10-K 1 k02751e10vk.txt ANNUAL REPORT FOR THE FISCAL YEAR ENDED 12/31/05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ---------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2005 Commission File Number 333-119215 AUTOCAM CORPORATION (Exact Name of Registrant as Specified in its Charter) MICHIGAN 38-2790152 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization)
4436 BROADMOOR AVENUE SOUTHEAST KENTWOOD, MICHIGAN 49512 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (616) 698-0707 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS DEFINED IN RULE 405 OF THE SECURITIES ACT. Yes [ ] No [x] INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE ACT. Yes [ ] No [x] INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes [x] No [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED FILER" AND "LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). Yes [ ] No [x] THE COMMON STOCK OF THE REGISTRANT IS NOT PUBLICLY TRADED. THEREFORE, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK IS NOT READILY DETERMINABLE. AS OF MARCH 24, 2006, 100 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE - NONE. INDEX
PAGE NO. -------- PART I Item 1. Business 2 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 19 Item 2. Properties 19 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 70 Item 9A. Controls and Procedures 70 Item 9B. Other Information 70 PART III Item 10. Directors and Executive Officers of the Registrant 70 Item 11. Executive Compensation 73 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 78 Item 13. Certain Relationships and Related Transactions 78 Item 14. Principal Accountant Fees and Services 79 PART IV Item 15. Exhibits and Financial Statement Schedules 80
Introduction Autocam Corporation is a Michigan corporation. We are a wholly-owned subsidiary of Titan Holdings, Inc., a Delaware corporation, which in turn is a wholly-owned subsidiary of Micron Holdings, Inc., a Delaware corporation. In this report, unless the context otherwise requires - "Parent" refers to Micron Holdings, Inc., or "Micron", - "Holdings" refers to Titan Holdings, Inc., or "Titan", - "we," "our" or "us" refer to Holdings together with its consolidated subsidiaries, and - "Autocam" refers to Autocam Corporation, a wholly-owned subsidiary of Holdings. Unless otherwise indicated, all references in this report to fiscal years are to the year ending on December 31. Unless the context requires otherwise, all references in this report to "2003," "2004" and "2005" relate to the fiscal years ended December 31, 2003, December 31, 2004 and December 31, 2005. References in this report to - Tier I suppliers refer to suppliers, like Delphi Corporation or Visteon Corporation, who sell directly to original equipment vehicle manufacturers, - OEMs refer to original equipment vehicle manufacturers like DaimlerChrysler Corporation, Ford Motor Company or General Motors Corporation, and - Tier II suppliers refer to suppliers like us who sell components, sub-assemblies and assemblies to Tier I suppliers. 1 Part I ITEM 1. BUSINESS GENERAL We are a leading independent manufacturer of a diverse mix of highly engineered, precision-machined, metal alloy components for many of the world's leading Tier I automotive parts suppliers. We focus on higher value-added products and emphasize product categories likely to benefit from technological innovation. Within each of our product categories, we strive to move our product offerings portfolio up the "value pyramid" described below by focusing on sub-assemblies, complete assemblies and other products that we believe generate margins above most of our peers. Our technology and manufacturing know-how allows us to produce complex parts requiring extremely close tolerances in the single-digit micron range, with one micron equaling 1/88th the width of a human hair. Given the high performance and safety critical nature of the applications where our parts are used, our products very often approach zero-defect quality levels. We believe our scale and precision manufacturing capabilities provide a significant competitive advantage over our independent competitors, many of which are smaller and lack the capital or technology to compete effectively with us. In addition, our scale allows us to pursue long production runs of high volume parts, enabling us to lower average manufacturing costs. Our in-house engineering expertise allows us to fully integrate with customers' application design and engineering efforts during the prototyping stage, further entrenching our competitive position. Our expertise has allowed us to achieve sole-source contracts covering an estimated 80% of our 2005 sales, which we believe provides greater visibility of and stability to earnings and cash flow. Our business was established in 1988 as Autocam Corporation, a Michigan corporation, to manufacture highly engineered, precision-machined, metal alloy components for automotive parts. On June 21, 2004, Micron Merger Corporation, a newly formed entity and wholly-owned subsidiary of Parent, merged with and into Holdings with Holdings continuing as the surviving corporation (the "Merger") and Autocam becoming an indirect wholly-owned subsidiary of Parent. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, registration statements and amendments to those filings are filed with the Securities and Exchange Commission and are available free of charge to the public at the website maintained by the Securities and Exchange Commission at www.sec.gov. OUR PRODUCTS Our products include precision-machined automotive components, sub-assemblies and assemblies. Generally, our products are platform neutral because they are not tied to any specific OEM models or platforms. We sell our products principally to North American and European Tier I automotive suppliers, which integrate these components into their own product offerings. These product offerings are in turn sold directly to OEMs primarily for the manufacture of new passenger vehicles and light trucks. A typical product life cycle for our products is five to seven years. We specifically target product categories that leverage our unique competencies and that we expect will further entrench our leading market positions. To this end, we are guided by a conceptual framework we refer to as the Autocam "value pyramid." We use the value pyramid to guide decisions regarding which product categories to target, which new business opportunities to pursue within each product category and which existing programs to exit. Our ultimate goal is to move our product offering up the value pyramid. The higher levels of the value pyramid generally include products where we are involved from the prototype stage, including specialty products, sub-assemblies, assemblies and selected products for niche applications. These products typically have the following characteristics: - high engineering and design content; - very close manufacturing tolerances at high volumes; - use of proprietary manufacturing know-how and specialty manufacturing equipment; and - high customer switching costs. We manufacture and sell over 200 types of precision automotive components for five primary product categories. We are a leading independent manufacturer of precision-machined components, sub-assemblies and assemblies in all five product categories in which we operate. 2 - Steering is our largest product category. Within the steering product category, we manufacture valve assemblies, as well as components like sleeves, torsion bars, input shafts, pinions and worms. These components are integrated into products that are sold primarily into the European and North American operations of OEMs. - Fuel delivery is our second largest product category. Within the fuel delivery product category, we manufacture components like disk checks, pole pieces, valves, seat guides, diesel pump bodies, diesel cases, sleeves and inlet tubes. These components are integrated into products that are sold primarily into the North American operations of OEMs. - Within the braking product category, we manufacture components like sleeves, push rods, seats and valve rods. These components are integrated into products that are sold into European and North American operations of OEMs. - Our products within the electric motors product category primarily include gears, gear sub-assemblies and worm shafts. These components are integrated into products that are sold primarily into the European operations of OEMs. - Within the airbag product category, we manufacture components like collars, adaptors, projectiles, chargeholders and diffusers. These components are integrated into products that are sold primarily into the North American operations of OEMs. In addition to our core products categories, we also manufacture components and assemblies for other automotive applications and for medical devices. Our components are used in the following medical devices: - hand pieces for use in ophthalmic surgery; - spinal, hip, knee, and shoulder implant systems; - blood cleaning and separation equipment, ultrasonic imaging equipment and DNA testing equipment; and - laser cut coronary and aortic stents. Our customers are among the leaders in their respective markets for ophthalmic surgical devices, orthopedic devices and minimally invasive stent delivery systems. INDUSTRY TRENDS We primarily operate within the automotive parts industry. The markets in that industry are very fragmented, niche markets where most of our independent competitors are much smaller. Currently, we believe several significant existing and emerging trends are impacting the automotive industry. We believe our business is well positioned to benefit from these trends, including: OUTSOURCING TRENDS BY TIER I SUPPLIERS. Over the past several years, Tier I automotive suppliers have continued a trend toward outsourcing automotive parts and systems to focus on their core design, development, assembly and marketing. We believe that Tier I suppliers are increasingly re-evaluating their own in-house machining operations with a focus on reducing costs through increased outsourcing of individual parts and assemblies to suppliers capable of global delivery. Independent suppliers are frequently able to achieve lower production costs per unit than Tier I suppliers and therefore can offer significant cost saving opportunities. We expect this trend to continue and believe that both our precision manufacturing base and global presence position us well to continue to increase our penetration of the Tier I precision parts market. INCREASING DEMAND FOR GLOBAL CAPABILITIES. OEMs and Tier I suppliers continue to expand their operations globally to capitalize on market opportunities. As these end use customers expand their geographic reach, they increasingly look to suppliers with the global capabilities to service their needs in those same locations. Suppliers with leading market positions and global capabilities have a competitive advantage and are best positioned to benefit from these trends. In 2005, we serviced our top six customers from more than one of our production locations. INCREASING DEMAND FOR SAFETY AND CONVENIENCE FEATURES. We expect that growing regulatory and consumer demand for safety and convenience features will continue to drive growth across a number of our product categories. The demand for these features typically drives OEM design changes and provides an opportunity to further increase our sales. We believe we will benefit from new and expanding product demand in a number of our product categories, including: - Steering -- Steering demand is expected to increase with the worldwide emergence of electric power-assisted steering; 3 - Braking Systems -- We believe pressure from consumers and regulatory agencies for safer vehicles will continue to put pressure on brake system suppliers to develop advanced systems that reduce stopping distances and control the vehicle during hard stopping and crash avoidance situations and that typically require improved technology and higher value-added precision manufactured components; - Electric Motors -- Consumers continue to demand more convenience, comfort and safety features in their vehicles, including seat adjusters, sunroofs, lumbar supports, power sliding doors and power lift gates. CSM Worldwide, Inc., an independent market research firm for the automotive industry ("CSM"), expects the demand for these conveniences to increase to an average of 38 electric motors per vehicle in 2006 from an average of 26 electric motors per vehicle in 2000; and - Airbags -- We believe growing customer demand for safety as well as regulatory activity will continue to increase airbag content in new vehicles principally from the demand for side and curtain airbags and a move toward "smart" airbags, which are airbag systems in which deployment is electronically controlled and typically require double the number of machined parts. DIESEL FUEL TRENDS. Given ongoing requirements for improved emissions and better fuel consumption, fuel systems are an area of constant focus for OEMs. Diesel engines, though not as common in North America, represented over 45% of the European fuel injection market in 2005. Diesel engines continue to gain popularity for their fuel efficiency, relative environmental friendliness and durability. New technological advancements in diesel fuel injectors, including common rail fuel delivery and other forms of diesel direct injection, will require higher value-added precision manufactured components and assemblies than traditional gasoline systems. We believe our experience in the manufacture of diesel components in Europe and North America positions us well to capture increased volume from potential diesel penetration in both locations. CONTINUED PENETRATION OF IMPORT-BRAND OEMS IN NORTH AMERICA. Import-brand OEMs, including Toyota, Honda and Nissan, continue to increase their manufacturing presence in North America. The North American market share of import-brand OEMs has grown from 28.8% in 1997 to 43.6% in 2005. CSM expects import-brand OEMs to capture 48.3% of the North American market by 2008. We believe there is an opportunity to take advantage of this trend by increasing our sales to Tier I suppliers that currently sell to import-brand OEMs. COMPETITIVE STRENGTHS INDUSTRY LEADER IN STRATEGICALLY TARGETED MARKETS. We are a leader in fragmented, niche markets. We specifically target those product categories that are likely to grow quicker than the overall industry, offer extensive value-added and higher margin product opportunities and are likely to benefit from technological change. We have continuously refined our processes and customized production equipment to provide state-of-the-art precision machining capabilities, enabling us to enhance our position as a valued supplier to our global Tier I customers. Our products contain a high degree of engineering content and require precision manufacturing processes in order to meet the performance requirements of these critical components. Moreover, we believe that as our customers continue to rationalize their supplier bases and re-evaluate their own in-house precision machining capabilities, we will be able to leverage our leading position to gain increased market share. BUSINESS VISIBILITY SUPPORTED BY LONG-TERM CONTRACTS. The majority of our products are sold under long-term, sole-source contracts that provide visibility on our future sales and cash flow. We focus our new product development efforts on securing long-term, sole-source contracts with Tier I automotive suppliers. Substantially all of our expected 2006 sales will be under existing contractual agreements, with much of the related capital expenditures and start-up costs already incurred. We believe that over 80% of our expected sales volumes through 2007 will come from products and customers already under contract. The long-term nature of our contracts permits us to achieve meaningful manufacturing cost reductions and sustain or improve our margins throughout a product's lifecycle as we pursue continuous manufacturing improvements. WELL ENTRENCHED POSITIONS WITH TIER I CUSTOMER BASE. We have aligned our business with many of the world's leading Tier I suppliers. The strength of our customer relationships is evidenced by the fact that our top 10 customers have been customers for an average of more than 18 years. We believe our reputation for close tolerance, high precision manufacturing expertise provides us with a strong competitive advantage that will allow us to continue to increase our sales to both new and existing customers. Our products typically have applications in performance-critical or safety-related applications that place a premium on quality and reliability, mitigating our customer's incentive to switch suppliers. Although our products are critical to the reliability and durability of our customer's products, they typically represent only a small portion of their overall system cost. Moreover, we strategically target those Tier I suppliers that are best positioned to grow within our core product categories. Our customers include 10 of the 15 largest global Tier I automotive suppliers, including ZF Friedrichshafen AG ("ZF"), TRW, Delphi, Bosch and Siemens VDO Automotive AG. 4 DIVERSE BUSINESS MIX. We supply a diverse range of precision products on a global basis to a broad group of customers. Our diversity across products, geography and automobile platforms provides stability and predictability to our business. Our precision products are provided to key Tier I suppliers who typically use them in critical products and systems for numerous vehicle models from many of the world's major automobile manufacturers, including BMW, DaimlerChrysler Corporation, Ford Motor Company, General Motors Corporation, Honda, Nissan, Toyota Motor Company and Volkswagen AG. Our products are typically automobile platform neutral, mitigating our exposure to any single vehicle model or platform. We support our global customer base from 15 strategically located manufacturing facilities in North America (7), France (4), Brazil (3) and Poland (1). Our geographic reach allows us to lower shipping costs, reduce delivery times and provide opportunities to grow with our customers in their local markets. Our breakdown of sales in 2005 by product category, geography and customer was: BY CATEGORY Power steering 34.9% Fuel injection 31.2% Braking 9.3% Electric motors 7.4% Air bags 5.0% Medical devices 4.6% Other 7.6%
BY GEOGRAPHY North America 45.7% Europe 45.7% South America 8.6% Asia (1)
BY CUSTOMER ZF 18.1% TRW 16.4% Delphi 15.1% Bosch 11.7% Other 38.7%
---------- (1) Our Asian facility had not yet begun production as of December 31, 2005. CULTURE OF LEAN MANUFACTURING AND CONTINUOUS IMPROVEMENT. We have built a pervasive culture centered on lean manufacturing, quality management and continuous improvement. In many cases, our management team considers us to be "best in class" in continuous process improvement. Our "Autocam Production System" incorporates lean manufacturing philosophies and other techniques into our operations, resulting in operational excellence that has allowed us to achieve improved margins over time. Our focus on long-term, high volume components allows us to fully leverage our continuous improvement and cost reduction capabilities. EXPERIENCED AND MOTIVATED MANAGEMENT TEAM. We are led by an experienced management team that averages 20 years of automotive parts manufacturing experience. The senior management team has been led by our president, John C. Kennedy, who has held that position with Autocam since he first acquired Autocam in 1988. The current management team has been responsible for developing and executing our strategy, which is focused on manufacturing expertise, profits, cash flow and profitable return on invested capital, or ROIC, throughout the product life cycle. Moreover, our senior management has deep experience with our current customer base and extensive relationships throughout the automotive industry. Mr. Kennedy and others in the management team own in the aggregate 21.0% of Parent on a fully-diluted basis. BUSINESS STRATEGY Our goals are to continue to increase our leading market position and leverage our manufacturing expertise and customer relationships to increase our sales and cash flow. Our strategy to achieve these goals includes the following initiatives: FOCUS ON HIGH GROWTH AND HIGHER VALUE-ADDED PRODUCT OFFERINGS. We seek to focus our design, engineering and manufacturing expertise on higher value-added products, sub-assemblies and assemblies that are not easily manufactured. By moving up the value pyramid to the highest precision products, we expect to leverage our technologically-advanced manufacturing expertise and increase our ROIC. In addition, we seek to align our development efforts on new products in categories that we believe will benefit from technological innovation and grow faster than the industry. For example, in late 2004 and 2005, we demonstrated our ability to provide value-added products and services by performing all of the design, assembly and testing of a custom-tailored, complete hydraulic power steering valve assembly for ThyssenKrupp Presta Steertec specifically used in Mercedes Benz M-Class and Jeep Grand Cherokee vehicles. 5 ALIGN SALES AND MARKETING EFFORTS WITH LEADING TIER I SUPPLIERS. We seek to focus our sales and marketing efforts on Tier I suppliers that can maintain or achieve leadership positions in our product categories. By focusing our efforts on these customers during the design and prototype stages of product development, we are able to secure early access to new products and better position ourselves to supply higher value-added components and sub-assemblies. This integrated approach allowed us to achieve sole-source contracts covering an estimated 80% of our 2005 sales. In addition, as the incumbent manufacturer, we are well positioned to leverage our manufacturing expertise onto next generation parts and secure additional sales and volumes with our customers. EXPLOIT TECHNICAL MANUFACTURING STRENGTH. We are recognized by our customers as a leading independent manufacturer of precision-machined, extremely close tolerance metal alloy components for high technology automotive applications. We produce these components through various processing techniques like high precision automatic and computer numerically controlled, or CNC, turning, rotary transfer, precision milling and precision grinding. From product development to final delivery, we employ state of the art manufacturing technologies and processes. Moreover, we have continuously refined our processes and customized our production equipment to deliver levels of precision machining capabilities that we believe provide a competitive advantage versus many of our competitors. We believe our recognized manufacturing advantage allows us to achieve close tolerance specifications, approach zero-defect manufacturing and achieve superior on-time delivery to better serve our customers. CONTINUOUSLY PURSUE PRODUCTIVITY IMPROVEMENTS AND LEAN MANUFACTURING. We have a deep culture throughout the organization of continuously pursuing efficiencies to lower costs and improve cash flows and margins. For example, in 2003 we consolidated the operations at our Chicago facility with our Kentwood and Marshall facilities, enabling us to reduce headcount and eliminate duplicate costs. In France, we have similarly undertaken efforts to reduce headcount and optimize operations to increase cash flow over the past two years. In addition, we believe we have identified additional operational initiatives to drive greater efficiency, lower costs and increase cash flow. SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. We have successfully completed and integrated acquisitions that have increased our scale and broadened our product portfolio. As a result of our strong position in our product categories, the fragmented nature of markets in which we operate and our prior success in making acquisitions, we believe we are well positioned to capitalize on potential acquisition opportunities. We intend to continue to apply a selective and disciplined acquisition strategy that is focused on improving financial performance, broadening our product portfolio and increasing our leadership position. PRODUCT OVERVIEW We organize our product lines into the following categories: - steering, - fuel, - braking, - electric motors, - air bags, - medical devices, and - other. 6 Set forth below are our sales by product line for the periods presented:
YEARS ENDED ------------------------ PRODUCT CATEGORIES 2003 2004 2005 ------------------ ------ ------ ------ (IN MILLIONS) Steering $ 99.9 $120.2 $121.4 Fuel 111.0 109.1 108.4 Braking 26.4 30.6 32.5 Electric motors 41.8 39.2 25.6 Air bags 18.5 18.6 17.5 Medical devices 8.1 9.0 15.8 Other 17.5 23.6 26.6 ------ ------ ------ Total revenue $323.2 $350.3 $347.8 ====== ====== ======
Set forth below are our sales by product line as a percentage of total sales for the periods presented:
YEARS ENDED ------------------ PRODUCT CATEGORIES 2003 2004 2005 ------------------ ---- ---- ---- Steering 31% 34% 35% Fuel 34% 31% 31% Braking 8% 9% 9% Electric motors 13% 11% 7% Air bags 6% 5% 5% Medical devices 3% 3% 5% Other 5% 7% 8% ---- ---- ---- Total revenue 100% 100% 100% ==== ==== ====
STEERING. We design, engineer and manufacture steering system components, sub-assemblies and assemblies. Some of our products include sleeves, input shafts, torsion bars, and integrated pinions and sleeves as well as finished hydraulic valve assemblies. We entered this product category in 1998 with the acquisition of Frank & Pignard, S.A. ("F&P"), in France. At the time of the acquisition, we regarded F&P as a leading independent manufacturer of hydraulic power steering components and sub-assemblies in Europe. We have leveraged F&P's leading market position to develop critical components for electric power assisted steering, or EPAS, including a "torque sensing assembly." These design efforts have positioned us as an exclusive supplier to a number of leading Tier I suppliers. Our steering component sales are predominantly generated in Europe where we serve many of the leading Tier I steering suppliers. We also have a growing presence in North and South America where we serve our top customers' local steering component needs. Our customers have penetration on a diverse OEM customer base. In Europe, OEM customers for our steering components include BMW, DaimlerChrysler, Fiat, General Motors, Honda, Nissan, Peugeot, Renault, Toyota and Volkswagen. In North and South America, OEM customers for our steering components include DaimlerChrysler, Fiat, General Motors and Peugeot. Steering demand was historically driven by consumer demand for the comfort and safety of power steering systems. In 2005, it is estimated that the North American light vehicle market has achieved almost 100% power steering penetration with Europe at slightly over 92%. Emerging markets are expected to continue to see increased penetration of power steering as vehicle offerings become more sophisticated. We also believe that the use of EPAS technology will expand market opportunity for us as it becomes more commercially accepted. We manufacture steering system components at our facilities in Kentwood, Michigan, Pochons, Ternier, Le Lac and Lecheres, France and Campinas, Brazil. FUEL. We design, engineer and manufacture fuel delivery system components for use in both gasoline and diesel powered engines. Our customers' products have applications in both light vehicles as well as heavy duty trucks and off road vehicles. Some of the component parts we manufacture include disk checks, pole pieces, valves, seat guides, diesel pump bodies and diesel cases. Our status as a value-added supplier positions us to participate in the design or redesign of our customer's products. For example, we have participated in the design and manufacture of components for three successive generations of one family of fuel injectors. 7 Our fuel delivery systems sales are predominantly generated in North America where we serve the leading Tier I fuel injector suppliers. We also have a presence in Europe and South America where we serve our top customers' European and South American fuel delivery system component needs. Our customers' products are generally platform neutral. Examples of North America OEM customers for our fuel delivery components include DaimlerChrysler, Ford, General Motors, Nissan and Hyundai. Examples of European OEM customers for our fuel delivery components include Opal, Fiat, DaimlerChrysler and Ford. Examples of South American OEM customers for our fuel delivery components include Volkswagon and Fiat. The fuel delivery market has been driven by a shift in technology, first from carburetion systems to fuel injectors, then from single-port fuel injectors to the multi-port fuel injectors commonly found on many vehicles today. Emission standards and performance considerations have each been a factor in this technology shift. Direct injecting systems, a newer form of fuel injectors, are gaining popularity and are expected to continue to support growth in this category. Direct injecting systems spray fuel directly into the cylinder, as opposed to the intake manifold, and provide increased fuel efficiency. This technology has become particularly important in Europe, where we have significant development efforts with a key fuel delivery systems customer. In addition, new developments in diesel fuel engines including technology-driven common rail fuel delivery and other diesel injection innovations are expected to increase the demand for high value component parts for diesel applications. We have significant development efforts underway to meet the future demand for diesel direct injection in Europe and North America. We manufacture fuel delivery system components at our facilities in Kentwood and Marshall, Michigan, Pochons, Ternier and Lecheres, France, and Campinas and Pinhal, Brazil. BRAKING. We design, engineer and manufacture braking system components including sleeves, seats, valve rods and push rods. We identified this market when luxury brands like Mercedes Benz and BMW first introduced premium anti-lock braking safety features to the European market. As the safety advantages of this feature became apparent, applications for "mass market" anti-lock braking systems emerged in both Europe and North America. Our growth focus in this category is on high value-added brake system applications, anti-lock brake systems and traction control and stability systems. As these systems become increasingly complex, we believe that the precision required in manufacturing components and assemblies will also increase. Our braking system component sales are generated in Europe and North America, where we serve many of the leading Tier I suppliers. Our customers' products are generally platform neutral. In Europe, OEM customers for our braking components include DaimlerChrysler, Fiat and Volkswagen, and in North America, they include DaimlerChrysler, Ford and General Motors. We manufacture braking system components at our facilities in Kentwood, Marshall and Dowagiac, Michigan, Pochons and Ternier, France and Campinas and Pinhal, Brazil. ELECTRIC MOTORS. We design, engineer and manufacture electric motor components including gears, worm shafts, gear sub-assemblies and gear boxes. We identified this growth market in the mid 1990's when the demand for high torque, safety and performance critical electric motors was emerging. High value electric motor applications include window lifts, seat adjusters and windshield wipers. In 2000, we enhanced our position in this product category with the acquisition of Bouverat Industries, S.A. ("Bouverat") in France. At the time of the acquisition, we regarded Bouverat as a leading manufacturer of technically complex gears, shafts and related components for electric motors. The acquisition of Bouverat provided global manufacturing capabilities and enhanced our manufacturing skills in this product category. Our electric motor component sales are predominantly generated in Europe where we serve many of the leading Tier I suppliers. Our customers' products are generally platform neutral. OEM customers for our electric motor components include many of the major OEMs in North America and Europe. Demand for electric motors has been driven by consumer preference for convenience, comfort and safety features. Although power windows and windshield wipers are approaching maximum penetration, other convenience applications including seat adjusters, sun roofs, convertible tops, electric lumbar supports and electric mirrors continue to expand. Applications in safety features include electric braking, electric power steering, hybrid starter motors, hybrid generators and emission control pumps. We believe OEMs will continue to develop new applications for electric motors to continue to differentiate their vehicles including electric massage units, retractable running boards, power folding mirrors, power door and deck lids and tilting head rests. We manufacture electric motor components at our facilities in Kentwood, Michigan, Lecheres, France, Boituva, Brazil and Kamienna Gora, Poland. 8 AIR BAGS. We engineer and manufacture air bag system components like collars, adaptors, projectiles, chargeholders, diffusers and bases for customers such as Autoliv, one of the world's largest producers of air bag systems. Our air bag system component sales are almost entirely generated in North America where we serve leading Tier I suppliers. Our customers' products are generally platform neutral. In North America, OEM customers for our air bag components include Ford, Honda, Renault/Nissan and Toyota. We believe the air bag system segment has significant opportunities for future growth driven by increasing consumer demand and ongoing regulatory activity. Driver and passenger air bags are now standard on all North American light vehicles. However, side curtain air bags have only achieved 29% penetration of North American light vehicles in 2005. CSM predicts that approximately 95% of North American vehicles will offer side curtain air bags by 2009. We expect state and federal regulators to continue to encourage and require OEMs to increase vehicle air bag content. Additionally, we expect pressure and publicity generated by industry groups, including the Alliance of Automobile Manufacturers and Insurance Institute for Highway Safety, will spur consumer demand for increasing use of air bags. We also expect the demand for "smart" or sensing air bags to contribute to future growth of this category. These air bags have staged deployments and typically require double the number of precision-machined parts compared to first generation air bags. We manufacture air bag system components at our facilities in Kentwood, Marshall and Dowagiac, Michigan and Campinas, Brazil. In June 2003, we closed the Chicago, Illinois facility that originally contained Har's operations and combined it with our Kentwood and Marshall facilities to reduce costs and improve quality to our customers. MEDICAL DEVICES. We design and manufacture a number of components and sub-assemblies primarily for ophthalmic surgical device and orthopedic implant applications. The bulk of our sales in the medical device category come from three primary customers, all of which are among the leaders in their respective markets for ophthalmic surgical and orthopedic implant devices. We manufacture our components for medical devices at our Hayward, California and Weymouth and Plymouth, Massachusetts facilities. OTHER. Examples of some of our other products include components for automatic and manual transmissions, air conditioning compressors and engine block valve guides. SALES AND MARKETING The substantial majority of our sales are generated under long-term, sole-source contracts with our customers. Our contracts typically last three to seven years, but can be shorter or longer. Most of our contracts provide us with sole-source status, prohibiting our customers from purchasing competing products unless we fail to maintain prescribed levels of production quality or quantity. Our customers typically provide quarterly or annual expected production volume estimates, based on anticipated OEM production volumes that we in turn utilize to schedule production. These contracts often mandate annual price concessions of between 1% and 3%, which we have historically offset by manufacturing efficiency gains over the life of a product. We undertake minimal advertising as most of our target customers have a working knowledge of our precision capabilities. We have built our sales department and crafted its culture on the premise that a properly serviced and satisfied customer will ultimately provide the best opportunity for market and customer expansion. Customer development activity is a collaborative effort led by our customer development engineers, or CDEs. The CDE's main focus is the growth and development of specific customers, while providing support at customer locations for manufacturing teams. The CDE is also able to gather critical customer and competitive intelligence regarding new product and market opportunities. Outside representatives are occasionally assigned to specific customers or regional areas. We will also use this approach to gain access to important new markets or regions where a presence is essential to the long-term business plan. For example, we employ independent agents in Germany and Eastern Europe to gain access to specific customers of strategic significance. 9 We view customer management as the activity required to maintain and manage customer relationships profitably. Due to the specific focus on customer satisfaction, the CDE is regarded as the "voice of the customer," providing timely feedback to quality, delivery and customer service issues. The CDE provides a critical link to the manufacturing product teams. Often, the CDE acts as the front-line liaison at the customer's facility or leads meetings with the customer regarding product or process issues. The CDE's involvement, facilitated by the fact that the CDE is often located on site, can also be critical in making sure that customer-derived satisfaction scores are accurate and that quality costs are minimized. In many cases, the CDE provides the necessary guidance as to the long-term strategy employed by a given individual customer. For example, CDE feedback to the sales management team may help determine if we decide to grow, maintain, or, in some cases, elect to terminate a particular customer relationship. Our market development specialists use their technical expertise and knowledge side-by-side with our customers to thoroughly understand a customer's requirements, offer solutions to these needs, and then coordinate a manufacturing strategy to satisfy the technological and performance requirements of the customer's applications. Currently, we have market development specialists and teams in steering, fuel delivery and electric motor product groups. Examples of past activities of our market development specialists include: - the development of a proprietary design for column mounted EPAS applications for a European customer; - the development of a hydraulic steering valve and associated manufacturing processes for applications in North America; and - the development of several fuel injection products with key customers, including a unique variable stroke solenoid valve assembly for gasoline direct injection. MANUFACTURING From initial product development and component design stage to delivery of the finished product, we employ state-of-the-art manufacturing technologies and processes. We primarily utilize a wide range of precision machining technologies, including high-precision automatic and CNC turning, rotary transfer, precision milling and precision grinding, to meet a wide range of customer specifications. The components we manufacture are carefully and efficiently processed through a variety of high precision finishing methods like ultrasonic cleaning and assembled into a value-added assembly or sub-assembly or shipped directly to a customer for use in its products. For example, we manufacture key components for steering systems using precision turning, grinding and milling methods in various facilities. These components are then matched with key purchased components, like seals, clips and housings, and assembled using specialty precision assembly equipment in our Kentwood, Michigan facility. This assembly is then balanced according to unique vehicle performance specifications, tested, packed and shipped to our customer who then adds our valve to their steering gear product. In this example, we have refined our processes and, in some cases, customized production equipment to achieve world class precision manufacturing capabilities. We also believe our in-house tooling capability provides us a unique advantage. We have the capability to manufacture precision cutting tools and to reconfigure specialized machine tools. These capabilities provide a competitive advantage as product launch times are reduced, specialized machines are available for use on future programs and proprietary know-how is maintained within the organization. RESEARCH, DEVELOPMENT AND TECHNOLOGY Our objective is to offer superior quality, technologically-advanced products to our customers at competitive prices. To this end, we engage in ongoing engineering, research and development activities to improve the reliability, performance and cost effectiveness of existing products and to design and develop new products for existing and new applications. We believe our technology and research and development support are among the best in our industry. Our research and development program is specifically designed to develop new products and applications, develop improved cost effective manufacturing and support processes and assist in marketing new products. Many of our customers work in partnership with our technical representatives to develop new, more competitive products. At the same time, our engineering staff also works independently to design new products, improve performance and technical features of existing products and develop methods to lower manufacturing costs. 10 PATENTS AND TRADEMARKS In limited cases, we rely on a combination of patents, trade secrets, trademarks, copyrights and other intellectual property rights, non-disclosure agreements and other protective measures to protect our proprietary rights. More commonly, we also rely on unpatented know-how and trade secrets and employ various methods, including confidentially agreements with third parties, employees and consultants, to protect our trade secrets and know-how. We do not believe that any individual item of our intellectual property is material to our business. COMPETITION Our competitors include Tier I suppliers as well as independent domestic and international suppliers. Many of these Tier I suppliers are larger companies that have greater financial resources than us and are also our most important customers. Over the past several years, Tier I suppliers have trended toward outsourcing the products we make, which we believe will reduce competition from those entities in the future. We compete primarily on the basis of quality and price, and we believe that a number of barriers to entry will serve to protect our competitive position. In general, our markets are highly fragmented with few independent competitors able to match our geographic footprint and the depth and breadth of our product offerings. Our well-entrenched position with Tier I suppliers gives us an advantage to source new business from these customers. Further, our independent competitors will not be able to match our global capabilities without a substantial investment in new facilities. Finally, development of new products is capital intensive, and we believe many of our smaller competitors lack sufficient financial resources to make the necessary investments in new product lines. SOURCES AND AVAILABILITY OF RAW MATERIALS The most important raw material we purchase is steel. We purchased approximately $66.5 million of steel in 2005, representing 21.7% of our total cost of goods sold. We purchase primarily high value-added specialty steel, which has historically experienced more stable pricing than commodity steel. The price of commodity steel is subject to cyclical fluctuation and cost increases were significant in 2004 and, to a lesser degree, in 2005. We are often able to pass through price changes through contractual price escalators and de-escalators tied to raw material costs. Further, we estimate that we can recoup a portion of any price increase of steel in the scrap steel market through the increased prices we receive for scrap steel left over from our manufacturing processes. Our purchasing strategy is to deal with only high quality, dependable suppliers. We believe that we have maintained strong relationships with our key suppliers and that these relationships will continue into the foreseeable future. Based on our experience, we expect that adequate quantities of steel will be available at market prices. EMPLOYEES Set forth below is a distribution of our workforce by geographic segment as of the end of 2005:
TOTAL EMPLOYEES --------- North America (United States) 746 Europe (France and Poland) 1,191 South America (Brazil) 674 Asia (China) 1 ----- 2,612 =====
None of our North American, Polish or Asian employees are covered by collective bargaining agreements. Governmental unions represent all of our French and South American employees. We consider our relations with our employees to be good. 11 ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION Our past and present operations as well as our past and present ownership and operations of real property are subject to federal, state, local and foreign environmental laws and regulations pertaining to emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our operations and facilities are being operated in compliance, in all material respects, with applicable environmental, health and safety laws and regulations. However, we cannot predict with any certainty that we will not in the future incur liability under environmental statutes and regulations with respect to non-compliance with environmental laws, contamination of sites formerly or currently owned or operated by us, including contamination caused by prior owners and operators of these sites, or the off-site disposal of hazardous substances. Like any manufacturer, we are subject to the possibility that we may receive notices of potential liability, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, or analogous state laws, for cleanup costs associated with offsite waste recycling or disposal facilities at which wastes associated with its operations have allegedly come to be located. Liability under CERCLA is strict, retroactive and joint and several. No such notices are currently pending. FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934 (the "Exchange Act") with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events. Statements that are predictive in nature that depend upon or refer to future events or conditions or that include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "likely," "would," "could" and similar expressions are forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this report. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include: - risks associated with our substantial indebtedness, leverage and debt service; - the cyclical nature of the automotive industry; - performance of our business and future operating results; - general business and economic conditions, particularly an economic downturn; - the loss of one or more significant customers; - changes in prices in and availability of raw materials; - risks of increased competition and pricing pressures in our existing and future markets; - loss of any key executives; - increases in the cost of compliance with laws and regulations, including environmental laws and regulations; - risks related to our acquisition strategy and integration of acquired businesses; - fluctuations in currency exchange and interest rates; - risks associated with international operations; - catastrophic loss of any of our key manufacturing facilities; - seasonality; and - the other risks described as "Risk Factors" below. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. ITEM 1A. RISK FACTORS If any of the following risks actually occur, our business, results of operations and financial condition could be adversely affected. 12 WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH COULD AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS AND MAY OTHERWISE RESTRICT OUR ACTIVITIES. As of December 31, 2005, we had total indebtedness for borrowed money of approximately $291.2 million. In addition, at that date, $28.9 million was available for future borrowings under the multi-currency revolving credit facility and E9.3 million was available to our French subsidiary, Autocam France, SARL under the euro-denominated revolving credit facility of our senior credit facilities. We are also permitted under the terms of the indenture governing our senior subordinated notes, or the "Notes," to incur additional indebtedness in the future provided that we comply with certain financial ratios or tests. Any additional indebtedness could intensify the leverage related risks described below. Our substantial indebtedness could: - make it more difficult for us to satisfy our obligations under our indebtedness; - require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development and other corporate requirements; - increase our vulnerability to general adverse economic and industry conditions, including changes in currency exchange rates; - limit our ability to respond to business opportunities; - limit our ability to borrow additional funds or refinance existing indebtedness, which may be necessary; and - subject us to financial and other restrictive covenants, which, if not complied with, could result in an event of default. TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to make payments on our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, including those described in this "Risk Factors" section, that are beyond our control. Our business may not generate sufficient cash flow from operations or we may be unable to borrow additional funds under our senior credit facilities or otherwise in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot provide any assurances that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we are unable to generate sufficient cash flow to refinance our debt obligations on favorable terms, it could have a significant adverse effect on our financial condition. THE INDUSTRIES IN WHICH WE OPERATE DEPEND UPON GENERAL ECONOMIC CONDITIONS AND ARE HIGHLY CYCLICAL. Our financial performance depends on conditions in the global automotive industry, and, generally, on the North American and European economies. Our sales to customers in the automotive and light-duty truck industries accounted for substantially all of our sales in 2005. Demand in the automotive industry fluctuates significantly in response to overall economic conditions and is particularly sensitive to changes in interest rate levels, consumer confidence and fuel costs. Any sustained weakness in demand or downturn in the economy generally could have a material adverse effect on our business, results of operations and financial condition. Our sales are also impacted by inventory levels and OEM production levels. We cannot predict when OEMs will decide to either build or reduce inventory levels or whether new inventory levels will approximate historical inventory levels. This may result in variability in our performance. Uncertainty regarding inventory levels has been exacerbated by favorable consumer financing programs initiated by OEM manufacturers, which may accelerate sales that otherwise would occur in future periods. In addition, we have historically experienced sales declines during the OEMs' scheduled shut-downs or shut-downs resulting from unforeseen events. Continued uncertainty and other unexpected fluctuations could have a material adverse effect on our business, results of operations and financial condition. The Tier I supplier industry is also cyclical, and in large part, dependant on the overall strength of consumer demand for various types of motor vehicles. A decrease in consumer demand for motor vehicles in general or specific types of vehicles could have a material adverse effect on our business, results of operations and financial condition. 13 OUR BASE OF CUSTOMERS IS CONCENTRATED AND THE LOSS OF BUSINESS FROM OR BANKRUPTCY OF A MAJOR CUSTOMER OR A CHANGE IN AUTO CONSUMER PREFERENCES OR REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON US. Because of the relative importance of our largest customers and the high degree of concentration of OEMs in the North American automotive industry, our business is exposed to a high degree of risk related to customer concentration. Our seven largest customers accounted for 76.6% of our sales in 2005. Although we have long-term contracts with many of our customers, some of our customers are not subject to long-term contracts or may have the ability to terminate their contracts with us. The loss or bankruptcy of a major customer or a significant reduction in sales to a major customer could have a material adverse effect on us. For example, on October 8, 2005, Delphi and its United States subsidiaries filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. See discussion in Item 7 of this report. Our customers consist primarily of Tier I suppliers, like ZF, TRW, Delphi and Bosch, that serve the large OEMs. Accordingly, while sales directly to OEMs accounted for an insignificant percentage of our sales, due to our significant Tier I customer base, adverse performance by, the bankruptcy of or production cuts at these OEMs could also adversely impact our sales to Tier I suppliers. Our sales and performance are also influenced by consumer preferences, regulatory changes and OEM new vehicle financing programs. In addition, government regulations, including those relating to fuel economy, could impact vehicle content and volume and, accordingly, have a material adverse impact on us. INCREASES IN OUR RAW MATERIAL OR ELECTRICITY COSTS OR THE LOSS OF A SUBSTANTIAL NUMBER OF OUR SUPPLIERS OR A MATERIAL DISRUPTION IN ELECTRICITY SUPPLIES COULD AFFECT OUR FINANCIAL HEALTH. The most significant raw material used in our business is steel. Generally, our raw materials requirements are obtainable from various sources and in the desired quantities. While we currently maintain alternative sources for raw materials, our businesses are subject to the risk of price fluctuations and periodic delays in the delivery of various raw materials and component parts. The domestic steel industry has experienced substantial financial instability due to numerous factors, including energy costs and the effect of foreign competition. As a result of various global economic factors, rising steel prices could have a negative impact on our financial results. In addition, a failure by our suppliers to continue to supply us with various raw materials on commercially reasonable terms, or at all, would have a material adverse effect on us. Electricity costs are an element of our cost structure. To the extent there are material fluctuations in electricity costs, our margins could be adversely impacted. Any material disruption in electricity supplies could delay our production and could have a material adverse effect on us. CONTINUING TRENDS AMONG OUR CUSTOMERS WILL INCREASE COMPETITIVE PRESSURES IN OUR BUSINESSES. The markets for our products are highly competitive. Our competitors include component manufacturing facilities of Tier I suppliers, as well as independent domestic and international suppliers. Some of our competitors are large companies with in-house machining operations that have greater financial resources than us. At times, we may be in a position of competing with some of our own customers, which could have adverse consequences. We believe that the principal competitive factors for all of our products are product quality and conformity to customer specifications, design and engineering capabilities, product development, timeliness of delivery and price. In addition, our competitors may develop products that are superior to our products or may adapt more quickly than us to new technologies or evolving customer requirements. Technological advances by our competitors may lead to new manufacturing techniques to make our products and make it more difficult for us to compete. Continuing trends by our customers in many of our markets to limit their number of outside suppliers may result in increased competition as many competitors may reduce prices to compete. In addition, financial and operating difficulties experienced by our major customers, particularly Delphi, and the OEMs that our customers supply their products to, may result in further pricing pressures on us. Pricing pressure from customers has been a characteristic of the automotive parts industry for many years. Almost all Tier I suppliers have policies of seeking price reductions each year. We have taken steps to reduce costs and resist price reductions, but price reductions have impacted our sales and profit margins. We may also be subject to increased pricing pressures from customers because our financial information is publicly available. If we are not able to offset continued price reductions through improved operating efficiencies and reduced costs, we may lose customers or be compelled to make price concessions that may have a material adverse effect on our business, results of operations and financial condition. 14 We are continually exposed to pressure from our customers to extend payment terms. Currently, customary industry payment terms in the United States are 30-45 days; however, customers routinely request payment terms of 45-60 days. In Europe, customary terms exceed 90 days. To the extent we are unsuccessful in resisting our customers' attempts to lengthen payment terms our liquidity may be adversely impacted. We expect competitive pressures in our markets to remain strong. These pressures arise from existing competitors, other companies that may enter our existing or future markets and, in some cases, our customers, which themselves may decide to produce certain items sold by us. There can be no assurance that we will be able to compete successfully with our existing competitors or with new competitors. Failure to compete successfully could have a material adverse effect on our business, results of operations and financial condition. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. IN ADDITION, WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS BY THIRD PARTIES. We rely upon proprietary technology and technology advancements to maintain competitiveness in the market. We generally rely on a combination of unpatented proprietary know-how and trade secrets, copyrights, trademarks, and, to a lesser extent, patents in order to preserve our position in the market. Because of the importance of our proprietary know-how, we typically enter into confidentiality or license agreements with third parties, employees and consultants, and control access to and distribution of our proprietary information. We have entered into, and may enter into in the future, other contractual arrangements with employees and third parties relating to our intellectual property rights. Despite efforts to protect our proprietary rights, unauthorized parties may copy or otherwise obtain and use our products or technology. It is difficult for us to monitor unauthorized uses of our products. The steps we have taken may not prevent unauthorized use of technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Although we enter into confidentiality agreements with third parties to whom we disclose unpatented proprietary know-how and trade secrets, these methods may not afford complete protection and there can be no assurance that others will not independently develop similar know-how and trade secrets. If third parties take actions that affect our rights or the value of our intellectual property, similar proprietary rights or reputation or we are unable to protect our intellectual property from infringement or misappropriation, other companies may be able to use our intellectual property to offer competitive products at lower prices and we may not be able to effectively compete against these companies. Although we believe that our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties, we can give no assurance that claims or litigation asserting infringement by us of intellectual property rights will not be initiated in the future seeking damages, payment of royalties or licensing fees, or an injunction against the sale of our products or that we would prevail in any litigation or be successful in preventing such judgment. In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights and, if not successful, we may not be able to protect the value of our intellectual property. Regardless of its outcome, any litigation, whether commenced by us or a third party, could be protracted and costly and could have a material adverse effect on our business, results of operations and financial condition. LOSS OF KEY EXECUTIVE OFFICERS COULD WEAKEN OUR BUSINESS EXPERTISE AND OTHER BUSINESS PLANS. Our success depends to a significant degree upon the continued contributions of our senior management team and technical, marketing and sales personnel. Our employees, including management, may voluntarily terminate their employment with us at any time. There is competition for qualified employees and personnel in our industry and there are a limited number of persons with relevant knowledge and experience. The loss of any of our key executive officers in the future could significantly impede our ability to successfully implement our business strategy, financial plans, expansion of services, marketing and other objectives. We believe that the growth and future success of our business will depend in large part on our continued ability to attract, motivate and retain highly-skilled, qualified personnel. 15 WE MAY BE SUBJECT TO WORK STOPPAGES AT OUR FACILITIES OR AT THE FACILITIES OF OUR PRINCIPAL CUSTOMERS. As is common in many European and South American jurisdictions, substantially all of our 1,191 French and 674 Brazilian employees are covered by country-wide collective bargaining agreements. There can be no assurance that future issues with our labor unions will be resolved favorably or that we will not experience a work stoppage that could materially and adversely affect our business, results of operations and financial condition. For example, in April 2004, we experienced a one hour work stoppage by some employees of our French facilities with respect to compensation negotiations then in progress. These negotiations concluded and the dispute was resolved. If our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations, which could have a material adverse effect on us. In addition, if a greater percentage of our work force becomes unionized, our business, results of operations and financial condition could be materially and adversely affected. Many of our direct or indirect customers have unionized work forces. Strikes, work stoppages or slowdowns experienced by OEMs or their suppliers could result in slowdowns or closures of assembly plants where our products are included in assembled vehicles. In addition, organizations responsible for shipping our customers' products may be impacted by occasional strikes. Any interruption in the delivery of our customers' products would reduce demand for our products and could have a material adverse effect on us. OUR ACQUISITION STRATEGY MAY BE UNSUCCESSFUL. As part of our growth strategy, we plan to pursue the acquisition of other companies, assets and product lines that either complement or expand our existing business. We cannot assure you that we will be able to consummate any acquisitions or that any future acquisitions will be able to be consummated at acceptable prices and terms. We continually evaluate potential acquisition opportunities in the ordinary course of business, including those that could be material in size and scope. Acquisitions involve a number of special risks and factors, including: - the focus of management's attention to the assimilation of acquired companies and their employees and on the management of expanding operations; - the incorporation of acquired products into our product line; - the increasing demands on our operational systems; - the failure to realize expected synergies; - possible adverse effects on our reported operating results, particularly during the first several periods after the acquisition is complete; - the amortization of acquired intangible assets; and - the loss of key employees of the acquired businesses. In pursuing acquisitions, we compete against other automotive part manufacturers, some of which are larger than us and have greater financial and other resources than we have. We compete for potential acquisitions based on a number of factors, including price, terms and conditions, size and ability to offer cash, stock or other forms of consideration. Increased competition for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. As a company without public equity, we may not be able to offer attractive equity to potential sellers. Additionally, our acquisition strategy may result in significant increases in our outstanding indebtedness and debt service requirements. The terms of the Notes, the senior credit facilities and the second lien credit facility further limit acquisitions we may pursue. In addition, the negotiation of potential acquisitions may require members of management to divert their time and resources away from our operations. THE INTEGRATION OF ACQUIRED BUSINESSES MAY RESULT IN SUBSTANTIAL COSTS, DELAYS OR OTHER PROBLEMS. We may not be able to successfully integrate our acquisitions without substantial costs, delays or other problems. We will have to continue to expend substantial managerial, operating, financial and other resources to integrate our businesses. The costs of integration could have a material adverse effect on our operating results and financial condition. These costs include non-recurring acquisition costs, including accounting and legal fees, investment banking fees, recognition of transaction-related obligations and various other acquisition-related costs. In addition, the pace of our acquisitions of other businesses may materially and adversely affect our efforts to integrate acquisitions and manage those acquisitions profitably. We may seek to recruit additional managers to supplement the incumbent management of the acquired businesses, but may be unable to recruit additional candidates with the necessary skills. 16 Although we conduct what we believe to be a prudent level of investigation regarding the operating and financial condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Until we actually assume operating control of these business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. Once we acquire a business, the risks we are faced with include: - the possibility that it will be difficult to integrate the operations into our other operations; - the possibility that we have acquired substantial undisclosed liabilities; - the risks of entering markets or offering services for which we have no prior experience; and - the potential loss of customers as a result of changes in management. We may not be successful in overcoming these risks. FLUCTUATIONS IN CURRENCY EXCHANGE AND INTEREST RATES MAY SIGNIFICANTLY IMPACT OUR RESULTS OF OPERATIONS AND MAY SIGNIFICANTLY AFFECT THE COMPARABILITY OF OUR RESULTS OF OPERATIONS BETWEEN FINANCIAL PERIODS. Our operations are conducted by subsidiaries in countries where the functional currency is not our reporting currency, the U.S. dollar. The results of the operations and the financial position of these subsidiaries are reported in the relevant foreign, or functional, currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our combined financial statements. As a result, our financial results are impacted by currency fluctuations between the U.S. dollar and the euro and, to a lesser extent, other currencies, which are unrelated to our underlying results of operations. In addition, as of December 31, 2005, $69.6 million, or 23.9%, of our total indebtedness was denominated in euros. While this helps us match the currency of some of our revenues and expenses with the currency of our debt repayment obligations, the carrying value of that indebtedness will fluctuate depending on currency exchange rates between the U.S. dollar and the euro. To the extent the U.S. dollar declines against the euro, interest expenses for our euro-denominated indebtedness will increase for financial reporting purposes. We are also subject to interest rate risk because we have substantial indebtedness at variable interest rates. As of December 31, 2005, our interest was determined on a variable basis on $142.4 million, or 48.9%, of our total indebtedness. An increase in interest rates of 0.25% will increase interest expense under our variable rate loans by $0.4 million per year. In March 2006, through an interest rate swap agreement we fixed the interest rate on $50.0 million of our variable-interest-rate indebtedness at a London Interbank Offered Rate (LIBOR) of 5.14% for five years. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Further, while we will attempt to repay indebtedness using cash flows from the same currency under which the indebtedness is denominated, there are no assurances we will be able to do so. For example, if we are forced to repay borrowings of ours or our domestic subsidiaries that are denominated in U.S. dollars with euros, depreciation of the euro against the U.S. dollar will make the debt repayment more costly in euro terms. While we may enter into various currency and interest rate hedging contracts, we cannot assure you that any hedging transactions we might enter into will be successful or that shifts in the currency exchange or interest rates will not have a material adverse effect on us. WE ARE SUBJECT TO TAXATION IN MULTIPLE JURISDICTIONS. We are subject to taxation primarily in the United States, France, Brazil, Poland and China. Our effective tax rate and tax liability will be affected by a number of factors, like the amount of taxable income in particular jurisdictions, the tax rates in these jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds to and repatriate funds from our foreign subsidiaries, and future changes in the law. Our tax liability will be dependent upon our operating results and the manner in which our operations are funded. Generally, the tax liability for each legal entity is determined either on a non-consolidated basis or on a consolidated basis only with other entities incorporated in the same jurisdiction. In either case, our tax liability is determined without regard to the taxable losses of non-consolidated affiliated entities. As a result, we may pay income taxes in one jurisdiction for a particular period even though on an overall basis we incur a net loss for that period. 17 OUR OPERATIONS OUTSIDE OF THE UNITED STATES ARE SUBJECT TO POLITICAL, INVESTMENT AND LOCAL BUSINESS RISKS. Sales by our subsidiaries located outside of the United States accounted for 54.3% of our 2005 sales and an additional 4.9% of our sales in 2005 were derived from sales of products manufactured in the United States that were sold outside the United States. As part of our business strategy, we intend to expand our international operations through internal growth and acquisitions. Sales outside of the United States, particularly sales to emerging markets, are subject to other various risks which are not present in sales within the United States that can materially affect our business, results of operations and financial condition. In addition to currency exchange and tax risks as discussed above, these risks include: - local political and social conditions, including hyperinflationary conditions and political instability in certain countries; - devaluation of foreign currencies; - potential imposition of limitations on conversion of foreign currencies into U.S. dollars and remittance of dividends and payment by foreign subsidiaries; - potential difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; - domestic and foreign customs, tariffs and quotas or other trade barriers; - increased costs for transportation and shipping; - potential difficulties in protecting intellectual property; - risk of nationalization of private enterprises by foreign governments; - managing and obtaining support and distributions for local operations; - potential imposition or increase of restrictions on investment; and - required compliance with a variety of laws and regulations. We cannot provide any assurances that we will succeed in developing and implementing policies and strategies to address the foregoing factors in a timely and effective manner in each location where we do business. Consequently, the occurrence of one or more of the foregoing factors could have a material adverse effect on the business, results of operations and financial condition of our international operations. WE MAY INCUR MATERIAL LOSSES AND COSTS AS A RESULT OF PRODUCT LIABILITY AND WARRANTY CLAIMS THAT MAY BE BROUGHT AGAINST US. We face an inherent business risk of exposure to product liability claims in the event that the use of our current and formerly manufactured or sold products results, or is alleged to result, in bodily injury and/or property damage. Although we have not been required to make any material payments in respect of product liability claims in the past five years, we cannot assure you that we will not experience any material product liability losses in the future or that we will not incur significant costs to defend such claims. In addition, if any of our products are or are alleged to be defective we may be required to participate in a government-required or manufacturer-instituted recall involving such products. In the automotive industry, each vehicle manufacturer has its own policy regarding product recalls and other product liability actions relating to its suppliers. However, as we move up the value pyramid and become more integrally involved in the system design process and assume more of the vehicle system assembly functions, vehicle manufacturers may begin to look to us for contribution when faced with product liability claims. A successful claim brought against us in excess of our available insurance coverage or a requirement to participate in a product recall may have a material adverse effect on our business, results of operations and financial condition. In addition, we cannot provide any assurances that claims will not be asserted against us with respect to former businesses disposed of by us, whether or not we are legally responsible or entitled to contractual indemnification. OUR INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT AGAINST THE POTENTIAL HAZARDS INCIDENT TO OUR BUSINESS. We maintain property, business interruption, product liability and casualty insurance coverage, which we believe is in accordance with customary industry practices, but we cannot be fully insured against all potential hazards incident to our business, including losses resulting from war risks or terrorist acts. A catastrophic loss of the use of all or a portion of our facilities due to accident, labor issues, weather conditions, national disasters or otherwise, whether short- or long-term, could have a material adverse effect on us. As a result of market conditions, premiums and deductibles for some of our insurance policies can increase substantially and, in some instances, some types of insurance may become available only for reduced amounts of coverage, if at all. In addition, there can be no assurance that our insurers would not challenge coverage for certain claims. If we were to incur a significant liability for which we were not fully insured or that our insurers disputed, it could have a material adverse effect on our business, results of operations and financial condition. 18 WE ARE SUBJECT TO RISKS AND COSTS ASSOCIATED WITH NON-COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. Our operations are subject to federal, state, local and foreign laws and regulations governing emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. While we believe that our operations and facilities are being operated in compliance in all material respects with applicable environmental health and safety laws and regulations, the operation of precision metal machining facilities entails risks in these areas. There can be no assurance that we will not incur material costs or liabilities, including substantial fines and criminal sanctions for violations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future. WE ARE CONTROLLED BY GS CAPITAL PARTNERS 2000, L.P. ("GSCP 2000"), OTHER PRIVATE EQUITY FUNDS AFFILIATED WITH GSCP 2000, TRANSPORTATION RESOURCE PARTNERS LP ("TRP") AND OTHER INVESTMENT VEHICLES AFFILIATED WITH TRP, AND THEIR INTERESTS AS EQUITY HOLDERS MAY CONFLICT WITH THE INTERESTS OF OTHER STAKEHOLDERS. GSCP 2000, other private equity funds affiliated with GSCP 2000, TRP, and other investment vehicles affiliated with TRP control, through Parent and Holdings, our voting interests and have the power to elect a majority of the members of our board of directors, to change our management and to approve any mergers or other extraordinary transactions. The interests of GSCP 2000 and TRP may not in all cases be aligned with the interests of our stakeholders, in particular the holders of our outstanding debt. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our principal executive offices are located at 4436 Broadmoor Avenue, S.E., Kentwood, Michigan 49512. We lease the majority of the real property used in our operations. We believe that our properties and equipment are in good operating condition and are adequate for our present needs. 19 The following table sets forth our principal manufacturing facilities as of December 31, 2005:
APPROXIMATE OWNED OR LOCATION SQUARE FOOTAGE LEASED PRIMARY PRODUCTS -------- -------------- -------- ---------------- North America (United States): Kentwood, Michigan 190,000 Lease Fuel, steering, electric motors, air bags, braking Marshall, Michigan 57,000 Lease Fuel, air bags, braking Dowagiac, Michigan 70,000 Own Braking, air bags Hayward, California 27,000 Lease Medical devices Weymouth, Massachusetts 13,000 Lease Medical devices Plymouth, Massachusetts 17,000 Lease Medical devices Europe: France: Thyez (Pochons) 194,000 Lease Fuel, steering, braking Thyez (Ternier) 194,000 Lease Fuel, steering, braking Thyez (Le Lac) 74,000 Lease Steering Marnaz (Perrieres) 91,000 Own Idle Marnaz (Lecheres) 75,000 Lease Fuel, steering, electric motors Poland - Kamienna Gora 75,000 Lease(1) Electric motors South America (Brazil): Campinas 50,000 Lease Steering, fuel, air bags, braking Sao Joao Boa Vista 65,000 Lease Fuel, braking Boituva 36,000 Lease Electric motors Asia (China) - Wuxi 69,000 Lease Electric motors Corporate - Kentwood, Michigan 17,000 Lease Corporate operations
---------- (1) In January 2006, we exercised our option to purchase this facility for 1.2 million Polish Zloties (USD-equivalent of $0.4 million as of December 31, 2005), 0.2 million Polish Zloties of which had already been paid as of December 31, 2005. ITEM 3. LEGAL PROCEEDINGS We are not a party to any pending legal proceedings other than ordinary or routine proceedings incidental to our operations, which, in the opinion of management, are not expected to have a material adverse effect on our business, results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES There is no public trading market for our common stock. Autocam Corporation is a Michigan corporation and is a wholly-owned subsidiary of Titan Holdings, Inc., a Delaware corporation, which in turn is a wholly-owned subsidiary of Micron Holdings, Inc., a Delaware corporation. Since the Merger, we have not paid any dividends. Our senior credit facilities and second lien credit facility agreements and the indenture governing the Notes place restrictions on our ability to pay dividends in the future. 20 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth Holdings' selected consolidated historical financial data for the years ended December 31, 2001, 2002 and 2003, and for the six months ended June 30, 2004, reflecting the historical basis of accounting without any application of purchase accounting for the Merger, and for the six months ended December 31, 2004 and the year ended December 31, 2005, reflecting the basis of accounting after purchase accounting for the Merger. All amounts have been derived from the consolidated financial statements of Holdings. The following data should be read in conjunction with our consolidated financial statements and related notes under Item 8 of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 of this report.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, ----------------------- YEAR ENDED ------------------------------- JUNE 30, DECEMBER 31, DECEMBER 31, 2001 2002 2003 2004 2004 2005 --------- -------- -------- -------- ------------ ------------ (predecessor) (successor) ------------------------------------------ --------------------------- (amounts in thousands) STATEMENTS OF OPERATIONS DATA: Sales $ 236,452 $275,117 $323,210 $184,489 $165,821 $ 347,823 Cost of sales 201,757 231,334 280,070 153,426 140,847 306,384 Goodwill impairment 33,000 --------- -------- -------- -------- -------- --------- Gross profit 34,695 43,783 43,140 31,063 24,974 8,439 Selling, general and administrative expenses 16,415 16,698 17,577 17,337 10,566 22,055 --------- -------- -------- -------- -------- --------- Income (loss) from operations 18,280 27,085 25,563 13,726 14,408 (13,616) Interest and other expense, net 17,782 15,931 13,872 8,338 13,432 30,354 Minority interest in net income (loss) 317 (21) Tax provision 1,540 4,635 4,697 3,211 422 (3,800) Net loss from joint venture 17 --------- -------- -------- -------- -------- --------- Net income (loss) ($1,359) $ 6,540 $ 6,994 $ 2,177 $ 554 ($40,187) ========= ======== ======== ======== ======== =========
2001 2002 2003 2004 2005 -------- -------- -------- -------- -------- (predecessor) (successor) ------------------------------ ------------------- BALANCE SHEET DATA (END OF PERIOD): Cash and equivalents $ 9,830 $ 4,996 $ 1,075 $ 2,117 $ 14,733 Adjusted working capital (1) 34,190 27,957 22,113 31,543 29,837 Property, plant and equipment, net 142,758 156,964 173,580 177,285 163,059 Total assets 371,700 392,335 409,075 569,432 531,763 Total debt 153,071 146,082 133,888 288,781 291,241
---------- (1) Adjusted working capital is defined as current assets (excluding cash and cash equivalents) less current liabilities (excluding current portion of long-term indebtedness). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements and accompanying notes included in this report. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties, including those described in "Risk Factors" in Item 1 of this report. Financial information presented herein as of dates and for periods prior to and including the date of the Merger on June 21, 2004 (see "Overview" below) is presented as "predecessor" financial information. Financial information presented herein as of dates and for periods subsequent to the date of the Merger is presented as "successor" financial information. Future results could differ materially from those discussed below. See "Forward-Looking Statements" in Item 1 of this report. 21 Autocam Corporation is a Michigan corporation and is a wholly-owned subsidiary of Titan Holdings, Inc., a Delaware corporation, which in turn is a wholly-owned subsidiary of Micron Holdings, Inc., a Delaware corporation. In this Item 7 and in Item 7A of this report, unless the context otherwise requires - "Parent" refers to Micron Holdings, Inc., or "Micron", the parent company of Titan, - "Holdings" refers to Titan Holdings, Inc., or "Titan", - "we," "our" or "us" refer to Holdings together with its consolidated subsidiaries, and - "Autocam" refers to Autocam Corporation, a wholly-owned subsidiary of Holdings. OVERVIEW We are headquartered in Kentwood, Michigan, and are a leading independent manufacturer of extremely close tolerance precision-machined, metal alloy components, sub-assemblies and assemblies, primarily for performance and safety critical automotive applications. Those applications in which we have significant penetration include steering, fuel delivery, electric motors, braking, and air bag systems. We provide these products from our facilities in North America, Europe, South America and Asia to some of the world's largest Tier I suppliers to the automotive industry. These Tier I suppliers include Autoliv, Delphi Corporation, Robert Bosch GmbH, SMI-Koyo, Siemens VDO, TRW Automotive, Inc. and ZF Friedrichshafen AG. We believe our manufacturing space is sufficient to meet the needs of our customer's current programs. We focus primarily on higher value-added categories of strategically targeted markets. The products we manufacture demand expertise typically exceeding the capabilities of many of our competitors. We produce complex products in high volumes where required tolerances are in the single-digit micron range with quality levels very often approaching zero defects. A number of factors influence our results of operations, including the following: - Our business is directly impacted by light vehicle production levels, primarily in North America and Western Europe. We are also impacted by the relative North American market shares of the traditional Big Three automakers, DaimlerChrysler Corporation, Ford Motor Company and General Motors Corporation. Material changes in either of these factors can have a material impact on our sales and profit levels. Market shares of the traditional Big Three have declined over the period from January 1, 2003 to December 31, 2005. Light vehicle production in North America was 15.9 million units in 2003, 15.8 million units in 2004 and 15.8 million units in 2005. In Western Europe, the comparable production rates were 16.2 million units in 2003, 16.5 million units in 2004 and 15.8 million units in 2005. CSM Worldwide, Inc. ("CSM") forecasts production of 15.8 million units in North America and 15.6 million units in Western Europe during 2006. - A significant portion of our sales and profits resulted from transactions denominated in foreign currencies (primarily the euro and the Brazilian real). Those sales and profits have been translated into U.S. dollars, or USD, for financial reporting purposes. As a result, the value of the USD compared to those foreign currencies in 2003, 2004 and 2005 relative to the same periods in the prior years impacted our reported results. The following table sets forth, for the periods indicated, the period end, period average, and high and low noon New York time buying rates for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York expressed as USD per euro and USD per Brazilian real. As of March 24, 2006, the noon buying rate of the euro was $1,20 per euro and of the Brazilian real was $.46 per Brazilian real.
YEARS ENDED DECEMBER 31, --------------------------------------- EURO BRAZILIAN REAL ------------------ ------------------ 2003 2004 2005 2003 2004 2005 ---- ---- ---- ---- ---- ---- Average (1) 1.14 1.24 1.25 0.32 0.34 0.41 End of year 1.26 1.36 1.18 0.34 0.38 0.43 High 1.26 1.36 1.35 0.35 0.38 0.46 Low 1.04 1.18 1.17 0.27 0.31 0.36
---------- (1) The average rates are the average of noon New York time buying rates on the last day of each month during the relevant period. 22 - We are routinely exposed to pressure by our customers to offer unit price reductions, which is typical of our industry. Through continuous improvement and increased efficiencies in our manufacturing and administrative processes, we have achieved improvements in margins over time in spite of these constant pressures. Our business and results of operations in 2003, 2004 and 2005 were affected by the following events: - In April 2003, we sold and leased back our Kentwood and Marshall, Michigan facilities for $5.8 million, using the proceeds of that sale to prepay some of our indebtedness outstanding at the time. Annual lease expense under these agreements is $0.6 million. - In June 2003, we closed our Chicago, Illinois production facility, moving all existing production to our Michigan facilities. Through the re-engineering of manufacturing processes and elimination of redundancies, we were able to reduce headcount in North America by 15% from December 2002 to December 2003. - In 2003, we successfully consolidated steering production lines formerly contained within three of our French facilities into one facility. Significant costs, including premium freight, outsourcing, labor and machinery repairs, were incurred to affect this reorganization. This reorganization has and is expected to continue to provide benefits in the future, primarily in the area of lower labor costs through headcount reductions and improved efficiency. - On June 21, 2004, Micron Merger Corporation, a newly formed entity and wholly-owned subsidiary of Parent, merged with and into Holdings with Holdings continuing as the surviving corporation (the "Merger"). As a result, Holdings became a wholly-owned subsidiary of Parent. The total amount of consideration paid in the Merger, including amounts related to the repayment of indebtedness, the redemption of the outstanding preferred stock of Holdings, payments to common shareholders of Holdings and the payment of transaction costs incurred by Holdings, was $395.0 million. The Merger was financed with the net proceeds from the issuance of $140.0 million of senior subordinated notes issued by us and guaranteed by Holdings (the "Notes"), borrowings under senior credit facilities of $114.0 million and combined common equity contributions of $143.4 million by GS Capital Partners 2000, L.P. ("GSCP 2000"), other private equity funds affiliated with GSCP 2000, Transportation Resource Partners LP ("TRP"), other investment vehicles affiliated with TRP, and certain of our management. - Effective November 1, 2004, Autocam France, SARL's wholly-owed subsidiary, Frank & Pignard, SA, acquired the stock of ATI, S.A.S. ("ATI"), for $1.7 million in cash and the assumption of $6.1 million in debt, primarily consisting of capital lease obligations. The acquisition was completed primarily for the purpose of eliminating costly outside processing of certain electric motor components. - Effective June 15, 2005, Autocam's wholly-owned subsidiary, Autocam Greenville, Inc., acquired the stock of Sager Precision Technologies, Inc. ("Sager") for $9.9 million in cash and the assumption of $0.2 million in capital lease obligations. The purchase price was primarily financed indirectly through equity contributions from the shareholders of Micron in the amount of $10.0 million. The acquisition was completed primarily for the purpose of expanding our medical devices product offerings. - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we evaluate the carrying value of our goodwill for indicators of impairment on at least an annual basis and on an interim basis if indicators of potential impairment arise between annual evaluations. Our European segment experienced unfavorable operating results primarily as a result of lower production volumes on key programs, excessive labor costs, increased customer pricing pressure and higher raw material costs. As a result, we concluded that our European reporting unit's goodwill has been impaired and we recorded against our 2005 results a goodwill impairment loss of $33.0 million. The fair value of that reporting unit was estimated using the present value of expected future cash flows. This charge does not result in current or future cash expenditures. 23 RESULTS OF OPERATIONS Set forth below is our Consolidated Statements of Operations expressed as a percentage of sales:
NON-GAAP ---------- 2003 (1) 2004 (2) 2005 (2) -------- ---------- ---------- Sales 100.0% 100.0% 100.0% Cost of sales 86.7% 84.0% 88.1% Goodwill impairment 9.5% ----- ----- ----- Gross profit 13.3% 16.0% 2.4% Selling, general and administrative expenses 5.4% 8.0% 6.3% ----- ----- ----- Income (loss) from operations 7.9% 8.0% -3.9% Interest expense, net 2.9% 4.7% 7.2% Other expenses, net 1.4% 1.6% 1.5% ----- ----- ----- Income (loss) before tax provision 3.6% 1.7% -12.6% Tax provision 1.5% 1.0% -1.0% ----- ----- ----- Net income (loss) 2.1% 0.7% -11.6% ===== ===== =====
---------- (1) Represents our consolidated results of operations reflecting the historical basis of accounting without any application of purchase accounting for the Merger. (2) Represents our combined consolidated results of operations reflecting the historical basis of accounting without any application of purchase accounting for the Merger for the six months ended June 30, 2004 and reflecting the basis of accounting after purchasing accounting for the Merger for the six months ended December 31, 2004 and for the year ended December 31, 2005. 2005 COMPARED TO 2004 SALES Sales decreased $2.5 million, or 0.7%, to $347.8 million in 2005 from $350.3 million in 2004. The fluctuation in the exchange rates between the USD and the functional currencies of our foreign operations caused a $5.8 million increase in sales when comparing 2005 to 2004. On a constant currency basis, sales in 2005 decreased $8.3 million from 2004 levels principally due to the following factors: - Factors resulting in a decrease in sales: 1. Our European operations were desourced by customers on steering, electric motor and fuel components resulting in a reduction in sales of $19.6 million when comparing 2005 to 2004; 2. We granted unit price reductions to our customers totaling $6.0 million in 2005; 3. Lower sales to a North American fuel customer whose primary customers lost market share and produced less vehicles in 2005 as compared to 2004; and 4. Lower sales to a European fuel customer as production on its current injector program was replaced by production on a new injector program for which we do not produce components. - Factors partially offsetting the decrease in sales: 1. Sales of medical device components by the newly-acquired Sager facilities totaled $7.1 million in 2005; 2. Our North American operations were awarded steering business by a new customer for whom we began production in late 2004; 3. Our European operations were awarded new steering business by an existing customer late in 2005; and 4. Our North American operations benefited from incremental sales to a braking customer for a new generation program while continuing to produce components for the old generation program. 24 GROSS PROFIT Gross profit decreased $47.6 million to $8.4 million, or 2.4% of sales, in 2005 from $56.0 million, or 16.0% of sales, in 2004. The gross profit percentage decline can be principally attributed to the following factors: - We recorded a goodwill impairment loss of $33.0 million in 2005. No charge was recorded in 2004; - The loss of sales volume as described above resulted in decreasing margins as existing equipment and facilities were underutilized, particularly in our European operations; - Unit price reductions of $6.0 million were granted to our customers between 2004 and 2005; - Our North American and European operations experienced production difficulties on product launches in 2005 resulting in higher levels of production scrap than were experienced in 2004; - Severance and equipment move costs associated with closing a French facility and moving production to other French facilities and to our new Polish facility were $3.1 million in 2005 and a $1.2 million charge taken to write down the carrying cost of the facility to be closed to its estimated net realizable value; and - Our European operations incurred excessive labor costs in 2005. Although restructuring and productivity improvement initiatives focused on reducing labor were largely successful in 2005, lower production volumes required a larger reduction in labor in order to maintain gross margin percentages comparable to 2004. Given the largely fixed nature of direct labor in our European operations, we were unable to quickly react to the drop in demand from our customers. These unfavorable effects were partially offset by lower outsouring costs. The acquisition of ATI as described above reduced outsourcing costs on certain electric motor components. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses decreased $5.8 million to $22.1 million, or 6.3% of sales, in 2005 from $27.9 million, or 8.0% of sales, in 2004 due to the net affects of the following: - The 2004 results include $8.2 million in costs associated with the Merger, consisting principally of investment banking fees, management bonuses, and legal and accounting fees, and $0.7 million in executive manager receivables forgiven under a split-dollar life insurance program; and - Severance, travel and consulting expenses associated with closing a French facility and moving production to other French facilities and to our new Polish facility were $1.8 million in 2005. INTEREST EXPENSE, NET Net interest expense increased $8.8 million to $25.1 million in 2005 from $16.3 million in 2004. Our 2005 interest expense reflects the full-year affect of increased debt levels incurred as a result of the Merger. In addition, average borrowings under our revolving credit facility were higher in 2005 as compared to 2004 as reduced operating cash flows necessitated increased borrowings to fund operations and capital expenditures. Finally, interest rates incurred on borrowings under our senior credit facility averaged 98 basis points more in 2005 when compared to 2004. OTHER EXPENSE, NET Net other expense of $5.2 million in 2005 and $5.5 million in 2004 consists primarily of the following: - The $1.9 million write-off in 2004 of unamortized debt issue costs associated with our former senior credit facilities, which was refinanced in connection with the Merger, and the $1.7 million write-off in 2005 of unamortized debt issue costs in connection with entering into our second lien credit facility agreement; 25 - Amortization of debt issue costs incurred in connection with entering into our senior credit facilities, the second lien facility and the Notes was $1.1 million in 2004 and $1.8 million in 2005; - Net losses on the disposal of fixed assets, financing costs associated with non-recourse factoring of accounts receivable in Europe and net foreign currency transaction losses of $2.5 million in 2004 and $1.7 million in 2005. TAX PROVISION In 2005, we recorded an income tax benefit of $3.8 million. This amount is less than the amount that would be calculated using the United States statutory rate of 35.0% primarily because the goodwill impairment charge is not deductible for income tax purposes, and therefore no offsetting tax benefit has been recorded. The impact on the 2005 income tax benefit of French legal profit sharing contribution expense was insignificant. 2004 COMPARED TO 2003 SALES Sales increased $27.1 million, or 8.4%, to $350.3 million in 2004 from $323.2 million in 2003. Of this increase, $17.9 million was attributable to the fluctuation in the exchange rates between the USD and the functional currencies of our foreign operations. On a constant currency basis, sales in 2004 increased $9.2 million over 2003 levels principally due to the following factors: - Factors resulting in an increase in sales: 1. Increased shipments of electric power-assisted steering products to two European customers in 2004; 2. During the latter part of 2003, we began shipping diesel injection components to two North American customers seeking to increase their penetration of the North American diesel injection market. The benefit derived from this development was partially offset by premium pricing earned in the second quarter of 2003 on one of the new product lines during the transition from prototype to production volumes; and 3. Sales of components manufactured by our South American operations have grown in 2004 relative to 2003 as lower labor costs in those facilities (relative to those in our European and North American facilities and those of our competitors) have afforded us additional demand for high value-added components from our customers. - Factors resulting in a decrease in sales: 1. We granted unit price reductions to our customers totaling $4.8 million in 2004; 2. Decreased sales to European steering and electric motor customers, both of which desourced us on some products; and 3. We had lower sales to a European fuel customer as we decided not to continue supplying some of its products at unacceptably low profit levels. GROSS PROFIT Gross profit increased $12.9 million to $56.0 million, or 16.0% of sales, in 2004 from $43.1 million, or 13.3% of sales, in 2003. The gross profit percentage improvement can generally be attributed to the following factors: - Labor productivity improvement initiatives implemented in 2004 resulted in the reduction of direct labor cost and a corresponding improvement in gross margin by 1.4 percentage points. Major initiatives included headcount reductions achieved in North America as a result of the Chicago, Illinois facility closure as described above and various other continuous process improvement initiatives, and in Europe as a result of the steering production line reorganization described above; - We incurred premium freight, outsourcing, consulting services and machinery repair costs in 2003 in connection with the European steering line reorganization. Some of these costs were offset by labor productivity improvements that occurred late in 2003. These costs were not repeated in 2004; - Depreciation expense was $1.8 million less in 2004 as compared to 2003 as we adjusted the historical cost of our property, plant and equipment to fair market appraised values in connection with the Merger; 26 - We incurred equipment move, severance and other costs of $1.5 million in 2003 in connection with the Chicago, Illinois facility closure. These costs were not repeated in 2004; and - The majority of our 2004 sales growth was due to expansion of existing programs, thereby increasing margins as existing equipment and facilities were more fully utilized. These positive factors were partially offset by the negative impact on gross profit of steel cost increase, price reductions to customers and the loss of business to European customers as described in "Sales" above. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $10.3 million to $27.9 million, or 8.0% of sales, in 2004 from $17.6 million, or 5.4% of sales, in 2003. The 2004 results include $8.2 million in costs associated with the Merger, consisting principally of investment banking fees, management bonuses, and legal and accounting fees, and $0.7 million in executive manager receivables forgiven under a split-dollar life insurance program. In addition, the devaluation of the USD versus the euro caused a comparative increase in selling, general and administrative expenses of $0.8 million from 2003 to 2004. INTEREST EXPENSE, NET Net interest expense increased $6.9 million to $16.3 million in 2004 from $9.4 million in 2003. Interest expense on increased debt levels incurred as a result of the Merger more than offset the favorable impact of principal reductions through regularly scheduled payments and repayments from the proceeds of the sale and leaseback of the production facilities as described above. In addition, interest rates incurred on borrowings under our new senior credit facility averaged 40-45 basis points less in 2004 when compared to interest rates incurred on borrowings under our former senior credit facility in 2003. OTHER EXPENSE, NET Net other expense increased $1.1 million to $5.5 million in 2004 from $4.4 million in 2003. The 2004 results include the accelerated write-off of $1.9 million in unamortized debt issue costs associated with our former senior credit facilities, which was refinanced in connection with the Merger. In addition, amortization of debt issue costs incurred in connection with securing our new senior credit facilities and the Notes was $0.4 million more in 2004 than the amortization of similar costs incurred in connection with securing our old senior credit facilities. These factors more than offset the $0.7 million negative impact on our 2003 results of the loss recorded on the sale of equipment from our Chicago, Illinois facility. TAX PROVISION In 2004, we recorded an income tax provision of $3.6 million, for an effective tax rate of 57.1%. Our effective tax rate was more than the United States statutory rate of 35.0% due primarily to the French income tax provision, which includes legal profit sharing contribution expense of $1.6 million. LIQUIDITY AND CAPITAL RESOURCES Our short-term liquidity needs include required debt service and day-to-day operating expenses like working capital requirements and the funding of capital expenditures. Long-term liquidity requirements include capital expenditures for new programs and maintenance of existing equipment and debt service. Capital expenditures in 2006 are expected to be $21.6 million. Our principal sources of cash to fund short- and long-term liquidity needs consist of cash generated by operations and borrowing under our revolving credit facilities. We believe our sources of liquidity are sufficient to meet our needs for 2006. 27 On October 8, 2005 (the "Filing Date"), Delphi Corporation and its United States subsidiaries ("Delphi-US") filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Delphi-US is a significant customer of ours, accounting for 12-13% of our gross sales in 2003, 2004 and 2005. We believe that we are a critical supplier to Delphi-US's continued operations as we are a sole source and just-in-time supplier for a majority of components we ship to Delphi-US. Critical supplier status increases the likelihood that invoices for product shipped by us to Delphi-US prior to the Filing Date will be collected and retained. We have had discussions with Delphi-US since the Filing Date and as yet have no final written agreements in place. Our short-term cash flows and profitability have been largely unaffected by the Delphi-US filing. Delphi-US's long-term survival and scope of operations are not clear at this time. The loss of Delphi-US as a customer or a significant reduction in Delphi-US's operations could have a material adverse effect on our net income and operating cash flows. THE SENIOR CREDIT FACILITIES In connection with the Merger, on June 21, 2004, Autocam entered into a $158.0 million USD-equivalent senior credit facilities agreement, which consisted of a $36.1 million multi-currency revolving credit facility available to Autocam, an E11.6 million revolving credit facility available to our French subsidiary, Autocam France, SARL, a $33.0 million term loan to Autocam and a E62.7 million term loan to Autocam France, SARL. On December 22, 2005, we amended our senior credit facilities agreement to permit us to incur the second lien term loans discussed below, to replace interest coverage, leverage and senior leverage ratio covenants with maximum first lien leverage and revised maximum senior leverage ratio covenants, to amend the consolidated capital expenditures covenant and to make other modifications. We also reduced the committed amount of our multi-currency-denominated revolving credit facility from $36.1 million to $28.9 million and we reduced the committed amount of Autocam France, SARL's euro-denominated revolving credit facility from E11.6 million to E9.3 million (USD-equivalent of $11.0 million as of December 31, 2005). We had no borrowings outstanding under any of the revolving credit facilities of our senior credit facilities as of December 31, 2005. Our ability to borrow against these facilities expires in June 2011. Interest and Fees. The interest rate margins on our senior credit facilities changed in conjunction with the December 2005 amendment to our senior credit facilities agreement. The interest rate margin applicable to the U.S. Term Loans (with a Eurocurrency rate) is 3.50% and the interest rate margin applicable to the Euro Term Loans is 4.00%, in each case from December 22, 2005 until the later of the first anniversary of the effective date of the first amendment to our senior credit facilities agreement (i.e. April 2006) and the date we demonstrate a "Leverage Ratio," as defined in our senior credit facilities agreement, of less than or equal to 4.50:1.00. Thereafter, the applicable interest rate margin is determined by reference to the Leverage Ratio in effect from time to time as set forth below:
APPLICABLE MARGIN FOR REVOLVING APPLICABLE MARGIN LOANS, EUROPEAN REVOLVING LOANS FOR EUROPEAN LEVERAGE RATIO AND U.S. TERM LOANS TERM LOANS -------------- ------------------------------- ----------------- > or = 3.00:1.00 3.25% 3.75% < 3.00:1.00 3.00% 3.50%
If, at any time our "First Lien Leverage Ratio" as defined in our senior credit facilities agreement exceeds 2.25:1.00, the applicable margins shown above shall be increased by 0.25%, and if our First Lien Leverage Ratio exceeds 2.75:1.00, the applicable margins shown above shall be increased by an additional 0.25%. The interest rate margin applicable to swing line loans and other loans that are base rate loans is an amount equal to the margin applicable to Eurocurrency rate loans at that time, minus 1.00% per annum. 28 Amortization and Prepayments. After giving effect to the prepayments made from the proceeds of the term loans under our second lien credit facility (described below), no amortization of the term loans under our senior credit facilities is required through the quarter ending June 30, 2008, and thereafter required amortization is as follows:
TERM LOAN INSTALLMENTS ---------------------- FISCAL QUARTER ENDING U.S. EUROPEAN --------------------- ----- -------- September 30, 2008 E0.9 December 31, 2008 1.1 March 31, 2009 2.7 June 30, 2009 2.7 September 30, 2009 2.7 December 31, 2009 2.7 March 31, 2010 3.9 June 30, 2010 3.9 September 30, 2010 $ 2.3 3.9 December 31, 2010 5.9 3.9 March 31, 2011 5.9 3.9 June 30, 2011 5.9 3.8 ----- ----- Total $20.0 E36.1 ===== =====
Our senior credit facilities also require mandatory prepayments on terms substantially identical to our second lien credit facility (described below). Collateral and Guarantors. Indebtedness under our senior credit facilities is guaranteed by Titan, Autocam Europe, B.V. (Autocam's Dutch holding company subsidiary) and by each existing and subsequently acquired or organized domestic and, to the extent no material adverse tax consequence would result and to the extent permitted under local law, foreign subsidiary, and by Autocam with respect to the obligations of Autocam France, SARL under the Eurocurrency Term Loan and revolving credit facilities. Indebtedness under our senior credit facilities is secured by a first priority lien on substantially all of our and the guarantors' tangible and intangible assets, including personal property, real property, intercompany indebtedness and capital stock owned by Autocam and such guarantors, limited to 65% of such capital stock in the case of certain foreign subsidiaries. Financial and Restrictive Covenants. Our senior credit facilities agreement contains maximum first lien leverage ratios, maximum senior leverage ratios and maximum capital expenditures and also contains covenants that restrict our ability to incur additional indebtedness, grant liens, make investments, loans, guarantees or advances, make restricted junior payments, including dividends, redemptions of capital stock and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. THE SECOND LIEN CREDIT FACILITY On December 22, 2005, Autocam entered into a second lien Term Loan and Guaranty Agreement ("second lien credit facility") with a syndicate of lenders, Goldman Sachs Credit Partners L.P. as syndication agent, lead arranger and sole book runner, and The Bank of New York as administrative agent and collateral agent. Amount and Final Maturity. The second lien credit facility provides for a $60.0 million term loan and a E12.7 million term loan (USD-equivalent of $15.0 million as of December 31, 2005). Each term loan has a final maturity of six years. Autocam is the borrower under the term notes, which were fully borrowed at the closing on December 22, 2005. Use of Proceeds. Proceeds of the second lien term loans were used by us to repay borrowings under our senior credit facilities as follows: (i) $12.6 million of term loans borrowed by Autocam, (ii) E22.7 million of term loans borrowed by Autocam France, SARL, and (iii) $29.0 million of revolving loans borrowed by Autocam. The balance of the proceeds was used to pay transaction costs and interest due on our senior credit facilities and for working capital and general corporate purposes. 29 Interest and Fees. The interest rates applicable to loans under our second lien credit facility will be (i) in the case of our USD-denominated term loans, at its option equal to either (x) a base (prime) rate plus 7.50% per annum or (y) an adjusted Eurodollar bank deposit rate plus 8.50% per annum; or (ii) in the case of our euro-denominated term loans, an adjusted Euro bank deposit rate plus 9.50% per annum. We may at our option, in lieu of payment of interest in cash, pay up to 1.50% per annum of the interest by adding such interest to the then outstanding principal amount of the term loans (payment-in-kind). We have agreed to pay various fees with respect to our second lien credit facility, including customary arrangement fees paid to Goldman Sachs Credit Partners L.P. and a customary annual administrative agent fee payable to The Bank of New York. Prepayments. Our second lien credit facility requires mandatory prepayments, subject to exceptions, of an amount equal to: - 100% of the net cash proceeds from asset sales or other dispositions of property by us or our subsidiaries, including insurance proceeds or governmental condemnations, other than inventory sold or disposed of in the ordinary course of business, certain other transactions and net cash proceeds reinvested in assets used in our business; - 50% of the net cash proceeds from the issuance of specified equity securities, provided that this percentage will be reduced to 25% if our "Leverage Ratio", as defined in our second lien credit facilities agreement, is less than 3.00:1.00; - 100% of the net cash proceeds from the issuance of specified debt obligations by us or our subsidiaries; and - 75% of "Consolidated Excess Cash Flow", as defined in our second lien credit facility agreement, provided that this percentage will be reduced to 50% if its "Leverage Ratio" is less than 3.00:1.00. Mandatory prepayments (which are permitted to be waived by the lenders in certain circumstances) will be applied first to repay our obligations under our senior credit facilities, and then remaining amounts, if any, to our USD term loans and our euro term loans under our second lien credit facility on a pro rata basis. We are permitted to voluntarily prepay loans under our second lien credit facility on or after December 22, 2006, subject to the terms of our senior credit facilities agreement. If we voluntarily prepay all or any portion of our second lien credit facility, we are required to pay a prepayment premium (as a percentage of the principal prepaid) as follows: on or after December 22, 2006 but prior to December 22, 2007, 2.0%; and on or after December 22, 2007 but prior to December 22, 2008, 1.0%. The term loans under our second lien credit facility may be prepaid without a prepayment premium from and after December 22, 2008. Collateral and Guarantors. Indebtedness under our second lien credit facility is guaranteed by Titan, Autocam's Dutch subsidiary, Autocam Europe, B.V., and each of our existing and subsequently acquired or organized domestic and, to the extent no material adverse tax consequence would result and permitted under local law, each of our foreign subsidiaries. Indebtedness under our second lien credit facility is secured by a second priority lien on substantially all of our and the guarantors' tangible and intangible assets, including personal property, real property, intercompany indebtedness and capital stock owned by us and such guarantors, limited to 65% of such capital stock in the case of certain foreign subsidiaries. The liens to secure our second lien credit facility are subordinated to the liens to secure our senior credit facilities. The priority of, and certain other matters relating to, the liens in the collateral under our second lien credit facility and our senior credit facilities is set out in an intercreditor agreement. Financial and Restrictive Covenants. Our second lien credit facility agreement contains maximum senior leverage ratios that vary during the term of the facility agreement. Our second lien credit facility agreement also contains covenants that restrict our ability to incur additional indebtedness, grant liens, make investments, loans, guarantees or advances, make restricted junior payments, including dividends, redemptions of capital stock and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. These are substantially identical to (and in some respects more flexible than) the covenants in our senior credit facilities agreement. Representations and Affirmative Covenants. Our second lien credit facility contains customary representations, warranties and affirmative covenants. 30 Events of Defaults. Our second lien credit facility contains customary events of default, which are substantially as set forth in our senior credit facilities agreement, but with materiality thresholds 15% higher than the corresponding provisions in our senior credit facilities agreement, including: - failure to make payments when due; - defaults under other material indebtedness; - non-compliance with covenants; - incorrectness of representations and warranties; - bankruptcy, insolvency or dissolution events; - material judgments; - certain events related to ERISA; - impairment of security interests in collateral or invalidity of guarantees; and - a "change of control," as defined in our second lien credit facilities agreement. There is a 60-day standstill period with respect to a cross default to our senior credit facilities agreement. THE SENIOR SUBORDINATED NOTES On June 10, 2004, we issued the Notes to fund a portion of the purchase price of the Merger. The Notes mature on June 15, 2014. The Notes are general unsecured obligations, are subordinated in right of payment to all existing and future senior debt, including borrowings under the senior credit facilities and the second lien credit facility, rank equally in right of payment to any future senior subordinated indebtedness, are senior in right of payment to any future subordinated indebtedness and are unconditionally guaranteed by certain of our domestic restricted subsidiaries and by Autocam Europe, B.V. Interest on the Notes accrues at the rate of 10.875% per annum and is payable semi-annually on June 15 and December 15 of each year. The indenture governing the Notes contains covenants that impose significant restrictions on us. These restrictions include limitations on our ability to: incur indebtedness or issue disqualified or preferred stock; pay dividends on, redeem or repurchase our capital stock; make investments or acquisitions; create liens; sell assets; restrict dividends or other payments to us; guarantee indebtedness; engage in transactions with affiliates; and consolidate, merge or transfer all or substantially all of our assets. At December 31, 2005, we were in compliance with the covenants contained in the indenture governing the Notes, the senior credit facilities agreement and the second lien credit facility agreement. 2005 Cash provided by operating activities of $16.1 million in 2005 reflects net income, excluding non-cash and other reconciling items, of $8.1 million, and a decrease in net working capital of $8.0 million due primarily to the following factors: - Accounts payable increased $6.7 million as payment terms for most vendors were extended at the end of December 2005 in order to conserve cash; - Accounts receivable decreased $5.3 million. Factored European accounts receivable increased $5.0 million from December 31, 2004 to December 31, 2005; and - These factors were partially offset by the impact of an increase in inventories of $4.2 million. Raw material inventories increased throughout 2005 consistent with the rise in steel and perishable tooling prices. Also, machinery spare parts inventories have increased consistent with the addition of new types of equipment. Cash used in investing activities of $31.6 million in 2005 included the following significant items: - Capital expenditures primarily for production equipment (net of proceeds from fixed asset sales) of $17.9 million; - Expenditures totaling $11.0 million for acquisitions; and - Refundable deposits paid of $2.0 million for equipment to be received in the future, which equipment will be subject to operating lease arrangements that provide for the deposits to be refunded upon signing. 31 Cash provided by financing activities of $28.0 million in 2005 included the following significant items: - Proceeds from borrowings pursuant to the second lien credit facility and other debt, including Brazilian equipment notes, of $76.0 million, less debt issue costs paid of $3.9 million; - Shareholder contributions received in connection with acquisitions of $17.0 million ($7.0 million of which was received in anticipation of funding the acquisition of the Precision Metals Division of ATS Automation Tooling Systems. Inc. in January 2006); - Principal payments of our senior credit facilities, capital lease obligations and equipment notes payable of $45.6 million; and - Net repayments under our revolving credit facilities of $15.5 million. 2004 Cash provided by operating activities of $10.2 million in 2004 reflects net income, excluding non-cash and other reconciling items of $25.3 million, and an increase in net working capital of $15.1 million due primarily to the following factors: - Inventories increased $8.8 million due primarily to the growth in our business as described above. In addition, the value of raw material inventories has risen consistent with the rise in steel and perishable tooling prices. Finally, machinery spare parts inventories have increased consistent with the addition of new types of equipment; and - Deferred credits and other long-term liabilities decreased $5.8 million. We satisfied obligations under interest rate derivative instruments totaling $2.4 million. Additionally, the French government passed a new law allowing for the partial early withdrawal of legal profit sharing earned by our employees, which resulted in the reduction of such liability of $1.6 million. Cash used in investing activities of $18.7 million in 2004 included capital expenditures primarily for production equipment (net of proceeds from fixed asset sales) of $19.0 million and $1.1 million in costs associated with the acquisition of an outsource vendor by our European operations. Investing cash inflows included $1.5 million in refunds of equipment deposits previously paid by leasing companies as such equipment is now subject to operating lease arrangements. Cash provided by financing activities of $9.7 million in 2004 included the following: - Proceeds from issuance of the Notes and term note borrowings at the closing of the Merger under our senior credit facilities of $246.0 million, less debt issue costs paid of $11.6 million; - Shareholder contributions received in connection with the Merger of $115.4 million; - Proceeds from the issuance of equipment notes payable and borrowings on swing lines of credit of $1.9 million; - Payments made to former shareholders and option holders of Holdings of $232.7 million; - Payments made to retire the term notes of our old senior credit facilities in existence at the closing of the Merger of $89.9 million; - Scheduled term note principal payments of our old and new senior credit facilities, capital lease obligations and equipment notes payable of $23.5 million; and - Net borrowings under the old and new revolving credit facilities of $4.1 million. 32 2003 Cash provided by operating activities of $38.0 million in 2003 reflects net income, excluding non-cash and other reconciling items, of $33.0 million and a decrease in net working capital of $5.0 million. Accounts receivable decreased $6.8 million commensurate with reduced European sales volume in the last quarter of 2003 relative to the same period in 2002. In addition, European accounts receivable factoring activity increased $2.1 million from December 31, 2002 to December 31, 2003. Accounts payable and accrued liabilities decreased $3.7 million due primarily to decreases in accrued compensation and benefits costs, the satisfaction in 2003 of certain liabilities existing as of December 31, 2002 arising from the closing of the Chicago facility, and the recognition of deferred revenue associated with the cancellation of a customer program. Cash used in investing activities of $14.9 million in 2003 included capital expenditures primarily for production equipment of $22.5 million and proceeds from the sale and leaseback of our Kentwood and Marshall facilities and the sale of equipment of $6.7 million. In addition, we received net cash from leasing companies totaling $1.7 million, representing reimbursements of deposits previously paid on production equipment now subject to operating lease agreements. Finally, we paid $0.7 million to terminate an operating lease for some of the production equipment that had been used in our Chicago facility as described above. Cash used in financing activities of $27.3 million in 2003 primarily represents scheduled principal payments on bank and capital lease obligations of $19.3 million, the final principal installment payment on a note payable to the sellers of Bouverat Industries, SA of $3.7 million, and a $5.8 million unscheduled principal payment on our USD-denominated term debt through proceeds from the sale and leaseback of our Kentwood and Marshall facilities referenced above. We issued $0.9 million in notes payable to fund capital expenditures in South America. CONTRACTUAL OBLIGATIONS Our contractual obligations as of December 31, 2005 are set forth below:
PAYMENTS DUE BY PERIOD -------------------------------- LESS MORE THAN 1-3 4-5 THAN TOTAL 1 YEAR YEARS YEARS 5 YEARS ------ ------ ----- ----- ------- (amounts in millions) Senior credit facilities, second lien credit facility and the Notes (1) $274.9 $ 2.3 $39.3 $233.3 Capital leases and other debt 16.3 $ 8.6 5.3 1.3 1.1 Operating leases 64.9 14.3 24.0 11.1 15.5 Pension obligations 0.3 0.3 Conditional purchase commitments (2) 13.1 10.3 1.3 1.2 0.3 ------ ----- ----- ----- ------ Total contractual cash obligations $369.5 $33.2 $32.9 $52.9 $250.5 ====== ===== ===== ===== ======
---------- (1) Interest obligations under our senior credit facilities and second lien credit facility are variable in nature. Interest obligations under the Notes are fixed at $15.2 million per year through the year ending December 31, 2013 and $7.6 million for the year ending December 31, 2014. (2) These amounts are non-cancelable purchase commitments for machinery and equipment and buildings, some of which may be assigned to financing companies under operating lease agreements. In accordance with terms of the purchase agreements, final acceptance of the equipment is contingent upon the equipment demonstrating capabilities as documented by our purchase orders. In addition, on January 3, 2006, Autocam purchased certain assets and assumed certain liabilities of ATS Automation Tooling Systems, Inc.'s Precision Metals Division pursuant to an asset purchase agreement, dated December 12, 2005. In connection therewith, we paid 6 million Canadian dollars (USD-equivalent of $5.2 million). OFF-BALANCE SHEET ARRANGEMENTS We have no off-balance sheet arrangements as defined by Item 303 of Regulation S-K. 33 CONTINGENT LIABILITIES AND OTHER COMMITMENTS We sponsor defined benefit pension plans, see "Critical Accounting Policies" below, for substantially all employees of our French subsidiaries. Our estimated liability under these plans as of December 31, 2005 was $2.1 million. Our expected funding obligation in 2006 is less than $0.1 million. SEASONALITY Our business is seasonal, as it is common that our customers and OEMs historically have one to two week shutdowns of operations in August and December. Our sales figures reflect the effects of these shutdowns. As a result, our working capital requirements are also seasonal, with the largest working capital commitments coming in the early part of the first quarter and the latter part of the third quarter of each year. EFFECTS OF INFLATION We believe that relatively moderate levels of inflation over the last few years have not had a significant impact on revenues or profitability and that our management has been able to offset the effects of inflation by realizing improvements in operating efficiency. FOREIGN OPERATIONS In 2005, our North American operations exported $17.0 million of product to customers located in foreign countries, and our foreign operations shipped $198.7 million of product to customers from their facilities. In 2004, our North American operations exported $21.1 million of product to customers located in foreign countries, and our foreign operations shipped $213.0 million of product to customers from their facilities. In 2003, our North American operations exported $22.4 million of product to customers located in foreign countries, and our foreign operations shipped $189.0 million of product to customers from their facilities. As a result, we are subject to the risks of doing business abroad, including currency exchange rate fluctuations, limits on repatriation of funds, compliance with foreign laws and other economic and political uncertainties. ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment," which will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation, and supercedes Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees," and related interpretations. SFAS No. 123(R) becomes effective January 1, 2006. We expect that the impact of adopting SFAS No. 123(R) will be consistent with the pro forma expense that has been previously disclosed, adjusted for future grants, cancellations and exercises of stock options in accordance with SFAS 123(R). In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No, 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principles and requires retrospective application (as defined) to prior periods' financial statements, unless it is impracticable to determine the effects of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS No. 154 beginning January 1, 2006. 34 CRITICAL ACCOUNTING POLICIES Our accounting policies, including those described below, require management to make estimates and assumptions using information available at the time the estimates are made. Actual amounts could differ significantly from these estimates. See Note 1 to our 2005 consolidated financial statements in Item 8 of this report for a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Our management believes the following are some of the more critical judgment areas in the application of accounting policies that currently affect the consolidated financial condition and results of operations. ACCOUNTS RECEIVABLE We evaluate our allowance for doubtful accounts on a quarterly basis and review the significant customers with delinquent balances to determine future collectibility. We base our determinations on legal issues like bankruptcy status, past history, current financial and credit agency reports, and the experience of our credit representatives. We reserve accounts that we deem to be uncollectible in the quarter in which we make the determination. We maintain additional reserves based on our historical bad debt experience, which is minimal. We believe that, based on past history and our credit policies, the net accounts receivable are of good quality. INVENTORY VALUATION Inventories are stated at the lower of actual cost, on a first-in, first-out, or FIFO, basis, or market. Market price is generally based on the current selling price of our products. We regularly review inventories to determine if their carrying value exceeds market value, and we record a reserve to reduce the carrying value to market price, as necessary. This write-down, if needed, would result in a lower value, which would become the new cost basis in the carrying value of the inventory. Historically, we have rarely experienced significant occurrences of obsolescence or slow moving inventory. FIXED ASSET IMPAIRMENT We review long-lived assets whenever events and circumstances indicate that the carrying value of these assets may not be recoverable based on estimated future cash flows. In determining future cash flows, significant estimates are made by us with respect to future operating results. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. GOODWILL We evaluate the carrying value of goodwill at least annually for impairment. Fair value is determined based upon discounted cash flows and requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market conditions and other information. While we believe the estimates and assumptions underlying the valuation methodology to be reasonable, different assumptions could result in different outcomes. In estimating future cash flows, we rely upon internally generated forecasts for sales, operating cash flows and capital expenditures to maintain current equipment levels. We generally develop these forecasts based upon recent sales data for existing operations and other factors. SELF INSURANCE RESERVES We offer our North American employees medical insurance and workers' compensation plans that are primarily self-insured by us. As a result, we accrue liabilities for known claims as well as the estimated amount of expected claims incurred but not reported. We evaluate our medical and workers' compensation claims liabilities on a quarterly basis through the review of claims lag studies and knowledge of past history. 35 PENSIONS We sponsor defined benefit pension plans for substantially all employees of our French subsidiaries. We account for our defined benefit pension plans using SFAS No. 87, "Employers' Accounting for Pensions." The benefits accrued under our plans are calculated based on each employee's years of credited service and most recent monthly compensation and service category. The obligations for the plan sponsored by F&P are not funded and the obligations for the plan sponsored by Bouverat are funded. Employees become vested in accordance with governmental regulations in place at the time of retirement under both plans. The calculation of pension expense and our pension liability requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future experience can differ from the assumptions. We believe that the two most critical assumptions are the compensation growth and discount rates. When calculating pension expense for 2003, we assumed a compensation growth rate of 2.0% or 3.0% depending on the plan. When calculating pension expense for 2004 and 2005, we assumed a compensation growth rate of 3.0%. We discounted our future pension obligation using a rate of 5.0% for all periods presented. We determined the appropriate compensation growth and discount rates based upon market conditions, long-term corporate and government yields commensurate with the ultimate pension obligation and long-term anticipated compensation trends. Future changes in assumed compensation growth and discount rates and various other factors related to participants in our pension plans will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future. REVENUE RECOGNITION Generally, sales are recognized at the time product is shipped to the customer at which time title and risk of ownership transfer to the purchaser. INCOME TAXES Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE RATES We have in the past and may in the future manage certain foreign currency exchange risk in relation to equipment purchases through the limited use of foreign currency futures contracts to reduce the impact of changes in foreign currency rates on firm commitments to purchase equipment. No such contracts related to equipment purchases were outstanding as of December 31, 2004 or 2005. We typically derive 50-60% of our sales from foreign manufacturing operations. The financial position and results of operations of our subsidiaries in France are measured in euros and translated into USD. The effects of foreign currency fluctuations in France are somewhat mitigated by the fact that sales and expenses are generally incurred in euros, and the reported net income will be higher or lower depending on fluctuations in exchange rates between the USD and the functional currencies of our foreign operations. 36 The financial position and results of operations of our subsidiary in Brazil are measured in Brazilian reais and translated into USD. With respect to approximately 40% of this subsidiary's sales, expenses are generally incurred in Brazilian reais, but sales are invoiced in USD or euro. As such, results of operations with regard to these sales are directly influenced by fluctuations in the exchange rates between the Brazilian real and the USD or euro. The effects of foreign currency exchange rate fluctuations are somewhat mitigated on the remainder of this subsidiary's sales by the fact that these sales and the related expenses associated with the sales are generally incurred in Brazilian reais and the reported income will be higher or lower depending on fluctuations in the exchange rates between the USD or euro and the Brazilian real. Our consolidated net assets as of December 31, 2005 include amounts based in Europe and in South America, and were translated into USD at the exchange rates in effect at that date (1.1797 USD per euro and 2.3399 Brazilian reais per USD). Accordingly, our consolidated net assets will fluctuate depending on the exchange rates between the USD and the functional currencies of our foreign operations as a result of currency translation adjustments. INTEREST RATES We are exposed to interest rate risk on a portion of our outstanding indebtedness. Our senior secured credit facilities and our second line credit facility bear interest at variable rates as described in Item 8 of this report. We previously managed interest rate risk on a majority of our indebtedness through the use of interest rate swap agreements that were settled in connection with the Merger. We did not enter into new interest rate swap agreements upon settlement of the prior agreements. In March 2006, through the purchase of an interest rate swap contract we fixed the interest rate on $50.0 million of our variable-interest-rate indebtedness at LIBOR of 5.14% for five years. Set forth below are the annual aggregate maturities of long-term obligations as of December 31, 2005: YEARS ENDING DECEMBER 31, 2006 $ 8.6 2007 3.2 2008 4.4 2009 13.6 2010 27.0 Thereafter 234.4 ------ Total $291.2 ======
Our weighted average interest rates incurred on long-term obligations was 6.7% in 2003, 7.9% in 2004 and 8.9% in 2005. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the fair value of long-term debt approximated its carrying value as of December 31, 2004 and was $249.9 million as of December 31, 2005. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TITAN HOLDINGS, INC. INDEX TO FINANCIAL INFORMATION
PAGE ---- TITAN HOLDINGS, INC. AUDITED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 39 Consolidated Balance Sheets as of December 31, 2004 and December 31, 2005 40 Consolidated Statements of Operations and Comprehensive Income 41 Consolidated Statements of Shareholders' Equity 42 Consolidated Statements of Cash Flows 43 Notes to Consolidated Financial Statements 44
38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Micron Holdings, Inc. Kentwood, Michigan We have audited the accompanying consolidated balance sheets of Titan Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004 (successor), and the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for the year ended December 31, 2005 (successor), for the periods from June 22, 2004 through December 31, 2004 (successor), January 1, 2004 through June 21, 2004 (date of the merger with Micron) (predecessor), and the year ended December 31, 2003 (predecessor). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Titan Holding, Inc. and subsidiaries as of December 31, 2005 and 2004 (successor), and the results of their operations and their cash flows for the year ended December 31, 2005 (successor), for the periods from June 22, 2004 through December 31, 2004 (successor), January 1, 2004 through June 21, 2004 (date of the merger with Micron) (predecessor), and the year ended December 31, 2003 (predecessor), in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche, LLP Grand Rapids, Michigan March 24, 2006 39 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- 2004 2005 -------- -------- Amounts in thousands, except share information (successor) Assets Current assets: Cash and equivalents $ 2,117 $ 14,733 Accounts receivable, net of allowances of $618 and $627, respectively 58,360 46,989 Inventories 36,947 40,927 Prepaid expenses and other current assets 3,485 5,249 -------- -------- Total current assets 100,909 107,898 Property, plant and equipment, net 177,285 163,059 Goodwill 268,039 224,024 Other long-term assets 23,199 36,782 -------- -------- Total assets $569,432 $531,763 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 12,942 $ 8,582 Accounts payable 46,688 46,014 Accrued liabilities: Compensation 18,002 15,325 Other 2,559 1,989 -------- -------- Total current liabilities 80,191 71,910 -------- -------- Long-term obligations, net of current maturities 275,839 282,659 Deferred taxes 40,563 42,696 Other long-term liabilities 7,479 7,893 Shareholders' equity: Common stock - $.01 par value; 100 shares authorized, issued and outstanding as of December 31, 2004 and 2005 Additional paid-in capital 145,112 162,140 Accumulated other comprehensive income 19,694 4,098 Retained earnings (accumulated deficit) 554 (39,633) -------- -------- Total shareholders' equity 165,360 126,605 -------- -------- Total liabilities and shareholders' equity $569,432 $531,763 ======== ========
See notes to consolidated financial statements. 40 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
SIX MONTHS ENDED YEAR ENDED ----------------------- YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, 2003 2004 2004 2005 ------------ -------- ------------ ------------ Amounts in thousands (predecessor) (successor) Sales $323,210 $184,489 $165,821 $ 347,823 Cost of sales 280,070 153,426 140,847 306,384 Goodwill impairment 33,000 -------- -------- -------- --------- Gross profit 43,140 31,063 24,974 8,439 Selling, general and administrative expenses 17,577 17,337 10,566 22,055 -------- -------- -------- --------- Income (loss) from operations 25,563 13,726 14,408 (13,616) Interest expense, net 9,444 4,666 11,638 25,141 Other expenses, net 4,428 3,672 1,794 5,213 -------- -------- -------- --------- Income (loss) before tax provision 11,691 5,388 976 (43,970) Tax provision 4,697 3,211 422 (3,800) Net loss from joint venture 17 -------- -------- -------- --------- Net income (loss) $ 6,994 $ 2,177 $ 554 ($40,187) ======== ======== ======== ========= Statements of Comprehensive Income (Loss): Net income (loss) $ 6,994 $ 2,177 $ 554 ($40,187) Other comprehensive income (losses): Foreign currency translation adjustments 5,744 (1,138) 19,694 (15,596) Amortization of interest rate agreements 269 135 -------- -------- -------- --------- Comprehensive income (loss) $ 13,007 $ 1,174 $ 20,248 ($55,783) ======== ======== ======== =========
See notes to consolidated financial statements. 41 TITAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES A SERIES B ACCUMULATED PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER --------------- --------------- -------------- PAID-IN COMPREHENSIVE RETAINED AMOUNTS IN THOUSANDS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS TOTAL -------------------- ------ ------ ------ ------ ------ ------ ---------- ------------- --------- --------- Balance, January 1, 2003 (predecessor) 579 $ 6 110 $ 1 6,479 $ 65 $ 137,824 ($3,835) $ 15,260 $ 149,321 Net income 6,994 6,994 Foreign currency translation adjustments 5,744 5,744 Amortization of interest rate agreements 269 269 --- --- --- --- ----- ---- --------- ------- --------- --------- Balance, December 31, 2003 (predecessor) 579 6 110 1 6,479 65 137,824 2,178 22,254 162,328 Net income 2,177 2,177 Foreign currency translation adjustments (1,138) (1,138) Amortization of interest rate agreements 135 135 --- --- --- --- ----- ---- --------- ------- --------- --------- Balance, June 30, 2004 (predecessor) 579 6 110 1 6,479 65 137,824 1,175 24,431 163,502 Elimination of former shareholders' equity upon consummation of Merger (579) (6) (110) (1) (6,479) (65) (137,824) (1,175) (24,431) (163,502) Equity contributions from shareholders 143,400 143,400 Tax benefit of stock option exercises 1,712 1,712 Net income 554 554 Foreign currency translation adjustments 19,694 19,694 --------- ------- --------- --------- Balance, December 31, 2004 (successor) 145,112 19,694 554 165,360 Equity contributions from shareholders 17,028 17,028 Net loss (40,187) (40,187) Foreign currency translation adjustments (15,596) (15,596) --------- -------- --------- --------- Balance, December 31, 2005 (successor) $ 162,140 $ 4,098 ($39,633) $ 126,605 ========= ======== ========= =========
See notes to consolidated financial statements. 42 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED ------------------------ YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, Amounts in thousands 2003 2004 2004 2005 -------------------- ------------ --------- ------------ ------------ (predecessor) (successor) Cash flows from operating activities: Cash received from customers $ 331,121 $ 175,424 $ 176,320 $ 353,523 Cash paid to suppliers and employees (281,726) (154,938) (163,250) (309,293) Income taxes received (paid) (950) (3,331) (1,768) (2,768) Interest paid (10,456) (6,461) (11,839) (25,365) --------- --------- --------- --------- Net cash provided by (used in) operating activities 37,989 10,694 (537) 16,097 --------- --------- --------- --------- Cash flows from investing activities: Expenditures for property, plant and equipment (22,459) (10,676) (9,679) (18,346) Equipment deposits refunded (paid and to be refunded), net 1,727 (165) 1,680 (1,999) Proceeds from sale of property, plant and equipment 6,656 808 550 450 Acquisitions, net of cash (1,084) (11,047) Payment to terminate lease (739) Investments in joint venture (450) Other (58) (174) 21 (169) --------- --------- --------- --------- Net cash used in investing activities (14,873) (10,207) (8,512) (31,561) --------- --------- --------- --------- Cash flows from financing activities: Borrowings (repayments) on lines of credit, net 620 (3,531) 7,615 (15,561) Proceeds from issuance of long-term obligations 872 247,248 647 76,021 Principal payments of long-term obligations (28,827) (109,940) (3,437) (45,605) Payments to shareholders and option holders (232,663) Shareholder contributions 115,400 17,028 Debt issue costs and other (10,855) (781) (3,882) --------- --------- --------- --------- Net cash provided by (used in) financing activities (27,335) 5,659 4,044 28,001 --------- --------- --------- --------- Effect of exchange rate changes on cash and equivalents 298 (18) (81) 79 --------- --------- --------- --------- Increase (decrease) in cash and equivalents (3,921) 6,128 (5,086) 12,616 Cash and equivalents at beginning of period 4,996 1,075 7,203 2,117 --------- --------- --------- --------- Cash and equivalents at end of period $ 1,075 $ 7,203 $ 2,117 $ 14,733 ========= ========= ========= =========
See notes to consolidated financial statements. 43 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In these notes, unless the context otherwise requires - "Micron" refers to Micron Holdings, Inc., a Delaware holding company and the parent company of Titan, - "Titan" refers to Titan Holdings, Inc., a Delaware holding company and the parent company of Autocam, - "we," "our" or "us" refer to Titan together with its consolidated subsidiaries, and - "Autocam" refers to Autocam Corporation, a wholly-owned subsidiary of Titan. Unless otherwise indicated, all references in these notes to fiscal years are to the year ended on December 31. Unless the context requires otherwise, all references in these notes to "2003," "2004" and "2005" relate to the fiscal years ended December 31, 2003, December 31, 2004 and December 31, 2005. PRINCIPLES OF CONSOLIDATION -- Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. All of our significant intercompany accounts and transactions have been eliminated in consolidation. All figures in these notes are expressed in thousands of U.S. dollars, unless otherwise noted. NATURE OF OPERATIONS -- We design and manufacture close-tolerance, specialty metal alloy components for mechanical and electromechanical systems using turning, grinding and milling processes. Currently, we manufacture components for use on steering, fuel delivery, electric motor, braking and air bag systems for the transportation industry and medical devices for the ophthalmic, orthopedic and cardiovascular surgery industries. We have seven manufacturing locations in the United States, four in France, three in Brazil and one each in Poland and China. Our customers are located in virtually all areas of the world, with the exception of the continent of Africa. On June 21, 2004, Micron Merger Corporation, a newly formed entity and wholly-owned subsidiary of Micron, merged with and into Titan with Titan continuing as the surviving corporation (the "Merger"). As a result, Titan became a wholly-owned subsidiary of Micron. The total amount of consideration paid in the Merger, including amounts related to the repayment of indebtedness, the redemption of the outstanding preferred stock of Titan, payments to common shareholders of Titan and the payment of transaction costs incurred by Titan, was $395,000. The Merger was financed with the net proceeds from Autocam's issuance of $140,000 of senior subordinated notes, which are guaranteed by Titan (the "Notes"), borrowings under our senior credit facilities of $114,000 and combined common equity contributions of $143,400 by GS Capital Partners 2000, L.P. ("GSCP 2000"), other private equity funds affiliated with GSCP 2000, Transportation Resource Partners LP ("TRP"), other investment vehicles affiliated with TRP, and certain of our management. SUCCESSOR PERIODS -- Represents our consolidated financial position and consolidated results of operations and cash flows reflecting the basis of accounting after purchasing accounting for the Merger. PREDECESSOR PERIODS -- Represents our consolidated financial position and results of operations and cash flows reflecting the historical basis of accounting without any application of purchase accounting for the Merger. ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts 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 reporting period. Although our management believes the estimates are reasonable, actual results could differ from those estimates. FINANCIAL INSTRUMENTS consist principally of cash and equivalents, accounts receivable and payable, debt and related interest contracts. The carrying amounts of our financial instruments approximate estimated fair value, except for the senior subordinated notes and interest contracts. We have determined the estimated fair value amounts using available market information and valuation methodologies (see Note 5). 44 CASH AND EQUIVALENTS consist of highly-liquid investments with original maturities of three months or less at the date of purchase. ACCOUNTS RECEIVABLE -- We participate in an accounts receivable financing facility under which accounts receivable are sold without recourse to an unrelated third party, resulting in reductions of accounts receivable of $18,809 as of December 31, 2004 and $23,846 as of December 31, 2005. We account for the sales of receivables in accordance with the requirements of Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Net discounts recognized on sales of receivables of $181 in 2003, $150 in 2004 and $285 in 2005 are included in Selling, General and Administrative Expenses, while certain factoring charges of $295 in 2003, $402 in 2004 and $541 in 2005 are included in Net Other Expenses. INVENTORIES are stated at the lower of actual cost, on a first-in, first-out (FIFO) basis, or market. PROPERTY, PLANT AND EQUIPMENT is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 31 years Leasehold improvements 3 to 12 years Machinery and equipment 3 to 12 years Furniture and fixtures 5 to 10 years
Maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense. When properties are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any gain or loss on disposition is recognized in the results of operations. Gains arising from sale and leaseback transactions are deferred for amortization to income over the lives of the related operating leases. Leasehold improvements are amortized of the lesser of their useful lives or the lease term. GOODWILL consists of amounts paid in excess of the fair value of acquired net assets. Goodwill is not amortized; rather, it is subject to impairment testing in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." We evaluate for indicators of impairment the carrying value of our goodwill at least on an annual basis (in the fourth quarter) and on an interim basis if indicators of potential impairment arise between annual evaluations. Our European segment experienced unfavorable operating results in 2005 primarily as a result of lower production volumes on key programs, excessive labor costs, increased customer pricing pressure and higher raw material costs. As a result, our management concluded that Autocam's European reporting unit's goodwill had been impaired and we recorded against our third quarter 2005 results a goodwill impairment loss of $33,000. The fair value of that reporting unit was estimated using the present value of expected future cash flows. This charge does not result in current or future cash expenditures. Set forth below is a summary of the changes in our goodwill balances by segment in 2004 and 2005:
NORTH SOUTH AMERICA EUROPE AMERICA TOTAL -------- -------- ------- -------- Balance at January 1, 2004 $125,209 $ 12,056 $ 2,181 $139,446 Acquisition activity (8,807) 113,516 8,658 113,367 Translation and other 15,921 (695) 15,226 -------- -------- ------- -------- Balance at December 31, 2004 116,402 141,493 10,144 268,039 Acquisition activity 5,412 5,412 Impairment charge (33,000) (33,000) Translation and other (18,220) 1,793 (16,427) -------- -------- ------- -------- Balance at December 31, 2005 $121,814 $ 90,273 $11,937 $224,024 ======== ======== ======= ========
45 EQUIPMENT DEPOSITS AND OTHER LONG-TERM ASSETS consists primarily of debt issue costs of $11,128 as of December 31, 2004 and $11,025 as of December 31, 2005 (amortized over the terms of the debt instruments) and deposits on equipment to be placed into service in the future of $2,093 as of December 31, 2004 and $3,069 as of December 31, 2005. Debt issue cost amortization expense was $706 in 2003, $2,962 in 2004 and $3,528 in 2005. This expense includes $1,822 in 2004 and $1,652 in 2005 in unamortized debt issue costs incurred to secure our senior credit facilities that were written off in connection repayment of indebtedness precipitated by the Merger and the repayment of a portion of our senior credit facilities indebtedness in connection with entering into our second lien credit facility agreement (see Note 5). Set forth below is expected debt issue cost amortization expense to be recorded by us in the years following December 31, 2005: YEARS ENDING DECEMBER 31, 2006 $ 1,786 2007 1,786 2008 1,782 2009 1,692 2010 1,498 Thereafter 2,481 ------- Total $11,025 =======
ACCOUNTS PAYABLE includes the reclassification from Cash and Equivalents of outstanding checks, net of related cash balances, totaling $4,142 as of December 31, 2004 and $4,691 as of December 31, 2005. REVENUE RECOGNITION -- Sales are recognized at the time product is shipped to the customer, at which time title and risk of ownership transfer to the purchaser. INCOME TAXES -- Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities (see Note 7). DERIVATIVE AND HEDGING ACTIVITIES -- From time to time, we manage interest rate risk through the use of interest rate swap agreements although no such instruments were outstanding as of December 31, 2004 or December 31, 2005. We also manage foreign currency exchange risks in relation to equipment purchases through the limited use of foreign currency futures contracts to reduce the impact of changes in foreign currency rates on firm commitments to purchase equipment. No such contracts related to equipment purchases were outstanding as of December 31, 2004 or December 31, 2005. In March 2006, through an interest rate swap agreement we fixed the interest rate on $50,000 of our variable-interest-rate indebtedness at a London Interbank Offered Rate of 5.14% for five years. STOCK-BASED COMPENSATION -- We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for our stock-based compensation plans. Accordingly, no stock-based employee compensation cost is reflected in net income as all options granted under those plans had an exercise price equal to the estimated market value of the underlying common stock on the date of the grant (see Note 10). Had stock-based employee compensation cost of our stock option plan been determined based upon the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," our net income would have changed to the pro forma amounts indicated below: 46
SIX MONTHS ENDED ----------------------------------------------------- DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, 2003 2004 2004 2005 ------------ -------- ------------ ------------ (predecessor) (successor) As reported $6,994 $2,177 $ 554 ($40,187) Compensation expense, net of related tax effects (559) (280) (200) (405) ------ ------ ----- -------- Pro forma $6,435 $1,897 $ 354 ($40,592) ====== ====== ===== ========
The fair value approach was used to value all option grants, with the following weighted-average assumptions: risk-free interest rates, 4%-4.51%; volatility rates, 10.98%-12.01%; and expected life of options, 10 years. NEW ACCOUNTING PRONOUNCEMENTS -- In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123(R) becomes effective at the beginning January 1, 2006. We expect the impact of adopting SFAS No. 123(R) will be consistent with the pro forma expense that has been previously disclosed, adjusted for future grants, cancellations and exercises of stock options in accordance with SFAS No. 123(R). In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No, 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principles and requires retrospective application (as defined) to prior periods' financial statements, unless it is impracticable to determine the effects of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS No. 154 beginning January 1, 2006. RESTRUCTURING -- In June 2003, we closed our Chicago, Illinois facility and moved all existing production to other facilities. We incurred related employee termination and plant closing costs of $879 in 2003. In that year, we also incurred $534 of costs associated with the termination of our building lease and other ancillary costs upon ceasing use of the facility. All of the aforementioned expenses are included in Cost of Sales. In December 2005, we closed our Perrieres, France facility and moved all existing production to other facilities. We incurred related employee termination and plant closing costs of $4,878 in 2005, $3,114 of which are included in Cost of Sales and $1,764 of which are included in Selling, General and Administrative Expenses. JOINT VENTURE -- We and an unrelated entity jointly own Wuxi Weifu Autocam Precision Machinery Company, Ltd. ("JV"), which was formed in China in 2005. The purpose of the JV is to produce fuel delivery systems components for a customer's Asian operations. Our investment in JV of 50% is being accounted for under the equity method. 2. BUSINESS COMBINATIONS The Merger (see Note 1) was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their relative fair market values. Cost in excess of the fair value of the net assets acquired (goodwill) was $249,371, allocated among our operating segments as follows: North America - $116,227, Europe - $124,486 and South America - $8,658. The results of our operations and cash flows (as predecessor company) have been reported through June 30, 2004. 47 Set forth below are our unaudited pro forma statements of operations information for 2003 and the six months ended June 30, 2004, which are based upon our historical Consolidated Statements of Operations for those periods after giving effect to the Merger as if such transaction had occurred at the beginning of each period presented. These pro forma results are based upon assumptions considered appropriate our management and include adjustments as considered necessary in the circumstances. Such adjustments include interest expense that would have been incurred to finance the purchase, depreciation expense based on the fair market value of the property and equipment acquired and the corresponding tax effects of each. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of results which would have actually been reported had the Merger taken place at the beginning of each period presented or which may be reported in the future.
SIX MONTHS ENDED JUNE 30, 2003 2004 -------- ---------- Sales $323,210 $184,489 Net income 1,269 6,649
Effective November 1, 2004, Autocam, through our wholly-owned subsidiary, Frank & Pignard, SA, acquired the stock of ATI, S.A.S. ("ATI"), for $1,681 in cash and the assumption of $6,065 in debt, primarily consisting of capital lease obligations. The acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their relative fair market values. Cost in excess of the fair value of the net assets acquired (goodwill) was $1,086. On June 15, 2005, Autocam Greenville, Inc., a wholly-owned subsidiary of Autocam, acquired the stock of Sager Precision Technologies, Inc. for $9,902 in cash and the assumption of $240 in capital lease obligations. In accordance with the purchase agreement, we recognized a receivable from the seller of $342 representing a shortfall in working capital on June 15, 2005. Additional consideration will be paid to the seller if earnings before interest, taxes, depreciation and amortization exceed certain levels for the year ending June 30, 2006. The purchase price was primarily financed indirectly through $10,028 in equity contributions from the shareholders of Micron. The acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their relative fair market values. Cost in excess of the fair value of the net assets acquired (goodwill) was $5,242. 48 3. INVENTORIES Set forth below are the components of Inventories as of December 31:
2004 2005 ------- ------- (successor) Raw materials $11,030 $12,657 Production supplies 7,188 7,512 Work in-process 12,979 14,916 Finished goods 5,750 5,842 ------- ------- Total inventories $36,947 $40,927 ======= =======
4. PROPERTY, PLANT AND EQUIPMENT Set forth below are the components of Property, Plant and Equipment, Net as of December 31:
2004 2005 -------- -------- (successor) Buildings and land $ 10,838 $ 10,156 Machinery and equipment 161,407 160,631 Furniture and fixtures 11,041 11,402 -------- -------- Total 183,286 182,189 Accumulated depreciation (6,001) (19,130) -------- -------- Total property, plant and equipment, net $177,285 $163,059 ======== ========
49 5. LONG-TERM OBLIGATIONS Set forth below are the components of Long-Term Obligations as of December 31 (percentages represent interest rates as of December 31, 2005):
2004 2005 -------- -------- (successor) Senior credit facility: U.S. dollar term note with banks - principal payments in quarterly installments beginning in September 2010; interest payable quarterly at variable interest rates based on LIBOR plus 3.5% (7.938-8.25% per annum); due June 2011 $ 32,835 $ 19,988 Euro term note with banks - principal payments in quarterly installments beginning in September 2008; interest payable quarterly at variable interest rates based on EURIBOR plus 4% (6.492% per annum); due June 2011 83,269 42,532 Multi-currency revolving line of credit with banks - interest payable quarterly at variable interest rates based on either LIBOR plus 3.5% or the bank's prime rate plus 2.5%; principal due June 2011 18,000 Second lien term note: U.S. dollar-denominated portion - interest payable in quarterly installments at variable interest rates based on LIBOR plus 7% (11.438% per annum); principal due December 2011; balance due at December 31, 2005 reflects paid-in kind interest accrued at 1.5% per annum of the principal balance outstanding 60,023 Euro-denominated portion - interest payable in quarterly installments at variable interest rates based on EURIBOR plus 8% (10.438% per annum); principal due December 2011; balance due at December 31, 2005 reflectes paid-in kind interest accrued at 1.5% per annum of the principal balance outstanding 14,951 Senior subordinated notes - interest payable in semi-annual installments at a fixed interest rate of 10.875% per annum, net of original issue discount; principal due June 2014 137,043 137,355 Capital leases obligations - payable in monthly installments, including interest imputed at rates ranging from 2.14% to 19.62%; due through February 2016 12,659 8,546 Other 4,975 7,846 -------- -------- Total long-term obligations 288,781 291,241 Current portion (12,942) (8,582) -------- -------- Long-term portion $275,839 $282,659 ======== ========
SENIOR CREDIT FACILITIES In connection with the Merger, on June 21, 2004, Autocam entered into a $158,000 USD-equivalent senior credit facilities agreement, which consisted of a $36,100 multi-currency revolving credit facility available to Autocam, an E11,621 revolving credit facility available to our French subsidiary, Autocam France, SARL, a $33,000 term loan to Autocam and a E62,700 term loan to Autocam France, SARL. 50 On December 22, 2005, we amended our senior credit facilities agreement to permit us to incur the second lien term loans discussed below, to replace interest coverage, leverage and senior leverage ratio covenants with maximum first lien leverage and revised maximum senior leverage ratio covenants, to amend the consolidated capital expenditures covenant and to make other modifications. We also reduced the committed amount of our multi-currency-denominated revolving credit facility from $36,100 to $28,880 and we reduced the committed amount of Autocam France, SARL's euro-denominated revolving credit facility from E11,621 to E9,297 (USD-equivalent of $10,968 as of December 31, 2005). We had no borrowings outstanding under any of the revolving credit facilities of our senior credit facilities as of December 31, 2005. Our ability to borrow against these facilities expires in June 2011. Interest and Fees. The interest rate margins on our senior credit facilities changed in conjunction with the December 2005 amendment to our senior credit facilities agreement. The interest rate margin applicable to the U.S. Term Loans (with a Eurocurrency rate) is 3.50% and the interest rate margin applicable to the Euro Term Loans is 4.00%, in each case from December 22, 2005 until the later of the first anniversary of the effective date of the first amendment (i.e. April 2006) to our senior credit facilities agreement and the date we demonstrate a "Leverage Ratio," as defined in our senior credit facilities agreement, of less than or equal to 4.50:1.00. Thereafter, the applicable interest rate margin is determined by reference to the Leverage Ratio in effect from time to time as set forth below:
APPLICABLE MARGIN FOR REVOLVING APPLICABLE MARGIN LOANS, EUROPEAN REVOLVING LOANS FOR EUROPEAN LEVERAGE RATIO AND U.S. TERM LOANS TERM LOANS -------------- ------------------------------- ----------------- > or = 3.00:1.00 3.25% 3.75% < 3.00:1.00 3.00% 3.50%
If, at any time our "First Lien Leverage Ratio" as defined in our senior credit facilities agreement exceeds 2.25:1.00, the applicable margins shown above shall be increased by 0.25%, and if our First Lien Leverage Ratio exceeds 2.75:1.00, the applicable margins shown above shall be increased by an additional 0.25%. The interest rate margin applicable to swing line loans and other loans that are base rate loans is an amount equal to the margin applicable to Eurocurrency rate loans at that time, minus 1.00% per annum. Amortization and Prepayments. After giving effect to the prepayments made from the proceeds of the term loans under our second lien credit facility (described below), no amortization of the term loans under our senior credit facilities is required through the quarter ending June 30, 2008, and thereafter required amortization is as follows:
TERM LOAN INSTALLMENTS ---------------------- FISCAL QUARTER ENDING U.S. EUROPEAN --------------------- ------- -------- September 30, 2008 E 894 December 31, 2008 1,073 March 31, 2009 2,682 June 30, 2009 2,682 September 30, 2009 2,682 December 31, 2009 2,682 March 31, 2010 3,893 June 30, 2010 3,893 September 30, 2010 $ 2,298 3,893 December 31, 2010 5,896 3,893 March 31, 2011 5,896 3,893 June 30, 2011 5,898 3,893 ------- ------- Total $19,988 E36,053 ======= =======
Our senior credit facilities also require mandatory prepayments on terms substantially identical to our second lien credit facility (described below). 51 Collateral and Guarantors. Indebtedness under our senior credit facilities is guaranteed by Titan, Autocam Europe, B.V. (Autocam's Dutch subsidiary), and by each existing and subsequently acquired or organized domestic and, to the extent no material adverse tax consequence would result and to the extent permitted under local law, foreign subsidiary, and by Autocam with respect to the obligations of Autocam France, SARL under the Eurocurrency Term Loan and revolving credit facilities. Indebtedness under our senior credit facilities is secured by a first priority lien on substantially all of our and the guarantors' tangible and intangible assets, including personal property, real property, intercompany indebtedness and capital stock owned by Autocam and such guarantors, limited to 65% of such capital stock in the case of certain foreign subsidiaries. Financial and Restrictive Covenants. Our senior credit facilities agreement contains maximum first lien leverage ratios, maximum senior leverage ratios and maximum capital expenditures and also contains covenants that restrict our ability to incur additional indebtedness, grant liens, make investments, loans, guarantees or advances, make restricted junior payments, including dividends, redemptions of capital stock and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. THE SECOND LIEN CREDIT FACILITY On December 22, 2005, Autocam entered into a second lien Term Loan and Guaranty Agreement ("second lien credit facility") with a syndicate of lenders, Goldman Sachs Credit Partners L.P. as syndication agent, lead arranger and sole book runner, and The Bank of New York as administrative agent and collateral agent. Amount and Final Maturity. The second lien credit facility provides for a $60,000 term loan and a E12,669 term loan (USD-equivalent of $15,000 as of December 31, 2005). Each term loan has a final maturity of six years. Autocam is the borrower under the term notes, which were fully borrowed at the closing on December 22, 2005. Use of Proceeds. Proceeds of the second lien term loans were used by us to repay borrowings under our senior credit facilities as follows: (i) $12,600 of term loans borrowed by Autocam, (ii) E22,728 of term loans borrowed by Autocam France, SARL, and (iii) $29,000 of revolving loans borrowed by Autocam. The balance of the proceeds was used to pay transaction costs and interest due on our senior credit facilities and for working capital and general corporate purposes. Interest and Fees. The interest rates applicable to loans under our second lien credit facility will be (i) in the case of our USD-denominated term loans, at its option equal to either (x) a base (prime) rate plus 7.50% per annum or (y) an adjusted Eurodollar bank deposit rate plus 8.50% per annum; or (ii) in the case of our euro-denominated term loans, an adjusted Euro bank deposit rate plus 9.50% per annum. We may at our option, in lieu of payment of interest in cash, pay up to 1.50% per annum of the interest by adding such interest to the then outstanding principal amount of the term loans (payment-in-kind). We have agreed to pay various fees with respect to our second lien credit facility, including customary arrangement fees paid to Goldman Sachs Credit Partners L.P. and a customary annual administrative agent fee payable to The Bank of New York. Prepayments. Our second lien credit facility requires mandatory prepayments, subject to exceptions, of an amount equal to: - 100% of the net cash proceeds from asset sales or other dispositions of property by us or our subsidiaries, including insurance proceeds or governmental condemnations, other than inventory sold or disposed of in the ordinary course of business, certain other transactions and net cash proceeds reinvested in assets used in our business; - 50% of the net cash proceeds from the issuance of specified equity securities, provided that this percentage will be reduced to 25% if our "Leverage Ratio", as defined in our second lien credit facilities agreement, is less than 3.00:1.00; - 100% of the net cash proceeds from the issuance of specified debt obligations by us or our subsidiaries; and - 75% of "Consolidated Excess Cash Flow", as defined in our second lien credit facility agreement, provided that this percentage will be reduced to 50% if its "Leverage Ratio" is less than 3.00:1.00. Mandatory prepayments (which are permitted to be waived by the lenders in certain circumstances) will be applied first to repay our obligations under our senior credit facilities, and then remaining amounts, if any, to our USD term loans and our euro term loans under our second lien credit facility on a pro rata basis. 52 We are permitted to voluntarily prepay loans under our second lien credit facility on or after December 22, 2006, subject to the terms of our senior credit facilities agreement. If we voluntarily prepay all or any portion of our second lien credit facility, we are required to pay a prepayment premium (as a percentage of the principal prepaid) as follows: on or after December 22, 2006 but prior to December 22, 2007, 2.0%; and on or after December 22, 2007 but prior to December 22, 2008, 1.0%. The term loans under our second lien credit facility may be prepaid without a prepayment premium from and after December 22, 2008. Collateral and Guarantors. Indebtedness under our second lien credit facility is guaranteed by Titan, Autocam's Dutch subsidiary, Autocam Europe, B.V., and each of our existing and subsequently acquired or organized domestic and, to the extent no material adverse tax consequence would result and permitted under local law, each of our foreign subsidiaries. Indebtedness under our second lien credit facility is secured by a second priority lien on substantially all of our and the guarantors' tangible and intangible assets, including personal property, real property, intercompany indebtedness and capital stock owned by us and such guarantors, limited to 65% of such capital stock in the case of certain foreign subsidiaries. The liens to secure our second lien credit facility are subordinated to the liens to secure our senior credit facilities. The priority of, and certain other matters relating to, the liens in the collateral under our second lien credit facility and our senior credit facilities is set out in an intercreditor agreement. Financial and Restrictive Covenants. Our second lien credit facility agreement contains maximum senior leverage ratios that vary during the term of the facility agreement. Our second lien credit facility agreement also contains covenants that restrict our ability to incur additional indebtedness, grant liens, make investments, loans, guarantees or advances, make restricted junior payments, including dividends, redemptions of capital stock and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. These are substantially identical to (and in some respects more flexible than) the covenants in our senior credit facilities agreement. Representations and Affirmative Covenants. Our second lien credit facility contains customary representations, warranties and affirmative covenants. Events of Defaults. Our second lien credit facility contains customary events of default, which are substantially as set forth in our senior credit facilities agreement, but with materiality thresholds 15% higher than the corresponding provisions in our senior credit facilities agreement, including: - failure to make payments when due; - defaults under other material indebtedness; - non-compliance with covenants; - incorrectness of representations and warranties; - bankruptcy, insolvency or dissolution events; - material judgments; - certain events related to ERISA; - impairment of security interests in collateral or invalidity of guarantees; and - a "change of control," as defined in our second lien credit facilities agreement. There is a 60-day standstill period with respect to a cross default to our senior credit facilities agreement. SENIOR SUBORDINATED NOTES Autocam issued $140,000 of Notes in connection with the Merger. The Notes will mature on June 15, 2014. Interest on the Notes accrues at the rate of 10.875% per annum and is paid semi-annually in arrears on June 15 and December 15. We make each interest payment to the holders of record on the immediately preceding June 1 and December 1. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes: - are general unsecured obligations of Autocam; 53 - are subordinated in right of payment to all our existing and future senior debt, including borrowings under our senior credit facilities and second lien credit facility; - rank equally in right of payment to any future senior subordinated indebtedness of ours; - are senior in right of payment to any future subordinated indebtedness of ours; and - are jointly, severally, fully and unconditionally guaranteed by the guarantors (see below and Note 14). The Notes are guaranteed by all of our existing and future restricted subsidiaries that are domestic subsidiaries and by Autocam Europe, B.V. and Titan. Each guarantee of the Notes: - is a general unsecured obligation of each guarantor; - is subordinated in right of payment to all existing and future senior debt of that guarantor; - is equal in right of payment with any future senior subordinated indebtedness of that guarantor; - is effectively subordinated to all secured indebtedness of that guarantor to the extent of the value of the assets securing such indebtedness; and - is effectively subordinated to the obligations of any subsidiary of that guarantor if that subsidiary is not a guarantor. Except for Autocam Europe, B.V., none of our foreign subsidiaries guarantee the Notes. The Notes are effectively subordinated in right of payment to all of our indebtedness and other liabilities and commitments (including trade payables and lease obligations) and those of our subsidiaries that are not guarantors. Any right of ours to receive assets of any of our subsidiaries that are not guarantors upon that subsidiary's liquidation or reorganization (and the consequent right of the holders of the Notes to participate in those assets) is effectively subordinated to the claims of that subsidiary's creditors, except to the extent that we are recognized as a creditor of the subsidiary, in which case those claims would still be subordinate in right of payment to any security in the assets of the subsidiary and any indebtedness of the subsidiary senior to that held by us. Set forth below are the annual aggregate maturities of long-term obligations as of December 31, 2005: YEARS ENDING DECEMBER 31, 2006 $ 8,582 2007 3,194 2008 4,399 2009 13,588 2010 27,004 Thereafter 234,474 -------- Total $291,241 ========
Our weighted average interest rates incurred on long-term obligations was 6.7% in 2003, 7.9% in 2004 and 8.9% in 2005. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the fair value of long-term debt approximated its carrying value as of December 31, 2004 and was $249,941 as of December 31, 2005. 6. COMMITMENTS We lease buildings and equipment under capital leases. The cost of assets purchased subject to capital leases was $239 in 2003, $1,933 in 2004 and $307 in 2005. The cost of the assets subject to the capital leases was $18,937 as of December 31, 2004 and $16,108 as of December 31, 2005. The accumulated amortization of such assets was $400 as of December 31, 2004 and $1,363 as of December 31, 2005. We lease buildings and equipment under non-cancelable operating leases, which generally contain renewal and purchase options at fair market value at the end of the lease terms. We lease other buildings under cancelable operating leases, which contain renewal options every three years in accordance with French law. 54 Set forth below are minimum future lease payments under all capital and operating leases as of December 31, 2005:
CAPITAL OPERATING LEASES LEASES ------- --------- YEARS ENDING DECEMBER 31, 2006 $ 2,864 $14,343 2007 2,424 13,205 2008 1,704 10,837 2009 926 6,622 2010 506 4,519 Thereafter 1,263 15,388 ------- ------- Subtotal 9,687 $64,914 ======= Less imputed interest (1,141) ------- Total $ 8,546 =======
Rent expense under operating leases summarized above was $11,404 in 2003, $12,422 in 2004 and $14,098 in 2005. As of December 31, 2005, we had non-cancelable purchase commitments for machinery and equipment and buildings totaling $7,871 some of which may be assigned to financing companies under operating lease agreements. In accordance with terms of the purchase agreements, final acceptance of the equipment is contingent upon the equipment demonstrating certain capabilities as documented in our purchase orders. On January 3, 2006, Autocam purchased certain assets and assumed certain liabilities of ATS Automation Tooling Systems, Inc.'s ("ATS") Precision Metals Division pursuant to an asset purchase agreement, dated December 12, 2005. In connection therewith, we paid 6,000 Canadian dollars (USD-equivalent of $5,179). We formerly guaranteed the performance under equipment leases of ATI. We acquired the outstanding stock of ATI in 2004 (see Note 2), and therefore became primarily responsible for the capital lease obligations of ATI. These obligations are reflected in Long-Term Obligations. 7. INCOME TAXES Set forth below is income (loss) before tax provision:
SIX MONTHS ENDED -------------------------------------------- JUNE 30, DECEMBER 31, 2003 2004 2004 2005 ------- -------- ------------ -------- (predecessor) (successor) U.S. income (loss) $ 4,477 ($4,034) ($3,913) ($ 3,915) Foreign income (loss) 7,214 9,422 4,889 (40,055) ------- -------- -------- -------- Total $11,691 $ 5,388 $ 976 ($43,970) ======= ======== ======== ========
55 Set forth below is our income tax expense:
SIX MONTHS ENDED ----------------------- JUNE 30, DECEMBER 31, 2003 2004 2004 2005 ------ -------- ------------ ------- (predecessor) (successor) Current: U.S. federal $ 27 ($1,691) $ 3,582 ($467) Foreign 1,349 4,525 (383) 948 U.S. state and local 28 9 15 34 ------ -------- ------- ------- Total current 1,404 2,843 3,214 515 ------ -------- ------- ------- Deferred: U.S. federal 1,559 326 (4,522) (727) Foreign 1,734 42 1,730 (3,588) ------ -------- ------- ------- Total deferred 3,293 368 (2,792) (4,315) ------ -------- ------- ------- Total taxes $4,697 $ 3,211 $ 422 ($3,800) ====== ======== ======= =======
We do not provide for deferred taxes on the excess of the financial reporting over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. That excess totaled $69,840 as of December 31, 2005. The determination of the additional deferred taxes that have not been provided is not practicable. Set forth below are reconciliations of the differences between our income tax expense and income taxes computed at the United States Federal statutory tax rate:
SIX MONTHS ENDED ----------------------- JUNE 30, DECEMBER 31, 2003 2004 2004 2005 ------- -------- ------------ -------- (predecessor) (successor) Tax at United States Federal statutory rate $4,092 $1,885 $ 342 ($15,390) Effect of foreign operations, net of related tax credits 558 1,068 (139) (999) Goodwill impairment 11,550 Non-deductible business combination expenditures 340 Other 47 (82) 219 1,039 ------ ------ ----- -------- Tax as reported $4,697 $3,211 $ 422 ($3,800) ====== ====== ===== ========
56 Deferred income tax assets and liabilities as of December 31, 2004 and as of December 31, 2005 reflect the effect of temporary differences between amounts of assets, liabilities and equity for financial reporting purposes and the bases of such assets, liabilities, and equity as measured by tax laws, as well as tax loss and tax credit carryforwards. Set forth below are temporary differences that gave rise to deferred tax assets and liabilities as of December 31:
2004 2005 --------------------- --------------------- DEFERRED TAX DEFERRED TAX --------------------- --------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------- ----------- ------- ----------- (successor) --------------------------------------------- Domestic international sales corporation income $ 568 $ 426 Accrued expenses $ 1,643 535 $ 989 426 Foreign tax and other credits 5,774 6,915 Net operating loss carryforward 7,421 10,516 Depreciation and other 43,607 38,163 ------- ------- ------- ------- Subtotal 14,838 44,710 18,420 39,015 Less valuation allowance (2,732) (3,945) ------- ------- ------- ------- Total deferred taxes $12,106 $44,710 $14,475 $39,015 ======= ======= ======= =======
Set forth below is the deferred tax detail above as reflected in the consolidated balance sheets as of December 31:
2004 2005 ------- -------- (successor) Short-term deferred tax assets ($238) ($725) Long-term deferred tax assets (7,721) (17,431) Long-term deferred tax liabilities 40,563 42,696 ------- -------- Total deferred taxes $32,604 $ 24,540 ======= ========
We had United States Federal income tax credit carryforwards of $6,915 as of December 31, 2005 related primarily to research and development expenses and foreign tax credits, which expire from 2008 to 2025. We also had net operating loss carryforwards available to offset future taxable income of $30,014, as of December 31, 2005, which expire from 2017 to 2025. 8. BUSINESS SEGMENT INFORMATION We have four operating segments: North America, Europe, South America and Asia. The North American segment provides precision-machined components to the transportation and medical devices industries, while the European, South American and Asia segments provide precision-machined components to the transportation industry. We have assigned specific business units to a segment based on their geographical location. Each of our segments is individually managed and have separate financial results reviewed by our chief executive and operating decision-makers. These results are used by those individuals both in evaluating the performance of, and in allocating current and future resources to, each of the segments. We evaluate segment performance primarily based on income from operations and the efficient use of assets. The totals set forth below are inclusive of all adjustments needed to reconcile to the data provided in the Consolidated Financial Statements and related notes as of December 31 and for 2003, 2004 and 2005: 57
SIX MONTHS ENDED ------------------- JUNE 30, DECEMBER 31, 2003 2004 2004 2005 -------- -------- -------- --------- (predecessor) (successor) Sales to Unaffiliated Customers from Company Facilities Located in: North America $139,876 $ 75,031 $ 68,903 $ 159,023 Europe 170,536 100,429 83,726 158,798 South America 12,798 9,029 13,192 30,002 -------- -------- -------- --------- Total $323,210 $184,489 $165,821 $ 347,823 ======== ======== ======== ========= Net Income (Loss) of Company Facilities Located in: North America $ 2,863 ($2,678) ($2,988) ($2,772) Europe 3,087 3,732 1,729 (40,089) South America 1,044 1,123 1,813 2,726 Asia (52) -------- -------- -------- --------- Total $ 6,994 $ 2,177 $ 554 ($40,187) ======== ======== ======== ========= Depreciation and Amortization on Assets Located in: North America $ 8,265 $ 6,225 $ 2,028 $ 6,323 Europe 11,313 6,189 5,306 11,981 South America 868 540 429 1,259 -------- -------- -------- --------- Total $ 20,446 $ 12,954 $ 7,763 $ 19,563 ======== ======== ======== ========= Net Interest Expense of Company Facilities Located in: North America $ 2,909 $ 1,763 $ 8,493 $ 17,792 Europe 6,257 2,699 2,841 6,794 South America 278 204 304 555 -------- -------- -------- --------- Total $ 9,444 $ 4,666 $ 11,638 $ 25,141 ======== ======== ======== ========= Tax Provision of Company Facilities Located in: North America $ 1,614 ($1,356) ($925) ($1,160) Europe 2,744 4,068 698 (4,031) South America 339 499 649 1,391 -------- -------- -------- --------- Total $ 4,697 $ 3,211 $ 422 ($3,800) ======== ======== ======== ========= Expenditures for Property, Plant and Equipment of Facilities Located in: North America $ 10,892 $ 4,085 $ 3,032 $ 7,254 Europe 8,866 5,622 4,813 7,648 South America 2,701 969 1,834 3,424 Asia 20 -------- -------- -------- --------- Total $ 22,459 $ 10,676 $ 9,679 $ 18,346 ======== ======== ======== =========
2004 2005 -------- -------- (successor) Total Assets of Company Facilities Located in: North America $205,690 $241,735 Europe 332,279 249,199 South America 31,463 38,927 Asia 1,902 -------- -------- Total $569,432 $531,763 ======== ========
Included in the North American sales to unaffiliated customers are sales exported from facilities in the United States of $22,381 in 2003, $21,138 in 2004 and $16,963 in 2005, with the majority being to customers in Germany, Mexico, Brazil and Austria. 58 Set forth below are our sales by product line for the periods presented:
2003 2004 2005 -------- -------- -------- Steering $ 99,858 $120,204 $121,387 Fuel 111,013 109,054 108,374 Braking 26,393 30,648 32,468 Electric motors 41,840 39,173 25,572 Air bags 18,544 18,612 17,464 Medical devices 8,112 9,001 15,830 Other 17,450 23,618 26,728 -------- -------- -------- Total revenue $323,210 $350,310 $347,823 ======== ======== ========
Set forth below are sales to customers that exceeded 10% of consolidated sales:
2003 2004 2005 -------- -------- -------- ZF Friedrichshafen AG $ 39,929 $ 57,252 $ 62,857 TRW Automotive, Inc. 42,077 53,531 57,173 Delphi Corporation 52,183 54,656 52,516 Robert Bosch GmbH 42,556 40,637 40,739 -------- -------- -------- $176,745 $206,076 $213,285 ======== ======== ========
9. RELATED PARTY TRANSACTIONS We lease a building in France from a partnership in which our president has a 50% interest subject to a 12-year operating lease, which expires in July 2014. Annual rent is due in quarterly installments subject to annual increases based upon an index tied to France's national public construction costs. Rent expense recorded in connection with this lease agreement was $588 in 2003, $664 in 2004 and $704 in 2005. We paid management fees of $530 in 2003 and $278 in 2004 to our former majority shareholder. We paid management fees of $317 in 2004 and $600 in 2005 to our current shareholders. GS Capital Partners 2000, L.P. ("GSCP 2000") and other private equity funds affiliated with Goldman, Sachs & Co. own 40.1% of the common stock and preferred stock of Micron. Under the registration rights agreement, we filed a "market-making" prospectus in order to allow Goldman, Sachs & Co. to engage in market-making activities for the Notes we entered into with these entities at the closing of the Merger. Goldman, Sachs & Co., an affiliate of GSCP 2000 and its related investment funds, acted as an initial purchaser in the offering of the Notes. Goldman Sachs Credit Partners L.P., an affiliate of GSCP 2000 and its related investment funds, was the joint lead arranger, joint book runner, syndication agent and a lender under our senior credit facilities initially and in the March and December 2005 amendments of the senior credit facilities agreement. Goldman Sachs Credit Partners L.P. was also the syndication agent, lead arranger and sole book runner for our second lien credit facility. In 2004, we paid Goldman Sachs Credit Partners L.P. $4,241 from the proceeds of our senior credit facilities and the Notes for underwriting and bridge financing commitment fees and out-of-pocket expenses. In 2005, we paid Goldman Sachs Credit Partners L.P. $1,902 from the proceeds of our second lien credit facility for syndication fees and out-of-pocket expenses. 10. CAPITAL STOCK Micron's Board of Directors has reserved 1,430,000 shares of common stock for issuance to employees under the 2004 Stock Option Plan (the "Option Plan"), and as of December 31, 2005, options for 948,035 shares were granted at $10 per share under the Option Plan, 929,498 of which were issued in 2004 and 18,537 in 2005. Options are not exercisable prior to twelve months from or ten years after the grant date. Certain options granted vest at a rate of twenty-five percent annually over a four-year period, while others vest based on Micron shareholders' ability to meet certain levels of return on their investment in Micron. No options were exercisable as of December 31, 2004. Options for 232,375 shares were exercisable as of December 31, 2005. 59 11. EMPLOYEE BENEFIT PLANS We maintain a self-funded medical and dental plan for our Kentwood and Marshall and certain of our Dowagiac, Michigan full-time employees. A third-party administrator makes benefit payments, and an estimate of our liability for unpaid and incurred but not reported claims is included in Other Accrued Liabilities. Employees of our other subsidiaries are enrolled in various insured group or governmental health plans. We sponsor a 401(k) savings plan (the "401k Plan") for all qualified full-time employees resident in the United States. The 401k Plan provides for an annual discretionary employer matching contribution that has historically been dollar-for-dollar up to two thousand dollars. Expense incurred in connection with the 401k Plan was $819 in 2003, $829 in 2004 and $818 in 2005. We sponsor defined benefit pension plans for substantially all employees of our French subsidiaries. These benefits are calculated based on each employee's years of credited service and most recent monthly compensation and service category. The obligations for the plan sponsored by Frank & Pignard (the "F&P Plan") are not funded and the obligations for the plan sponsored by Bouverat (the "Bouverat Plan") are funded. Accordingly, the unfunded obligations under the F&P Plan are included in Deferred Credits and Other Long-Term Liabilities. Employees become vested in accordance with governmental regulations in place at the time of retirement under both plans. For the purpose of calculating the actuarial present value of the benefit obligation under the F&P and Bouverat Plans, the discount rate assumed for all periods was 5%. The compensation growth rate for the F&P Plan was assumed at 3% for all periods presented. The compensation growth rates for the Bouverat Plan were assumed at 2% in 2003, 3% in 2004 and 3% in 2005. The measurement date was December 31 of each year. Set forth below is projected benefit obligation information for the F&P and Bouverat Plans:
2004 2005 ------------------------ ------------------------ F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- Accumulated benefit obligation at measurement date $1,144 $354 $1,013 $256 Effect of salary increases 729 173 665 159 ------ ---- ------ ---- Projected benefit obligation at measurement date $1,873 $527 $1,678 $415 ====== ==== ====== ====
2004 2005 ------------------------ ------------------------ F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- Projected benefit obligation at beginning of year $2,335 $ 545 $1,873 $527 Plan amendments (293) (125) Service and interest costs 148 115 316 19 Actuarial gain (304) Benefits paid (150) (48) (258) (61) Effect of foreign currency translation gain 137 40 (254) (69) ------ ----- ------ ---- Projected benefit obligation at measurement date $1,873 $ 527 $1,678 $415 ====== ===== ====== ====
Set forth below is net periodic benefit cost information for the F&P and Bouverat Plans:
2003 2004 2005 ------------------------ ------------------------ ------------------------ F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- -------- ------------- Service and interest costs $308 $ 34 $148 $115 $316 $ 19 Expected return on plan assets (23) (30) (32) ---- ---- ---- ---- ---- ----- Net periodic benefit cost $308 $ 11 $148 $ 85 $316 ($13) ==== ==== ==== ==== ==== =====
60 Set forth below are expected benefit payments under the F&P Plan for the next five years and the five years thereafter: YEARS ENDING DECEMBER 31, 2006 $ 5 2007 2008 2009 8 2010 22 2011-2015 256 ---- Total $291 ====
Set forth below is plan asset information for the Bouverat Plan:
2004 2005 ----- ----- Plan assets at fair value at measurement date $ 648 $ 512 Projected benefit obligations at measurement date (527) (415) ----- ----- Funded status and accrued benefit cost $ 121 $ 97 ===== =====
2004 2005 ---- ---- Plan assets at fair value at beginning of year $602 $648 Actual return on plan assets 43 25 Benefits paid (48) (61) Other (15) Effect of foreign currency translation loss 51 (85) ---- ---- Plan assets at fair value at measurement date $648 $512 ==== ====
The assumed rate of return on assets of the Bouverat Plan was 5% for all periods presented, which is consistent with historical long-term rates of return experienced for each asset class. We have a targeted goal of allocating Bouverat Plan assets one-third to equity and two-thirds to fixed income securities. Set forth below are actual allocations of plan assets of the Bouverat Plan between equity and fixed income securities as of December 31:
2004 2005 ---- ---- Equity 27% 19% Fixed income 73% 81% --- --- 100% 100% === ===
Our expected funding obligations under the Bouverat Plan are $47 in 2006. 61 12. SUPPLEMENTAL CASH FLOW INFORMATION Set forth below is a reconciliation of net income (loss) to net cash provided by (used in) operating activities:
SIX MONTHS ENDED ---------------------- JUNE 30, DECEMBER 31, 2003 2004 2004 2005 ------- -------- ------------ --------- (predecessor) (successor) Net income (loss) $ 6,994 $ 2,177 $ 554 ($40,187) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 20,446 12,954 7,763 19,563 Goodwill impairment 33,000 Deferred taxes 3,293 395 (874) (4,768) Realized gains and losses and other, net 2,223 2,627 (257) 476 Changes in assets and liabilities that provided (used) cash: Accounts receivable 6,782 (9,243) 10,488 5,250 Inventories 1,838 (2,899) (5,908) (4,179) Prepaid expenses and other current assets 53 (44) (280) 1,323 Other long-term assets (69) (1,192) 203 (1,916) Accounts payable 1,950 1,687 (6,217) 6,670 Accrued liabilities (5,634) 6,962 (2,985) (247) Deferred credits and other 113 (2,730) (3,024) 1,112 ------- ------- ------- --------- Net cash provided by (used in) operating activities $37,989 $10,694 ($537) $ 16,097 ======= ======= ======= =========
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2005 QUARTERS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR ------------------- -------- ------- ------------ ----------- ---------- (successor) ----------------------------------------------- Sales $88,787 $87,554 $ 85,416 $ 86,066 $ 347,823 Gross profit 12,294 12,935 (24,215) 7,425 8,439 Net income (loss) 322 419 (35,614) (5,314) (40,187)
2005 QUARTERS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR ------------------- -------- ------- ------------ ----------- ---------- (predecessor) (successor) ------------------ -------------------------- Sales $92,856 $91,633 $80,249 $85,572 $350,310 Gross profit 16,241 14,822 11,901 13,073 56,037 Net income (loss) 4,865 (2,688) (140) 694 2,731
62 14. FINANCIAL INFORMATION FOR GUARANTOR AND NON-GUARANTOR SUBSIDIARIES Set forth below are the guarantor and non-guarantor subsidiaries of Autocam with respect to the Notes:
GUARANTOR SUBSIDIARIES NON-GUARANTOR SUBSIDIARIES ---------------------- -------------------------- Autocam-Pax, Inc. Autocam-Har, Inc. Autocam Acquisition, Inc. Autocam France, SARL Autocam Laser Technologies, Inc. Frank & Pignard, SA Autocam International Ltd. Bouverat Industries, SA Autocam Europe, B.V. Autocam do Brasil Usinagem Ltda. Autocam International Sales Corporation Autocam Foreign Sales Corporation Autocam Greenville, Inc. Autocam Poland Sp. z o.o. Autocam South Carolina, Inc. Wuxi Kent Precision Automotive Components Co., Ltd.
Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2004, management determined that the previously presented condensed combining financial data for 2003 and 2004 did not reflect the investment in subsidiaries within Titan Holdings, Inc. and Autocam under the equity method for purposes of the supplemental combining presentation. The current presentation has been restated to reflect all investments in subsidiaries under the equity method. Net income (losses) of the subsidiaries accounted for under the equity method are therefore reflected in their parents' investment accounts. The principle elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. The changes in presentation did not effect our consolidated financial position or consolidated results of operations, nor did the changes adversely impact our compliance with debt covenants or ratios. Set forth below are schedules that reconcile the amounts as previously reported in our condensed combining balance sheet as of December 31, 2004 and the condensed combining statements of operations for the years ended December 31, 2003 and 2004, to the corresponding restated amounts.
TITAN (PARENT SUBSIDIARIES COMPANY ------------------------- ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------- -------- ---------- ------------- ------------- --------- YEAR ENDED DECEMBER 31, 2003: Net income (loss) as previously reported ($ 38) $ 3,425 $ 1,084 $ 2,523 $ 6,994 Net income as restated 6,994 7,032 1,084 2,523 ($10,639) 6,994 SIX MONTHS ENDED JUNE 30, 2004: Net income (loss) as previously reported ($ 4,262) $ 77 $ 1,509 $ 4,853 $ 2,177 Net income as restated 2,177 6,439 1,509 4,853 ($12,801) 2,177 SIX MONTHS ENDED DECEMBER 31, 2004: Net income (loss) as previously reported ($ 12) ($ 3,791) $ 815 $ 3,542 $ 554 Net income as restated 554 566 815 3,542 ($ 4,923) 554 DECEMBER 31, 2004: As previously reported: Total assets $145,060 $210,909 $ 1,368 $213,082 ($ 987) $569,432 Total equity 145,094 (1,303) 815 20,754 165,360 As restated: Total assets 145,626 215,266 1,368 213,082 (5,910) 569,432 Total equity 145,660 3,054 815 20,754 (4,923) 165,360
63 Set forth below is financial information regarding the guarantors and non-guarantors:
COMBINING STATEMENT OF OPERATIONS (RESTATED) SUBSIDIARIES YEAR ENDED DECEMBER 31, 2003 TITAN (PARENT ------------------------- (predecessor) COMPANY ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- ------------- -------- --------- ------------- ------------ -------- Sales $118,722 $17,332 $192,282 ($ 5,126) $323,210 Cost of sales 102,995 13,794 168,407 (5,126) 280,070 -------- ------- -------- -------- -------- Gross profit 15,727 3,538 23,875 43,140 Selling, general and administrative expenses $ 38 6,103 1,247 10,189 17,577 ------ -------- ------- -------- -------- Income (loss) from operations (38) 9,624 2,291 13,686 25,563 Interest expense, net 2,168 591 6,685 9,444 Other expense (income), net 2,150 57 2,221 4,428 ------ -------- ------- -------- -------- Income (loss) before tax provision (38) 5,306 1,643 4,780 11,691 Tax provision 1,881 559 2,257 4,697 Equity in net income of subsidiaries 7,032 3,607 (10,639) ------ -------- ------- -------- -------- -------- Net income $6,994 $ 7,032 $ 1,084 $ 2,523 ($10,639) $ 6,994 ====== ======== ======= ======== ======== ========
COMBINING STATEMENT OF OPERATIONS (RESTATED) SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2004 TITAN (PARENT ------------------------- (predecessor) COMPANY ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- ------------- -------- --------- ------------- ------------ -------- Sales $64,212 $11,061 $112,477 ($3,261) $184,489 Cost of sales 55,053 7,848 93,786 (3,261) 153,426 ------- ------- -------- ------- -------- Gross profit 9,159 3,213 18,691 31,063 Selling, general and administrative expenses $ 6,438 5,214 591 5,094 17,337 ------- ------- ------- -------- -------- Income (loss) from operations (6,438) 3,945 2,622 13,597 13,726 Interest expense, net 1,472 291 2,903 4,666 Other expense (income), net 19 2,358 21 1,274 3,672 ------- ------- ------- -------- -------- Income (loss) before tax provision (6,457) 115 2,310 9,420 5,388 Tax provision (2,195) 38 801 4,567 3,211 Equity in net income of subsidiaries 6,439 6,362 (12,801) ------- ------- ------- -------- -------- -------- Net income $ 2,177 $ 6,439 $ 1,509 $ 4,853 ($12,801) $ 2,177 ======= ======= ======= ======== ======== ========
64
COMBINING STATEMENT OF OPERATIONS (RESTATED) SUBSIDIARIES SIX MONTHS ENDED DECEMBER 31, 2004 TITAN (PARENT ------------------------- (successor) COMPANY ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ---------------------------------- ------------- -------- --------- ------------- ------------ -------- Sales $60,389 $8,854 $100,498 ($3,920) $165,821 Cost of sales 52,462 6,693 85,612 (3,920) 140,847 ------- ------ -------- ------- -------- Gross profit 7,927 2,161 14,886 24,974 Selling, general and administrative expenses 4,127 587 5,852 10,566 ------- ------ -------- -------- Income (loss) from operations 3,800 1,574 9,034 14,408 Interest expense, net 8,170 323 3,145 11,638 Other expense, net $ 18 775 1 1,000 1,794 ---- ------- ------ -------- -------- Income (loss) before tax provision (18) (5,145) 1,250 4,889 976 Tax provision (6) (1,354) 435 1,347 422 Equity in net income of subsidiaries 566 4,357 (4,923) ---- ------- ------ -------- ------- -------- Net income $554 $ 566 $ 815 $ 3,542 ($4,923) $ 554 ==== ======= ====== ======== ======= ========
COMBINING STATEMENT OF OPERATIONS SUBSIDIARIES YEAR ENDED DECEMBER 31, 2005 TITAN (PARENT ------------------------- (successor) COMPANY ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ---------------------------------- ------------- --------- --------- ------------- ------------ --------- Sales $ 132,517 $28,191 $ 198,296 ($11,181) $ 347,823 Cost of sales 115,055 20,401 182,109 (11,181) 306,384 Goodwill impairment 33,000 33,000 --------- ------- --------- --------- --------- Gross profit (loss) 17,462 7,790 (16,813) 8,439 Selling, general and administrative expenses 7,191 1,777 13,087 22,055 --------- ------- --------- --------- Income (loss) from operations 10,271 6,013 (29,900) (13,616) Interest expense, net 16,643 1,149 7,349 25,141 Other expense, net $ 15 2,363 44 2,791 5,213 -------- --------- ------- --------- --------- Income (loss) before tax provision (15) (8,735) 4,820 (40,040) (43,970) Tax provision (5) (2,819) 1,664 (2,640) (3,800) Equity in net loss of subsidiaries (40,177) (34,244) 74,421 Net loss in joint venture 17 17 -------- --------- ------- --------- --------- --------- Net income (loss) ($40,187) ($40,177) $ 3,156 ($37,400) $ 74,421 ($40,187) ======== ========= ======= ========= ========= =========
65
CONDENSED COMBINING STATEMENT OF CASH FLOWS TITAN (PARENT SUBSIDIARIES YEAR ENDED DECEMBER 31, 2003 COMPANY ------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------------- ------------- -------- --------- ------------- -------- Net cash provided by (used in) operating activities ($10) $ 11,763 $ 1,389 $ 24,847 $ 37,989 Expenditures for property, plant and equipment (11,156) (1,438) (9,865) (22,459) Proceeds from sale of property, plant and equipment 6,080 50 526 6,656 Borrowings (repayments) on line of credit, net 4,000 (3,380) 620 Principal payments of long-term obligations (9,399) (19,428) (28,827) Other (914) (1) 3,015 2,100 ---- -------- ------- -------- -------- Net decrease in cash and equivalents (10) 374 (4,285) (3,921) Cash and equivalents at beginning of period 10 376 2 4,608 4,996 -------- ------- -------- -------- Cash and equivalents at end of period $ 750 $ 2 $ 323 $ 1,075 ======== ======= ======== ========
CONDENSED COMBINING STATEMENT OF CASH FLOWS TITAN (PARENT SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2004 COMPANY ------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------------- ------------- --------- --------- ------------- --------- Net cash provided by (used in) operating activities ($6,457) $ 2,206 $ 207 $ 14,738 $ 10,694 Expenditures for property, plant and equipment (3,880) (205) (6,591) (10,676) Borrowings (repayments) on lines of credit, net (1,280) 21,829 (24,080) (3,531) Proceeds from issuance of long-term obligations 169,888 77,360 247,248 Principal payments of long-term obligations (51,268) (58,672) (109,940) Payments to shareholders and option holders (232,663) (232,663) Shareholder contributions 115,400 115,400 Dividends received (paid) 125,000 (125,000) Debt issue costs (10,855) (10,855) Other (145) 596 451 --------- ----- -------- --------- Net increase (decrease) in cash and equivalents 2,775 2 3,351 6,128 Cash and equivalents at beginning of period 750 2 323 1,075 --------- ----- -------- --------- Cash and equivalents at end of period $ 3,525 $ 4 $ 3,674 $ 7,203 ========= ===== ======== =========
66
CONDENSED COMBINING STATEMENT OF CASH FLOWS TITAN (PARENT SUBSIDIARIES SIX MONTHS ENDED DECEMBER 31, 2004 COMPANY ------------------------- (successor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------------- ------------- -------- --------- ------------- --------- Net cash provided by (used in) operating activities ($7,104) $ 882 $ 5,685 ($537) Expenditures for property, plant and equipment (2,149) (883) (6,647) (9,679) Borrowings (repayments) on lines of credit, net 6,972 643 7,615 Proceeds from issuance of long-term obligations 647 647 Principal payments of long-term obligations (152) (3,285) (3,437) Debt issue costs (781) (781) Other 776 (1) 311 1,086 -------- ----- ------- ------- Net increase (decrease) in cash and equivalents (2,438) (2) (2,646) (5,086) Cash and equivalents at beginning of period 3,525 4 3,674 7,203 -------- ----- ------- ------- Cash and equivalents at end of period $ 1,087 $ 2 $ 1,028 $ 2,117 ======== ===== ======= =======
CONDENSED COMBINING STATEMENT OF CASH FLOWS TITAN (PARENT SUBSIDIARIES YEAR ENDED DECEMBER 31, 2005 COMPANY ------------------------- (successor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR CONSOLIDATED ------------------------------------------- ------------- -------- --------- ------------- ------------ Net cash provided by (used in) operating activities ($15) $ 3,671 ($484) $ 12,925 $ 16,097 Expenditures for property, plant and equipment (6,912) (342) (11,092) (18,346) Acquisitions, net of cash (944) (9,902) (201) (11,047) Transactions with affiliates (17,013) (23,457) 10,732 29,168 (570) Borrowings (repayments) on lines of credit, net (18,000) 2,439 (15,561) Proceeds from issuance of long-term debt 75,000 1,021 76,021 Principal payments of long-term obligations (12,848) (31) (32,726) (45,605) Shareholder contributions 17,028 17,028 Debt issue costs (3,762) (3,762) Other (570) 39 (1,108) (1,639) -------- ------- -------- -------- Net increase (decrease) in cash and equivalents 12,178 12 426 12,616 Cash and equivalents at beginning of period 1,087 2 1,028 2,117 -------- ------- -------- -------- Cash and Equivalents at End of Period $ 13,265 $ 14 $ 1,454 $ 14,733 ======== ======= ======== ========
67
TITAN (PARENT SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET (RESTATED) COMPANY ------------------------- DECEMBER 31, 2004 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- -------- -------- --------- ------------- ------------ -------- (successor) Assets Current assets: Cash and equivalents $ 1,087 $ 2 $ 1,028 $ 2,117 Accounts receivable, net 20,329 1,700 37,202 ($871) 58,360 Inventories 10,314 1,501 25,132 36,947 Prepaid expenses and other current assets 1,148 78 2,259 3,485 -------- ------- --------- ------- -------- Total current assets 32,878 3,281 65,621 (871) 100,909 Property, plant and equipment, net 29,772 5,637 141,457 419 177,285 Goodwill $116,399 3 151,637 268,039 Investment in affiliates 29,227 134,493 (7,600) (150,662) (5,458) Other long-term assets 18,120 50 5,029 23,199 -------- -------- ------- --------- ------- -------- Total assets $145,626 $215,266 $ 1,368 $ 213,082 ($5,910) $569,432 ======== ======== ======= ========= ======= ======== Liabilities and Shareholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $330 $ 12,612 $ 12,942 Accounts payable 9,232 $ 184 38,256 ($984) 46,688 Accrued liabilities ($34) 4,005 369 16,224 (3) 20,561 -------- -------- ------- --------- ------- -------- Total current liabilities (34) 13,567 553 67,092 (987) 80,191 -------- -------- ------- --------- ------- -------- Long-term obligations, net of current maturities 187,548 88,291 275,839 Deferred taxes and other 11,097 36,945 48,042 Shareholders' equity (deficit): Capital stock 145,112 145,112 Accumulated other comprehensive income 2,483 17,211 19,694 Retained earnings (accumulated deficit) 548 571 815 3,543 (4,923) 554 -------- -------- ------- --------- ------- -------- Total shareholders' equity (deficit) 145,660 3,054 815 20,754 (4,923) 165,360 -------- -------- ------- --------- ------- -------- Total liabilities and shareholders' equity (deficit) $145,626 $215,266 $ 1,368 $ 213,082 ($5,910) $569,432 ======== ======== ======= ========= ======= ========
68
TITAN (PARENT SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET COMPANY ------------------------- DECEMBER 31, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- -------- -------- --------- ------------- ------------ -------- (successor) Assets Current assets: Cash and equivalents $ 13,264 $ 15 $ 1,454 $ 14,733 Accounts receivable, net 18,693 2,426 28,896 ($3,026) 46,989 Inventories 11,709 3,954 24,009 1,255 40,927 Prepaid expenses and other current assets 1,428 393 3,428 5,249 -------- -------- --------- -------- -------- Total current assets 45,094 6,788 57,787 (1,771) 107,898 Property, plant and equipment, net 31,933 7,745 122,616 765 163,059 Goodwill $116,507 135 5,242 102,210 (70) 224,024 Investments in affiliates 5,969 121,200 (13,479) (181,817) 68,683 556 Other long-term assets 28,116 254 6,984 872 36,226 -------- -------- -------- --------- -------- -------- Total assets $122,476 $226,478 $ 6,550 $ 107,780 $ 68,479 $531,763 ======== ======== ======== ========= ======== ======== Liabilities and Shareholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 44 $ 8,538 $ 8,582 Accounts payable $ 12,213 731 34,104 ($1,034) 46,014 Accrued liabilities ($19) 3,564 970 12,784 15 17,314 -------- -------- -------- --------- -------- -------- Total current liabilities (19) 15,777 1,745 55,426 (1,019) 71,910 -------- -------- -------- --------- -------- -------- Long-term obligations, net of current maturities 232,316 165 50,178 282,659 Deferred taxes and other 18,546 668 31,375 50,589 Shareholders' equity (deficit): Capital stock 162,140 162,140 Accumulated other comprehensive income (564) 4,662 4,098 Retained earnings (accumulated deficit) (39,645) (39,597) 3,972 (33,861) 69,498 (39,633) -------- -------- -------- --------- -------- -------- Total shareholders' equity (deficit) 122,495 (40,161) 3,972 (29,199) 69,498 126,605 -------- -------- -------- --------- -------- -------- Total liabilities and shareholders' equity (deficit) $122,476 $226,478 $ 6,550 $ 107,780 $ 68,479 $531,763 ======== ======== ======== ========= ======== ========
69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive and Financial Officers, as appropriate, to allow timely decisions regarding required disclosures. At the end of the period covered by this report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). The evaluation was performed under the supervision and with the participation of our management, including our Chief Executive and Financial Officers. Based upon the evaluation, including our assessment of the restatement of Note 14, the Chief Executive and Financial Officers concluded that our disclosure controls and procedures were effective in ensuring that material information relating to us (including our consolidated subsidiaries) was made known to them by others within our consolidated group during the period in which this report was being prepared and that the information required to be included in the report has been recorded, processed, summarized and reported on a timely basis. During our most recent fiscal quarter, there have been no significant changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. ITEM 9B. OTHER INFORMATION None. Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of Parent and Autocam are as follows:
NAME AGE TITLE ---- --- ----- John C. Kennedy 47 President, Chief Executive Officer and Director Warren A. Veltman 44 Chief Financial Officer and Secretary/Treasurer Thomas K. O'Mara 45 Vice President, Sales and Marketing John R. Buchan 44 Chief Operating Officer, North American Operations Jonathan B. DeGaynor 39 Chief Operating Officer, International Operations Eduardo Renner de Castilho 45 Chief Operating Officer, South American Operations Jack Daly 40 Vice President and Director * James A. Hislop 48 Vice President and Director * Adrian Jones 41 Vice President and Director * Richard J. Peters 58 Vice President and Director * Richard J. Lacks, Jr. 55 Director Tsutomu (Tom) Yoshida 49 Director
---------- * Vice President of Parent only. Director of both Parent and Autocam. The following is a brief description of the present and past business experience of each of those directors and executive officers. 70 JOHN C. KENNEDY Mr. Kennedy became a Director, our President and Chief Executive Officer at our inception in April 1988 and has been a Director of Parent since June 2004. Mr. Kennedy earned a Bachelor of Science in Accounting and Finance from the University of Detroit and an Executive Masters in Business Administration from the University of Michigan. Mr. Kennedy serves on the Board of Directors of Lacks Enterprises, Inc. WARREN A. VELTMAN Mr. Veltman became our Chief Financial Officer in November 1990 and our secretary/treasurer in August 1991. Mr. Veltman earned a Bachelor of Business Administration from the University of Michigan. THOMAS K. O'MARA Mr. O'Mara has been with us since November 1989 as the Vice President of Sales and Marketing. Mr. O'Mara earned a Bachelor of Science in Marketing from Central Michigan University. JOHN R. BUCHAN Mr. Buchan has been with us since January 2002 as the Chief Operating Officer of our North American operations. Prior to that, he worked 12 years at Benteler Automotive, most recently as executive vice president of the Exhaust Products Group. Mr. Buchan earned a Bachelor of Science in Electrical Engineering and a Masters in Manufacturing Management from the General Motors Institute. JONATHAN B. DEGAYNOR Mr. DeGaynor has been with us since September 2005 as the Chief Operating Officer of our International operations. Prior to that, he worked 17 years first at General Motors Corporation and then at Delphi Corporation, most recently as the Business Line Executive for the Diesel Business Line based in Paris, France. Mr. DeGaynor earned a Bachelor of Science in Mechanical Engineering at the University of Michigan and a Masters in Business Administration from The University of Pennsylvania's Wharton School of Business. EDUARDO RENNER DE CASTILHO Mr. de Castilho has been with us since January 1998 as the Chief Operating Officer of our South American operations. Mr. de Castilho earned law and business degrees from Mackenzie University and a Masters in Business Administration from Northwestern University. JACK DALY Mr. Daly has been a Director of Autocam since June 2004 and a Director of Parent since April 2004. He is a Vice President in the Principal Investment Area of Goldman, Sachs & Co., where he has worked since 2000. From 1998 to 2000, he was a member of the Investment Banking Division of Goldman, Sachs & Co. Mr. Daly earned Bachelor and Masters degrees in Engineering from Case Western Reserve University and a Masters in Business Administration from the University of Pennsylvania's Wharton School of Business. Mr. Daly currently serves on the boards of directors of IPC Acquisition Corporation, Euramax and Cooper Standard Automotive. JAMES A. HISLOP Mr. Hislop has been a Director of Autocam since June 2004 and a Director of Parent since April 2004. He is a Managing Director of Transportation Resource Partners LP and the President and Chief Executive Officer of Penske Capital Partners. Mr. Hislop was formerly a Managing Director in the Investment Banking Division of the Corporate Banking Group at Merrill Lynch. Mr. Hislop earned a Bachelor of Science in Business Administration from Bucknell University and a Masters of Business Administration in Corporate Finance from New York University. Mr. Hislop currently serves on the Boards of Directors of Penske Corporation, UnitedAuto Group, Inc., Fleetwash, Inc., Home Direct, Inc. and Katt Worldwide Logistics, Inc. 71 ADRIAN JONES Mr. Jones has been a Director of Autocam since June 2004 and a Director of Parent since April 2004. He is a Managing Director in the Principal Investment Area of Goldman, Sachs & Co., where he has worked since 1998. He joined Goldman and became a Managing Director in 2002. Mr. Jones earned a Bachelor of Administration from University College Galway, a Masters of Administration from University College Dublin, and a Masters of Business Administration from Harvard Graduate School of Business Administration. Mr. Jones currently serves on the Board of Directors of Burger King Corporation. RICHARD J. PETERS Mr. Peters has been a Director of Autocam and Parent since June 2004. He is a Managing Director of Transportation Resource Partners LP. Mr. Peters was with Penske Corporation from 1986 to 2003 serving in various capacities, most recently as its President. Mr. Peters is a Director and a member of the Executive Committees of Penske Corporation, Penske Truck Leasing Corporation, UnitedAuto Group and Hino Trucks. He earned a degree from Wayne State University in 1970. RICHARD J. LACKS, JR. Mr. Lacks has been a Director of Autocam since October 2004. He is the President and Chief Executive Officer and a board member of Lacks Enterprises, Inc. Mr. Lacks joined Lacks in 1973 and has served in his present capacities since 1999. He earned a Bachelor of Business Administration from Western Michigan University. Mr. Lacks also serves on the boards of directors of Adac Plastics, Inc., and Plastic Plate, Inc. TSUTOMU (TOM) YOSHIDA Mr. Yoshida has been a Director of Autocam since October 2004. He is the Senior Vice President and General Manager of the Financial Markets Business Division of Mitsui & Company (U.S.A.), Inc. and has served in that capacity since September 2004. From November 2003 through August 2004, Mr. Yoshida served as Managing Director of Mitsui & Co. Principal Investment, Ltd. From 2000 through October 2004, he served as Managing Partner of ACTIV Investment Partners, Ltd. He earned a Bachelor of Arts in Economics from Tokyo University and a Masters in Business Administration from the University of Pennsylvania's Wharton School of Business. Mr. Yoshida also serves on the boards of directors of Mitsui & Co. Venture Partners, Inc., MVC Corporation, Mitsui & Co. Capital, Inc., Mitsui & Co. Precious Metals, Inc., and Mitsui & Co. Energy Risk Management, Ltd. COMMITTEES OF THE BOARD OF DIRECTORS Autocam is not a "listed company and is not required to have an audit committee comprised of independent directors. Autocam does not currently have an audit committee and does not have an audit committee financial expert. Autocam's Board of Directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in the member's financial sophistication. Accordingly, the Board of Directors believes that each of its members have sufficient knowledge and the experience necessary to fulfill the duties and obligations of an audit committee. STOCKHOLDERS AGREEMENT On June 21, 2004, in connection with the closing of the Merger, Parent entered into a stockholders agreement with GSCP 2000, other private equity funds affiliated with GSCP 2000, TRP, other investment vehicles affiliated with TRP and Mr. Kennedy. The stockholders agreement provides each of GSCP 2000 and TRP the right to designate two members and Mr. Kennedy the right to designate one member of the board of directors. The original GSCP 2000 designees were Messrs. Daly and Jones, the original TRP designees were Messrs. Hislop and Peters and the original Mr. Kennedy designee was himself. The stockholders agreement allows, at the request of TRP, for the expansion of the board of directors to a maximum of 10, with four each being designated by GSCP 2000 and TRP and two by Mr. Kennedy. In October 2004, the parties agreed to allow TRP and Mr. Kennedy to add one additional board member each. TRP appointed Mr. Yoshida and Mr. Kennedy appointed Mr. Lacks. The stockholders agreement provides that Mr. Kennedy has the right: - to designate members of the board of directors as described above; - to approve any transactions between us and our affiliates; and - to approve: 72 1. entering into or engaging in the ownership, active management, development, construction or operation of any line of business that is not substantially similar to that conducted by Titan and its subsidiaries; 2. amendment of our organization documents; 3. hiring and remuneration of our key executives; and 4. acquisitions of or investments in businesses outside of the automotive precision parts business. In addition, the stockholders agreement contains customary terms, including transfer restrictions, rights of first offer, tag along rights, drag along rights, preemptive rights and veto rights. Additionally, Parent has the right to purchase Mr. Kennedy's shares in Parent if his employment is terminated for cause. The stockholders agreement, except for the registration rights provisions, will terminate upon an initial public offering of our equity securities. CODE OF ETHICS Our Board of Directors has not adopted a code of ethics applicable to our principal executive, financial or accounting officers. The Board of Directors believes that our current internal control procedures and business practices are adequate to promote honest and ethical conduct and to deter wrongdoing by these executives. ITEM 11. EXECUTIVE COMPENSATION Directors who are also employees of Parent or its subsidiaries or the employees of our principal stockholders will receive no additional compensation for their services as directors. All other directors are entitled to annual compensation for their services of $25,000. 73 The following table sets forth a summary of the compensation earned by our chief executive officer and each of our other four most highly-compensated executive officers in 2005 paid by us and our affiliates.
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION (1) SECURITIES NAME AND PRINCIPAL ---------------------------------- UNDERLYING ALL OTHER POSITION YEAR SALARY ($) BONUS ($) OTHER ($) OPTIONS (#) COMPENSATION ($) (2) -------- ---- ---------- --------- --------- ------------ -------------------- John C. Kennedy 2005 500,000 600 2,000 President and 2004 425,000 1,700 1,671,765 Chief Executive Officer 2003 356,731 600 99,383 John R. Buchan 2005 184,135 102,850 40,014 Chief Operating Officer, 2004 170,000 143,950 105,926 385,724 North American Operations 2003 173,269 130,600 64,609 Eduardo Renner de Castilho 2005 275,000 Chief Operating Officer, 2004 275,000 26,481 South American Operations 2003 275,000 Warren A. Veltman 2005 168,846 104,600 31,309 Secretary, Treasurer and 2004 150,000 146,700 105,926 624,714 Chief Financial Officer 2003 152,885 131,350 28,157 Thomas K. O'Mara 2005 158,846 80,600 27,694 Vice President of Sales 2004 140,000 111,700 105,926 735,970 and Marketing 2003 142,692 100,600 25,670 FORMER OFFICER - Bruno Le Sech 2005 264,690 70,214 374,680 Chief Operating Officer, 2004 223,344 67,003 105,926 106,204 European Operations (3) 2003 203,382 61,015 40,676
---------- (1) Does not include any value that might be attributable to job-related personal benefits, the amount of which did not exceed the lesser of 10% of annual salary, plus bonus or $50,000 for each executive officer. These benefits include car allowances, country club fees and executive disability policies. (2) 2005 amounts include the following: - Premiums paid under life insurance policies owned by Messrs. Veltman and O'Mara in the amounts of $29,309 for Mr.Veltman and $25,694 for Mr. O'Mara. See "Split Dollar Arrangements"; - Insurance premiums paid on a life insurance policy for Mr. Buchan of $38,014; - Matching contributions under our 401(k) plan of $2,000 each for Messrs. Kennedy, Buchan, Veltman and O'Mara; and - Tuition costs of $4,296 reimbursed to Mr. Le Sech for his children. (3) Converted at USD per euro rates of 1.1299 in 2003, 1.2408 in 2004 and 1.2456 in 2005. 74 EMPLOYEE EQUITY INCENTIVE PLANS Parent adopted the Micron Holdings, Inc. 2004 Stock Option Plan, effective as of June 21, 2004. The plan provides for the grant of non-qualified stock options to key employees, directors and consultants of Parent and its affiliates. Subject to adjustment for stock dividends, splits, and other similar transactions, a maximum of 1,430,000 shares of common stock of Parent may be subject to awards under the plan. The Board of Parent or a committee of the Board as may be designated to administer the plan selects the individuals that may participate in the plan, the amount of any grant and the terms and conditions of such grant (not otherwise specified in the plan), and has the authority to otherwise interpret and administer the plan. As of December 31, 2005, options in respect of 948,035 shares have been granted under the plan. Options may not be granted under the plan after June 21, 2014. The term of stock options granted under the plan may not exceed ten years. Options granted under the plan will be exercisable at such time and upon such terms and conditions as may be determined by the Board or committee, but in no event will an option be exercisable more than ten years after the date of grant. If a "transaction" (as defined in the plan) occurs, the Board or committee may provide that outstanding options held by participants will become fully vested and exercisable upon the consummation of the transaction. In addition, the Board or committee may, in its discretion, cancel all options for payment of the excess of the "fair market value" (as defined in the plan) of the shares subject to the options over the aggregate exercise price of the options or provide for the issuance of substitute options or other awards that will preserve the economic terms of the options. Unless the Board or committee determines otherwise, the exercise of an option will be conditioned on the execution by the participant of a form of stockholders' agreement prepared by Parent. The plan may be amended by the Board of Parent, but no amendment that would increase the number of shares reserved under the plan may be made without approval of the stockholders of Parent, and no amendment that would diminish the rights of a participant under a previously granted option may be made without the consent of the participant. AGGREGATED OPTION EXERCISES IN 2005 AND OPTION VALUES AS OF DECEMBER 31, 2005 For each named executive officer, as of December 31, 2005, the following table provides: - the total number of shares of Holdings stock received upon the exercise of options in 2005; - the value realized upon such exercises; - the total number of shares of Holdings stock held by the named executive officers (exercisable and unexercisable) as of December 31, 2005; and - the value of all options that were in-the-money as of December 31, 2005.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT THE-MONEY OPTIONS AT SHARES DECEMBER 31, 2005 (#) DECEMBER 31, 2005 ($) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- ------------ ----------- ------------- ----------- ------------- John R. Buchan -- -- 18,537 87,389 -- -- Eduardo Renner de Castilho -- -- 4,634 21,847 -- -- Warren A. Veltman -- -- 18,537 87,389 -- -- Thomas K. O'Mara -- -- 18,537 87,389 -- -- FORMER OFFICER - Bruno Le Sech -- -- -- -- -- --
75 EMPLOYMENT AGREEMENTS OF MESSRS. KENNEDY, BUCHAN, VELTMAN AND O'MARA GENERAL We have employment agreements with each of Messrs. Kennedy, Buchan, Veltman and O'Mara. The agreement for Mr. Kennedy expires on June 21, 2007, the agreement for Mr. Buchan expires on January 20, 2007 and the agreements for Messrs. Veltman and O'Mara expire on January 31, 2007, in each case subject to automatic renewal for additional one-year periods unless either party provides 90-day notice of non-extension to the other prior to the end of the term. The employment agreements provide for base salaries as of the end of 2005 of $500,000 for Mr. Kennedy, $200,000 for Mr. Buchan, $190,000 for Mr. Veltman and $180,000 for Mr. O'Mara. Salaries are subject to annual adjustment at the discretion of our board of directors in the cases of Messrs. Buchan, Veltman and O'Mara and their employment agreements provide for performance-based bonuses. MATERIAL TERMS UNIQUE TO MR. KENNEDY'S EMPLOYMENT AGREEMENT The salary of Mr. Kennedy is subject to periodic review by Parent's board of directors for increase and his target performance bonus per year is 60% of his salary. If Mr. Kennedy is terminated by Parent without "cause" (as defined in the employment agreement), he is entitled to 1.5 times the sum of his base salary and target bonus, and a prorated portion of his target bonus in effect immediately prior to his termination based on the number of days employed in the calendar year in which the termination occurred. If Mr. Kennedy is terminated by us without "cause" (as defined in his employment agreement), he is entitled to 18 months base salary and benefits continuation. Additionally, if - Parent materially breaches the employment agreement, - assigns him duties or responsibilities inconsistent with his positions with us, Parent or Holdings, - makes a change resulting in a material diminution of his responsibilities with us, Parent or Holdings, - fails to provide employee benefits substantially comparable to those provided to him on June 21, 2004, - fails to require a successor to assume his employment agreement, - we relocate Autocam's headquarters by more than 35 miles or relocate his place of employment to other than Autocam's headquarters, or - there is a reduction in his base salary or target bonus, Mr. Kennedy can terminate his employment and be entitled to the same consideration as if he had been terminated without "cause." If Parent delivers a notice of non-extension of the term under the employment agreement, Mr. Kennedy can terminate his employment and be entitled to the sum of his base salary and target bonus, as well as a prorated portion of his target bonus in effect immediately prior to his termination based on the number of days employed in the calendar year in which the termination occurred. Mr. Kennedy's employment agreement provides that if any payment or benefit made pursuant to the employment agreement would be subject to the excise tax on golden parachute payments, then he will be entitled to a gross-up payment for the excise tax and any federal income tax deductions disallowed in connection with the gross-up payment. Each employment agreement includes a perpetual non-disclosure provision. Additionally, Mr. Kennedy's agreement contains a post-termination perpetual and mutual non-disparagement provision and non-competition and non-solicitation provisions that apply for a 2-year period following the termination of his employment. MATERIAL TERMS UNIQUE TO MR. BUCHAN'S EMPLOYMENT AGREEMENT In order to compensate Mr. Buchan for the loss of supplemental retirement plan benefits earned by him at his previous employer, we must pay the premiums on a life insurance policy that will have a cash value of $111,000 at the end of the initial term of his agreement. MATERIAL TERMS COMMON TO MESSRS. BUCHAN'S, VELTMAN'S AND O'MARA'S EMPLOYMENT AGREEMENTS If Messrs. Buchan, Veltman or O'Mara is terminated by us without "cause" (as defined in his employment agreement), he is entitled to 18 months base salary and benefits continuation. If Messrs. Buchan, Veltman or O'Mara is involuntarily terminated within 180 days following a change of control (as defined in his employment agreement), he is entitled to 24 months base salary with bonus and 12 months benefits continuation. Messrs. Buchan's, Veltman's and O'Mara's agreements contain non-competition and non-solicitation provisions that apply for the severance period. If we materially breach the employment agreements of those individuals or make a change resulting in a material diminution of their duties, authority or compensation, they can terminate their employment and be entitled to the same base salary and benefits as if they had been terminated without "cause." 76 EMPLOYMENT AGREEMENT OF MR. EDUARDO RENNER DE CASTILHO Autocam do Brasil Usinagem Ltda entered into a services agreement with Lean Management Consultoria Empresarial S/C Ltda, dated January 1, 1998 (as amended and restated as of January 31, 2002). The agreement provides for the rendering of advisory services by Lean Management Consultoria Empresarial with respect to the operational management of Autocam do Brasil's industrial plants. The term of the agreement is indefinite and may be terminated by either party with 90 days' written notice. The partner in charge of the project on behalf of Lean Management Consultoria Empresarial is Mr. de Castilho. He receives $22,917 per month for his services. Lean Management Consultoria Empresarial is solely responsible for all labor and social security obligations relating to its employees. Lean Management Consultoria Empresarial is subject to a perpetual confidentiality provision with respect to all confidential information of Autocam do Brasil acquired during the course of its services. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Kennedy serves on the board of directors of Lacks Enterprises, Inc. and Mr. Lacks serves on our board of directors. In their respective roles on those boards of directors, both Messrs. Kennedy and Lacks participate in deliberations over each others' compensation arrangements. SPLIT DOLLAR ARRANGEMENTS We formerly had split dollar arrangements with Messrs. Buchan, Veltman and O'Mara. As described above, these split dollar arrangements were terminated as of September 17, 2004 and all amounts due from each of Messrs. Buchan, Veltman and O'Mara with respect to premiums paid by Autocam prior to the at date were forgiven. Autocam will continue to pay the premiums on all life insurance policies previously subject to the split dollar arrangements for Messrs. Buchan, Veltman and O'Mara until the termination of the executive's employment agreement. Autocam treated the amount of the debt forgiveness as a bonus to each of Messrs. Buchan, Veltman and O'Mara and paid the executive an additional bonus to substantially compensate him for the tax consequences of the debt forgiveness and the premium payments on the policies. We also formerly had a comparable arrangement for Mr. Kennedy. Mr. Kennedy's split dollar arrangements were converted into interest bearing loans initially at an interest rate of 3.55%, and these interest bearing loans were forgiven immediately following the Merger. 77 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Autocam is wholly-owned by Holdings. Holdings is wholly-owned by Parent. Set forth below is information regarding the beneficial ownership by class of the shares of Parent, by (1) all stockholders known by us to beneficially own more than 5% (either individually or as a group of related entities) of its outstanding common stock, (2) our directors, (3) our named executive officers, and (4) all of our executive officers and directors as a group. The address for each of GS Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 GMBH & Co. Beteiligungs KG, GS Capital Partners 2000 Employee Fund, L.P. and Goldman Sachs Direct Investment Fund 2000, L.P. is c/o Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004. The address for each of Transportation Resource Partners LP, TRP Autocam Holdings I, L.L.C., TRP Autocam Holdings II, L.L.C., TRP Autocam Holdings III, L.L.C., TRP Autocam Holdings IV, L.L.C. and TRP Autocam Holdings V, L.L.C., is 2555 Telegraph Road, Bloomfield Hills, Michigan 48302. The address for Mr. Kennedy is 4436 Broadmoor Avenue, S.E., Kentwood, Michigan 49512. The address for Mr. de Castilho is rua guido de camargo pentendo sobrinho, 3055-cep 13082-800, Campinas, Sao Paulo, Brazil.
10% SERIES A CONVERTIBLE 12% SERIES B CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------------------------ ------------------------ ----------------------- # OF % # OF % # OF % NAME SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING ---- ------- ----------- ------- ----------- --------- ----------- Transportation Resource Partners LP 3,479,224 24.3% GS Capital Partners 2000, L.P. 222,058 22.1% 206,676 22.1% 3,175,408 22.1% John C. Kennedy 195,800 19.5% 182,237 19.5% 2,800,000 19.5% TRP Autocam Holdings I, L.L.C 1,200,000 8.4% GS Capital Partners 2000 Offshore, L.P. 80,687 8.0% 75,098 8.0% 1,153,821 8.0% GS Capital Partners 2000 Employee Fund, L.P. 19,519 1.9% 65,667 7.0% 1,008,920 7.0% TRP Autocam Holdings II, L.L.C 636,473 4.4% Goldman Sachs Direct Investment 2000, L.P. 9,282 * 18,167 1.9% 279,126 1.9% TRP Autocam Holdings IV, L.L.C 255,600 1.8% GS Capital Partners 2000 GmbH & Co. Beteiligungs KG 70,554 7.0% 8,639 * 132,725 * TRP Autocam Holdings III, L.L.C 124,110 * TRP Autocam Holdings V, L.L.C 54,593 * TRP Autocam Holdings VI, L.L.C 402,100 40.1% 374,247 40.1% Eduardo Renner de Castilho 2,797 * 2,603 * 40,000 * All directors and officers as a group 198,597 19.8% 184,840 19.8% 2,840,000 19.8%
---------- * Represents less than 1% of respective class of stock outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AURORA CAPITAL Prior to the Merger, Aurora Capital Partners was the largest voting stockholder of Holdings. Pursuant to a management agreement, Aurora Capital provided us with financial advisory and management consulting services. In consideration of such services, we paid Aurora Capital fees and expenses of $0.5 million in 2003 and $0.3 million in 2004. 78 GSCP 2000 GSCP 2000 and other private equity funds affiliated with Goldman, Sachs & Co. own 40.1% of the common stock and preferred stock of Parent. Under the registration rights agreement, we filed a "market-making" prospectus in order to allow Goldman, Sachs & Co. to engage in market-making activities for the Notes after completion of the exchange offer in September 2004. Goldman, Sachs & Co., an affiliate of GSCP 2000 and its related investment funds, acted as an initial purchaser in the offering of the Notes. Goldman Sachs Credit Partners L.P., an affiliate of GSCP 2000 and its related investment funds, was the joint lead arranger, joint book runner, syndication agent and a lender under our senior credit facilities initially and in the March 2005 amendment of the senior credit facilities agreement. Goldman Sachs Credit Partners L.P. was also the syndication agent, lead arranger and sole book runner for our second lien credit facility. Goldman, Sachs & Co. and its affiliates may in the future engage in commercial banking, investment banking or other financial advisory transactions with us and our affiliates. In 2004, we paid Goldman Sachs Credit Partners L.P. $4.2 million from the proceeds of our senior credit facilities and the Notes for underwriters and bridge financing commitment fees and out-of-pocket expenses. In 2005, we paid Goldman Sachs Credit Partners L.P. $1.9 million from the proceeds of our second lien credit facility for syndication fees and out-of-pocket expenses. STOCKHOLDERS AGREEMENT Parent entered into a stockholders agreement on June 21, 2004, with GSCP 2000, other private equity funds affiliated with GSCP 2000, TRP, other investment vehicles affiliated with TRP and Mr. Kennedy. See Item 10 of this report. MANAGEMENT SERVICES AGREEMENT We entered into a Management Services Agreement with Goldman, Sachs & Co., Transportation Resource Advisors, LLC, and Mr. Kennedy, on June 21, 2004. Under the management services agreement, we pay these parties an annual aggregate fee of $0.6 million, plus reasonable out-of-pocket expenses, as compensation for various advisory services. This fee will be shared by the parties as follows: Goldman, Sachs & Co., 40.1%; Transportation Resource Advisors, LLC, 40.1%; and Mr. Kennedy, 19.8%. We also agreed to indemnify these parties and their affiliates for liabilities arising from their actions under the management services agreement. In consideration of such services, we paid these parties combined fees and expenses of $0.3 million in 2004 and $0.6 million in 2005. RENTAL EXPENSES We lease a building in France 50% owned by Mr. Kennedy. The present term of the lease expires in July 2014. Annual rent is due in quarterly installments subject to annual increases based upon an index tied to France's national public construction costs. Rent expense recorded in connection with this lease agreement was $0.6 million in 2003, $0.7 million in 2004 and $0.7 million in 2005. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Set forth below are fees we paid to our principal accountant, Deloitte & Touche LLP ("D&T") for services rendered in 2004 and 2005 (amounts in thousands of U.S. dollars):
2004 2005 NATURE OF SERVICES -------- -------- ------------------- Audit fees $591,866 $388,819 Audit-related fees 77,605 143,067 Business transaction due diligence; benefit plan audits billed to the registrant Tax fees 186,371 337,713 Tax return preparation and planning All other fees 2,341 667 Miscellaneous consulting -------- -------- $858,183 $870,266 ======== ========
Our Board of Directors pre-approves audit and non-audit services performed for us by D&T. Our Board of Directors has considered whether the provision of non-audit services by D&T to us is compatible with maintaining D&T's independence and has concluded that such services are compatible with D&T's role as our independent registered public accountant. D&T advised our Board of Directors that D&T was and continues to be independent with respect to us. 79 Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: 1. Consolidated Financial Statements See Index to Consolidated Financial Statements in Item 8 of this report. 2. Consolidated Financial Statement Schedules None. 3. The following is a list of all the exhibits filed as part of this report or incorporated by reference as indicated.
NUMBER DESCRIPTION ------- ----------- 3.1 Restated Articles of Incorporation of Autocam Corporation (filed as Exhibit 3.1 to the Form S-4, filed September 23, 2004 (Form No. 333-119215; the "Form S-4"), and incorporated herein by reference) 3.2 Bylaws of Autocam Corporation (as amended, September 9, 1991) (filed as Exhibit 3.2 to the Form S-4, and incorporated herein by reference) 4.1 Indenture, dated as of June 10, 2004, among Micron Notes Corporation and J.P. Morgan Trust Company, National Association relating to the 10.875% Senior Subordinated Notes due June 15, 2014 (filed as Exhibit 4.1 to the Form S-4, and incorporated herein by reference) 4.2 Supplemental Indenture, dated as of June 21, 2004, among Titan Holdings, Inc., Autocam-Pax, Inc., Autocam South Carolina, Inc., Autocam Greenville, Inc., Autocam Acquisition, Inc., Autocam Laser Technologies, Inc., Autocam-Har, Inc., Autocam International Ltd., Autocam International Sales Corporation, Autocam Europe B.V., Autocam Corporation and J.P. Morgan Trust Company, National Association (filed as Exhibit 4.2 to the Form S-4, and incorporated herein by reference) 4.3 Registration Rights Agreement, dated as of June 10, 2004, among Micron Notes Corporation, Goldman, Sachs & Co. and Citigroup Global Markets Inc. (filed as Exhibit 4.3 to the Form S-4, and incorporated herein by reference) 4.4 Joinder Agreement, dated June 21, 2004, among Titan Holdings, Inc., Autocam-Pax, Inc., Autocam South Carolina, Inc., Autocam Greenville, Inc., Autocam Acquisition, Inc., Autocam Laser Technologies, Inc., Autocam-Har, Inc., Autocam International Ltd., Autocam International Sales Corporation, Autocam Europe B.V., Goldman, Sachs & Co., Citigroup Global Markets Inc., Micron Notes Corporation and Micron Holdings, Inc. (filed as Exhibit 4.4 to the Form S-4, and incorporated herein by reference) 4.5 Assumption Agreement, dated June 21, 2004, among Autocam Corporation and J.P. Morgan Trust Company, National Association (filed as Exhibit 4.5 to the Form S-4, and incorporated herein by reference) 4.6 Form of Initial Note and Form of Exchange Note (included within the Indenture filed as Exhibit 4.1 to the Form S-4, and incorporated herein by reference) 10.1 Stockholders Agreement dated as of June 21, 2004, among Micron Holdings, Inc., GS Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, GS Capital Partners 2000 Employee Fund, L.P., Goldman Sachs Direct Investment Fund 2000, L.P., Transportation Resource Partners LP, TRP Autocam Holdings I, L.L.C., TRP Autocam Holdings II, L.L.C. and John C. Kennedy (filed as Exhibit 10.1 to the Form S-4, and incorporated herein by reference)
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NUMBER DESCRIPTION ------- ----------- 10.2.1 Credit and Guaranty Agreement, dated as of June 21, 2004, among Autocam Corporation, Autocam France, SARL, as Borrowers, Titan Holdings, Inc., and certain subsidiaries of Autocam Corporation, as Guarantors, various lenders, Goldman Sachs Credit Partners L.P. and Citigroup Global Markets Inc. as Joint Lead Arrangers, Goldman Sachs Credit Partners L.P., as Syndication Agent, Citicorp North America, Inc., as General Administrative Agent and Collateral Agent, Citibank International PLC, as European Administrative Agent, and Bank One, NA, ING Capital, LLC and National City Bank as Documentation Agents (filed as Exhibit 10.2 to the Form S-4, and incorporated herein by reference) 10.2.2* Pledge and Security Agreement, dated as of June 21, 2004, between Autocam Corporation and each of the other parties thereto and Citigroup North America, Inc., as Collateral Agent 10.3+ Supply Contract with Delphi, dated March 28, 2003, for Multec 2 Fuel Injection Components (filed as Exhibit 10.3 to the Form S-4, and incorporated herein by reference) 10.4 Lease for Facility at 4070 E. Paris Avenue, S.E., dated April 11, 2003 (filed as Exhibit 10.4 to the Form S-4, and incorporated herein by reference) 10.5 Lease for Facility at 1511 George Brown Dr., dated April 11, 2003 (filed as Exhibit 10.5 to the Form S-4, and incorporated herein by reference) 10.6 Management Services Agreement, dated June 21, 2004, among Goldman, Sachs & Co., Transportation Resource Advisors, LLC and John C. Kennedy (filed as Exhibit 10.6 to the Form S-4, and incorporated herein by reference) 10.7 Management Rights Letter from Micron Holdings, Inc., Titan Holdings, Inc. and Autocam Corporation to GS Capital Partners 2000, L.P., dated as of June 21, 2004 (filed as Exhibit 10.7 to the Form S-4, and incorporated herein by reference) 10.8 Management Rights Letter from Micron Holdings, Inc., Titan Holdings, Inc. and Autocam Corporation to Transportation Resource Partners, LP, dated as of June 21, 2004 (filed as Exhibit 10.8 to the Form S-4, and incorporated herein by reference) 10.9 Management Rights Letter from Micron Holdings, Inc., Titan Holdings, Inc. and Autocam Corporation to GS Private Equity Partners 2002 -- Direct Investment Fund, L.P., GS Private Equity Partners II -- Direct Investment Fund, L.P. and GS Private Equity Partners 1999 -- Direct Investment Fund, L.P., dated as of June 21, 2004 (filed as Exhibit 10.9 to the Form S-4, and incorporated herein by reference) 10.10 Employment Agreement, dated June 21, 2004, by and between Micron Holdings, Inc., Autocam Corporation, Titan Holdings, Inc. and John C. Kennedy (filed as Exhibit 10.10 to the Form S-4, and incorporated herein by reference) 10.11 Employment Agreement, dated February 1, 2002, by and between Autocam Corporation and Warren A. Veltman (filed as Exhibit 10.11 to the Form S-4, and incorporated herein by reference) 10.12 First Amendment to Employment Agreement by and between Autocam Corporation and Warren A. Veltman, dated September 17, 2004 (filed as Exhibit 10.12 to the Form S-4, and incorporated herein by reference) 10.13 Employment Agreement, dated January 21, 2002, by and between Autocam Corporation and John R. Buchan (filed as Exhibit 10.13 to the Form S-4, and incorporated herein by reference) 10.14 First Amendment to Employment Agreement by and between Autocam Corporation and John R. Buchan, dated September 17, 2004 (filed as Exhibit 10.14 to the Form S-4, and incorporated herein by reference) 10.15 Employment Agreement, dated April 30, 2002, by and between Autocam France, SARL and Bruno Le Sech (filed as Exhibit 10.15 to the Form S-4, and incorporated herein by reference)
81
NUMBER DESCRIPTION ------- ----------- 10.16 Amendment to the Employment Agreement by and between Autocam France, SARL and Bruno Le Sech, dated June 4, 2002 (filed as Exhibit 10.16 to the Form S-4, and incorporated herein by reference) 10.17 Services Agreement by and between Autocam Do Brazil and Lean Management Consultoria Empresarial S/C Ltda, dated January 1, 1998 (filed as Exhibit 10.17 to the Form S-4, and incorporated herein by reference) 10.18 First Amendment to Services Agreement by and between Autocam Do Brasil Usinagem Ltda and Lean Management Consultoria Empresarial S/C Ltda, dated January 1, 2000 (filed as Exhibit 10.18 to the Form S-4, and incorporated herein by reference) 10.19 Second Amendment to Services Agreement by and between Autocam Do Brasil Usinagem Ltda and Lean Management Consultoria Empresarial S/C Ltda, dated January 31, 2002 (filed as Exhibit 10.19 to the Form S-4, and incorporated herein by reference) 10.20 Employment Agreement, dated February 1, 2002, by and between Autocam Corporation and Thomas K. O'Mara (filed as Exhibit 10.20 to the Form S-4, and incorporated herein by reference) 10.21 Amendment to Employment Agreement by and between Autocam Corporation and Thomas K. O'Mara, dated September 17, 2004 (filed as Exhibit 10.21 to the Form S-4, and incorporated herein by reference) 10.22 Micron Holdings, Inc. 2004 Stock Option Plan (filed as Exhibit 10.22 to the Form S-4, and incorporated herein by reference) 10.23 Form of Micron Holdings, Inc. Nonqualified Stock Option Agreement (Time-vesting) (filed as Exhibit 10.23 to the Form S-4, and incorporated herein by reference) 10.24 Form of Micron Holdings, Inc. Nonqualified Stock Option Agreement (Performance-vesting) (filed as Exhibit 10.24 to the Form S-4, and incorporated herein by reference) 10.25 Termination of Split Dollar Life Insurance Agreement, dated September 17, 2004, by and between Autocam Corporation and Warren A. Veltman (filed as Exhibit 10.25 to the Form S-4, and incorporated herein by reference) 10.26 Termination of Split Dollar Life Insurance Agreement, dated September 17, 2004, by and between Autocam Corporation and John R. Buchan (filed as Exhibit 10.26 to the Form S-4, and incorporated herein by reference) 10.27 Termination of Split Dollar Life Insurance Agreement, dated September 17, 2004, by and between Autocam Corporation and Thomas K. O'Mara (filed as Exhibit 10.27 to the Form S-4, and incorporated herein by reference) 10.28 First Amendment to Guaranty and Credit Agreement, dated March 31, 2005 among Autocam Corporation, Autocam France, SARL, as Borrowers, Titan Holdings, Inc., and certain subsidiaries of Autocam Corporation, as Guarantors, various lenders, Goldman Sachs Credit Partners L.P. and Citigroup Global Markets Inc. as Joint Lead Arrangers, Goldman Sachs Credit Partners L.P., as Syndication Agent, Citicorp North America, Inc., as General Administrative Agent and Collateral Agent, Citibank International PLC, as European Administrative Agent, and Bank One, NA, ING Capital, LLC and National City Bank as Documentation Agents (filed as Exhibit 10.2.1 to Autocam's Registration Statement on Form S-1, filed April 25, 2005, and incorporated herein by reference) 10.29.1 Term Loan and Guaranty Agreement, dated as of December 22, 2005, among Autocam Corporation, as Borrower, Titan Holdings, Inc. and certain subsidiaries of Autocam Corporation, as Guarantors, various lenders party thereto, The Bank of New York, as Administrative Agent and Collateral Agent, and Goldman Sachs Credit Partners L.P., as Syndication Agent, Lead Arranger and Sole Bookrunner (filed as Exhibit 10.1 to the Form 8-K, filed December 27, 2005, and incorporated herein by reference)
82
NUMBER DESCRIPTION ------- ----------- 10.29.2 Pledge and Security Agreement, dated as of December 22, 2005, between Autocam Corporation and each of the other Grantors party thereto and The Bank of New York, as Collateral Agent (filed as Exhibit 10.2 to the Form 8-K, filed December 27, 2005, and incorporated herein by reference) 10.29.3 Intercreditor Agreement, dated as of December 22, 2005, between Citicorp North America. Inc., as First Lien Collateral Agent, The Bank of New York, as Second Lien Collateral Agent, and Autocam Corporation (filed as Exhibit 10.3 to the Form 8-K, filed December 27, 2005, and incorporated herein by reference) 10.30 Second Amendment to Credit and Guaranty Agreement, dated as of December 22, 2005 (effective as of December 22, 2005), by and among Autocam Corporation, Autocam France, SARL, Titan Holdings, Inc., certain subsidiaries of Autocam Corporation, various lenders parties thereto, Citicorp North America. Inc., as General Administrative Agent and Collateral Agent, and Citibank International PLC, as European Administrative Agent (filed as Exhibit 10.4 to the Form 8-K, filed December 27, 2005, and incorporated herein by reference) 21.1* List of Subsidiaries of the Registrant 23.1* Consent of Deloitte & Touche LLP 31.1* Certification of John C. Kennedy, Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Warren A. Veltman, Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of John C. Kennedy, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of Warren A. Veltman, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------- + Certain portions of this exhibit have been omitted and separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. * Filed herewith. 83 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. Autocam Corporation By: /s/ John C. Kennedy ------------------------------------ John C. Kennedy President Date: March 30, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John C. Kennedy President and Director (Principal Executive Officer) March 30, 2006 ------------------------- John C. Kennedy /s/ Warren A. Veltman Chief Financial Officer, Treasurer and Secretary March 30, 2006 ------------------------- (Principal Financial Officer and Principal Warrren A. Veltman Accounting Officer) /s/ Richard J. Peters Director March 30, 2006 ------------------------- Richard J. Peters /s/ Adrian Jones Director March 30, 2006 ------------------------- Adrian Jones /s/ James A. Hislop Director March 30, 2006 ------------------------- James A. Hislop /s/ Jack Daly Director March 30, 2006 ------------------------- Jack Daly /s/ Richard J. Lacks, Jr. Director March 30, 2006 ------------------------- Richard J. Lacks, Jr. /s/ Tsutomu Yoshida Director March 30, 2006 ------------------------- Tsutomu Yoshida
84 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. The Registrant has not sent an annual report or proxy materials to its security holders during the last fiscal year. The Registrant does not currently intend to send an annual report or proxy materials to security holders subsequent to this filing. 85
EXHIBIT NO. DESCRIPTION ----------- ----------- EX- 10.2.2 Pledge and Security Agreement, dated as of June 21, 2004, between Autocam Corporation and each of the other parties thereto and Citigroup North America, Inc., as Collateral Agent EX- 21.1 list of subsidaries of the Registrant EX- 23.1 Consent of Deloitte & Touche LLP EX- 31.1 Certification of John C. Kennedy, Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 EX- 31.2 Certification of Warren A. Veltman, Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 EX- 32.1 Certification of John C. Kennedy, Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX- 32.2 Certification of Warren A. Veltman, Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002