FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission file number 1-12733 TOWER AUTOMOTIVE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 41-1746238 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4508 IDS CENTER 55402 MINNEAPOLIS, MINNESOTA (Zip Code) (Address of principal executive offices) (612) 342-2310 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares outstanding of the Registrant's common stock, par value $.01 per share, at October 15, 1999 was 46,879,454 shares. TOWER AUTOMOTIVE, INC. FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended September 30, 1999 and 1998 Condensed Consolidated Statements of Operations (unaudited) for the Nine Months Ended September 30, 1999 and 1998 Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 1999 and 1998 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk See "Market Risk & Foreign Currency Transactions" Sections of Management Discussion & Analysis PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURE -2- ITEM 1 - FINANCIAL INFORMATION TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED) Three Months Ended September 30, ------------------------------------- 1999 1998 -------------- ------------ Revenues $ 536,152 $ 444,851 Cost of sales 453,851 377,862 -------------- ------------ Gross profit 82,301 66,989 Selling, general and administrative expenses 29,382 24,003 Amortization expense 4,451 3,461 -------------- ------------ Operating income 48,468 39,525 Interest expense, net 10,642 8,620 -------------- ------------ Income before provision for income taxes 37,826 30,905 Provision for income taxes 15,130 12,362 -------------- ------------ Income before equity in earnings of joint ventures and minority interest 22,696 18,543 Equity in earnings of joint ventures 3,664 2,342 Minority interest--dividends on trust preferred, net (2,619) (2,619) -------------- ------------ Net income $ 23,741 $ 18,266 -------------- ------------ -------------- ------------ Basic earnings per share $ 0.50 $ 0.40 -------------- ------------ -------------- ------------ Diluted earnings per share $ 0.44 $ 0.36 -------------- ------------ -------------- ------------ The accompanying notes are an integral part of these condensed consolidated statements. -3- TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED) Nine Months Ended September 30, ------------------------------------- 1999 1998 ---------------- --------------- Revenues $ 1,565,404 $ 1,367,854 Cost of sales 1,316,627 1,166,822 ---------------- --------------- Gross profit 248,777 201,032 Selling, general and administrative expenses 76,386 65,968 Amortization expense 11,642 10,034 ---------------- --------------- Operating income 160,749 125,030 Interest expense, net 25,171 33,230 ---------------- --------------- Income before provision for income taxes 135,578 91,800 Provision for income taxes 54,231 36,722 ---------------- --------------- Income before equity in earnings of joint ventures and minority interest 81,347 55,078 Equity in earnings of joint ventures 10,959 9,013 Minority interest - dividends on trust preferred, net (7,861) (3,259) ---------------- --------------- Net income $ 84,445 $ 60,832 ---------------- --------------- ---------------- --------------- Basic earnings per share $ 1.80 $ 1.32 ---------------- --------------- ---------------- --------------- Diluted earnings per share $ 1.52 $ 1.18 ---------------- --------------- ---------------- --------------- The accompanying notes are an integral part of these condensed consolidated statements. -4- TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) September 30, December 31, Assets 1999 1998 -------------- ------------- (unaudited) Current assets: Cash and cash equivalents $ 1,067 $ 3,434 Accounts receivable 359,362 239,888 Inventories 115,863 76,913 Prepaid tooling and other 99,011 115,859 -------------- ------------- Total current assets 575,303 436,094 -------------- ------------- Property, plant and equipment, net 1,047,872 821,873 Restricted cash -- 2,677 Investments in joint ventures 220,902 209,625 Goodwill and other assets, net 654,651 465,898 -------------- ------------- $ 2,498,728 $ 1,936,167 -------------- ------------- -------------- ------------- Liabilities and Stockholders' Investment Current liabilities: Current maturities of long-term debt and capital lease obligations $ 6,303 $ 18,191 Accounts payable 245,620 214,194 Accrued liabilities 158,337 96,773 -------------- ------------- Total current liabilities 410,260 329,158 -------------- ------------- Long-term debt, net of current maturities 710,012 316,579 Obligations under capital leases, net of current maturities 23,246 25,770 Convertible subordinated notes 200,000 200,000 Deferred income taxes 3,510 20,376 Other noncurrent liabilities 193,148 178,738 -------------- ------------- Total non-current liabilities 1,129,916 741,463 -------------- ------------- Mandatorily redeemable trust convertible preferred securities 258,750 258,750 Stockholders' investment: Preferred stock -- -- Common stock 471 463 Warrants to acquire common stock 2,000 2,000 Additional paid-in capital 435,710 426,471 Retained earnings 261,879 177,434 Accumulated other comprehensive income (loss) - cumulative translation adjustment (258) 428 -------------- ------------- Total stockholders' investment 699,802 606,796 -------------- ------------- $ 2,498,728 $ 1,936,167 -------------- ------------- -------------- ------------- -5- The accompanying notes are an integral part of these condensed consolidated balance sheets. TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS - UNAUDITED) Nine Months Ended September 30, --------------------------------- 1999 1998 -------------- -------------- OPERATING ACTIVITIES: Net income $ 84,445 $ 60,832 Adjustments to reconcile net income to net cash provided by Operating activities - Depreciation and amortization 80,665 64,925 Changes in other operating items (65,395) (2,353) -------------- -------------- Net cash provided by operating activities 99,715 123,404 -------------- -------------- INVESTING ACTIVITIES: Acquisitions and investment in joint venture (331,767) (116,827) Net proceeds from sale of Hinge Business -- 35,631 Capital expenditures, net (160,299) (122,308) Change in restricted cash 2,677 5,254 -------------- -------------- Net cash used in investing activities (489,389) (198,250) -------------- -------------- FINANCING ACTIVITIES: Proceeds from borrowings 1,647,118 786,231 Repayment of debt (1,269,190) (965,198) Proceeds from issuance of stock 9,379 2,094 Proceeds from issuance of preferred securities -- 251,350 Other, net -- 532 -------------- -------------- Net cash provided by financing activities 387,307 75,009 -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,367) 163 CASH AND CASH EQUIVALENTS: Beginning of period 3,434 -- -------------- -------------- End of period $ 1,067 $ 163 -------------- -------------- -------------- -------------- -6- The accompanying notes are an integral part of these condensed consolidated statements. TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying condensed consolidated financial statements have been prepared by Tower Automotive, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's 1998 Annual Report Form and 10-K for the year ended December 31, 1998. Revenues and operating results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Inventories consisted of the following (in thousands): September 30, December 31, 1999 1998 ------------- ------------ Raw materials $ 49,532 $ 26,787 Work in process 36,685 27,734 Finished goods 29,646 22,392 ------------- ------------ $115,863 $ 76,913 ------------- ------------ ------------- ------------ 3. Basic earnings per share were computed by dividing net income by the weighted average number of common shares outstanding during the respective quarters. Diluted earnings per share were determined on the assumptions: (i) the Edgewood notes were converted at the beginning of the respective periods, (ii) the Convertible Subordinated Notes were converted at the beginning of the respective periods, and (iii) the Preferred Securities were converted upon issuance on June 3, 1998 as follows (in thousands, except per share data): -7- Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net income $23,741 $18,266 $84,445 $60,832 Interest expense on Edgewood notes, net of tax 9 14 28 45 Interest expense on Convertible Subordinated Notes, net of tax 1,627 1,627 4,881 4,881 Dividends on Preferred Securities, net of tax 2,619 2,619 7,861 3,259 ------- ------- ------- ------- Net income applicable to common stockholders -- diluted $27,996 $22,526 $97,215 $69,017 ------- ------- ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding 47,081 46,236 46,871 46,174 Dilutive effect of outstanding stock options and warrants after application of the treasury stock method 569 427 647 499 Dilutive effect of Edgewood notes, assuming conversion 296 539 339 549 Dilutive effect of Convertible Subordinated Notes, assuming conversion 7,728 7,728 7,728 7,728 Dilutive effect of Preferred Securities, assuming conversion 8,425 8,425 8,425 3,495 ------- ------- ------- ------- Diluted shares outstanding 64,099 63,355 64,010 58,445 ------- ------- ------- ------- ------- ------- ------- ------- Basic earnings per share $ 0.50 $ 0.40 $ 1.80 $ 1.32 ------- ------- ------- ------- ------- ------- ------- ------- Diluted earnings per share $ 0.44 $ 0.36 $ 1.52 $ 1.18 ------- ------- ------- ------- ------- ------- ------- ------- 4. Long-term debt consisted of the following (in thousands): September 30, December 31, 1999 1998 -------------- --------------- Revolving credit facility $ 330,054 $ 257,563 Term loan add on facility 325,000 -- Industrial development revenue bonds 43,765 43,765 Edgewood notes 878 1,636 Italian Stand Alone Demand Borrowings -- 10,889 Other 11,933 16,412 --------- --------- 711,630 330,265 Less-current maturities (1,618) (13,686) --------- --------- --------- --------- Total long-term debt $ 710,012 $ 316,579 --------- --------- --------- --------- The Company's Credit Agreement includes a revolving credit facility that provides for borrowings of up to $750 million on an unsecured basis with a letter of credit sublimit of $75 million. In addition, under the terms of the revolving credit facility, the equivalent of up to $85 million in borrowings can be denominated in foreign currency. As of September 30, 1999, approximately $81 million of the outstanding borrowings are denominated in Italian 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 Agreement 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 6.2% for the nine months ended September 30, 1999. -8- On August 23, 1999, the Company amended and restated its Credit Agreement to include a term loan add on facility of $325 million. The term loan facility matures in eight equal repayments beginning September 2002 with final maturity in June 2004. Interest on the term loan facility is at prime rate or Libor plus a margin ranging from 25 to 175 basis points depending on the Company's ratio of consolidated indebtedness to its total capitalization. The weighted average interest rate for the term loan facility was 7.38% for the nine months ending September 30, 1999. The proceeds from the term facility were used to repay outstanding indebtedness under the revolving facility incurred in connection with the acquisition of Active on July 29, 1999. (See note 5) The Credit Agreement requires the Company to meet certain financial tests, including but not limited to a minimum interest coverage, maximum debt/capital, maximum leverage and maximum senior leverage ratio. As of September 30, 1999, the Company was in compliance with all debt covenants. 5. Effective July 1, 1998, the Company acquired IMAR, S.r.L. ("IMAR") and OSLAMT S.p.A. ("OSLAMT"). IMAR designs and manufactures structural parts and assemblies from two facilities in Italy, primarily for Fiat. OSLAMT designs and manufactures tools and assemblies for the automotive market from its facility in Turin, Italy. The purchase price consisted of approximately $32.5 million in cash plus the assumption of approximately $17 million of indebtedness plus an additional amount of $15 million for achieving certain operating targets. In July 1999 the Company paid the additional amount of $15 million in connection with this agreement. On August 31, 1998, the Company sold its hinge business (the "Hinge Business") to Dura Automotive Systems, Inc. for net proceeds of approximately $36.9 million which approximated the book value of the net assets sold. The net proceeds were used to repay outstanding indebtedness under the revolving credit facility. On July 29, 1999, the Company acquired all of the outstanding stock of Active Tool and Manufacturing Company, Inc. and its affiliate Active Products Corporation (collectively "Active") for total consideration of approximately $315 million. Active, which has five facilities, is a leading designer and producer of large structural stampings and assemblies including Class A exposed metal surfaces to the North American automotive industry. Active's principle customers include DaimlerChrysler, Ford, General Motors, and Saturn. Products offered by Active include body sides, pickup box sides, fenders, floor pan assemblies, door panels, pillars, and heat shields. The acquisition of Active enhances the Company's ability to manufacture large and complex structures, as well as exposed surface panels. The acquisition was financed under the Company's revolving credit facility. These acquisitions have been accounted for using the purchase method of accounting and, accordingly, the assets and acquired liabilities assumed have been recorded at the fair value as of the date of the acquisitions. The assets and liabilities of Active have been recorded based on preliminary estimates of fair value as of the dates of the acquisition. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed has been recorded as goodwill. The Company is further evaluating the fair value of certain assets acquired and liabilities assumed in connection with the Active acquisition and as a result, will likely result in adjustments to the preliminary allocation of the purchase price. In conjunction with acquisitions made, reserves have been established for certain costs associated with facility shutdown and consolidation activities and for general and payroll related costs primarily for planned employee termination activities. As of December 31, 1998, approximately $18.5 million and $3.2 million were recorded for facility shutdown and payroll related costs, respectively. Additional reserves of $6.6 million related to facility shutdown costs and $4.7 million for payroll related costs were recorded in the nine months ended September 30, 1999 in connection with acquisitions. Cost incurred and charged to such reserves amounted to $1.9 million for payroll related termination costs for the nine months ended September 30, 1999. At September 30, 1999, liabilities for approximately $25.1 million for costs associated with facility shutdown and consolidation activities and $6.0 million of general and payroll related and costs primarily for planned employee termination activities remained. The timing of facility shutdown and consolidation activities has been adjusted to reflect customer concerns with supply interruption. These reserves have been utilized as originally intended and management believes the liabilities recorded for shutdown and consolidation activities are adequate but not excessive as of September 30, 1999. -9- 6. The following presents comprehensive income, defined as changes in the stockholder's investment of the Company, for the three and nine month periods ended September 30, 1999 and 19998 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------- ---------------------------------------- 1999 1998 1999 1998 ------------------- -------------- -------------- ---------------------- Net income $ 23,741 $ 18,266 $ 84,445 $ 60,832 Change in cumulative translation adjustments 333 (87) (686) (89) Comprehensive income $ 24,074 $ 18,179 $ 83,759 $ 60,743 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 7. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", becomes effective for the years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133. During the first quarter of 1999, the Company adopted the Financial Accounting Standards Board Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that start-up activities be expensed as incurred, versus capitalizing and expensing them over a period of time. The adoption of SOP 98-5 did not affect the Company's consolidated results of operations of the financial position of the Company. 8. Supplemental cash flow information (in thousands): Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------- -------------------------------------- 1999 1998 1999 1998 ------------------ --------------- --------------- -------------------- Cash paid for - Interest $ 11,447 $ 10,913 $ 25,438 $ 33,519 Income taxes $ 2,100 $ 455 $ 12,356 $ 5,663 On June 3, 1998, Tower Automotive Capital Trust (the "Issuer"), a wholly owned statutory business trust of the Company, completed the offering of $258.8 million of its 6 3/4% Trust Convertible Preferred Securities ("Preferred Securities No separate financial statements of the Issuer have been included herein. The Company does not consider that such financial statements would be material to holders of Preferred Securities because (i) all of the voting securities of the Issuer are owned, directly or indirectly, by the Company, a reporting company under the Exchange Act, (ii) the Issuer has no independent operations and exists for the sole purpose of issuing securities representing undivided beneficial interests in the assets of the Issuer and investing the proceeds thereof in 6 3/4% Convertible Subordinated Debentures due June 30, 2018 issued by the Company and (iii) the obligations of the Issuer under the Preferred Securities are fully and unconditionally guaranteed by the Company. 9. On October 14, 1999, the Company loaned $30.0 million to J. L. French Automotive Castings, Inc. (J. L. French) in exchange for a convertible subordinated promissory note due October 14, 2009. The note bears interest at 7.50% annually with interest payable on the last day of each calendar quarter beginning December 31, 1999. The Company can convert, at its option, any portion of the outstanding principle of the note into Class A Common Stock of J. L. French at a preset agreed upon conversion price. -10- On October 29, the Company infused $21 million for new shares representing a 49% equity interest in Seojin Industrial Company Limited ("Seojin"). Seojin is a supplier of frames, modules and structural components to the Korean automobile industry. Total consideration for the equity interest was financed under the Company's revolving credit facility. In addition, the Company advanced $19 million to Seojin in exchange for variable rate convertible bonds ("bonds") due October 30, 2009. The bonds are unsecured and rank pari passu with all other present and future obligations of Seojin. Interest on the bonds is payable annually beginning October 30, 2000 and each October 30 thereafter until maturity. The Company has the right at its option to convert the bonds into common stock of Seojin any time on or after October 30, 2000. -11- ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES -- Revenues for the third quarter of 1999 were $536.2 million, compared to $444.9 million for the prior period. The increase is due to incremental new business of approximately $31.2 million, including business relating to the Lincoln LS/Jaguar S type, Ford Excursion, and Freightliner, $64 million relating to the acquisitions of Active Tool and Manufacturing Company Inc. and its affiliate Active Products Corporation (collectively "Active"), offset by a decline of $20 million relating primarily to Ford Escort, Ranger, and Taurus. The General Motors strike had the effect of reducing revenues in the 1998 period by approximately $16.1 million. COST OF SALES -- Cost of sales as a percentage of revenues for the third quarter of 1999 was 84.6% compared to 84.9% for the prior period. The improvement in gross profit was primarily due to increased production volumes and product mix on light truck, sport utility and other models served by the Company. The expected improvement from increased production was offset by inefficiencies caused by significant launch activity incurred during the current period compared with the 1998 period. S, G & A EXPENSES -- Selling, general and administrative expenses increased to $29.4 million, or 5.5% of revenues, for the third quarter of 1999 compared to $24.0 million, or 5.4% of revenues for the prior period. The increased expense was due primarily to $3.3 million of incremental costs associated with the Company's acquisition of Active, increased engineering, program development, and launch costs related to new business of $1.1 million, and the write off of $ 1.0 million of expenses relating to EVA training and unsuccessful acquisitions efforts. AMORTIZATION EXPENSE -- Amortization expense for the third quarter of 1999 was $4.5 million compared to $3.5 million for the prior period. The increase was primarily due to incremental goodwill amortization related to the acquisitions of IMAR and OSLAMT in July 1998 including operating performance payments, and the acquisition of Active in July 1999. INTEREST EXPENSE -- Interest expense for the third quarter of 1999 was $10.6 million compared to $8.6 million for the prior period. Interest expense was primarily affected by increased borrowings to fund the Company's acquisition of Active in July 1999 and payments for performance made in connection with the acquisition of IMAR. INCOME TAXES -- The effective income tax rate was 40% for the third quarter of 1999 and 1998. The effective rates differed from the statutory rates primarily as a result of state taxes and non-deductible goodwill amortization. EQUITY IN EARNINGS OF JOINT VENTURES -- Equity in earnings of joint ventures for the third quarter of 1999 and 1998 represents the Company's share of the earnings from its joint venture interests in Metalsa, Caterina and Tower Golden Ring. MINORITY INTEREST -- Minority interest for the third quarter of 1999 and 1998 represents dividends, net of income tax benefits, on the Preferred Securities. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES -- Revenues for the nine months ended September 30, 1999 were $1,565.4 million, compared to $1,367.9 million for the nine months ended September 30, 1998. The increase is due to net new business of approximately $113.1 million. The new business related primarily to the Ford Explorer, F-Series pick-up, Ranger , Excursion and Lincoln LS/Jaguar S Type, Dodge Durango and Dakota, and the Chrysler LH. The increase of $94.4 million relating to the acquisitions of IMAR, OSLAMT , and Active offset by $39.0 million relating to the sale of the Hinge Business. The General Motors strike had the effect of reducing revenues in the 1998 period by approximately $29.0 million. -12- COST OF SALES -- Cost of sales as a percentage of revenues for the nine months ended September 30, 1999 was 84.1% compared to 85.3% for the nine months ended September 30, 1998. Improvement in gross profit was due to increased production volumes and product mix on light truck, sport utility and other models served by the Company. The improvement from increased production was offset by inefficiencies caused by customer demand exceeding planned capacity at certain locations, resulting in weekend overtime to meet production, and inefficiencies due to significant launch activity. S, G & A EXPENSES -- Selling, general and administrative expenses increased to $76.4 million, or 4.9% of revenues, for the nine months ended September 30, 1999 compared to $66.0 million, or 4.8% of revenues, for the nine months ended September 30, 1998. The increased expense was due to incremental costs associated with the Company's acquisitions of IMAR, OSLAMT, and Active of $5.0 million and increased engineering, program development, and launch costs related to new business of approximately $5.6 million. Additionally, the Company wrote off certain expenses of approximately $1.7 million relating to unsuccessful acquisition efforts. This increase was offset partially by the realization of gains totaling $1.9 million on the cash settlement of amounts due under the interest rate swap and lock agreements during the first nine months of 1999. AMORTIZATION EXPENSE -- Amortization expense for the nine months ended September 30, 1999 was $11.6 million compared to $10.0 million for the nine months ended September 30, 1998. The increase was due to amortization related to the costs associated with the June 1998 offering of the Preferred Securities and incremental goodwill amortization related to the acquisitions of IMAR and OSLAMT in July 1998, including performance payments, and Active in July 1999. INTEREST EXPENSE -- Interest expense for the nine months ended September 30, 1999 was $25.2 million compared to $33.2 million for the nine months ended September 30, 1998. Interest expense was affected by (i) increased borrowings incurred to fund the Company's joint venture interests in Caterina in March 1998, (ii) increased borrowings to fund the Company's acquisition of IMAR and OSLAMT in July 1998, (iii) increased borrowings to fund the Company's acquisition of Active in July 1999, and (iv) the proceeds from the June 1998 offering of Preferred Securities, which were used to reduce borrowings under the Company's revolving credit facility, (v) increased capitalized interest on long term frame line construction projects. INCOME TAXES -- The effective income tax rate was 40% for the nine months ended September 30, 1999 and 1998. The effective rates differed from the statutory rates primarily as a result of state taxes and non-deductible goodwill amortization. EQUITY IN EARNINGS OF JOINT VENTURES -- Equity in earnings of joint ventures for the first nine months of 1999 and 1998 represents the Company's share of the earnings from its joint venture interests in Metalsa, Caterina and Tower Golden Ring. MINORITY INTEREST -- Minority interest for the first nine months of 1999 and 1998 represents dividends, net of income tax benefits, on the Preferred Securities. LIQUIDITY AND CAPITAL RESOURCES The Company has a credit agreement, which includes a revolving credit facility that provides for borrowings of up to $750 million on an unsecured basis, with a letter of credit sublimit of $75 million. In addition, under the terms of the credit facility, the equivalent of up to $85 million in borrowings can be denominated in foreign currency. As of September 30, 1999 approximately $81 million of the $330.1 million outstanding borrowings under the revolving credit facility are denominated in Italian 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 6.2% for the nine months ended September 30, 1999. On August 23, 1999, the Company amended and restated its Credit Agreement to include a term loan add on facility of $325 million. -13- The term loan facility matures in eight equal repayments beginning September 2002 with final maturity in June 2004. Interest on the term loan facility is at prime rate or Libor plus a margin ranging from 25 to 175 basis points depending on the Company's ratio of consolidated indebtedness to its total capitalization. The weighted average interest rate for the term loan facility was 7.38% for the nine months ending September 30, 1999. The Credit Agreement requires the Company to meet certain financial tests, including but not limited to minimum interest coverage, maximum debt/capital, maximum leverage and maximum senior leverage ratio as detailed below. As of September 30, 1999 the Company was in compliance with all debt covenants. SENIOR INTEREST COVERAGE DEBT/CAPITAL LEVERAGE LEVERAGE PERIODS RATIO (1) RATIO (2) RATIO (3) RATIO (4) ------- --------- --------- --------- --------- 12/31/98 - 12/30/1999 2.50 to 1.00 60% 4.50 to 1.00 3.50 to 1.00 12/31/99 - 12/30/2000 2.75 to 1.00 55% 4.25 to 1.00 3.25 to 1.00 12/31/2000 - thereafter 3.00 to 1.00 50% 4.00 to 1.00 3.00 to 1.00 -------------------------- (1) Interest Coverage Ratio means the ratio of EBIT (as defined) to consolidated interest expense. (2) Debt/Capital Ratio means the ratio of total indebtedness of the Company to the sum of the Company's stockholders' investment plus total indebtedness of the Company. (3) Leverage Ratio means the ratio of total indebtedness of the Company to EBITDA (as defined). (4) Senior Leverage Ratio means the ratio of total indebtedness of the Company, excluding subordinated indebtedness and the Convertible Notes and Debentures, to EBITDA (as defined). The Credit Agreement also contains certain negative covenants that restrict, among other things, the ability of the Company to: (i) incur any liens and other encumbrances; (ii) sell, assign, lease or transfer assets; (iii) consolidate or merge with another person; (iv) make loan or make any investment in any person; (v) incur any additional indebtedness; (vi) engage in transactions with affiliates; (vii) incur any contingent obligations; (viii) enter into any joint venture; (ix) enter into any obligations for the payment of rent for any property under a lease or agreement to lease; declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of its capital stock, or purchase, redeem or otherwise acquire or retire for value any subordinated indebtedness or any shares of its capital stock; (x) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any employee benefit plan qualified under ERISA which has resulted or could reasonably be expected to result in liability in an aggregate amount in excess of 10% of the Company's tangible net worth; and (xi) engage in any material line of business substantially different from their existing lines of business. Effective July 1, 1998, the Company acquired IMAR, S.r.L. ("IMAR") and OSLAMT S.p.A. ("OSLAMT"). IMAR designs and manufactures structural parts and assemblies from two facilities in Italy, primarily for Fiat. OSLAMT designs and manufactures tools and assemblies for the automotive market from its facility in Turin, Italy. The purchase price consisted of approximately $32.5 million in cash plus the assumption of approximately $17 million of indebtedness plus an additional amount of $15 million for achieving certain operating targets. In July 1999 the Company paid the additional amount of $15 million in connection with this agreement. On July 29, 1999, the Company acquired all of the outstanding stock of Active Tool and Manufacturing Company, Inc. and its affiliate Active Products Corporation (collectively "Active") for total consideration of approximately $315 million. Active, which has five facilities, is a leading designer and producer of large structural stampings and assemblies including Class A exposed metal surfaces to the North American automotive industry. Active's principle customers include DaimlerChrysler, Ford, General Motors, and Saturn. Products offered by Active include body sides, pickup box sides, fenders, floor pan assemblies, door panels, pillars, and heat shields. The acquisition of Active enhances the Company's ability to manufacture large and complex structures, as well as exposed surface panels. The acquisition was financed under the Company's revolving credit facility. 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 excess of the purchase price over the fair value of the assets acquired and liabilities assumed has been recorded as goodwill. -14- Results of operations for these acquisitions have been included in the accompanying consolidated financial statements since the dates of acquisition. On August 31, 1998, the Company sold its hinge business (the "Hinge Business") to Dura Automotive Systems, Inc. for net proceeds of approximately $36.9 million which approximated the book value of the net assets sold. The net proceeds were used to repay outstanding indebtedness under the revolving credit facility. The Company is a 40% partner in Metalsa S. de R.L. ("Metalsa") with Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). The partnership agreement provides additional amounts of up to $45 million payable based upon net earnings of Metalsa during 1998, 1999, and 2000. Based upon Metalsa's 1998 net earnings, the Company paid Proeza approximately $9.0 million in additional consideration during the second quarter of 1999. During the first nine months of 1999, the Company generated $99.7 million of cash from operations. This compares with $123.4 million provided during the same period in 1998. Cash provided by net income, depreciation and amortization was $165.1 million and $125.8 million for 1999 and 1998, respectively. Working capital requirements relating to customer tooling development and related receivables during pre-launch phase decreased operating cash flow by approximately $46 million during the period. Net cash used in investing activities was $489.4 million during the first nine months of 1999 as compared to $198.3 million in the prior period. Net capital expenditures totaled $160.3 million and $122.3 million for the comparable 1999 and 1998 periods, respectively. Acquisitions and investments in joint ventures were approximately $331.8 and $116.8 million for the 1999 and 1998 periods respectively. Net cash provided by financing activities totaled $387.3 million for the first nine months of 1999 compared with $75.0 million in the prior period. Net proceeds from borrowings were $377.9 million. The issuance of stock contributed $9.4 million to cash flow for the period. At September 30, 1999, the Company had unused borrowing capacity of $420.0 million, under its most restrictive debt covenant. The Company believes the borrowing availability under its credit agreement, together with funds generated by operations, should provide liquidity and capital resources to pursue its business strategy for the foreseeable future, with respect to working capital, capital expenditures, and other operating needs. The Company estimates its 1999 capital expenditures will approximate $200 million. 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 effected 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. MARKET RISK The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company's policy is not to enter into derivatives or other financial instruments for trading or speculative purposes. The Company periodically enters into financial instruments to manage and reduce the impact of changes in interest rates. At September 30, 1999, Tower Automotive had debt totaling $911.6 million. Of this amount, $200 million represents fixed debt and $711.6 million represents floating rate debt. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings and cash flows. Conversely for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant (such as foreign exchange rates and debt levels). Based on debt levels at September 30, 1999, a one percentage point change in interest rates would have a net change in the unrealized fair market value of the fixed rate debt of approximately $5.7 million. The pre-tax earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates on variable rate debt would be approximately $7.1 million, holding other variables constant. -15- During June of 1999, the Company terminated its position in interest rate swaps in the notional amount of $300 million, resulting in a gain of $0.5 million. The swaps were held as a hedge to convert floating rate indebtedness to fixed rate indebtedness without changing the underlying debt instrument. The Company believes that over the life of the revolving credit facility, interest rates will continue to remain stable, decreasing the effectiveness of the interest swap, and therefore, terminated the hedge. FOREIGN CURRENCY TRANSACTIONS A portion of Tower Automotive's revenues was derived from manufacturing operations in Europe. The results of operations and financial position of the Company's operations in Europe are principally measured in its respective currency and translated into U. S. dollars. The effects of foreign currency fluctuations in Europe are somewhat mitigated by the fact that expenses are generally incurred in the same currency in which revenues are generated. The reported income of these subsidiaries will be higher or lower depending on a weakening or strengthening of the U. S. dollar against the respective foreign currency. A portion of Tower Automotive's assets is based in its foreign operations and is translated into U. S. dollars at foreign currency exchange rates in effect as of the end of each period, with the effect of such translation reflected as a separate component of stockholders' investment. Accordingly, the Company's consolidated stockholders' investment will fluctuate depending upon the weakening or strengthening of the U. S. dollar against the respective foreign currency. The Company's strategy for management of currency risk relies primarily upon conducting its operations in a country's respective currency and may, from time to time, engage in hedging programs intended to reduce the Company's exposure to currency fluctuations. There are no foreign currency hedges outstanding during the periods presented. YEAR 2000 The Company is currently working to resolve the potential impact of the year 2000 ("Y2K") on the processing of date-sensitive information by the Company's computerized and embedded systems. Any of the Company's programs that have date-sensitive software may recognize the year "00" as 1900 rather than the year 2000. This could result in miscalculations, classification errors or system failures. Based on the information available to date, none of the Company's products contain software or embedded date related logic. Therefore, the Company does not anticipate any significant readiness problems with respect to its products. The Company's facilities have completed the inventory and assessment of their internal information technology ("IT") and non-IT systems (including business, operating, facilities and factory floor systems). During 1998 remediation includes repair, replacement, upgrading or retirement of specific systems and components, with priorities based on a business risk assessment. The Company's remediation activities were substantially completed in the third quarter of 1999, with isolated, limited exceptions expected to be completed in the fourth quarter of 1999. The Company is currently assessing Y2K issues associated with its suppliers by working with the Automotive Industry Action Group ("AIAG"), an industry trade association. As the critical supplier assessments are completed, the Company will develop contingency plans, where feasible and needed, to address the risks which are identified. Such plans sometimes include resourcing materials or building inventory banks of purchased items. The most reasonably likely worst case scenario that the Company currently anticipates with respect to Y2K is the failure of some of its suppliers, including utilities suppliers, to be ready. This could cause a temporary interruption of materials or services that the Company needs to make its products, which could result in delayed shipments to customers and lost sales and profits for the Company. Contingency plans, as needed, are in progress and they will be completed before the end of 1999. Driven by our internal risk assessment and customer expectations, in some cases some stockpiling of inventory will occur, to help ensure business continuity. The Company estimates that it has spent $1.5 million on Y2K activities to date and anticipates that it will incur additional future costs not to exceed $0.5 million in total in addressing Y2K issues. These costs are included in normal operating expenses. -16- The outcome of the Company's Y2K program is subject to a number of risks and uncertainties, some of which (such as the availability of qualified personnel and the Y2K preparation of third parties) are beyond its control. Therefore, there can be no assurances that the Company will not incur material remediation costs beyond the above anticipated future costs, or that the Company's business, financial condition, or results of operations will not be significantly impacted if Y2K problems with its systems, or with the products or systems of other parties with whom it does business, are not resolved in a timely manner. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", becomes effective for the years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 and has not yet determined the timing of adoption. During the first quarter of 1999, the Company adopted the Financial Accounting Standards Board Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that start-up activities be expensed as incurred, versus capitalizing and expensing them over a period of time. The adoption of SOP 98-5 did not affect the Company's consolidated results of operations of the financial position of the Company. FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in this Form 10-Q, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Form 10-Q, the words "anticipate," "believe," "estimate," "expect," "intends," and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. Various economic and competitive factors could cause actual results to differ materially from those discussed in such forward-looking statements, including factors which are outside the control of the Company, such as risks relating to: (i) the degree to which the Company is leveraged; (ii) the Company's reliance on major customers and selected models; (iii) the cyclicality and seasonality of the automotive market; (iv) the failure to realize the benefits of recent acquisitions and joint ventures; (v) obtaining new business on new and redesigned models; (vi) the Company's ability to continue to implement its acquisition strategy; and (vii) the highly competitive nature of the automotive supply industry. All subsequent written and oral forward-looking statements attributable to the Company or persons acing on behalf of the Company are expressly qualified in their entirety by such cautionary statements. -17- PART II. OTHER INFORMATION TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES Item 1. Legal Proceedings: None Item 2. Change in Securities: None Item 3. Defaults Upon Senior Securities: None Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 12.1 Statement and Computation of Ratio of Earnings to Fixed Charges. 27.1 Financial Data Schedule. (b) During the quarter for which this report is filed, the Company filed the following Form 8-K Current Reports with the Securities and Exchange Commission: 1. The Company's current report on Form 8-K dated July 20, 1999 (Commission File No. 1-12733). -18- SIGNATURE Pursuant to the requirements 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: November 15, 1999 By /S/ ANTHONY A. BARONE -------------------------------------------- Anthony A. Barone Vice President, Chief Financial Officer (principal accounting and financial officer) -19-