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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission file number:
DECEMBER 31, 2002 1-12733
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TOWER AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1746238
(State of Incorporation) (I.R.S. Employer Identification
No.)
5211 CASCADE ROAD SE - SUITE 300 49546
GRAND RAPIDS, MICHIGAN (Zip Code)
(Address of Principal Executive
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(616) 802-1600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
As of February 28, 2003, 56,131,242 shares of Common Stock of the
Registrant were outstanding. As of June 28, 2002, the aggregate market value of
the Common Stock of the Registrant (based upon the last reported sale price of
the Common Stock at that date by the New York Stock Exchange), excluding shares
owned beneficially by affiliates, was approximately $890,771,000.
Information required by Items 10, 11, 12 and 13 of Part III of this Annual
Report on Form 10-K incorporates by reference information (to the extent
specific sections are referred to herein) from the Registrant's Proxy Statement
for its annual meeting to be held May 21, 2003 (the "2003 Proxy Statement").
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TOWER AUTOMOTIVE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Additional Item. Executive Officers.......................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 19
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 39
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 90
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 90
Item 11. Executive Compensation...................................... 90
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 90
Item 13. Certain Relationships and Related Transactions.............. 91
Item 14. Disclosure Controls and Procedures.......................... 91
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 91
i
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
BACKGROUND OF COMPANY
Tower Automotive, Inc. and its subsidiaries (collectively referred to as
the "Company" or "Tower Automotive") is a leading global designer and producer
of structural components and assemblies used by every major automotive original
equipment manufacturer ("OEM"), including Ford, DaimlerChrysler, General Motors
("GM"), Honda, Toyota, Renault/Nissan, Fiat, Hyundai/Kia, Mazda, BMW, Volkswagen
Group, and Isuzu. The Company's current products include automotive body
structural stampings and assemblies including exposed sheet metal ("Class A")
components, lower vehicle structural stampings and assemblies, suspension
components, modules and systems. The Company believes it is the largest
independent global supplier of structural components and assemblies to the
automotive market (based on net revenues).
The Company has over 60 manufacturing, product development, and
administrative facilities located in the United States, Canada, Mexico, Brazil,
India, Germany, Belgium, Poland, Slovakia, Italy, France, Spain, Japan, China
and Korea. The Company continues to broaden its geographic coverage and
strengthen its ability to supply products on a global basis as a result of its
acquisition strategy, targeted organic growth and disciplined manufacturing
efficiency and productivity initiatives.
Since its inception in April 1993, when the Company was formed to acquire
R. J. Tower Corporation, the Company's revenues have grown rapidly through
internal growth and acquisitions. Since 1993, the Company has successfully
completed 14 acquisitions and established six joint ventures in China, Mexico,
Korea, Japan and the United States. As a result of these acquisitions and
internal growth, the Company's revenues have increased from approximately $86
million in 1993 to approximately $2.8 billion in 2002. The Company's North
American average content per vehicle has increased from $6.23 in 1993 to $124.61
in 2002.
The Company operates in the large and highly fragmented structural segment
of the automotive supply industry, which has continued to undergo significant
consolidation. In order to lower costs and improve quality, OEMs are reducing
their supplier base by awarding sole-source contracts to full-service suppliers
who are able to supply larger portions of a vehicle on a global basis. OEMs'
criteria for supplier selection include not only cost, quality and
responsiveness, but also full-service design, engineering and program management
capabilities. OEMs are increasingly seeking suppliers capable of providing
complete systems or modules rather than suppliers who only provide separate
component parts. In addition, OEMs are increasingly requiring their suppliers to
have the capability to design and manufacture their products in multiple
geographic markets. As a full-service supplier with strong OEM relationships,
the Company expects to continue to benefit from these trends within the
structural segment of the automotive supply industry.
Approximately 75 percent of the Company's 2002 revenues were generated from
sales in North America. The Company supplies products for many of the most
popular car, light truck and sport utility models, including the Honda Accord
and Civic, Toyota Camry, Ford Taurus, Focus, Explorer, Ranger and F-Series
pickups, Chevrolet Silverado and GMC Sierra pickups, and Dodge Ram pickup.
Approximately 12 percent of the Company's 2002 revenues were generated from
sales in Europe and 12 percent in Asia. The remaining 1 percent of revenue was
generated from sales in South America.
The Company's acquisition and joint venture activity is summarized below:
Presskam. In November 2000, the Company completed the acquisition of
Strojarne Malacky, a.s. ("Presskam"), a manufacturer of upper body structural
assemblies for Volkswagen, Porsche and Skoda, located near Bratislava, Slovakia.
The Company paid total consideration of approximately $10 million for Presskam
and has used the investment to further support Volkswagen's Bratislava assembly
operation.
1
Yorozu. In September 2000, the Company acquired a 17 percent equity
interest in Yorozu Corporation ("Yorozu"), a supplier of suspension modules and
structural parts to the Asian and North American automotive markets, from Nissan
Motor Co. Ltd. ("Nissan"). Yorozu is based in Japan and is publicly traded on
the first tier of the Tokyo Stock Exchange. Its principal customers include
Nissan, Auto Alliance, GM, Ford, and Honda. The Company will pay Nissan
approximately $38 million over two and one half years for the 17 percent
interest. In conjunction with the original investment, the Company had an option
to increase its holdings in Yorozu to 30.8 percent through the purchase of
additional Yorozu shares. In February 2001, the Company exercised the right to
purchase the additional equity interest and will pay Nissan approximately $30
million over two and one half years for the additional 13.8 percent interest.
The remaining obligation to Nissan, as of December 31, 2002, was $18.3 million,
is recorded as indebtedness on the Company's balance sheet and will be paid in
full in the first quarter of 2003, pursuant to the joint venture agreement.
Caterina. In July 2000, the Company acquired the remaining 60 percent
equity interest in Metalurgica Caterina S.A. ("Caterina") for approximately $42
million. The initial 40 percent interest was acquired in March 1998 for
approximately $48 million. Caterina is a supplier of structural stampings and
assemblies to the Brazilian automotive market. This investment provided the
Company with a substantial manufacturing presence and added Volkswagen and
Mercedes-Benz as new customers in Brazil.
Algoods. In May 2000, the Company acquired all of the outstanding common
stock of Algoods, Inc. ("Algoods") for total consideration of approximately $33
million. Algoods manufactures aluminum heat shields and impact discs for the
North American automotive industry from aluminum mini-mill and manufacturing
operations located in Toronto, Canada. Its primary customer is DaimlerChrysler.
The acquisition of Algoods represents a significant investment in processing
technology for lightweight materials which complements the Company's existing
heat shield capabilities and provides opportunities for application in other
lightweight vehicle structural products.
DTA Development. In March 2000, the Company invested $2.1 million in the
formation of a product technology and development joint venture with Defiance
Testing & Engineering Services, Inc., a subsidiary of GenTek Inc. The joint
venture, DTA Development, located in Westland, Michigan, provides the Company
with product-testing services. Traditionally, the Company utilizes both internal
and external product testing extensively to validate complex systems during the
development stage of a program. This joint venture allows the Company to have
access to a broader and more cost efficient range of testing capabilities. DTA
Development blends the benefits of chassis product technology and development
activities with leading edge commercial testing services.
Dr. Meleghy. In January 2000, the Company acquired all of the outstanding
shares of Dr. Meleghy GmbH & Co. KG Werkzeugbau und Presswerk, Bergisch Gladbach
("Dr. Meleghy") for approximately $86 million. Dr. Meleghy designs and produces
structural stampings, exposed surface panels and modules for the European
automotive industry. Dr. Meleghy also designs and manufactures tools and dies
for use in its production and for the external market. Dr. Meleghy operates
three facilities in Germany and one facility in Poland. Dr. Meleghy's principal
customers include DaimlerChrysler, Audi, Volkswagen, Ford, Opel and BMW.
Products offered by Dr. Meleghy include body side panels, floor pan assemblies,
and miscellaneous structural stampings. Under the original purchase agreement,
the Company has paid an additional $29.6 million for this acquisition based on
Dr. Meleghy achieving certain operating targets in 2000.
Seojin. In October 1999, the Company invested $21 million for new shares
representing a 49 percent equity interest in Seojin Industrial Company Limited
("Seojin"). Seojin is a supplier of frames, modules and structural components to
the Korean automotive industry. In addition, the Company advanced $19 million to
Seojin in exchange for variable rate convertible bonds (the "Bonds") due October
30, 2009. The Bonds were unsecured and ranked equally with all other present and
future obligations of Seojin. Interest on the Bonds became payable annually
beginning October 30, 2000 and each October 30 thereafter until maturity. Under
the joint venture investment agreement, the Company had the right to convert the
Bonds into common stock of Seojin any time on or after October 30, 2000. The
conversion
2
rate was based upon a predetermined formula that increases the Company's equity
interest to approximately 66 percent. On October 31, 2000, the Company exercised
its right to convert the bonds into 17 percent of the common stock of Seojin.
Based upon the formula for conversion of the Seojin variable rate bonds, the
Company paid $1.2 million for the additional equity interest.
Active. In July 1999, the Company acquired all of the outstanding stock of
Active Tool Corporation and Active Products Corporation (collectively, "Active")
for total approximate consideration of $315 million. Active, which included five
facilities, designs and produces a variety of large unexposed structural
stampings, exposed surface panels, and modules to the North American automotive
industry. Active's main customers include DaimlerChrysler, Ford, GM, and Saturn.
Products offered by Active include body sides, pick-up box sides, fenders, floor
pan assemblies, door panels, pillars, and heat shields. The acquisition of
Active enhanced the Company's ability to manufacture large and complex
structures, as well as exposed surface panels.
IMAR and OSLAMT. In July 1998, the Company acquired IMAR s.r.l. ("IMAR")
and OSLAMT S.p.A. ("OSLAMT"). IMAR designs and manufactures structural parts and
assemblies from two facilities in Italy, primarily for Fiat. OSLAMT designs and
manufactures tools and assemblies for the automotive market from its facility in
Turin, Italy. The purchase price consisted of approximately $32 million cash
plus the assumption of approximately $17 million of indebtedness. Under the
acquisition agreement, the Company also paid an additional amount of $15
million, based on the achievement of certain operating targets.
Metalsa. In October 1997, the Company acquired a 40 percent equity
interest in Metalsa S. de R.L. ("Metalsa"). In addition, the Company has entered
into a technology sharing arrangement which will allow it to utilize the latest
available product and process technology. Metalsa is the largest supplier of
vehicle frames and structures in Mexico. The Company paid approximately $120
million for its equity interest with an additional amount of up to $45 million
payable based upon Metalsa's net earnings through December 31, 2000. The Company
paid approximately $26 million under the earnout provisions of the joint venture
investment agreement.
SIMES. In May 1997, the Company acquired Societa Industria Meccanica e
Stampaggio S.p.A. ("SIMES"), an Italian automotive parts manufacturer, for
approximately $51 million in cash, plus an additional $3 million based on
achievement by SIMES of certain operating targets following the acquisition. The
acquisition of SIMES (i) significantly expanded the Company's global
capabilities by providing the Company with a manufacturing presence in Europe,
(ii) added Fiat as a new customer and (iii) enhanced the Company's design and
engineering capabilities.
APC. In April 1997, the Company acquired Automotive Products Company
("APC") from A.O. Smith Corporation ("A.O. Smith") for approximately $700
million in cash. APC is a leading designer and producer of structural and
suspension components for the automotive, light truck and heavy truck markets.
The Company believes that the acquisition of APC provided it with several
strategic benefits, including: (i) expanded product offerings and modular
product opportunities; (ii) increased customer penetration within each of the
three major North American OEMs and within certain foreign OEMs with
manufacturing operations in North America; (iii) increased penetration in the
light truck segment and other key models; (iv) complementary new technology; (v)
opportunities to reduce costs and improve operational efficiency; and (vi) an
expanded presence in China, Japan and South America, which complemented the
Company's European initiatives to provide expanded global production
capabilities for both North American and foreign OEMs.
MSTI. In May 1996, the Company acquired MascoTech Stamping Technologies,
Inc. ("MSTI") from MascoTech, Inc. ("MascoTech") for approximately $79 million,
plus an additional $30 million in earnout payments as certain operating targets
were achieved by the MSTI facilities in the first three years following the
acquisition. The MSTI acquisition: (i) expanded the Company's product
capabilities into chassis and suspension components; (ii) provided chassis and
suspension technology as well as value-added processing technologies including
assembling, painting and welding; and (iii) increased the Company's content per
vehicle on key light truck and sport utility vehicles such as the Ford F-Series,
Explorer and
3
Windstar and the Dodge Ram and Dakota as well as on high volume passenger cars
such as the Ford Taurus/Sable.
Trylon. In January 1996, the Company acquired Trylon Corporation
("Trylon") from MascoTech for approximately $25 million in cash. The acquisition
of Trylon: (i) broadened the Company's product offerings to include small,
precision metal stampings and assemblies, which were previously outsourced to
third parties; (ii) established a relationship between the Company and GM; and
(iii) increased content on Ford models, primarily the Villager.
J.L. French. In October 1999, the Company loaned $30 million to J.L.
French Automotive Castings, Inc., ("J.L. French") in exchange for a convertible
subordinated promissory note due October 14, 2009 that bears interest at 7.5
percent annually. The Company had the option to convert any portion of the
outstanding principal of the note into Class A Common Stock of J.L. French at a
preset agreed upon conversion price. In November 2000, the Company exercised its
option to convert the note into 7,124 shares of Class A "1" Common Stock of J.L.
French, which has a 7.5 percent pay-in-kind dividend right. Additionally, in
November 2000, the Company invested $2.9 million in J.L. French through the
purchase of Class P Common Stock, which has an 8 percent pay-in-kind dividend
right. In May 2000, the Company invested $11.0 million in J.L. French through
the purchase of Class A Common Stock. During the fourth quarter of 2001, the
Company evaluated its investment in J.L. French and determined it was impaired
and therefore recorded a charge of $46.3 million to write off the entire
investment in J.L. French. At December 31, 2001, the Company had an ownership
interest of approximately 16 percent in J.L. French. J.L. French's capital
structure was reorganized in December 2002. The Company elected not to
participate in a new class of stock that now controls J.L. French and as a
result, the Company effectively no longer has a substantive ownership interest
in J.L. French.
Roanoke Heavy Truck Business. In December 2000, the Company sold its
Roanoke, Virginia heavy truck rail manufacturing business (the "Roanoke Heavy
Truck Business") to its joint venture partner, Metalsa, for net proceeds of
approximately $55 million, which approximated the book value of the net assets
sold, plus an earnout of up to $30 million based on achieving certain profit
levels over the next three years. The net proceeds were used to repay
outstanding indebtedness under the revolving credit facility.
Hinge Business. In August 1998, the Company sold its hinge business to
Dura Automotive Systems, Inc. for net proceeds of approximately $37 million
which approximated the book value of the net assets sold. The net proceeds were
used to repay outstanding indebtedness under the revolving credit facility.
BUSINESS STRATEGY
The Company's strategy is to capitalize upon its position as the largest
independent global supplier of automotive structural components and assemblies
in order to take advantage of the opportunities arising from the consolidation,
globalization and sourcing trends in the automotive industry. The ultimate goal
of this strategy is to maximize return on invested capital and create long-term
value for shareholders. Key elements of the Company's operating and growth
strategies are outlined below:
Operating Strategy:
Continue to Optimize Manufacturing Efficiency and Quality. In response to
OEMs' increasingly stringent production specifications, the Company has
implemented manufacturing practices designed to maximize product quality and
timeliness of delivery to reduce waste and enhance efficiency. The Company has
continued to upgrade its manufacturing equipment and processes through selective
investment in new equipment, maintenance of existing equipment and efficient
utilization of manufacturing engineering personnel. In order to maximize return
on invested capital, the Company increasingly employs flexible manufacturing
processes that allow it to maximize equipment utilization in meeting customer
expectations for product quality and timely delivery. Consistent with this
strategy, the Company, where appropriate, outsources the production of select
commodity components to Tier II manufacturers, as well as seeks to provide
administrative services to these manufacturers to maximize supply chain
efficiency and return on invested capital. The Company monitors existing
manufacturing capacity relative to expected capacity,
4
which is determined primarily by current and expected business backlog and by
opportunities to outsource commodity operations to Tier II manufacturers. As a
result, beginning in the second half of 2000, the Company began restructuring
its operations to reduce excess manufacturing capacity and improve the
efficiency of its operations.
Further Enhance Global Presence. The Company offers manufacturing and
support services to its customers on a global basis through a combination of
international wholly-owned subsidiaries and by entering into joint ventures and
partnerships with foreign suppliers. Outside of North America, the Company has
technical/customer service centers in Yokohama, Japan; Turin, Italy; Hyderabad,
India; Bergisch-Gladbach, Germany; Seoul, Korea; Changchun, China and Sao Paulo,
Brazil. The Company believes that these global, technical, and manufacturing
capabilities have led to the award of several major new programs to the Company.
Offer Technical Design, Engineering and Program Management
Capabilities. The Company continues to build its competitive advantage through
investment in product development, advanced engineering and program management.
As a result of this investment, and of consolidation among suppliers of
automotive structural components and assemblies, the Company believes that it is
one of only a select group of suppliers able to provide automotive OEMs with
full-service technical design, engineering and program management capabilities
with respect to the entire body structure of a vehicle on a global basis. The
Company works with OEMs throughout the product development process from concept
vehicle and prototype development through the design and implementation of
manufacturing processes to provide full-service capabilities to its customers.
In some cases, the Company places design engineers at customer facilities to
coordinate its product design efforts with those of its OEM customers.
Maintain Participative and Incentive-Based Culture. The Company's approach
to managing its manufacturing facilities encourages decision making and
colleague participation in areas such as manufacturing processes and customer
service. To increase colleague productivity, the Company utilizes incentive
programs for all salaried and hourly colleagues that provide incentives for
colleagues who take advantage of continuous improvement programs and who provide
cost savings ideas.
Growth Strategy:
The Company's growth strategy comprises two fundamental elements: increased
organic growth and the pursuit of strategic acquisitions, alliances and
partnerships.
Increase Organic Growth. The Company actively pursues increased organic
growth from both new and replacement vehicle programs. Specifically, it is the
Company's belief that the following competitive strengths have played, and will
continue to play, an important role in achieving its organic growth objectives:
- Strong customer relationships with key domestic and foreign automotive
OEMs;
- Scale position as the largest independent supplier of automotive
structural components and assemblies;
- Global engineering and manufacturing presence.
As a result of these competitive strengths, and the efforts to increase
organic growth, the Company was awarded programs during the past two years that,
based on independent estimates of expected program volumes and current
expectations of program pricing, represent more than $1.4 billion in revenues.
These programs are scheduled to launch over the next three years and be in full
production by the end of 2005. These programs will help to further the
diversification of the Company's customer base. The proportion of revenues from
Ford and DaimlerChrysler, the Company's two largest customers, has decreased
from 68 percent in 2000 to 60 percent in 2001 and 2002. Of the $1.4 billion in
revenues represented by the new program awards described above, 42 percent is
expected to be derived from Ford/Volvo and DaimlerChrysler, 18 percent from
Nissan, and the remaining 40 percent from other customers including Honda,
Toyota, GM, VW Group, Hyundai/Kia, Fiat, and BMW.
5
Pursue Strategic Acquisitions, Alliances and Partnerships. Strategic
acquisitions, alliances and partnerships have contributed significantly to the
Company's growth. The Company continues to believe that consolidation in the
automotive supply industry will provide further attractive opportunities to
either acquire, or purchase a majority or minority ownership interest in
companies that complement its existing business. The Company seeks to make
acquisitions that:
- Provide a targeted return on invested capital;
- Add new customers;
- Broaden the Company's geographic coverage;
- Facilitate outsourcing opportunities from the in-house operations of new
and existing customers; and
- Provide additional product, manufacturing and technical capabilities.
A particular focus for the Company has been and will continue to be to
pursue acquisitions or develop strategic partnerships and alliances that
strengthen the Company's ability to supply its products on a global basis.
Consistent with this strategy, the Company has formed, or is in the process of
forming, strategic alliances with other suppliers throughout the world,
including those located in Europe, Asia and South America. For example, the
Company has majority-owned operations in Asia through its 66 percent interest in
Seojin in Korea and its 60 percent interest in Tower Golden Ring, which
manufactures structural components in China. The Company also has equity
interests in Mexico through its 40 percent interest in Metalsa and in Japan
through its 30.8 percent interest in Yorozu. Increased international sales are
intended to mitigate the effects of cyclical downturns in a given geographic
region and further diversify the Company's OEM customer base.
INDUSTRY TRENDS
The Company's performance and growth is directly related to certain trends
within the automotive market, including the consolidation of the component
supply industry. It is also directly related to automotive production, which is
cyclical and depends on general economic conditions and consumer confidence.
Continuation of Supplier Consolidation. In order to lower costs and
improve quality, OEMs have continued to reduce their supply base by awarding
sole-source contracts to suppliers who are able to supply larger segments of a
vehicle. OEMs' criteria for supplier selection include not only cost, quality
and responsiveness, but also design, engineering and program management
capabilities. As a result, over the past decade, the automotive supply industry
has been undergoing significant consolidation. Furthermore, in 2001 and in 2002,
a number of suppliers experienced financial difficulties, which may result in
further consolidation activity as the operations of these suppliers are acquired
and rationalized by larger, more capable suppliers. This environment provides an
opportunity to grow both organically, by obtaining business previously provided
by these struggling suppliers, and through acquisition, by acquiring suppliers
that further enhance product, manufacturing and service capabilities. OEMs
rigorously evaluate suppliers on the basis of product quality, cost control,
reliability of delivery, product design capability, financial strength, new
technology implementation, quality and condition of facilities and overall
management. Suppliers that obtain superior ratings are considered for sourcing
new business. Although these new OEM policies have already resulted in
significant consolidation of component suppliers in certain segments in North
America, the Company believes that consolidation within the structural and
suspension component segments of the automotive industry outside of North
America will continue to provide attractive opportunities to acquire or partner
with companies that complement its existing business.
Growth in Emerging Markets. Countries and regions such as China, Korea,
Thailand, India, Mexico and Eastern Europe are expected to experience
significant growth in vehicle demand over the next ten years. OEMs are
positioning themselves to reach these emerging markets in a cost-effective
manner. In order to best meet these OEM requirements, the Company has over 24
manufacturing facilities outside the
6
U.S., including locations in Canada, Brazil, Germany, Italy, Belgium, Poland,
Slovakia, Mexico, Korea, and China. In addition, the Company's
alliance/partnership relationships provide access to new geographic markets and
customers. A recent trend is the consolidation of platforms across OEMs through
joint development efforts. GM and Fiat have combined platforms across the two
companies. DaimlerChrysler with Mitsubishi, Ford with Mazda, and Renault with
Nissan have combined platforms as well. OEMs have created common component sets
across platforms in areas such as powertrain, axles, suspensions, and other
areas, thereby reducing the degree of product differentiation.
System/Modular Sourcing. OEMs are increasingly seeking suppliers capable
of providing complete systems or modules. A system is a group of components,
which may be dispersed throughout the vehicle, yet operate together to provide a
specific engineering function. Modules, on the other hand, consist of sub-
assemblies at a specific location in the vehicle, incorporating components from
various functional systems, which are assembled and shipped to the OEM ready for
installation in a vehicle as a unit. By outsourcing complete systems or modules,
OEMs are able to reduce their costs associated with the design and integration
of different components and improve quality by enabling their suppliers to
assemble and test major portions of the vehicle prior to production. The Company
has capitalized on the system/modular sourcing trend among OEMs by offering
customers higher value-added supply capabilities through a focus on the
production of assemblies consisting of multiple component parts that are welded
or otherwise fastened together by the Company.
OEM Consolidation. The recent acquisition and consolidation activity among
select OEMs has not led to the disadvantage of the smaller OEMs in the industry
as previously predicted. Rather, smaller OEMs such as Peugeot, Honda,
Hyundai/Kia, and BMW have strengthened their positions in the industry and their
financial performance, while some of the larger OEMs have struggled to
successfully integrate acquisitions. The Company's global capabilities have
allowed it to continue to serve as a valuable supplier to those smaller
producers.
PRODUCTS
The Company produces a broad range of structural components and assemblies,
many of which are critical to the structural integrity of a vehicle. The
Company's products generally can be classified into the following categories:
body structures and assemblies; lower vehicle structures; suspension and
powertrain modules; and suspension components. A brief summary of each of the
Company's principal product categories follows:
PRODUCT CATEGORY/DESCRIPTION
BODY STRUCTURES AND ASSEMBLIES:
Products that form the basic upper body structure of the vehicle and
include large metal stampings such as body pillars, roof rails, side sills,
parcel shelves and intrusion beams. This category also includes Class A surfaces
and assemblies. Class A surfaces include exposed sheet metal components such as
body sides, pick-up box sides, door panels and fenders.
LOWER VEHICLE STRUCTURES:
Products that form the basic lower body structure of the vehicle and
include heavy gauge metal stampings from both traditional and hydroforming
methods, such as pickup truck and SUV full frames, automotive engine and rear
suspension cradles, floor pan components and cross members. Critical to the
strength and safety of vehicles, these products carry the load of the vehicle
and provide crash integrity.
7
SUSPENSION AND POWERTRAIN MODULES:
Products include axle assemblies, which consist of stamped metal trailing
axles, assembled brake shoes, hoses and tie rods, and front and rear structural
suspension modules/systems. These modules/systems consist of control arms,
suspension links, value-added assemblies and powertrain modules.
SUSPENSION COMPONENTS:
Products include stamped, formed and welded products, such as control arms,
suspension links, track bars, spring and shock towers, and trailing axles. These
suspension components are critical to the ride, handling and noise
characteristics of a vehicle.
OTHER:
The Company manufactures a variety of other products, including heat
shields and other precision stampings, for its OEM customers.
The following table summarizes the approximate composition by product
category of the Company's global revenues for the last two fiscal years:
YEAR ENDED
DECEMBER 31,
------------
PRODUCT CATEGORY 2002 2001
---------------- ---- ----
Lower vehicle structures.................................... 40% 36%
Body structures and assemblies (including Class A
surfaces)................................................. 38 39
Suspension and powertrain modules........................... 11 15
Suspension components....................................... 8 8
Other....................................................... 3 2
--- ---
Total.................................................. 100% 100%
=== ===
CUSTOMERS AND MARKETING
The North American automotive manufacturing market is dominated by GM, Ford
and DaimlerChrysler, with the Japanese and European OEMs representing
approximately 23 percent of production in this market in 2002 and 2001. The
Company currently supplies its products primarily to Ford, DaimlerChrysler, GM,
Honda, Toyota, and Nissan in North America. As a result of past growth
strategies, the Company has further expanded its global presence and has
increased penetration into certain existing customers and added new customers
such as Fiat, BMW, Volkswagen Group, Nissan, and Hyundai/Kia.
OEMs typically award contracts that cover parts to be supplied for a
particular vehicle model or platform. Such contracts range from one year to over
the life of the model, which is generally three to ten years and do not require
the purchase of any minimum number of parts by the OEM. The Company also
competes for new business to supply parts for successor models and, therefore,
is subject to the risk that the OEM will not select the Company to produce parts
on a successor model. The Company supplies parts for a broad cross-section of
both new and mature models, thereby reducing its reliance on any particular
model.
8
Following is a summary of the global composition of significant customers
for the last two fiscal years:
YEAR ENDED
DECEMBER 31,
------------
CUSTOMER 2002 2001
-------- ---- ----
Ford........................................................ 38% 35%
DaimlerChrysler............................................. 22 25
General Motors.............................................. 8 4
Hyundai/Kia................................................. 7 12
Volkswagen Group............................................ 5 4
Fiat........................................................ 4 4
Toyota...................................................... 3 2
Honda....................................................... 2 3
BMW......................................................... 1 --
Nissan...................................................... 1 1
Other....................................................... 9 10
--- ---
Total.................................................. 100% 100%
=== ===
Below is a summary of the Company's sales by geographic region for the last
two fiscal years:
YEAR ENDED
DECEMBER 31,
-------------
GEOGRAPHIC CATEGORY 2002 2001
------------------- ----- ----
U.S. and Canada............................................. 75% 72%
Asia........................................................ 12 15
Europe...................................................... 12 11
Mexico and South America.................................... 1 2
--- ---
Total.................................................. 100% 100%
=== ===
The following table presents an overview of the major models for which the
Company supplies products:
VEHICLE MANUFACTURER CAR MODELS TRUCK MODELS
-------------------- ---------- ------------
Ford........................... Taurus/Sable, Mustang, Focus, Explorer/Mountaineer, Aviator,
Escort, Crown Victoria/Grand Explorer Sport Trac, Explorer
Marquis, Cougar, Continental, Sport, Econoline, Villager,
Lincoln LS, Towncar, Thunderbird Windstar, Escape, Expedition,
Navigator, Excursion, Ranger,
F-Series LD & HD, Blackwood,
Transit, Medium Duty Trucks
DaimlerChrysler................ Concorde/Intrepid/300M, Neon, Ram Pick-up, Ram Van, Dakota,
Stratus/Sebring, Sebring Durango, Voyager/Caravan/ Town &
Convertible, Smart Country, Jeep Wrangler, Jeep
Liberty, Grand Cherokee, PT
Cruiser
Mercedes....................... A-Class, C-Class, E-Class, SLK, Atego, Actros, Sprinter
CLK
General Motors................. Cadillac CTS Silverado/Sierra, Astro/Safari,
Blazer, S10-Pickup, Sonoma,
Medium Duty Trucks
Saturn......................... LS/LW Saturn VUE
9
VEHICLE MANUFACTURER CAR MODELS TRUCK MODELS
-------------------- ---------- ------------
Opel........................... Omega, Astra, Agila, Corsa,
Vectra, Zafira, Meriva
Honda.......................... Accord, Civic/Acura EL, Acura Odyssey, Passport, Acura MDX,
TL/CL Element
Mazda.......................... Mazda 626, Atenza Tribute, B-Series Pickup
Toyota......................... Avalon, Camry, Solara, Corolla, Sienna, Tacoma, Tundra, Sequoia,
Vios, Xiali Matrix, Vibe
Renault........................ Clio, Twingo
Nissan......................... Sentra, Micra Quest, Xterra, Frontier
Isuzu.......................... Rodeo, Amigo, Axiom
VW............................. Passat, Golf/Bora, GOL, Polo, Touareg, Transporter/Microbus
Kombi, Santana
Audi........................... A3, A4, A6, Cabrio
Skoda.......................... Felicia/Fabia, Octavia
BMW............................ 3 Series, 5 Series X5
Fiat........................... Marea, Punto, Bravo/Brava, Ducato
Palio, Panda, Stilo, Multipla,
Uno
Alfa Romeo..................... 147, 156, 166, GTV, Spider
Lancia......................... Lybra, Thesis, Y
Porsche........................ Cayenne
Land Rover..................... Range Rover
Jaguar......................... XJ, S-Type
Suzuki......................... Wagon R
Hyundai........................ Eqquus Teracan, Galloper, Starex,
Libero, Grace, SantaFe
Kia............................ Spectra, Rio, Optima, Sportage, Carens, Retona,
Enterprise, Potentia Pregio, Carnival, Frontier,
Sorento
Most of the parts the Company produces have a lead time of two to five
years from product development to production. See "Design and Engineering
Support." The selling prices of these products are generally negotiated between
the Company and its customers.
Sales of the Company's products to OEMs are made directly by the sales and
engineering teams, located at its technical/customer service centers in Novi,
Michigan; Rochester Hills, Michigan; Yokohama, Japan; Turin, Italy;
Bergisch-Gladbach, Germany; Sao Paolo, Brazil; Seoul, Korea; Changchun, China
and Hyderabad, India. Through its technical centers, the Company services its
OEM customers and manages its continuing programs of product design improvement
and development. The Company periodically places engineering staff at various
customer facilities to facilitate the development of new programs.
The Company's sales and marketing efforts are designed to create overall
awareness of its engineering, program management, manufacturing and assembly
expertise to acquire new business and to provide ongoing customer service. The
sales group is organized into customer-dedicated teams within product groups.
From time to time, the Company also participates in industry and customer
specific trade and technical shows.
DESIGN AND ENGINEERING SUPPORT
The Company strives to maintain a technological advantage through targeted
investment in product development and advanced engineering capabilities. The
Company's manufacturing engineering capabilities enable it to design and build
high-quality and efficient manufacturing systems, processes and equipment
10
and improve its production processes and equipment continuously. The Company's
manufacturing engineers are located at each of its manufacturing facilities. The
Company's engineering staff's responsibilities range from research and
development, advanced product development, product design, testing and initial
prototype development, to the design and implementation of manufacturing
processes.
Because structural parts must be designed at an early stage in the
development of new vehicles or model revisions, the Company is given the
opportunity to utilize its product and process engineering resources early in
the vehicle planning process. Advanced development engineering resources create
original engineering designs, computer-aided designs, feasibility studies,
working prototypes and testing programs to meet customer specifications. The
Company's Hyderabad, India technical center allows for 24 hour engineering
globally, thereby optimizing product design and analysis capabilities, leading
to reduced development costs.
MANUFACTURING
The Company's manufacturing operations consist primarily of stamping and
welding operations, system and modular assembly operations, roll-forming
operations, hydroforming operations, associated coating and other ancillary
operations.
Stamping involves passing metal through dies in a stamping press to form
the metal into three-dimensional parts. The Company produces stamped parts using
precision single-stage, progressive and transfer presses, ranging in size from
150 to 4,000 tons, which perform multiple functions to convert raw material into
a finished product. The Company continually invests in its press technology to
increase flexibility, improve safety and minimize die changeover time.
Stampings that are to be used in assemblies are fed into cell-oriented
assembly operations that produce complex, value-added assemblies through the
combination of multiple parts that are welded or fastened together. The
Company's assembly operations are performed on either dedicated, high-volume
welding/fastening machines or on flexible-cell oriented robotic lines for units
with lower volume production runs. The assembly machines attach additional
parts, fixtures or stampings to the original metal stampings. In addition to
standard production capabilities, the Company's assembly machines are also able
to perform various statistical control functions and identify improper welds and
attachments. The Company works continuously with manufacturers of fixed/robotic
welding systems to develop faster, more flexible machinery. Several of the
Company's welding systems were designed by the Company.
The products manufactured by the Company use various grades and thicknesses
of steel and aluminum, including high strength hot and cold rolled, galvanized,
organically coated, stainless and aluminized steel. The Company also produces
exposed sheet metal components, such as exterior body panels. See "Suppliers and
Raw Materials."
OEMs have established quality rating systems involving rigorous inspections
of suppliers' facilities and operations. OEMs' factory rating programs provide a
quantitative measure of a company's success in improving the quality of its
operations. The Company has received quality awards from Ford (Q1) and
DaimlerChrysler (Pentastar). The automotive industry has adopted a quality
rating system known as QS-9000. All of the Company's existing operating
facilities in North America and around the world have received QS-9000
certification in compliance with the automotive industry requirements.
COMPETITION
The Company operates in a highly competitive, fragmented market segment of
the automotive supply industry, with a limited number of competitors generating
revenues in excess of $200 million. The number of the Company's competitors has
decreased in recent years and is expected to continue to decrease due to
supplier consolidation. The Company's major competitors include Thyssen-Budd, a
subsidiary of Thyssen-Krupp AG; Magna International, Inc. ("Magna"); Dana
Corporation; Benteler Automotive; and divisions of OEMs with internal stamping
and assembly operations, all of which have substantial financial resources. The
Company competes with other competitors in various segments of its product lines
and in various
11
geographic markets. The Company views Magna as its strongest competitor across
most of the Company's product lines; however, the Company believes that no
single competitor can provide the same range of products and capabilities as the
Company across as broad of a geographic range.
The Company principally competes for new business both at the beginning of
the development of new models and upon the redesign of existing models. New
model development generally begins two to five years before the marketing of
such models to the public. Once a supplier has been designated to supply parts
for a new program, an OEM usually will continue to purchase those parts from the
designated producer for the life of the program, although not necessarily for a
redesign. Competitive factors in the market for the Company's products include
product quality and reliability, cost and timely delivery, technical expertise
and development capability, new product innovation and customer service. In
addition, there is substantial and continuing pressure at the OEMs to reduce
costs, including the cost of products purchased from outside suppliers such as
the Company. Historically, the Company has been able to generate sufficient
production cost savings to offset these price reductions.
SUPPLIERS AND RAW MATERIALS
The primary raw material used to produce the majority of the Company's
products is steel. The Company purchases hot and cold rolled, galvanized,
organically coated, stainless and aluminized steel from a variety of suppliers.
The Company employs just-in-time manufacturing and sourcing systems enabling it
to meet customer requirements for faster deliveries while minimizing its need to
carry significant inventory levels. The Company has not experienced any
significant shortages of raw materials and normally does not carry inventories
of raw materials or finished products in excess of those reasonably required to
meet production and shipping schedules. Raw material costs represented
approximately 58 percent and 56 percent of the Company's revenues in 2002 and
2001, respectively.
Ford, Honda and DaimlerChrysler currently purchase all of the steel used by
the Company for their models directly from steel producers. As a result, the
Company has minimal exposure to changes in steel prices for parts supplied to
Ford, Honda and DaimlerChrysler, which collectively represented 62 percent and
63 percent of the Company's revenues in 2002 and 2001, respectively.
The Company expects that the content level of metal in cars and light
trucks will remain constant or increase slightly due to the trend toward
increased vehicle size and a greater emphasis on metal recycling. Although the
search for improved fuel economy and weight reduction has resulted in attempts
to reduce the sheet metal content of light vehicles, an efficient,
cost-effective substitute for steel used in the Company's structural products
has not been found. While various polymers have been used recently for fenders,
hoods and decks, such products do not have the inherent strength or structural
integrity on a cost-effective basis to be used for structural components. The
Company is involved in ongoing evaluations of the potential to use aluminum and
specialty steel in its products.
Other raw materials purchased by the Company include dies, fasteners,
tubing, springs, rivets and rubber products, all of which are available from
numerous sources.
COLLEAGUES
As of December 31, 2002, the Company had over 12,000 colleagues worldwide,
of whom approximately 4,800 are covered under collective bargaining agreements.
These collective bargaining agreements expire between 2003 and 2007. The Company
believes that its future success will depend in part on its ability to continue
to recruit, retain and motivate qualified personnel at all levels of the
Company. The Company has instituted a large number of colleague incentive
programs to increase colleague morale and expand the colleagues' participation
in the Company's business. Since its inception in 1993, the Company has not
experienced any significant work stoppages and considers its relations with its
colleagues to be good.
12
ITEM 2. PROPERTIES
FACILITIES
The following table provides information regarding Tower Automotive's
principal facilities. The Company maintains several manufacturing facilities
located in close proximity to many of the high-volume vehicle assembly plants of
its customers. The Company's facilities are geographically located in such a way
as to enable the Company to optimize its management and logistical capabilities
on a regional basis.
SQUARE TYPE OF
LOCATION FOOTAGE INTEREST DESCRIPTION OF USE
-------- --------- --------- --------------------------------
Milwaukee, Wisconsin................. 3,118,000 Owned Manufacturing
Elkton, Michigan..................... 1,100,000 Owned Manufacturing
Caserta, Italy (2 locations)......... 751,000 Owned Manufacturing
Milan, Tennessee..................... 531,000 Leased Manufacturing
Turin, Italy (4 locations)........... 512,000 Mixed Manufacturing/Office
Granite City, Illinois............... 458,000 Leased Manufacturing
Malacky, Slovakia.................... 453,600 Owned Manufacturing
Zwickau, Germany..................... 409,000 Owned Manufacturing
Clinton Township, Michigan........... 385,000 Leased Manufacturing
Gent, Belgium........................ 376,000 Owned Manufacturing
Sebewaing, Michigan.................. 366,000 Owned Manufacturing
Toronto, Ontario..................... 329,400 Owned Manufacturing/Office
Bardstown, Kentucky.................. 300,000 Owned Manufacturing
Plymouth, Michigan................... 294,000 Leased Manufacturing
Corydon, Indiana..................... 290,000 Leased Manufacturing
Lansing, Michigan.................... 250,000 Leased Manufacturing
Hwasung kun, Korea................... 219,000 Owned (2) Manufacturing
Madison, Mississippi................. 200,000 Leased Manufacturing
Kunpo City, Korea.................... 200,000 Owned (2) Manufacturing
Sao Paolo, Brazil.................... 193,000 Owned Manufacturing/Office
Changchun, China..................... 179,200 Leased (1) Manufacturing
Bluffton, Ohio....................... 172,000 Leased Manufacturing
Traverse City, Michigan.............. 170,000 Owned Manufacturing
Greenville, Michigan................. 156,000 Owned Manufacturing/Office
Auburn, Indiana...................... 132,000 Leased Manufacturing/Office
Kendallville, Indiana................ 131,000 Leased Manufacturing
Bellevue, Ohio....................... 126,000 Owned Manufacturing
Bergisch-Gladbach, Germany........... 102,000 Owned Manufacturing/Engineering/Office
Shiheung City, Korea................. 93,000 Owned (2) Manufacturing
Rochester Hills, Michigan............ 89,000 Leased Office/Engineering/Design
Novi, Michigan....................... 86,000 Leased Engineering/Design/Sales
Chemnitz, Germany.................... 76,000 Leased Manufacturing
Barrie, Ontario...................... 72,000 Leased Manufacturing
Belcamp, Maryland.................... 70,000 Owned Manufacturing
Kwangju City, Korea.................. 64,000 Owned (2) Manufacturing
Minas Gerais, Brazil................. 59,000 Owned Manufacturing
Upper Sandusky, Ohio................. 56,000 Leased Manufacturing
13
SQUARE TYPE OF
LOCATION FOOTAGE INTEREST DESCRIPTION OF USE
-------- --------- --------- --------------------------------
Ansan City, Korea.................... 56,000 Owned (2) Manufacturing
Buchholz, Germany.................... 54,000 Owned Manufacturing
Opole, Poland........................ 54,000 Owned Manufacturing
Youngchun City, Korea................ 50,000 Owned (2) Manufacturing
Bowling Green, Kentucky.............. 46,000 Owned Manufacturing
Fenton, Missouri..................... 41,000 Leased Warehouse
Ulsan City, Korea.................... 29,000 Owned (2) Manufacturing
Grand Rapids, Michigan (2
locations)......................... 26,000 Leased Corporate Headquarters
Tokod, Hungary....................... 22,000 Owned Manufacturing
Hyderabad, India..................... 2,800 Leased Engineering/Design
Yokohama, Japan...................... 1,000 Leased Sales
---------------
(1) Facility is leased by a joint venture in which the Company holds a 60
percent equity interest.
(2) Facility is owned by a joint venture in which the Company holds a 66 percent
equity interest.
Management believes that substantially all of the Company's property and
equipment is in good condition. In order to increase efficiency, the Company
expects to continue to make capital expenditures for equipment upgrades at its
facilities as necessary.
The Company's facilities were specifically designed for the manufacturing
of the Company's products. The utilization and capacity of such facilities are
dependent upon the mix of products being produced by the Company.
The Company's principal executive offices are located at 5211 Cascade Road
SE, Suite 300, Grand Rapids, Michigan 49546, and its telephone number is (616)
802-1600. The Company makes available, free of charge through its internet
website (www.towerautomotive.com) annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports,
filed with the Securities Exchange Commission ("SEC"), as soon as reasonably
practicable after they are filed or furnished to the SEC.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material lawsuits. The Company
believes it maintains adequate insurance, including product liability coverage.
The Company historically has not been required to pay any material liability
claims.
ENVIRONMENTAL MATTERS
The Company is subject to foreign, federal, state and local laws and
regulations governing the protection of the environment and occupational health
and safety, including laws regulating the generation, storage, handling, use and
transportation of hazardous materials and laws regulating the health and safety
of its colleagues. The Company is also required to obtain permits from
governmental authorities for certain operations. The Company has taken steps to
assist in the compliance with the numerous and sometimes complex regulations,
such as holding environmental and safety training for representatives from its
domestic facilities. The Company is also in the process of achieving ISO 14001
registration for its facilities. The Company conducts third party or internal
audits for environmental, health, and safety compliance and uses outside
expertise to assist in the filing of permits and reports when required. The
Company does not expect that its capital expenditures for environmental controls
will be material for the current or succeeding fiscal year.
With respect to laws imposing liability for the cleanup of contaminated
property to which the Company may have sent wastes for disposal, the Company is
not currently aware of any significant
14
exposure. The Company is currently in the process of investigating contamination
at its Elkton, Michigan facility, and at a nearby waste disposal site that was
allegedly used for the disposal of wastes from the Elkton facility in the 1970s.
These investigations are being conducted under the oversight of the Michigan
Department of Environmental Quality ("MDEQ"). Because the MDEQ has not yet
approved a Remedial Action Plan for these sites, the cost to remediate the sites
can only be estimated, however it is not expected to exceed the $6.4 million in
an escrow established as part of a prior acquisition to indemnify the Company
for the cleanup of these sites.
The Company acquired Algoods, Inc. in 2000, with a facility in Toronto,
Ontario. Prior operations had resulted in contamination at the facility. In
2000, the Company had preliminarily estimated that the present value of its
costs to address these issues at $3.5 million. Alcan Aluminum, Ltd., a former
owner of the property, is in the process of investigating and remediating this
contamination. After 2008, the Company has agreed to be responsible for
continued operation of the remediation system for the on-site contamination.
Alcan has agreed to maintain responsibility for off-site contamination.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Stockholders during the fourth
quarter of 2002.
ADDITIONAL ITEM -- EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 2002:
NAME AGE POSITION
---- --- --------
Dugald K. Campbell........................ 56 President, Chief Executive Officer and Director
James W. Arnold........................... 50 Vice President
Anthony A. Barone......................... 53 Vice President and Assistant Secretary
Richard S. Burgess........................ 48 Vice President
Kathy J. Johnston......................... 45 Vice President
Vincent Pairet............................ 39 Vice President
Tommy G. Pitser........................... 55 Vice President
Ernest T. Thomas.......................... 48 Chief Financial Officer and Treasurer
Jeffrey W. Wilson......................... 42 Vice President
Antonio R. Zarate......................... 58 Vice President
DUGALD K. CAMPBELL has served as President, Chief Executive Officer and a
Director of the Company since December 1993. From 1991 to 1993, Mr. Campbell
served as a consultant to Hidden Creek Industries, a private industrial
management company. From 1988 to 1991, he served as Vice President and General
Manager of the Sensor Systems Division of Siemens Automotive, a manufacturer of
engine management systems and components. From 1972 to 1988, he held various
executive, engineering and marketing positions with Allied Automotive, a
manufacturer of vehicle systems and components and a subsidiary of AlliedSignal,
Inc.
JAMES W. ARNOLD has served as Vice President of the Company since May 2000,
with current responsibility for the Company's North American strategy. Mr.
Arnold joined the Company in 1998 and previously had responsibility for the
Company's Asian strategy. From 1977 to 1998, Mr. Arnold held a variety of
manufacturing, sales, marketing and Asian general management positions at
AlliedSignal.
ANTHONY A. BARONE has served as Vice President of the Company since May
1995, with primary responsibility for business planning and development of the
Company. From May 1995 to October 2002, Mr. Barone was also the Chief Financial
Officer of the Company. From 1984 to 1995, Mr. Barone served as Chief Financial
Officer of O'Sullivan Corporation, a manufacturer of interior trim components
for the automotive industry.
15
RICHARD S. BURGESS has served as Vice President of the Company with
responsibility for colleague growth and development since January 1996. From
June 1994 to January 1996, Mr. Burgess served as the colleague growth and
development leader during the start-up of the Bardstown, Kentucky operation.
From October 1991 to June 1994, Mr. Burgess filled various roles in colleague
growth and development of R.J. Tower Corporation.
KATHY J. JOHNSTON has served as Vice President of the Company since June
2000 with responsibility for enterprise strategy and commercial development.
From 1997 to 2000, Ms. Johnston served as Vice President Planning and Business
Development at TRW Automotive in Cleveland, Ohio. From 1981 to 1997, Ms.
Johnston served in finance, sales and marketing, purchasing, operations and
strategic planning roles at TRW's vehicle safety systems group in Detroit,
Michigan.
VINCENT PAIRET has served as Vice President of the Company since September
2002 with responsibility for the Company's Asian strategy. From 2000 to 2002,
Mr. Pairet was based in Tokyo, Japan, as President of INERGY Automotive Systems,
a joint venture between Solvay and Plastic-Omnium. From 1998 to 2000, Mr. Pairet
was President of Solvay Automotive Asia and from 1987 to 1998, Mr. Pairet held
various general management, marketing, and business development positions within
the Solvay Group in Belgium and the United States.
TOMMY G. PITSER has served as Vice President of the Company since 1996,
with current responsibility for the Company's European strategy. Mr. Pitser
previously had responsibility for the Company's South American strategy and its
joint venture investment in China and operations in Barrie, Ontario; Plymouth,
Michigan; Yokohama, Japan; Romulus, Michigan; Manchester, Michigan and Novi,
Michigan, since May 1996. Prior to joining the Company, Mr. Pitser served in
various sales and marketing capacities at MSTI. Prior to joining MSTI, Mr.
Pitser served as Market Director-Automotive at AE Goetze North America. From
1969 to 1992, Mr. Pitser was an employee of Borg-Warner Corporation, most
recently as General Manager-Marine & Industrial Transmissions.
ERNEST T. THOMAS has served as Chief Financial Officer and Treasurer of the
Company since November 2002. From 2000 to 2002, Mr. Thomas served as Chief
Financial Officer and from 1998 to 2000, as a Group Vice President, of Modine
Manufacturing Co., a manufacturer of heat-transfer components and systems for
the automotive, industrial, and agricultural industries. From 1989 to 1997, Mr.
Thomas served in the mergers and acquisitions area and various operations roles
with Eaton Corp. From 1976 to 1987, Mr. Thomas served on the General Motors
financial staff.
JEFFREY W. WILSON has served as Vice President of the Company since May
2002, with current responsibility for the Company's North American strategy. Mr.
Wilson joined the Company in 1998, and has previously held multiple general
managerial roles. From 1987 to 1998, Mr. Wilson held various positions in North
America as well as Europe in operations, finance and engineering for Lear
Corporation, Automotive Industries and O'Sullivan Corporation, all manufacturers
of components in the automotive industry.
ANTONIO R. ZARATE has served as Vice President of the Company since May
2000 with responsibility for the Company's strategy in Mexico and South America.
From 1994 to 2000, Mr. Zarate served as President of the Automotive Division of
Proeza, S.A. de C.V., a diversified international company that has operations
primarily in the automotive and citrus juice processing industries.
There are no family relationships between or among the above-named
executive officers. There are no arrangements or understandings between any of
these officers pursuant to which any of them served as an officer.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol TWR. As of February 28, 2003, there were approximately 2,725
stockholders of record of the Company's stock. The following table sets forth,
for the periods indicated, the low and high closing sale prices for Common Stock
as reported on the New York Stock Exchange:
LOW HIGH
------ ------
2001
First Quarter............................................. $ 8.50 $11.65
Second Quarter............................................ 8.70 11.21
Third Quarter............................................. 7.01 14.71
Fourth Quarter............................................ 5.90 9.65
2002
First Quarter............................................. $ 8.19 $14.00
Second Quarter............................................ 10.85 15.21
Third Quarter............................................. 6.15 13.00
Fourth Quarter............................................ 4.23 7.13
During the last two years, the Company has not paid any cash dividends. The
Company has no current plans to pay any cash dividends in 2003. The Company's
ability to pay cash dividends on its Common Stock is dependent on the receipt of
dividends or other payments from its operating subsidiaries. The payment of cash
dividends to the Company by such operating subsidiaries for the purpose of
paying cash dividends on the Common Stock is limited by the terms of the $725
million senior unsecured credit agreement.
17
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for Tower Automotive presented
below for each of the years in the five-year period ended December 31, 2002, is
derived from Tower Automotive, Inc.'s Consolidated Financial Statements. Tower
Automotive, Inc.'s Consolidated Financial Statements have been audited by
Deloitte & Touche LLP, independent public accountants, for and as of the year
ended December 31, 2002 and by Arthur Andersen LLP, independent public
accountants, for and as of each of the years in the four-year period ended
December 31, 2001. The consolidated financial statements as of December 31, 2001
and 2002 and for each of the three years in the period ended December 31, 2002
and the reports of independent public accountants thereon are included elsewhere
in this report. The consolidated financial statements as of December 31, 1998,
1999 and 2000 are not included herein. This selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and Tower Automotive's
Consolidated Financial Statements and Notes to Consolidated Financial
Statements, included elsewhere in this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues......................... $2,754,464 $2,467,433 $2,531,953 $2,170,003 $1,836,479
Cost of sales.................... 2,455,577 2,190,248 2,160,359 1,823,103 1,562,167
Selling, general and
administrative expenses........ 143,822 139,203 137,003 105,950 85,169
Amortization expense............. 4,161 24,804 21,517 15,803 13,472
Restructuring and asset
impairment charges, net........ 61,125 383,739 141,326 -- --
Operating income (loss).......... 89,779 (270,561) 71,748 225,147 175,671
Interest expense, net............ 66,909 73,765 64,711 37,981 40,318
Provision (benefit) for income
taxes.......................... 7,636 (73,312) 2,619 74,866 54,143
Income (loss) before
extraordinary loss and
cumulative effect of change in
accounting principle........... 15,180 (267,524) 16,422 117,088 88,040
Net income (loss)................ (97,606) (267,524) 13,434 117,088 88,040
Basic earnings (loss) per share
before extraordinary loss and
cumulative effect of change in
accounting principle........... $ 0.26 $ (5.87) $ 0.35 $ 2.50 $ 1.91
Diluted earnings (loss) per share
before extraordinary loss and
cumulative effect of change in
accounting principle........... $ 0.26 $ (5.87) $ 0.34 $ 2.10 $ 1.68
Basic earnings (loss) per
share.......................... $ (1.70) $ (5.87) $ 0.29 $ 2.50 $ 1.91
Diluted earnings (loss) per
share.......................... $ (1.70) $ (5.87) $ 0.28 $ 2.10 $ 1.68
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
2002 2001 2000 1999 1998
--------- --------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital................... $(305,466) $(379,785) $ 78,753 $ 126,940 $ 106,936
Total assets...................... 2,557,885 2,533,436 2,892,747 2,552,550 1,936,167
Long-term debt, including
convertible subordinated notes
and capital leases, net......... 764,935 805,688 1,141,900 921,221 542,349
Mandatorily redeemable trust
convertible preferred
securities...................... 258,750 258,750 258,750 258,750 258,750
Stockholders' investment.......... 512,076 447,408 700,095 727,135 606,796
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
Since its inception in April 1993, when the Company was formed to acquire
R.J. Tower Corporation, the Company's revenues have grown rapidly through
internal growth and acquisitions. Since 1993, the Company has successfully
completed 14 acquisitions and established six joint ventures in China, Mexico,
Korea, Japan and the United States. As a result of these acquisitions and
internal growth, the Company's revenues have increased from approximately $86
million in 1993 to approximately $2.8 billion in 2002.
Initially, the Company's growth came primarily from acquisitions of North
American-based automotive suppliers, some of which had international operations.
The Company succeeded in consolidating a portion of the North American
automotive supplier base for structural components and assemblies and
established itself as a key supplier of those products. The Company's more
recent acquisitions have been intended to strengthen its ability to supply
products on a global basis, grow its technology and manufacturing capabilities,
and diversify its customer base. See "Recent Transactions" below.
The Company's rapid growth through acquisitions coincided with an extended
period of increased automotive production that resulted in high levels of
utilization of the Company's acquired resources and capacity and contributed to
periods of strong operating results. Beginning in late 2000, automotive
production declined relative to prior periods, leading the Company to focus its
efforts on reducing the capacity of the enterprise and improving the efficiency
of its continuing operations. These efforts resulted in three significant
restructurings, described in more detail below, that reduced excess capacity,
eliminated redundant overhead costs, and reorganized the management structure of
the Company's U.S. and Canadian operations. These efforts also involved the
divestiture of certain non-core functions, including the sale of the Company's
heavy truck business, in December 2000, to its joint venture partner, Metalsa.
Prior to these restructurings, the Company did not undertake any significant
reductions in the scope of its operations or any capacity rationalizations as a
result of or following any of its prior acquisitions.
The Company's most recent objective during 2001 and 2002 has been to reduce
indebtedness by maximizing cash flow. Several cash management initiatives, such
as extending its accounts payable terms to coincide with prevailing industry
practices and accelerating collections from customers have resulted in
significant negative working capital levels for the Company of $305 million and
$380 million as of December 31, 2002 and 2001, respectively. As a result of
these actions, a sale-leaseback transaction in April 2002 and an equity offering
in May 2002, as described in more detail below under "Liquidity and Capital
Resources," the Company was able to reduce its indebtedness in 2002 by making
net repayments of $159 million. This 2002 debt reduction by the Company is
incremental to the significant reduction of indebtedness in 2001 in which net
repayments were $335 million.
The automotive market continues to be highly cyclical and dependent upon
consumer spending. Due to the relatively long lead times required to produce
many of the Company's complex structural components, it may be difficult, in the
short term, for the Company to obtain new sales to replace any decline in the
sales of existing products. As a result, the Company has implemented and
continues to pursue the actions necessary to mitigate the effects of any
production downturn, focusing on reducing costs, maximizing its cash return on
invested capital, reducing debt balances and matching capital expenditures with
operating cash flow.
The Company's recent growth in Europe and Asia and with foreign transplant
operations in the U.S. has reduced its reliance on Ford and DaimlerChrysler,
increased penetration into certain existing customers and added new customers
such as Fiat, BMW, Volkswagen, Nissan, and Hyundai/Kia. The Company expects this
trend to continue as a result of its anticipated organic growth outside the U.S.
and from recent awards to supply foreign transplant operations in the U.S.
19
RECENT TRANSACTIONS
The Company has extended the geographic scope of its manufacturing base
through both acquisitions and joint ventures. Below is a summary of the last
three years of acquisitions and joint ventures of the Company:
The Company acquired a 30.8 percent interest (17 percent in September 2000
and 13.8 percent in February 2001) in Yorozu, a supplier of suspension modules
and structural parts to the Asian and North American automotive markets. The
total purchase price of approximately $68 million is payable over a three-year
period beginning in September 2000. The remaining obligation of $18.3 million as
of December 31, 2002, is recorded as indebtedness on the Company's balance sheet
and will be paid in full in the first quarter of 2003, pursuant to the joint
venture agreement. In November 2000, the Company acquired Presskam for
approximately $10 million. Located near Bratislava, Slovakia, Presskam
manufactures upper body structural assemblies for Volkswagen, Porsche and Skoda.
The Company acquired, for approximately $41 million, a 66 percent interest (49
percent in October 1999 and 17 percent in October 2000) in Seojin, a supplier of
frames, modules and structural components to the Korean automotive industry.
The Company acquired, for approximately $90 million, a 100 percent interest
(40 percent in March 1998 and 60 percent in July 2000) in Caterina, a supplier
of structural stampings and assemblies to the Brazilian automotive market,
including Volkswagen and Mercedes-Benz. In May 2000, the Company paid
approximately $33 million to acquire all of the outstanding common stock of
Algoods, a Canadian manufacturer of aluminum heat shields and impact discs for
the North American automotive industry. In March 2000, the Company invested $2.1
million in the formation of a product technology and development joint venture
with Defiance Testing & Engineering Services, Inc., a subsidiary of GenTek in
order to provide the Company with product testing services and more cost
efficient testing capabilities. Finally, in January 2000, the Company acquired
German-based Dr. Meleghy for approximately $86 million, plus an earnout payment
of $29.6 million. Dr. Meleghy designs and produces structural stampings,
assemblies, exposed surface panels and modules for the European automotive
industry with its main customers including DaimlerChrysler, VW Group, Ford,
Opel, and BMW.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001
Revenues. Revenues for the year ended December 31, 2002 were $2,754.5
million, an 11.6 percent increase, compared to $2,467.4 million for the year
ended December 31, 2001. The net $287.1 million increase was composed of net
volume increases of $351.3 million, primarily in the platforms of Dodge Ram
pickup; Cadillac CTS; Ford Thunderbird, Econoline, Expedition, and Explorer; BMW
X5; and Toyota Camry and Corolla, partially offset by volume decreases primarily
in the Ford Ranger and Dodge Durango platforms. Revenue also increased in the
2002 period due to incremental revenues of $23.3 million associated with the
consolidation of Tower Golden Ring, which first occurred in the third quarter of
2001. These increases were offset by a decline in revenues of $87.5 million,
which were attributable to the sale of the Iwahri, Korea plant to an affiliate
of Hyundai, which occurred during the first quarter of 2002.
Cost of Sales. Cost of sales as a percent of total revenues for the year
ended December 31, 2002 was 89.1 percent compared to 88.8 percent for the year
ended December 31, 2001. The Company's gross profit margin declined slightly in
the 2002 period compared to the 2001 period. The decline was due primarily to
changes in product mix on light truck, sport utility and other models served by
the Company in addition to increases in module assembly sales by the Company in
the 2002 period, offset by increased production volumes and the lack of
significant product launch activity. Gross profit margins in 2002 were also
negatively impacted by increased operating lease costs and operational
inefficiencies associated with the production of the new generation Ford
Explorer frame. The Company also experienced certain adjustments in the 2002
period impacting cost of sales that were not incurred in 2001. The most
significant items included favorable adjustments of $9.8 million related to
changes in estimate to certain purchase accounting reserves, reflecting certain
plant closures, product changes and contract revisions related to the
20
Company's restructuring actions, offset by additional expenses related to
postretirement and other employee fringe benefits of $9.7 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $143.8 million, or 5.2 percent of revenues,
for the year ended December 31, 2002 compared to $139.2 million, or 5.6 percent
of revenues, for the year ended December 31, 2001. The $4.6 million year-
over-year increase in expense is due to $2.9 million increased program
management costs in the engineering and support activities of the launch of the
Company's upcoming new programs related to Volvo, Ford and Nissan and
incremental costs of $1.7 million associated with the Company's consolidation of
Tower Golden Ring. The Company's selling, general and administrative expenses as
a percentage of revenues have declined due to efficient use of management
resources to support the Company's growing revenue base.
Amortization Expense. Amortization expense for the year ended December 31,
2002 was $4.2 million compared to $24.8 million for the year ended December 31,
2001. The decrease was due to the adoption of the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", and as a result, beginning January 1, 2002, the Company no longer
records amortization expense of goodwill. Goodwill amortization for the 2001
period was $21.1 million.
Interest Expense, net. Interest expense, net of interest income, for the
year ended December 31, 2002 was $66.9 million compared to $73.8 million for the
year ended December 31, 2001. The $6.9 million reduction in net interest expense
is attributable to $13.3 million due to reduced borrowings in 2002 and $6.5
million due to lower interest rates, which was partially offset by decreased
capitalized interest on construction projects of $8.6 million and decreased
interest income of $4.3 million in 2002.
Income Taxes. The effective income tax rate was 35.0 percent and 21.3
percent in 2002 and 2001, respectively. The effective income tax rate is not
comparable between the years as the Company did not receive tax benefit for the
full amount of the loss in 2001 due to the amortization and write-off of
nondeductible goodwill and the provision for a valuation allowance associated
with loss carryforwards.
Equity in Earnings of Joint Ventures, net. Equity in earnings of joint
ventures, net of tax, was $16.8 million and $17.3 million for the years ended
December 31, 2002 and 2001, respectively. These amounts represent the Company's
share of the earnings from its joint venture interests in Metalsa, Yorozu, and
DTA Development in the 2002 and 2001 periods. In addition, the 2001 period
includes the Company's share of earnings from its joint venture interest in
Tower Golden Ring prior to its consolidation. The decrease in equity earnings in
the 2002 period as compared to the 2001 period was due to the Company's share of
joint venture earnings in Metalsa and Yorozu increasing by $4.8 million, offset
by a reduction in equity earnings of $5.3 million due to the consolidation of
Tower Golden Ring beginning in the third quarter of 2001.
Minority Interest, net. Minority interest, net of tax, for the years ended
December 31, 2002 and 2001 represents dividends, net of income tax benefits, on
the 6 3/4% Trust Preferred Securities ("Preferred Securities") and the minority
interest held by the 40 percent joint venture partners in Tower Golden Ring. The
increase in minority interest expense was due to the full year of consolidation
of Tower Golden Ring during 2002 compared to the third and fourth quarter
consolidation of Tower Golden Ring during 2001.
Cumulative Effect of a Change in Accounting Principle, net. The Company
adopted SFAS No. 142 relating to the accounting for goodwill and other
intangible assets as of January 1, 2002. Application of the nonamortization
provisions of SFAS No. 142 resulted in a reduction in goodwill amortization
expense of approximately $16 million in fiscal 2002, after reflecting the 2001
goodwill write downs of $196.1 million. Under SFAS No. 142, the Company
designated four reporting units: 1) United States/Canada, 2) Europe, 3) Asia and
4) South America/Mexico. During the second quarter of 2002, the Company
completed its formal valuation procedures under SFAS No. 142, utilizing a
combination of valuation techniques including the discounted cash flow approach
and the market multiple approach. As a result of this valuation process as well
as the application of the remaining provision of SFAS No. 142, the Company
21
recorded a transitional impairment loss of $112.8 million, representing the
write-off of all of the Company's existing goodwill in the reporting units of
Asia ($29.7 million) and South America/Mexico ($83.1 million). The write-off was
recorded as a cumulative effect of a change in accounting principle in the
Company's consolidated statements of operations for the year ended December 31,
2002. There was no tax impact since the Company recorded a $24.2 million tax
valuation allowance for the deductible portion of the goodwill written off in
the reporting unit of South America/Mexico. The Company determined that it was
appropriate to record a valuation allowance against the entire amount of the
$24.2 million deferred tax asset recognized in adopting SFAS No. 142, given the
uncertainty of realization and the lack of income in the reporting unit. The
Asia goodwill was not deductible for tax purposes.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31,
2000
Revenues. Revenues for the year ended December 31, 2001 were $2,467.4
million, a 2.5 percent decrease, compared to $2,532.0 million for the year ended
December 31, 2000. The decrease was comprised of U.S. and Canada volume declines
of $263.0 million, primarily in the following platforms: Dodge Dakota, Durango
and Ram pickup; Chrysler LH; Ford Econoline, Focus, Explorer, Expedition, Taurus
and Ranger; and Lincoln LS. Other declines in revenues of $126.0 million were
attributable to a decline in GM light truck program sales and the sale of the
heavy truck business in December 2000. These declines were partially offset by
$324.4 million in incremental revenues associated with the acquisitions of
Algoods (May 2000), Caterina (July 2000), Presskam (November 2000) and Seojin
(November 2000), and the consolidation of Tower Golden Ring (July 2001).
Cost of Sales. Cost of sales as a percent of revenues for the year ended
December 31, 2001 was 88.8 percent compared to 85.3 percent for the year ended
December 31, 2000. The decline in the gross profit margin was primarily due to
decreased production volumes and product mix changes on light truck, sport
utility and other models served by the Company in North America and increasing
sales with lower margins in Asia and South America. Increased costs associated
with the launch of the Ford Explorer, Dodge Ram Truck and Cadillac CTS programs
also contributed to the decline in 2001 gross margins as compared to 2000. The
Company experienced an unusually high number of launches in 2001. The costs
incurred with respect to these launches exceeded planned costs due to both a
greater than expected number of engineering changes from the Company's customers
as well as unanticipated launch inefficiencies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $139.2 million, or 5.6 percent of revenues,
for the year ended December 31, 2001 compared to $137.0 million, or 5.4 percent
of revenues, for the year ended December 31, 2000. This increase was due
primarily to incremental costs of $12.4 million associated with the Company's
acquisition of Algoods, Caterina, Presskam, and Seojin and the consolidation of
Tower Golden Ring, partially offset by $10.2 million in decreased costs due
mainly to colleague reductions associated with the consolidation of the
Company's engineering and support activities.
Amortization Expense. Amortization expense for the year ended December 31,
2001 was $24.8 million compared to $21.5 million for the year ended December 31,
2000. The increase was due to incremental goodwill amortization related to the
acquisitions of Algoods, Caterina, Presskam and Seojin.
Interest Expense, net. Interest expense, net of interest income, for the
year ended December 31, 2001 was $73.8 million compared to $64.7 million for the
year ended December 31, 2000. The increased interest expense resulted from (i)
the full year effect in 2001 of increased borrowings to fund the Company's
acquisitions of Algoods, Caterina, Presskam and Seojin and the additional equity
investment in Yorozu totaling $23.5 million, which was partially offset by (ii)
decreased interest rates and decreased spreads associated with the new credit
agreement of $12.7 million, and (iii) increased capitalized interest on
construction projects of $1.7 million.
Income Taxes. The effective income tax rate was 21.3 percent and 37.2
percent in 2001 and 2000, respectively. The effective income tax rate is not
comparable between the years as the Company did not receive tax benefit for the
full amount of the loss in 2001 due to the amortization and write-off of
nondeductible goodwill and the provision for a valuation allowance associated
with loss carryforwards.
22
Equity in Earnings of Joint Ventures, net. Equity in earnings of joint
ventures, net of tax, was $17.3 million and $22.5 million for the years ended
December 31, 2001 and 2000, respectively. These amounts represent the Company's
share of the earnings from its joint venture interests in Metalsa, Tower Golden
Ring, Yorozu, and DTA Development, in the 2001 period and Metalsa, Caterina,
Tower Golden Ring, and Seojin in the 2000 period. The decrease in 2001 was due
primarily to the consolidation of Tower Golden Ring beginning in the third
quarter of 2001.
Minority Interest, net. Minority interest, net of tax, for the years ended
December 31, 2001 represents dividends, net of income tax benefits, on the
Preferred Securities and the minority interest held by the 40 percent joint
venture partners in Tower Golden Ring. Minority interest for the year ended
December 31, 2000 represents dividends, net of income tax benefits on the
Preferred Securities. The increase in minority interest expense in 2001 was due
primarily to the consolidation of Tower Golden Ring in the third quarter of
2001.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
The Company's growth through acquisitions coincided with an extended period
of high automotive production that resulted in higher levels of utilization of
the Company's acquired resources and capacity and contributed to periods of
strong operating results. During the second half of 2000, the Company focused
its efforts on reducing the capacity of the enterprise and improving the
efficiency of its continuing operations. During the 18 month period beginning in
the fourth quarter of 2000, the Company: (i) divested itself of its non-core
heavy truck business; (ii) consolidated its manufacturing operations by closing
manufacturing locations in Kalamazoo, Michigan, Sebewaing, Michigan, and certain
operations in Milwaukee, Wisconsin; (iii) reduced redundant overhead through a
consolidation of its technical activities and a reduction of other salaried
colleagues; (iv) reorganized the management of its U.S. and Canada region; and
(v) discontinued remaining stamping and ancillary processes performed at its
Milwaukee Press Operations and relocated remaining work to other locations or
Tier II suppliers. These actions were accomplished through three restructurings,
which are described in more detail below. The first restructuring was initiated
in October 2000 (the "2000 Plan"), the second restructuring was initiated in
October 2001 (the "2001 Plan"), and the third restructuring was initiated in
January 2002 (the "2002 Plan").
The restructuring and asset impairment charges consist of both
restructuring charges and non-restructuring related asset impairments, major
components of which are discussed in the sections below. The following table
summarizes the principal components of these charges (in millions):
2002 PLAN 2001 PLAN 2000 PLAN
--------- --------- ---------
RESTRUCTURING AND RELATED ASSET IMPAIRMENTS
Asset impairments......................................... $ 47.2 $127.4 $103.7
Severance and outplacement costs.......................... 8.4 24.6 25.2
Loss contracts............................................ -- -- 8.1
Other exit costs.......................................... 19.8 32.0 4.3
Revision of estimate associated with previous plans....... (14.3) (5.9) --
------ ------ ------
Total restructuring related charges.................... 61.1 178.1 141.3
------ ------ ------
OTHER GOODWILL AND ASSET IMPAIRMENTS
Goodwill write down....................................... -- 108.6 --
Other asset impairments................................... -- 50.7 --
Investment impairment..................................... -- 46.3 --
------ ------ ------
Total non restructuring related goodwill and asset
impairment charges................................... -- 205.6 --
------ ------ ------
Total restructuring and asset impairment charges,
net.................................................. $ 61.1 $383.7 $141.3
====== ====== ======
Estimated cash and non cash charges in the original
plan are as follows:
Non-cash charges..................................... $ 45.3 $333.0 $103.7
------ ------ ------
Cash charges......................................... $ 15.8 $ 50.7 $ 37.6
------ ------ ------
23
Under the 2000 Plan, the Company realized cash savings of approximately $32
million in 2001 as a result of reductions in payroll costs directly related to
restructuring activities. Under the 2001 Plan, the Company realized cash savings
of approximately $20 million in 2002. Under the 2002 Plan, the Company realized
cash savings of approximately $11 million in 2002, with full realization of cash
savings beginning in 2003. These cash savings from all three Plans are
attributable to permanent payroll reductions and are expected to be realized
annually.
MILWAUKEE PRESS OPERATIONS (2002 PLAN):
On January 31, 2002, the Company announced that it would discontinue the
remaining stamping and ancillary processes performed at its Milwaukee Press
Operations and relocate the remaining work to other Tower locations or Tier II
suppliers. The Company substantially completed the transfer process in 2002. As
a result of these efforts (the "2002 Plan"), the Company recorded a
restructuring charge in the first quarter of 2002 totaling $75.4 million, which
reflects the estimated qualifying "exit costs" to be incurred over the next 12
months pertaining to the 2002 Plan. During the fourth quarter of 2002, due to a
favorable settlement of anticipated other exit costs and an assessment of
remaining costs, the Company subsequently reduced the estimates associated with
the 2002 and 2001 Plans by $14.3 million, resulting in a net restructuring
charge of $61.1 million for 2002.
The 2002 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to colleague terminations and certain
other exit costs. Through December 31, 2002, the Company eliminated
approximately 500 colleagues pursuant to the 2002 Plan, consistent with the
original estimate. The estimated restructuring charge does not cover certain
aspects of the 2002 Plan, including movement of equipment and colleague
relocation and training. These costs will be recognized in future periods as
incurred.
The asset impairments consist of long-lived assets, including fixed assets,
buildings and manufacturing equipment from the facilities the Company intends to
dispose of or discontinue. The carrying value of the long-lived assets written
off was $47.2 million. Fixed assets that will be disposed of as part of the 2002
Plan were written down to their estimated residual values. For assets that will
be sold currently, the Company measured impairment based on estimated proceeds
on the sale of the facilities and equipment. These asset impairments have arisen
as a consequence of the Company making the decision to exit these activities
during the first quarter of 2002.
The accrual for the 2002 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2002. The table below
summarizes the accrued operational realignment and other charges through
December 31, 2002 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT
IMPAIRMENTS COSTS OTHER EXIT COSTS TOTAL
----------- ------------- ---------------- ------
Provision............................ $ 47.2 $ 8.4 $ 19.8 $ 75.4
Cash usage........................... -- (4.7) (6.6) (11.3)
Non-cash charges..................... (47.2) -- (11.2) (58.4)
Revision of estimate................. -- (0.2) (1.0) (1.2)
------ ----- ------ ------
Balance at December 31, 2002......... $ -- $ 3.5 $ 1.0 $ 4.5
====== ===== ====== ======
During 2002, the Company charged $11.2 million of other exit costs from the
2002 Plan restructuring reserves for expected remaining pension curtailment
costs against the pension liability accrual. As of December 31, 2002, the
Company anticipates future cash payments of $4.5 million under the 2002 Plan.
The revision in estimate for the 2002 Plan resulted from minor variances in
severance and other exit costs experienced during 2002, as compared to the
amount initially established in the 2002 Plan. Such revision was credited to the
"Restructuring and Asset Impairment Charges" line in the consolidated financial
statements.
24
SEBEWAING AND MILWAUKEE PRESS OPERATIONS (2001 PLAN):
In October 2001, the Company's board of directors approved a restructuring
of the enterprise that included the closing of the Sebewaing, Michigan facility.
In addition, in December 2001, the Company's board of directors approved a
restructuring plan that related to the consolidation of technical activities and
a reduction of other salaried colleagues in conjunction with a reorganization of
the Company's U.S. and Canada operations and the relocation of some component
manufacturing from the Company's Milwaukee Press Operations to other Tower
locations. As a result of the 2001 Plan, the Company recorded a restructuring
charge in the fourth quarter of 2001 of $178.1 million, which reflects the
estimated qualifying "exit costs" to be incurred over the next 12 months
pertaining to the 2001 Plan. This total reflected a provision of $184.0 million,
net of certain revisions in the estimate of the 2000 Plan of $5.9 million, which
were reversed in 2001.
The 2001 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to colleague terminations and certain
other exit costs. These activities resulted in a reduction of more than 700
colleagues in the Company's technical and administrative centers in Novi,
Rochester Hills, and Grand Rapids, Michigan; Milwaukee, Wisconsin; and its U.S.
and Canada manufacturing locations. The estimated restructuring charge does not
cover certain aspects of the 2001 Plan, including movement of equipment and
colleague relocation and training. These costs will be recognized in future
periods as incurred.
The asset impairments consist of long-lived assets, including fixed assets,
buildings and manufacturing equipment from the facilities the Company intends to
dispose of or discontinue, and goodwill. The carrying value of the long-lived
assets written off was $127.4 million as of December 31, 2001. For assets that
will be disposed of currently, the Company measured impairment based on
estimated proceeds on the sale of the facilities and equipment. These asset
impairments have arisen only as a consequence of the Company making the decision
to exit these activities during the fourth quarter of 2001.
The write-off of assets having a total book value of $127.4 million
included $87.5 million of goodwill associated with Sebewaing and Milwaukee Press
Operations, $20.6 million of property, plant and equipment associated with the
Sebewaing operations and $12.1 million of property, plant and equipment
associated with the Milwaukee Press Operations business that was discontinued.
Additionally, there was $7.2 million of property and building write downs
associated with the decision to consolidate the Company's technical centers. As
of December 31, 2002, the Company anticipates future cash payments of $9.3
million under the 2001 Plan.
25
The accrual for the 2001 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2002 and 2001. The
table below summarizes the accrued operational realignment and accrued other
charges related to the 2001 Plan through December 31, 2002 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT OTHER EXIT
IMPAIRMENTS COSTS COSTS TOTAL
----------- ------------- ---------- -------
Provision................................ $ 127.4 $ 24.6 $ 32.0 $ 184.0
Cash usage............................... -- (0.7) (0.6) (1.3)
Non cash charges......................... (127.4) -- -- (127.4)
------- ------ ------ -------
Balance at December 31, 2001............. -- 23.9 31.4 55.3
Cash usage............................... -- (22.2) (3.6) (25.8)
Non cash charges......................... -- -- (7.1) (7.1)
Revision of estimate..................... -- (0.7) (12.4) (13.1)
------- ------ ------ -------
Balance at December 31, 2002............. $ -- $ 1.0 $ 8.3 $ 9.3
======= ====== ====== =======
During 2002, the Company charged $7.1 million for expected special
termination benefits to be paid out in the future from the 2001 Plan
restructuring reserves against the pension liability accrual. The revision in
estimate for the 2001 Plan resulted from a legal settlement negotiated in
December 2002 with A.O. Smith, which allocated the cost of certain supplemental
early retirement benefits to colleagues at the Press Operations and Heavy Truck
Operations in Milwaukee. The impact of this legal settlement was to
substantially reduce the cost of actuarial pension benefits due to colleagues
terminated under the 2001 Plan. This difference of $11.1 million was credited to
the "Restructuring and Asset Impairment Charges" line in the consolidated
financial statements. Certain other revisions in estimate of $2.0 million
related to minor variances in the execution of the 2001 Plan and were accounted
for in a similar manner.
HEAVY TRUCK AND KALAMAZOO STAMPING OPERATIONS (2000 PLAN):
In October 2000, the Company's board of directors approved the 2000 Plan,
which was intended to improve the Company's long-term competitive position and
lower its cost structure. The 2000 Plan included phasing out the heavy truck
rail manufacturing in Milwaukee, Wisconsin; reducing stamping capacity by
closing the Kalamazoo, Michigan facility; and consolidating related support
activities across the enterprise. The Company recognized a charge to operations
of approximately $141.3 million in the fourth quarter of 2000, which reflected
the estimated qualifying "exit costs" to be incurred over the next 12 months
under the 2000 Plan.
The 2000 Plan charge included costs associated with asset impairments,
severance and outplacement costs related to colleague terminations, loss
contract provisions and certain other exit costs. These activities resulted in a
reduction of approximately 850 colleagues.
The asset impairments consisted of long-lived assets, including fixed
assets, manufacturing equipment and land, from the facilities the Company
intends to dispose of or discontinue. For assets that were disposed of
currently, the Company measured impairment based on estimated proceeds on the
sale of the facilities and equipment. For assets that will be held and used in
the future, the Company prepared a forecast of expected undiscounted cash flows
to determine whether asset impairment existed, and used fair values to measure
the required write-downs. These asset impairments have arisen only as a
consequence of the Company making the decision to exit these activities during
the fourth quarter of 2000.
26
The accrual for the 2000 Plan was fully utilized as of December 31, 2001.
The table below summarizes the accrued operational realignment and other charges
through December 31, 2001 (in millions):
SEVERANCE AND OTHER
ASSET OUTPLACEMENT LOSS EXIT
IMPAIRMENTS COSTS CONTRACTS COSTS TOTAL
----------- ------------- --------- ----- -------
Provision............................. $ 103.7 $ 25.2 $ 8.1 $ 4.3 $ 141.3
Cash usage............................ -- (8.7) (2.5) (0.3) (11.5)
Non cash charges...................... (103.7) -- -- -- (103.7)
------- ------ ----- ----- -------
Balance at December 31, 2000.......... -- 16.5 5.6 4.0 26.1
Cash usage............................ -- (13.6) (4.2) (2.4) (20.2)
Revision of estimate.................. -- (2.9) (1.4) (1.6) (5.9)
------- ------ ----- ----- -------
Balance at December 31, 2001.......... $ -- $ -- $ -- $ -- $ --
======= ====== ===== ===== =======
The following table summarizes the major components of the asset impairment
charge for the 2000 Plan (in millions):
CARRYING
AMOUNT
--------
Milwaukee Heavy Truck Rail Manufacturing.................... $ 47.3
Milwaukee Press Operations Machinery & Equipment............ 7.9
Milwaukee Shared Services Land & Equipment.................. 19.8
Milwaukee Prototype & Technical Center Building, Machinery &
Equipment................................................. 14.0
Kalamazoo Stamping Operations Land, Building & Equipment.... 5.7
Granite City Stamping Operations Machinery & Equipment...... 4.6
Related Stamping & Assembly Machinery & Equipment........... 4.4
------
Total..................................................... $103.7
======
The triggering event for each major component's asset impairment charge was
the decision to exit the activities, which was made by the Company's board of
directors on October 2, 2000.
NON-RESTRUCTURING ASSET IMPAIRMENTS:
The other goodwill and asset impairment charges recorded in 2001 are a
result of the Company's review of the carrying amount of certain of its
goodwill, fixed assets and certain investments, based upon the Company's current
operating plans (including the organizational realignment initiative discussed
above) and current and forecasted trends in the automotive industry. Based upon
a review of anticipated cash flows, the Company determined that goodwill
assigned to two of its plants was impaired and was written down. In addition,
the Company identified assets which no longer had sufficient cash flows to
support their carrying amounts and were written down to fair value, including
its investment in J.L. French.
27
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes the Company's primary sources and uses of cash (in
millions):
YEAR ENDED
DECEMBER 31,
---------------
2002 2001
------ ------
Sources of Cash:
Net income before depreciation and amortization, deferred
income taxes, gain on sale of plant, equity in earnings
of joint ventures, restructuring and asset impairment
charges, and cumulative effect of change in accounting
principle(1)........................................... $198.6 $178.1
Proceeds from sale of receivables......................... 2.3 15.2
Decrease (increase) in accounts receivable................ (33.6) 74.5
Decrease (increase) in inventories........................ (20.5) 21.4
Decrease (increase) in prepaid tooling and other assets... (36.5) 129.3
Increase in accounts payable.............................. 48.8 120.5
Increases in accrued liabilities.......................... 32.2 13.1
Changes in other assets and liabilities................... (60.3) (38.3)
------ ------
Net cash provided by operating activities.............. 131.0 513.8
Proceeds from sale of fixed assets........................ 50.3 --
Proceeds from issuance of stock........................... 225.7 39.0
Proceeds from divestiture................................. 4.0 --
------ ------
Total sources of cash....................................... $411.0 $552.8
====== ======
Uses of Cash:
Capital expenditures, net(2).............................. 159.0 194.0
Acquisitions, including joint venture interests and
earnout payments....................................... 40.8 5.4
Repurchase of stock....................................... 59.9 --
Increase (decrease) in cash balances...................... (8.1) 18.4
Net repayments of debt.................................... 159.4 335.0
------ ------
Total uses of cash.......................................... $411.0 $552.8
====== ======
---------------
(1) Net income before depreciation and amortization, deferred income taxes, gain
on sale of plant, equity in earnings of joint ventures, restructuring and
asset impairment charges, and cumulative effect of change in accounting
principle is computed as follows (in millions):
YEAR ENDED
DECEMBER 31,
----------------
2002 2001
------ -------
Net loss................................................... $(97.6) $(267.5)
Depreciation and amortization.............................. 140.8 159.9
Deferred income tax expense (benefit)...................... 2.1 (80.8)
Gain on sale of plant...................................... (3.8) --
Equity in earnings of joint ventures, net.................. (16.8) (17.2)
Restructuring and asset impairment charges, net............ 61.1 383.7
Cumulative effect of change in accounting principle, net... 112.8 --
------ -------
$198.6 $ 178.1
====== =======
28
(2) The Company leases certain equipment utilized in its operations under
operating lease agreements. If certain equipment had been purchased instead
of leased, capital expenditures would have been $187.2 million and $265.7
million in 2002 and 2001, respectively.
SOURCES OF CASH
The Company's principal sources of cash are cash flow from operations,
commercial borrowings and capital markets activities. During the year ended
December 31, 2002, the Company generated $131.0 million of cash from operations.
This compares with $513.8 million generated during the same period in 2001,
which was a year of significant focus by the Company on working capital
improvement. Net income before depreciation and amortization, deferred income
taxes, gain on sale of plant, equity in joint venture earnings, restructuring
and asset impairment charges, and cumulative effect of change in accounting
principle was $198.6 million and $178.1 million for 2002 and 2001, respectively.
Operating cash flow was reduced by $37.1 million in 2002 and $21.5 million in
2001 for cash restructuring payments, and was increased by net tax refunds of
$19.8 million in 2002 and $12.9 million in 2001. Operating cash flow was also
reduced in the 2002 period by $32.9 million for required pension contributions.
No pension contributions were made by the Company in the 2001 period. Expected
pension contribution funding requirements of the Company for 2003 are
approximately $27 million. In total, working capital and other operating items
decreased operating cash flow by $67.6 million during 2002 and increased
operating cash flow by $335.7 million during 2001.
In April 2002, the Company entered into a sale-leaseback transaction
involving seven of its manufacturing facilities contributing $50.3 million to
the cash flow of the 2002 period. Under the terms of the sale-leaseback
agreement with investment banking firm W.P. Carey and Company, LLC, the
facilities will be leased to the Company under an 18-year term. The lease
requires quarterly payments of approximately $1.6 million through 2020 and is
accounted for as an operating lease.
The issuance of common stock under the underwritten primary offering of
17.25 million shares completed in May 2002 contributed $222.4 million to the
cash flow in the 2002 period. The issuance of stock for the Company's colleague
stock purchase plan and option plans contributed an additional $3.3 million to
cash flow for the 2002 period. In August 2001, the Company realized net proceeds
of $37.5 million from the issuance of 3.6 million shares of common stock in a
private placement transaction. The issuance of stock from the Company's
colleague stock purchase plan and option plans contributed an additional $1.5
million to cash flow for the 2001 period.
In June 2002, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") that permanently reduced borrowings under the
facility and deferred the start of the scheduled repayment of its remaining
borrowings until March 2005. The amendment reduced the former $1.15 billion
facility to a $725 million facility by voluntarily repaying $200 million of the
$325 million term loan portion of the facility with proceeds from the Company's
May 2002 common stock offering, and reducing capacity under the revolving credit
facility from $825 million to $600 million. The Credit Agreement also includes a
multi-currency borrowing feature that allows the Company to borrow up to $500
million in certain freely tradable offshore currencies, and letter of credit
sublimits of $250 million. At December 31, 2002, approximately $36.4 million of
the outstanding borrowings are denominated in Japanese Yen, $31.2 million are
denominated in Euro and $15.9 million are denominated in Canadian dollars.
Interest on the Credit Agreement is at the financial institutions' reference
rate, LIBOR, or the Eurodollar rate plus a margin ranging from 0 to 200 basis
points depending on the ratio of the consolidated funded debt for restricted
subsidiaries of the Company to its total EBITDA. The weighted average interest
rate for such borrowings was 6.4 percent (including the effect of the interest
rate swap contract discussed below) for the year ended December 31, 2002. The
Credit Agreement has a final maturity of 2006.
At December 31, 2002, the Company had borrowed $177.3 million under its
revolving credit facility of $600 million. In order to borrow under the
revolving facility, the Company must meet certain covenant ratio requirements,
including but not limited to a minimum interest coverage and maximum leverage
ratio. Under the most restrictive covenants, the amount of unused availability
under the revolving facility was
29
$239 million at December 31, 2002, compared to unused availability of $103
million at December 31, 2001. This increase in availability between the periods
resulted from the reduction of indebtedness (as defined in the credit
agreement), and an increase in trailing four quarter EBITDA between the periods.
The covenant conditions contained in the credit agreement also limit the
Company's ability to pay dividends. At December 31, 2002, the Company was in
compliance with all debt covenants.
In September 2000, the Company entered into an interest rate swap contract
to hedge against interest rate exposure on approximately $160 million of its
floating rate indebtedness under the credit agreement. The contracts have the
effect of converting the floating rate interest to a fixed rate of approximately
6.9 percent, plus any applicable margin required under the Credit Agreement. The
interest rate swap contract was executed to balance the Company's fixed-rate and
floating-rate debt portfolios and expires in September 2005.
In June 2001, the Company entered into a financing agreement whereby its
domestic operating units sell eligible customer receivables on an ongoing basis
to a fully consolidated financing subsidiary. The financing subsidiary
subsequently sells its interest in the receivables to a third party funding
agent in exchange for cash and a subordinated interest in the unfunded
receivables transferred. The Company acts as an administrative agent in the
management and collection of accounts receivable sold. Through December 31,
2002, the Company realized net cash proceeds of $17.5 million from the sale of
receivables.
In July 2000, R. J. Tower Corporation, a wholly owned subsidiary of the
Company, issued Euro-denominated senior unsecured notes in the amount of E150
million ($157.4 million at December 31, 2002). The notes bear interest at a rate
of 9.25 percent, payable semi-annually. The notes rank equally with all of the
Company's other senior unsecured and unsubordinated debt. The net proceeds after
issuance costs were used to repay a portion of the Company's existing
Euro-denominated indebtedness under its credit facility. The notes mature on
August 1, 2010.
USES OF CASH
The Company's principal uses of cash are debt repayment, capital
expenditures and acquisitions and investments in joint ventures. Net cash used
in investing activities was $145.4 million during the year ended December 31,
2002, as compared to $199.4 million in the prior period. Earnout payments offset
by net proceeds received from the sale of a plant, reduced investment cash flows
by $36.8 million in the 2002 period. No additional earnout payments are required
after 2002 under any of the Company's acquisition agreements. The Company's
consolidation of Tower Golden Ring, its acquisition of an additional 13.8
percent interest in Yorozu, and payments and dividends received from investments
in joint ventures decreased net cash used in investing activities by $5.4
million in the 2001 period.
Net capital expenditures were $159.0 million and $194.0 million in 2002 and
2001, respectively. Capital expenditures in 2002 included investment in new
programs, additional capabilities in Europe, maintenance, safety and
productivity improvements. The Company estimates its 2003 capital expenditures
will be approximately $200 million. Where appropriate, the Company may lease
rather than purchase such equipment, which would have the effect of reducing
this anticipated level of capital expenditures. The Company leases certain
equipment utilized in its operations under operating lease agreements. If
certain equipment had been purchased instead of leased, capital expenditures
would have been $187.2 million and $265.7 million in 2002 and 2001,
respectively. The Company intends to continue to utilize operating lease
financing on occasion when the effective interest rate equals or is lower than
the Company's financing costs and the lease terms match the expected life of the
respective program. Annual operating lease payments under the Company's lease
agreements range from $51 million to $62 million over the next five years.
Operating lease expense is included in cost of sales in the Company's statements
of operations.
Net cash provided by financing activities totaled $6.4 million for the year
ended December 31, 2002, compared with net cash used in financing activities of
$296.0 million in the prior period. Net proceeds from the issuance of stock of
$225.7 million and $39.0 million were offset by net repayments of debt of $159.4
million and $335.0 million for the comparable 2002 and 2001 periods,
respectively. Also offsetting
30
proceeds from the issuance of stock in the 2002 period were payments for the
repurchase of common shares of $59.9 million.
WORKING CAPITAL
The Company maintained significant negative levels of working capital of
$305.5 million and $379.8 million as of December 31, 2002 and 2001,
respectively, as a result of its continuing focus on minimizing the cash flow
cycle. The $74.3 million net increase in working capital in 2002 was due to a
$33.6 million increase in accounts receivable and a $20.5 million increase in
inventories attributable to the significant sales and production increases in
December 2002 relative to December 2001, a $36.5 million timing-related increase
in tooling, and $37.1 million in restructuring reserve payments made during
2002, offset by a $39.7 million increase in accounts payable and other current
liabilities resulting from the increase in production volumes, in addition to a
$13.7 million decrease in other current assets. The Company's management of its
accounts receivable includes participation in specific receivable programs with
key customers which allow for accelerated collection of receivables, subject to
interest charges ranging from 4.5 percent to 6.5 percent at an annualized rate.
The Company expects to continue its focus on maintaining a large negative
working capital position through a continuation of the efforts discussed above
and continued focus on minimizing the length of the cash flow cycle. The Company
believes that the available borrowing capacity under its credit agreement,
together with funds generated by operations, should provide sufficient liquidity
and capital resources to pursue its business strategy for the foreseeable
future, with respect to working capital, capital expenditures, and other
operating needs.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company's contractual obligations and commercial commitments as of
December 31, 2002 are as follows:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
----------------------- ---------- --------- ----------- ----------- --------
Long-term debt................ $ 645,498 $110,278 $ 77,581 $224,803 $232,836
Convertible Subordinated
Notes*...................... 199,984 -- 199,984 -- --
Capital lease obligations..... 39,923 10,192 15,789 10,585 3,357
Operating leases.............. 460,435 59,383 123,300 107,782 169,970
---------- -------- -------- -------- --------
Balance at December 31,
2002........................ $1,345,840 $179,853 $416,654 $343,170 $406,163
========== ======== ======== ======== ========
---------------
* The Convertible Subordinated Notes are due on August 1, 2004 and are
convertible into common stock of the Company at a conversion price of $25.88
per share; therefore, they have been included as part of the contractual
obligations in the 1-3 year period above.
The Company's commercial commitments included up to $250 million of standby
letters of credit which are available under the terms of the Company's $725
million senior unsecured credit agreement of which $85 million was outstanding
as of December 31, 2002.
LOSS CONTRACTS, FACILITY SHUTDOWN AND PAYROLL RELATED COSTS
The Company is committed under certain existing agreements, assumed in
connection with prior acquisitions, to supply product to its customers at
selling prices that are not sufficient to cover the direct costs to produce
those parts. The Company is obligated to supply these products for the life of
the related vehicles, which is typically three to ten years. Accordingly, the
Company recognizes liabilities at the time these losses are probable and
reasonably estimable at an amount equal to the minimum amount necessary to
fulfill its obligations to its customers. The reserves established in connection
with these recognized losses are reversed as the product is shipped to the
customers.
31
The Company's acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the assets acquired and liabilities
assumed have been recorded at fair value as of the dates of the acquisitions.
The excess of the purchase price over the fair value of the assets acquired and
liabilities assumed has been recorded as goodwill. Results of operations for
these acquisitions have been included in the accompanying consolidated financial
statements since the dates of acquisition.
In conjunction with its acquisitions, reserves have been established for
certain costs associated with facility shutdown and consolidation activities,
for general and payroll related costs primarily for planned colleague
termination activities, and for provisions for acquired loss contracts. A
rollforward of these reserves is as follows (in millions):
FACILITY PAYROLL
SHUTDOWN COSTS RELATED COSTS LOSS CONTRACTS
-------------- ------------- --------------
Balance at December 31, 2000................. $ 7.3 $ 3.8 $ 28.7
Utilization................................ (2.1) (2.7) (11.7)
----- ----- ------
Balance at December 31, 2001................. 5.2 1.1 17.0
Utilization................................ (0.7) (1.1) (3.9)
Revision of estimate....................... -- -- (7.0)
----- ----- ------
Balance at December 31, 2002................. $ 4.5 $ -- $ 6.1
===== ===== ======
The timing of facility shutdown and consolidation activities was adjusted
from the Company's original plans to reflect customer concerns over supply
interruption. As of December 31, 2002, all of the identified facilities have
been shutdown, but the Company continues to incur ongoing costs related to
maintenance, taxes and other items related to buildings that are held for sale.
The Company's acquisition reserves have been utilized as originally intended,
and management believes the liabilities recorded for shutdown and consolidation
activities are adequate, but not excessive as of December 31, 2002.
In 2002, the Company revised its accrual for estimated loss contracts to
reflect the discontinuance of certain contracts that the Company was fulfilling
at a loss, and the reduction of costs associated with remaining loss contracts
which were transferred to lower cost locations as part of the Company's
restructuring activities.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the interest expense
of floating-rate indebtedness and by increasing the cost of labor, equipment and
raw materials. However, because selling prices generally cannot be increased
until a model changeover, the effects of inflation must be offset by
productivity improvements and volume from new business awards.
MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company's policy is to not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company periodically enters into financial instruments to manage and reduce
the impact of changes in interest rates.
Interest rate swaps are entered into as a hedge of underlying debt
instruments to change the characteristics of the interest rate from variable to
fixed without actually changing the debt instrument. Therefore, these interest
rate swap agreements convert outstanding floating rate debt to fixed rate debt
for a period of time. For fixed rate debt, interest rate changes affect the fair
market value, but do not impact earnings or cash flows. Conversely for floating
rate debt, interest rate changes generally do not affect the fair market value,
but do impact future earnings and cash flows, assuming other factors are held
constant.
32
At December 31, 2002, Tower Automotive had total debt and obligations under
capital leases of $885.4 million. This debt comprises fixed rate debt of $517.4
million and floating rate debt of $368.0 million. The pre-tax earnings and cash
flow impact in 2003 resulting from a one percentage point increase in interest
rates on the Company's variable rate debt would be approximately $3.7 million,
holding other variables constant. A one percentage point increase in interest
rates would not materially impact the fair value of the fixed rate debt.
A portion of Tower Automotive's revenues were derived from manufacturing
operations in Europe, Asia and South America. The results of operations and
financial position of the Company's foreign operations are principally measured
in its respective currency and translated into U.S. dollars. The effects of
foreign currency fluctuations in Europe, Asia and South America are somewhat
mitigated by the fact that expenses are generally incurred in the same currency
in which revenues are generated. The reported income of these subsidiaries will
be higher or lower depending on a weakening or strengthening of the U.S. dollar
against the respective foreign currency.
A portion of Tower Automotive's assets are based in its foreign operations
and are translated into U.S. dollars at foreign currency exchange rates in
effect as of the end of each period, with the effect of such translation
reflected as a separate component of stockholders' investment. Accordingly, the
Company's consolidated stockholders' investment will fluctuate depending upon
the weakening or strengthening of the U.S. dollar against the respective foreign
currency.
The Company's strategy for management of currency risk relies primarily
upon conducting its operations in a country's respective currency and may, from
time to time, also involve hedging programs intended to reduce the Company's
exposure to currency fluctuations. Management believes the effect of a 100 basis
point movement in foreign currency rates versus the dollar would not have
materially affected the Company's financial position or results of operations
for the periods presented.
CRITICAL ACCOUNTING POLICIES
The Company believes the following represent its critical accounting
policies:
Goodwill and Impairment of Long-Lived Assets -- During 2002, the Company
adopted the new rules on accounting for goodwill and other intangible assets
under SFAS No. 142, "Goodwill and Other Intangible Assets." During the second
quarter of 2002, the Company completed its formal valuation procedures under
SFAS No. 142, utilizing a combination of valuation techniques, including the
discounted cash flow approach and the market multiple approach. As a result of
this valuation process as well as the application of the remaining provisions of
SFAS No. 142, the Company recorded a transitional impairment loss of $112.8
million, representing the write-off of all of the Company's existing goodwill in
the reporting units of Asia ($29.7 million) and South America/Mexico ($83.1
million). The Company utilized projections of future cash flows for each of its
reporting units in determining their fair value for purposes of this analysis.
Such amounts are estimates made by management using the best information
available at that time.
During 2001, the Company recorded goodwill and long-lived asset impairment
writedown provisions of $333.0 million, pursuant to restructuring of the
Company's operations and revised cash flow expectations for the related business
units.
Other Loss Reserves -- The Company has other loss reserves such as purchase
accounting reserves, restructuring reserves, and loss contract reserves that
require the use of estimates and judgment regarding profitability, risk
exposure, and ultimate liability. Reserves for loss contracts are estimated by
determining which parts are being sold pursuant to loss contracts, their
profitability per unit and expected sales volumes over the life of each
contract. Other losses are estimated using consistent and appropriate methods;
however, changes to the assumptions could materially affect the recorded
liabilities for loss. During 2002, favorable adjustments to the Company's loss
contract reserves of approximately $7.0 million were recorded to reflect the
discontinuance of certain contracts that the Company was fulfilling at a loss,
and the
33
reduction of costs associated with remaining loss contracts which were
transferred to lower cost locations as part of the Company's restructuring
activities.
Customer Tooling and Other Design Costs -- As indicated in Note 2 to the
Consolidated Financial Statements, the Company incurs costs related to tooling
for specific customer programs, which in some instances is owned by the
Company's customers. Because the Company has the contractual right to use such
tooling over the life of the supply arrangement with its customers, these
tooling costs are capitalized and amortized over the life of the related
product.
Pension and Other Post-Retirement Benefits -- The determination of the
obligation and expense for pension and other postretirement benefits is
dependent on the selection of certain assumptions used by actuaries in
calculating such amounts. Those assumptions are described in Note 11 to the
Consolidated Financial Statements and include, among others, the discount rate,
expected long-term rate of return on plan assets, as well as expected increases
in compensation and healthcare costs. In accordance with generally accepted
accounting principles, actual results that differ from these assumptions are
accumulated and amortized over future periods and, therefore, generally affect
the recognized expense and recorded obligation in such future periods. While the
Company believes that its current assumptions are appropriate based on available
information, significant differences in the actual experience or significant
changes in the assumptions may materially affect the pension and other
postretirement obligations and the future expense.
The Company recorded pension expense (excluding special termination benefit
costs and curtailment loss) of $13.8 million and $10.8 million for 2002 and
2001, respectively. The Company recorded other post-retirement benefit costs of
$10.5 million and $12.9 million for 2002 and 2001, respectively. These amounts
are calculated based on a number of actuarial assumptions, most notably the
discount rates used in the calculation of the Company's benefit obligations of
6.75 percent and 7.5 percent as of the Company's September 30 measurement date
in 2002 and 2001, respectively. The discount rate used by the Company is
developed based on consultation with the Company's actuary and is predominately
based on the Moody's Aa corporate bond rate as of the last business day of the
actual measurement dates. The Company feels that the 75 basis point decrease in
its discount rate is warranted based on the expectation that discount rates
should move with general economic trends. The Company has used consistent
discount rates for its post-retirement benefit obligation calculation under SFAS
106 with those used for the measurement of its pension benefit liability under
SFAS 87.
The expected rates of return on pension plan assets under SFAS 87 of 8.5
percent and 9.5 percent as of December 31, 2002 and 2001, respectively, utilized
by the Company are based on consultation with the Company's actuary and
represent the Company's expected long-term rate of return on plan assets. The
rate of return assumptions selected by the Company reflect the Company's
estimate of the average rate of earnings expected on the funds invested or to be
invested in order to provide for future participant benefits to be paid out over
time. As part of this estimate of the Company's rate of return assumption, the
Company's actuary contemplated the composition of the Company plans' actual
investment policies, as well as, the expected long-term rates of return for the
various categories of investment vehicles within the plans. The Company feels
that the 100 basis point decrease in its expected return on plan assets is
warranted based on the overall downward economic trend in investment returns
experienced within the U.S. equity market during the last 18 months and reduced
future expectations.
The Company expects its 2003 pension benefit expense (net of any special
termination benefit costs or curtailment cost) to be approximately $19 million
and its 2003 other post-retirement benefit expense (net of any curtailment cost)
to approximate $11 million. If the assumption of the discount rate for 2003 were
75 basis points lower, the 2003 pension benefit expense and 2003 other
post-retirement benefit expense would be increased by $2.2 million and $0.1
million, respectively. If the assumption of the expected rate of return on
pension plan assets for 2003 were 100 basis points lower, the 2003 pension
benefit expense would be increased by $1.0 million.
34
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
establishes accounting standards for the recognition and measurement of legal
obligations associated with the retirement of tangible long-lived assets. SFAS
No. 143 will become effective for the Company on January 1, 2003 and requires
recognition of a liability for an asset retirement obligation in the period in
which it is incurred. The Company does not believe that SFAS No. 143 will have a
material impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other provisions, this Statement eliminates the requirement
that gains and losses from extinguishments of debt be classified as
extraordinary items. SFAS No. 145 will become effective for the Company on
January 1, 2003. Upon adoption of SFAS No. 145, the Company will reclassify
losses on extinguishments of debt that were classified as extraordinary items in
prior periods.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, rather than when a company commits to an exit
plan as was previously required. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. The new standard
will result in the Company recognizing liabilities for any future restructuring
activities at the time the liability is incurred rather than the past method of
recognizing the liability upon the announcement of the plan and communication to
colleagues.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for financial statements for fiscal years ending
after December 15, 2002. The Company has included the additional disclosures
about its method of stock-based compensation in Note 2.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The recognition and
measurement provisions of FIN 45 are effective for all guarantees issued or
modified after December 31, 2002. The Company has disclosed all guarantees.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." FIN 46 addresses
consolidation by business enterprises of certain variable interest entities that
are currently not consolidated. FIN 46 is effective for variable interests
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. For variable interest entities
in which the Company holds a variable interest that it acquired before February
1, 2003, the Interpretation applies on July 1, 2003. The Company is currently
analyzing the impact of FIN 46 on its balance sheet and results of operations.
35
RISK FACTORS
The Company is subject to the following risks relating to its operations
and the nature of the industry in which it competes:
- THE LOSS OF FORD, DAIMLERCHRYSLER OR ANY OTHER SIGNIFICANT CUSTOMER COULD HAVE
A MATERIAL ADVERSE EFFECT ON EXISTING AND FUTURE REVENUES AND NET INCOME
(LOSS)
Revenues from Ford and DaimlerChrysler represented approximately 38 percent
and 22 percent, respectively, of the Company's revenues in 2002. The contracts
with many customers, including Ford and DaimlerChrysler, provide for supplying
the customer's requirements for a particular model, rather than for
manufacturing a specific quantity of products. These contracts range from one
year to the life of the model, usually three to ten years, and do not require
the purchase by the customer of any minimum number of parts. Therefore, the loss
of any one of these customers or a significant reduction in demand for certain
key models or a group of related models sold by any major customer could have a
material adverse effect on the Company's existing and future revenues and net
income (loss).
During December 2002, the Company announced its intention not to pursue the
follow-on program of the next generation Ford Explorer frame. The current Ford
Explorer frame program, expected to run through 2005, is produced at the
Company's Corydon, IN facility. The Company's decision was based on the fact
that the expected returns at targeted pricing levels did not meet the Company's
requirements. The Company has mitigated the loss of revenue anticipated when the
current Explorer program ceases by winning approximately $1.4 billion in new
business, which is expected to launch over the next three years and be in full
production by the end of 2005.
- GROSS MARGIN AND PROFITABILITY WILL BE ADVERSELY AFFECTED BY THE INABILITY TO
REDUCE COSTS OR INCREASE PRICES
There is substantial continuing pressure from the major OEMs to reduce
costs, including the cost of products purchased from outside suppliers. In
addition, the Company's profitability is dependent, in part, on its ability to
spread fixed production costs over increasing product sales. If the Company is
unable to generate sufficient production cost savings in the future to offset
price reductions and any reduction in consumer demand for automobiles resulting
in decreased sales, the Company's gross margin and profitability would be
adversely affected. In addition, the Company's customers often times require
engineering, design or production changes. In some circumstances, the Company
may not be able to achieve price increases sufficient in amounts to cover the
costs of these changes.
- CYCLICALITY AND SEASONALITY IN THE AUTOMOTIVE MARKET COULD ADVERSELY AFFECT
REVENUES AND NET INCOME (LOSS)
The automotive market is highly cyclical and is dependent on consumer
spending. For example, during the third and fourth quarters of 2000, the
automotive market began experiencing a decline in production levels. This
decline continued throughout 2001, but production levels increased slightly in
2002. Economic factors adversely affecting automotive production and consumer
spending could adversely impact the Company's revenues and net income. The
automotive market is also somewhat seasonal. The Company typically experiences
decreased revenue and operating income during the third calendar quarter of each
year due to the impact of scheduled OEM plant shutdowns in July and August for
vacations and new model changeovers.
36
- THE COMPANY IS SUBJECT TO CERTAIN RISKS ASSOCIATED WITH FOREIGN OPERATIONS
THAT COULD HARM REVENUES AND PROFITABILITY
The Company has significant international operations, specifically in
Europe, Asia and South America. Certain risks are inherent in international
operations, including:
- difficulty in enforcing agreements and collecting receivables through
certain foreign legal systems;
- foreign customers may have longer payment cycles than customers in the
United States;
- tax rates in certain foreign countries may exceed those in the United
States, and foreign earnings may be subject to withholding requirements
or the imposition of tariffs, exchange controls or other restrictions;
- general economic and political conditions in countries where the Company
operates may have an adverse effect on operations in those countries;
- the Company may find it difficult to manage a large organization spread
throughout various countries; and
- required compliance with a variety of foreign laws and regulations.
As the Company continues to expand its business globally, its success will
depend, in part, on the ability to anticipate and effectively manage these and
other risks. The occurrence of any of the foregoing risks could have a
significant effect on the Company's international operations and, as a result,
its revenues and profitability.
- CURRENCY EXCHANGE RATE FLUCTUATIONS COULD HAVE AN ADVERSE EFFECT ON REVENUES
AND FINANCIAL RESULTS
The Company generates a significant portion of its revenues and incurs a
significant portion of its expenses in currencies other than U.S. dollars. To
the extent that the Company is unable to match revenues received in foreign
currencies with costs paid in the same currency, exchange rate fluctuations in
any such currency could have an adverse effect on revenues and financial
results.
- THE COMPANY'S BUSINESS MAY BE DISRUPTED SIGNIFICANTLY BY WORK STOPPAGES AND
OTHER LABOR MATTERS
Many OEMs and their suppliers have unionized work forces. Work stoppages or
slow-downs experienced by OEMs or their suppliers could result in slow-downs or
closures of assembly plants where the Company's products are included in
assembled vehicles. For example, strikes by the United Auto Workers led to the
shutdown of most of GM's North American assembly plants in June and July of
1998. The Company estimates that this work stoppage at GM's facilities had an
unfavorable impact of approximately $24.7 million on its 1998 revenues. In the
event that one or more of its customers experiences a material work stoppage,
such a work stoppage could have a material adverse effect on the Company's
business.
In addition, approximately 4,800 of the Company's colleagues are unionized
(representing approximately 40 percent of its colleagues as of December 31,
2002). The Company may encounter strikes, further unionization efforts or other
types of conflicts with labor unions or the Company's colleagues, any of which
could have an adverse effect on the Company's ability to produce structural
components and assemblies or may limit its flexibility in dealing with its
workforce.
- OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY THE IMPACT OF ENVIRONMENTAL AND
SAFETY REGULATIONS
The Company is subject to foreign, federal, state and local laws and
regulations governing the protection of the environment and occupational health
and safety, including laws regulating the generation, storage, handling, use and
transportation of hazardous materials; the emission and discharge of hazardous
materials into the soil, ground or air; and the health and safety of its
colleagues. The Company is also required to obtain permits from governmental
authorities for certain operations. Although the Company will make every effort
to do so, it cannot assure that it has been or will be at all times in complete
37
compliance with such laws, regulations and permits. If it violates or fails to
comply with these laws, regulations or permits, it could be fined or otherwise
sanctioned by regulators. In some instances, such a fine or sanction could be
material.
The Company is also subject to laws imposing liability for the cleanup of
contaminated property. Under these laws, it could be held liable for costs and
damages relating to contamination at its past or present facilities and at third
party sites to which these facilities sent wastes containing hazardous
substances. The amount of such liability could be material.
- THE INABILITY TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE AUTOMOTIVE
SUPPLY INDUSTRY COULD RESULT IN THE LOSS OF CUSTOMERS, WHICH COULD HAVE AN
ADVERSE EFFECT ON THE COMPANY'S REVENUES AND OPERATING RESULTS
The automotive component supply industry is highly competitive. Some of the
Company's competitors are companies, or divisions or subsidiaries of companies,
that are larger than the Company and have greater financial and other resources.
In addition, with respect to certain of the Company's products, it competes with
divisions of its OEM customers. The Company's products may not be able to
compete successfully with the products of these other companies, which could
result in the loss of customers and, as a result, decreased revenues and
profitability. In addition, the Company's competitive position in the automotive
component supply industry could be adversely affected in the event that it is
unsuccessful in making strategic acquisitions or establishing joint ventures
that would enable it to expand globally.
The Company principally competes for new business both at the beginning of
the development of new models and upon the redesign of existing models by its
major customers. New model development generally begins two to five years prior
to the marketing of such models to the public. The failure to obtain new
business on new models or to retain or increase business on redesigned existing
models could adversely affect the Company's business and financial results. In
addition, as a result of the relatively long lead times required for many of its
complex structural components, it may be difficult in the short-term for the
Company to obtain new sales to replace any unexpected decline in the sale of
existing products. The Company may incur significant expense in preparing to
meet anticipated customer requirements which may not be recovered.
- ACTUAL PROGRAM VOLUMES AND PRICING MAY BE LESS THAN PLANNED
The Company incurs costs and makes capital expenditures for new program
awards based upon certain estimates of production volumes for certain vehicles.
While the Company attempts to establish the price of its products for variances
in production volumes, if the actual production of certain vehicle models is
significantly less than planned, the Company's revenues and net income may be
adversely affected. The Company cannot predict its customers' demands for the
products it supplies either in the aggregate or for particular reporting
periods. For example, the Company cannot predict whether or to what extent the
expected $1.4 billion in annual new program revenue, anticipated to be fully
realized by 2006, will actually result in firm orders from customers.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
Form 10-K or incorporated by reference herein, are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this Form 10-K, the words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate to the
Company, are intended to identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the time such statements were made. Various economic and competitive
factors could cause actual results to differ materially from those discussed in
such forward-looking statements, including factors which are outside the control
of the Company, such as risks relating to: (i) the degree to which the Company
is
38
leveraged; (ii) the Company's reliance on major customers and selected models;
(iii) the cyclicality and seasonality of the automotive market; (iv) the failure
to realize the benefits of recent acquisitions and joint ventures; (v) obtaining
new business on new and redesigned models; (vi) the Company's ability to
continue to implement its acquisition strategy; (vii) the highly competitive
nature of the automotive supply industry; (viii) the ability to achieve the
anticipated volume of production from new and planned supply programs; and (ix)
such other factors noted in this Form 10-K with respect to the Company's
businesses. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by such cautionary statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" section of Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management of the Company is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of the 2002 Annual Report. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
therefore include certain amounts based on management's best estimates and
judgments. The financial information contained elsewhere in the 2002 Annual
Report is consistent with that in the consolidated financial statements.
The Company maintains internal accounting control systems which management
believes provide reasonable assurance that the Company's assets are properly
safeguarded and accounted for, that the Company's books and records properly
reflect all transactions, and that the Company's policies and procedures are
implemented by qualified personnel. Reasonable assurance is based upon the
recognition that the cost of an internal control system should not exceed the
related benefits.
The Audit Committee of the Board of Directors meets with representatives of
management and Deloitte & Touche LLP, the Company's independent public
accountants, on financial reporting matters and the evaluation of internal
accounting controls. The independent public accountants have free access to meet
with the Audit Committee, without the presence of management, to discuss any
appropriate matters.
Deloitte & Touche LLP is engaged to express an opinion as to whether the
consolidated financial statements present fairly, in all material respects and
in accordance with generally accepted accounting principles, the financial
position, results of operations and cash flows of the Company.
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report for the year ended December 31,
2002...................................................... 41
Report of Independent Public Accountants for the years ended
December 31, 2001 and 2000................................ 42
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... 43
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.......................... 44
Consolidated Statements of Stockholders' Investment for the
years ended December 31, 2002, 2001 and 2000.............. 45
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... 46
Notes to Consolidated Financial Statements.................. 47
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Tower Automotive, Inc.
We have audited the accompanying consolidated balance sheet of Tower
Automotive, Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of
December 31, 2002 and the related consolidated statements of operations,
stockholders' investment and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements of the Company
as of December 31, 2001 and for each of the two years in the period ended
December 31, 2001 were audited by other auditors who have ceased operations and
whose report, dated January 25, 2002, expressed an unqualified opinion on those
financial statements and included an explanatory paragraph concerning a change
in accounting for derivative financial instruments as discussed in Note 2 to the
financial statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tower Automotive, Inc. and
Subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for goodwill in 2002.
As discussed above, the financial statements of Tower Automotive, Inc. and
Subsidiaries as of December 31, 2001 and for each of the two years in the period
then ended were audited by other auditors who have ceased operations. As
described in Note 2, these financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
(Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of January 1, 2002. Our audit procedures with respect to the
disclosures in Note 2 with respect to 2001 and 2000 included (i) agreeing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill, as a result of initially applying Statement No. 142, to the Company's
underlying records obtained from management, and (ii) testing the mathematical
accuracy of the reconciliation of adjusted net income to reported net income,
and the related earnings-per-share amounts. In our opinion, the disclosures for
2001 and 2000 in Note 2 are appropriate. However, we were not engaged to audit,
review or apply any procedures to the 2001 or 2000 financial statements of the
Company other than with respect to such disclosures and accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000 financial
statements taken as a whole.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 11, 2003
41
The following report is a copy of a report previously issued by Arthur
Andersen LLP ("Andersen"), which report has not been reissued by Andersen.
Certain financial information for each of the two years in the period ended
December 31, 2001 was not reviewed by Andersen and includes:
(ii) reclassifications to conform to our fiscal 2002 financial statement
presentation and
(ii) additional disclosure to conform with new accounting pronouncements and SEC
rules and regulations issued during such fiscal year.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tower Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of Tower
Automotive, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tower Automotive, Inc. and
Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 2 to the financial statements, effective January 1,
2001, the Company adopted the new requirements of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
Arthur Andersen LLP
Minneapolis, Minnesota,
January 25, 2002
42
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 13,699 $ 21,767
Accounts receivable....................................... 249,341 216,638
Inventories............................................... 133,074 112,536
Deferred income taxes, net................................ 20,634 26,323
Prepaid tooling and other................................. 100,433 62,906
---------- ----------
Total current assets................................... 517,181 440,170
---------- ----------
Property, Plant and Equipment, net.......................... 1,073,619 1,120,259
Investments in Joint Ventures............................... 260,898 243,198
Deferred Income Taxes, net.................................. 105,699 61,461
Goodwill.................................................... 472,967 567,080
Other Assets, net of accumulated amortization of $20,297 and
$17,083................................................... 127,521 101,268
---------- ----------
$2,557,885 $2,533,436
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 120,470 $ 172,083
Accounts payable.......................................... 417,727 368,910
Accrued liabilities....................................... 284,450 278,962
---------- ----------
Total current liabilities.............................. 822,647 819,955
---------- ----------
Long-Term Debt, net of current maturities................... 535,220 601,084
Obligations Under Capital Leases, net of current
maturities................................................ 29,731 4,620
Convertible Subordinated Notes.............................. 199,984 199,984
Other Noncurrent Liabilities................................ 199,477 201,635
---------- ----------
Total noncurrent liabilities........................... 964,412 1,007,323
---------- ----------
Commitments and Contingencies (Notes 6 and 12)
Mandatorily Redeemable Trust Convertible Preferred
Securities................................................ 258,750 258,750
Stockholders' Investment:
Preferred stock, par value $1; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, par value $.01; 200,000,000 shares
authorized; 65,878,655 issued and 56,050,855
outstanding in 2002; 48,077,142 shares issued and
outstanding in 2001.................................... 659 481
Additional paid-in capital................................ 683,072 456,627
Retained earnings (deficit)............................... (57,174) 40,432
Deferred compensation plans............................... (10,746) (15,571)
Accumulated other comprehensive loss...................... (43,875) (34,561)
Treasury stock, at cost: 9,827,800 shares in 2002......... (59,860) --
---------- ----------
Total stockholders' investment......................... 512,076 447,408
---------- ----------
$2,557,885 $2,533,436
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
43
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................. $2,754,464 $2,467,433 $2,531,953
Cost of sales............................................ 2,455,577 2,190,248 2,160,359
---------- ---------- ----------
Gross profit........................................... 298,887 277,185 371,594
Selling, general and administrative expenses............. 143,822 139,203 137,003
Amortization expense..................................... 4,161 24,804 21,517
Restructuring and asset impairment charges, net.......... 61,125 383,739 141,326
---------- ---------- ----------
Operating income (loss)................................ 89,779 (270,561) 71,748
Interest expense......................................... 69,197 80,319 71,162
Interest income.......................................... (2,288) (6,554) (6,451)
Other expense, net....................................... 1,052 -- --
---------- ---------- ----------
Income (loss) before provision for income taxes, equity
in earnings of joint ventures, minority interest,
extraordinary item and cumulative effect of
accounting change................................... 21,818 (344,326) 7,037
Provision (benefit) for income taxes..................... 7,636 (73,312) 2,619
---------- ---------- ----------
Income (loss) before equity in earnings of joint
ventures, minority interest, extraordinary item and
cumulative effect of accounting change.............. 14,182 (271,014) 4,418
Equity in earnings of joint ventures, net of tax......... 16,822 17,250 22,480
Minority interest, net of tax............................ (15,824) (13,760) (10,476)
---------- ---------- ----------
Income (loss) before extraordinary item and cumulative
effect of accounting change......................... 15,180 (267,524) 16,422
Extraordinary loss on early extinguishment of debt, net
of tax................................................. -- -- (2,988)
Cumulative effect of change in accounting principle, net
of tax................................................. (112,786) -- --
---------- ---------- ----------
Net income (loss)................................... $ (97,606) $ (267,524) $ 13,434
========== ========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary loss and cumulative
effect of accounting change......................... $ 0.26 $ (5.87) $ 0.35
Extraordinary loss..................................... -- -- (0.06)
Cumulative effect of change in accounting principle.... (1.96) -- --
---------- ---------- ----------
Net income (loss)................................... $ (1.70) $ (5.87) $ 0.29
========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary loss and cumulative
effect of accounting change......................... $ 0.26 $ (5.87) $ 0.34
Extraordinary loss..................................... -- -- (0.06)
Cumulative effect of change in accounting principle.... (1.96) -- --
---------- ---------- ----------
Net income (loss)................................... $ (1.70) $ (5.87) $ 0.28
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
44
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
COMMON STOCK ADDITIONAL RETAINED WARRANTS TO DEFERRED
------------------- PAID-IN EARNINGS ACQUIRE COMPENSATION
SHARES AMOUNT CAPITAL (DEFICIT) COMMON STOCK PLANS
---------- ------ ---------- --------- ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 31, 1999........ 46,879,454 $469 $437,210 $ 294,522 $ 2,000 $ (4,484)
Conversion of warrants............ 400,000 4 5,596 -- (2,000) --
Exercise of options............... 56,000 1 348 -- -- --
Sales of stock under Employee
Stock Discount Purchase Plan.... 224,342 2 2,843 -- -- --
Deferred Income Stock Plan
deferrals....................... 24,595 -- 4,458 -- -- (4,458)
Repurchase of common stock........ -- -- -- -- -- --
Net income........................ -- -- -- 13,434 -- --
Other comprehensive
loss -- foreign currency
translation adjustment.......... -- -- -- -- -- --
Total comprehensive income........
---------- ---- -------- --------- ------- --------
BALANCE, DECEMBER 31, 2000........ 47,584,391 476 450,455 307,956 -- (8,942)
Conversion of Edgewood and 5%
convertible notes............... 273,862 3 825 -- -- --
Exercise of options............... 42,750 -- 268 -- -- --
Sales of stock under Employee
Stock Discount Purchase Plan.... 172,502 2 1,167 -- -- --
Deferred Income Stock Plan
deferrals....................... -- -- 1,279 -- -- (1,279)
Restricted stock issued in
exchange for stock options...... -- -- 5,350 -- -- (5,350)
Private placement of common
stock........................... 3,637 -- (2,717) -- -- --
Net loss.......................... -- -- -- (267,524) -- --
Other comprehensive loss:
Foreign currency translation
adjustment.................... -- -- -- -- -- --
Transition adjustment relating
to loss on qualifying cash
flow hedges................... -- -- -- -- -- --
Unrealized loss on qualifying
cash flow hedges.............. -- -- -- -- -- --
Minimum pension liability....... -- -- -- -- -- --
Total comprehensive loss..........
---------- ---- -------- --------- ------- --------
BALANCE, DECEMBER 31, 2001........ 48,077,142 481 456,627 40,432 -- (15,571)
Exercise of options............... 329,368 3 1,653 -- -- --
Sales of stock under Employee
Stock Discount Purchase Plan.... 222,145 2 1,423 -- -- --
Deferred Income Stock Plan
deferrals....................... -- -- 1,387 -- -- (1,387)
Deferred Income Stock Plan
distributions................... -- -- -- -- -- 3,781
Restricted stock grants earned and
forfeited....................... -- -- (465) -- -- 2,431
Issuance of common stock.......... 17,250,000 173 222,447 -- -- --
Repurchase of common stock........ -- -- -- -- -- --
Net loss.......................... -- -- -- (97,606) -- --
Other comprehensive income (loss):
Foreign currency translation
adjustment.................... -- -- -- -- -- --
Unrealized loss on qualifying
cash flow hedges.............. -- -- -- -- -- --
Minimum pension liability....... -- -- -- -- -- --
Total comprehensive loss..........
---------- ---- -------- --------- ------- --------
BALANCE, DECEMBER 31, 2002........ 65,878,655 $659 $683,072 $ (57,174) $ -- $(10,746)
========== ==== ======== ========= ======= ========
ACCUMULATED
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE --------------------- STOCKHOLDERS'
INCOME (LOSS) SHARES AMOUNT INVESTMENT
------------- ---------- -------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 31, 1999........ $ (2,582) -- $ -- $ 727,135
Conversion of warrants............ -- -- -- 3,600
Exercise of options............... -- -- -- 349
Sales of stock under Employee
Stock Discount Purchase Plan.... -- -- -- 2,845
Deferred Income Stock Plan
deferrals....................... -- -- -- --
Repurchase of common stock........ -- (4,112,100) (40,178) (40,178)
Net income........................ -- -- --
Other comprehensive
loss -- foreign currency
translation adjustment.......... (7,090) -- --
Total comprehensive income........ 6,344
-------- ---------- -------- ---------
BALANCE, DECEMBER 31, 2000........ (9,672) (4,112,100) (40,178) 700,095
Conversion of Edgewood and 5%
convertible notes............... -- -- -- 828
Exercise of options............... -- -- -- 268
Sales of stock under Employee
Stock Discount Purchase Plan.... -- -- -- 1,169
Deferred Income Stock Plan
deferrals....................... -- 479,337 -- --
Restricted stock issued in
exchange for stock options...... -- -- -- --
Private placement of common
stock........................... -- 3,632,763 40,178 37,461
Net loss.......................... -- -- --
Other comprehensive loss:
Foreign currency translation
adjustment.................... (2,115) -- --
Transition adjustment relating
to loss on qualifying cash
flow hedges................... (4,200) -- --
Unrealized loss on qualifying
cash flow hedges.............. (4,102) -- --
Minimum pension liability....... (14,472) -- --
Total comprehensive loss.......... (292,413)
-------- ---------- -------- ---------
BALANCE, DECEMBER 31, 2001........ (34,561) -- -- 447,408
Exercise of options............... -- -- -- 1,656
Sales of stock under Employee
Stock Discount Purchase Plan.... -- -- -- 1,425
Deferred Income Stock Plan
deferrals....................... -- -- -- --
Deferred Income Stock Plan
distributions................... -- -- -- 3,781
Restricted stock grants earned and
forfeited....................... -- -- -- 1,966
Issuance of common stock.......... -- -- -- 222,620
Repurchase of common stock........ -- (9,827,800) (59,860) (59,860)
Net loss.......................... -- -- --
Other comprehensive income (loss):
Foreign currency translation
adjustment.................... 19,915 -- --
Unrealized loss on qualifying
cash flow hedges.............. (4,521) -- --
Minimum pension liability....... (24,708) -- --
Total comprehensive loss.......... (106,920)
-------- ---------- -------- ---------
BALANCE, DECEMBER 31, 2002........ $(43,875) (9,827,800) $(59,860) $ 512,076
======== ========== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
45
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)................................... $ (97,606) $ (267,524) $ 13,434
Adjustments required to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of change in accounting
principle, net................................. 112,786 -- --
Restructuring and asset impairment charge, net... 61,125 383,739 141,326
Depreciation and amortization.................... 140,859 159,893 144,805
Deferred income tax expense (benefit)............ 2,107 (80,758) (23,373)
Extraordinary loss on extinguishment of debt,
net............................................ -- -- 2,988
Gain on sale of plant............................ (3,839) -- --
Equity in earnings of joint ventures, net........ (16,822) (17,250) (22,480)
Change in other operating items:
Accounts receivable............................ (33,638) 74,515 111,706
Inventories.................................... (20,538) 21,415 6,789
Prepaid tooling and other...................... (36,486) 129,339 (115,780)
Accounts payable and accrued liabilities....... 83,314 148,802 (119,763)
Other assets and liabilities................... (60,310) (38,356) (47,004)
----------- ----------- -----------
Net cash provided by operating activities...... 130,952 513,815 92,648
----------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net........................... (158,964) (193,955) (93,588)
Acquisitions, net of cash acquired, including joint
venture interests and earnout payments........... (40,802) (5,418) (228,547)
Net proceeds from divestitures...................... 4,004 -- 55,353
Proceeds from sale of fixed assets.................. 50,313 -- --
----------- ----------- -----------
Net cash used for investing activities...... (145,449) (199,373) (266,782)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings............................ 2,038,037 2,308,821 3,372,311
Repayments of debt.................................. (2,197,449) (2,643,860) (3,299,737)
Net proceeds from issuance of senior Euro notes..... -- -- 134,700
Net proceeds from issuance of common stock.......... 225,701 38,991 6,794
Payments for repurchase of common stock............. (59,860) -- (40,178)
----------- ----------- -----------
Net cash provided by (used for) financing
activities................................ 6,429 (296,048) 173,890
----------- ----------- -----------
Net Change in Cash and Cash Equivalents............... (8,068) 18,394 (244)
Cash and Cash Equivalents, beginning of year.......... 21,767 3,373 3,617
----------- ----------- -----------
Cash and Cash Equivalents, end of year................ $ 13,699 $ 21,767 $ 3,373
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized........ $ 66,095 $ 79,099 $ 63,776
=========== =========== ===========
Income taxes (refunded) paid..................... $ (19,820) $ (12,853) $ 18,808
=========== =========== ===========
NON CASH FINANCING ACTIVITIES:
Notes payable converted to common stock............. $ -- $ 828 $ --
=========== =========== ===========
Deferred Income Stock Plan.......................... $ 1,387 $ 1,279 $ 4,458
=========== =========== ===========
Issuance of restricted stock for options............ $ -- $ 5,350 $ --
=========== =========== ===========
Debt assumed by buyer upon sale of plant............ $ 11,923 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
46
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Tower Automotive, Inc. and Subsidiaries (the "Company") produces a broad
range of assemblies and modules for vehicle frames, upper body structures and
suspension systems for the global automotive industry. Including both
wholly-owned subsidiaries and investments in joint ventures, the Company has
facilities in the United States, Canada, Italy, Germany, Belgium, Poland,
France, Spain, Brazil, India, Slovakia, Korea, Japan, China, and Mexico.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Tower Automotive, Inc., its wholly-owned subsidiaries, and its majority-owned
and majority-controlled investments. All material intercompany accounts and
transactions have been eliminated in consolidation.
The Company owns a 60 percent joint venture interest in Tower Golden Ring,
which produces certain parts in China. The remaining 40 percent of the joint
venture is owned by unrelated third parties. Prior to the third quarter of 2001,
this investment was accounted for using the equity method since all significant
business decisions required the approval of 80 percent of the joint venture
partners. During the third quarter of 2001, the Company determined that its
relationship with the other investors and the fact that representatives
appointed by the Company hold key management positions within the joint venture
allowed it to exercise significant control over significant business decisions.
As a result, this joint venture was consolidated effective as of the third
quarter of 2001. The Company's investments in Metalsa and Yorozu are accounted
for using the equity method.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less. Cash equivalents are stated at cost
which approximates fair value.
SUBORDINATED INTEREST IN ACCOUNTS RECEIVABLE:
In June 2001, the Company entered into a financing agreement whereby its
domestic operating units sell eligible customer receivables on an ongoing basis
to a newly formed, fully consolidated, financing entity. The financing entity
subsequently sells its interest in the receivables to a third party funding
agent in exchange for cash and a subordinated interest in the unfunded
transferred receivables. The Company acts as an administrative agent in the
management and collection of accounts receivable sold.
At December 31, 2002, the Company sold approximately $118.0 million of net
accounts receivable in exchange for $17.5 million of cash and a retained
subordinated interest in the receivables sold of approximately $100.5 million.
The receivables sold represented amounts owed to the Company from customers as
of November 30, 2002. The majority of such receivables were collected in
December 2002 and as a result, the Company's retained interest in accounts
receivable is not significant as of December 31, 2002 and is not presented
separately from accounts receivable. As of December 31, 2002, the Company
recorded a liability to the funding agent of $17.5 million, which represents
receivables for which the Company has received collections from customers and
are required to be submitted to the funding agent. Settlement of amounts due to
the funding agent, as well as the cost of funding at a rate of approximately 7.6
percent, occurs during the month subsequent to the sale of the receivables.
47
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES:
Inventories are valued at the lower of first-in, first-out ("FIFO") cost or
market, and consisted of the following (in thousands):
DECEMBER 31,
-------------------
2002 2001
-------- --------
Raw materials............................................. $ 64,777 $ 52,579
Work-in-process........................................... 20,630 24,636
Finished goods............................................ 47,667 35,321
-------- --------
$133,074 $112,536
======== ========
TOOLING AND OTHER DESIGN COSTS:
Tooling and other design costs represent costs incurred by the Company in
the development of new tooling used in the manufacture of the Company's
products. The Company follows the provisions of Emerging Issues Task Force
("EITF") Issue No. 99-5, "Accounting for Pre-Production Costs Related to
Long-Term Supply Arrangements," that requires all pre-production tooling costs
incurred for tools that the Company will not own and that will be used in
producing products to be supplied under long-term supply agreements be expensed
as incurred unless the supply agreement provides the supplier with the
noncancellable right to use the tools or the reimbursement of such costs is
contractually guaranteed by the customer. At the time that the customer awards a
contract to the Company, the customer agrees to reimburse the Company for
certain of its tooling costs either in the form of a lump sum payment or by
reimbursement on a piece price basis. When the part for which tooling has been
developed reaches a production-ready status, the Company is reimbursed by its
customers for the cost of the tooling (in instances of lump sum payment), at
which time the tooling becomes the property of the customers. For those costs
related to other tooling and design costs reimbursed through the piece price as
contractually guaranteed, such costs are capitalized as property, plant and
equipment and amortized using the unit of production method over the life of the
related product. The Company has certain other tooling costs related to tools
for which the Company has the contractual right to use the tool over the life of
the supply arrangement, which are capitalized as property, plant and equipment
and amortized over the life of the related product. The components of
capitalized tooling costs are as follows (in thousands):
DECEMBER 31,
------------------
2002 2001
-------- -------
Reimbursable pre-production design and development costs.... $ 9,771 $ 5,628
Customer-owned tooling...................................... 56,449 51,019
Supplier-owned tooling...................................... 48,253 28,533
-------- -------
Total..................................................... $114,473 $85,180
======== =======
All tooling amounts owned by the customer for which the Company expects
reimbursement are recorded in other current and other long-term assets on the
accompanying consolidated balance sheet. A loss is recognized if the Company
forecasts that the amount of capitalized tooling and design costs exceeds the
amount to be realized through the sale of product.
48
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following (in thousands):
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Land........................................................ $ 3,414 $ 8,058
Buildings and improvements.................................. 403,214 348,200
Machinery and equipment..................................... 1,136,569 1,095,955
Construction in progress.................................... 118,595 145,108
---------- ----------
1,661,792 1,597,321
Less-accumulated depreciation............................... (588,173) (477,062)
---------- ----------
Property, plant and equipment, net..................... $1,073,619 $1,120,259
========== ==========
Property, plant and equipment acquired in the acquisitions discussed in
Note 6 was recorded at its fair value, determined based on appraisals, as of the
respective acquisition dates. Additions to property, plant and equipment
following the acquisitions are stated at cost. For financial reporting purposes,
depreciation and amortization are provided using the straight-line method over
the following estimated useful lives:
Buildings and improvements.................................. 15 to 40 years
Machinery and equipment..................................... 3 to 20 years
Accelerated depreciation methods are used for tax reporting purposes.
Interest is capitalized during the construction of major facilities and is
amortized over their estimated useful lives. Interest of $6.0 million, $14.6
million and $12.9 million was capitalized in 2002, 2001 and 2000, respectively.
Maintenance and repairs are charged to expense as incurred. Major
betterments and improvements which extend the useful life of the related item
are capitalized and depreciated. The cost and accumulated depreciation of
property, plant and equipment retired or otherwise disposed of are removed from
the related accounts, and any residual values after considering proceeds are
charged or credited to operations.
In April 2002, the Company entered into a sale-leaseback transaction on
seven of its business unit facilities in the United States. This transaction
resulted in net proceeds of $50.3 million after reflecting prepaid lease
payments retained by the lessor. The Company recorded a loss on the sale of the
buildings of $0.3 million in the second quarter 2002 that was classified as
other expense. The lease requires quarterly payments of approximately $1.6
million through 2020 and is accounted for as an operating lease.
GOODWILL:
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired, and through December 31, 2001, was being amortized on a
straight-line basis over 40 years. Effective January 1, 2002, the Company
adopted the new rules on accounting for goodwill and other intangible assets
under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets."
Under SFAS No. 142, the Company designated four reporting units: United
States/Canada, Europe, Asia and South America/Mexico. Preliminary procedures
under SFAS No. 142 indicated an excess of book value over fair value for the
Asia and South America/Mexico reporting units. During the second quarter of
2002, the Company completed its formal valuation procedures under SFAS No. 142,
utilizing a combination of valuation techniques including the discounted cash
flow approach and the market multiple
49
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approach. As a result of this valuation process, the Company recorded a
transitional impairment loss of $112.8 million, representing the write-off of
all of the Company's existing goodwill in the reporting units of Asia ($29.7
million) and South America/Mexico ($83.1 million). The write-off was recorded as
a cumulative effect of a change in accounting principle in the Company's
consolidated statements of operations for the year ended December 31, 2002.
There was no tax impact since the Company recorded a $24.2 million tax valuation
allowance for the deductible portion of the goodwill written off in the
reporting unit of South America/Mexico. The Company determined that it was
appropriate to record a valuation allowance against the entire amount of the
$24.2 million deferred tax asset recognized in adopting SFAS No. 142 given the
uncertainty of realization and the lack of historical income in the reporting
unit. The Asia goodwill was not deductible for tax purposes.
Under the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill. The following table presents a reconciliation of net
income and earnings per share adjusted for the exclusion of goodwill
amortization, net of tax (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- --------- -------
Reported net income (loss)........................... $(97,606) $(267,524) $13,434
Add: Goodwill amortization, net of tax............... -- 12,859 10,987
-------- --------- -------
Adjusted net income (loss)........................... $(97,606) $(254,665) $24,421
======== ========= =======
Reported basic earnings (loss) per common share...... $ (1.70) $ (5.87) $ 0.29
Add: Goodwill amortization, net of tax............... -- 0.28 0.23
-------- --------- -------
Adjusted basic earnings (loss) per common share...... $ (1.70) $ (5.59) $ 0.52
======== ========= =======
Reported diluted earnings (loss) per common share.... $ (1.70) $ (5.87) $ 0.28
Add: Goodwill amortization, net of tax............... -- 0.28 0.23
-------- --------- -------
Adjusted diluted earnings (loss) per common share.... $ (1.70) $ (5.59) $ 0.51
======== ========= =======
The change in the carrying amount of goodwill for the year ended December
31, 2002, by operating segment, is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ---------
Balance at December 31, 2001.................... $337,527 $ 229,553 $ 567,080
Transitional impairment loss.................... -- (112,786) (112,786)
Currency translation adjustment................. (874) 19,547 18,673
-------- --------- ---------
Balance at December 31, 2002.................... $336,653 $ 136,314 $ 472,967
======== ========= =========
During 2001, the Company recorded goodwill and long-lived asset impairment
writedown provisions of $333.0 million, pursuant to restructuring of the
Company's operations and revised cash flow expectations for the related business
units.
OTHER ASSETS:
Other assets consist primarily of prepaid rent expense, non-current tooling
assets and debt issuance costs. All costs are amortized on a straight-line basis
over the term of the related obligations.
50
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and revolving credit facilities approximates fair value because
of the short maturity of these instruments. The carrying amount of the Company's
long-term debt approximates fair value because of the variability of the
interest cost associated with these instruments. The fair value of the Company's
Convertible Subordinated Notes and Preferred Securities approximated $178.6
million and $102.8 million, respectively, as of December 31, 2002 and $167.5
million and $111.3 million as of December 31, 2001.
DERIVATIVE FINANCIAL INSTRUMENTS:
The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met, and requires that
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The effect of this change as of
January 1, 2001, was a pretax charge to accumulated other comprehensive loss of
$6.8 million ($4.2 million net of income tax benefit).
The Company uses derivative financial instruments principally to manage the
risk that changes in interest rates will affect the amount of its future
interest payments. Interest rate swap contracts are used to adjust the
proportion of total debt that is subject to variable and fixed interest rates.
Under these agreements, the Company agrees to pay an amount equal to a specified
fixed rate times a notional principal amount, and to receive in return an amount
equal to a specified variable rate times the same notional principal amount. The
notional amounts of the contract are not exchanged. No other cash payments are
made unless the contract is terminated prior to maturity, in which case the
amount paid or received in settlement is established by agreement at the time of
termination, and usually will represent the net present value, at current rates
of interest, of the remaining obligation to exchange payments under the term of
the contract.
The interest rate swap contracts are recorded at fair value in the
consolidated balance sheet as accrued liabilities and the related gains or
losses on these contracts are recorded in stockholders' investment (as a
component of accumulated other comprehensive loss). Amounts to be paid or
received under the contracts are accrued as interest rates change and are
recognized over the life of the contracts as an adjustment to interest expense.
The net effect of this accounting is that interest expense on the portion of
variable rate debt being hedged is generally recorded based on fixed interest
rates.
During September of 2000, the Company entered into an interest rate swap
contract to hedge against interest rate exposure on approximately $160 million
of its floating rate indebtedness under its Credit Agreement. The contract has
the effect of converting the floating rate interest to a fixed rate of
approximately 6.9 percent, plus any applicable margin required under the
revolving credit facility. The interest rate swap contract was executed to
balance the Company's fixed-rate and floating-rate debt portfolios and expires
in September 2005. As of December 31, 2002, this is the only swap contract the
Company has outstanding. The fair value of the interest rate swap agreement at
December 31, 2002 and 2001 was a liability of $20.4 million and $13.4 million,
respectively, representing the cost that would be incurred to terminate the
agreement. This swap contract has been designated as a cash flow hedge and there
were no gains or losses recorded for any ineffectiveness. The amounts recorded
in stockholders' investment are recognized as an adjustment to interest expense
over the remaining term of the interest rate swap. In 2003, $9.0 million of the
amount recorded in accumulated other comprehensive loss is expected to be
reclassified to interest expense.
51
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER NONCURRENT LIABILITIES:
Other noncurrent liabilities consisted of the following (in thousands):
DECEMBER 31,
-------------------
2002 2001
-------- --------
Post-retirement benefits.................................... $ 71,254 $ 86,382
Purchase accounting reserves................................ 19,885 43,119
Pension liability........................................... 60,276 22,264
Minority interest........................................... 16,945 19,305
Customer prepayments on capital............................. 13,221 20,540
Other....................................................... 17,896 10,025
-------- --------
$199,477 $201,635
======== ========
REVENUE RECOGNITION AND SALES COMMITMENTS:
The Company recognizes revenue as its products are shipped to its
customers. The Company enters into agreements to produce products for its
customers at the beginning of a given vehicle's life. Once such agreements are
entered into by the Company, fulfillment of the customers' purchasing
requirements is the obligation of the Company for the entire production life of
the vehicle, which range from three to ten years, and the Company has no
provisions to terminate such contracts. In certain instances, the Company may be
committed under existing agreements to supply product to its customers at
selling prices which are not sufficient to cover the direct cost to produce such
product. In such situations, the Company records a liability for the estimated
future amount of such losses. Such losses are recognized at the time that the
loss is probable and reasonably estimable and is recorded at the minimum amount
necessary to fulfill the Company's obligations to its customers. Losses are
discounted and are estimated based upon information available at the time of the
estimate, including future production volume estimates, length of the program,
selling price and production cost information. For certain design and
development projects, the Company recognizes revenues under the percentage of
completion method. The amount of revenues recognized under this method is not
significant for any period presented.
INCOME TAXES:
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using currently enacted tax rates.
COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) reflects the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the Company, comprehensive income (loss) represents
net income (loss) adjusted for foreign currency translation adjustments, pension
liability adjustments, and gains or losses on qualifying cash flow hedges in
accordance with SFAS No. 133.
SEGMENT REPORTING:
In accordance with SFAS No. 131, the Company uses the "management approach"
to reporting segment disclosures. The management approach designates the
internal organization that is used by
52
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
STOCK OPTIONS:
The Company accounts for stock options under the provisions of Accounting
Principles Board Opinion ("APB") No. 25, under which no compensation expense is
recognized when the stock options are granted to employees and directors at fair
market value as of the grant date. The Company may also grant stock options to
outside consultants. The fair value of these option grants are expensed over the
period services are rendered based on the Black-Scholes valuation model.
As discussed in Note 4, the Company has three stock option plans: the Stock
Option Plan, the Long Term Incentive Plan, the Independent Director Stock Option
Plan and two stock purchase plans (the Employee Stock Purchase Plan and the
Deferred Income Stock Plan). Had compensation cost for these plans been
determined as required under SFAS No. 123, "Accounting for Stock-Based
Compensation," amended by SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," the Company's pro forma net income
(loss) and pro forma earnings (loss) per share would have been as follows (in
thousands, except per share data):
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
--------- --------- -------
Net income (loss)
As Reported....................................... $ (97,606) $(267,524) $13,434
Pro Forma......................................... (102,924) (271,396) 5,001
Basic earnings (loss) per share
As Reported....................................... $ (1.70) $ (5.87) $ 0.29
Pro Forma......................................... (1.80) (5.95) 0.11
Diluted earnings (loss) per share
As Reported....................................... $ (1.70) $ (5.87) $ 0.28
Pro Forma......................................... (1.80) (5.95) 0.11
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: Risk free interest rates of 5.02 percent in 2002, 4.88 percent in
2001, and 5.56 to 6.72 percent in 2000; expected life of seven years for 2002,
2001, and 2000; expected volatility of 58 percent in 2002, 52 percent in 2001,
and 49 percent in 2000; expected dividends of zero in all years.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The actual results could differ from those
estimates.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars using the year-end rates of exchange. Results of operations
are translated at average rates prevailing throughout the
53
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period. Translation gains or losses are reported as a separate component of
"accumulated other comprehensive loss" in the accompanying consolidated
statements of stockholders' investment.
RECLASSIFICATIONS:
Certain prior year amounts were reclassified to conform to the current year
presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS No. 143 will become effective for the
Company on January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. The Company does
not believe that SFAS No. 143 will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other provisions, this Statement eliminates the requirement
that gains and losses from extinguishment of debt be classified as extraordinary
items. SFAS No. 145 will become effective for the Company on January 1, 2003.
Upon adoption of SFAS No. 145, the Company will reclassify losses on
extinguishments of debt that were classified as extraordinary items in prior
periods.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, rather than when a company commits to an exit
plan as was previously required. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. The new standard
will result in the Company recognizing liabilities for any future restructuring
activities at the time the liability is incurred rather than the past method of
recognizing the liability upon the announcement of the plan and communication to
colleagues.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for financial statements for fiscal years ending
after December 15, 2002. The Company has included the additional disclosures
about its method of stock-based compensation in the "Stock Options" section of
this note.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The recognition and
measurement provisions of FIN 45 are effective for all guarantees issued or
modified after December 31, 2002. The Company has disclosed all guarantees.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." FIN 46 addresses
consolidation by business enterprises of certain variable interest entities that
are currently not consolidated. FIN 46 is effective for variable interests
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date.
54
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For variable interest entities in which the Company holds a variable interest
that it acquired before February 1, 2003, the Interpretation applies on July 1,
2003. The Company is currently analyzing the impact of FIN 46 on its balance
sheet and results of operations.
3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES:
MILWAUKEE PRESS OPERATIONS (2002 PLAN):
On January 31, 2002, the Company announced that it would discontinue the
remaining stamping and ancillary processes performed at its Milwaukee Press
Operations and relocate the remaining work to other Tower locations or Tier II
suppliers. The Company substantially completed the transfer process in 2002. As
a result of these efforts (the "2002 Plan"), the Company recorded a
restructuring charge in the first quarter of 2002 totaling $75.4 million, which
reflects the estimated qualifying "exit costs" to be incurred over the next 12
months pertaining to the 2002 Plan. During the fourth quarter 2002, due to a
favorable settlement of anticipated other exit costs and an assessment of
remaining costs, the Company subsequently reduced the estimates associated with
the 2002 and 2001 Plans by $14.3 million, resulting in a net restructuring
charge of $61.1 million for 2002.
The 2002 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to colleague terminations and certain
other exit costs. Through December 31, 2002, the Company eliminated
approximately 500 colleagues pursuant to the 2002 Plan, consistent with the
original estimate. The estimated restructuring charge does not cover certain
aspects of the 2002 Plan, including movement of equipment and colleague
relocation and training. These costs will be recognized in future periods as
incurred.
The asset impairments consist of long-lived assets, including fixed assets,
buildings and manufacturing equipment from the facilities the Company intends to
dispose of or discontinue. The carrying value of the long-lived assets written
off was $47.2 million. Fixed assets that will be disposed of as part of the 2002
Plan were written down to their estimated residual values. For assets that will
be sold currently, the Company measured impairment based on estimated proceeds
on the sale of the facilities and equipment. These asset impairments have arisen
as a consequence of the Company making the decision to exit these activities
during the first quarter of 2002.
The accrual for the 2002 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2002. The table below
summarizes the accrued operational realignment and other charges through
December 31, 2002 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT OTHER EXIT
IMPAIRMENTS COSTS COSTS TOTAL
----------- ------------- ---------- ------
Provision................................. $ 47.2 $ 8.4 $ 19.8 $ 75.4
Cash usage................................ -- (4.7) (6.6) (11.3)
Non-cash charges.......................... (47.2) -- (11.2) (58.4)
Revision of estimate...................... -- (0.2) (1.0) (1.2)
------ ----- ------ ------
Balance at December 31, 2002.............. $ -- $ 3.5 $ 1.0 $ 4.5
====== ===== ====== ======
During 2002, the Company charged $11.2 million of other exit costs from the
2002 Plan restructuring reserves for expected remaining pension curtailment
costs against the pension liability accrual. As of December 31, 2002, the
Company anticipates future cash payments of $4.5 million under the 2002 Plan.
The revision in estimate for the 2002 Plan resulted from minor variances in
severance and other exit costs experienced during 2002, as compared to the
amount initially established in the 2002 Plan. Such revision
55
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was credited to the "Restructuring and Asset Impairment Charges" line in the
consolidated financial statements.
SEBEWAING AND MILWAUKEE PRESS OPERATIONS (2001 PLAN):
In October 2001, the Company's board of directors approved a restructuring
of the enterprise that included the closing of the Sebewaing, Michigan facility.
In addition, in December 2001, the Company's board of directors approved a
restructuring plan that related to the consolidation of technical activities and
a reduction of other salaried colleagues in conjunction with a reorganization of
the Company's U.S. and Canada operations and the relocation of some component
manufacturing from the Company's Milwaukee Press Operations to other Tower
locations. As a result of the 2001 Plan, the Company recorded a restructuring
charge in the fourth quarter of 2001 of $178.1 million, which reflects the
estimated qualifying "exit costs" to be incurred over the next 12 months
pertaining to the 2001 Plan. This total reflected a provision of $184.0 million,
net of certain revisions in the estimate of the 2000 Plan of $5.9 million, which
were reversed in 2001.
The 2001 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to colleague terminations and certain
other exit costs. These activities resulted in a reduction of more than 700
colleagues in the Company's technical and administrative centers in Novi,
Rochester Hills, and Grand Rapids, Michigan; Milwaukee, Wisconsin; and its U.S.
and Canada manufacturing locations. The estimated restructuring charge does not
cover certain aspects of the 2001 Plan, including movement of equipment and
colleague relocation and training. These costs will be recognized in future
periods as incurred.
The asset impairments consist of long-lived assets, including fixed assets,
buildings and manufacturing equipment from the facilities the Company intends to
dispose of or discontinue, and goodwill. The carrying value of the long-lived
assets written off was $127.4 million as of December 31, 2001. For assets that
will be disposed of currently, the Company measured impairment based on
estimated proceeds on the sale of the facilities and equipment. These asset
impairments have arisen only as a consequence of the Company making the decision
to exit these activities during the fourth quarter of 2001.
The write-off of assets having a total book value of $127.4 million
included $87.5 million of goodwill associated with Sebewaing and Milwaukee Press
Operations, $20.6 million of property, plant and equipment associated with the
Sebewaing operations and $12.1 million of property, plant and equipment
associated with the Milwaukee Press Operations business that was discontinued.
Additionally, there was $7.2 million of property and building write downs
associated with the decision to consolidate the Company's technical centers. As
of December 31, 2002, the Company anticipates future cash payments of $9.3
million under the 2001 Plan.
56
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accrual for the 2001 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2002 and 2001. The
table below summarizes the accrued operational realignment and accrued other
charges related to the 2001 Plan through December 31, 2002 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT OTHER EXIT
IMPAIRMENTS COSTS COSTS TOTAL
----------- ------------- ---------- -------
Provision................................ $ 127.4 $ 24.6 $ 32.0 $ 184.0
Cash usage............................... -- (0.7) (0.6) (1.3)
Non cash charges......................... (127.4) -- -- (127.4)
------- ------ ------ -------
Balance at December 31, 2001............. -- 23.9 31.4 55.3
Cash usage............................... -- (22.2) (3.6) (25.8)
Non cash charges......................... -- -- (7.1) (7.1)
Revision of estimate..................... -- (0.7) (12.4) (13.1)
------- ------ ------ -------
Balance at December 31, 2002............. $ -- $ 1.0 $ 8.3 $ 9.3
======= ====== ====== =======
During 2002, the Company charged $7.1 million for expected special
termination benefits to be paid out in the future from the 2001 Plan
restructuring reserve against the pension liability accrual. The revision in
estimate for the 2001 Plan resulted from a legal settlement negotiated in
December 2002 with A.O. Smith, which allocated the cost of certain supplemental
early retirement benefits to colleagues at the Press Operations and Heavy Truck
Operations in Milwaukee. The impact of this legal settlement was to
substantially reduce the cost of actuarial pension benefits due to colleagues
terminated under the 2001 Plan. This difference of $11.1 million was credited to
the "Restructuring and Asset Impairment Charges" line in the consolidated
financial statements. Certain other revisions in estimate of $2.0 million
related to minor variances in the execution of the 2001 Plan and were accounted
for in a similar manner.
HEAVY TRUCK AND KALAMAZOO STAMPING OPERATIONS (2000 PLAN):
In October 2000, the Company's board of directors approved the 2000 Plan,
which was intended to improve the Company's long-term competitive position and
lower its cost structure. The 2000 Plan included phasing out the heavy truck
rail manufacturing in Milwaukee, Wisconsin; reducing stamping capacity by
closing the Kalamazoo, Michigan facility; and consolidating related support
activities across the enterprise. The Company recognized a charge to operations
of approximately $141.3 million in the fourth quarter of 2000, which reflected
the estimated qualifying "exit costs" to be incurred over the next 12 months
under the 2000 Plan.
The 2000 Plan charge included costs associated with asset impairments,
severance and outplacement costs related to colleague terminations, loss
contract provisions and certain other exit costs. These activities resulted in a
reduction of approximately 850 colleagues.
The asset impairments consisted of long-lived assets, including fixed
assets, manufacturing equipment and land, from the facilities the Company
intends to dispose of or discontinue. For assets that were disposed of
currently, the Company measured impairment based on estimated proceeds on the
sale of the facilities and equipment. For assets that will be held and used in
the future, the Company prepared a forecast of expected undiscounted cash flows
to determine whether asset impairment existed, and used fair values to measure
the required write-downs. These asset impairments have arisen as a consequence
of the Company making the decision to exit these activities during the fourth
quarter of 2000.
The Company anticipated this charge would require cash payments of
approximately $37.6 million combined with the write-off of assets having a book
value of approximately $103.7 million. Actual amounts
57
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have been revised by $5.9 million compared to the original estimate. The assets
written off included Milwaukee heavy truck rail manufacturing machinery and
equipment of approximately $47.3 million, Milwaukee and corporate campus support
operating assets of approximately $46.1 million, Kalamazoo stamping operation's
land, buildings and equipment of approximately $5.7 million and Granite City
stamping, machinery and equipment of $4.6 million.
The accrual for the 2000 Plan was fully utilized as of December 31, 2001.
The table below summarizes the accrued operational realignment and other charges
through December 31, 2001 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT LOSS OTHER EXIT
IMPAIRMENTS COSTS CONTRACTS COSTS TOTAL
----------- ------------- --------- ---------- -------
Provision...................... $ 103.7 $ 25.2 $ 8.1 $ 4.3 $ 141.3
Cash usage..................... -- (8.7) (2.5) (0.3) (11.5)
Non cash charges............... (103.7) -- -- -- (103.7)
------- ------ ----- ----- -------
Balance at December 31, 2000... -- 16.5 5.6 4.0 26.1
Cash usage..................... -- (13.6) (4.2) (2.4) (20.2)
Revision of estimate........... -- (2.9) (1.4) (1.6) (5.9)
------- ------ ----- ----- -------
Balance at December 31, 2001... $ -- $ -- $ -- $ -- $ --
======= ====== ===== ===== =======
NON-RESTRUCTURING ASSET IMPAIRMENTS:
The restructuring and asset impairment charges line on the accompanying
consolidated statements of operations is comprised of both restructuring and
non-restructuring related asset impairments. The components of that line are as
follows for each of the three years ending December 31, 2002 (in millions):
2002 2001 2000
------ ------ ------
Restructuring and related asset impairments, net........... $ 75.4 $184.0 $141.3
Revision of estimate....................................... (14.3) (5.9) --
Other goodwill and asset impairments....................... -- 205.6 --
------ ------ ------
Total...................................................... $ 61.1 $383.7 $141.3
====== ====== ======
The other goodwill and asset impairment charges recorded in 2001 are a
result of the Company's review of the carrying amount of certain of its
goodwill, fixed assets, and certain investments based upon the Company's current
operating plans (including the organizational realignment initiative discussed
above) and current and forecasted trends in the automotive industry. Based upon
a review of anticipated cash flows, the Company determined that goodwill
assigned to two of its plants was impaired and was written down. In addition,
the Company identified assets which no longer had sufficient cash flows to
support their carrying amounts and were written down to fair value, including
its investment in J.L. French.
The total of the other goodwill and asset impairment charges recorded in
2001 is as follows (in millions):
Goodwill writedown.......................................... $108.6
Other asset impairments..................................... 50.7
Investment in J.L. French impairment........................ 46.3
------
Total.................................................. $205.6
======
58
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. STOCKHOLDERS' INVESTMENT:
SALE OF COMMON STOCK:
In May 2002, the Company completed an underwritten primary offering of
17.25 million shares of Tower Automotive, Inc. common stock, which included the
exercise of the underwriters' over-allotment option to acquire 2.25 million
shares. The net proceeds from the offering were $222.4 million, based on an
offering price of $13.75 per share. The Company has used the net proceeds to
repay borrowings under its Credit Agreement.
In August 2001, the Company issued 3.6 million shares of Tower Automotive,
Inc. common stock at a price of $11.00 per share in a private placement
transaction. The Company used the net proceeds of approximately $37.5 million to
repay outstanding indebtedness under its Credit Agreement.
STOCK REPURCHASE:
In May 2000, the Company announced that its board of directors approved the
purchase of up to $100 million of its Common Stock in the open market at times
and amounts to be determined by the Company. During 2000, the Company
repurchased approximately 4.1 million shares at a total cost of $40.1 million.
In August 2002, the Company announced its plan to resume its stock repurchase
program. During 2002, approximately 9.8 million shares, at a total cost of $59.9
million were purchased to complete the total board-approved amount. Repurchased
shares are placed in treasury until subsequently reissued for general corporate
purposes.
EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share for the year ended December 31, 2000 was calculated on the assumption
that the Edgewood notes were converted at the beginning of the period. The
Convertible Subordinated Notes and Preferred Securities were not included in the
computation of earnings per share for the years ended December 31, 2002, 2001,
and 2000 due to their anti-dilutive effect. In addition, common stock
equivalents relating to options and the Edgewood notes totaling approximately
63,000 and 230,000 shares, using the treasury stock method, were excluded from
the calculation of earnings per share in 2002 and 2001, respectively, because
their impact was anti-dilutive.
YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss).................................... $(97,606) $(267,524) $13,434
Interest expense on Edgewood notes, net of tax....... -- -- 30
-------- --------- -------
Net income (loss) applicable to common stockholders--
diluted............................................ $(97,606) $(267,524) $13,464
======== ========= =======
59
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Weighted average number of common shares outstanding.... 57,329 45,597 47,100
Dilutive effect of outstanding stock options and
warrants after application of the treasury stock
method................................................ -- -- 171
Dilutive effect of Edgewood notes, assuming
conversion............................................ -- -- 289
------- ------- -------
Weighted average number of diluted shares outstanding... 57,329 45,597 47,560
======= ======= =======
Basic earnings (loss) per share......................... $ (1.70) $ (5.87) $ 0.29
======= ======= =======
Diluted earnings (loss) per share....................... $ (1.70) $ (5.87) $ 0.28
======= ======= =======
STOCK OPTION PLAN:
The Company adopted and the shareholders approved the 1994 Key Employee
Stock Option Plan (the "Stock Option Plan"), under which any person who is a
full-time, salaried employee of the Company (excluding non-management directors)
is eligible to participate (a "Colleague Participant"). A committee of the Board
of Directors selects the Colleague Participants and determines the terms and
conditions of the options. The Stock Option Plan provides for the issuance of
options to purchase up to 3,000,000 shares of Common Stock at exercise prices
equal to the market price on the date of grant, subject to certain adjustments
reflecting changes in the Company's capitalization. Information regarding the
Stock Option Plan is as follows:
WEIGHTED
WEIGHTED AVERAGE FAIR
SHARES AVERAGE VALUE OF EXERCISABLE
UNDER EXERCISE OPTIONS AT END OF
OPTION EXERCISE PRICE PRICE GRANTED YEAR
---------- -------------- -------- ------------ -----------
Outstanding, December 31, 1999.... 2,442,850 $ 4.00 - 25.75 $13.07 $9.51 552,475
Exercised....................... (56,000) 4.00 - 7.56 6.48
Forfeited....................... (366,500) 4.00 - 25.75 19.20
---------- -------------- ------
Outstanding, December 31, 2000.... 2,020,350 4.00 - 22.97 19.00 9.72 978,725
Exercised....................... (42,750) 4.00 - 7.56 6.60
Converted to restricted stock... (1,251,500) 17.13 - 22.97 19.98
Forfeited....................... (223,500) 4.00 - 22.97 19.70
---------- -------------- ------
Outstanding, December 31, 2001.... 502,600 4.00 - 22.97 17.29 8.85 378,600
Exercised....................... (75,000) 4.00 - 7.56 6.11
Forfeited....................... (201,250) 17.13 - 22.97 19.93
---------- -------------- ------
Outstanding, December 31, 2002.... 226,350 $ 4.00 - 22.97 $18.65 $9.36 205,913
========== ============== ======
60
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER --------------------------------- ----------------------------
RANGE OF OUTSTANDING WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
EXERCISABLE AT REMAINING AVERAGE EXERCISABLE AVERAGE
OPTIONS 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE 12/31/02 EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$ 4.00 2,100 2.2 $ 4.00 2,100 $ 4.00
7.56 8,500 3.1 7.56 8,500 7.56
17.13 - 22.97 215,750 5.7 19.23 195,313 19.22
The weighted average exercise price of options exercisable at the end of
the year was $18.59 at December 31, 2002, $16.59 at December 31, 2001 and $18.13
at December 31, 2000. The weighted average remaining contractual life of
outstanding options was 5.6 years at December 31, 2002, 6.1 years at December
31, 2001 and 7.3 years at December 31, 2000.
All options granted under the Stock Option Plan have a contractual life of
10 years from the date of grant and vest ratably over a four-year or two-year
period from the date of grant.
In March 1999, the Company's board of directors adopted and shareholders
approved the Tower Automotive Inc. Long Term Incentive Plan ("Incentive Plan").
The Incentive Plan is designed to promote the long-term success of the Company
through stock based compensation by aligning the interests of participants with
those of its stockholders. Eligible participants under the Incentive Plan
include key company colleagues, directors, and outside consultants. Awards under
the Incentive Plan may include stock options, stock appreciation rights,
performance shares, and other stock based awards. The Incentive Plan provides
for the issuance of up to 3,000,000 shares of common stock. A committee of the
board of directors is responsible for administration, participant selection, and
determination of terms and conditions of the Incentive Plan.
61
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the Incentive Plan is as follows:
WEIGHTED
WEIGHTED AVERAGE FAIR
SHARES AVERAGE VALUE OF EXERCISABLE
UNDER EXERCISE OPTIONS AT END OF
OPTION EXERCISE PRICE PRICE GRANTED YEAR
--------- -------------- -------- ------------ -----------
Outstanding, December 31,
1999........................ 526,490 $19.25 - 26.81 $20.99 $9.08 --
Granted..................... 1,315,480 13.19 13.19
Granted..................... 120,000 15.56 15.56
Granted..................... 60,000 12.06 12.06
Granted..................... 5,000 11.94 11.94
Granted..................... 5,000 9.63 9.63
Granted..................... 5,000 10.75 10.75
Granted..................... 10,000 10.19 10.19
Granted..................... 120,000 9.13 9.13
Forfeited................... (179,000) 13.19 - 19.25 18.44
--------- -------------- ------
Outstanding, December 31,
2000........................ 1,987,970 9.13 - 26.81 14.61 7.94 70,000
Granted..................... 918,450 11.33 11.33
Converted to restricted
stock.................... (252,000) 19.25 19.25
Forfeited................... (273,450) 9.13 - 13.19 10.62
--------- -------------- ------
Outstanding, December 31,
2001........................ 2,380,970 9.63 - 26.81 13.36 7.48 373,783
Granted..................... 859,050 13.75 13.75
Exercised................... (33,400) 11.33 - 13.19 12.87
Forfeited................... (249,175) 10.19 - 19.25 13.62
--------- -------------- ------
Outstanding, December 31,
2002........................ 2,957,445 $ 9.63 - 26.81 $13.46 $7.79 925,605
========= ============== ======
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER ----------------------------------- ------------------------------
RANGE OF OUTSTANDING WEIGHTED-AVERAGE NUMBER
EXERCISABLE AT REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
OPTIONS 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE 12/31/02 EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$9.63 - 13.75 2,770,955 8.2 $13.20 771,615 $13.33
15.56 65,000 7.4 15.56 32,500 15.56
26.81 121,490 6.3 26.81 121,490 26.81
Options granted in each of the past three years have a remaining
contractual life of five to 10 years and vest ratably over a four-year period
from the date of grant. The weighted average exercise price of options
exercisable at the end of the year was $14.63 at December 31, 2002, $13.65 at
December 31, 2001, and $19.25 at December 31, 2000. The weighted average
remaining contractual life of outstanding options was 8.1 years at December 31,
2002, 8.5 years at December 31, 2001 and 9.1 years at December 31, 2000.
INDEPENDENT DIRECTOR STOCK OPTION PLAN:
In February 1996, the Company's Board of Directors approved the Tower
Automotive, Inc. Independent Director Stock Option Plan (the "Director Option
Plan") that provides for the issuance of options to Independent Directors, as
defined, to acquire up to 200,000 shares of the Company's Common Stock, subject
to certain adjustments reflecting changes in the Company's capitalization. The
option
62
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise price must be at least equal to the fair value of the Common Stock at
the time the option is granted. Vesting is determined by the board of directors
at the date of grant and in no event can be less than six months from the date
of grant. Information regarding the Director Option Plan is as follows:
WEIGHTED
WEIGHTED AVERAGE FAIR
SHARES AVERAGE VALUE OF EXERCISABLE
UNDER EXERCISE OPTIONS AT END OF
OPTION EXERCISE PRICE PRICE GRANTED YEAR
------- -------------- -------- ------------ -----------
Outstanding, December 31,
1999......................... 163,000 $ 7.56-22.97 $16.32 $8.70 90,600
Forfeited.................... (41,000) 7.56-22.97 15.37
------- ------------- ------
Outstanding, December 31,
2000......................... 122,000 7.56-22.97 16.64 8.80 91,200
Forfeited.................... (6,800) 19.25 19.25
------- ------------- ------
Outstanding, December 31,
2001......................... 115,200 7.56-22.97 16.49 8.75 108,400
Exercised.................... (15,000) 7.56 7.56
------- ------------- ------
Outstanding, December 31,
2002......................... 100,200 $7.56-22.97 $17.82 $9.42 100,200
======= ============= ======
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISABLE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
OPTIONS AT 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE 12/31/02 EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$ 7.56 15,000 3.1 $7.56 15,000 $7.56
18.94 - 22.97 85,200 5.1 19.60 85,200 19.63
The weighted average exercise price of options exercisable at the end of
the year was $17.82 at December 31, 2002, $16.31 at December 31, 2001 and $15.59
at December 31, 2000. The weighted average remaining contractual life of
outstanding options was 4.8 years at December 31, 2002, 5.6 years at December
31, 2001 and 6.7 years at December 31, 2000.
EMPLOYEE STOCK PURCHASE PLAN:
The Company also sponsors an employee stock discount purchase plan which
provides for the sale, to colleagues only, of up to 1,400,000 shares of the
Company's Common Stock at discounted purchase prices, subject to certain
limitations. The cost per share under this plan is 85 percent of the market
value of the Company's Common Stock at the date of purchase, as defined. During
the year ended December 31, 2002, 222,145 shares of Common Stock were issued to
colleagues pursuant to this plan, 172,502 shares of Common Stock were issued
during the year ended December 31, 2001, and 224,342 shares of Common Stock were
issued during the year ended December 31, 2000. The weighted average fair value
of shares sold in 2002, 2001, and 2000 was $6.43, $6.64, and $11.23,
respectively.
DEFERRED STOCK PLANS:
The Company sponsors the Tower Automotive, Inc. Key Leadership Deferred
Income Stock Purchase Plan and the Tower Automotive, Inc. Director Deferred
Stock Purchase Plan (the "Deferred Stock Plans"), which allow certain colleagues
to defer receipt of all or a portion of their annual cash bonus and outside
directors to defer all or a portion of their annual retainer. The Company makes
a matching contribution of one-third of the deferral. The Company matching
contribution vests on the 15th day of December of the second plan year following
the date of the deferral. In accordance with the terms of the plans, the
deferral and Company's matching contribution may be placed in a "Rabbi" trust,
which invests solely in the Company's Common Stock. This trust arrangement
offers a degree of assurance for ultimate
63
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment of benefits without causing constructive receipt for income tax
purposes. Distributions from the trust can only be made in the form of the
Company's Common Stock. The assets in the trust remain subject to the claims of
creditors of the Company and are not the property of the colleague or outside
director; therefore, they are included as a separate component of stockholders'
investment under the caption "deferred compensation plans". Under these plans,
$1.4 million, $1.3 million and $4.5 million were deferred during the years ended
December 31, 2002, 2001 and 2000, respectively. The Company expensed $0.6
million related to the employer match of these plans during the year ended
December 31, 2002.
RESTRICTED STOCK:
In July 2001, the Company offered to its existing colleagues, and
designated consultants, the right to exchange certain Company stock options,
having an exercise price of $17.125 or more, for shares of restricted stock. As
a result of the offer, effective September 17, 2001, the Company issued
approximately 530,671 shares of its common stock, subject to certain
restrictions and risks of forfeiture, in exchange for the surrender of options
to purchase a total of 1,503,500 shares of the Company's Common Stock. The cost
of this exchange was recorded in stockholders' investment as deferred
compensation based upon the fair value of stock issued and is being expensed
over the vesting period. During the year ended December 31, 2002, 575 shares
vested and 61,003 shares were forfeited. As of December 31, 2002, 469,093 shares
remain restricted.
SUPPLEMENTAL RETIREMENT PLAN:
During 2001, the Company's board of directors approved the Tower Automotive
Supplemental Retirement Plan (the "Supplemental Retirement Plan"), which allows
certain colleagues who are restricted in their contributions to the Tower
Automotive Retirement Plan by certain statutory benefit limitations to defer
receipt of all or a portion of their annual cash compensation. The Company makes
a matching contribution based on the terms of the plan. A portion of the
Company's matching contributions vests immediately and a portion vests on the
first day of the third plan year following the date of the employee's deferral.
OTHER COMMON STOCK EQUIVALENTS:
In connection with the acquisition of Edgewood Tool and Manufacturing
Company ("Edgewood") in May 1994, the Company issued options to acquire 205,968
shares of Common Stock at an exercise price of $3.28 per share. All of these
options were exercised during the year ended December 31, 2002.
In connection with the acquisition of MSTI in May 1996, the Company issued
warrants to MascoTech, Inc. ("MascoTech") to acquire 400,000 shares of Common
Stock at an exercise price of $9 per share. In May 2000, MascoTech exercised all
of the warrants outstanding under this agreement.
In addition, the Company has Convertible Subordinated Notes outstanding as
discussed in Note 8, and Convertible Preferred Securities as discussed in Note
5.
DIVIDENDS:
The Company has not declared or paid any cash dividends in the past. The
covenant conditions contained in the Credit Agreement limit the Company's
ability to pay dividends.
5. MANDATORILY REDEEMABLE TRUST CONVERTIBLE PREFERRED SECURITIES:
On June 9, 1998, Tower Automotive Capital Trust (the "Preferred Issuer"), a
wholly owned statutory business trust of the Company, completed the offering of
$258.8 million of its 6 3/4 percent Trust Convertible Preferred Securities
("Preferred Securities"), resulting in net proceeds of approximately
64
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$249.7 million. The Preferred Securities are redeemable, in whole or in part, on
or after June 30, 2001 and all Preferred Securities must be redeemed no later
than June 30, 2018. The Preferred Securities are convertible, at the option of
the holder, into common stock of the Company at a rate of 1.6280 shares of
common stock for each Preferred Security, which is equivalent to a conversion
price of $30.713 per share. The net proceeds of the offering were used to repay
outstanding indebtedness. Minority interest reflected in the accompanying
consolidated statements of operations represents dividends on the Preferred
Securities at a rate of 6 3/4 percent, net of income tax benefits at the
Company's incremental tax rate of 35 percent in 2002, 39 percent in 2001, and 40
percent in 2000.
No separate financial statements of the Preferred Issuer have been included
herein. The Company does not consider that such financial statements would be
material to holders of Preferred Securities because (i) all of the voting
securities of the Preferred Issuer are owned, directly or indirectly, by the
Company, a reporting company under the Exchange Act, (ii) the Preferred Issuer
has no independent operations and exists for the sole purpose of issuing
securities representing undivided beneficial interests in the assets of the
Preferred Issuer and investing the proceeds thereof in 6 3/4 percent Convertible
Subordinated Debentures due June 30, 2018 issued by the Company and (iii) the
obligations of the Preferred Issuer under the Preferred Securities are fully and
unconditionally guaranteed by the Company.
6. ACQUISITIONS AND INVESTMENT IN JOINT VENTURES:
ACQUISITIONS:
On November 30, 2000, the Company completed the acquisition of Strojarne
Malacky, a.s. ("Presskam"), a manufacturer of upper body structural assemblies
for Volkswagen, Porsche and Skoda, located in Bratislava, Slovakia. The Company
paid total consideration of approximately $10 million for Presskam and intends
to use the investment to further support Volkswagen's Bratislava assembly
operation.
On July 6, 2000, the Company acquired the remaining 60 percent equity
interest in Metalurgica Caterina S.A. ("Caterina") for approximately $42
million. The initial 40 percent interest was acquired in March 1998, for
approximately $48 million. Caterina is a supplier of structural stampings and
assemblies to the Brazilian automotive market, including Volkswagen and
Mercedes-Benz.
On May 3, 2000, the Company acquired all of the outstanding common stock of
Algoods, Inc. ("Algoods") for total consideration of approximately $33 million.
Algoods manufactures aluminum heat shields and impact discs for the North
American automotive industry from aluminum mini-mill and manufacturing
operations located in Toronto, Canada. Its primary customer is DaimlerChrysler.
The acquisition of Algoods represents a significant investment in processing
technology for lightweight materials which complements the Company's existing
heat shield capabilities and provides opportunities for application in other
lightweight vehicle structural products.
Effective January 1, 2000, the Company acquired all of the outstanding
shares of Dr. Meleghy GmbH & Co. KG Werkzeugbau und Presswerk, Bergisch Gladbach
("Dr. Meleghy") for approximately $86 million plus earnout payments of $26.9
million paid in 2002 and $2.7 million paid in 2001. Dr. Meleghy designs and
produces structural stampings, assemblies, exposed surface panels and modules to
the European automotive industry. Dr. Meleghy also designs and manufactures
tools and dies for use in its production and for the external market. Dr.
Meleghy operates three facilities in Germany and one facility in both Hungary
and Poland. Dr. Meleghy's main customers include DaimlerChrysler, Audi,
Volkswagen, Ford, Opel, and BMW. Products offered by Dr. Meleghy include body
side panels, floor pan assemblies, and miscellaneous structural stampings.
On October 29, 1999, the Company invested $21 million for new shares
representing a 49 percent equity interest in Seojin Industrial Company Limited
("Seojin"). Seojin is a supplier of frames, modules and structural components to
the Korean automotive industry. In addition, the Company advanced $19
65
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million to Seojin in exchange for variable rate convertible bonds (the "Bonds")
due October 30, 2009. The conversion rate was based on a predetermined formula
that would increase the Company's equity interest to 66 percent. On October 31,
2000, the Company exercised its right to convert the bonds into 17 percent of
the common stock of Seojin. Based upon the formula for conversion of the Seojin
bonds, the Company paid an additional $1.2 million for the 17 percent equity
interest.
These acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at fair value as of the dates of the acquisitions. The excess of
the purchase price over the fair value of the assets acquired and liabilities
assumed has been recorded as goodwill. Results of operations for these
acquisitions have been included in the accompanying consolidated financial
statements since the dates of acquisition.
In conjunction with its acquisitions, reserves have been established for
certain costs associated with facility shutdown and consolidation activities,
for general and payroll related costs primarily for planned employee termination
activities, and for provisions for acquired loss contracts. A rollforward of
these reserves is as follows (in millions):
FACILITY PAYROLL LOSS
SHUTDOWN COSTS RELATED COSTS CONTRACTS
-------------- ------------- ---------
December 31, 2000............................... $ 7.3 $ 3.8 $ 28.7
Utilization................................... (2.1) (2.7) (11.7)
----- ----- ------
December 31, 2001............................... $ 5.2 $ 1.1 $ 17.0
Utilization................................... (0.7) (1.1) (3.9)
Revision of estimate.......................... -- -- (7.0)
----- ----- ------
December 31, 2002............................... $ 4.5 $ -- $ 6.1
===== ===== ======
The timing of facility shutdown and consolidation activities was adjusted
from the Company's original plans to reflect customer concerns with supply
interruption. As of December 31, 2002, all of the identified facilities have
been shutdown, but the Company continues to incur costs related to maintenance,
taxes and other costs related to buildings that are held for sale. The Company's
acquisition reserves have been utilized as originally intended and management
believes the liabilities recorded for shutdown and consolidation activities are
adequate but not excessive as of December 31, 2002.
In 2002, the Company revised its accrual for estimated loss contracts to
reflect the discontinuance of certain contracts that the Company was fulfilling
at a loss, and the reduction of costs associated with remaining loss contracts
which were transferred to lower cost locations as part of the Company's
restructuring activities. Additionally, environmental and other reserves
decreased by $2.8 million based on an analysis of outstanding exposures.
66
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the purchase accounting liabilities detailed in the
table above to the total purchase accounting liabilities shown in Note 2 follows
(in millions):
DECEMBER 31,
-------------
2002 2001
----- -----
Facility shutdown costs..................................... $ 4.5 $ 5.2
Payroll-related costs....................................... -- 1.1
Loss contracts.............................................. 6.1 17.0
Environmental liabilities................................... 7.1 10.8
Customer obligations........................................ -- 2.7
Legal and other............................................. 2.2 6.3
----- -----
Total purchase accounting reserves..................... $19.9 $43.1
===== =====
INVESTMENT IN JOINT VENTURES:
On January 2, 2001, the Company invested approximately $2 million in the
formation of a prototyping joint venture with Carron Industries. The joint
venture, Carron Prototype Center, located in Inkster, Michigan, provided the
Company with detail stamping and tooling capabilities and had capacity for full
frame prototypes and vehicle builds. During the year ended December 31, 2002,
the Company determined that the investment was impaired and recognized a
non-cash charge of approximately $0.7 million associated with the write-off of
its investment in this joint venture.
On September 21, 2000, the Company acquired a 17 percent equity interest in
Yorozu Corporation ("Yorozu"), a supplier of suspension modules and structural
parts to the Asian and North American automotive markets, from Nissan Motor Co.
Ltd. ("Nissan"). Yorozu is based in Japan and is publicly traded on the first
tier of the Tokyo Stock Exchange. Its principal customers include Nissan, Auto
Alliance, General Motors, Ford, and Honda. The Company agreed to pay Nissan
approximately $68 million over two and one half years for the original 17
percent interest and an option to increase its holdings in Yorozu by 13.8
percent through the purchase of additional Yorozu shares, which was exercised on
February 20, 2001. As of December 31, 2002, $18.3 million remains to be paid
under these arrangements and is recorded as indebtedness on the Company's
balance sheet. As of December 31, 2002, the traded market value of shares held
in Yorozu was $20.3 million and the Company's investment in Yorozu was $62.2
million, as compared with a traded market value of $22.4 million and investment
in Yorozu of $60.4 million at the original dates of the investment. The Company
has determined that the investment in Yorozu has not suffered an other than
temporary decline in market value. This determination is based on the long-term
strategic nature of the investment which supported the Company's original
investment decision and the fact that the Company believes that there is a
significant premium associated with the large block of stock held in Japan.
In March 23, 2000, the Company invested $2.1 million in the formation of a
product technology and development joint venture with Defiance Testing &
Engineering Services, Inc., a subsidiary of GenTek Inc. The joint venture, DTA
Development, located in Westland, Michigan, provides the Company with
product-testing services. Traditionally, the Company utilizes both internal and
external product testing extensively to validate complex systems during the
development stage of a program. This joint venture allows the Company to have
access to a broader and more cost efficient range of testing capabilities. DTA
Development blends the benefits of chassis product technology and development
activities with leading edge commercial testing services.
On October 14, 1999, the Company loaned $30.0 million to J. L. French
Automotive Castings, Inc., ("J.L. French") in exchange for a convertible
subordinated promissory note due October 14, 2009 that
67
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bears interest at 7.5 percent. On November 30, 2000, the Company exercised its
option to convert the note into 7,124 shares of Class A "1" Common Stock of J.L.
French, which has a 7.5 percent pay-in-kind dividend right. Additionally, on
November 30, 2000, the Company invested $2.9 million in J.L. French through the
purchase of Class P Common Stock, which has an 8 percent pay-in-kind dividend
right. On May 24, 2000, the Company invested $11.0 million in J.L. French
through the purchase of Class A Common Stock. As discussed in Note 3, the
Company evaluated its investment in J.L. French and determined that the
investment has been impaired. Due to this impairment, the Company recorded a
charge of $46.3 million to write off the entire investment in J.L. French during
2001. At December 31, 2002 and 2001, the Company has an ownership interest of
approximately 16 percent in J.L. French. J.L. French's capital structure was
reorganized in December 2002. The Company elected not to participate in a new
class of stock that now controls J.L. French and as a result, the Company
effectively no longer has a substantive ownership interest in J.L. French.
The Company is a 40 percent partner in Metalsa S. de R.L. ("Metalsa") with
Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). Metalsa is the largest
supplier of vehicle frames and structures in Mexico. In addition, the parties
have entered into a technology sharing arrangement that enables both companies
to utilize the latest available product and process technology. Metalsa is
headquartered in Monterrey, Mexico and has manufacturing facilities in Monterrey
and San Luis Potosi, Mexico. Metalsa's customers include DaimlerChrysler,
General Motors, Ford, and Nissan. In connection with the original agreement, the
Company paid $120 million to Proeza, with an additional amount of up to $45
million payable based upon net earnings of Metalsa for the years 1998, 1999 and
2000. Based upon Metalsa's 1998 and 1999 net earnings, the Company paid Proeza
$9.0 million and $7.9 million of additional consideration during 1999 and 2000,
respectively. Based upon Metalsa's 2000 net earnings, the Company paid $9.7
million of additional consideration during 2002.
Summarized unaudited U.S. GAAP financial information for Metalsa is as
follows (in thousands):
DECEMBER 31,
----------------------------------
2002 2001 2000
-------- ------------ --------
CONDENSED STATEMENTS OF EARNINGS
Revenues......................................... $311,334 $280,543 $258,951
======== ======== ========
Operating income................................. $ 46,454 $ 31,940 $ 38,355
======== ======== ========
Net income....................................... $ 34,156 $ 21,520 $ 31,001
======== ======== ========
CONDENSED BALANCE SHEETS
Current assets................................... $121,554 $115,728 $ 79,182
Noncurrent assets................................ 302,776 303,717 234,105
-------- -------- --------
$424,330 $419,445 $313,287
======== ======== ========
Current liabilities.............................. $ 75,456 $ 64,502 $ 58,550
Noncurrent liabilities........................... 143,214 157,819 105,517
Stockholders' investment......................... 205,660 197,124 149,220
-------- -------- --------
$424,330 $419,445 $313,287
======== ======== ========
The accompanying unaudited consolidated pro forma results of operations for
the year ended December 31, 2000 give effect to the following as if they were
completed at the beginning of the year: (i) the acquisitions of Algoods,
Caterina, Seojin and Presskam, (ii) the refinancing of bank indebtedness under
the new senior credit facility (Note 8), and (iii) the completion of the sale of
the senior Euro notes and the application of the net proceeds therefrom (Note
8). The unaudited pro forma financial
68
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information does not purport to represent what the Company's results of
operations would actually have been if such transactions in fact had occurred at
such date or to project the Company's results of future operations (in
thousands, except per share data):
PRO FORMA FOR THE YEAR
ENDED DECEMBER 31,
2000
----------------------
Revenues.................................................... $2,920,727
Net income.................................................. $ 9,276
Basic earnings per share.................................... $ 0.20
Diluted earnings per share.................................. $ 0.20
The proforma effect of the Carron joint venture investment or the
additional Yorozu joint venture investment in 2001 was not materially different
from the actual reported results.
7. DIVESTITURES:
On February 1, 2002, the Company sold its Iwahri, Korea plant to a Hyundai
affiliate for net proceeds of $4.0 million after fees and debt assumed by the
purchaser and realized a gain on sale of the plant of $3.8 million in the first
quarter of 2002, that was classified as other income. The net proceeds were used
to repay outstanding subsidiary indebtedness. The results of operations of the
Iwahri plant, which assembles the Kia Sportage lower vehicle module, are not
significant to the operating results of the Company as a whole, and therefore,
pro forma financial information has not been provided, as the results would not
be materially different. The Company will continue to manufacture body structure
components in Korea, including components used in the Kia Sportage module.
On December 7, 2000, the Company sold its Roanoke, Virginia heavy truck
rail manufacturing business (the "Roanoke Heavy Truck Business") to its joint
venture partner, Metalsa, for net proceeds of approximately $55 million, which
approximated the book value of the net assets sold, plus an earnout of up to $30
million based on achieving certain profit levels over the three years following
the sale. Through December 31, 2002, no additional payments have been earned.
The net proceeds were used to repay outstanding indebtedness under the revolving
credit facility. The results of operations of the Roanoke Heavy Truck Business
are not significant to the operating results of the Company as a whole,
therefore, pro forma financial information is not deemed significant.
69
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
DECEMBER 31,
---------------------
2002 2001
--------- ---------
Revolving credit facility, due July 2006, interest at prime
or LIBOR plus a margin ranging from 0 to 200 basis points
(2.87 percent at December 31, 2002 and 3.5 percent at
December 31, 2001)........................................ $ 93,800 $ 9,300
Revolving credit facility, multi currency borrowings, due
July 2006, interest at prime or LIBOR plus a margin
ranging from 0 to 200 basis points (3.33 percent at
December 31, 2002 and 4.26 percent at December 31, 2001).. 83,503 91,308
Term credit facility, due in quarterly repayments beginning
March 2005 to July 2006, Interest at prime or LIBOR plus a
margin ranging from 0 to 200 basis points (2.91 percent at
December 31, 2002 and 3.85 percent at December 31,
2001)..................................................... 125,000 325,000
R. J. Tower Corporation 9.25 percent Senior Euro Notes due
August 2010............................................... 157,440 133,560
Industrial development revenue bonds, due in lump sum
payments in June 2024 and March 2025, interest payable
monthly at a rate adjusted weekly by a bond remarketing
agent (1.60 percent at December 31, 2002 and 2.17 percent
at December 31, 2001)..................................... 43,765 43,765
Convertible Edgewood notes, due May 2003, interest at 5.75
percent payable quarterly................................. 50 50
Other foreign subsidiary indebtedness, consisting primarily
of borrowings at Seojin, interest ranging from 4.5 percent
to 13.3 percent, renewable annually....................... 123,518 136,987
Other....................................................... 18,422 30,474
--------- ---------
645,498 770,444
Less -- Current maturities.................................. (110,278) (169,360)
--------- ---------
$ 535,220 $ 601,084
========= =========
Future maturities of long-term debt as of December 31, 2002 are as follows
(in thousands):
2003........................................................ $110,278
2004........................................................ 68
2005........................................................ 77,513
2006........................................................ 224,803
2007........................................................ --
Thereafter.................................................. 232,836
--------
$645,498
========
In June 2002, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") that permanently reduced borrowings under the
facility and deferred the start of the scheduled repayment of its remaining
borrowings until March 2005. The amendment reduced the former $1.15 billion
facility to a $725 million facility by voluntarily repaying $200 million of the
$325 million term loan portion of the facility with proceeds from the Company's
May 2002 common stock offering (see Note 4), and reduced capacity under the
revolving credit facility from $825 million to $600 million. The Credit
Agreement also includes a multi-currency borrowing feature that allows the
Company to borrow up to $500 million in certain freely tradable offshore
currencies, and letter of credit sublimits of $250 million.
70
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2002, approximately $36.4 million of the outstanding
borrowings are denominated in Japanese Yen, $31.2 million are denominated in
Euro, and $15.9 million are denominated in Canadian dollars. Interest on the
Credit Agreement is at the financial institutions' reference rate, LIBOR, or the
Eurodollar rate plus a margin ranging from 0 to 200 basis points depending on
the ratio of the consolidated funded debt for restricted subsidiaries of the
Company to its total EBITDA. The weighted average interest rate for such
borrowings was 6.4 percent and 7.0 percent for the years ended December 31, 2002
and 2001, respectively (including the effect of the interest rate swap contract
discussed below). The Credit Agreement has a final maturity of 2006.
As a result of the permanent reduction of borrowing capacity under the
amendment, the Company recorded a $2.0 million non-cash charge in 2002 that was
classified as a component of other expense for the write-off of deferred
financing costs associated with the credit facility. As a result of the July
2000 replacement of a previous $750 million amortizing credit agreement with the
$1.15 billion senior unsecured facility, the Company recorded an extraordinary
loss, net of tax, of $3.0 million during 2000.
The Credit Agreement requires the Company to meet certain financial tests,
including but not limited to a minimum interest coverage and maximum leverage
ratio. The credit agreement limits the Company's ability to pay dividends. As of
December 31, 2002, the Company was in compliance with all debt covenants.
In July 2000, R. J. Tower Corporation (the "Issuer"), a wholly-owned
subsidiary of the Company, issued Euro-denominated senior unsecured notes in the
amount of E150 million ($157.4 million at December 31, 2002). The notes bear
interest at a rate of 9.25 percent, payable semi-annually. The notes rank
equally with all of the Company's other senior unsecured and unsubordinated
debt. The net proceeds after issuance costs were used to repay a portion of the
Company's existing Euro-denominated indebtedness under its credit facility. The
notes mature on August 1, 2010.
During September 2000, the Company entered into an interest rate swap
contract to hedge against interest rate exposure on approximately $160 million
of its floating rate indebtedness under its Credit Agreement. The contracts have
the effect of converting the floating rate interest to a fixed rate of
approximately 6.9 percent, plus any applicable margin required under the
revolving credit facility. The interest rate swap contract was executed to
balance the Company's fixed-rate and floating-rate debt portfolios and expires
in September 2005.
The Company has designated the swap as a cash flow hedge. Accordingly,
gains and losses are recorded in accumulated other comprehensive income (loss),
net of income taxes. As of December 31, 2002, there is $12.8 million recorded in
accumulated other comprehensive loss related to the cash flow hedge. Derivative
liabilities relating to the interest rate swap agreement totaling $20.4 million
have been recorded in accrued liabilities on the balance sheet as of December
31, 2002. The fair value of the interest rate swap agreement is based upon the
difference between the contractual rates and the present value of the expected
future cash flows on the hedged interest rate.
The $200 million of Convertible Subordinated Notes (the "Notes") bear
interest at 5 percent, are unsecured, due on August 1, 2004 and are convertible
into Common Stock at a conversion price of $25.88 per share. The Company may
make optional redemptions of the Notes after August 1, 2000 at amounts ranging
from 102.857 percent to 100.714 percent of face value. In the event of a change
in control (as defined), the holders of the Notes may require the Company to
redeem the Notes at face value plus accrued interest. Proceeds from the Notes
were used to repay outstanding indebtedness under the revolving credit facility.
71
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
The provision (benefit) for income taxes consisted of the following (in
thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------- -------- --------
Current --
Domestic............................................ $(4,981) $ 201 $ 19,383
Foreign............................................. 10,510 7,245 6,609
------- -------- --------
Total............................................ 5,529 7,446 25,992
Deferred --
Domestic............................................ 4,321 (75,139) (13,264)
Foreign............................................. (2,214) (5,619) (10,109)
------- -------- --------
Total............................................ 2,107 (80,758) (23,373)
------- -------- --------
Total.......................................... $ 7,636 $(73,312) $ 2,619
======= ======== ========
A reconciliation of income taxes computed at the statutory rates to the
reported income tax provision (benefit) is as follows (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------- --------- ------
Taxes at federal statutory rates....................... $ 7,636 $(120,514) $2,463
Foreign taxes and other................................ (7,252) (1,226) 852
Effect of permanent differences, primarily interest
expense and nondeductible goodwill................... (457) 32,174 (696)
Valuation allowance.................................... 7,709 16,254 --
------- --------- ------
Total................................................ $ 7,636 $ (73,312) $2,619
======= ========= ======
The summary of income (loss) before provision (benefit) for income taxes,
equity in earnings of joint ventures, minority interests, extraordinary item and
cumulative effect of accounting change consisted of the following (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- --------- -------
Domestic............................................. $(12,246) $(364,688) $(4,669)
Foreign.............................................. 34,064 20,362 11,706
-------- --------- -------
Total........................................... $ 21,818 $(344,326) $ 7,037
======== ========= =======
72
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of deferred income tax assets (liabilities) is as follows (in
thousands):
DECEMBER 31,
-------------------
2002 2001
-------- --------
Deferred income tax assets:
Accrued compensation costs................................ $ 27,536 $ 11,569
Postretirement benefit obligations........................ 30,981 31,952
Loss contracts............................................ 3,770 5,397
Facility closure and consolidation costs.................. 40,548 48,009
Net operating loss carryforwards and tax credits.......... 113,770 76,618
Investment valuation adjustments.......................... 16,254 16,254
Other reserves and accruals not currently deductible for
tax purposes........................................... 30,588 10,975
-------- --------
263,447 200,774
Less: Valuation allowance.............................. (48,151) (16,254)
-------- --------
Total deferred income tax assets....................... 215,296 184,520
Deferred income tax liabilities -- fixed asset and goodwill
lives and methods......................................... (88,963) (96,736)
-------- --------
Net deferred tax assets................................ $126,333 $ 87,784
======== ========
A $24.2 million valuation allowance was provided during 2002 due to the
uncertainty of the use of the tax benefit associated with the writedown of
goodwill under FAS 142 related to the Company's Brazil operations. The goodwill
writedown and related income tax provision were netted and reported as a
cumulative effect of a change in accounting principle in the 2002 Consolidated
Statement of Operations. In 2002, a $7.7 million valuation allowance was
established due to the uncertainty of realization of certain state tax net
operating losses. In 2001, a $16.2 million valuation allowance was provided due
to the uncertainty of the use of the tax benefit associated with a specific
reserve recorded against the carrying value of a cost-based investment.
The Company has an alternative minimum tax ("AMT") credit carryforward of
approximately $2.7 million. The AMT credit has an indefinite carryforward
period. The Company has federal net operating loss carryforwards ("NOL's") of
approximately $223.6 million which expire 2020 through 2022 and various state
NOL's that expire through 2022.
The Company has not recorded deferred income taxes applicable to
undistributed earnings of its foreign joint venture operations as all such
earnings are deemed to be indefinitely reinvested in those operations. If the
earnings of such joint ventures were not indefinitely reinvested, a deferred
liability would have been required. Total undistributed net earnings from
foreign joint ventures totaled $53.5 million at December 31, 2002. Undistributed
amounts, if remitted in the future, may not result in additional U.S. income
taxes because of the use of available foreign tax credits at that time. The
amount of unrecognized deferred tax liability for temporary differences related
to investments in foreign subsidiaries and foreign corporate joint ventures
which are permanent in duration is not practicable for the Company to determine.
10. SEGMENT INFORMATION:
The Company produces a broad range of assemblies and modules for vehicle
body structures and suspension systems for the global automotive industry. These
operations have similar characteristics including the nature of products,
production processes and customers, and produce lower vehicle structures, body
structures (including Class A surfaces), suspension components, and suspension
and powertrain
73
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
modules for the automotive industry. Management reviews the operating results of
the Company and makes decisions based upon two operating segments: United
States/Canada and International. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (see
Note 2). Financial information by segment is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ----------
2002:
Revenues........................................ $2,075,222 $679,242 $2,754,464
Interest expense, net........................... 54,814 12,095 66,909
Operating income................................ 34,235 55,544 89,779
Total assets.................................... 1,747,772 810,113 2,557,885
Capital expenditures, net....................... 95,922 63,042 158,964
Depreciation and amortization expense........... 103,483 37,376 140,859
Restructuring and asset impairment charges,
net........................................... 57,475 3,650 61,125
Provision (benefit) for income taxes............ (660) 8,296 7,636
2001:
Revenues........................................ $1,777,361 $690,072 $2,467,433
Interest expense, net........................... 61,721 12,044 73,765
Operating income (loss)......................... (315,387) 44,826 (270,561)
Total assets.................................... 2,041,851 491,585 2,533,436
Capital expenditures, net....................... 131,455 62,500 193,955
Depreciation and amortization expense........... 126,863 33,030 159,893
Restructuring and asset impairment charges,
net........................................... 383,739 -- 383,739
Provision (benefit) for income taxes............ (74,938) 1,626 (73,312)
2000:
Revenues........................................ $2,163,358 $368,595 $2,531,953
Interest expense, net........................... 57,239 7,472 64,711
Operating income................................ 45,463 26,285 71,748
Total assets.................................... 2,516,000 376,747 2,892,747
Capital expenditures, net....................... 78,512 15,076 93,588
Depreciation and amortization expense........... 126,011 18,794 144,805
Restructuring and asset impairment charges,
net........................................... 141,326 -- 141,326
Provision (benefit) for income taxes............ 6,119 (3,500) 2,619
The following is a summary of revenues and long-lived assets by geographic
location (in thousands):
YEARS ENDED DECEMBER 31 AND END OF YEAR
---------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
---------- ---------- ---------- ---------- ---------- ----------
United States and
Canada.................. $2,075,222 $ 743,552 $1,777,361 $ 852,887 $2,163,358 $ 985,215
Europe.................... 322,773 176,412 278,789 121,993 256,970 114,920
Asia...................... 322,951 180,298 376,040 159,940 91,270 118,254
Mexico and South
America................. 33,518 10,481 35,243 12,972 20,355 11,863
---------- ---------- ---------- ---------- ---------- ----------
$2,754,464 $1,110,743 $2,467,433 $1,147,792 $2,531,953 $1,230,252
========== ========== ========== ========== ========== ==========
74
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are attributed to geographic locations based on the location of
specific production. Long-lived assets consist of net property, plant and
equipment and capitalized tooling, and excludes intangible assets.
The following is a summary of the approximate composition by product
category of the Company's revenues (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Body structures and assemblies (including Class A
surfaces)...................................... $1,046,696 $ 971,858 $ 998,407
Lower vehicle structures......................... 1,101,786 895,118 1,029,596
Suspension and powertrain modules................ 302,991 355,981 270,892
Suspension components............................ 220,357 198,296 199,567
Other............................................ 82,634 46,180 33,491
---------- ---------- ----------
$2,754,464 $2,467,433 $2,531,953
========== ========== ==========
The Company sells its products directly to automotive manufacturers.
Following is a summary of customers that accounted for 10 percent or more of
consolidated revenues in any of the three years in the period ended December 31,
2002:
2002 2001 2000
---- ---- ----
Ford........................................................ 38% 35% 37%
DaimlerChrysler............................................. 22 25 31
Hyundai/Kia................................................. 7 12 4
Receivables from these customers represented 39 percent of total accounts
receivable at December 31, 2002, 38 percent of total accounts receivable at
December 31, 2001 and 50 percent of total accounts receivable at December 31,
2000.
11. EMPLOYEE BENEFIT PLANS:
The Company sponsors various pension and other postretirement benefit plans
for its employees.
RETIREMENT PLANS:
The Company's UAW Retirement Income Plan and the Tower Automotive Pension
Plan provide for substantially all union employees. Benefits under the plans are
based on years of service. Contributions by the Company are intended to provide
not only for benefits attributed to service to date, but also for those benefits
expected to be earned in the future. The Company's funding policy is to
contribute annually the amounts sufficient to meet the higher of the minimum
funding requirements set forth in the Employee Retirement Income Security Act of
1974 or the minimum funding requirements under the Company's union contracts.
75
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of the changes in the benefit
obligations and fair value of assets for the defined benefit pension plans (in
thousands):
2002 2001
-------- --------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at the beginning of the year...... $ 89,355 $104,884
Actual loss on plan assets.................................. (6,296) (10,746)
Employer contributions...................................... 27,959 --
Benefits paid............................................... (4,446) (4,783)
-------- --------
Fair value of plan assets at the end of the year....... $106,572 $ 89,355
======== ========
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at the beginning of the year............ $143,485 $115,525
Service cost................................................ 9,536 9,956
Interest cost............................................... 11,486 9,883
Actuarial loss.............................................. 21,967 11,171
Benefits paid............................................... (4,446) (4,783)
Curtailment loss............................................ -- 1,422
Special termination benefits................................ 7,067 311
-------- --------
Benefit obligations at the end of the year............. $189,095 $143,485
======== ========
FUNDED STATUS RECONCILIATION:
Funded status............................................... $(82,523) $(54,130)
Unrecognized transition asset............................... (34) (67)
Unrecognized prior service cost............................. 8,975 9,787
Unrecognized actuarial losses............................... 61,320 25,065
Contributions made after measurement date................... 4,956 --
-------- --------
Net amount recognized.................................. $ (7,306) $(19,345)
======== ========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET AS OF EACH YEAR END:
Accrued benefit liability................................... $(81,513) $(51,396)
Intangible asset............................................ 8,975 9,787
Accumulated other comprehensive income...................... 60,276 22,264
Contributions made after measurement date................... 4,956 --
-------- --------
Net amount recognized.................................. $ (7,306) $(19,345)
======== ========
In connection with the comprehensive realignment plans discussed in Note 3,
benefits for certain employees covered by the Tower Automotive Pension Plan and
the UAW Retirement Income Plan are accounted for as a curtailment and special
termination benefits for the periods ending December 31, 2002 and 2001.
76
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the components of net periodic pension benefit
cost for the plans for the years ended December 31, (in thousands):
2002 2001 2000
------- ------- -------
Service cost............................................ $ 9,536 $ 9,956 $11,677
Interest cost........................................... 11,486 9,883 8,126
Expected return on plan assets.......................... (9,602) (9,815) (7,431)
Amortization of transition asset........................ (31) (31) (31)
Amortization of prior service cost...................... 812 1,077 2,533
Amortization of net (gains) losses...................... 1,609 (287) (158)
Curtailment loss (gain)................................. -- 12,839 (572)
Special termination benefit............................. 7,067 311 586
------- ------- -------
Net periodic benefit cost.......................... $20,877 $23,933 $14,730
======= ======= =======
The assumptions used in the measurement of the Company's benefit obligation
are as follows:
2002 2001
--------- ---------
Weighted-average assumptions at each year end:
Discount rate............................................. 6.75% 7.50%
Expected return on plan assets............................ 8.50% 9.50%
Rate of compensation increase............................. 4.50% 4.50%
Measurement date.......................................... 9/30/2002 9/30/2001
The Company contributes to a union sponsored multi-employer pension plan
providing defined benefits to certain Michigan hourly employees. Contributions
to the pension plan are based on rates set forth in the Company's union
contracts. The expense related to this plan was $0.8 million, $0.7 million, and
$0.8 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company also contributes to a union sponsored multi-employer pension
plan providing defined benefits for certain hourly employees of the Milwaukee
facility. Expense relating to this plan was $0.4 million, $0.6 million and $0.5
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
expense is determined based on contractual rates with the union.
The Company also maintains a qualified profit sharing retirement plan and
401(k) employee savings plan covering certain salaried and hourly employees. The
expense related to these plans was $10.6 million during 2002 and $11.0 million
during 2001 and 2000.
The Company also sponsors a 401(k) employee savings plan covering certain
union employees. The Company matches a portion of the employee contributions
made to this plan. The expense under this plan in each of the three years in the
period ended December 31, 2002 was not material.
POSTRETIREMENT PLANS:
The Company provides certain medical insurance benefits for retired
employees. Certain employees of the Company are eligible for these benefits if
they fulfill the eligibility requirements specified by the plans. Certain
retirees between the ages of 55 and 62 must contribute all or a portion of the
cost of their coverage. Benefits are continued for dependents of eligible
retiree participants after the death of the retiree.
77
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of the changes in the benefit
obligations for the retiree medical plans (in thousands):
2002 2001
--------- ---------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at the beginning of the year...... $ -- $ --
Employer contributions...................................... 19,250 12,435
Benefits paid............................................... (19,250) (12,435)
--------- ---------
Fair value of plan assets at the end of the year............ $ -- $ --
========= =========
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at the beginning of the year............ $ 145,552 $ 117,664
Service cost................................................ 858 862
Interest cost............................................... 8,519 10,676
Plan amendments............................................. 10,827 --
Actuarial loss (gain)....................................... (22,151) 28,671
Benefits paid............................................... (19,250) (12,435)
Curtailment loss............................................ -- 114
--------- ---------
Benefit obligations at the end of the year.................. $ 124,355 $ 145,552
========= =========
FUNDED STATUS RECONCILIATION:
Funded status............................................... $(124,355) $(145,552)
Unrecognized prior service cost............................. 9,735 --
Unrecognized actuarial losses............................... 25,365 42,572
--------- ---------
Net amount recognized....................................... $ (89,255) $(102,980)
========= =========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET AS OF EACH YEAR END:
Accrued benefit liability................................... $ (89,255) $(102,980)
========= =========
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, (in thousands):
2002 2001 2000
------- ------- -------
Service cost............................................ $ 858 $ 862 $ 1,524
Interest cost........................................... 8,519 10,676 9,174
Amortization of prior service cost...................... 1,092 -- --
Amortization of net loss................................ 3 1,484 3,227
Curtailment loss........................................ -- 115 --
------- ------- -------
Net periodic benefit cost............................... $10,472 $13,137 $13,925
======= ======= =======
The discount rate used to measure the Company's post retirement medical
benefit obligation was 6.75 percent and 7.5 percent in 2002 and 2001,
respectively.
For measurement purposes, an 11.5 percent annual rate of increase in per
capita cost of covered health care benefits was assumed for 2002. The rate was
assumed to decrease gradually to 5.5 percent for 2006 and remain at that level
thereafter.
78
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the post retirement medical plans. A one percentage point
change in assumed health care costs trend rates would have the following effects
(in thousands):
INCREASE DECREASE
-------- --------
ONE PERCENTAGE POINT:
Effect on total service and interest cost components... $ 250 $ 226
====== ======
Effect on the accumulated benefit obligation........... $3,044 $2,758
====== ======
12. COMMITMENTS:
LEASES:
The Company leases office and manufacturing space and certain equipment
under lease agreements which require it to pay maintenance, insurance, taxes and
other expenses in addition to annual rentals. The Company has entered into
several leasing commitments with maturities of between 2003 and 2015. The
properties covered under these transactions include manufacturing equipment,
facilities and administrative offices. The leases provide for substantial
residual value guarantees, which may become payable upon the termination of the
transaction, and include purchase and renewal options. As of December 31, 2002,
residual value guarantees in connection with these leases totaled approximately
$102.9 million. Upon termination of the leases, the Company expects the fair
market value of the leased properties to reduce substantially or eliminate
entirely the payment under the residual value guarantees. Future annual rental
commitments at December 31, 2002 under these leases are as follows (in
thousands):
YEAR OPERATING CAPITAL
---- --------- -------
2003........................................................ $ 59,383 $16,305
2004........................................................ 61,940 11,872
2005........................................................ 61,360 10,979
2006........................................................ 56,621 10,548
2007........................................................ 51,161 3,328
Thereafter.................................................. 169,970 4,166
-------- -------
$460,435 $57,198
========
Less-amount representing interest........................... 17,275
-------
Present value of minimum lease payments..................... $39,923
=======
Total rent expense for all operating leases totaled $57.0 million, $55.2
million and $21.5 million in 2002, 2001 and 2000, respectively.
Rent commitments associated with acquired facilities which will not be
utilized by the Company have been excluded from the above amounts and were
provided for in the recording of the related acquisition, as discussed in Note
6.
LITIGATION:
The Company is party to certain claims arising in the ordinary course of
business. In the opinion of management, based upon the advice of legal counsel,
the outcomes of such claims are impossible to ascertain or are not expected to
be material to the Company's financial position or statements of operations.
79
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED PARTY TRANSACTIONS:
The Company has made payments to Hidden Creek Industries, an affiliated
consultant of the Company, for certain acquisition related and other management
services totaling $0.6 million during 2002 and 2001, and $4.4 million during
2000.
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a condensed summary of quarterly results of operations for
2002 and 2001. The goodwill impairment loss described in Note 2 is reflected in
the first quarter of 2002. The restructuring and asset impairment charges
described in Note 3 are reflected in the first and fourth quarters of 2002 and
the fourth quarter of 2001 amounts. The sum of the per share amounts for the
quarters does not equal the total for the year due to the effects of rounding
and the anti-dilutive effects of certain common stock equivalents (in thousands,
except per share amounts):
BASIC DILUTED
OPERATING EARNINGS EARNINGS
GROSS INCOME NET INCOME (LOSS) (LOSS)
REVENUES PROFIT (LOSS) (LOSS) PER SHARE PER SHARE
---------- -------- --------- ---------- --------- ---------
2002:
First.................... $ 668,107 $ 69,009 $ (40,284) $(147,303) $(3.05) $(3.05)
Second................... 750,872 92,916 54,429 22,891 0.40 0.37
Third.................... 653,841 66,623 30,254 9,545 0.15 0.15
Fourth................... 681,644 70,339 45,380 17,261 0.30 0.29
---------- -------- --------- ---------
$2,754,464 $298,887 $ 89,779 $ (97,606) $(1.70) $(1.70)
========== ======== ========= =========
2001:
First.................... $ 628,376 $ 79,271 $ 37,894 $ 12,861 $ 0.29 $ 0.28
Second................... 642,407 85,261 44,111 16,672 0.38 0.35
Third.................... 557,785 55,419 16,185 (1,364) (0.03) (0.03)
Fourth................... 638,865 57,234 (368,751) (295,693) (6.15) (6.15)
---------- -------- --------- ---------
$2,467,433 $277,185 $(270,561) $(267,524) $(5.87) $(5.87)
========== ======== ========= =========
The amounts for the first quarter of 2002 are different from the amounts
originally reported as a result of the adoption of SFAS 142 effective as of
January 1, 2002.
80
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents the impact of the transitional impairment
loss on the first quarter of 2002 results as previously reported:
THREE MONTHS ENDED
MARCH 31, 2002
-------------------------
AS REPORTED AS ADJUSTED
----------- -----------
Loss before cumulative effect of change in accounting
principle................................................. $(34,517) $ (34,517)
Cumulative effect of change in accounting principle......... -- (112,786)
-------- ---------
Net loss.................................................... $(34,517) $(147,303)
======== =========
Basic loss per common share:
Loss before cumulative effect of change in accounting
principle.............................................. $ (0.72) $ (0.72)
Cumulative effect of change in accounting principle....... -- (2.33)
-------- ---------
Net loss.................................................. $ (0.72) $ (3.05)
======== =========
Weighted-average basic shares outstanding................... 48,253 48,253
======== =========
Diluted loss per common share:
Loss before cumulative effect of change in accounting
principle.............................................. $ (0.72) $ (0.72)
Cumulative effect of change in accounting principle....... -- (2.33)
-------- ---------
Net loss.................................................. $ (0.72) $ (3.05)
======== =========
Weighted-average diluted shares outstanding................. 48,253 48,253
======== =========
15. CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
The following consolidating financial information presents balance sheets,
statements of operations and cash flow information related to the Company's
business. Each Guarantor, as defined, is a direct or indirect wholly-owned
subsidiary of the Company and has fully and unconditionally guaranteed the 9.25
percent senior unsecured notes issued by R. J. Tower Corporation, on a joint and
several basis. Tower Automotive, Inc. (the parent company) has also fully and
unconditionally guaranteed the note and is reflected as the Parent Guarantor in
the consolidating financial information. The Non-Guarantors are the Company's
foreign subsidiaries. Separate financial statements and other disclosures
concerning the Guarantors have not been presented because management believes
that such information is not material to investors.
81
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS
AT DECEMBER 31, 2002
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ -- $ -- $ 13,699 $ -- $ 13,699
Accounts receivable.............. -- -- 151,774 97,567 -- 249,341
Inventories...................... -- -- 82,765 50,309 -- 133,074
Prepaid tooling and other........ -- -- 67,708 53,359 -- 121,067
--------- --------- ---------- -------- --------- ----------
Total current assets.......... -- -- 302,247 214,934 -- 517,181
--------- --------- ---------- -------- --------- ----------
Property, plant and equipment,
net.............................. -- -- 709,127 364,492 -- 1,073,619
Investments in joint ventures...... 260,898 -- -- -- -- 260,898
Investment in subsidiaries......... 404,864 512,076 -- -- (916,940) --
Goodwill and other assets, net..... 6,167 27,144 483,794 189,082 -- 706,187
--------- --------- ---------- -------- --------- ----------
$ 671,929 $ 539,220 $1,495,168 $768,508 $(916,940) $2,557,885
========= ========= ========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term
debt and capital lease
obligations................... $ 8,352 $ -- $ 4,274 $107,844 $ -- $ 120,470
Accounts payable................. -- -- 285,585 132,142 -- 417,727
Accrued liabilities.............. 6,963 5,889 183,876 87,722 -- 284,450
--------- --------- ---------- -------- --------- ----------
Total current liabilities..... 15,315 5,889 473,735 327,708 -- 822,647
--------- --------- ---------- -------- --------- ----------
Long-term debt, net of current
maturities....................... 428,651 -- 43,765 62,804 -- 535,220
Obligations under capital leases,
net of current maturities........ -- -- 370 29,361 -- 29,731
Convertible subordinated notes..... -- 199,984 -- -- -- 199,984
Due to/(from) affiliates........... (332,628) (443,582) 753,142 23,068 -- --
Other noncurrent liabilities....... -- 6,103 157,230 36,144 -- 199,477
--------- --------- ---------- -------- --------- ----------
Total noncurrent
liabilities................. 96,023 (237,495) 954,507 151,377 -- 964,412
--------- --------- ---------- -------- --------- ----------
Mandatorily redeemable trust
convertible preferred
securities....................... -- 258,750 -- -- -- 258,750
Stockholders' investment........... 560,591 512,076 66,926 289,423 (916,940) 512,076
--------- --------- ---------- -------- --------- ----------
$ 671,929 $ 539,220 $1,495,168 $768,508 $(916,940) $2,557,885
========= ========= ========== ======== ========= ==========
82
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenues........................ $ -- $ -- $1,937,140 $ 817,324 $ -- $2,754,464
Cost of sales................... -- -- 1,759,587 695,990 -- 2,455,577
-------- -------- ---------- --------- -------- ----------
Gross profit............... -- -- 177,553 121,334 -- 298,887
Selling, general and
administrative expenses....... -- -- 104,026 39,796 -- 143,822
Amortization expense............ 1,497 1,302 -- 1,362 -- 4,161
Restructuring and asset
impairment charges, net....... -- -- 57,475 3,650 -- 61,125
-------- -------- ---------- --------- -------- ----------
Operating income (loss).... (1,497) (1,302) 16,052 76,526 -- 89,779
Interest expense, net........... 43,872 10,000 653 12,384 -- 66,909
Other expense................... 1,993 -- 946 (1,887) -- 1,052
-------- -------- ---------- --------- -------- ----------
Income (loss) before
provision for income
taxes, equity in earnings
of joint ventures,
minority interest and
cumulative effect of
accounting change........ (47,362) (11,302) 14,453 66,029 -- 21,818
Provision (benefit) for income
taxes......................... (16,577) (3,956) 5,061 23,108 -- 7,636
-------- -------- ---------- --------- -------- ----------
Income (loss) before equity
in earnings of joint
ventures, minority
interest and cumulative
effect of accounting
change................... (30,785) (7,346) 9,392 42,921 -- 14,182
Equity in earnings of joint
ventures and subsidiaries,
net........................... (48,121) (78,906) -- -- 143,849 16,822
Minority interest, net.......... -- (11,354) -- (4,470) -- (15,824)
-------- -------- ---------- --------- -------- ----------
Income (loss) before
cumulative effect of
accounting change........ (78,906) (97,606) 9,392 38,451 143,849 15,180
Cumulative effect of change in
accounting principle, net..... -- -- -- (112,786) -- (112,786)
-------- -------- ---------- --------- -------- ----------
Net income (loss).......... $(78,906) $(97,606) $ 9,392 $ (74,335) $143,849 $ (97,606)
======== ======== ========== ========= ======== ==========
83
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)........... $ (78,906) $ (97,606) $ 9,392 $(74,335) $143,849 $ (97,606)
Adjustments required to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities
Cumulative effect of
change in accounting
principle.............. -- -- -- 112,786 -- 112,786
Restructuring and asset
impairment charge,
net.................... -- -- 57,475 3,650 -- 61,125
Depreciation and
amortization........... 1,497 1,302 99,543 38,517 -- 140,859
Deferred income tax
provision (benefit).... -- -- (3,902) 6,009 -- 2,107
Gain on sale of
plant................ -- -- -- (3,839) -- (3,839)
Equity in earnings of
joint ventures, net.... (16,822) -- -- -- -- (16,822)
Changes in working capital
and other operating
items.................. 285,461 (6,113) (284,092) 23,367 (86,281) (67,658)
----------- --------- --------- -------- -------- -----------
Net cash provided by
(used in) operating
activities........... 191,230 (102,417) (121,584) 106,155 57,568 130,952
----------- --------- --------- -------- -------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net... -- -- (96,176) (62,788) -- (158,964)
Acquisitions and other,
net....................... (88,479) (63,424) 168,702 3,971 (57,568) (36,798)
Proceeds from sale of fixed
assets.................... -- -- 50,313 -- -- 50,313
----------- --------- --------- -------- -------- -----------
Net cash provided by
(used in) investing
activities........... (88,479) (63,424) 122,839 (58,817) (57,568) (145,449)
----------- --------- --------- -------- -------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings.... 1,994,990 -- 98 42,949 -- 2,038,037
Repayments of debt.......... (2,097,741) -- (3,797) (95,911) -- (2,197,449)
Net proceeds from the
issuance of common
stock..................... -- 225,701 -- -- -- 225,701
Payments for the repurchase
of common stock........... -- (59,860) -- -- -- (59,860)
----------- --------- --------- -------- -------- -----------
Net cash provided by
(used for) financing
activities........... (102,751) 165,841 (3,699) (52,962) -- 6,429
----------- --------- --------- -------- -------- -----------
Net Change in Cash and Cash
Equivalents............... -- -- (2,444) (5,624) -- (8,068)
Cash and Cash Equivalents,
Beginning of Period....... -- -- 2,444 19,323 -- 21,767
----------- --------- --------- -------- -------- -----------
Cash and Cash Equivalents,
End of Period............. $ -- $ -- $ -- $ 13,699 $ -- $ 13,699
=========== ========= ========= ======== ======== ===========
84
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS
AT DECEMBER 31, 2001
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents............. $ -- $ -- $ 2,444 $ 19,323 $ -- $ 21,767
Accounts receivable........ -- -- 140,402 76,236 -- 216,638
Inventories................ -- -- 72,003 40,533 -- 112,536
Prepaid tooling and
other................... -- -- 52,238 36,991 -- 89,229
-------- --------- ---------- -------- ----------- ----------
Total current assets.... -- -- 267,087 173,083 -- 440,170
-------- --------- ---------- -------- ----------- ----------
Property, plant and
equipment, net............. -- -- 824,437 295,822 -- 1,120,259
Investments in joint
ventures................... 237,834 -- 4,177 1,187 -- 243,198
Investment in subsidiaries... 744,808 447,408 -- -- (1,192,216) --
Goodwill and other assets,
net........................ 9,659 9,700 428,186 282,264 -- 729,809
-------- --------- ---------- -------- ----------- ----------
$992,301 $ 457,108 $1,523,887 $752,356 $(1,192,216) $2,533,436
======== ========= ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-
term debt and capital
lease obligations....... $ 67,381 $ -- $ 2,723 $101,979 $ -- $ 172,083
Accounts payable........... -- -- 263,800 105,110 -- 368,910
Accrued liabilities........ 7,234 4,167 203,832 63,729 -- 278,962
-------- --------- ---------- -------- ----------- ----------
Total current
liabilities........... 74,615 4,167 470,355 270,818 -- 819,955
-------- --------- ---------- -------- ----------- ----------
Long-term debt, net of
current maturities......... 472,373 -- 44,765 83,946 -- 601,084
Obligations under capital
leases, net of current
maturities................. -- -- 4,620 -- -- 4,620
Convertible subordinated
notes...................... -- 199,984 -- -- -- 199,984
Due to/(from) affiliates..... (27,392) (453,201) 428,037 52,556 -- --
Other noncurrent
liabilities................ -- -- 150,639 50,996 -- 201,635
-------- --------- ---------- -------- ----------- ----------
Total noncurrent
liabilities........... 444,981 (253,217) 628,061 187,498 -- 1,007,323
-------- --------- ---------- -------- ----------- ----------
Manditorily redeemable trust
convertible preferred
securities................. -- 258,750 -- -- -- 258,750
Stockholders' investment..... 472,705 447,408 425,471 294,040 (1,192,216) 447,408
-------- --------- ---------- -------- ----------- ----------
$992,301 $ 457,108 $1,523,887 $752,356 $(1,192,216) $2,533,436
======== ========= ========== ======== =========== ==========
85
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenues............. $ -- $ -- $1,644,357 $823,076 $ -- $2,467,433
Cost of sales........ -- -- 1,467,062 723,186 -- 2,190,248
--------- --------- ---------- -------- -------- ----------
Gross profit.... -- -- 177,295 99,890 -- 277,185
Selling, general and
administrative
expenses........... -- -- 103,591 35,612 -- 139,203
Amortization
expense............ 1,774 1,301 14,660 7,069 -- 24,804
Restructuring and
asset impairment
charges, net....... -- -- 383,614 125 -- 383,739
--------- --------- ---------- -------- -------- ----------
Operating income
(loss)........ (1,774) (1,301) (324,570) 57,084 -- (270,561)
Interest expense,
net................ 60,621 7,516 (7,773) 13,401 -- 73,765
--------- --------- ---------- -------- -------- ----------
Income (loss)
before
provision for
income taxes,
equity in
earnings of
joint ventures
and minority
interest...... (62,395) (8,817) (316,797) 43,683 -- (344,326)
Provision (benefit)
for income taxes... (24,334) (3,439) (57,803) 12,264 -- (73,312)
--------- --------- ---------- -------- -------- ----------
Income (loss)
before equity
in earnings of
joint ventures
and minority
interest...... (38,061) (5,378) (258,994) 31,419 -- (271,014)
Equity in earnings of
joint ventures and
subsidiaries,
net................ (213,429) (251,490) 300 -- 481,869 17,250
Minority interest,
net................ -- (10,656) -- (3,104) -- (13,760)
--------- --------- ---------- -------- -------- ----------
Net income
(loss)........ $(251,490) $(267,524) $ (258,694) $ 28,315 $481,869 $ (267,524)
========= ========= ========== ======== ======== ==========
86
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)............... $ (251,490) $(267,524) $(258,694) $ 28,315 $ 481,869 $ (267,524)
Adjustments required to
reconcile net income (loss) to
net cash provided by (used in)
operating activities
Restructuring and asset
impairment charge, net...... -- -- 383,614 125 -- 383,739
Depreciation and
amortization................ 1,774 1,301 122,026 34,792 -- 159,893
Deferred income tax benefit... -- -- (65,976) (14,782) -- (80,758)
Equity in earnings of joint
ventures, net............... (16,950) -- (300) -- -- (17,250)
Changes in working capital and
other operating items....... 251,214 381 281,364 (2,562) (194,682) 335,715
----------- --------- --------- --------- --------- -----------
Net cash provided by (used
in) operating
activities............... (15,452) (265,842) 462,034 45,888 287,187 513,815
----------- --------- --------- --------- --------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net....... -- -- (142,253) (51,702) -- (193,955)
Acquisitions and other, net..... 366,055 226,851 (316,282) 5,145 (287,187) (5,418)
----------- --------- --------- --------- --------- -----------
Net cash provided by (used
in) investing
activities............... 366,055 226,851 (458,535) (46,557) (287,187) (199,373)
----------- --------- --------- --------- --------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings........ 2,201,333 -- -- 107,488 -- 2,308,821
Repayments of debt.............. (2,533,164) -- (2,630) (108,066) -- (2,643,860)
Net proceeds from the issuance
of common stock............... -- 38,991 -- -- -- 38,991
----------- --------- --------- --------- --------- -----------
Net cash provided by (used
for) financing
activities............... (331,831) 38,991 (2,630) (578) -- (296,048)
----------- --------- --------- --------- --------- -----------
Net Change in Cash and Cash
Equivalents................... 18,772 -- 869 (1,247) -- 18,394
Cash and Cash Equivalents,
Beginning of Period........... (18,772) -- 1,575 20,570 -- 3,373
----------- --------- --------- --------- --------- -----------
Cash and Cash Equivalents, End
of Period..................... $ -- $ -- $ 2,444 $ 19,323 $ -- $ 21,767
=========== ========= ========= ========= ========= ===========
87
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
R.J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenues........................ $ 77,723 $ -- $1,911,493 $542,737 $ -- $2,531,953
Cost of sales................... 47,389 -- 1,627,593 485,377 -- 2,160,359
-------- -------- ---------- -------- -------- ----------
Gross profit............... 30,334 -- 283,900 57,360 -- 371,594
Selling, general and
administrative expenses....... 5,030 -- 108,636 23,337 -- 137,003
Amortization expense............ 2,921 1,305 13,210 4,081 -- 21,517
Restructuring and asset
impairment charges, net....... 12,465 -- 128,861 -- -- 141,326
-------- -------- ---------- -------- -------- ----------
Operating income (loss).... 9,918 (1,305) 33,193 29,942 -- 71,748
Interest expense, net........... 63,795 7,906 (15,044) 8,054 -- 64,711
-------- -------- ---------- -------- -------- ----------
Income (loss) before
provision for income
taxes, equity in earnings
of joint ventures,
minority interest and
extraordinary loss....... (53,877) (9,211) 48,237 21,888 -- 7,037
Provision (benefit) for income
taxes......................... (21,550) (3,681) 19,289 8,561 -- 2,619
-------- -------- ---------- -------- -------- ----------
Income (loss) before equity
in earnings of joint
ventures, minority
interest and
extraordinary item....... (32,327) (5,530) 28,948 13,327 -- 4,418
Equity in earnings of joint
ventures and subsidiaries,
net........................... 64,755 29,440 -- -- (71,715) 22,480
Minority interest, net.......... -- (10,476) -- -- -- (10,476)
-------- -------- ---------- -------- -------- ----------
Income before extraordinary
item.......................... 32,428 13,434 28,948 13,327 (71,715) 16,422
Extraordinary loss on early
extinguishments of debt,
net........................... 2,988 -- -- -- -- 2,988
-------- -------- ---------- -------- -------- ----------
Net income................. $ 29,440 $ 13,434 $ 28,948 $ 13,327 $(71,715) $ 13,434
======== ======== ========== ======== ======== ==========
88
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
R.J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income....................... $ 29,440 $ 13,434 $ 28,948 $ 13,327 $(71,715) $ 13,434
Adjustments required to reconcile
net income to net cash provided
by (used in) operating
activities
Restructuring and asset
impairment charge, net....... 12,465 -- 128,861 -- -- 141,326
Depreciation and
amortization................. 6,426 1,305 115,873 21,201 -- 144,805
Deferred income tax provision
(benefit).................... (23,335) -- (631) 593 -- (23,373)
Extraordinary loss on
extinguishments of debt,
net.......................... 2,988 -- -- -- -- 2,988
Equity in earnings of joint
ventures, net................ (22,480) -- -- -- -- (22,480)
Changes in working capital and
other operating items........ (144,253) (381) (184,533) 165,115 -- (164,052)
----------- -------- --------- --------- -------- -----------
Net cash provided by (used
in) operating
activities................ (138,749) 14,358 88,518 200,236 (71,715) 92,648
----------- -------- --------- --------- -------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net........ (20,800) -- (85,898) 13,110 -- (93,588)
Acquisitions and other, net...... (164,981) 19,026 (35,082) (119,225) 71,715 (228,547)
Net proceeds from the sale of
Roanoke Heavy Truck Business... -- -- 55,353 -- -- 55,353
----------- -------- --------- --------- -------- -----------
Net cash provided by (used
in) investing
activities................ (185,781) 19,026 (65,627) (106,115) 71,715 (266,782)
----------- -------- --------- --------- -------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings......... 3,304,062 -- 21 68,228 -- 3,372,311
Repayments of debt............... (3,135,316) -- (21,821) (142,600) -- (3,299,737)
Net proceeds from the issuance of
senior Euro notes.............. 134,700 -- -- -- -- 134,700
Net proceeds from the issuance of
common stock................... -- 6,794 -- -- -- 6,794
Payments for the repurchase of
common shares.................. -- (40,178) -- -- -- (40,178)
----------- -------- --------- --------- -------- -----------
Net cash provided by (used
for) financing
activities................ 303,446 (33,384) (21,800) (74,372) -- 173,890
----------- -------- --------- --------- -------- -----------
Net Change in Cash and Cash
Equivalents.................... (21,084) -- 1,091 19,749 -- (244)
Cash and Cash Equivalents,
Beginning of Period............ 2,312 -- 484 821 -- 3,617
----------- -------- --------- --------- -------- -----------
Cash and Cash Equivalents, End of
Period......................... $ (18,772) $ -- $ 1,575 $ 20,570 $ -- $ 3,373
=========== ======== ========= ========= ======== ===========
89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company determined, for itself and on behalf of its subsidiaries, to
dismiss our independent auditors, Arthur Andersen LLP ("Arthur Andersen") and to
engage the services of Deloitte & Touche LLP ("Deloitte & Touche") as our new
independent auditors. The change in auditors was approved by the Company's Audit
Committee and Board of Directors and was effective as of June 20, 2002. As a
result, Deloitte & Touche audited the Company's consolidated financial
statements for the year ended December 31, 2002.
Arthur Andersen's reports on the Company's consolidated financial
statements for the years ended December 31, 2001 and 2000 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. During the year ended
December 31, 2001, through June 20, 2002 (the "Relevant Period"), (1) there were
no disagreements with Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Arthur Andersen's satisfaction, would have caused Arthur
Andersen to make reference to the subject matter of the disagreement(s) in
connection with its reports on the Company's consolidated financial statements
for such year, and (2) there were no reportable events as described in Item
304(a)(1)(v) ("Reportable Events") of the Commission's Regulation S-K.
During the Relevant Period, neither the Company nor anyone acting on its
behalf consulted with Deloitte & Touche regarding (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our consolidated
financial statements, or (ii) any matters or reportable events as set forth in
Items 304(a)(1)(iv) and (v), respectively, or Regulation S-K.
The Company has not been able to obtain, after reasonable efforts, the
re-issued reports or consent of Arthur Andersen related to the 2001 and 2000
consolidated financial statements and financial statement schedules. Therefore,
the Company has included a copy of their previously issued report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE REGISTRANT
The information required by Item 10 with respect to the directors and
director nominees is incorporated herein by reference to the section labeled
"Election of Directors" which appears in the Company's 2003 Proxy Statement.
B. EXECUTIVE OFFICERS
See "Additional Item -- Executive Officers" in Part I.
C. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by Item 10 with respect to compliance with
reporting requirements is incorporated herein by reference to the section
labeled "Section 16(a) Beneficial Ownership Reporting Compliance" which appears
in the Company's 2003 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the sections labeled "Compensation of Directors" and "Executive Compensation"
which appear in the Company's 2003 Proxy Statement, excluding information under
the headings "Compensation Committee Report on Executive Compensation" and
"Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the section labeled "Ownership of Tower Automotive Common Stock" and "Equity
Compensation Plan Information" which appear in the Company's 2003 Proxy
Statement.
90
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the section labeled "Other Compensatory Agreements" which appears in the
Company's 2003 Proxy Statement.
PART IV
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
With the participation of management, the Company's chief executive officer
and chief financial officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules
13(a) -- 14(c) and 15(d) -- 14(c)) on January 23, 2003 ("the Evaluation Date"),
have concluded that, as of such dates, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities in connection with the Company's filing of
its Annual Report on Form 10-K for the annual period ended December 31, 2002.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's disclosure controls
subsequent to the Evaluation Date through the date of this filing of Form 10-K
for the annual period ended December 31, 2002.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements:
- Independent Auditors' Report for the year ended December 31, 2002
- Report of Independent Public Accountants for the years ended
December 31, 2001 and 2000
- Consolidated Balance Sheets as of December 31, 2002 and 2001
- Consolidated Statements of Operations for the Years Ended December
31, 2002, 2001 and 2000
- Consolidated Statements of Stockholders' Investment for the Years
Ended December 31, 2002, 2001 and 2000
- Consolidated Statement of Cash Flows for the Years Ended December
31, 2002, 2001 and 2000
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
- Independent Auditors' Report for the year ended December 31, 2002
- Report of Independent Public Accountants for the years ended
December 31, 2001 and 2000
- Financial Statement Schedule I -- Condensed Financial Information
of Registrant
- Financial Statement Schedule II -- Valuation and Qualifying
Accounts of Registrant
- Financial Statement Schedule III -- Separate Financial Statements
of Significant Equity Method Investee
(3) Exhibits: See "Exhibit Index" beginning on page 92.
91
(b) REPORTS ON FORM 8-K
(1) During the fourth quarter of 2002, the Company furnished the
following Form 8-K Current Reports to the Securities and Exchange
Commission:
- The Company's Current Report on Form 8-K, dated October 18, 2002
(Commission File No. 1-12733), under Item 5.
- The Company's Current Report on Form 8-K, dated October 18, 2002
(Commission File No. 1-12733), under Item 9.
- The Company's Current Report on Form 8-K, dated December 17, 2002
(Commission File No. 1-12733), under Item 5.
92
TOWER AUTOMOTIVE, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
PAGE NUMBER IN
SEQUENTIAL
NUMBERING OF ALL
FORM 10-K AND
EXHIBIT EXHIBIT PAGES
------- ----------------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as amended by the Certificate of Amendment to
Certificate of Incorporated, dated June 2, 1997,
incorporated by reference to the Registrant's Form S-3
Registration Statement (Registration No. 333-38827), filed
under the Securities Act of 1933 (the "S-3"). *
3.2 Amended and Restated Bylaws of the Registrant, incorporated
by reference to Exhibit 3.2 of the Company's Form S-1
Registration Statement (Registration No. 333-80320) (the
"S-1"). *
4.1 Form of Common Stock Certificate, incorporated by reference
to Exhibit 4.1 of the S-1. *
4.2 Euro Indenture, dated July 25, 2000, by and among R.J. Tower
Corporation, certain of its affiliates and United States
Trust Company of New York, as trustee (including the form of
notes), incorporated by reference to Exhibit 4.1 of the
Registrant's Form S-4 Registration Statement (Registration
No. 333-45528), as filed with the SEC on December 21, 2000
(the "S-4"). *
4.3 Exchange and Registration Rights Agreement, dated July 25,
2000, by and among R.J. Tower Corporation, certain of its
affiliates and Chase Manhattan International Limited, Bank
of America International Limited, ABN AMRO Incorporated,
Donaldson, Lufkin & Jennrette International, First Chicago
Limited and Scotia Capital (USA) Inc. (collectively, the
"Initial Purchasers"), incorporated by reference to Exhibit
4.2 of the S-4. *
4.4 Deposit Agreement, dated July 25, 2000, among R.J. Tower
Corporation, Deutsche Bank Luxembourg S.A., and the Trustee,
incorporated by reference to Exhibit 4.3 of the S-4. *
4.5 Indenture, dated as of July 28, 1997, by and between the
Registrant and Bank of New York, as trustee (including form
of 5% Convertible Subordinated Note due 2004) incorporated
by reference to Exhibit 4.5 of the S-3. *
10.1 Registration Agreement dated as of April 15, 1993 between
the Registrant and certain investors; and First Amendment to
Registration Agreement dated as of May 4, 1994 by and among
the Registrant and certain investors, incorporated by
reference to Exhibit 10.4 of the S-1. *
10.2 Form of Convertible Promissory Note dated as of May 4, 1994
of the Registrant, incorporated by reference to Exhibit
10.12 of the S-1. *
10.3** Stock Option Agreement dated May 4, 1994 by and between the
Registrant and James R. Lozelle incorporated by reference to
Exhibit 10.14 of the S-1. *
10.4** 1994 Key Employee Stock Option Plan, incorporated by
reference to
10.5** Tower Automotive, Inc. Independent Director Stock Option
Plan, incorporated by reference to Exhibit 4.3 of the
Registrant's Form S-8 dated December 5, 1996, filed under
the Securities Act of 1933. *
10.6 Joint Venture Agreement by and among Promotora de Empresas
Zano, S.A. de C.V., Metalsa, S.A. de C.V. and R.J. Tower
Corporation dated as of September 26, 1997, incorporated by
reference to Exhibit 2.1 of the Registrant's Form 8-K dated
October 23, 1997, filed under the Securities Exchange Act of
1934. *
93
PAGE NUMBER IN
SEQUENTIAL
NUMBERING OF ALL
FORM 10-K AND
EXHIBIT EXHIBIT PAGES
------- ----------------
10.7 Certificate of Trust of Tower Automotive Capital Trust,
incorporated by reference to Exhibit 4.1 of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998, filed under the Securities Exchange Act of
1934. *
10.8 Amended and Restated Declaration of Trust of Tower
Automotive Capital Trust, dated June 9, 1998, incorporated
by reference to Exhibit 4.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998, filed under the Securities Exchange Act of 1934. *
10.9 Junior Convertible Subordinated Indenture for the 6%
Convertible Subordinated Debentures, between Tower
Automotive, Inc. and the First National Bank of Chicago, as
Subordinated Debt Trustee, dated as of June 9, 1998,
incorporated by reference to Exhibit 4.3 of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998, filed under the Securities Exchange Act of
1934. *
10.10 Form of 6 3/4% Preferred Securities, incorporated by
reference to Exhibit 4.4 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998, filed under the Securities Exchange Act of 1934. *
10.11 Form of 6 3/4% Junior Convertible Subordinated Debentures,
incorporated by reference to Exhibit 4.5 of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998, filed under the Securities Exchange Act of
1934. *
10.12 Guarantee Agreement, dated as of June 9, 1998, between Tower
Automotive, Inc., as Guarantor, and the First National Bank
of Chicago, as Guarantee Trustee, incorporated by reference
to Exhibit 4.6 of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998, filed
under the Securities Exchange Act of 1934. *
10.13 Amended and Restated Credit Agreement among R.J. Tower
Corporation, Tower Italia, S.r.L., Bank of America National
Trust and Savings Association, as agent, and the other
financial institutions named therein, dated August 23, 1999,
incorporated by reference to Exhibit 10.43 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed under the Securities Exchange
Act of 1934. *
10.14 Purchase Agreement, dated July 19, 2000, among R.J. Tower
Corporation ("Issuer"), Tower Automotive, Inc. ("Parent"),
those subsidiaries of the Issuer named therein (the
"Subsidiary Guarantors", and together with Parent, the
"Guarantors") and the Initial Purchasers, incorporated by
reference to Exhibit 1.1 of the S-4. *
10.15** Tower Automotive, Inc. Long-Term Incentive Plan,
incorporated by reference to Appendix A to Parent's Proxy
Statement, dated April 12, 1999. *
10.16** Tower Automotive, Inc. Director Deferred Stock Purchase
Plan, incorporated by reference to Appendix A to Parent's
Proxy Statement, dated April 10, 2000. *
10.17** Tower Automotive, Inc. Key Leadership Deferred Income Stock
Purchase Plan, incorporated by reference to Appendix B to
Parent's Proxy Statement, dated April 12, 1999. *
10.18** Tower Automotive, Inc. Colleague Stock Purchase Plan,
incorporated by reference to Exhibit 10.19 of the S-1. *
10.19 Credit Agreement, dated as of July 25, 2000, among the
Issuer, certain direct and indirect wholly-owned
subsidiaries of the Issuer and Bank of America, N.A., as
administrative agent, and The Chase Manhattan Bank, as
syndication agent, and the other lenders named therein,
incorporated by reference to Exhibit 10.1 of the S-4. *
94
PAGE NUMBER IN
SEQUENTIAL
NUMBERING OF ALL
FORM 10-K AND
EXHIBIT EXHIBIT PAGES
------- ----------------
10.20 Second Amendment to Credit Agreement, dated as of June 28,
2002, among R.J. Tower Corporation, Tower Automotive Europe
B.V., Tower Automotive Finance B.V., the parties named as
Guarantors, the several financial institutions from time to
time party to this Agreement, Bank of America, N.A., as
administrative agent, JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank), as syndication agent, and The
Bank of Nova Scotia, Comerica Bank, U.S. Bank National
Association and Bank One, Michigan, as co-agents,
incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002, filed under the Securities
Exchange Act of 1934. *
12.1 Statement and Computation of Ratio of Earnings to Fixed
Charges filed herewith.
21.1 List of Subsidiaries filed herewith.
23.1 Consent of Deloitte and Touche LLP filed herewith.
23.2 Information Concerning Consent of Arthur Andersen LLP filed
herewith.
23.3 Consent of KPMG Cardenas Dosal, S.C. filed herewith.
99.1 Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
---------------
* Incorporated by reference.
** Indicates compensatory arrangement.
95
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TOWER AUTOMOTIVE, INC.
By /s/ S.A. JOHNSON
------------------------------------
S.A. Johnson, Chairman
Date: March 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each director of
the Registrant, whose signature appears below, hereby appoints Dugald K.
Campbell and Ernest T. Thomas and each of them severally, as his or her
attorney-in-fact, to sign in his or her name and on his or her behalf, as
director of the Registrant, and to file with the Commission any and all
amendments to this Report on Form 10-K.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ S.A. JOHNSON Chairman and Director March 17, 2003
------------------------------------------------
S.A. Johnson
/s/ DUGALD K. CAMPBELL President, Chief Executive March 17, 2003
------------------------------------------------ Officer (Principal Executive
Dugald K. Campbell Officer) and Director
Director March , 2003
------------------------------------------------
Jurgen M. Geissinger
/s/ ALI JENAB Director March 17, 2003
------------------------------------------------
Ali Jenab
/s/ F.J. LOUGHREY Director March 17, 2003
------------------------------------------------
F.J. Loughrey
/s/ JAMES R. LOZELLE Director March 17, 2003
------------------------------------------------
James R. Lozelle
/s/ GEORGIA R. NELSON Director March 17, 2003
------------------------------------------------
Georgia R. Nelson
/s/ SCOTT D. RUED Director March 17, 2003
------------------------------------------------
Scott D. Rued
Director March , 2003
------------------------------------------------
Enrique Zambrano
/s/ ERNEST T. THOMAS Chief Financial Officer and March 17, 2003
------------------------------------------------ Treasurer (Principal Accounting
Ernest T. Thomas Officer)
96
CERTIFICATIONS
I, Dugald K. Campbell, certify that:
1. I have reviewed this annual report on Form 10-K of Tower
Automotive, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ DUGALD K. CAMPBELL
--------------------------------------
Dugald K. Campbell
Chief Executive Officer
Date: March 17, 2003
97
I, Ernest T. Thomas, certify that:
1. I have reviewed this annual report on Form 10-K of Tower
Automotive, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ ERNEST T. THOMAS
--------------------------------------
Ernest T. Thomas
Chief Financial Officer
Date: March 17, 2003
98
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Tower Automotive, Inc.
We have audited the consolidated financial statements of Tower Automotive, Inc.
(a Delaware corporation) and Subsidiaries (the Company) as of December 31, 2002
and for the year then ended, and have issued our report thereon dated February
11, 2003, which report expresses an unqualified opinion and includes explanatory
paragraphs relating to (i) the change in its method of accounting for goodwill
(ii) and the application of procedures relating to certain other disclosures of
financial statement amounts related to the 2001 and 2000 consolidated financial
statements that were audited by other auditors who have ceased operations, and
for which we have expressed no opinion or other form of assurance other than
with respect to such disclosures appearing in this Annual Report on Form 10-K.
Our audit was made for the purpose of forming an opinion on the 2002
consolidated financial statements taken as a whole. The consolidated financial
statements and related financial statement schedules of the Company as of
December 31, 2001, and for each of the two years in the period then ended, were
audited by other auditors who have ceased operations and whose reports, dated
January 25, 2002, expressed an unqualified opinion on those statements and
schedules and included an explanatory paragraph concerning a change in
accounting for derivative financial instruments as discussed in Note 2 to the
consolidated financial statements.
Our audit also included the 2002 Schedule I - Condensed Financial Information of
the Registrant and Schedule II - Valuation and Qualifying Accounts of the
Registrant (the "Schedules") as listed in Item 15 of this Annual Report on Form
10-K. The financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the Schedules based
on our audit. In our opinion, the Schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 11, 2003
The following report is a copy of a report previously issued by Arthur Andersen
LLP ("Andersen"), which report has not been reissued by Andersen. Certain
financial information for each of the two years in the period ended December 31,
2001 was not reviewed by Andersen and includes:
(ii) reclassifications to conform to our fiscal 2002 financial statement
schedule presentation and
(ii) additional disclosure to conform with new accounting pronouncements and
SEC rules and regulations issued during such fiscal year.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements included in the Tower Automotive, Inc.
and Subsidiaries' annual report to stockholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 25, 2002.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule I - Condensed Financial Information of
Registrant and Schedule II - Valuation and Qualifying Accounts of Registrant are
the responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Minneapolis, Minnesota,
January 25, 2002
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(Amounts in thousands, except share amounts)
2002 2001
--------- ---------
ASSETS
Investment in consolidated subsidiaries $ 955,658 $ 900,609
Other assets, net of accumulated amortization of $6,662
and $5,361 27,144 9,700
--------- ---------
$ 982,802 $ 910,309
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Accrued liabilities $ 5,889 $ 4,167
Convertible subordinated notes 199,984 199,984
Other noncurrent liabilities 6,103
6-3/4% convertible subordinated debentures payable
to trust subsidiary 258,750 258,750
Commitments and contingencies
Stockholders' investment:
Preferred stock, par value $1; 5,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, par value $.01; 200,000,000 shares
authorized; 56,050,855 and 48,077,142 shares issued
and outstanding 659 481
Additional paid-in capital 683,072 456,627
Retained earnings (57,174) 40,432
Deferred compensation plans (10,746) (15,571)
Accumulated other comprehensive loss (43,875) (34,561)
Treasury stock, at cost: 9,827,800 shares in 2002 (59,860) --
--------- ---------
Total stockholders' investment 512,076 447,408
--------- ---------
$ 982,802 $ 910,309
========= =========
The accompanying notes are an integral part of these condensed statements.
S-1
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands)
2002 2001 2000
--------- --------- ---------
Amortization expense $ 1,302 $ 1,301 $ 1,305
--------- --------- ---------
Operating loss (1,302) (1,301) (1,305)
Interest expense 27,466 27,466 27,466
Interest income -- (2,484) (2,094)
--------- --------- ---------
Loss before income taxes and equity in earnings
of consolidated subsidiaries (28,768) (26,283) (26,677)
Income tax benefit 10,068 10,249 10,671
Equity in earnings of consolidated subsidiaries (78,906) (251,490) 29,440
--------- --------- ---------
Net income (loss) $ (97,606) $(267,524) $ 13,434
========= ========= =========
The accompanying notes are an integral part of these condensed statements.
S-2
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON STOCK ADDITIONAL WARRANTS TO
--------------------------- PAID-IN RETAINED ACQUIRE
SHARES AMOUNT CAPITAL EARNINGS COMMON STOCK
----------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1999 46,879,454 $ 469 $ 437,210 $ 294,522 $ 2,000
Conversion of warrants 400,000 4 5,596 -- (2,000)
Exercise of options 56,000 1 348 -- --
Sales of stock under Employee Stock
Discount Purchase Plan 224,342 2 2,843 -- --
Deferred Income Stock Plan deferrals 24,595 -- 4,458 -- --
Repurchase of common stock -- -- -- -- --
Net income -- -- -- 13,434 --
Other comprehensive loss--foreign currency
translation adjustment -- -- -- -- --
Total comprehensive income
----------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 2000 47,584,391 476 450,455 307,956 --
Conversion of Edgewood and 5%
convertible notes 273,862 3 825 -- --
Exercise of options 42,750 -- 268 -- --
Sales of stock under Employee Stock
Discount Purchase Plan 172,502 2 1,167 -- --
Deferred Income Stock Plan deferrals -- -- 1,279 -- --
Restricted stock issued in exchange for
stock options -- -- 5,350 -- --
Private placement of common stock 3,637 -- (2,717) -- --
Net loss -- -- -- (267,524) --
Other comprehensive loss:
Foreign currency translation adjustment -- -- -- -- --
Transition adjustment relating to loss on
qualifying cash flow hedges -- -- -- -- --
Unrealized loss on qualifying cash flow hedges -- -- -- -- --
Minimum pension liability -- -- -- -- --
Total comprehensive loss
----------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 2001 48,077,142 481 456,627 40,432 --
Exercise of options 329,368 3 1,653 -- --
Sales of stock under Employee Stock
Discount Purchase Plan 222,145 2 1,423 -- --
Deferred Income Stock Plan deferrals -- 1,387 --
Deferred Income Stock Plan distributions -- -- -- -- --
Restricted stock grants earned and forfeited -- (465) --
Issuance of common stock 17,250,000 173 222,447 -- --
Repurchase of common stock -- -- -- -- --
Net loss -- -- -- (97,606) --
Other comprehensive income (loss):
Foreign currency translation adjustment -- -- -- -- --
Unrealized loss on qualifying cash flow hedges -- -- -- -- --
Minimum pension liability -- -- -- -- --
Total comprehensive loss
----------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 2002 65,878,655 $ 659 $ 683,072 $ (57,174) $ --
=========== =========== =========== =========== ============
ACCUMULATED
DEFERRED OTHER TREASURY STOCK TOTAL
COMPENSATION COMPREHENSIVE ------------------------- STOCKHOLDERS'
PLANS INCOME (LOSS) SHARES AMOUNT INVESTMENT
------------ ------------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1999 $ (4,484) $ (2,582) -- $ -- $ 727,135
Conversion of warrants -- -- -- -- 3,600
Exercise of options -- -- -- -- 349
Sales of stock under Employee Stock
Discount Purchase Plan -- -- -- -- 2,845
Deferred Income Stock Plan deferrals (4,458) -- -- -- --
Repurchase of common stock -- -- (4,112,100) (40,178) (40,178)
Net income -- -- -- -- --
Other comprehensive loss--foreign currency
translation adjustment -- (7,090) -- --
Total comprehensive income 6,344
------------ ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 2000 (8,942) (9,672) (4,112,100) (40,178) 700,095
Conversion of Edgewood and 5%
convertible notes -- -- -- -- 828
Exercise of options -- -- -- -- 268
Sales of stock under Employee Stock
Discount Purchase Plan -- -- -- -- 1,169
Deferred Income Stock Plan deferrals (1,279) -- 479,337 -- --
Restricted stock issued in exchange for
stock options (5,350) -- -- -- --
Private placement of common stock -- -- 3,632,763 40,178 37,461
Net loss -- -- -- --
Other comprehensive loss:
Foreign currency translation adjustment -- (2,115) -- --
Transition adjustment relating to loss on
qualifying cash flow hedges -- (4,200) -- --
Unrealized loss on qualifying cash flow hedges -- (4,102) -- --
Minimum pension liability -- (14,472) -- --
Total comprehensive loss (292,413)
------------ ------------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 2001 (15,571) (34,561) -- -- 447,408
Exercise of options -- -- -- -- 1,656
Sales of stock under Employee Stock
Discount Purchase Plan -- -- -- -- 1,425
Deferred Income Stock Plan deferrals (1,387) -- -- -- --
Deferred Income Stock Plan distributions 3,781 -- -- -- 3,781
Restricted stock grants earned and forfeited 2,431 -- -- -- 1,966
Issuance of common stock -- -- -- -- 222,620
Repurchase of common stock -- -- (9,827,800) (59,860) (59,860)
Net loss -- -- -- -- --
Other comprehensive income (loss):
Foreign currency translation adjustment -- 19,915 -- --
Unrealized loss on qualifying cash flow hedges -- (4,521) -- --
Minimum pension liability -- (24,708) -- --
Total comprehensive loss (106,920)
------------ ------------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 2002 $ (10,746) $ (43,875) (9,827,800) $ (59,860) $ 512,076
============ ============= ========== =========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
S-3
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Amounts in thousands)
2002 2001 2000
--------- --------- ---------
Operating Activities:
Net income (loss) $ (97,606) $(267,524) $ 13,434
Amortization expense 1,302 1,301 1,305
Equity in earnings of consolidated subsidiaries 78,906 251,490 (29,440)
Changes in working capital and other operating items (6,113) 381 (381)
--------- --------- ---------
Net cash used in operating activities (23,511) (14,352) (15,082)
--------- --------- ---------
Investing Activities:
Dividends received from consolidated subsidiaries 27,466 27,466 27,466
Additional investment in consolidated subsidiaries (169,796) (52,105) 21,000
--------- --------- ---------
Net cash provided by (used in) investing activities (142,330) (24,639) 48,466
--------- --------- ---------
Financing Activities:
Net proceeds from issuance of common stock 225,701 38,991 6,794
Payments for repurchase of common shares (59,860) -- (40,178)
--------- --------- ---------
Net cash provided by (used for) financing activities 165,841 38,991 (33,384)
--------- --------- ---------
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents:
Beginning of period -- -- --
--------- --------- ---------
End of period $ -- $ -- $ --
========= ========= =========
Supplemental Cash Flow Information:
Cash paid for -
Interest $ 27,466 $ 27,466 $ 27,466
========= ========= =========
Income taxes $ -- $ -- $ --
========= ========= =========
The accompanying notes are an integral part of these condensed statements.
S-4
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND OPERATIONS
Tower Automotive, Inc. (the "Parent Company") and its consolidated
subsidiaries (the "Subsidiaries"), collectively "the Company", produces
a broad range of assemblies and modules for vehicle frames, upper body
structures and suspension systems for the global automotive industry.
Including both wholly-owned subsidiaries and investments in joint
ventures, the Company has facilities in the United States, Canada,
Italy, Germany, Belgium, Poland, France, Spain, Brazil, India,
Slovakia, Korea, Japan, China, and Mexico.
The Notes to Consolidated Financial Statements of Tower Automotive,
Inc. and Subsidiaries should be read in conjunction with this Schedule
I.
NOTE 2. CONVERTIBLE SUBORDINATED NOTES
In July 1997, the Parent Company completed the offering of $200 million
of Convertible Subordinated Notes (the "Notes"). The net proceeds from
the Notes, $194.1 million, were contributed as an additional investment
in the Subsidiaries. The Notes bear interest at 5 percent, are
unsecured, are due on August 1, 2004 and are convertible into Common
Stock of the Parent Company at a conversion price of $25.88 per share.
The Parent Company may make optional redemptions of the Notes after
August 1, 2000 at amounts ranging from 102.857 percent to 100.714
percent of face value. In the event of a change in control (as
defined), the holders of the Notes may require the Parent Company to
redeem the Notes at face value plus accrued interest.
NOTE 3. CONVERTIBLE SUBORDINATED DEBENTURES
On June 9, 1998, Tower Automotive Capital Trust (the "Preferred
Issuer"), a wholly owned statutory business trust of the Parent
Company, completed the offering of $258.8 million of its 6-3/4 percent
Trust Convertible Preferred Securities ("Preferred Securities"),
resulting in net proceeds of approximately $249.7 million. The
Preferred Securities are redeemable, in whole or in part, on or after
June 30, 2001 and all Preferred Securities must be redeemed no later
than June 30, 2018. The Preferred Securities are convertible, at the
option of the holder, into Common Stock of the Parent Company at a rate
of 1.6280 shares of Common Stock for each Preferred Security, which is
equivalent to a conversion price of $30.713 per share. The obligations
of the Preferred Issuer under the Preferred Securities are fully and
unconditionally guaranteed by the Parent Company. Concurrently with the
issuance of the Preferred Securities, the Preferred Issuer acquired
$258.8 million of the Parent Company's 6-3/4 percent Convertible
Subordinated Debentures ("Debentures") for net proceeds of $249.7
million. Interest is payable quarterly and the notes mature on June 30,
2018. The net proceeds received from the issuance of the Debentures by
the Parent Company were contributed as an additional investment in the
Subsidiaries.
NOTE 4. INVESTMENT IN J.L. FRENCH
On October 14, 1999, the Company loaned $30.0 million to J.L. French
Automotive Castings, Inc. ("J.L. French") in exchange for a convertible
subordinated promissory note due October 14, 2009 that bears interest
at 7.5 percent.
S-5
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The Company can convert, at its option, any portion of the outstanding
principal of the note into Class A Common Stock of J.L. French at a
preset agreed upon conversion price. On November 30, 2000, the Company
exercised its option to convert the note into 7,124 shares of Class A
"1" Common Stock of J. L. French, which has a 7.5 percent pay-in-kind
dividend right. Additionally, on November 30, 2000, the Company
invested $2.9 million in J. L. French through the purchase of Class P
Common Stock, which has an 8 percent pay-in-kind dividend right. On May
24, 2000, the Company invested $11.0 million in J. L. French through
the purchase of Class A Common Stock. During the fourth quarter of
2001, the Company evaluated its investment in J.L. French and
determined that the investment has been impaired, and therefore,
recorded a charge of $46.3 million to write off the entire investment
in J.L. French.
NOTE 5. GUARANTEES AND RESTRICTIONS
Guarantee of Subsidiaries' Debt
In June 2002, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") that permanently reduced borrowings
under the facility and deferred the start of the scheduled repayment of
its remaining borrowings until March 2005. The amendment reduced the
former $1.15 billion facility to a $725 million facility by voluntarily
repaying $200 million of the $325 million term loan portion of the
facility with proceeds from the Company's May 2002 common stock
offering, and reduced capacity under the revolving credit facility from
$825 million to $600 million. The Credit Agreement also includes a
multi-currency borrowing feature that allows the Company to borrow up
to $500 million in certain freely tradable offshore currencies, and
letter of credit sublimits of $250 million. The Parent Company provided
a guarantee for this debt. As of December 31, 2002, approximately $36.4
million of the outstanding borrowings are denominated in Japanese yen,
$31.2 million are denominated in Euro, and $15.9 million are
denominated in Canadian dollars. Interest on the Credit Agreement is at
the financial institutions' reference rate, LIBOR, or the Eurodollar
rate plus a margin ranging from 0 to 200 basis points depending on the
ratio of the consolidated funded debt for restricted subsidiaries of
the Company to its total EBITDA. The weighted average interest rate for
such borrowings was 6.4 percent and 7.0 percent for the years ended
December 31, 2002 and 2001, respectively. The Credit Agreement has a
final maturity of 2006. As a result of the permanent reduction of
borrowing capacity under the amendment, the Subsidiaries recorded a
$2.0 million non-cash charge in the second quarter of 2002 that was
classified as other expense for the write-off of deferred financing
costs associated with the credit facility.
In July 2000, R. J. Tower (the "Issuer"), a wholly-owned subsidiary of
the Parent Company, issued Euro-denominated senior unsecured notes in
the amount of E150 million ($157.4 million at December 31, 2002). The
notes bear interest at a rate of 9.25 percent, payable semi-annually.
The notes rank equally with all of the Company's other unsecured and
unsubordinated debt. The notes mature on August 1, 2010.
For the periods presented through July 24, 2000, the Subsidiaries'
Credit Agreement included an amortizing revolving credit facility that
provided for borrowings of up to $750 million on an unsecured basis
with a letter of credit sublimit of $75 million. The Parent Company
provided a guarantee for this debt. Interest on the credit facility was
at the prime rate or LIBOR plus a margin ranging from 17 to 50 basis
points depending upon the ratio of the consolidated indebtedness of the
Company to its total capitalization.
Restrictions on Subsidiaries to Make Distributions to the Parent
Company
Under the terms of the $725 million senior unsecured credit agreement
described above, the Subsidiaries are restricted in their ability to
dividend, loan or otherwise distribute assets, properties, cash,
rights, obligations or securities to the Parent Company. These
restrictions are subject to a number of important exceptions, including
the ability of the Subsidiaries to: (i) purchase shares of the capital
stock of the Parent and declare or pay cash dividends to the Parent
S-6
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Company in an aggregate amount equal to $125,000,000 (provided that no
event of default exists after giving effect to such action); (ii)
declare and pay dividends to the Parent Company to be used to pay taxes
and other expenses of the Parent Company and the Subsidiaries on a
consolidated basis; and (iii) declare and pay dividends to the Parent
Company to enable the Parent Company to make regularly scheduled
interest payments or the payment of principal at maturity of any
unsecured indebtedness issued by the Parent Company (including the
Notes and the Debentures (see Note 3)), the proceeds of which are
applied to the prepayment of the revolving loans, in each case (a) has
no scheduled principal payments before July 25, 2006; (b) has no
guaranty obligation by the borrower under the revolving credit
facility; and (c) has terms and conditions which are acceptable to the
principal lender under the revolving credit facility. As of December
31, 2002, the Subsidiaries could have paid up to approximately $125
million to the Parent Company under the exception described in item (i)
above.
NOTE 6. SALE/REPURCHASE OF COMMON STOCK
In May 2002, the Parent Company completed an underwritten primary
offering of 17.25 million shares of its common stock. The net proceeds
from the offering of $222.4 million were used to repay borrowings under
the Company's Credit Agreement. In August 2001, the Parent Company
issued 3.6 million shares of its common stock in a private placement
transaction which provided for net proceeds of $37.5 million which were
used to repay outstanding indebtedness under the Company's Credit
Agreement.
Under a May 2000 board of director approval amount of $100 million, the
Parent Company repurchased 4.1 million shares at a total cost of $40.1
million during 2000 and 9.8 million shares at a total cost of $59.9
million during 2002.
S-7
SCHEDULE II
TOWER AUTOMOTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS OF REGISTRANT
(DOLLARS IN MILLIONS)
RESTRUCTURING RELATED
---------------------------------------------------
LOSS CONTRACTS RESTRUCTURING OTHER
EMPLOYEE FACILITY ESTABLISHED IN RELATED LOSS RESTRUCTURING TOTAL
DESCRIPTION COST COST PURCHASE ACCOUNTING CONTRACTS COSTS RESTRUCTURING
-------------------------- -------- -------- ------------------- ------------- ------------- ----------------
Balance, December 31, 1999 $ 6.4 $ 13.8 $ 24.8 $ -- $ -- $ --
Additional Provision -- 1.0 12.3 8.1 29.5 37.6
Utilization (2.6) (7.5) (8.4) (2.5) (9.0) (11.5)
-------- -------- ------------------- ------------- ------------- ----------------
Balance, December 31, 2000 3.8 7.3 28.7 5.6 20.5 26.1
Additional Provision -- -- -- -- 56.6 56.6
Utilization (2.7) (2.1) (11.7) (4.2) (17.3) (21.5)
Revision of Estimate -- -- -- (1.4) (4.5) (5.9)
-------- -------- ------------------- ------------- ------------- ----------------
Balance, December 31, 2001 1.1 5.2 17.0 -- 55.3 55.3
Additional Provision -- -- -- -- 28.2 28.2
Utilization (1.1) (0.7) (3.9) -- (55.4) (55.4)
Revision of Estimate -- -- (7.0) -- (14.3) (14.3)
-------- -------- ------------------- ------------- ------------- ----------------
Balance, December 31, 2002 $ -- $ 4.5 $ 6.1 $-- $13.8 $13.8
======== ======== =================== ============= ============= ================
SCHEDULE III
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metalsa, S. de R.L.:
We have audited the accompanying consolidated balance sheet of Metalsa, S. de
R.L. and subsidiary as of December 31, 2002, and the related consolidated
statements of earnings, changes in stockholders' equity, and changes in
financial position for the year then ended which, as described in note 2a, have
been prepared on the basis of accounting principles accepted in Mexico. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States and in Mexico. U.S. standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metalsa, S. de
R.L. and subsidiary as of December 31, 2002, and the results of its operations,
their changes in stockholders' equity and their changes in financial position
for the year then ended in conformity with accounting principles generally
accepted in Mexico.
The accompanying consolidated financial statements as of and for the year ended
December 31, 2002 have been translated into United States dollars solely for the
convenience of the reader. We have audited the translation and, in our opinion,
the consolidated financial statements expressed in Mexican pesos have been
translated into dollars on the basis set forth in note 2b of the notes to the
consolidated financial statements.
KPMG Cardenas Dosal, S.C.
Luis A. Carrero Roman
January 22, 2003, except for note
19, which is as of January 28, 2003
Monterrey, N.L. Mexico
S-1
SCHEDULE III
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES
ACCEPTED IN MEXICO - SEE NOTE 17
METALSA, S. DE R.L. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2001 and 2002
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2002 and thousands of US dollars ($))
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
ASSETS
Current assets:
Cash (includes cash equivalents for Ps.287,305 in 2002
and Ps.267,380 in 2001, net Ps. 284,350 452,896 $ 43,917
Accounts receivable (note 6) 479,235 373,451 36,213
Inventories (note 7) 261,944 336,159 32,597
Other current assets 15,299 26,451 2,565
------------ ------------ ------------
Total current assets 1,040,828 1,188,957 115,292
Goodwill, net (note 8) 99,236 108,374 10,509
Property, plant and equipment, net (note 9) 2,694,529 2,912,555 282,430
Other non-current assets, net (notes 5 and 10) 135,156 150,088 14,554
------------ ------------ ------------
Ps.3,969,749 4,359,974 $ 422,785
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 10) Ps. -- 309,375 $ 30,000
Accounts payable and accrued liabilities (note 11) 581,540 475,418 46,101
------------ ------------ ------------
Total current liabilities 581,540 784,793 76,101
Long-term debt (note 10) 1,444,656 1,237,497 120,000
Deferred income taxes and employees' statutory
profit sharing (note 13) 263,501 379,661 36,816
Accrued seniority premium 3,656 4,773 463
------------ ------------ ------------
Total liabilities 2,293,353 2,406,724 233,380
------------ ------------ ------------
Stockholders' equity (note 12):
Social parts 17,704 17,704 1,717
Additional paid-in capital 471,231 471,231 45,695
Retained earnings 2,026,950 2,260,786 219,228
Result from holding non-monetary assets (605,611) (562,593) (54,554)
Initial deferred income tax effect (233,878) (233,878) (22,681)
------------ ------------ ------------
Total stockholders' equity 1,676,396 1,953,250 189,405
Contingencies and commitments (note 16)
------------ ------------ ------------
Ps.3,969,749 4,359,974 $ 422,785
============ ============ ============
See accompanying notes to consolidated financial statements.
S-2
SCHEDULE III
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES
ACCEPTED IN MEXICO - SEE NOTE 17
METALSA, S. DE R.L. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended December 31, 2000, 2001 and 2002
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2002 and thousands of US dollars ($))
2000 2001 2002 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (SEE NOTE 2B)
Net sales (notes 5 and 6) Ps.3,346,390 3,487,031 3,559,520 $ 345,166
Cost of sales (note 11) 2,573,438 2,869,709 2,733,168 265,034
------------ ------------ ------------ ------------
Gross profit 772,952 617,322 826,352 80,132
Selling, general and administrative
expenses (note 5) 213,728 215,093 247,927 24,041
------------ ------------ ------------ ------------
Operating income 559,224 402,229 578,425 56,091
------------ ------------ ------------ ------------
Comprehensive financial results:
Interest, net (78,523) (121,017) (45,080) (4,371)
Currency exchange (loss) gain, net 19,417 42,239 (96,701) (9,377)
Monetary position result 60,030 79,420 46,247 4,485
------------ ------------ ------------ ------------
Comprehensive financial result, net 924 642 (95,534) (9,263)
------------ ------------ ------------ ------------
Earnings before other income,
income taxes and
employees' profit
sharing 560,148 402,871 482,891 46,828
Other expenses, net 6,072 (34,503) (69,813) (6,770)
------------ ------------ ------------ ------------
Earnings before income taxes
and employees' profit
sharing 566,220 368,368 413,078 40,058
------------ ------------ ------------ ------------
Income taxes (note 13):
Current 109,808 94,688 67,454 6,541
Deferred 85,708 6,413 74,194 7,195
------------ ------------ ------------ ------------
195,516 101,101 141,648 13,736
------------ ------------ ------------ ------------
Employees' profit sharing (note 13):
Current 30,117 31,604 27,998 2,715
Deferred -- 8,428 9,596 931
------------ ------------ ------------ ------------
30,117 40,032 37,594 3,646
------------ ------------ ------------ ------------
Net earnings Ps. 340,587 227,235 233,836 $ 22,676
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
S-3
SCHEDULE III
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES
ACCEPTED IN MEXICO - SEE NOTE 17
METALSA, S. DE R.L. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2000, 2001 and 2002
(Thousands of Mexican pesos (Ps.) of constant
purchasing power as of December 31, 2002)
RETAINED EARNINGS
------------------------------------------------
NET
ADDITIONAL EARNINGS
SOCIAL PAID-IN FOR THE
PARTS CAPITAL UNAPPROPRIATED YEAR TOTAL
------------ ------------ -------------- ------------ ------------
Balances at December 31, 1999 (UNAUDITED) Ps. 17,704 265,882 1,348,656 373,749 1,722,405
Appropriation of retained earnings -- -- 373,749 (373,749) --
Additional paid-in capital -- 87,722 -- -- --
Dividends -- -- (170,260) -- (170,260)
Comprehensive income -- -- -- 340,587 340,587
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 (UNAUDITED) 17,704 353,604 1,552,145 340,587 1,892,732
Appropriation of retained earnings -- -- 340,587 (340,587) --
Additional paid-in capital -- 117,627 -- -- --
Dividends (note 12b) -- -- (93,017) -- (93,017)
Comprehensive income (note 12d) -- -- -- 227,235 227,235
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2001 17,704 471,231 1,799,715 227,235 2,026,950
Appropriation of retained earnings -- -- 227,235 (227,235) --
Comprehensive income (note 12d) -- -- -- 233,836 233,836
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2002 Ps. 17,704 471,231 2,026,950 233,836 2,260,786
============ ============ ============ ============ ============
Convenience translation (see note 2b) $ 1,717 $ 45,695 $ 196,552 $ 22,676 $ 219,228
============ ============ ============ ============ ============
RESULT FROM INITIAL
HOLDING DEFERRED TOTAL
NON-MONETARY INCOME TAX STOCKHOLDERS'
ASSETS EFFECT EQUITY
------------ ------------ ------------
Balances at December 31, 1999 (UNAUDITED) (452,229) -- 1,553,762
Appropriation of retained earnings -- -- --
Additional paid-in capital -- -- 87,722
Dividends -- -- (170,260)
Comprehensive income (39,506) (233,878) 67,203
------------ ------------ ------------
Balances at December 31, 2000 (UNAUDITED) (491,735) (233,878) 1,538,427
Appropriation of retained earnings -- -- --
Additional paid-in capital -- -- 117,627
Dividends (note 12b) -- -- (93,017)
Comprehensive income (note 12d) (113,876) 113,359
------------ ------------ ------------
Balances at December 31, 2001 (605,611) (233,878) 1,676,396
Appropriation of retained earnings -- -- --
Comprehensive income (note 12d) 43,018 -- 276,854
------------ ------------ ------------
Balances at December 31, 2002 (562,593) (233,878) 1,953,250
============ ============ ============
Convenience translation (see note 2b) $ (54,554) $ (22,681) $ 189,405
============ ============ ============
See accompanying notes to consolidated financial statements.
S-4
SCHEDULE III
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES
ACCEPTED IN MEXICO - SEE NOTE 17
METALSA, S. DE R.L. AND SUBSIDIARY
Consolidated Statements of Changes in Financial Position
Years ended December 31, 2000, 2001 and 2002
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2002 and thousands of US dollars ($))
2000 2001 2002 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (SEE NOTE 2B)
Operating activities:
Net earnings Ps. 340,587 227,235 233,836 $ 22,676
Plus charges (credits) to operations not
requiring (providing) resources:
Depreciation and amortization 109,959 201,032 250,584 24,299
Impairment of fixed assets -- -- 34,524 3,348
Deferred income tax and employees'
statutory profit sharing 85,708 (1,745) 84,209 8,166
Accrual for seniority premiums -- -- 1,117 108
------------ ------------ ------------ ------------
Resources generated by operations 536,254 426,522 604,270 58,597
Changes in:
Accounts receivable (768) 9,110 105,784 10,258
Inventories (114,562) 54,522 (86,369) (8,375)
Other current assets (12,222) 8,994 (12,074) (1,171)
Accounts payable and accrued liabilities 24,871 241,232 (106,968) (10,373)
------------ ------------ ------------ ------------
(102,681) 313,858 (99,627) (9,661)
Resources generated by operating
activities 433,573 740,380 504,643 48,936
------------ ------------ ------------ ------------
Financing activities:
Dividends (170,260) (93,017) -- --
Loans, net 885,963 (198,195) 102,216 9,912
Additional paid-in capital 87,722 117,627 -- --
------------ ------------ ------------ ------------
Resources generated by (used in) financing
activities 803,425 (173,585) 102,216 9,912
------------ ------------ ------------ ------------
Investing activities:
Acquisition of property, plant and
equipment, net (1,157,371) (249,348) (404,513) (39,226)
Goodwill (51,555) (63,088) (5,603) (543)
Change in other assets, net (122,630) 17,929 (28,197) (2,734)
------------ ------------ ------------ ------------
Resources used in investing activities (1,331,556) (294,507) (438,313) (42,503)
------------ ------------ ------------ ------------
Increase in cash and cash equivalents (94,558) 272,288 168,546 16,345
Cash and cash equivalents at beginning of year 106,620 12,062 284,350 27,572
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year Ps. 12,062 284,350 452,896 $ 43,917
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
S-5
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000, 2001 and 2002
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2002)
(1) COMPANY ACTIVITY AND OPERATIONS
ACTIVITY
The Company is engaged in the manufacturing and sale of frames
(chassis), heavy truck side rails, fuel tanks, and steel stamped
parts for the automotive industry, mainly to the North America Free
Trade Agreement (NAFTA) market. Its stockholders are Promotora de
Empresas Zano, S. A. de C. V. (Proeza) and Tower Automotive Mexico, S.
de R. L., de C.V. (Tower). The Company is structured in three Strategic
Business Units (SBU) identified as follows: Light trucks, Heavy trucks
and Passenger cars. The Heavy trucks SBU operates two plants; located
in Apodaca N.L., Mexico and Roanoke, Virginia, USA. The passenger cars
SBU operates in San Luis Potosi, S.L.P., Mexico.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and practices followed by the Company in the
preparation of the financial statements are described below:
a) BASIS OF PRESENTATION AND DISCLOSURE
The consolidated financial statements of the Company are
prepared in accordance with Generally Accepted Accounting
Principles in Mexico ("Mexican GAAP").
Mexican GAAP includes the recognition of the effects of
inflation on the financial information, and are expressed in
Mexican pesos of constant purchasing power, based on the
National Consumer Price Index (NCPI), published by the Bank of
Mexico. The indexes used for effects of recognizing inflation
were the following:
DECEMBER 31, NCPI % INFLATION
------------ ------------ ------------
2002 371.283 5.30%
2001 352.441 4.80%
2000 336.387 8.70%
1999 309.525 12.50%
============ ============
For purposes of disclosure, when reference is made to pesos or
"Ps", it means Mexican pesos; when reference is made to
dollars or $, it means currency of the United States of
America ("United States"). Except when specific references are
made to "million dollars," "thousand dollars" and "number of
shares", all amounts included in these notes are stated in
thousands of constant Mexican pesos as of the balance sheet
date.
S-6
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
b) CONVENIENCE TRANSLATION
The dollar amounts provided and, unless otherwise indicated, elsewhere
in the financial statements and related footnotes are translations of
constant Mexican peso amounts at an exchange rate of Ps10.31 to U.S.
$1.00, the Company's accounting rate as of December 31, 2002. These
translations have been prepared solely for the convenience of the
reader and should not be constructed as representations that the
Mexican peso amounts actually represent those dollar amounts or could
be converted into dollars at the rate indicated.
c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Metalsa,
S. de R.L. and its subsidiary Metalsa-Roanoke, Inc., in which the
Company holds a 100% interest and has control. All intercompany
balances and transactions have been eliminated in consolidation. The
consolidation was made based on the financial statements of both
companies, which were prepared in accordance with Mexican GAAP.
d) TRANSLATION OF FOREIGN SUBSIDIARY FINANCIAL STATEMENTS
The financial statements of the foreign subsidiary are restated by the
inflation of United States of America (USA) and subsequently translated
into Mexican pesos by using the exchange rate at the end of the
corresponding period for balance sheet and income statement. The
translation effects are recorded directly in the stockholders' equity,
as part of comprehensive income.
e) PRESENTATION OF PRIOR YEAR FIGURES
The restatement factor applied to the consolidated financial statements
of prior periods was the NCPI.
f) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include deposits in bank accounts, and other
fixed interest instruments of immediate realization or, if applicable,
realizable within a three-month period. Interest and valuation gains or
losses are included in the results of the period, as part of the
comprehensive financial result.
g) INVENTORIES AND COST OF SALES
Inventories represent raw material acquired that has not been applied
to manufacturing and spare parts, and are valued at the lower of
replacement cost or realization value. Replacement cost is determined
through the cost of the last raw material and indirect materials
acquired and the latest production cost for finished goods and in
work-in process inventory. Cost of sales represents the replacement
cost of the inventories at the time of the sale and is expressed in
Mexican pesos of purchasing power as of the closing at the balance
sheet date.
S-7
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
h) GOODWILL
Goodwill represents the excess of the foreign subsidiary acquisition
cost over the book value of its net assets at the acquisition date, and
it is indexed using the USA inflation rate and is translated into
Mexican pesos at the year-end exchange rate. Goodwill is amortized over
a 20-year period, using the straight-line method. Annual amortization
expense is impacted by the effect of movements in the exchange rate
used to translate amounts from the Company's foreign subsidiary.
i) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment of national origin are updated using the
NCPI. Imported assets are updated using a compound factor. This
compound factor is determined by using the inflation of the machinery's
country of origin and the exchange rate variation between the currency
of that country and the Mexican currency.
The comprehensive financial result corresponding to assets during the
construction or installation period is capitalized as part of the value
of the assets.
The most significant compound factors used to update imported assets
were:
2001 2002
------------ ------------
United States of America 0.9794 1.1402
Germany 0.9197 1.3070
Japan 0.8422 1.2034
============ ============
Depreciation is calculated primarily using the straight-line method
over the useful life of the assets, determined by Company's management,
as disclosed in note 9. Maintenance expenses and minor repairs are
recorded in operations as they are incurred.
j) OTHER NON-CURRENT ASSETS
As discussed in notes 5 and 10, the major accounts included in this
caption are: advance rent and a long-term receivable due from a related
party. Additionally, included are direct financing cost and licenses.
These balances are adjusted for inflation using factors based on the
NCPI. These assets (other deferred financial costs) are amortized using
the straight-line method according to their maturities.
Deferred financing costs resulting from financing activities are
amortized using the interest method over the term of the related loan.
S-8
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
k) DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into agreements to manage certain exposures to
fluctuations in interest rates and currency exchange rates.
Interest-rate contracts generally involve the exchange of floating
interest rates and fixed interest rate payments without the exchange of
the underlying principal. Net amounts paid or received are reflected as
adjustments to interest expense.
Changes in the fair value of derivative financial instruments, net of
the costs and expenses or gains resulting from the assets or
liabilities, are reported as part of the comprehensive financial
results. Assets and liabilities arising from the derivative financial
instruments are recognized on the balance sheet accounting to fair
value. Premiums paid are expensed as incurred, see note 4.
l) SENIORITY PREMIUM AND SEVERANCE PAYMENT
The accumulated seniority premium benefits, to which the Mexican
operations workers are entitled by the Mexican Labor Law, are
recognized in the results of each period, based on actuarial
calculations of the present value of this liability. The amortization
of prior years service cost, which has not been recognized, is based on
the estimated personnel service life. As of December 31, 2002 and 2001
the estimated service life of employees entitled to the plan benefits
is approximately 4.85 years.
All other compensations to which personnel might be entitled are
recognized in results of the period in which they are paid. These
benefits consist mainly of severance.
m) INCOME TAX (IT), TAX ON ASSETS (TA) AND EMPLOYEE STATUTORY PROFIT
SHARING (ESPS)
Income taxes are accounted for under the asset and liability method.
Deferred taxes are recognized (assets and liabilities) for the future
tax consequences attributable to the temporary differences between the
book values of the existing assets and liabilities and their related
tax bases, as well as, to the tax losses carryforward and the unused
tax credits (TA). Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect of changes in tax rates on deferred taxes is
recognized in the results of the period in which such changes are
enacted and approved.
ESPS is calculated for the Mexican operations only. It is also required
to determine the effect of deferred ESPS for those temporary
differences arising from the reconciliation of the net income of the
period and the taxable income for ESPS.
S-9
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
n) INITIAL DEFERRED INCOME TAX EFFECT
Represents the recognition of accumulated deferred income tax effects
as of January 2000, the date Bulletin D-4 was adopted.
o) SOCIAL PARTS, OTHER CONTRIBUTIONS AND ACCUMULATED RESULTS RESTATEMENT
This is determined by multiplying the accumulated contributions and
earnings (losses) by the NCPI, which measures the accumulated inflation
from the dates the contributions were made and the earnings (losses)
were generated to the date of the most recent balance sheet. The result
is intended to represent the constant values of the stockholders'
investment.
p) RESULT FROM HOLDING NON-MONETARY ASSETS
This represents the difference between the original cost of
non-monetary assets restated through specific costs and the amounts
determined by application of NCPI factors, decreased by the effects of
deferred taxes recorded directly in stockholders' equity, and currency
translation effects.
q) COMPREHENSIVE FINANCIAL RESULT (CFR)
The CFR includes interest expense, currency exchange differences,
monetary position result and the valuations effects of financial
instruments. CFR is recorded in the results of the period, net of
amounts capitalized (see note 9).
Transactions executed in foreign currency are recorded at the exchange
rate prevailing on their execution or liquidation dates. Foreign
currency assets and liabilities are converted at the exchange rate
prevailing on the date of the balance sheet. The exchange differences
related to assets or liabilities contracted in foreign currency are
recorded in results of the period.
The monetary position result is determined by multiplying the
difference between monetary assets and liabilities at the beginning of
each month, including deferred taxes, by the inflation rate at the end
of the period. The result obtained thereby is recorded in comprehensive
financial results of the period.
r) REVENUE RECOGNITION
Revenue is recognized when the risks of ownership and title are
transferred to the client, which is usually when the products are
delivered. The Company records sales commissions, refunds and discounts
at the time the related income is recognized, which are deducted from
sales or recognized as sales expense, as determined by the
circumstances.
The income and costs resulting from the manufacturing of tool and die
projects are recognized using the percentage-of-completion method,
based mainly on the cost incurred in the contract as a proportion of
the total estimated cost to be incurred. If during the project, the
Company estimates that the costs incurred plus the estimated costs to
be incurred will exceed total income of the project, the estimated loss
is recognized in the results of operations immediately.
S-10
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
s) CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company had net sales to four customers representing approximately
64%, 75% and 80% of total net sales during 2000, 2001 and 2002,
respectively. Accounts receivable balances of those customers as of
December 31, 2001 and 2002 represent approximately 52% and 59% of total
accounts receivable, respectively. The Company records reserves for
losses in the collection of accounts receivable based on management
analysis and estimates.
t) CONTINGENCIES
Significant obligations or losses related to contingencies are
recognized when it is probable that their effects will materialize and
there are reasonable bases for their estimation. If a reasonable
estimate cannot be made, disclosure of the nature of the contingency is
included in the notes to the consolidated financial statements.
Contingent income, earnings or assets are recognized when their
realization is certain.
u) IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND OTHER NON-CURRENT
ASSETS
The Company periodically evaluates the restated values of property,
plant and equipment and other non-current assets to determine the
existence of indications that such values exceed their recoverable
value. The recoverable value represents the potential revenues that can
reasonably be expected from the use of such assets. If it is determined
that the carrying values exceed such revenues, the Company records the
necessary adjustments to reduce their value. Assets held for sale are
presented in the financial statements at the lower of their restated or
realizable values. At December 31, 2002, 2001 and 2000 impairment
charges of Ps.4,640, Ps.6,910 and Ps.34,523, respectively were recorded
attributable to products whose production was reduced due to market
conditions and requirements from its customers.
v) COMPREHENSIVE INCOME
Comprehensive income is presented in the consolidated statement of
changes in stockholders' equity in accordance with Bulletin B-4
"Comprehensive Income". For the years ended December 31, 2000, 2001 and
2002, comprehensive income includes net earnings, the effects of
inflation from holding non-monetary assets net of related deferred
income taxes, and currency translation adjustments arising from the
subsidiary.
w) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in Mexico requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
S-11
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
x) OTHER EXPENSE
For the year ended December 31, 2002, other expenses includes
the following:
Loss on disposition of fixed assets Ps. 29,175 $ 2,829
Legal expenses (see note 16) 15,927 1,544
Others, net 24,711 2,397
------------ ------------
Ps. 69,813 $ 6,770
============ ============
y) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period
to conform to the 2002 presentation.
(3) EXCHANGE RATE AND FOREIGN MONETARY POSITION
The amounts shown in this note are expressed in thousands of US
dollars; the currency in which Metalsa, S. de R. L. denominates or
carries out its foreign currency transactions.
The US dollar exchange rate as of December 31, 2001 and 2002, was
Ps.9.14 and Ps.10.31, respectively. As of January 22, 2003, it was
approximately Ps.10.68.
The foreign currency assets and liabilities held as of December 31,
2001 and 2002, are as follows:
2001 2002
------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Current assets $ 81,170 65,113
Less:
Current liabilities (48,651) (55,082)
Long-term liabilities (150,000) (130,822)
------------ ------------
Net liabilities $ (117,481) (120,791)
============ ============
In addition, as of December 31, 2001 and 2002, the Company had the
following non-monetary asset position of foreign origin, whose value
can only be denominated in US dollars:
2001 2002
------------ ------------
(UNAUDITED)
Inventories $ 25,516 34,727
============ ============
Machinery and equipment $ 155,103 193,861
============ ============
Goodwill $ 10,304 10,520
============ ============
S-12
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
The transactions executed outside of Mexico mainly with the United
States of America, excluding the machinery and equipment imports, for
the years ended December 31, 2000, 2001 and 2002 are summarized below:
2000 2001 2002
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Export of merchandise $ 49,310 44,939 40,304
Import of merchandise and spare parts (110,104) (101,586) (122,619)
Interest expense (6,819) (12,536) (35,650)
Service expense (3,873) (3,892) (1,394)
------------ ------------ ------------
$ (71,486) (73,075) (119,359)
============ ============ ============
Additionally, the Company had sales within Mexican territory in US
dollars but payable in Mexican currency at the exchange rate on the
date of payment. These sales amounted to $191,505 in 2000, $187,941 in
2001 and $217,343 in 2002.
(4) DERIVATIVE FINANCIAL INSTRUMENTS
The Company manages its debt by using interest rate agreements to
achieve an overall desired position of fixed and floating rates. As of
December 31, 2001 and 2002, Metalsa had the following interest rate
contracts outstanding:
o Interest rate swap contract related to Metalsa's long-term
debt. The swap converts $45 million dollar notional amount
from variable rates to fixed rates. For the years ended
December 31, 2001 and 2002, there were losses on the contract
amounting to $133 and $111 thousand dollars, respectively,
which were recorded in interest expense in the accompanying
statement of earnings. At December 31, 2002 a liability
amounting to $526 thousand dollars, was recorded.
o Interest rate cap contract also related to Metalsa's long-term
debt. The $80 million dollar cap agreement entitles the
Company to receive from a financial institution the amounts,
if any, by which debt selected market interest rates exceed
the interest rates stated in the agreements. The fair value of
the interest rate cap contract was estimated using quotes from
brokers and represents the cash settlement amounts if the
contract had been settled at December 31, 2002.
Credit and market risk exposures are limited to the impact of
fluctuations in interest rates. The net payments or receipts from
interest rate swaps and caps are recorded as part of interest expense
and are not material. At December 31, 2002 the fair value of the above
mentioned financial instruments is immaterial.
The purpose of Metalsa's currency hedging strategy is to reduce the
exposure that the Company has to changes in the Mexican peso's exchange
rate. The Company enters into currency exchange forward contracts to
hedge part of its anticipated working capital expenses, such as
salaries and wages, in Mexican pesos. These contracts cover periods,
generally not more than nine months, and are negotiated with selected
banks. At December 31, 2002, the notional amount of the remaining
forward contracts was $1,200 U.S. dollar thousands with a fair value of
approximately (Ps.5,000).
S-13
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
The Company is exposed to credit losses in the event of default by
counter parties on the above instruments, but does not anticipate
such event.
(5) RELATED PARTIES
At December 31, 2001 and 2002, the balances and transactions with
related parties are as follows:
(a) DUE FROM
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Teknik, S.A. de C.V Ps. -- 2,294 $ 222
Tower Automotive, Inc. 46,533 -- --
Other 1,313 269 26
------------ ------------ ------------
Ps. 47,846 2,563 $ 248
============ ============ ============
(b) DUE TO
Promotora Empresas Zano, S.A. de C.V Ps. 156,889 57,050 $ 5,532
Tower Automotive, Inc. -- 11,194 1,085
Other 18,341 14,622 1,418
------------ ------------ ------------
Ps. 175,230 82,866 $ 8,035
============ ============ ============
(c) RELATED PARTY TRANSACTIONS
The transactions carried out during the years ended December 31,
2000, 2001 and 2002 with related parties are as follows:
2000 2001 2002 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (SEE NOTE 2B)
Sales Ps. 118,549 81,241 42,882 $ 4,158
============ ============ ============ ============
Purchases Ps. 260,421 221,666 94,237 $ 9,138
============ ============ ============ ============
Service and technical assistance Ps. 148,581 130,220 153,417 $ 14,877
============ ============ ============ ============
Rents paid Ps. 109 101 101 $ 10
============ ============ ============ ============
During year 2001, the Company sold equipment to a related party for
approximately Ps.138,756 (nominal value) and a long-term accounts
receivable was recorded. No gain or loss arose from this transaction.
At the same time, the Company leased back the equipment through an
operating lease with total payments of Ps.97,750. For financial
statement presentation, the net balance arising from this transaction
was classified as a long-term accounts receivable, and included as
part of other non-current assets. The receivable and payable balances
bear interest at 2% plus TIIE. The net balance at December 31, 2002
amounts to Ps.42,259, including interest of Ps.1,253.
S-14
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
At December 31, 2002 the advance rent was also included as part of the
other non-current assets. This advance rent is for the following years
and amounts to Ps.79,144 as follows:
Year ending December 31:
2003 Ps. 11,712 $ 1,136
2004 11,712 1,136
2005 12,288 1,192
2006 12,288 1,192
2007 and thereafter 31,144 3,020
------------ ------------
Ps. 79,144 $ 7,676
============ ============
Rental expense for the year 2002 amounted to Ps.5,856 (nominal value).
The Company has a contract with an affiliated company (Proeza) and a
stockholder (Tower) whereby it agrees to pay for administrative
services and technical assistance provided, respectively. The amount to
be paid for these services is determined based on a percentage of sales
which are 1.5% to Proeza and 3.5% to Tower. For the years ended
December 31, 2000, 2001 and 2002, total expense related to the
abovementioned contracts amounted to Ps.101,149, Ps.90,960 and
Ps.103,642 respectively.
(6) ACCOUNTS RECEIVABLE
At December 31, 2001 and 2002 accounts receivable are as follows:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Trade Ps. 343,494 229,299 $ 22,235
Receivable from tool and die projects 88,677 100,234 9,720
Related parties (note 5) 47,846 2,563 249
Advances for taxes and other accounts
receivable -- 45,424 4,405
------------ ------------ ------------
480,017 377,520 36,609
Less allowance for doubtful accounts 782 4,069 396
------------ ------------ ------------
Ps. 479,235 373,451 $ 36,213
============ ============ ============
The revenue from tool and die projects is determined using the
percentage-of-completion method (see note 2q). For the years ended
December 31, 2000, 2001 and 2002, the net sales include Ps.532,327
Ps.357,525 and Ps.520,641 of revenue from tool and die projects,
respectively. At December 31, 2002 and 2001, the unbilled portion for
tool and die projects amounts to Ps.68,786 and Ps.56,032, respectively.
S-15
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
A summary of the changes in the allowance for doubtful accounts, in
Ps., for the years ended December 31, 2000, 2001 and 2002 is as
follows:
BALANCES AT
BEGINNING CHARGES TO BALANCES AT
DESCRIPTION OF PERIOD EXPENSE WRITE-OFF END OF PERIOD
---------------------------------------- --------------- ---------------- -------------- ----------------
Year ended:
December 31, 2000 (UNAUDITED) Ps. 3,856 1,466 (4,107) Ps. 1,215
December 31, 2001 (UNAUDITED) Ps. 1,215 133 (566) Ps. 782
December 31, 2002 Ps. 782 4,047 (760) Ps. 4,069
=============== ================ ============== ================
(7) INVENTORIES
At December 31, 2001 and 2002, inventories are comprised of the
following:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Raw material Ps. 83,474 115,183 $ 11,169
Work-in process 61,615 84,629 8,206
Finished goods 64,274 39,871 3,866
Spare parts and merchandise in transit 27,492 87,101 8,446
Advances to suppliers 25,089 9,375 910
------------ ------------ ------------
Ps. 261,944 336,159 $ 32,597
============ ============ ============
(8) GOODWILL
Goodwill arose from the acquisition of Metalsa Roanoke, Inc. in
December 2000. At the date of acquisition, $11.7 million dollars of
goodwill was generated. This goodwill is included as a non-current
asset and its amortization is recorded as an operating expense in the
consolidated statements of earnings. In 2002, Metalsa Roanoke, Inc.
paid $544 thousand dollars of additional consideration arising from the
original acquisition of the business. See note 16 for additional
possible cash commitments.
At December 31, 2001 and 2002 the goodwill balance is analyzed as
follows:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Goodwill Ps. 104,651 120,016 $ 11,638
Less:
Accumulated amortization 5,415 11,642 1,129
------------ ------------ ------------
Ps. 99,236 108,374 $ 10,509
============ ============ ============
S-16
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
The increase in the amortizable balance of goodwill is the result of
the application of inflation accounting and the effects of currency
translation.
(9) PROPERTY, PLANT AND EQUIPMENT
At December 31, 2001 and 2002 the investment in property, plant and
equipment consists of:
ESTIMATED
2001 2002 2002 USEFUL LIFE
----------------- ----------------- ----------------- -----------------
(UNAUDITED) (SEE NOTE 2B)
Land Ps. 107,152 109,573 $ 10,625
Building 749,030 766,372 74,315 35 years
Plant and equipment 2,440,415 3,131,592 303,670 11 years
Transportation equipment 8,691 18,593 1,803 3 years
Furniture and fixtures 38,102 93,219 9,039 6 years
Computer equipment 47,354 60,518 5,868 2 years
Tools and dies 14,780 16,563 1,606 5 years
Construction in process 471,334 182,968 17,742 --
----------------- ----------------- -----------------
3,876,858 4,379,398 424,668
Less accumulated
depreciation 1,182,329 1,466,843 142,238
----------------- ----------------- -----------------
Ps. 2,694,529 2,912,555 $ 282,430
================= ================= =================
During the year Metalsa's management performed an evaluation of the
carrying amounts of fixed assets. In the performance of this
evaluation, the Company recorded a pre-tax loss of Ps.34,524, which
was recorded as an operating expense. This amount reflects the write
off or write down to fair value of certain machinery and equipment no
longer utilized in operations.
Property, plant and equipment includes capitalized CFR of Ps.121,326
net of accumulated amortization, of which Ps.22,897 was capitalized
during 2002.
(10) LONG-TERM DEBT AND BANK LOANS
At December 31, 2002, long-term debt is as follows:
2001 2002 2002
-------------- -------------- --------------
(UNAUDITED) (SEE NOTE 2B)
Syndicated credit contract amounting to 150
million US dollars, payable in varying maturities
from June 2003 until June 2006 Ps. 1,444,656 1,546,872 $ 150,000
Less current installments -- 309,375 30,000
-------------- -------------- --------------
Long-term debt, net Ps. 1,444,656 1,237,497 $ 120,000
============== ============== ==============
S-17
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
In 2001, the Company entered into a syndicated loan contract with
several financial institutions, for $150 million dollars with a
LIBOR-based interest rate. For the years 2001 and 2002, the average
interest rate was 3.19% and 3.48%, respectively. The proceeds were used
to pay off existing debt and to support the Company's capital
investment program. The loan is unsecured. Deferred financing costs
amounting to approximately Ps.16.6 million were paid and recorded as
other non-current assets.
The syndicated loan imposes certain limitations on the payment of
dividends and restrictions on certain financial ratios. The Company was
in compliance with these limitations at December 31, 2002.
The installments of long-term debt are as follows:
Years ending December 31:
2004 Ps. 386,718 $ 37,500
2005 541,405 52,500
2006 309,374 30,000
---------------- ----------------
Ps. 1,237,497 $ 120,000
================ ================
In addition, the Company has available lines of credit in place for a
total amount of $40 million dollars. As of December 31, 2002, the
Company has used $836 thousand dollars under these lines of credit.
(11) ACCOUNTS PAYABLES AND ACCRUED LIABILITIES
At December 31, 2001 and 2002, liabilities and accruals are as follows:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Accounts payable and accrued liabilities Ps. 406,310 392,552 $ 38,066
Related parties (note 6) 175,230 82,866 8,035
------------ ------------ ------------
Ps. 581,540 475,418 $ 46,101
============ ============ ============
The Company made purchases from a raw material supplier that
represented 32%, 38% and 35% of its total purchases made during 2000,
2001 and 2002. The balance of the accounts payable to this supplier as
of December 31, 2001, and 2002 represents 7% and 6% of total accounts
payable, respectively.
(12) STOCKHOLDERS' EQUITY
The characteristics of stockholders' equity are as follows:
(a) CAPITAL
o Social parts represent the capital of the Company,
each one representing the value of the contribution
made by the respective partner. Each partner has one
vote for each Mexican peso of contributed capital.
S-18
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
o Social parts can be divided into as many as four
series. Social parts series A must be owned by
individuals or groups of partners that have an
affiliates relation, parent, and subsidiaries and of
Mexican nationals whose by-laws have the direct and
indirect exclusion clause for foreign nationals that
reside in Mexico as legal residents. Series B parts
can be subscribed to any person or legal entity.
o The capital of the Company amounts to Ps.7,373
(nominal value) in Series A and B.
o The partners will have the first right of refusal to
subscribe new shares of each series held by them if
an increase in capital is approved.
(b) STOCKHOLDERS' EQUITY TRANSACTIONS
1. The Company received, on January 7th 2002, $11.7
million dollars of additional paid-in-capital from
the commitment that Tower Automotive Mexico, S. de
R.L. de C.V. had. This transaction was recorded in
2001.
2. In March 2001, a dividend for $9.3 million dollars
was declared and was paid to the majority equity
shareholders on January 7th 2002.
(c) RETAINED EARNINGS
The principal restrictions to retained earnings are:
1. Net earnings for the year are subject to an
appropriation of 5% for the legal reserve until this
reserve equals 20% of the Company's capital stock. At
December 31, 2002, the legal reserve amounts to
Ps.2,897 (nominal value).
2. Earnings distributed as dividends in excess of
accumulated tax earnings will be subject to payment
of income taxes in accordance with the Mexican Income
Tax Law. At December 31, 2002, no deferred income tax
has been recognized on this excess because it is
expected that dividends will be paid free of taxes.
(d) COMPREHENSIVE INCOME
For the years ended December 31, 2000, 2001 and 2002,
comprehensive income is as follows:
2000 2001 2002 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (SEE NOTE 2B)
Net earnings Ps. 340,587 227,236 233,836 $ 22,675
Inflation effects of non-monetary
assets (58,023) (136,793) 48,071 4,661
Translation effects of foreign -- (26,425) 27,317 2,649
subsidiary
Deferred income taxes net (215,361) 49,341 (32,370) (3,139)
------------ ------------ ------------ ------------
Ps. 67,203 113,359 276,854 $ 26,846
============ ============ ============ ============
S-19
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
(13) INCOME TAX (IT) TAX ON ASSETS (TA) AND EMPLOYEES' PROFIT SHARING (ESPS)
In accordance with present tax legislation, corporations must pay
either the IT or TA, whichever is greater. Both taxes recognize
inflation effects, in a manner different from Mexican GAAP. ESPS is
calculated in the same manner as IT but without the recognition of
inflation. For the years ended December 31, 2001 and 2002, the Company
was subject to IT.
On January 1, 2002 a new IT Law was enacted, which reduces the IT rate
by 1% each year beginning in 2002, until it reaches 32% in 2005. As a
result of these changes in the rate, the Company reduced its net
deferred tax liability by approximately Ps.26 million at December 31,
2002.
Under the IT Law, tax losses of a period, updated for inflation, can be
carried forward to offset taxable income of the immediately following
ten tax periods. The tax losses have no effect on ESPS. As of December
31, 2002, the Company had no tax losses to carry forward in Mexico.
TA law establishes a 1.8% tax levy on assets, indexed for inflation in
the case of inventory and property, plant and equipment, after
deducting certain liabilities. This same law allows the use of the net
assets balance of the preceding fourth period, updated with NCPI, as
the basis for the calculation of this tax, which option is currently
being followed by the Company. At December 31, 2002, there is no TA
available to carry forward.
Income tax expense for the years ended December 31, 2001 and 2002, was
as follows:
2000 2001 2002 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (SEE NOTE 2B)
Current Mexican taxes Ps. 109,808 94,688 61,968 $ 6,009
Current US Federal and state taxes -- -- 5,486 532
Deferred Mexican taxes 85,708 (3,792) 48,885 4,740
Deferred US Federal and state taxes -- 10,205 25,309 2,455
------------ ------------ ------------ ------------
Ps. 195,516 101,101 141,648 $ 13,736
============ ============ ============ ============
For the year ended December 31, 2001, the actual income tax expense
differed from the amounts computed by applying the 35% Mexican tax rate
to earnings before income taxes as a result of the following:
(UNAUDITED)
Current Mexican taxes Ps. 128,929
Current US Federal and state taxes (44,487)
Deferred Mexican taxes 5,706
Deferred US Federal and state taxes 10,953
-------------
Ps. 101,101
=============
Beginning in 2002, the deferred income taxes for its Mexican operations
were calculated assuming a 34% tax rate for current assets and
liabilities and tax rates of 33% and 32%, for assets whose tax effects
will be reversed after 2004 and 2005. Deferred ESPS was calculated for
the differences arising from the Mexican operation.
S-20
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
The tax rate for deferred income taxes arising from Metalsa Roanoke,
Inc. were calculated using a tax rate of approximately 39%. This tax
rate considers US federal and state taxes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities, as of
December 31, 2001 and 2002, are presented below:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Deferred tax assets:
Allowance for doubtful accounts Ps. 296 1,383 $ 134
Liability accruals 22,840 17,985 1,744
Tax loss carryforwards 20,049 2,102 204
------------ ------------ ------------
Total deferred tax assets 43,185 21,470 2,082
------------ ------------ ------------
Deferred tax liabilities:
Inventories 52,562 90,339 8,760
Accruals 43,163 24,537 2,379
Property, plant and equipment 163,240 226,381 21,952
Other non-current assets 39,293 41,850 4,059
------------ ------------ ------------
Total deferred tax liabilities 298,258 383,107 37,150
------------ ------------ ------------
Deferred tax liability, net Ps. 255,073 361,637 $ 35,068
============ ============ ============
A summary of the changes in the net deferred IT liability for the years
ended December 31, 2001 and 2002 is presented below:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Initial balance of deferred income tax Ps. 298,002 255,073 $ 24,734
Deferred IT expense 6,413 74,194 7,195
Deferred IT in stockholders' equity (49,342) 32,370 3,139
------------ ------------ ------------
Ending balance Ps. 255,073 361,637 $ 35,068
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred ESPS liabilities, as of December 31, 2001 and
2002 are presented below:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Other non-current assets Ps. 5,647 7,275 $ 705
Accruals, net 2,781 (9,330) (905)
Property, plant and equipment -- 9,441 915
Inventories -- 10,638 1,033
------------ ------------ ------------
Total deferred ESPS liability Ps. 8,428 18,024 $ 1,748
============ ============ ============
S-21
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
During year 2002, an ESPS deferred asset was created for the foreign
currency exchange loss, which can be deducted for ESPS when the Company
realizes the payment. The year 2002 foreign exchange loss amounted to
approximately Ps. 130 million.
As of December 31, 2001 and 2002, the updated balance of the
stockholders' equity tax accounts is as follows:
2001 2002 2002
------------ ------------ ------------
(UNAUDITED) (SEE NOTE 2B)
Contribution capital account Ps. 820,105 820,105 $ 79,525
============ ============ ============
Tax earnings and profits account Ps. 38,623 63,331 $ 6,141
============ ============ ============
Tax reinvested earnings account Ps. 723,182 626,195 $ 60,722
============ ============ ============
(14) EMPLOYEE BENEFIT PLAN
Metalsa Roanoke, Inc. has a 401(k) investment plan (the Plan) for the
benefit of its employees. Employees are eligible to participate in the
Plan in the quarter following their first 60 days of service. Under the
Plan, employees may elect to have up to 16% of their salary, subject to
Internal Revenue Service limitations, withheld on a pretax basis. The
company matches 100% of employees' contributions up to 3% of their
compensation, then matches 50% of employees' contributions up to an
additional 2% of their compensation. The company made matching
contributions of $195,059 and $190,736 dollars for the years ended
December 31, 2001 and 2002, respectively.
As an additional incentive, the Company established deferred profit
sharing as a part of the Plan. Deferred profit sharing is based on the
Company reaching 75% of the target operating income as defined by the
Plan. To be eligible, employees must be employed on the last day of the
plan year or employment terminated because of retirement age, death or
disability. The employee must complete at least 1,000 hours of service
during the plan year. Employees receive up to 5% of their wages
excluding bonuses and are 100% vested after three years of service. If
the target operating income is below 75%, there is no profit sharing in
the plan year. For the years ended December 31, 2001 and 2002, the
Company made profit sharing contributions of $189,952 and $312,348
dollars, respectively.
S-22
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
(15) SEGMENT INFORMATION
Condensed financial information is presented below per geographical
area for December 31, 2001 and 2002:
DECEMBER 31, 2001 (UNAUDITED)
METALSA
MEXICO USA ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Current assets Ps. 962,314 85,343 (6,829) 1,040,828
Goodwill -- 99,236 -- 99,236
Fixed assets 2,300,442 394,087 -- 2,694,529
Investment in subsidiary 224,330 -- (224,330) --
Other long-term assets 112,269 22,887 -- 135,156
-------------- -------------- -------------- --------------
Total assets Ps. 3,599,355 601,553 (231,159) 3,969,749
============== ============== ============== ==============
Current liabilities Ps. 555,949 32,420 (6,829) 581,540
Long-term debt 1,107,568 337,088 -- 1,444,656
Other long-term liabilities 259,442 7,715 -- 267,157
Stockholders' equity 1,676,396 224,330 (224,330) 1,676,396
-------------- -------------- -------------- --------------
Total liabilities and
stockholders' equity Ps. 3,599,355 601,553 (231,159) 3,969,749
============== ============== ============== ==============
Net sales Ps. 3,196,334 305,581 (14,884) 3,487,031
============== ============== ============== ==============
Operating income Ps. 363,074 44,705 (5,550) 402,229
============== ============== ============== ==============
Net earnings Ps. 227,235 16,588 (16,588) 227,235
============== ============== ============== ==============
DECEMBER 31, 2002
METALSA METALSA
MEXICO USA ELIMINATIONS CONSOLIDATED CONSOLIDATED
------------- ------------- ------------- ------------- -------------
Current assets Ps. 1,032,733 185,980 (29,756) 1,188,957 $ 115,292
Goodwill -- 108,374 -- 108,374 10,509
Fixed assets 2,468,016 444,539 -- 2,912,555 282,430
Investment in subsidiary 307,806 -- (307,806) -- --
Other long-term assets 105,307 44,781 -- 150,088 14,554
------------- ------------- ------------- ------------- -------------
Total assets Ps. 3,913,862 783,674 (337,562) 4,359,974 $ 422,785
============= ============= ============= ============= =============
Current liabilities Ps. 674,584 139,965 (29,756) 784,793 $ 76,101
Long-term debt 948,747 288,750 -- 1,237,497 120,000
Other long-term liabilities 337,281 47,153 -- 384,434 37,279
Stockholders' equity 1,953,250 307,806 (307,806) 1,953,250 189,405
------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity Ps. 3,913,862 783,674 (337,562) 4,359,974 $ 422,785
============= ============= ============= ============= =============
Net sales Ps. 3,112,998 446,522 -- 3,559,520 $ 345,166
============= ============= ============= ============= =============
Operating income Ps. 473,609 104,816 -- 578,425 $ 56,091
============= ============= ============= ============= =============
Net earnings Ps. 233,836 77,229 (77,229) 233,836 $ 22,676
============= ============= ============= ============= =============
S-23
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
No information is disclosed for the statements of earnings for 2000,
since all the results were from Mexico.
(16) CONTINGENCIES AND COMMITMENTS
The Company has the following contingencies and commitments:
(a) There is a contingency with respect to personnel termination
costs mentioned in note 2(l). However, the Company considers
that this contingency is not significant for its financial
position or the results of its operations.
(b) The Company entered into an agreement with a supplier for a
period of 11 years under the contract, if the Company
terminates the agreement before the contracted termination
date, the Company must acquire the machinery from the supplier
at market value.
In connection with this agreement, in November 2001, the
supplier initiated a lawsuit. This litigation in Ohio is a
dispute between the Company and Industrial Powder Coatings de
Mexico, S.A. de C.V. ("IPC"). IPC and its Ohio parent company
allege breach of contract, appropriation of trade secrets,
unfair trade practices, conversion, and trespass. The amount
of damages sought from the Company is approximately $60
million dollars. This litigation is still at an early stage.
The trial judge recently denied Metalsa's motion to dismiss
for lack of personal jurisdiction, and the case is now
entering discovery on the merits of the various claims brought
by IPC. A jury trial is currently set for April 2004. At this
time, based on present information known, the Company is
unable to express any opinion concerning the outcome of the
lawsuit or to estimate an amount or range of any potential
loss. The Company intends to contest the case vigorously, and
at December 31, 2002, no reserve has been recorded in the
accounting records. For the year ended December 31, 2002,
approximately Ps.14 million were incurred in legal expenses,
which were included in the accompanying income statement as
part of other expenses.
(c) The Company has entered into contracts with external parties
for services and has a commitment to pay for these services in
US dollars. The amount recorded in general and administrative
expenses for the year ended December 31, 2002 in thousands of
US dollars was $6,769. The minimum annual payments under these
contracts based on their maturities, in thousands of US
dollars, are as follows: $6,845 in 2003, and $6,845 in 2004.
(d) There is an agreement with a related party to supply certain
parts and accessories required by the Company. This agreement
establishes that should the Company require parts and
accessories of Japanese origin, they will be purchases from
this related party, if the costs are similar.
(e) The Company guarantees its Metalsa-Roanoke, Inc. subsidiary's
$35 million dollar loan.
(f) Metalsa-Roanoke, Inc. agreed to pay up to $30 million dollars
during the next two years to Tower Automotive, Inc. if certain
of its operating parameters are exceeded. The cash flows
necessary to make these additional contributions are expected
to come from Metalsa-Roanoke, Inc. operations, or if
necessary, from Metalsa, S. de R. L. For the years ended
December 31, 2001 and 2002 Metalsa-Roanoke, Inc. did not
exceed the parameters.
S-24
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
(g) In accordance with the tax law in force, tax authorities
have the right to review up to the five tax periods prior to
the last period covered by the last income tax return filed.
(h) According to the Income Tax Law, companies carrying out
operations with related parties, residing in the country or
abroad, are subject to tax limitations and obligations,
regarding the determination of agreed-upon prices, since they
must be equivalent to those that would be used with or between
independent parties in comparable operations.
In case the tax authorities review the prices and reject the
determined amounts, they could demand, besides collection of
corresponding tax and accessories (update and late charges),
fines on the determined deficiencies over the omitted
contributions, which could reach up to 100% of the deficiency.
(i) Metalsa Roanoke, Inc. has certain noncancelable operating
leases that expire over the next four years. Rent expense for
operating leases during 2001 and 2002 approximated $47,000 and
$43,000, respectively. Future minimum lease payments under
noncancelable operating leases as of December 31, 2002 are as
follows (all figures in dollars):
Years ending December 31:
2003 $ 25,842
2004 25,842
2005 25,842
2006 12,921
-------------
$ 90,447
=============
(17) SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP
The consolidated financial statements of Metalsa, S. de R.L. and
subsidiaries are prepared and presented in accordance with generally
accepted accounting principles and reporting practices in Mexico
("Mexican GAAP"). Mexican GAAP varies in certain significant respects
form generally accepted accounting principles in the United States
("U.S. GAAP"). Certain significant differences between Mexican GAAP and
U.S. GAAP relevant to the Company are summarized below.
RECOGNITION OF THE EFFECTS OF INFLATION
MEXICO. Mexican GAAP requires that effects of inflation be recorded in
the basic financial statements. All financial statements should be
presented in Pesos of purchasing power as of the latest balance sheet
date. Inventories can be valued at the lower of their replacement cost
or net realizable value or using the inflation index. Property,
machinery and equipment is restated using the inflation rate of each
country and permits the use of a specific inflation index for imported
property, machinery and equipment. Prior to 1997, property, machinery
and equipment were stated at replacement cost determined by independent
appraisers. All other nonmonetary assets are restated using the
inflation rate. Stockholders' equity is also restated using the Mexican
inflation rate. The accumulated effect of holding nonmonetary assets
and liabilities, included in stockholders' equity, reflects the
difference between the increase in the specific values of nonmonetary
assets and the increase attributable to general inflation as measured
by the National Consumer Price Index ("NCPI").
S-25
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
Included in the results of operations is a gain or loss from monetary
position that represents the inflation gain or loss resulting from
having net monetary liabilities or assets, respectively.
UNITED STATES. Historical costs are maintained in the basic financial
statements and no gain or loss on monetary position is recognized.
DEFERRED INCOME TAX AND EMPLOYEES' STATUTORY PROFIT SHARING (ESPS)
MEXICO. As mentioned in notes 2m and 2n, beginning in 2000, Bulletin
D-4 requires the determination of deferred income tax through the asset
and liability method, in a manner similar to U.S. GAAP. Nonetheless,
there are certain specific differences in the application of Bulletin
D-4 as compared to the calculation under SFAS 109 that give rise to
differences in the reconciliation to US GAAP. These differences arise
from the recognition of the accumulated initial balance as of
January 1, 2000 which is recorded directly to stockholders' equity and,
therefore, does not consider the provisions of APB Opinion 16 and the
effects of deferred tax on the recognition items between Mexican and
U.S. GAAP.
In addition, under Mexican GAAP deferred ESPS is calculated only for
temporary differences arising from the reconciliation of the net income
of the period and the taxable income for ESPS. In addition ESPS
expense, both current and deferred, is considered as a separate line
item equivalent to income tax.
Under Mexican GAAP, the deferred taxes and deferred ESPS are presented
in the balance sheet as long-term liabilities.
UNITED STATES. U.S. GAAP requires comprehensive interperiod tax
allocation. Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes", requires deferred income taxes to
be recorded for all temporary differences using the liability method at
the enacted income tax rates for the years in which such taxes will be
payable or refundable. Also, depending on the functional currency
determination under SFAS No. 52 "Foreign Currency Translation" the tax
bases of non-monetary assets and other tax credits, can be restated
using inflation.
Under U.S. GAAP deferred ESPS is calculated under the asset and
liability method, at the statutory rate of 10%. Also, ESPS expense is
included in the determination of operating income.
VACATIONS
MEXICO. Vacation expense is recognized when taken rather than during
the period the employee earns it.
UNITED STATES. Under U.S. GAAP, an employer is required to accrue a
liability and recognize an expense during the period it is earned by
the employee.
GOODWILL
MEXICO. Goodwill arising on the acquisition of a subsidiary is defined
as the excess of the acquisition cost over the book value of the
subsidiary acquired, for which purpose all the subsidiary's
non-monetary assets and liabilities are restated through the
acquisition date for the effects of inflation as required by Bulletin
B-10. The goodwill so determined is carried on the balance sheet as a
noncurrent asset. Goodwill is amortized over a period not exceeding 20
years. Also, the excess of book value over the purchase price of shares
acquired should be amortized over a maximum period of five years from
the date of acquisition. The amortization method is not specified.
UNITED STATES. SFAS No. 142 "Goodwill and other Intangible assets"
requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121 and subsequently, SFAS No.
144 after its adoption.
S-26
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
FOREIGN CURRENCY TRANSLATION
MEXICO. The Mexican Institute of Public Accountants issued Bulletin
B-15 "Foreign Currency Transactions and Translation of Foreign Currency
Financial Statements," which requires financial statements of
consolidated foreign companies be restated for inflation in their
functional currency based on the subsidiary country's rate of inflation
and subsequently translated to Mexican pesos by using the foreign
exchange rate at the balance sheet date.
UNITED STATES. U.S. GAAP requires that the differences arising from the
use of an average exchange rate for the income statement and the use of
an exchange rate in effect at the date of the balance sheet, to be
shown as a separate component of stockholders equity. Depending on the
functional currency, the translation effects are recorded in the
statement of operations or directly to the stockholders equity.
SEVERANCE
MEXICO. Under Mexican GAAP, postemployment benefit expenses other than
pension benefits are recorded when retirement occurs. Metalsa does not
provide for any severance benefits. Beginning in 1997, in accordance
with Mexican GAAP (Circular 50), SFAS 112 is the supplementary
accounting standard for postemployment benefits.
UNITED STATES. Under U.S. GAAP postemployment benefits for former or
inactive employees, excluding retirement benefits, are accounted for
under the provisions of SFAS 112, which requires companies to accrue
the cost of certain benefits, including severance, over an employee's
service life.
CAPITALIZED INTEREST
MEXICO. Under Mexican GAAP, a company is allowed, but not required, to
capitalize interest on assets under construction. Mexican GAAP states
that the amount of financing cost to be capitalized during the period
of construction of property, machinery and equipment must be
comprehensively measured in order to properly include the effects of
inflation. Therefore, the amount capitalized includes (i) the interest
cost of the debt incurred, plus (ii) any foreign currency exchange loss
that results from the related debt, and less (iii) the related monetary
position result recognized on the debt incurred to finance the
construction project.
UNITED STATES. Under U.S. GAAP, interest must be considered an
additional cost of constructed assets to be capitalized in property,
machinery and equipment and depreciated over the lives of the related
assets. However, U.S. GAAP accounting does not permit the
capitalization of the monetary position result nor the foreign currency
exchange loss on the debt incurred to finance construction projects.
RELATED PARTY TRANSACTIONS
The Company entered into certain related party transactions, as
disclosed in note 5, that under U.S. GAAP, would be accounted for
differently as follows:
The Company executed a Sale and Leaseback transaction, and under U.S.
GAAP, no long-term receivable, payable or advance rent would have been
recorded.
The Company pays a total of 5% of sales as administrative and technical
services to affiliated companies and under U.S. GAAP; those amounts
would have been recorded as a reduction of sales.
DISCLOSURES TO THE FINANCIAL STATEMENTS
Disclosures to the financial statements are generally more extensive
under U.S. GAAP than under Mexican GAAP.
S-27
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
RECENTLY ISSUED ACCOUNTING STANDARDS(1)
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also records
a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. The Company is required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material effect on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of
such extinguishments have become part of the risk management strategy
of many companies. SFAS No. 145 also amends SFAS No. 13 to require
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions
of the Statement related to the rescission of Statement No. 4 is
applied in fiscal years beginning after May 15, 2002. Earlier
application of these provisions is encouraged. The provisions of the
Statement related to Statement No. 13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS No. 145 is not expected to have a material effect on
the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The provisions of this
Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect
on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002 and are not expected to have a
material effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
----------
(1) SEC Staff Accounting Bulletin No. 74 requires public companies to disclose
the expected impact of accounting standards issued but not yet adopted in the
notes to the financial statements. These disclosures are included here for
guidance for consideration by non-public companies.
S-28
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. The adoption of SFAS No. 148 is not expected to have
effects on the Company's financial statement.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. For nonpublic enterprises, such as the Company, with a variable
interest in a variable interest entity created before February 1, 2003,
the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material
effect on the Company's financial statements.
(18) NEW ACCOUNTING PRONOUNCEMENTS
a. Liabilities, allowances, contingent assets and liabilities and
commitments -
In December 2001, the Mexican Institute of Public Accountants
issued the new Bulletin C-9, "Liabilities, Allowances,
Contingent Assets and Liabilities and Commitments". This
Bulletin is mandatory beginning on January 1, 2003 and
replaces previous Bulletin C-9, "Liabilities", and previous
Bulletin C-12, "Contingencies and Commitments". The new
Bulletin C-9 provides more precise guidelines for accounting
for liabilities, allowances and contingent assets and
liabilities and establishes the requirements for the use of
techniques of the current value for the determination of
liabilities and accounting for early payment of debt, and for
recording the debt convertible into shares. Additionally, this
Bulletin establishes rules for the disclosure of commitments
that arise from normal operations.
b. Intangible assets-
In January 2002, the Mexican Institute of Public Accountants
issued the new Bulletin C-8, "Intangible Assets", which is
mandatory beginning on January 1, 2003 and replaces previous
Bulletin C-8, "Intangibles". The new Bulletin establishes the
criteria that must be met by the development costs to be
capitalized as intangibles. The main criteria refer to their
being identifiable, provide future benefits and that there is
control on these benefits. The expenses not meeting all the
established requirements, incurred after Bulletin C-8 becomes
effective, must be charged to results. The pre-operating
expenses recognized in previous years, according to Bulletin
C-8, will be amortized and be subject to a periodic impairment
evaluation. The development costs incurred in the
pre-operating stage can be capitalized, provided that the
requirements established by the new Bulletin are met.
S-29
SCHEDULE III
METALSA, S. DE R.L. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2002)
It also establishes that the intangible assets generated in a
business acquisition must be valued at fair value on the date
when the purchase took place and be separately recorded,
unless their cost cannot be determined reliably, in which case
they are included in goodwill; likewise, if there is no
observable market, they should be reduced up to the amount by
which the book value exceeds the purchase price or to zero.
These assets are also subject to a periodic impairment
evaluation. The amortization of goodwill must be classified in
operating expenses.
(19) SUBSEQUENT EVENT
In an Ordinary Stockholders Meeting held on January 28, 2003, the
Company's stockholders approved a Ps.116,900 dividend, payable in two
installments. The first installment amounting to $8 million dollars
will be paid in February 2003 and the remaining amount will be paid
during the second half of the year if the Company meets financial
projections for 2003.
In a Board of Directors meeting held on January 28, 2003, the Company's
directors approved the expansion of Metalsa's Roanoke facilities for up
to $15 million dollars. The purpose of the expansion is to increase the
production capacity and it is expected that the cash flows required for
this expansion will be generated through the normal operations of the
companies.
S-30