1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
-------- ---------
COMMISSION FILE NO. 333-56461
TALON AUTOMOTIVE GROUP, INC
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3382174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
900 WILSHIRE DRIVE, SUITE 203, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip Code)
(248) 362-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No x
---------- ----------
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at October 31, 1998
----------------------------- -------------------
Class A Voting Common Stock 4,074
Class B Non-Voting Common Stock 158,853
Exhibit Index located at page 10
Page 1 of 11
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TALON AUTOMOTIVE GROUP, INC. FORM 10 Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Operations (unaudited) for the Three Months
Ended October 3, 1998 and October 4, 1997
Consolidated Statements of Operations (unaudited) for the Nine Months
Ended October 3, 1998 and October 4, 1997
Consolidated Balance Sheets at October 3, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended October 3, 1998 and October 4, 1997
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended October 3, 1998 and October 4, 1997
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
for the Nine Months Ended October 3, 1998 and October 4, 1997
Notes to Consolidated Financial Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II OTHER INFORMATION
3
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS - UNAUDITED)
THREE MONTHS ENDED: NINE MONTHS ENDED:
----------------------------- ----------------------------
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---- ---- ---- ----
Net sales .................................................... $ 55,470 $ 32,843 $ 189,656 $ 117,049
Cost of sales ................................................ 47,048 29,083 161,035 99,474
-------------------------- --------------------------
Gross profit ............................................ 8,422 3,760 28,621 17,575
Operating expenses:
SG&A ................................................... 6,630 4,209 19,873 12,647
Special compensation .................................... -- -- 1,359 --
-------------------------- --------------------------
Income (loss) from operations ................................ 1,792 (449) 7,389 4,928
Other expenses (income)
Interest ................................................ 3,337 1,026 8,713 3,110
Foreign currency ........................................ (213) 140 574 25
Other ................................................... -- -- (198) --
-------------------------- --------------------------
Income (loss) before income taxes and extraordinary expenses (1,332) (1,615) (1,700) 1,793
Provision for income taxes ................................... 767 (664) 1,999 222
-------------------------- --------------------------
Income (loss) before extraordinary expenses .................. (2,099) (951) (3,699) 1,571
Extraordinary expenses ....................................... -- -- 553 --
-------------------------- --------------------------
Net Income (loss) ............................................ $ (2,099) $ (951) $ (4,252) $ 1,571
============================ ===========================
See accompanying notes.
4
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
OCTOBER 3, DECEMBER 31,
1998 1997
------------- ------------
ASSETS UNAUDITED
CURRENT ASSETS
Cash and cash equivalents..................................... $ 5,727 $ 1,233
Accounts receivable, less allowance of $252 ($267 in 1997) ... 36,023 36,021
Inventory .................................................... 24,218 19,347
Prepaid expenses ............................................. 1,862 2,765
--------- --------
Total current assets .................................... 67,830 59,366
Property, plant and equipment ..................................... 101,702 94,194
Less accumulated depreciation ................................ 38,556 31,723
--------- ---------
Net property, plant and equipment ............................ 63,146 62,471
Goodwill, less amortization of $1,289 ($465 in 1997)............... 41,123 43,298
Deferred financing costs, less amortization of $228 ($187 in 1997). 5,111 680
Other assets ...................................................... 382 679
--------- ---------
$ 177,592 $166,494
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit .......................................... $ -- $ 2,651
Accounts payable ............................................. 28,632 31,043
Accrued liabilities .......................................... 17,089 9,472
Deferred tooling revenue ..................................... 57 1,423
Current portion of capital leases............................. 903 720
Current portion of long term debt............................. -- 33,463
--------- ---------
Total current liabilities ............................... 46,681 78,772
Long term debt .................................................... 130,213 67,844
Capital leases .................................................... 2,371 2,637
Other liabilities ................................................. 343 1,276
Deferred income taxes ............................................. 1,483 1,364
--------- ---------
Total liabilities ....................................... 181,091 151,893
--------- ---------
SHAREHOLDER'S EQUITY
Common stock ................................................. 1,250 1,250
Paid in capital .............................................. 1,413 1,413
Retained earnings ............................................ 7,915 12,168
Distributions ................................................ (12,037) --
Accumulated translation adjustment ........................... (2,040) (230)
--------- ---------
(3,499) 14,601
--------- ---------
$ 177,592 $ 166,494
========= =========
See accompanying notes.
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TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS - UNAUDITED)
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------------ ------------------------
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---- ---- ---- ----
OPERATING ACTIVITIES
Net Income (loss) ............................................................. $ (2,099) $ (951) $ (4,252) $ 1,571
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation ............................................................. 2,453 1,270 7,203 3,771
Amortization ............................................................. 180 115 964 332
Other non-cash expenses .................................................. 50 (1) 254 (3)
Gain on sale of assets ................................................... -- -- (198) --
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (2,725) 7,690 (2) 2,328
Inventories .............................................................. (4,648) 4,224 (4,871) (20,897)
Prepaids ................................................................. 648 (847) 903 (849)
Other assets ............................................................. (340) (683) 269 (1,295)
Accounts payable ......................................................... (1,346) (3,687) (2,200) 2,236
Accrued liabilities ...................................................... 3,733 4,107 7,785 6,574
Deferred tooling revenue ................................................. (3) (5,016) (1,381) 9,689
---------------------- -----------------------
Net cash provided by (used in) operating activities ........................... (4,097) 6,221 4,474 3,457
INVESTING ACTIVITIES
Net fixed asset additions ................................................ (3,829) (2,562) (8,009) (5,793)
Proceeds from sale of equipment .......................................... -- -- 327 --
---------------------- -----------------------
Net cash used in investing activities ......................................... (3,829) (2,562) (7,682) (5,793)
FINANCING ACTIVITIES
Proceeds from long term debt ............................................. 8,516 1,301 129,683 21,212
Payments on long term debt................................................ (2,160) (3,167) (103,434) (16,651)
Deferred financing costs ................................................. (435) 24 (4,701) (159)
Distributions ............................................................ -- (264) (12,037) (1,417)
---------------------- -----------------------
Net cash provided by (used in) financing activities ........................... 5,921 (2,106) 9,511 2,985
Translation adjustment ........................................................ (1,203) (33) (1,810) (219)
---------------------- -----------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................ (3,208) 1,520 4,493 430
CASH AND CASH EQUIVALENTS
Beginning of period ........................................................... 8,935 -- 1,234 1,090
---------------------- -----------------------
End of period ................................................................. $ 5,727 $ 1,520 $ 5,727 $ 1,520
====================== =======================
See accompanying notes.
6
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS - UNAUDITED)
NINE MONTHS ENDED OCTOBER 4, 1997
------------------------------------------------------------------------
ACCUMULATED
COMMON PAID-IN RETAINED TRANSLATION COMPREHENSIVE
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
----- ------- -------- ---------- ----- ------
Balance at January 1, 1997 ... $ 1,150 $ 538 $ 12,789 $ (76) $ 14,401
Net income ................... 1,571 1,571 1,571
Foreign currency translation (218) (218) (218)
Tax benefit .................. 79
---------
Comprehensive income ......... $ 1,432
=========
Distribution to shareholders.. (1,417) (1,417)
---------------------------------------------------------
Balance at October 4, 1997 $ 1,150 $ 538 $ 12,943 $ (294) $ 14,337
=========================================================
NINE MONTHS ENDED OCTOBER 3, 1998
------------------------------------------------------------------------
ACCUMULATED
COMMON PAID-IN RETAINED TRANSLATION COMPREHENSIVE
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
----- ------- -------- ---------- ----- ------
Balance at January 1, 1998 ... $ 1,250 $ 1,413 $ 12,168 $ (230) $ 14,601
Net loss ..................... (4,252) (4,253) (4,253)
Foreign currency translation.. (1,810) (1,810) (1,810)
Tax Benefit .................. 652
---------
Comprehensive income ......... (5,411)
=========
Distribution to shareholders (12,037) (12,037)
---------------------------------------------------------
Balance at October 3, 1998 ... $ 1,250 $ 1,413 $ (4,121) $(2,040) $ (3,499)
=========================================================
See accompanying notes.
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TALON AUTOMOTIVE GROUP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Talon Automotive
Group, Inc. and its wholly owned subsidiaries (the "Company"). All significant
intercompany transactions and account balances have been eliminated in
combination.
The nine month period ended October 3, 1998 consists of 276 days and is
consistent with the prior year. The Company reports quarterly financial
information in thirteen-week increments and ends each respective quarter on the
Saturday following the thirteenth week with the fiscal year ending December 31.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended October 3, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. EFFECT OF ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company has elected to adopt
the requirements of this standard effective December 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information. The
Statement supersedes Statement No. 14 and establishes standards for the way
public business enterprises report selected information about operating segments
in annual reports and interim financial reports issued to debtholders. Statement
No. 131 is effective for fiscal years beginning after December 15, 1997. The
Company is currently evaluating and has not determined the impact of this
standard, if any.
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Because the Company does
not use derivative instruments and currently does not engage in hedging
activities, management does not anticipate that the adoption of the new
statement will have a significant effect on earnings or the financial position
of the Company.
1
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TALON AUTOMOTIVE GROUP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(IN THOUSANDS)
3. INVENTORIES
Inventory is comprised of the following at:
OCTOBER 3, DECEMBER 31,
1998 1997
---- ----
UNAUDITED
Raw material $ 6,318 $ 5,031
Work in process 4,648 3,996
Finished goods 3,710 3,992
Pre-production tooling 9,542 6,328
----------------------------------
Total Inventory $ 24,218 $ 19,347
==================================
4. COMMITMENTS AND CONTINGENCIES
As of October 3, 1998, there were no significant changes to the status of
commitments and contingencies presented in the footnotes to the financial
statements for the fiscal year ended December 31, 1997.
5. REORGANIZATION
Prior to April 28, 1998 the Company had reported the combined financial
statements of Talon Automotive Group, LLC ("Talon"), Hawthorne Metal Products
Company ("Hawthorne"), J&R Manufacturing, Inc. ("J&R"), Veltri Metal Products
Co., Veltri Holdings Inc., Veltri Holdings No. 2 Inc., Veltri Holdings USA, Inc.
and Production Stamping, Inc. ("PSI"). These companies were reorganized into
Talon Automotive Group, Inc. on April 28, 1998, in connection with the issuance
of senior subordinated notes in the amount of $120,000.
To effect the reorganization, Hawthorne and J&R merged with and into PSI and PSI
changed its name to Talon Automotive Group, Inc. ("TAG, Inc."). Immediately
thereafter, Talon, which was owned by Hawthorne and J&R, merged up and into PSI.
Simultaneously, VS Holdings No. 2 Inc. sold its 1% interest in Veltri Metal
Products Co. to Veltri Metal Products Co. VS Holdings No. 2 Inc. then merged
with and into VS Holdings Inc., which owned all of the remaining outstanding
stock of Veltri Metal Products Co., such that, Veltri Metal Products Co. became
a wholly owned subsidiary of VS Holdings Inc. The shareholders of VS Holdings
Inc. then exchanged their shares in VS Holdings Inc. for shares in TAG, Inc.,
and VS Holdings Inc. thereupon became a wholly owned subsidiary of TAG, Inc.
Also, immediately thereafter, the shareholders of Veltri Holdings USA, Inc.
exchanged their shares in Veltri Holdings USA, Inc. for shares in TAG, Inc., and
Veltri Holdings USA, Inc. also became a wholly owned subsidiary of TAG, Inc. The
reorganization was accounted for retroactively as if it were a pooling of
interest with no change made to the carrying base of the assets and liabilities
of the combined entities.
2
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TALON AUTOMOTIVE GROUP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(IN THOUSANDS)
5. REORGANIZATION (CONTINUED)
The equity ownership agreement of the Company was restated such that the
resultant stock options in TAG, Inc. were equivalent to those currently existing
in each of the affiliated companies prior to the reorganization. The deferred
compensation agreements of the Company were amended to suspend further
allocations of deferred compensation to participants, except up to $300 in
additional deferred compensation which can be earned by one participant and
annual increases for interest on all vested amounts at the rate of 6% per year.
6. REFINANCING
On April 28, 1998, the Company completed a refinancing and retired substantially
all long-term debt that was outstanding prior to the issuance of the $120,000
aggregate principal amount of senior subordinated notes which mature on May 1,
2008 and bear interest at the fixed rate of 9.625%.
On October 15, 1998, the Company completed an offer to exchange up to $120
million aggregate principal amount of its 9.625% senior subordinated notes due
2008, Series B, for up to $120 million aggregate principal amount of its 9.625%
senior subordinated notes due 2008, Series A. All notes were exchanged.
7. EXTRAORDINARY EXPENSES AND REFINANCING CHARGES
The Company recorded extraordinary and non-recurring expenses totaling $2,517 as
a result of the refinancing on April 28, 1998. These expenses were comprised of
(i) a $553 non-recurring extraordinary loss, net of $122 tax benefit, on the
early extinguishment of debt, (ii) a $605 non-recurring loss on foreign exchange
associated with the retirement of indebtedness and (iii) a $1,359 non-recurring
expense under deferred compensation agreements.
3
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8. SUPPLEMENTAL GUARANTOR INFORMATION
Veltri Metal Products Co., Veltri Holdings, Inc. and Veltri Holdings USA, Inc.
(collectively the "Veltri Group") are wholly owned subsidiaries of the Company
and constitute all of the direct and indirect subsidiaries of the Company. All
members of the Veltri Group have fully and unconditionally guaranteed, on a
joint and several basis, the obligation to pay principal, premium, if any, and
interest with respect to the senior subordinated indebtedness. In addition,
there are no restrictions on the ability of the Veltri Group to transfer funds
to the Company in the form of cash dividends, loans or advances, except as
follows: (i) pursuant to the Veltri Group purchase agreements among the Veltri
Group and its former owners, the Veltri Group agreed not to make any loans or
advances to any person (including the Company) until certain earn-out
provisions for the former owners have been satisfied; and (ii) pursuant to the
senior credit 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 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:
OCTOBER 3, DECEMBER 31,
1998 1997
---- ----
UNAUDITED
Current assets $ 27,140 $ 25,886
Non-current assets 24,597 26,937
Current liabilities 12,861 17,546
Non-current liabilities 35,858 33,727
NINE MONTHS ENDED:
OCTOBER 3, OCTOBER 4,
1998 1997
---- ----
UNAUDITED UNAUDITED
Net sales $ 76,404 $ 57,946
Gross profit 15,312 9,536
Net income 2,643 303
9. RELATED PARTY TRANSACTIONS
The Company has a business services agreement with Talon L.L.C., an affiliate of
the Company. For the nine month period ended October 3, 1998 and October 4,
1997, total fees incurred under this agreement amounted to $538 and $862,
respectively. Effective April 1, 1998, fees under this agreement were reduced
from $1,150 to $500 per year.
The Company also provides certain consulting and administrative services to G&L
Industries, Inc. ("G&L"), an affiliate of the Company. For the nine month period
ended October 3, 1998 and October 4, 1997, total fees received under this
agreement were $245 and $375 respectively. Effective July 1, 1998, fees and
services under this agreement were discontinued. Prospectively, the Company
intends to provide G&L limited consulting and administrative services and G&L
will pay the Company for these services as they are rendered.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this section,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions are generally intended to identify forward-looking statements.
Readers are cautioned that any forward-looking statements, including statements
regarding the intent, belief, or current expectations of the Company or its
management, are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to: (i) general economic conditions in the markets in which the
Company operates; (ii) fluctuations in worldwide or regional automobile and
light and heavy truck production; (iii) labor disputes involving the Company or
its significant customers; (iv) changes in practices and/or policies of the
Company's significant customers toward outsourcing automotive components and
systems; (v) foreign currency and exchange fluctuations; (vi) factors affecting
the ability of the Company or its key suppliers to resolve Year 2000 issues in
a timely manner; and (vii) other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission. The Company
does not intend to update these forward-looking statements.
COMPARISON OF THE THREE MONTH PERIOD ENDED OCTOBER 3, 1998 TO THE THREE MONTH
PERIOD ENDED OCTOBER 4, 1997
Net Sales - Net sales for the three month period ended October 3, 1998 ("third
quarter 1998") were $55.5 million. This was an increase of approximately $22.6
million or 68.9% as compared to the three month period ended October 4, 1997
("third quarter 1997"). Approximately 61.4% of this increase is attributable to
the Company's acquisition of Production Stamping Inc. ("PSI") in December 1997.
The remaining 38.6% of the increase was due to incremental new business in 1998,
including business related to the 1998, Chrysler LH Concorde/Intrepid program.
In addition, there was a significant amount of model changeover activity in the
third quarter 1997 and this had the effect of reducing sales in the prior
period. The General Motors strike had the effect of reducing net sales by $7.4
million during the third quarter 1998.
Gross Profit - Gross profit for the third quarter 1998 was $8.4 million or 15.2%
of net sales as compared to $3.8 million or 11.4% of net sales for the third
quarter 1997. This represents an increase of $4.6 million or 124.0% as compared
to the prior year. The increase in gross profit, as a percentage of net sales,
was primarily due to operating efficiencies achieved in the third quarter 1998,
offset by unabsorbed overhead costs as a result of the General Motors strike. In
addition, the gross profit percentage for the third quarter 1997 was reduced as
a result of model changeover activity that resulted in unabsorbed overhead costs
in the prior period. The General Motors strike had the effect of reducing gross
profit by approximately $3.2 million during the third quarter 1998.
Selling, General and Administrative Expenses ("SG&A") - SG&A expenses for the
third quarter 1998 were $6.6 million or 12.0% of net sales, compared to $4.2
million or 12.8% of net sales for the third quarter 1997. This represents an
increase of $2.4 million or 57.5% as compared to the prior year. Approximately
80.6% of this increase is attributable to the Company's acquisition of PSI. The
remaining 19.4% of the increase is related to increased engineering and support
costs related to new business awards. The decrease in SG&A, as a percentage of
net sales, was a result of a larger sales base to which corporate expenses were
allocated.
Interest Expense - Interest expense for the third quarter 1998 was $3.3 million
or 6.0% of net sales, compared to $1.0 million or 3.1% of net sales for the
third quarter 1997. The increase was attributable to additional borrowings
related to the acquisition of PSI in December 1997 and the issuance of $120.0
million of senior subordinated notes on April 28, 1998.
Foreign Currency - The foreign currency gain for the third quarter 1998 was $0.2
million compared to a foreign currency loss of $0.1 million for the third
quarter 1997. Foreign currency gains and losses are all attributable to the
Company's Canadian operation.
Income Taxes - The provision for income taxes for the third quarter 1998 was
$0.8 million or 1.4% of net sales compared to a negative $0.7 million for the
third quarter 1997. The Company's income taxes relate solely to its Canadian
operations. The effective tax rate for the third quarter 1998 was approximately
40.0%.
12
LIQUIDITY AND CAPITAL RESOURCES
For the third quarter 1998, net cash used by operating activities was a $4.1
million as compared to $6.2 million of net cash from operating activities for
the third quarter 1997. The decrease, as compared to the prior year, was the
result of losses related to a strike at General Motors and unfavorable changes
in working capital between the two periods. The increase in working capital
requirements for the third quarter 1998 included an increase in pre-production
inventory built during the quarter and an increase in accounts receivable that
resulted from higher sales. For the third quarter 1997, working capital
requirements were reduced by lower accounts receivable levels as a result of
model changeovers.
Net cash used in investing activities totaled $3.8 million for the third quarter
1998, as compared to $2.6 million for the third quarter 1997. Investing
activities for the third quarter 1998 and 1997 related to capital expenditures.
Net cash provided by financing activities totaled $5.9 million for the third
quarter 1998, compared to $2.1 million used in financing activities for the
third quarter 1997. For the third quarter 1998, net proceeds from long-term debt
totaled $6.3 million.
For the third quarter 1998, EBITDA was $4.6 million as compared to $0.8 million
for the third quarter 1997. For the third quarter 1998, EBITDA was reduced by
approximately $3.2 million as a result of the General Motors strike. EBITDA is
defined as income from continuing operations before the effect of changes in
accounting principles and extraordinary expenses plus interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted non-GAAP financial indicator of a company's ability to incur and
service debt. However, EBITDA should not be considered in isolation as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. EBITDA measures presented may not be comparable to
similarly-titled measures of other companies.
COMPARISON OF THE NINE MONTH PERIOD ENDED OCTOBER 3, 1998 TO THE NINE MONTH
PERIOD ENDED OCTOBER 4, 1997
Net Sales - Net sales for the nine month period ended October 3, 1998 ("first
nine months of 1998") were $189.7 million. This was an increase of approximately
$72.6 million or 62.0% as compared to the nine month period ended October 4,
1997 ("first nine months of 1997"). Approximately 66.7% of this increase is
attributable to the Company's acquisition of PSI in December 1997. The remaining
33.3% of the net sales increase was due to new factory-assist business that was
awarded in 1998, including business related to the Chrysler NS Minivan and Dodge
Neon, and increased volumes and content related to the 1998 Chrysler LH
Concorde/Intrepid program. Sales for the first nine months of 1998 were reduced
by approximately $10.8 million as a result of the General Motors strike.
Gross Profit - Gross profit for the first nine months of 1998 was $28.7 million
or 15.1% of net sales as compared to $17.6 million or 15.0% of net sales for the
first nine months of 1997. This represents an increase of $11.1 million or 63.0%
as compared to the prior year and is attributable to the increase in sales. The
increase in gross profit, as a percentage of net sales, was primarily due to
increased sales and operating efficiencies achieved since the prior period,
offset by unabsorbed overhead as a result of the General Motors strike. The
General Motors strike had the effect of reducing gross profit by approximately
$4.8 million during the first nine months of 1998.
Selling, General and Administrative Expenses ("SG&A") - SG&A expenses for the
first nine months of 1998 were $19.9 million or 10.5% of net sales, compared to
$12.6 million or 10.8% of net sales for the first nine months of 1997. The
decrease, as a percentage of net sales, was a result of a larger net sales base
to which corporate expenses were allocated.
Special Compensation Expense - Included in the first nine months of 1998 was a
special compensation expense related to deferred compensation agreements
totaling $1.4 million or 0.7% of net sales. There was no special compensation
expense for the first nine months of 1997.
Interest Expense - Interest expense for the first nine months of 1998 was $8.7
million or 4.6% of net sales, compared to $3.1 million or 2.7% of net sales for
the first nine months of 1997. The increase in interest expense is attributable
to additional borrowings related to the acquisition of PSI in December 1997 and
the issuance of $120.0 million of senior subordinated notes on April 28, 1998.
13
Foreign Currency - The foreign currency loss for the first nine months of 1998
was $0.6 million and was all attributable to the Company's Canadian operation.
This was primarily related to a $0.6 million loss on deferred foreign exchange
associated with certain debt that was retired as a result of the issuance of
senior subordinated notes.
Other income - Other income for the first nine months of 1998 was $0.2 million
and related to a gain on the sale of certain assets.
Extraordinary Expenses - Included in the first nine months of 1998 were $0.6
million of extraordinary expenses related to the write-off of certain deferred
financing costs on debt that was retired using proceeds from the issuance of
senior subordinated notes. There were no extraordinary items in the first nine
months of 1997.
Income Taxes - The provision for income taxes for the first nine months of 1998
was $2.0 million or 1.1% of net sales compared to $0.2 million or 0.2% of net
sales for the first nine months of 1997. The Company's income taxes relate
solely to its Canadian operation. The effective tax rate for the first nine
months of 1998 was 40.8% compared to 43.5% for the first nine months of 1997.
The decrease in the rate was due to changes in non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company completed the sale of $120 million of senior
subordinated notes due 2008. The interest rate on the notes is 9.625% and the
proceeds were primarily used to repay existing indebtedness. On October 15,
1998, the Company completed an offer to exchange these notes for identical
registered notes.
Veltri Metal Products Co., Veltri Holdings, Inc. and Veltri Holdings USA, Inc.
(collectively the "Veltri Group") are wholly owned subsidiaries of the Company
and constitute all of the direct and indirect subsidiaries of the Company. All
members of the Veltri Group have fully and unconditionally guaranteed, on a
joint and several basis, the obligation to pay principal, premium, if any, and
interest with respect to the senior subordinated indebtedness. In addition,
there are no restrictions on the ability of the Veltri Group to transfer funds
to the Company in the form of cash dividends, loans or advances, except as
follows: (i) pursuant to the Veltri Group purchase agreements, among the Veltri
Group and its former owners, the Veltri Group agreed not to make any loans or
advances to any person (including the Company) until certain earn-out
provisions for the former owners have been satisfied; and (ii) pursuant to the
senior credit 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 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 the
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 in the Notes to the Consolidated
Financial Statements.
In April 1998, the Company established a new senior credit facility that
provides for borrowings of up to $100 million. The senior credit facility
agreement has a maturity date of April 27, 2003 and can be extended to May 15,
2005. Interest on the senior credit facility is at the prime rate plus a margin
ranging from 0 to 75 basis points or at LIBOR plus a margin ranging 117.5 to
200.0 basis points, depending on the Company's leverage ratio as defined in the
agreement. The weighted average interest rate for such borrowings was
approximately 7.0% at October 3, 1998.
In July 1998, the senior credit facility agreement was amended to revise certain
definitions pertaining to financial covenants. The amendment provides for the
allowance of certain adjustments to the calculation of EBITDA, as that term is
defined in the agreement, to offset substantially all of the effect of the
General Motors strike. In addition, the definition of net worth was amended to
exclude accumulated foreign currency translation, and the net worth floor, as
defined in the agreement, was amended to allow for substantially all of the
impact of the General Motors strike.
For the first nine months of 1998, net cash flow from operating activities
totaled $4.5 million as compared to $3.5 million for the first nine months of
1997. The increase, as compared to the prior year, was the result of favorable
changes in working capital between the two periods, including a significant
decrease in pre-production tooling inventory.
Net cash used in investing activities totaled $7.7 million for the first nine
months of 1998, as compared to $5.8 million for the first nine months of 1997.
Investing activities for the first nine months of 1998 and 1997 related
primarily to capital expenditures.
Net cash provided by financing activities totaled $9.5 million for the first
nine months of 1998 compared to $3.0 million for the first nine months of 1997.
For the first nine months of 1998, proceeds from long-term debt totaled $129.7
million and included $120.0 million from the issuance of senior subordinated
notes. Principal repayments on long-term debt totaled $103.4 million and
primarily represented debt retired using proceeds from the issuance of senior
subordinated notes. During the first nine months of 1998, the Company incurred
$5.3 million of deferred financing costs related to the issuance of senior
subordinated indebtedness and the new senior credit facility and made cash and
non-cash distributions of $12.0 million.
14
Capital expenditures for the first nine months of 1998 were $8.0 million, as
compared to $5.8 million for the first nine months of 1997. Capital expenditures
primarily related to various investments in machinery and equipment, including
press equipment related to new and replacement programs.
For the first nine months of 1998, EBITDA was $15.2 million as compared to $6.3
million for the first nine months of 1997. For the first nine months of 1998,
EBITDA was reduced by approximately $4.8 million as a result of the General
Motors strike and $2.0 million as a result of certain non-recurring refinancing
charges incurred in April 1998 (see "Extraordinary Expenses and Refinancing
Charges"). EBITDA is defined as income from continuing operations before the
effect of changes in accounting principles and extraordinary expenses plus
interest, income taxes, depreciation and amortization. EBITDA is presented
because it is a widely accepted non-GAAP financial indicator of a company's
ability to incur and service debt. However, EBITDA should not be considered in
isolation as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of a
company's profitability or liquidity. EBITDA measures presented may not be
comparable to similarly-titled measures of other companies.
The Company believes the borrowing availability under its senior credit
facility, together with funds generated by operations, should provide sufficient
liquidity and capital resources to meet its working capital requirements,
capital expenditures and other operating needs through 1998. At October 3, 1998,
outstanding borrowings under the senior credit facility totaled $8.0 million and
the Company had the ability to take on additional borrowings of approximately
$23.0 million.
EFFECT OF STRIKE AT GENERAL MOTORS
The United Auto Workers union began a strike at two General Motors' parts
plants in early June 1998. The strike caused a disruption of General Motors'
parts-supply chain and forced it to close nearly all of its North American
assembly plant operations until the strike was resolved in late July 1998. As
a result of the strike, the Company temporarily discontinued shipping parts to
General Motors. The Company resumed shipping to General Motors in August 1998
but did not achieve pre-strike sales volumes until late September 1998 due to
production delays on certain programs at General Motors. As a result of the
strike, the Company's sales and earnings for the first nine months of 1998 were
reduced by approximately $10.8 million and $4.8 million, respectively.
EXTRAORDINARY EXPENSES AND REFINANCING CHARGES
On April 28, 1998, the Company completed a refinancing and retired
substantially all long-term debt that was outstanding prior to the issuance of
$120.0 million of senior subordinated notes. The Company recorded
extraordinary and non-recurring expenses totaling $2.5 million as a result of
the refinancing on April 28, 1998. These expenses were comprised of (i) a $0.5
non-recurring extraordinary loss, net of $0.1 tax benefit, on the early
extinguishment of debt, (ii) a $0.6 non-recurring loss on foreign exchange
associated with the retirement of indebtedness and (iii) a $1.4 non-recurring
expense under deferred compensation agreements.
YEAR 2000 ISSUE
The Company has conducted an evaluation of its IT and non-IT computer systems in
order to ensure that its business critical computer systems will be able to
function without disruption with respect to the application of dating systems in
the Year 2000. As a result of this evaluation, the Company is engaged in the
process of upgrading, replacing and testing certain of its information and other
computer systems so as to be able to operate without disruption due to Year 2000
issues. The Company's remedial actions are scheduled to be completed during the
third quarter of 1999 and, based upon information currently available, the
Company does not anticipate that the costs of its remedial actions will be
material to its consolidated results of operations and financial position.
However, there can be no assurance that the remedial actions being implemented
by the Company will be able to be completed by the time necessary to avoid
dating systems problems or that the cost of doing so will not be material.
If the Company is unable to complete its remedial actions in the planned
timeframe, contingency plans will be developed to address those business
critical systems that may not be Year 2000 compliant. In addition, disruptions
with respect to the computer systems of vendors or customers, which systems are
outside the control of the Company, could impair the ability of the Company to
obtain necessary materials or products or to sell or to service its customers.
Disruptions of the Company's computer systems, or the computer systems of the
Company's vendors or customers, as well as the cost of avoiding such disruption,
could have a material adverse effect upon the Company's financial condition and
results of operations. The Company has deployed, in conjunction with an industry
trade association (the Automotive Industry Action Group), a process to pursue a
common Year 2000 compliance approach with the automotive supply industry in
North America and to assess the Year 2000 readiness of its business critical
vendors and customers. The Company believes that the most reasonably likely
worst case scenario is that a small number of vendors will be unable to supply
components for a short time after January 1, 2000. As part of the assessment
process, the Company will develop contingency plans for those business critical
vendors who are either unable or unwilling to develop remediation plans to
become Year 2000 compliant. Although these plans are yet to be developed, the
Company expects that these plans will be comprised of a combination of actions
that may include stockpiling of components and selective resourcing of materials
to Year 2000 compliant vendors. The Company expects that vendors in this
category will represent an insignificant part of its total supply base. It is
expected that these plans will be in place by the third quarter of 1999.
15
FOREIGN CURRENCY
The financial condition and results of operations of one of the Company's
subsidiaries are reported in Canadian currency and then translated into U.S.
dollars at the applicable exchange rate for inclusion in the Company's
consolidated financial statements. As a result, the appreciation of the dollar
against this foreign currency will have a negative impact on the reported sales
and operating margin of this subsidiary as consolidated into the Company and
will incrementally increase any accumulated translation adjustment in the
consolidated Company's balance sheet. Conversely, the depreciation of the dollar
against this foreign currency will have a positive impact and will incrementally
decrease any accumulated translation adjustment. For the third quarter 1998,
the average exchange rate for the U.S. dollar had increased to approximately
1.51 Canadian dollars as compared to an average rate of approximately 1.38
Canadian dollars for the third quarter 1997. The Company did not incur any
material foreign currency gains or losses during the first nine months of 1998
and 1997.
SCRAP STEEL PRICES
The Company has certain agreements to sell scrap metal resulting from its
manufacturing processes at prices based on the prevailing market rate and this
revenue is recorded as a reduction to the Company's cost of sales. Market
prices for scrap metal have declined during 1998 and this has resulted in a
significant decrease in the Company's revenue related to scrap metal sales,
beginning in the third quarter of 1998. The Company believes that this trend in
scrap metal pricing is related to increased foreign imports of steel which have
lowered steel production requirements for U.S. steel mills and thereby also
reduced the demand for scrap metal. The Company believes the average market
price per ton of scrap steel was approximately $115 per ton in the third quarter
of 1998 as compared to $140 per ton in the third quarter of 1997. Market prices
for scrap metal have continued to decline and based on the current trend, the
Company believes market prices for the fourth quarter of 1998 could average as
low as $65 per ton as compared to an average price of approximately $149 per ton
for the fourth quarter of 1997. This could have an adverse effect on the
Company's results of operations and could reduce earnings approximately $1
million as compared to the prior period.
16
PART II. OTHER INFORMATION
TALON AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings:
None
Item 2. Change in Securities:
On September 16, 1998, the Company's registration statement was declared
effective by the SEC.
On October 15, 1998, the Company completed an offer to exchange up to
$120 million aggregate principal amount of 9 5/8% Senior Subordinated
Notes due 2008, Series B, for up to $120 million aggregate principal
amount of its 9 5/8% Senior Subordinated Notes due 2008, Series A. All
notes were exchanged.
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
The Company filed no Reports on Form 8-K during the quarter ended
October 3, 1998.
Exhibit 10 - First Amendment to Credit Agreement.
Exhibit 27 - Summary Financial Information
17
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TALON AUTOMOTIVE GROUP, INC.
By: /s/ David J. Woodward
-----------------------------------------
David J. Woodward
Vice President of Finance,
Chief Financial Officer and
Treasurer
18
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10 First Amendment to Talon
Automotive Group, Inc. Credit
Agreement
27 Financial Data Schedule