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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 333-56461
TALON AUTOMOTIVE GROUP, INC
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3382174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
900 WILSHIRE DRIVE, SUITE 203, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip Code)
(248) 362-7600
(Registrant's telephone number, including area code)
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
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APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at August 15, 2000
----------------------------- ---------------------
Class A Voting Common Stock 4,074
Class B Non-Voting Common Stock 158,853
Exhibit Index located at page 12
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TALON AUTOMOTIVE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Operations (unaudited) for the
Three and Six Months Ended July 1, 2000 and July 3, 1999
Consolidated Balance Sheets at July 1, 2000 (unaudited)
and December 31, 1999
Consolidated Statements of Cash Flows (unaudited) for the
Three and Six Months Ended July 1, 2000 and July 3, 1999
Notes to Consolidated Financial Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
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TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS - UNAUDITED)
QUARTER ENDED: SIX MONTHS ENDED:
---------------------------------- -----------------------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
---- ---- ---- ----
Net sales $ 82,633 $ 78,723 $ 168,314 $ 149,743
Cost of sales 73,046 69,366 147,825 132,932
---------- ---------- ---------- ---------
Gross profit 9,587 9,357 20,489 16,811
Operating expenses:
SG&A 6,097 5,232 12,631 10,771
Advanced program expenses 702 0 1,430 0
Amortization 402 418 813 797
---------- ---------- ---------- ---------
Income from operations 2,386 3,707 5,615 5,243
Other (income) expenses:
Interest 4,858 3,971 9,477 7,985
Foreign currency (192) (34) (200) (32)
---------- ---------- ---------- ---------
Loss before income taxes (2,280) (230) (3,662) (2,710)
Provision for income taxes 474 948 1,463 1,825
---------- ---------- ---------- ---------
Net loss $ (2,754) $ (1,178) $ (5,125) $ (4,535)
========== ========== ========== =========
See accompanying notes.
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TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - UNAUDITED)
ASSETS JULY 1, 2000 DECEMBER 31, 1999
------ ---------------- -----------------
Current assets:
Cash $ 872 $ 708
Accounts receivable 53,756 49,527
Inventory 17,432 18,062
Reimbursable tooling 19,679 20,727
Prepaid expenses 2,736 3,082
---------- -----------
Total current assets 94,475 92,106
Property, plant and equipment, net 86,423 90,578
Goodwill and other assets, net 62,544 62,573
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$ 243,442 $ 245,437
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 44,318 $ 46,495
Accrued liabilities 20,575 20,252
Deferred tooling revenue 17,603 26,667
Current portion of debt and capital leases 1,552 1,861
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Total current liabilities 84,048 95,275
Long term debt 176,367 161,318
Capital leases 1,351 1,507
Deferred income taxes 1,891 1,931
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Total non-current liabilities 179,609 164,756
Shareholders' equity:
Common stock 1,250 1,250
Paid in capital 1,413 1,413
Retained earnings (deficit) (21,688) (16,680)
Accumulated other comprehensive income (loss) (1,190) (577)
---------- -----------
Total shareholders' equity (20,215) (14,594)
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$ 243,442 $ 245,437
========== ===========
See accompanying notes.
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TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
QUARTER ENDED: SIX MONTHS ENDED:
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
---- ---- ---- ----
Net loss $ (2,754) $ (1,178) $ (5,125) $ (4,535)
Depreciation and amortization 2,663 2,802 5,303 5,731
Other non-cash expenses 183 194 349 389
Change in operating assets and liabilities:
Accounts receivable 6,251 (6,929) (4,698) (6,038)
Inventories 56 (489) 543 417
Reimbursable tooling, net (118) (6,140) (8,136) (5,464)
Prepaids 271 706 331 (1,297)
Accounts payable (6,842) 7,127 (1,937) 10,660
Accrued liabilities (4,169) (10,867) 527 (5,350)
Other operating items (883) (186) (883) (668)
--------- --------- --------- -------
Cash provided by (used in) operating activities (5,342) (14,960) (13,726) (6,155)
Investing Activities:
Additions to property and equipment (529) (4,035) (835) (12,481)
Financing Activities:
Proceeds from long-term borrowings 5,970 10,889 15,478 13,000
Payments on long-term debt (461) (575) (865) (741)
Deferred financing costs -- (9) 0 (252)
--------- --------- --------- -------
Cash provided by financing activities 5,509 10,305 14,613 12,007
Effects of exchange rates (66) (1,311) 112 (518)
--------- --------- --------- -------
Net change in cash (428) (10,001) 164 (7,147)
Beginning cash 1,300 12,266 708 9,412
--------- --------- --------- -------
Ending cash $ 872 $ 2,265 $ 872 $ 2,265
========= ========= ========= =======
See accompanying notes.
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TALON AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Talon Automotive Group, Inc. (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
in the 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. The unaudited consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 1999.
The Company reports quarterly financial information in thirteen-week increments
and ends each respective quarter on the Saturday following the thirteenth week
with the fiscal year ending December 31.
2. EFFECT OF ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivatives Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133--an Amendment of FASB Statement No. 133." Statement No. 137 defers the
effective date of Statement No. 133 by one year to fiscal years beginning after
June 15, 2000. Accordingly, the Company plans to adopt Statement No. 133
beginning in 2001. Implementation of this statement is not expected to have a
material impact on the Company's results of operations.
In September 1999, the Financial Accounting Standards Board reached a consensus
on EITF Statement No. 99-5, "Accounting for Pre-Production Costs Related to
Long-Term Supply Arrangements". Statement No. 99-5 restricts capitalization of
pre-production costs based on certain criteria and is effective, on a
prospective basis, for fiscal years beginning after December 31, 1999. On
January 1, 2000, the Company adopted Statement 99-5 and has not capitalized any
pre-production costs for the six month period ending July 1, 2000. This
accounting change has the effect of accelerating expense recognition of advance
costs related to business that has not yet begun production. The Company has
defined these advance engineering and program management costs of future
business as "Advanced Program Expenses". If the Company is not able to meet
capitalization criteria prescribed by Statement 99-5 during 2000, it could
reduce the Company's reported earnings by up to $3,000 as compared to 1999. Due
to the materiality of these expenses, advanced program expenses have been
separated on the consolidated statement of operations. The change has no effect
on cash flow.
3. COMMITMENTS AND CONTINGENCIES
As of July 1, 2000, there were no significant changes to the status of
commitments and contingencies presented in the footnotes to the financial
statements for the fiscal year ended December 31, 1999.
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4. INVENTORIES
Inventory consisted of the following:
JULY 1, 2000 DECEMBER 31, 1999
------------ -----------------
UNAUDITED
Raw material $ 8,310 $ 8,739
Work in process 4,623 5,629
Finished goods 4,499 3,694
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Total Inventory $17,432 $18,062
5. COMPREHENSIVE LOSS
The Company's comprehensive loss includes the reported net loss and the change
in accumulated foreign currency translation adjustment. For the second quarter
and six months ended July 1, 2000 the comprehensive loss was $2,818 and $5,014
as compared to $2,489 and $5,051 for the second quarter and six months ended
July 3, 1999.
6. SUPPLEMENTAL GUARANTOR INFORMATION
Veltri Metal Products Co. and Veltri Holdings, Inc. (collectively, the "Veltri
Group") are wholly owned subsidiaries of the Company and constitute all of the
direct and indirect subsidiaries of the Company. The Veltri Group has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest with respect to the Company's senior
subordinated notes.
There are no restrictions on the ability of the Veltri Group to transfer funds
to the Company in the form of cash dividends, loans or advances, except as
follows: (i) pursuant to the senior credit agreement the Veltri Group agreed not
to (a) declare or make any dividend or other distribution with respect to any
shares of capital stock; or (b) make loans, advances or extensions of credit to
any person (except for credit sales in the ordinary course of business and loans
to affiliates in an aggregate amount not to exceed $15,000 at any time
outstanding); and (ii) pursuant to the indenture agreement for the Company's
senior subordinated notes, the Veltri Group is prohibited from making loans or
advances to the Company if a default or event of default shall have occurred
under the indenture.
Management does not believe that separate financial statements for the Veltri
Group is material to investors. Therefore, separate financial statements and
other disclosures concerning the Veltri Group have been omitted, and in lieu
thereof, summarized financial information relating to the Veltri Group is shown
as follows:
JULY 1, 2000 DECEMBER 31, 1999
------------ -----------------
UNAUDITED
Current assets $43,768 $46,868
Non-current assets 50,519 55,016
Current liabilities 45,790 56,394
Non-current liabilities 32,749 29,525
SIX MONTHS ENDED:
JULY 1, 2000 JULY 3, 1999
------------ ------------
UNAUDITED UNAUDITED
Net sales $64,723 $59,013
Gross profit 13,411 11,026
Net income 2,269 3,283
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7. RELATED PARTY TRANSACTIONS
The Company has a business services agreement with Talon L.L.C., an affiliated
company owned by the shareholders of the Company. Under this agreement, the
Company receives services of risk management, benefits management, tax
preparation and other services from Talon L.L.C. as requested by the Company.
For the six month period ended July 1, 2000 and July 3, 1999, the Company paid
fees to Talon L.L.C. of $250 under this agreement.
In 1996, the Company purchased the outstanding capital stock of the Veltri Group
and a former shareholder of the Veltri Group was appointed as an officer of the
Company. The stock purchase agreement included certain earnout provisions
payable to the former shareholder. On April 6, 2000, the Company made an earnout
payment of approximately $1.8 million, including interest, for the calendar year
1999. This was the Company's final earnout payment due under the stock purchase
agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JULY 1, 2000
AS COMPARED TO THE THREE AND SIX MONTHS ENDED JULY 3, 1999
Net Sales
Net sales for the three month period ended July 1, 2000 ("second quarter 2000")
were $82.6 million compared to $78.7 million for the three month period ended
July 3, 1999 ("second quarter 1999"). This represents an increase of
$3.9 million or 5% as compared to the prior year. The increase was primarily due
to higher industry volumes and incremental new business on the General Motors
GMT 800 truck platform and the Honda Odyssey minivan.
For the year-to-date period, net sales were $168.3 million compared to $149.7
million for the same period in the prior year. This represents an increase of
$18.6 million or 12.4% as compared to the prior year. The increase was primarily
due to higher industry volumes and incremental new business on the General
Motors GMT 800 truck platform, DaimlerChrysler Dodge Neon and Honda Odyssey
minivan.
Gross Profit
Gross profit for the second quarter 2000 was $9.6 million or 11.6% of net sales
compared to $9.4 million or 11.9% of net sales for the second quarter 1999. This
represents an increase of $0.2 million or 3% as compared to the prior year. The
increase was due to higher sales and the impact of a press breakdown in the
second quarter 1999.
For the year-to-date period, gross profit was $20.5 million or 12.2% compared to
$16.8 million or 11.2% of net sales for the same period in the prior year. This
represents an increase of $3.7 million or 22% as compared to the prior year.
This increase was primarily due to higher sales and the impact of a press
breakdown in the second quarter 1999.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses for the second quarter 2000 were $6.1 million or 7.4% of net sales
compared to $5.2 million or 6.6% of net sales for the second quarter 1999. The
increase of $0.9 million or 17% was primarily due to incremental investment in
program launches and consulting expenses.
For the year-to-date period, SG&A expenses were $12.6 million or 7.5% of net
sales compared to $10.8 million or 7.2% of net sales for the same period in the
prior year. The increase of $1.9 million or 17% was primarily due to incremental
investment in program launches, consulting expenses and $0.2 million bad debt
provision in the first quarter 2000.
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Advanced Program Expenses
Advanced program expenses for the second quarter 2000 and year-to-date period
were $0.7 million and $1.4 million or 1.0% of net sales. This expense was
capitalized for the same periods in the prior year, however, due to the new
accounting rule, FASB 99-5 (see "Effect of Accounting Pronouncements"), advanced
program expenses were expensed beginning January 1, 2000. Advanced program
expenses are the investment in advance engineering and program management for
future programs.
Interest Expense
Interest expense for the second quarter 2000 was $4.9 million or 5.9% of net
sales, as compared to $4.0 million or 5.0% of net sales for the second quarter
1999. The increase of $0.9 million or 22% was due to higher borrowings and
higher interest rates on the Company's senior credit facility.
For the year-to-date period, interest expense was $9.5 million or 5.6% of net
sales, as compared to $8.0 million or 5.3% of net sales for the same period in
the prior year. The increase of $1.5 million or 19% was due to higher borrowings
and higher interest rates on the Company's senior credit facility.
Income Taxes
The Company's shareholder's have elected under the provisions of the Internal
Revenue Code to be treated as an S-Corporation with respect to the Company's
U.S. operations. As a result, income taxes relate solely to the Company's
Canadian operations. The provision for Canadian income taxes for the second
quarter 2000 was $0.5 million compared to $0.9 million for the second quarter
1999. For the year to date period, the provision was $1.5 million compared to
$1.8 million for the same period in the prior year. The effective tax rate for
the first quarter 2000 and year to date period was approximately 41% and 39%.
LIQUIDITY AND CAPITAL RESOURCES
For the first six months of 2000, net cash flow used in operating activities
totaled $13.7 million compared to $6.1 million used in operating activities for
the same period in the prior year. The change compared to the prior year period
was due to the timing of expenditures for reimbursable tooling, accrued earnout
payments associated with the acquisition of the Veltri Group and working capital
changes.
Net cash used in investing activities primarily relates to capital expenditures.
Capital expenditures totaled $0.8 million for the first six months compared to
$12.5 million for the first six months of 1999. Capital expenditures were
primarily for new machinery and equipment. The decrease, as compared to the
prior year period, was largely due to a sale-leaseback transaction in February
and April of 2000 for which the Company was reimbursed $9.6 million.
The Company has made significant capital expenditures related to a new
production facility and new equipment for the 2002 Jeep Cherokee program ("KJ").
Through July 1, 2000, the cumulative construction-in-process related to the KJ
totaled approximately $9.2 million. The Company believes the new KJ will launch
by the second quarter 2001 and additional KJ capital expenditures of
approximately $6.0 million will be required through that date.
Net cash provided by financing activities totaled $14.6 million for the first
six months of 2000, compared to $12.0 million for the first six months of 1999.
Financing activities primarily related to incremental borrowings on the
Company's senior credit facility for working capital requirements and
reimbursable tooling investments.
EBITDA for the second quarter 2000 was $5.0 million as compared to $6.5 million
for the second quarter 1999. This represents a decrease of $1.5 million or 23%
as compared to the prior year period. For the year to date period, EBITDA was
$10.9 million compared to $11.0 million for the same period in the prior year.
This represents an decrease of $0.1 million or 1% as compared to the prior year
period. EBITDA is defined as income from operations plus depreciation and
amortization and may not be comparable to similarly-titled measures of other
companies. EBITDA is presented because it is a widely accepted non-GAAP
financial indicator of a company's ability to incur and service debt. However,
EBITDA should not be considered in isolation as a substitute for net income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
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On June 27, 2000 the Company's $100 million senior credit facility was amended
to increase the interim borrowing limit on the facility from $63 million to $75
million. On July 1, 2000, the Company was in default of two financial covenants
in the senior credit facility agreement, the interest coverage and quarterly
EBITDA covenants, as defined. On August 11, 2000 the Company's senior credit
facility was amended to waive these defaults through September 29, 2000 and
redefine the borrowing advance rates and remove the interim borrowing limit. The
Company expects to amend the senior credit facility in the third quarter 2000
resetting financial covenants. On July 1, 2000, borrowings under the senior
credit facility were $55.9 million with the availability to borrow an additional
$3 million based on the financial covenants contained in the senior credit
facility agreement. The Company believes borrowing availability under the senior
credit facility, together with funds generated by operations, should provide
sufficient liquidity and capital resources to meet its working capital
requirements, capital expenditures and other operating needs for the foreseeable
future.
CHRYSLER SALES DECLINE
The company expects to have significant decline in the Chrysler LH sales, in the
third quarter 2000, due to a paint line explosion at the Chrysler LH Bramalea,
Ontario assembly facility. The paint line explosion, which occurred in July
2000, resulted in the Bramalea facility remaining closed for an additional three
weeks after the regularly scheduled July 3, 2000 shutdown period (two weeks).
The Company believes the Bramalea facility is anticipating increasing production
volumes through August. The Company believes the impact of this extended
shutdown may have a material adverse effect on the Company's earnings for the
third quarter 2000.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this section, the words
"anticipate", "believe", "estimate" and "expect" and similar expressions are
generally intended to identify forward-looking statements. Readers are cautioned
that any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to: (i)
general economic conditions in the markets in which the Company operates; (ii)
the degree to which the Company is leveraged; (iii) labor disputes involving the
Company or its significant customers; (iv) changes in practices and/or policies
of the Company's significant customers toward outsourcing automotive components
and systems; (v) the Company's reliance on major customers and selected models;
(vi) foreign currency and exchange fluctuations; and (viii) other risks detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. The Company does not intend to update such forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, including changes in foreign currency exchange rates, interest rates
and commodity prices. The Company believes there was no significant change in
its market risk factors since December 31, 1999.
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PART II. OTHER INFORMATION
TALON AUTOMOTIVE GROUP, INC.
Item 1. Legal Proceedings: None
Item 2. Change in Securities: None
Item 3. Defaults Upon Senior Securities: See part 1, item 2
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 10.1(f) - Fifth Amendment to Credit Agreement dated as of April
28, 1998 by and between the Company, as Borrower, and Comerica Bank, as
Agent for the Lenders.
(b) Exhibit 10.1(g) - Sixth Amendment to Credit Agreement dated as of April
28, 1998 by and between the Company, as Borrower, and Comerica Bank, as
Agent for the Lenders.
(c) Exhibit 27 - Financial Data Schedule
(d) The Company filed no Reports on Form 8-K during the six months ended
July 1, 2000.
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SIGNATURE
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TALON AUTOMOTIVE GROUP, INC.
By: /s/ David J. Woodward
----------------------------
David J. Woodward
Vice President of Finance, Chief Financial
Officer and Treasurer
Date: August 15, 2000
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 (f) Fifth Amendment to Credit Agreement dated as of April
28, 1998 by and between the Company, as Borrower, and
Comerica Bank, as Agent for the Lenders.
10.1 (g) Sixth Amendment to Credit Agreement dated as of April
28, 1998 by and between the Company, as Borrower, and
Comerica Bank, as Agent for the Lenders.
27 Financial Data Schedule
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