ITEM 1. BUSINESS
(a) 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 designer and producer of structural components and assemblies used by the major automotive original equipment manufacturers ("OEMs"), including Ford, DaimlerChrysler, General Motors, Saturn, Honda, Toyota, Nissan, Auto Alliance, Fiat, BMW, Volkswagen and Mercedes. The Company's current products include large structural stampings and assemblies, such as body pillars, full frame assemblies, chassis, suspension and floor pan components, engineered assemblies, such as brake components and exposed sheet metal components, such as body sides, pick-up box sides and fenders. The Company believes it is the largest independent supplier of structural components and assemblies to the automotive market (based on net revenues).
Since its inception in April 1993, the Company's revenues have grown rapidly through a focused strategy of internal growth and a highly disciplined acquisition program. During the last five years, the Company has successfully completed eight acquisitions and established joint ventures in Mexico, Brazil and Korea. As a result of such acquisitions and internal growth, the Company's revenues have increased from approximately $86 million in 1993 to approximately $2.2 billion in 1999, representing a compound annual growth rate of approximately 71%. The Company's North American content per vehicle has increased from $6.23 in 1993 to $123.13 in 1999.
The Company operates in the large and highly fragmented structural segment of the automotive supply industry, which has continued to undergo significant consolidation. In order to lower costs and improve quality, OEMs are reducing their supplier base by awarding sole-source contracts to full-service suppliers who are able to supply larger portions of a vehicle on a global basis. OEMs' criteria for supplier selection include not only cost, quality and responsiveness, but also full-service design, engineering and program management capabilities. OEMs are increasingly seeking suppliers capable of providing complete systems or modules rather than suppliers who only provide separate component parts. In addition, OEMs are increasingly requiring their suppliers to have the capability to design and manufacture their products in multiple geographic markets. As a full-service supplier with strong OEM relationships, the Company expects to continue to benefit from these trends within the structural segment of the automotive supply industry.
The Company was formed to acquire R.J. Tower Corporation (the "Predecessor" or "R.J. Tower"), the acquisition of which was completed in April 1993 for an aggregate cost of approximately $26 million. Since April 1993, the Company has successfully completed eight strategic acquisitions and established three joint ventures.
Seojin. In October 1999, the Company invested $21 million for new shares representing a 49% equity interest in Seojin Industrial Company Limited ("Seojin"). Seojin is a supplier of frames, modules and structural components to the Korean automotive industry. Total consideration for the equity interest was financed under the Company's revolving credit facility. In addition, the Company advanced $19 million to Seojin in exchange for variable rate convertible bonds (the "Bonds") due October 30, 2009. The Bonds are unsecured and rank equally with all other present and future obligations of Seojin. Interest on the Bonds is payable annually beginning October 30, 2000 and each October 30 thereafter until maturity. The Company has the right to convert the Bonds into common stock of Seojin any time on or after October 30, 2000. The conversion rate is based upon a predetermined formula that would increase the Company's equity interest to approximately 66%.
Active. In July 1999, the Company acquired all of the outstanding stock of Active Tool Corporation and Active Products Corporation (collectively, "Active") for total approximate consideration of $315 million. Active, which has five facilities, designs and produces a variety of large unexposed structural stampings, exposed surface panels, and modules to the North American automotive industry. Active's main customers
include DaimlerChrysler, Ford, General Motors, and Saturn. Products offered by Active include body sides, pick-up box sides, fenders, floor pan assemblies, door panels, pillars, and heat shields. The acquisition of Active enhances the Company's ability to manufacture large and complex structures, as well as exposed surface panels. The acquisition was financed under the Company's revolving credit facility.
IMAR and OSLAMT. In July 1998, the Company acquired IMAR s.r.l. ("IMAR") and OSLAMT S.p.A. ("OSLAMT"). IMAR designs and manufactures structural parts and assemblies from two facilities in Italy, primarily for Fiat. OSLAMT designs and manufactures tools and assemblies for the automotive market from its facility in Turin, Italy. The purchase price consisted of approximately $32.5 million cash plus the assumption of approximately $17 million of indebtedness with an additional amount of up to $15 million payable if IMAR achieves certain operating targets.
Caterina. In March 1998, the Company acquired a 40 % equity interest in Metalurgica Caterina S.A. ("Caterina"), a supplier of structural stampings and assemblies to the Brazilian automotive market. This investment (i) provided the Company with a substantial manufacturing presence in one of the fastest growing automotive markets in the world and (ii) added Volkswagen and Mercedes as new customers. The Company has the right to acquire the remaining 60% of the equity of Caterina for $66.0 million. This right continues until 90 days after December 31, 1999, at which time, Caterina may exercise a call option to repurchase Tower Automotive's 40% equity investment for $26.4 million. The call option remains in effect until March 31, 2001. The Company paid approximately $48 million for its initial equity interest.
Metalsa. In October 1997, the Company acquired a 40% equity interest in Metalsa S. de R.L. ("Metalsa"). In addition, the Company has entered into a technology sharing arrangement which will allow it to utilize the latest available product and process technology. Metalsa is the largest supplier of vehicle frames and structures in Mexico. The Company paid approximately $120 million for its equity interest with an additional amount of up to $45 million payable based upon Metalsa's future net earnings.
SIMES. In May 1997, the Company acquired Societa Industria Meccanica e Stampaggio S.p.A. ("SIMES"), an Italian automotive parts manufacturer, for approximately $50.7 million in cash, plus up to an additional $3.0 million if SIMES achieves certain operating targets following the acquisition. The acquisition of SIMES (i) significantly expanded the Company's global capabilities by providing the Company with a manufacturing presence in Europe, (ii) added Fiat as a new customer and (iii) enhanced the Company's design and engineering capabilities. SIMES generated revenues of approximately $70.0 million during its last fiscal year, with Fiat representing substantially all of such revenues.
APC. In April 1997, the Company acquired Automotive Products Company ("APC") from A.O. Smith Corporation for approximately $700 million in cash. APC is a leading designer and producer of structural and suspension components for the automotive, light truck and heavy truck markets. The Company believes that the acquisition of APC provided it with several strategic benefits, including: (i) expanded product offerings and modular product opportunities; (ii) increased customer penetration within each of the three major North American OEMs and within certain foreign OEMs with manufacturing operations in North America ("Transplants"); (iii) increased penetration in the light truck segment and other key models; (iv) complementary new technology; (v) opportunities to reduce costs and improve operational efficiency; and (vi) an expanded presence in China, Japan and South America, which complemented the Company's current European initiatives to provide expanded global production capabilities for both North American and international OEMs. APC had revenues of $863.0 million in 1996.
MSTI. In May 1996, the Company acquired MascoTech Stamping Technologies, Inc. ("MSTI") from MascoTech, Inc. ("MascoTech") for approximately $79 million, plus additional earn-out payments if certain operating targets are achieved by the MSTI facilities in the first three years following the acquisition. The MSTI acquisition: (i) expanded the Company's product capabilities into chassis and suspension components; (ii) provided chassis and suspension technology as well as value-added processing technologies including assembling, painting and welding; and (iii) increased the Company's content per vehicle on key light truck and sport utility vehicles such as the Ford F-Series, Explorer and Windstar and the DaimlerChrysler Ram and Dakota as well as on high volume passenger cars such as the Ford Taurus/Sable. MSTI had revenues of $152.9 million in 1995.
Trylon. In January 1996, the Company acquired Trylon Corporation ("Trylon") from MascoTech for approximately $25 million in cash. The acquisition of Trylon: (i) broadened the Company's product offerings to include small, precision metal stampings and assemblies, which were previously outsourced to third parties; (ii) established a relationship between the Company and General Motors; and (iii) increased content on Ford models, primarily the Villager. Trylon generated $47.9 million in revenues in 1995.
Kalamazoo. In June 1994, the Company acquired Kalamazoo Stamping and Die Company ("Kalamazoo"), a supplier of structural stampings and assemblies, for approximately $12 million in cash. The acquisition of Kalamazoo added additional structural components to the Company's product offerings and increased model penetration with Ford.
Edgewood. In May 1994, the Company acquired Edgewood Tool and Manufacturing Company and its affiliate, Ann Arbor Assembly Corporation (collectively, "Edgewood") for approximately $30 million in aggregate consideration. Edgewood is a leading supplier of hood and deck lid hinges as well as structural stampings and assemblies. The acquisition of Edgewood: (i) added engineered mechanical stampings, primarily hood and deck lid hinges, and additional structural components to the Company's product offerings; (ii) increased model penetration with the Company's existing customers; and (iii) provided the Company with a significant new customer, Mazda.
Dr. Meleghy. During the first quarter of 2000, the Company acquired all of the outstanding shares of Dr. Meleghy GmbH & Co. KG Werkzeugbau und Presswerk, Bergisch Gladbach ("Dr. Meleghy") for approximately $86.4 million. Dr. Meleghy designs and produces structural stampings, exposed surface panels and modules to the European automotive industry. Dr. Meleghy also designs and manufactures tools and dies for use in their production and for the external market. Dr. Meleghy operates three facilities in Germany and one facility in both Hungary and Poland. Dr. Meleghy's main customers include DaimlerChrysler, Audi, Volkswagen, Ford, Opel, and BMW. Products offered by Dr. Meleghy include body side panels, floor pan assemblies, and miscellaneous structural stampings. The Company may pay an additional $38 million if certain operating targets are met. The acquisition was financed under the Company's revolving credit facility.
J.L. French. In October 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. The note bears interest at 7.5% annually with interest payable on the last day of each calendar quarter beginning December 31, 1999. 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.
Hinge Business. In August 1998, the Company sold its hinge business to Dura Automotive Systems, Inc. for net proceeds of approximately $36.9 million which approximated the book value of the net assets sold. The net proceeds were used to repay outstanding indebtedness under the revolving credit facility.
The Company completed an initial public offering (the "IPO") of its Common Stock in August 1994, the sale of an additional 4,465,800 shares in June 1996 and an additional 17,000,000 shares in April 1997. The Company's principal executive offices are located at 4508 IDS Center, Minneapolis, Minnesota 55402, and its telephone number is (612) 342-2310.
Business Strategy
The Company's business objective is to capitalize upon the consolidation, globalization and system/modular sourcing trends in the automotive supply industry in order to be the leading provider of structural and suspension components to OEMs on a worldwide basis. Key elements of the Company's operating and growth strategies are outlined below:
OPERATING STRATEGY:
Full-Service Technical Design, Engineering and Program Management Capabilities. The Company strives to maintain a competitive advantage through investment in research and product development, advanced engineering and program management. The Company works with OEMs throughout the product development process from concept vehicle and prototype development through the design and implementation
of manufacturing processes to provide full-service capabilities to its customers. In some cases, the Company places design engineers at customer facilities to coordinate its product design efforts with those of its OEM customers. During 1999, the Company added a technical and customer service center in Hyderabad, India to enable around-the-clock product development across several time zones.
Efficient Manufacturing/Continuous Improvement Programs. In response to OEMs' increasingly stringent demands, the Company has implemented manufacturing practices designed to maximize product quality and timeliness of delivery and eliminate waste and inefficiency. The Company has continued to upgrade its manufacturing equipment and processes through substantial investment in new equipment, maintenance of existing equipment and utilization of manufacturing engineering personnel.
Global Presence. The Company strives to offer manufacturing and support services to its customers on a global basis through a combination of international wholly owned facilities and by entering into joint ventures and partnerships with foreign suppliers. Since 1993, in furtherance of its global expansion strategy, the Company has opened a European sales and engineering office to service U.K. and German OEM customers and has established an industrial partnership with The Kirchhoff Group ("Kirchhoff") in Germany. The Company also has technical/customer service centers in Yokohama, Japan, Turin, Italy, Hyderabad, India, and with the acquisition of Dr. Meleghy, Bergisch-Gladbach, Germany. The Company also has relocated certain technical personnel resources to locations where OEMs are developing "world cars."
Decentralized, Participative Culture. The Company's decentralized approach to managing its manufacturing facilities encourages decision making and employee participation in areas such as manufacturing processes and customer service. The Company's leadership team meets frequently at various Company locations in order to maintain a unified Company culture. To increase employee productivity, the Company utilizes incentive programs for all salaried and hourly employees and provides incentives for employees who take advantage of its continuous improvement programs and who provide cost savings ideas.
GROWTH STRATEGY:
Strategic Acquisitions. The Company continues to believe that consolidation in the automotive supply industry will provide further attractive opportunities to acquire high-quality companies that complement its existing business. The Company seeks to make acquisitions that (i) provide additional product, manufacturing and technical capabilities; (ii) broaden the Company's geographic coverage domestically and strengthen its ability to supply products on a global basis; (iii) increase the number of models for which the Company supplies products and the content supplied for existing models; and (iv) add new customers. The Company intends to seek future acquisitions or develop strategic alliances that will strengthen the Company's ability to supply its products on a global basis.
Modular Product Opportunities. The Company has capitalized on the system/modular sourcing trend among OEMs by offering customers higher value-added supply capabilities through an increasing focus on the production of assemblies consisting of multiple component parts that are welded or otherwise fastened together by the Company. The Company has the ability to supply OEMs with modules consisting of integrated assemblies and component parts that can be installed as a unit in a vehicle at the OEM assembly plant.
Increase Vehicle Penetration. The Company has developed strong relationships with certain OEM engineering and purchasing personnel which allow it to identify business opportunities and to react to customer needs in the early stages of vehicle design. The Company believes that these relationships give it a competitive advantage over smaller and less capable suppliers in marketing its broad range of products and in developing new product concepts, such as expanded use of modules, that complement its existing product lines.
Pursuit of "World Car" Opportunities. The Company has been working closely with certain customers on the development of "world cars," which are designed by OEMs in one vehicle center to a single global standard but produced and sold in different geographic markets. Suppliers for a specific "world car" are often required to provide their products on a worldwide basis. The Company believes that it has a competitive
advantage in potentially supplying certain world cars given its international presence, full-service capabilities and existing position as a leading supplier on the Ford Focus and DEW98 luxury car, as well as on other existing vehicle platforms which may eventually evolve into world cars.
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, the increase in global sourcing and the growth of system/modular sourcing.
Supplier Consolidation. The automotive supply industry has been undergoing significant consolidation. In order to lower costs and improve quality, OEMs are reducing their supplier base by awarding sole-source contracts to full-service suppliers who are able to supply larger segments of a vehicle. OEMs' criteria for supplier selection include not only cost, quality and responsiveness, but also full-service design, engineering and program management capabilities. For full-service suppliers such as the Company, this environment provides an opportunity to grow by obtaining business previously provided by other non-full service suppliers and by acquiring suppliers that further enhance product, manufacturing and service capabilities. OEMs rigorously evaluate suppliers on the basis of product quality, cost control, reliability of delivery, product design capability, financial strength, new technology implementation, quality and condition of facilities and overall management. Suppliers that obtain superior ratings are considered for sourcing new business. Although these new supplier policies have already resulted in significant consolidation of component suppliers in certain segments, the Company believes that consolidation within the structural and suspension component segments of the automotive industry will continue to provide attractive opportunities to acquire high-quality companies that complement its existing business.
Global Sourcing. Regions such as Asia, Latin America, 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 by seeking to design and produce "world cars" which can be designed in one vehicle center to a single global standard but produced and sold in different geographic markets, thereby allowing OEMs to reduce design costs, take advantage of low-cost manufacturing locations and improve product quality and consistency. OEMs increasingly are requiring their suppliers to have the capability to design and manufacture their products in multiple geographic markets.
System/Modular Sourcing. OEMs are increasingly seeking suppliers capable of providing complete systems or modules rather than suppliers who only provide separate component parts. A system is a group of component parts which operate together to provide a specific engineering driven functionality whereas a module is a group of systems and/or component parts which are assembled and shipped to the OEM for installation in a vehicle as a unit. By outsourcing complete systems or modules, OEMs are able to reduce their costs associated with the design and integration of different components and improve quality by enabling their suppliers to assemble and test major portions of the vehicle prior to beginning production.
Products
The Company produces a broad range of stamped and welded assemblies for vehicle body structures and suspension systems, many of which are critical to the structural integrity of a vehicle. These products include body structural assemblies such as pillars and package trays, control arms, suspension links, engine cradles and full frame assemblies. These stampings and assemblies are attached directly to the frame of an automobile at the OEM assembly plant and comprise the major structure of a vehicle. The Company's products generally can be classified into the following categories: structural components, suspension components, engineered assemblies and exposed sheet metal components.
Structural Components. The Company's structural component products 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. The Company expanded its product offerings to include structural component products that form the basic lower body structure of the vehicle such as light truck frames, automotive engine
cradles and heavy truck frame rails. Critical to the strength and safety of vehicles, structural products carry the load of the vehicle and provide crash integrity.
Suspension Components. The Company's current suspension component products include stamped, formed and welded products such as control arms, suspension links, track bars, spring/shock towers, and trailing axles. Critical to the ride, handling and noise characteristics of a vehicle, suspension components are a natural extension of the Company's larger structural components.
Engineered Assemblies. The Company's current engineered assemblies include a broad array of highly engineered parts such as brake components and fuel filter assemblies. Such engineered assemblies are a natural extension to the Company's other products in that they are attached to both structural and suspension components.
Exposed Sheet Metal Components. The Company's current exposed sheet metal components include body sides, pick-up box sides and fenders. The capability to produce these types of components complements the Company's substantial presence in upper body structures and allows for the combination of these offerings into modules for supply to customers.
Other. In addition to the Company's structural, suspension, mechanical, and exposed metal component products, the Company manufactures a variety of other products, including heat shields and other precision stampings, for its OEM customers.
Although a portion of the Company's products are manufactured and then sold directly to OEMs as finished products, some are also manufactured to produce assemblies consisting of multiple parts that are welded or otherwise fastened together by the Company and then sold to the OEMs. Systems and assemblies currently produced by the Company include front and rear structural suspension systems comprised of control arms, suspension links and axle assemblies consisting of stamped metal trailing axles, assembled brake shoes, hoses and tie rods.
Customers and Marketing
The North American automotive market is dominated by General Motors, Ford and DaimlerChrysler, with Transplants representing approximately 23% of this market in 1999. The Company currently supplies its products primarily to Ford, DaimlerChrysler, General Motors, Saturn, Honda, Toyota, Nissan, Auto Alliance, Fiat, BMW and Volkswagen.
OEMs typically award contracts that cover parts to be supplied for a particular car model. 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 by the customer of any minimum number of parts. 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. For example, the Company supplies parts for substantially all models produced by Ford, Honda and DaimlerChrysler and also currently supplies DaimlerChrysler with substantially all of its full frame requirements. The following table presents an overview of the major models for which the Company supplies products:
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 and are typically not subject to a competitive bid process.
Sales of the Company's products to OEMs are made directly by the Company's sales and engineering forces, located at its technical/customer service centers in Novi, Michigan, Milwaukee, Wisconsin, Yokohama, Japan, Turin, Italy, 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.
Design and Engineering Support
The Company strives to maintain a technological advantage through investment in product development and advanced engineering capabilities. The Company's manufacturing engineering capabilities enable it to design and build high-quality and efficient manufacturing systems, processes and equipment and to continually improve its production processes and equipment. The Company's manufacturing engineers are located at each of its manufacturing facilities. The Company's engineering staff currently consists of approximately 350 full-time engineers, whose 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 assembled parts must be designed at an early stage in the development of new vehicles or model revisions, the Company is increasingly given the opportunity to utilize its product engineering resources early in the 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 also has full-service design capability for chassis components.
Global Initiatives
The Company has formed, or is in the process of forming, strategic alliances with other suppliers throughout the world, including those located in Europe, Asia and Latin America. The Company has opened a European sales and engineering office to service its U.K. and German OEM customers. As part of its acquisition of APC, the Company acquired a 60% equity interest in a joint venture, Tower Golden Ring, that manufactures structural components in China. In addition to the Company's equity interests in Tower Golden Ring, Metalsa, Caterina and Seojin, the Company has a joint manufacturing and marketing agreement with Kirchhoff, a German automobile parts supplier, pursuant to which the Company and Kirchhoff have agreed to provide manufacturing and marketing services to each other when and as required by each company's OEM customers. A current focus of the Company's acquisition strategy is to continue to acquire foreign suppliers, such as Dr. Meleghy, that would provide the Company with a manufacturing presence in new geographic areas and afford the Company access to new customer opportunities.
Manufacturing
The Company's manufacturing operations consist primarily of stamping operations, system and modular assembly operations, roll-forming and hydroforming operations and 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 over 640 precision single-stage, progressive and transfer presses, ranging in size from 150 to 4,000 tons, which perform multiple functions as raw material proceeds through the press and is converted into a finished product. The Company continually invests in its press technology to increase flexibility, improve safety and minimize die changeover time.
After forming is completed, stampings that are to be used in assemblies are placed in work-in-progress staging areas from which they 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 continually works 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 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) and has consistently received one of Ford's highest commercial ratings for suppliers in the stamping segment. The automotive industry adopted a quality rating system known as QS-9000. The Company has 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 the supplier consolidation resulting from changing OEM policies. The Company's largest competitors include The Budd Company, a subsidiary of Krupp-Thyssen AG ("Budd"), Magna International, Inc. ("Magna"), Dana Corporation, Midway Products Corp., Modern Tool & Die Co., Midland Corporation and divisions of OEMs with internal stamping and assembly operations, all of which have substantial financial resources. The Company competes with Magna across most of the Company's product lines, and with its other significant competitors in various segments of its product lines. For example, the Company competes with Budd for large stampings, while it competes with Aetna Industries, AG Simpson Ltd., and Oxford Automotive, Inc. for medium-size structural stampings.
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 producer 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.
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 52% of the Company's revenues in 1999.
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 70% of the Company's revenues in 1999.
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 for the use of aluminum and of 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.
Employees
As of December 31, 1999, the Company had approximately 12,000 employees, of whom approximately 6,500 are covered under collective bargaining agreements. These collective bargaining agreements expire between 2000 and 2005. 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 employee programs to increase employee morale and expand the employees' participation in the Company's business. The Company has not experienced any work stoppages and considers its relations with its employees to be good.
(b) DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Form 10-K or incorporated by reference herein, including without limitation the statements under "Business" are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). When used in this Form 10-K, the words "anticipate," "believe," "estimate," "expect," "intends" and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. Various economic and competitive factors could cause actual results to differ materially from those discussed in such forward-looking statements, including factors which are outside the control of the Company, such as risks relating to: (i) the degree to which the Company is leveraged; (ii) the Company's reliance on major customers and selected models; (iii) the cyclicality and seasonality of the automotive market; (iv) the failure to realize the benefits of recent acquisitions and joint ventures; (v) obtaining new business on new and redesigned models; (vi) the Company's ability to continue to implement its acquisition strategy; (vii) the highly competitive nature of the
automotive supply industry; and (viii) such other factors noted in this Form 10-K with respect to the Company's businesses. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such cautionary statements.
ITEM 2.
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.
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(1) Facility is leased by a joint venture in which the Company holds a 60% 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 believes that its existing facilities will be adequate to meet its production demands for the foreseeable future. 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.
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 believes it conducts its operations in substantial compliance with applicable environmental and occupational health and safety laws. The Company does not expect to incur material capital expenditures for environmental compliance during its current or succeeding fiscal year. However, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or at any associated offsite disposal location, if contamination from prior activities is discovered at any of the Company's properties or if non-compliance with environmental regulations or permits is discovered, the Company may be held liable and the amount of such liability could be material. In connection with the acquisition of Trylon, MascoTech agreed to indemnify the Company for all losses (including reasonable legal expenses) resulting from: (i) a breach of its representation set forth in the acquisition agreement relating to environmental and safety matters (to the extent that such breach results in a claim being made within five years after the acquisition and subject to a $500,000 cap); and (ii) each known environmental condition identified on a schedule to the acquisition agreement, including the replacement of underground storage tanks at the Traverse City facilities. In connection with the acquisition of MSTI, MascoTech agreed to indemnify the Company for all losses (including reasonable legal expenses) resulting from: (i) a breach of its representation set forth in the acquisition agreement relating to environmental and safety matters (to the extent that such breach results in a claim being made within five years after the acquisition and subject to a $1.5 million threshold for all losses resulting from breaches of representation and warranties contained in the acquisition agreement); (ii) MSTI's non-compliance with applicable federal, state, local and foreign statutes, regulations, ordinances and similar provisions that have the force or effect of law, judicial orders and common law concerning public health and safety, worker health and safety and pollution or protection of the environment prior to the acquisition; and (iii) any remediation that may be required at the Kendallville facility.
In connection with the acquisition of APC, A.O. Smith agreed, subject to certain limitations, to indemnify the Company for environmental matters relating to APC arising from events occurring, or conditions arising, prior to the closing date of the acquisition of APC. This indemnification obligation applies to claims to the extent exceeding $250,000 submitted by the Company within three years of the acquisition date. To the extent that such claims exceed $5.0 million in the aggregate, A.O. Smith will indemnify 70% of such losses, up to A.O. Smith's maximum $75.0 million indemnification obligation under the purchase agreement. In addition, A.O. Smith has agreed to retain certain environmental liabilities for, among other things, offsite disposal of hazardous substances prior to the acquisition of APC.
In connection with the acquisition of Active, the Company will be indemnified, subject to certain limitations, for all losses (including reasonable legal fees and expenses) resulting from claims arising under environmental laws relating to pre-closing environmental matters. This indemnification obligation applies to certain claims submitted by the Company within two years after the closing date of the merger agreement. To the extent that indemnification claims exceed $1.0 million in the aggregate, this indemnification obligation will be satisfied only out of escrowed funds held pursuant to an escrow agreement, up to a maximum indemnification obligation of $15.0 million under the merger agreement.
ITEM 4.
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 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the New York Stock Exchange under the symbol TWR. As of March 24, 2000, there were approximately 2,351 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:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for Tower Automotive presented below for and as of the end of each of the years in the five-year period ended December 31, 1999, is derived from Tower Automotive, Inc.'s Consolidated Financial Statements which have been audited by Arthur Andersen LLP, independent public accountants. The consolidated financial statements at December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999 and the report of independent public accountants thereon are included elsewhere in this report. The consolidated financial statements at and for the years ended December 31, 1994, 1995 and 1996 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This discussion should be read in conjunction with Tower Automotive's Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this report.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
Revenues. Revenues for the year ended December 31, 1999 were $2.2 billion, an 18.2% increase, compared to $1.8 billion for the year ended December 31, 1998. The increase was partially due to net new business of approximately $157.3 million. The new business related primarily to the Ford Explorer, F-Series pick-up, Ranger, Excursion and Lincoln LS/Jaguar S Type, Dodge Durango and Dakota, Chrysler LH, and Fiat. Additional increases of $190.5 million related to the acquisitions of IMAR and OSLAMT in July 1998, and Active in July 1999 were offset by $39.0 million related to the sale of the Company's Hinge Business in August 1998. The General Motors strike had the effect of reducing revenues in the 1998 period by approximately $24.7 million.
Cost of Sales. Cost of sales as a percent of revenues for the year ended December 31, 1999 was 84.0% compared to 85.1% for the year ended December 31, 1998. Improvement in gross profit was due to increased production volumes and product mix on light truck, sport utility and other models served by the Company. The improvement from increased production was partially offset by inefficiencies caused by customer demand
exceeding planned capacity at certain locations, resulting in weekend overtime to meet production, and inefficiencies due to significant launch activity.
S, G & A Expenses. Selling, general and administrative expenses increased to $106.0 million, or 4.9% of revenues, for the year ended December 31, 1999 compared to $85.2 million, or 4.6% of revenues, for the year ended December 31, 1998. The increased expense was due to incremental costs associated with the Company's acquisitions of IMAR, OSLAMT, and Active of $11.9 million and increased engineering, program development, and launch costs related to new business of approximately $9.1 million. Additionally, the Company wrote off certain expenses of approximately $1.7 million relating to unsuccessful acquisition efforts. This increase was offset partially by the realization of gains totaling $1.9 million on the cash settlement of amounts due under the interest rate swap and lock agreements during 1999.
Amortization Expense. Amortization expense for the year ended December 31, 1999 was $15.8 million compared to $13.5 million for the year ended December 31, 1998. The increase was due to amortization related to the costs associated with the June 1998 offering of $258.8 million of 6 3/4% Trust Convertible Preferred Securities ("Preferred Securities"), incremental goodwill amortization related to the acquisitions of IMAR and OSLAMT including performance payments, and the goodwill amortization associated with the Active acquisition.
Interest Expense. Interest expense for the year ended December 31, 1999 was $38.0 million compared to $40.3 million for the year ended December 31, 1998. Interest expense was affected by (i) increased borrowings incurred to fund the Company's joint venture interest in Caterina in March 1998, (ii) increased borrowings to fund the Company's acquisition of IMAR and OSLAMT in July 1998, (iii) increased borrowings to fund the Company's acquisition of Active in July 1999, (iv) the proceeds from the June 1998 offering of Preferred Securities, which were used to reduce borrowings under the Company's revolving credit facility, and (v) increased capitalized interest on construction projects.
Income Taxes. The effective income tax rate was 40% for the years ended December 31, 1999 and 1998. The effective rates differed from the statutory rates primarily as a result of state taxes and non-deductible goodwill amortization.
Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures net of tax was $15.3 million and $12.7 million for the years ended December 31, 1999 and 1998, respectively. These amounts represent the Company's share of the earnings from its joint venture interests in Metalsa, Caterina, Tower Golden Ring and Seojin.
Minority Interest. Minority interest for the years ended December 31, 1999 and 1998 represents dividends, net of income tax benefits, on the Preferred Securities.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
Revenues. Revenues for the year ended December 31, 1998 were $1.8 billion, a 48.6% increase, compared to $1.2 billion for the year ended December 31, 1997. The increase is due to the acquisitions of APC in April 1997, SIMES in May 1997 and IMAR and OSLAMT in July 1998, which totaled approximately $352.9 million, and new business awards, which totaled approximately $310.5 million, including business relating to the Ford Ranger, Explorer, F-Series and Econoline, Dodge Durango, Dakota and Ram Club Cab pick-ups, Honda Accord and the Chrysler LH line. These increases were offset by a decline in production of certain models served by the Company of approximately $38.7 million. In addition, the General Motors strike had the effect of reducing revenues by approximately $24.7 million during 1998.
Cost of Sales. Cost of sales as a percent of revenues for the year ended December 31, 1998 was 85.1% compared to 85.7% for the year ended December 31, 1997. The increase in gross margin was due to operating efficiencies and productivity initiatives of approximately $12.6 million implemented particularly at certain of the Company's business units acquired from A.O. Smith Corporation in 1997 as well as increased production volumes on models served by the Company. These increases were partially offset by a higher proportion of components purchased from outside suppliers as a result of the APC acquisition and launch costs associated with new business totaling approximately $1.8 million.
S, G & A Expenses. Selling, general and administrative expenses increased to $85.2 million, or 4.6% of revenues, for the year ended December 31, 1998 compared to $57.9 million, or 4.7% of revenues, for the year ended December 31, 1997. Approximately $4.8 million of the increase relates to a charge taken to mark to market an interest rate agreement. The remaining increase was due primarily to incremental costs associated with the Company's acquisitions of APC, SIMES, IMAR and OSLAMT as well as increased engineering and program development costs related to new business.
Amortization Expense. Amortization expense for the year ended December 31, 1998 was $13.5 million compared to $9.5 million for the year ended December 31, 1997. The increase was due to amortization related to the costs associated with (i) the July 1997 sale of $200 million of 5% Convertible Subordinated Notes (the "Notes"), (ii) the June 1998 offering of the Preferred Securities and (iii) incremental goodwill amortization related to the acquisitions of APC, SIMES, IMAR and OSLAMT.
Interest Expense. Interest expense for the year ended December 31, 1998 was $40.3 million compared to $29.0 million for the year ended December 31, 1997. Interest expense was affected by (i) increased borrowings incurred to fund the acquisitions of APC, SIMES, IMAR and OSLAMT, (ii) increased borrowings incurred to fund the Company's investments in its joint venture interests in Metalsa in October 1997 and Caterina in March 1998, (iii) more favorable terms related to the Company's borrowings under the credit agreement entered into in April 1997, (iv) the proceeds from the April 1997 offering of 17,000,000 shares of Common Stock at $17.50 per share (the "Offering"), (v) the proceeds from the July 1997 sale of the Notes, and (vi) the proceeds from the June 1998 offering of Preferred Securities.
Income Taxes. The effective income tax rate was 40% for the year ended December 31, 1998 and 39.9% for the year ended December 31, 1997. The effective rates differed from the statutory rates primarily as a result of state taxes and non-deductible goodwill amortization.
Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures, net of tax, was $12.7 million and $0.2 million for the years ended December 31, 1998 and 1997, respectively. These amounts represent the Company's share of the earnings from its joint venture interests in Metalsa, Caterina, and Tower Golden Ring.
Minority Interest. Minority interest for the year ended December 31, 1998 represents dividends, net of income tax benefits, on the Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a credit agreement which includes a revolving credit facility that provides for borrowings of up to $750 million on an unsecured basis, with a letter of credit sublimit of $75 million. In addition, under the terms of the credit facility, the equivalent of up to $85 million in borrowings can be denominated in foreign currency. As of December 31, 1999, approximately $76 million of the outstanding borrowings are denominated in Italian lira. The amount available under the revolving credit facility reduces to $675 million in April 2000, $600 million in April 2001 and $500 million in April 2002. The credit agreement has a final maturity of April 2003. Interest on the credit facility is at the prime rate or LIBOR plus a margin ranging from 17 to 50 basis points depending upon the ratio of the consolidated indebtedness of the Company to its total capitalization. The weighted average interest rate for such borrowings was 6.0% for the year ended December 31, 1999.
In August 1999, the Company amended and restated its Credit Agreement to include an additional term loan facility of $325 million. The weighted average interest rate for the term loan facility was 7.4% for the twelve months ended December 31, 1999. The proceeds from the term facility were used to repay outstanding indebtedness under the revolving facility incurred in connection with the acquisition of Active in July 1999.
The credit agreement requires the Company to meet certain financial tests, including but not limited to a minimum interest coverage, maximum debt/capital, maximum leverage and maximum senior leverage ratio.
The credit agreement also contains certain negative covenants that restrict, among other things, the ability of the Company to: (i) incur any liens and other encumbrances; (ii) sell, assign, lease or transfer assets; (iii) consolidate or merge with another person; (iv) make loan or make any investment in any person;
(v) incur any additional indebtedness; (vi) engage in transactions with affiliates; (vii) incur any contingent obligations; (viii) enter into any joint venture; (ix) enter into any obligations for the payment of rent for any property under a lease or agreement to lease; declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of its capital stock, or purchase, redeem or otherwise acquire or retire for value any subordinated indebtedness or any shares of its capital stock; (x) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any employee benefit plan qualified under ERISA which has resulted or could reasonably be expected to result in liability in an aggregate amount in excess of 10% of the Company's tangible net worth; and (xi) engage in any material line of business substantially different from their existing lines of business. As of December 31, 1999 and 1998, the Company was in compliance with all debt covenants.
During 1997, the Company entered into interest rate swap contracts to hedge against interest rate exposures on certain floating-rate indebtedness. These contracts, which were to expire in November 2002, had the effect of converting the floating-rate interest related to a notional amount of $300 million of borrowings outstanding under the revolving credit facility into a fixed-rate of approximately 6.75%. The interest rate swap contract was executed to balance the Company's fixed-rate and floating-rate debt portfolios. During June 1999, the Company terminated its position in the interest rate swap contracts resulting in a gain of $0.5 million.
During 1997, the Company entered into an interest rate contract in a notional amount of $75 million in anticipation of financing that did not materialize. Accordingly, the Company adjusted the interest rate contract to market as of December 31, 1998 and 1997. The write-down to fair value of approximately $6.4 million and $2.0 million, respectively, was recorded as expense in the consolidated statements of operations. During the first quarter of 1999, the Company settled the $75 million contract with a cash payment of approximately $7.0 million.
In certain instances, the Company is committed under existing agreements to supply product to its customers at selling prices which are not sufficient to cover the direct costs to produce such parts. The Company is obligated to supply these products to its customers for the life of the related vehicles, three to ten years. Accordingly, the Company recognizes losses 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. Such amounts reversed during the years ended December 31, 1999, 1998 and 1997 were $16.8 million, $9.7 million, and $4.6 million, respectively.
In October 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. The note bears interest at 7.5% annually with interest payable on the last day of each calendar quarter beginning December 31, 1999. 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.
In October 1999, the Company invested $21 million for new shares representing a 49% equity interest in Seojin Industrial Company Limited ("Seojin"). Seojin is a supplier of frames, modules and structural components to the Korean automotive industry. Total consideration for the equity interest was financed under the Company's revolving credit facility. In addition, the Company advanced $19 million to Seojin in exchange for variable rate convertible bonds (the "Bonds") due October 30, 2009. The Bonds are unsecured and rank equally with all other present and future obligations of Seojin. Interest on the Bonds is payable annually beginning October 30, 2000 and each October 30 thereafter until maturity. The Company has the right to convert the Bonds into common stock of Seojin any time on or after October 30, 2000. The conversion rate is based upon a predetermined formula that would increase the Company's equity interest to approximately 66%.
In July 1999, the Company acquired all of the outstanding stock of Active for total approximate consideration of $315 million. Active, which has five facilities, designs and produces a variety of large unexposed structural stampings, exposed surface panels, and modules to the North American automotive industry. Active's main customers include DaimlerChrysler, Ford, General Motors, and Saturn. Products offered by Active include body sides, pickup box sides, fenders, floor pan assemblies, door panels, pillars, and
heat shields. The acquisition of Active enhances the Company's ability to manufacture large and complex structures, as well as exposed surface panels. The acquisition was financed with proceeds from the Company's revolving credit facility.
In July 1998, the Company acquired IMAR and OSLAMT. IMAR designs and manufactures structural parts and assemblies from two facilities in Italy, primarily for Fiat. OSLAMT designs and manufactures tools and assemblies for the automotive market from its facility in Turin, Italy. The purchase price consisted of approximately $32.5 million in cash plus the assumption of approximately $17 million of indebtedness, and an additional $15 million for IMAR achieving certain operating targets subsequent to the acquisition.
In June 1998, Tower Automotive Capital Trust (the "Issuer"), a wholly owned statutory business trust of the Company, completed the offering of $258.8 million of its 6 3/4% 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 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.
In May 1998, the Company's Board of Directors approved a two-for-one stock split, which was effected as a stock dividend. On July 15, 1998, stockholders were issued one additional share of common stock for each share of common stock held on the record date of June 30, 1998. All references to the number of common shares and per share amounts have been adjusted to reflect the stock split on a retroactive basis.
In March 1998, the Company acquired a 40% equity interest in Caterina, a supplier of structural stampings and assemblies to the Brazilian automotive market. In addition, the Company has the right to acquire the remaining 60 % of the equity of Caterina for $66.0 million. This right continues until 90 days after December 31, 1999, at which time, Caterina may exercise a call option to repurchase Tower Automotive's 40% equity investment for $26.4 million. The call option remains in effect until March 31, 2001. The Company paid approximately $48 million for its initial equity interest. This investment added Volkswagen and Mercedes-Benz as new customers in Brazil.
In October 1997, the Company completed an agreement to become a partner in Metalsa with Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). Metalsa is the largest supplier of vehicle frames and structures in Mexico. Under the terms of the agreement, the Company acquired a 40% equity interest in Metalsa. In addition, the parties have entered into a technology sharing arrangement that will enable 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 Chrysler, General Motors, Ford, Nissan and Mercedes-Benz. In connection with this agreement, the Company paid $120 million to Proeza, with an additional amount of up to $45 million payable based upon the net earnings of Metalsa in 1998, 1999 and 2000. Based upon Metalsa's 1998 and 1999 net earnings, the Company paid Proeza additional consideration of approximately $9.0 million in the second quarter of 1999 and approximately $7.9 million during the first quarter of 2000. The investment in Metalsa was financed with proceeds from borrowings under the Company's revolving credit facility.
In July 1997, the Company completed the sale of the Notes pursuant to a private placement. The Notes are due on August 1, 2004 and are convertible into the Company's Common Stock at a conversion price of $25.88 per share. The Notes are unsecured and may not be redeemed until August 1, 2000, except in the event of a change in control. Proceeds from the Notes were used to repay outstanding indebtedness under the revolving credit facility.
In May 1997, the Company acquired SIMES, headquartered in Turin, Italy. SIMES designs and manufactures structural metal components in two facilities in Italy, principally for Fiat. The purchase price was approximately $50.7 million and was financed with borrowings under the Company's revolving credit facility. The Company also paid an additional $3 million for meeting certain operating targets subsequent to the acquisition.
In April 1997, the Company acquired APC, a division of A.O. Smith Corporation. The aggregate purchase price consisted of approximately $700 million in cash and was financed with the proceeds from the Offering and borrowings under the credit facility. APC designs and manufactures frames, frame components, engine cradles, suspension components and modules for the North American automotive and heavy truck industries. This acquisition has been accounted for using the purchase method of accounting and, accordingly, APC's assets and liabilities have been recorded at fair value as of the acquisition date, with the excess purchase price recorded as goodwill.
In connection with its May 1996 acquisition of MSTI, the Company financed the cash portion of the purchase price through the issuance of two series of senior notes having an aggregate principal amount of $65 million. The senior notes were retired in connection with the Offering and the new revolving credit facility described above. In connection with the retirement, the Company paid prepayment penalties and wrote off deferred financing costs which resulted in an extraordinary loss, net of income taxes, of approximately $2.4 million.
In August 1998, the Company sold its hinge business (the "Hinge Business") to Dura Automotive Systems, Inc. for net proceeds of approximately $36.9 million which approximated the book value of the net assets sold. The net proceeds were used to repay outstanding indebtedness under the revolving credit facility.
In conjunction with its acquisitions, the Company has established reserves for certain costs associated with facility shutdown and consolidation activities and for general and payroll related costs primarily for planned employee termination activities. As of December 31, 1998, approximately $21.1 million and $3.6 million were recorded for facility shutdown and payroll related costs, respectively. Additional reserves of $5.4 million related to facility shutdown costs and $8.7 million for payroll related costs were recorded for the year ended December 31, 1999. Costs incurred and charged to such reserves amounted to $2.5 million for facility shutdown costs and $5.2 million for payroll related termination costs during the year ended December 31, 1999. Additionally, as a result of revisions to acquisitions' restructuring plans, $10.2 million of facility related costs and $0.7 million of payroll related costs were reversed against goodwill in 1999. At December 31, 1999, liabilities for approximately $13.8 million for costs associated with facility shutdown and consolidation and $6.4 million of costs for planned employee termination activities remained. The timing of facility shutdown and consolidation activities has been adjusted to reflect customer concerns with supply interruption. These reserves have been utilized as originally intended and management believes the liabilities recorded for shutdown and consolidation activities are adequate but not excessive as of December 31, 1999.
During the year ended December 31, 1999, the Company generated $227.3 million of cash from operations. This compares with $221.1 million provided during the same period in 1998. Cash provided by net income before depreciation and amortization was $228.7 million and $175.4 million for 1999 and 1998, respectively. Other operating items and working capital requirements relating to customer tooling development and related receivables during pre-launch phase decreased operating cash flow by approximately $1.4 million during 1999 and increased operating cash flow $45.7 during the 1998 period.
Net cash used in investing activities was $599.2 million during the year ended December 31, 1999 as compared to $267.4 million in the prior period. Net capital expenditures totaled $197.3 million and $185.1 million for the comparable 1999 and 1998 periods, respectively. Acquisitions and investments in joint ventures were approximately $401.9 million and $119.2 million for the 1999 and 1998 periods, respectively. The sale of the Hinge Business contributed $36.9 million during the 1998 period.
Net cash provided by financing activities totaled $372.1 million for the year ended December 31, 1999 compared with $49.7 million in the prior period. Net proceeds from borrowings were $367.5 million in 1999, with net repayments of $203.3 million in 1998. The issuance of stock contributed $4.6 million and $253.0 million to cash flow for 1999 and 1998, respectively.
At December 31, 1999, the Company had unused borrowing capacity of approximately $270 million, under its most restrictive debt covenant. The Company believes the borrowing availability under its credit agreement, together with funds generated by operations, should provide liquidity and capital resources to pursue its business strategy for the foreseeable future, with respect to working capital, capital expenditures,
and other operating needs. The Company estimates its 2000 capital expenditures will approximate $225 million. Under present conditions, management does not believe access to funds will restrict its ability to pursue its acquisition strategy.
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. Management believes that inflation has not significantly effected the Company's business over the past 12 months. 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 effectively change the characteristics of the interest rate 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, 1999, Tower Automotive had total debt and obligations under capital leases of $935.1 million. The debt is comprised of fixed rate debt of $200 million and floating rate debt of $735.1 million. The pre-tax earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates on variable rate debt would be approximately $7.4 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 1999 and 1998 revenues were derived from manufacturing operations in Europe. The results of operations and financial position of the Company's operations in Europe are principally measured in its respective currency and translated into U.S. dollars. The effects of foreign currency fluctuations in Europe 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 at December 31, 1999 and 1998 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, engage in hedging programs intended to reduce the Company's exposure to currency fluctuations. As of December 31, 1999, the Company held no foreign currency hedge positions. Management believes the effect of a one percent change in foreign currency rates would not materially affect the Company's financial position or results of operations for the years ended December 31, 1999 and 1998.
YEAR 2000
The Company completed its effort in resolving the impact of the year 2000 ("Y2K") on the processing of date-sensitive information by the Company's computerized and embedded systems. The Company experienced no significant business interruption as a result of the year 2000, either internally or externally from suppliers. The Company does not anticipate any further impact relating to date-sensitive information processing capabilities. The Company spent approximately $2.0 million on Y2K readiness activities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, becomes effective for the years beginning after June 15, 2000. 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. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 and 137, and has not yet determined the timing of adoption.
In April 1998, the Financial Accounting Standards Board issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires the expensing of start-up activities as incurred, versus capitalizing and expensing them over a period of time. The Company's adoption of SOP 98-5 during the first quarter of 1999 did not materially affect the consolidated results of operations or the financial position of the Company.
ITEM 7A.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" section of Item 7.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Tower Automotive are hereby incorporated by reference to Exhibit 99.1.
Management of the Company is responsible for the financial information and representations contained in the consolidated financial statements and other sections of the 1999 Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and therefore include certain amounts based on management's best estimates and judgments. The financial information contained elsewhere in the 1999 Annual Report is consistent with that in the consolidated financial statements.
The Company maintains internal accounting control systems which management believes provide reasonable assurance that the Company's assets are properly safeguarded and accounted for, that the Company's books and records properly reflect all transactions, and that the Company's policies and procedures are implemented by qualified personnel. Reasonable assurance is based upon the recognition that the cost of an internal control system should not exceed the related benefits.
The Audit Committee of the Board of Directors meets with representatives of management and Arthur Andersen LLP, the Company's independent public accountants, on financial reporting matters and the evaluation of internal accounting controls. The independent public accountants have free access to meet with the Audit Committee, without the presence of management, to discuss any appropriate matters.
Arthur Andersen LLP is engaged to express an opinion as to whether the consolidated financial statements present fairly, in all material respects and in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows of the Company. Solely for purposes of
planning and performing their audit of the Company's 1999 financial statements, Arthur Andersen LLP obtained an understanding of, and selectively tested, certain aspects of the Company's system of internal controls.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE REGISTRANT
The information required by Item 10 with respect to the directors and director nominees is incorporated herein by reference to the section labeled "Election of Directors" which appears in the Company's 2000 Proxy Statement.
B. EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the Company's executive officers as of December 31, 1999:
S.A. (TONY) JOHNSON has served as Chairman and a Director of the Company since April 1993. Mr. Johnson is the founder, Chief Executive Officer and President of Hidden Creek Industries ("Hidden Creek"), a private industrial management company based in Minneapolis which has provided certain management and other services to the Company. Mr. Johnson is also the managing partner of J2R Partners ("J2R"), an investment partnership that participated in the acquisition of R.J. Tower. Prior to forming Hidden Creek, Mr. Johnson served from 1985 to 1989 as Chief Operating Officer of Pentair, Inc., a diversified industrial company. From 1981 to 1985, Mr. Johnson was President and Chief Executive Officer of Onan Corp., a diversified manufacturer of electrical generating equipment and engines for commercial, defense and industrial markets. Mr. Johnson currently serves as Chairman and a director of Dura Automotive Systems, Inc., a manufacturer of mechanical assemblies and integrated systems for the automotive industry, and served as Chairman and a director of Automotive Industries Holding, Inc., a supplier of automotive interior trim components, from May 1990 until its sale to Lear Corporation in August 1995.
DUGALD K. CAMPBELL has served as President, Chief Executive Officer and a Director of the Company since December 1993. From 1991 to 1993, Mr. Campbell served as a consultant to Hidden Creek. From 1988 to 1991, he served as Vice President and General Manager of the Sensor Systems Division of Siemens Automotive, a manufacturer of engine management systems and components. From 1972 to 1988, he held various executive, engineering and marketing positions with Allied Automotive, a manufacturer of vehicle systems and components and a subsidiary of Allied Signal, Inc.
JAMES W. ARNOLD has served as Vice President of the Company since 1999, with current responsibility for the Company's Asian strategy. Mr. Arnold joined the Company in 1998. From 1977 to 1998, Mr. Arnold held a variety of manufacturing, sales, marketing and Asian general management positions at Allied Signal.
ANTHONY A. BARONE has served as Vice President and Chief Financial Officer of the Company since May 1995. From 1984 to 1995, Mr. Barone served as Chief Financial Officer of O'Sullivan Corporation, a manufacturer of interior trim components for the automotive industry.
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.
LUIGI CANDUSSO has served as Vice President of the Company since 1995. Mr. Candusso is currently leading the development of global strategies relating to customers and advanced technology. Mr. Candusso held multi-location operational responsibility during the period April 1995 through December 1999. The operations included Bowling Green, Kentucky; Corydon, Indiana; Granite City, Illinois; Milan, Tennessee; Turin, Italy; Bardstown, Kentucky; Kalamazoo, Michigan; Romulus, Michigan and Auburn, Indiana. From 1990 to April 1995, Mr. Candusso served as Vice President and General Manager of the Sensor Systems Division of Siemens Automotive, a manufacturer of engine management systems and components. From 1988 to 1990, Mr. Candusso served as Vice President of Operations at Fabricated Steel Products (FABCO), a division of Indal Canada.
PAUL W. JONES, JR. has served as Vice President of the Company since April of 1998, with responsibility for Platform Leadership and the launch of new products for Tower Automotive worldwide. From 1995 to 1998, Mr. Jones served as the Senior Vice President of Operations for Rollerblade and NordicTrack in Minnesota. From 1987 to 1995, Mr. Jones served as Corporate Director of Procurement for Steelcase in Grand Rapids, Michigan. Prior to Steelcase, Mr. Jones served from 1984 to 1987 as Vice President of Technology for a Division of PepsiCo. As of January 2000, Mr. Jones has left the Company.
TOMMY G. PITSER has served as Vice President since 1996, with current responsibility for the Company's European and South American strategy. Mr. Pitser previously had responsibility for the Company's 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.
SCOTT D. RUED has served as Vice President, Corporate Development, and a Director of the Company since April 1993. Mr. Rued served as Vice President, Chief Financial Officer and a director of Automotive Industries Holding, Inc. from April 1990 until its sale to Lear Corporation in August 1995. Mr. Rued, a partner of J2R, has also served as Executive Vice President and Chief Financial Officer of Hidden Creek since January 1994 and served as its Vice President - -Finance and Corporate Development from June 1989 through 1993. Mr. Rued is also a director of The Rottlund Company, Inc., a corporation engaged in the development and sale of residential real estate.
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.
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 2000 Proxy Statement.
ITEM 11.
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 2000 Proxy Statement, excluding information under the headings "Compensation Committee Report on Executive Compensation" and "Performance Graph."
ITEM 12.
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 "Security Ownership" which appears in the Company's 2000 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the sections labeled "Other Compensatory Agreements" and "Certain Relationships and Related Transactions" which appears in the Company's 2000 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997
- Consolidated Statements of Stockholders' Investment for the Years Ended December 31, 1999, 1998 and 1997
- Consolidated Statement of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
- Report of Independent Public Accountants -- S-1
- Financial Statement Schedule I -- Condensed Financial Information of the Registrant -- S-2
- Financial Statement Schedule II -- Valuation and Qualifying Accounts
(3) Exhibits: See "Exhibit Index" beginning on page 27.
(b) REPORTS ON FORM 8-K
(1) During the fourth quarter of 1999, the Company filed the following Form 8-K Current Reports with the Securities and Exchange Commission:
- The Company's Current Report on Form 8-K, dated October 15, 1999 (Commission File No. 1-12733), under Items 2 and 7.
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.
Date: March 8, 2000 By /s/ S.A. JOHNSON ----------------------------------- S.A. Johnson, Chairman
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.
TOWER AUTOMOTIVE, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
- ---------------
* Incorporated by reference.
** Indicates compensatory arrangement.
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
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, 2000.
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 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, 2000
S-1
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of these condensed statements.
S-2
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of the condensed statements.
S-3
SCHEDULE I
TOWER AUTOMOTIVE INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TOWER AUTOMOTIVE, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF STOCKHOLDERS' INVESTMENT (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
S-4
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, 1999, 1998 AND 1997 (AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of these condensed statements.
S-5
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 body structures and suspension systems for the global automotive industry. The Company has facilities in the United States, Canada, Italy and Japan, in China through its joint venture investment in Tower Golden Ring, in Brazil through its joint venture interest in Caterina, in Mexico through its joint venture investment in Metalsa, and in Korea through its joint venture investment in Seojin.
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%, 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% to 100.714% 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. STOCKHOLDERS' INVESTMENT
In April 1997, the Company completed an offering of 17,000,000 shares of Common Stock in a public offering at an offering price of $17.50 per share. The net proceeds of approximately $284.6 million were contributed as an additional investment in the Subsidiaries.
On May 19, 1998, the Parent Company's Board of Directors approved a two-for-one stock split, which was effected as a stock dividend. On July 15, 1998, stockholders were issued one additional share of Common Stock for each share of Common Stock held on the record date of June 30, 1998. All references to the number of common shares and per share amounts have been adjusted to reflect the stock split on a retroactive basis.
NOTE 4. 6 3/4% CONVERTIBLE SUBORDINATED DEBENTURES
On June 9, 1998, Tower Automotive Capital Trust (the "Issuer"), a wholly owned statutory business trust of the Parent Company, completed the offering of $258.8 million of its 6 3/4% 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 Issuer under the Preferred Securities are fully and unconditionally guaranteed by the Parent Company. Concurrently with the issuance of the Preferred Securities, the Issuer acquired $258.8 million of the Parent Company's 6 3/4% 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.
S-6
SCHEDULE I
TOWER AUTOMOTIVE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
NOTE 5. J.L. FRENCH CONVERTIBLE SUBORDINATED NOTE
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. The note bears interest at 7.5% annually with interest payable on the last day of each calendar quarter beginning December 31, 1999. 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.
NOTE 6. GUARANTEES AND RESTRICTIONS
Guarantee of Subsidiaries' Debt
In April 1997, the Subsidiaries entered into a revolving credit facility that provides for borrowings of up to $750 million on an unsecured basis with a letter of credit sublimit of $75 million. The Parent Company provided a guarantee for this debt. Under the terms of the credit facility, the equivalent of up to $85 million in borrowings can be denominated in foreign currency. As of December 31, 1999, approximately $76 million of the outstanding borrowings were denominated in Italian lira. The amount available under the revolving credit facility reduces to $675 million in April 2000, $600 million in April 2001 and $500 million in April 2002. The credit facility has a final maturity of April 2003. Interest on the credit facility is at the prime rate or LIBOR plus a margin ranging from 17 to 50 basis points depending upon the ratio of the consolidated indebtedness of the Company to its total capitalization. The weighted average interest rate for such borrowings was 6.0% for the year ended December 31, 1999.
On August 23, 1999, the Company amended and restated its Credit Agreement to include a term loan add on facility of $325 million. The weighted average interest rate for the term loan facility was 7.4% for the twelve months ended December 31, 1999. The proceeds from the term facility were used to repay outstanding indebtedness under the revolving facility incurred in connection with the acquisition of Active in July 1999.
Restrictions on Subsidiaries to Make Distributions to the Parent Company
Under the terms of the revolving credit facility described above, the Subsidiaries are restricted in their ability to dividend, loan or otherwise distribute assets, properties, cash, rights, obligations or securities to the Parent Company. These restrictions are subject to a number of important exceptions, including the ability of the Subsidiaries to: (i) declare or pay cash dividends to the Parent Company in an aggregate amount equal to 50% of the net income of the Company arising after December 31, 1996 and computed on a cumulative basis (provided that no event of default exists after giving effect to such action); (ii) declare and pay dividends to the Parent Company to be used to pay taxes and other expenses of the Parent Company and the Subsidiaries on a consolidated basis; and (iii) declare and pay dividends to the Parent Company to enable the Parent Company to make regularly scheduled interest payments or the payment of principal at maturity of any unsecured indebtedness issued by the Parent Company (including the Notes and the Debentures (see Note 3)), the proceeds of which are applied to the prepayment of the revolving loans, in each case (a) has no scheduled principal payments before April 18, 2004; (b) has no guaranty obligation by the borrower under the revolving credit facility; and (c) has terms and conditions which are acceptable to the principal lender under the revolving credit facility. As of December 31, 1999, the Subsidiaries could have paid up to approximately $125.7 million to the Parent Company under the exception described in item (i) above.
S-7
SCHEDULE II
TOWER AUTOMOTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
S-8