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 2, 1999, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
-------- -------
COMMISSION FILE NO. 333-56461
TALON AUTOMOTIVE GROUP, INC
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3382174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
900 WILSHIRE DRIVE, SUITE 203, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip Code)
(248) 362-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
---------- ----------
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 November 16, 1999
----------------------------- ---------------------
Class A Voting Common Stock 4,074
Class B Non-Voting Common Stock 158,853
Exhibit Index located at page
2
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 2, 1999 and October 3, 1998
Consolidated Statements of Operations (unaudited) for the
Nine Months Ended October 2, 1999 and October 3, 1998
Consolidated Balance Sheets at October 2, 1999 (unaudited)
and December 31, 1998
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended October 2, 1999 and October 3, 1998
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended October 2, 1999 and October 3, 1998
Notes to Consolidated Financial Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
3
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS - UNAUDITED)
QUARTER ENDED: NINE MONTHS ENDED:
---------------------------------- -----------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 67,285 $ 55,470 $ 217,028 $ 189,657
Cost of sales 58,757 48,459 191,689 165,272
---------- ---------- ---------- ----------
Gross profit 8,528 7,011 25,339 24,385
Operating expenses:
SG&A 4,798 5,039 15,569 14,474
Amortization 435 180 1,232 965
Special compensation - - - 1,359
---------- ---------- ---------- ----------
Income from operations 3,295 1,792 8,538 7,587
Other (income) expenses:
Interest 3,691 3,337 11,676 8,713
Foreign currency 130 (213) 98 574
---------- ---------- ---------- ----------
Loss before income taxes and
extraordinary expenses (526) (1,332) (3,236) (1,700)
Provision for income taxes 222 767 2,047 1,999
---------- ---------- ---------- ----------
Loss before extraordinary expenses (748) (2,099) (5,283) (3,699)
Extraordinary expenses - - - 553
---------- ---------- ---------- ----------
Net loss $ (748) $ (2,099) $ (5,283) $ (4,252)
========== ========== ========== ==========
See accompanying notes.
4
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - UNAUDITED)
ASSETS OCTOBER 2, 1999 DECEMBER 31, 1998
------ ---------------- -----------------
Current assets:
Cash $ 95 $ 9,412
Accounts receivable 53,135 42,580
Inventory 21,208 16,003
Reimbursable tooling 17,627 6,618
Prepaid expenses 2,933 2,266
---------- -----------
Total current assets 94,998 76,879
Property, plant and equipment, net 80,064 65,222
Goodwill and other assets, net 59,300 58,119
---------- -----------
$ 234,362 $ 200,220
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 44,004 $ 33,333
Accrued liabilities 20,760 24,527
Deferred tooling revenue 11,987 -
Current portion of debt and capital leases 1,569 1,863
---------- -----------
TOTAL CURRENT LIABILITIES 78,320 59,723
Long term debt 163,234 143,648
Capital leases 1,647 2,182
Deferred income taxes 1,793 1,712
---------- -----------
TOTAL NON-CURRENT LIABILITIES 166,674 147,542
Shareholders' equity:
Common stock 1,250 1,250
Paid in capital 1,413 1,413
Retained earnings (12,298) (7,015)
Accumulated other comprehensive income (997) (2,693)
---------- -----------
Total shareholders' equity (10,632) (7,045)
---------- ----=------
$ 234,362 $ 200,220
========== ===========
See accompanying notes.
5
TALON AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
QUARTER ENDED: NINE MONTHS ENDED:
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
----- ----- ----- ----
Net loss $ (748) $ (2,099) $ (5,283) $ (4,252)
Depreciation and amortization 2,401 2,633 8,132 8,167
Other non-cash expenses 124 50 513 55
Change in operating assets and liabilities:
Accounts receivable (4,517) (2,725) (10,555) (2)
Inventories (5,622) (4,648) (5,205) (4,309)
Prepaids 630 648 (667) 903
Accounts payable 11 (1,346) 10,671 (2,199)
Accrued liabilities 1,583 3,734 (3,767) 7,787
Other operating items 5,986 (343) (146) (1,674)
-------- -------- -------- ---------
Cash provided by (used in) operating activities (152) (4,096) (6,307) 4,476
Investing Activities:
Additions to property and equipment (8,629) (3,829) (21,110) (8,010)
Proceeds from sale of equipment 204 - 204 327
-------- -------- -------- ---------
Cash used in investing activities (8,425) (3,829) (20,906) (7,683)
Financing Activities:
Proceeds from long-term borrowings 6,903 8,516 19,903 129,683
Payments on long-term debt (406) (2,160) (1,147) (103,434)
Deferred financing costs - (435) (252) (4,701)
Distributions - - - (12,037)
-------- -------- -------- ---------
Cash provided by financing activities 6,497 5,921 18,504 9,511
Effects of exchange rates (90) (1,203) (608) (1,810)
-------- -------- -------- ---------
Net change in cash (2,170) (3,207) (9,317) 4,494
Beginning cash 2,265 8,934 9,412 1,233
-------- -------- -------- ---------
Ending cash $ 95 $ 5,727 $ 95 $ 5,727
======== ======== ======== =========
See accompanying notes.
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TALON AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Talon Automotive Group, Inc. (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
in the consolidated financial statements includes normal recurring adjustments
and reflects all adjustments which are, in the opinion of management, necessary
for a fair presentation of such financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The unaudited consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended
December 31, 1998.
The Company reports quarterly financial information in thirteen-week increments
and ends each respective quarter on the Saturday following the thirteenth week
with the fiscal year ending December 31.
2. EFFECT OF ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivatives Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133--an Amendment of FASB Statement No. 133." Statement No. 137 defers the
effective date of Statement No. 133 by one year to fiscal years beginning after
June 15, 2000. Accordingly, the Company plans to adopt Statement No. 133
beginning in 2001. Implementation of this statement is not expected to have a
material impact on the Company's results of operations.
In September 1999, the Financial Accounting Standards Board reached a consensus
on EITF Statement No. 99-5, "Accounting for Pre-Production Costs Related to
Long-Term Supply Arrangements". Statement No. 99-5 may become effective, on a
prospective basis, for fiscal years beginning after December 31, 1999. The
Company has not yet determined what impact this statement will have on the
Company's results of operations. As of October 2, 1999, the Company had
capitalized approximately $900 of pre-production costs subject to Statement No.
99-5.
3. COMMITMENTS AND CONTINGENCIES
As of October 2, 1999, 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, 1998.
4. INVENTORIES
Inventory consisted of the following:
OCTOBER 2, 1999 DECEMBER 31, 1998
---------------- -----------------
UNAUDITED
Raw material $ 9,774 $ 4,935
Work in process 6,677 6,084
Finished goods 4,757 4,984
------- -------
Total Inventory $21,208 $16,003
======= =======
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5. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended October 2, 1999 was a
loss of $295 and $3,586 compared to $3,302 and $6,062 for the three and nine
months ended October 3, 1998. Comprehensive income includes reported net income
and the non-cash effect of changes in foreign currency translation.
6. 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 Company's senior subordinated notes.
There are no restrictions on the ability of the Veltri Group to transfer funds
to the Company in the form of cash dividends, loans or advances, except as
follows: (i) pursuant to the 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 2, 1999 DECEMBER 31, 1998
--------------- -----------------
UNAUDITED
Current assets $38,954 $33,990
Non-current assets 43,819 34,510
Current liabilities 33,413 17,290
Non-current liabilities 37,482 42,137
NINE MONTHS ENDED:
OCTOBER 2, 1999 OCTOBER 3, 1998
--------------- ---------------
UNAUDITED UNAUDITED
Net sales $83,960 $76,404
Gross profit 16,000 15,312
Net income 2,852 2,643
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7. RECLASSIFICATIONS
Certain amounts in the prior periods' statements have been reclassified to
conform to the current periods' presentation.
8. RELATED PARTY TRANSACTIONS
The Company has a business services agreement with Talon L.L.C., an affiliated
company owned by the shareholders of the Company. Under this agreement, the
Company receives services of risk management, benefits management, tax
preparation and other services from Talon L.L.C.. For the nine month period
ended October 2, 1999 and October 3, 1998, business services fees paid to Talon
L.L.C. amounted to $375 and $537, respectively.
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. For the nine
month period ended October 3, 1998, service fees received from G&L amounted to
$250.
In 1996, the Company purchased the outstanding capital stock of the Veltri Group
and a former shareholder of the Veltri Group was appointed as an officer of the
Company. The stock purchase agreement included certain earnout provisions
payable to the former shareholder. On April 6, 1999, the Company made an earnout
payment of approximately $8.5 million, including interest, for the calendar year
1998. A final earnout payment for the calendar year 1999 will be paid on March
31, 2000. This payment will not exceed approximately $2.0 million per the terms
of the agreement.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED OCTOBER 2, 1999
AS COMPARED TO THE THREE AND NINE MONTHS ENDED OCTOBER 3, 1998
Net Sales
Net sales for the three month period ended October 2, 1999 ("third quarter
1999") were $67.3 million compared to $55.5 million for the three month period
ended October 3, 1998 ("third quarter 1998"). This represents an increase of
$11.8 million or 21% as compared to the prior year. The increase was due to
incremental new business, higher industry volumes and lower sales in the third
quarter 1998 due to a General Motors strike.
For the year-to-date period, net sales were $217.0 million as compared to $189.7
million for the same period last year. This represents an increase of $27.3
million or 14%. The increase was due to a full ramp up of the DaimlerChrysler LH
platform, incremental new business and higher industry volumes. The increase was
also affected by a General Motors strike that reduced sales last year.
Gross Profit
Gross profit for the third quarter 1999 was $8.5 million or 12.7% of net sales
compared to $7.0 million or 12.7% of net sales for the third quarter 1998. This
represents an increase of $1.5 million or 22% as compared to the prior year. The
increase was due to higher sales in the third quarter 1999, offset by lower
scrap pricing (see "Decline in Scrap Steel Prices") and sales mix.
For the year-to-date period, gross profit was $25.3 million as compared to $24.4
million for the same period last year. This represents an increase of $0.9
million or 4% as compared to the prior year. The increase was due to higher
sales, offset by lower scrap pricing and a press breakdown (see "Outsourcing
Costs").
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses for the third quarter 1999 were $4.8 million or 7.1% of net sales
compared to $5.0 million or 9.1% of net sales for the third quarter 1998. This
represents a decrease of $0.2 million or 5% as compared to the prior year.
For the year-to-date period, SG&A was $15.6 million or 7.2% of sales as compared
to $14.5 million or 7.6% of sales for the same period last year. This represents
an increase of $1.1 million or 8% as compared to the same period last year. The
increase is associated with new infrastructure costs, offset by leveraging SG&A
expenses over a larger sales base.
Special Compensation
In connection with the offering of the Company's senior subordinated notes in
April 1998, the Company incurred a special compensation expense of $1.4 million.
This was a non-recurring expense related to deferred compensation agreements
with certain employees.
Interest Expense
Interest expense for the third quarter 1999 was $3.7 million or 5.5% of net
sales, as compared to $3.3 million or 6.0% of net sales for the third quarter
1998. The increase of $0.4 million was due to financing new equipment for future
business awards and working capital requirements for rising sales. For the
year-to-date period, interest expense was $11.7 million as compared to $8.7
million for the same period last year. The increase of $3.0 million or 34% was
due to financing requirements for new equipment and working capital, as
explained above.
10
Foreign Currency
Foreign currency gains and losses are all attributable to the Company's Canadian
operation. In connection with the offering of the Company's senior subordinated
notes in the third quarter 1998, the Company made an early retirement of
Canadian denominated debt and recorded a non-recurring foreign currency loss of
$0.6 million.
Income Taxes
The Company's income taxes relate solely to its Canadian operations. The
provision for income taxes for the third quarter 1999 was $0.2 million compared
to $0.8 million for the third quarter 1998. For the year-to-date period, the
provision for income taxes was $2.0 million, consistent with the same period
last year. The effective tax rate was approximately 40%.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the first nine months of 1999 were $21.1 million
compared to $8.0 million for the first nine months of 1998. Capital expenditures
primarily relate to various investments in machinery and equipment. For the
first nine months of 1999, capital expenditures included approximately $10.0
million for new business launching in 2000.
For the first nine months of 1999, net cash flow used in operating activities
totaled $6.3 million as compared to $4.5 million from operating activities for
the first nine months of 1998. The change from the prior year was primarily due
to a reduction in accrued liabilities. During the first nine months of 1999, the
Company made an $8.5 million accrued earnout payment associated with its
acquisition of the Veltri Group in 1996.
Net cash used in investing activities totaled $20.9 million for the first nine
months of 1999, as compared to $7.7 million for the first nine months of 1998.
Investing activities primarily related to capital expenditures.
Net cash provided by financing activities totaled $18.5 million for the first
nine months of 1999 compared to $9.5 million for the first nine months of 1998.
Financing activities primarily related to new borrowings.
The Company has a $100.0 million senior credit facility with a syndicate of
banks. On October 2, 1999, outstanding borrowings on this facility totaled $42.0
million and the Company had approximately $98.0 million of eligible bank
collateral, as defined in its senior credit facility agreement. The Company
believes 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 for the foreseeable future.
DECLINE IN SCRAP STEEL PRICES
The Company sells scrap steel resulting from its manufacturing processes at the
prevailing market rate. This revenue is recorded as a reduction to the Company's
cost of sales. Market prices for scrap steel declined significantly from the
prior period and this decreased the Company's revenue for scrap steel sales. The
Company believes lower scrap steel prices reduced gross profit by $0.5 million
for the third quarter 1999 and $2.8 million for the first nine months of 1999 as
compared to the prior year.
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OUTSOURCING COSTS
One of the Company's large press lines experienced a mechanical problem during
the first nine months of 1999. As a result, the Company had to temporarily
outsource certain business to meet customer requirements. The problem resulted
from unusual circumstances which the Company believes is covered by its
insurance policy. Outsourcing expenses, net of insurance proceeds recovered or
accrued, reduced gross profit approximately $0.2 million for the third quarter
1999 and $1.4 million for the first nine months of 1999 as compared to the prior
year. The Company believes the problem has been resolved and has filed an
insurance claim. Through October 2, 1999, the Company has recovered
approximately $1.0 million of insurance proceeds and anticipates resolving its
insurance claim by December 31, 1999. The total amount of insurance recovery is
currently not determinable.
YEAR 2000 COMPLIANCE
The Company is currently working to address possible effects the Year 2000 issue
could have on its operations. This issue relates to date-sensitive software
that may recognize the year "00" as 1900 rather than the year 2000. None of the
Company's products contain software or embedded date related logic. Therefore,
the Company does not anticipate any readiness problems related to its products.
For both its IT systems and non-IT systems (operating equipment), the Company
believes it has either replaced or remediated substantially all hardware and
software affected by the Year 2000 issue. The Company is following the Year 2000
guidelines set forth by the Automotive Industry Action Group ("AIAG") and is
reporting Year 2000 status quarterly to the AIAG. The Company believes it has an
effective program in place to address possible Year 2000 problems in a timely
manner. At this time, the Company believes its "reasonably likely worst case
scenario" would be the failure of its third party business partners ("external
agents") to address Year 2000 issues.
The Company has gathered information about Year 2000 compliance from its
significant external agents and is not aware of any external agent with a Year
2000 issue that would materially impact the Company. However, the Company has no
means of ensuring external agents will be Year 2000 ready. If certain external
agents are unable to comply with the Year 2000 issue, it could have a material
adverse impact on the Company (the effect of such non-compliance is not
currently determinable). Current contingency plan focus is on thorough testing,
alternate supplier sources, manual backup for critical processes, and build-up
of safety stock in limited cases.
The total cost of the Company's Year 2000 project is estimated at $2.0 million
and is being funded through operating cash flows. To date, the Company has
incurred substantially all of these costs including approximately $1.5 million
capitalized for new systems and equipment. Certain capital expenditures were for
the ordinary replacement of systems and equipment not already Year 2000
compliant.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this section, the words
"anticipate", "believe", "estimate" and "expect" and similar expressions are
generally intended to identify forward-looking statements. Readers are cautioned
that any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to: (i)
general economic conditions in the markets in which the Company operates; (ii)
the degree to which the Company is leveraged; (iii) labor disputes involving the
Company or its significant customers; (iv) changes in practices and/or policies
of the Company's significant customers toward outsourcing automotive components
and systems; (v) the Company's reliance on major customers and selected models;
(vi) foreign currency and exchange fluctuations; (vii) factors affecting the
ability of the Company or its key suppliers to resolve Year 2000 issues in a
timely manner; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, including changes in foreign currency exchange rates and interest
rates. The Company believes there was no significant change in its market risk
factors since December 31, 1998.
12
PART II. OTHER INFORMATION
TALON AUTOMOTIVE GROUP, INC.
Item 1. Legal Proceedings: None
Item 2. Change in Securities: None
Item 3. Defaults Upon Senior Securities: 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:
(a) Exhibit 27 - Financial Data Schedule
(b) The Company filed no Reports on Form 8-K during the six months ended
October 2, 1999.
SIGNATURE
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TALON AUTOMOTIVE GROUP, INC.
By: /s/ David J. Woodward
----------------------------
David J. Woodward
Vice President of Finance, Chief Financial
Officer and Treasurer
Date: November 16, 1999
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule