1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Numbers: 333-34475
VENTURE HOLDINGS TRUST
(Exact name of registrant as specified in its charter)
Michigan 3714 38-6530870
(Primary standard industrial classification code number)
VEMCO, INC.
Michigan 38-2737797
VENTURE INDUSTRIES CORPORATION
Michigan 38-2034680
VENTURE MOLD & ENGINEERING CORPORATION
Michigan 38-2556799
VENTURE LEASING COMPANY
Michigan 38-2777356
VEMCO LEASING, INC.
Michigan 38-2777324
VENTURE HOLDINGS CORPORATION
Michigan 38-2793543
VENTURE SERVICE COMPANY
Michigan 38-3024165
(State or other (Exact name of registrant as
jurisdiction of specified in its charter) (I.R.S. Employer
incorporation or Identification
organization) Number)
------------------
33662 James J. Pompo
Fraser, Michigan 48026
(810) 294-1500
(Address, including zip code, and telephone number, including area code, of
registrants principal executive offices)
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
--------- ---------
The common stock of each of the registrants, except for Venture Holdings Trust,
is owned by Venture Holdings Trust.
2
TABLE OF CONTENTS
-----------------
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE #
--------------------------------- ------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999,
December 31, 1998 and March 31, 1998 1
Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended March 31, 1999
and 1998 2
Consolidated Statements of Changes in Trust Principal
for the Three Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 9
PART II. OTHER INFORMATION (UNAUDITED)
-----------------------------
Item 6. Exhibits and Reports on Form 8-K 10
Signature 12
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VENTURE HOLDINGS TRUST
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
March 31, March 31,
1999 Dec. 31, 1998
ASSETS (Unaudited) 1998 (Unaudited)
- ------ ----------- ---- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 3,153 $ 130 $ 7,985
Accounts receivable, net, includes related
party receivables of $59,878, $56,648 and
$27,745 at March 31, 1999, December 31,
1998 and March 31, 1998, respectively
(Note 4) 200,067 190,135 195,972
Inventories (Note 2) 53,288 51,139 54,354
Prepaid and other current assets 8,648 8,870 8,625
-------------- -------------- -------------
Total current assets 265,156 250,274 266,936
Property, Plant and Equipment, Net 196,226 200,544 205,529
Goodwill, Net 51,552 52,022 53,428
Other Assets 26,547 26,636 25,392
Deferred Tax Assets 11,035 11,839 13,056
-------------- -------------- -------------
Total Assets $ 550,516 $ 541,315 $ 564,341
============== ============== =============
LIABILITIES AND TRUST PRINCIPAL
CURRENT LIABILITIES:
Accounts payable $ 62,506 $ 52,351 $ 86,601
Accrued payroll and taxes 10,331 9,017 10,017
Accrued interest 6,274 13,387 4,187
Accrued expenses 5,701 5,299 7,671
Current portion of long-term debt (Note 3) 1,588 1,565 2,384
-------------- -------------- -------------
Total current liabilities 86,400 81,619 110,860
Other Liabilities 5,948 7,254 10,853
Deferred Tax Liabilities 11,881 11,955 13,403
Long Term Debt (Note 3) 361,068 363,374 355,412
-------------- -------------- -------------
Total liabilities 465,297 464,202 490,528
Commitments and Contingencies -- -- --
Trust Principal:
Accumulated other comprehensive income-
minimum pension liability in excess of
unrecognized prior service cost, net of tax (737) (737) --
Trust principal 85,956 77,850 73,813
-------------- -------------- -------------
Trust Principal 85,219 77,113 73,813
-------------- -------------- -------------
Total Liabilities and Trust Principal $ 550,516 $ 541,315 $ 564,341
============== ============== =============
See notes to consolidated financial statements.
1
4
VENTURE HOLDINGS TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
---------
1999 1998
---- ----
NET SALES $ 165,992 $ 166,612
COST OF PRODUCT SOLD 133,070 133,616
------------ ------------
GROSS PROFIT 32,922 32,996
SELLING GENERAL AND 14,270 14,855
ADMINISTRATIVE EXPENSE
PAYMENTS TO BENEFICIARY IN
LIEU OF TRUST DISTRIBUTIONS -- --
------------ ------------
INCOME FROM OPERATIONS 18,652 18,141
INTEREST EXPENSE 9,479 7,145
------------ ------------
INCOME BEFORE TAXES 9,173 10,996
TAX PROVISION 1,067 1,465
------------ ------------
NET INCOME 8,106 9,531
OTHER COMPREHENSIVE INCOME -- --
------------ ------------
COMPREHENSIVE INCOME $ 8,106 $ 9,531
============ ============
See notes to consolidated financial statements.
VENTURE HOLDINGS TRUST
- ----------------------
CONSOLIDATED STATEMENTS OF CHANGES IN TRUST PRINCIPAL (Unaudited)
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
--------
1999 1998
---- ----
TRUST PRINCIPAL, BEGINNING OF PERIOD $ 77,113 $ 64,282
COMPREHENSIVE INCOME:
NET INCOME 8,106 9,531
OTHER COMPREHENSIVE INCOME -- --
------------ ------------
COMPREHENSIVE INCOME 8,106 9,531
------------ ------------
TRUST PRINCIPAL, END OF PERIOD $ 85,219 $ 73,813
============ ============
See notes to consolidated financial statements.
2
5
VENTURE HOLDINGS TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
----------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,106 $ 9,531
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 10,794 9,079
Change in accounts receivable (10,056) (34,815)
Change in inventories (2,149) (1,738)
Change in prepaid and other current assets (100) 343
Change in other assets (3,105) 379
Change in accounts payable 10,155 16,554
Change in accrued expenses (5,397) (4,099)
Change in other liabilities (1,305) (3,428)
Change in deferred taxes 1,052 1,465
--------------- --------------
Net cash provided by (used in) operating activities 7,995 (6,729)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities-Capital expenditures (2,688) (8,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under revolving credit agreement (2,000) 23,000
Principal payments on debt (284) (1,392)
--------------- --------------
Net cash (used in) provided by financing activities (2,284) 21,608
--------------- --------------
NET INCREASE IN CASH 3,023 6,508
CASH AT BEGINNING OF PERIOD 130 1,477
--------------- --------------
CASH AT END OF PERIOD $ 3,153 $ 7,985
=============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 16,592 $ 15,311
=============== ==============
Cash paid during the period for taxes $ 20 $ 120
=============== ==============
See notes to consolidated financial statements.
3
6
VENTURE HOLDINGS TRUST
- ----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- ------------------------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. The consolidated financial statements
include the accounts of Venture Holdings Trust (hereinafter referred to
as the Trust) and all domestic subsidiaries and a foreign subsidiary
that are all wholly owned, including Venture Industries Corporation,
Vemco, Inc., Venture Mold & Engineering Corporation, Venture Leasing
Company, Vemco Leasing, Inc., Venture Holdings Corporation, Venture
Service Company, Experience Management L.L.C. and Venture Industries
Canada, Ltd. (collectively referred to as the Company). In the opinion
of management, all adjustments (consisting of only normal recurring
items), which are necessary for a fair presentation have been included.
The results for interim periods are not necessarily indicative of results
which may be expected for any other interim period or for the full year.
For further information, refer to the consolidated financial statements
and notes thereto included in the Company's 1998 Annual Report on Form
10-K filed with the Securities and Exchange Commission.
Separate financial statements for the Trust and each subsidiary are not
included in this report because each entity (other than Venture
Industries Canada, Ltd. and Experience Management L.L.C.) is jointly and
severally liable for the Company's senior bank credit agreement (the
Senior Credit Agreement) and 9% Senior Notes due 2005 (the Senior
Notes); and each entity (including Venture Industries Canada, Ltd. but
excluding Experience Management L.L.C.) is jointly and severally liable
for the Company's 9 % Senior Subordinated Notes due 2004 (the Senior
Subordinated Notes) either as a co-issuer or as a guarantor. In
addition, the aggregate total assets, net earnings and net equity of the
subsidiaries of the Trust are substantially equivalent to the total
assets, net earnings and net equity of the Company on a consolidated
basis. Venture Industries Canada, Ltd. and Experience Management L.L.C.
represent less than 1% of total assets, net earnings, net trust principal
and operating cash flow.
2. INVENTORIES
Inventories included the following (in thousands):
March 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
Raw materials $ 22,900 $ 25,169 $ 27,001
Work-in-process manufactured parts 2,952 2,965 3,244
Work-in-process molds 15,002 11,436 12,284
Finished goods 12,434 11,569 11,825
----------- ----------- -------------
Total $ 53,288 $ 51,139 $ 54,354
=========== =========== =============
4
7
3. DEBT
Debt consisted of the following (in thousands):
March 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
Revolving credit agreement $ 75,000 $ 77,000 $ 68,000
Series B senior notes payable, Due 2005
with interest at 9.5% 205,000 205,000 205,000
Senior subordinated notes payable
with interest at 9.75% 78,940 78,940 78,940
Capital leases with interest from 8.25%
to 11.5% 2,056 2,196 3,749
Installment notes payable with
interest from 5.85% to 11.75% 1,660 1,803 2,107
----------- ----------- -------------
Total 362,656 364,939 357,796
Less current portion of debt 1,588 1,565 2,384
----------- ----------- -------------
Total $ 361,068 $ 363,374 $ 355,412
=========== =========== =============
The senior credit agreement provides for borrowings of up to the lesser
of a borrowing base or $200 million under a revolving credit facility.
The annual interest rate for borrowings under this agreement is a
floating rate based upon LIBOR or the banks prime rate. The Company must
pay a fee of up to 0.5% of the unused portion of the commitment. The
Company has issued letters of credit of approximately $3.0 million at
March 31, 1999 against this agreement, thereby reducing the maximum
availability to $197.0 million, and pursuant to the borrowing base
formula could have borrowed $117.1 million, of which $75.0 million was
outstanding thereunder.
The senior credit agreement, senior notes and the senior subordinated
notes contain certain restrictive covenants relating to cash flow, fixed
charges, debt, trust principal, trust principal, trust distributions,
leases, and liens on assets. The Companys debt obligations contain
various restrictive covenants that require the Company to maintain
stipulated financial ratios, including a minimum consolidated net worth
(adjusted yearly), fixed charge coverage ratio, interest coverage ratio
and total indebtedness ratio. As of March 31, 1999, the Company was in
compliance with all debt covenants.
See also Note 5 Acquisition.
5
8
4. RELATED PARTY TRANSACTIONS
The Company has entered into various transactions with entities that the
sole beneficiary owns or controls. These transactions include leases of
real estate, usage of machinery, equipment and facilities, purchases and
sales of inventory, performance of manufacturing related services,
administrative services, insurance activities, and payment and receipt of
sales commissions. In addition, employees of the Company are made
available to certain of these entities for services such as design, model
and tool building. Since the Company operates for the benefit of the sole
beneficiary, the terms of these transactions are not the result of
arms-length bargaining; however, the Company believes that such
transactions are on terms no less favorable to the Company than would be
obtained if such transactions or arrangements were arms-length
transaction with non-affiliated persons.
The Company provides or arranges for others to provide certain related
parties with various administrative and professional services, including
employee group insurance and benefit coverage, property and other
insurance, financial and cash management and administrative services such
as data processing. The related parties are charged fees and premiums for
these services. Administrative services were allocated to the entity for
which they were incurred and certain entities were charged a management
fee. In connection with the above cash management services, the Company
pays the administrative and operating expenses on behalf of certain
related parties and charges them for the amounts paid which results in
receivables from these related parties.
The result of these related party transactions was a net receivable,
which was included in accounts receivable as follows:
March 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
Amounts receivable $ 70,386 $ 65,755 $ 32,392
Amounts payable 10,508 9,107 4,647
----------- ----------- -------------
Net amounts receivable $ 59,878 $ 56,648 $ 27,745
=========== =========== =============
5. ACQUISITION
On March 8, 1999, the Company entered into an agreement to acquire
Peguform GmbH ("Peguform"), a leading European supplier of high
performance interior and exterior plastic modules, systems and components
to European OEMs (the "Peguform Acquisition"). Consummation of the
Peguform Acquisition is subject to only limited conditions, including
approval of the shareholders of Klockner-Werke AG, the parent of
Peguform, and receipt of regulatory approvals. The purchase agreement
does not permit the Company to terminate the transaction, even if there
has been a material adverse change in the business of Peguform from the
date of signing the purchase agreement to closing, which is currently
expected to occur no later than May 31, 1999.
The Company has executed commitment letters with subsidiaries of Bank One
Corporation and Goldman Sachs Credit Partners, L.P., pursuant to which
such entities have committed, subject to certain conditions, to provide
financing for the Peguform Acquisition.
The aggregate purchase price of the Peguform Acquisition is approximately
DEM 850 million (approximately $459.1 million as of April 30, 1999),
reduced by the amount of certain indebtedness for borrowed money, and
subject to post-closing adjustments. In addition, the Company estimates
an additional $28.2 million of fees, expenses and post-closing
adjustments associated with the Peguform Acquisition. The Company expects
to complete the Peguform Acquisition on or about May 31, 1999. The
Peguform Acquisition will be accounted for as a purchase.
In connection with the Peguform Acquisition, the Company expects to enter
into an amended and restated credit agreement (the "New Credit
Agreement"). The New Credit Agreement will provide for borrowings of (1)
up to $200.0 million under a Revolving Credit Facility, which, in
addition to those matters described below, will be used for working
capital and general corporate purposes; (2) $100.0 million under a
five-year Term Loan A; and (3) $150.0 million under a six-year Term Loan
B. The Revolving Credit Facility will permit the Company to borrow up to
the lesser of a borrowing base computed as a percentage of accounts
receivable and inventory, or $200.0 million less the amount of any letter
of credit issued against the New Credit Agreement. Pursuant to the
borrowing base formula as of December 31, 1998 the Company could have
borrowed up to the maximum availability under the Revolving Credit
Facility.
Interest rates under the New Credit Agreement are based on the London
Interbank Offer Rate ("LIBOR"), Alternate Base Rate ("ABR"), which is the
larger of the bank's corporate base rate of interest announced from
time-to-time or the federal funds rate plus 1/2% per annum, and, in the
case of non-dollar denominated loans, a euro currency reference rate.
Interest rates will be determined by reference to the relevant interest
rate option, plus an Applicable Margin (as defined) based on the
Company's Consolidated Ratio of Total Debt to EBITDA. Obligations under
the New Credit Agreement will be jointly and severally guaranteed by the
Trust's domestic subsidiaries and will be secured by first priority
security interests in substantially all of the assets of the Trust and
its domestic subsidiaries. The New Credit Agreement will contain certain
restrictive covenants, which we expect will be similar in nature to those
in the Company's current senior credit facility (the "Existing Credit
Agreement"). The New Credit Agreement will become effective
contemporaneously with the completion of the Peguform Acquisition.
In addition, we expect to offer an aggregate amount of up to $375.0
million of unsecured senior subordinated notes and unsecured senior
notes. Proceeds from the offering of the notes, together with borrowings
under the New Credit Agreement will be used to (1) fund cash
consideration paid in the Acquisition; (2) redeem the Company's 9 3/4%
Senior Subordinated Notes due 2004 at the redemption price of 104.875%,
plus accrued interest; (3) refinance amounts outstanding under the
Existing Credit Agreement; (4) pay certain fees and expenses related to
the Peguform Acquisition and the offering of the notes; and (5) fund
working capital and other general corporate purposes.
After completing the Peguform Acquisition, the Company expects its budget
for capital expenditures during the remainder of 1999 to be approximately
$70.0 million, which is expected to be financed either with cash
generated from operations or borrowings under the New Credit Agreement.
The Company expects, on or before the closing of the sale of the notes,
to enter into hedging obligations and interest rate swaps totalling
approximately $375.0 million which will have a maturity of 5 years.
These hedging obligations and interest rate swaps will effectively
convert the Company's United States dollar fixed rate coupon on the
notes to a euro fixed rate coupon. These instruments may not qualify for
hedge accounting, which may result in non-cash charges to earnings
related to the mark to market on the swaps. The Company is entering
into this arrangement to take advantage of lower interest rates in
Europe and to hedge its exchange rate risk, however, no commitment is
currently in effect with respect to any such arrangements and no
assurance can be given that the Company will enter into such
arrangements on the terms described or at all.
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following managements discussion and analysis of results of operations and
financial condition (MD&A) should be read in conjunction with the MD&A
included in the Company's 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth, for the periods indicated, the Company's
consolidated statements of income expressed as a percentage of net sales. This
table and the subsequent discussion should be read in conjunction with the
consolidated financial statements and related notes.
Three months ended
March 31,
1999 1998
---- ----
Net sales 100.0 % 100.0 %
Cost of products sold 80.2 80.2
------- --------
Gross profit 19.8 19.8
Selling, general and administrative expense 8.6 8.9
Payments to beneficiary in lieu of trust distributions 0.0 0.0
------- --------
Income from operations 11.2 10.9
Interest expense 5.7 4.3
------- --------
Income before taxes 5.5 6.6
Tax provision 0.6 0.9
======= ========
Net income 4.9 % 5.7 %
======= ========
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales for the first quarter of 1999 decreased $0.6 million,
or 0.4%, from the first quarter of 1998. Net sales were relatively flat due
primarily to lower tooling sales in the first quarter of 1999 compared to the
first quarter of 1998, offset by increased component sales.
GROSS PROFIT. Gross profit for the first quarter of 1999 decreased $0.1 million
to $32.9 million compared to $33.0 million for the first quarter of 1998. As a
percentage of net sales, gross profit remained constant at 19.8%. During the
first quarter of 1999, a $1.4 million reserve was reversed relating to the
renegotiation of a contract. Excluding the impact of the reserve reversal, the
gross profit margin during the first quarter of 1999 was 19.0%. As compared to
the first quarter 1998 gross profit margin, the first quarter 1999 gross profit
margin was lower as a result of a decrease in tooling sales, which generally
account for higher margins than sales of components.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense for the first quarter of 1999 decreased $0.6 million, or 4.0%, to $14.3
million compared to $14.9 million for the first quarter of 1998. As a percentage
of net sales, selling, general and administrative expense decreased from 8.6%
for the first quarter of 1999 as compared to 8.9% for the first quarter of 1998.
The decrease is primarily attributable to cost cutting efforts at the corporate
office.
INCOME FROM OPERATIONS. As a result of the foregoing, income from operations for
the first quarter of 1999 increased $0.6 million, or 2.8%, to $18.7 million,
compared to $18.1 million for the first quarter of 1998. As a percentage of net
sales, income from operations increased to 11.2% for the first quarter of 1999
from 10.9% for the first quarter of 1998.
INTEREST EXPENSE. Interest expense for the first quarter of 1999 increased $2.4
million, to $9.5 million, as compared to $7.1 million for the first quarter of
1998. The increase is the result of additional borrowing under the Company's
revolving credit facility to fund increased working capital needs.
NET INCOME. Due to the foregoing, net income for the first quarter of 1999
decreased $1.4 million, or 15.0%, to $8.1 million compared to $9.5 million for
the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES (UNAUDITED)
The Company's consolidated working capital was $178.8 million at March 31, 1999
compared to $156.1 million at March 31, 1998, an increase of $22.7 million. The
Company's working capital ratio increased to 3.07x at March 31, 1999 from 2.41x
at March 31, 1998. The increase is due to a decrease in current liabilities,
primarily accounts payable. Net cash provided by operating activities was $8.0
million for the three months ended March 31, 1999 compared to net cash used of
$6.7 million for the same period in 1998. The increase in cash provided by
operations is due primarily to a reduction in the net increase in accounts
receivable.
7
10
Capital expenditures were $2.7 million for the three months ended March 31, 1999
compared to $8.4 million for the same period in 1998. The Company continues to
upgrade machinery and equipment and paint lines at all facilities to handle
expected increased volumes and general reconditioning of equipment.
In the ordinary course of business, the Company seeks additional business with
existing and new customers. The Company continues to compete for the right to
supply new components which could be material to the Company and require
substantial capital investment in machinery, equipment, tooling and facilities.
On March 8, 1999, the Company entered into an agreement to acquire Peguform GmbH
("Peguform"), a leading supplier of high performance interior and exterior
plastic modules, systems and components to European OEMs (the "Peguform
Acquisition"). As of the date hereof, however, the Company has no formal
commitments with respect to any such material business, other than business
acquired as a consequence of the Peguform Acquisition, and there is no assurance
that the Company will be awarded any such business.
Net cash used in financing activities was $2.3 million for the three months
ended March 31, 1999 compared to net cash provided by financing activities of
$21.6 million for the same period in 1998. The fluctuation primarily relates to
a repayment on the revolving credit agreement during the first three months of
1999 as opposed to additional borrowings during first three months of 1998
The Company has executed commitment letters with subsidiaries of Bank One
Corporation and Goldman Sachs Credit Partners, L.P., pursuant to which such
entities have committed, subject to certain conditions, to provide financing for
the Peguform Acquisition.
The aggregate purchase price of the Peguform Acquisition is approximately DEM
850 million (approximately $459.1 million as of April 30, 1999), reduced by the
amount of certain indebtedness for borrowed money, and subject to post-closing
adjustments. In addition, the Company estimates an additional $28.2 million of
fees, expenses and post-closing adjustments associated with the Peguform
Acquisition. The Company expects to complete the Peguform Acquisition on or
about May 31, 1999. The Peguform Acquisition will be accounted for as a
purchase.
In connection with the Peguform Acquisition, the Company expects to enter into
an amended and restated credit agreement (the "New Credit Agreement"). The New
Credit Agreement will provide for borrowings of (1) up to $200.0 million under
a Revolving Credit Facility, which, in addition to those matters described
below, will be used for working capital and general corporate purposes; (2)
$100.0 million under a five-year Term Loan A; and (3) $150.0 million under a
six-year Term Loan B. A Revolving Credit Facility will permit the Company to
borrow up to the lesser of a borrowing base computed as a percentage of accounts
receivable and inventory, or $200.0 million less the amount of any letter of
credit issued against the New Credit Agreement. Pursuant to the borrowing base
formula as of December 31, 1998 the Company could have borrowed up to the
maximum availability under the Revolving Credit Facility.
Interest rates under the New Credit Agreement are based on the London Interbank
Offer Rate ("LIBOR"), Alternate Base Rate ("ABR"), which is the larger of the
bank's corporate base rate of interest announced from time-to-time or the
federal funds rate plus 1/2% per annum, and, in the case of non-dollar
denominated loans, a euro currency reference rate. Interest rates will be
determined by reference to the relevant interest rate option, plus an Applicable
Margin (as defined) based on the Company's Consolidated Ratio of Total Debt to
EBITDA. Obligations under the New Credit Agreement will be jointly and severally
guaranteed by the Trust's domestic subsidiaries and will be secured by first
priority security interests in substantially all of the assets of the Trust and
its domestic subsidiaries. The New Credit Agreement will contain certain
restrictive covenants, which we expect will be similar in nature to those in the
Company's current senior credit facility (the "Existing Credit Agreement"). The
New Credit Agreement will become effective contemporaneously with the completion
of the Peguform Acquisition.
In addition, we expect to offer an aggregate amount of up to $375.0 million of
unsecured senior subordinated notes and unsecured senior notes. Proceeds from
the offering of the notes, together with borrowings under the New Credit
Agreement will be used to (1) fund cash consideration paid in the Acquisition;
(2) redeem the Company's 9 3/4% Senior Subordinated Notes due 2004 at the
redemption price of 104.875%, plus accrued interest; (3) refinance amounts
outstanding under the Existing Credit Agreement; (4) pay certain fees and
expenses related to the Peguform Acquisition and the offering of the notes; and
(5) fund working capital and other general corporate purposes.
After completing the Peguform Acquisition, the Company expects its budget for
capital expenditures during the remainder of 1999 to be approximately $70.0
million, which is expected to be financed either with cash generated from
operations or borrowings under the New Credit Agreement.
The Company expects, on or before the closing of the sale of the notes, to enter
into hedging obligations and interest rate swaps totalling approximately $375.0
million which will have a maturity of 5 years. These hedging obligations and
interest rate swaps will effectively convert the Company's United States dollar
fixed rate coupon on the notes to a euro fixed rate coupon. These instruments
may not qualify for hedge accounting, which may result in non-cash charges to
earnings related to the mark to market on the swaps. The Company is entering
into this arrangement to take advantage of lower interest rates in Europe and to
hedge its exchange rate risk, however, no commitment is currently in effect with
respect to any such arrangements and no assurance can be given that the Company
will enter into such arrangements on the terms described or at all.
YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
Company is in the process of addressing the year 2000 problem. The year 2000
issue is the result of computer programs being written using two digits rather
than four digits to define the applicable year. Any of the Company's systems,
equipment, or hardware that have date sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than year 2000. This could
result in a system failure or miscalculations causing disruption of operations,
including among other things, a temporary inability to properly manufacture
products, process transactions, send invoices or engage in similar normal
business activities.
Based on its initial assessments, the Company determined that it would be
required to modify or replace certain portions of its equipment, hardware, and
software so that affected systems will properly utilize dates beyond December
31, 1999. The Company presently believes that, with modifications and some
replacement of existing equipment, hardware and software, the year 2000 issue
will be mitigated.
The Company's plan to resolve the year 2000 issue is being implemented by each
facility across the Company and involves six phases: inventory; risk assessment;
prioritization and ownership assignment; compliance research; remediation; and
testing. The inventory, risk assessment, prioritization, and ownership
assignment phases were performed concurrently and are substantially complete.
The compliance research phase is substantially complete. The remediation and
testing phases are expected to be substantially completed by August 31, 1999.
The Company's year 2000 plan is being completed on a facility by facility basis.
It is estimated that the compliance research phase is approximately 95% complete
in all of our locations, the remediation phase is approximately 70% complete,
and the testing phase is approximately 80% complete.
The Company's year 2000 inventory of potentially affected items is segregated
into four categories: business application (developed software, customized
extensions to purchased software and systems interfaces); tools and platforms
(purchased commercial products, both hardware and software); intelligent devices
(manufacturing, laboratory, office and facilities equipment); and external
business partners (suppliers, customers and other service providers). Business
applications, tools and platforms are considered information technology ("IT")
systems while intelligent devices and external business partners are considered
non-IT systems.
Concerning IT systems, several of the facilities that share existing
applications will upgrade those applications to year 2000 compliant versions.
All other facilities have already made their systems year 2000 compliant.
With respect to non-IT systems, the Company has dedicated resources to assist in
identifying potentially affected intelligent devices. Determination of
compliance status, remediation, and testing of these devices may be more
difficult than IT systems, as some of the manufacturers of potentially affected
equipment may no longer be in business.
8
11
The external business partners category of potentially affected items primarily
includes the process of identifying and prioritizing critical suppliers and
customers, and communicating with them about their plans and progress in
addressing the year 2000 problem. The Company has established a questionnaire
that it used to obtain this information from key existing business partners. To
date the Company is not aware of any problems that would materially impact
results of operations, liquidity, or capital resources. However, the Company has
no means of ensuring that these parties will be year 2000 ready and the
inability of these parties to successfully complete their year 2000 compliance
program could impact the Company. For key business partners, the initial
assessments are evaluated and, as deemed necessary, follow-up assessments are
made. We expect this process to be ongoing throughout 1999. The Company is in
the process of developing contingency plans to address potential year 2000
exposure.
The Company has utilized both internal and external resources to repair or
replace, test, and implement software and operating equipment for year 2000
modifications. The Company is unable to estimate with any certainty the total
cost of the year 2000 project. However, the Company has not seen a significant
increase in its IT cost nor in the normal overhead cost associated with its
facilities. Primarily all of the costs of the year 2000 project have been
expensed and have been funded through normal operating cash flow or bank
borrowings.
The failure to remediate a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations of the Company including the ability to produce or deliver products
to customers. Such failures could materially or adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, the Company is unable to
determine with certainty at this time whether the consequences of year 2000
failure will have a material impact on the Company. The Company's year 2000 plan
is expected to significantly reduce its level of uncertainty about the year 2000
problem. The Company believes that by executing its year 2000 plan in a timely
manner, the possibility of significant interruptions to normal operations should
be reduced. The Company believes its most reasonably likely worst case scenario
is that certain suppliers would not be able to supply the Company with key
materials, thus disrupting the manufacture and sale of products to customers.
The Company's plans to complete the year 2000 project are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including, but not limited to, the continued availability of certain
resources and other factors. Estimates of the status of completion and the
expected completion dates are based on tasks completed to date compared to all
required tasks. However, there can be no guarantee that expected completion
dates will be met, and actual results could differ materially for those
forecasted. Specific factors that might cause such material difference include,
but are not limited to, the availability and cost of personnel trained in
certain areas, the ability to locate and correct all relevant equipment, devices
and computer codes, and similar uncertainties.
* * * * * * *
The foregoing discussion in MD&A includes forward-looking statements within the
meaning of the Securities Exchange Act of 1934 and are subject to a number of
risks and uncertainties. Such factors include, among others, the following:
international, national and local general economic and market conditions;
demographic changes; the size and growth of the automobile market or the plastic
automobile component market; the ability of the Company to sustain, manage or
forecast its growth; the Company successfully remediating Year 2000 issues; the
size, timing and mix of purchases of the Company's products; new product
development and introduction; existing government regulations and changes in, or
the failure to comply with, government regulations; adverse publicity;
dependence upon original equipment manufacturers; liability and other claims
asserted against the Company; competition; the loss of significant customers or
suppliers; fluctuations and difficulty in forecasting operating results; changes
in business strategy or development plans; business disruptions; product
recalls; warranty costs; the ability to attract and retain qualified personnel;
the ability to protect technology; retention of earnings; and control and the
level of affiliated transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
The Company is exposed to market risk related to changes in interest rates and
commodity prices and selectively uses financial instruments to manage some of
these risks. The Company does not enter into financial instruments for
speculation or trading purposes. A discussion of the Company's accounting
policy for derivative financial instruments is included in the Organization and
Summary of Significant Accounting Policies and Financial Instruments footnotes
to the financial statements found in Item 8 of the Company's 1998 Annual Report
on Form 10-K.
The Company has three interest rate exchange agreements with a financial
institution to limit exposure to interest rate volatility. The Company has
currency exposure primarily with respect to the Australian dollar and has chosen
not to hedge that risk at the present time. The Company's exposure to commodity
price changes relates to operations that utilize certain commodities as raw
materials. The Company manages its exposure to changes in these prices
primarily through its procurement and sales practices. At March 31, 1999, the
Company had no financial instruments outstanding as hedges of commodity price
risk.
These financial exposures are monitored and managed as a part of a risk
management program, which recognizes the unpredictability of financial markets
and seeks to reduce the potentially adverse effect. Sensitivity analysis is one
technique used to evaluate the impact of such possible movements on the
valuation of these instruments. A hypothetical ten-percent change in the value
of foreign currency movements would not have a significant impact on the
Company's financial position, results of operations or future cash flows. In
addition, based upon a one percentage point decrease in interest rates at March
31, 1999, the Company estimates that the fair market value of the interest rate
exchange agreement would have decreased by $2.5 million. A hypothetical one
percentage point increase in interest rates related to floating rate debt at
March 31, 1999 would decrease future pretax earnings and cash flow by $0.2
million annually.
9
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
2.1 Share Purchase and Transfer Agreement Between Klockner
Mercator Maschinenbau GmbH, on the one hand, and Venture
Beteilgungs GmbH and Venture Holdings Trust, on the other
hand, dated March 8, 1999. (incorporated herein by reference
to Exhibit 2.1 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998)
27.1* Financial Data Schedule
- ----------------
* Filed herewith
(b) Reports on Form 8-K.
The Company was not required to file a current report on Form
8-K during the three months ended March 31, 1999 and none
were filed during that period.
10
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENTURE HOLDINGS TRUST, VEMCO, INC.,
VENTURE INDUSTRIES CORPORATION,
VENTURE MOLD & ENGINEERING
CORPORATION, VENTURE LEASING
COMPANY, VEMCO LEASING,INC., VENTURE
HOLDINGS CORPORATION, AND VENTURE
SERVICE COMPANY
Date: May 7, 1999
/s/ James E. Butler
------------------------------
James E. Butler
Chief Financial Officer
Signing on behalf of each
registrant and as principal
financial officer of each
registrant.
14
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 FINANCIAL DATA SCHEDULE