income applicable to common stockholders -
diluted............................................ $ 49,182 $ 20,765 $ 12,247
-------------------------------------------
-------------------------------------------
Weighted average number of common shares outstanding. 20,360 12,683 10,827
Dilutive effect of outstanding stock options and
warrants after application of the treasury stock
method............................................. 249 138 46
Dilutive effect of Edgewood notes, assuming
conversion......................................... 382 603 824
Dilutive effect of Convertible Subordinated Notes,
assuming conversion................................ 1,610 - -
-------------------------------------------
Diluted shares outstanding........................... 22,601 13,423 11,697
-------------------------------------------
-------------------------------------------
Basic earnings per share............................. $ 2.27 $ 1.63 $ 1.11
-------------------------------------------
-------------------------------------------
Diluted earnings per share........................... $ 2.18 $ 1.55 $ 1.05
-------------------------------------------
-------------------------------------------
</TABLE>
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
22
<PAGE>
The Company adopted SFAS No. 128, "Earnings per Share," effective December
15, 1997. As a result, the Company's reported earnings per share (EPS) for
1996 and 1995 have been restated as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Primary EPS as reported.............................. $ 1.55 $ 1.05
Effect of SFAS No. 128............................... .08 .06
-----------------------
Basic EPS as restated................................ $ 1.63 $ 1.11
-----------------------
-----------------------
Fully diluted EPS as reported........................ $ 1.55 $ 1.05
Effect of SFAS No. 128............................... - -
-----------------------
Diluted EPS as restated.............................. $ 1.55 $ 1.05
-----------------------
-----------------------
</TABLE>
STOCK OPTION PLAN
The Company sponsors the 1994 Key Employee Stock Option Plan (the Stock
Option Plan), under which any person who is a full-time, salaried employee of
the Company (excluding non-management directors) is eligible to participate
in the Stock Option Plan (an Employee Participant). A committee of the board
of directors selects the Employee Participants and determines the terms and
conditions of the options. The Stock Option Plan provides for the issuance of
options up to 1,500,000 shares of Common Stock at exercise prices equal to
the stock market price on the date of grant to Employee Participants, subject
to certain adjustments reflecting changes in the Company's capitalization.
Information regarding the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDER EXERCISE EXERCISE
OPTION PRICES PRICE
<S> <C> <C> <C>
Outstanding December 31, 1994............... - $ - $ -
Granted................................. 133,750 8.00-10.00 8.16
Forfeited............................... (13,000) 8.00 8.00
-------------------------------------
Outstanding December 31, 1995............... 120,750 8.00-10.00 8.18
Granted................................. 139,000 15.13 15.13
Exercised............................... (6,625) 8.00 8.00
Forfeited............................... (4,875) 8.00-15.13 10.19
-------------------------------------
Outstanding December 31, 1996............... 248,250 8.00-15.13 12.04
Granted................................. 191,250 37.88 37.88
Exercised............................... (26,300) 8.00-15.13 10.20
Forfeited............................... (15,125) 8.00-37.88 17.11
-------------------------------------
Outstanding December 31, 1997............... 398,075 $ 8.00-37.88 $ 24.38
-------------------------------------
-------------------------------------
</TABLE>
Of the outstanding options at December 31, 1997, options covering
69,325 shares are currently exercisable with a weighted average exercise
price of $10.95 per share.
The weighted average fair value of options granted during 1997 was
$26.70, during 1996 was $9.51 and during 1995 was $4.23.
As of December 31, 1997, the outstanding stock options granted in 1997
have a remaining contractual life of 10 years, the outstanding stock options
granted in 1996 have a remaining contractual life of nine years and the
outstanding stock options granted in 1995 have a remaining contractual life
of eight years.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
In February 1996, the Company's board of directors approved the Tower
Automotive, Inc. Independent Director Stock Option Plan (the Director Option
Plan) that provides for the issuance of options to Independent Directors, as
defined, to acquire up to 100,000 shares of the Company's Common Stock,
subject to certain adjustments reflecting changes in the Company's
capitalization. The option exercise price must be at least equal to the fair
value of the Common Stock at the time the option is issued. Vesting is
determined by the board of directors at the date of grant and in no event can
be less than six months from the date of grant. As of December 31, 1997, the
Company had granted stock options under this plan to acquire 22,500 shares of
Common Stock at an exercise price of $15.125 per share and 30,000 shares of
Common Stock at an exercise price of $37.875 per share. At December 31, 1997,
7,500 of these director options were exercisable or vested.
EMPLOYEE STOCK PURCHASE PLAN
The Company also sponsors an employee stock discount purchase plan which
provides for the sale of up to 500,000 shares of the Company's Common Stock
at discounted purchase prices, subject to certain limitations. The cost per
share under this plan is 85 percent of the market value of the Company's
Common Stock at the date of purchase, as defined. During the year ended
December 31, 1997, 64,901 shares of Common Stock were issued to employees
pursuant to this plan, 18,350 shares of Common Stock were issued during the
year ended December 31, 1996, and 4,143 shares of Common Stock were issued
during the year ended December 31, 1995. The weighted average fair value of
shares sold in 1997, 1996 and 1995 were $24.19, $14.32 and $8.11,
respectively.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK-BASED COMPENSATION PLANS
As discussed above, the Company has two stock option plans, the Stock Option
Plan and the Independent Director Stock Option Plan, and the Employee Stock
Purchase Plan. The Company has elected to continue to account for these plans
under APB No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined as required under SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's pro forma net
income and pro forma earnings per share would have been as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Net income As Reported........ $ 46,244 $ 20,637 $ 12,071
Pro Forma.......... 45,722 20,483 12,037
Basic earnings As Reported........ $ 2.27 $ 1.63 $ 1.11
per share Pro Forma.......... 2.25 1.61 1.11
Diluted earnings As Reported........ $ 2.18 $ 1.55 $ 1.05
per share Pro Forma.......... 2.15 1.54 1.04
</TABLE>
The effect of the stock issued under the Employee Stock Purchase Plan
was not material for 1997, 1996 and 1995.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rates of 6.39 percent in
1997, 5.67 percent in 1996 and 6.64 percent and 7.05 percent in 1995;
expected life of seven years for 1997, 1996 and 1995; expected volatility of
67 percent in 1997, 56 percent in 1996 and 35 percent, 37 percent and 41
percent in 1995.
OTHER COMMON STOCK EQUIVALENTS
In connection with the acquisition of Edgewood Tool and Manufacturing Company
(Edgewood) in May 1994, the Company issued options to acquire 102,984 shares
of Common Stock at an exercise price of $6.55 per share. These options are
fully exercisable through 2004. As of December 31, 1997, options to acquire
68,656 shares of Common Stock were exercisable.
In connection with the acquisition of MSTI in May 1996, the Company
issued warrants to MascoTech to acquire 200,000 shares of Common Stock at an
exercise price of $18 per share. The warrants expire in 2006.
In addition, the Company has Convertible Subordinated Notes outstanding
as discussed in Note 5.
DIVIDENDS
The Company has not declared or paid any cash dividends in the past. As
discussed in Note 5, the Company's debt agreements restrict the amount of
dividends the Company can declare or pay. As of December 31, 1997, under the
most restrictive debt covenants, the Company could not have paid any cash
dividends.
NOTE 5. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
<S> <C> <C>
Revolving credit facility, due April 2003,
interest at prime or LIBOR plus
a margin ranging from 17 to 50 basis points
(6.3% at December 31, 1997)..................... $ 465,599 $ -
Series A senior notes, due June 1, 2006,
interest at 7.65% payable semi-annually,
repaid during 1997.............................. - 40,000
Series B senior notes, due June 1, 2008,
interest at 7.82% payable semi-annually,
repaid during 1997.............................. - 25,000
Industrial development revenue bonds, due in
lump sum payments in June 2024 and March 2025,
interest payable monthly at a rate
adjusted weekly by the bond remarketing
agent (6.1% at December 31, 1997 and 5.82%
at December 31, 1996)........................... 43,765 43,765
Edgewood notes, due May 2003, interest at
5.75% payable quarterly......................... 1,824 2,508
Other.............................................. 3,187 2,909
-------------------------
514,375 114,182
Less - Current maturities.......................... (722) (722)
-------------------------
$ 513,653 $ 113,460
-------------------------
-------------------------
</TABLE>
Future maturities of long-term debt as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998.......................................................... $ 722
1999.......................................................... 720
2000.......................................................... 718
2001.......................................................... -
2002.......................................................... -
Thereafter.................................................... 512,215
-----------
$ 514,375
-----------
-----------
</TABLE>
In connection with the acquisition of APC, the Company entered into a
revolving credit facility that provides for borrowings of up to $750 million
on an unsecured basis. Under the terms of the credit facility, the equivalent
of up to $60 million in borrowings can be denominated in foreign currency. As
of December 31, 1997, approximately $51.4 million of the outstanding
borrowings are denominated in lira. The amount
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
24
<PAGE>
available under the revolving credit facility reduces to $675 million in
April 2000, $600 million in April 2001 and $500 million in April 2002. The
credit facility has a final maturity of April 2003. Interest on the credit
facility is at the prime rate or LIBOR plus a margin ranging from 17 to 50
basis points depending upon the ratio of the consolidated indebtedness of the
Company to its total capitalization. The weighted average interest rate for
such borrowings was 6.5 percent for the year ended December 31, 1997.
In July 1997, the Company completed the offering of $200 million of
Convertible Subordinated Notes (the Notes). The Notes bear interest at 5
percent, are unsecured, due on August 1, 2004 and are convertible into Tower
Automotive Common Stock at a conversion price of $51.75 per share. The
Company may make optional redemptions of the Notes after August 1, 2000 at
amounts ranging from 102.857 percent to 100.714 percent of face value. In the
event of a change in control (as defined), the holders of the Notes may
require the Company to redeem the Notes at face value plus accrued interest.
Proceeds from the Notes were used to repay outstanding indebtedness under the
revolving credit facility.
In June 1994 and March 1995, the Company issued $25.0 million and $20.0
million, respectively, of industrial development revenue bonds related to the
construction and equipping of a manufacturing facility in Bardstown,
Kentucky. The bonds are collateralized by letters of credit. The undispersed
proceeds from these bonds are invested in treasury securities and reflected
as restricted cash in the accompanying consolidated balance sheets.
The Company financed the cash portion of the MSTI acquisition through
the issuance of two series of Senior Notes having an aggregate principal
amount of $65 million, with interest rates of 7.65 percent and 7.82 percent
and final maturities of 2006 and 2008. The Senior Notes were retired in
connection with the transactions described in Note 4. In connection with the
retirement, the Company paid prepayment penalties and wrote off deferred
financing costs which resulted in an extraordinary loss, net of income taxes,
of approximately $2.4 million.
The debt agreements described above contain various restrictive
covenants which, among other matters, require the Company to maintain certain
financial ratios, including but not limited to interest coverage, debt to
capital and total leverage. The agreements also limit additional
indebtedness, capital expenditures and cash dividends. The Company was in
compliance with all debt covenants as of December 31, 1997 and 1996.
NOTE 6. INCOME TAXES
The income tax provision consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Currently payable.................... $ 7,310 $ 7,374 $ 2,391
Deferred income tax provision........ 24,980 6,326 5,659
----------------------------------------
$ 32,290 $ 13,700 $ 8,050
----------------------------------------
----------------------------------------
</TABLE>
The deferred income tax provision consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Depreciation lives and methods......... $ 24,893 $ 3,348 $ 2,624
Accrued compensation costs............. (1,539) (915) 1,064
Other reserves and accruals............ 1,626 3,893 1,971
----------------------------------------
Net deferred income tax provision...... $ 24,980 $ 6,326 $ 5,659
----------------------------------------
----------------------------------------
</TABLE>
A reconciliation of income taxes computed at the statutory rates to the
reported income tax provision is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Taxes at federal statutory rates....... $ 28,339 $ 12,018 $ 7,042
State income taxes, net of federal
benefit.......................... 2,227 1,199 829
Effect of permanent differences,
primarily goodwill amortization.. 1,724 483 179
---------------------------------------
Provision for income taxes............. $ 32,290 $ 13,700 $ 8,050
---------------------------------------
---------------------------------------
</TABLE>
A summary of deferred income tax assets (liabilities) is as follows (in
thousands):
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
<S> <C> <C>
Current deferred tax assets:
Accrued compensation costs........................ $ 8,448 $ 2,453
Inventory valuation adjustments................... 4,486 496
Other reserves and accruals not currently
deductible for tax purposes.............. 4,467 1,039
------------------------
Net current deferred tax assets.......... $ 17,401 $ 3,988
------------------------
------------------------
Noncurrent deferred tax assets (liabilities):
Depreciation lives and methods.................... $ (59,679) $ (28,770)
Postretirement benefit obligations................ 38,982 5,486
Other reserves and accruals not currently
deductible for tax purposes.............. 34,805 6,994
------------------------
Net noncurrent deferred tax assets
(liabilities)........................ $ 14,108 $ (16,290)
------------------------
------------------------
</TABLE>
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company has not recorded deferred income taxes applicable to
undistributed earnings of its foreign joint venture operations as all such
earnings are deemed to be indefinitely reinvested in those operations. If the
earnings of such joint ventures were not indefinitely reinvested, a deferred
liability would have been required which would not have been material as of
December 31, 1997. Undistributed amounts, if remitted in the future, may not
result in additional U.S. income taxes because of the use of available
foreign tax credits at that time.
NOTE 7. MAJOR CUSTOMERS
The Company sells its products directly to automobile manufacturers.
Following is a summary of customers that accounted for more than 10 percent
of consolidated revenues in any of the three years in the period ended
December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Ford.................................... 48% 67% 68%
Chrysler................................ 19 10 10
General Motors.......................... 13 2 -
</TABLE>
Receivables from these customers represented 65 percent of total accounts
receivable at December 31, 1997 and 76 percent of total accounts receivable
at December 31, 1996.
NOTE 8. COMMITMENTS
RETIREMENT PLANS
The Company contributes to a union-sponsored multi-employer pension plan
providing defined benefits to certain Michigan hourly employees.
Contributions to the pension plan are based on rates set forth in the
Company's union contracts. The expense related to this plan was $762,000 for
the year ended December 31, 1997, $852,000 for the year ended December 31,
1996 and $788,000 for the year ended December 31, 1995. The plan was
substantially fully funded as of the latest valuation date.
The Company also has a qualified profit sharing retirement plan and
401(k) employee savings plan covering certain salaried and hourly employees.
The expense related to these plans was $4,310,000 during 1997, $2,803,000
during 1996 and $1,157,000 during 1995.
The Company sponsors a 401(k) employee savings plan covering certain
union employees. The Company matches a portion of the employee contributions
made to this plan. The expense under this plan in each of the three years in
the period ended December 31, 1997 was not material.
The Company's UAW Retirement Income Plan covers substantially all union
employees at its Kalamazoo and Bluffton facilities. The Company also sponsors
defined benefit plans covering substantially all of the employees at its APC
facilities. Benefits under the plans are based on years of service.
Contributions by the Company are intended to provide not only for benefits
attributed to service to date, but also for those benefits expected to be
earned in the future. The Company's funding policy is to contribute annually
the amounts sufficient to meet the higher of the minimum funding requirements
set forth in the Employee Retirement Income Security Act of 1974 or the
minimum funding requirements under the Company's union contracts. Net pension
expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
<S> <C> <C> <C>
Service cost-benefits earned during the period.. $ 4,757 $ 219 $ 117
Interest cost on projected benefit obligation... 250 219 170
Return on plan assets........................... (318) (337) (504)
Net amortization and deferral................... 117 136 282
--------- -------- --------
Net pension expense.......................... $ 4,806 $ 237 $ 65
--------- -------- --------
--------- -------- --------
</TABLE>
The following table sets forth the funded status of the plans as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------- -----------
ASSETS ACCUMULATED ASSETS
EXCEED BENEFITS EXCEED
ACCUMULATED EXCEED ACCUMULATED
BENEFITS ASSETS BENEFITS
------------------------- ------------
<S> <C> <C> <C>
Accumulated benefit obligation:
Vested.................................. $ 2,708 $ 4,035 $ 2,464
Nonvested............................... 653 81 567
--------------------------------------
$ 3,361 $ 4,116 $ 3,031
--------------------------------------
--------------------------------------
Projected benefit obligation............... $ 3,361 $ 5,016 $ 3,031
Fair value plan assets, principally
equity securities and bonds............. 3,502 - 3,146
--------------------------------------
Excess (deficiency) of assets over
projected benefit obligation............ 141 (5,016) 115
Unrecognized net transition gain........... (191) - (350)
Unrecognized net gain from experience
differences............................. (156) (31) (223)
Unrecognized prior service cost............ 612 339 770
Adjustment needed to recognize minimum
liability.............................. - (73) (70)
--------------------------------------
Prepaid pension cost (pension liability)... $ 406 $ (4,781) $ 242
--------------------------------------
--------------------------------------
Actuarial assumptions:
Discount rate.............................. 7.5% 7.5% 7.5%
--------------------------------------
--------------------------------------
Expected long-term rate of return on
plan assets............................. 8.0% 8.0% 8.0%
--------------------------------------
--------------------------------------
</TABLE>
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
26
<PAGE>
POSTRETIREMENT PLANS
The Company provides certain medical insurance benefits for retired
employees. Certain employees of the Company are eligible for these benefits
if they remain employed until age 55 or 59 and fulfill other eligibility
requirements specified by the plans. Certain retirees between the ages of 55
and 62 must contribute 100 percent of the group rate for active employees. No
contributions are required for retirees 62 or older. Benefits are continued
for dependents of eligible retiree participants after the death of the
retiree.
Net periodic postretirement benefit cost consisted of the following for
the periods ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
< <C> <C> <C>
Service cost-benefits earned during the period.... $ 1,178 $ 174 $ 276
Interest cost on accumulated postretirement
benefit obligation.......................... 4,743 707 636
----------------------------
Net periodic postretirement benefit cost.......... $ 5,921 $ 881 $ 912
----------------------------
----------------------------
</TABLE>
The Company funds benefits under the plans as they are incurred. A summary
of the accumulated present value of the postretirement benefit obligation
included in other noncurrent liabilities as of December 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Retirees.......................................... $ 39,380 $ 5,920
Active employees eligible to retire............... 25,734 1,752
Active employees not eligible to retire........... 32,634 6,341
--------------------------
Accrued postretirement benefit costs........... $ 97,748 $ 14,013
--------------------------
--------------------------
</TABLE>
The projected postretirement benefit obligation is calculated using a
discount rate of 7.5 percent and an annual rate of increase in per capita
claims cost ranging from 6.5 percent to 9.5 percent in 1997 and 7.0 percent
in 1996. In 1998, the rate is assumed to range from 5.5 percent to 9.0
percent.
A 1 percent increase in the health care cost trend rates would cause
the accumulated postretirement obligation to increase by $.9 million, and the
aggregate of the service and interest components of 1997 net periodic
postretirement benefit cost to increase by $.4 million.
LEASES
The Company leases office and manufacturing space and certain equipment under
lease agreements which require it to pay maintenance, insurance, taxes and
other expenses in addition to annual rentals. Future annual rental
commitments at December 31, 1997 under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR OPERATING CAPITAL
<S> <C> <C>
1998................................................. $ 18,519 $ 6,579
1999................................................. 15,837 6,501
2000................................................. 5,893 6,424
2001................................................. 2,225 6,346
2002................................................. 1,281 8,291
Thereafter........................................... 8,945 9,125
--------- ---------
Total minimum lease payments......................... $ 52,700 43,266
---------
---------
Less amount representing interest.................... 8,703
---------
Present value of minimum lease payments.............. $ 34,563
---------
---------
</TABLE>
Rent commitments associated with acquired facilities which will not be
utilized by the Company have been excluded from the above amounts and will be
provided for in the recording of the related acquisition, as discussed in
Note 3.
LITIGATION
The Company is party to certain claims arising in the ordinary course of
business. In the opinion of management, based upon the advice of legal
counsel, the outcomes of such claims are not expected to be material to the
Company.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has made payments to Hidden Creek Industries, an affiliate of the
Company, for certain acquisition-related and other management services
totaling $3.3 million during 1997 and $750,000 during 1996.
NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a condensed summary of quarterly results of operations for
1997 and 1996 (in thousands except per share amounts):
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
GROSS OPERATING NET PER PER
REVENUES PROFIT INCOME INCOME SHARE SHARE
<S> <C> <C> <C> <C> <C> <C>
1997
First...... $ 125,117 $ 19,012 $ 12,540 $ 6,718 $ .47 $ .45
Second..... 327,272 46,129 28,763 10,747 .51 .49
Third...... 349,507 47,189 27,416 11,828 .52 .50
Fourth..... 433,933 64,779 40,984 16,951 .74 .68
-------------------------------------------------------------------
$ 1,235,829 $ 177,109 $ 109,703 $ 46,244 $ 2.27 $ 2.18
-------------------------------------------------------------------
-------------------------------------------------------------------
1996
First...... $ 68,921 $ 10,515 $ 6,626 $ 3,188 $ .29 $ .28
Second..... 96,521 15,351 10,307 5,302 .46 .44
Third...... 114,583 17,041 10,155 5,236 .37 .36
Fourth..... 119,900 18,728 12,352 6,911 .48 .47
-------------------------------------------------------------------
$ 399,925 $ 61,635 $ 39,440 $ 20,637 $ 1.63 $ 1.55
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
The sum of the per share amounts for the quarters do not necessarily
equal the total for the years due to the effects of rounding.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO TOWER AUTOMOTIVE, INC.:
We have audited the accompanying consolidated balance sheets of Tower
Automotive, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1997. 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 financial position of Tower Automotive,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
MINNEAPOLIS, MINNESOTA,
JANUARY 23, 1998
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------------------------------
EIGHT AND
COMBINED ONE-HALF MONTH
(DOLLARS IN THOUSANDS, YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
EXCEPT PER SHARE AMOUNTS) DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993(1) DEC. 31, 1993
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues..................... $ 1,235,829 $ 399,925 $ 222,801 $ 165,526 $ 86,334 $ 61,297
Cost of sales................ 1,058,720 338,290 185,388 142,986 72,367 51,941
Selling, general and
administrative expense... 57,869 20,004 14,308 7,435 4,378 3,155
Amortization expense......... 9,537 2,191 1,185 803 197 197
Operating income............. 109,703 39,440 21,920 14,302 9,392 6,004
Interest expense, net........ 28,962 5,103 1,799 1,899 729 636
Provision for income taxes... 32,290 13,700 8,050 5,042 3,679 2,287
Net income................... 46,244 20,637 12,071 7,361 5,009 3,081
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Basic earnings per share..... $ 2.27 $ 1.63 $ 1.11 $ .94 $ .84 $ .52
Diluted earnings per share... $ 2.18 $ 1.55 $ 1.05 $ .86 $ .74 $ .45
THE PREDECESSOR
---------------
THREE AND
ONE-HALF MONTH
PERIOD ENDED
APRIL 14, 1993
<S> <C>
Income Statement Data
Revenues..................... $ 25,037
Cost of sales................ 20,426
Selling, general and
administrative expense... 1,223
Amortization expense......... -
Operating income............. 3,388
Interest expense, net........ 93
Provision for income taxes... 1,392
Net income .................. 1,928
------------
------------
Basic earnings per share..... $ -
Diluted earnings per share... $ -
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
<S> <C> <C>
Balance Sheet Data
Working capital .............. $ 140,592 $ 85,523
Total assets ................. 1,680,088 402,595
Long-term debt................ 743,934 113,460
Stockholders' investment ..... 515,279 181,877
</TABLE>
(1)ON APRIL 15, 1993, THE COMPANY ACQUIRED R.J. TOWER CORPORATION (PRIOR
THERETO, THE "PREDECESSOR") IN A TRANSACTION BY AN INVESTOR GROUP LED BY A
SUBSIDIARY OF ONEX CORPORATION, J2R PARTNERS AND CERTAIN OTHERS, INCLUDING
MEMBERS OF MANAGEMENT. ACCORDINGLY, THE INFORMATION PROVIDED FOR THE YEAR
ENDED DECEMBER 31, 1992, AND FOR THE THREE-AND-ONE-HALF MONTH PERIOD ENDED
APRIL 14, 1993, IS NOT COMPARABLE. IN ADDITION, OPERATING DATA OF THE
PREDECESSOR FOR THE PERIOD JANUARY 1, 1993 TO APRIL 14, 1993, HAVE BEEN
COMBINED FOR DISCUSSION PURPOSES WITH THE OPERATING DATA OF THE COMPANY FOR
THE EIGHT-AND ONE-HALF MONTH PERIOD ENDED DECEMBER 31, 1993, WITHOUT GIVING
EFFECT TO PURCHASE ACCOUNTING OR THE IMPACT OF THE FINANCING OF THE
ACQUISITION OF R.J. TOWER.
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
28
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
DIRECTORS
S.A. "Tony" Johnson
CHAIRMAN
TOWER AUTOMOTIVE, INC.
Adrian VanderStarre
VICE CHAIRMAN
TOWER AUTOMOTIVE,INC.
Dugald K. Campbell
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TOWER AUTOMOTIVE, INC.
James R. Lozelle
EXECUTIVE VICE PRESIDENT
TOWER AUTOMOTIVE, INC.
Scott D. Rued
VICE PRESIDENT, CORPORATE DEVELOPMENT
TOWER AUTOMOTIVE, INC.
W.H. Clement
VICE CHAIRMAN
HIDDEN CREEK INDUSTRIES
Eric J. Rosen
MANAGING DIRECTOR
ONEX INVESTMENT CORPORATION
Matthew O. Diggs, Jr.
CHAIRMAN
THE DIGGS GROUP
F.J. "Joe" Loughrey
EXECUTIVE VICE PRESIDENT AND GROUP PRESIDENT - INDUSTRIAL AND CHIEF TECHNICAL
OFFICER
CUMMINS ENGINE COMPANY, INC.
Kim B. Clark
DEAN OF GRADUATE SCHOOL OF BUSINESS ADMINISTRATION,
HARVARD UNIVERSITY
Enrique Zambrano
CHIEF EXECUTIVE OFFICER
PROEZA, S.A. DE C.V.
LEADERSHIP TEAM
Anthony A. Barone
Richard S. Burgess
Dugald K. Campbell
Luigi Candusso
Ronald E. Gavalis
James R. Lozelle
Tom G. Pitser
Paul D. Rysenga
STOCK INFORMATION
Tower Automotive, Inc.'s Common Stock trades on the New York Stock Exchange
under the symbol TWR. Prior to February 19, 1997, the Company's Common Stock
traded on the Nasdaq National Market under the symbol TWER. The following stock
prices were obtained from New York Stock Exchange and Nasdaq reports:
Stock Price by Quarter
<TABLE>
<CAPTION>
1997 LOW HIGH
<S> <C> <C>
Fourth Quarter............... 36 13/16 48 9/16
Third Quarter................ 33 7/8 46 1/4
Second Quarter............... 33 3/4 43
First Quarter................ 29 3/4 45 1/16
1996 LOW HIGH
Fourth Quarter............... 24 32 1/8
Third Quarter................ 23 3/4 27
Second Quarter............... 16 25 1/4
First Quarter................ 14 1/8 16 1/8
</TABLE>
SHAREHOLDER SERVICES
Tower Automotive, Inc.
4508 IDS Center
Minneapolis, Minnesota 55402
Ph: 612-342-2310
Fax: 612-332-2012
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Minneapolis, Minnesota
GENERAL COUNSEL
Varnum, Riddering, Schmidt & Howlett
Grand Rapids, Michigan
SHAREHOLDER RELATIONS COUNSEL
Padilla Speer Beardsley Inc.
Minneapolis, Minnesota
REGISTRAR AND TRANSFER AGENT
First Chicago Trust Company of New York
Jersey City, New Jersey
Ph: 800-446-2617
ANNUAL MEETING
The annual meeting of stockholders will be held on Tuesday, May 19, 1998, at
1:00 p.m. Central Time, at Tower Automotive, Inc., 3533 North 27th Street,
Milwaukee, Wisconsin.
FORM 10-K
Copies of the Form 10-K, filed with the Securities and Exchange Commission, are
available upon request from Shareholder Services, Tower Automotive, Inc. 4508
IDS Center, Minneapolis, Minnesota 55402.
DESIGN: Eaton & Associates PHOTOGRAPHY: Keri Pickett
<PAGE>
TOWER
AUTOMOTIVE
BUSINESS UNITS
Auburn, IN
Bardstown/Bowling Green, KY
Barrie, Ontario, Canada
Bellevue, OH/Belcamp, MD
Bluffton/Upper Sandusky, OH
Corydon, IN
Granite City, IN
Greenville, MI
Heavy Truck, Milwaukee, WI
Heavy Truck, Roanoke, VA
Kalamazoo, MI
Kendallville, IN
Milan, TN
Plymouth, MI
Press Operations, Milwaukee, WI
Ram Assembly, Milwaukee, WI
Rockford, IL
Romulus/Manchester, MI
Tooling Operations, Milwaukee, WI
Traverse City, MI
Turin, Italy
TECHNICAL CENTERS
38900 Hills Tech Drive
Farmington Hills, MI 48831
Ph: 248-488-6000
Fax: 248-488-6161
3533 North 27th Street
Milwaukee, WI 53216
Ph: 414-447-4000
Fax: 414-447-6161
20-20 Hiradai, Tsuzuki-ku
Yukohama, Kanajawa 224 Japan
Ph: 045-943-4911
Fax: 045-943-4906
Corso Orbassano 336
10137 Torino Italy
Ph: 11-3092002
Fax: 11-3095675
PARTNERSHIPS
Metalsa, Monterrey, Mexico
Tower Golden Ring,
Changchun China
Metalurgica Caterina S.A.,
Sao Paulo, Brazil
OPERATING HEADQUARTERS
6303 28th Street S.E.
Grand Rapids, MI 49546
Ph: 616-954-7600
Fax: 616-954-7599
CORPORATE HEADQUARTERS
4508 IDS Center
Minneapolis, MN 55402
Ph: 612-342-2310
Fax: 612-332-2012
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
R.J. Tower Corporation (a Michigan corporation)
R.J. Tower Corporation (an Indiana corporation)
R.J. Tower Corporation (a Kentucky corporation)
Edgewood Manufacturing Corp. (a Delaware corporation)
Kalamazoo Stamping and Die Company (a Michigan corporation)
Trylon Corporation (a Michigan corporation)
Tower Automotive Delaware, Inc. (a Delaware corporation)
Tower Automotive Products Company, Inc. (a Delaware corporation)
Tower Automotive Export, Inc. (a Barbados, West Indies corporation)
Tower Automotive Limited (a United Kingdom corporation)
Changchun Tower Gold Ring Automotive Products Company, Ltd. (a China
corporation)
Tower Automotive Canada, Inc. (a Canada corporation)
Tower Automotive do Brasil Ltda (a Brazil corporation)
Tower Automotive Mexico, S. de R.L. de C.V. (a Mexico corporation)
Tower do Brasil Ltda (a Brazil corporation)
Tower Italia, S.r.L. (an Italy corporation)
Tower Automotive, S.r.L. (an Italy corporation)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-91578, 333-13589,
333-17355, 333-21943, 333-38827 and 333-39523.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TOWER
AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF AND
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000925548
<NAME> TOWER AUTOMOTIVE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 219,256
<ALLOWANCES> 0
<INVENTORY> 73,809
<CURRENT-ASSETS> 371,282
<PP&E> 762,593
<DEPRECIATION> (64,082)
<TOTAL-ASSETS> 1,680,088
<CURRENT-LIABILITIES> 230,690
<BONDS> 0
0
0
<COMMON> 230
<OTHER-SE> 515,049
<TOTAL-LIABILITY-AND-EQUITY> 1,680,088
<SALES> 1,235,829
<TOTAL-REVENUES> 1,235,829
<CGS> 1,058,720
<TOTAL-COSTS> 1,058,720
<OTHER-EXPENSES> 67,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,962
<INCOME-PRETAX> 80,968
<INCOME-TAX> 32,290
<INCOME-CONTINUING> 48,678
<DISCONTINUED> 0
<EXTRAORDINARY> (2,434)
<CHANGES> 0
<NET-INCOME> 46,244
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.18
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000925548
<NAME> TOWER AUTOMOTIVE, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 957 39,596 1,057 54,273
38,534
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 39,133 61,073 53,075 71,197
70,071
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 11,398 21,864 14,777 22,170
24,094
<CURRENT-ASSETS> 61,826 140,954 75,735 156,993
144,754
<PP&E> 97,778 176,812 115,632 165,201
170,679
<DEPRECIATION> (10,191) (20,564) (12,398) (15,002)
(18,246)
<TOTAL-ASSETS> 209,476 402,595 251,710 405,229
406,878
<CURRENT-LIABILITIES> 29,581 55,431 49,234 68,689
75,192
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 108 143 108 140
142
<OTHER-SE> 85,477 181,734 88,879 163,881
174,406
<TOTAL-LIABILITY-AND-EQUITY> 209,476 402,595 251,710 405,229
406,878
<SALES> 222,801 399,925 68,921 165,442
280,025
<TOTAL-REVENUES> 222,801 399,925 68,921 165,442
280,025
<CGS> 185,388 338,290 58,406 139,576
237,118
<TOTAL-COSTS> 185,388 338,290 58,406 139,576
237,118
<OTHER-EXPENSES> 15,493 22,195 3,889 8,933
15,819
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 1,799 5,103 1,308 2,773
4,302
<INCOME-PRETAX> 20,121 34,337 5,318 14,160
22,786
<INCOME-TAX> 8,050 13,700 2,130 5,670
9,060
<INCOME-CONTINUING> 12,071 20,637 3,188 8,490
13,726
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 12,071 20,637 3,188 8,490
13,726
<EPS-PRIMARY> 1.11 1.63 .29 .75
1.12
<EPS-DILUTED> 1.05 1.55 .28 .72
1.08
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000925548
<NAME> TOWER AUTOMOTIVE, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 33,307 34,599 10,776
<SECURITIES> 0 0 0
<RECEIVABLES> 74,840 197,869 210,282
<ALLOWANCES> 0 0 0
<INVENTORY> 26,508 74,921 86,432
<CURRENT-ASSETS> 17,101 109,123 391,359
<PP&E> 187,334 703,630 1,132,102
<DEPRECIATION> (24,154) (33,987) (423,778)
<TOTAL-ASSETS> 421,222 1,463,553 1,477,934
<CURRENT-LIABILITIES> 71,990 235,471 232,978
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 143 228 229
<OTHER-SE> 189,659 484,990 497,069
<TOTAL-LIABILITY-AND-EQUITY> 421,222 1,463,553 1,477,934
<SALES> 125,117 452,389 801,896
<TOTAL-REVENUES> 125,117 452,389 801,896
<CGS> 106,105 387,441 689,566
<TOTAL-COSTS> 106,105 387,441 689,566
<OTHER-EXPENSES> 6,472 23,838 43,611
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,348 7,953 15,852
<INCOME-PRETAX> 11,192 33,157 52,867
<INCOME-TAX> 4,474 13,258 21,140
<INCOME-CONTINUING> 6,718 19,899 31,727
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 2,434 2,434
<CHANGES> 0 0 0
<NET-INCOME> 6,718 17,465 29,293
<EPS-PRIMARY> .47 .98 1.50
<EPS-DILUTED> .45 .94 1.44
</TABLE>
