ITEM 1. BUSINESS
THE COMPANY
Viasystems, Inc. ("Viasystems" or the "Company") is a Delaware corporation and is a wholly-owned subsidiary of Viasystems Group, Inc. ("Group"), its parent holding company and sole stockholder. Group was formed in August 1996 to make strategic acquisitions of printed circuit board ("PCB") manufacturers and backplane assemblers and to integrate those acquisitions into a global enterprise that is the preferred supplier to end users of PCBs and backplanes. Discussion herein of Viasystems or the Company refer to Group, prior to the formation of Viasystems as a subsidiary of Group in April 1997, and to Viasystems subsequent to that date.
In a series of transactions during 1996 and 1997, the Company completed acquisitions of: (i) Circo Craft Co. Inc. ("Circo Craft"), a PCB manufacturer with principal operations in Canada and Puerto Rico; (ii) substantially all of the assets of the Interconnection Technologies Unit of the Microelectronics Group ("Lucent Division") of Lucent Technologies Inc. ("Lucent Technologies"), which unit was a producer of PCBs in Richmond, Virginia and backplanes in Richmond and is now operated as Viasystems Technologies Corp. ("Viasystems Technologies"); (iii) Forward Group PLC ("Forward"), a PCB manufacturer with principal operations in the United Kingdom; and (iv) Interconnection Systems (Holdings) Limited ("ISL"), a PCB manufacturer with principal operations in the United Kingdom.
During the first quarter of 1998, the Company completed three additional acquisitions of: (i) certain assets and obligations of Ericsson Telecom AB's ("Ericsson") PCB production facility located in Sweden (the "Ericsson Facility"); (ii) Mommers Print Service B.V. ("Mommers"), a PCB manufacturer located in the Netherlands; and (iii) Zincocelere S.p.A. ("Zincocelere"), a PCB manufacturer with principal operations in Italy.
MARKETS AND CUSTOMERS
Based on published industry data and management's knowledge of the industry, the Company believes it is one of the largest manufacturers and marketers of PCBs and backplanes in the world. PCBs are the basic platforms used to interconnect microprocessors, integrated circuits and other components essential to the functioning of virtually all electronic systems, ranging from sophisticated computers and industrial products to basic household appliances. Backplanes are printed circuit boards populated with components, such as connectors, capacitors, resistors and power supplies. Backplanes are used in electronic systems to distribute and ground power, to connect PCBs, power supplies and other elements, and to relay information into and out of electronic systems. The Company supplies over 800 customers globally, serving primarily the telecommunications, computer, automotive, industrial and instrumentation, military, and consumer electronics industries. As of December 31, 1998, the Company operated 20 manufacturing facilities, strategically located in North America, Europe and Asia.
The Company has a unique, long-term supplier relationship with Lucent Technologies, one of the world's leading designers, developers and manufacturers of telecommunications systems, software and products. In connection with the Lucent Division acquisition in December 1996, Lucent Technologies and the Company have entered into a five-year supply agreement pursuant to which substantial revenues may be derived. Under the agreement, Lucent Technologies is required to purchase a minimum annual dollar volume of PCBs and backplanes from the Company and is required to compensate the Company if it fails to purchase such minimum annual dollar volume. The supply agreement contains automatic renewal provisions for two additional one-year periods upon the Company's satisfaction of specified performance requirements for cost, quality and service. After the expiration of the two additional annual renewal periods, the agreement continues to renew unless either party terminates the agreement on 18 months' notice. Lucent Technologies has also designated the Company as a preferred supplier and afforded Viasystems the right to bid to supply all of Lucent Technologies' product requirements for which the Company demonstrates capability.
Sales to Lucent Technologies by the Company for the period from inception (August 28, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998 were $13.6 million, $310.1 million, and $334.2 million, respectively. Lucent Technologies accounted for approximately 27.0%, 39.0% and 32.4% of the Company's net sales for the period from inception (August 28, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, respectively. The loss of, or a significant curtailment of orders from, Lucent Technologies would affect adversely the Company's business, results of operations, financial condition, prospects and ability to service debt.
In connection with the acquisition of the Ericsson Facility in January 1998, the Company entered into a perpetual global supply agreement with Ericsson to produce a substantial portion of Ericsson's ongoing PCB requirements.
PRODUCTS AND SERVICES
The Company's offering of products and services includes the following:
Design and Development. The Company provides design and engineering assistance to customers in the early stages of product development to assure that both mechanical and electrical considerations are integrated to achieve a high quality and cost-effective product. Through development groups located at various facilities, the Company identifies, develops and markets new technologies that it believes will benefit its customers. These development groups work closely with customers during all stages of product life-cycles. For instance, process design changes and refinements required for volume production are identified and implemented prior to production. The Company also evaluates customer designs in light of manufacturing considerations and, when appropriate, recommends design changes to reduce manufacturing costs or lead times or to increase manufacturing yields or the quality of finished PCBs.
Quick-Turnaround Prototype. Prototypes typically require lead times of three to seven days, although lead times can be as short as 24 hours. The Company provides quick-turnaround prototype services to customers to facilitate their testing of products in development. Prototype development at the Company has included multilayer PCBs of up to 24 layers, embedded discrete components, and various high performance substrates for the high frequency microwave market.
Pre-Production. Pre-production is the manufacture of limited quantities of PCBs and backplanes during the transition period from prototype to volume production. Pre-production generally requires quick-turnaround delivery to accommodate time-to-volume pressures or as a temporary solution for unpredictable customer demands.
Medium to High Volume Production. Volume production is characterized by longer lead times and increased emphasis on lower cost as the product moves to full-scale commercial production. As customers increasingly demand a quick transition from prototype to volume production, few independent manufacturers can provide complex PCBs of 18 or more layers in the volume provided by the Company's larger facilities. The Company operates nine facilities that have medium and/or high volume PCB production capabilities.
Backplanes. Backplanes are generally larger and thicker PCBs on which connectors, pins and other components are mounted to interconnect PCBs, integrated circuits and other electronic components. The Company incorporates its own PCBs in backplanes to provide customers with a high level of PCB technology on a quick-turnaround and volume basis.
Specialty Production. The Company manufactures the following specialty products in quick-turnaround and medium to high volume quantities:
High-Performance PCBs. High-performance PCBs are used in electronic products that require high frequency interconnect solutions, such as cellular phone base stations and other telecommunications products, and are manufactured using specialty materials with properties that address the need for higher operating temperatures, higher frequencies and increased density. The Company has the expertise and specialized engineering processes required to manufacture high-performance PCBs with a broad range of materials and technological requirements.
PCMCIA Products. Personal Computer Memory Card Industry Association ("PCMCIA") products are credit card-sized, plug-in PCBs, a significant portion of which are memory and communication cards tailored to the mobile computing market. PCMCIA production requires the ability to produce very thin, dense packaging.
MANUFACTURING PROCESSES
The production of PCBs involves a variety of manufacturing disciplines, including mechanical operations (such as lamination, drilling and routing), chemical operations (such as copper deposition and etching), and graphics operations (such as phototool generation, photoprinting and screen printing). Much of the equipment is automated and highly specialized. The production processes are substantially similar for all PCB products, whether double-sided or multi-layer, and whether for a customer in the telecom industry or for customers in any of the computer, automotive or other industries served by the Company.
The Company's customers require that their suppliers be qualified under various industry standards for manufacture of PCBs, including Bellcore standards for telecommunications products, and UL (Underwriters Laboratories) standards for electronics. All of the Company's facilities are ISO-9002 certified. This certification facilitates worldwide acceptance of the Company's products. ISO-9002 certification is based on successful implementation of certain quality assurance requirements and includes ongoing monitoring of the Company's business and periodic compliance audits conducted by an independent quality assessor.
The Company's more sophisticated manufacturing processes used in the various manufacturing disciplines described above include:
Drilling. Complex multilayer PCBs require large numbers of small (less than 0.019 inches) holes in order to interconnect the various PCB layers.
Automatic Plating. The Company has custom designed, computer controlled plating lines that are capable of plating significant volumes of high quality PCBs. The plating lines are installed above a special purpose basement where chemicals are prepared and pumped to the manufacturing lines, chemical wastes are pre-processed and water is pre-treated and recycled.
Automatic Optical Inspection ("AOI") and Electrical Test ("ET") Equipment. Because defects in complex circuitry cannot be readily detected by conventional visual inspection, sophisticated AOI and ET equipment is used to improve yields and reduce the potential for customer returns.
Surface Mount Technology. The Company incorporates the use of surface mount technology to achieve greater component packaging densities. Surface mount technology allows components to be soldered to the surface of a PCB as opposed to the traditional through-hole technique, which requires components to be affixed to PCBs by inserting leads through the board. The use of surface mount technology has facilitated several overall improvements in PCBs, including: (i) the miniaturization of PCBs; (ii) end-user innovations using smaller and more complex designs; and (iii) more reliable interconnection within the PCB.
SALES AND MARKETING
The Company places a high priority on identifying and responding to its customers' requirements on a timely basis. In order to ensure that the Company is best positioned to respond to these requirements, it has developed a sales and marketing strategy that utilizes global account managers, a highly trained Company-employed direct sales force and independent manufacturers' representatives. This global sales organization is structured to ensure geographic coverage and account coordination.
As of December 31, 1998, the Company employed approximately 190 sales and marketing employees, of which 71 were direct sales representatives strategically located throughout 12 countries in North America, Europe, the Middle East and South Africa. The Company is also represented by 11 manufacturers' representative organizations in North America. The North American sales organization is divided into three regions which are jointly serviced by direct sales representatives and manufacturers' representatives. In Europe, the Company's sales force is organized into four regions, by customer. In both North America and Europe, a staff of sales engineers, technical service personnel and customer service organizations support the sales organization to ensure high-quality, customer-focused service. The global marketing organization further supports the sales organization through market research, market development and communications.
INTERNATIONAL OPERATIONS
Approximately 37% and 50% of the Company's 1997 and 1998 sales, respectively, originated outside of North America, primarily in Europe. As of December 31, 1998, the Company had manufacturing facilities in the U.K., Scotland, the Netherlands, Italy, Sweden and China, and sales offices throughout Europe. The Company believes that its global presence is important as it allows the Company to provide consistent, quality products on a timely basis to its multinational customers worldwide. See Note 13 of the Company's Consolidated Financial Statements for geographic region information.
The Company is subject to risks generally associated with international operations, including price and exchange controls and other restrictive actions. In addition, fluctuations in currency exchange rates may affect the Company's results of operations. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" in Item 7 hereof.
RAW MATERIALS AND SUPPLIER RELATIONSHIP
The Company orders materials and supplies based on purchase orders received and accepted and seeks to minimize its inventory of materials that are not identified for use in filling specific orders. Raw materials used in the Company's products consist mainly of inorganic chemicals, copper foil, copper clad epoxy glass laminate, epoxy glass prepreg and dryfilm resist. Although the Company uses a select group of suppliers, the materials used in manufacturing PCBs are generally readily available in the open market. The Company works with its suppliers to develop just-in-time supply systems to reduce inventory carrying costs. The Company also maintains a Supplier Certification Program to evaluate potential vendors on the basis of such factors as quality, on-time delivery, cost, technical capability, and potential technical advancement. In addition, the Company works closely with certain of its suppliers to improve the raw materials used in PCB and backplane production. Although adequate amounts of raw materials have been available in the past, there can be no assurances this will continue in the future.
TECHNOLOGY, DEVELOPMENT AND PATENTS
The Company maintains a strong commitment to research and development, focusing its efforts on enhancing existing product lines as well as developing new products based on the Company's existing technologies and production capabilities. During the period from the Company's inception (August 28, 1996) to December 31, 1996 and the years ended December 31, 1997 and 1998, the Company's research and development expenditures were $0.5 million, $10.8 million and $13.4 million, respectively. In addition, in the Company's acquisitions of Circo Craft and the Lucent Division in 1996, of Forward and ISL in 1997 and of Mommers and Zincocelere in 1998, portions of the purchase prices -- totals of $50.8 million, $294.5 million and $20.1 million in 1996, 1997 and 1998, respectively -- were assigned to acquired in-process research and
development and expensed in the Company's statements of operations. See the Consolidated Financial Statements included in Item 8, hereof.
The Company's research and development staff of over 650 experienced engineers, chemists and laboratory technicians works together with the Company's sales staff to identify specific customer and industry needs and develop innovative, high performance solutions which satisfy those needs. This method of product development allows the customer to effectively become a member of the development team, develops close ongoing working relationships between the Company and its customers and, in many instances, permits the Company to gain an in-depth understanding of its customers' businesses, thereby enabling it to better anticipate and serve their needs. The Company also seeks to apply advancements resulting from this process to other high-margin end user markets.
The Company has developed proprietary techniques and manufacturing expertise, particularly in the area of complex multilayer PCBs. The Company has received certain U.S. and foreign patents, including patents on advanced registration and positioning techniques, solder leveling, drilling and pin insertion, but chooses to rely primarily on trade secret protection. Although such techniques and expertise are subject to misappropriation or obsolescence, the Company intends to continue to develop improved methods, processes and techniques as dictated by the technological needs of the business.
COMPETITION
The PCB and backplane industry is highly fragmented and characterized by intense competition. The Company believes that its major competitors are the independent and captive producers that manufacture multilayer PCBs and provide backplane and other electronic assemblies.
The demand for PCBs has continued to be affected by the development of smaller, more powerful electronic components requiring less PCB area but a higher layer count. Expansion of the Company's existing products or services could expose the Company to new competition. Moreover, new developments in the electronics industry could render existing technology obsolete or less competitive and could potentially introduce new competition into the industry. There can be no assurance that the Company will continue to compete successfully against present and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations.
The Company competes on the basis of product quality, timeliness of delivery, price, product costs, customer technical support and the Company's integrated offering from development and design through volume production and backplane assembly.
BACKLOG
The Company estimates that its backlog of unfilled orders on December 31, 1996, 1997 and 1998 was approximately $50.8 million, $108.5 million and $141.7 million, respectively. The increases in backlog in 1997 and 1998 were due to the 1997 acquisitions of Forward and ISL and the 1998 acquisitions of the Ericsson Facility, Mommers and Zincocelere. Unfilled orders may be cancelled prior to delivery; however, such cancellations have historically not been material. Substantially all the backlog as of December 31, 1998 is expected to be filled by March 30, 1999. The backlog outstanding at any point in time is not necessarily indicative of the level of business to be expected in the ensuing period.
ENVIRONMENTAL
Certain operations of the Company are subject to federal, state, local and foreign environmental laws and regulations, which govern, among other things, the discharge of pollutants into the air and water, as well as the handling and disposal of solid and hazardous wastes. The Company believes that it is in material compliance with applicable environmental laws and the costs of compliance with such current or proposed environmental laws and regulations will not have a material adverse effect on the Company. Further, the Company is not a party to any claim or proceeding and is not aware of any threatened claim or proceeding under environmental
laws that could, if adversely decided, reasonably be expected to have a material adverse effect. Currently, remedial activities are being undertaken at the Company's facilities in Virginia and Puerto Rico. While the cost of such remediation could be material, the prior owners are conducting the requisite remedial actions pursuant to governmental orders and have agreed to indemnify the Company for costs associated with the remediations. The Company believes that the prior owners of those facilities are fully capable of performing and will perform under such agreements. Accordingly, the Company does not believe that any of these matters are reasonably likely to have a material adverse effect on its business, results of operations, financial condition, prospects and ability to service debt.
EMPLOYEES
As of December 31, 1998, the Company had approximately 9,300 employees. Approximately 3,300 employees, or about 35%, were represented by various unions pursuant to collective bargaining agreements. The Company has not experienced any labor problems resulting in a work stoppage, and believes it has good relations with its employees.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports and other information with the Securities and Exchange Commission (the "SEC"). Any reports, statements or other information filed by the Company may be read and copied at the SEC's public reference room, at 450 Fifth Street NW, Washington, DC, as well as at public reference rooms in New York, NY and Chicago, Ill. For further information on public reference rooms, call 1 (800) SEC-0330. The Company's filings are also available to the public from commercial retrieval services and at the Internet web site maintained by the SEC at http://www.SEC.gov.
ITEM 2.
ITEM 2. PROPERTIES
In addition to its executive offices in St. Louis, Missouri, as of December 31, 1998, the Company operated 20 principal manufacturing and research facilities located in nine different countries with a total area of approximately 3.6 million square feet. The Company owns approximately 2.9 million square feet and leases approximately 747,000 square feet. The Company owns what it believes to be the largest PCB manufacturing facility in Europe. The Company believes its plants and equipment include state-of-the-art technology and are well-maintained. Production facilities for certain of the Company's products are operating at or near capacity.
All of the Company's owned facilities are subject to mortgages pursuant to a credit facility with a financial institution. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included in Items 7 and 8, respectively, hereof.
The Company's facilities at December 31, 1998 were as follows:
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(1) Lease expires December 31, 2002.
(2) Lease portion of facility (approximately 30,000 sq. ft.) expires May 15, 2004.
(3) Lease expires June 24, 2009.
(4) Lease expires October 1, 2004.
(5) Lease expires June 21, 2014.
(6) Lease expires December 31, 2006.
(7) Lease expires December 31, 2000.
(8) Lease expires July 31, 2000.
In addition to the facilities listed above, at December 31, 1998 the Company maintained several sales and marketing facilities located throughout North America and Europe, all of which are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The operations of the Company have from time to time been involved in claims and litigation. The nature of the Company's business is such that it is anticipated that the Company will be involved from time to time in claims and litigation considered to be in the ordinary course of its business. Based on experience with similar claims and litigation, the Company does not anticipate that these matters will have a material adverse effect on its business, results of operations, financial condition, prospects or ability to service debt.
The Company anticipates that it may, from time to time, receive notifications alleging infringements of patents generally held by other manufacturers. Disputes over patent infringement are common in the electronics industry and typically begin with notices of the type described above. Although the ultimate resolution of the legal action and infringement notices described above cannot be predicted, the Company believes that such resolution, including any ultimate liability, will not have a material adverse effect on its business, results of operations, financial condition, prospects or ability to service debt.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding common stock is held by Group, and, accordingly, there is no established public trading market for the Company's common stock. The Company has paid no dividends since inception, and its ability to pay dividends is limited by the terms of certain agreements related to its indebtedness.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
THE COMPANY
The selected financial and other data below for the period from inception (August 28, 1996) to December 31, 1996 presents financial information of Group for the period during which Circo Craft and Viasystems Technologies were operated by Group and prior to the formation of the Company and Group's contribution of its assets to the Company in April 1997. The data for the period from inception (August 28, 1996) to December 31, 1996 has been derived from the audited consolidated financial statements of Group. The selected information below for the years ended December 31, 1997 and 1998, present the financial information of Viasystems and its subsidiaries subsequent to the capital contribution by Group and the financial information of Group and its subsidiaries prior to the capital contribution to Viasystems. The data for the years ended December 31, 1997 and 1998, have been derived from the audited consolidated financial statements of Viasystems. The following information should be read in conjunction with the audited Consolidated Financial Statements of Viasystems and the notes thereto and "Item 7.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in Item 8 of this report.
Certain information presented herein includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. One can identify these forward-looking statements by their use of words such as "expects," "plans," "will," "intends," "anticipates," "estimates," "forecasts," "projects" and other words of similar meaning. These statements are likely to address expected or possible future events, including statements of the plans and objectives of management for future growth, operations, products and services and statements relating to future economic performance. There can be no assurance that the
Company's actual results will not differ materially from its expectations. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company's forward-looking statements. These factors include assumptions based on historic experiences that may not apply to future results as well as a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Although it is not possible to predict or identify all such factors, they include the following:
- General competition in the markets and industries in which the Company operates;
- Consequences of the Company's substantial leverage including: (i) significant cash requirements to service indebtedness, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions and competition; (ii) possible limitations on its ability to obtain additional financing for operations and acquisitions; and (iii) restrictions placed on it by the agreements setting forth the terms and conditions of such indebtedness;
- Uncertainties arising from the Company's limited history of integrating the operations of separate and distinct businesses acquired since August 1996;
- Uncertainties arising from the Company's ability to implement its operating and acquisition strategies, including the ability to identify, negotiate and consummate future acquisitions on terms management considers favorable;
- Fluctuation in operating results arising from the variability in timing and volume of customer orders compared to the Company's capacity at the time of such orders, timing of expenditures in anticipation of future sales, pricing pressures, variations in product mix, start-up expenses relating to new facilities, economic conditions in the electronics industry and adverse developments with respect to significant customers, including Lucent Technologies, any or all of which could have a material adverse effect on the Company and its results of operations, financial condition, cash flows and its ability to service debt;
- Uncertainties arising from the rapidly changing technology and continually changing process developments characteristic of the market for the Company's products and services;
- Uncertainties relating to the Company's significant operations in international markets, including currency fluctuations and restrictions, inflation, changes in political and economic conditions, governmental regulation, changes in import duties, trade restrictions, work stoppages and taxes;
- Changes in accounting standards promulgated by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board or the SEC that are adverse to the Company; and
- Economic factors over which the Company has no control, including inflation and interest rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties that may affect adversely the Company's business, results of operations, financial condition, prospects and ability to service debt.
GENERAL
The Company was formed by Hicks, Muse, Tate & Furst Incorporated ("HMTF") and Mills & Partners, Inc. ("M&P") in August 1996 to make acquisitions of PCB manufacturers and backplane assemblers globally. Viasystems had no operations prior to the first acquisition completed in October 1996. A total of seven acquired businesses include five previously stand-alone companies and two previously captive divisions of electronic manufacturing OEMs.
The four initial acquisitions included i) an approximate $129.9 million cash purchase price for Circo Craft in Canada in October 1996, ii) an approximate $200.0 million cash purchase price for the Lucent Division in Richmond, Virginia in December 1996, iii) an approximate $208.5 million cash purchase price for Forward in the United Kingdom in April 1997, and iv) an approximate $140.0 million cash purchase price, plus assumption of debt, for ISL in the United Kingdom in April 1997.
Three subsequent acquisitions included i) an approximate $7.1 million cash purchase price for the Ericsson Facility in Sweden in January 1998, ii) an approximate $59.4 million cash purchase price for Mommers in the Netherlands in February 1998, and iii) an approximate $85.0 million cash purchase price, plus assumption of debt for Zincocelere in Italy in March 1998.
Assimilation of the seven acquired businesses into a single global operation has included the closure of acquired manufacturing facilities, severance of redundant production and administrative personnel, relocation of production equipment, transfer of technology and customer-specific product capabilities among Viasystems' sites, leverage of purchasing power of the larger combined business and other similar activities. Management plans to continue such activities related to the existing business and related to any subsequent acquisitions.
In general, volume demand for Viasystems' products increases or decreases consistent with demand trends in the electronics industry markets served by the Company, predominantly telecommunications, computer, automotive, and industrial and instrumentation. Demand trends for higher layer count PCBs and backplanes, greater density of circuits and vias on PCBs and backplanes, and surface mount and other developing interconnect technologies, among others, have also resulted in increased demand for the Company's more complex product offerings. Management expects increased demand for denser and increasingly complex products in most industry markets.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs written using two digits rather than four digits to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, produce invoices, or engage in similar normal business activities.
Management has implemented a Company-wide initiative to ensure that both its information technology systems and non-information technology systems applications are capable of processing data and transactions pertaining to the year 2000. The initiative utilizes both Company resources and external resources to identify and assess systems and applications affected, to correct existing systems or to acquire replacement systems, and to test the systems and applications for compliance with the requirements for processing year 2000 information. The Company's information systems are currently being upgraded and replaced as part of a strategy to implement consistent systems worldwide. The new systems being installed are capable of processing year 2000 information. All remaining systems will either be corrected in order to enable them to process year 2000 information or, if necessary, will be replaced with year 2000 compliant systems. The Company is more than fifty percent complete in having its mission critical business applications, computers and communications, facilities and process equipment fully compliant. The Company believes that it will achieve compliance with all business critical year 2000 processing requirements by the third fiscal quarter of 1999, and does not anticipate any material disruption in its operations as the result of any failure by the Company to be in compliance. The Company will capitalize and depreciate the cost of replacement systems consistent with its existing capital expenditures policies. Costs incurred to modify and maintain existing systems will be expensed as incurred. Management believes that a substantial portion of the costs for the new systems and the modifications will not represent incremental costs to the Company, but rather will represent the reallocation of existing and planned information technology resources. The amounts expensed in 1998 were immaterial, and management expects that amounts required to be expensed in future periods will not have a material effect on its financial position or results of operations. However, there can be no assurance that this process can be completed on the timetable described above; that all issues have been identified; or that the remediation process will be fully effective.
The Company is currently in the process of evaluating the external risk associated with the year 2000 issue. All critical or significant suppliers have been identified by the Company and have been surveyed regarding their year 2000 readiness. The Company is currently reviewing the results of those surveys and is planning year 2000 risk assessment audits at each critical supplier. Although the Company uses a select group of suppliers, the materials used in manufacturing PCBs are generally readily available in the open market.
Therefore, the Company believes any costs associated with the anticipated effect of third parties will be immaterial on its business, financial position or results of operations. However, there can be no guarantee that the systems of third parties on which the Company's systems rely will be converted timely or that a failure of a third party to convert would not have a material adverse effect on the Company.
The Company is currently developing contingency plans for all inventoried business critical year 2000 applications and significant third parties based on the assessed level of risk known to date.
The failure to identify and remediate year 2000 issues or the failure of key third parties who do business with the Company to timely remediate their year 2000 issues could cause systems failures or errors, business interruptions and in a worst case scenario, the inability to engage in normal business practices for an unknown length of time. Litigation could also ensue. The effect on the Company's business, financial condition, results of operations and cash flows could be materially adverse.
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisitions made in 1996, 1997 and 1998 the Company incurred significant charges related to purchased in-process research and development. The Company believes that efforts to complete the acquired in-process research and development projects will consist primarily of internal engineering costs over the next two to four years. These costs are estimated to be approximately $22.0 million. Such estimate is subject to revision should there be changes in the operating environment or the technical knowledge available within the industry or the Company. The Company, through its continued investment in research and development, intends to achieve and sustain technical superiority in the design and delivery of advanced PCB products, and believes, given its leadership position in the industry, that it is well positioned to do so. The Company believes that the new product and process technologies which result from ongoing research and development will build on the existing core printed circuit board technology and contribute to an anticipated growth in the Company's sales and anticipated improvements in the Company's cost of production in the future. If acceptable advancements are not achieved, failed research and development projects could have a material adverse effect on the Company's financial position or results of operations. The Company is unable to accurately quantify the potential impact in the future of the failure of any single project or multiple projects which were acquired as in-process research and development in the acquisitions. Although there can be no guarantee that the acquired in-process research and development projects will achieve technological feasibility, the Company believes that the likelihood of development is reasonable for these projects. The Company does not believe that it is subject to any greater risk of failure than its competitors, and, in fact, believes that its size, access to financial resources and relationships with customers contribute to a reduction of that risk which gives the Company a competitive technical advantage.
CONVERSION TO THE EURO
On January 1, 1999, eleven participating countries of the European Union converted to the Euro as their common national currency. The previous national currencies of these countries will still be accepted as legal tender until at least January 1, 2002. We do not expect the conversion to the Euro to have a material effect on our results of operations, financial condition or cash flows.
PREDECESSORS
Each of Circo Craft, the Lucent Division, Forward and ISL are considered predecessors to Viasystems and, as such, a discussion of the results of operations of each separate predecessor follows the discussion of the results of operations of the Company. The separate results of Viasystems and of each predecessor are affected by a number of factors including target markets, customers, and local economics. Differing demand for printed circuit boards in general and demand for different technologies of printed circuit boards may not be consistent for each of the predecessor entities acquired. The Company believes that the combination of the predecessor entities will provide it with a significant advantage in managing its operations to meet demand. The discussion of the results of operations of the separate entities has been prepared based upon the results of each separate entity in accordance with the local GAAP of the entity and should be read in conjunction with the "Item 6.
Selected Financial Data" for each predecessor and the financial statements and notes thereto of Circo Craft, the Lucent Division, Forward and ISL, all of which are included elsewhere herein.
RESULTS OF OPERATIONS -- THE COMPANY
Viasystems is a wholly owned subsidiary of Group. Viasystems was formed on April 2, 1997, as a subsidiary of Group. On April 10, 1997, Group contributed to Viasystems all of the capital of its then existing subsidiaries -- Circo Craft, Viasystems Technologies, and PCB Acquisition Limited (the acquisition parent of Forward). Prior to the contribution of this capital by Group, Viasystems had no operations of its own. The discussion included herein of the Company represents the results of operations of Viasystems and its subsidiaries subsequent to the capital contribution by Group and of Group and its subsidiaries prior to the capital contribution of such subsidiaries to Viasystems.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1998
Net sales for the year ended December 31, 1998, were $1,031.9 million, representing an increase of $236.6 million, or 29.8%, increase over the year ended December 31, 1997. The increase was primarily attributable to the acquisitions of the Ericsson Facility, Mommers and Zincocelere completed in the first quarter of 1998 (the "1998 Acquisitions") and increased volume partially offset by typical, industry-wide pricing pressures as well as the negative impact of the stronger U.K. pound as it relates to continental European and certain Asian currencies.
Cost of goods sold for the year ended December 31, 1998, was $723.7 million, or 70.1% of net sales, compared to $554.1 million, or 69.7% of net sales for the year ended December 31, 1997. Cost of goods sold as
a percent of net sales increased as product mix changes from the 1998 Acquisitions as well as the above mentioned currency-related price reductions experienced by the Company were partially offset by cost containment and reduction activities.
Selling, general and administrative expenses for the year ended December 31, 1998, increased by $31.1 million over selling, general and administrative expenses for the year ended December 31, 1997. These costs increased primarily due to the 1998 Acquisitions, the implementation of the Company's sales and marketing plan and planned increases in administrative expenses at the Company's Richmond, Virginia facility related to the separation from Lucent Technologies.
Depreciation and amortization for the year ended December 31, 1998, increased $56.6 million over the comparable period for 1997 primarily as a result of the full year impact of the acquisitions of Forward and ISL in the second quarter of 1997 and of the Ericsson Facility, Mommers and Zincocelere in the first quarter of 1998.
During the year ended December 31, 1998, the Company recorded a one-time non-cash write-off of $20.1 million related to in-process research and development acquired in the acquisitions of Mommers and Zincocelere. During the year ended December 31, 1997, the Company recorded a similar charge of $294.5 million related to the acquisitions of Forward and ISL.
Other expense increased $34.5 million, from $72.3 million for the year ended December 31, 1997, to $106.8 million for the same period in 1998, due primarily to increased interest expense and amortization of deferred financing costs related to the debt financing incurred to fund the 1998 Acquisitions.
Year Ended December 31, 1997
The Company's net sales for the year ended December 31, 1997 were $795.3 million and cost of goods sold were $554.1 million, or 69.7% of net sales. Selling, general and administrative expenses for the same period were $75.6 million, or 9.5% of net sales. During the year ended December 31, 1997, the Company recorded a one-time non-cash write-off of $294.5 million related to the acquisitions of Forward and ISL.
The Period from Inception (August 28, 1996) to December 31, 1996
The Company's net sales for the period from inception (August 28, 1996) to December 31, 1996 were $50.4 million and cost of goods sold were $42.1 million, or 83.4% of net sales. Selling, general and administrative expenses for the same period were $3.8 million, or 7.5% of net sales. During the period from inception (August 28, 1996) to December 31, 1996, net cash provided by operating activities was $1.7 million. For the same period, the Company used approximately $286.3 million in investing activities primarily for the acquisitions of Circo Craft and the Lucent Division. The acquisitions were funded through the issuance of $238.3 million of long-term obligations and the proceeds of $73.8 million of equity offerings offset by $11.4 million of financing costs.
The Company believes that its operating results are not comparable between the period from inception (August 28, 1996) to December 31, 1996 and the years ended December 31, 1997 and 1998 nor to the operating results expected to be achieved in the future due to, among other things, the startup of the Company in 1996, the acquisitions made in 1996, 1997 and 1998, the anticipated future acquisitions, and the financing incurred to fund past and future acquisitions. The Company believes that, due to the acquisitions made, sales in subsequent periods will increase from those reported for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998.
RESULTS OF OPERATIONS -- CIRCO CRAFT
Nine Months Ended September 30, 1996 Compared to Fiscal 1995
Net sales and cost of goods sold for the nine months ended September 30, 1996, were C$129.6 million and C$101.5 million, respectively, compared to sales and cost of goods sold for fiscal 1995 of C$185.2 million and C$148.8 million, respectively. Net sales for the nine months ended September 30, 1996, were
approximately 70.0% of sales for fiscal 1995. In general, Circo Craft's sales were lower during 1996 due to a shift in the product mix to lower layer count products driven primarily by the demand of one of Circo Craft's customers in the automotive industry. As a percentage of sales, cost of goods sold for the nine months ended September 30, 1996, decreased to 78.3% from 80.4% for fiscal 1995 primarily as a result of cost savings achieved through improved production processes. Selling, general and administrative expenses for the nine months ended September 30, 1996, were C$8.0 million compared to selling, general and administrative expenses for fiscal 1995 of C$11.1 million. Selling, general and administrative expenses as a percentage of sales for the nine months ended September 30, 1996, increased to 6.1% from 6.0% for fiscal 1995 primarily as a result of the lower sales caused by the product mix shift discussed above.
RESULTS OF OPERATIONS -- VIASYSTEMS TECHNOLOGIES
Eleven Months Ended November 30, 1996 Compared to Fiscal 1995
Net sales and cost of goods sold for the eleven months ended November 30, 1996, were $325.1 million and $244.3 million, respectively, compared to sales and cost of goods sold for fiscal 1995 of $325.0 million and $274.8 million, respectively. Net sales for the eleven months ended November 30, 1996, were approximately 100.0% of sales for fiscal 1995 as sales for Viasystems Technologies increased during 1996 due to increased demand by Lucent Technologies caused by the rapidly expanding telecommunications market. As a percentage of sales, cost of goods sold for the eleven months ended November 30, 1996, decreased to 75.1% from 84.5% for fiscal 1995 primarily as a result of the favorable impact of productivity improvements. Selling, general and administrative expenses for the eleven months ended November 30, 1996, were $34.8 million compared to selling, general and administrative expenses for fiscal 1995 of $42.4 million. Selling, general and administrative expenses as a percentage of sales for the eleven months ended November 30, 1996, decreased to 10.7% from 13.1% for fiscal 1995 as a result of decreased allocations from Lucent Technologies.
RESULTS OF OPERATIONS -- FORWARD
Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31,
Net sales and cost of goods sold for the fiscal year ended 1997 were L105.0 million and L79.0 million, respectively, compared to sales and cost of goods sold for the fiscal year ended 1996 of L66.8 million and L49.9 million, respectively. Sales during the fiscal year ended 1997 increased over the fiscal year ended 1996 due primarily to the full year impact of the 1995 acquisition of Exacta Circuits and three smaller companies in 1996. As a percentage of sales, cost of goods sold for the fiscal year ended 1997 increased to 75.2% from 74.6% for the fiscal year ended 1996 primarily as a result of the three smaller acquisitions of companies in 1996 which have products with lower margins. Selling, general and administrative expenses for the fiscal year ended 1997 were L11.2 million compared to selling, general and administrative expenses for the fiscal year ended 1996 of L6.4 million. Selling, general and administrative expenses increased in the fiscal year ended 1997 primarily due to the impact of the acquisitions discussed above.
RESULTS OF OPERATIONS -- ISL
Fiscal Year Ended April 4, 1997 Compared to Fiscal Year Ended March 29, 1996
Net sales and cost of goods sold for the fiscal year ended 1997 were L141.6 million and L94.5 million, respectively, compared to sales and cost of goods sold for the fiscal year ended 1996 of L104.6 million and L73.4 million, respectively. Sales during the fiscal year ended 1997 increased over the fiscal year ended 1996 due to increased demand for higher layer count PCBs for the telecommunications and computer industries. As a percentage of sales, cost of goods sold for the fiscal year ended 1997 decreased to 66.7% from 70.2% for the fiscal year ended 1996 primarily as a result of improved absorption of costs due to higher sales and productivity improvements achieved as a result of a number of cost savings projects underway including projects to decrease the cost of process materials and improve process automation. Selling, general and administrative expenses for the fiscal year ended 1997 were L10.5 million compared to selling, general and administrative expenses for the fiscal year ended 1996 of L7.5 million. Selling, general and administrative expenses as a
percentage of sales for the fiscal year ended 1997 remained relatively consistent at 7.4% compared to 7.2% for the fiscal year ended 1996.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
Net cash used in operating activities was $43.8 million for the year ended December 31, 1998, which compared to $104.9 million provided by operating activities for the comparable period in 1997 primarily as a result of timing of payments made in 1998 to vendors and related to certain plant shutdown, downsizing and consolidation costs. Net cash used in investing activities was $276.0 million for the year ended December 31, 1998, compared to net cash used of $273.1 million for the year ended December 31, 1997. The net cash used in investing activities for the year ended December 31, 1998, consisted of capital expenditures of $130.4 million and $145.7 million used for the acquisitions of the Ericsson Facility, Mommers, and Zincocelere. Net cash used in investing activities for the year ended December 31, 1997, consisted of $117.2 million for capital expenditures and $155.9 million for the acquisitions of Forward and ISL.
Net cash provided by operating activities was $104.9 million for the year ended December 31, 1997, which compared to $1.7 million provided by operations for the period from inception (August 28, 1996) to December 31, 1996. Net cash used in investing of $273.1 million for the year ended December 31, 1997, consisted of capital expenditures of $117.2 million and acquisition activities of a net of $155.9 million. Net cash used in investing of $286.3 million for the period from inception (August 28, 1996) to December 31, 1996 consisted of capital expenditures of $3.6 million and acquisition activities of a net of $282.7 million. Net cash provided by financing activities was $184.1 million for the year ended December 31, 1997, compared to net cash provided by financing activities of $300.7 million for the period from inception (August 28, 1996) to December 31, 1996. The net cash provided by financing activities for the year ended December 31, 1997 was used primarily for the acquisition of Forward. The acquisition of ISL was completed in a non-cash transaction in which the selling stockholders received notes payable (the "Chips Loan Notes"). The net cash provided by financing activities in the period from inception (August 28, 1996) to December 31, 1996 was used primarily to finance the acquisitions of Circo Craft and the Lucent Division.
In connection with the acquisition of ISL, Group assumed the $437.5 million of Chips Loan Notes of which $285.3 million was outstanding at December 31, 1998. In order to fund principal payments when the remaining Chips Loan Notes are called the Senior Credit Facilities contain a committed, term loan facility that may be drawn upon by the Company so that it may satisfy its obligation in respect of the remaining $285.3 million principal amount of the Chips Loan Notes (see Note 8 to the Notes to Consolidated Financial Statements in Item 8 hereof). In June 1997, the Company completed the offering of $400.0 million of 9 3/4% Senior Subordinated Notes due 2007 (the "1997 Notes"). The net proceeds of the 1997 Notes were used to repay the Subordinated Credit Facility, approximately $130.3 million of term loans outstanding under the Senior Credit Facilities, and approximately $41.6 million of revolving credit amounts outstanding under the Senior Credit Facilities which was borrowed subsequent to December 31, 1996, to repay debt assumed in the acquisition of ISL.
In February 1998, the Company completed the offering of an additional $100.0 million of 9 3/4% Senior Subordinated Notes due 2007 at a price of 104.5%, yielding net proceeds of $101.0 million (the "1998 Notes" and together with the 1997 Notes, the "2007 Notes"). As a condition of the offering of the 1998 Notes, HMTF contributed an additional $50.0 million of equity to the Company and the Senior Credit Facilities were amended to, among other things, establish an additional $70.0 million term loan and increase available revolving credit facilities by $25.0 million (the "Amended Senior Credit Facilities"). A portion of the proceeds of the 1998 Notes, the additional term loan under the Amended Senior Credit Facilities, and the equity contribution have been used to fund the acquisitions of the Ericsson Facility, Mommers, and Zincocelere. In addition, the Company used a portion of these proceeds to repay revolving credit line amounts outstanding under the Amended Senior Credit Facilities.
In April 1998, the holders of the Chips Loan Notes redeemed $152.2 million of the Chips Loan Notes. As such, $118.3 million of cash held by Bisto Funding, Inc. was paid to the holders of the Chips Loan Notes.
The Company borrowed $33.9 million of the available Chips Term Loan to fund its portion of the payment of the Chips Loan Notes.
As of December 31, 1998, the Company's indebtedness consisted of amounts outstanding under the Amended Senior Credit Facilities, the 2007 Notes, the Company's liability under the Chips Loan Notes, capital leases and other debt.
The Company's Adjusted EBITDA (as defined in "Item 6. Selected Financial Data") for fiscal 1996, 1997 and 1998 was $4.5 million, $165.8 million and $201.4 million, respectively. As a percentage of sales, Adjusted EBITDA was 8.9%, 20.9% and 19.5%, respectively, for the same periods. Adjusted EBITDA is one of the financial measures in the covenants to the Amended Senior Credit Facilities. Although Adjusted EBITDA does not necessarily indicate whether cash flows will be sufficient for cash requirements, the Company believes that Adjusted EBITDA provides additional information for determining its ability to meet debt service requirements as revenues increase more than cash expenditures for operating expenses.
The Company anticipates that its primary uses of cash in 1999 will be (i) for capital expenditures for maintenance, replacement and acquisitions of equipment, expansion of capacity, productivity improvements and product and process technology development and (ii) to pay interest on, and to repay principal of, indebtedness under the Amended Senior Credit Facilities, the 2007 Notes, the Chips Reimbursement Obligation and other outstanding indebtedness of the Company as discussed in Note 8 to the Notes to Consolidated Financial Statements in Item 8 hereof. The Company anticipates making capital expenditures in 1999 for facilities, equipment and information systems. The Amended Senior Credit Facilities contain annual limits on the Company's capital expenditures. The Company believes that such limits are sufficient to allow the Company to undertake all anticipated capital projects. In 1999, the Company will be obligated to make principal and interest payments of approximately $117.0 million under the Amended Senior Credit Facilities, the 2007 Notes, and the Chips Reimbursement Obligation, which the Company anticipates will be made from cash flow from operations or, if necessary, additional borrowings.
The Company expects that its primary sources of cash will be cash from operating activities and revolving borrowings under the Amended Senior Credit Facilities. As of December 31, 1998, there was $117.2 million outstanding under the revolving credit facilities available under the Amended Senior Credit Facilities, and approximately $161.2 million ($58.9 million of which was only available for future acquisitions) of available borrowing capacity thereunder, subject to certain limitations. The Company anticipates that the cash flow from operations and additional funds available under the revolving facilities of the Amended Senior Credit Facilities will be sufficient to meet its foreseeable requirements for working capital, capital expenditures and debt service and other operating cash requirements. The acquisition of other businesses by the Company in the future likely would require external sources of debt and/or equity financing. There can be no assurance that such funds would be available on terms satisfactory to the Company, or at all. In addition, the Company's future operating performance and ability to meet its financial obligations will be subject to future economic conditions and to financial, business and other factors, many of which will be beyond the Company's control.
Borrowings under the Amended Senior Credit Facilities bear interest at floating rates and will require interest payments on varying dates depending on the interest rate option selected by the Company. The 2007 Notes bear interest at the rate of 9 3/4% per annum, which is payable semiannually in arrears. The Chips Loan Notes have a maturity of six years and pay cash interest quarterly at a fixed rate initially of approximately 6.2% per annum and thereafter at a varying discount to The Chase Manhattan Bank's prime rate. The Company is liable for payment of interest on the Chips Loan Notes through the Chips Reimbursement Obligation. The holders of the Chips Loan Notes have the right after the first anniversary of their issuance to redeem the Chips Loan Notes by putting them to Group on any interest payment date at 100% of their principal amount. In the event additional Chips Loan Notes are redeemed, the Company's liability under the Chips Reimbursement Obligation of $285.3 million will be funded by a term loan available under the Amended Senior Credit Facilities.
The Amended Senior Credit Facilities and the 2007 Notes restrict the Company from, among other things: (i) incurring additional indebtedness (other than permitted indebtedness); (ii) creating liens; (iii) disposing of assets; (iv) guaranteeing indebtedness; (v) merging or selling substantially all of its assets;
(vi) declaring and paying certain dividends; (vii) making certain investments and loans; and (viii) entering into certain transactions with affiliates, in each case with certain exceptions customary for credit facilities such as the Amended Senior Credit Facilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosure of comprehensive income (loss) and its components. Effective January 1, 1998, the Company adopted SFAS No. 130. See the consolidated statements of operations and comprehensive income for the impact of such gains and losses on the measurement of comprehensive income.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes reporting requirements related to a business' operating segments, products and services, geographic areas of operations and major customers. Effective January 1, 1998, the Company adopted SFAS No. 131. See Note 13 to the Consolidated Financial Statements.
In February 1998, the FASB adopted SFAS No. 132, "Employer's Disclosure about Pensions and Other Post Retirement Benefits," which establishes reporting requirements related to a business' pension and other post retirement benefits. Effective January 1, 1998, the Company adopted SFAS No. 132. See Note 16 to the Consolidated Financial Statements.
In April 1998, the FASB adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company will adopt SOP 98-5 in fiscal year 1999 and will report the write off of the net book value of start-up costs as of January 1, 1999, of approximately $23.0 million as a cumulative effect of a change in accounting principle.
In June 1998, the FASB adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement, and require that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
At December 31, 1998, approximately $514.8 million of the Company's long-term debt, specifically borrowings outstanding under the Amended Senior Credit Facilities and the Chips Loan Notes, bear interest at variable rates. Accordingly, the Company's earnings and cash flow are affected by changes in interest rates. Assuming the current level of borrowings at variable rates and assuming a two percentage point change in the average interest rate under these borrowings, it is estimated that the Company's 1998 interest expense would have increased by approximately $10.3 million. In the event of an adverse change in interest rates, management would likely take actions that would mitigate the Company's exposure to interest rate risk; however, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.
FOREIGN CURRENCY RISK
The Company manufactures PCBs and assembles backplanes in various regions of the world, and exports and imports these products to and from several countries. The Company's operations may therefore be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Sales and expenses are frequently denominated in local currencies, and results of operations may be affected adversely as currency fluctuations affect the Company's product prices and operating costs or those of its competitors. The Company, from time to time, engages in hedging operations, such as forward exchange contracts, to reduce its exposure to foreign currency fluctuations. The Company does not engage in hedging transactions for speculative investment reasons. Such hedging operations historically have not been material, and gains and losses from such operations have not been significant. There can be no assurance that such hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Viasystems, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Viasystems, Inc. and its subsidiaries at December 31, 1997 and 1998 and the results of their operations and their cash flows for the period from inception (August 28, 1996) to December 31, 1996 and the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri March 23, 1999
VIASYSTEMS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
The accompanying notes are an integral part of the consolidated balance sheets.
VIASYSTEMS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
VIASYSTEMS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
VIASYSTEMS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND ACQUISITIONS
Viasystems, Inc. ("Viasystems"), a wholly owned subsidiary of Viasystems Group, Inc. ("Group"), was formed on April 2, 1997. On April 10, 1997, Group contributed to Viasystems all of the capital of its then existing subsidiaries. Prior to the contribution of this capital by Group, Viasystems had no operations of its own. The consolidated financial statements included herein present the results of operations of Viasystems and its subsidiaries subsequent to the capital contribution by Group, and the results of operations of Group and its subsidiaries prior to the capital contribution of such subsidiaries to Viasystems. As used herein, the Company refers to Viasystems and its subsidiaries subsequent to the capital contribution by Group and to Group and its subsidiaries prior to such capital contribution. These financial statements have been adjusted to reflect the equity structure of Viasystems on a retroactive basis.
On October 1, 1996, the Company acquired all of the outstanding stock of Circo Craft Co. Inc. ("Circo Craft"), a Quebec corporation and a rigid printed circuit board ("PCB") manufacturer, for aggregate cash consideration of $129,850 plus acquisition fees and expenses of $885 (the "Circo Craft Acquisition"). The operating results of Circo Craft Co. Inc. are included in the consolidated financial statements of Viasystems since the date of the Circo Craft Acquisition.
The Circo Craft Acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been allocated to the assets and liabilities based on their estimated respective fair values. The Company allocated a significant portion of the purchase price, as described below, to intangible assets, including approximately $39,200 of in-process research and development ("in-process R&D"). The portion of the purchase price allocated to in-process R&D projects that did not have a future alternative use totaled $39,200 and was charged to expense as of the acquisition date. The in-process R&D projects relate primarily to developing significant enhancements to the current product offering, as well as introducing advanced new products. The incomplete projects include new connector functionality, chip packaging solutions, component miniaturization, specialty drilling and surface finishes. Given the uniqueness of the tasks and the technologies involved, alternative future uses for these projects, apart from the objectives and economics of the projects for which they are intended, do not exist. The Company believes that the efforts to complete the acquired in-process R&D projects will consist of internally-staffed engineering costs over the next two to four years. The costs to complete the in-process R&D projects and to procure, develop and test the required capital assets are anticipated to be significant. The other acquired intangibles include developed technology, assembled workforce, and customer list. These intangibles are being amortized over their estimated useful lives of 1-15 years. The remaining unidentified intangible asset has been allocated to goodwill and is being amortized over its estimated useful life of 20 years (see Note 2).
On December 1, 1996, the Company, through its newly formed subsidiary, Viasystems Technologies Corp., acquired certain assets and assumed certain liabilities of the Microelectronics Group, Interconnection Technologies Unit of Lucent Technologies Inc. (the "Lucent Division"), a rigid PCB manufacturer and backplane assembler, (the "Lucent Division Acquisition") for an aggregate cash consideration of $170,000 and 1,200,000 shares of preferred stock valued at $30,000 plus acquisition fees and expenses of $1,969. The operating results of Viasystems Technologies Corp. are included in the consolidated financial statements of the Company since the date of the Lucent Division Acquisition.
The Lucent Division Acquisition was accounted for using the purchase method of accounting whereby the total purchase price has been allocated to the assets and liabilities based on their estimated respective fair values. The Company allocated a significant portion of the purchase price, as described below, to intangible assets, including approximately $11,600 of in-process R&D. The portion of the purchase price allocated to in-process R&D projects that did not have a future alternative use totaled $11,600 and was charged to expense as of the acquisition date. The in-process R&D projects relate primarily to developing significant enhancements to the current product offering as well as introducing advanced new products. The incomplete projects VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
include new connector functionality, chip packaging solutions, component miniaturization, specialty drilling and surface finishes. Given the uniqueness of the tasks and the technologies involved, alternative future uses for these projects, apart from the objectives and economics of the projects for which they are intended, do not exist. The Company believes that the efforts to complete the acquired in-process R&D projects will consist of internally-staffed engineering costs over the next two to four years. The costs to complete the in-process R&D projects and to procure, develop and test the required capital assets are anticipated to be significant. The other acquired intangibles include developed technology, assembled workforce, and customer list. These intangibles are being amortized over their estimated useful lives of 1-15 years. The remaining unidentified intangible asset has been allocated to goodwill and is being amortized over its estimated useful life of 20 years (see Note 2).
In connection with the Lucent Division Acquisition, the Company entered into a supply agreement with Lucent Technologies Inc. ("Lucent Technologies") under which Lucent Technologies agreed to purchase minimum annual dollar volumes of PCBs and backplanes from the Company at defined prices. Such agreement also provides the Company with specified remedies against Lucent Technologies in the event Lucent Technologies does not purchase the minimum annual volumes set forth in the agreement.
On April 11, 1997, the Company acquired all of the outstanding stock of Forward Group, PLC ("Forward"), a manufacturer of rigid PCBs located in the U.K. The purchase price of approximately $208,483 consisted of cash and notes payable to certain Forward stockholders plus $5,585 of acquisition fees and expenses (the "Forward Acquisition"). The Forward Acquisition and related transaction fees and expenses were funded with (i) $40,000 from the issuance of 1,600,000 shares of Series C Preferred Stock of Viasystems Group, Inc. and (ii) $216,000 from a Subordinated Credit Facility. The Subordinated Credit Facility was paid off with a subsequent debt offering (see Note 8).
The Forward Acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been allocated to the assets and liabilities based on their estimated respective fair values. Accordingly, the results of operations of Forward since its acquisition are included in the results of operations of the Company. The Company has allocated a significant portion of the purchase price, as described below, to intangible assets, including approximately $97,800 of in-process R&D. The portion of the purchase price allocated to in-process R&D projects that did not have a future alternative use totaled $97,800 and was charged to expense as of the acquisition date. The other acquired intangibles include developed technology, assembled workforce, and customer list. These intangibles are being amortized over their estimated useful lives of 1-15 years. The remaining unidentified intangible asset has been allocated to goodwill and is being amortized over its estimated useful life of 20 years (see Note 2).
The total purchase price including fees and expenses has been allocated to the acquired net assets as follows:
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1997, Viasystems Group, Inc.'s stockholders and certain of its affiliates formed Chips Holding, Inc., to acquire Interconnection Systems (Holdings) Limited ("ISL"), a manufacturer of rigid PCBs located in the U.K. On April 21, 1997, Chips Holdings, Inc. acquired ISL for $437,500 plus $8,953 of acquisition fees and expenses (the "ISL Acquisition"). The purchase price consisted entirely of notes payable to the former stockholders of ISL. In connection with the transaction, the stockholders of Viasystems Group, Inc. invested $140,000 of equity capital in Chips Holdings, Inc. On June 6, 1997, Chips Holdings, Inc. merged with Viasystems Group, Inc. and the subsidiaries of Chips Holdings, Inc., including ISL, became subsidiaries of Viasystems and certain of its subsidiaries (the "Chips Merger") in consideration for the issuance to Viasystems Group, Inc.'s stockholders and certain of its affiliates of 140,000,000 shares of Viasystems Group, Inc. common stock valued at $140,000. Viasystems Group, Inc. assumed the $437,500 of notes payable which were incurred by Chips Holdings, Inc. (the "Chips Loan Notes") to finance the ISL acquisition (see Note 8).
The ISL Acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been allocated to the assets and liabilities based on their estimated respective fair values. The Company has allocated a significant portion of the purchase price, as described below, to intangible assets, including approximately $196,700 of in-process R&D. The portion of the purchase price allocated to in-process R&D projects that did not have a future alternative use totaled $196,700 and was charged to expense as of the acquisition date. The other acquired intangibles include developed technology, assembled workforce, and customer list. These intangibles are being amortized over their estimated useful lives of 1-15 years. The remaining unidentified intangible asset has been allocated to goodwill and is being amortized over its estimated useful life of 20 years (see Note 2).
The Chips Merger was accounted for as a transfer of assets among companies under common control and was recorded at Chips Holdings, Inc.'s historical cost. In the Chips Merger, ISL and its subsidiaries became wholly owned subsidiaries of Viasystems, and as such, Viasystems will account for the acquisition of ISL as of the acquisition by Chips Holdings, Inc. and the results of operations of ISL since the acquisition by Chips Holdings, Inc. are included in the results of operations of the Company.
The total purchase price including fees and expenses has been allocated to the acquired net assets as follows:
Forward's and ISL's (the "1997 Acquisitions") in-process R&D value is comprised of numerous R&D programs that should reach completion during periods ranging from 1998 through 1999. These projects will include the introduction of important new technology that will, if successful, enable the advancement of the 1997 Acquisitions' PCB product line. At the acquisition date, R&D programs ranged in completion from 10% to 90% complete and total continuing research and development commitments to complete the projects are expected to be approximately $5,900. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, these projects will require maintenance research and development after they have reached a state of technological and commercial feasibility. In addition to usage of the companies' internal cash flows, Viasystems will likely provide a substantial amount of funding to complete each company's programs. Remaining development efforts for the in-process R&D programs are complex and include the development of next-generation technological solutions.
Certain projects within the 1997 Acquisitions' in-process R&D programs began to bear results in 1998. As evidenced by their continued support for these projects, management believes the Company is well positioned to successfully complete each of the major in-process R&D programs. Management believes other in-process projects are on track to be completed and will continue to bear results in future periods. However, there is risk associated with the completion of the projects and there is no assurance that each will meet with either technological or commercial success. The substantial delay or outright failure of the in-process R&D related to the 1997 Acquisitions would impact the Company's business, results of operations and cash flows.
The 1997 Acquisitions' total revenues are projected to increase over the next 5 years, assuming the successful completion and market acceptance of the in-process R&D programs. Estimated revenue from existing technologies of the 1997 Acquisitions is expected to grow in 1999, then begins a slow decline over the next 10 years as the in-process technologies are completed and existing processes and know-how approach obsolescence. The estimated revenues for in-process R&D projects related to the 1997 Acquisitions are expected to peak in 2005, and thereafter decline as other new products and technologies are expected to enter the market.
In January 1998, the Company acquired certain assets and assumed certain liabilities of the PCB production facility of Ericsson Telecom AB ("Ericsson") located in Sweden (the "Ericsson Facility"), for a cash purchase price of approximately $7,000. In addition, the Company and Ericsson signed a three-year supply agreement whereby Ericsson committed to purchase 40% of its PCB requirements from the Company.
In February 1998, the Company acquired all the outstanding shares of Print Service Holding N.V., the parent holding company of Mommers Print Service B.V. ("Mommers"), a PCB manufacturer located in The Netherlands and specializing in the production of high-volume, medium- to high-complexity PCBs and backplanes, for a cash purchase price of approximately $59,399, plus assumed obligations (the "Mommers Acquisition"). Accordingly, the results of operations of Mommers since its acquisition are included in the results of operations of the company.
The Mommers Acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been allocated to the assets and liabilities based on their estimated respective fair values. The Company has allocated a portion of the purchase price, as described below, to intangible assets, including in-process R&D. The portion of the purchase price allocated to in-process R&D projects that did not have a future alternative use totaled $5,300 and was charged to expense as of the acquisition date. The other acquired intangibles include developed technologies, assembled workforce, and customer list. These intangibles are being amortized over their estimated useful lives of 1-15 years. The remaining unidentified intangible asset has been allocated to goodwill and is being amortized over its estimated useful life of 20 years (see Note 2).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total purchase price including fees and expenses has been allocated to the acquired net assets as follows:
In March 1998, the Company acquired all the outstanding shares of Zincocelere S.p.A. ("Zincocelere"), a PCB manufacturer located in northern Italy and specializing in the production of high-volume medium- to high-complexity PCBs, for a cash purchase price of approximately $85,012, plus assumed obligations (the "Zincocelere Acquisition").
The Zincocelere Acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been allocated to the assets and liabilities based on their estimated respective fair values. The Company has allocated a portion of the purchase price, as described below, to intangible assets, including in-process R&D. The portion of the purchase price allocated to in-process R&D projects that did not have a future alternative use totaled $14,800 and was charged to expense as of the acquisition date. The other acquired intangibles include developed technologies, assembled workforce, and customer list. These intangibles are being amortized over their estimated useful lives of 1-15 years. The remaining unidentified intangible asset has been allocated to goodwill and is being amortized over its estimated useful life of 20 years (see Note 2).
The total purchase price including fees and expenses has been allocated to the acquired net assets as follows:
The Mommers and Zincocelere Acquisitions were funded by a February 1998 offering of $100,000 of 9 3/4% Series B Senior Subordinated Notes due 2007, a $70,000 term loan (see Note 8), and an additional equity contribution of $50,000.
Mommers' and Zincocelere' (the "1998 Acquisitions") in-process R&D value is comprised of numerous R&D programs that should reach completion during periods ranging from 1999 through 2001. These projects will include the introduction of important new technology that will, if successful, enable the advancement of the 1998 Acquisitions' PCB product line. At the acquisition date, R&D programs ranged in completion from 10% to 90% complete and total continuing research and development commitments to complete the projects are expected to be approximately $15,900. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, these projects will require maintenance research and development after they have reached a state of technological and commercial feasibility. In addition to usage of the companies' internal cash flows, Viasystems will likely provide a substantial amount of funding to complete each company's programs. Remaining development efforts for the in-process R&D programs are complex and include the development of next-generation technological solutions.
Certain projects within the 1998 Acquisitions' in-process R&D programs will begin to bear results in late 1999. As evidenced by their continued support for these projects, management believes the Company is well positioned to successfully complete each of the major in-process R&D programs. Management believes other in-process projects are on track to be completed and will continue to bear results in future periods. However, there is risk associated with the completion of the projects and there is no assurance that each will meet with either technological or commercial success. The substantial delay or outright failure of the in-process R&D related to the 1998 Acquisitions would impact the Company's business, results of operations and cash flows.
The 1998 Acquisitions' total revenues are projected to increase over the next 5 years, assuming the successful completion and market acceptance of the in-process R&D programs. Estimated revenue from existing technologies of the 1998 Acquisition is expected to grow in 1999, then begins a slow decline over the next 5-8 years as the in-process technologies are completed and existing processes and know-how approach obsolescence. The estimated revenues for in-process projects related to the 1998 Acquisitions are expected to peak in 2003, and thereafter decline as other new products and technologies are expected to enter the market.
The Company incurred significant charges in 1996, 1997 and 1998 related to purchased in-process R&D costs. A portion of the purchase price for acquisitions was attributed to the value of in-process R&D projects and was expensed in accordance with Statement of Accounting Standards No. 2, "Accounting for Research and Development Costs." The Company believes its accounting for purchased in-process R&D was made in accordance with generally accepted accounting principles and valuation practices at the time of the related acquisitions. The Company obtained independent valuations of the purchased in-process R&D. The income valuation approach was used to determine the fair value of the in-process R&D projects acquired in connections with the acquisitions made in 1996 and 1997. In 1998, the Company applied the Security and Exchange Commission's new guidelines for valuing purchased in-process R&D.
In connection with the acquisitions of Forward, ISL, Mommers, Zincocelere, and the Ericsson Facility, the Company's management assessed and evaluated the operations, employment levels and overall strategic fit of each facility acquired. As a result of this assessment and finalization of its plans, the Company recorded certain plant shutdown, downsizing and consolidation accruals as part of the purchase price allocations related to the 1997 and 1998 Acquisitions, which also resulted in certain adjustments to the Company's preliminary purchase price allocations.
Accruals were established to cover costs associated with the closure of the Selkirk and Galashiels, Scotland facilities, to cover costs associated with the closure of the Manchester, Rugby and Telford, England facilities, to cover costs associated with redundant employment levels at the Norrkoping, Sweden and Echt, Netherlands facilities and to cover the cost of consolidating redundant administrative functions among the 1998 Acquisitions. The accruals cover shutdown costs from the period of the plant closure to the date of disposal, including personnel and severance related costs, lease commitment costs, equipment removal and disposal costs, cleanup and restoration costs and idle plant costs.
During fiscal 1998, plant shutdown and downsizing actions resulted in the termination of approximately 860 employees. Remaining shutdown actions are expected to be complete by the end of fiscal 1999.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of accrued liabilities follows:
Included below is unaudited pro forma financial data setting forth results of operations of the Company for the year ended December 31, 1997, as though the Forward Acquisition, the ISL Acquisition, the Mommers Acquisition and the Zincocelere Acquisition and the related financing had occurred at January 1, 1997 and for the year ended December 31, 1998, as though the Mommers Acquisition and the Zincocelere Acquisition and the related financing had occurred at January 1, 1998. In preparing this data, the financial data of Forward for the three months ended March 31, 1997 has been translated at an exchange rate of U.K. L0.61=U.S.$1.00, which is not materially different from the average exchange rate for the period. The financial data for ISL for the three months ended April 4, 1997, has been translated at an exchange rate of U.K. L0.61=U.S.$1.00, which is not materially different from the average exchange rate for the period. The financial data of Mommers for the year ended December 31, 1997 and for the two months ended February 28, 1998, has been translated at an exchange rate of Dutch Guilder 2.02=U.S.$1.00 and Dutch Guilder 2.08=U.S.$1.00, respectively, which is not materially different from the average exchange rate for the respective period. The financial data of Zincocelere for the year ended December 31, 1997, and for the two months ended February 28, 1998 has been translated at an exchange rate of Italian Lira 1,761.00=U.S.$1.00 and Italian Lira 1,821.00=U.S.$1.00, respectively, which is not materially different from the average exchange rate for the respective period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is primarily involved in marketing, manufacturing and distributing advanced printed circuit boards ("PCBs") and assembled backplanes at various facilities located in the United States, Canada, Mexico, the United Kingdom, the Netherlands, Italy, Sweden, China and Puerto Rico. The Company's
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers include a diverse base of manufacturers in the telecommunications, computer and automotive industries throughout North America and Europe.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Translation
Local currencies have been designated as the functional currency for all subsidiaries. Accordingly, assets and liabilities of foreign subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items of these subsidiaries are translated at average monthly rates of exchange. The resultant translation gains and losses are included as a component of stockholders' equity on the consolidated balance sheet. See the consolidated statements of operations and comprehensive income for the impact of such gains and losses on the measurement of comprehensive income.
Derivative Financial Instruments
From time to time, the Company engages in short-term hedging activities to reduce its exposure to foreign currency fluctuations. Such hedging activities are not material and gains and losses from such activities are not significant. There can be no assurance that these hedging activities will eliminate or reduce foreign currency risk.
Inventories
Inventories are stated at the lower of cost (valued using the first-in, first-out (FIFO) method) or market. Cost includes raw materials, labor and manufacturing overhead.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Repairs and maintenance which do not extend the useful life of an asset are charged to expense as incurred. The useful lives of leasehold improvements are the lesser of the remaining lease term or the useful life of the improvement. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
Deferred Financing Costs
Deferred financing costs, consisting of fees and other expenses associated with debt financing, are amortized over the term of the related debt using the straight-line method, which approximates the effective interest method.
Intangible Assets
Intangible assets consist primarily of identifiable intangibles acquired and goodwill arising from the excess of cost over the fair value of net assets acquired. The Company assesses the recoverability of its intangible assets based on its current and anticipated future undiscounted cash flows. In addition, the Company's policy for the recognition and measurement of any impairment of goodwill is to assess the current and anticipated future discounted cash flows associated with the goodwill. An impairment of goodwill occurs
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
when the discounted cash flows (excluding interest) do not exceed the carrying amount of goodwill. The amount of the impairment loss is the difference between the amount of the goodwill and the discounted cash flows associated with the goodwill. At December 31, 1998 the Company does not believe there has been any impairment of its identified intangible assets or goodwill. Amortization of intangible assets is computed using systematic methods over the estimated useful lives of the related assets as follows:
Revenue Recognition
Sales and related costs of goods sold are included in income when goods are shipped to the customer in accordance with the delivery terms.
Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, the Company considers investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair market value of the Senior Subordinated Notes due 2007 and the Series B Senior Subordinated Notes due 2007 is $372,000 and $93,000, respectively, at December 31, 1998. The Company has estimated this fair value data by using current market data. The fair market values of the other financial instruments included in the consolidated financial statements approximate the carrying values of those instruments.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosure of comprehensive income (loss) and its components. Effective January 1, 1998, the Company adopted SFAS No. 130. See the consolidated statements of operations and comprehensive income for the impact of such gains and losses on the measurement of comprehensive income.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes reporting requirements related to a business' operating segments, products and services, geographic areas of operations and major customers. Effective January 1, 1998, the Company adopted SFAS No. 131 (See Note 13).
In February 1998, the FASB adopted SFAS No. 132, "Employer's Disclosure about Pensions and Other Post Retirement Benefits," which establishes reporting requirements related to a business' pension and other post retirement benefits. Effective January 1, 1998, the Company adopted SFAS No. 132 (See Note 16).
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1998, the FASB adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company will adopt SOP 98-5 in fiscal year 1999 and will report the write off of the net book value of start-up costs as of January 1, 1999, of approximately $23,000 as a cumulative effect of a change in accounting principle.
In June 1998, the FASB adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allow a derivative's gains and 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. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, was $323, $59,956 and $91,068, respectively. Cash paid for income taxes for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998 was $1,184, $4,742 and $20,951, respectively.
The purchase of the shares of Forward Group was partially funded through the issuance of approximately $24,420 of notes payable to Forward Group's former shareholders. The purchase of shares of ISL was entirely funded through the issuance of approximately $437,500 of loan notes.
In 1997, the Company received a non-cash contribution of $118,250 from Group when Group transferred $118,250 in cash to Bisto Funding, Inc. The cash transfer was recorded as a capital contribution and a reduction of the carrying amount of the notes payable to the former shareholders of Interconnection Systems (Holdings) Limited (see Note 1). The notes payable recorded by the Company are net of the $118,250 as Bisto Funding, Inc. is contractually obligated to pay such amount to the note holders in the event the notes payable are redeemed (see Note 8).
4. INVENTORIES
The composition of inventories at December 31 is as follows:
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
The composition of intangible assets at December 31 is as follows:
6. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at December 31 is as follows:
7. ACCRUED AND OTHER LIABILITIES
The composition of accrued and other liabilities at December 31 is as follows:
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM OBLIGATIONS
The composition of long-term obligations at December 31 is as follows:
The schedule of principal payments for long-term obligations at December 31, 1998 is as follows:
Second Amended and Restated Credit Agreement
In connection with the 1997 Offering and the Chips Merger, Viasystems Group, Inc., as guarantor, and Viasystems and certain of its subsidiaries, as borrowers, entered into a Second Amended and Restated Credit Agreement with terms substantially similar to the Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement provides for (i) an $88,000 term loan facility (the "U.S. Term Loan") and a $150,000 revolving credit facility (the "U.S. Revolving Loan" and together with the U.S. Term Loan, the "U.S. Loans"); (ii) a U.S. $25,000 revolving credit facility (the "Canadian Revolving Loan"), (iii) a L32,000 revolving credit facility (the "Forward Group Revolving Loan") and a L27,600 revolving credit facility (the "Chips Revolving Loan", and together with the Forward Group Revolving Loan, the "U.K. Revolving Loans", and together with the U.S. Revolving Loan and the Canadian Revolving Loan, the "Revolving Loans") and (iv) U.S.$346,463 Letter of Credit Facility in respect of the Chips Loan Notes comprised of (a) a U.S.$319,250 term loan facility ("the Chips Term Loan" and together with the U.S. Term Loan, the "Term Loans") in respect of the principal portion of the Chips Loan Notes and (b) a U.S.$27,213 facility in respect of interest on the Chips Loan Notes. The Chips Term Loan is an unfunded term loan facility that may be drawn upon by the Company so that it may satisfy the Chips Loan Notes Liability. Borrowings under the Second Amended and Restated Credit Agreement are collateralized by first priority mortgages and liens on substantially all of the material assets of the Company and its subsidiaries.
In February 1998, the Senior Credit Facilities were amended to, among other things, establish an additional $70.0 million U.S. term loan (the "Additional Term Loan") and increases available revolving credit facilities by $25.0 million (the "Amended Senior Credit Facilities"). VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. Term Loan consists of three tranches: (i) $55,000 of tranche B term loans (the "Tranche B Loan"), (ii) $33,000 of tranche C term loans (the "Tranche C Loan") and (iii) $70,000 of Addition Term Loan. The Tranche B Loan amortizes semiannually over eight years, the Tranche C Loan is payable $1,500 on December 31, 2004 and $31,500 on June 30, 2005, and the Additional Term Loan amortizes semiannually over 6.5 years. The Chips Term Loan amortizes semi-annually over six years.
The Company may use the Revolving Loans for letters of credit in an amount not to exceed $15,000, in the case of both the U.S. Revolving Loan and the Canadian Revolving Loan, and related letters of credit and bankers' acceptances in an amount not to exceed L5,000 in the case of the Forward Group Revolving Loan and L10,000 in the case of the Chips Revolving Loan. Of the Forward Group Revolving Loan, L2,232 is available solely to finance obligations in respect of the notes payable to the selling stockholders of Forward. At December 31, 1998, the Company had approximately $161,200 of available borrowing capacity under the Revolving Loans, of which, approximately $59,900 was available solely for future acquisitions.
The U.S. Loans bear interest, at the Company's election, at either: (i) the Eurocurrency Base Rate plus (a) 2.5% in the case of the Chips Term Loan and U.S. Revolving Loan, (b) 2.75% in the case of the Additional Term Loan, (c) 3.0% in the case of Tranche B Loan, or (d) 3.5% in the case of Tranche C Loan; or (ii) the Alternate Base Rate plus (a) 1.5% in the case of the Chips Term Loan or U.S. Revolving Loan, (b) 1.75% in the case of the Additional Term Loan, (c) 2.0% in the case of Tranche B Loan, or (d) 2.5% in the case of Tranche C Loan. The Alternate Base Rate is the highest of The Chase Manhattan Bank's Prime Rate, the Three-Month Secondary CD Rate (as defined therein) plus 1.0%, and the Federal Funds Effective Rate (as defined therein) plus 0.5%. The Canadian Revolving Loan denominated in U.S. dollars bears interest, at Circo Craft's election, at either (i) the Eurocurrency Base Rate plus 2.5% or (ii) the Canadian Alternate Base Rate plus 1.5%. The Canadian Revolving Loan denominated in Canadian Dollars bears interest, at Circo Craft's election either (i) the Canadian Bankers Acceptance Discount Rate plus 2.5% or (ii) the Canadian Prime Rate plus 1.5%. The Canadian Alternate Base Rate is equal to the higher of Canadian Agent's prime rate or the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.5%. The U.K. Revolving Loans and any Chips Term Loans converted to pounds sterling bear interest at the Eurocurrency Base Rate plus 2.5%. At December 31, 1997 and 1998 the weighted average interest rate on outstanding borrowings under the Amended an Restated Credit Agreement was 8.69% and 8.0%, respectively.
The Company pays a per annum fee equal to the applicable margin on Revolving Loans which bear interest at the Eurocurrency Base Rate, of the average daily face amount of outstanding letters of credit, other than with respect to the Chips Letter of Credit, which fee is equal to the applicable margin on the Chips Term Loan bearing interest at the Eurocurrency Base Rate. The Company pays a Commitment Fee equal to 0.5% on the undrawn portion of the commitments in respect of Revolving Loans and a Facility Fee equal to 0.5% on the Canadian revolving credit commitment. In addition, the Company pays a fee of 0.25% per annum of Bisto Funding, Inc.'s $118,250 portion of the Chips Letter of Credit to the extent not paid by Bisto Funding, Inc.
The Amended Senior Credit Facilities restrict the Company from, among other things: (i) incurring additional indebtedness (other than permitted indebtedness); (ii) creating liens; (iii) disposing of assets; (iv) guaranteeing indebtedness; (v) merging or selling substantially all of its assets; (vi) declaring and paying certain dividends; (vii) making certain investments and loans; and (viii) entering into certain transactions with affiliates, in each case with certain exceptions customary for credit facilities such as the Amended Senior Credit Facilities. In addition, the Second Amended and Restated Credit Agreement contains financial covenants which require the Company to maintain certain financial ratios and limit the Company's amount of capital expenditures.
Senior Subordinated Notes and Series B Senior Subordinated Notes
In June 1997, Viasystems completed an offering (the "1997 Offering") of $400,000 of 9 3/4% Senior Subordinated Notes due 2007 (the "1997 Notes"). In February 1998, the Company completed the offering of VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an additional $100.0 million of 9 3/4% Senior Subordinated Notes due 2007 at a price of 104.5% (the "1998 Notes" and together with the 1997 Notes, the "2007 Notes"). As a condition of the offering of the 1998 Notes, Hicks Muse contributed an additional $50.0 million of equity to the Company. A portion of the proceeds of the 1998 Notes, the additional term loan under the Senior Credit Facilities, and the equity contribution have been used to fund the acquisitions of the Ericsson Facility, Mommers, and Zincocelere (see Note 1).
Interest on the 2007 Notes is due semiannually. The 2007 Notes may not be redeemed prior to June 1, 2002, except in the event of a Change of Control (as defined) or and Initial Public Offering (as defined) and at premium (as defined in the Indenture). The 2007 Notes are redeemable, at the Company's option, at the redemption prices of 104.875% at June 1, 2002, and at decreasing prices to 100% at June 1, 2005, and thereafter, plus accrued interest. In addition, prior to June 1, 2001, the Company may redeem, within specified guidelines, up to $35,000 of the 2007 Notes with proceeds of one or more Equity Offerings (as defined) by the Company or Viasystems Group, Inc. at a redemption price of 109.75% plus accrued interest. Viasystems used the net proceeds of the 1997 Offering to repay the Subordinated Credit Facility, approximately $130,000 of term loans outstanding under the Amended and Restated Credit Agreement, and approximately $41,600 of revolving credit amounts outstanding under the Amended and Restated Credit Agreement which was borrowed subsequent to December 31, 1996, to repay debt assumed in the acquisition of Chips, plus interest on all debt repaid.
The fair market value of the Senior Subordinated Notes due 2007 and the Series B Senior Subordinated Notes due 2007 is $372,000 and $93,000, respectively, at December 31, 1998. The Company has estimated this fair value data by using current market data.
Chips Loan Notes Liability
In June 1997 and pursuant to the Chips Merger, Viasystems Group, Inc. assumed the $437,500 of Chips Loan Notes, and the Company entered into a reimbursement obligation which requires it to pay a portion of the Chips Loan Notes in the event such notes are called. The Chips Loan Notes mature on March 31, 2003 and bear interest, payable quarterly, at approximately 6.22% per annum through April 1, 1998, with variable rate thereafter discounted from the U.S. prime rate. The Chips Loan Notes may be called by the holders on or after any interest payment date commencing April 1, 1998. The Chips Loan Notes are collateralized by letters of credit which are in turn collateralized in part by a fully cash collateralized $118,250 reimbursement obligation of Bisto Funding, Inc., a special purpose entity and sister company of Viasystems established as a subsidiary of Viasystems Group, Inc. in connection with the acquisition of ISL, with the remainder, including interest on the Chips Loan Notes for one year, collateralized by a reimbursement obligation of Viasystems (the "Chips Reimbursement Obligation"). As such, the Company's liability for principal under the Chips Loan Notes represents $319,250 (the "Chips Loan Notes Liability"), or the amount achieved by netting the $118,250 of cash collateral held by Bisto Funding, Inc. against the $437,500 of Chips Loan Notes. To the extent the interest income earned by Bisto Funding, Inc. on the $118,250 of cash it holds is insufficient to fund interest on $118,250 of the principal amount of the Chips Loan Notes, the Company will be required pursuant to the terms of the Chips Reimbursement Obligation to fund any such shortfall. Upon redemption of the Chips Loan Notes, the first $118,250 of principal payments will be paid by Bisto Funding, Inc. and the remainder will be funded by the Company in accordance with the Chips Reimbursement Obligation. Although the Chips Loan Notes may be called by the holders on or after any interest payment date commencing April 1, 1998, the Chips Loan Notes have not been classified as current at December 31, 1997 and 1998, since the Company has in place a facility to replace the Chips Loan Notes in the event they are called.
In April 1998 the holders of the Chips Loan Notes redeemed $152,200 of the Chips Loan Notes. As such, $118,300 of cash held by Bisto Funding, Inc. was paid to the holders of the Chips Loan Notes. The
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company borrowed $33,900 of the available Chips Term Loan to fund its portion of the payment of the Chips Loan Notes.
Senior Subordinated Credit Agreement
In April 1997, the Company entered into a $216,000 Senior Subordinated Credit Agreement (the "Subordinated Credit Facility"). The proceeds of the Subordinated Credit Facility were used to repay $20,000 of term loans outstanding under the Credit Agreement and to repay a tender facility used to acquire Forward Group. Amounts due under the Senior Subordinated Credit Facility were repaid with proceeds from the 1997 Offering.
9. COMMITMENTS
The Company leases certain building and transportation and other equipment under capital and operating leases. Included in property, plant, and equipment as of December 31, 1997 and 1998, was $49,042 and $59,134, respectively, of cost basis and $16,895 and $28,067, respectively, of accumulated depreciation related to equipment held under capital leases. Total rental expense under operating leases was $255, $3,005 and $3,209 for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively. Future minimum lease payments under capital leases and operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows:
10. OTHER NONCURRENT LIABILITIES
Included in other noncurrent liabilities are liabilities for monitoring and oversight fees to Hicks, Muse & Co. Partners L.P. ("Hicks, Muse"), a shareholder and affiliate of the Company, (see Note 18) and deferred income related to reimbursement agreements with two governmental agencies in the U.K (the "U.K. Agreements"). Pursuant to the U.K. Agreements, the agencies have provided funds totaling approximately $20,000 as of December 31, 1998. Funds received by the Company under the U.K. Agreements are not subject to repayment, provided that the Company meets certain employment requirements at its manufacturing facilities. As the Company has met and management believes that it will continue to meet these requirements, the Company is recognizing the amounts to be received under the U.K. Agreements as a reduction of cost of sales over the life of the U.K. Reimbursement Agreements and, as such, recognized a reduction of cost of sales of approximately $3,134 and $3,147 during the years ended December 31, 1997 and 1998, respectively.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of SFAS No. 109. The (benefit) for income taxes for the period from inception (August 28, 1996) to December 31, 1996 and the provision (benefit) for income taxes for the years ended December 31, 1997 and 1998 consisted of the following:
Reconciliation between the statutory income tax rate and effective tax rate is summarized below:
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant temporary differences representing deferred tax assets and liabilities are as follows:
The current deferred tax assets are included in prepaid expenses and other and the long-term deferred tax assets, consisting of net operating loss carryforwards, are in other assets in the Consolidated Balance Sheets.
Approximate domestic and foreign income (loss) before income tax provision and extraordinary item are as follows:
As of December 31, 1998, the Company has $5,794 of Puerto Rican net operating loss carryforwards, which will expire in 2001-2003, if not previously utilized. All other net operating loss carryforwards carry forward indefinitely. The Company has not recognized and does not anticipate recognizing a deferred tax liability for approximately $15,000 of undistributed earnings of its foreign subsidiaries because the Company does not expect those earnings to reverse and become taxable to the Company in the foreseeable future.
12. CONTINGENCIES
The Company is subject to various lawsuits and claims with respect to such matters as patents, product development and other actions arising in the normal course of business. In the opinion of the Company's management, the ultimate liabilities resulting from such lawsuits and claims will not have a material adverse effect on the Company's financial condition and results of operations and cash flows.
The Company believes it is in material compliance with applicable environmental laws and regulations and that its environmental controls are adequate to address existing regulatory requirements.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BUSINESS SEGMENT INFORMATION
The Company operates in one product business segment -- the manufacture and sale of PCBs, which are sold throughout many diverse markets.
The Company's operations are located worldwide and are analyzed by two geographical segments. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" (note 2). Segment data includes intersegment revenues.
Pertinent financial data by major geographic segments is as follows:
Sales by country of destination are as follows:
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-lived assets by country are as follows:
14. CONCENTRATION OF BUSINESS
Sales to one customer were 27%, 39% and 32% of net revenues for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
15. STOCK OPTION PLANS
On February 4, 1997, Viasystems Group, Inc. adopted the Viasystems Group, Inc. 1997 Stock Option Plan (the "Option Plan"), pursuant to which incentive and non-qualified stock options, stock appreciation rights, stock awards, performance awards, and stock units (vesting stock awards) may be issued. A total of 8,409,782 shares of Viasystems Group, Inc. Common Stock will be reserved for issuance under the Stock Option Plan. As of December 31, 1997, options to purchase an aggregate of 5,235,000 shares of Viasystems Group, Inc. Common Stock subject to the terms and conditions of the Stock Option Plan are outstanding. The terms and vesting periods of the options granted are to be determined by the board of directors. All options granted under the Option Plan to date have ten year terms and vest over five year periods.
Viasystems Group, Inc. has also granted performance options ("the Performance Options") to certain key executives. The Performance Options are exercisable only on the occurrence of certain events. The exercise price for the Performance Options is initially equal to $1.00 per share for grants made during 1996 and 1997 and $1.22 per share for grants made during 1998 and, effective each anniversary of the grant date, the per share exercise price for the Performance Options is equal to the per share exercise price for the prior year multiplied by 1.08. The Performance Options terminate on the tenth anniversary date of the date of grant.
In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for the Option Plan. Had compensation cost for the Option Plan and the Performance Options been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Financial Accounting Standards No. 123, pro forma net loss for the years ended December 31, 1997 and 1998, would have been $(327,588) and $(84,961), respectively.
The fair value of each option grant is estimated on the date of grant using the minimum value method with the following assumptions: (i) no dividend yield; (ii) risk free interest rate of 5.5%; and (iii) expected life of 5 years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts of compensation costs. Additional awards in future years are anticipated.
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the status of the Option Plan are summarized below:
Changes in the status of the Performance Options are summarized below:
The weighted average grant-date fair value of options granted during 1997 and 1998 was $0.23 and $0.29 per share, respectively. All options outstanding under the Option Plan at December 31, 1998, have exercise prices between $1.00 and $1.22 per share and have weighted average remaining contractual lives of between 9 and 10 years.
Of the Performance Options outstanding at December 31, 1998, 998,371 and 7,618,007 and 1,663,320 have exercise prices of $1.17, $1.08 and $1.22, respectively, and have weighted average remaining contractual lives of between 9 and 10 years.
16. RETIREMENT PLANS
The Company has a defined contribution retirement savings plan (the "Plan") covering substantially all domestic employees who meet certain eligibility requirements as to age and length of service. The Plan incorporates the salary deferral provision of Section 401 (k) of the Internal Revenue Code and employees may defer up to 15% of compensation or the annual maximum limit prescribed by the Internal Revenue Code. The Company contributes 1% of employees salaries to the Plan and matches a percentage of the employees'
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferrals. The Company may also elect to contribute an additional profit-sharing contribution to the Plan at the end of each year. The Company's contributions to the Plan were $0, $807 and $1,450 for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
The Company and its subsidiaries have two defined benefit pension plans covering certain groups of employees in foreign countries. The benefits are based on years of services and final average salary. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined.
Components of net pension expense are as follows:
The following table sets forth a reconciliation of the projected benefit obligation:
The following table sets forth a reconciliation of the plan assets:
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plans' funded status and the amounts recognized in the Company's consolidated balance sheet:
The principal assumptions used are as follows:
17. RESEARCH AND DEVELOPMENT
Research, development and engineering expenditures for the creation and application of new products and processes were approximately $500, $10,800 and $13,400 for the period from inception (August 28, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
18. RELATED PARTY TRANSACTIONS
In connection with the Acquisitions and the related financing, the Company entered into a Monitoring and Oversight Agreement and a Financial Advisory Agreement (together herein defined as the "Agreements") with Hicks, Muse (a shareholder and affiliate of the Company) pursuant to which the Company paid Hicks, Muse a cash fee of $5,013, $10,400 and $2,463 for the period from inception (August 28, 1996) through December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively, as compensation for financial advisory services. The fees have been allocated to acquisition costs and the debt and equity securities issued in connection with the Acquisitions as deferred financing costs. The Agreements further provide that the Company shall pay Hicks, Muse an annual fee of $1,750 for ten years of monitoring and oversight services, adjusted annually at the end of each fiscal year to an amount equal to .2% of the budgeted consolidated net sales of the Company, but in no event less than $1,750 annually. The obligation under the Agreement and the related deferred financing costs have been recorded in the consolidated balance sheet and will be amortized over the life of the agreement.
Pursuant to the Chips Merger, Viasystems Group, Inc. assumed the $437,500 of Chips Loan Notes, and the Company entered into a Reimbursement Obligation which requires it to pay a portion of the principal and interest on the Chips Loan Notes in the event such notes are called. In April 1998, the holders of the Chips Loan Notes redeemed $152,188 of the Chips Loan Notes. As such, $118,250 of cash held by Bisto Fundings, Inc. was paid to the holders of the Chips Loan Notes. The remaining $33,938 was paid to the holders of the Chips Loan Notes by the Company. The Company's remaining portion of the Chips Loan Notes at December 31, 1998 is $285,312 (see Note 8).
VIASYSTEMS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EXTRAORDINARY ITEM
During the year ended December 31, 1997, the Company recorded, as an extraordinary item, a one-time, non-cash write-off of deferred financing fees of approximately $7,796, net of income tax benefit of $4,332, related to deferred financing fees incurred on debt retired before maturity.
SCHEDULE II
VIASYSTEMS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
AUDITORS' REPORT
To The Directors of Circo Craft Co. Inc.
We have audited the consolidated statements of earnings, retained earnings and changes in financial position of Circo Craft Co. Inc. for the nine-month period ended September 30, 1996. These statements are the responsibility of the company's management. Our responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation.
In our opinion, these consolidated statements of earnings, retained earnings and changes in financial position present fairly, in all material respects, the results of operations of the Company and the changes in its financial position for the nine-month period then ended in accordance with generally accepted accounting principles in Canada.
Coopers & Lybrand General Partnership Chartered Accountants
Montreal, Quebec December 20, 1996
CIRCO CRAFT CO. INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (EXPRESSED IN CANADIAN DOLLARS)
CIRCO CRAFT CO. INC.
CONSOLIDATED STATEMENT OF EARNINGS (EXPRESSED IN CANADIAN DOLLARS)
CIRCO CRAFT CO. INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (EXPRESSED IN CANADIAN DOLLARS)
CIRCO CRAFT CO. INC.
NOTES TO CONSOLIDATED STATEMENTS (EXPRESSED IN CANADIAN DOLLARS) 1. ACCOUNTING POLICIES
The consolidated statements of earnings, retained earning and changes in financial position have been prepared in accordance with accounting principles generally accepted in Canada and include the following significant accounting policies:
Principles of Consolidation
The consolidated statements of earnings, retained earnings and changes in financial position include the accounts of the company and its wholly owned subsidiary, Circo Caribe Corporation ("Circo Caribe"). All significant intercompany transactions have been eliminated on consolidation.
Inventories
Inventories are valued at the lower of cost and market. Cost is determined using the first-in, first-out method for raw materials. The cost of work in process inventories and finished goods includes the cost of raw materials, direct labour and applicable manufacturing overhead, excluding depreciation. Market is defined as replacement cost for raw materials, and as net realizable value for work in process and finished goods.
Fixed Assets and Depreciation
Fixed assets are recorded at cost less applicable investment tax credits, government grants and accumulated depreciation. Assets under capital leases are included in fixed assets. Depreciation is computed using the straight-line method at the following annual rates:
Revenue Recognition
Sales and related cost of sales are included in income when goods are delivered to the customer in accordance with the delivery terms.
Foreign Currency
Foreign currency transactions and balances including those of Circo Caribe, an integrated foreign subsidiary, are translated using the temporal method. Under this method, monetary assets and liabilities are translated into Canadian dollars at exchange rates in effect as at the balance sheet date and non-monetary assets and liabilities at the exchange rates prevailing when the assets were acquired and liabilities incurred. Sales and expenses, with the exception of depreciation and amortization, are translated at average monthly rates. Depreciation and amortization are translated at the rates used in the translation of the relevant asset accounts. Translation gains and losses are included in determining net earnings in the period in which the exchange rate changes except for gains and losses on long-term debt, which are deferred and amortized over the remaining life of the debt.
Income Taxes
The company follows the tax allocation method in providing for income taxes. Deferred income taxes result primarily from the difference between capital cost allowance claimed for income tax purposes and depreciation recorded for accounting purposes.
CIRCO CRAFT CO. INC.
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
2. NON-CONTROLLING INTEREST
The Economic Development Bank for Puerto Rico (EDB) subscribed to 150,000 Class A Preferred shares of Circo Caribe (EDB shares) for a total amount of U.S. $1,500,000. The EDB shares have a par value of U.S. $10 per share and carry a cumulative preferential annual dividend of 7.5% on the par value thereof, payable on a semi-annual basis. EDB shares carry no voting rights.
3. CAPITAL STOCK
(a) As at September 30, 1996, the authorized capital stock consists of the following in an unlimited number:
First Preferred shares, without nominal or par value, issuable in series
Second Preferred shares, without nominal or par value, issuable in series
Common shares, without nominal or par value
The directors are responsible for defining the rights, privileges, restrictions and conditions attached to each series of the First and Second Preferred shares upon their issuance.
(b) The issued and paid capital stock consists of the following:
(c) The company issued Second Preferred shares, Series A, B and C in connection with the financial assistance amounting to $1,200,000 in 1986, $78,000 in 1988, $78,000 in 1990, $852,000 in 1991, $852,000 in 1992 and $852,000 in 1993, received from the Government of Quebec for costs incurred in the installation of facilities. Such shares are non-voting and are entitled to receive, as and when declared, an aggregate non-cumulative preferential dividend of $1 and upon liquidation, to receive an aggregate amount of $1. The company issued such shares for the purposes of such financial assistance and will repurchase such shares at their issue price of $1 per share upon request of the holder thereof if the majority of the common shares or more than half of the assets of the company are transferred, within five years following the granting of such financial assistance, to an enterprise whose head office is not located in the Province of Quebec or to an individual who does not reside therein unless prior approval is obtained from the holder of such Preferred shares. The proceeds from these issues were deducted from the cost of certain fixed assets.
Subsequent to September 30, 1996, pursuant to an agreement with the Government of Quebec, the company repurchased and cancelled all of the issued Second Preferred shares, Series A, B and C for a total cash consideration of $752,400. As at September 30, 1996, the company recorded a provision for the share repurchase as an increase to the cost of certain fixed assets, which had been previously reduced upon receiving the Government of Quebec grant.
(d) On September 28, 1996, the company issued 317,100 common shares to the Economic Development Bank for Puerto Rico in exchange for the 150,000 Class A Preferred shares it previously held in Circo Caribe.
CIRCO CRAFT CO. INC.
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The value attributed to the common shares issued corresponds to the redemption price of the shares of Circo Caribe received, which was $2,044,950 (U.S. $1,500,000).
(e) In 1995, the company established a Key Employee Stock Option Plan (the "Plan"). The maximum number of common shares that may be issued under the Plan shall not exceed 1,250,000 common shares. In 1996, the company issued 317,000 common shares for a total cash consideration of $2,002,225 upon exercise of options granted in 1995 and 1996 under this Plan. There were no outstanding options as at September 30, 1996.
4. INCOME TAXES
(a) The company's provision for income taxes includes the following:
(b) The company's effective income tax rate is as follows:
(c) Circo Caribe obtained a fifteen-year tax exemption grant under the 1987 Puerto Rico Tax Incentives Act. The grant expires in December 2011 and provides a 90% exemption on industrial development income and property taxes.
5. MAJOR CUSTOMERS
Approximately 26%, 19%, and 10%, respectively, of the company's sales were to three unrelated multinational corporations which have multiple divisions responsible for their own purchasing decisions.
6. BUSINESS AND GEOGRAPHIC SEGMENT
The company's operations are concentrated in the manufacturing of printed circuits, with facilities located in Canada and Puerto Rico selling to a diversified base of manufacturers in the telecommunications,
CIRCO CRAFT CO. INC.
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
computer, automotive, and industrial electronics markets throughout North America. Information concerning the company's business by geographic segment is as follows:
Export sales amounted to approximately 66% of the company's total sales to external customers.
7. UNITED STATES ACCOUNTING PRINCIPLES
The consolidated statements of earnings, retained earnings and changes in financial position have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). In certain respects, Canadian GAAP differs from accounting principles generally accepted in the United States ("U.S. GAAP").
Net Earnings
(a) The following summary sets out the material adjustments to the company's reported net earnings, which would be made in order to conform to U.S. GAAP:
(b) Under Canadian GAAP, translation gains and losses arising on the translation, at exchange rates prevailing at the balance sheet date, of long-term debt denominated in foreign currency are deferred and amortized over the remaining life of the related debt. Under U.S. GAAP, such gains and losses are included in the statement of earnings in the period in which the exchange rate changes.
(c) Under Canadian GAAP, the company follows the tax allocation method in providing for income taxes while under U.S. GAAP the liability method would be used. Under this method, deferred income taxes are calculated on the difference between accounting and tax values of the assets and liabilities. The current tax rate is used to calculate deferred income taxes at the balance sheet date. Deferred tax assets arising from losses and temporary differences are subject to a valuation allowance whenever it is more likely that the assets will not be realized.
(d) Under Canadian GAAP, costs of providing life insurance and health care benefits to employees after retirement are recognized as incurred while under U.S. GAAP these costs are accrued during the employees'
CIRCO CRAFT CO. INC.
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
years of active service. This difference in GAAP would not result in a material change to the company's consolidated statements of earnings, retained earnings and changes in financial position.
Cash flows
(e) Under U.S. GAAP, the following amounts would be reported:
(f) Canadian GAAP allows the disclosure of a subtotal of the amount of cash provided by operating activities before cash provided by non-cash operating working capital items. U.S. GAAP requires a statement of cash flows without subtotal.
(g) Under U.S. GAAP, the definition of cash in the statement of cash flows would exclude short-term deposits with original maturities of three months or more and bank indebtedness, which amounted to $8,000,000 and $3,147,000, respectively as at September 30, 1996. Under U.S. GAAP, changes in short-term deposits with original maturities of three months or more would be disclosed as an investing activity and changes in bank indebtedness would be disclosed as a financing activity.
(h) Machinery and equipment financed through capital leases are included as financing and investing activities in the consolidated statement of changes in financial position under Canadian GAAP but would be excluded from a statement of cash flows under U.S. GAAP. New capital leases amounted to $2,096,000 for the nine-month period ended September 30, 1996.
Other disclosure
(i) The disclosure of the following amounts is required under U.S. GAAP:
(j) The company maintains defined contribution pension plans for certain key employees. The plan allows for employee contributions for a maximum of $11,500, subject to certain legal limitations, of which the company contributes 100%. Under both U.S. GAAP and Canadian GAAP, company contributions are expensed when incurred. The company's contributions for the nine-month period ended September 30, 1996 were $105,000.
CIRCO CRAFT CO. INC.
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
(k) As at September 30, 1996, Circo Caribe had net operating loss carryforwards of approximately U.S.$5,400,000, which expire from 2000 to 2003.
8. COMMITMENTS
Circo Caribe leases its manufacturing facilities in Puerto Rico under an operating lease with the Puerto Rico Industrial Development Corporation, which expires on December 31, 2002. Future lease payments will aggregate U.S.$3,048,000, including the following amounts, over the next five years:
9. SUBSEQUENT EVENT
On October 1, 1996, the company was acquired and, effective November 8, 1996, was amalgamated with its new parent company, HMTF Canada Acquisition Inc. under the provisions of Part IA of the Companies Act (Quebec). Combined operations have continued under the name of Circo Craft Co. Inc.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Lucent Technologies, Inc. Berkeley Heights, New Jersey
and
The Board of Directors Viasystems Group, Inc. St. Louis, Missouri:
We have audited the accompanying statement of operations of the Interconnection Business (the "Business") of the Microelectronics Group, Interconnection Technologies Unit of Lucent Technologies Inc. ("Lucent") for the period January 1, 1996 through November 30, 1996. This statement is the responsibility of Lucent's management. Our responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statement was prepared to present the results of operations of the Business pursuant to the acquisition agreement described in Note 1, and are not intended to be a complete presentation of the Business' results of operations or cash flows.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the statement of operations of the Business for the period January 1, 1996 through November 30, 1996, pursuant to the acquisition agreement referred to in Note 1, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P. St. Louis, Missouri February 21, 1997
MICROELECTRONICS GROUP, INTERCONNECTION TECHNOLOGIES UNIT OF LUCENT TECHNOLOGIES INC.
STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the financial statement.
MICROELECTRONICS GROUP, INTERCONNECTION TECHNOLOGIES UNIT OF LUCENT TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENT (DOLLARS IN THOUSANDS)
1. BACKGROUND AND BASIS OF PRESENTATION:
Pursuant to an Acquisition Agreement (the "Agreement") dated November 26, 1996, between Viasystems Technologies Corp. ("Viasystems Technologies"), a wholly owned subsidiary of Viasystems Group, Inc., and Lucent Technologies, Inc. ("Lucent"), Viasystems Technologies agreed to acquire certain assets and assume certain liabilities from the Microelectronics Group, Interconnection Technologies Unit (the "Business") of Lucent in exchange for consideration totaling $200,000. The Business designs, manufactures and markets printed circuit boards, backplanes and related products and components for the telecommunications and computer-related markets. The effective date of the Agreement is December 1, 1996.
The Business' financial statements are derived from the historical books and records of the Microelectronics Group, Interconnection Technologies Unit of Lucent and present assets sold and liabilities assumed and the results of operations of the Business related to the acquisition by Viasystems Technologies. The historical operating results may not be indicative of the results after the acquisition by Viasystems Technologies. No statement of cash flows has been presented since any computation of historical cash flow data for the Business would be based on arbitrary assumptions of the financial information necessary to prepare such data and, in the opinion of management, would not be meaningful.
The Business' financial statements include allocations of certain expenses that have historically been accounted for by Lucent based on allocation methods that depend on the nature of the account. For those costs that are labor intensive, such as research and development, allocations are made based on forecasted head count percentages. Most other costs are allocated based on forecasted sales. Many of the marketing and sales costs are negotiated each year between the department providing the service and the individual business unit. The percentage of the negotiated cost of the business unit to the total negotiated cost for that service is applied to the actual cost each month and allocated to the individual business units. A portion of the operating expenses are incurred at the Richmond Works location, particularly product management, transportation and local research and development. These expenses are allocated to the Business using estimates calculated by the department's manager. Some transportation expense is based on specific service contracts when they can be identified.
Allocated expenses include certain direct and indirect selling, marketing, and research and development costs from the Microelectronics Group and services from Lucent. Services from Lucent represent the allocated costs for services such as employee benefits, human resources, labor relations, corporate tax and business planning and overhead expenses, public relations, legal services, environmental management, data processing and training.
Lucent's management believes that these allocations are based on assumptions that are reasonable under the circumstances. However, these allocations are not necessarily indicative of the costs and expenses that would have resulted if the Business had been operated as a separate entity.
MICROELECTRONICS GROUP, INTERCONNECTION TECHNOLOGIES UNIT OF LUCENT TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
The allocations and other components of cost of sales and selling, general and administrative expenses are as follows:
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the report period. Actual results could differ from those estimates.
B. Revenue Recognition: Sales and related costs of goods sold are included in income when goods are shipped to the customer.
C. Income Taxes: The Business is not a separate taxable entity for federal, state, or local income tax purposes. The Business' operations are included in the consolidated Lucent tax returns. Lucent has historically allocated income taxes to the Business using an assumed statutory tax rate in effect without consideration to segregating current and deferred income taxes. In addition, the statutory tax rate has not been reduced for research and development or other tax credits, if any, as these amounts cannot be separately determined for the Business. Accordingly, the provision for income taxes is based on an assumed combined federal and state statutory rate of 38% for each year presented, but current and deferred portions of the provision have not been determined.
D. Research and Development Costs: Research and development costs are charged to expense when incurred.
3. TRANSACTIONS WITH AFFILIATES:
The Business through the normal course of business, conducts transactions with Lucent and its affiliates. In addition to the various allocated costs and expenses described in Note 1, the majority of the Business' net sales is with Lucent affiliated entities.
The Business' sales to Lucent and its affiliates were $295,189 for the period January 1, 1996 through November 30, 1996.
MICROELECTRONICS GROUP, INTERCONNECTION TECHNOLOGIES UNIT OF LUCENT TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
The cost of sales related to the sales to Lucent and its affiliates were $232,276 for the period January 1, 1996 through November 30, 1996.
Receipts, disbursements and the net cash position of the Business have been managed by the Microelectronics Group through a centralized treasury system. Accordingly, both cash generated by and cash requirements of the Business flow through the Microelectronics Group. There is no direct interest cost allocation to the Business with respect to borrowings, if any, and, accordingly, the Statements of Operations do not include any financing costs.
4. EMPLOYEE BENEFIT PLANS:
A. Pension Plans: The Business participates in noncontributory defined benefit plans sponsored by Lucent covering substantially all employees. Benefits for management employees are principally based on career average pay. Benefits for occupational employees are not directly pay-related. Information required pursuant to SFAS No. 87, Employer's Accounting for Pensions, including the funded status of the plans is not available for the Business as a separate entity.
Pension contributions are principally determined using the aggregate cost method and are primarily made to trust funds held for the sole benefit of plan participants. Pension cost is computed using the projected unit credit method and an assumed long-term rate of return on plan assets of 9% in 1996.
B. Savings Plans: The Business participates in savings plans sponsored by Lucent covering the majority of employees. The plans allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. Lucent matches a percentage of the employee contributions up to certain limits.
C. Postretirement Benefit Plans: The Business participates in benefit plans for retirees, which include health care benefits, life insurance coverage and telephone concessions sponsored by Lucent. Lucent adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, effective January 1, 1993. This Standard requires that estimated future retiree benefits be accrued for during the years the employees are working and accumulating these benefits. Information required pursuant to SFAS No. 106, including the net periodic postretirement benefit cost and information on the funded status of the plan, is not available for the Business as a separate entity.
The costs of these plans were allocated to the Business on the basis of salaries, the majority of which are included in cost of sales. Benefit costs included in cost of sales were approximately $6,200 for the period January 1, 1996 through November 30, 1996.
5. COMMITMENTS:
In conjunction with the Agreement, Lucent and Viasystems Technologies have entered into certain contractual arrangements whereby Lucent has agreed to provide to Viasystems Technologies manufacturing, labor and support services. Lucent and Viasystems Technologies have also entered into a supply agreement effective through December 31, 2001, which shall extend through December 31, 2003 in the event Viasystems Technologies has in all material respects satisfied the Performance Metrics (as defined) of the supply agreement. Such agreement shall continue thereafter until terminated by either party upon eighteen months prior written notice.
REPORT OF INDEPENDENT AUDITORS
To: The Shareholders and Board of Directors of Forward Group PLC
We have audited the accompanying consolidated profit and loss account and cash flow statement of Forward Group PLC and its subsidiaries for the year ended 31 January 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in the United Kingdom and the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the results of the operations and the cash flows of Forward Group PLC and its subsidiaries for the year ended 31 January 1997 in conformity with generally accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States of America. Application of generally accepted accounting principles in the United States of America would have affected the profit for the financial year ended 31 January 1997 to the extent summarized in Note 17 to the consolidated financial statements.
KPMG Audit Plc Chartered Accountants
Birmingham, England 7 April 1997
FORWARD GROUP PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT (EXPRESSED IN BRITISH POUNDS STERLING)
The results on a historical cost basis are not materially different to those reported above.
A reconciliation of the movement in shareholders' funds is shown in note 12.
FORWARD GROUP PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES (EXPRESSED IN BRITISH POUNDS STERLING)
FORWARD GROUP PLC
CONSOLIDATED STATEMENT OF CASH FLOWS (EXPRESSED IN BRITISH POUNDS STERLING)
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN BRITISH POUNDS STERLING)
1. GENERAL
As used in the consolidated financial statements and related notes, the term "Company" refers to Forward Group PLC and the term "Group" refers to Forward Group PLC and its subsidiary undertakings as set out in note 16.
PRINCIPAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the consolidated financial statements of Forward Group PLC:
Basis of preparation
The consolidated financial statements have been prepared under the historical cost convention, modified to include the revaluation of certain freehold property, and in accordance with applicable Accounting Standards.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of Forward Group PLC and all of its subsidiary undertakings made up to 31 January 1997 under the acquisition method of accounting. The results of companies or businesses acquired during the year are included from the date of acquisition. Internal sales and profits are eliminated on consolidation. Goodwill arising on acquisitions is written off directly against reserves on acquisition.
Turnover
Turnover represents the amounts (excluding value added tax) derived from the provision of goods to third party customers and is recognized when goods are shipped and title has passed.
Government revenue grants
Government revenue grants are recognized in the profit and loss account in the period during which the expenditure to which they relate is incurred.
Stocks and work in progress
Stocks and work in progress are valued on a first in, first out basis at the lower of cost and net realizable value. Cost comprises materials, labor and an appropriate proportion of production overheads.
Depreciation
Depreciation is provided so as to write off the cost or valuation, including commissioning costs, of tangible fixed assets to their estimated residual value on a straight line basis, at the following annual rates:
Freehold land is not depreciated.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and development
Expenditure on research and development is expensed in the year in which it is incurred.
Deferred taxation
Deferred taxation is provided using the liability method in respect of the taxation effect of all timing differences to the extent that it is probable that liabilities will crystallise or assets be realized in the foreseeable future.
Hire purchase and leased assets
Assets held under hire purchase or finance lease contracts are capitalized and included in tangible fixed assets at their fair value. Each asset is depreciated over the shorter of the contract term or its estimated useful life. Obligations relating to such contracts, net of finance charges in respect of future periods, are included as appropriate under creditors. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance. Rentals under operating leases are charged to the profit and loss account on a straight-line basis over the life of the lease.
Pensions
The Group operates both a defined contribution pension scheme and a defined benefit pension scheme. The Group's contributions to the defined contribution scheme are charged against profits on an accruals basis in the year to which they relate. Contributions to the defined benefit scheme are charged against profits so as to spread the cost of pensions over employees' working lives. The funds of both schemes are administered by trustees and are independent of the Group's finances.
Foreign exchange
Transactions denominated in foreign currencies are translated at the rate of exchange ruling on the day the transaction occurs or at the contracted rate if the transaction is covered by a forward exchange contract.
Foreign currency monetary assets and liabilities in the balance sheet are translated into sterling at the rates of exchange ruling at the end of the year or, if appropriate, at the forward contract rate. Any resulting exchange gains or losses are taken to the profit and loss account.
The assets and liabilities of overseas subsidiary undertakings are translated at the closing exchange rate. The profit and loss accounts of those undertakings are translated using the average rate of exchange during the year. Net exchange differences arising on translation are taken to reserves.
2. SEGMENTAL ANALYSIS
Turnover is analyzed by geographical destination as follows:
The Group's turnover, profit before taxation and assets relate to only one business segment, the electronics division.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the opinion of the Directors an analysis of turnover, profit before taxation and net assets by geographical area of operation would be seriously prejudicial to the interests of the Group and therefore as permitted under SSAP25 no disclosure is made.
3. OPERATING PROFIT
Included in the above are the following exceptional charges relating to the restructuring of continuing operations and acquired businesses:
Acquisitions comprise the former GEC-Marconi hybrid business, Manchester Circuits Limited and TI Technologies (Pty) Limited.
4. STAFF NUMBERS AND COSTS
The average number of persons employed by the Group (including executive Directors) during the year, analysed by category, was as follows:
The aggregate payroll costs of these persons were as follows:
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NET INTEREST PAYABLE
6. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Profit on ordinary activities before taxation is stated after charging/(crediting):
In addition, KPMG Audit Plc and its associates received L97,000 in respect of other services provided during the year.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DIRECTORS' EMOLUMENTS
(a) Remuneration
The emoluments of the Chairman, excluding pension contributions, were L97,000. The emoluments of the highest paid Director, excluding pension contributions, were L136,000.
The emoluments of the Directors, excluding pension contributions, were within the following ranges:
(b) Share options over Ordinary shares
The figures shown as at 1 February 1996 have been restated to reflect the 3 for 1 capitalisation issue.
The closing price of the Company's Ordinary shares on the London Stock Exchange on 31 January 1997 was 171.5p. The range during the period was 103.5p to 289.5p.
8. TAX ON PROFIT ON ORDINARY ACTIVITIES
The current year charge includes the effect of tax losses which have not been relieved.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DIVIDENDS
10. INVESTMENTS
(a) Acquisition of businesses
On 26 March 1996 Technograph Microcircuits Limited acquired GEC-Marconi's hybrid business for a total cash consideration of L2,726,000.
On 7 May 1996 the Company acquired the entire issued share capital of Manchester Circuits Limited for a total consideration of L830,000.
On 27 June 1996 the Company acquired the entire issued share capital of TI Technologies (Pty) Limited (based in South Africa) for an initial consideration of L510,000. Further consideration, which has not been provided for, of up to L501,000 may become payable upon certain profit targets being achieved in the 22 months ending on 31 January 1998.
The fair values of the assets and liabilities acquired as a result of the above are as follows:
Fair values are after taking account of adjustments of L755,000 to reflect an assessment of the differences between the book values and fair values of assets acquired, L97,000 of alignments to accord with group accounting policies and the recognition of unprovided liabilities of L265,000 at the relevant dates of acquisition.
Following the triennial valuation of the Exacta Circuits Pension Plan on 5 April 1996 the provision at 31 January 1996 has been released resulting in an adjustment to the provisional assessment of fair values made at the date of acquisition.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill written off in the year comprises:
The following table, which is presented for the purposes of disclosure under US GAAP in accordance with the requirements of Accounting Principles Board Opinion No. 16 "Business Combinations" ("APB 16"), reflects the unaudited pro forma combined results of operations of the Group, together with the companies and businesses acquired during the year ended 31 January 1997 on the basis that the acquisitions had taken place on 1 February 1996:
These unaudited pro forma combined results have been prepared for comparative purposes only. In management's opinion the unaudited pro forma results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the years presented or of future operations of the combined companies under the ownership and management of the Company.
11. RESERVES
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the end of the year cumulative goodwill written off against reserves in respect of the acquisition of businesses amounted to L7,447,000.
12. RECONCILIATION OF MOVEMENT IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS
13. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
(a) Reconciliation of operating profit to net cash inflow from operating activities
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Analysis of changes in financing during the year
(c) Analysis of cash and cash equivalents
(d) Acquisition of businesses
The investing cash flows arising in respect of acquisitions during the year were as follows:
Further information on the acquisitions is given in note 10.
(e) Major non-cash transactions
Fixed asset additions of L4,548,000 were financed by hire purchase borrowings.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. PENSIONS
Exacta Circuits Limited operates a funded defined benefit pension scheme covering substantially all of its employees. Employer contributions are determined by a qualified actuary on the basis of triennial valuations using the projected unit method.
The most recent full valuation by William M. Mercer Limited was as at 5 April 1996. The assumptions which have the most significant effect on the result of the valuation are those relating to the rate of return on investments and the rates of increase in salaries and pensions. It was assumed that the investment returns would be 9% per annum, that salary increases would average 7% per annum, that present and future pensions would increase at rates of between 3% and 4.5% per annum and that equity dividend growth would average 5% per annum. The valuation showed that the market value of the scheme's assets at that date was L17,593,000 and that the actuarial value of assets represented 110% of the benefits that has accrued to members, after allowing for expected future increases in earnings. Group contributions to the scheme in the year were L955,000.
As part of its provisional review of the fair value of the net assets of Exacta Circuits Limited the Group took actuarial advice regarding the current position of the pension scheme. This highlighted uncertainty concerning the impact of equalisation of retirement ages. In view of this uncertainty, the SSAP24 provision of Exacta Circuits Limited of L655,000 at the date of acquisition was replaced by a provision of the same amount. Following the valuation as at 5 April 1996 the provision was released.
In addition, the Group made contributions of L284,000 during the year to several defined contribution schemes.
SFAS NO 87 DISCLOSURES (UNAUDITED)
For the purpose of the disclosure in accordance with US GAAP, the pension cost of the Exacta Circuits Limited pension scheme has been restated in the following tables, in accordance with the requirements of SFAS No 87. The funded status of the scheme, under SFAS No 87 is as follows:
Plan assets consist primarily of investments in UK and overseas equity and fixed interest securities. The principal assumptions used for SFAS No 87 purposes were as follows:
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net periodic pension cost for the pension scheme under SFAS No 87 comprised:
15. POST BALANCE SHEET EVENT
On 26 March 1997 the Recommended Cash Offer for Forward Group PLC by Hicks, Muse, Tate and Furst Equity Fund III, L.P. was declared unconditional in all respects and, in due course, the Company will become a wholly owned subsidiary of PCB Investments plc.
16. SUBSIDIARY UNDERTAKINGS
The Company has the following trading subsidiary undertakings:
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Group's consolidated financial statements are prepared in conformity with generally accepted accounting principles applicable in the United Kingdom (UK GAAP), which differ in certain significant respects from those applicable in the United States of America (US GAAP). These differences, together with the approximate effects of the adjustments on net profit and equity shareholders' funds, relate principally to the items set out below:
(a) Goodwill: Under UK GAAP, goodwill arising from acquisitions is written off against equity shareholders' funds. Upon the subsequent disposal of the business, goodwill previously written off is reinstated and considered in the calculation of the gain or loss on disposal. Under US GAAP, goodwill is capitalised and amortised over its estimated useful life. For the purpose of calculating the amortisation of goodwill a life of 40 years has been assumed. Upon the subsequent disposal of the business, unamortised goodwill is considered in the calculation of the gain or loss on disposal.
(b) Dividends: Under UK GAAP, proposed dividends on ordinary shares, as recommended by the Directors, are deducted from equity shareholders' funds and shown as a liability in the balance sheet at the end of the period to which they relate. Under US GAAP, such dividends are deducted from equity shareholders' funds at the date of declaration of the dividend.
(c) Deferred taxation: UK GAAP requires that no provision for deferred taxation should be made if there is reasonable evidence that such taxation will not be payable in the foreseeable future. Under US GAAP, deferred taxation is recognised under the full liability method which permits deferred tax assets to be recognised if their realisation is considered more likely than not.
Deferred taxation also arises in relation to the tax effect of other US GAAP differences.
(d) Revaluation of properties: UK GAAP allows periodic revaluations of freehold land and buildings and the related depreciation is calculated on the revalued amounts. The surplus on revaluation of property is credited directly to equity shareholders' funds. Under US GAAP, such revaluations are not permitted and depreciation is provided on the original cost.
(e) Pension costs: Under UK GAAP, the expected cost of pensions is charged to the profit and loss account so as to spread the cost of pensions over the expected service lives of employees. Surpluses arising from the actuarial valuation are similarly spread. Under US GAAP, costs and surpluses are also spread over the expected service lives but based on prescribed actuarial assumptions, allocation of costs and valuation methods, which differ from those used for UK GAAP.
(f) Cash flows: The principal difference between UK GAAP and US GAAP is in respect of classification. Under UK GAAP, the Group presents its cash flows for operating activities, returns on investments and servicing of finance, taxation, investing activities, and financing activities. US GAAP requires only three categories of cash flow activities which are operating, investing and financing.
Cash flows arising from taxation and returns on investments and servicing of finance under UK GAAP would, with the exception of dividends paid, be included as operating activities under US GAAP; dividend payments would be included as a financing activity under US GAAP. In addition, under UK GAAP, cash and cash equivalents include short term borrowings which under US GAAP would be presented as financing activities.
FORWARD GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under US GAAP, the following amounts would be reported:
Approximate effects on net profit of differences between UK and US GAAP:
Approximate effects on equity shareholders' funds of differences between UK and US GAAP at 31 January:
18. COMPANIES ACT 1985
These consolidated financial statements do not comprise the Company's statutory accounts within the meaning of Section 240 of the Companies Act 1985 of Great Britain. Statutory accounts have been prepared for the year ended 31 January 1997, on which the auditors' report was unqualified. The statutory accounts for the year ended 31 January 1997 have not yet been delivered to the Registrar of Companies for England and Wales.
REPORT OF INDEPENDENT AUDITORS
To: The Directors Interconnection Systems (Holdings) Limited
We have audited the accompanying consolidated profit and loss account and statement of total recognized gains and losses and of cash flows of Interconnection Systems (Holdings) Limited for the year ended April 4, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with United Kingdom auditing standards which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and consolidated cash flows of Interconnection Systems (Holdings) Limited for the year ended April 4, 1997 in conformity with accounting principles generally accepted in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted principles in the United States. The application of generally accepted principles in the United States would have affected the profit and cash flows for the year ended April 4, 1997 to the extent summarized in Note 13 to the consolidated financial statements.
PricewaterhouseCoopers Chartered Accountants Birmingham, England
September 28, 1998
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT (EXPRESSED IN BRITISH POUNDS STERLING)
- ---------------
* A summary of the significant adjustments to profit for the year that would be required if United States generally accepted accounting principles had been applied instead of those generally accepted in the United Kingdom is set forth in Note 13 of the Notes to the Consolidated Financial Statements.
The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES (EXPRESSED IN BRITISH POUNDS STERLING)
The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (EXPRESSED IN THOUSANDS OF BRITISH POUNDS STERLING)
The significant differences between the cash flow statement presented above and that required under United States generally accepted accounting principles are described in Note 13 of the Notes to the Consolidated Financial Statements.
The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN BRITISH POUNDS STERLING)
1. ACCOUNTING POLICIES
Accounting convention
The financial statements are prepared under the historical cost convention modified to include the revaluation of certain tangible fixed assets.
The financial statements are prepared in accordance with applicable United Kingdom accounting standards.
Basis of consolidation
The consolidated financial statements consolidate the accounts of Interconnection Systems (Holdings) Limited (the "Company") and its subsidiary undertaking Interconnection Systems Limited (together the "Group"). They do not include the financial statements of Interconnection Systems Sales Limited as, in the opinion of the directors, it would be of no real value to the Company's members in view of the insignificant amounts involved. Interconnection Systems Sales Limited has not traded since incorporation. The accounting period for both companies comprises 52 weeks ending on the Friday nearest to March 31. Periodically a 53 week period will be necessary to realign the accounting period with the calendar. On December 4, 1997 the Company changed names to Viasystems II Limited.
Restatement of results
In previous filings financial statements for the Company have been reported for the year ended April 4, 1997. These previously reported financial statements have been adjusted by the directors of the Company for a revaluation of land and buildings and plant and machinery at an earlier date of the year as allowed under UK GAAP. This adjustment has the effect of increasing depreciation on these assets for the year ended April 4, 1997 under UK GAAP. The adjusted profits under US GAAP as shown in Note 13 are not effected by this change in the revaluation date and the related impact on profit under UK GAAP.
Revenue recognition
Revenue is recognized in the period in which goods are dispatched to customers.
Goodwill
Goodwill, both positive and negative, arising on the acquisition of Interconnection Systems Limited has been taken directly to reserves under "Other reserves".
Depreciation
Depreciation is provided on all tangible fixed assets, at rates calculated to write off the cost or valuation of each asset evenly over its expected useful life, as follows:
Freehold buildings -- over 40 years Plant and machinery -- over 2 to 10 years Fixtures and fittings -- over 3 to 10 years
The part of the annual depreciation charge on revalued assets which relates to the surplus over cost is transferred from the revaluation reserve to retained profits.
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Government grants
Regional Selective Assistance is credited to income over the period to which it relates.
Deferred funding arrangements
Amounts secured by way of loan arrangements which if certain conditions are achieved may not be repaid are shown in creditors and credited to income over the life of the primary term of the funding arrangement.
Stocks
Stocks are stated at the lower of cost and net realizable value as follows:
Costs incurred in bringing each product to its present location and condition:
Net realizable value is based on estimated selling price less further costs expected to be incurred to completion and disposal.
Finance leases
Assets held under finance leases are capitalized in the balance sheet and are depreciated over their useful lives. The interest element of rental obligations is charged to the profit and loss account over the period of the lease in accordance with Statement of Standard Accounting Practice 21.
Research and development
Research and development expenditure is written off as incurred.
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the profit and loss account.
Deferred taxation
Deferred taxation is provided using the liability method on all timing differences to the extent that they are expected to reverse in the future without being replaced, calculated at the rate at which it is estimated that taxation will be payable.
Pensions
Interconnection Systems Limited operates a defined benefit pension scheme which is funded by the payment of contributions to a separately administered fund.
Contributions to the fund are charged to the profit and loss account so as to spread the cost of pensions over the employees' working lives.
Future variations in pension cost, which are identified as a result of an actuarial valuation, will be amortised over the expected remaining lives of current employees in the scheme. Differences between the
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts funded and the amounts charged to the profit and loss account will be treated as either provisions or prepayments in the balance sheet.
2. TURNOVER
Turnover represents the net invoiced sales, excluding value added tax, of goods sold during the period.
The Company's operations are all located in the United Kingdom and its turnover and pre-tax profit is attributable to one continuing activity, the manufacture of printed circuit boards.
An analysis of turnover by geographical market is given below:
Of the total turnover, 16.3% related to one customer and 15.8% to another.
3. OPERATING PROFIT
(a) This is stated after charging/(crediting):
(b) Reconciliation of operating profit to net cash inflow from operating activities:
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DIRECTORS' REMUNERATION
Directors emoluments (excluding pension contributions) fell within the following ranges:
5. STAFF COSTS
The average weekly number of employees during the period was made up as follows:
6. INTEREST RECEIVABLE
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTEREST PAYABLE
8. TAX ON PROFIT ON ORDINARY ACTIVITIES
If full recognition had been made in respect of deferred taxation for the period in respect of capital allowances in advance of depreciation and other timing differences the taxation charge would have decreased by L2,252,930.
9. DIVIDENDS
10. PENSION COMMITMENTS
Interconnection Systems Limited operates a defined benefit pension scheme which is funded by the payment of contributions to a separately administered fund.
The contributions to the scheme are determined on behalf of the company with the advice of an independent qualified actuary on the basis of a triennial valuation using the Projected Unit Method. The most recent valuation was carried out as at January 1, 1996. The actuary's valuation used the following main assumptions:
This valuation showed that the market value of the Scheme's assets at January 1, 1996 amounted to L5,660,314 and the actuarial value was sufficient to cover 103% of the benefits that had accrued to members after projecting pensionable salaries to the assumed date of retirement or death.
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net periodic pension cost for each fiscal year is as follows:
11. DIRECTORS' INTERESTS
I H Bradbury has an interest in payments of L389,933 made by Interconnection Systems Limited to Interconnection Systems (Holdings) Limited in the period ended 4 April 1997 in respect of consultancy services provided to Interconnection Systems Limited by I H Bradbury.
In addition, the company purchased a property during the year at its market value of L145,000 from T P Robinson, a director of Interconnection Systems Limited and Interconnection Systems (Holdings) Limited.
12. COMPANIES ACT 1985
These financial statements do not comprise the Company's statutory accounts within the meaning of section 240 of the Companies Act 1985 of Great Britain. Statutory accounts for the year ended April 4, 1997, have been delivered to the Registrar of Companies for England and Wales. The auditors' report on these accounts was unqualified.
13. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Group's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United Kingdom ("UK GAAP") which differ from United States generally accepted accounting principles ("US GAAP"). The significant differences as they apply to the Group are summarized below.
Pension costs
The Group provides for the cost of retirement benefits based upon consistent percentages of employees' pensionable pay as recommended by independent qualified actuaries. US GAAP require that the projected benefit obligation (pension liability) be matched against the fair value of the plan's assets and be adjusted to reflect any unrecognized obligations or assets in determining the pension cost or credit for the year. For the purposes of the reconciliation below, US GAAP have been adopted as of April 1, 1995. The Company has not implemented FAS 87 as of the effective date specified in the standard for a foreign plan (fiscal years beginning after December 15, 1988) due to the unavailability of actuarial data. A portion of the transition liability at April 1, 1995 has been allocated to shareholders' funds based on a ratio of 6/15, being the number of years elapsed between the effective date of FAS 87 and April 1, 1995 over the 15 year period being used to amortize the transition liability.
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary of principal assumptions made by the actuary:
The following table details the funded status of the plan under US GAAP:
Amounts funded to the pension are primarily invested in equity and fixed income securities.
Goodwill and negative goodwill
Under UK GAAP, goodwill and negative goodwill arising on acquisitions is set off against or credited to shareholders' funds in the year of acquisition. Under US GAAP, such goodwill would be capitalized and amortized over its estimated useful life which in the case of the acquisition of Interconnection Systems Limited is estimated to be 10 years. Under US GAAP, negative goodwill would be eliminated by reducing the value of the interest in the noncurrent assets acquired.
Accordingly, under US GAAP the carrying value of the additional 20% interest in the tangible fixed assets of Interconnection Systems Limited acquired in 1994 would have been reduced by L1,067,000 and subsequent depreciation would have been reduced by L201,000 per annum.
Revaluation of fixed assets
Under UK GAAP, the Group's tangible fixed assets are carried at valuations and depreciation is computed based on the revalued amounts. Under US GAAP, such revaluation is not permitted and all tangible assets would be carried at cost subject to any impairment write down and the depreciation charge would be based on such carrying amount. The gain or loss arising on the disposal of tangible assets under US GAAP would differ from that arising under UK GAAP by the amount of the revaluation gain thus realized, which in the year ended April 4, 1997 is not material.
Deferred taxation
Under UK GAAP, deferred taxation is provided using the liability method on all timing differences to the extent that they are expected to reverse in the future without being replaced, calculated at the rate at which it is estimated that taxation will be payable. Under US GAAP, deferred taxation would be computed on all temporary differences between the tax and book bases of assets and liabilities, which will result in taxable or
INTERCONNECTION SYSTEMS (HOLDINGS) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax deductible amounts in future years. Deferred taxation assets would be recognized to the extent that it is more likely than not that they will be realized.
Deferred taxation also arises in relation to the tax effect of other UK GAAP to US GAAP adjustments.
Approximate effects on net income of differences between UK GAAP and US GAAP:
Consolidated statement of cash flows
The consolidated statement of cash flows prepared under UK GAAP presents substantially the same information as that required under US GAAP. The statements differ however with regard to the classification of items within the statements and as regards the definition of cash and cash equivalents.
Under US GAAP, cash and cash equivalents would not include bank overdrafts. Under UK GAAP, cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, investing activities and financing. US GAAP require only three categories of cash flow activity to be reported; operating, investing and financing. Cash flows from taxation and returns on investments and servicing of finance shown under UK GAAP would be included as operating activities under US GAAP.
The categories of cash flow activity under US GAAP can be summarized as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND FINANCIAL DISCLOSURE
None, other than previously disclosed.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names and positions of the respective directors and executive officers of the Company and, if applicable, such directors' and executive officers' positions with Group. All directors hold office until the next annual meeting of stockholders of the Company and until their successors are duly elected and qualified.
James N. Mills has been Chairman of the Board and Chief Executive Officer of Group since January 1997 and Chairman of the Board and Chief Executive Officer of the Company since April 1997. Mr. Mills is the Chairman and Chief Executive Officer of M&P. Mr. Mills is also Chairman of the Board and Chief Executive Officer of International Wire Holding Company and International Wire Group, Inc. Mr. Mills was Chairman of the Board and Chief Executive Officer of Berg Electronics Corp. and Chairman of the Board and sole director of Berg Electronics Group, Inc. from March 1993 through October 1998 and was Chairman of the Board and Chief Executive Officer of Crain Holdings Corp. and Crain Industries, Inc. from August 1995 through December 1997 and of Jackson Holding Company and Jackson Products, Inc. from February 1993 through August 1995. Mr. Mills was Chairman of the Board and Chief Executive Officer of Thermadyne Holdings Corporation from February 1989 through February 1995. Mr. Mills was Executive Vice President of McGraw-Edison Company from 1978 to 1985, and served as Industrial Group President and President of the Bussman Division of the McGraw-Edison Company from 1980 to 1984.
Thomas O. Hicks has been a director of Group since January 1997 and a director of the Company since May 1997. Mr. Hicks is Chairman of the Board and Chief Executive Officer of HMTF. From 1984 to May 1989, Mr. Hicks was Co-Chairman of the Board and Co-Chief Executive Officer of Hicks & Haas Incorporated, a Dallas-based private investment firm. Mr. Hicks serves as a director, Chairman and Chief Executive Officer of Chancellor Media Corporation, International Home Foods, Inc., D.A.C. Vision, Inc., Sybron International Corporation, Capstar Broadcasting Partners, Inc. and Cooperative Computing Holding Company, Inc.
Jack D. Furst has been a director of Group since August 1996 and a director of the Company since May 1997. Mr. Furst is a Managing Director and Principal of HMTF and has held such position since 1989. Mr. Furst has approximately 15 years of experience in leveraged acquisitions and private investments. Mr. Furst is involved in all aspects of HMTF's business and has been actively involved in originating, structuring and monitoring its investments. Mr. Furst is primarily responsible for managing the relationship with M&P. Prior to joining HMTF, Mr. Furst was a Vice President and subsequently a Partner of Hicks & Haas, Incorporated, a Dallas-based private investment firm from 1987 to May 1989. From 1984 to 1986, Mr. Furst was a merger and acquisition/corporate finance specialist for The First Boston Corporation in New
York. Before joining First Boston, Mr. Furst was a financial consultant at Price Waterhouse. Mr. Furst serves on the board of directors of America Tower Corporation, International Wire Holding Company and Cooperative Computing, Inc.
Richard W. Vieser has been a director of Group since January 1997 and a director of the Company since May 1997. Mr. Vieser is the retired Chairman of the Board, Chief Executive Officer and President of Lear Siegler, Inc. (a diversified manufacturing company), the former Chairman of the Board and Chief Executive Officer of FL Industries, Inc. and FL Aerospace (also diversified manufacturing companies), and the former President and Chief Operating Officer of McGraw-Edison Co. He is also a director of Ceridian Corporation (formerly Control Data Corporation), Dresser Industries, Inc., INDRESCO Inc., Sybron International Corporation and Varian Associates, Inc.
Kenneth F. Yontz has been a director of Group since January 1997 and a director of the Company since May 1997. Mr. Yontz is the Chairman, President and Chief Executive Officer of Sybron International Corporation, a manufacturer and marketer of laboratory apparatus products, dental sundry supplies and orthodontic appliances. Mr. Yontz is also a director of Playtex Products, Inc. Prior to joining Sybron, Mr. Yontz was Group Vice President and Executive Vice President of the Allen-Bradley Company. Mr. Yontz also held various managerial and professional positions with Chemetron from 1974 to 1980 and at Ford Motor Company from 1966 to 1974.
Robert N. Mills has been a director of Group since January 1997 and has been Co-Chairman of the Board of Group since October 1998, and prior to that was President and Chief Operating Officer since the Company's formation in April 1997 and a director of the Company since May 1997. Mr. Mills also was Vice Chairman of Berg Electronics Corp. until October 1998 and previously served as President of Berg Electronics Corp. from June 1995 through December 1996, and as Chief Operating Officer of Berg Electronics Corp. and as President and Chief Executive Officer of Berg Electronics Group, Inc. from March 1993 through December 1996. Mr. Mills served as a Vice President of Berg Electronics Corp. from March 1993 through June 1995. Mr. Mills is a Vice President of M&P. Prior to joining Berg in March 1993, Mr. Mills was Vice President of Thermadyne Industries, Inc. and President of Stoody Deloro Stellite and held such positions since February 1990 and July 1989, respectively. Prior thereto, he served as President and Chief Operating Officer and as a director of Tridex Corporation from 1987 through 1989, and Vice President and General Manager of Elco Corporation, a subsidiary of Wickes Manufacturing Company, from 1983 through 1987. Robert N. Mills is the brother of James N. Mills.
Timothy L. Conlon has been a director, President and Chief Operating Officer of Group and the Company since October 1998. Prior to joining the Company Mr. Conlon was employed as President and Chief Operating Officer of Berg Electronics Corp. from January 1997 through October 1998. Mr. Conlon also served as Executive Vice President and Chief Operating Officer of Berg Electronics Group, Inc., a wholly owned subsidiary of Berg Electronics Corp., from October 1993 through January 1997. Prior to joining Berg Electronics Group, Inc., Mr. Conlon was employed as President of the Cutting and Welding Division of Thermadyne Industries, Inc. from April 1993 through October 1993. Prior to joining Thermadyne Industries, Inc., Mr. Conlon spent nine years in the electronic connector industry including serving as General Manager of the Information Technologies and Spectra strip divisions of Amphenol Corporation from 1990 through July 1992 and President of Cambridge Products from 1988 through 1989.
David M. Sindelar has been a Senior Vice President of Group since January 1997 and Chief Financial Officer of Group since its inception and has been Senior Vice President, Chief Financial Officer and Treasurer of the Company since its formation in April 1997. Mr. Sindelar is also President and Chief Operating Officer of M&P. Mr. Sindelar also serves as Senior Vice President and Chief Financial Officer of International Wire Holding Company. Mr. Sindelar was Senior Vice President and Chief Financial Officer of Berg Electronics Corp. from March 1993 through October 1998 and of Crain Industries, Inc. and Crain Holdings Corp. from August 1995 through December 1997 and of Jackson Holding Company from February 1993 through August 1995.
James G. Powers has been a Vice President of Group since April 1997 and a Vice President of the Company since its formation in April 1997. Prior to joining the Company, Mr. Powers served as Vice
President -- Finance of Crain Industries, Inc. He also held various positions at Berg Electronics Corp., including Vice President -- Controller, from June 1993 to August 1995. Previously, Mr. Powers was Controller of Moog Automotive, Inc. from 1991 through 1993 and was employed by Arthur Andersen & Co. from 1983 to 1991.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are officers, employees or otherwise an affiliate of Group or the Company receive no compensation for their services as directors. Each director of Group or the Company who is not also an officer, employee or an affiliate of Group or the Company (an "Outside Director") receives an annual retainer of $12,000 and a fee of $1,000 for each meeting of the board of directors at which the director is present. Directors of Group and the Company are reimbursed for their reasonable out-of-pocket expenses in connection with their travel to and attendance at the meetings of the board of directors or committees thereof.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and non-cash compensation earned during the fiscal years ended December 31, 1997 and 1998 by the Chief Executive Officer and the four other most highly compensated executive officers of the Company. The executive officers of Group and the Company did not receive any compensation from either Group or the Company during the period from inception (August 28, 1996) to December 31, 1996.
SUMMARY COMPENSATION TABLE
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(1) The Company provides a car allowance, reimbursement of club memberships and other benefits to certain executives. The aggregate incremental costs of these benefits to the Company do not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for each executive.
(2) Bonuses were paid in 1998 for 1997 and in 1999 for 1998.
(3) Options were granted under the Viasystems Group, Inc. 1997 Stock Option Plan (the "Stock Option Plan") pursuant to which incentive and non-qualified stock options may be issued to certain of Group's or the Company's officers, key employees and directors.
(4) Reflects Performance Options (as hereinafter defined) granted by Group. For a description of the material terms of such options, see "Benefit Plans -- Performance Options." The Performance Options are exercisable only in the event that Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("Hicks, Muse Fund III") as of the exercise date, has realized an overall rate of return of at least 35% per annum, compounded annually on its equity funds invested in Group.
(5) Reflects amounts paid to Mr. Conlon to partially compensate him for his voluntary termination of his employment contract with Berg Electronics Corp. and forego compensation otherwise payable to him thereunder.
(6) Mr. Brigman received compensation in the form of reimbursement of relocation expenses during 1997 and 1998.
The following table summarizes option grants made with respect to the common stock, par value $.01 per share of Group's common stock during fiscal year 1998 to the executive officers named above:
OPTION GRANTS IN LAST FISCAL YEAR
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(1) Reflects Performance Options granted by Group. For a description of the material terms of such options, see "Benefit Plans -- Performance Options."
(2) The potential realizable value portion of the foregoing table illustrates the value that might be realized upon exercise of the option immediately prior to the expiration of its term, assuming the specified compound rules of appreciation of Group's common stock over the term of the options. Actual gains on the exercise of the options are dependent on the future performance of Group's common stock. There can be no assurance that the potential values reflected in this table will be achieved. All amounts have been rounded to the nearest whole dollar. Excludes Performance Options, which would not be exercisable under either scenario.
The following table summarizes the number of options exercised during the fiscal year ended December 31, 1998 for the above named executive officers and the value of unexercised options as of December 31, 1998:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
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(1) Represents the difference between the value at December 31, 1998 of Group's common stock underlying the options and the exercise price of such options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions are made by the entire Board of Directors. James N. Mills served as both an executive officer and a director during 1998 and is expected to serve in such capacities in 1999. Mr. Mills participated in deliberations of the Board of Directors concerning compensation of executive officers.
EMPLOYMENT AGREEMENTS
James N. Mills Executive Employment Agreement. Mr. James N. Mills entered into an executive employment agreement with Group, Viasystems Technologies and Circo Craft as of January 1, 1997. Pursuant to his employment agreement, Mr. J. Mills will serve as the Chairman of the Board of Directors and Chief Executive Officer of Group through December 31, 2001, unless terminated earlier as provided therein. Mr. J. Mills is required to devote such time as is reasonably necessary to faithfully and adequately supervise the overall executive management of Group and its subsidiaries, both direct and indirect. Subject to the foregoing limitation on his activities, Mr. J. Mills is free to participate in other endeavors.
The compensation provided to Mr. J. Mills under his executive employment agreement includes an annual base salary of not less than $685,000, subject to upward adjustment at the sole discretion of the Board of Directors of Group, and such benefits as are customarily accorded the executives of Group as long as the executive employment agreement is in force. In addition, Mr. J. Mills is entitled to an annual bonus in an amount determined in accordance with the Senior Executive Incentive Compensation Plan and reimbursement for expenses to own and maintain an automobile.
Mr. J. Mills' executive employment agreement also provides that if Mr. J. Mills' employment is terminated without cause, Mr. J. Mills will continue to receive his then current salary, which shall not be less than $685,000, for the longer of the remainder of the period the executive employment agreement is in force or a period of one year following such termination. The executive employment agreement terminates upon death
or "total disability" (as defined therein) and no further compensation shall be payable except that he or his estate, heirs or beneficiaries, as applicable, shall receive his then current salary for a period of 18 months, in addition to benefits otherwise specifically provided for. The agreement also provides medical benefits for Mr. J. Mills' and his spouse's lifetime.
Robert N. Mills Executive Employment Agreement. Mr. Robert N. Mills entered into an executive employment agreement with Group, Viasystems Technologies and Circo Craft as of January 1, 1997 and amended on October 16, 1998. Pursuant to his employment agreement, Mr. R. Mills will serve as the Co-Chairman of the Board of Directors of Group through December 31, 2001, unless terminated earlier as provided therein. Mr. R. Mills is required to devote such time as is reasonably necessary to faithfully and adequately supervise the overall financial management of Group and its subsidiaries, both direct and indirect. Subject to the foregoing limitation on his activities, Mr. R. Mills is free to participate in other endeavors.
The compensation provided to Mr. R. Mills under his executive employment agreement includes an annual base salary of not less than $510,000, subject to upward adjustment at the sole discretion of the Chairman of the Board of Directors of Group, and such benefits as are customarily accorded the executives of Group as long as the executive employment agreement is in force. In addition, Mr. R. Mills is entitled to an annual bonus in an amount determined in accordance with the Senior Executive Incentive Compensation Plan and reimbursement for expenses to own and maintain an automobile.
Mr. R. Mills' executive employment agreement also provides that if Mr. R. Mills' employment is terminated without cause, Mr. R. Mills will continue to receive his then current salary, which shall not be less than $510,000, for the longer of the remainder of the period the executive employment agreement is in force or a period of one year following such termination. The executive employment agreement terminates upon death or "total disability" (as defined therein) and no further compensation shall be payable except that he or his estate, heirs or beneficiaries, as applicable, shall receive his then current salary for a period of 18 months, in addition to benefits otherwise specifically provided for. The agreement also provides medical benefits for Mr. R. Mills' and his spouse's lifetime.
Timothy L. Conlon Executive Employment Agreement. Mr. Timothy L. Conlon entered into an executive employment agreement with Group, Viasystems and Viasystems Technologies as of October 16, 1998. Pursuant to his employment agreement, Mr. Conlon will serve as the President and Chief Operating Officer of Group through December 31, 2001, unless terminated earlier as provided therein. Mr. Conlon is required to devote such time as is reasonably necessary to faithfully and adequately supervise the overall financial management of Group and its subsidiaries, both direct and indirect. Subject to the foregoing limitation on his activities, Mr. Conlon is free to participate in other endeavors.
The compensation provided to Mr. Conlon under his executive employment agreement includes an annual base salary of not less than $425,000, subject to upward adjustment at the sole discretion of the Chairman of the Board of Directors of Group, and such benefits as are customarily accorded the executives of Group as long as the executive employment agreement is in force. In addition, Mr. Conlon is entitled to an annual bonus in an amount determined in accordance with the Senior Executive Incentive Compensation Plan and reimbursement for expenses to own and maintain an automobile.
Mr. Conlon's executive employment agreement also provides that if Mr. Conlon's employment is terminated without cause, Mr. Conlon will continue to receive his then current salary, which shall not be less than $425,000, for the longer of the remainder of the period the executive employment agreement is in force or a period of one year following such termination. The executive employment agreement terminates upon death or "total disability" (as defined therein) and no further compensation shall be payable except that he or his estate, heirs or beneficiaries, as applicable, shall receive his then current salary for a period of 18 months, in addition to benefits otherwise specifically provided for. The agreement also provides medical benefits for Mr. Conlon's and his spouse's lifetime.
David M. Sindelar Executive Employment Agreement. Mr. David M. Sindelar entered into an executive employment agreement with Group, Viasystems Technologies and Circo Craft as of January 1, 1997. Pursuant to his employment agreement, Mr. Sindelar will serve as the Senior Vice President and Chief Financial
Officer of Group through December 31, 2001, unless terminated earlier as provided therein. Mr. Sindelar is required to devote such time as is reasonably necessary to faithfully and adequately supervise the overall financial management of Group and its subsidiaries, both direct and indirect. Subject to the foregoing limitation on his activities, Mr. Sindelar is free to participate in other business endeavors.
The compensation provided to Mr. Sindelar under his executive employment agreement includes an annual base salary of not less than $230,000, subject to upward adjustment at the sole discretion of the Chairman of the Board of Directors of Group, and such benefits as are customarily accorded the executives of Group as long as the executive employment agreement is in force. In addition, Mr. Sindelar is entitled to an annual bonus in an amount determined in accordance with the Senior Executive Incentive Compensation Plan and reimbursement for expenses to own and maintain an automobile.
Mr. Sindelar's executive employment agreement also provides that if Mr. Sindelar's employment is terminated without cause, Mr. Sindelar will continue to receive his then current salary, which shall not be less than $230,000, for the longer of the remainder of the period the executive employment agreement is in force or a period of one year following such termination. The executive employment agreement terminates upon death or "total disability" (as defined therein) and no further compensation shall be payable except that he or his estate, heirs or beneficiaries, as applicable, shall receive his then current salary for a period of 18 months, in addition to benefits otherwise specifically provided for. The agreement also provides medical benefits for his and his spouse's lifetime.
BENEFIT PLANS
Stock Option Plan
Group has adopted the Stock Option Plan pursuant to which incentive and non-qualified stock options, stock appreciation rights, stock awards, performance awards and stock units may be issued to such employees of Group and any parent or subsidiary corporation designated by the Board of Directors of Group. A total of 8,260,000 shares of Group common Stock will be reserved for issuance under the Stock Option Plan. As of December 31, 1998, options to purchase an aggregate of 6,755,000 shares of Group common stock subject to the terms and conditions of the Stock Option Plan are outstanding.
The Stock Option Plan provides that it is to be administered by a committee of the Board of Directors of Group or a subcommittee of such a committee (the "Committee"). The Committee has the authority to grant to any participant one or more stock options, and to establish the terms and conditions of such options, subject to certain limitations specified in the Stock Option Plan. For example, the per-share exercise price of each option must not be less than 100% of the fair market value of the Group common Stock on the date such option is granted, and no option may be exercisable later than ten years after the date of grant. In the event of a change in control (as defined in the Stock Option Plan), the Committee, in its discretion, may take such actions as it deems appropriate with respect to outstanding awards, including, without limitation, accelerating the exercisability or vesting of such awards.
The Stock Option Plan became effective as of February 4, 1997. Effective concurrent with the consummation of the Chips Merger, the Stock Option Plan was amended to increase the number of shares of Group common stock reserved for issuance under the Stock Option Plan. The Stock Option Plan, as amended, is subject to stockholder approval and will terminate on February 4, 2007, unless sooner terminated by the Committee.
Performance Options
On November 26, 1996, Group granted options (the "Performance Options") to purchase 1,085,187 shares of Group common stock. Messrs. J. Mills and Sindelar were granted Performance Options to purchase 336,408 and 227,889 shares of Group common stock, respectively, and Performance Options to purchase the remaining 520,890 shares of Group common stock were granted to certain officers of the Company who are also affiliated with M&P. On June 2, 1997, Group granted Performance Options to purchase an additional 8,138,904 shares (of which 1,454,158 shares were cancelled) of Group common stock.
Messrs. J. Mills and Sindelar were granted additional Performance Options to purchase 2,132,392 and 1,318,501 shares of Group common stock, respectively, and additional Performance Options to purchase the remaining 4,688,011 shares of Group common stock were granted to certain officers of the Company who are also affiliated with M&P. On March 9, 1998, Group granted Performance Options to purchase an additional 1,663,320 shares of Group common stock. Messrs. J. Mills and Sindelar were granted additional Performance Options to purchase 803,320 and 485,000 shares of Group common stock, respectively, and additional Performance Options to purchase the remaining 375,000 shares of Group common stock were granted to certain officers of the Company who are also affiliated with M&P.
Pursuant to the terms of the option agreements (the "Performance Option Agreements") related to the Performance Options, the Performance Options will become options to purchase an identical number of shares of Group common stock. The Performance Options are exercisable only in the event that Hicks, Muse Fund III has, as of the exercise date, realized an overall rate of return of at least 35% per annum, compounded annually, on all equity funds invested by it in Group. Subject to the foregoing, the Performance Options are exercisable (i) immediately prior to the consummation of a Liquidity Event (as hereinafter defined), (ii) concurrently with the consummation of a Qualified IPO (as hereinafter defined), or (iii) on the ten year anniversary of their grant. A "Liquidity Event" generally means (i) one or more sales or other dispositions of Group common stock if, thereafter, the amount of Group common stock owned by Hicks, Muse Fund III is reduced by 50%, (ii) any merger, consolidation or other business combination of Group pursuant to which any person or group acquires a majority of the common stock of the resulting entity, or (iii) any sale of all or substantially all of the assets of Group. A "Qualified IPO" means a firm commitment underwritten public offering of Group common stock for gross proceeds of at least $50 million pursuant to an effective registration statement under the Securities Act of 1933, as amended.
The exercise price for the Performance Options is initially equal to $1.00 per share for the grants made in 1996 and 1997 and $1.22 per share for the grants made in 1998 and, effective each anniversary of the grant date, the per share exercise price for the Performance Options is increased to the per share exercise price for the prior year multiplied by 1.08. The exercise price of the Performance Options and the number of shares of Group common stock for which the Performance Options are exercisable are subject to adjustment in the event of certain fundamental changes in the capital structure of Group. All Performance Options terminate on the ten-year anniversary of their grant.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
All the issued and outstanding shares of common stock of Viasystems are held by Group. The following table sets forth certain information regarding the beneficial ownership of the voting securities of Group by each person who beneficially owned more than 5% of any class of Group voting securities and by the directors and certain executive officers of Group, individually, and by the directors and executive officers of Group as a group. The Class A Common Stock and Class A Series II Common Stock votes together with the common stock as a single class and are entitled to one vote for each share. Shares of Class A Common Stock and Class A Series II Common Stock are convertible into shares of common stock:
- at the option of any holder thereof at any time,
- at the option of Group upon the occurrence of a Triggering Event (as defined below), and
- automatically on September 30, 2006.
A "Triggering Event" means any sale of substantially all of the assets of Group or any merger, consolidation or other business combination of Group in which HMTF and its affiliates cease to beneficially own, directly or indirectly, at least 50% of the resulting entity. Each share of Class A Common Stock and Class A Series II Common Stock is convertible into a fraction of a share of common stock equal to:
(1) the fair market value of a share of common stock at the time of conversion, minus the sum of $.99, or $1.21 in the case of Class A Series II Common Stock, plus imputed interest at a rate of 8% per annum, compounded annually, at the time of conversion,
(2) divided by the fair market value of a share of common stock at the time of conversion.
Because the fraction of a share of common stock into which Class A Common Stock and Class A Series II Common Stock is convertible can be determined only at the time of a conversion, shares of common stock that may be issuable upon conversion of Class A Common Stock and Class A Series II Common Stock are not included in the shares of common stock beneficially owned in the following table.
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* Represents less than 1%.
(1) These figures include shares of common stock owned of record by:
- Hicks, Muse Equity Fund III, a limited partnership, of which the ultimate general partner is Hicks, Muse, Tate & Furst Fund III, Incorporated, an affiliate of HMTF;
- HM3 Coinvestors, L.P., a limited partnership of which the ultimate general partner is Hicks, Muse Fund III; and
- Other stockholders who own shares of common stock subject to an irrevocable proxy in favor of Hicks, Muse Fund III.
Thomas O. Hicks is a controlling stockholder of HMTF and serves as Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer and Secretary of HMTF. Accordingly, Mr. Hicks may be deemed to be the beneficial owner of common stock held by Hicks, Muse Fund III and HM3 Coinvestors, L.P. John R. Muse, Charles W. Tate, Jack D. Furst, Lawrence D. Stuart, Jr., Michael J. Levitt, and David R. Deniger are officers, directors and minority stockholders of HMTF and as such may be deemed to share with Mr. Hicks the power to vote or dispose of common stock held by Hicks, Muse Fund III and HM3 Coinvestors, L.P. Each of Messrs. Hicks, Muse, Tate, Furst, Stuart, and Levitt disclaims the existence of a group and disclaims beneficial ownership of common stock not owned of record by him.
(2) These figures include shares of common stock, Class A Common Stock and Class A Series II Common Stock held by James N. Mills and shares of common stock, Class A Common Stock and Class A Series II Common Stock owned of record by certain individuals, including Messrs. R. Mills and D. Sindelar, subject to an irrevocable proxy in favor of Mr. J. Mills. For more information on this proxy, see the text under the heading "Certain Relationships and Related Transactions." These figures do not
include 3,272,120 shares of common stock issuable to Mr. J. Mills upon the exercise of Performance Options that are not currently exercisable. For more information on these Performance Options, see the text under the heading "Item 10. Executive Compensation -- Benefit Plans -- Performance Options."
(3) These figures include 100,000 shares of Group common stock that may be acquired by Mr. Vieser upon the exercise of options granted to him pursuant to a stock option agreement with Group.
(4) These figures include 200,000 shares of common stock owned of record by the Kenneth F. Yontz 1997 Family Trust, a trust of which Mr. Yontz does not have the power to vote or dispose of this stock. Mr. Yontz disclaims beneficial ownership of common stock not owned of record by him. These figures include 100,000 shares of Group common stock that may be acquired by Mr. Yontz upon the exercise of options granted to him pursuant to a stock option agreement with Group.
(5) These figures include:
- 4,000,000 shares of Class A Common Stock held of record by the Robert N. Mills Revocable Living Trust, a trust of which Mr. R. Mills is a trustee having the power to vote and dispose of this stock;
- 3,090,000 shares of Class A Common Stock and 1,156,380 shares of Class A Series II Common Stock owned of record by the Robert Mills Family Limited Partnership, [of which Mr. R. Mills is a general partner having the power to vote and dispose of this stock]; and
- 50,000 shares owned of record by another individual, subject to an irrevocable proxy in favor of Mr. R. Mills.
Mr. R. Mills disclaims beneficial ownership of Class A Common Stock not owned of record by him.
(6) These figures include:
- 200,000 shares of Class A Common Stock owned of record by two children's trusts, of which Mr. Sindelar is a trustee having the power to vote and dispose of this stock; and
- 7,443,331 shares of Class A Common Stock and 1,240,609 shares of Class A Series II Common Stock owned of record by The D&S Trust #2, of which Mr. Sindelar's brother is the sole trustee. Mr. Sindelar disclaims beneficial ownership of Class A Common Stock not owned of record by him.
These figures do not include 2,031,390 shares of common stock issuable to Mr. Sindelar upon exercise of Performance Options that are not exercisable within the next 60 days. For more information on these Performance Options, see the text under the heading "Management -- Benefit Plans -- Performance Options."
(7) These figures do not include 9,433,253 shares of common stock issuable to executive officers of Group upon the exercise of Performance Options or options issued under the Stock Option Plan, or Performance Options to be issued in connection with the Equity Contribution, none of which are exercisable within the next 60 day. For more information on these Performance Options, see the text under the heading "Item 10. Executive Compensation -- Benefit Plans -- Performance Options."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Group and its subsidiaries have entered into a ten-year agreement monitoring and oversight agreement (the "Monitoring and Oversight Agreement") with Hicks Muse Partners, an affiliate of Hicks Muse & Co. L.P. ("Hicks Muse Partners"), which was amended upon consummation of the acquisition of Forward and ISL. Under the Monitoring and Oversight Agreement, Group and its subsidiaries are required to pay Hicks Muse Partners an annual fee payable quarterly for oversight and monitoring services to the Company. The annual fee is adjustable on January 1 of each calendar year to an amount equal to 0.2% of our budgeted consolidated annual net sales for the then-current fiscal year, but in no event less than the base fee of $1.75 million. Upon the acquisition by Group or any of its subsidiaries of another entity or business, the fee shall be adjusted prospectively in the same manner using our pro forma combined budgeted consolidated annual net sales. Thomas O. Hicks and Jack D. Furst, directors of Group and Viasystems, Inc., are each
principals of Hicks Muse Partners. Hicks Muse Partners is also entitled to reimbursement for any expenses incurred by it in connection with rendering services allocable to the Company under the Monitoring and Oversight Agreement. In addition, Group and its subsidiaries have agreed to indemnify Hicks Muse Partners, its affiliates, and their respective directors, officers, controlling persons, agents and employees from and against all claims, liabilities, losses, damages, expenses and fees and disbursements of counsel related to or arising out of or in connection with the services rendered by Hicks Muse Partners under the monitoring and oversight agreement and not resulting primarily from the bad faith, gross negligence, or willful misconduct of Hicks Muse Partners. The Monitoring and Oversight Agreement makes available the resources of Hicks Muse Partners concerning a variety of financial and operational matters. The Company does not believe that the services that have been and will continue to be provided to it by Hicks Muse Partners could otherwise be obtained by the Company without the addition of personnel or the engagement of outside professional advisors. In the opinion of the Company's management, the fees provided for under the Monitoring and Oversight Agreement reasonably reflect the benefits received and to be received by the Company and its respective subsidiaries.
Group and its subsidiaries have also entered into a ten-year financial advisory agreement (the "Financial Advisory Agreement"), pursuant to which Hicks Muse Partners is entitled to receive a fee equal to 1.5% of the "transaction value" (as defined) for each "add-on transaction" (as defined) in which Group or any of its subsidiaries is involved. In respect of acquisitions to date, Hicks Muse has received aggregate fees of approximately $17.9 million under the Financial Advisory Agreement. The term "transaction value" means the total value of the add-on transaction including without limitation, the aggregate amount of the funds required to complete the add-on transaction, excluding any fees payable pursuant to the Financial Advisory Agreement, including the amount of any indebtedness, preferred stock or similar terms assumed (or remaining outstanding). The term "add-on transaction" means any future proposal for a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction directly involving Group or any of its subsidiaries or any of their respective subsidiaries and any other person or entity. In addition, Group and its subsidiaries has agreed to indemnify Hicks Muse Partners, its affiliates, and their respective directors, officers, controlling persons, agents and employees from and against all claims, liabilities, losses, damages, expenses and fees related to or arising out of or in connection with the services rendered by Hicks Muse Partners under the Financial Advisory Agreement and not resulting primarily from the bad faith, gross negligence, or willful misconduct of Hicks Muse Partners. The Financial Advisory Agreement makes available the resources of Hicks Muse Partners concerning a variety of financial and operational matters. The Company does not believe that the services that have been and will continue to be provided by Hicks Muse Partners could otherwise be obtained by the Company without the addition of personnel or the engagement of outside professional advisors. In the opinion of the Company's management, the fees provided for under the Financial Advisory Agreement reasonably reflect the benefits received and to be received by Group and its respective subsidiaries. No fee was paid under the financial advisory agreement in connection with the acquisition of Chips Holdings.
Nearly all holders of all classes of common stock of Group have entered into an amended and restated stockholders agreement. The stockholders agreement, among other things, grants preemptive rights and certain registration rights to the parties thereto and contains provisions requiring the parties thereto to sell their shares of common stock in connection with certain sales of Common Stock by Hick Muse Fund III, which are referred to as "drag-along rights," and granting the parties thereto the right to include a portion of their shares of common stock in certain sales in which Hicks Muse Fund III does not exercise its drag-along rights, which are referred to as "tag-along rights". All parties to the stockholders agreement agreed to take all action within their respective power, including the voting of Common Stock, Class A Common Stock and Class A Series II Common Stock, to cause the board of directors of Group to at all times be constituted by the members designated by Hicks Muse Fund III. The stockholders agreement contains an irrevocable proxy pursuant to which all parties to the stockholders agreement, other than the initial holders of Class A Common Stock, Class A Series II Common Stock and their transferees, grant to Hicks Muse Fund III the power to vote all shares of Common Stock held by these parties on all matters submitted to stockholders. Further, the stockholders agreement contains an irrevocable proxy pursuant to which the initial holders of Class A Common Stock, Class A Series II Common Stock and their transferees grant to James N. Mills, or to Hicks
Muse Fund III if Mr. Mills is no longer an officer or director of Group, the power to vote all shares of Class A Common Stock and Class A Series II Common Stock held by these parties on all matters submitted to stockholders. The stockholders agreement was amended in November 1998 to provide that either James N. Mills and David Sindelar or the beneficial owners of a majority of the outstanding shares of Class A Common Stock and Class A Series II Common Stock may waive preemptive rights with respect to all shares of Class A Common Stock and Class A Series II Common Stock. The stockholders agreement terminates on its tenth anniversary date, although the preemptive rights, drag-along rights and tag-along rights terminate earlier upon the consummation of a firm commitment underwritten public offering of Common Stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
VIASYSTEMS, INC.
By /s/ DAVID M. SINDELAR ----------------------------------- David M. Sindelar Senior Vice President and Chief Financial Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
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* Filed herewith.