1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER 333-56461
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TALON AUTOMOTIVE GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-3382174
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
900 WILSHIRE DRIVE, SUITE 203, TROY, MICHIGAN 48084
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 362-7600
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
As of April 2, 2001, 4,074 shares of Class A Voting Common Stock and
158,853 shares of Class B Non-Voting Common Stock of the Registrant were
outstanding. There is no public trading market for the Common Stock.
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TALON AUTOMOTIVE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business........................................................... 4
Item 2. Properties......................................................... 9
Item 3. Legal Proceedings.................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................ 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................ 9
Item 6. Selected Financial Data............................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 17
Item 8. Financial Statements and Supplementary Data........................ 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 17
PART III
Item 10. Directors and Executive Officers of the Registrant................ 17
Item 11. Executive Compensation............................................ 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 18
Item 13. Certain Relationships and Related Transactions.................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 21
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FORWARD LOOKING STATEMENTS
Forward-looking statements included in this Form 10-K are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Statements which address activities, events or developments that the Company
expects or anticipates may occur, including future acquisitions, business
strategy, expansion and growth of the Company's business and operations,
negotiations with senior lenders and noteholders and other similar matters, are
forward looking statements. Readers are cautioned that any forward-looking
statements, including statements regarding the intent, belief, or current
expectations of the Company or its management, are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors including, but not limited to: (i) general economic conditions
in the markets in which the Company operates; (ii) fluctuations in worldwide or
regional automobile and light and heavy truck production; (iii) labor disputes
involving the Company or its significant customers; (iv) changes in practices
and/or policies of the Company's significant customers toward outsourcing
automotive components and systems; (v)foreign currency and exchange
fluctuations; (vi) availability of funds, credit, or extension of debt; (vii)
the matter described in the paragraph below; 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 these forward-looking
statements.
RELIANCE ON MAJOR CUSTOMERS AND SELECTED MODELS. The Company's primary customers
are DaimlerChrysler, General Motors, Ford and Honda. The loss of any one of such
customers, or an unanticipated significant reduction in business generated by
them, would have a material adverse effect. The Company currently expects to
derive a substantial portion of its 2001 net sales from the DaimlerChrysler LH
platform vehicles (Concorde, Intrepid, 300M and LHS passenger cars), the RS
platform vehicles (Voyager/Town & Country/Caravan minivans) and the GMT-800
platform vehicles (Silverado/Sierra/Tahoe/Yukon/Escolade/Suburban). The Company
also anticipates launching significant new business on the DaimlerChrysler 2002
KJ platform (Jeep Liberty sport utility) during 2001. There can be no assurance
that these vehicles will achieve a strong level of market acceptance.
INDUSTRY CYCLICALITY AND SEASONALITY. The automobile industry is highly
cyclical, dependent on consumer spending and subject to the impact of domestic
and international economic conditions. In addition, production and sales can be
affected by labor relations issues, regulatory requirements, trade agreements
and other factors. There can be no assurance the automotive industry will not
experience downturns in the future. An economic recession may impact highly
leveraged companies, such as the Company, more than similarly situated companies
with less leverage.
COMPETITION. The automotive component supply industry is highly fragmented and
highly competitive. The Company's ability to compete is dependent upon
successful implementation of its current and future business strategies.
Competitors include companies that are larger and have substantially greater
resources, as well as divisions of OEMs with internal stamping and assembly
operations. There can be no assurance Talon's business will not be adversely
affected by existing or increased competition.
INCREASING CUSTOMER REQUIREMENTS. The automotive industry is characterized by a
small number of OEM's that are able to exert considerable pressure on component
suppliers to reduce costs and improve quality. In the past, OEM's have generally
demanded and received price reductions and measurable increases in quality by
implementing competitive selection processes, rating programs and other
arrangements. Through increased partnering, OEM's have generally required
suppliers to provide more design and engineering input at earlier stages of
product development, including the building and financing of new tools. Costs
related to these requirements are often at least partially absorbed by the
suppliers. There can be no assurance the Company will be able to improve or
maintain its profit margins on sales to OEM's, or that such customer
requirements will not have a material adverse effect on the business.
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PART I
ITEM 1. BUSINESS
GENERAL
Talon Automotive Group, Inc. and its subsidiaries (collectively referred to as
"Talon" or the "Company") is a full-service Tier 1 designer and manufacturer
of high-quality, stamped metal components and assemblies used by North
American automotive original equipment manufacturers ("OEM's"). Talon
specializes in underbody/chassis and unexposed body structure assemblies that
are major structural components of passenger cars, light trucks, and vans.
Products include frame rails, inner quarter panels, rear back panels,
crossmembers, cowls, radiator/front-end supports and trailer hitch assemblies.
Talon's four largest OEM customers, DaimlerChrysler Corporation
("DaimlerChrysler"), General Motors Corporation ("General Motors"), Ford Motor
Company ("Ford") and Honda Motor Co., Ltd. ("Honda") accounted for approximately
44%, 28%, 8% and 6%, respectively, of net sales for the year ended December 31,
2000. Given the concentration of DaimlerChrysler and General Motors business,
any downturn in the industry may have a similar effect on the Company. The
Company also sells products to targeted Tier 1 suppliers. Platforms on which
Talon had its most significant content in 2000 included:
Customer Platform
- -------- --------
DaimlerChrysler LH 300M/Concorde/Intrepid/LHS, RS Voyager/Town&
Country/Caravan Minivan, NPL Neon and AB Ram Van
General Motors GMT 800 Full-size Pickup/Tahoe/Suburban, GMT 325/330
Blazer/Jimmy and M-Van/Astro/Safari
Ford UN105 Explorer, UPN207 Explorer Sport and SportTrac
and Lincoln Continental
Honda LS Accord, VC Civic and BM Odyssey Minivan
Talon has grown rapidly through a combination of strategic acquisitions and new
customer platform awards. Net sales have increased at a compound annual growth
rate of 38% from $56.8 million in 1995 to $284.4 million in 2000. At this time,
the Company is going through an integration phase and is expected to close
three facilities (See Note 10 to the Company's Consolidated Financial
Statements) in 2001.
On April 28, 1998, Talon completed a reorganization. As used in this report on
form 10-K, the "Company" or "Talon" means
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1) for periods prior to April 28, 1998, the business and operations of Talon
Automotive Group, L.L.C. ("TAG"), Hawthorne Metal Products Company
("Hawthorne"), Production Stamping, Inc. ("PSI"), J&R Manufacturing, Inc.
("J&R"), Veltri Metal Products Co. ("Veltri"), Veltri Holdings USA, Inc.,
VS Holdings, Inc., and VS Holdings No. 2 Inc., (collectively, the "Talon
Entities")and
2) for periods after April 28, 1998, Talon Automotive Group, Inc., and its
subsidiaries which collectively own the former Talon Entities.
The Talon Entities were affiliated by common ownership. The shareholders of
Talon are the same shareholders that owned each of the Talon Entities and their
respective ownership percentages did not change as a result of the
reorganization (see also Note 16 to the Company's consolidated financial
statements).
BUSINESS STRATEGY
The North American market for body and chassis stampings is dominated by the OEM
captive suppliers and approximately 20 major independent suppliers, including
Talon. Talon believes it is one of the leading independent suppliers in its
core product segment of underbody/chassis and unexposed body structure
assemblies. The Company's strategic objective is to become the customer-
preferred supplier in this market segment.
The Company believes OEM's are focusing their own internal stamping operations
on production of Class A exposed surface panels. As a result, OEM's are
increasingly relying on outside suppliers with full-service capabilities for
underbody/chassis and unexposed body structure assemblies and modules. The
Company believes OEM's are reducing their supply base by concentrating business
with suppliers, such as Talon, that can manufacture high value-added
assemblies/modules and supply technical expertise in design and engineering.
Stamping parts are generally classified into five categories:
1) unexposed underbody/chassis assemblies (comprising the lower vehicle
structure);
2) unexposed body structure assemblies (beneath the Class A surface panels,
and comprising the upper vehicles structure);
3) Class A exposed surface panels;
4) full truck frames (body-on-frame) and engine cradles; and
5) powertrain, mechanical hardware and other components.
Talon's strategy is to focus on underbody/chassis and unexposed body structure
assemblies (the first two categories above). Key elements of this strategy
include:
SUPPLYING COMPLEX HIGH VALUE-ADDED MODULES AND SYSTEMS. Value-added assemblies
represented approximately 80% of the Company's 2000 net sales. The Company seeks
to gain new business of modules and systems, which typically includes greater
content than value-added assemblies. Talon believes its capabilities, combined
with current industry trends, have created an opportunity for Talon to supply
certain systems comprising multiple assemblies and integrated modules.
Examples of these systems are:
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System Components
- ------ ----------
Front-end chassis Frame rails, bumpers, wheel house inner panels,
cross members, and shock towers
Front-end body Front fenders, cowl/plenum assemblies, body
reinforcements.
Center floor plan Center floor pans, floor pan reinforcements, and
tunnel reinforcement assemblies
Rear chassis Rear frame rails, rear wheel houses, rear floor
pans and crossmembers
Rear body-side Body side panels, quarter panels, B/C pillars, rear
back panels
ENHANCING FULL-SERVICE ENGINEERING AND PROGRAM MANAGEMENT CAPABILITIES. Talon
seeks to be a leader in its supply of design, engineering, prototyping, program
management, product development and assembly capabilities to further strengthen
its preferred position with certain key customers. Talon believes these
capabilities will enable it to participate in the product development process
during the concept and prototype development stages as well as throughout the
design and manufacturing stages. As OEMs continue to outsource complex,
unexposed stamped assemblies and modules to fewer suppliers, Talon believes Tier
1 suppliers with proven full-service capabilities will be better positioned to
secure such business.
FOCUSING ON KEY CUSTOMERS. As OEMs continue to consolidate their supplier base,
Talon believes strong customer relationships are increasingly important. As a
result, the Company focuses on a limited number of customers to anticipate and
better service those customer needs. Examples of Talon's close relationships
with key customers include:
1) Talon has been awarded a rear frame rail chassis module for a future
DaimlerChrysler vehicle which will include the frame rails, crossmembers,
and floor plan. The Company believes that its advanced engineering
capabilities and prior Program successes contributed to this award.
2) The Company believes it is one of DaimlerChrysler's largest independent
supplier of front frame rail assemblies.
3) The Company received a Best Practices Award for delivery performance and
CAD/CAM Recognition Award from DaimlerChrysler.
4) Talon has been selected by Honda of America to provide guest engineering
support at Honda's North American research center for a future Honda
vehicle platform.
5) Talon received a productivity improvement award from Honda of America as a
result of implementing cost improvements.
QUALITY COMMITMENT. Talon believes its quality performance is a significant
competitive advantage. The OEM's largely evaluate supplier quality by the number
of defective parts per million supplied ("PPM"). The Company's PPM performance
with DaimlerChrysler for the period ended December 2000 was 13 PPM. This was
favorable to DaimlerChrysler's benchmark of 50 PPM for world class suppliers.
Talon has received certain quality and delivery awards from key OEM customers,
including DaimlerChrysler's Gold Pentastar Award in 1998,1999 and 2000.
SELECTIVELY PURSUE STRATEGIC OPPORTUNITIES. The Company regularly evaluates
strategic opportunities, including, among other things, alliances, joint
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ventures, mergers, acquisitions, divestitures and recapitalizations. While the
Company intends to selectively pursue such opportunities as would allow it to
gain access to new customers and new technologies, the Company also intends to
continue to review the results and prospects of its existing operations to
determine whether any or all of them should be sold or otherwise divested or
refinanced to maximize investment return.
PRODUCTS
Talon manufactures a broad range of complex products on over 25 different
platforms. Approximately 80% of the 2000 net sales were from value-added
assemblies and our core products are generally classified into the following
three categories:
1) UNDERBODY/CHASSIS
These products form the lower vehicle structure or foundation of the vehicle and
include large metal stampings and assemblies such as frame rails, wheelhouse
panels, floor pans, suspension braces and crossmembers.
2) UNEXPOSED BODY STRUCTURES
These products form the basic body structure of the vehicle and comprise large
metal stampings and assemblies such as body side panels, cowls, pillars, roof
rails, side sills, inner quarter panels, rear back panels and fender
reinforcement assemblies.
3) OTHER
Talon manufactures certain other products, including trailer hitch assemblies,
air bag canisters, heat shields, battery trays and other complex stampings and
assemblies. We also have the capability to produce low volume production runs
and prototype or pre-production stamped assemblies. Often, this includes
production utilizing a hydroforming process that was internally developed. Our
capabilities include managing math data from the customer, building soft
tooling, stamping parts, laser trimming/piercing, and final assembly/welding of
all required components. We believe our prototype stamping operation enhances
our ability to provide one-stop engineering solutions to our customers.
DESIGN AND ADVANCED ENGINEERING
OEM's are increasingly focused on shortening design cycles and reducing costs by
involving suppliers earlier in the process of designing a vehicle. The Company
has invested substantial resources in developing engineering capabilities to
meet these demands, including computer-aided design terminals that support
DaimlerChrysler, General Motors, Ford and Honda language formats, structural and
fatigue (finite element or "FEA") analysis, computer simulated analysis of the
metal forming process, weld process simulation analysis and electronic
communication via automotive network exchange ("ANX"). These capabilities enable
the Company to provide creative product design and manufacturing services that
result in cost and quality improvements. The objective is to achieve a
competitive advantage through these product design, engineering and development
capabilities.
CUSTOMERS AND MARKETING
The Company primarily serves automotive OEM's in the North American market. The
four largest OEM customers are DaimlerChrysler, General Motors, Ford and Honda.
It also sells products to targeted Tier 1 suppliers that in turn supply OEMs in
the North American market.
1) DAIMLERCHRYSLER
The Company first developed expertise in frame rail assemblies on the 1993 LH
Concord/Intrepid/LHS and AB Ram Van vehicles. The success with these programs
led to increased content on the 1998 LH for which our sales increased over 50%
per vehicle. In addition, new business was recently awarded on the 2000 NPL
Neon, 2001 RS Voyager/Town&Country/Caravan minivan, 2002 KJ
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Jeep Liberty, and 2003 model Chrysler Citadel CS hybrid wagon. The Company
believes it's one of DaimlerChrysler's largest key independent suppliers of
front and rear frame rail assemblies for passenger cars, vans and sport utility
vehicles.
2) GENERAL MOTORS
In 1999, new business was launched on the GMT 800 Series Tahoe/Suburban and the
2000 model GMX 220/310 LeSabre/Bonneville. New products on the Tahoe/Suburban
include a trailer hitch assembly, suspension tie bar and floor pan reinforcement
assembly. New products for the LeSabre/Bonneville include a heat shield, dash
panel reinforcement and frame rail reinforcement. In 2000, volume on the GMT 800
pickup and GMT 820/830 Tahoe Suburban trailer hitch assemblies increased to
reflect both higher industry and higher option rate usage for trailer hitches.
Using the automated robotic welding system that was successfully launched in
1999, the Company was able to quickly respond to General Motors' request for
this increased production.
3) FORD
Ford has been insourcing its stamping needs and may further reduce the number of
its outside suppliers. Accordingly, Ford's future stamping strategy remains
uncertain and the Company continues to support Ford as a full-service stamping
supplier for certain current and carryover parts.
4) HONDA
The Company believes it is one of Honda's leading independent stamping
suppliers. It currently supplies 24 parts on the LS Accord, 13 parts on the BM
Odyssey minivan and 9 parts on the VC Civic. It expects business with Honda to
increase as Honda increases its export volumes and expands capacity in North
America. As an example of growth with Honda, new business was launched in 2000
on the Acura MDX, and have been sourced new business on the Honda HP SUV,
planned to be launched in 2002.
BACKLOG
In general, the Company does not manufacture products against a backlog of
orders. Production and inventory levels are geared primarily to projections of
future demand and the level of incoming orders.
RAW MATERIALS
Talon's principal raw material is steel, representing approximately 87% of raw
material cost for 2000. The remaining 13% of raw material represents various
purchased parts such as tubular products, sealers, corrosion resistant coating,
aluminum and various fasteners.
Talon participates in steel purchase programs through DaimlerChrysler, Ford,
General Motors and Honda wherein steel is purchased by the OEM from the steel
mill and sold to the Company at a price fixed by the OEM. These purchase
programs substantially neutralize our exposure to steel price increases or
decreases since price changes are absorbed by the OEM prior to our purchasing
the steel.
COMPETITION
Talon's competitors include both captive OEM suppliers and external, non-captive
suppliers. The Company competes with a limited number of competitors that have
the physical assets and technical resources to produce large bed stampings,
complex parts and sub-assemblies. The number of competitors has decreased in
recent years and is expected to further decrease as the OEM supplier industry
continues to consolidate. Talon's competitors include Cosma Body and Chassis
Systems (a group within Magna International Inc.); Tower Automotive, Inc.; Budd
Company (a group within ThyssenKrupp AG); A.G. Simpson Automotive, Inc.; Oxford
Automotive, Inc.; L&W Engineering; Trianon Industries Corp.; The Narmco Group;
and divisions of OEMs with internal stamping and assembly operations.
Competitive factors for products include quality, cost, delivery, technical
expertise, engineering capability and customer service.
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EMPLOYEES
As of December 31, 2000, Talon had 1,912 employees, including 398 salaried and
1,514 hourly employees. Included in the hourly total are 442 employees
represented by the United Auto Workers union, 514 employees represented by the
Canadian Auto Workers union, 432 employees represented by the United Steel
Workers of America union and 73 employees represented by the International
Association of Machinist & Aerospace Workers union. The remaining 53 hourly
workers are not unionized. Talon's collective bargaining agreements with these
unions expire at various times at each production facility. At the present time,
the Company is in an integration phase that is expected to reduce the workforce
by 170 employees (see Note 10 of the Company's Consolidated Financial
Statements).
Item 2. PROPERTIES
Talon conducts operations in 15 facilities in 12 locations, as summarized below:
LOCATION DESCRIPTION SQUARE FOOTAGE OWNED/LEASED
- -------- ----------- -------------- ------------
Celina, Tennessee............ Manufacturing 96,000 Leased
Harrison Township, Michigan.. Manufacturing/Prototyping 86,000 Leased
New Baltimore, Michigan...... Manufacturing/Office 105,000 Leased
New Baltimore, Michigan...... Manufacturing/Warehouse 100,000 Leased
Rochester Hills, Michigan.... Sales and Engineering 9,480 Leased
Oxford, Michigan............. Manufacturing 62,000 Leased
Troy, Michigan............... Corporate Headquarters, 18,000 Leased
Design and Engineering
Windsor, Ontario, Canada..... Manufacturing/Robotics 254,000 Leased
Windsor, Ontario, Canada..... Tooling 20,000 Leased
Windsor, Ontario, Canada..... Manufacturing/Robotics 105,000 Owned
Royal Oak, Michigan.......... Manufacturing/Office 250,000 Owned
Glencoe, Ontario, Canada..... Manufacturing/Robotics 51,000 Owned
The utilization and capacity of facilities fluctuates based upon the mix of
components and the vehicle models for which they are produced. Currently, the
Company is expected to integrate the PSI Division reducing the number of
facilities and locations to 12 and 9, respectively. Leases on facilities have
expiration dates ranging from 2001 through 2007. Certain Windsor, Ontario,
Canada facilities are leased from affiliated parties (see "Certain Relationships
and Related Transactions").
Item 3. LEGAL PROCEEDINGS
The Company is, from time to time, involved in ordinary routine litigation
arising out of the ordinary course of its business. In management's opinion,
after reviewing available information with respect to such matters and
consulting with legal counsel, pending or threatened litigation is not expected
to have a material adverse effect on the business, financial condition or
results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There is no public trading market for the Company's Common Stock. As of April 2,
2001, there were 12 holders of record of the Company's Common Stock.
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The Company paid aggregate cash dividends of $10,475,000 in 1998, immediately
after the issuance of the Company's Senior Subordinated Notes. The Company's
ability to pay dividends was restricted at December 31, 1999 under the terms of
its Senior Credit Facility. In addition, there are certain dividend restrictions
on the Company's wholly-owned subsidiaries (see Note 17 to the Company's
Consolidated Financial Statements).
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the Company
for the five years ended December 31, 2000. Selected historical financial data
for the three years ended December 31, 2000 are derived from the audited
consolidated financial statements of the Company included elsewhere in this
Report. The selected financial data for the two years ended December 31, 1997 is
derived from audited combined financial statements of the Company incorporated
by reference in this Report. The following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
related notes presented elsewhere in this Report.
(In Thousands) 1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA
Net sales ............................ $ 71,029 $ 158,718 $ 249,821 $ 291,175 $ 284,445
Gross profit ......................... 12,909 22,555 31,018 31,731 26,193
Selling, general and administrative
expenses(a) ........................ 8,375 13,788 18,614 20,539 24,995
Advanced Program Expense ............. -- -- -- -- 2,930
Restructuring Charge ................. -- -- -- -- 10,183
Amortization expense ................. 115 587 1,417 2,036 1,621
Special compensation(b) .............. -- 1,343 1,359 --
Income (loss )from operations ........ 4,419 6,837 9,628 9,156 (13,536)
Interest ............................. 1,754 4,599 12,293 15,676 19,540
Income (loss) before income taxes(c) . 2,363 2,121 (3,235) (6,654) (32,622)
Net income (loss) .................... 2,269 796 (7,146) (9,699) (34,383)
BALANCE SHEET DATA (END OF PERIOD)
Cash and cash equivalents ............ $ 1,090 $ 1,233 $ 9,412 $ 708 $ 1,564
Total assets ......................... 91,110 166,494 200,220 245,437 224,766
Total debt ........................... 49,468 107,315 147,693 164,686 183,831
Shareholders' equity (deficit) ....... 14,401 14,601 (7,045) (14,594) (49,834)
OTHER FINANCIAL DATA
Cash flows from operations ........... 6,317 $ 6,166 $ 10,191 $ 9,457 $ (13,202)
EBITDA(d) ............................ 7,536 13,116 20,741 20,003 7,282
Depreciation and amortization ........ 3,419 6,279 11,113 10,847 10,635
Capital expenditures ................. 3,942 9,389 12,901 33,430 7,379
- --------------------------
(a) Included in selling, general and administrative expenses are business
services fees paid to Talon L.L.C., an affiliate of the Company, of $500,000
$500,000 and $645,000 for 2000, 1999, and 1998, respectively. Such fees were
reduced to $500,000 annually, effective April 1, 1998 and discontinued effective
January 1, 2001. In addition, certain items in the Company's 1997 and 1998
financial statements have been reclassified to conform with the presentation
used in 2000.
(b) Certain members of the Company's management team participate in deferred
compensation agreements which reward the employee for increases in share value.
Approximately $1,343,000 was recorded in 1997 under these agreements and an
additional amount of $1,359,000 was recorded upon the issuance of Senior
Subordinated Notes on April 28, 1998. Effective on that date, all future
contributions under these agreements were discontinued, excluding annual
interest increases on all vested amounts at the rate of 6% per year.
(c) The shareholders have elected under the provisions of the Internal Revenue
Code to be treated as an S-Corporation, except for the Company's Canadian
subsidiary. As a result, the taxable income of the Company is included in the
taxable income of the individual shareholders, and no provision for federal
income taxes has been included in income. The Company's Canadian subsidiary is
subject to Canadian income tax.
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(d) EBITDA is defined as income from operations plus depreciation, amortization
and one-time restructuring charges (see "PSI Division") and may not be
comparable to similarly-titled measures of other companies. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability to
incur and service debt. However, EBITDA should not be considered in isolation as
a substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. In 1998, EBITDA included certain non-recurring items
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations").
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this annual report on Form 10-K contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this section, the words
"anticipate", "believe", "estimate" and "expect" and similar expressions are
generally intended to identify forward-looking statements. Readers are cautioned
that any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to: (i)
general economic conditions in the markets in which the Company operates; (ii)
fluctuations in worldwide or regional automobile and light and heavy truck
production; (iii) labor disputes involving the Company or its significant
customers; (iv) changes in practices and/or policies of the Company's
significant customers toward outsourcing automotive components and systems;
(v)foreign currency and exchange fluctuations; (vi) availability of funds,
credit, or extension of debt; and (vii) other risks detailed from time to time
in the Company's filings with the Securities and Exchange Commission. The
Company does not intend to update these forward-looking statements.
RESULTS OF CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Net Sales - Net sales for the year ended December 31, 2000 were $284.4 million
compared to $291.9 million for 1999. This represents a decrease of $6.5 million
or 2.2% as compared to the prior year. The decrease was attributable to the
production fluctuations at OEM customers (see "Sales Decline") during the third
and fourth quarter 2000 due to generally slower market conditions. These
decreases were partially offset by strong GM truck sales throughout 2000.
Gross Profit - Gross profit was $26.2 million or 9.2% of net sales for 2000 as
compared to $31.7 million or 10.9% of net sales for 1999. This represents an
decrease of $5.5 million or 17.5% as compared to the prior year. The decrease
was primarily due to lower sales (see "Sales Decline") and the related impact of
unabsorbed overhead for the third and fourth quarters 2000.
Selling, General and Administrative Expenses ("SG&A") - SG&A expenses for 2000
were $25.0 million or 8.7% of net sales, compared to $20.5 million or 7.1% of
net sales for 1999. This represents an increase of $4.5 million or 21.9% as
compared to the prior year. The increase was primarily due to incremental
investment in program launches, consulting expenses and bad debt provisions.
Advanced Program Expenses - Advanced program expenses for the year ended
December 31, 2000 were $2.9 million or 1.0% of net sales. This expense was
capitalized for the same period in the prior year, however, in accordance with
the provisions of EITF 99-5 (see "Effect of Accounting Pronouncements"),
advanced program expenses were expensed beginning January 1, 2000. Advanced
program expenses are the investment in engineering and program management for
future programs.
Restructuring Charge - Restructuring charge (see "PSI Division") for the year
ended December 31, 2000 was $10.2 million or 3.6% of net sales. This charge
includes severance benefits for terminated employees, write-off of certain
leasehold improvements, future lease obligations for buildings that have been
vacated and other facility closure costs.
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Amortization expense - Amortization expense for 2000 was $1.6 million compared
to $2.0 million for 1999. The decrease was primarily due to the write-off of
start up costs in 1999.
Interest Expense - Interest expense for 2000 was $19.5 million or 6.8% of net
sales, compared to $15.7 million or 5.4% of net sales for 1999. The increase was
primarily due to higher borrowings and interest rates on the Company's senior
credit facility.
Foreign Currency - Foreign currency gains and losses all relate to the Company's
Canadian operation. The foreign currency gain for 2000 was $0.5 million compared
to a foreign currency loss of $0.1 million for 1999.
Income Taxes - The Company's income taxes relate solely to its Canadian
subsidiary. The provision for income taxes for 2000 was $1.8 million compared to
$3.0 million for 1999. The decrease was due to additional SG&A costs that had
the effect of reducing taxable income. The effective tax rate for the Canadian
subsidiary was approximately 41% in 2000 and differed from the statutory tax
rates primarily as a result of non-deductible goodwill amortization.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net Sales - Net sales for the year ended December 31, 1999 were $291.2 million
compared to $249.8 million for 1998. This represents an increase of $41.4
million or 16.6% as compared to the prior year. The increase was attributable to
new business awards in 1999, higher industry volumes and a GM strike that
lowered 1998 sales by approximately $10.8 million.
Gross Profit - Gross profit was $31.7 million or 10.9% of net sales for 1999 as
compared to $31.0 million or 12.4% of net sales for 1998. This represents an
increase of $0.7 million or 2.3% as compared to the prior year. The increase was
due to higher sales in 1999 and a GM strike that lowered 1998 gross profit by
approximately $4.8 million. Excluding the GM strike, gross profit decreased $4.1
million in 1999 as compared to 1998. The decrease was primarily due to lower
margins at the Company's PSI division (see "PSI Division"), a press breakdown
and lower scrap steel pricing, partially offset by higher sales.
Selling, General and Administrative Expenses ("SG&A") - SG&A expenses for 1999
were $20.5 million or 7.1% of net sales, compared to $18.6 million or 7.5% of
net sales for 1998. This represents an increase of $1.9 million or 10.3% as
compared to the prior year. The increase was largely due to incremental design
and engineering expenses and two new facilities. The decrease, as a percentage
of net sales, was due to a larger sales base to which corporate expenses were
allocated.
Amortization expense - Amortization expense for 1999 was $2.0 million compared
to $1.4 million for 1998. The increase was primarily due to additional goodwill
amortization related to the Company's Veltri division (see Note 3 to the
Company's Consolidated Financial Statements).
Interest Expense - Interest expense for 1999 was $15.7 million or 5.4% of net
sales, compared to $12.3 million or 4.9% of net sales for 1998. The increase was
primarily due to higher borrowings and interest rates on the Company's senior
credit facility.
Foreign Currency - Foreign currency gains and losses all relate to the Company's
Canadian operation. The foreign currency loss for 1999 was $0.1 million compared
to $0.6 million for 1998. The prior year included a $0.6 million non-recurring
loss on the early retirement of Canadian dollar denominated debt.
Income Taxes - The Company's income taxes relate solely to its Canadian
subsidiary. The provision for income taxes for 1999 was $3.0 million compared to
$3.4 million for 1998. The decrease was due to additional SG&A costs in Canada
that had the effect of reducing taxable income. The effective tax rate for the
Canadian subsidiary was approximately 48% in 1999 and differed from the
statutory tax rates primarily as a result of non-deductible goodwill
amortization.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, servicing the
Company's indebtedness and capital expenditures.
The Company's liquidity is affected by both the cyclical nature of its business
and levels of net sales to its major customers. The Company's ability to meet
its working capital and capital expenditure requirements and debt obligations
will depend on its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control. The Company's ability to meet its
future cash flow requirements under its existing borrowing agreements depends
in large part upon the outcome of negotiations currently in process with the
senior subordinated noteholders, senior bank group, shareholders and
management. The outcome of these negotiations cannot be determined at this time.
Net cash used by operating activities was approximately $13.2 million for the
year ended December 31, 2000, as compared to net cash provided of $9.5 million
for the year ended December 31, 1999. The decrease is primarily related to an
increase in the net loss between the periods, working capital impacts of tooling
programs for new product launches partially offset by accrued liabilities. The
increase in accrued liabilities reflects a restructuring charge taken in 2000
and an increase in accrued interest. The Company believes that for the twelve
months ending December 31, 2001, approximately $10.2 million net cash is
expected to be provided by operating activities.
Net cash used in investing activities primarily relates to capital expenditures.
Capital expenditures totaled $7.4 million for the year ended December 31, 2000
compared to $35.0 million for the year ended December 31, 1999. Capital
expenditures were primarily for new machinery and equipment associated with new
product launches. The decrease, as compared to the prior year period, was
largely due to sale-leaseback transactions completed during 2000 for which the
Company was reimbursed $10.5 million. The Company believes that for the twelve
months ending December 31, 2001, approximately $14 million net cash is expected
to be used for investing activity primarily related to capital expenditures.
The Company has made significant capital expenditures related to a new
production facility and new equipment for the 2002 Jeep Liberty program ("KJ").
Through December 31, 2000, the cumulative construction-in-process related to the
KJ totaled approximately $11.7 million. The Company believes the new KJ will
launch by the second quarter 2001 and additional KJ capital expenditures of
approximately $2.7 million will be required through that date.
The Company expects to finance total capital expenditures of approximately $14.0
million in 2001, $8.0 million in 2002 and $8.0 million in 2003. Capital
expenditures may be greater than currently anticipated as the result of new
business opportunities. In 2001, the Company also expects to finance tooling
expenditures of approximately $8.0 million. Tooling expenditures may be greater
than currently anticipated as a result of changes in customer requirements.
Net cash provided by financing activities was approximately $21.7 million for
the year ended December 31, 2000 as compared to $16.6 million for the year ended
December 31, 1999. In 2000, financing activities were incremental borrowings on
the Company's senior credit facility made to finance the net loss, tooling
investments and capital investments. The Company believes that for the twelve
months ending December 31, 2001, approximately $12 million is expected to be
provided by financing activities under its senior credit facility.
Senior Credit Facility
On July 1,2000, the Company was in default of two financial covenants in the
Company's $100 million senior credit facility, the interest coverage and
quarterly EBITDA covenants, as defined. On August 11, 2000 the Company's senior
credit
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facility was amended to waive the July 1, 2000 defaults through September 29,
2000 and redefine the borrowing advance rates and remove an interim borrowing
limit. On September 29, 2000, the senior credit facility was amended to waive
the July 1, 2000 defaults through October 27, 2000. On October 27, 2000, the
senior credit facility was amended to waive the July 1, 2000 default until
November 20, 2000. On November 20,2000 the Company received a waiver of the July
1, 2000 default until November 29,2000.
For the period ending September 30, 2000, the Company was in default of three
financial covenants, the interest coverage, quarterly EBITDA and leverage
covenants, as defined. On November 14, 2000 the Company's senior credit facility
was amended to waive the September 30, 2000 defaults through November 20,2000.
On November 20,2000, the Company received a waiver of the September 30, 2000
defaults until November 29, 2000.
On December 21, 2000 the Company received a partial waiver under its senior
credit facility to provide access to the senior credit under existing advance
rates through January 12,2001 which was subsequently extended until January 26,
2001. During this interim period, borrowings under the line of credit were
limited to $75 million and subsequently increased to $80 million. The partial
waiver did not waive the existing financial covenant and other defaults for the
quarters ending July 1, and September 30, 2000.
For the period ending December 31,2000, the Company was in default of three
financial covenants, the interest coverage, quarterly EBITDA and leverage
covenants, as defined. In addition, the Company was in default of certain other
provisions of the senior credit facility including those relating to
cross-defaults of other Company obligations.
On December 31,2000 the Company had $63.8 million outstanding under the senior
credit facility with the availability to borrow an additional $11.2 million
subject to borrowing base limitations.
On February 16, 2001 the Company entered into an Amended and Restated Credit
Agreement with its bank group. This agreement amended and restated financial
covenants such that the Company is no longer in default for the quarters ending
July 1, September 30 and December 31, 2000 and reset advance rates, removed
interim limits and reset financial and other covenants through the original term
of the agreement which ends April 27, 2003. In addition, the amendment
eliminated as an event of default the existing cross-defaults under the
Company's $120 million 9.625% senior subordinated notes for a forty-five day
period or until April 2, 2001 to allow the Company to continue negotiations with
its noteholders. On March 29, 2001 the Company's senior facility was amended to
extend the April 12, 2001 negotiation deadline to April 30, 2001 to allow for
continued negotiations with the noteholders.
Senior Subordinated Notes
Due to liquidity concerns resulting from the performance of the PSI division,
sales declines with a major customer and capital investment for new program
launches, the Company elected not to make the November 1, 2000 interest payment
on its $120 million 9.625% Senior Subordinated Notes due May 1, 2008. The notes
were declared in default on December 1, 2000 following the expiration of a
30-day grace period. On November 30, 2000, the Company's bank group formally
exercised its right to block the interest payment for a period of six months.
The Company is actively negotiating with an informal committee representing the
majority of the noteholders regarding an exchange of existing outstanding notes
for a substantial portion of the equity of the Company. The Company is
optimistic that an agreement will be reached in the near future. However, the
results of these negotiations are uncertain at this time and the noteholders
retain their rights to accelerate the principal of the notes and exercise other
remedies available to them under the terms of the indenture including forcing
the Company into an involuntary bankruptcy filing. The Company believes that it
currently does not have the ability to either cure the interest payment default
or refinance the outstanding notes.
Management of the Company plans to continue negotiations with its noteholders
and its bank group to facilitate an exchange of outstanding notes for equity in
the Company. This transaction, if successful, would significantly reduce the
outstanding indebtedness and interest obligations of the Company. If the Company
is unsuccessful in its negotiations with the noteholders and its bank group, a
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deficiency in liquidity would occur which could cause the Company to
involuntarily enter bankruptcy proceedings.
ACCOUNTING RULE CHANGE FOR PRE-PRODUCTION COSTS
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 No. 99-5 and has not capitalized
any pre-production costs for the twelve-month period ending December 31, 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". The Company was not able to meet
capitalization criteria prescribed by Statement 99-5 for certain costs during
2000, which resulted in a reduction of the Company's reported earnings by
approximately $2.9 million 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.
SALES DECLINE
As previously disclosed, the Company experienced a significant decline in
Chrysler LH sales, in the third quarter 2000, due to a paint line explosion at
the Chrysler LH Bramalea, Ontario, Canada 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) and a slow volume ramp up in August
2000.
In addition, sales were negatively impacted by OEM inventory adjustments, the
balance out of certain programs at DaimlerChrysler and Ford, and lower
prototype sales. These factors had a material adverse impact on sales and
EBITDA for the third and fourth quarters of 2000.
CHANGE IN FIXED ASSET LIVES
In May 1999, the Company extended the lives of certain fixed assets. Certain
building improvements were extended from 20 years to 30 years and certain
machinery & equipment (presses) were extended from 7-12 years to 20 years. The
Company believes these changes:
(i) better aligned the cost of equipment with its expected use,
(ii) resulted in useful lives more consistent with predominant industry
practice, and
(iii) allowed for greater consistency across the Company's various facilities.
This change had the effect of both reducing depreciation expense and increasing
income from operations by approximately $1.5 million in 1999. The change had no
effect on cash flow.
INCREASE IN FIXED INTEREST RATE
Approximately 65% of the Company's debt at December 31, 2000 was due to the
Senior Subordinated Notes. Due to the default on December 1, 2000, under the
Senior Subordinated Notes, the interest rate has increased from 9.625% to
11.625%.
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PSI DIVISION
The Company acquired Production Stamping, Inc. ("PSI") in December 1997. This
division principally serves General Motors. While achieving the Company's
strategic objectives, the financial performance of this division has not met the
Company's expectations. During the quarter ending December 31,2000 the Company
initiated a plan to integrate the PSI division into other existing Company
facilities. This plan includes the closure of four existing PSI facilities in
2000 and 2001 and the movement of the related sales volume and corresponding
equipment into existing operations in New Baltimore and Royal Oak, Michigan and
Windsor, Ontario, Canada. Upon completion of the integration, approximately 170
employees will be eliminated with estimated savings totaling $9.6 million per
year. In addition, four facilities and related infra-structure costs will be
eliminated with estimated savings of $2.8 million per year when complete. The
Company anticipates the majority of this integration to be completed by the
third quarter of 2001.
As a result of this integration plan, the Company has recorded a $10.3 million
restructuring charge in 2000. This charge includes severance benefits for
terminated employees, write-off of certain leasehold improvements, future lease
obligations for buildings that have been or will be vacated and other facility
closure costs.
PRESS BREAKDOWN EXPENSES
One of the Company's large press lines experienced mechanical problems in 1999.
As a result, the Company had to temporarily outsource certain business to meet
customer requirements and incurred a capacity constraint. The problems resulted
from unusual circumstances and were covered by the Company's insurance policy.
The Company filed a $5.0 million insurance claim and recovered $3.9 million in
1999, net of deductibles and other items. Approximately $0.3 million of the
insurance recovery was applied towards related capital expenditures and $3.6
million was applied to offset related operating expenses. The Company believes
the press line problems were resolved at December 31, 1999 and that losses in
excess of insurance proceeds reduced 1999 earnings by approximately $1.1
million.
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Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK QUANTITATIVE AND QUALITATIVE ANALYSIS.
The Company's Canadian subsidiary manufactures and sells products in Canada.
This Canadian subsidiary operates in the Canadian dollar and its functional
currency is the Canadian dollar. As a result, the Company's net assets in Canada
(defined as total Canadian assets less total Canadian liabilities) are exposed
to exchange rate changes between the U.S. dollar and the Canadian dollar. Such
exchange rate changes can affect the recorded currency translation adjustment on
the Company's Consolidated Balance Sheet. The Company's net assets subject to
foreign currency translation totaled $15.9 million at December 31, 2000 and
1999, respectively. The potential loss from a hypothetical 10% adverse change in
the foreign exchange rate at December 31, 2000 would be approximately $1.6
million.
INTEREST RATE RISK QUALITATIVE AND QUANTITATIVE ANALYSIS.
Borrowings on the Company's revolving Senior Credit Facility, due April 2003 is
at variable interest rates. Related interest expense is sensitive to (i) changes
in the general level of U.S. interest rates and (ii) increases in the borrowing
spread over these variable base rates by the Company's bank group. The Company
had $63.8 million outstanding on the Senior Credit Facility at December 31, 2000
($40.5 million in 1999). The weighted average interest rate was approximately
10.3% at December 31, 2000 (8.3% in 1999). A hypothetical increase of 2% in the
weighted average interest rate on the Senior Credit Facility at December 31,
2000, if that balance remained constant during 2000, would increase the
Company's interest expense by $1.3 million.
A significant portion of the Company's interest expense has been fixed through
long-term borrowings on the Company's $120.0 million of Senior Subordinated
Notes, due May 2008. The fixed interest rate on the Senior Subordinated Notes is
9.625%. However, due to the default on December 1, 2000, the interest rate has
increased to 11.625%. The impact of the rate increase would increase the
Company's interest expense by $2.4 million.
COMMODITY PRICING RISK
The Company analyzed the impact of commodity pricing risk as it relates to its
results of operations and cash flows. The Company believes the potential impact
to be immaterial (see also Item 1. related to Raw Materials).
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted as a separate section of this Form 10-K.
See Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all executive officers and directors of the Company on
April 2, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Michael Veltri.................... 44 President, Chief Executive Officer and Director
David J. Woodward................. 43 Vice President of Finance, Chief
Financial Officer, Treasurer
and Director
Randolph J. Agley................. 58 Chairman of the Board
Michael T. Timmis................. 61 Vice Chairman of the Board
Wayne C. Inman.................... 54 Secretary and Director
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Directors of the Company are elected each year at the Annual Meeting of
Stockholders to serve for the ensuing year or until their successors are elected
and qualified. The officers of the Company are elected each year at the Annual
Meeting of the Board of Directors to serve for the ensuing year or until their
successors are elected and qualified.
Randolph J. Agley has served as Chairman of the Board for Talon since 1995.
Michael T. Timmis has served as Vice Chairman of the Board for Talon since 1995.
Wayne C. Inman has served as Secretary and as a Director for Talon since 1995
and currently serves as the President and Chief Executive Officer for Talon LLC.
Michael Veltri was elected President and Chief Executive Officer for Talon
effective February 1, 2001. Prior to that, he held the position of Vice
President for Talon as well as the President and Chief Executive Officer for
Veltri Group since 1996 and has been a Director for the Company since 1998.
David J. Woodward has served as the Vice President of Finance, Chief Financial
Officer and Treasurer for Talon since 1995 and Director since 1998.
Effective February 1, 2001, Delmar O. Stanley resigned his position as
President, Chief Executive Office and Director.
Effective January 15, 2001, the position of Vice President of Business
Development, held by Kris Pfaehler, was eliminated.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to each of the
Company's executive officers for fiscal year 2000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND TITLE YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
- -------------- ---- -------- -------- ------------ -------------
Delmar O. Stanley,.......................... 2000 $400,000 $ -- $ 8,016 $114,872
President & Chief Executive Officer 1999 400,000 222,170 3,535 84,948
1998 400,000 94,500 7,025 793,848
Michael Veltri,............................. 2000 490,000 220,000 57,915 22,421
Vice President 1999 440,000 210,000 44,443 14,460
1998 420,000 230,000 41,999 248,077
David J. Woodward,.......................... 2000 231,000 -- 3,386 47,528
Vice President of Finance, Chief Financial 1999 231,000 68,000 4,469 32,060
Officer & Treasurer 1998 220,000 51,303 4,077 248,077
Kris R. Pfaehler,........................... 2000 155,000 -- 4,281 38,054
Vice President of Business Development 1999 155,000 44,155 5,348 25,690
1998 147,500 39,700 4,966 208,385
(1) Includes amounts earned under the Company's equity ownership plan and
deferred compensation agreements in 1998 and interest on the earned amounts
in 1999 and 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The authorized capital stock of the Company consists of 25,000 shares of Class A
Voting Common Stock, of which 4,074 were issued and outstanding as of April 2,
2001, and 250,000 shares of Class B Non-voting Common Stock, of which 158,853
were issued and outstanding as of April 2, 2001. The holders of Class A Common
Stock are entitled to one vote per share on all matters to be voted upon by the
shareholders generally, including the election of directors. The holders of
Class B Non-voting Common Stock are not entitled to vote.
The following table sets forth information regarding beneficial ownership of the
Common Stock of the Company as of April 2, 2001 by each person known by the
Company to be the beneficial owner of more than 5% of its stock, each director
of the Company, each named executive officer of the Company and all executive
officers and directors of the Company as a group. The number of shares of Class
B Non-voting Common Stock allocated to Messrs. Stanley, Woodward, Veltri and
Pfaehler represents options under the Company's Equity Ownership Plan.
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NUMBER OF SHARES OF NUMBER OF SHARES OF
CLASS A VOTING CLASS B NON-VOTING
COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER (% OF CLASS)* (% OF CLASS)+
------------------------------------ ------------------- -------------------
Randolph J. Agley..................................... 2,165(i)(ii) 33,540
c/o Talon L.L.C. (53.1%) (17.5%)
350 Talon Centre
Detroit, Michigan 48207
Judith A. Agley....................................... 1,328 20,739
c/o Talon L.L.C. (32.6%)(i) (10.8%)
350 Talon Centre
Detroit, Michigan 48207
James R. Agley........................................ 354 9,422
c/o Talon L.L.C. (8.7%) (4.9%)
350 Talon Centre
Detroit, Michigan 48207
Joseph A. Agley....................................... 300(ii) 8,259
c/o Talon L.L.C. (7.4%) (4.3%)
350 Talon Centre
Detroit, Michigan 48207
Michael T. Timmis..................................... 1,473(iii) 679
c/o Talon L.L.C. (36.2%) (0.4%)
350 Talon Centre
Detroit, Michigan 48207
Nancy E. Timmis....................................... 1,428(iii) 35,400
c/o Talon L.L.C. (35.1%) (18.5%)
350 Talon Centre
Detroit, Michigan 48207
Wayne C. Inman........................................ 41 9,735(iv)
c/o Talon L.L.C. (1.0%) (5.1%)
350 Talon Centre
Detroit, Michigan 48207
Delmar O. Stanley..................................... -- 13,034(v)
c/o Talon Automotive Group, Inc. (6.8%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
David J. Woodward..................................... -- 4,073(v)
c/o Talon Automotive Group, Inc. (2.1%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
Michael Veltri ....................................... -- 4,073(v)
c/o Talon Automotive Group, Inc. (2.1%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
Kris R. Pfaehler...................................... -- 3,421(v)
c/o Talon Automotive Group, Inc. (1.8%)
900 Wilshire Drive
Suite 203
Troy, Michigan 48084
All current Executive Officers and Directors as a
Group (7 persons)................................... 3,679 68,555
(90.3%) (35.8%)
- ---------------------------
* Percentage calculations based on 4,074 shares of Class A Voting Common
Stock outstanding as of April 2, 2001.
+ Percentage calculations based on 191,600 shares of Class B Non-voting
Common Stock as of April 2, 2001, which consists of 158,853 shares Class
B Non-voting Common Stock outstanding and stock options granted to
acquire an additional 32,747 such shares.
(i) Includes 1,328 shares held in trust for Judith Agley and subject to a
voting trust agreement which irrevocably grants Randolph Agley the power
to vote such shares.
(ii) Includes 300 shares held in trust for Randolph Agley's son, Joseph
Agley, for which Randolph Agley shares in the voting power as
co-trustee.
(iii) Includes 1,428 shares held in trust for Nancy Timmis and subject to a
voting trust agreement which irrevocably grants Michael Timmis the
power to vote such shares.
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20
(iv) Includes 8,146 shares of Class B Non-voting Common Stock Wayne Inman has
the right to acquire pursuant to the exercise of outstanding stock
options.
(v) The respective individual has the right to acquire these shares of Class
B Non-Voting Common Stock pursuant to the exercise of outstanding stock
options (See Note 12).
Item 13. Certain Relationships and Related Transactions
The Company uses the services of the law firm of Timmis & Inman L.L.P. as
general counsel. Michael T. Timmis is a senior partner in the firm, and Wayne C.
Inman was formerly a senior partner and of Counsel. The Company believes that
its arrangements with Timmis & Inman L.L.P. for legal services are on terms at
least as favorable as could have been obtained from non-affiliated persons.
The Company leases certain of its manufacturing facilities from Maria Veltri,
the spouse of Michael Veltri, President and Chief Executive Officer, and
Director of the Company. The table below sets forth certain information for
these leases:
AFFILIATED LEASE LEASE ANNUAL
PERSON LOCATION COMMENCEMENT TERMINATION RENT
---------- -------- ------------ ----------- -------
Maria Veltri........... Windsor, Ontario, Canada 1994 2002 $ 56,201
Maria Veltri........... Windsor, Ontario, Canada 1993 2001 26,727
Although the terms of these leases are not the result of arms-length bargaining,
the Company believes that such leases are on terms no less favorable to the
Company than would have been obtained if such transactions or arrangements were
arms-length transactions with non-affiliated persons.
Talon L.L.C., an affiliate of the Company beneficially owned and controlled by
the shareholders of the Company, has previously provided certain consulting and
administrative services to the Company, including benefit plan and risk
management, tax assistance and acquisition support. Effective April 1, 1998, the
Company entered into an amended services agreement with Talon L.L.C. to provide
for a continuation of such services as requested by the Company. The amended
services agreement is on a year-to-year basis, subject to termination by either
party and a fee of $500,000 annually. Effective January 1, 2001, all services
and fees under this agreement were discontinued.
The Company had an agreement to provide limited services to G&L Industries, Inc.
("G&L"), an affiliate of the Company beneficially owned and controlled by the
shareholders of the Company. The Company discontinued fees under this agreement
in July 1998 and the agreement has been terminated. During 1998 and 1997, the
Company received fees from G&L of $250,000 and $1,600,000.
Michael Veltri, individually and/or as Trustee u/a/d December 17, 1992
("Mr. Veltri"), is owed certain amounts by Veltri Metal Products Co., the
Company's Canadian Subsidiary. On November 8, 1996, the Company purchased all of
the outstanding capital stock of several related companies constituting the
Veltri Group from Mr. Veltri and Maria Veltri, his spouse, pursuant to a stock
purchase agreement. Pursuant to such stock purchase agreement, Mr. Veltri was
eligible for certain earn-out amounts, denominated in Canadian dollars, for the
calendar years 1999 and 1998, based upon the amount by which the combined EBIT
(as defined in the agreement) of the Veltri Group, exceeds a certain threshold.
The maximum aggregate earn-out amount payable to Mr. Veltri was not to exceed
$15,000,000 (Canadian). The 1998 earn-out amount of $12,470,000 (Canadian) was
paid in April 1999, including interest at the prime rate from December 31, 1998.
The 1999 earn-out was approximately $2,524,000 (Canadian) and was paid in
April 2000, including interest from December 31, 1999.
In 1998, the Veltri Group repaid an outstanding promissory note totaling
$748,746, including interest of $90,421, to Mr. Veltri in connection with the
stock purchase agreement.
Page 20
21
The Company participates in several group casualty and property insurance plans
with affiliated companies. Such plans include workers' compensation,
general/products liability, automobile liability, fiduciary liability,
umbrella/excess liability, property insurance and crime insurance. The casualty
insurance plans for workers' compensation, general/products liability and
automobile liability provide for specific loss retention. Insurance is carried
to limit self-insurance per occurrence to $250,000 for workers' compensation and
general/products liability and $100,000 for automobile liability. For the
current policy year ending April 1, 2001, the aggregate annual loss retention
for the group plans is $3,251,800 for automobile, general/products liability and
for workers' compensation. At December 31, 2000, the self-insurance liability
estimate for prior years, based upon insurance carrier case reserves and
internal loss development projections, was $840,967. The Company's share of
this liability estimate was $696,000 and this amount was fully accrued by the
Company at December 31, 2000.
Under the group insurance programs, one hundred percent of each retained loss is
allocated to the responsible affiliate Company. The Company has also caused
letters of credit totaling $1,125,000 to be issued based upon the Company's
credit, which stand as sole security for such retention. The affiliated
companies in this program have, in the past, been financially able to meet their
commitments under the program but there can be no assurance that they will
continue to be able to do so in the future. The affiliated companies in this
program, excluding the Company, had annual sales of approximately $59,957,000
for the calendar year 2000 and a combined book net worth of approximately
$3,734,000 at December 31, 2000. The Company believes it receives substantial
economic benefit as a result of participating in the group insurance program.
The Company will continue to review the cost of participation in the group
program on each renewal date to determine if its continued participation in the
group program is justified.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
The following consolidated financial statements and notes of
Talon Automotive Group, Inc. and subsidiaries are filed herewith.
Report of Independent Auditors
Consolidated Statements of Operations for each of the years in
the three-year period ended December 31, 2000.
Consolidated Balance Sheets at December 31, 2000 and December 31,
1999.
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 2000.
Consolidated Statements of Comprehensive Income (Loss) and
Stockholders' Equity (Deficit) for each of the years in the
three-year period ended December 31, 2000.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
None.
All Schedules have been omitted because they are not applicable
or are not required or the information to be set forth therein is
included in the Consolidated Financial Statements or Notes
thereto.
Page 21
22
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
3.1* Articles of Incorporation of Talon Automotive Group,
Inc. (the "Company"),as amended, including Certificate
of Merger dated as of November 27, 1997,Certificate of
Assumed name dated as of April 9, 1998, Certificate of
Merger/Consolidation dated as of April 28, 1998, and
Certificates of Share Exchange dated as of April 28,
1998
3.2* Articles of Incorporation of VS Holdings, Inc. ("VS
Holdings"), as amended, including Certificate of
Merger/Consolidation dated as of April 28, 1998,
Certificate of Share Exchange dated as of April 28,
1998, and Articles of Share Exchange dated as of April
28, 1998
3.3* Articles of Incorporation of Veltri Holdings USA, Inc.
("Veltri Holdings"), including Certificate of Share
Exchange dated as of April 28, 1998
3.4* Certificate of Status and Order of Amalgamation of
Veltri Metal Products Co. ("Veltri Metal Products")
3.5* By-laws of the Company
3.6* By-laws of VS Holdings
3.7* By-laws of Veltri Holdings
3.8* Articles of Association of Veltri Metal Products Co.
3.9* Agreement and Plan of Merger dated as of April 28, 1998
by and between VS Holdings and VS Holdings No. 2, Inc.
3.10* Agreement and Plan of Merger dated as of April 28, 1998
by and between Production Stamping, Inc. ("PSI"),
Hawthorne Metal Products Company ("Hawthorne"), and J&R
Manufacturing Inc. ("J&R")
3.11* Agreement and Plan of Merger dated as of April 28, 1998
by and between the Company and TAG L.L.C.
3.12* Agreement and Plan of Share Exchange dated as of April
28, 1998 by and between the Company and VS Holdings
3.13* Agreement and Plan of Share Exchange dated as of April
28, 1998 by and Indenture dated as of April 28, 1998 by
and among the Company, as Issuer, VS Holdings, Veltri
Holdings, and Veltri Metal Products, as Guarantors, and
U.S. Bank Trust National Association, as Trustee
4.1* Form of 9 5/8% Senior Subordinated Note Due 2008,
Series B
4.2* Form of Guarantee
10.1(a)* Credit Agreement dated as of April 28, 1998 by and
between the Company, as Borrower, and Comerica Bank, as
Agent for the Lenders
10.1(b)* First Amendment to Credit Agreement dated as of April
28, 1998 by and between the Company, as Borrower, and
Comerica Bank, as Agent for the Lenders
10.1(c)** Second 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(d)** Third 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(e)*** Fourth 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(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
Page 22
23
10.1(h)***** Seventh 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(i)***** Eighth 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(j)***** Waiver 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(k) Waiver 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(l) Partial Waiver 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(m) Partial Waiver 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(n) Amended and Restated 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(o) First Amendment to the Amended and Restated Credit
Agreement dated as of April 28, 1998 by and between the
Company, as Borrower, and Comerica Bank, as Agent for
the Lenders
10.2* Pledge Agreement dated as of April 28, 1998 by and
between the Company and Comerica Bank
10.3* Mortgage Agreement dated as of April 28, 1998 by and
between the Company and Comerica Bank
10.4* Security Agreements dated as of April 28, 1998 between
each of the Company, VS Holdings, and Veltri Holdings
and Comerica Bank
10.5* Guaranty Agreements dated as of April 28, 1998 between
each of the Company, VS Holdings, Veltri Metal Products
and Veltri Holdings and Comerica Bank
10.6* Debenture Agreement dated as of April 28, 1998 by and
between Veltri Metal Products and Comerica Bank
10.7* Debenture Pledge Agreement dated as of April 28, 1998
by and between Veltri Metal Products and Comerica Bank
10.8* Agreement dated as of April 28, 1998 by and among
Michael T. Veltri ("Mr. Veltri"), Veltri Metal
Products, VS Holdings, Veltri Holdings and the Company
10.9* Amended and Restated Promissory Note dated as of April
28, 1998 by Veltri Metal Products in favor of Mr.
Veltri
10.10* Unconditional Guaranty dated as of April 28, 1998 by
the Company, VS Holdings, and Veltri Holdings in favor
of Mr. Veltri
10.11* Security Agreement dated as of April 28, 1998 by the
Company, its subsidiaries, VS Holdings and Veltri
Holdings in favor of Mr. Veltri
10.12* Mortgage dated as of April 28, 1998 by and between the
Company, as mortgagor, and Mr. Veltri, as mortgagee
10.13* First Amendment to Stock Purchase Agreement dated as of
April 28, 1998 by and among Mr. Veltri, Veltri Metal
Products, VS Holdings and Veltri Holdings
10.14* Intercreditor Agreement dated as of April 28, 1998
between and among Mr. Veltri and Comerica Bank
10.15* Registration Rights Agreement dated as of April 28,
1998 by and among the Company, VS Holdings, Veltri
Holdings, and Veltri Metal Products, Salomon Brothers
Inc and Credit Suisse First Boston Corporation
10.16* Stock Purchase Agreement dated as of November 8, 1996
by and among Mr. Veltri, Maria Veltri and the Company
10.17* Stock Purchase Agreement dated as of October 17, 1997,
as amended, by and among the former shareholders of PSI
and the Company
10.18* Purchase Agreement dated as of September 30, 1996 by
and among the former shareholders of J&R and the
Company
Page 23
24
10.19* Employment Agreement dated as of November 27, 1995, as
amended on January 1, 1998, by and between the Company
and Delmar O. Stanley ("Mr. Stanley")
10.20* Employment Agreement dated as of November 8, 1996 by
and between the Company and Mr. Veltri
10.21* Non-Compete Agreement dated as of November 8, 1996 by
and between the Company and Mr. Veltri
10.22* Severance Agreement dated as of February 6, 1996 by and
between the Company and David Woodward ("Mr. Woodward")
10.23* Severance Agreement dated as of February 7, 1996 by and
between the Company and Kris Pfaehler
10.24* Consolidated Equity Ownership Plan and Agreements
thereunder by and between the Company and each of Mr.
Stanley, Mr. Woodward, Mr. Pfaehler, and Wayne C. Inman
("Mr. Inman")
10.25* Deferred Compensation Agreements by and between the
Company and each of Mr. Stanley, Mr. Woodward, and Mr.
Pfaehler
10.26* Talon L.L.C. 401(k) Plan, as amended
10.27* Veltri Holdings 401(k) Plan
10.28* Executive Bonus Program of the Company
10.29* Lease Agreement by and between the Company and Maria
Veltri dated August 1, 1994
10.30* Lease Agreement by and between the Company and Maria
Veltri dated July 1, 1993
10.31* Amended and Restated Agreement dated as of April 28,
1998, by and between the Company and Talon L.L.C.
10.32* Loan and Facility Agreements dated as of April, 1997
between and among Veltri Metal Products and Export
Development Corporation
21 Subsidiaries and Affiliates of the Company
* Incorporated by reference to the filing of the 10K for the year ended
December 31, 1998.
** Incorporated by reference to the filing of the 10Q for the quarter
ended April 3, 1999.
*** Incorporated by reference to the filing of the 10Q for the quarter
ended April 1, 2000.
**** Incorporated by reference to the filing of the 10Q for the quarter
ended July 1, 2000.
***** Incorporated by reference to the filing of the 10Q for the quarter
ended September 30, 2000.
Page 24
25
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Troy,
State of Michigan on the 2nd day of April, 2001.
TALON AUTOMOTIVE GROUP, INC.
By: /s/ DAVID J. WOODWARD
-----------------------------------
David J. Woodward
Vice President of Finance,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 2, 2001.
SIGNATURE TITLE
- --------- -----
/s/ MICHAEL VELTRI President, Chief Executive Officer
- --------------------------- and Director (Principal Executive Officer)
Michael Veltri
/s/ DAVID J. WOODWARD Vice President of Finance, Chief
- --------------------------- Financial Officer, Treasurer and Director
David J. Woodward (Principal Financial and Accounting Officer)
/s/ RANDOLPH J. AGLEY Chairman of the Board
- ---------------------------
Randolph J. Agley
/s/ MICHAEL T. TIMMIS Vice Chairman of the Board
- ---------------------------
Michael T. Timmis
/s/ WAYNE C. INMAN Secretary and Director
- ---------------------------
Wayne C. Inman
Page 25
26
REPORT OF INDEPENDENT AUDITORS
Boards of Directors and Shareholders
Talon Automotive Group, Inc.
We have audited the accompanying consolidated balance sheets of Talon Automotive
Group, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for each of the three years ended December 31, 2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Talon Automotive
Group, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Talon
Automotive Group, Inc. will continue as a going concern. As more fully described
in Notes 8 and 10, the Company has recurring net losses, a working capital
deficiency and is in default of certain covenants under the terms of the
agreement for its senior subordinated notes. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 8 and 10. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Detroit, Michigan
March 29, 2000
Page 26
27
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales $ 284,445 $ 291,175 $ 249,821
Cost of sales 258,252 259,444 218,803
---------- ---------- ----------
Gross profit
26,193 31,731 31,018
Operating expenses:
Selling, general and administrative 24,995 20,539 18,614
Advanced program expenses 2,930 -- --
Restructuring charge 10,183 -- --
Amortization 1,621 2,036 1,417
Special compensation -- -- 1,359
---------- ---------- ----------
Income from operations
(13,536) 9,156 9,628
Other (income) expenses:
Interest 19,540 15,676 12,293
Foreign currency (454) 100 570
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item
(32,622) (6,620) (3,235)
Provision for income taxes 1,765 3,045 3,358
Income (loss) before extraordinary item (34,377) (9,665) (6,593)
Extraordinary item (loss on early retirement of debt), net
of applicable tax benefit -- -- 553
========== ========== ==========
Net income (loss) $ (34,377) $ (9,665) $ (7,146)
========== ========== ==========
See accompanying notes.
Page 27
28
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------------
2000 1999
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 1,564 $ 708
Accounts receivable 40,164 49,527
Inventories 17,930 18,062
Reimbursable tooling, net 9,932 20,727
Prepaid expenses 2,267 3,082
---------- ----------
Total current assets 71,857 92,106
Property, plant and equipment, net 88,090 90,578
Goodwill and other assets, net 64,819 62,753
---------- ----------
Total assets $ 224,766 $ 245,437
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Senior credit facility $ 63,831 $--
Senior subordinated notes 120,000 --
Accounts payable 39,283 46,495
Accrued liabilities 39,501 20,252
Deferred tooling revenue 6,378 26,667
Current portion of debt and capital leases 1,303 1,831
---------- ----------
Total current liabilities 270,296 256,593
Senior credit facility -- 40,492
Senior subordinated notes -- 120,000
Capital leases 1,149 1,507
Deferred income taxes 3,155 1,931
---------- ----------
Total non-current liabilities 4,304 3,438
Shareholders' deficit
Common stock 1,250 1,250
Paid in capital 1,413 1,413
Retained earnings (deficit) (51,057) (16,680)
Accumulated other comprehensive loss -
currency translation (1,440) (577)
---------- ----------
Total shareholders' deficit (49,834) (14,594)
---------- ----------
Total liabilities and shareholders' deficit $ 224,766 $ 245,437
========== ==========
See accompanying notes.
Page 28
29
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UPDATE)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
Operating Activities:
Net income (loss) $ (34,377) $ (9,665) $ (7,146)
Depreciation and amortization 10,635 10,847 11,113
Deferred taxes and other non-cash items 1,956 666 650
Change in operating assets and liabilities:
Accounts receivable 8,718 (5,691) (6,559
Inventories 11 (1,846) (2,984)
Prepaid expenses 800 (789) (955)
Reimbursable tooling, net (9,542) 12,709 --
Accounts payable (6,776) 12,297 2,290
Accrued liabilities 19,590 (4,993) 15,058
Other operating items (4,217) (4,078) (1,276)
---------- ---------- ----------
Cash used by operating activities (13,202) 9,457 10,191
Investing Activities:
Additions to property, plant and equipment (7,379) (33,430) (12,901)
Proceeds from sale of equipment (9) 208 573)
Acquisitions, less cash acquired -- (1,737) (11,295)
---------- ---------- ----------
Cash used in investing activities (7,388) (34,959) (24,196)
Financing Activities:
Proceeds from long-term debts 23,339 18,492 143,950
Payments on long-term debt (1,684) (1,631) (103,573)
Deferred financing costs -- (252) (4,834)
Distributions -- -- (12,037)
---------- ---------- ----------
Cash provided by financing activities 21,655 16,609 23,506
Effects of foreign exchange rates (110) 189 (1,322)
Other comprehensive income (99)
---------- ---------- ----------
Net change in cash 856 (8,704) 8,179
Beginning cash 708 9,412 1,233
---------- ---------- ----------
Ending cash $ 1,564 $ 708 $ 9,412
========== ========== ==========
See accompanying notes.
Page 29
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TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
ADDITIONAL EARNINGS (LOSS)
COMMON PAID-IN Accumulated - CURRENCY
STOCK CAPITAL (Deficit) TRANSLATION TOTAL
---------- ---------- ---------- ---------- ----------
Balance at January 1, 1998 $ 1,250 $ 1,413 $ 12,168 $ (230) $ 14,601
Comprehensive loss:
Net loss for 1998 -- -- (7,146) -- (7,146)
Currency translation adjustment -- -- -- (2,463) (2,463)
----------
Comprehensive loss (9,609)
Distribution to shareholders -- -- (12,037) -- (12,037)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 1,250 1,413 (7,015) (2,693) (7,045)
Comprehensive loss:
Net loss for 1999 -- -- (9,665) -- (9,665)
Currency translation adjustment -- -- -- 2,116 2,116
----------
Comprehensive loss (7,549)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 1,250 1,413 (16,680) (577) (14,594)
Comprehensive loss:
Net loss for 2000 -- -- (34,377) -- (34,377)
Currency translation adjustment -- -- -- (764) (764)
Other (99) (99)
----------
Comprehensive loss (35,817)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 $ 1,250 $ 1,413 $ (51,057) $ (1,440) $ (49,834)
========== ========== ========== ========== ==========
See accompanying notes.
Page 30
31
TALON AUTOMOTIVE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
Talon Automotive Group, Inc. and its subsidiaries (collectively referred to as
"Talon" or the "Company") Veltri Metal Products Co. and VS Holdings, Inc.
(collectively the "Veltri Group"), both of which are wholly-owned by the
Company. Effective October 3, 1999, Veltri Holdings USA, a former subsidiary,
was merged into Talon Automotive Group, Inc. All significant intercompany
transactions and account balances have been eliminated in consolidation.
2. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
The primary business of the Company is the manufacture of automotive stampings
and assemblies used as original equipment components by North American
automotive manufacturers in the production of sport utility vehicles, minivans,
other light trucks and passenger cars. The Company primarily operates from
fifteen facilities in the United States and Canada. The hourly employees of the
Company are represented by various union locals of the United Auto Workers,
Canadian Auto Workers, United Steel Workers and International Association of
Machinist & Aerospace Workers.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year's data to the
current presentation.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks and short-term marketable
securities with maturities of 90 days or less as cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value. The fair value of the Company's Senior Credit Facility approximates the
recorded amount at December 31, 2000 since the respective interest rate
approximate the December 31, 2000 market rate for similar debt instruments. The
Company also has Senior Subordinated Notes (the "Notes") which traded at
approximately 10% of par on December 31, 2000. However, the Company believes the
Notes are thinly traded and this may not be a fair representation of market
value.
REIMBURSABLE TOOLING
Reimbursable tooling represents costs incurred by the Company in the development
of new tooling used in the manufacture of the Company's products. Once customer
approval is obtained for the manufacture of a new product, the Company is
reimbursed by the customer for the cost of the tooling, at which time the
tooling becomes the property of the customer. Provisions are made for losses in
the year in which the losses are first determinable.
Page 31
32
INVENTORIES
Inventories are stated at the lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation, principally using the straight-line
method, over 30 years for buildings and building/lease improvements and over 5
to 20 years for machinery and equipment. Property, plant and equipment are
stated at cost. Upon retirement or disposal, the asset cost and related
accumulated depreciation are removed from the accounts and the net amount, less
proceeds, is charged or credited to income. Expenditures for renewals and
betterments are capitalized. Expenditures for maintenance and repairs are
expensed as incurred.
In May 1999, the Company extended the lives of certain fixed assets. Certain
buildings that previously averaged 20 years were extended to 30 years and
certain machinery & equipment (presses) that previously averaged 7-12 years were
extended to 20 years. The change better aligns the cost of equipment with its
expected use and results in useful lives more consistent with predominant
industry practice. This change had the effect of reducing depreciation expense
and increasing income from operations by approximately $1.5 million in 1999. The
change had no effect on cash flow.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the debt.
GOODWILL
Goodwill represents the excess of cost over the fair value of tangible net
assets acquired and is amortized over 40 years using the straight-line method.
IMPAIRMENT OF ASSETS
The Company uses an undiscounted cash flow method to review the recoverability
of the carrying value of goodwill and other long-lived assets. If the sum of the
expected future cash flows is less than net book value, the Company adjusts the
net book value of the assets to fair value.
REVENUE RECOGNITION
Revenue from sales is recorded upon shipment of product to the customer. The
Company recognizes revenue with respect to reimbursable tooling contracts on the
completed contract basis and therefore records advance tooling payments as
deferred tooling revenue. Provisions are made for losses in the year in which
the losses are first determinable.
FOREIGN CURRENCY TRANSLATION
All balance sheet items denominated in a foreign currency (i.e. Canadian
dollars) are translated into United States dollars at the rate of exchange in
effect as of the balance sheet date. For revenues, expenses, gains and losses,
weighted average exchange rate for the respective periods is used.
COMPREHENSIVE LOSS
Comprehensive loss is presented as part of the Company's consolidated statement
of changes in shareholders' equity (deficit). The earnings associated with the
Company's investment in its Canadian subsidiary are considered to be permanent
investments. Comprehensive loss includes the Company's consolidated net loss
plus the non-cash effect of changes in foreign currency translation as it
relates to the net assets of the Company's Canadian subsidiary.
Page 32
33
INCOME TAXES
The shareholders have elected under the provisions of the Internal Revenue Code
to be treated as an S-Corporation, except for the Company's Canadian subsidiary.
As a result, the taxable income of the Company is included in the taxable income
of the individual shareholders, and no provision for federal income taxes has
been included in income. The Company's Canadian subsidiary is subject to
Canadian income tax and the Company utilizes the asset and liability method in
accounting for income taxes which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amount and tax basis of assets and liabilities.
CONCENTRATION OF CREDIT RISK
The Company sells products to customers primarily in the automotive industry.
The Company performs on-going credit evaluations of its customers and generally
does not require collateral when extending credit. The Company's reserve for bad
debts totaled $570 and $194 at December 31, 2000 and 1999, respectively. Credit
losses have historically been within management's expectations.
OTHER ASSETS
Other assets consist of deferred financing costs, capitalized pre-production
costs related to long-term supply arrangements and long-term deposits.
BUSINESS SEGMENT REPORTING
The Company conducts business in one operating segment, automotive stamping,
which corresponds with its major product offerings.
IMPACT OF ACCOUNTING STANDARDS ADOPTED IN YEAR ENDED DECEMBER 31, 1999
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 is effective, on a
prospective basis, for fiscal years beginning after December 31, 1999, and the
Company adopted the provisions in 2000. These provisions will restrict the
Company's ability to capitalize certain pre-production costs. The effect of the
no accounting treatment for pre-production costs in the year 2000 was $2,930.
This change has no effect on cash flow.
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34
3. ACQUISITIONS
In November 1996 the Company aquired the Veltri Group. The purchase agreement
provided for additional payments based on the earnings of the Veltri Group, as
defined, for 1999, 1998 and 1997. Such additional consideration is accounted for
as additional purchase price (goodwill) and is amortized over the then remaining
goodwill amortization period. Additional consideration amounted to approximately
$1,737 and $8,117 in 1999 and 1998, respectively.
4. MAJOR CUSTOMERS
Sales are made primarily to automotive original equipment manufacturers and
their suppliers. Following is a summary of net production sales to such key
customers as a percentage of total net production sales:
2000 1999 1998
--------- --------- ---------
DaimlerChrysler ......... 44.2% 46.4% 45.6%
General Motors .......... 28.1% 26.0% 23.3%
Ford .................... 8.0% 8.6% 10.4%
Other ................... 19.7% 19.0% 20.7%
--------- --------- ---------
100.0% 100.0% 100.0%
========= ========= =========
Accounts receivable from these customers at December 31 is as follows:
2000 1999
---------- ----------
DaimlerChrysler .... $ 18,967 $ 25,859
General Motors ..... 10,225 8,248
Ford ............... 2,193 3,297
Other .............. 8,779 12,121
---------- ----------
$ 40,164 $ 49,525
========== ==========
5. INVENTORIES
Inventory is comprised of the following at December 31:
2000 1999
---------- ----------
Raw material ....... $ 6,562 $ 8,739
Work in process .... 6,008 5,629
Finished goods ..... 5,360 3,694
---------- ----------
$ 17,930 $ 18,062
========== ==========
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35
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at December 31:
2000 1999
---------- ----------
Land and improvements ............. $ 1,625 $ 1,629
Buildings and improvements ........ 19,660 20,698
Machinery and equipment ........... 91,638 89,908
Construction in process ........... 18,927 23,485
Furniture and fixtures ............ 2,266 2,383
---------- ----------
134,116 138,103
Less accumulated depreciation ..... 46,026 47,425
---------- ----------
Net carrying amount ............... $ 88,090 $ 90,578
========== ==========
The Company recorded depreciation expense on property, plant and equipment and
capital leases of $9,014, 8,811, and $9,696 in 2000, 1999 and 1998,
respectively.
7. SELF-INSURANCE
The Company participates in a self-insurance pool for workers' compensation,
general and automobile liability. Insurance is carried to limit self-insurance
per occurrence to $250 for workers' compensation, $250 for general liability and
$100 for automobile liability. Aggregate retention is established by policy year
to pool total loss experience with affiliated companies. The Company provided
$959, $746, and $723 in 2000, 1999 and 1998 respectively, for both claims
reported and claims incurred but not reported. The Company's self-insurance
reserves totaled $696, $515 and $980 at December 31, 2000, 1999 and 1998
respectively. The Company is also self-insured for health care and insurance is
carried to limit self-insurance per occurrence to $150. The Company provided
$3,059, $2,149 and $1,541 in 2000, 1999 and 1998 respectively, for employee
group health insurance. These amounts are included in accrued liabilities in the
balance sheets.
8. GOING CONCERN
Due to liquidity concerns resulting from the performance of the PSI division,
sales declines with a major customer and capital investment for new program
launches, the Company elected not to make the November 1, 2000 interest payment
on its $120 million 9.625% Senior Subordinated Notes due May 1, 2008. The notes
were declared in default on December 1, 2000 following the expiration of a
30-day grace period. On November 30, 2000, the Company's bank group formally
exercised its right to block the interest payment for a period of six months.
The Company is currently negotiating with an informal committee representing the
majority of the noteholders regarding an exchange of existing outstanding notes
for a substantial portion of the equity of the Company. The Company is
optimistic that an agreement will be reached in the near future. However, the
results of these negotiations are uncertain at this time and the noteholders
retain their rights to accelerate the principal of the notes and exercise other
remedies available to them under the terms of the indenture, including forcing
the Company into an involuntary bankruptcy filing. The Company believes that it
currently does not have the ability to either cure the interest payment default
or refinance the outstanding notes. The Company therefore, has elected to
classify the notes as a current obligation as required by FAS 78: Classification
of Obligations that are Callable by the Creditor.
On February 16, 2001, the Company entered into an Amended and Restated Credit
Agreement with its bank group. This agreement amended and restated financial
covenants such that the Company is no longer in default for the quarters ended
July 1, September 30 and December 31, 2000 and reset advance rates, financial
and other covenants through the original term of the agreement which ends April
27, 2003. In addition, the amendment eliminated as an event of default existing
cross-defaults for non-payment of interest under the Senior Subordinated notes
for forty-five days or until April 2, 2001 to allow the Company to continue
negotiations with its noteholders. On March 29, 2001, the Company's senior
facility was amended to extend the April 2, 2001 negotiation deadline to April
30, 2001.
Page 35
36
However, the Company does not believe that the existing interest payment default
under its notes will be cured by April 30, 2001 and has elected to reclassify
its $100 million senior credit facility to a current obligation as required by
FAS 78: Classification of Obligations that are Callable by the Creditor.
Management plans to continue active negotiations with its noteholders and its
senior bank group to facilitate an exchange of outstanding notes for equity in
the Company. The Company is optimistic that an agreement will be reached in the
near future. This transaction, if successful, would significantly reduce the
outstanding indebtedness and interest obligations of the Company. If the Company
is unsuccessful in its negotiations with the noteholders and its senior bank
group, a deficiency in liquidity would occur which could cause the Company to
involuntarily enter bankruptcy proceedings.
In addition, the Company expects to move towards profitability by cost
reductions associated with the integration of the PSI division (see Note 10 of
the Company's Consolidated Financial Statements) into other Company facilities
and launching new business on the DaimlerChrysler Liberty in the second quarter
of 2001.
9. LONG-TERM DEBT
The components of long-term debt consisted of the following at December 31:
2000 1999
--------- ---------
Senior subordinated notes, semiannual interest payments
at 9.625%, principal due May 2008 ............................................ $ 120,000 $ 120,000
Revolving senior credit facility, due April 2003, interest at the prime
rate plus a margin ranging 0 to 175 basis points or Eurodollar plus
a margin ranging 117.5 to 375 basis points (weighted average of 10.3%
at December 31, 2000) ........................................................ 63,831 40,492
Tooling facility with EDC, due 2001, payable quarterly, including
interest based on a Eurodollar rate less an applicable margin,
as defined in the agreement (6.397% at December 31, 2000) .................... 608 1,419
Employment obligation to former owners of J&R, payable monthly
through September 2001, discounted at 8.5% ................................... 186 440
--------- ---------
Total long term debt ........................................................... $ 184,625 $ 162,351
Less current portion ........................................................... (184,625) (1,033)
--------- ---------
$ 0 $ 161,318
========= =========
The Senior Credit Facility is secured by substantially all assets of the
Company. The Senior Credit Facility contains certain covenants, the more
restrictive of which require the maintenance of leverage and debt service
coverage ratios. On December 1, 2000, the Company was in default under the
Senior Subordinated Notes (see Note 8 of the Company's Consolidated Financial
Statements). Due to this default, the interest rate increased to 11.625%. The
Senior Credit Facility and Senior Subordinated Notes also place limits on the
purchase or sale of property and equipment, and restrict distributions of
earnings to shareholders.
Scheduled maturities of long term debt for the companies are as follows:
TOTAL
-------
2001........................................................ $184,625
2002........................................................ --
2003........................................................ --
2004........................................................ --
Thereafter.................................................. --
--------
Total....................................................... $184,625
========
The Company paid interest of approximately $13,337, $16,719, and $10,391 in
2000, 1999, and 1998, respectively. The Company capitalized interest payments as
construction in progress of approximately $802, $1,250, and $250 in 2000,
1999, and 1998, respectively.
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37
10. RESTRUCTURING CHARGE
During the quarter ending December 31,2000, the Company initiated a plan to
integrate what was formerly known as the PSI division into other existing
Company operations. This plan includes the closure of four existing PSI
facilities in 2000 and 2001 and the movement of the related sales volume and
corresponding equipment into existing operations in New Baltimore, Michigan,
Royal Oak, Michigan and Windsor, Ontario, Canada. Upon completion of the
integration, approximately 170 employees will be eliminated with estimated
savings totaling $9,600 per year, when complete. In addition, four facilities
with related infra-structure costs will be eliminated with estimated savings of
$2,800 per year, when complete. The Company anticipates the majority of this
integration to be completed by the third quarter of 2001.
As a result of this integration plan, the Company has recorded a $10,183
restructuring charge in 2000. This charge includes severance benefits for
terminated employees, the write-off of certain leasehold improvements, future
lease obligations for buildings that have been or will be vacated and other
facility closure costs. There were no charges against this reserve in 2000.
11. EMPLOYEE BENEFIT ARRANGEMENTS
DEFINED BENEFIT PLANS
The Company has a noncontributory defined benefit retirement plan covering
substantially all hourly employees at its Hawthorne plant. Benefits under the
plan are based upon years of service multiplied by a specified amount. The
Company's general funding policy is to make contributions based on the plan's
normal cost plus amortization of prior service costs over a period not to exceed
30 years. Plan assets are held in the Talon Group Profit Sharing Trust, which
invests in various debt and equity securities.
The following table sets forth the certain information for the plan as of
December 31:
2000 1999 1998
------ ------ ----
Components of net periodic benefit cost:
Service cost 114 123 108
Interest cost 188 177 169
Expected return on assets (211) (204) (186)
Amortization of unrecognized transition obligation/(asset) (5) (5) (5)
Amortization of unrecognized prior service cost 13 13 12
Amortization of actuarial (gain)/loss (11) - -
------- ------ ------
Net periodic pension cost 88 104 98
======= ====== ======
Changes in benefit obligation:
Benefit obligation at beginning of year 2,539 2,688 2,465
Service cost 114 123 108
Interest cost 188 177 169
Benefits paid (156) (128) (125)
Changes in liability due to reduction in interest rate
and census experience 294 (321) 71
------- ------ ------
Benefit obligation at end of year 2,979 2,539 2,688
======= ====== ======
Change in plan assets:
Fair value of assets at beginning of year 2,554 2,303 2,046
Actual return on assets 48 195 168
Contributions 0 184 214
Benefits paid (156) (128) (125)
------- ------ ------
Fair value of assets at end of year 2,446 2,554 2,303
======= ====== ======
Funded status of the plan:
Funded status as of the end of the year (533) 15 (385)
Unrecognized net (asset)/obligation at transition (27) (33) (38)
Unrecognized prior service cost 147 159 172
Unrecognized net (gain)/loss 99 (369) (57)
------- ------ ------
(Accrued)/prepaid pension cost (314) (228) (308)
======= ====== ======
Page 37
38
The weighted average discount rate used to determine the actuarial present value
of the projected benefit obligations was 7.25% in 2000, 7.75% in 1999, and 6.75%
in 1998. The expected long-term rate of return on plan assets was 8.5% in 2000,
1999 and 1998.
The Company's PSI division had a noncontributory defined benefit retirement plan
covering substantially all hourly employees. The plan was frozen as of June 30,
1997 and was terminated in 1998. The Company distributed all benefits under this
plan to participants in 1999.
PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan covering
substantially all salaried employees. The plan allows eligible employees to make
voluntary, tax-deferred contributions of up to 15% of compensation not to exceed
statutory limits. The Company matches up to 50% of the employees' contributions,
limited to 3% of each participant's compensation. In addition, the plan provides
for discretionary contributions by the Company as determined by the Board of
Directors. The Company's contributions to the plan amounted to approximately
$370, $284 and $457 in 2000, 1999 and 1998 respectively.
DEFERRED COMPENSATION
Effective January 1, 1997, the Company entered into agreements with certain key
employees that provide for deferred compensation. Deferred compensation benefits
were determined based on increases in the value of the Company, as defined,
through December 31, 1996 and based on a percentage of shareholder
distributions, as defined, made during 1998 and 1997. The Company accrues
deferred compensation as amounts are allocated to the accounts of participants
under the terms of the agreements. As a result of the issuance of Senior
Subordinated Notes in 1998, vesting of deferred compensation allocations was
accelerated subject to a forfeiture of 33% percent per year during 1999 and
2000. Deferred compensation expense charged to operations amounted to $0, $0 and
$1,359 in 2000, 1999 and 1998, respectively.
12. EQUITY OWNERSHIP PLAN
Under the equity ownership plan, the Company provides the opportunity for
certain executive employees to be granted the right to purchase Class B
non-voting common shares of the Company's common stock at pre-determined prices.
These rights to purchase stock are referred to as "stock options" for purposes
of this footnote. The Company granted stock options to purchase up to 32,747
shares of the Company's common stock on December 31, 1996, and these options
remained outstanding as of December 31, 2000. As of December 31, 2000, 17,978
shares were exercisable under the terms of the plan and no stock options had
been exercised.
The employee stock options are subject to certain vesting periods and employment
requirements. One stock option for 8,000 shares was immediately vested and
exercisable on December 31, 1996. All other stock options began vesting on
January 1, 1999 and become fully vested and exercisable on January 2, 2003. All
options expire on January 1, 2018. The exercise price of the stock options
outstanding at December 31, 2000 and 1999 ranged from $183 to $288 per share.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) in accounting for its stock
options. Under APB 25, no compensation expense is recognized because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant.
The Company is required to provide pro forma information regarding the effect of
stock options on net income. The weighted average fair value of the stock
options granted on December 31, 1996 was $12.21 per share. A fair value for the
stock options was estimated at the date of grant using the minimal value method
for non-public companies with the following weighted-average assumptions;
risk-free interest rate of 6.0%, dividend yield of 0.0% and a weighted-average
expected life of 7 years. For pro forma disclosure, the estimated fair value of
the stock options is amortized to expense over the stock options' vesting
period. This results in proforma expense of $20, $14, and $14 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Page 38
39
13. INCOME TAXES
The Company's shareholders have elected under the provisions of the Internal
Revenue Code to be treated as an S Corporation for federal income tax purposes,
except for the Company's Canadian subsidiaries (the "Veltri Group"). As a
result, the taxable income of the Company is included in the taxable income of
the individual shareholders, and no provision for federal income taxes has been
included in the statement of income. The Veltri Group is subject to Canadian
income tax.
The components of Veltri Group's provision for income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
Current ............ $ 940 $ 2,925 $ 2,943
Deferred ........... 815 120 415
---------- ---------- ----------
$ 1,755 $ 3,045 $ 3,358
========== ========== ==========
The components of Veltri Group's deferred income taxes is as follows:
AS OF DECEMBER 31,
------------------------------------------
2000 1998 1998
---------- ---------- ----------
Depreciation .................... $ 1,336 $ 1,509 $ 1,575
Pre-Production................... 1,960 540 298
Other............................ 96
---------- ---------- ----------
3,392 2,049 1,873
Assets:
Loss carry forward .............. -- -- --
Product warranty ................ 62 96 125
Other ........................... 175 22 36
---------- ---------- ----------
237 118 161
---------- ---------- ----------
Net deferred tax liability ........ $ 3,155 $ 1,931 $ 1,712
========== ========== ==========
The reconciliation of U.S. statutory income tax rates to the Company's
provision for income taxes (related to Veltri Group) is as follows:
2000 1999 1998
---------- ---------- ----------
Taxes at U.S. statutory rates .................... $ (7,632) $ (2,251) $ (1,100)
Effect of loss not subject to corporate tax ...... 9,058 4,421 4,405
Canadian tax differences ......................... (23) 371 (290)
Non-deductible items ............................. 296 223 130
Other ............................................ 56 281 213
---------- ---------- ----------
Provision for income taxes ....................... $ 1,755 $ 3,358 $ 1,325
========== ========== ==========
Veltri Group paid income taxes of $2,016, $2,699, and $128 in 2000, 1999, and
1998, respectively.
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14. COMMITMENTS AND CONTINGENCIES
The Company leases certain warehouse space, automobiles, trucks and trailers and
machinery and equipment under operating and capital leases expiring on various
dates through December 1, 2006. As of December 31, 2000, minimum lease rental
payments due under these leases are as follows:
OPERATING CAPITAL
--------- ---------
2001....................................................... $ 7,511 $ 629
2002....................................................... 6,323 471
2003....................................................... 5,257 381
2004....................................................... 4,820 519
2005....................................................... 3,344 0
Thereafter................................................. 5,302 0
---------
Total minimum lease payments...................... $ 32,557
=========
Amount representing interest............................... (343)
---------
Present value of net minimum lease payments................ $ 1,658
=========
The Company incurred rent expense for all operating leases of approximately
$6,962, 6,224 and $3,192 in 2000, 1999 and 1998, respectively. The Company had
outstanding letters of credit amounting to $1,689, $1,867 and $1,615 in 1999,
1998 and 1997, respectively.
At December 31, 2000, the Company had entered into commitments to purchase
approximately $1,500 of new machinery equipment. In addition, the Company had
commitments to purchase new tooling, for which customers will reimburse the
Company, of approximately $12,000.
The Company has guaranteed to the Economic Development Corporation of Canada
("EDC") that certain tooling vendors of the Company will reimburse EDC for
interim financing. This guarantee totaled approximately $14,700 at December 31,
2000 and represents a financial instrument with off-balance sheet risk if the
tooling vendors do not fulfil obligations to EDC.
15. CAPITAL STRUCTURE
The authorized capital stock of the Company consists of 25,000 shares of Class A
Voting Common Stock of which 4,074 were issued and outstanding as of December
31, 2000 in an amount of $925, and 250,000 shares of Class B Non-voting Common
Stock, of which 158,853 were issued and outstanding in an amount of $325.
16. RELATED PARTY TRANSACTIONS
The Company leases certain of its manufacturing facilities from Maria Veltri,
the spouse of Michael Veltri, President and Chief Executive Officer and Director
of the Company. The table below sets forth certain information for these leases:
AFFILIATED LEASE LEASE ANNUAL
PERSON LOCATION COMMENCEMENT TERMINATION RENT
- ---------- -------- ------------ ----------- -------
Maria Veltri........... Windsor, Ontario, Canada 1994 2002 $56
Maria Veltri........... Windsor, Ontario, Canada 1993 2001 $27
The Company has a business services agreement with Talon L.L.C., an affiliated
Company owned by the shareholders of the Company, under which the Company
receives services of risk management, benefits management, tax preparation and
other services from Talon L.L.C. as requested by the Company. Fees incurred
under the agreement aggregated $500, $500 and $645 in 2000, 1999 and 1998,
respectively. In connection with the issuance of the Company's Senior
Subordinated Notes in April 1998, fees under this agreement were limited to $500
per year. Effective January 1, 2001 fees and services under this agreement were
discontinued.
Page 40
41
The Company had an agreement to provide limited services to G&L Industries, Inc.
("G&L"), an affiliate of the Company beneficially owned and controlled by the
shareholders of the Company. The Company discontinued fees under this agreement
in July 1998 and the agreement has been terminated. During 1998 the Company
recorded fees from G&L of $250, included in the Company's accounts
receivable at December 31, 1999.
Michael Veltri, an officer and director of the Company, is owed certain amounts
by Veltri Metal Products Co. ("VMP"), the Company's Canadian Subsidiary. On
November 8, 1996, the Company purchased all of the outstanding capital stock of
VMP pursuant to a stock purchase agreement, Mr. Veltri is to be paid certain
earn-out amounts, denominated in Canadian dollars, for the calendar years 1999
and 1998, based upon the amount by which the combined EBIT (as defined in the
agreement) of VMP, exceeds a certain threshold. The maximum aggregate earn-out
amount payable to Mr. Veltri is not to exceed $15,000 (Canadian). The 1998
earn-out amount of $12,470 (Canadian) was paid in April 1999, including interest
from December 31, 1998. The 1999 earn-out was $2,524 (Canadian) and was paid in
April 2000, including interest from December 31, 1999. In 1998, VMP also repaid
a promissory note totaling $748 (Canadian), including interest of $90, to Mr.
Veltri in connection with the stock purchase agreement.
17. SUPPLEMENTAL GUARANTOR INFORMATION
Veltri Metal Products Co. and VS 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 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 Veltri Group purchase agreements among the Veltri
Group and its former owners, the Veltri Group agreed not to make any loans or
advances to any person (including the Company) until certain earn-out provisions
for the former owners have been satisfied; and (ii) pursuant to the Senior
Credit Facility agreement the Veltri Group agreed not to (a) declare or pay any
dividends on, or make any other distribution with respect to any shares of
capital stock; or (b) make loans, advances or extensions of credit to any person
(except for credit sales in the ordinary course of business and loans to
affiliates in an aggregate amount not to exceed $15 million U.S. dollars at any
time outstanding); and (iii) pursuant to the indenture agreement for the
Company's Senior Subordinated Notes, the Veltri Group is prohibited from making
loans or advances to the Company if a default or event of default shall have
occurred under the indenture.
Management does not believe that separate financial statements of each of these
members of the Veltri Group are material to investors. Therefore, separate
financial statements and other disclosures concerning members of the Veltri
Group have been omitted, and in lieu thereof, summarized financial information
relating to the Veltri Group is shown as follows:
AS OF DECEMBER 31:
--------------------------
2000 1999
------- --------
(in thousands)
Current assets $30,650 $ 46,868
Non-current assets 55,527 55,016
Current liabilities 36,890 56,394
Non-current liabilities 33,330 29,525
YEAR ENDED DECEMBER 31:
--------------------------
2000 1999
------- --------
(in thousands)
Net sales $110,600 $112,918
Gross profit 21,815 21,600
Net income 2,440 3,338
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42
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated results of operations are summarized as follows:
QUARTER ENDED
----------------------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 31,
2000
Net Sales $ 85,682 $ 82,633 $ 56,746 $ 59,384
Gross Profit 10,903 9,587 1,570 4,133
Income before tax provision (1,382) (2,280) (10,306) (18,654)
Net Income (2,371) (2,754) (10,036) (19,216)
1999
Net Sales $ 71,020 $ 78,723 $ 67,285 $ 74,147
Gross Profit 7,454 9,357 8,528 6,392
Income before tax provision (2,480) (230) (526) (3,384)
Net Income (3,357) (1,178) (748) (4,382)
19. REORGANIZATION AND REFINANCING
In April 1998, the Company issued $120,000 of 9.625% Senior Subordinated Notes
and received net proceeds of approximately $116,000 after issuance costs. The
Company used the net proceeds to retire existing indebtedness. The Company is
required to make scheduled semi-annual interest payments on the Notes of $5,775
on May 1 and November 1 each year until their maturity on May 1, 2008 or unless
the Notes are redeemed earlier.
In connection with the issuance of the Notes, the Company was reorganized and a
special shareholder distribution of $10,000 was made concurrent with the
issuance of the Notes. To effect the reorganization, the combined capital stock
of Talon Automotive Group, LLC, Hawthorne Metal Products, Co., J&R
Manufacturing, Inc. and Production Stamping, Inc. (collectively the "Talon
Entities"), were merged into the Company. The Veltri Group became wholly owned
subsidiaries of the Company. The reorganization was accounted for retroactively
as if it were a pooling of interest with no change made to the carrying bases of
the assets.
The Company recorded extraordinary and non-recurring expenses totaling $2,500 as
a result of the refinancing on April 28, 1998. These expenses were comprised of
(i) a $500 non-recurring extraordinary loss, net of $100 tax benefit, on the
early extinguishment of debt, (ii) a $600 non-recurring loss on foreign exchange
associated with the retirement of indebtedness and (iii) a $1,400 non-recurring
expense under deferred compensation agreements.
Page 42
43
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
3.1* Articles of Incorporation of Talon Automotive Group,
Inc. (the "Company"),as amended, including Certificate
of Merger dated as of November 27, 1997,Certificate of
Assumed name dated as of April 9, 1998, Certificate of
Merger/Consolidation dated as of April 28, 1998, and
Certificates of Share Exchange dated as of April 28,
1998
3.2* Articles of Incorporation of VS Holdings, Inc. ("VS
Holdings"), as amended, including Certificate of
Merger/Consolidation dated as of April 28, 1998,
Certificate of Share Exchange dated as of April 28,
1998, and Articles of Share Exchange dated as of April
28, 1998
3.3* Articles of Incorporation of Veltri Holdings USA, Inc.
("Veltri Holdings"), including Certificate of Share
Exchange dated as of April 28, 1998
3.4* Certificate of Status and Order of Amalgamation of
Veltri Metal Products Co. ("Veltri Metal Products")
3.5* By-laws of the Company
3.6* By-laws of VS Holdings
3.7* By-laws of Veltri Holdings
3.8* Articles of Association of Veltri Metal Products Co.
3.9* Agreement and Plan of Merger dated as of April 28, 1998
by and between VS Holdings and VS Holdings No. 2, Inc.
3.10* Agreement and Plan of Merger dated as of April 28, 1998
by and between Production Stamping, Inc. ("PSI"),
Hawthorne Metal Products Company ("Hawthorne"), and J&R
Manufacturing Inc. ("J&R")
3.11* Agreement and Plan of Merger dated as of April 28, 1998
by and between the Company and TAG L.L.C.
3.12* Agreement and Plan of Share Exchange dated as of April
28, 1998 by and between the Company and VS Holdings
3.13* Agreement and Plan of Share Exchange dated as of April
28, 1998 by and Indenture dated as of April 28, 1998 by
and among the Company, as Issuer, VS Holdings, Veltri
Holdings, and Veltri Metal Products, as Guarantors, and
U.S. Bank Trust National Association, as Trustee
4.1* Form of 9 5/8% Senior Subordinated Note Due 2008,
Series B
4.2* Form of Guarantee
10.1(a)* Credit Agreement dated as of April 28, 1998 by and
between the Company, as Borrower, and Comerica Bank, as
Agent for the Lenders
10.1(b)* First Amendment to Credit Agreement dated as of April
28, 1998 by and between the Company, as Borrower, and
Comerica Bank, as Agent for the Lenders
10.1(c)** Second 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(d)** Third 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(e)*** Fourth 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(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
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10.1(h)***** Seventh 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(i)***** Eighth 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(j)***** Waiver 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(k) Waiver 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(l) Partial Waiver 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(m) Partial Waiver 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(n) Amended and Restated 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(o) First Amendment to the Amended and Restated Credit
Agreement dated as of April 28, 1998 by and between the
Company, as Borrower, and Comerica Bank, as Agent for
the Lenders
10.2* Pledge Agreement dated as of April 28, 1998 by and
between the Company and Comerica Bank
10.3* Mortgage Agreement dated as of April 28, 1998 by and
between the Company and Comerica Bank
10.4* Security Agreements dated as of April 28, 1998 between
each of the Company, VS Holdings, and Veltri Holdings
and Comerica Bank
10.5* Guaranty Agreements dated as of April 28, 1998 between
each of the Company, VS Holdings, Veltri Metal Products
and Veltri Holdings and Comerica Bank
10.6* Debenture Agreement dated as of April 28, 1998 by and
between Veltri Metal Products and Comerica Bank
10.7* Debenture Pledge Agreement dated as of April 28, 1998
by and between Veltri Metal Products and Comerica Bank
10.8* Agreement dated as of April 28, 1998 by and among
Michael T. Veltri ("Mr. Veltri"), Veltri Metal
Products, VS Holdings, Veltri Holdings and the Company
10.9* Amended and Restated Promissory Note dated as of April
28, 1998 by Veltri Metal Products in favor of Mr.
Veltri
10.10* Unconditional Guaranty dated as of April 28, 1998 by
the Company, VS Holdings, and Veltri Holdings in favor
of Mr. Veltri
10.11* Security Agreement dated as of April 28, 1998 by the
Company, its subsidiaries, VS Holdings and Veltri
Holdings in favor of Mr. Veltri
10.12* Mortgage dated as of April 28, 1998 by and between the
Company, as mortgagor, and Mr. Veltri, as mortgagee
10.13* First Amendment to Stock Purchase Agreement dated as of
April 28, 1998 by and among Mr. Veltri, Veltri Metal
Products, VS Holdings and Veltri Holdings
10.14* Intercreditor Agreement dated as of April 28, 1998
between and among Mr. Veltri and Comerica Bank
10.15* Registration Rights Agreement dated as of April 28,
1998 by and among the Company, VS Holdings, Veltri
Holdings, and Veltri Metal Products, Salomon Brothers
Inc and Credit Suisse First Boston Corporation
10.16* Stock Purchase Agreement dated as of November 8, 1996
by and among Mr. Veltri, Maria Veltri and the Company
10.17* Stock Purchase Agreement dated as of October 17, 1997,
as amended, by and among the former shareholders of PSI
and the Company
10.18* Purchase Agreement dated as of September 30, 1996 by
and among the former shareholders of J&R and the
Company
10.19* Employment Agreement dated as of November 27, 1995, as
amended on January 1, 1998, by and between the Company
and Delmar O. Stanley ("Mr. Stanley")
10.20* Employment Agreement dated as of November 8, 1996 by
and between the Company and Mr. Veltri
10.21* Non-Compete Agreement dated as of November 8, 1996 by
and between the Company and Mr. Veltri
10.22* Severance Agreement dated as of February 6, 1996 by and
between the Company and David Woodward ("Mr. Woodward")
10.23* Severance Agreement dated as of February 7, 1996 by and
between the Company and Kris Pfaehler
10.24* Consolidated Equity Ownership Plan and Agreements
thereunder by and between the Company and each of Mr.
Stanley, Mr. Woodward, Mr. Pfaehler, and Wayne C. Inman
("Mr. Inman")
10.25* Deferred Compensation Agreements by and between the
Company and each of Mr. Stanley, Mr. Woodward, and Mr.
Pfaehler
10.26* Talon L.L.C. 401(k) Plan, as amended
10.27* Veltri Holdings 401(k) Plan
10.28* Executive Bonus Program of the Company
10.29* Lease Agreement by and between the Company and Maria
Veltri dated August 1, 1994
10.30* Lease Agreement by and between the Company and Maria
Veltri dated July 1, 1993
10.31* Amended and Restated Agreement dated as of April 28,
1998, by and between the Company and Talon L.L.C.
10.32* Loan and Facility Agreements dated as of April, 1997
between and among Veltri Metal Products and Export
Development Corporation
21 Subsidiaries and Affiliates of the Company
* Incorporated by reference to the filing of the 10K for the year ended
December 31, 1998.
** Incorporated by reference to the filing of the 10Q for the quarter
ended April 3, 1999.
*** Incorporated by reference to the filing of the 10Q for the quarter
ended April 1, 2000.
**** Incorporated by reference to the filing of the 10Q for the quarter
ended July 1, 2000.
***** Incorporated by reference to the filing of the 10Q for the quarter
ended September 1, 2000.
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