UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------------------
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, 2003 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.)
27175 HAGGERTY ROAD 48377
NOVI, MICHIGAN (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(248) 675-6000
5211 CASCADE ROAD SE -- SUITE 300, GRAND RAPIDS, MICHIGAN 49546
(Former Name or Former Address, if Changed Since Last Report)
---------------------
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 27, 2004, 57,341,805 shares of Common Stock of the
Registrant were outstanding. As of June 30, 2003, 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 $199,152,000.
Information required by Items 10, 11, 12, 13 and 14 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 20, 2004 (the "2004 Proxy Statement").
TOWER AUTOMOTIVE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Additional Item. Executive Officers.......................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 38
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 90
Item 9A. Disclosure Controls and Procedures.......................... 90
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 90
Item 11. Executive Compensation...................................... 91
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 91
Item 13. Certain Relationships and Related Transactions.............. 92
Item 14. Principal Accountant Fees and Services...................... 92
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 92
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, Renault/Nissan,
Volkswagen Group, General Motors ("GM"), Toyota, Honda, BMW, Fiat, Hyundai/Kia,
Mazda, 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, Germany,
Belgium, Poland, Slovakia, Italy, France, Spain, Japan, China, Korea, Brazil,
and India. The Company continues to broaden its geographic coverage and
strengthen its ability to supply products on a global basis as a result of
targeted organic growth and disciplined operations excellence and quality
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. From 1993 to 2000, 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 2003. The
Company's North American average content per vehicle has increased from $6.23 in
1993 to $124.99 in 2003.
The Company operates in the structural metal segment of the automotive
supply industry, which saw significant consolidation recently. In order to lower
costs and improve quality, OEMs are reducing their supplier base by awarding
sole-source contracts to broadly capable suppliers who are able to supply large
portions of a vehicle on a global basis. OEMs' criteria for supplier selection
include cost, quality, responsiveness, full-service design, engineering and
program management capabilities. OEMs are increasingly seeking suppliers capable
of providing complex structural assemblies rather than suppliers who only
provide individual 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 supplier with strong OEM relationships,
scale and global presence, the Company expects to continue to benefit from these
trends going forward.
Approximately 71 percent of the Company's 2003 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 Ford Taurus,
Focus, Explorer, Ranger and F-Series pickups, Chevrolet Silverado and GMC Sierra
pickups, Dodge Ram pickup, Toyota Camry, and Honda Accord and Civic.
Approximately 15 percent of the Company's 2003 revenues were generated from
sales in Europe, 13 percent in Asia, and 1 percent in South America.
The Company's principal executive offices are located at 27175 Haggerty
Road, Novi, Michigan 48377, and its telephone number is (248) 675-6000. 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.
1
BUSINESS STRATEGY
Tower Automotive was created through a series of acquisitions of
complementary businesses that have allowed the Company to become the largest
independent global supplier of structural metal components and assemblies (based
on net revenues) with a diverse customer portfolio and a broad scope of product
offerings. Now, the Company's challenge is to deliver on the promise of top-line
revenue growth and diversification by launching the significant backlog of new
business well, driving operational excellence throughout the Company to improve
profitability, quality and capital utilization, and leveraging the Company's
scale to realize structural cost reductions in global purchasing, integrated
manufacturing strategy and common approaches to technology. The Company's
medium-term goal is to improve its credit profile to investment-grade levels by
strengthening its balance sheet and liquidity for long-term health.
Operating Strategy:
Focus on Operational Excellence. 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. The Company monitors existing manufacturing capacity
relative to expected capacity, which is determined primarily by current and
expected business backlog and by opportunities to outsource 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.
Leverage Scale to Realize Structural Cost Reductions. The Company offers
manufacturing and support services to its customers on a global basis through a
combination of wholly-owned subsidiaries and 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.
The Company has recently established a centralized Purchasing and Manufacturing
Strategy group in order to reduce costs; leverage the overall buy; and
facilitate make versus buy decisions based on capacity versus demand outlooks.
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
broad 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. 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 transparency, commonality,
shared learning and standardized processes and cadence across the Company. 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.
The Company has recently implemented an Enterprise-wide Balanced Scorecard tied
to customer, operating and financial metrics to improve visibility at all
levels.
2
Growth Strategy:
The Company's growth strategy is focused on increased 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 including two established
facilities in China.
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 new
revenues. These programs have either launched in 2003 or will launch 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 54 percent in 2003. 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.
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.
The Company's strategy is to also capitalize on several important trends in
the automotive industry that have benefited Tower Automotive in the past and
will continue to benefit in the future. These trends include:
Continuation of Trend to Larger, More Capable Suppliers. 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 greater
vehicle content through complex subassemblies. 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 undergone significant consolidation.
Furthermore, in 2001 through 2003, a number of suppliers experienced financial
difficulties. These factors have combined to provide an opportunity for further
organic growth by obtaining business from smaller or troubled suppliers through
providing the scale and broad capabilities that OEMs require.
OEM "Shakeout." 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 position in the industry and their
financial performance, while some of the larger OEMs have struggled to
successfully integrate acquisitions. The Company's global capabilities has
allowed it to continue to serve as a valuable supplier to those smaller
producers.
System/Modular Sourcing. OEMs are increasingly seeking suppliers capable
of providing larger assemblies, 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
3
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. Tower Automotive has capitalized on the
system/modular sourcing trend among OEMs by offering customers high 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
Tower.
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 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.
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.
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.
4
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 2003 2002
---------------- ----- -----
Body structures and assemblies (including Class A
surfaces)................................................. 43% 38%
Lower vehicle structures.................................... 34 40
Suspension and powertrain modules........................... 12 11
Suspension components....................................... 8 8
Other....................................................... 3 3
--- ---
Total.................................................. 100% 100%
=== ===
CUSTOMERS AND MARKETING
The North American automotive manufacturing production is dominated by GM,
Ford and DaimlerChrysler, but the Japanese and European OEMs are increasing
their production capacity representing approximately 26 percent of production in
2003 versus 23 percent in 2002. The Company currently supplies products
primarily to Ford, DaimlerChrysler and GM 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
and programs such as these from 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.
Following is a summary of the global composition of the Company's
significant customers for the last two fiscal years:
YEAR ENDED
DECEMBER 31,
-------------
CUSTOMER 2003 2002
-------- ----- -----
Ford........................................................ 35% 38%
DaimlerChrysler............................................. 19 22
General Motors.............................................. 10 8
Hyundai/Kia................................................. 9 7
Volkswagen Group............................................ 5 5
Fiat........................................................ 4 4
Toyota...................................................... 3 3
Honda....................................................... 2 2
BMW......................................................... 2 1
Nissan...................................................... 1 1
Other....................................................... 10 9
--- ---
Total.................................................. 100% 100%
=== ===
5
Below is a summary of the Company's sales by geographic region for the last
two fiscal years:
YEAR ENDED
DECEMBER 31,
-------------
GEOGRAPHIC CATEGORY 2003 2002
------------------- ----- -----
U.S. and Canada............................................. 71% 75%
Europe...................................................... 15 12
Asia........................................................ 13 12
Mexico and South America.................................... 1 1
--- ---
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,
Escort, Crown Victoria/Grand Aviator, Explorer Sport Trac,
Marquis, Lincoln LS, Towncar, Explorer Sport, Econoline,
Thunderbird, StreetKa, Windstar, Freestar/Monterey,
Mondeo, Fiesta Escape, Expedition,
Navigator, Excursion, Ranger,
F-Series LD & HD, Transit,
Medium Duty Trucks
Volvo........................ S40/V50
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, Pacifica
Mercedes..................... A-Class, C-Class, E-Class, Atego, Actros, Sprinter,
SLK, CLK Vario
General Motors............... Cadillac CTS, Malibu Silverado/Sierra, Astro/
Safari, S-10 Pick-up, Sonoma,
Cadillac SRX, Medium Duty
Trucks
Saturn....................... LS/LW Saturn VUE
Opel......................... Omega, Astra, Agila, Corsa,
Vectra, Zafira, Meriva
Honda........................ Accord, Civic/Acura EL, Acura Odyssey, Acura MDX, Element,
TL/CL, Fit Pilot
Mazda........................ Mazda 6 Tribute, B-Series Pick-up
Toyota....................... Avalon, Camry, Solara, Sienna, Tacoma, Tundra,
Corolla, Vios, Xiali, Crown Sequoia, Lexus RX330
Renault...................... Clio, Twingo, Megane, Kangoo
PSA.......................... Peugeot 206, Citroen C3
Nissan....................... Sentra, Micra Quest, Xterra, Frontier,
Titan, Pathfinder Armada
Isuzu........................ Rodeo, Axiom
VW........................... Passat, Golf/Bora, GOL, Polo, Touareg,
Kombi, Santana, Fox, Jetta, Transporter/Microbus, Caddy
Phaeton Van
Audi......................... A3, A4, A6, Cabrio
Skoda........................ Felicia/Fabia, Octavia,
Superb
6
VEHICLE MANUFACTURER CAR MODELS TRUCK MODELS
-------------------- ---------- ------------
BMW.......................... 3 Series, 5 Series X5
Fiat......................... Marea, Punto, Palio, Panda, Ducato
Stilo Multipla, Uno, Idea
Alfa Romeo................... 147, 156, 166, GTV, Spider
Lancia....................... Lybra, Thesis, Y
Bentley...................... Continental Coupe
Porsche...................... Cayenne
Land Rover................... Range Rover
Jaguar....................... XJ, S-Type
Suzuki....................... Wagon R+, Ignis
Hyundai...................... Eqquus, Click, Visto Teracan, Galloper, Starex,
Libero, Grace, SantaFe,
Porter
Kia.......................... Spectra, Rio, Optima, Cerato, Sportage, Carens, Retona,
Potentia, Opirus 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 engineering capabilities enable it to design and build high-quality
and efficient manufacturing systems, processes and equipment 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.
7
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 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
8
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 59 percent and 58 percent of the Company's revenues in 2003 and
2002, 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 56 percent and
62 percent of the Company's revenues in 2003 and 2002, 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, 2003, the Company had approximately 12,000 colleagues
worldwide, of whom approximately 4,500 are covered under collective bargaining
agreements. These collective bargaining agreements expire between 2004 and 2009.
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.
9
ENVIRONMENTAL MATTERS
See Item 3, "Legal Proceedings" for discussion of environmental matters.
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
LOCATION FOOTAGE TYPE OF 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
Chicago, Illinois................ 480,000 Leased Manufacturing
Granite City, Illinois........... 458,000 Leased Manufacturing
*Turin, Italy (3 locations)...... 455,000 Owned Manufacturing/Office
*Malacky, Slovakia............... 453,600 Owned Manufacturing
*Zwickau, Germany................ 409,000 Owned Manufacturing
Clinton Township, Michigan....... 385,000 Leased Manufacturing
*Gent, Belgium................... 376,000 Leased 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 City, Kyunggido,
Korea.......................... 223,000 Owned (2) Manufacturing
Bluffton, Ohio................... 218,000 Leased Manufacturing
*Kunpo City, Kyunggido, Korea.... 215,000 Owned (2) Manufacturing
Bellevue, Ohio (2 locations)..... 200,000 Owned Manufacturing
Madison, Mississippi............. 200,000 Leased Manufacturing
*Sao Paolo, Brazil............... 193,000 Owned Manufacturing/Office
*Changchun, China................ 179,200 Leased (1) 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
*Kwangju City, Pyungdong,
Korea.......................... 121,000 Owned (2) Manufacturing
*Kwangju City, Hanam, Korea...... 107,000 Owned (2) Manufacturing
*Bergisch-Gladbach, Germany...... 102,000 Owned Manufacturing/Engineering/Office
*Shiheung City, Kyunggido,
Korea.......................... 100,000 Owned (2) Manufacturing
Rochester Hills, Michigan........ 89,000 Leased Office/Engineering/Design
Novi, Michigan................... 86,000 Leased Corporate Office/Engineering/Design
*Chemnitz, Germany............... 76,000 Leased Manufacturing
10
SQUARE
LOCATION FOOTAGE TYPE OF INTEREST DESCRIPTION OF USE
-------- --------- ---------------- -----------------------------------
Belcamp, Maryland................ 70,000 Leased Manufacturing
*Ansan City, Kyunggido, Korea.... 70,000 Owned (2) Manufacturing
*Minas Gerais, Brazil............ 59,000 Owned Manufacturing
Upper Sandusky, Ohio............. 56,000 Leased 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
*Ulsan City, Korea............... 44,000 Owned (2) Manufacturing
Fenton, Missouri................. 41,000 Leased Warehouse
Grand Rapids, Michigan (2
locations)..................... 28,000 Leased Office
*Hyderabad, India................ 2,800 Leased Engineering/Design
*Yokohama, Japan................. 1,000 Leased Sales
---------------
* These principal facilities are located within the International reportable
unit. All other principal facilities are located within the United
States/Canada operating segment.
(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.
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
11
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 exposure.
The Company owns properties which have been impacted by releases to the
environment. At some of these properties, the Company is liable for costs
associated with investigation and/or remediation of contamination in one or more
environmental media. The Company is currently actively involved in investigation
and/or remediation at several of these locations. At certain of these locations,
costs incurred for environmental investigation and/or remediation will be paid
partly or completely out of funds placed into escrow by previous property
owners. Nonetheless, total costs associated with remediating environmental
contamination at the properties could be substantial, and may be material to the
financial condition of the Company.
The Company has accrued reserves of $6.9 million to cover estimated
environmental liabilities at its properties. This amount is based on reasonable
estimates of expected investigation/remediation costs related to environmental
contamination. It is possible, however, that total costs will exceed the
environmental reserves.
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 2003.
ADDITIONAL ITEM -- EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers:
NAME AGE POSITION
---- --- --------
Kathleen A. Ligocki....................... 47 President and Chief Executive Officer
James A. Mallak........................... 48 Chief Financial Officer and Treasurer
Richard S. Burgess........................ 49 Vice President
Kathy J. Johnston......................... 46 Vice President
Jeffrey L. Kersten........................ 36 Vice President
Vincent Pairet............................ 40 Vice President
Tommy G. Pitser........................... 56 Vice President
Thomas Werle.............................. 45 Vice President
Antonio R. Zarate......................... 59 Vice President
KATHLEEN A. LIGOCKI has served as President and Chief Executive Officer of
the Company since August 2003. Ms. Ligocki joined Tower Automotive from Ford
Motor Company, where she had most recently served as a corporate officer and
Vice President, Ford Customer Service Division. During her five year tenure at
Ford, Ms. Ligocki held various other positions, including President and CEO,
Ford of Mexico, Vice President, North American Marketing and Director of
Business Strategy. From 1994 to 1998, Ms. Ligocki worked for United Technologies
Corporation, initially at Carrier Corporation as the Director of Manufacturing
and Purchasing in Paris, France, subsequently at UT Automotive as the Vice
President of Worldwide Sales and as the Vice President of the Motors Division.
Ms. Ligocki worked for General Motors from 1979 to 1994 at Delco Electronics
Corporation.
JAMES A. MALLAK has served as Chief Financial Officer and Treasurer of the
Company since January 2004. From 2001 to 2003, Mr. Mallak served as the
Executive Vice President and Chief Financial Officer of Textron Fastening
Systems, a division of Textron Inc. From 1999 to 2001, Mr. Mallak served as
12
Executive Vice President and CFO of Textron Automotive Company. Prior to joining
Textron, Mr. Mallak served as Vice President, Finance for the Heavy Vehicle
Systems division of ArvinMeritor.
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 current responsibility for global purchasing and manufacturing
strategy and previous 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.
JEFFREY L. KERSTEN has served as Vice President of the Company since
December 2003 with current responsibility for the Company's enterprise strategy
and business development. Mr. Kersten had served as the Company's European
finance leader since January 2001. Prior to 2001, Mr. Kersten served in various
finance roles since joining the Company in January 1997.
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 North American strategy. Mr.
Pitser previously had responsibility for the Company's European strategy, 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.
THOMAS WERLE has served as Vice President of the Company since December
2003, with current responsibility for the Company's global technology strategy.
Mr. Werle has served on the Company's European leadership team since 2000. From
1995 to 2000, Mr. Werle served as Managing Director of the German company Dr.
Meleghy GmbH & Co., a European diversified group of operations in the tool and
die, stamping and component industry.
ANTONIO R. ZARATE has served as Vice President of the Company since May
2000 with responsibility for the Company's European strategy. Mr. Zarate
previously had 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.
13
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 27, 2004, there were approximately 2,666
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
------ ------
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
2003
First Quarter............................................. $ 2.10 $ 4.72
Second Quarter............................................ 2.37 3.93
Third Quarter............................................. 3.61 5.37
Fourth Quarter............................................ 3.29 7.11
During the last two years, the Company has not paid any cash dividends on
its Common Stock. The Company has no current plans to pay any cash dividends in
2004. 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 $600 million Credit Agreement. During the past year,
the Company did not sell any of its securities that were not registered under
the Securities Act of 1933.
14
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, 2003, 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 auditors, as of and for the years ended
December 31, 2003 and 2002 and by Arthur Andersen LLP, independent auditors, as
of and for each of the years in the three-year period ended December 31, 2001.
The consolidated financial statements as of December 31, 2003 and 2002 and for
each of the three years in the period ended December 31, 2003 and the reports of
independent auditors thereon are included elsewhere in this report. The
consolidated financial statements as of December 31, 2001, 2000 and 1999 and for
the years ended December 31, 2000 and 1999 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,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $2,815,749 $2,754,464 $2,467,433 $2,531,953 $2,170,003
Cost of sales......................... 2,560,689 2,456,380 2,190,248 2,160,359 1,823,103
Selling, general and administrative
expenses............................ 155,500 143,822 139,203 141,984 105,950
Amortization expense.................. -- -- 24,804 21,517 15,803
Restructuring and asset impairment
charges, net........................ 157,532 61,125 383,739 141,326 --
Operating income (loss)............... (57,972) 93,137 (270,561) 66,767 225,147
Interest expense, net................. 92,747 70,267 73,765 64,711 37,981
Provision (benefit) for income
taxes............................... (50,811) 7,636 (73,312) 626 74,866
Income (loss) before cumulative effect
of change in accounting principle... (124,675) 15,180 (267,524) 13,434 117,088
Net income (loss)..................... (124,675) (97,606) (267,524) 13,434 117,088
Basic earnings (loss) per share before
cumulative effect of change in
accounting principle................ $ (2.20) $ 0.26 $ (5.87) $ 0.29 $ 2.50
Diluted earnings (loss) per share
before cumulative effect of change
in accounting principle............. $ (2.20) $ 0.26 $ (5.87) $ 0.28 $ 2.10
Basic earnings (loss) per share....... $ (2.20) $ (1.70) $ (5.87) $ 0.29 $ 2.50
Diluted earnings (loss) per share..... $ (2.20) $ (1.70) $ (5.87) $ 0.28 $ 2.10
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital (deficiency).......... $ (377,321) $ (305,466) $ (379,785) $ 78,753 $ 126,940
Total assets.......................... 2,846,409 2,557,885 2,533,436 2,892,747 2,552,550
Long-term debt and capital leases,
net................................. 1,103,657 764,935 805,688 1,141,900 921,221
Mandatorily redeemable trust
convertible preferred securities.... -- 258,750 258,750 258,750 258,750
Stockholders' investment.............. 413,510 512,076 447,408 700,095 727,135
As of December 31, 2003, the mandatorily redeemable trust convertible
preferred securities are shown as a component of long-term debt, due to the
adoption of FASB Interpretation No. (FIN) 46,
15
Consolidation of Variable Interest Entities, an Interpretation of ARB 51. There
were no dividends declared per common share in any period presented.
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. 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 2003.
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 objectives are to strengthen its balance sheet and 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 $377 million and
$305 million as of December 31, 2003 and 2002, 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. In June 2003, the Company completed a senior note
offering which provided net proceeds of $244 million which, subject to final
negotiations with the Company's senior lenders, will be utilized to refund the
Company's $200 million convertible subordinated notes by August 1, 2004. The
$183 million in net borrowings in 2003 primarily represents this incremental
debt as of December 31, 2003 (most of which is residing in the $161 million of
cash and cash equivalents as of December 31, 2003).
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.
16
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., from recent awards to supply foreign transplant operations in the U.S and
its efforts to diversify its customer base.
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 most
recent 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
Company paid Nissan approximately $68 million over a three-year period beginning
in September 2000. During the fourth quarter of 2003, the Company reevaluated
the strategic nature and current intent of its investment in Yorozu. As a
result, the Company recorded an impairment charge of $27.4 million to record the
investment at the December 31, 2003 traded value on the Tokyo Stock Exchange.
The Company has, for approximately $51 million, a 100 percent interest (49
percent in October 1999, 17 percent in October 2000 and 34 percent in February
2004) in Seojin, a supplier of frames, modules and structural components to the
Korean automotive industry.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31,
2002
Revenues. Revenues for the year ended December 31, 2003 were $2,815.7
million, a 2.2 percent increase, compared to $2,754.5 million for the year ended
December 31, 2002. The net $61.2 million increase was composed of positive
foreign exchange rate effect in Europe and Asia of $75.9 million, offset by a
decline in revenues of $12.3 million attributable to the sale of the Iwahri,
Korea plant which occurred during the first quarter 2002 and $10.4 million
attributable to pricing and economic conditions. In addition, net volume
increased $8.0 million, primarily in the platforms of Dodge Ram, GM Cadillac
CTS, Ford F-Series and Lincoln SUV and various Nissan, Volkswagen and
Hyundai/Kia platforms were offset by volume decreases primarily in the Dodge
Dakota/Durango series, Chrysler LH and Concorde platforms and the Ford Explorer,
Focus and Taurus platforms. While net volume increased $8.0 million, the Company
experienced a $32.9 million decrease in value-added revenue platforms which was
offset by a non-value-added module assembly revenue increase of $40.9 million.
Cost of Sales. Cost of sales as a percent of total revenues for the year
ended December 31, 2003 was 90.9 percent compared to 89.1 percent for the year
ended December 31, 2002. Gross profit decreased $43.0 million from $298.1
million in 2002 to $255.1 million in 2003 and is attributable to the combined
effects of: (i) $10.4 million in negative profit effect of pricing and cost
economics, (ii) increased health care costs of $3.3 million, (iii) $25.0 million
of additional launch costs related primarily to new programs launched for Volvo,
Ford, Nissan and GM, (iv) lease expense of $4.7 million not present in the 2002
period, (v) $14.8 million decline in gross profit on value-added revenue
decreases, offset by (vi) $6.9 million in positive foreign exchange rate effect
on gross profit, (vii) $1.2 million increase in gross profit on non-value added
module assembly revenues and (viii) $7.1 million in operational performance
improvements in 2003.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $155.5 million, or 5.5 percent of revenues,
for the year ended December 31, 2003 compared to $143.8 million, or 5.2 percent
of revenues, for the year ended December 31, 2002. The $11.7 million increase in
expense is due to increased compensation related expenses of $7.7 million due
primarily to executive leadership retirement and recruitment costs of $4.4
million, increased legal and professional costs of $1.2 million, and increased
program management costs of $2.8 million related to engineering and support
activities.
17
Interest Expense, net. Interest expense, net of interest income, for the
year ended December 31, 2003 was $92.7 million compared to $70.3 million for the
year ended December 31, 2002. The $22.4 million increase in net interest expense
is attributable to (i) increased interest of $17.2 million related to the $258.8
million senior notes issued in June 2003 (ii) $9.0 million related to the Trust
Preferred Securities which was previously recorded as minority interest, and
(iii) an increase of $1.4 million due to higher short-term rates, offset by (iv)
decreased interest costs of $2.2 million due to decreased revolver borrowings
during 2003 compared to 2002 and (v) increased capitalized interest on
construction projects in the 2003 period of $3.0 million.
Income Taxes. The effective income tax rate was 33.7 percent and 35.0
percent in 2003 and 2002, respectively. The effective income tax rates reflects
the actual rates in the tax jurisdiction in which the Company operates, adjusted
for permanent differences.
Write-down of Joint Venture Investment to Market Value, net. Previous to
the fourth quarter of 2003, the Company had determined that its investment in
Yorozu had not suffered an other than temporary decline in market value. This
determination was based on the strategic nature of the investment which
supported the Company's original investment decision and the fact that the
Company believed that there was a significant premium associated with the large
block of stock held in Japan. During the fourth quarter of 2003, the Company
reevaluated the strategic nature and current intent of its investment in Yorozu.
As a result, the Company recorded an impairment charge of $27.4 million to
record the investment at the December 31, 2003 traded value on the Tokyo stock
exchange.
Equity in Earnings of Joint Ventures, net. Equity in earnings of joint
ventures, net of tax, was $13.3 million and $16.8 million for the years ended
December 31, 2003 and 2002, respectively. These amounts represent the Company's
share of the earnings from its joint venture interests in Metalsa, Yorozu and
DTA Development. The Company's share of joint venture earnings in Metalsa has
decreased by $6.0 million in the 2003 period, offset by increases during the
2003 period in the Company's share of joint venture earnings in DTA and Yorozu
of $0.1 million and $2.4 million, respectively.
Minority Interest, net. Minority interest, net of tax, was $10.6 million
and $15.8 million for the years ended December 31, 2003 and 2002, respectively.
Minority interest in the 2003 period represents the minority interest held by
the 40 percent joint venture partners in Tower Golden Ring and dividends, net of
income tax benefits, on the Trust Preferred Securities, through June 2003.
Minority interest in the 2002 period represents dividends, net of income tax
benefits, on the Trust Preferred Securities and the minority interest held by
the 40 percent joint venture partners in Tower Golden Ring. The decrease is due
to the adoption of FASB Interpretation No. (FIN) 46 (see "Recently Issued
Accounting Pronouncements") during the third quarter of 2003, which requires the
dividends previously recorded as minority interest to be classified as interest
expense.
Cumulative Effect of a Change in Accounting Principle, net. The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142 relating to
the accounting for goodwill and other intangible assets as of January 1, 2002.
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 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 statement 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
18
deductible for tax purposes. The Company performed its annual goodwill
impairment tests of as December 31, 2002 and 2003 utilizing the same valuation
techniques as applied during the original adoption under SFAS No. 142 which did
not provide indications of goodwill impairment relating to the United
States/Canada and Europe reporting units given the excess fair value over
carrying value for these reporting units.
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 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. There was no amortization expense recorded for the
year ended December 31, 2002 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.
Interest Expense, net. Interest expense, net of interest income, for the
year ended December 31, 2002 was $70.3 million compared to $73.8 million for the
year ended December 31, 2001. The $3.5 million reduction in net interest expense
is attributable to $9.9 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.
19
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. 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
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 statement 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.
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. Beginning in the fourth quarter of
2000, the Company: (i) divested 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; (v) discontinued
remaining stamping and ancillary processes performed at its Milwaukee Press
Operations and relocated remaining work to other locations or Tier II suppliers,
and (vi) planned the transfer of production of high-volume frame assemblies for
the Ford Ranger from its Milwaukee facility to its Bellevue, Ohio facility and
began consolidating its Novi, Michigan North America oversight and its Grand
Rapids, Michigan corporate office activities and closing its Rochester Hills,
Michigan prototype tooling and technical center facility. These actions were
accomplished through four restructurings: the first restructuring was initiated
in October 2000 (the "2000
20
Plan"), the second restructuring was initiated in October 2001 (the "2001
Plan"), the third restructuring was initiated in January 2002 (the "2002 Plan"),
and the fourth restructuring related to the Milwaukee Ford Ranger line
relocation was initiated in May 2003, and subsequently reversed in December
2003, in addition to the North America/Corporate Office Consolidation initiated
in October 2003 (the "2003 Plan"). There are cash costs remaining to be paid in
connection with the 2001 Plan, 2002 Plan, and 2003 Plan; these plans are
described in further detail below.
Under the 2003 Plan, the Company realized cash savings of $2.6 million and
expects to realize approximately $8 million in 2004. Under the 2002 Plan, the
Company realized cash savings of $15.8 million during 2003. Under the 2001 Plan,
the Company realized cash savings of $24.6 million during 2003. These cash
savings from permanent payroll reductions are expected to be realized annually.
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):
2003 PLAN 2002 PLAN 2001 PLAN
--------- --------- ---------
RESTRUCTURING AND RELATED ASSET IMPAIRMENTS
Asset impairments......................................... $ 14.2 $47.2 $127.4
Severance and outplacement costs.......................... 4.9 8.4 24.6
Other exit costs.......................................... 9.6 19.8 32.0
Revision of estimate associated with previous plans....... -- (14.3) (5.9)
------ ----- ------
Total restructuring related charges.................... 28.7 61.1 178.1
------ ----- ------
OTHER GOODWILL AND ASSET IMPAIRMENTS
Goodwill write down....................................... -- -- 108.6
Other asset impairments................................... 128.8 -- 50.7
Investment impairment..................................... -- -- 46.3
------ ----- ------
Total non restructuring related goodwill and asset
impairment charges................................... 128.8 -- 205.6
------ ----- ------
Total restructuring and asset impairment charges,
net.................................................. $157.5 $61.1 $383.7
====== ===== ======
Estimated cash and non cash charges in the original
plan are as follows:
Non-cash charges..................................... $143.0 $45.3 $333.0
------ ----- ------
Cash charges......................................... $ 14.5 $15.8 $ 50.7
------ ----- ------
MILWAUKEE RANGER AND NORTH AMERICA/CORPORATE OFFICE CONSOLIDATION ACTIVITIES
(2003 PLAN):
The Company announced in October 2003 plans to consolidate its Novi,
Michigan North America oversight and Grand Rapids, Michigan corporate office
activities and close its Rochester Hills, Michigan prototype tooling and
technical center facility. Qualifying exit costs (in accordance with SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities") relating
to these activities were recognized by the Company in the fourth quarter of 2003
totaling $3.7 million, comprised of cash charges of $2.1 million and non-cash
asset impairment charges of $1.6 million. These costs incurred to date as well
as any additional costs expected to be incurred relating to these activities are
within the United States/ Canada reportable unit. The Company does not
anticipate any significant additional expenses related to this restructuring
activity.
On May 27, 2003, the Company announced that it would transfer the
production of high-volume frame assemblies for the Ford Ranger from its
Milwaukee facility to its Bellevue, Ohio facility. During 2003, the Company
recorded $25.0 million pre-tax restructuring and asset impairment charges
relating to this event. These charges reflect estimated qualifying "exit costs"
comprising cash charges of $6.1 million, pension and other post-retirement
benefit plan curtailment costs of $6.3 million and non-cash asset
21
impairment charges of $12.6 million, all within the United States/Canada
reportable unit. These charges did not cover certain aspects of the 2003 Plan,
including movement of equipment and colleague relocation and training, which are
recognized in future periods as incurred. On December 5, 2003, the Company
announced that it had decided not to proceed with the relocation of the Ford
Ranger line based on revised economic factors from the original May 2003
decision principally due to concessions received from the Milwaukee labor unions
and a need for management to focus on its 2004 new product launch schedule.
Because the Company's measurement date for pension and post-retirement benefits
is September 30, the decision to continue Ranger frame production in Milwaukee
made in December 2003 will result in a reversal of the curtailment loss on a
three-month lag (first quarter of 2004). The remaining charges related to the
original decision to move the Ranger frame production will not be reversed.
The accrual for the 2003 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2003. The table below
summarizes the accrued operational realignment and other charges related to the
2003 Plan through December 31, 2003 (in millions):
ASSET SEVERANCE AND
IMPAIRMENT OUTPLACEMENT OTHER EXIT
COSTS COSTS COSTS TOTAL
---------- ------------- ---------- ------
Provision................................. $ 14.2 $ 4.9 $ 9.6 $ 28.7
Cash usage................................ -- (2.9) (3.3) (6.2)
Non-cash charges.......................... (14.2) -- (6.3) (20.5)
------ ----- ----- ------
Balance at December 31, 2003.............. $ -- $ 2.0 $ -- $ 2.0
====== ===== ===== ======
During 2003, the Company charged $6.3 million of other exit costs from the
2003 Plan restructuring reserves for expected curtailment cost against the
pension and post-retirement benefit liability accrual. As described above, these
curtailment charges will be reversed in the first quarter of 2004. The Company
anticipates satisfying the remaining 2003 Plan restructuring reserves during the
next twelve to eighteen months.
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 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. These activities resulted in a reduction of approximately 500
colleagues.
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 were disposed of as part of the 2002
Plan were written down to their estimated residual values. For assets that were
sold currently, the Company measured impairment based on estimated proceeds on
the sale of the facilities and equipment. These asset impairments arose as a
consequence of the Company making the decision to exit these activities during
the first quarter of 2002.
22
The accrual for the 2002 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2003 and 2002. The
table below summarizes the accrued operational realignment and other charges
through December 31, 2003 (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
Cash usage........................... -- (1.8) (1.0) (2.8)
Revision of estimate................. -- (0.7) -- (0.7)
------ ----- ------ ------
Balance at December 31, 2003......... $ -- $ 1.0 $ -- $ 1.0
====== ===== ====== ======
As of December 31, 2003, the Company anticipates future cash payments of
$1.0 million under the 2002 Plan during the next twelve months. 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. The revision in estimates for the 2002 Plan
resulted from minor variances in severance and other exit costs, as compared to
the amount initially established in the 2002 Plan. Such revisions were credited
to "Restructuring and Asset Impairment Charges" 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 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 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 which
were disposed of currently, the Company measured impairment based on estimated
proceeds on the sale of the facilities and equipment. These asset impairments
arose 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.
23
The accrual for the 2001 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2003 and 2002. The
table below summarizes the accrued operational realignment and accrued other
charges related to the 2001 Plan through December 31, 2003 (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
Cash usage............................... -- (2.0) (3.5) (5.5)
Revision of estimate..................... -- 1.0 (0.3) 0.7
------- ------ ------ -------
Balance at December 31, 2003............. $ -- $ -- $ 4.5 $ 4.5
======= ====== ====== =======
The remaining other exit costs of $4.5 million as of December 31, 2003
relate to the present value of operating lease payments that the Company is
obligated to pay though 2010. 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
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
"Restructuring and Asset Impairment Charges" in the consolidated financial
statements. The revision in estimates for the 2001 Plan resulted from minor
variances in the execution of the 2001 Plan and were accounted for in a similar
manner.
NON-RESTRUCTURING ASSET IMPAIRMENTS
During 2003, the Company evaluated the current operating plans and current
and forecasted business for three of its frame assembly plants and other
facilities. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
the Company determined that there were indicators of impairment present for each
of the facilities based upon the potential for new business and evaluation of
pricing. Cash flow projections were prepared which indicated that there were not
sufficient cash flows projected to support the carrying value of the long-lived
assets at these facilities and they were written down by $122.7 million to their
fair value based upon discounted cash flows. Additionally, the Company
identified assets which no longer had sufficient cash flow amounts to support
their carrying amounts and were written down by $6.1 million to their fair
value. The asset write-offs of $128.8 million are included in the $157.5 million
restructuring and asset impairment charge in the consolidated statement of
operations for the year ended December 31, 2003. The non-restructuring asset
impairment charges recorded during 2003 are within the United States/ Canada
operating segment.
The other goodwill and asset impairment charges of $205.6 million 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
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 of
$108.6 million assigned to two of its
24
plants was impaired and was written down. The Company also identified assets
which no longer had sufficient cash flows to support their carrying amounts and
were written down by $50.7 million to fair value, in addition to a write-down of
$46.3 million related to its joint venture investment in J.L. French.
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes the Company's primary sources and uses of cash (in
millions):
YEAR ENDED DECEMBER 31,
------------------------
2003 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, write-down of joint venture investment to
market value, customer recovery related to program
cancellation, and cumulative effect of change in
accounting principle(1)................................ $175.9 $194.5 $178.1
Cash advances from receivables program.................... (17.5) 2.3 15.2
Decrease (increase) in accounts receivable................ (76.3) (33.6) 74.5
Decrease (increase) in inventories........................ 3.1 (20.5) 21.4
Decrease (increase) in prepaid tooling and other assets... 8.8 (36.5) 129.3
Increase in accounts payable.............................. 138.3 48.8 120.5
Increase (decrease) in accrued liabilities................ (18.5) 32.2 13.1
Changes in other assets and liabilities................... (29.0) (56.2) (38.3)
------ ------ ------
Net cash provided by operating activities............ 184.8 131.0 513.8
Proceeds from sale of fixed assets........................ -- 50.3 --
Proceeds from issuance of stock........................... 0.6 225.7 39.0
Proceeds from divestiture................................. -- 4.0 --
Net proceeds from borrowings of debt...................... 183.4 -- --
------ ------ ------
Total sources of cash....................................... $368.8 $411.0 $552.8
====== ====== ======
Uses of Cash:
Capital expenditures, net(2).............................. 230.1 159.0 194.0
Acquisitions, including joint venture interests, earnout
payments and dividends received........................ (8.5) 40.8 5.4
Repurchase of stock....................................... -- 59.9 --
Increase (decrease) in cash balances...................... 147.2 (8.1) 18.4
Net repayments of debt.................................... -- 159.4 335.0
------ ------ ------
Total uses of cash.......................................... $368.8 $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, write-down of joint venture
25
investment to market value, customer recovery related to program
cancellation, and cumulative effect of change in accounting principle is
computed as follows (in millions):
YEAR ENDED DECEMBER 31,
--------------------------
2003 2002 2001
------- ------ -------
Net loss................................................. $(124.7) $(97.6) $(267.5)
Depreciation and amortization............................ 151.2 136.7 159.9
Deferred income tax expense (benefit).................... (36.0) 2.1 (80.8)
Gain on sale of plant.................................... -- (3.8) --
Equity in earnings of joint ventures, net................ (13.3) (16.8) (17.2)
Restructuring and asset impairment charges, net.......... 155.7 61.1 383.7
Write-down of joint venture investment to market value... 27.4 -- --
Customer recovery related to program cancellation........ 15.6 -- --
Cumulative effect of change in accounting principle,
net.................................................... -- 112.8 --
------- ------ -------
$ 175.9 $194.5 $ 178.1
======= ====== =======
(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 $262.9 million, $187.2
million and $265.7 million in 2003, 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, 2003, the Company generated $184.8 million of cash from operations.
This compares with $131.0 million generated during the same period in 2002. Net
income before depreciation and amortization, deferred income taxes, gain on sale
of plant, equity in joint venture earnings, restructuring and asset impairment
charges, write-down of joint-venture investment to market value, customer
recovery related to program cancellation, and cumulative effect of change in
accounting principle was $175.9 million and $194.5 million for 2003 and 2002,
respectively. Operating cash flow was reduced by $14.5 million in 2003 and $37.1
million in 2002 for cash restructuring payments, and was increased by net tax
refunds of $19.8 million in 2002. Operating cash flow was also reduced in the
2003 and 2002 periods by $26.8 million and $32.9 million, respectively, for
required pension contributions. Expected pension contribution funding
requirements of the Company for 2004 are approximately $38 million under
currently enacted pension funding relief legislation. In total, working capital
and other operating items increased operating cash flow by $8.9 million during
2003 and decreased cash flow by $63.5 million during 2002.
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 stock from the Company's colleague stock purchase plan and
option plans contributed $0.6 million to the cash flow for the 2003 period. 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 June 2003, R.J. Tower Corporation (the "Issuer"), a wholly-owned
subsidiary of the Company, completed a senior note offering with a face amount
of $258 million and a 12 percent interest rate. The notes were discounted upon
issuance to yield 12.5 percent, with interest payable semi-annually. The notes
are recorded in the Company's consolidated balance sheet net of debt discount of
$7.0 million as of
26
December 31, 2003. The notes rank equally with all of the Company's other senior
unsecured and unsubordinated debt and mature on June 1, 2013.
In June 2003, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") to reduce the borrowing capacity of the
facility and provide for amended financial covenants in order to enhance overall
liquidity. The amendment reduced the former $725 million facility to a $600
million facility. The term portion of the facility increased from $125 million
to $240 million, and the revolver portion decreased from $600 million to $360
million. The amount available to borrow under the revolver portion of the credit
facility is restricted by $44 million of permanent letters of credit, and is
also restricted by $200 million to provide flexibility for the Company to redeem
its $200 million convertible subordinated notes (due August 1, 2004). The $200
million restricted amount is available to the Company for the redemption of
these notes upon a grant of additional collateral to its lendors, in the event
the Company does not elect to refinance the convertible notes in another manner.
The Credit Agreement also includes a multi-currency borrowing feature that
allows the Company to borrow up to $316 million in certain freely tradable
offshore currencies, and letters of credit sublimits of $250 million. As of
December 31, 2003, there were no borrowings outstanding on the revolver portion
of the Credit Agreement. Interest on the Credit Agreement is at the financial
institutions' reference rate, LIBOR, or the Eurodollar rate plus a margin
ranging from 100 to 325 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 7.3 percent for the year
ended December 31, 2003 (including the effect of the interest rate swap contract
discussed below). The Credit Agreement has a final maturity of July 2006.
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 $8.2 million at December 31, 2003, compared to unused
availability of $239 million at December 31, 2002. The Company's leverage
covenant increases to 4.5 at March 31, 2004 and June 30, 2004, compared to a
requirement of 4.25 at December 31, 2003. The revolver availability combined
with the Company's cash balances of $160.9 million and $13.7 million as of
December 31, 2003 and 2002, respectively, produced total available liquidity of
$169.1 million and $252.7 million for those same periods. The $83.6 million
decrease in available liquidity between the periods resulted from the increase
in indebtedness (as defined in the credit agreement) and reduced revolver
capacity under the amended credit agreement and a decrease in trailing four
quarter EBITDA (as defined in the credit agreement), offset by an increase in
cash between the periods. The covenant conditions contained in the credit
agreement include limits on the Company's ability to pay dividends. As of
December 31, 2003, the Company was in compliance with all debt covenants and
anticipates achieving covenant compliance throughout 2004.
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 ($188.6 million at December 31, 2003). 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 and mature on August 1,
2010.
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 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.
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 $221.6 million during the year ended December 31,
2003, as compared to $145.4 million in the prior period. Dividends received from
27
investments in joint ventures increased investing cash flows by $8.5 million in
the 2003 period, while earnout payments offset by net proceeds received from the
sale of a plant, reduced investing 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.
Net capital expenditures were $230.1 million and $159.0 million in 2003 and
2002, respectively. Capital expenditures in 2003 included significant
investments to support major product launches. The Company has commitments for
capital expenditures of approximately $125 million as of December 31, 2003. The
Company estimates its 2004 gross and net (of leasing activities) capital
expenditures will be approximately $240 million and $195 million, respectively.
Where appropriate, the Company leases rather than purchases certain equipment
utilized in its operations under operating lease agreements, which has the
effect of reducing cash outflows for capital spending. If certain equipment had
been purchased instead of leased, capital expenditures would have been $262.9
million and $187.2 million in 2003 and 2002, 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 $54 million to
$79 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 $184.0 million and $6.4
million for the year ended December 31, 2003 and 2002, respectively. Net
increased borrowings were $183.4 million for the 2003 period primarily
representing the incremental debt as of December 31, 2003 relating to the
Company's June 2003 senior note offering in anticipation of refunding of the
$200 million convertible subordinated notes by August 1, 2004. Proceeds from the
issuance of stock of $225.7 million were offset by net repayments of debt of
$159.4 million for the comparable 2002 period. Also offsetting proceeds from the
issuance of stock in the 2002 period were payments for the repurchase of common
shares of $59.9 million.
The Company has a significant amount of new product launch activity that
consumed a significant amount of cash resources in 2003 and will continue into
2004 (approximately $40 million of launch related costs in each period). The
current launch activity is challenging for the Company, however, the launch
status is on-track and the Company anticipates that it will achieve its
customer's requirements on schedule. The Company is subject to unforeseen launch
costs and execution risk that could utilize additional cash resources beyond
those planned in 2004, however, the Company's new management team is dedicated
to driving operational execution and quality performance and will monitor and
update the Company's performance as necessary.
WORKING CAPITAL
The Company maintained significant negative levels of working capital of
$377.3 million and $305.5 million as of December 31, 2003 and 2002,
respectively, as a result of its continuing focus on minimizing the cash flow
cycle. The $71.8 million net decrease in working capital in 2003 was due to the
combined effects of a $3.1 million decrease in inventory, a $9.3 million
decrease in prepaid tooling and other current assets, a $179.1 million increase
in current maturities primarily due to the reclassification of the $200 million
Convertible Subordinated Notes to current maturities, and a $103.8 million net
increase in accounts payable and accrued liabilities at December 31, 2003,
offset by a $147.2 million increase in cash attributable to net proceeds of
approximately $244 million related to the senior note offering completed in June
2003 and a $76.3 million timing-related increase in accounts receivable. The
Company's management of its accounts receivable includes participation in
specific receivable programs with key customers that allow for accelerated
collection of receivables, subject to interest charges ranging from 4.3 percent
to 6.0 percent at an annualized rate. The Company expects to continue its focus
on maintaining a large negative working capital position through the efforts
discussed above and continued focus on minimizing the length of the cash flow
cycle.
The Company believes that funds generated by operations, together with cash
on hand and available borrowing capacity under its credit agreement, should
provide sufficient liquidity and capital resources to
28
pursue its business strategy for the foreseeable future, with respect to working
capital, capital expenditures, and other operating needs. The Company
anticipates that it will meet its liquidity requirements through the prudent use
of its cash resources, effective management of operating working capital and
capital expenditures and also employing other potential financing and strategic
alternatives, as required. Certain assumptions underlie this belief, including
among others, that there will be no material adverse developments in the
Company's business, the automotive market in general, or the Company's
anticipated activities and costs associated with its new program launches
scheduled for the next twelve months.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company's contractual obligations and commercial commitments as of
December 31, 2003 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............... $1,152,794 $ 91,935 $310,754 $ 4,492 $745,613
Convertible Subordinated
Notes...................... 199,984 199,984 -- -- --
Capital lease obligations.... 50,460 7,662 21,360 6,696 14,742
Operating leases............. 495,363 79,039 209,767 106,390 100,167
---------- -------- -------- -------- --------
Total contractual obligations
at December 31, 2003....... $1,898,601 $378,620 $541,881 $117,578 $860,522
========== ======== ======== ======== ========
- 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 less than one year period above.
- Other anticipated 2004 contractual obligations (future amounts beyond 2004 are
not readily determinable):
1. cash interest payments of approximately $120 million,
2. pension funding contributions of approximately $38 million,
3. other post-retirement benefit payments of approximately $25 million and
4. purchase obligations of approximately $315 million. The Company's
significant purchase obligations consist primarily of inventory, tooling
and capital expenditures. The Company's purchase orders for inventory
are "requirements" based which do not require the Company to purchase
minimum quantities. As of December 31, 2003, the Company was obligated
under executory purchase orders for $190 million of tooling and $125
million of capital expenditures.
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 $600
million Credit Agreement of which $114.7 million was outstanding as of December
31, 2003.
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.
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
29
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 January 1, 2002................... $ 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
Utilization................................ (0.4) -- (3.0)
Revision of estimate....................... (2.1) -- (0.2)
----- ----- -----
Balance at December 31, 2003................. $ 2.0 $ -- $ 2.9
===== ===== =====
As of December 31, 2003, 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 the buildings. The revision of
estimate for the remaining facility shutdown costs resulted from an analysis of
future costs to be incurred. The $2.1 million was recorded as an adjustment to
goodwill. The Company's acquisition reserves have been utilized as originally
intended, and management believes the liabilities recorded for shutdown and
consolidation activities are adequate as of December 31, 2003.
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.
At December 31, 2003, Tower Automotive had total debt and obligations under
capital leases of $1,403.2 million. This debt comprises fixed rate debt of
$1,058.3 million and floating rate debt of
30
$344.9 million. The pre-tax earnings and cash flow impact in 2004 resulting from
a one percentage point increase in interest rates on the Company's variable rate
debt would be approximately $3.4 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 the second quarter
of 2002, the Company completed its formal valuation procedures upon adoption of
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, 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. The Company annually assesses its goodwill
for realizability. As of December 31, 2003, that assessment indicated there was
no impairment.
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.
Deferred Income Taxes -- The Company has total net deferred tax assets of
$167.1 million as of December 31, 2003 compared to $126.3 million as of December
31, 2002, which are inclusive of deferred tax valuation allowances of $60.1
million and $48.2 million as of December 31, 2003 and 2002 respectively. The
Company is required to estimate whether recoverability of its deferred tax asset
is more likely than not based on forecasts of taxable earnings in each tax
jurisdiction. As disclosed in Note 9, a large portion of the Company's deferred
tax assets are comprised of net operating loss carryforwards and tax credits.
The Company uses historical and projected future operating results, including a
review of the eligible carryforward period, tax planning opportunities and other
relevant considerations in determining recoverability. Key factors that could
effect the determination of the need for a deferred tax valuation allowance
include tax law changes and variances to future projected profitability. The
Company assesses its deferred tax asset for realizability on a quarterly basis.
31
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. Favorable adjustments to the Company's loss contract
reserves of approximately $7.0 million during the year ended December 31, 2002
was recorded 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.
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 $17.5 million and $13.8 million for 2003 and
2002, respectively. The Company recorded other post-retirement benefit costs
(excluding curtailment loss) of $12.5 million and $10.5 million for 2003 and
2002, 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 5.95 percent and 6.75 percent as of the
Company's September 30 measurement date in 2003 and 2002, 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 80 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 as of December 31, 2003 and 2002, 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 expects its 2004 pension benefit expense (excluding curtailment
charge reversal) to be approximately $22 million and its 2004 other
post-retirement benefit expense (excluding curtailment charge reversal) to
approximate $13 million. If the assumption of the discount rate for 2004 were 75
basis points lower, the 2004 pension benefit expense and 2004 other
post-retirement benefit expense would be increased by $1.8 million and $0.1
million, respectively. If the assumption of the expected rate of return on
32
pension plan assets for 2004 were 100 basis points lower, the 2004 pension
benefit expense would be increased by $1.3 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (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 became effective for
the Company on January 1, 2003. Upon adoption, there was no material impact on
the Company's results of operations or financial condition.
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 is effective for exit or disposal activities
that are initiated after December 31, 2002.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires that certain financial instruments previously accounted for as equity
under previous guidance be classified as liabilities in statements of financial
position. Such financial instruments include (i) mandatorily redeemable shares
that the issuer is obligated to buy back in exchange for cash or other assets,
(ii) instruments, including put options and forward purchase contracts, that
require the issuer to buy back some of its shares in exchange for cash or other
assets and (iii) obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuer's shares. SFAS No. 150
became effective for all financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 on July 1,
2003, did not have a material impact on the Company's results of operations or
financial condition.
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 currently does not have any
guarantees requiring disclosure or measurement under FIN 45.
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. In December 2003,
the FASB issued FIN 46(R), Consolidation of Variable Interest Entities, which
represents a revision to FIN 46. The provisions of FIN 46(R) are effective for
interests in variable interest entities as of the first interim, or annual,
period ending after March 15, 2004, except for variable interest entities
considered special purposes entities or for those variable interest entities
that had already applied FIN 46 in a previous period. FIN 46(R) requires that
both the primary beneficiary and all other enterprises with a significant
variable interest make additional disclosure in filings. An enterprise shall
consolidate a variable interest entity if that enterprise is the primary
beneficiary. An enterprise is considered the primary beneficiary if it has a
variable interest that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both. The
Company elected to adopt the provisions of FIN 46 early (July 1, 2003) as it
relates to the securities issued by the Tower Automotive Capital Trust. The
Company determined that, under FIN 46, the trust which issued its mandatorily
redeemable convertible preferred securities will no longer be consolidated by
the Company. Beginning in the quarter ended September 30, 2003, the Company
modified its presentation of the
33
securities by recording an amount due to the trust of $258.8 million as debt,
and recording interest expense on the related obligation (previously recorded as
minority interest, net of tax). During the fourth quarter of 2003, the Company
adopted FIN 46(R) and consolidated the variable interest entity related to its
Lansing, Michigan building and equipment leasing arrangement and therefore
recorded property, plant and equipment of $25.7 million and related indebtedness
of $25.7 million as of December 31, 2003. Pursuant to the transition guidance in
FIN 46, the Company has elected to adopt FIN 46 on a prospective basis. As a
result, prior periods have not been reclassified to the new presentation for
both variable interest entities. The Company does not anticipate any further
impact related to FIN 46.
In December 2003, the FASB issued SFAS No. 132(R), as revision to SFAS No.
132, Employers' Disclosure about Pensions and Other Postretirement Benefits.
SFAS No. 132(R) does not change the measurement or recognition related to
pension and other postretirement plans required by SFAS No. 87, Employers'
Accounting for Pensions, SFAS No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions and retains the disclosure requirements contained in SFAS No. 132. SFAS
No. 132(R) requires additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and other
defined postretirement plans. SFAS No. 132(R) is effective for financial
statements for fiscal years ending after December 15, 2003, with the exception
of disclosures related to foreign plans and estimated future benefit payments
which are effective for fiscal years ending after June 15, 2004. The Company has
included the required disclosures in Note 11 to its consolidated financial
statements. The adoption of SFAS No. 132(R) did not impact the Company's
consolidated balance sheet or results of operations.
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 35 percent
and 19 percent, respectively, of the Company's revenues in 2003. 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).
In February 2004, the Company announced that a decision had been finalized
by DaimlerChrysler to move the current production of the frame assembly for the
Dodge Ram light truck from the Company's Milwaukee, WI facility to the Company's
40% owned joint venture partner, Metalsa located in Monterrey, Mexico. The
current Dodge Ram frame program produced in the Milwaukee facility was expected
to run through 2009. The production move to Mexico is planned for mid-2005. The
move was dictated by DaimlerChrysler economic pricing requirements given the
lower cost structure in Mexico. The Company is in the process of determining the
expected net economic impact of DaimlerChrysler's decision to move the Dodge Ram
frame line on its future consolidated results for 2005 and beyond.
In 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.
34
The Company has mitigated the loss of revenue anticipated when the current
Dodge Ram and Ford Explorer programs cease by winning approximately $1.4 billion
in new business, which is expected to launch 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.
- INCREASING RAW MATERIALS COSTS MAY ADVERSELY AFFECT OUR PROFITABILITY
The primary raw material used to produce the majority of the Company's
products is steel. A substantial portion of the steel used for domestic-based
vehicle programs is purchased from OEM customers at pre-arranged prices that we
are able to pass through to such customers. In connection with
international-based vehicle programs, the Company purchases steel directly at
fluctuating market prices, and, in some cases, the Company may be unable to pass
through any price increases to its customers. Other raw materials purchased by
the Company include dies, fasteners, tubing, springs, rivets, and rubber
products. It is also generally difficult to pass increased prices for these raw
materials to customers in the form of price increases. Therefore, a significant
increase in the costs of these items, as well as for steel purchased in the open
market, could materially increase the Company's operating costs and have a
material adverse effect on profit margins.
- THE COMPANY'S CASH FLOWS AND EARNINGS MAY BE NEGATIVELY IMPACTED BY ITS
SIGNIFICANT LAUNCH ACTIVITIES IN 2004
The Company has a significant amount of new product launch activity that
consumed a significant amount of cash resources in 2003 and will continue into
2004 (approximately $40 million of launch related costs in each period). The
current launch activity is challenging for the Company; however, the launch
status is on-track and the Company anticipates that it will achieve its
customer's requirements on schedule. The Company is subject to unforeseen launch
costs and execution risk that could utilize additional cash resources beyond
those planned in 2004; however, the Company's new management team is dedicated
to driving operational execution and quality performance and will monitor and
update the Company's performance as necessary.
- 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.
35
- 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 4,500 of the Company's colleagues are unionized
(representing approximately 38 percent of its colleagues as of December 31,
2003). 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
36
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", "project", "plan" 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
37
Company is leveraged and the ability to generate sufficient cash flow from
operations to meet future liquidity needs; (ii) the Company's reliance on major
customers and selected vehicle platforms; (iii) the cyclicality and seasonality
of the automotive market; (iv) the failure to realize the benefits of recent
acquisitions and joint ventures; (v) the Company's ability to obtain new
business on new and redesigned models; (vi) the Company's ability to achieve the
anticipated volume of production from new and planned supply programs; (vii) the
general economic or business conditions affecting the automotive industry (which
is dependent on consumer spending), either nationally or regionally, being less
favorable than expected; (viii) the Company's failure to develop or successfully
introduce new products; (ix) increased competition in the automotive components
supply market; (x) unforeseen problems associated with international sales,
including gains and losses from foreign currency exchange; (xi) implementation
of or changes in the laws, regulations or policies governing the automotive
industry that could negatively affect the automotive components supply industry;
(xii) changes in general economic conditions in the United States and Europe;
and (xiii) various other factors beyond the Company's control. 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.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report for the years ended December
31, 2003 and 2002......................................... 40
Report of Independent Public Accountants for the year ended
December 31, 2001......................................... 41
Consolidated Balance Sheets as of December 31, 2003 and
2002...................................................... 42
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.......................... 43
Consolidated Statements of Stockholders' Investment for the
years ended December 31, 2003, 2002 and 2001.............. 44
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.......................... 45
Notes to Consolidated Financial Statements.................. 46
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Tower Automotive, Inc.
We have audited the accompanying consolidated balance sheets of Tower
Automotive, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
December 31, 2003 and 2002 and the related consolidated statements of
operations, stockholders' investment, and cash flows for the years 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 audits. The financial statements of the
Company for the year 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 audits 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 audits provide 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, 2003 and 2002 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Notes 2 and 8 to the financial statements, the Company
changed its method of accounting for certain variable interest entities to
conform to Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" in 2003. As discussed in Note 2 to
the consolidated financial statements, the Company changed its method of
accounting for goodwill in 2002.
As discussed above, the consolidated financial statements of Tower
Automotive, Inc. and Subsidiaries for the year ended December 31, 2001 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 (SFAS) 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 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 SFAS 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 in Note 2 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 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 financial statements taken as a whole.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 4, 2004
40
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 in the year ended December 31, 2001 was not
reviewed by Andersen and includes:
(i) reclassifications to conform to our fiscal 2003 and 2002 financial statement
presentation and
(ii) additional disclosure to conform with new accounting pronouncements and SEC
rules and regulations issued during subsequent fiscal years.
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
41
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 160,899 $ 13,699
Accounts receivable....................................... 325,599 249,341
Inventories............................................... 130,004 133,074
Deferred income taxes, net................................ 20,116 20,634
Prepaid tooling and other................................. 91,662 100,433
---------- ----------
Total current assets................................. 728,280 517,181
---------- ----------
Property, Plant and Equipment, net.......................... 1,055,873 1,073,619
Investments in Joint Ventures............................... 248,133 260,898
Deferred Income Taxes, net.................................. 146,944 105,699
Goodwill.................................................... 498,663 472,967
Other Assets, net........................................... 168,516 127,521
---------- ----------
$2,846,409 $2,557,885
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 99,597 $ 120,470
Convertible Subordinated Notes............................ 199,984 --
Accounts payable.......................................... 556,036 417,727
Accrued liabilities....................................... 249,984 284,450
---------- ----------
Total current liabilities............................ 1,105,601 822,647
---------- ----------
Long-Term Debt, net of current maturities................... 1,060,859 535,220
Obligations Under Capital Leases, net of current
maturities................................................ 42,798 29,731
Convertible Subordinated Notes.............................. -- 199,984
Other Noncurrent Liabilities................................ 223,641 199,477
---------- ----------
Total noncurrent liabilities......................... 1,327,298 964,412
---------- ----------
Commitments and Contingencies (Notes 6 and 12)
Mandatorily Redeemable Trust Convertible Preferred
Securities................................................ -- 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; 66,133,731 issued and 57,341,805
outstanding in 2003; 65,878,655 issued and 56,050,855
outstanding in 2002.................................... 661 659
Additional paid-in capital................................ 680,608 683,072
Retained deficit.......................................... (181,849) (57,174)
Deferred compensation plans............................... (9,609) (10,746)
Accumulated other comprehensive loss...................... (22,751) (43,875)
Treasury stock, at cost: 8,791,926 shares in 2003 and
9,827,800 shares in 2002............................... (53,550) (59,860)
---------- ----------
Total stockholders' investment....................... 413,510 512,076
---------- ----------
$2,846,409 $2,557,885
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
42
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................. $2,815,749 $2,754,464 $2,467,433
Cost of sales............................................ 2,560,689 2,456,380 2,190,248
---------- ---------- ----------
Gross profit........................................... 255,060 298,084 277,185
Selling, general and administrative expenses............. 155,500 143,822 139,203
Amortization expense..................................... -- -- 24,804
Restructuring and asset impairment charges, net.......... 157,532 61,125 383,739
---------- ---------- ----------
Operating income (loss)................................ (57,972) 93,137 (270,561)
Interest expense......................................... 95,222 72,555 80,319
Interest income.......................................... (2,475) (2,288) (6,554)
Other expense, net....................................... -- 1,052 --
---------- ---------- ----------
Income (loss) before provision for income taxes, equity
in earnings of joint ventures, minority interest,
and cumulative effect of accounting change.......... (150,719) 21,818 (344,326)
Provision (benefit) for income taxes..................... (50,811) 7,636 (73,312)
---------- ---------- ----------
Income (loss) before equity in earnings of joint
ventures, minority interest, and cumulative effect
of accounting change................................ (99,908) 14,182 (271,014)
Write-down of joint venture investment to market value,
net of tax............................................. (27,436) -- --
Equity in earnings of joint ventures, net of tax......... 13,298 16,822 17,250
Minority interest, net of tax............................ (10,629) (15,824) (13,760)
---------- ---------- ----------
Income (loss) before cumulative effect of accounting
change.............................................. (124,675) 15,180 (267,524)
Cumulative effect of change in accounting principle, net
of tax................................................. -- (112,786) --
---------- ---------- ----------
Net loss............................................ $ (124,675) $ (97,606) $ (267,524)
========== ========== ==========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of accounting
change.............................................. $ (2.20) $ 0.26 $ (5.87)
Cumulative effect of change in accounting principle.... -- (1.96) --
---------- ---------- ----------
Net loss............................................ $ (2.20) $ (1.70) $ (5.87)
========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of accounting
change.............................................. $ (2.20) $ 0.26 $ (5.87)
Cumulative effect of change in accounting principle.... -- (1.96) --
---------- ---------- ----------
Net loss............................................ $ (2.20) $ (1.70) $ (5.87)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
43
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
COMMON STOCK ADDITIONAL RETAINED DEFERRED
------------------- PAID-IN EARNINGS COMPENSATION
SHARES AMOUNT CAPITAL (DEFICIT) PLANS
---------- ------ ---------- --------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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)
Sales of stock under Employee Stock
Discount Purchase Plan........... 252,156 2 650 -- --
Deferred Income Stock Plan
deferrals........................ -- -- 3,395 -- (3,395)
Deferred Income Stock Plan
forfeitures...................... -- -- (199) -- 199
Deferred Income Stock Plan
distributions.................... -- -- -- -- 2,999
Deferred Income Stock Plan
funding.......................... -- -- (6,310) -- --
Restricted stock grants earned and
forfeited........................ -- -- -- -- 1,316
Restricted stock grant
distributions.................... 2,920 -- -- -- 18
Net loss........................... -- -- -- (124,675) --
Other comprehensive income (loss):
Foreign currency translation
adjustment..................... -- -- -- -- --
Unrealized gain on qualifying
cash flow hedges............... -- -- -- -- --
Minimum pension liability........ -- -- -- -- --
Total comprehensive loss...........
---------- ---- -------- --------- --------
BALANCE, DECEMBER 31, 2003......... 66,133,731 $661 $680,608 $(181,849) $ (9,609)
========== ==== ======== ========= ========
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY STOCK TOTAL
INCOME --------------------- STOCKHOLDERS'
(LOSS) SHARES AMOUNT INVESTMENT
------------- ---------- -------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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
Sales of stock under Employee Stock
Discount Purchase Plan........... -- -- -- 652
Deferred Income Stock Plan
deferrals........................ -- -- -- --
Deferred Income Stock Plan
forfeitures...................... -- -- -- --
Deferred Income Stock Plan
distributions.................... -- -- -- 2,999
Deferred Income Stock Plan
funding.......................... -- 1,035,874 6,310 --
Restricted stock grants earned and
forfeited........................ -- -- -- 1,316
Restricted stock grant
distributions.................... -- -- -- 18
Net loss........................... -- -- --
Other comprehensive income (loss):
Foreign currency translation
adjustment..................... 28,609 -- --
Unrealized gain on qualifying
cash flow hedges............... 4,586 -- --
Minimum pension liability........ (12,071) -- --
Total comprehensive loss........... (103,551)
-------- ---------- -------- ---------
BALANCE, DECEMBER 31, 2003......... $(22,751) (8,791,926) $(53,550) $ 413,510
======== ========== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
44
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss............................................ $ (124,675) $ (97,606) $ (267,524)
Adjustments required to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle, net................................. -- 112,786 --
Restructuring and asset impairment charge, net... 155,750 61,125 383,739
Customer recovery related to program
cancellation................................... 15,600 -- --
Depreciation and amortization.................... 151,198 136,698 159,893
Deferred income tax expense (benefit)............ (36,027) 2,107 (80,758)
Gain on sale of plant............................ -- (3,839) --
Write-down of joint venture investment to market
value.......................................... 27,436 -- --
Equity in earnings of joint ventures, net........ (13,298) (16,822) (17,250)
Change in other operating items:
Accounts receivable............................ (76,258) (33,638) 74,515
Inventories.................................... 3,070 (20,538) 21,415
Prepaid tooling and other...................... 8,771 (36,486) 129,339
Accounts payable and accrued liabilities....... 102,277 83,314 148,802
Other assets and liabilities................... (29,046) (56,149) (38,356)
----------- ----------- -----------
Net cash provided by operating activities...... 184,798 130,952 513,815
----------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net........................... (230,126) (158,964) (193,955)
Acquisitions, net of cash acquired, including joint
venture interests, earnout payments and dividends
received......................................... 8,503 (40,802) (5,418)
Net proceeds from divestitures...................... -- 4,004 --
Proceeds from sale of fixed assets.................. -- 50,313 --
----------- ----------- -----------
Net cash used for investing activities...... (221,623) (145,449) (199,373)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings............................ 1,664,567 2,038,037 2,308,821
Repayments of debt.................................. (1,481,212) (2,197,449) (2,643,860)
Net proceeds from issuance of common stock.......... 670 225,701 38,991
Payments for repurchase of common stock............. -- (59,860) --
----------- ----------- -----------
Net cash provided by (used for) financing
activities................................ 184,025 6,429 (296,048)
----------- ----------- -----------
Net Change in Cash and Cash Equivalents............... 147,200 (8,068) 18,394
Cash and Cash Equivalents, beginning of year.......... 13,699 21,767 3,373
----------- ----------- -----------
Cash and Cash Equivalents, end of year................ $ 160,899 $ 13,699 $ 21,767
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized........ $ 87,660 $ 66,095 $ 79,099
=========== =========== ===========
Income taxes refunded............................ $ (12) $ (19,820) $ (12,853)
=========== =========== ===========
NON CASH FINANCING ACTIVITIES:
Notes payable converted to common stock............. $ -- $ -- $ 828
=========== =========== ===========
Deferred Income Stock Plan.......................... $ 3,395 $ 1,387 $ 1,279
=========== =========== ===========
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.
45
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, such that the amount
received from the funding agent is treated as an advance and recorded in accrued
liabilities in the consolidated balance sheet.
During December 2003, the Company sold approximately $83.9 million of net
accounts receivable, retaining a subordinated interest in all of the
receivables. The receivables sold represented amounts owed to the Company from
customers as of November 30, 2003. The majority of such receivables were
collected in December 2003 and as a result, the Company's retained interest in
accounts receivable is not significant as of December 31, 2003 and is not
presented separately from accounts receivable. As of December 31, 2003, the
Company has not received collections from customers that are required to be
remitted to the funding agent, and as a result, there are no amounts due to the
funding agent as of December 31, 2003. Settlement of any amounts due to the
funding agent, as well as the cost of funding at a rate of approximately 2.42
percent, occurs during the month subsequent to the sale of the receivables.
46
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,
-------------------
2003 2002
-------- --------
Raw materials............................................. $ 56,100 $ 64,777
Work-in-process........................................... 23,288 20,630
Finished goods............................................ 50,616 47,667
-------- --------
$130,004 $133,074
======== ========
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,
-------------------
2003 2002
-------- --------
Reimbursable pre-production design and development costs.... $ 12,959 $ 9,771
Customer-owned tooling...................................... 79,796 56,449
Supplier-owned tooling...................................... 43,073 48,253
-------- --------
Total..................................................... $135,828 $114,473
======== ========
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.
47
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,
-----------------------
2003 2002
---------- ----------
Land........................................................ $ 4,913 $ 4,175
Buildings and improvements.................................. 277,050 293,281
Machinery and equipment..................................... 1,209,178 1,242,264
Construction in progress.................................... 167,157 122,072
---------- ----------
1,658,298 1,661,792
Less-accumulated depreciation............................... (602,425) (588,173)
---------- ----------
Property, plant and equipment, net........................ $1,055,873 $1,073,619
========== ==========
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
Interest is capitalized during the construction of major facilities and is
amortized over their estimated useful lives. Interest of $9.1 million, $6.0
million and $14.6 million was capitalized in 2003, 2002 and 2001, respectively.
Maintenance and repairs are charged to expense as incurred. Significant
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 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
48
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 statement 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. The Company
performed its annual goodwill impairment tests of as December 31, 2002 and 2003
utilizing the same valuation techniques as applied during the original adoption
under SFAS No. 142 which did not provide indications of goodwill impairment
relating to the United States/Canada and Europe reporting units given the excess
fair value over carrying value for these reporting units.
Under the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill on January 1, 2002. The following table presents a
reconciliation of net loss and loss per share adjusted for the exclusion of
goodwill amortization, net of tax for the 2001 reporting period (in thousands,
except per share amounts):
2001
---------
Reported net loss........................................... $(267,524)
Add: Goodwill amortization, net of tax...................... 12,859
---------
Adjusted net loss........................................... $(254,665)
=========
Reported basic loss per common share........................ $ (5.87)
Add: Goodwill amortization, net of tax...................... 0.28
---------
Adjusted basic loss per common share........................ $ (5.59)
=========
Reported diluted loss per common share...................... $ (5.87)
Add: Goodwill amortization, net of tax...................... 0.28
---------
Adjusted diluted loss per common share...................... $ (5.59)
=========
The change in the carrying amount of goodwill for the years ended December
31, 2003 and 2002, by operating segment, is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ---------
Balance at January 1, 2002...................... $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
Adjustment of goodwill.......................... (2,122) -- (2,122)
Currency translation adjustment................. 1,937 25,881 27,818
-------- --------- ---------
Balance at December 31, 2003.................... $336,468 $ 162,195 $ 498,663
======== ========= =========
During 2003, the Company reduced goodwill due to the revision of purchase
accounting reserves related to shut down cost estimates.
49
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS:
Other assets consist primarily of intangible pension asset, prepaid rent
expense, non-current tooling assets and debt issuance costs. All costs are
amortized over the term of the related obligations.
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 $198.0
million and $155.2 million, respectively, as of December 31, 2003 and $178.6
million and $102.8 million as of December 31, 2002.
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, 2003, this is the only swap contract the
Company has outstanding. The fair value of the interest rate swap agreement at
December 31, 2003 and 2002 was a liability of $13.4 million and $20.4 million,
respectively, representing the cost that would be
50
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred to terminate the agreement. This swap contract has been designated as a
cash flow hedge and there were no gains or losses recorded due to 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 2004, $9.3 million of the amount recorded in accumulated other
comprehensive loss is expected to be reclassified to interest expense.
OTHER NONCURRENT LIABILITIES:
Other noncurrent liabilities consisted of the following (in thousands):
DECEMBER 31,
-------------------
2003 2002
-------- --------
Post-retirement benefits.................................... $ 61,348 $ 71,254
Purchase accounting reserves................................ 13,534 19,885
Pension liability........................................... 78,565 60,276
Minority interest........................................... 22,090 16,945
Customer prepayments on capital............................. 20,362 13,221
Other....................................................... 27,742 17,896
-------- --------
$223,641 $199,477
======== ========
REVENUE RECOGNITION AND SALES COMMITMENTS:
The Company recognizes revenue as its products are shipped to its customers
at which time title passes. 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 variable 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. On a quarterly basis, the
Company reviews whether the recoverability of its deferred tax asset is more
likely than not based on forecasts of taxable earnings in each tax jurisdiction.
As disclosed in Note 9, a large portion of the Company's deferred tax assets are
comprised of net operating loss carryforwards and tax credits. The Company uses
historical and projected future operating results, including a review of the
eligible carryforward period, tax planning opportunities and other relevant
considerations in determining recoverability.
51
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, Disclosures about Segments of an
Enterprise and Related Information, the Company uses the "management approach"
to reporting segment disclosures. The management approach designates the
internal organization that is used by 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-BASED COMPENSATION:
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 colleagues 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.
The Company has three stock option plans: the 1994 Key Employee Stock
Option Plan, the Long Term Incentive Plan, and the Independent Director Stock
Option Plan and three stock purchase plans: the Employee Stock Purchase Plan,
the Key Leadership Deferred Income Stock Purchase Plan and the Director Deferred
Income Stock Purchase 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 loss and
pro forma loss per share would have been as follows (in thousands, except per
share data):
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Net loss
As Reported..................................... $(124,675) $ (97,606) $(267,524)
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects.................................. 793 1,225 --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects...................................... (4,126) (6,543) (3,872)
--------- --------- ---------
Pro Forma....................................... $(128,008) $(102,924) $(271,396)
========= ========= =========
52
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Basic loss per share
As Reported..................................... $ (2.20) $ (1.70) $ (5.87)
Pro Forma....................................... (2.26) (1.80) (5.95)
Diluted loss per share
As Reported..................................... $ (2.20) $ (1.70) $ (5.87)
Pro Forma....................................... (2.26) (1.80) (5.95)
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 2.91 percent in 2003, 5.02 percent in
2002, and 4.88 percent in 2001; expected life of seven years for 2003, 2002, and
2001; expected volatility of 58 percent in 2003 and 2002, and 52 percent in
2001; 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 of America 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 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 April 2002, the Financial Accounting Standards Board (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 became effective for
the Company on January 1, 2003. Upon adoption, there was no material impact on
the Company's results of operations or financial condition.
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 is effective for exit or disposal activities
that are initiated after December 31, 2002.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires that certain financial instruments previously accounted for as equity
under previous guidance be classified as liabilities in statements of financial
position. Such financial instruments include (i) mandatorily redeemable shares
that the issuer is
53
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligated to buy back in exchange for cash or other assets, (ii) instruments,
including put options and forward purchase contracts, that require the issuer to
buy back some of its shares in exchange for cash or other assets and (iii)
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuer's shares. SFAS No. 150 became
effective for all financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 on July 1, 2003, did
not have a material impact on the Company's results of operations or financial
condition.
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 currently does not have any
guarantees requiring disclosure or measurement under FIN 45.
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. In December 2003,
the FASB issued FIN 46(R), "Consolidation of Variable Interest Entities," which
represents a revision to FIN 46. The provisions of FIN 46(R) are effective for
interests in variable interest entities as of the first interim, or annual,
period ending after March 15, 2004, except for variable interest entities
considered special purposes entities or for those variable interest entities
that had already applied FIN 46 in a previous period. FIN 46(R) requires that
both the primary beneficiary and all other enterprises with a significant
variable interest make additional disclosure in filings. An enterprise shall
consolidate a variable interest entity if that enterprise is the primary
beneficiary. An enterprise is considered the primary beneficiary if it has a
variable interest that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both. The
Company elected to adopt the provisions of FIN 46 early (July 1, 2003) as it
relates to the securities issued by the Tower Automotive Capital Trust (see Note
8). The Company determined that, under FIN 46, the trust which issued its
mandatorily redeemable convertible preferred securities will no longer be
consolidated by the Company. Beginning in the quarter ended September 30, 2003,
the Company modified its presentation of the securities by recording an amount
due to the trust of $258.8 million as debt, and recording interest expense on
the related obligation (previously recorded as minority interest, net of tax).
During the fourth quarter of 2003, the Company adopted FIN 46(R) and
consolidated the variable interest entity related to its Lansing, Michigan
building and equipment leasing arrangement and therefore recorded property,
plant and equipment of $25.7 million and related indebtedness of $25.7 million
as of December 31, 2003. Pursuant to the transition guidance in FIN 46, the
Company has elected to adopt FIN 46 on a prospective basis. As a result, prior
periods have not been reclassified to the new presentation for both variable
interest entities. The Company does not anticipate any further impact related to
FIN 46.
In December 2003, the FASB issued SFAS No. 132(R), as revision to SFAS No.
132, Employers' Disclosure about Pensions and Other Postretirement Benefits.
SFAS No. 132(R) does not change the measurement or recognition related to
pension and other postretirement plans required by SFAS No. 87, Employers'
Accounting for Pensions, SFAS No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions and retains the disclosure requirements contained in SFAS No. 132. SFAS
No. 132(R) requires additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and other
defined postretirement plans. SFAS No. 132(R) is effective for financial
statements with fiscal years
54
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ending after December 15, 2003, with the exception of disclosures related to
foreign plans and estimated future benefit payments which are effective for
fiscal years ending after June 15, 2004 (see Note 11). Upon adoption, there was
no impact on the Company's results of operations or financial condition.
3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES:
MILWAUKEE RANGER AND NORTH AMERICA/CORPORATE OFFICE CONSOLIDATION ACTIVITIES
(2003 PLAN):
The Company announced in October 2003 plans to consolidate its Novi,
Michigan North America oversight and Grand Rapids, Michigan corporate office
activities and close its Rochester Hills, Michigan prototype tooling and
technical center facility. Qualifying exit costs (in accordance with SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities") relating
to these activities were recognized by the Company in the fourth quarter of 2003
totaling $3.7 million, comprised of cash charges of $2.1 million and non-cash
asset impairment charges of $1.6 million. These costs incurred to date as well
as any additional costs expected to be incurred relating to these activities are
within the United States/ Canada reportable unit. The Company does not
anticipate any significant additional expenses related to this restructuring
activity.
On May 27, 2003, the Company announced that it would transfer the
production of high-volume frame assemblies for the Ford Ranger from its
Milwaukee facility to its Bellevue, Ohio facility. During 2003, the Company
recorded $25.0 million pre-tax restructuring and asset impairment charges
relating to this event. These charges reflect estimated qualifying "exit costs"
comprising cash charges of $6.1 million, pension and other post-retirement
benefit plan curtailment costs of $6.3 million and non-cash asset impairment
charges of $12.6 million, all within the United States/Canada reportable unit.
These charges did not cover certain aspects of the 2003 Plan, including movement
of equipment and colleague relocation and training, which are recognized in
future periods as incurred. On December 5, 2003, the Company announced that it
had decided not to proceed with the relocation of the Ford Ranger line based on
revised economic factors from the original May 2003 decision principally due to
concessions received from the Milwaukee labor unions and a need for management
to focus on its 2004 new product launch schedule. Because the Company's
measurement date for pension and post-retirement benefits is September 30, the
decision to continue Ranger frame production in Milwaukee made in December 2003
will result in a reversal of the curtailment loss on a three-month lag (first
quarter of 2004). The remaining charges related to the original decision to move
the Ranger frame production will not be reversed.
The accrual for the 2003 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2003. The table below
summarizes the accrued operational realignment and other charges related to the
2003 Plan through December 31, 2003 (in millions):
SEVERANCE AND
ASSET IMPAIRMENT OUTPLACEMENT OTHER EXIT
COSTS COSTS COSTS TOTAL
---------------- ------------- ---------- ------
Provision............................. $ 14.2 $ 4.9 $ 9.6 $ 28.7
Cash usage............................ -- (2.9) (3.3) (6.2)
Non-cash charges...................... (14.2) -- (6.3) (20.5)
------ ----- ----- ------
Balance at December 31, 2003.......... $ -- $ 2.0 $ -- $ 2.0
====== ===== ===== ======
During 2003, the Company charged $6.3 million of other exit costs from the
2003 Plan restructuring reserves for expected curtailment cost against the
pension and post-retirement benefit liability accrual. As described above, these
curtailment charges will be reversed in the first quarter of 2004. The Company
anticipates satisfying the remaining 2003 plan restructuring reserves during the
next twelve to eighteen months.
55
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. These activities resulted in a reduction of approximately 500
colleagues.
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 were disposed of as part of the 2002
Plan were written down to their estimated residual values. For assets that were
sold currently, the Company measured impairment based on estimated proceeds on
the sale of the facilities and equipment. These asset impairments arose 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, 2003 and 2002. The
table below summarizes the accrued operational realignment and other charges
through December 31, 2003 (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
Cash usage................................ -- (1.8) (1.0) (2.8)
Revision of estimate...................... -- (0.7) -- (0.7)
------ ----- ------ ------
Balance at December 31, 2003.............. $ -- $ 1.0 $ -- $ 1.0
------ ----- ------ ------
As of December 31, 2003, the Company anticipates future cash payments of
$1.0 million under the 2002 Plan within the next twelve months. 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. The revision in estimates for the 2002 Plan
resulted from minor variances in severance and other exit costs, as compared to
the amount initially established in the 2002 Plan. Such revisions were credited
to "Restructuring and Asset Impairment Charges" in the consolidated financial
statements.
56
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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
were disposed of currently, the Company measured impairment based on estimated
proceeds on the sale of the facilities and equipment. These asset impairments
arose 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.
The accrual for the 2001 Plan is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 2003 and 2002. The
table below summarizes the accrued operational realignment and accrued other
charges related to the 2001 Plan through December 31, 2003 (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
Cash usage............................... -- (2.0) (3.5) (5.5)
Revision of estimate..................... -- 1.0 (0.3) 0.7
------- ------ ------ -------
Balance at December 31, 2003............. $ -- $ -- $ 4.5 $ 4.5
======= ====== ====== =======
57
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining other exit costs of $4.5 million as of December 31, 2003
relate to the present value of operating lease payments that the Company is
obligated to pay though 2010. 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
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
restructuring and asset impairment charges in the consolidated statement of
operations for the year ended December 31, 2002. The revision in estimates for
the 2001 Plan resulted from minor variances in the execution of the 2001 Plan
and were accounted for in a similar manner.
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 ended December 31 (in millions):
2003 2002 2001
------ ------ ------
Restructuring and related asset impairments, net........... $ 28.7 $ 75.4 $184.0
Revision of estimate....................................... -- (14.3) (5.9)
Other goodwill and asset impairments....................... 128.8 -- 205.6
------ ------ ------
Total...................................................... $157.5 $ 61.1 $383.7
====== ====== ======
NON-RESTRUCTURING ASSET IMPAIRMENTS
During 2003, the Company evaluated the current operating plans and current
and forecasted business for three of its frame assembly plants and other
facilities. In accordance with SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, the Company determined that there were indicators
of impairment present for each of the facilities based upon the potential for
new business and evaluation of pricing. Cash flow projections were prepared
which indicated that there were not sufficient cash flows projected to support
the carrying value of the long-lived assets at these facilities and they were
written down by $122.7 million to their fair value based upon discounted cash
flows. Additionally, the Company also identified assets which no longer had
sufficient cash flows to support their carrying amounts and were written down by
$6.1 million to their fair value. The asset write-offs of $128.8 million are
included in the $157.5 million restructuring and asset impairment charge in the
consolidated statement of operations for the year ended December 31, 2003. The
non-restructuring asset impairment charges recorded during 2003 are within the
United States/Canada operating segment.
The other goodwill and asset impairment charges of $205.6 million 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
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 of
$108.6 million assigned to two of its plants was impaired and was written down.
The Company also identified assets which no longer had sufficient cash flows to
support their carrying amounts and were written down by $50.7 million to fair
value, in addition to a write-down of $46.3 million related to its joint venture
investment in J.L. French.
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 $222.6 million, based on an
offering price of $13.75 per share. The Company 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 original board-approved amount.
Repurchased shares are placed in treasury until subsequently reissued for
general corporate purposes. The Company has no current plans to repurchase its
common stock.
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. None of the
potentially dilutive common shares, totaling approximately 16.6 million, 16.2
million, and 16.4 million shares were included in the calculation of earnings
per share in 2003, 2002, and 2001, respectively, because their impact was
anti-dilutive.
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss -- basic and diluted...................... $(124,675) $(97,606) $(267,524)
========= ======== =========
Weighted average number of common shares
outstanding -- basic and diluted................. 56,703 57,329 45,597
========= ======== =========
Basic loss per share............................... $ (2.20) $ (1.70) $ (5.87)
========= ======== =========
Diluted loss per share............................. $ (2.20) $ (1.70) $ (5.87)
========= ======== =========
STOCK OPTION PLANS:
The Company adopted and the stockholders 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.
59
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. As of December 31, 2003, 1,103,900 shares of common
stock were available for issuance under the Stock Option Plan. 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, January 1, 2001...... 2,020,350 $ 4.00 - 22.97 $19.00
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
Forfeited....................... (58,650) 4.00 - 22.97 20.03
----------
Outstanding, December 31, 2003.... 167,700 $ 4.00 - 22.97 $18.16 $9.07 167,700
==========
The following table summarizes information about stock options outstanding
at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER --------------------------------- ----------------------------
RANGE OF OUTSTANDING WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
EXERCISABLE AT REMAINING AVERAGE EXERCISABLE AVERAGE
OPTIONS 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE 12/31/03 EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$ 4.00 1,950 1.2 $ 4.00 1,950 $ 4.00
7.56 8,000 2.1 7.56 8,000 7.56
17.13 - 22.97 157,750 4.8 18.88 157,750 18.88
The weighted average exercise price of options exercisable at the end of
the year was $18.16 at December 31, 2003, $18.59 at December 31, 2002 and $16.59
at December 31, 2001. The weighted average remaining contractual life of
outstanding options was 4.6 years at December 31, 2003.
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 the
stockholders 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. As of December 31, 2003, 1,365,985 shares of common stock were available
for issuance under the Incentive Plan. A committee of the board of directors is
responsible for administration, participant selection, and determination of
terms and conditions of the Incentive Plan.
60
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding options granted under 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, January 1,
2001....................... 1,987,970 $ 9.13 - 26.81 $14.61
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
Granted.................... 562,900 3.16 3.16
Granted.................... 3,000 4.55 4.55
Forfeited.................. (1,234,232) 3.16 - 13.75 12.35
----------
Outstanding, December 31,
2003....................... 2,289,113 $ 3.16 - 26.81 $11.51 $6.50 1,024,239
==========
The following table summarizes information about stock options outstanding
at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER ----------------------------------- ------------------------------
RANGE OF OUTSTANDING WEIGHTED-AVERAGE NUMBER
EXERCISABLE AT REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
OPTIONS 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE 12/31/03 EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$ 3.16 - 4.55 499,450 9.4 $ 3.17 -- N/A
9.63 - 13.75 1,603,173 7.2 8.30 853,999 $12.68
15.56 65,000 6.4 15.56 48,750 15.56
26.81 121,490 5.3 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 $14.49 at December 31, 2003, $14.63 at
December 31, 2002, and $13.65 at December 31, 2001. The weighted average
remaining contractual life of outstanding options was 7.6 years at December 31,
2003. Information on shares of restricted stock granted under this Plan is set
forth below under the caption "Restricted Stock".
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. As of
December 31, 2003, 84,800 shares of common stock were available for issuance
under the Director Option Plan. The option 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
61
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, January 1, 2001... 122,000 $7.56 - 22.97 $16.64
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
and 2003..................... 100,200 $7.56 - 22.97 $17.82 $9.42 100,200
=======
The following table summarizes information about stock options outstanding
at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISABLE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
OPTIONS AT 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE 12/31/03 EXERCISE PRICE
------------ ----------- ---------------- ---------------- ----------- ----------------
$ 7.56 15,000 2.1 $ 7.56 15,000 $ 7.56
18.94-22.97 85,200 4.1 19.63 85,200 19.63
The weighted average exercise price of options exercisable at the end of
the year was $17.82 at December 31, 2003, $17.82 at December 31, 2002 and $16.31
at December 31, 2001. The weighted average remaining contractual life of
outstanding options was 3.8 years at December 31, 2003.
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, 2003, 252,156 shares of Common Stock were issued to
colleagues pursuant to this plan, 222,145 shares of Common Stock were issued
during the year ended December 31, 2002, and 172,502 shares of Common Stock were
issued during the year ended December 31, 2001. The weighted average fair value
of shares sold in 2003, 2002, and 2001 was $2.59, $6.43 and $6.64, 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 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
62
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
caption "deferred compensation plans". Under these plans, $3.4 million, $1.4
million and $1.3 million were deferred (including employer match) during the
years ended December 31, 2003, 2002 and 2001, respectively.
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 530,671
shares of its common stock under the Tower Automotive, Inc. Long Term Incentive
Plan, 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 years ended December
31, 2003 and 2002, 2,920 and 575 shares vested, respectively and 98,172 and
61,003 shares were forfeited, respectively. As of December 31, 2003, 368,767
shares remain restricted.
During the year ended December 31, 2003, a committee of the board of
directors awarded 210,360 shares of its common stock under the Tower Automotive,
Inc. Long Term Incentive Plan, subject to certain restriction and risks of
forfeiture to existing colleagues. During the year ended December 31, 2003,
19,620 shares were forfeited. As of December 31, 2003, 190,740 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 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 $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
63
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During the third quarter of 2003, the Company elected to adopt the current
provisions of FASB Interpretation Number (FIN) 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51 (see additional discussion in
note 8) as it relates to its Preferred Securities prior to the required
effective date. Under FIN 46, the Tower Automotive Capital Trust which was
previously consolidated by the Company is no longer consolidated. As a result,
the Company no longer presents the Preferred Securities as mezzanine financing,
but instead records a debt obligation for the proceeds which are owed to the
Trust by the Company. Interest is recorded at 6 3/4 percent on the amount owed
by the Company to the Trust, which is equal to the amount that was previously
presented as minority interest (net of tax) for the dividends on the preferred
stock. Interest expense increased by $8.7 million in 2003 related to this
reclassification. Pursuant to the guidance in FIN 46, the Company has not
reclassified the presentation in prior periods.
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:
Effective February 2004, the Company has acquired all of the outstanding
shares of Seojin Industrial Company Limited ("Seojin") for approximately $51
million in aggregate consideration through a series of three stages that
commenced in October 1999. The Company has been consolidating Seojin since
October 2000 due to its previous 66 percent controlling ownership interest. The
Company acquired the remaining 34 percent ownership interest for $10.3 million
in the final transaction in February 2004 to achieve its current 100 percent
ownership. Seojin is a supplier of frames, modules and structural components to
the Korean automotive industry with primary customers of Hyundai and Kia.
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 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.
The Company accounts for its acquisitions 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
64
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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
Utilization................................... (0.4) -- (3.0)
Revision of estimate.......................... (2.1) -- (0.2)
----- ----- -----
December 31, 2003............................... $ 2.0 $ -- $ 2.9
===== ===== =====
As of December 31, 2003, all of the identified facilities have been
shutdown, but the Company continues to incur costs related to maintenance, taxes
and other costs related to the buildings. The revision of estimate in 2003 for
the remaining facility shut down costs resulted from an analysis of future costs
to be incurred. The $2.1 million was recorded as an adjustment to goodwill. The
Company's acquisition reserves have been utilized as originally intended and
management believes the liabilities recorded for shutdown and consolidation
activities are adequate as of December 31, 2003.
In 2002 and 2003, 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 $0.5 million based on an analysis of outstanding exposures
in 2002.
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,
-------------
2003 2002
----- -----
Facility shutdown costs..................................... $ 2.0 $ 4.5
Loss contracts.............................................. 2.9 6.1
Environmental liabilities................................... 6.9 7.1
Legal and other............................................. 1.7 2.2
----- -----
Total purchase accounting reserves........................ $13.5 $19.9
===== =====
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 charge
of approximately $0.7 million associated with the write-off of its investment in
this joint venture.
65
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2003 and 2002, the Company held a 30.8 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 paid Nissan
approximately $68 million over a three-year period beginning in September 2000.
Previous to the fourth quarter of 2003, the Company had determined that its
investment in Yorozu had not suffered an other than temporary decline in market
value. This determination was based on the strategic nature of the investment
which supported the Company's original investment decision and the fact that the
Company believed that there was a significant premium associated with the large
block of stock held in Japan. During the fourth quarter of 2003, the Company
reevaluated the strategic nature and current intent of its investment in Yorozu,
and determined that the most appropriate valuation is based upon the traded
value of the shares. As a result, the Company recorded an impairment charge of
$27.4 million during the fourth quarter of 2003 to record the investment at the
December 31, 2003 traded value on the Tokyo stock exchange.
On 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 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 A1 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. 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.
66
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited financial information for Metalsa and Yorozu is as
follows (in thousands):
DECEMBER 31,
----------------------------------
2003 2002 2001
---------- ---------- --------
CONDENSED STATEMENTS OF EARNINGS
Revenues........................................ $ 927,239 $1,023,627 $778,108
========== ========== ========
Operating income................................ $ 56,613 $ 58,795 $ 33,202
========== ========== ========
Net income...................................... $ 31,179 $ 40,837 $ 23,813
========== ========== ========
CONDENSED BALANCE SHEETS
Current assets.................................. $ 343,505 $ 329,453 $326,628
Noncurrent assets............................... 693,096 649,307 624,217
---------- ---------- --------
$1,036,601 $ 978,760 $950,845
========== ========== ========
Current liabilities............................. $ 281,799 $ 196,104 $169,002
Noncurrent liabilities.......................... 299,111 360,292 370,119
Stockholders' investment........................ 455,691 422,364 411,724
---------- ---------- --------
$1,036,601 $ 978,760 $950,845
========== ========== ========
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.
67
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,
----------------------
2003 2002
---------- ---------
Revolving credit facility, due July 2006, interest at
reference, money market or LIBOR plus a margin ranging
from 100 to 325 basis points (2.87 percent at December 31,
2002)..................................................... $ -- $ 93,800
Revolving credit facility, multi currency borrowings, due
July 2006, interest at reference or LIBOR plus a margin
ranging from 100 to 325 basis points (3.33 percent at
December 31, 2002)........................................ -- 83,503
Term credit facility, due July 2006, interest at reference
or LIBOR plus a margin ranging from 100 to 325 basis
points (4.17 percent at December 31, 2003 and 2.91 percent
at December 31, 2002)..................................... 239,512 125,000
R. J. Tower Corporation 9.25 percent Senior Euro Notes due
August 2010............................................... 188,640 157,440
R. J. Tower Corporation 12 percent Senior Notes, due June
2013 (net of debt discount of $6,955)..................... 251,005 --
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 (1.26 percent at December 31, 2003 and 1.60 percent
at December 31, 2002)..................................... 43,765 43,765
Convertible Edgewood notes, paid in May 2003, interest at
5.75 percent.............................................. -- 50
Due to Tower Automotive Capital Trust, due June 2018,
interest at 6.75 percent payable quarterly................ 258,750 --
Other foreign subsidiary indebtedness, consisting primarily
of borrowings at Seojin, interest ranging from 4.5 percent
to 13.3 percent, renewable annually....................... 145,373 123,518
Other....................................................... 25,749 18,422
---------- ---------
1,152,794 645,498
Less -- Current maturities.................................. (91,935) (110,278)
---------- ---------
$1,060,859 $ 535,220
========== =========
Future maturities of long-term debt as of December 31, 2003 are as follows
(in thousands):
2004........................................................ $ 91,935
2005........................................................ 95,495
2006........................................................ 211,599
2007........................................................ 3,660
2008........................................................ 2,373
Thereafter.................................................. 747,732
----------
$1,152,794
==========
In June 2003, R. J. Tower Corporation (the "Issuer"), a wholly-owned
subsidiary of the Company, completed a senior note offering with a face amount
of $258 million and a 12 percent interest rate. The notes were discounted upon
issuance to yield 12.5 percent payable semi-annually. The notes rank equally
with all of the Company's other senior unsecured and unsubordinated debt and
mature on June 1, 2013.
In June 2003, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") to reduce the borrowing capacity of the
facility and provide for amended financial covenants
68
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in order to enhance overall liquidity. The amendment reduced the former $725
million facility to a $600 million facility. The term portion of the facility
increased from $125 million to $240 million, and the revolver portion decreased
from $600 million to $360 million. The Company had previously amended, in June
2002, its prior credit agreement, which voluntarily reduced its borrowing
facility from $1.15 billion to $725 million. The amount available to borrow
under the revolver portion of the credit facility is restricted by $44 million
of permanent letters of credit, and is also restricted by $200 million to
provide flexibility for the Company to redeem its $200 million convertible
subordinated notes (due August 1, 2004), in the event it elects to do so without
refinancing the convertible notes in another manner. The Credit Agreement also
includes a multi-currency borrowing feature that allows the Company to borrow up
to $316 million in certain freely tradable offshore currencies, and letters of
credit sublimits of $250 million. As of December 31, 2003, there were no
revolver borrowings outstanding. Interest on the Credit Agreement is at the
financial institutions' reference rate, LIBOR, or the Eurodollar rate plus a
margin ranging from 100 to 325 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 7.3 percent
for the year ended December 31, 2003 (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 reductions of borrowing capacity under the
June 2003 and June 2002 amendments, the Company recorded $0.4 million and $2.0
million non-cash charges during the second quarters of 2003 and 2002,
respectively for the write-off of deferred financing costs associated with the
credit facilities.
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, 2003, 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 ($188.6 million at December 31, 2003). 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
and mature on August 1, 2010.
During the third quarter of 2003, the Company elected to adopt the current
provisions of FASB Interpretation Number (FIN) 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51" (see additional discussion
in note 2) as it relates to its mandatorily redeemable convertible trust
preferred securities prior to the required effective date. Under FIN 46, the
Tower Automotive Capital Trust, which was previously consolidated by the
Company, is no longer consolidated. As a result, the Company no longer presents
the mandatorily redeemable convertible trust preferred securities as mezzanine
financing, but instead records a debt obligation for the proceeds which are owed
to the Trust by the Company. Interest is recorded at 6 3/4 percent on the amount
owed by the Company to the Trust, which is equal to the amount that was
previously presented as minority interest (net of tax) for the dividends on the
preferred stock. Interest expense increased by $8.7 million in 2003 related to
this reclassification. Pursuant to the guidance in FIN 46, the Company has
elected not to reclassify the presentation in prior periods. The $258.8 million
trust convertible preferred securities held by the Trust were issued in June
1998 at a dividend rate of 6 3/4 percent and are redeemable, in whole or in
part, after June 30, 2001 but before June 30, 2018. The preferred securities are
also convertible at the option of the holder into common stock of Tower at an
equivalent conversion price of $30.713 per share. As of December 31, 2003, the
Company consolidated the variable interest entity related to its Lansing,
Michigan building and equipment leasing arrangement and therefore recorded
property, plant and equipment of $25.7 million and related indebtedness of $25.7
million as of December 31, 2003.
69
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Company issued $200 million unsecured convertible
subordinated notes, which bear interest at 5 percent and are due on August 1,
2004, and therefore, have been classified as a component of current maturities
in the current liability section of the consolidated balance sheet as of
December 31, 2003. The notes are convertible into common stock of the Company at
a conversion price of $25.88 per share.
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, 2003, there is $8.2 million (net of tax)
recorded in accumulated other comprehensive loss related to the cash flow hedge.
Derivative liabilities relating to the interest rate swap agreement totaling
$13.4 million have been recorded in accrued liabilities in the consolidated
balance sheet as of December 31, 2003. 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.
9. INCOME TAXES:
The provision (benefit) for income taxes consisted of the following (in
thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
-------- ------- --------
Current --
Domestic............................................ $(11,213) $(4,981) $ 201
Foreign............................................. (3,571) 10,510 7,245
-------- ------- --------
Total............................................ (14,784) 5,529 7,446
Deferred --
Domestic............................................ (48,491) 4,321 (75,139)
Foreign............................................. 12,464 (2,214) (5,619)
-------- ------- --------
Total............................................ (36,027) 2,107 (80,758)
-------- ------- --------
Total.......................................... $(50,811) $ 7,636 $(73,312)
======== ======= ========
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,
------------------------------
2003 2002 2001
-------- ------- ---------
Taxes at federal statutory rates..................... $(52,752) $ 7,636 $(120,514)
Foreign taxes and other.............................. (14,469) (7,252) (1,226)
Effect of permanent differences, primarily interest
expense and nondeductible goodwill................. (2,385) (457) 32,174
Valuation allowance.................................. 18,795 7,709 16,254
-------- ------- ---------
Total.............................................. $(50,811) $ 7,636 $ (73,312)
======== ======= =========
70
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
--------------------------------
2003 2002 2001
--------- -------- ---------
Domestic........................................... $(183,070) $(12,246) $(364,688)
Foreign............................................ 32,351 34,064 20,362
--------- -------- ---------
Total............................................ $(150,719) $ 21,818 $(344,326)
========= ======== =========
A summary of deferred income tax assets (liabilities) is as follows (in
thousands):
DECEMBER 31,
--------------------
2003 2002
--------- --------
Deferred income tax assets:
Accrued compensation costs................................ $ 36,735 $ 27,536
Postretirement benefit obligations........................ 30,073 30,981
Loss contracts............................................ 2,894 3,770
Facility closure and consolidation costs.................. 79,339 40,548
Net operating loss carryforwards and tax credits.......... 191,878 113,770
Investment valuation adjustments.......................... 25,857 16,254
Other reserves and accruals not currently deductible for
tax purposes........................................... 12,669 30,588
--------- --------
379,445 263,447
Less: Valuation allowance.............................. (60,103) (48,151)
--------- --------
Total deferred income tax assets....................... 319,342 215,296
Deferred income tax liabilities -- fixed asset and goodwill
lives and methods......................................... (152,282) (88,963)
--------- --------
Net deferred tax assets................................ $ 167,060 $126,333
========= ========
The Company has federal net operating loss carryforwards ("NOL's") of
$323.6 million that expire 2021 through 2023. The Company has a federal
alternative minimum tax ("AMT") credit carryforward of $2.7 million. The AMT
credit has an indefinite carryforward period.
The Company has various state tax credit and NOL carryforwards that expire
through 2023. In 2002, a $7.7 million valuation allowance was established due to
the uncertainty of realization of certain state tax credits and net operating
losses. In 2003, an additional valuation allowance of $13.5 million was
established raising the total state tax valuation allowance to $21.2 million.
The Company's foreign subsidiaries have NOL carryforwards of $157.7
million. In 2002, the Company established a $24.2 million valuation allowance
due to the uncertainty of the realization of a tax benefit associated with the
writedown of goodwill under SFAS 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 2003, the Company determined that
realization of the entire goodwill tax benefit is now probable and reversed the
remaining portion of the valuation allowance. In 2003, a $13.1 million valuation
allowance was established due to the uncertainty of realization of certain
foreign net operating losses.
71
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 deferred tax valuation allowance consisted of the following
unrealizable elements (in millions):
DECEMBER 31,
-------------
2003 2002
----- -----
Brazil non-deductible goodwill.............................. $ -- $24.2
State NOL's................................................. 21.2 7.7
J.L. French investment capital loss......................... 16.2 16.2
Foreign investment capital loss............................. 9.6 --
Foreign NOL's............................................... 13.1 --
----- -----
Net deferred tax valuation allowance...................... $60.1 $48.1
===== =====
The Company records deferred taxes for its earnings on equity method
investments representing the equity method earnings or losses recorded for
financial reporting basis which differ from those recorded for tax. Deferred
taxes are not recognized for consolidated foreign investments as such investment
is deemed permanently reinvested by the Company. The Company has a $18.9 million
deferred income tax liability for a temporary difference arising from
undistributed earnings from its investment in a foreign joint venture recorded
on the equity method. In 2003, a $9.6 million valuation allowance was provided
due to the uncertainty of the use of the tax benefit associated with the
write-down of the Yorozu investment to less than its carrying value for tax
purposes due to the capital nature of the loss. The amount of unrecognized
deferred tax liability for temporary differences related to investments in
foreign subsidiaries, 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 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).
72
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by segment is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ----------
2003:
Revenues........................................ $1,987,701 $828,048 $2,815,749
Interest expense, net........................... 80,111 12,636 92,747
Operating income................................ (111,703) 53,731 (57,972)
Total assets.................................... 1,892,602 953,807 2,846,409
Capital expenditures, net....................... 140,226 89,900 230,126
Depreciation and amortization expense........... 105,084 46,114 151,198
Restructuring and asset impairment charges,
net........................................... 153,884 3,648 157,532
Income (loss) before provision (benefit) for
income taxes.................................. (183,070) 32,351 (150,719)
Provision (benefit) for income taxes............ (59,704) 8,893 (50,811)
2002:
Revenues........................................ $2,075,222 $679,242 $2,754,464
Interest expense, net........................... 57,703 12,564 70,267
Operating income................................ 37,124 56,013 93,137
Total assets.................................... 1,747,772 810,113 2,557,885
Capital expenditures, net....................... 95,922 63,042 158,964
Depreciation and amortization expense........... 100,595 36,103 136,698
Restructuring and asset impairment charges,
net........................................... 57,475 3,650 61,125
Income (loss) before provision (benefit) for
income taxes.................................. (12,246) 34,064 21,818
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
Income (loss) before provision (benefit) for
income taxes.................................. (364,688) 20,362 (344,326)
Provision (benefit) for income taxes............ (74,938) 1,626 (73,312)
73
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of revenues and long-lived assets by geographic
location (in thousands):
YEARS ENDED DECEMBER 31 AND END OF YEAR
---------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
---------- ---------- ---------- ---------- ---------- ----------
United States and
Canada.................. $1,987,701 $ 679,634 $2,075,222 $ 743,552 $1,777,361 $ 852,887
Europe.................... 426,778 242,766 322,773 176,412 278,789 121,993
Asia...................... 359,583 183,995 322,951 180,298 376,040 159,940
Mexico and South America.. 41,687 12,923 33,518 10,481 35,243 12,972
---------- ---------- ---------- ---------- ---------- ----------
$2,815,749 $1,119,318 $2,754,464 $1,110,743 $2,467,433 $1,147,792
========== ========== ========== ========== ========== ==========
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,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Body structures and assemblies (including Class A
surfaces)...................................... $1,203,772 $1,046,696 $ 971,858
Lower vehicle structures......................... 955,301 1,101,786 895,118
Suspension and powertrain modules................ 354,411 302,991 355,981
Suspension components............................ 221,777 220,357 198,296
Other............................................ 80,488 82,634 46,180
---------- ---------- ----------
$2,815,749 $2,754,464 $2,467,433
========== ========== ==========
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,
2003:
2003 2002 2001
---- ---- ----
Ford........................................................ 35% 38% 35%
DaimlerChrysler............................................. 19 22 25
GM.......................................................... 10 8 4
Hyundai/Kia................................................. 9 7 12
Receivables from these customers represented 33 percent of total accounts
receivable at December 31, 2003 and 42 percent of total accounts receivable at
December 31, 2002.
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
74
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company expects minimum pension funding requirements of $38 million during
2004 subject to extension of currently enacted funding relief provisions.
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):
2003 2002
--------- --------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at the beginning of the year...... $ 106,572 $ 89,355
Actual return on plan assets................................ 12,710 (6,296)
Employer contributions...................................... 25,772 27,959
Benefits paid............................................... (11,500) (4,446)
--------- --------
Fair value of plan assets at the end of the year.......... $ 133,554 $106,572
========= ========
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at the beginning of the year............ $ 189,095 $143,485
Service cost................................................ 6,517 9,536
Interest cost............................................... 13,949 11,486
Plan Amendments............................................. 18,872 --
Actuarial loss.............................................. 24,644 21,967
Benefits paid............................................... (11,500) (4,446)
Curtailment loss............................................ 53 --
Special termination benefits................................ -- 7,067
--------- --------
Benefit obligations at the end of the year................ $ 241,630 $189,095
========= ========
FUNDED STATUS RECONCILIATION:
Funded status............................................... $(108,076) $(82,523)
Unrecognized transition asset............................... (5) (34)
Unrecognized prior service cost............................. 21,887 8,975
Unrecognized actuarial losses............................... 78,570 61,320
Contributions made after measurement date................... 5,948 4,956
--------- --------
Net amount recognized..................................... $ (1,676) $ (7,306)
========= ========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET AS OF EACH YEAR END:
Accrued benefit liability................................... $(108,076) $(81,513)
Intangible asset............................................ 21,887 8,975
Accumulated other comprehensive income...................... 78,565 60,276
Contributions made after measurement date................... 5,948 4,956
--------- --------
Net amount recognized..................................... $ (1,676) $ (7,306)
========= ========
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
75
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounted for as a curtailment and special termination benefits for the periods
ending December 31, 2003 and 2002.
The following table provides the components of net periodic pension benefit
cost for the plans for the years ended December 31, (in thousands):
2003 2002 2001
------- ------- -------
Service cost............................................ $ 6,517 $ 9,536 $ 9,956
Interest cost........................................... 13,949 11,486 9,883
Expected return on plan assets.......................... (9,751) (9,602) (9,815)
Amortization of transition asset........................ (31) (31) (31)
Amortization of prior service cost...................... 2,380 812 1,077
Amortization of net (gains) losses...................... 4,435 1,609 (287)
Curtailment loss........................................ 3,632 -- 12,839
Special termination benefit............................. -- 7,067 311
------- ------- -------
Net periodic benefit cost............................. $21,131 $20,877 $23,933
======= ======= =======
The assumptions used in the measurement of the Company's benefit obligation
are as follows:
2003 2002
--------- ---------
Weighted-average assumptions at each year end:
Discount rate............................................. 5.95% 6.75%
Expected return on plan assets............................ 8.50% 8.50%
Rate of compensation increase............................. 4.50% 4.50%
Measurement date.......................................... 9/30/2003 9/30/2002
The Company's percentage of plan assets as of September 30, 2003 and 2002
measurements dates is shown below:
2003 2002
---- ----
Equity securities........................................... 57% 60%
Fixed income................................................ 34 39
Real estate................................................. 5 --
Cash equivalents............................................ 4 1
The expected long-term rate of return on plan assets is based on the
expected return of each of the above categories, weighted based on the median of
the target allocation for each class. Equity securities are expected to return
between 10 percent to 11 percent over the long-term, while cash and fixed income
is expected to return between 4 percent and 6 percent. Based on historical
experience, the Company expects that the asset managers overseeing plan assets
will provide a modest (0.5 percent to 1.0 percent per annum) premium to their
respective market benchmark indices.
The investment policy, as established by the Company's Defined Benefit
Investment Committee ("the Committee"), allows for effective supervision,
monitoring, and evaluating of the investment of the Company's retirement plan
assets. This includes setting forth an investment structure for managing assets,
and providing guidelines for each portfolio to control the level of overall risk
and liquidity. The cash inflows and outflows will be deployed in a manner
consistent with the above target allocations. If the Committee judges cash flows
to be insufficient within the strategic allocation target ranges, the Committee
shall decide whether to effect transactions to bring the strategic allocation
within the threshold ranges.
76
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.0 million, $0.8 million, and
$0.7 million for the years ended December 31, 2003, 2002 and 2001, 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 $0.2 million, $0.4 million and $0.6
million for the years ended December 31, 2003, 2002 and 2001, 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 $12.8 million during 2003, $10.6 million
during 2002, and $11.0 during 2001.
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, 2003 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):
2003 2002
--------- ---------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at the beginning of the year...... $ -- $ --
Employer contributions...................................... 25,100 19,250
Benefits paid............................................... (25,100) (19,250)
--------- ---------
Fair value of plan assets at the end of the year............ $ -- $ --
========= =========
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at the beginning of the year............ $ 124,355 $ 145,552
Service cost................................................ 667 858
Interest cost............................................... 8,313 8,519
Plan amendments............................................. (9,735) 10,827
Actuarial loss (gain)....................................... 34,065 (22,151)
Benefits paid............................................... (25,100) (19,250)
Curtailment loss............................................ 2,644 --
--------- ---------
Benefit obligations at the end of the year.................. $ 135,209 $ 124,355
========= =========
FUNDED STATUS RECONCILIATION:
Funded status............................................... $(135,209) $(124,355)
Unrecognized prior service cost............................. -- 9,735
Unrecognized actuarial losses............................... 55,862 25,365
--------- ---------
Net amount recognized....................................... $ (79,347) $ (89,255)
========= =========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET AS OF EACH YEAR END:
Accrued benefit liability................................... $ (79,347) $ (89,255)
========= =========
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, (in thousands):
2003 2002 2001
------- ------- -------
Service cost............................................ $ 667 $ 858 $ 862
Interest cost........................................... 8,313 8,519 10,676
Amortization of prior service cost...................... -- 1,092 --
Amortization of net loss................................ 3,569 3 1,484
Curtailment loss........................................ 2,644 -- 115
------- ------- -------
Net periodic benefit cost............................... $15,193 $10,472 $13,137
======= ======= =======
The discount rate used to measure the Company's post retirement medical
benefit obligation was 5.95 percent and 6.75 percent in 2003 and 2002,
respectively.
For measurement purposes, a 9.5 percent annual rate of increase in per
capita cost of covered health care benefits was assumed for 2003. The rate was
assumed to decrease gradually to 5.5 percent for 2007 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...... $ 239 $ 216
====== ======
Effect on the accumulated benefit obligation.............. $3,310 $2,999
====== ======
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 2004 and 2020. The
properties covered under these transactions include manufacturing equipment,
facilities and administrative offices. The leases provide for fair market
purchase and renewal options. Future annual rental commitments at December 31,
2003 under these leases are as follows (in thousands):
YEAR OPERATING CAPITAL
---- --------- -------
2004........................................................ $ 79,039 $12,776
2005........................................................ 76,004 12,256
2006........................................................ 68,177 8,501
2007........................................................ 65,586 6,331
2008........................................................ 54,218 5,790
Thereafter.................................................. 152,339 24,294
-------- -------
$495,363 $69,948
========
Less-amount representing interest........................... 19,488
-------
Present value of minimum lease payments..................... $50,460
=======
Total rent expense for all operating leases totaled $72.5 million, $57.0
million and $55.2 million in 2003, 2002 and 2001, 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 $0.8 million during 2003 and $0.6 million during 2002 and
2001.
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a condensed summary of quarterly results of operations for
2003 and 2002. The restructuring and asset impairment charges described in Note
3 are reflected in the second, third and fourth quarters of 2003 and the first
and fourth quarters of 2002. The goodwill impairment loss described in Note 2 is
reflected in the first quarter of 2002. 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
EARNINGS EARNINGS
INCOME (LOSS) PER (LOSS) PER
(LOSS) SHARE SHARE
BEFORE BEFORE BEFORE
CUMULATIVE CUMULATIVE CUMULATIVE
EFFECT OF A EFFECT OF A BASIC EFFECT OF A
OPERATING CHANGE IN CHANGE IN EARNINGS CHANGE IN
GROSS INCOME ACCOUNTING NET INCOME ACCOUNTING (LOSS) ACCOUNTING
REVENUES PROFIT (LOSS) PRINCIPLE (LOSS) PRINCIPLE PER SHARE PRINCIPLE
---------- -------- --------- ----------- ---------- ----------- --------- -----------
2003:
First.............. $ 732,578 $ 74,524 $ 39,848 $ 11,572 $ 11,572 $ 0.21 $ 0.21 $ 0.21
Second............. 743,179 78,448 23,947 2,677 2,677 0.05 0.05 0.05
Third.............. 623,013 35,846 (138,179) (105,890) (105,890) (1.87) (1.87) (1.87)
Fourth............. 716,979 66,242 16,412 (33,034) (33,034) (0.58) (0.58) (0.58)
---------- -------- --------- --------- ---------
$2,815,749 $255,060 $ (57,972) $(124,675) $(124,675) $(2.20) $(2.20) $(2.20)
========== ======== ========= ========= =========
2002:
First.............. $ 668,107 $ 69,009 $ (39,393) $ (34,517) $(147,303) $(0.72) $(3.05) $(0.72)
Second............. 750,872 92,694 55,327 22,891 22,891 0.40 0.40 0.37
Third.............. 653,841 66,374 31,027 9,545 9,545 0.15 0.15 0.15
Fourth............. 681,644 70,007 46,176 17,261 17,261 0.30 0.30 0.29
---------- -------- --------- --------- ---------
$2,754,464 $298,084 $ 93,137 $ 15,180 $ (97,606) $ 0.26 $(1.70) $ 0.26
========== ======== ========= ========= =========
DILUTED
EARNINGS
(LOSS)
PER SHARE
---------
2003:
First.............. $ 0.21
Second............. 0.05
Third.............. (1.87)
Fourth............. (0.58)
$(2.20)
2002:
First.............. $(3.05)
Second............. 0.37
Third.............. 0.15
Fourth............. 0.29
$(1.70)
The amounts for the second and third quarters of 2003 are different from
the amounts originally reported as a result of a restatement of the $7.7 million
curtailment loss for pension and postretirement benefits related to the 2003
restructuring (subsequently reduced to $6.3 million based upon updated actuary
information in the fourth quarter -- see Note 3). The curtailment charge, which
was initially recorded in the second quarter, should have been recorded in the
third quarter in accordance with SFAS No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and the Company's policy of accounting for pension and
post-retirement
80
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefits which requires a three-month delay in recognition due to its September
30 plan measurement date. The impact of this restatement is reflected in the
following table:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 SEPTEMBER 30, 2003
------------------------- -------------------------
AS REPORTED AS ADJUSTED AS REPORTED AS ADJUSTED
----------- ----------- ----------- -----------
Operating income (loss)................ $16,247 $23,947 $(130,479) $(138,179)
Net income (loss)...................... $(2,423) $ 2,677 $(100,790) $(105,890)
Basic earnings (loss) per share........ $ (0.04) $ 0.05 $ (1.78) $ (1.87)
Diluted earnings (loss) per share...... $ (0.04) $ 0.05 $ (1.78) $ (1.87)
This change did not impact the Company's results of operations for the year
ended December 31, 2003.
15. SUBSEQUENT EVENTS
On February 10, 2004, the Company announced that a decision had been
finalized by DaimlerChrysler to move the current production of the frame
assembly for the Dodge Ram light truck from the Company's Milwaukee, WI facility
to the Company's 40 percent owned joint venture partner, Metalsa located in
Monterrey, Mexico. The current Dodge Ram frame program produced in the Milwaukee
facility was expected to run through 2009. The production move to Mexico is
planned for mid-2005. The move was dictated by DaimlerChrysler economic pricing
requirements given the lower cost structure in Mexico. The Company is in the
process of determining the expected net economic impact of DaimlerChrysler's
decision to move the Dodge Ram frame line on its future consolidated results.
On February 27, 2004, the Company acquired the remaining 34 percent
interest in Seojin from its joint venture partner bringing its total ownership
to 100 percent for net cash consideration of $10.3 million financed under Korean
debt facilities which are not covered under the Company's Credit Agreement.
(Note 6).
16. 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 Euro notes issued by R. J. Tower Corporation in 2000
and the 12 percent senior unsecured notes issued by R.J. Tower Corporation in
2003, on a joint and several basis. Tower Automotive, Inc. (the parent company)
has also fully and unconditionally guaranteed the notes and is reflected as the
Parent Guarantor in the consolidating financial information. The Non-Guarantor
Restricted Companies are the Company's foreign subsidiaries except for Seojin
Industrial Company Limited, which is reflected as the Non-Guarantor Unrestricted
Company in the consolidating financial information. 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, 2003
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents.............. $ -- $ -- $ 118,352 $ 40,419 $ 2,128 $ -- $ 160,899
Accounts receivable........ -- -- 177,177 129,633 18,789 -- 325,599
Inventories................ -- -- 73,760 44,876 11,368 -- 130,004
Deferred income taxes,
net...................... -- -- 14,250 5,866 -- -- 20,116
Prepaid tooling and
other.................... -- -- 39,849 41,445 10,368 -- 91,662
-------- -------- ---------- -------- -------- --------- ----------
Total current assets..... -- -- 423,388 262,239 42,653 -- 728,280
-------- -------- ---------- -------- -------- --------- ----------
Property, plant and
equipment, net............. -- -- 642,240 288,430 125,203 -- 1,055,873
Investments in joint
ventures................... 247,756 -- -- 377 -- -- 248,133
Investment in subsidiaries... 411,267 413,510 -- -- -- (824,777) --
Deferred income taxes, net... -- 21,716 119,857 (3,406) 8,777 -- 146,944
Goodwill..................... -- -- 326,309 172,354 -- -- 498,663
Other assets, net............ 14,881 7,096 82,162 37,574 26,803 -- 168,516
-------- -------- ---------- -------- -------- --------- ----------
$673,904 $442,322 $1,593,956 $757,568 $203,436 $(824,777) $2,846,409
======== ======== ========== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of
long-term debt and
capital lease
obligations.............. $ -- $ -- $ 3,622 $ 32,916 $ 63,059 $ -- $ 99,597
Convertible subordinated
notes.................... -- 199,984 -- -- -- -- 199,984
Accounts payable........... -- -- 399,319 114,333 42,384 -- 556,036
Accrued liabilities........ 11,124 4,166 161,788 64,044 8,862 -- 249,984
-------- -------- ---------- -------- -------- --------- ----------
Total current
liabilities............ 11,124 204,150 564,729 211,293 114,305 -- 1,105,601
-------- -------- ---------- -------- -------- --------- ----------
Long-term debt, net of
current maturities......... 679,177 258,750 65,871 16,202 40,859 -- 1,060,859
Obligations under capital
leases, net of current
maturities................. -- -- -- 40,054 2,744 -- 42,798
Due to/(from) affiliates..... (479,789) (434,088) 758,417 147,123 8,337 -- --
Other noncurrent
liabilities................ -- -- 180,827 34,431 8,383 -- 223,641
-------- -------- ---------- -------- -------- --------- ----------
Total noncurrent
liabilities............ 199,388 (175,338) 1,005,115 237,810 60,323 -- 1,327,298
-------- -------- ---------- -------- -------- --------- ----------
Stockholders' investment..... 463,392 413,510 24,112 308,465 28,808 (824,777) 413,510
-------- -------- ---------- -------- -------- --------- ----------
$673,904 $442,322 $1,593,956 $757,568 $203,436 $(824,777) $2,846,409
======== ======== ========== ======== ======== ========= ==========
82
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenues..................... $ -- $ -- $1,883,907 $635,915 $295,927 $ -- $2,815,749
Cost of sales................ -- -- 1,738,388 546,362 275,939 -- 2,560,689
--------- --------- ---------- -------- -------- -------- ----------
Gross profit............. -- -- 145,519 89,553 19,988 -- 255,060
Selling, general and
administrative expenses.... -- -- 110,362 39,004 6,134 -- 155,500
Restructuring and asset
impairment charge.......... -- -- 152,079 5,453 -- -- 157,532
--------- --------- ---------- -------- -------- -------- ----------
Operating income
(loss)................. -- -- (116,922) 45,096 13,854 -- (57,972)
Interest expense (income),
net........................ 61,714 27,464 (9,425) 4,454 8,540 -- 92,747
--------- --------- ---------- -------- -------- -------- ----------
Income (loss) before
provision for income
taxes, equity in
earnings of joint
ventures and minority
interest............... (61,714) (27,464) (107,497) 40,642 5,314 -- (150,719)
Provision (benefit) for
income taxes............... (20,549) (9,336) (36,552) 13,819 1,807 -- (50,811)
--------- --------- ---------- -------- -------- -------- ----------
Income (loss) before
equity in earnings of
joint ventures and
minority interest...... (41,165) (18,128) (70,945) 26,823 3,507 -- (99,908)
Write-down of joint venture
investment to market value,
net........................ (27,436) -- -- -- -- -- (27,436)
Equity earnings in joint
ventures and subsidiaries,
net........................ (32,182) (100,783) -- -- -- 146,263 13,298
Minority interest, net....... -- (5,764) -- (4,865) -- -- (10,629)
--------- --------- ---------- -------- -------- -------- ----------
Net income (loss)........ $(100,783) $(124,675) $ (70,945) $ 21,958 $ 3,507 $146,263 $ (124,675)
========= ========= ========== ======== ======== ======== ==========
83
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)............. $ (100,783) $(124,675) $ (70,945) $ 21,958 $ 3,507 $146,263 $ (124,675)
Adjustments required to
reconcile net income (loss)
to net cash provided by
(used in) operating
activities
Restructuring and asset
impairment charge......... -- -- 151,868 3,882 -- -- 155,750
Customer recovery related to
program cancellation...... -- -- 15,600 -- -- 15,600
Depreciation................ -- -- 103,919 32,266 15,013 -- 151,198
Deferred income tax expense
(benefit)................. -- -- (37,088) 740 321 -- (36,027)
Write-down of joint venture
investment to market
value..................... 27,436 -- -- -- -- -- 27,436
Equity in earnings of joint
ventures, net............. (13,298) -- -- -- -- -- (13,298)
Changes in working capital
and other operating
items..................... 3,727 (10,796) 34,083 48,751 6,852 (73,803) 8,814
----------- --------- --------- -------- -------- -------- -----------
Net cash provided by (used
in) operating
activities.............. (82,918) (135,471) 197,437 107,597 25,693 72,460 184,798
----------- --------- --------- -------- -------- -------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net..... -- -- (139,880) (63,185) (27,061) -- (230,126)
Acquisitions and other, net... (119,278) 134,801 65,440 -- -- (72,460) 8,503
----------- --------- --------- -------- -------- -------- -----------
Net cash provided by (used
in) investing
activities.............. (119,278) 134,801 (74,440) (63,185) (27,061) (72,460) (221,623)
----------- --------- --------- -------- -------- -------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings...... 1,564,234 -- 1,834 55,146 43,353 -- 1,664,567
Repayments of debt............ (1,362,038) -- (6,479) (68,330) (44,365) -- (1,481,212)
Net proceeds from issuance of
stock....................... -- 670 -- -- -- -- 670
----------- --------- --------- -------- -------- -------- -----------
Net cash provided by (used
for) financing
activities.............. 202,196 670 (4,645) (13,184) (1,012) -- 184,025
----------- --------- --------- -------- -------- -------- -----------
Net Change in Cash and Cash
Equivalents................. -- -- 118,352 31,228 (2,380) -- 147,200
Cash and Cash Equivalents,
Beginning of Period......... -- -- -- 9,191 4,508 -- 13,699
----------- --------- --------- -------- -------- -------- -----------
Cash and Cash Equivalents, End
of Period................... $ -- $ -- $ 118,352 $ 40,419 $ 2,128 $ -- $ 160,899
=========== ========= ========= ======== ======== ======== ===========
84
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS
AT DECEMBER 31, 2002
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents.............. $ -- $ -- $ -- $ 9,191 $ 4,508 $ -- $ 13,699
Accounts receivable........ -- -- 151,774 84,224 13,343 -- 249,341
Inventories................ -- -- 82,765 40,051 10,258 -- 133,074
Deferred income taxes,
net...................... -- -- 12,255 8,379 -- -- 20,634
Prepaid tooling and
other.................... -- -- 55,453 41,699 3,281 -- 100,433
-------- -------- ---------- -------- -------- --------- ----------
Total current assets..... -- -- 302,247 183,544 31,390 -- 517,181
-------- -------- ---------- -------- -------- --------- ----------
Property, plant and
equipment, net............. -- -- 709,127 217,503 146,989 -- 1,073,619
Investments in joint
ventures................... 260,898 -- -- -- -- -- 260,898
Investment in subsidiaries... 404,864 512,076 -- -- -- (916,940) --
Deferred income taxes, net... -- -- 99,313 (2,712) 9,098 -- 105,699
Goodwill..................... -- -- 328,308 144,659 -- -- 472,967
Other assets, net............ 1,501 27,144 60,839 27,690 10,347 -- 127,521
-------- -------- ---------- -------- -------- --------- ----------
$667,263 $539,220 $1,499,834 $570,684 $197,824 $(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 $ 18,932 $ 88,912 $ -- $ 120,470
Accounts payable........... -- -- 285,585 91,803 40,339 -- 417,727
Accrued liabilities........ 6,963 5,889 183,876 80,703 7,019 -- 284,450
-------- -------- ---------- -------- -------- --------- ----------
Total current
liabilities............ 15,315 5,889 473,735 191,438 136,270 -- 822,647
-------- -------- ---------- -------- -------- --------- ----------
Long-term debt, net of
current maturities......... 428,651 -- 43,765 51,398 11,406 -- 535,220
Obligations under capital
leases, net of current
maturities................. -- -- 370 21,050 8,311 -- 29,731
Convertible subordinated
notes...................... -- 199,984 -- -- -- -- 199,984
Due to/(from) affiliates..... (337,294) (443,582) 757,808 21,905 1,163 -- --
Other noncurrent
liabilities................ -- 6,103 157,230 21,993 14,151 -- 199,477
-------- -------- ---------- -------- -------- --------- ----------
Total noncurrent
liabilities............ 91,357 (237,495) 959,173 116,346 35,031 -- 964,412
-------- -------- ---------- -------- -------- --------- ----------
Mandatorily redeemable trust
convertible preferred
securities................. -- 258,750 -- -- -- -- 258,750
-------- -------- ---------- -------- -------- --------- ----------
Stockholders' investment..... 560,591 512,076 66,926 262,900 26,523 (916,940) 512,076
-------- -------- ---------- -------- -------- --------- ----------
$667,263 $539,220 $1,499,834 $570,684 $197,824 $(916,940) $2,557,885
======== ======== ========== ======== ======== ========= ==========
85
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenues.................. $ -- $ -- $1,937,140 $543,235 $274,089 $ -- $2,754,464
Cost of sales............. -- -- 1,759,587 451,264 245,529 -- 2,456,380
-------- -------- ---------- -------- -------- -------- ----------
Gross profit............ -- -- 177,553 91,971 28,560 -- 298,084
Selling, general and
administrative
expenses................ -- -- 104,026 31,481 8,315 -- 143,822
Restructuring and asset
impairment charge....... -- -- 57,475 3,650 -- -- 61,125
-------- -------- ---------- -------- -------- -------- ----------
Operating income
(loss)................ -- -- 16,052 56,840 20,245 -- 93,137
Interest expense (income),
net..................... 45,369 11,302 653 14,209 (1,266) -- 70,267
Other expense (income).... 1,993 -- 946 (10,257) 8,370 -- 1,052
-------- -------- ---------- -------- -------- -------- ----------
Income (loss) before
provision for income
taxes, equity in
earnings of joint
ventures and minority
interest.............. (47,362) (11,302) 14,453 52,888 13,141 -- 21,818
Provision (benefit) for
income taxes............ (16,577) (3,956) 5,061 18,510 4,598 -- 7,636
-------- -------- ---------- -------- -------- -------- ----------
Income (loss) before
equity in earnings of
joint ventures and
minority interest..... (30,785) (7,346) 9,392 34,378 8,543 -- 14,182
Equity earnings in joint
ventures and
subsidiaries, net....... (48,121) (78,906) -- -- -- 143,849 16,822
Minority interest, net.... -- (11,354) -- (4,525) 55 -- (15,824)
-------- -------- ---------- -------- -------- -------- ----------
Income (loss) before
cumulative effect of
accounting change..... (78,906) (97,606) 9,392 29,853 8,598 143,849 15,180
-------- -------- ---------- -------- -------- -------- ----------
Cumulative effect of
change in accounting
principle, net.......... -- -- -- (83,108) (29,678) -- (112,786)
-------- -------- ---------- -------- -------- -------- ----------
Net income (loss)..... $(78,906) $(97,606) $ 9,392 $(53,255) $(21,080) $143,849 $ (97,606)
======== ======== ========== ======== ======== ======== ==========
86
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)............. $ (78,906) $(97,606) $ 9,392 $(53,255) $(21,080) $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... -- -- -- 83,108 29,678 -- 112,786
Restructuring and asset
impairment charge......... -- -- 57,475 3,650 -- -- 61,125
Depreciation................ 3,095 -- 96,402 23,010 14,191 -- 136,698
Deferred income tax expense
(benefit)................. -- -- (3,902) 15,107 (9,098) -- 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..................... 283,863 (4,811) (280,951) 26,857 (2,174) (86,281) (63,497)
----------- --------- --------- -------- -------- -------- -----------
Net cash provided by (used
in) operating
activities................ 191,230 (102,417) (121,584) 98,477 7,678 57,568 130,952
----------- --------- --------- -------- -------- -------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net..... -- -- (96,176) (44,960) (17,828) -- (158,964)
Acquisitions and other, net... (88,479) (63,424) 168,702 (33) 4,004 (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 (44,993) (13,824) (57,568) (145,449)
----------- --------- --------- -------- -------- -------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings...... 1,994,990 -- 98 30,166 12,783 -- 2,038,037
Repayments of debt............ (2,097,741) -- (3,797) (89,605) (6,306) -- (2,197,449)
Net proceeds from issuance of
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) (59,439) 6,477 -- 6,429
----------- --------- --------- -------- -------- -------- -----------
Net Change in Cash and Cash
Equivalents................. -- -- (2,444) (5,955) 331 -- (8,068)
Cash and Cash Equivalents,
Beginning of Period......... -- -- 2,444 15,146 4,177 -- 21,767
----------- --------- --------- -------- -------- -------- -----------
Cash and Cash Equivalents, End
of Period................... $ -- $ -- $ -- $ 9,191 $ 4,508 $ -- $ 13,699
=========== ========= ========= ======== ======== ======== ===========
87
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
NON- NON-
GUARANTOR GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ---------- ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenues......................... $ -- $ -- $1,644,357 $473,529 $349,547 $ -- $2,467,433
Cost of sales.................... -- -- 1,467,062 398,367 324,819 -- 2,190,248
--------- --------- ---------- -------- -------- -------- ----------
Gross profit................... -- -- 177,295 75,162 24,728 -- 277,185
Selling, general and
administrative expenses........ -- -- 103,591 27,185 8,427 -- 139,203
Amortization expense............. 1,774 1,301 14,660 6,287 782 24,804
Restructuring and asset
impairment charge.............. -- -- 383,614 125 -- -- 383,739
--------- --------- ---------- -------- -------- -------- ----------
Operating income (loss)........ (1,774) (1,301) (324,570) 41,565 15,519 -- (270,561)
Interest expense (income), net... 60,621 7,516 (7,773) 4,844 8,557 -- 73,765
--------- --------- ---------- -------- -------- -------- ----------
Income (loss) before provision
for income taxes, equity in
earnings of joint ventures
and minority interest........ (62,395) (8,817) (316,797) 36,721 6,962 -- (344,326)
Provision (benefit) for income
taxes.......................... (24,334) (3,439) (57,803) 9,897 2,367 -- (73,312)
--------- --------- ---------- -------- -------- -------- ----------
Income (loss) before equity in
earnings of joint ventures
and minority interest........ (38,061) (5,378) (258,994) 26,824 4,595 -- (271,014)
Equity earnings in 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) $ 23,720 $ 4,595 $481,869 $ (267,524)
========= ========= ========== ======== ======== ======== ==========
88
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
NON-GUARANTOR NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED UNRESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------- ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).......... $ (251,490) $(267,524) $(258,694) $23,720 $ 4,595 $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...... -- -- 383,614 125 -- -- 383,739
Depreciation and
amortization........... 1,774 1,301 122,026 24,136 10,656 -- 159,893
Deferred income tax
expense (benefit)...... -- -- (65,976) (12,576) (2,206) -- (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 (13,002) 10,440 (194,682) 335,715
----------- --------- --------- ------- -------- -------- -----------
Net cash provided by
(used in) operating
activities............. (15,452) (265,842) 462,034 22,403 23,485 287,187 513,815
----------- --------- --------- ------- -------- -------- -----------
INVESTING ACTIVITIES:
Capital expenditures,
net...................... -- -- (142,253) (28,166) (23,536) -- (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) (23,021) (23,536) (287,187) (199,373)
----------- --------- --------- ------- -------- -------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings... 2,201,333 -- 60,208 47,280 -- 2,308,821
Repayments of debt......... (2,533,164) -- (2,630) (59,735) (48,331) -- (2,643,860)
Net proceeds from issuance
of stock................. -- 38,991 -- -- -- -- 38,991
----------- --------- --------- ------- -------- -------- -----------
Net cash provided by
(used for) financing
activities............. (331,831) 38,991 (2,630) 473 (1,051) -- (296,048)
----------- --------- --------- ------- -------- -------- -----------
Net Change in Cash and Cash
Equivalents.............. 18,772 -- 869 (145) (1,102) -- 18,394
Cash and Cash Equivalents,
Beginning of Period...... (18,772) -- 1,575 15,291 5,279 -- 3,373
----------- --------- --------- ------- -------- -------- -----------
Cash and Cash Equivalents,
End of Period............ $ -- $ -- $ 2,444 $15,146 $ 4,177 $ -- $ 21,767
=========== ========= ========= ======= ======== ======== ===========
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.
ITEM 9A. 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 13a-15(e)
and 15d-15(e)) have concluded that as of December 31, 2003, 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 year ended
December 31, 2003.
CHANGES IN INTERNAL CONTROLS
During the period covered by this report, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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" and "Corporate Governance and Board Matters" which
appears in the Company's 2004 Proxy Statement.
90
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 2004 Proxy Statement.
The Company has adopted a Code of Ethics for its Chief Executive Officer
and Senior Financial Officers. A copy of that Code is available on the Company's
website at www.towerautomotive.com
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 2004 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" which appears
in the Company's 2004 Proxy Statement.
We maintain certain equity compensation plans under which common stock is
authorized for issuance to employees and directors, including our 1994 Key
Employee Stock Option Plan, 1999 Long-Term Incentive Plan, Independent Director
Stock Option Plan, Colleague Stock Discount Purchase Plan, Director Deferred
Income Stock Purchase Plan, and Key Leadership Deferred Income Stock Purchase
Plan.
The following table sets forth certain information regarding the above
referenced equity compensation plans as of December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
(C)
NUMBER OF SECURITIES
REMAINING AVAILABLE
(A) (B) FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE UNDER EQUITY
BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS(1) WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- ----------------------- -------------------- ------------------------
Equity compensation plans approved by security
holders..................................... 2,557,013(1) $12.19(1) 3,504,685(2)
Equity compensation plans not approved by
security holders............................ -- -- --
Total......................................... 2,557,013 $12.19 3,504,685
---------------
(1) Excludes purchase rights accrued under the Colleague Stock Discount Purchase
Plan (which has a shareholder approved reserve of 1,400,000 shares), the
Director Deferred Income Stock Purchase Plan (which has a shareholder
approved reserve of 200,000 shares), and the Key Leadership Deferred Income
Stock Purchase Plan (which has a shareholder approved reserve of 750,000
shares).
(2) Consists of 1,103,900 shares under the 1994 Key Employee Stock Option Plan,
1,365,985 shares under the 1999 Long-Term Incentive Plan, 84,800 shares
under the Independent Director Stock Option Plan, zero shares under the
Colleague Stock Discount Purchase Plan, 200,000 shares under the Director
Deferred Income Stock Purchase Plan, and 750,000 shares under the Key
Leadership Deferred Income Stock Purchase Plan.
91
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 2004 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to
the section labeled "Disclosure of Fees Paid to Independent Auditors" which
appears in the Company's 2004 Proxy Statement.
PART IV
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 years ended December 31, 2003
and 2002
- Report of Independent Public Accountants for the year ended December
31, 2001
- Consolidated Balance Sheets as of December 31, 2003 and 2002
- Consolidated Statements of Operations for the Years Ended December
31, 2003, 2002 and 2001
- Consolidated Statements of Stockholders' Investment for the Years
Ended December 31, 2003, 2002 and 2001
- Consolidated Statements of Cash Flows for the Years Ended December
31, 2003, 2002 and 2001
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
- Independent Auditors' Report for the years ended December 31, 2003
and 2002
- Report of Independent Public Accountants for the year ended December
31, 2001
- 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 94.
(B) REPORTS ON FORM 8-K
(1) During the fourth quarter of 2003, 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 15, 2003
(Commission File No. 1-12733), under Item 9.
- The Company's Current Report on Form 8-K, dated October 21, 2003
(Commission File No. 1-12733), under Item 9.
- The Company's Current Report on Form 8-K, dated October 23, 2003
(Commission File No. 1-12733), under Item 12.
- The Company's Current Report on Form 8-K, dated December 5, 2005
(Commission File No. 1-12733), under Item 5.
92
- The Company's Current Report on Form 8-K, dated December 12, 2003
(Commission File No. 1-12733), under Item 5.
- The Company's Current Report on Form 8-K, dated December 18, 2003
(Commission File No. 1-12733), under Item 5.
93
TOWER AUTOMOTIVE, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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. *
4.6 Indenture, dated June 13, 2003, among Registrant, certain
subsidiaries and BNY Midwest Trust Company, as trustee,
incorporated by reference to Exhibit 4.1 to the Registrant's
Form S-4 Registration Statement (Registration No.
333-107232), filed under the Securities Act of 1933 (the
"2003 S-4"). *
4.7 Registration Rights Agreement, dated June 13, 2003, by and
among the Registrant, certain of its subsidiaries, and J.P.
Morgan Securities Inc., for itself and on behalf of other
Initial Purchases, incorporated by reference to Exhibit 4.2
of the 2003 S-4. *
10.1** 1994 Key Employee Stock Option Plan, incorporated by
reference to the S-1. *
10.2** 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. *
10.3 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. *
10.4 Certificate of Trust of Tower Automotive Capital Trust,
incorporated by reference to Exhibit 4.1 of the Registrant's
1998 Second Quarter 10-Q, filed under the Securities
Exchange Act of 1934. *
10.5 Amended and Restated Declaration of Trust of Tower
Automotive Capital Trust, dated June 9, 1998, incorporated
by reference to Exhibit 4.2 of the 1998 Second Quarter 10-Q,
filed under the Securities Exchange Act of 1934. *
94
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10.6 Junior Convertible Subordinated Indenture for the 6 3/4%
Convertible Subordinated Debentures, between Registrant 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 1998 Second Quarter 10Q. *
10.7 Form of 6 3/4% Preferred Securities, incorporated by
reference to Exhibit 4.4 of the 1998 Second Quarter 10-Q. *
10.8 Form of 6 3/4% Junior Convertible Subordinated Debentures,
incorporated by reference to Exhibit 4.5 of the 1998 Second
Quarter 10Q. *
10.9 Guarantee Agreement, dated as of June 9, 1998, between
Registrant as Guarantor, and the First National Bank of
Chicago, as Guarantee Trustee, incorporated by reference to
Exhibit 4.6 of the 1998 Second Quarter 10-Q. *
10.10 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. *
10.11** Tower Automotive, Inc. Long-Term Incentive Plan,
incorporated by reference to Appendix A to Registrant's
Proxy Statement, dated April 12, 1999. *
10.12** Tower Automotive, Inc. Director Deferred Stock Purchase
Plan, incorporated by reference to Appendix A to
Registrant's Proxy Statement, dated April 10, 2000. *
10.13** 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. *
10.14** Tower Automotive, Inc. Colleague Stock Purchase Plan,
incorporated by reference to Exhibit 10.19 of the S-1. *
10.15 Credit Agreement, dated as of July 25, 2000, among the
Registrant, certain direct and indirect wholly-owned
subsidiaries of the Registrant 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. *
10.16 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 financial institutions from time to time
party to that 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. *
10.17 Third Amendment to Credit Agreement, dated June 10, 2003,
among R.J. Tower Corporation, Tower Automotive Europe B.V.,
Tower Automotive Finance B.V., the parties named as
Guarantors, the financial institutions from time to time
party to that Agreement, Bank of America N.A., as
administration agent, JP Morgan Chase Bank, as syndication
agent, and the Bank of Nova Scotia, Comerica Bank, U.S. Bank
National Association and Bank One N.A., as co-agents,
incorporated by reference to the Registrant's Current Report
on 8-K, dated June 18, 2003, filed under Securities Act of
1933. *
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.
95
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EXHIBIT EXHIBIT PAGES
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31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
---------------
* Incorporated by reference.
** Indicates compensatory arrangement.
96
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 5, 2004
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 Kathleen Ligocki
and James A. Mallak 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 5, 2004
------------------------------------------------
S.A. Johnson
/s/ KATHLEEN LIGOCKI Director and March 5, 2004
------------------------------------------------ President and Chief Executive Officer
Kathleen Ligocki
/s/ ANTHONY FERNANDES Director March 5, 2004
------------------------------------------------
Anthony Fernandes
/s/ JURGEN GEISSINGER Director March 5, 2004
------------------------------------------------
Jurgen M. Geissinger
/s/ ALI JENAB Director March 5, 2004
------------------------------------------------
Ali Jenab
Director March , 2004
------------------------------------------------
F.J. Loughrey
/s/ JAMES R. LOZELLE Director March 5, 2004
------------------------------------------------
James R. Lozelle
/s/ GEORGIA R. NELSON Director March 5, 2004
------------------------------------------------
Georgia R. Nelson
Director March , 2004
------------------------------------------------
Enrique Zambrano
/s/ JAMES A. MALLAK Chief Financial Officer and Treasurer March 5, 2004
------------------------------------------------ (Principal Financial and Accounting Officer)
James A. Mallak
97
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, 2003
and 2002 and for the years then ended, and have issued our report thereon dated
March 4, 2004, which report expresses an unqualified opinion and includes
explanatory paragraphs relating to (i) the change in its method of accounting
for certain variable interest entities and the change in its method of
accounting for goodwill and (ii) the application of procedures relating to
certain other disclosures of financial statement amounts related to the 2001
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 2003 and 2002 consolidated financial statements taken as a whole. The
consolidated financial statements and related financial statement schedules of
the Company for the year 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 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 audits also included the 2003 and 2002 Schedule I - Condensed Financial
Information of Registrant and Schedule II - Valuation and Qualifying Accounts of
Registrant (the Schedules) 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 audits. In our opinion, the 2003 and 2002 Schedules, when considered in
relation to the 2003 and 2002 basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 4, 2004
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 2003 and 2002 financial
statement schedule presentation and
(ii) additional disclosure to conform with new accounting pronouncements and SEC
rules and regulations issued during subsequent fiscal years.
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, 2003 AND 2002
(Amounts in thousands, except share amounts)
2003 2002
----------- -----------
ASSETS
Investment in consolidated subsidiaries $ 847,598 $ 955,658
Other assets 28,812 27,144
----------- -----------
$ 876,410 $ 982,802
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Accrued liabilities $ 4,166 $ 5,889
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; 66,133,731 issued and 57,341,805
outstanding in 2003; 56,050,855 and 48,077,142
shares issued and outstanding in 2002 661 659
Additional paid-in capital 680,608 683,072
Retained deficit (181,849) (57,174)
Deferred compensation plans (9,609) (10,746)
Accumulated other comprehensive loss (22,751) (43,875)
Treasury stock, at cost: 8,791,926 shares in 2003 and
9,827,800 shares in 2002 (53,550) (59,860)
----------- -----------
Total stockholders' investment 413,510 512,076
----------- -----------
$ 876,410 $ 982,802
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
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, 2003, 2002 AND 2001
(in thousands)
2003 2002 2001
----------- ----------- ------------
Interest expense $ 28,768 $ 28,768 $ 28,767
Interest income -- -- (2,484)
----------- ----------- ------------
Loss before income taxes and equity in earnings
of consolidated subsidiaries (28,768) (28,768) (26,283)
Income tax benefit 9,780 10,068 10,249
Equity in earnings of consolidated subsidiaries (105,687) (78,906) (251,490)
----------- ----------- ------------
Net loss $ (124,675) $ (97,606) $ (267,524)
=========== =========== ============
The accompanying notes are an integral part of these condensed financial
statements.
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, 2003, 2002 AND 2001
COMMON STOCK ADDITIONAL RETAINED DEFERRED
--------------------- PAID-IN EARNINGS COMPENSATION
SHARES AMOUNT CAPITAL (DEFICIT) PLANS
---------- ------ -------- -------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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)
Sales of stock under Employee
Stock Discount Purchase Plan....... 252,156 2 650 -- --
Deferred Income Stock Plan
deferrals........................ -- -- 3,395 -- (3,395)
Deferred Income Stock Plan
forfeitures...................... -- -- (199) -- 199
Deferred Income Stock Plan
distributions.................... -- -- -- -- 2,999
Deferred Income Stock Plan
funding.......................... -- -- (6,310) -- --
Restricted stock grants earned and
forfeited........................ -- -- -- -- 1,316
Restricted stock grant
distributions.................... 2,920 -- -- -- 18
Net loss......................... -- -- -- (124,675) --
Other comprehensive income (loss):
Foreign currency translation
adjustment.................... -- -- -- -- --
Unrealized loss on qualifying
cash flow hedges.............. -- -- -- -- --
Minimum pension liability........ -- -- -- -- --
Total comprehensive loss...........
---------- ---- -------- --------- --------
BALANCE, DECEMBER 31, 2003......... 66,133,731 $661 $680,608 $(181,849) $ (9,609)
========== ==== ======== ========= ========
ACCUMULATED
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE -------------------- STOCKHOLDERS'
INCOME (LOSS) SHARES AMOUNT INVESTMENT
------------- --------- ------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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
Sales of stock under Employee
Stock Discount Purchase Plan....... -- -- -- 652
Deferred Income Stock Plan
deferrals........................ -- -- -- --
Deferred Income Stock Plan
forfeitures...................... -- -- -- --
Deferred Income Stock Plan
distributions.................... -- -- -- 2,999
Deferred Income Stock Plan
funding.......................... -- 1,035,874 6,310 --
Restricted stock grants earned and
forfeited........................ -- -- -- 1,316
Restricted stock grant
distributions.................... -- -- -- 18
Net loss......................... -- -- --
Other comprehensive income (loss):
Foreign currency translation
adjustment.................... 28,609 -- --
Unrealized loss on qualifying
cash flow hedges.............. 4,586 -- --
Minimum pension liability........ (12,071) -- --
Total comprehensive loss........... (103,551)
-------- ---------- -------- ---------
BALANCE, DECEMBER 31, 2003......... $(22,751) (8,791,926) $(53,550) $ 413,510
======== ========== ======== =========
The accompanying notes are an integral part of these condensed financial
statements.
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, 2003, 2002 AND 2001
(Amounts in thousands)
2003 2002 2001
------------ ------------- ------------
Operating Activities:
Net loss $ (124,675) $ (97,606) $ (267,524)
Equity in earnings of consolidated subsidiaries 105,687 78,906 251,490
Changes in working capital and other operating items (10,796) (4,811) 1,682
----------- ------------ ------------
Net cash used in operating activities (29,784) (23,511) (14,352)
----------- ------------ ------------
Investing Activities:
Dividends received from consolidated subsidiaries 27,466 27,466 27,466
Additional investment in consolidated subsidiaries 1,648 (169,796) (52,105)
----------- ------------ ------------
Net cash provided by (used in) investing activities 29,114 (142,330) (24,639)
----------- ------------ ------------
Financing Activities:
Net proceeds from issuance of common stock 670 225,701 38,991
Payments for repurchase of common shares -- (59,860) --
----------- ------------ ------------
Net cash provided by financing activities 670 165,841 38,991
----------- ------------ ------------
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 financial
statements.
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. 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. J.L. French's capital structure was
reorganized in December 2002. The Company elected not to participate in a new
class of stock
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
that now controls J.L. French and as a result, the Company effectively no longer
has a substantive ownership interest in J.L. French.
NOTE 5. GUARANTEES AND RESTRICTIONS
Guarantee of Subsidiaries' Debt
In June 2003, R.J. Tower Corporation (the "Issuer"), a wholly-owned subsidiary
of the Company, completed a senior note offering with a face amount of $258
million and a 12 percent interest rate. The notes were discounted upon issuance
to yield 12.5 percent payable semi-annually. The notes rank equally with all of
the Company's other senior unsecured and unsubordinated debt and mature on June
1, 2013.
In June 2003, the Company completed an amendment to its senior credit facility
(the "Credit Agreement") to reduce the borrowing capacity of the facility and
provide for amended financial covenants in order to enhance overall liquidity.
The amendment reduced the former $725 million facility to a $600 million
facility. The term portion of the facility increased from $125 million to $240
million, and the revolver portion decreased from $600 million to $325 million.
The Company had previously amended, in June 2002, its prior credit agreement,
which voluntarily reduced its borrowing facility from $1.15 billion to $725
million. The amount available to borrow under the revolver portion of the credit
facility is restricted by $44 million of permanent letters of credit, and is
also restricted by $200 million to provide flexibility for the Company to redeem
its $200 million convertible subordinated notes (due August 1, 2004), in the
event it elects to do so without refinancing the convertible notes in another
manner. The Credit Agreement also includes a multi-currency borrowing feature
that allows the Company to borrow up to $316 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, 2003, there were
no revolver borrowings outstanding. Interest on the Credit Agreement is at the
financial institutions' reference rate, LIBOR, or the Eurodollar rate plus a
margin ranging from 100 to 325 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 7.3 percent
and 6.4 percent for the years ended December 31, 2003 and 2002, respectively.
The Credit Agreement has a final maturity of 2006.
As a result of the permanent reduction of borrowing capacity under the June 2003
and June 2002 amendments, the Subsidiaries recorded $0.4 million and $2.0
million non-cash charges in 2003 and 2002, respectively 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 ($188.6 million at December 31, 2003). 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.
Restrictions on Subsidiaries to Make Distributions to the Parent Company
Under the terms of the $600 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 exceptions,
including, but not limited to, 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
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Company in an aggregate amount equal to $125 million (provided that no default
or event of default exists under the credit agreement after giving effect to
such action and provided further that no cash dividends are to be declared or
paid prior to June 30, 2005); (ii) declare and pay dividends to the Parent
Company to be used to pay taxes and other expenses (not relating to interest,
bank fees or other payments on indebtedness) of the Parent Company and the
Subsidiaries on a consolidated basis; (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 certain unsecured
indebtedness issued by the Parent Company (including the Notes and the
Debentures (see Note 3); and (iv) declare and pay dividends to the Parent to be
used to pay amounts due and payable by the Parent with respect to indebtedness
of joint ventures which are guaranteed by the Parent provided that such
dividends pursuant to this clause do not exceed $10 million in the aggregate. As
of December 31, 2003, the Subsidiaries could have paid up to approximately $10
million to the Parent Company under the exception described in item (iv) 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
$222.6 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.
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, 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
Additional Provision -- -- -- -- 8.1 8.1
Utilization -- (0.4) (3.0) -- (14.4) (14.4)
Revision of Estimate -- (2.1) (0.2) -- -- --
------ ------ ------- ----- ------- -------
Balance, December 31, 2003 $ -- $ 2.0 $ 2.9 $ -- $ 7.5 $ 7.5
====== ====== ======= ===== ======= =======
SCHEDULE III
INDEPENDENT AUDITORS' REPORT
The Board of Managers
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, 2003 and 2002, and the related
consolidated statements of earnings, changes in partners' equity, and changes in
financial position for the years 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, 2003 and 2002, and the results of its
operations, their changes in partners' equity and their changes in financial
position for the years 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, 2003 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 23, 2004
Monterrey, N.L. Mexico
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES ACCEPTED IN
MEXICO - SEE NOTE 20
METALSA, S. DE R.L. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2003
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of December
31, 2003 and thousands of US dollars ($))
ASSETS 2002 2003 2003
--------------- --------------- ----------------
(SEE NOTE 2B)
Current assets:
Cash (includes cash equivalents for $102,295 in 2003
and $299,142 in 2002) Ps. 471,566 143,501 $ 12,767
Accounts receivable (note 7) 388,845 477,849 42,513
Inventories (note 8) 350,020 361,824 32,191
Other current assets 27,541 44,413 3,951
--------------- --------------- ----------------
Total current assets 1,237,972 1,027,587 91,422
Goodwill, net (note 9) 112,841 142,112 12,643
Property, plant and equipment, net (note 10) 2,994,916 3,390,989 301,689
Deferred income tax (note 16) - 46,844 4,168
Other non-current assets, net (notes 11) 156,275 169,894 15,115
--------------- --------------- ----------------
Ps. 4,502,004 4,777,426 $ 425,037
=============== =============== ================
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 12) Ps. 322,126 4,483 $ 399
Accounts payable and accrued liabilities (note 13) 495,016 624,592 55,569
--------------- --------------- ----------------
Total current liabilities 817,142 629,075 55,968
Long-term debt (note 12) 1,288,509 1,623,838 144,470
Deferred income taxes and employees' statutory profit
sharing (note 16) 357,616 - -
Negative goodwill (note 14) - 344,212 30,624
Accrued seniority premium 4,970 5,714 506
--------------- --------------- ----------------
Total liabilities 2,468,237 2,602,839 231,568
--------------- --------------- ----------------
Partners' equity (note 15):
Social parts 18,434 18,434 1,640
Additional paid-in capital 490,656 493,865 43,938
Retained earnings 2,353,980 2,397,528 213,303
Result from holding non-monetary assets (585,784) (491,721) (43,747)
Cumulative deferred income tax effect (243,519) (243,519) (21,665)
--------------- --------------- ----------------
Total partners' equity 2,033,767 2,174,587 193,469
Contingencies and commitments (note 19)
--------------- --------------- ----------------
Ps. 4,502,004 4,777,426 $ 425,037
=============== =============== ================
See accompanying notes to consolidated financial statements.
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES ACCEPTED IN
MEXICO - SEE NOTE 20
METALSA, S. DE R.L. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 2001, 2002 and 2003
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003 and thousands of US dollars ($))
2001 2002 2003 2003
---------------- -------------- -------------- ---------------
(UNAUDITED) (SEE NOTE 2B)
Net sales (notes 6 and 7) Ps. 3,630,697 3,706,250 3,393,480 $ 301,910
Cost of sales (note 13) 2,987,941 2,876,211 2,752,419 244,877
---------------- -------------- -------------- ---------------
Gross profit 642,756 830,039 641,061 57,033
Selling, general and administrative expenses (note 6) 223,955 258,147 270,997 24,110
---------------- -------------- -------------- ---------------
Operating income 418,801 571,892 370,064 32,923
---------------- -------------- -------------- ---------------
Comprehensive financial results:
Interest expense (136,022) (59,716) (82,661) (7,354)
Interest gain 10,019 12,778 7,579 674
Currency exchange loss 43,979 (100,687) (97,223) (8,650)
Monetary position result 82,692 48,153 52,282 4,651
---------------- -------------- -------------- ---------------
Comprehensive financial result, net 668 (99,472) (120,023) (10,679)
---------------- -------------- -------------- ---------------
Earnings before other expenses,
income taxes, employees' profit
sharing and extraordinary item 419,469 472,420 250,041 22,244
Other expenses, net (note 2y) (35,925) (42,314) (49,392) (4,394)
---------------- -------------- -------------- ---------------
Earnings before income taxes,
employees' profit sharing and
extraordinary item 383,544 430,106 200,649 17,850
---------------- -------------- -------------- ---------------
Income taxes (note 16)
Current 98,589 70,235 55,157 4,907
Deferred 6,677 77,252 30,143 2,682
---------------- -------------- -------------- ---------------
105,266 147,487 85,300 7,589
---------------- -------------- -------------- ---------------
Employees' profit sharing (note 16)
Current 32,906 29,152 28,553 2,540
Deferred 8,770 9,992 (18,767) (1,670)
---------------- -------------- -------------- ---------------
41,676 39,144 9,786 870
---------------- -------------- -------------- ---------------
Earnings before extraordinary
item 236,602 243,475 105,563 9,391
Amortization of negative goodwill (note 14) - - 34,978 3,112
---------------- -------------- -------------- ---------------
Net earnings Ps. 236,602 243,475 140,541 $ 12,503
================ ============== ============== ===============
See accompanying notes to consolidated financial statements.
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES ACCEPTED IN
MEXICO - SEE NOTE 20
METALSA, S. DE R.L. AND SUBSIDIARIES
Consolidated Statements of Changes in
Partners' Equity Years ended
December 31, 2001, 2002 and 2003
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003 and thousands of US dollars ($))
RETAINED EARNINGS
---------------------------------------
NET
ADDITIONAL EARNINGS
SOCIAL PAID-IN FOR THE
PARTS CAPITAL UNAPPROPRIATED YEAR TOTAL
--------- ---------- ---------- ---------- ----------
Balances at December 31, 2000 (UNAUDITED) Ps. 18,434 368,206 1,616,183 354,551 1,970,734
Appropriation of retained earnings -- -- 354,551 (354,551) --
Additional paid-in capital -- 122,450 -- -- --
Dividends (note 12b) -- -- (96,831) -- (96,831)
Comprehensive income -- -- -- 236,602 236,602
--------- ---------- ---------- ---------- ----------
Balances at December 31, 2001 (UNAUDITED) 18,434 490,656 1,873,903 236,602 2,110,505
Appropriation of retained earnings -- -- 236,602 (236,602) --
Comprehensive income -- -- -- 243,475 243,475
----------- ---------- ---------- ---------- ----------
Balances at December 31, 2002 18,434 490,656 2,110,505 243,475 2,353,980
Appropriation of retained earnings -- -- 243,475 (243,475) --
Dividends paid (note 15b) -- -- (90,799) -- (90,799)
Cumulative effect of vacation accrual
(note 3) -- -- (6,194) -- (6,194)
In-kind contribution (note 15c) -- 3,209 -- -- --
Comprehensive income -- -- -- 140,541 140,541
---------- ---------- ---------- ---------- ----------
Balances at December 31, 2003 Ps. 18,434 493,865 2,256,987 140,541 2,397,528
========== ========== ========== ========== ==========
Balances at December 31, 2003 (SEE NOTE 2B) $ 1,640 43,938 200,800 12,503 213,303
========== ========== ========== ========== ==========
CUMULATIVE
DEFERRED TOTAL
INCOME TAX PARTNERS'
EFFECT EQUITY
---------- ---------- ----------
Balances at December 31, 2000 (UNAUDITED) Ps. (512,030) (243,519) 1,601,825
Appropriation of retained earnings -- -- --
Additional paid-in capital -- -- 122,450
Dividends (note 12b) -- -- (96,831)
Comprehensive income (118,545) -- 118,057
---------- ---------- ----------
Balances at December 31, 2001 (UNAUDITED) (630,575) (243,519) 1,745,501
Appropriation of retained earnings -- -- --
Comprehensive income 44,791 -- 288,266
---------- ---------- ----------
Balances at December 31, 2002 (585,784) (243,519) 2,033,767
Appropriation of retained earnings -- -- --
Dividends paid (note 15b) -- -- (90,799)
Cumulative effect of vacation accrual
(note 3) -- -- (6,194)
In-kind contribution (note 15c) -- -- 3,209
Comprehensive income 94,063 -- 234,604
---------- ---------- ----------
Balances at December 31, 2003 Ps. (491,721) (243,519) 2,174,587
========== ========== ==========
Balances at December 31, 2003 (SEE NOTE 2B) $ (43,747) (21,665) 193,469
========== ========== ==========
See accompanying notes to consolidated financial statements.
FINANCIAL STATEMENTS PREPARED UNDER ACCOUNTING PRINCIPLES ACCEPTED IN
MEXICO - SEE NOTE 20
METALSA, S. DE R.L. AND SUBSIDIARIES
Consolidated Statements of Changes in Financial Position
Years ended December 31, 2001, 2002 and 2003
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003 and thousands of US dollars ($))
2001 2002 2003 2003
---- ----
(UNAUDITED) (SEE NOTE 2B)
Operating activities:
Net earnings Ps. 236,602 243,475 140,541 $ 12,504
Plus charges (less credits) to operations not
requiring (providing) resources:
Amortization of negative goodwill - - (34,978) (3,112)
Depreciation and amortization 209,224 260,914 272,952 24,284
Impairment of fixed assets - 35,947 - -
Deferred income tax and employees' statutory profit sharing (1,817) 87,680 11,376 1,012
Accrual for seniority premiums - 1,163 744 66
--------------- -------------- -------------- -------------
Resources generated by operations 444,009 629,179 390,635 34,754
Changes in:
Accounts receivable 9,484 110,145 (89,004) (7,919)
Inventories 56,757 (89,929) (11,804) (1,050)
Other current assets 9,363 (12,572) (16,872) (1,501)
Accounts payable and accrued liabilities 251,095 (111,377) 129,576 11,528
--------------- -------------- -------------- -------------
326,699 (103,733) 11,896 1,058
--------------- -------------- -------------- -------------
Resources generated by operating activities 770,708 525,446 402,531 35,812
--------------- -------------- -------------- -------------
Financing activities:
Dividends (96,831) - (90,799) (8,078)
Additional paid-in capital (206,321) - 3,209 285
Long-term debt 122,540 106,430 17,686 1,573
--------------- -------------- -------------- -------------
Resources (used in) generated by financing activities (180,612) 106,430 (69,904) (6,220)
--------------- -------------- -------------- -------------
Investing activities:
Acquisition of property, plant and equipment, net (259,571) (421,188) (581,757) (51,758)
Change in other non-current assets, net (65,675) (35,193) (13,619) (1,212)
Negative goodwill 18,664 - 379,190 33,736
Tax losses carry forward - - (444,506) (39,547)
--------------- -------------- -------------- -------------
Resources used in investing activities (306,582) (456,381) (660,692) (58,781)
--------------- -------------- -------------- -------------
(Decreased) increase in cash and cash
equivalents 283,514 175,495 (328,065) (29,189)
Cash and cash equivalents at beginning of period 12,557 296,071 471,566 41,956
--------------- -------------- -------------- -------------
Cash and cash equivalents at end of period Ps. 296,071 471,566 143,501 $ 12,767
=============== ============== ============== =============
See accompanying notes to consolidated financial statements.
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2002 and 2003
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
(1) COMPANY ACTIVITY AND SALIENT EVENTS
ACTIVITY
The Company is engaged in the manufacturing and sale of frames
(chassis's), 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 partners are Promotora de Empresas Zano, S.
A. de C. V. (Proeza) 60% and Tower Automotive Mexico, S. de R. L., de
C.V. (Tower) 40%. The Company is structured in three Strategic Business
Units (SBU) identified as follows: Heavy trucks, Upper Vehicle Structure
and the Lower Vehicle Structure. The Heavy truck SBU operates two plants;
one is located in Apodaca N.L., Mexico and the other in Roanoke,
Virginia, USA. The Upper Vehicle Structure SBU operates in Apodaca, N.L.
and San Luis Potosi, S.L.P., Mexico. The Lower Vehicle Structure operates
only in Apodaca, N.L.
SALIENT EVENTS
During 2003, the following salient events took place:
1. In April, the Company and Industrial Powder Coatings de Mexico, S.A.
de C.V. entered into a settlement agreement related to a litigation
procedure that was outstanding at December 31, 2002. As part of this
settlement agreement, the Company paid $5 million dollars. From this
amount, $2.5 million were paid to acquire the painting line and the
remaining was recorded as part of the other expenses.
2. The Company established or acquired various subsidiaries including:
Promotow, S. de R.L. de C.V. (Promotow), Metalsa Servicios, S. de R.L.
(Servicios) and Tecnicas en Procesos Aplicadas, S. de R.L. (TAP). As part
of the acquisition, by an affiliated company, Ps. 65,316 were paid for
TAP, whose fair value at the date of the acquisition was Ps. 444,506, of
which Ps. 444,394 were tax losses and the remaining were other assets.
The difference between the purchase price and the fair value was recorded
as a negative goodwill. During 2003 Ps. 34,978 were amortized and
recorded as an extraordinary item.
3. During 2003, Roanoke continued with its $32 million US dollar expansion
program to increase its production capacity. As of December 31, 2003 the
project is expected to be completed by the end of the first quarter in
2004.
4. As disclosed in note 12, the Company refinanced its long-term of debt.
As a result of the refinancing, an additional line of credit, a reduction
of the interest rate and an extension of the payment period were
obtained. At December 31, 2003 from the $150 million dollars borrowing
line, $140 million dollars have been drawn.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and practices followed by the Company in the
preparation of the consolidated 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").
2
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
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
------------ ---- -----------
2003 107.098 4.10%
2002 102.858 5.30%
2001 97.6809 4.80%
=====
For purposes of disclosure, when references 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 "U.S. dollar
millions," "U.S. dollar thousands" and "number of shares", all
amounts included in these notes are stated in thousands of constant
Mexican pesos as of the balance sheet date.
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
Ps. 11.24 to U.S. $1.00, the Company's accounting exchange rate as
of December 31, 2003. 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 includes the accounts of
Metalsa, S. de R.L. and its subsidiaries Metalsa-Roanoke, Inc.,
Grupo Metalsa S. de R.L., Promotow, TAP and Servicios 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 audited financial statements of the
issuing companies, which were prepared under 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.
3
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
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 that date.
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. See note 9.
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:
2002 2003
---- ----
United States of America 1.1402 1.1174
Germany 1.3070 1.3021
Japan 1.2034 1.2031
====== ======
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 note 6, 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.
4
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
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 5.
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, 2003 and 2002 the estimated service life of employees
entitled of the plan benefits is approximately 5.5 and 4.85 years,
respectively.
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) NEGATIVE GOODWILL
This represents the excess of the book value of the net assets at
the acquisition date over the acquisition cost. This amount is
indexed using the NCPI, and is amortized based upon the amortization
of the deferred tax asset acquired, not to exceed a 5 year period.
See notes 1 and 14.
N) 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 carry forward
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.
5
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
O) 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.
P) 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.
Q) 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.
R) 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 10).
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 (define) 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.
S) 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.
6
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
T) CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company had net sales to four customers representing
approximately 80%, 74% and 73% of total net sales during 2001, 2002
and 2003, respectively. Accounts receivable balances of those
customers as of December 31, 2002 and 2003 represent approximately
67% and 65% of total accounts receivable, respectively. The Company
records reserves for losses in the collection of accounts receivable
based on management analysis and estimates.
U) 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.
V) 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,
2001, 2002 and 2003 impairment charges of Ps. 7,193, Ps. 35,947 and
Ps .0, respectively were recorded attributable to products whose
production equipment whose utilization was reduced due to market
conditions and requirements from its customers.
W) 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, 2001, 2002
and 2003, 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.
X) 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.
Y) OTHER EXPENSE
For the years ended December 31, 2002 and 2003, other expenses
includes the following:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
IPC settlement Ps. - 27,321 $ 2,431
Legal expenses 16,583 8,135 723
Other 25,731 13,936 1,240
------------- ------------- ---------------
Ps. 42,314 49,392 $ 4,394
============= ============= ===============
7
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
Z) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period to
conform to the 2002 presentation.
(3) ACCOUNTING CHANGES
(A) LIABILITIES, ACCRUALS, CONTINGENT ASSETS AND LIABILITIES, AND
COMMITMENTS-
In December 2001, the Mexican Institute of Public Accountants issued
the new Bulletin C-9, "Liabilities, Accruals, Contingent Assets and
Liabilities, and Commitments." New Bulletin C-9, effective for
fiscal years beginning after December 31, 2002, supersedes former
Bulletins C-9, "Liabilities," and C-12, "Contingencies and
Commitments." New Bulletin C-9 establishes additional guidance
clarifying the accounting for liabilities, accruals, and contingent
assets and liabilities, and establishes new standards for the use of
present value techniques to measure liabilities, and accounting for
the early extinguishment of liabilities and convertible debt.
Additionally, new Bulletin C-9 establishes new rules for disclosing
commitments arising from current business operations.
The Company adopted this Bulletin in 2003 and, as a result,
recognized a vacation accrual amounting to Ps. 9,384, which was
recorded directly in the stockholders equity, net of its deferred
income tax effect of Ps. 3,192. At December 31, 2003 the vacations
accrual amounts to Ps. 10,027, and is included as part of the
accrued liabilities.
(B) INTANGIBLE ASSETS
In January 2002, the Mexican Institute of Public Accountants issued
the new Bulletin C-8, "Intangible Assets," effective for fiscal
years beginning after December 31, 2002. New Bulletin C-8 supersedes
former Bulletin C-8, "Intangibles," and establishes that qualifying
project development costs be capitalized as intangible assets if the
criteria for intangible asset recognition are met. The principal
criteria are that these costs be identifiable, that there is
reasonable certainty that these costs will generate future benefits
to the Company, and that the Company has control over such benefits.
Other costs, not meeting the new criteria and incurred after the
effective date of new Bulletin C-8, should be expensed as incurred.
This Bulletin also requires that intangibles acquired in a business
combination be accounted for at fair value at the date of the
purchase and be separately reported, unless their cost cannot be
reasonably determined, in which case, they should be reported as
goodwill. Also, if there is no active market for these assets, they
should be written-down to the excess of their book value over the
purchase price or to zero. These assets are also subject to periodic
impairment evaluations. Amortization of goodwill should be reported
in operating expenses on the statements of income.
Based on the adoption of this Bulletin, goodwill balance is no
longer amortized beginning on 2003.
8
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
(4) 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, 2002 and 2003, was Ps.
10.31 and Ps. 11.24, respectively. As of February 24, 2004, it was
approximately Ps.10.94
The foreign currency assets and liabilities held as of December 31, 2002
and 2003, are as follows:
2002 2003
---- ----
Current assets 65,113 55,599
Less:
Current liabilities (55,082) (41,349)
Long-term liabilities (130,822) (151,794)
-------------- -------------
Net liabilities (120,791) (137,544)
============== =============
In addition, as of December 31, 2002 and 2003, the Company had the
following non-monetary asset position of foreign origin, or whose value
can only be denominated in US dollars:
2002 2003
---- ----
Inventories 34,727 17,369
============== =============
Machinery and equipment 193,861 173,470
============== =============
Goodwill 10,520 10,520
============== =============
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:
2001 2002 2003
---- ---- ----
(UNAUDITED)
Export of merchandise $ 44,939 202,752 197,071
Import of merchandise and spares parts (101,586) (90,388) (52,504)
Interest expense (12,536) (3,287) (4,075)
Service expense 3,892 (1,394) (1,728)
---------------- -------------- --------------
$ (73,075) (107,683) (138,764)
================ ============== ==============
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 $187,941 in 2001, $217,343 in 2002
and $211,194 in 2003.
9
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
(5) 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, 2002 and 2003, Metalsa had the following interest rate contracts
outstanding:
- 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, 2002 and 2003,
there were losses on the contract amounting to $111 and $500
thousands dollar, respectively, which were recorded in interest
expense in the accompanying statement of earnings. At December 31,
2002 a liability amounting to $1 million U.S. dollar million, was
recorded.
- 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,
2003.
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, 2003 the fair value of the
abovementioned 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, 2003, the notional amount of the remaining forward contracts
was $6,000 U.S. dollar thousands with a fair value of approximately (Ps.
27,050), and the related adjustment is included as part of the CFR.
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.
(6) RELATED PARTIES
At December 31, 2002 and 2003, the balances and transactions with related
parties are as follows:
(A) DUE FROM
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Teknik, S.A. de C.V. Ps. 2,388 932 $ 83
Other 280 185 16
--------------- --------------- ---------------
Ps. 2,668 1,117 $ 99
=============== =============== ===============
(B) DUE TO
Promotora Empresas Zano, S.A. de C.V. Ps. 59,400 57,102 $ 5,080
Tower Automotive, Inc. 11,655 55,650 4,951
Ogihara Proeza Mexico, S.A. de C.V. - 4,011 358
Other 15,224 2,141 190
--------------- --------------- --------------
Ps. 86,279 118,904 $ 10,579
=============== =============== ==============
10
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power as of
December 31, 2003)
(C) RELATED PARTY TRANSACTIONS
The transactions carried out during the years ended December 31,
2001, 2002 and 2003 with related parties are as follows:
2001 2002 2003 2003
---- ---- ---- ----
(UNAUDITED) (SEE NOTE 2B)
Sales Ps. 84,572 44,649 21,431 $ 1,907
============= =============== =============== ===============
Purchases Ps. 230,754 98,120 104,007 $ 9,253
============= =============== =============== ===============
Service and technical assistance Ps. 135,559 159,738 95,155 $ 8,466
============= =============== =============== ===============
Rents paid Ps. 105 105 33 $ 3
============= =============== =============== ===============
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 losses arise from this transaction.
At the same time, the Company leased back the equipment through an
operating lease with total payments of Ps. 97,750 (nominal value). 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,
2003 amounts to Ps. 67,432, including interest of Ps. 2,580.
At December 31, 2003 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. 67,432 as follows:
Year ending December 31:
2004 Ps. 11,712 $ 11,712
2005 12,288 11,712
2006 12,288 12,288
2007 12,288 12,288
2008 and thereafter 18,856 31,144
--------------- ---------------
Ps. 67,432 $ 79,144
=============== ===============
Rental expense for the year 2002 and 2003 amounted to Ps. 5,856 and Ps.
11,712 (nominal value).
The Company has a contract with an affiliated company (Proeza) and an
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 3.6% to Proeza and 1.5% to Tower. For the years ended December 31,
2001, 2002 and 2003, total expense related to the abovementioned
contracts amounted to Ps. 94,689, Ps. 107,891 and Ps.97,735,
respectively.
11
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(7) ACCOUNTS RECEIVABLE
At December 31, 2002 and 2003 accounts receivable are as follows:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Trade Ps. 238,754 351,779 $ 31,297
Receivable from tool and die projects 104,364 73,949 6,579
Related parties (note 6) 2,668 1,117 99
Advances for taxes and other accounts
receivable 47,295 52,413 4,663
---------------------------------- ---------------
393,081 479,258 42,638
Less allowance for doubtful accounts 4,236 1,409 125
---------------------------------- ---------------
Ps. 388,845 477,849 $ 42,513
================================== ===============
The revenue from tool and die projects is determined using the
percentage-of-completion method (see note 2s). For the years ended
December 31, 2001, 2002 and 2003, the net sales include Ps. 372,184 Ps.
541,987 and Ps.261,620 of revenue from tools and dies projects,
respectively. At December 31, 2003 and 2002, the unbilled portion for
tools and die projects amounts to Ps.56,124 and Ps. 71,606, respectively.
A summary of the changes in the allowance for doubtful accounts, in Ps.,
for the years ended December 31, 2001, 2002 and 2003 is as follows:
BALANCES BALANCES
AT AT
BEGINNING CHARGES TO END OR
DESCRIPTION OF PERIOD EXPENSE WRITE-OFF PERIOD
--------------------------------------- --------------- ---------------- -------------- ----------------
Year ended:
December 31, 2001 (UNAUDITED) Ps. 1,265 138 (589) Ps. 814
December 31, 2002 Ps. 814 4,213 (791) Ps. 4,236
December 31, 2003 Ps. 4,236 (2,827) - Ps. 1,409
=============== ================ ============== ================
(8) INVENTORIES
At December 31, 2002 and 2003, inventories are comprised of the
following:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Raw material Ps. 119,928 111,182 $ 9,892
Work-in process 88,127 76,663 6,821
Finished goods 41,514 56,354 5,014
Spare parts and merchandise in transit 90,690 103,983 9,251
Advances to suppliers 9,761 13,642 1,213
----------------------------------- --------------
Ps. 350,020 361,824 $ 32,191
=================================== ==============
12
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(9) GOODWILL
Goodwill arose from the acquisitions by 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
thousands dollars of additional consideration arising from the original
acquisition of the business from Tower.
As part of the acquisition agreement, Roanoke was required to make an
additional payment to Tower of amounting to approximately $1.9 million
dollars, because exceeded based upon the operating parameters established
in the acquisition agreement. This amount was recorded as part of the
goodwill and the related payable was accrued and included in the due to
Tower balance.
At December 31, 2002 and 2003 the goodwill balance is analyzed as
follows:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Goodwill Ps. 124,960 153,867 $ 13,689
Less:
Accumulated amortization 12,119 11,755 1,046
----------------------------------- --------------
Ps. 112,841 142,112 $ 12,643
=================================== ==============
The increase in the amortizable balance of goodwill is the result of the
application of inflation accounting and the effects of currency
translation.
(10) PROPERTY, PLANT AND EQUIPMENT
At December 31, 2002 and 2003 the investment in property, plant and
equipment consists of:
ESTIMATED
2002 2003 2003 USEFUL LIFE
---- ---- ---- -----------
(SEE NOTE 2B)
Land Ps. 114,087 118,083 $ 10,505
Building 797,947 913,081 81,235 35 years
Plant and equipment 3,260,673 3,898,047 346,800 11 years
Transportation equipment 19,359 14,680 1,306 3 years
Furniture and fixtures 97,060 109,770 9,766 6 years
Computer equipment 63,011 46,717 4,156 2 years
Tools and dies 17,246 24,094 2,144 5 years
Construction in process 152,811 132,261 11,768 -
----------------------------- ----------------
4,522,194 5,256,733 467,680
Less accumulated
depreciation 1,527,278 1,865,744 165,991
----------------------------- ----------------
Ps. 2,994,916 3,390,989 $ 301,689
============================= ================
During 2002 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. 35,947, 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.28,431 net
of accumulated amortization, of which Ps. 23,836 was capitalized during
2002 and Ps.4,595 was capitalized in 2003.
13
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(11) OTHER NON-CURRENT ASSETS
At December 31, 2003 and 2002, other non-current assets are integrated as
follows:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Software Ps. 31,773 67,358 $ 5,992
Prepaid rent (note 6) 67,432 55,720 4,958
Due from related parties (note 6) 35,657 35,657 3,172
Deferred financing cost 13,700 7,048 627
Others 7,713 4,111 366
---------------------------- -------------
Ps. 156,275 169,894 $ 15,115
============================ =============
(12) LONG-TERM DEBT AND BANK LOANS
At December 31, 2002 and 2003, long-term debt is as follows:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
a) Syndicated credit contract amounting to 150
million US dollars, payable in different terms
from June 2003 until June 2006. Ps. 1,610,635 1,573,040 $ 139,951
b) ECA premium credit contract to EUR 5.5 million
its equivalent in US dollar. - 55,281 4,918
Less current installments of
long-term debt 322,126 4,483 399
------------------------------- ---------------
Long-term debt, net Ps. 1,288,509 1,623,838 $ 144,470
=============================== ===============
a) During 2003 the Company and Roanoke refinanced their long-term debt.
Through this refinancing they obtained a $150 million dollar Dual
Tranche Syndicated Facility (the facility). The facility has two
tranches, A and B. Tranche A is a $125 million dollar five-year
amortizing facility and Tranche B is a $25 million dollar three-year
revolving credit facility. Tranche B has an extension option for and
additional year, but such extension will only be possible if 100% of
Tranche B lenders approve.
Tranche A has a 24 month grace period, then semi-annual amortizations
as follows: 10% in months 24, 30 and 36; 15% in months 42 and 48 and
20% in months 54 and 60. Tranche B will be paid in full at maturity
(year three).
The interest rate for the Tranche A will be LIBOR plus 125 basis
points (bps) for the first two years, LIBOR plus 137.5 bps for year
three and four and LIBOR plus 150 bps for the fifth year. For Tranche
B the interest rate will be LIBOR plus 125 bps for the first two
years and LIBOR plus 150 bps for the third year.
The facility imposes certain covenants, with which at December 31,
2003 the Company was in compliance. Also, the Company and Roanoke
irrevocably guarantee both tranches. At December 31, 2003, $115
million dollars from the $25 million dollars of Tranche B have been
drawn.
b) Additionally, the purchase of two pieces of equipment was financed
with a long-term loan for the equivalent in US Dollars of EUR 4.9
million. The loan will be paid in 14 equal installments during a
7-year period beginning during 2004 and is secured with the equipment
acquired. The Company and Roanoke irrevocably guarantee this loan.
14
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
The installments of long-term debt are as follows:
Years ending December 31: (SEE NOTE 2B)
2005 Ps. 148,265 $ 13,191
2006 457,255 40,681
2007 429,165 38,182
2008 589,153 52,416
--------------- ---------------
Ps. 1,623,838 $ 144,470
=============== ===============
For the years 2001, 2002 and 2003, the average interest rate was 3.19%,
3.48% and 2.86%, respectively.
The Company has contracted several short-term credit lines for
approximately $50 million dollars. As of December 31, 2003, the Company
has not used these lines of credit.
(13) ACCOUNTS PAYABLES AND ACCRUED LIABILITIES
At December 31, 2002 and 2003, liabilities and accruals are as follows:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Trade Ps. 244,766 294,645 $ 26,214
Accrued liabilities 163,971 211,043 18,776
Related parties (note 6) 86,279 118,904 10,579
------------------------------- ----------------
Ps. 495,016 624,592 $ 55,569
=============================== ================
The Company made purchases from a raw material supplier that represented
42% and 35% of its total purchases made during 2003 and 2002. The balance
of the accounts payable to this supplier as of December 31, 2003, and
2002 represents 7% and 6% of total accounts payable, respectively.
(14) NEGATIVE GOODWILL
At December 31, 2003 the negative goodwill balance is analyzed as
follows:
(SEE NOTE 2B)
Negative goodwill Ps. 379,190 $ 33,736
Less:
Accumulated amortization 34,978 (3,112)
----------------- -----------------
Ps. 344,212 $ 30,624
================= =================
15
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(15) PARTNERS' 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.
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) PARTNERS' EQUITY TRANSACTIONS
1. In an Ordinary Partners Meeting held on January 28, 2003, the
Company's partners approved a Ps. 116,900 dividend, payable in
two installments. The first installment amounting to $8
million dollars was paid on February 2003 and the remaining
will be paid during the second half of the year if the Company
meets financial projections for 2003. As a result of the
financial projections the remaining amount of the dividend was
canceled.
2. 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 on 2001.
3. On 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,
2003, no deferred income tax has been recognized on this
excess because it is expected that dividends will be paid free
of taxes.
3. During 2003, Roanoke purchased land adjacent to its existing
land for $10 dollars from Boteturt County. The fair value of
such land amounted to $300,000 dollars at the moment of the
purchase. In accordance with Mexican GAAP, the Company
properly recorded the $299,990 dollars difference as part of
the additional paid-in capital in the statement of changes in
stockholder's equity.
16
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(D) COMPREHENSIVE INCOME
For the years ended December 31, 2001, 2002 and 2003,
comprehensive income is as follows:
2001 2002 2003 2003
---- ---- ---- ----
(UNAUDITED) (SEE NOTE 2B)
Net earnings Ps. 236,602 243,475 140,541 $ 12,504
Inflation effects of non-monetary
assets (142,401) 50,054 93,119 8,285
Translation effects of foreign (27,508) 28,442 29,614 2,634
subsidiary
Deferred income taxes net 51,364 (33,704) (28,670) (2,551)
------------- ------------- ------------- ------------
Ps. 118,057 288,266 234,604 $ 20,872
============= ============= ============= ============
(16) 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 2003, 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. 27 million during 2002. The enacted tax
rate for 2003 was 34%.
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.
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, 2002 and 2003, was as
follows:
2001 2002 2003 2003
---- ---- ---- ----
(UNAUDITED) (SEE NOTE 2B)
Current Mexican taxes Ps. 98,589 64,523 54,714 $ 4,868
Current US Federal and state taxes - 5,712 443 39
Deferred Mexican taxes (3,947) 50,899 (7,585) (675)
Deferred US Federal and state taxes 10,624 26,353 37,728 3,357
------------ ------------ ------------- -----------
Ps. 105,266 147,487 85,300 $ 7,589
============ ============ ============= ===========
17
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
Income tax expense attributable to income from continuing operations
before IT differed from the amounts computed by applying the Mexican
rates of 34% in 2003 and to pretax income from continuing operations, as
a result of the following:
(SEE NOTE 2B)
Computed expected tax expense Ps. 68,221 $ 6,069
Non-deductible expenses 13,290 1,182
Tax rate differential effects of inflation and other, net 3,789 338
------------- --------------
Actual income tax expense Ps. 85,300 $ 7,589
============= ==============
As mentioned above, the deferred income taxes, for its Mexican
operations, were calculated assuming a 33% tax rate for current assets
and current liabilities 32%, for assets whose tax effects will be
reversed after 2004. Deferred ESPS was calculated for the differences
arising from the Mexican operation.
The tax rate for deferred income taxes arising from Metalsa Roanoke, Inc.
was 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, 2002 and 2003, are presented below:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Deferred tax assets:
Allowance for doubtful accounts Ps. 1,440 426 $ 38
Liability accruals 38,315 24,517 2,181
Tax loss carry forwards 2,189 432,597 38,487
----------------- --------------- --------------
Total deferred tax assets 41,944 457,540 40,706
----------------- --------------- --------------
Deferred tax liabilities:
Inventories (75,955) (69,405) (6,175)
Accruals (25,556) (17,296) (1,539)
Property, plant and equipment (235,708) (294,753) (26,223)
Other non-current assets (43,574) (29,242) (2,601)
----------------- --------------- --------------
Total deferred tax liabilities (380,793) (410,696) (36,538)
----------------- --------------- --------------
Deferred tax (liability) asset, net Ps. (338,849) 46,844 $ 4,168
================= =============== ==============
The deferred IT roll forward for the net deferred IT asset (liability)
for the years ended December 31, 2001, 2002 and 2003 is presented below:
2001 2002 2003 2003
---- ---- ---- ----
(UNAUDITED) (SEE NOTE
2B)
Initial balance of deferred income tax Ps. (275,772) (231,084) (338,849) $ (30,147)
Deferred IT from acquisition (note1) - - 444,506 39,548
Cumulative initial effects from vacation
payable - 3,190 - -
Deferred IT expense (6,676) (77,251) (30,143) (2,682)
Deferred IT in partners' equity 51,364 (33,704) (28,670) (2,551)
------------- ------------ ------------ --------------
Ending balance Ps. (231,084) (338,849) 46,844 $ 4,168
============= ============ ============ ==============
18
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
At December 31,2003, the tax losses carry forward are integrated as
follows:
Historical Restated
Amount Amount Expire in (SEE NOTE 2B)
------ ------ ---------
1994 Ps. 40,784 157,356 2004 $ 14,000
1995 4,126 11,379 2005 1,012
1996 55,547 116,911 2006 10,401
1997 4,448 7,821 2007 696
1998 44,070 67,140 2008 5,973
2001 845,384 929,077 2011 82,658
2003 48,773 48,773 2013 4,339
--------------- --------------- -----------------
Ps. 1,043,132 1,338,457 $ 119,079
=============== =============== =================
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
---- ----
(UNAUDITED)
Other non-current assets Ps. 5,879 7,575
Accruals, net 2,895 (9,715)
Property, plant and equipment - 9,830
Inventories - 11,077
---------------- ----------------
Total deferred ESPS liability Ps. 8,774 18,767
================ ================
During years 2002 and 2003, an ESPS deferred asset was created for the
foreign currency exchange loss, which can be deducted for ESPS when the
Company realizes the payment.
At December 31, 2003 the Company has available approximately Ps. 150
million of foreign exchange losses arising primordially from its
long-term debt that can be deducted for ESPS purposes when the Company
realizes the payment
In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment.
As of December 31, 2002 and 2003, the updated balance of the partners'
equity tax accounts is as follows:
2002 2003 2003
---- ---- ----
(SEE NOTE 2B)
Contribution capital account Ps. 853,893 889,073 $ 79,099
============== ============== =============
Tax earnings and profits account Ps. 65,940 98,417 $ 8,756
============== ============== =============
Tax reinvested earnings account Ps. 651,994 562,053 $ 50,005
============== ============== =============
19
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(17) EMPLOYEE BENEFIT PLAN
Metalsa Roanoke, Inc. has a 401(k) investment plan (the Plan) for the
benefit of its employee. 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, $190,736 and $262,871 dollars for the years
ended December 31, 2001, 2002 and 2003, 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, 2002 and 2003, the Company
made profit sharing contributions of $189,952, $312,348 and $423,993
dollars, respectively.
(18) SEGMENT INFORMATION
Condensed financial information is presented below per geographical area
for December 31, 2001, 2002 and 2003:
DECEMBER 31, 2001
----------------- METALSA
MEXICO USA ELIMINATIONS CONSOLIDATED
---------------- --------------- ---------------- ---------------
Current assets Ps. 1,001,769 88,842 (7,109) 1,083,502
Goodwill - 103,305 - 103,305
Fixed assets 2,394,760 410,245 - 2,805,005
Investment in subsidiary 233,528 - (233,528) -
Other long-term assets 116,872 23,825 - 140,697
---------------- --------------- ---------------- ---------------
Total assets Ps. 3,746,929 626,217 (240,637) 4,132,509
================ =============== ================ ===============
Current liabilities Ps. 578,743 33,749 (7,109) 605,383
Long-term debt 1,152,978 350,909 - 1,503,887
Other long-term liabilities 270,079 8,031 - 278,110
Partners' equity 1,745,129 233,528 (233,528) 1,745,129
---------------- --------------- ---------------- ---------------
Total liabilities and Ps.
partners' equity 3,746,929 626,217 (240,637) 4,132,509
================ =============== ================ ===============
Net sales Ps. 3,328,081 318,110 (15,494) 3,630,697
================ =============== ================ ===============
Operating income Ps. 378,041 46,538 (5,778) 418,801
================ =============== ================ ===============
Net earnings Ps. 236,602 17,268 (17,268) 236,602
================ =============== ================ ===============
20
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
DECEMBER 31, 2002
----------------- METALSA
MEXICO USA ELIMINATIONS CONSOLIDATED
---------------- --------------- ---------------- ---------------
Current assets Ps. 1,075,301 193,653 (30,982) 1,237,972
Goodwill - 112,841 - 112,841
Fixed assets 2,532,057 462,859 - 2,994,916
Investment in subsidiary 320,494 - (320,494) -
Other long-term assets 109,648 46,627 - 156,275
---------------- --------------- ---------------- ---------------
Total assets Ps. 4,037,500 815,980 (351,476) 4,502,004
================ =============== ================ ===============
Current liabilities Ps. 702,389 145,735 (30,982) 817,142
Long-term debt 987,856 300,653 - 1,288,509
Other long-term liabilities 313,490 49,096 - 362,586
Partners' equity 2,033,765 320,496 (320,494) 2,033,767
---------------- --------------- ---------------- ---------------
Total liabilities and Ps.
partners' equity 4,037,500 815,980 (351,476) 4,502,004
================ =============== ================ ===============
Net sales Ps. 3,241,322 464,928 - 3,706,250
================ =============== ================ ===============
Operating income Ps. 462,756 109,136 - 571,892
================ =============== ================ ===============
Net earnings Ps. 243,475 80,411 (80,411) 243,475
================ =============== ================ ===============
DECEMBER 31, 2003
----------------- METALSA
MEXICO USA ELIMINATIONS CONSOLIDATED (SEE NOTE 2B)
-------------- ------------- ---------------- ---------------- -------------
Current assets Ps. 857,986 194,551 (24,950) 1,027,587 $ 91,422
Goodwill - 142,112 - 142,112 12,643
Fixed assets 2,645,883 745,106 - 3,390,989 301,689
Investment in subsidiary 832,615 - (832,615) -
Other long-term assets 184,441 32,297 - 216,738 19,283
-------------- ------------- ---------------- ---------------- -------------
Total assets Ps. 4,520,925 1,114,066 (857,565) 4,777,426 $ 425,037
============== ============= ================ ================ =============
Current liabilities Ps. 537,541 116,484 (24,950) 629,075 $ 55,968
Long-term debt 1,123,600 500,238 - 1,623,838 144,470
Other long-term liabilities 269,139 80,787 - 349,926 31,130
Partners' equity 2,590,645 416,557 (832,615) 2,174,587 193,469
-------------- ------------- ---------------- ---------------- -------------
Total liabilities and Ps.
partners' equity 4,520,925 1,114,066 (857,565) 4,777,426 $ 425,037
============== ============= ================ ================ =============
Net sales Ps. 2,998,402 537,234 (142,156) 3,393,480 $ 301,911
============== ============= ================ ================ =============
Operating income Ps. 314,528 82,269 (26,733) 370,064 $ 32,924
============== ============= ================ ================ =============
Net earnings Ps. 220,119 75,465 (155,043) 140,541 $ 12,504
============== ============= ================ ================ =============
21
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
(19) 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 has entered into contracts with external parties for
services and has a commitment to pay for these services in
dollars. The amount recorded in general and administrative
expenses for the year ended December 31, 2003 in thousands of
dollar, was $6,769. The minimum annual payments under these
contracts based on their maturities, in thousands of dollars, are
as follows: $6,845 in 2004, and $6,845 in 2005.
(c) 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 to a cost from an unrelated
party.
(d) In accordance with to 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.
(e) 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 assessments (update and late
charges), fines on the determined deficiencies over the omitted
contributions, which could reach up to 100% of the deficiency.
(f) Metalsa Roanoke, Inc. has certain non- cancelable operating
leases that expire over the next four years. Rent expense for
operating leases during 2002 and 2003 approximated $43,000 and
$47,000, respectively. Future minimum lease payments under no
cancelable operating leases as of December 31, 2003 are as
follows (all figures in dollars):
Years ending December 31:
2004 $ 25,842
2005 25,842
2006 12,921
------------
$ 64,605
============
(20) 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 from 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
22
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
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").
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 i) 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, in considered as a separate line item equivalent to
income tax.
For the other hand, 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", which 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.
ACQUISITION OF COMPANY
UNITED STATES. In relation with the acquisition mentioned in note 1, under
U.S. GAAP it will be accounted different in terms of the classification of
the tax asset acquired and the income statement classification.
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.
23
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
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, post employment 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 post employment benefits.
UNITED STATES. Under U.S. GAAP post employment 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 US GAAP, would be accounted differently as follows:
The Company executed a Sale and Leaseback transaction, and under US 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 US 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46 Consolidation of Variable Interest Entities, which
was issued in January 2003. The Company will be required to apply FIN 46R
to variable interests in VIEs created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will
be applied beginning on January 1, 2005. 10 For any VIEs that must be
24
METALSA, S. DE R.L. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Mexican pesos (Ps.) of constant purchasing power
as of December 31, 2003)
consolidated under FIN 46R that were created on January 1, 2005. 10 For any
VIEs that must be consolidated under FIN 46R that were created on January
1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured at their carrying amounts, with any differences
between the net amount added to the balance sheet and any previously
recognized interest begin recognized as the cumulative effect of an
accounting change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46R first applies may be used to measure the
assets, liabilities, and noncontrolling interest of the VIE. The
application of this interpretation is not expected to have effects on the
Company's financial statements.
FASB Statements No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003.
This Statement establishes standards for the classification and measurement
of certain financial instruments with characteristics of both liabilities
and equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective
for instruments entered into or modified after May 31, 2003 and otherwise
will be effective as of January 1, 2004, except for mandatory redeemable
financial instruments. For certain mandatory redeemable financial
instruments, the Statement will be effective for the Company on January 1,
2005. The effective date has been deferred indefinitely for certain types
of mandatory redeemable financial instruments. The Company currently does
not have any financial instruments that are within the scope of this
Statement.
(21) RECENTLY ISSUED ACCOUNTING STANDARD
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF LIABILITIES, EQUITY, OR BOTH-
In May 2003, the Mexican Institute of Public Accountants issued Bulletin
C-12, "Financial Instruments with Characteristics of Liabilities, Equity,
or Both." Bulletin C-12, is effective for fiscal years beginning after
December 31, 2003, although earlier application is permitted. Bulletin C-12
puts together regulations contained in other bulletins related to issuance
of complex financial instruments, and adds regulations necessary for a
comprehensive resolution of general problems. Therefore, Bulletin C-12
defines the basic differences between liabilities and equity; establishes
rules for the classification and valuation of the liability and equity
components of combined financial instruments, upon initial recognition; and
establishes rules for disclosure of combined financial instruments. Under
Bulletin C-12, financial instruments should be classified as liabilities or
equity at the beginning of the year of adoption, and comparative financial
information for prior years should not be restated, nor a
cumulative-effect-type adjustment recognized in the year of adoption.
The Company estimates that the adoption of this Bulletin will not have a
material effect on its financial position or results of operations.