-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T6F6EO7YAMv/Bf6mteNJKTj6oVKaJzGddgvUTQdrlvFcSZzDTi9BdIi6OsirdELi +WSxk1MlTIXp5Cc844KcEw== 0000950124-99-002687.txt : 19990421 0000950124-99-002687.hdr.sgml : 19990421 ACCESSION NUMBER: 0000950124-99-002687 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALBRO CORP CENTRAL INDEX KEY: 0000104174 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 381358966 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11567 FILM NUMBER: 99597802 BUSINESS ADDRESS: STREET 1: 6242 GARFIELD ST CITY: CASS CITY STATE: MI ZIP: 48726 BUSINESS PHONE: 5178722131 MAIL ADDRESS: STREET 1: 6242 GARFIELD STREET CITY: CASS CITY STATE: MI ZIP: 48726 10-K/A 1 ANNUAL REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 10-K/A (Amendment No. 1) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission File Number 0-6955 WALBRO CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 38-1358966 (STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.) 1227 Centre Road, Auburn Hills, Michigan 48236 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (248) 377-1800 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.50 par value (TITLE OF CLASS) 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. The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, based upon the last reported sale price of the registrant's Common Stock on March 18, 1999. $79,474,260 The number of shares outstanding of the registrant's Common Stock, par value $.50, as of March 18, 1999. 8,688,294 --------------------------- DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 4, 1999 are incorporated by reference into Part III of this report. ================================================================================ 2 PART I SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in this discussion that are not historical facts are forward-looking statements subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Whenever possible, the Company has identified these forward-looking statements by words such as "anticipating," "believes," "estimates," "expects," and similar expressions. Walbro Corporation cautions readers of this discussion that a number of important factors could cause Walbro's actual consolidated results for 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Walbro. These important factors include, without limitation, changes in demand for automobiles and light trucks, relationships with significant customers, price pressures, the timing and structure of future acquisitions or dispositions including the restructuring program announced during the fourth quarter of 1997, impact of environmental regulations, the year 2000 issue, continued availability of adequate funding sources, currency and other risks inherent in international sales, and general economic and business conditions. These important factors and other factors which could affect Walbro's results are more fully discussed in Walbro's filings with the Securities and Exchange Commission. Readers of this discussion are referred to such filings. The Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 1. BUSINESS GENERAL Walbro Corporation is a global leader in the design, development and manufacture of precision fuel storage and delivery systems and products for automotive and small engine markets worldwide. The Company manufactures plastic fuel tanks, fuel pumps, fuel modules, plastic fuel rails and fuel level sensors for sale to automotive original equipment manufacturers ("OEMs"). Products manufactured for the small engine market include carburetors and ignitions for chain saws, outboard marine engines, two-wheeled vehicles, industrial engines and lawn and garden equipment, such as lawn mowers and weed trimmers. From 1993 to 1998, the Company increased net sales at the compound rate of approximately 20% per year. This growth was primarily due to the introduction of new automotive products, penetration of additional automotive platforms and a recovery in the small engine industry from depressed levels in the late 1980s. The Company had net sales of $619.9 million and $678.0 million in 1997 and 1998. Approximately 73% of the Company's net sales for 1998 were generated by Walbro Automotive. Through Walbro Automotive, the Company designs, develops and manufactures fuel storage and delivery systems and components for a broad range of U.S. and foreign manufacturers of passenger automobiles and light trucks (including minivans). The Company and its joint ventures hold a strong market position in North America, Europe and South America and a growing market presence in Asia. In July 1995, the Company substantially expanded its European automotive business by acquiring the fuel systems business of Dyno Industrier A.S. ("Dyno"). In 1998, management estimates that the Company supplied Chrysler (Chrysler refers to the former Chrysler portion of DaimlerChrysler) with approximately 75% of its fuel pump and fuel module requirements, including all requirements for Chrysler's passenger cars and minivans and approximately 45% of the requirements for Chrysler's light trucks. Management believes that the Company manufactures substantially all of the fuel tank systems for Saab and Volvo light vehicles and all of the fuel tanks for the Mercedes-Benz C Class, Volkswagen Polo and Renault Twingo. Other automotive 1 3 customers of the Company and its joint ventures include Audi, Daewoo, Fiat, Ford, General Motors, Hyundai, Kia, Nedcar, Peugeot and Rover. Approximately 21% of the Company's net sales for 1998 were generated by Walbro Engine Management. Through Walbro Engine Management, the Company designs, develops and manufactures diaphragm carburetors for portable engines (such as those used in chain saws and weed trimmers), float feed carburetors for ground supported engines (such as those used in lawn mowers and marine engines) and ignition systems and other components for a variety of small engine products. The Company believes that it is the world's largest independent manufacturer of small engine carburetors, with an approximate 70% share of the global diaphragm carburetor market including sales to such leading chain saw and weed trimmer manufacturers as Poulan/Weedeater, Deere and Company (Homelite), Stihl Incorporated, McCulloch Corporation, Ryobi Ltd. and Kioritz (Echo) Corporation. The Company believes it has an approximate 10% share of the global float feed carburetor market, including sales to Briggs & Stratton Corporation, the world's largest small engine manufacturer, Kohler Company, Tecumseh Products Co., and Mercury Marine, a major manufacturer of outboard marine engines. The Company produces substantial volumes of float feed carburetors for the Chinese two-wheeled vehicle market. The remaining 6% of the Company's net sales for 1998 were primarily related to replacement products for both the automotive and small engine aftermarkets. The Company has recently begun pursuing initiatives to expand its aftermarket customer base and product lines in an effort to grow this segment of its business. The Company was incorporated in Michigan in 1950 and reincorporated in Delaware in 1972. The Company's principal executive offices are located at 1227 Centre Road, Auburn Hills, Michigan 48236, and its telephone number is (248) 377-1800. WALBRO AUTOMOTIVE AUTOMOTIVE INDUSTRY OVERVIEW A number of trends within the global automotive market have had and will continue to have a fundamental impact on the Company's future profitability and growth prospects, including: the shift by OEMs to the purchase of "systems" rather than individual components, the globalization of the OEM supplier base, the expansion of OEM supplier responsibilities and increased emissions regulation. These trends have contributed to a consolidation of OEM suppliers which the Company expects will continue. Purchase of Integrated Systems. Automotive OEMs are relying increasingly on suppliers who can provide entire systems rather than a number of different parts. OEMs can reduce their own internal engineering efforts and the number of suppliers by purchasing systems rather than components. Management believes the engineering and technological challenges facing systems suppliers will continue to grow as these systems become more complex. To strengthen the Company's position as a major supplier of automotive fuel systems, the Company is investing in its engineering and testing capabilities and actively pursuing its systems philosophy. The Company believes that the systems approach is being adopted outside North America and that the Company will be able to provide systems to the European market in the future. Globalization of the OEM Supplier Base. Several OEMs, including Ford, General Motors and Volkswagen, are introducing automobile models which are designed for the world automotive market ("World Cars"). This departure from the historical practice of designing separate models for each regional market is requiring suppliers to establish international development and manufacturing facilities capable 2 4 of providing system components with consistent quality on a worldwide basis. The Company believes it is well positioned as a major supplier of fuel storage and delivery systems ("FSDS") to the world automotive markets. Expansion of OEM Supplier Responsibilities. Since the 1980s, Ford, DaimlerChrysler and General Motors have been actively reducing their respective supplier bases to those who accept significant responsibility for product management and meet increasingly strict standards for product quality, on time delivery and manufacturing costs. These suppliers are expected to control all aspects of production of system components, including design, development, component sourcing, manufacturing, quality assurance, testing and delivery to the customer's assembly plant. The Company believes that many suppliers do not have the resources to meet these OEM requirements and that the automotive OEM supplier market will be divided among a smaller group of key suppliers. The Company has received a number of quality awards from its OEM customers, including the Ford Q1 Award, DaimlerChrysler QE Award and General Motors Supplier of the Year Award, and believes that this supplier consolidation provides an opportunity for the Company's increased penetration of the OEM market. Increasing Emissions Regulation. Beginning in the late 1970s, U.S. environmental regulations, including fuel economy regulations and the Clean Air Act and its Amendments, have had a significant impact on fuel systems and the controls placed on mobile source emissions. As a result, U.S. automotive fuel systems have evolved from mechanically controlled carbureted systems to more sophisticated, electronically controlled fuel injection systems. Governmental action in many other parts of the world is forcing a similar transition to engine management systems which produce less emissions. For example, the European Economic Community, which previously had less stringent automotive exhaust regulations, adopted exhaust standards effective January 1, 1993 which are comparable to 1983 U.S. requirements. Compliance with these regulations has resulted in efforts to reduce evaporative emissions and the development of new "flexible" fuels such as ethanol and methanol blends. In response to these changes, the Company has developed a number of products including electric pumps designed for electronic fuel injection systems, onboard running and vapor recovery ("ORVR") systems and plastic fuel tanks which reduce hydrocarbon permeation and are corrosion resistant to flexible fuels. AUTOMOTIVE BUSINESS STRATEGY The Company intends to capitalize on trends in the automotive industry through the development of its fuel systems technology and expansion of its product line and customer base. The key elements of the Company's strategy include: Systems Approach to Product Development. The Company is utilizing its expertise to develop integrated FSDS which reduce evaporative emissions, are compatible with the corrosive nature of flexible fuels and provide customers with the cost savings and convenience of purchasing complete systems rather than numerous individual components. The Company's "systems" approach to product development is designed to allow the Company to increase product content on each vehicle in which its products are installed while providing customers with substantial performance and cost benefits. This systems approach has made possible an increase in the dollar value of the Company's products per vehicle. For example, the new Dodge Durango, which began volume production in the third quarter of 1997, is equipped with the Company's fuel storage and delivery system. These products have a selling price that range from $100 to $190, compared to a typical 1987 vehicle equipped with only $15 of the Company's products. The Company's ability to assume responsibility for the development of FSDS allows OEMs to reduce internal engineering efforts and use fewer suppliers through the purchase of systems rather than components. 3 5 Global Capabilities. The Company's international manufacturing and market presence allows the Company to offer its current and future FSDS technology to the global automotive market. The Company's presence in Europe provides it with additional resources and marketing contacts to supply integrated fuel systems to both European and North American OEMs assembling vehicles in Europe and European OEMs assembling vehicles in the United States. The Company's international sales for 1998 were 39% of the Company's net sales (excluding joint ventures) compared to 20% in 1994. The Company's plastic tank manufacturing capability allows it to pursue its systems strategy in Europe and serve OEM customers as they confront new environmental and regulatory challenges worldwide and introduce World Cars designed for sale to the global automotive market. In addition, the Company has a market presence in Brazil, South Korea and Japan and it has entered into joint ventures with manufacturers in Brazil, France, Japan, Mexico and Argentina which enable the Company to access those foreign markets. Technical and Product Development Capabilities. The Company's engineers focus their research and development efforts to respond to the technical challenges facing their customers. The Company has designed its current line of FSDS products in response to U.S. fuel economy and emission regulations and changing consumer demands over the past two decades. Management believes that the Company is well positioned to capitalize on the emergence of more stringent global emission regulations through the development of a new generation of products and systems with greater fuel efficiency, reduced component weight, improved durability, fuel vapor control and flexible fuel compatibility. An example of these products is the ORVR system which captures fuel vapors from the fuel system and routes them to a carbon canister for storage and reuse. The Company has made substantial investments in fuel systems technology, product design and test capability and technical personnel to advance FSDS technology and respond to customer needs. A state-of-the-art systems center in Auburn Hills, Michigan provides the Company with the full-service product management capability which OEMs require of key suppliers and provides the Company with a competitive advantage in the development of proprietary fuel systems technology. Similarly, the Company opened a new systems center during 1998 in Rastatt, Germany to provide product design and test capabilities for European customers. AUTOMOTIVE PRODUCTS The Company's product development engineers design fuel storage and delivery systems in response to customer needs and in anticipation of evolving trends in the market. Today's electronic fuel injected engines demand an uninterrupted supply of fuel under pressure and some vehicles require complex fuel tank configurations. The Company specializes in technology employed in the FSDS and currently manufactures and sells fuel pumps, fuel modules, fuel level sensors, plastic fuel tanks, bracket assemblies and plastic fuel rails. In response to the environmental and fuel efficiency demands on today's automobiles, the Company has developed, and is continually taking steps to improve, an electric pump designed to deliver fuel under pressure to electronic fuel injection equipped engines. The pump is fastened to a bracket and flange assembly, which allows the pump to be mounted in the fuel tank. The assembly has been increasingly replaced with a single integrated unit, called a fuel module, which performs all of the functions of the assembly described above. The fuel module is a complete, value-added package for specific applications composed of a fuel pump, plastic reservoir, fuel level sensor and related parts. These injection-molded plastic units fit inside the fuel tank, ensuring continuous fuel delivery under low fuel conditions, maximum vehicle driving range and enhanced fuel delivery under high temperature conditions, all at a reduced noise level. Although vehicles were not equipped with fuel modules until 1988, 4 6 approximately 70% of cars and light trucks manufactured by General Motors, Ford and DaimlerChrysler in North America in 1998 used fuel modules. In 1998, the Company supplied approximately 20% of all of the fuel modules purchased in North America, principally to Ford and Chrysler. Approximately 40% of North American vehicles and 80% of European vehicles produced in 1998 contained plastic fuel tanks. Plastic fuel tanks offer several advantages over conventional steel tanks, including lighter weight, greater corrosion resistance to new, cleaner-burning fuels like methanol and the ability to be produced in unusual shapes to better use available space. In anticipation of customer demand in North America for more sophisticated fuel tanks, the Company built a new facility in Ossian, Indiana in 1993 to produce plastic multi-layer fuel tanks. The Company produced three-layer plastic fuel tanks during the fourth quarter of 1994, and during 1995 and 1996 for the Ford Windstar. The multi-layer construction of the Company's new, six-layer plastic tank substantially eliminates fuel permeation, making this one of the first plastic tanks which complies with the EPA permeability requirements which became effective beginning in model year 1996. The first production run of six-layer tanks began in 1996 for the GM T600 and was followed in 1997 by production of fuel tanks for the 1998 Saturn, the 1998 GM Yukon/Tahoe and the 1998 Chassis Cab. In addition a new facility in Meriden, Connecticut began production of the fuel tanks for the 1998 Dodge Durango in September 1997. The Company is currently producing mono-layer plastic fuel tanks, which include coatings and permeation barriers that meet European emission requirements, for Audi, Mercedes-Benz, Nedcar, Peugeot, Renault, Rover, Saab, Volkswagen and Volvo. The Company launched multi-layer tanks for Volvo during 1998, and expects that as other customers require more sophisticated fuel tanks, the Company will likely provide additional multi-layer blow molding machines to provide the Company's OEM customers in Europe with advanced, plastic fuel tank technology. The Company also produces plastic fuel rails suitable for a variety of engine applications. An extension of the FSDS concept, these under-hood components, located on the engine, deliver fuel to the individual fuel injectors used in electronic multi-point fuel injection systems. The Company has designed a plastic fuel rail which is superior to metal fuel rails in cost, weight and handling of more corrosive flexible fuels. In 1994, Ford began to install this new rail on the 3.0 liter engine in the Windstar. In 1997 Ford began to install this new fuel rail on 3.0 liter 2-valve engines for Taurus and Sable vehicles, as well as the 3.0 liter engines in the Windstar vans. An important advantage of the Company's systems approach is that it assists customers in responding to developments in safety and environmental standards. For example, current environmental regulations call for a FSDS that minimizes or eliminates the escape of fuel vapors during refueling, storage and operation. In January 1994, the EPA announced regulations governing ORVR systems as mandated by the 1990 Clean Air Act. The regulations require installation of devices which trap hydrocarbon vapors on a phase-in basis for passenger cars beginning in model year 1998 and for light trucks in model year 2001. In anticipation of these regulations, the Company has developed a variety of ORVR devices which help prevent fuel vapor loss from fuel delivery systems. The first of these devices entered production during 1997. AUTOMOTIVE MARKETS AND CUSTOMER BASE The Company currently provides a wide variety of products to a diverse customer base in a number of geographic areas. North America. DaimlerChrysler is the Company's largest customer, representing approximately 26% of net sales in 1998 (21% former Chrysler and 5% former Daimler/Mercedes-Benz). General 5 7 Motors, the Company's second largest customer, with approximately 11% of sales, has become a significant customer as a result of substantial plastic fuel tank programs launched since 1996. These customers have ongoing supply relationships with the Company which are subject to continued satisfactory price, quality and delivery. The Company is the primary outside supplier of fuel pumps, the core of the FSDS, to DaimlerChrysler. In the past, the Company has capitalized on its fuel system components penetration to supply additional fuel system products, such as fuel modules and fuel rails, to DaimlerChrysler and Ford, and to assume a key role in the development of new fuel system products, such as ORVR devices. General Motors historically developed and produced substantially all of its fuel storage and delivery systems internally but recently has sourced a significant portion of plastic fuel tank programs to outside suppliers, including the Company. The Company has formed a joint venture ("VITEC") with a group of minority business owners to produce automotive components in Detroit's Empowerment Zone. VITEC is expected to manufacture FSDS products (including blow-molded plastic fuel tanks). General Motors has awarded $450 million of new business to the joint venture over a five-year period commencing in 1999. Chrysler has also awarded new business to the joint venture. In September 1996, the Company received a tax credit worth an estimated $13.6 million from the Michigan Economic Growth Authority for this new facility. Europe. In 1991, the Company began operations in Europe with the establishment of its Marwal Systems joint venture in France with Magneti Marelli S.p.A. of Italy to serve customers that include Fiat, Nissan, Peugeot, Renault, Rover, Saab and Volvo. The Company is the only integrated FSDS supplier in Europe, which has provided the Company with the immediate opportunity to increase its participation in the European automotive market. In addition, the Company is using its relationships in the U.S. to increase its sales to North American manufacturers in Europe. Similarly, the Company is leveraging its relationships with Mercedes-Benz, Peugeot, Renault, Saab, Volkswagen, Volvo and other European manufacturers to enhance the Company's marketing efforts with these European manufacturers around the world. Approximately 80% of the European light duty vehicles and 40% of the North American light duty vehicles are equipped with plastic fuel tanks. Management estimates that operations in Europe produced plastic fuel tanks accounting for approximately 19% of the European plastic fuel tank market in 1998. South America. In January 1993, operations began at the Company's Marwal do Brasil joint venture, which targets the South American automotive market of approximately two million units per year. In September 1995, the Company established Walbro Automotive do Brasil to manufacture plastic fuel tanks for the Brazilian automotive market. It began production of plastic fuel tanks for Volkswagen in November 1996. In 1996, the Company received an order from Ford for a supply of plastic fuel tanks for Ranger trucks to be produced in Argentina. Asia. In December 1986, the Company entered into a joint venture in Japan known as Mitsuba-Walbro, Inc. with Mitsuba Electric Manufacturing Company to manufacture fuel pump components. In January 1998, the Company began production and sale of FSDS products in South Korea for the domestic South Korean automotive market. AUTOMOTIVE COMPETITION The Company competes with several other manufacturers, including the OEMs themselves, many of which have greater sales and financial resources than the Company. In the fuel pump market, the Company's major competitors include Robert Bosch GmbH, Denso Corp., Ltd., VDO (a division of Mannesmann), Visteon Automotive (Ford's component group) and Delphi Automotive Systems (formerly GM's component group). In the fuel rail market, the Company's major competitors include Delphi, Visteon Automotive, Echlin Inc. (which was acquired by Dana Corporation in 1998) and Siemens A.G. The 6 8 Company has competition in the fuel module market from Delphi, Robert Bosch GmbH, Denso Corp., VDO and Visteon Automotive. The Company's largest competitors in the plastic fuel tank market include Kautex Werke Reinold Hagen A.G. (which was acquired by Textron Inc. in January 1997), Solvay S.A., Plastic Omnium Industries, Inc. and Visteon Automotive. Steel tanks, manufactured primarily by the OEMs, also compete with the Company's plastic fuel tanks. The Company competes for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to three years prior to a product introduction. Once a producer has been designated to supply parts for a new program, an OEM usually will continue to purchase those parts from the designated producer for the life of the program, although not necessarily for a redesign. Competitive factors in the market for fuel storage and delivery products include product quality and reliability, cost and timely delivery, technical expertise and development capability and new product innovation. AUTOMOTIVE SALES AND ENGINEERING SUPPORT Sales of the Company's FSDS products to automotive OEMs are made directly by the Company's sales/engineering force, who not only sell the products but assist customers with related engineering matters. Because of the automobile design process, the Company is generally able to determine a few years in advance the models for which it will supply products. The Company's sales force works closely with the Company's engineering departments and systems center in Auburn Hills in the research, design, development and improvement of its products. Since the Company's systems center in Europe was completed in 1998, the Company has additional design and research capabilities to provide OEMs in Europe with full-service product management. Because the Company has the capability to provide comprehensive engineering resources with respect to its product line and assume increasing responsibility for the development of FSDS products, the Company has been successful in responding to the decisions by OEMs to consolidate suppliers and reduce internal engineering resources. AUTOMOTIVE WARRANTY AND OTHER PRODUCT EXPOSURE The design and manufacture of fuel systems entails an inherent risk that a governmental authority or a customer may require the recall of one of the Company's products or a product in which one of the Company's products has been installed. The Company has taken and intends to continue to take all reasonable precautions to avoid the risk of exposure to an expensive recall campaign which could have a material adverse effect on the business and financial condition of the Company. WALBRO ENGINE MANAGEMENT SMALL ENGINE INDUSTRY OVERVIEW The small engine industry is facing a number of environmentally-driven changes which will require an increased emphasis on fuel systems technology and the development of new fuel systems products. Growth opportunities outside of the U.S. are expected to be driven by growth in the use of two-wheeled vehicles and the increased use of gasoline-powered portable equipment in developing countries. Emphasis on Engine Management Systems and New Product Development. Historically, exhaust emissions of gasoline-powered small engines were unregulated. In 1992, the California Air Resources Board promulgated comprehensive air quality regulations limiting small engine emissions, which regulations became effective in August 1995. A more stringent phase is scheduled to become effective in 1999. In addition, the EPA has implemented similar regulations that became effective in August 1996, with a more stringent phase expected to be phased in beginning 2002. The products designed to meet these new emission standards in the small engine market will require more sophisticated product research and 7 9 new production capabilities. The increased technological content and sophistication required to meet emission regulations is expected to result in lower unit sales with greater value added per product and higher unit prices. Growing Demand in Developing Countries. The Company expects significant growth in the demand for float feed carburetors in developing countries as per capita income increases and two-wheeled vehicles become more affordable. Production of two-wheeled vehicles in the People's Republic of China, for example, increased from approximately 49,000 units in 1980 to approximately 3.4 million in 1993, 5.2 million in 1994, 7.8 million in 1995 and management estimates 1997 and 1998 production to have been approximately 10.0 million units each year. In addition, management believes demand for diaphragm carburetors used in gasoline-powered portable tools will grow in these developing countries. The inaccessibility of electrical power distribution and geographic isolation of many projects, such as the clearing of land and highway construction, hinder the use of electric-powered equipment. SMALL ENGINE BUSINESS STRATEGY To respond to the promulgation of increasingly strict emission regulations in the small engine industry, the Company is working to develop a small engine management system which will comply with new emission standards. As the leading developer of fuel systems technology for portable engines, the Company is well positioned to draw upon its expertise in carburetor and ignition system design and development, as well as its experience in responding to emissions-driven challenges in the automotive sector. The Company's advanced product design and development facilities in Michigan and Japan, which are equipped with sophisticated emission measurement instruments, provide the Company with the facilities necessary to develop more sophisticated small engine management systems. In addition to developing new technologies, the Company intends to grow its small engine business through expansion into foreign markets. The Company's presence in developing countries such as the People's Republic of China will allow it to benefit from the growing market for carburetors for two-wheeled vehicles and from infrastructure development which requires portable power tools. SMALL ENGINE PRODUCTS The Company was founded as a manufacturer of carburetors for small engine products such as lawn mowers and marine engines, and later expanded its customer base to include manufacturers of chain saws, weed trimmers, snow blowers and two-wheeled vehicles. The Company's carburetor technology has continually evolved, with the Company now manufacturing diaphragm and float feed carburetors, ignition systems and other components for small engine products and aftermarket applications. The Company's diaphragm carburetor, float feed carburetor and ignition system sales accounted for 50%, 28% and 15%, respectively, of the Company's 1998 small engine net sales. The diaphragm carburetor uses a diaphragm and a series of interconnected passages to draw and regulate the amount of fuel delivered to the engine from the fuel tank. The Company manufactures several basic models of diaphragm carburetors from which are derived numerous variations. Diaphragm carburetors are used on chain saw and weed trimmer engines because they will operate in any position and minimize vapor lock. The Company believes that it is the world's largest manufacturer of small engine diaphragm carburetors. The float feed carburetor uses a float in a reservoir of fuel to regulate the amount of fuel delivered to the engine. In contrast to the diaphragm carburetor, which operates in all positions, the float feed carburetor operates only in an upright position. The Company manufactures several basic models of float 8 10 feed carburetors from which are derived numerous variations. The Company's float feed carburetors are used on engines for lawn mowers, garden tractors, two-wheeled vehicles, marine outboard engines, generators and industrial engines. The ignition system uses rotating magnets in a flywheel, which induce an electrical charge in the ignition module. The ignition module releases this charge to the spark plug. The Company's ignition systems are used predominantly in chain saw and weed trimmer applications. In response to California and proposed EPA air quality regulations, the Company is integrating its carburetor and ignition technology to develop an engine management system which will electronically control both fuel delivery and ignition functions to limit exhaust emissions. The Company has successfully refined existing carburetors through the incorporation of extremely close tolerances which provide more accurate control of the fuel/air mixture to meet the first set of standards that became effective in California in 1995 and nationwide in 1996. Company engineers are developing new technology to meet the subsequent requirements which will become effective in California in 1999 and nationwide during the period 2002 to 2005. This development effort focuses on complete engine management systems that control air flow, fuel delivery and ignition timing to enhance fuel efficiency and reduce pollution. SMALL ENGINE MARKETS AND CUSTOMER BASE The Company sells its small engine products in a global market. Carburetors and small engine ignitions are sold by the Company's sales and engineering staff directly to engine manufacturers. The Company sells a major portion of its diaphragm carburetors to most of the leading chain saw and weed trimmer manufacturers, including Poulan/Weedeater, Deere and Company (Homelite), Stihl Incorporated, McCulloch Corporation, Ryobi Ltd. and Kioritz (Echo) Corporation. The Company sells float feed carburetors to several of the leading manufacturers of small engines, including Briggs & Stratton Corporation, the world's largest small engine manufacturer. Mercury Marine, a major outboard engine manufacturer, buys approximately 75% of its outboard engine carburetors from the Company. One of the Company's opportunities for growth in the small engine industry is the Chinese market. In January 1994, the Company acquired a 60% interest, increased to 70% in 1995, in Fujian Hualong Carburetor Co., Ltd. (Fujian) which manufactures and markets carburetors for two-wheeled vehicles in the People's Republic of China. In addition, the Company has built a new manufacturing facility in Tianjin to provide additional capacity to take advantage of growth in the two-wheeled vehicle market. This new facility began production in October 1996. SMALL ENGINE COMPETITION The Company has several competitors that manufacture diaphragm carburetors for the global small engine market, including Zama Industries, Ltd., Tillotson Commercial Motors Ltd. and Dell' Orto, some of which are divisions of large diversified organizations which have total sales and financial resources exceeding those of the Company. In the market for float feed carburetors, the Company has several competitors, including Briggs & Stratton and Tecumseh Products, both of which have greater sales and financial resources than the Company. The Company's major competitors in the ignition systems market are R.E. Phelon Company Inc. in the U.S.; Ikeda Denki, Oppama Kougyou, Iida Denki, Kokusan Denki in Japan; and other internal suppliers to engine manufacturers. AFTERMARKET PRODUCTS The Company sells automotive aftermarket products for both carbureted vehicle applications and electronic fuel injection vehicle applications through independent distributors, such as Federal-Mogul 9 11 Corporation and Standard Motor Products, Inc., and jobbers and dealers worldwide. Some automotive products are also sold to national manufacturing and distribution organizations for sale under private brand names or to industrial customers for use in special applications. The Company has recently begun pursuing initiatives to expand its aftermarket customer base and product lines in an effort to grow this segment of its business. Such initiatives include entry into components for performance vehicles and recreational vehicles, as well as broader coverage of fuel pumps and fuel modules. The Company sells automotive aftermarket products to support its OEM customers and to benefit from higher margins on aftermarket sales. Management believes that the overall market size for automotive electronic fuel injection systems components sold to the aftermarket will continue to grow as the population of vehicles equipped with electronic fuel injection systems ages. The Company sells its own brand name small engine aftermarket products through independent distributors, jobbers and dealers worldwide. Some of these products are also sold to national manufacturing and distribution organizations for sale under private brand names or to industrial customers for use in special applications. ACQUISITION AND JOINT VENTURE STRATEGY As part of a long-term strategy for growth and expansion into new geographic and product markets, the Company may undertake select acquisitions and strategic alliances in the form of joint ventures. The Company may make select acquisitions of companies which can enhance the Company's traditional products and technologies and can provide additional growth opportunities. These acquisitions would contribute new product technology and open new markets to the Company. In evaluating these acquisitions, the Company seeks high quality operations which fit with the Company's expertise in markets where it has an established customer base and a clear vision of opportunities, thus decreasing transition costs and other financial risks associated with corporate acquisitions. Similarly, each of the Company's joint ventures provides the Company with the opportunity to benefit from established customer relationships or a unique technological advancement which the Company could not develop on its own without the risk and expense of establishing marketing and manufacturing organizations alone. In management's opinion, the Company's joint ventures ultimately reduce the cost of penetrating new markets and limit the Company's financial exposure with respect to these operations. At the present time the Company has no specific agreements with respect to any new acquisitions or joint ventures. MANUFACTURING AND FACILITIES The Company conducts operations in approximately 2.4 million square feet of space in 28 locations. Six additional sites are operated as joint venture operations. The Company believes that substantially all of its property and equipment are in good condition. The Company has not experienced significant limitations on its ability to transfer products between, or sell products in, various countries. Each of the Company's manufacturing facilities practices advanced inventory control procedures and has installed statistical process controls to insure high levels of quality. In that regard, some of the Company's factories have received the Ford Q1 Award and the DaimlerChrysler QE Award. In connection with its sales to Saab, which is partially owned by General Motors, the Company's Norway facility has been named a General Motors supplier of the year five years in a row beginning in 1991. In 1995, Walbro Automotive was named Supplier of the Year by General Motors. Various other Company factories have been recognized by customers such as Mercury Marine, Stihl and Federal-Mogul Corporation for excellence in product quality and delivery. 10 12 In addition, the Company's domestic automotive customers have cooperated in the development of a broad based quality procedure for which their suppliers are required to be certified. The procedure, known as QS 9000, has been derived from the International Standards Organization's ISO 9000 procedure and has become the primary quality discipline within the automotive industry. All but one of the Company's automotive manufacturing locations around the world have been certified. When justified by volume, the Company has invested in labor-saving automated machining, assembly and testing equipment. For example, the operation in Meriden, Connecticut employs computer controlled molding machines to form the Company's plastic in-tank reservoirs. These machines are individually programmable so that variations can be reduced and refined as part of the continuous control process. Another example is the Caro, Michigan manufacturing facility's automated fuel pump assembly line, which is capable of producing 1,000 pumps per hour using only six persons. Over the past several years, the Company has reduced the cost to manufacture its fuel pumps at this facility by reducing both labor and material costs. In Ettlingen, Germany, the Company uses a fully automated assembly line for production of plastic fuel tanks for the Mercedes-Benz C Class. In addition to these examples of purchased automation, the Company designs and builds major portions of its own machining and assembly equipment. This in-house capability permits close control over the manufacturing process and helps the Company stay competitive in both cost and quality. PATENTS, RESEARCH AND PRODUCT DEVELOPMENT The Company owns approximately 165 U.S. patents plus 400 international patents in the fuel systems field and has a number of applications pending. These patents include proprietary ownership of designs for control devices for engines and engine systems, fuel pumps, fuel delivery systems, fuel regulators, fuel level sensors, fuel reservoirs and fuel system vapor control devices, carburetors and throttle bodies, as well as ancillary devices for engine and vehicle applications. Although these patents are significant to the Company, management believes that in many cases the adaptation and use of the technology involved and the proprietary process technology employed to manufacture these products are more important. The Company maintains a systems center in Michigan for the research, design and development of new products. The Company opened its new European engineering center in 1998. The Company's engineering departments also engage in design, development and testing. In 1998, 1997 and 1996, the Company spent approximately $12.9 million, $17.3 million and $18.4 million, respectively, for research and product development. The decrease in 1998 was almost entirely due to the reclassification of certain product engineering and testing expenses from research and development to cost of goods sold. COMPONENTS, MATERIALS AND INVENTORY The Company has a number of sources for the components used in manufacturing its products. The suppliers who manufacture components often use tools and dies owned by the Company. If a supplier were to discontinue supplying any component, it could take the Company some time to replace the supplier; however, the Company believes its operations would not be materially adversely affected. The Company's principal customers provide it with estimates of their annual needs and make monthly purchase commitments. As a result, the Company does not experience material backlog. Consequently, the Company manages its manufacturing facilities on a just-in-time production basis. 11 13 EMPLOYEES As of December 31, 1998, the Company had approximately 5,422 employees. The Company believes that its relations with its employees are satisfactory. All of the Company's approximately 600 European plant employees are unionized under their traditional national organizations. The Company's United States plant employees at two manufacturing sites in Michigan and one site in Connecticut (approximately 707) are unionized. All other United States employees are non-unioned. The Company's five-year contract with the bargaining unit for these Michigan plants expires in November 2003. A three-year contract with the Company's bargaining unit employees at Meriden, Connecticut expires March 20, 2002. REGULATION The Company's operations are subject to increasingly stringent environmental laws and regulations governing air emissions, waste water discharges, the generation, treatment, storage, disposal and remediation of hazardous substances and wastes, and employee health and safety. Certain of these laws can impose joint and several liability for releases or threatened releases of material upon certain statutorily defined parties, including the Company, regardless of fault or the lawfulness of the original activity or disposal. The Company believes it is currently in material compliance with applicable environmental laws and regulations. The Company's compliance with environmental laws and regulations has not materially affected the results of its operations or the conduct of its business; however, the Company cannot predict the future effects of such laws and regulations. 12 14 ITEM 2. PROPERTIES The Company conducts operations in approximately 2.4 million square feet of space in a total of 28 locations. Six additional sites are operated as joint venture operations. The Company believes that substantially all of its property and equipment are in good condition. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation, and is not aware of any pending or threatened litigation, that would have a material adverse effect on the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. 13 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price DIVIDENDS QUARTERS ENDED HIGH Low PER SHARE ---- --- --------- December 31, 1998........ 8 1/2 6 3/16 $ -- September 30, 1998....... 12 15/16 7 1/2 -- June 30, 1998............ 14 1/8 8 5/8 -- March 31, 1998........... 15 11 -- -- $ -- December 31, 1997........ 24 1/8 12 $.10 September 30, 1997....... 24 1/4 191/2 .10 June 30, 1997............ 21 1/2 15 .10 March 31, 1997........... 19 1/4 161/2 .10 -- $.40
On February 23, 1999, the closing per share price was $10.00. The above prices do not include retail markup, markdown, or commission. As of February 23, 1999, the approximate number of shareholders was 1,024. Walbro is traded on the NASDAQ National Market ("NNM") and reported by NNM under the symbol "WALB". ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The results of operations of the Company for each of the years in the three-year period ended December 31, 1998 and balance sheet data as of December 31, 1998 and 1997, respectively, were derived from the audited Consolidated Financial Statements of the Company, and the notes thereto, appearing elsewhere in this Form 10-K.
Years Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands, Except Per Share Data) From Continuing Operations: Net Sales.................... $677,990 $ 619,905 $585,389 $459,272 $325,205 Cost of Sales................ 571,992 538,751 488,134 377,755 261,501 Income (Loss) Before Extraordinary Item...................... 5,191 (36,627) 11,229 13,830 14,595 Income (Loss) Per Share Before Extraordinary Item (basic and diluted)....... 0.60 (4.23) 1.30 1.61 1.70 Cash Dividends Per Share....... -- 0.40 0.40 0.40 0.40 Working Capital................ 96,926 75,273 68,275 95,713 58,378 Total Assets................... 648,667 610,593 589,649 493,473 257,366 Long-Term Debt................. 324,289 291,393 291,723 233,389 66,136 Stockholders' Equity........... 77,556 69,866 137,733 135,427 127,915
14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the years ended December 31, 1998, 1997 and 1996. YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997, 1997 COMPARED TO 1996 SALES. The Company reported sales in 1998 of $678.0 million, an increase of 9.4% from $619.9 million in 1997. The 1998 increase was generated by a 8.6% increase in sales to the automotive original equipment market, a 13.1% increase to the small engine market and a 12.8% increase in aftermarket sales. Sales in 1997 of $619.9 million were 5.9% higher than the 1996 sales of $585.4 million. The 1997 sales increase came from increased automotive product sales in North and South America and increased sales to the small engine market partially offset by lower sales to the European automotive market caused by lower foreign currency exchange rates. In addition, aftermarket sales increased by 17.5% in 1997 compared to 1996. Sales of the Company's automotive products were $497.4 million in 1998 compared to $458.0 million in 1997, an increase of 8.6%. In 1998, North American automotive product sales were up 11.4%, despite the General Motors strike that affected sales in the second and third quarters by approximately $7.0 million and several other factors which are described as follows. The Company sold its automotive steel fuel rail operations in 1998, which represented a $17.2 million decline in automotive sales for 1998 compared to 1997. The Company also began to phase out the sale of component parts for fuel pumps to its joint ventures (the joint ventures now buy direct from the parts manufacturers) which reduced U.S. automotive sales by $17.3 million for 1998. The North American and European automotive sales increase in 1998 resulted from increased sales of plastic fuel tank systems as plastic fuel tanks continue to replace steel fuel tanks in both markets. Sales of the Company's automotive products in Europe were up 5.0% for 1998 compared to 1997. However, automotive product sales in Brazil were down 22.0% due to the economic disruptions and reduced vehicle sales in that market. The Company's new plastic fuel tank plant in South Korea started production in January 1998 and added $2.6 million of new sales. The 1997 sales of automotive products were $458.0 million, an increase of 4.4% compared to $438.6 million in 1996. The increase resulted from increased sales of plastic fuel tank systems to both North and South American OEM customers, partially offset by lower sales of steel fuel rails in the U.S. and lower sales dollars from the Company's European operations due to foreign currency exchange rates, which declined 16% compared to the U.S. dollar. The lower sales growth in North America during 1997 was due to insourcing of fuel pumps and fuel modules by Ford Motor Company, and lower shipments to Chrysler in the second quarter of 1997 because of a strike at Chrysler's Mound Road Engine Plant. Sales of the Company's small engine products were $142.4 million in 1998, an increase of 13.1%, compared to $125.9 million in 1997, which had increased by 7.5% in 1997 compared to $117.1 million in 1996. The most significant factors driving the 1998 sales increase was an 11.8% increase in diaphragm carburetor sales, a 23.7% increase in ignition systems sales and an 80.4% increase in float feed carburetor sales in The People's Republic of China ("PRC"). For both ignition systems and PRC carburetors, the Company increased its production capacity and broadened its product offering during 1997 and 1998, which resulted in increased sales during 1998. The Company also gained market share in The PRC during 1998 as importers lost sales due to higher import taxes. The 1997 increase in small engine products was driven by a 25.9% increase in ignition systems and a 6.4% increase in motorcycle carburetor sales in The 15 17 PRC. The 1997 PRC sales were less than expected as the Company experienced a significant reduction in orders during the second half of 1997 as customers reduced excess motorcycle inventories. Sales of the Company's aftermarket products were $33.2 million in 1998, an increase of 12.5%, compared to $29.5 million in 1997, which had increased by 17.5% compared to $25.1 million in 1996. Aftermarket sales growth in both years was primarily due to growth in automotive product sales generated by the addition of new products offered to aftermarket customers and by adding new customers. COST OF SALES. Cost of sales was $572.0 in 1998 compared to $538.8 million in 1997 compared to $488.1 million in 1996. Cost of sales as a percent of sales was 84.4% in 1998 compared to 86.9% in 1997 compared to 83.4% in 1996 and consequently gross margin was 15.6% in 1998 compared to 13.1% in 1997 compared to 16.6% in 1996. Gross margin increased in 1998 due to higher production volumes at most plants, lower launch costs for new plastic tank programs and the benefits of the restructuring program started during the fourth quarter of 1997. The restructuring program resulted in headcount reductions, closure of the Company's small engine carburetor plant in Singapore and sale of the Company's automotive steel fuel rail operations -- all of which contributed to higher gross margin in 1998. Gross margin declined in 1997 compared to 1996 because of lower margins in both automotive and small engine products. Lower automotive gross margin was due to a number of factors including the following: change in the mix of products sold in the U.S., high launch costs for new plastic fuel tank programs, start-up cost for new plants in Argentina and South Korea, relocation of two plants in Europe and increased warranty costs. The change in mix of products sold involved increased volume of new plastic fuel tank systems, which carry lower gross margins since they include a high level of purchased components. In addition, sales volume for steel fuel rails, fuel pumps and fuel modules was lower in 1997 because of Ford in-sourcing of fuel systems, the Chrysler strike and lower production of U.S. passenger cars. The lower gross margin in 1997 for small engine products was caused by start-up costs for the new plant in The PRC, lower volume at both facilities in The PRC, the one-time cost of moving two plants in Mexico and increased warranty costs. SELLING AND ADMINISTRATIVE EXPENSES. Selling and Administrative ("S&A") expenses were $55.6 million in 1998, a decrease of 8.6%, compared to $60.8 million in 1997. S&A expenses in 1997 included a number of one-time items totaling $5.1 million which included increased professional fees, financing fees for modifications to bank loan agreements, legal fees, settlement of legal claims and other one-time charges. 1997 S&A expenses were also higher due to the addition of new facilities in Argentina, South Korea and The PRC. The decrease in 1998 was primarily due to headcount reductions and the sale of the Company's steel fuel rail operations when compared to 1997 excluding the one-time charges in 1997. As a percent of sales, S&A expenses were 8.2% in 1998, 9.8% in 1997 and 8.9% in 1996. RESEARCH AND DEVELOPMENT EXPENSES. Research and Development ("R&D") expenses were $12.9 million in 1998, a decrease of 25.4%, compared to $17.3 million in 1997 which declined by 6.0% compared to $18.4 million in 1996. The decline in both 1998 and 1997 was caused by a shift of engineers out of R&D activities and into product engineering activities, which is included in cost of sales. RESTRUCTURING AND IMPAIRMENT CHARGES. During the fourth quarter of 1997, the Company recorded a $27.0 million pretax charge for restructuring its operations and other actions. The charge was comprised of a $17.0 million charge for restructuring and a $10.0 million charge associated with asset impairments. The restructuring actions included divestiture of the Company's Ligonier, Indiana steel fuel rail manufacturing facility and disposition of its interest in U.S. Coexcell Inc., a manufacturer of blow- 16 18 molded plastic drums in Maumee, Ohio. In addition, the Company consolidated its small engine operations in the Asia Pacific region and restructured its European automotive fuel tank operations. The asset impairment charge included the write down to net realizable value certain tooling, machinery and equipment, write off of its interest in Saginaw Plastics, an injection molder in Saginaw, Michigan and charges related to its Korean automotive activities. Lastly, the restructuring charge included a corporate-wide headcount reduction of approximately 10 percent including reductions related to the divestitures and restructuring. All of the restructuring activities were completed during 1998 except for the divestiture of U.S. Coexcell Inc. INTEREST EXPENSE. Interest expense was $31.8 million in 1998 compared to $25.4 million in 1997 and $20.5 million in 1996. In May 1998, the Company obtained a new $150 million bank secured credit facility and in December 1997 the Company sold $100 million of its 10.125% senior notes and used the proceeds to repay the previous secured credit facilities, for working capital and for capital expenditures. The higher interest expense in both 1998 and 1997 was due to higher levels of borrowing in each year and the shift to a higher percentage of long-term fixed rate debt which raised the average cost of borrowing in each year. INTEREST INCOME. Interest income was $3.2 million in 1998 compared to $0.7 million in 1997 and $2.7 million in 1996. The higher amounts in 1998 and 1996 were the result of interest income recorded for interest from the Internal Revenue Service for interest due related to income tax refunds for prior years. ROYALTY INCOME. Royalty income was $3.2 million in 1998 compared to $3.9 million in 1997 and $1.4 million in 1996. The increased royalty income in 1997 versus 1996 was the result of receiving royalty income from the Marwal joint ventures starting in the fourth quarter of 1996 and receiving a full year in 1997. The decline in 1998 compared to 1997 resulted from lower sales by the Marwal joint ventures in Brazil and Argentina. INCOME TAXES. The provision for income taxes was $4.0 million in 1998 compared to a credit for income taxes of $10.1 million in 1997 and a provision of $3.1 million in 1996. The effective tax rate in 1998 was 28.1% due to a large portion of the taxable income earned in France, Germany and Japan, which have higher income tax rates than the U.S. which was more than offset by the benefit from tax deductible preferred stock dividends. The credit in 1997 was the result of the taxable loss recorded in 1997 from the restructuring and other one-time charges. JOINT VENTURE INCOME. The Company's equity in income of joint ventures was $0.8 million in 1998 compared to $3.1 million in 1997 and $4.2 million in 1996. The decrease in 1998 resulted from start-up costs at VITEC, the Company's joint venture in Detroit's Empowerment Zone and by reduced earnings at other automotive joint ventures around the world which were adversely affected by the strong U.S. dollar. In addition, the Marwal joint ventures in Brazil and Argentina were also affected by the difficult economic conditions in that region. The decline in 1997 compared to 1996 resulted from lower earnings at the Marwal joint ventures due to the payment of royalties to the Company, start-up costs for Marwal Argentina and losses at Korea Automotive Fuel Systems, the Company's joint venture in South Korea. MINORITY INTEREST. Minority interest was $5.8 million in 1998 compared to $5.0 million in 1997 and $0.5 million in 1996. The 1998 increase was due to a full year of preferred dividends paid in 1998 on the Convertible Preferred Securities of Walbro Capital Trust issued in February 1997. The 1996 minority interest represented only minority earnings from less than wholly owned subsidiaries. 17 19 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM. Income before extraordinary item was $5.2 million in 1998 compared to a loss of $36.6 million in 1997 and income of $11.2 million in 1996. Income per share before extraordinary item was $0.60 in 1998 compared to loss per share before extraordinary item of $4.23 in 1997 and income per share of $1.30 in 1996. EXTRAORDINARY ITEM. The extraordinary item in 1998 was $1.5 million net of tax for the early payment premium for the retirement of the 2004 Senior Notes that occurred in May 1998. NET INCOME (LOSS) AND INCOME (LOSS) PER SHARE. Net income in 1998 was $3.7 million compared to a net loss of $36.6 million in 1997 and net income of $11.2 million in 1996. Net income per share was $0.43 in 1998 compared to net loss per share of $4.23 in 1997 and net income per share of $1.30 in 1996. The net loss for 1997 was the result of the reasons stated above including the restructuring charge, warranty reserve and other one-time charges. INFLATION. Inflation potentially affects the Company in two principal ways. First, a portion of the Company's debt is tied to prevailing short-term interest rates which may change as a result of inflation rates, translating into changes in interest expense. Second, general inflation can impact material purchases, labor and other costs. In many cases, the Company has limited ability to pass through inflation-related cost increases due to the competitive nature of the markets that the Company serves. In the past three years, however, inflation has not been a significant factor for the Company. FOREIGN CURRENCY TRANSACTIONS. Approximately 49% of the Company's sales during 1998 were derived from international manufacturing operations in Europe, Asia, South America and Mexico. The financial position and the results of operations of the Company's subsidiaries in Europe (31% of sales), Asia (8% of sales) and South America (2% of sales) are measured in local currency of the countries in which they operate and translated into U.S. dollars. The effects of foreign currency fluctuations in those regions are somewhat mitigated by the fact that expenses are generally incurred in the same currencies in which sales are generated, and the reported income of these subsidiaries will be higher or lower, depending on a weakening or strengthening of the U.S. dollar. For the Company's subsidiary in Mexico (8% of sales) the expenses are generally incurred in the local currency but sales are generated in U.S. dollars; therefore, results of operations are more directly influenced by a weakening or strengthening of the local currency versus the U.S. dollar. Approximately 44% of the Company's assets at December 31, 1998, are based in its foreign operations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period. Accordingly, the Company's consolidated stockholders' equity will fluctuate depending upon the strengthening or weakening of the U.S. dollar. In addition, the Company has equity investments in unconsolidated joint ventures in Argentina, Brazil, France, Japan and Mexico. The Company's reported income from these joint ventures will be higher or lower depending upon a weakening or strengthening of the U.S. dollar. The Company's strategy for management of currency risk relies primarily upon the use of forward currency exchange contracts to manage its exposure to foreign currency fluctuations related to its firm commitments in foreign currencies. THE YEAR 2000 ISSUE. The year 2000 issue ("Y2K") is the result of computer programs that were written using two digits (rather than four) to define the applicable year. Any of the Company's computer 18 20 programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company is actively participating in the Automotive Industry Action Group ("AIAG") for Y2K and is using AIAG procedures and standards as the guideline for compliance. The Company's plan for compliance includes several phases: (1) awareness, (2) assessment, (3) renovation, (4) validation and (5) implementation. Each phase considers the impact of Y2K on information technology systems, embedded technology (i.e. machinery and equipment with date sensitive technology) and the Company's suppliers. None of the Company's products include date sensitive technology. The Company is currently at various stages of completion within each phase. The Company has completed its assessment of its information technology systems and embedded technology identifying those that need further evaluation. The Company has also identified critical suppliers that need evaluation. This phase of the process includes obtaining compliance certificates from suppliers for all existing systems and embedded technology that are already Y2K compliant and obtaining compliance certificates for all significant vendors. The renovation phase, which is also in process, includes obtaining revised software for existing systems and purchasing new computer programs and replacement computer hardware for non-compliant systems. This phase is expected to be complete by June 30, 1999. The estimated cost associated with the purchase of these items is approximately $2.3 million. Existing staff will do all of the implementation and testing. The Company does not have a project tracking system that tracks the cost and time that its own internal employees spend on the Y2K project. The validation and implementation phases are also in process and are expected to be completed by June 30, 1999. Management believes that this plan will effectively mitigate the risks associated with Y2K. A worst-case scenario with respect to a Y2K failure in a key internal system or supplier system would result in shipments of product to customers to be temporarily interrupted. This could result in missing production schedules with customers, which in turn could lead to lost sales and profits for the Company and our customers. As part of the Y2K strategy, we are in the process of developing contingency plans on a site-by- site, system-by-system basis. These plans include identifying alternative sources of materials and components as well as potentially stockpiling some key raw materials. All plans will be documented and will be executed if necessary. LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 1998, the Company had outstanding $14.4 million in short-term debt, including current portion of long-term debt, and $324.3 million in long-term debt. The approximate minimum principal payments required on the Company's long-term debt in each of the five fiscal years subsequent to December 31, 1998 are $2.4 million in 1999, $2.6 million in 2000, $2.6 million in 2001, $2.0 million in 2002, $95.9 million in 2003 and $221.3 million thereafter. In May 1998, the Company obtained a $150 million Credit Facility consisting of $125 million revolving line of credit and a $25 million capital expenditure facility. The new credit facility is available for five years. Proceeds of the new credit facility were initially used to retire $30 million under the previous credit facility; to pay off the Purchase Money Loan Agreement; to pay off the $45 million Senior Notes due 2004 including an early retirement premium of $2.0 million. In addition, the facility will be used to finance capital expenditures and to meet working capital needs. At December 31, 1998, the Company had borrowed $93.1 million on the revolving line of credit and $2.5 million of the capital expenditure facility. 19 21 The Company's plans for 1999 capital expenditures for facilities, equipment and tooling total approximately $40 million. The Company intends to finance the capital expenditures with the credit facility, potential lease financing, funds available in the capital markets and cash from operations. As of December 31, 1998, accounts receivable amounted to $154.4 million, an increase of $9.4 million, compared to $145.0 million at December 31, 1997. The increase in accounts receivable was due to higher sales, larger amounts of accounts receivable for customer tooling and additional sales to foreign customers with longer payment terms. The average collection period at December 31, 1998 was 90.2 days compared to the average collection period at December 31, 1997 of 85.3 days. Management believes that the Company's long-term cash needs will continue to be provided principally by operating activities supplemented, to the extent required, by borrowing under the Company's existing and future credit facilities and by access to the capital markets. Management expects to replace these credit facilities as they expire with comparable facilities. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in this discussion that are not historical facts are forward-looking statements subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Whenever possible, the Company has identified these forward-looking statements by words such as "anticipating," "believes," "estimates," "expects," and similar expressions. The Company cautions readers of this discussion that a number of important factors could cause the Company's actual consolidated results for 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These important factors include, without limitation, changes in demand for automobiles and light trucks, relationships with significant customers, price pressures, the timing and structure of future acquisitions or dispositions including the restructuring program announced during the fourth quarter of 1997, impact of environmental regulations, the year 2000 computer issue, continued availability of adequate funding sources, currency and other risks inherent in international sales, and general economic and business conditions. These important factors, and other factors which could affect the Company's results, are more fully disclosed in the Company's filings with the Securities and Exchange Commission. Readers of this discussion are referred to such filings. The Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates in the normal course of business. The Company manages these risks through the use of derivative financial instruments in accordance with management's guidelines. The Company does not enter into derivative financial instruments for trading purposes. A discussion of the Company's accounting policies for these instruments is included in Note 1 to the Company's consolidated financial statements and further disclosure is provided in Note 12 to the Company's consolidated financial statements. The Company uses a combinantion of fixed rate and variable rate debt to manage its exposure to changes in interest rates based on its financing and cash management activities. The table below provides information about the Company's long term debt obligations that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average interest rates are based on implied forward rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency. The instrument's actual cash flows are denominated in both U.S. dollars ($US) and Belgian Francs (BEF), as indicated in parentheses (in thousands).
December 31, 1998 Expected Maturity Date - --------------------- ------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 Thereafter Total Fair Value ----- ----- ----- ----- ------ ---------- ------- ---------- Fixed rate (US$) $ 910 $1,080 $1,134 $ 481 $ 387 $212,254 $216,246 $212,250 Average interest rate 7.1% 7.0% 7.1% 6.7% 6% 9.9% 9.9% Fixed rate (BEF) - - - - 5,550 - 5,550 2,805 Average interest rate 5.4% 5.4% Variable rate (US$) 1,493 1,493 1,493 1,493 89,924 9,000 104,896 104,896 Average interest rate 8.0% 8.0% 8.1% 8.1% 8.1% 4.7% 7.8%
The Company enters into foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates related to buying, selling, and financing in foreign currencies and to manage exposure related to uncertainty to which future earnings or assets and liability values are exposed to operating cash flows and financial instruments denominated in foreign currencies. These commitments are generally for terms of less than one year. The Company has performed a quantitative analysis of its overall currency rate exposure at December 31, 1998. Based on this analysis, a 10% change in currency rates would not have a material effect on its earnings. 20 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated balance sheets are as of December 31, 1998 and 1997 and the consolidated statements of income, cash flows and stockholders equity are for each of the years ended December 31, 1998, 1997 and 1996. Report of Independent Public Accountants, page F-1. Consolidated Balance Sheets, page F-2. Consolidated Statements of Income, page F-3. Consolidated Statements of Stockholders' Equity, page F-4. Consolidated Statements of Cash Flows, page F-5. Notes to Consolidated Financial Statements, pages F-6 through F-22. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 21 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to "Election of Directors" on pages 2 through 5, "Identification of Other Executive Officers" on page 7 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 7 of the Company's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 4, 1999 (the "1999 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to "Executive Compensation" on pages 8 through 11 and "Compensation of the Board of Directors" on page 5 of the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to "Security Ownership of Certain Beneficial Owners and Management" on pages 13 and 14 of the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to "Indebtedness of Management" on page 7 of the 1999 Proxy Statement. 22 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. The following consolidated financial statements of the Company and its subsidiaries, together with the applicable report of independent public accountants, are included in Item 8: Report of Independent Public Accountants, page F-1. Consolidated Balance Sheets at December 31, 1998 and 1997, page F-2. Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996, page F-3. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996, page F-4. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996, page F-5. Notes to Consolidated Financial Statements, page F-6 through F-22. 2. The following consolidated supplemental financial information of the Company and its subsidiaries for the three years ended December 31, 1998, 1997 and 1996 is filed as part of this Form 10-K. Report of Independent Public Accountants, page S-1. Supplemental Notes to Consolidated Financial Statements, page S-2 through S-12. (1) Valuation and Qualifying Accounts. (2) Supplemental Guarantor Condensed Consolidating Financial Statements. The information required to be submitted in Schedule II is included in the Supplemental Note 1 to Consolidated Financial Statements. 3. The following exhibits are filed with this report or incorporated by reference as set forth below. EXHIBIT NO. 3.1 Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-3, File No. 333-18317. (2) 3.2 By-laws of the Company, as amended, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. (2) 23 25 EXHIBIT NO. 3.3 Amendment to Section 2.9 of the By-laws of the Company, filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) 4.1 Indenture for the 10 1/8% Senior Notes due 2007 dated as of December 15, 1997 among the Company, Walbro Automotive Corporation, Walbro Engine Management Corporation, Sharon Manufacturing Company, Whitehead Engineered Products, Inc. and Bankers Trust Company, as Trustee (including form of the Exchange Note and form of Guarantee), filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, File No. 333-45693. (2) 4.2 Purchase Agreement dated December 11, 1997 among the Company, Walbro Automotive Corporation, Walbro Engine Management Corporation, Sharon Manufacturing Company, Whitehead Engineered Products, Inc. and Salomon Brothers Inc., filed as Exhibit 4.2 to the Company's Registration Statement on Form S-4, File No. 333-45693. (2) 4.3 Registration Rights Agreement dated December 11, 1997 among the Company, Walbro Automotive Corporation, Walbro Engine Management Corporation, Sharon Manufacturing Company, Whitehead Engineered Products, Inc. and Salomon Brothers Inc., filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, File No. 333-45693. (2) 4.4 Form of the Exchange Note (included in Exhibit 4.1). 4.5 Form of Guarantee (included in Exhibit 4.1). 4.6 Loan Agreement between Walbro Automotive Corporation and the Town of Ossian, Indiana, dated as of December 1, 1993, filed as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (2) 4.7 Indenture for the 9 7/8% Senior Notes due 2005 dated as of July 27, 1995 among the Company, Walbro Automotive Corporation, Walbro Engine Management Corporation, Sharon Manufacturing Company, Whitehead Engineered Products, Inc. and Bankers Trust Company, as Trustee (including form of Exchange Note), filed as Exhibit 2.3 to the Company's Current Report on Form 8-K dated July 27, 1995. (2) 4.8 Certificate of Trust of Walbro Capital Trust dated December 17, 1996 filed as Exhibit 4.10 to the Company's Registration Statement on Form S-3, File No. 333-18317. (2) 4.9 Amended and Restated Declaration of Trust of Walbro Capital Trust dated as of February 3, 1997 among Walbro Corporation, as Sponsor, Bankers Trust (Delaware), as Delaware Trustee, and Lambert E. Althaver, Daniel L. Hittler and Michael A. Shope, as Regular Trustees, filed as Exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2) 4.10 Indenture between Walbro Corporation and Bankers Trust Company, as Indenture Trustee, dated as of February 3, 1997, filed as Exhibit 4.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2) 4.11 Form of Preferred Security issued by Walbro Capital Trust, included as Exhibit A-1 to Exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2) 4.12 Convertible Debenture issued by Walbro Corporation to Walbro Capital Trust, included as Exhibit A to Exhibit 4.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2) 4.13 Preferred Securities Guarantee Agreement between Walbro Corporation, as Guarantor, and Bankers Trust Company, as Guarantee Trustee, with respect to the Preferred Securities of Walbro Capital Trust dated as of February 3, 1997, filed as Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2) 24 26 EXHIBIT NO. 4.14 Rights Agreement dated as of June 30, 1998 between Walbro Corporation and Harris Trust and Savings Bank, filed as Exhibit 1 to the Company's Registration Statement on Form 8-A filed on July 8, 1998. (2) 4.15 Financing and Security Agreement between the Company and NationsBank N.A., as Administrative Agent and Lender, dated May 29, 1998, filed as exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (2) 4.16 Amendment No. 1 to the Financing and Security Agreement between the Company and NationsBank, N.A., as Administrative Agent and Lender, dated December 31, 1998, filed as exhibit 4.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (2) 10.1 Joint Venture Agreement between the Company and Mitsuba Electric Manufacturing Company, Ltd. dated December 12, 1986, filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. (2) 10.2 The Company's Amended and Restated Equity Based Long-Term Incentive Plan effective as of June 20, 1994, filed as exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (2)(3) 10.3 Retirement Income Plan for Directors dated February 9, 1988, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (2)(3) 10.4 The Company's Employee Stock Ownership Plan dated August 15, 1989, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. (2) 10.5 Walbro Engine Management Incentive Compensation Plan, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (2)(3) 10.6 Joint Venture Agreement dated June 17, 1991 between the Company and Jaeger S.A., an indirect, majority-controlled subsidiary of Magneti Marelli S.p.A., relating to the Marwal Systems S.A. joint venture, filed as Exhibit 10.23 to the Company's Registration Statement on Form S-2, File No. 33-41425. (2) 10.7 Joint Venture Agreement between the Company and Jaeger S.A. dated as of January 1, 1993 relating to the Marwal do Brasil joint venture, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (2) 10.8 The Company's Advantage Plan, filed as the Exhibit to the Company's Registration Statement on Form S-8 filed October 28, 1991. (2)(3) 10.9 Joint Venture Contract among Walbro Engine Management Corporation, Fujian Fuding Carburetor Factory and Twin Winner Trading Co., Ltd. dated December 30, 1993 relating to the Fujian Hualong Carburetor Co. Ltd. joint venture, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) 10.10 Agreement among the Company, Walbro Automotive Corporation and Magneti Marelli France S.A. dated February 7, 1995, filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) 10.11 Purchase and Sale Agreement dated as of April 7, 1995 between the Company and Dyno Industrier AS, filed as Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (2) 10.12 Addendum to Purchase and Sale Agreement between the Company and Dyno Industrier AS dated as of July 27, 1995, filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated July 27, 1995. (2) 10.13 General Partnership Agreement dated August 18, 1995 between Iwaki Diecast U.S.A., Inc. and Walbro Tucson Corp., filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (2) 10.14 Employment Agreement between the Company and Daniel L. Hittler dated August 16, 1996, filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 25 27 EXHIBIT NO. 10.15 Termination and Change of Control Agreement between the Company and Daniel L. Hittler dated August 16, 1996, filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.16 Employment Agreement between the Company and Michael A. Shope dated August 16, 1996, filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.17 Termination and Change of Control Agreement between the Company and Michael A. Shope dated August 16, 1996, filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.18 Employment Agreement between the Company and Robert H. Walpole dated August 16, 1996, filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.19 Termination and Change of Control Agreement between the Company and Robert H. Walpole dated August 16, 1996, filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.20 Employment Agreement between the Company and R.H. Whitehead III dated August 16, 1996, filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.21 Termination and Change of Control Agreement between the Company and R.H. Whitehead III dated August 16, 1996, filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (2)(3) 10.22 Amended and Restated Employment Agreement between the Company and Frank E. Bauchiero effective as of April 17, 1998, filed as exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (2)(3) 10.23 Amended and Restated Termination and Change of Control Agreement between the Company and Frank E. Bauchiero effective as of April 17, 1998, filed as exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (2)(3) 10.24 The Company's Broad-Based Long Term Incentive Plan, filed as Exhibit 10.33 to the Company's Registration Statement on Form S-4, File No. 333-45693. (2) 23.1 Consent of Arthur Andersen LLP. (1) 23.2 Consent of Ernst & Young Audit. (1) - ------------------ (1) Filed herewith. (2) Incorporated by reference. (3) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: There was no report on Form 8-K filed during the last quarter of the period covered by this Form 10-K. (d) (1) The following Financial Statements of Marwal Systems S.N.C. as of December 31, 1998, 1997 and 1996, and for the years ended December 31, 1998, 1997 and 1996 are included as part of this Form 10-K/A on pages F-23 through F-68: Letter of Confirmation . . . . . . . . . . . . . . . . . . . . . . .F-23 Report of Independent Public Accountants for 1998 . . . . . . . . . .F-24 Balance Sheet as of December 31, 1998 . . . . . . . . . . . . . . . .F-25 Income Statement for the year ended December 31, 1998 . . . . . . . .F-27 Notes to the Financial Statements for 1998. . . . . . . . . . . . . .F-29 Report of Independent Public Accountants for 1997 . . . . . . . . . .F-39 Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . .F-40 Income Statement for the year ended December 31, 1997 . . . . . . . .F-42 Notes to the Financial Statements for 1997. . . . . . . . . . . . . .F-44 Report of Independent Public Accountants for 1996 . . . . . . . . . .F-55 Balance Sheet as of December 31, 1996 . . . . . . . . . . . . . . . .F-56 Income Statement for the year ended December 31, 1996 . . . . . . . .F-58 Notes to the Financial Statements for 1996. . . . . . . . . . . . . .F-60 26 28 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, on the 20th day of April, 1999. WALBRO CORPORATION By: /s/ MICHAEL A. SHOPE ----------------------------------------- Michael A. Shope, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- PRESIDENT, CHIEF OPERATING OFFICER AND /S/ FRANK E. BAUCHIERO DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) APRIL 20, 1999 - ----------------------------- FRANK E. BAUCHIERO CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL /S/ MICHAEL A. SHOPE AND ACCOUNTING OFFICER) APRIL 20, 1999 - ----------------------------- MICHAEL A. SHOPE /S/ JOHN E. UTLEY CHAIRMAN OF THE BOARD APRIL 20, 1999 - ----------------------------- John E. Utley /S/ VERNON E. OECHSLE DIRECTOR APRIL 20, 1999 - ----------------------------- VERNON E. OECHSLE /S/ ROBERT D. TUTTLE DIRECTOR APRIL 20, 1999 - ---------------------------- ROBERT D. TUTTLE /S/ WILLIAM T. BACON, JR. DIRECTOR APRIL 20, 1999 - ----------------------------- WILLIAM T. BACON, JR. /S/ ROBERT H. WALPOLE DIRECTOR APRIL 20, 1999 - ----------------------------- Robert H. Walpole /S/ J. DWANE BAUMGARDNER DIRECTOR APRIL 20, 1999 - ----------------------------- J. DWANE BAUMGARDNER
27 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Walbro Corporation & Subsidiaries TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF WALBRO CORPORATION: We have audited the accompanying consolidated balance sheets of Walbro Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Marwal Systems, S.N.C. and Marwal do Brasil Ltda., the investments in which are reflected in the accompanying consolidated financial statements using the equity method of accounting. The investments in Marwal Systems, S.N.C. and Marwal do Brasil Ltda. together represent 3.9% and 3.7% of consolidated total assets in 1998 and 1997, respectively, and the equity in their net income together represents income of $1,559,000, $3,710,000 and $4,560,000 in 1998, 1997 and 1996, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Walbro Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Detroit, Michigan, February 17, 1999. F-1 30 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 -------- -------- (In Thousands, Except Share Data) ASSETS Current Assets: Cash...................................................... $ 19,647 $ 13,539 Accounts receivable, net.................................. 154,416 144,985 Inventories............................................... 60,871 56,207 Prepaid expenses and other................................ 11,734 17,405 Deferred and refundable income taxes...................... 10,735 8,519 -------- -------- Total Current Assets................................... 257,403 240,655 -------- -------- Plant and Equipment, at cost: Land...................................................... 4,905 5,230 Buildings and improvements................................ 94,842 90,099 Machinery and equipment................................... 308,151 297,032 -------- -------- 407,898 392,361 Less--Accumulated depreciation............................ 129,357 116,991 -------- -------- Net Plant and Equipment................................ 278,541 275,370 -------- -------- Other Assets: Assets held for sale...................................... 3,175 -- Joint ventures............................................ 38,435 26,681 Investments............................................... 2,690 3,261 Goodwill, net............................................. 31,887 32,803 Notes receivable.......................................... 2,023 126 Deferred income taxes..................................... 5,612 8,179 Other..................................................... 28,901 23,518 -------- -------- Total Other Assets..................................... 112,723 94,568 -------- -------- Total Assets........................................... $648,667 $610,593 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt......................... $ 2,403 $ 13,960 Bank and other borrowings................................. 12,012 26,204 Accounts payable.......................................... 114,133 84,209 Accrued liabilities....................................... 31,009 39,221 Dividends payable......................................... 920 1,788 -------- -------- Total Current Liabilities.............................. 160,477 165,382 -------- -------- Long-Term Liabilities: Long-term debt, less current portion...................... 324,289 291,393 Pension obligations and other............................. 11,585 11,823 Deferred income taxes..................................... 4,535 2,077 Minority interest......................................... 1,225 1,052 -------- -------- Total Long-Term Liabilities............................ 341,634 306,345 -------- -------- Company-obligated mandatorily redeemable convertible preferred securities of Walbro Capital Trust holding solely convertible debentures............................. 69,000 69,000 Stockholders' Equity: Common stock, $.50 par value; authorized 25,000,000; outstanding 8,688,294 in 1998 and 8,682,595 in 1997.... 4,344 4,341 Paid-in capital........................................... 66,088 66,151 Retained earnings......................................... 37,656 33,938 Deferred compensation..................................... (125) (379) Accumulated other comprehensive income.................... (30,407) (34,185) -------- -------- Total Stockholders' Equity............................. 77,556 69,866 -------- -------- Total Liabilities and Stockholders' Equity............. $648,667 $610,593 ======== ========
The accompanying notes are an integral part of these statements. F-2 31 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------- -------- -------- (In Thousands, Except Per Share Data) Net Sales...................................... $677,990 $619,905 $585,389 Costs and Expenses: Cost of sales................................ 571,992 538,751 488,134 Selling and administrative expenses.......... 55,643 60,786 52,177 Research and development expenses............ 12,883 17,289 18,400 Restructuring and impairment charges......... -- 27,000 -- -------- -------- -------- Operating Income (Loss)........................ 37,472 (23,921) 26,678 Other Expense (Income): Interest expense, net of capitalized interest of $204 in 1998, $1,207 in 1997 and $3,683 in 1996................................... 31,806 25,410 20,535 Interest income.............................. (3,177) (674) (2,716) Royalty income, net.......................... (3,228) (3,878) (1,410) Foreign currency exchange gain............... (1,262) (308) (70) Other........................................ (785) 365 (63) -------- -------- -------- Income (Loss) Before (Provision) Credit for Income Taxes, Minority Interest, Equity in Income of Joint Ventures and Extraordinary item......................................... 14,118 (44,836) 10,402 (Provision) Credit for Income Taxes............ (3,967) 10,131 (3,075) Minority Interest.............................. (5,806) (5,035) (285) Equity in Income of Joint Ventures............. 846 3,113 4,187 -------- -------- -------- Income (Loss) before Extraordinary Item........ 5,191 (36,627) 11,229 Extraordinary Item (net of tax of $762)........ (1,473) -- -- -------- -------- -------- Net Income (Loss).............................. $ 3,718 $(36,627) $ 11,229 ======== ======== ======== Basic and Diluted Income (Loss) Per Share before Extraordinary Item.................... $ 0.60 $ (4.23) $ 1.30 Extraordinary Item............................. (0.17) -- -- -------- -------- -------- Basic and Diluted Net Income (Loss) Per Share........................................ $ 0.43 $ (4.23) $ 1.30 ======== ======== ======== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 1998, 1997 and 1996 Net Income (Loss).............................. $ 3,718 $(36,627) $ 11,229 Other Comprehensive Income, net of tax: Minimum pension liability adjustment......... -- -- 63 Unrealized loss on securities available for sale...................................... (207) (620) (139) Cumulative translation adjustments........... 3,985 (28,226) (6,580) -------- -------- -------- Other Comprehensive Income (Loss).............. 3,778 (28,846) (6,656) -------- -------- -------- Comprehensive Income (Loss).................... $ 7,496 $(65,473) $ 4,573 ======== ======== ========
The accompanying notes are an integral part of these statements. F-3 32 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996
Accumulated Other Comprehensive Income --------------------------------------- Unrealized Gain (Loss) Minimum on Securities Cumulative Common Paid-in Retained Deferred Pension Available Translation Stock Capital Earnings Compensation Liability for Sale Adjustments ------ ------- -------- ------------ --------- ------------- ----------- (In Thousands, Except Share Data) Balance-- December 31, 1995....... $4,290 $64,381 $ 66,256 $(817) $(63) $ 827 $ 553 Exercise of stock options............... 21 750 -- -- -- -- -- ESOP debt payments...... -- -- -- 408 -- -- -- Restricted stock issued................ 15 543 -- (558) -- -- -- Net income.............. -- -- 11,229 -- -- -- -- Adjust minimum pension liability............. -- -- -- -- 63 -- -- Cash dividends ($.40 per share)................ -- -- (3,446) -- -- -- -- Change in market value of securities available for sale.... -- -- -- -- -- (139) -- Translation adjustments........... -- -- -- -- -- -- (6,580) ------ ------- -------- ----- ---- ----- -------- Balance-- December 31, 1996....... 4,326 65,674 74,039 (967) -- 688 (6,027) Exercise of stock options............... 15 477 -- -- -- -- -- ESOP debt payments...... -- -- -- 408 -- -- -- Change in restricted stock................. -- -- -- 180 -- -- -- Net loss................ -- -- (36,627) -- -- -- -- Cash dividends ($.40 per share)................ -- -- (3,474) -- -- -- -- Change in market value of securities available for sale.... -- -- -- -- -- (620) -- Translation adjustments........... -- -- -- -- -- -- (28,226) ------ ------- -------- ----- ---- ----- -------- Balance-- December 31, 1997....... 4,341 66,151 33,938 (379) -- 68 (34,253) Exercise of stock options............... 3 54 -- -- -- -- -- ESOP debt payments...... -- -- -- 408 -- -- -- Change in restricted stock................. -- (117) -- (154) -- -- -- Net income.............. -- -- 3,718 -- -- -- -- Change in market value of securities available for sale.... -- -- -- -- -- (207) -- Translation adjustments........... -- -- -- -- -- -- 3,985 ------ ------- -------- ----- ---- ----- -------- Balance-- December 31, 1998....... $4,344 $66,088 $ 37,656 $(125) $ -- $(139) $(30,268) ====== ======= ======== ===== ==== ===== ========
The accompanying notes are an integral part of these statements. F-4 33 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 --------- --------- --------- (In Thousands) Cash Flows From Operating Activities: Net income (loss)........................ $ 3,718 $ (36,627) $ 11,229 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Depreciation and amortization....... 36,683 31,417 29,736 (Gain) loss on disposition of assets........................... (785) 1,459 774 Minority interest................... 286 (624) (238) Equity in income of joint ventures......................... (846) (3,113) (4,187) Restructuring and impairment charges.......................... -- 27,000 -- Change in assets and liabilities, net of effects of acquisitions--................... Accounts receivable, net....... (10,499) (28,299) (16,956) Inventories.................... (4,362) (8,674) (473) Prepaid expenses and other..... 5,012 (10,933) (5,943) Deferred and refundable income taxes....................... 2,208 (8,631) (762) Accounts payable and accrued liabilities................. 22,874 12,687 25,507 Pension obligations and other....................... 313 (1,888) (2,049) --------- --------- --------- Total adjustments................ 50,884 10,401 25,409 --------- --------- --------- Net cash provided by (used in) operating activities........... 54,602 (26,226) 36,638 --------- --------- --------- Cash Flows From Investing Activities: Purchase of plant and equipment.......... (42,006) (62,019) (99,147) Acquisitions, net of cash acquired....... -- -- (1,018) Purchase of other assets................. (5,476) (3,087) (3,434) Investment in joint ventures and other... (11,569) 1,756 (1,451) Proceeds from disposal of assets......... 8,379 5,415 4,156 --------- --------- --------- Net cash used in investing activities..................... (50,672) (57,935) (100,894) --------- --------- --------- Cash Flows From Financing Activities: Borrowings under revolving lines-of-credit....................... 230,453 199,981 200,548 Repayments under revolving lines-of-credit....................... (157,109) (283,116) (135,298) Debt repayments.......................... (68,831) (1,210) (1,104) Proceeds from issuance of debt........... -- 105,404 2,772 Proceeds from issuance of convertible preferred securities.................. -- 69,000 -- Proceeds from issuance of common stock and options........................... 57 492 771 Financing fees paid...................... (2,603) (5,680) (508) Cash dividends paid...................... (868) (3,463) (3,439) --------- --------- --------- Net cash provided by financing activities..................... 1,099 81,408 63,742 --------- --------- --------- Effect of Exchange Rate Changes on Cash.... 1,079 (1,921) (1,065) --------- --------- --------- Net Increase (Decrease) in Cash............ 6,108 (4,674) (1,579) Cash at Beginning of Year.................. 13,539 18,213 19,792 --------- --------- --------- Cash at End of Year........................ $ 19,647 $ 13,539 $ 18,213 ========= ========= =========
The accompanying notes are an integral part of these statements. F-5 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Principles of Consolidation: - ----------------------------- The consolidated financial statements include the accounts of Walbro Corporation and its wholly-owned and majority-owned subsidiaries (the Company). Investments in joint ventures are accounted for under the equity method (Note 8). Significant transactions and balances among the Company and its subsidiaries have been eliminated in the consolidated financial statements. Foreign Currency Translation: - -------------------------------- The assets and liabilities of the Company's foreign operations are generally translated into U.S. dollars at current exchange rates, and revenues and expenses are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred. Accounts Receivable: - ----------------------- Accounts receivable are net of allowances for doubtful accounts of $4,159,000 and $809,000 as of December 31, 1998 and 1997, respectively. Inventories: - ------------ Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories include raw materials and component parts, work-in-process and finished products. Work-in-process and finished products inventories include material, labor and manufacturing overhead costs. Inventory at December 31 consisted of the following:
1998 1997 ------- ------- (In Thousands) Raw materials and components.......... $34,804 $30,857 Work-in-process....... 6,287 6,545 Finished products..... 19,780 18,805 ------- ------- $60,871 $56,207 ======= =======
Plant and Equipment: - ----------------------- The Company provides for depreciation of plant and equipment based upon the acquisition costs and the estimated service lives of depreciable assets. The straight-line method is the principal method used to compute depreciation for financial reporting purposes. However, the units-of-production method is used to compute depreciation of certain equipment. Estimated service lives of depreciable assets are as follows: buildings and improvements - 10 to 40 years, machinery and equipment - 5 to 15 years. Investments: - ------------- The carrying value of marketable equity securities is market value. The Company classifies certain investments in common stock securities as "available-for-sale", recording these investments at fair market value with the gross unrealized gains and losses, after-tax, included as a separate component of stockholders' equity. At December 31, 1998, the Company had no investments classified as "trading." At December 31, 1997, the fair market value of investments classified as "trading" was $687,000. Goodwill: - ---------- Goodwill consists of purchase price and related acquisition costs in excess of the fair value of the identifiable net assets acquired. Goodwill is amortized on a straight-line basis over 15 to 40 years. The Company evaluates the carrying value of goodwill for potential impairment on an ongoing basis. Such evaluations compare the undiscounted expected future cash flows of the operations to which the goodwill relates to the carrying value of the goodwill. The Company also considers future anticipated operating results, trends and other circumstances in making such evaluations. Goodwill consisted of the following at December 31:
1998 1997 ------- ------- (In Thousands) Goodwill.............. $39,559 $39,449 Less: Accumulated amortization........ (7,672) (6,646) ------- ------- $31,887 $32,803 ======= =======
Income Taxes: - --------------- Deferred income taxes represent the effect of cumulative temporary differences between income and expense items reported for financial statement and tax purposes, and between the bases of various assets and liabilities for financial statement and tax purposes. Deferred tax assets are reduced by a valuation allowance if, based on the F-6 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Walbro Corporation & Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (continued) weight of evidence, it is deemed more likely than not that the assets will not be realized. Financial Instruments: In order to manage exposure to fluctuations in foreign currency exchange rates, the Company enters into forward currency exchange contracts. Gains and losses on contracts that hedge specific foreign currency commitments are deferred and recognized in net income in the period in which the related transaction is consummated. Gains and losses on contracts that hedge net investments in foreign joint ventures or subsidiaries are recognized as cumulative translation adjustments in stockholders' equity. Gains and losses on forward currency exchange contracts that do not qualify as hedges are recognized as foreign currency exchange gain or loss. Asset Impairments: The Company continually evaluates whether events and circumstances have occurred that indicate that the carrying amount of certain long-lived assets may not be recoverable. When events and circumstances indicate that a long-lived asset should be evaluated for possible impairment, the Company uses an estimate of the expected undiscounted future cash flows to be generated by the asset to determine whether the carrying amount is recoverable or if an impairment exists. When it is determined that an impairment exists, the Company uses the fair market value of the asset, usually measured by the expected discounted future cash flows to be generated by the asset, to determine the amount of impairment to be recorded in the financial statements. Comprehensive Income: During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income. Comprehensive income is defined as all changes in a Company's net assets except changes resulting from transactions with shareholders. It differs from net income in that certain items currently recorded to equity are included in comprehensive income. Prior years have been restated to conform to the requirements of SFAS No. 130. Reclassifications: Certain amounts in prior years' consolidated financial statements have been reclassified to conform with the presentation used in 1998. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. NOTE 2. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS. During the fourth quarter of 1997, the Company recorded a $27,000,000 pre-tax charge for restructuring its operations and other actions. The charge was comprised of a $17,000,000 charge for restructuring and a $10,000,000 charge associated with asset impairments. In addition, the Company recorded a pre-tax charge of $5,700,000 for warranty costs (included in cost of sales) which became known during the fourth quarter of 1997. The components of the restructuring charge included $15,100,000 million for the divestiture of non-strategic businesses and facilities, $1,200,000 for personnel reductions and $700,000 for other actions. The divestiture component included $8,100,000 related to the divestiture of the Company's Ligonier, Indiana, steel fuel rail manufacturing facility, $5,700,000 related to the planned disposition of its interest in U.S. Coexcell Inc., a manufacturer of blow-molded plastic drums in Maumee, Ohio, $400,000 related to the movement of small engine operations in Mexico to a larger facility, $500,000 related to the divestiture of the Company's share of an automotive joint venture in Korea and $400,000 related to the consolidation of small engine operations in the Asia-Pacific region. Amounts paid to consolidate these small engine operations were charged against the reserve during 1998 at approximately the amount established as of December 31, 1997. The $8,100,000 charge related to the divestiture of the Company's steel fuel rail facility is comprised of $7,800,000 of non-cash asset revaluations and $300,000 of exit F-7 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Walbro Corporation & Subsidiaries NOTE 2. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS. (continued) cost liabilities. This facility was sold as of May 31, 1998, resulting in a gain of approximately $500,000. Exit costs were paid and charged against the reserve during 1998 at approximately the amount established as of December 31, 1997. The $5,700,000 charge related to the planned disposition of the Company's interest in U.S. Coexcell Inc. is comprised of $5,300,000 of non-cash asset revaluations and $400,000 of exit cost liabilities. The Company did not complete the disposition of U.S. Coexcell Inc. during 1998 and continued to operate the facility. The Company is continuing to evaluate its options for U.S. Coexcell Inc.. As such, no payments were made or charged against the reserve during 1998. The $400,000 related to the movement of small engine operations in Mexico to a larger facility represents primarily remaining lease payments on the old facility for the period of time in which the Company will no longer use the facility. Of the amount established as of December 31, 1997, $300,000 was paid and charged against the reserve during 1998 and $100,000 remains accrued at December 31, 1998 for the first quarter of 1999. The $500,000 related to the divestiture of the Company's share of an automotive joint venture in Korea represents a non-cash charge to reduce the Company's investment to zero. During 1998, the Company divested its share of the joint venture. The $1,200,000 charge for personnel reductions relates to severance costs associated with a corporate-wide headcount reduction program including reductions related to the divestitures and restructuring. The Company planned to reduce the overall work force by approximately 10% or 500 employees, working in both manufacturing and administrative capacities. During 1998, approximately $1,000,000 was paid and charged against the reserve. The remainder will be paid and charged against the reserve during 1999. The components of the $10,000,000 charge for asset impairments include $4,200,000 to write-down to net realizable value certain tooling, machinery and equipment, $2,800,000 to reserve for uncertainties related to its Korean automotive activities, $1,300,000 to write-off its interest in Saginaw Plastics, an injection molder in Saginaw, Michigan and $1,700,000 associated with other impairment issues. No further circumstances arose during 1998 to question the net realizable value of these assets. NOTE 3. CONVERTIBLE TRUST PREFERRED SECURITIES. In February 1997, the Company sold 2,760,000 Convertible Trust Preferred Securities of Walbro Capital Trust, a wholly-owned subsidiary of the Company, at a face value of $25 per share and an interest rate of 8% per annum. The preferred securities are convertible into common stock of the Company at the option of the security-holder at a rate of 1.1737 shares of common stock for each preferred security. Net proceeds of the offering were approximately $66,000,000 and were used to repay a portion of the Company's Old Revolving Credit Facility. NOTE 4. STOCKHOLDERS' EQUITY. The Company has a stock rights plan which entitles the holder of each right, upon the occurrence of certain events, to purchase one-hundredth of a share of a new series of preferred stock (Series A Junior Participating Preferred Stock) for $45. The rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer upon consummation of which such person or group would own 15% or more of the Company's common stock. F-8 37 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5. LONG-TERM DEBT AND LINES OF CREDIT. Long-term debt consisted of the following at December 31:
1998 1997 -------- -------- (In Thousands) Senior notes due 2005, unsecured, stated interest at 9.875% (9.92% effective interest rate), net of unamortized discount of $253 and $292 at December 31, 1998 and 1997, respectively(b)........................................... $109,747 $109,708 Senior notes due 2007, unsecured, interest at 10.125%(b).... 100,000 100,000 New Revolving Credit Facility, secured, interest at the LIBOR or prime rate, plus an additional margin. (a)....... 93,312 -- New Purchase Money Loan Agreement, secured, interest at the LIBOR or prime rate, plus an additional margin (a)........ 2,584 -- Old Revolving Credit Facility, repaid during 1998 (a)....... -- 19,700 Old Purchase Money Loan Agreement, repaid during 1998 (a)... -- 2,852 2004 Senior Notes, repaid during 1998 (a)................... -- 45,000 Industrial revenue bond, secured, issued by Town of Ossian, Indiana, interest at a variable municipal bond rate, due in 2023................................................... 9,000 9,000 Industrial revenue bond, issued by City of Ligonier, Indiana, repaid during 1998............................... -- 6,300 Term loan, interest at 5.44% payable in Belgian Francs in quarterly amounts from 2003 to 2007....................... 5,550 5,163 Term loan from the State of Connecticut, secured, interest at 6% per annum, payable in monthly amounts from 1998 to 2006...................................................... 3,400 3,400 Capital lease obligation, interest at 7.5%, payable in monthly amounts through February 2002..................... 2,399 3,042 Other....................................................... 700 1,188 -------- -------- 326,692 305,353 Less--current portion....................................... 2,403 13,960 -------- -------- $324,289 $291,393 ======== ========
(a) In May 1998, the Company executed a new $150,000,000 multi-currency revolving credit facility (New Credit Facility) for the Company and certain of its wholly-owned domestic and foreign subsidiaries. The proceeds of the New Credit Facility were used to retire the Old Revolving Credit Facility, the Old Purchase Money Loan Agreement and the 2004 Senior Notes. The early retirement of these debt instruments resulted in an extraordinary charge of $1,473,000 (net of tax) during 1998. The New Credit Facility consists of a $125,000,000 revolving line of credit (New Revolving Credit Facility) and a $25,000,000 capital expenditure facility (New Purchase Money Loan Agreement). The New Credit Facility is available through May 2003. Borrowings under the New Revolving Credit Facility bear interest at either the London interbank offered rate (LIBOR), plus 2.25% or at the prime rate, plus 0.25%. Availability under the New Revolving Credit Facility is subject to a borrowing base, consisting of 85% of the eligible accounts receivable of the Company and certain of its subsidiaries, plus the lesser of (i) 60% of certain raw materials and finished products inventory and 70% of commodity raw material resin inventory or (ii) $50,000,000, less customary reserves. The New Purchase Money Loan Agreement bears interest at either the LIBOR, plus 2.50% or at the prime rate, plus 0.50%. Amounts drawn under the New Purchase Money Loan Agreement are repayable in 20 equal quarterly principal installments, beginning one quarter after such draw. If the New Revolving Credit Facility is terminated by the Company during the first three years, certain pre-payment fees may be applicable. The New Credit Facility contains numerous covenants, including financial covenants such as a fixed charge coverage ratio and a senior secured funded indebtedness to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, and restrictions on additional indebtedness, liens, capital expenditures, mergers and sales of assets, and events of default. Obligations outstanding under the New Revolving Credit Facility are secured by accounts receivable, inventory capital expenditure line equipment and general intangibles of the Company and certain of its subsidiaries, and are also secured by a pledge of the stock of certain of the material domestic subsidiaries of the Company and 65% of the stock of the material foreign subsidiaries of the Company. Each advance under the New Purchase Money Loan Agreement is secured by the item of equipment purchased with the proceeds of such advance. The collateral for the New F-9 38 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5. LONG-TERM DEBT AND LINES OF CREDIT. (continued) Purchase Money Loan Agreement does not constitute collateral for the New Revolving Credit Facility. In addition, certain of the subsidiaries of the Company provide guarantees of the obligation under the New Credit Facility. (b) In July 1995, the Company sold $110,000,000 in aggregate principal amount of 9.875% Senior Notes due 2005 (the 2005 Notes). In December 1997, the Company sold $100,000,000 in aggregate principal amount of 10.125% Senior Notes due 2007 (the 2007 Notes). The 2005 Notes and 2007 Notes are general unsecured obligations of the Company with interest payable semi-annually. The 2005 Notes and 2007 Notes are guaranteed on a senior unsecured basis, jointly and severally, by each of the Company's principal wholly-owned domestic operating subsidiaries and certain of its indirect wholly-owned subsidiaries. Except as noted below, the 2005 Notes and 2007 Notes are not redeemable at the Company's option prior to July 15, 2000 and December 15, 2002, respectively. Thereafter, the 2005 Notes and 2007 Notes will be redeemable, in whole or part, at the option of the Company at various redemption prices as set forth in the 2005 Note Indenture and 2007 Note Indenture. In the event of a change in control, the Company will be obligated to make an offer to purchase all of the outstanding 2005 Notes and 2007 Notes at a premium. Also, in certain circumstances, the Company will be required to make an offer to repurchase the 2005 Notes at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of repurchase, with the net cash proceeds of certain asset sales. As of December 31, 1998 and 1997, assets recorded under capital lease obligations were approximately $4,793,000 and $5,127,000, respectively, net of accumulated amortization of approximately $1,140,000 and $806,000, respectively. Aggregate minimum principal payment requirements on long-term debt, including capital lease obligations, in each of the five years subsequent to December 31, 1998 are as follows: 1999 - $2,403,000; 2000 - $2,573,000; 2001 - $2,627,000; 2002 - $1,974,000; 2003 - $95,861,000; thereafter - $221,254,000. In addition to long-term debt, the Company and its subsidiaries have line of credit arrangements with foreign banks for short-term borrowings of approximately $15,493,000 and $27,600,000 at December 31, 1998 and 1997, respectively. The weighted average interest rate on short-term bank borrowings outstanding under these arrangements was 4.7% and 4.1% at December 31, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- NOTE 6. LEASES. The Company leases certain of its buildings, equipment and vehicles under operating leases. The leases involving buildings contain options enabling the Company to renew the leases at the end of the respective lease terms. Rent expense was approximately $6,313,000, $6,178,000 and $7,702,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Aggregate minimum future payments under noncancellable leases are as follows:
Capital Operating Leases Leases ------- --------- (In Thousands) 1999.................. $ 900 $ 7,234 2000.................. 883 6,531 2001.................. 862 6,244 2002.................. 142 5,723 2003.................. -- 4,731 Thereafter............ -- 18,536 ------ ------- Total minimum lease payments......... 2,787 $48,999 ======= Amount representing interest............ 315 ------ Present value of minimum lease payments......... $2,472 ======
F-10 39 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. INCOME TAXES. A summary of income (loss) before (provision) credit for income taxes, minority interest, equity in income of joint ventures and extraordinary item and components of the (provision) credit for the years ended December 31, are as follows:
1998 1997 1996 ------- -------- ------- (In Thousands) Income (loss) before (provision) credit for income taxes, minority interest, equity in income of joint ventures and extraordinary item: Domestic...................................... $ 4,255 $(31,095) $ 1,774 Foreign....................................... 9,863 (13,741) 8,628 ------- -------- ------- $14,118 $(44,836) $10,402 ======= ======== ======= (Provision) credit for income taxes: Currently payable-- Domestic...................................... $ 632 $ (3,297) $ (384) Foreign....................................... (1,185) (1,334) (2,456) ------- -------- ------- (553) (4,631) (2,840) ------- -------- ------- Deferred-- Domestic...................................... (2,511) 14,053 (988) Foreign....................................... (1,946) 3,264 (1,544) Utilization of tax credits.................... 2,861 1,000 2,517 Change in valuation allowance................. (1,818) (3,555) (220) ------- -------- ------- (3,414) 14,762 (235) ------- -------- ------- $(3,967) $ 10,131 $(3,075) ======= ======== =======
Reconciliations of the U.S. Federal statutory income tax rates to the Company's consolidated effective income tax rates for the years ended December 31, are as follows:
1998 1997 1996 ----- ----- ----- U.S. Federal statutory income tax rate............... 35.0% (35.0)% 35.0% Increase (decrease) in effective income tax rate resulting from-- Differences between U.S. and foreign income tax rates.............................................. (2.3) 6.4 9.4 Utilization of tax credits......................... (20.2) (2.2) (15.9) Increase in valuation allowance.................... 12.9 7.9 2.1 Foreign taxes and dividends........................ 10.8 3.4 -- Goodwill amortization.............................. 4.3 .4 1.5 Tax benefit on deductible preferred stock dividends....................................... (13.7) (3.9) -- Other, net......................................... 1.3 .4 (2.5) ----- ----- ----- Effective income tax rates........................... 28.1% (22.6)% 29.6% ===== ===== =====
F-11 40 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. INCOME TAXES. (continued) The components of the net deferred income tax asset at December 31 are summarized as follows:
1998 1997 -------- -------- (In Thousands) Deferred income tax liabilities: Depreciation and basis differences........................ $ 12,927 $ 8,715 Other..................................................... 756 279 -------- -------- 13,683 8,994 -------- -------- Deferred income tax assets: Estimated net operating loss carryforwards................ (7,406) (5,533) Employee benefits......................................... (2,927) (2,802) Foreign tax credit carryforwards.......................... (659) (980) Accruals.................................................. (1,845) (3,444) Other tax credit carryforwards............................ (8,965) (5,783) Inventory................................................. (1,709) (931) Accounts receivable reserve............................... (268) (114) Write-down of investment.................................. (368) (368) Loss on joint ventures.................................... (819) (1,086) Other..................................................... (1,103) (1,936) -------- -------- (26,069) (22,977) Valuation allowance....................................... 6,337 4,519 -------- -------- (19,732) (18,458) -------- -------- Net deferred income tax asset............................... $ (6,049) $ (9,464) ======== ========
At December 31, 1998, the cumulative amount of undistributed earnings of foreign subsidiaries was approximately $26,500,000. No deferred U.S. income taxes have been provided on these earnings as such amounts are deemed to be permanently reinvested. If such earnings were remitted, the impact of additional U.S. income taxes or foreign withholding taxes would not be significant. As of December 31, 1998, the Company has net operating loss carryforwards of approximately $23,515,000, which expire in varying amounts between 2003 and 2012, available from certain of its subsidiaries. The Company has recorded a deferred tax asset of $7,406,000 associated with these carryforwards. Realization of the related deferred tax asset is dependent on generating sufficient taxable income in specific countries prior to the expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Provisions (credits) for state income taxes are included in selling and administrative expenses and amounted to $410,000 in 1998, $(22,000) in 1997 and $197,000 in 1996. F-12 41 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8. JOINT VENTURES. The investments in joint ventures as of December 31 are as follows:
Percent Beneficial Ownership 1998 1997 1996 ---- ---- ---- Marwal Systems, S.N.C. (France)............. 49% 49% 49% Mitsuba-Walbro, Inc. (Japan).............. 50% 50% 50% Marwal do Brasil, Ltda................. 49% 49% 49% Korea Automotive Fuel Systems, Ltd......... -- 49% 49% Marwal de Mexico S.A. de C.V............... 52% 52% 52% Marwal Argentina S.A. ................ 49% 49% -- Vitec L.L.C............ 48% -- --
The above joint ventures are generally involved in the design and manufacture of precision fuel systems products for the global automotive market. All of the above investments in joint ventures are accounted for using the equity method. Certain adjustments are made to the joint ventures' income so that recorded income is stated in accordance with United States generally accepted accounting principles. At December 31, 1998 and 1997, the cumulative effect of these adjustments was to increase the Company's equity in its joint ventures by approximately $3,884,000 and $3,158,000, respectively. At December 31, 1998, the amount included in retained earnings as undistributed earnings of foreign joint ventures was approximately $8,056,000. In 1996, the Company entered into a joint venture (Marwal de Mexico S.A. de C.V.) with its 49% owned joint venture, Marwal Systems, S.N.C. The Company owns 5% of the venture directly and Marwal Systems S.N.C. owns the remaining 95%. Marwal de Mexico S.A. de C.V. manufactures fuel pumps and fuel modules for the Central American and Mexican automotive markets. In 1996, the Company expanded its Marwal joint venture locations to include Marwal Argentina S.A. This is a joint venture 1% owned by the Company, 1% owned by Magneti Marelli and 98% owned by Marwal Systems S.N.C. Marwal Argentina S.A. builds fuel sending units for the Argentinean automotive market. In 1998, the Company reduced its equity in its Korean joint venture to zero. Additionally, the Company invested in Vitec L.L.C., a joint venture in Detroit's Empowerment Zone. Vitec manufactures and assembles fuel storage and delivery systems for the U.S. automotive market. Summarized combined financial information for joint ventures accounted for using the equity method is as follows (Unaudited, in Thousands):
As of December 31, 1998 1997 ------- ------- Balance sheet data: Current assets............................................ $93,934 $90,358 Long-term assets.......................................... 58,395 44,365 Current liabilities....................................... 81,936 65,162 Long-term liabilities..................................... 11,666 13,355
For the Year Ended December 31, 1998 1997 1996 -------- -------- -------- Income statement data: Net sales.................................... $209,627 $248,527 $200,276 Gross margin................................. 30,435 31,846 24,806 Income before provision for income taxes..... 2,998 12,769 14,510 Net income................................... 1,715 5,978 7,515
Dividends from joint ventures of approximately $1,052,000 and $3,418,000 were received by the Company during 1998 and 1997, respectively. No dividends were received from joint ventures during 1996. The Company had sales to joint ventures of approximately $37,125,000, $64,109,000 and $42,413,000 during 1998, 1997 and 1996, respectively. Included in accounts receivable are trade receivables from joint ventures of approximately $4,675,000 and $12,741,000 as of December 31, 1998 and 1997, F-13 42 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8. JOINT VENTURES. (continued) respectively and royalty receivables of $1,012,000 and $1,674,000 as of December 31, 1998 and 1997, respectively. The Company had purchases from joint ventures of approximately $35,558,000, $41,447,000 and $33,149,000 during 1998, 1997 and 1996, respectively. Included in accounts payable are trade payables to joint ventures of approximately $8,295,000 and $5,277,000 as of December 31, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- NOTE 9. STOCK OPTION PLANS AND LONG-TERM INCENTIVE PLANS. Under the Walbro Corporation Equity Based Long Term Incentive Plan (Equity Plan), 856,457 shares of common stock are reserved for issuance to officers, directors and key employees. Options are granted yearly based on certain financial performance criteria as compared to the annual business plan and other factors. In addition, Stock Performance Award Grants (Grants) are awarded annually when the common stock price appreciates and Grants are exchanged for common stock at the end of the five-year term. If the Company's common stock price appreciates at a 17% compounded rate over the term, the number of Grants awarded, valued at the common stock price, will equal the dollar amount necessary to exercise the stock options. Participants will receive a greater or lesser number of Grants based on the actual market performance of the common stock over the term. The number of Grants outstanding was 2,331 and 4,900 as of December 31, 1998 and 1997, respectively. Effective December 1997, the Company approved a Broad-Based Long Term Incentive Plan (Broad-Based Plan), which consists of 572,129 shares of common stock that are reserved and available for distribution to employees and consultants to the Company, its subsidiaries and affiliates. The purpose of the Broad-Based Plan is to enable these persons to participate in the Company's future and to aid in retaining employees of merit. Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company continues to apply Accounting Principles Board Opinion No. 25 for expense recognition. All stock options issued by the Company are exercisable at a price equal to the market price at the date of the grant. Accordingly, no compensation cost has been recognized for any of the options granted. A summary of the stock option transactions of the 1983 Plan (closed with no options outstanding as of December 31, 1998), the Equity Plan, and the Broad-Based Plan for the years ended December 31, 1998, 1997 and 1996 is as follows:
Number of Options Exercisable Outstanding Option price (per share) ----------- ----------- ------------------------ December 31, 1995.................... 321,695 432,092 $ 9.25-33.25 Granted............................ 117,385 18.19-21.75 Exercised.......................... (12,279) 9.25-18.00 Canceled........................... (5,458) 26.00-33.25 -------- December 31, 1996.................... 418,936 531,740 9.25-33.25 Granted............................ 19,804 13.75-22.75 Exercised.......................... (29,480) 9.25-19.125 Canceled........................... (83,698) 9.25-33.25 -------- December 31, 1997.................... 424,016 438,366 9.25-33.25 Granted............................ 493,966 9.25-13.25 Exercised.......................... (3,700) 9.25 Canceled........................... (164,679) 13.25-33.25 -------- December 31, 1998.................... 663,953 763,953 $9.25-27.125 ========
The weighted-average fair value of options granted during the year is $7.15 and $5.01 for the years ended December 31, 1998 and 1997, respectively. F-14 43 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9. STOCK OPTION PLANS AND LONG-TERM INCENTIVE PLANS. (continued) The following table summarizes information about options outstanding at December 31, 1998: Options Outstanding: Range of Exercise Prices............. $ 9.25 $13.25-19.75 $20.00-27.25 Number Outstanding at 12/31/98....... 109,175 539,692 115,086 Weighted-Average: Remaining Contractual Life (years)......................... 9.03 8.17 5.55 Exercise Price.................... $ 9.25 $ 15.20 $ 25.48 Options Exercisable: Number Exercisable at 12/31/98....... 9,175 539,692 115,086 Weighted Average Exercise Price...... $ 9.25 $ 15.20 $ 25.48
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions by year:
ASSUMPTIONS 1998 1997 1996 - --------------------- ------- ------- ------- Risk-free interest rate............... 4.6% 5.7% 6.4% Expected life........ 10 yrs. 10 yrs. 10 yrs. Expected volatility......... 37.8% 34.6% 35.2% Expected dividends... 0.0% 2.0% 2.0%
Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method described in SFAS No. 123, the Company's net income (loss) and basic net income (loss) per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------ -------- ------- (In thousands) Net income (loss)................................ As reported $3,718 $(36,627) $11,229 Pro forma 1,422 (36,644) 10,601 Basic net income (loss) per share................ As reported 0.43 (4.23) 1.30 Pro forma 0.16 (4.23) 1.23
The Company cautions that the pro forma net income (loss) and per share results in the initial years of adoption are overstated due to the recognition of pro forma compensation cost over the vesting period. During 1996, the Walbro Engine Management Corporation Incentive Compensation Plan reached the end of its five-year measurement term, and the first of four annual payments was made. The second and third of four payments were made during 1997 and 1998, respectively. The Company accrued approximately $1,659,000 and $3,287,000 as of December 31, 1998 and 1997, respectively, under this plan. Participants can elect to receive their payments in either cash or common stock of the Company. - -------------------------------------------------------------------------------- NOTE 10. COMMITMENTS AND CONTINGENCIES. The manufacture of automotive components entails the risk that a customer or governmental authority may require the recall of one of the Company's products or a product in which one of the Company's products has been installed. The Company has taken and will continue to take all reasonable precautions to avoid the risk of exposure to a recall or warranty claim that would have a material effect on the financial position of the Company. The Company does not believe that significant insurance coverage is available to protect against potential product recall/warranty liability. The Company provides for warranty claims on its products on a specific identification basis. While there can be no assurance that the Company will not incur substantial recall or warranty expense in the future, management believes that any liability resulting from these matters will not have a material impact on the financial position or future results of operations of the Company. F-15 44 Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS. The Company sponsors pension plans covering substantially all domestic collectively bargained employees and certain foreign employees. The plan covering domestic collectively bargained employees provides benefits of stated amounts for each year of service. Plans covering certain foreign employees provide payments at termination which are based upon length of service, compensation rate and whether termination was voluntary or involuntary. The Company annually contributes to the plans covering domestic employees and certain foreign employees amounts which are actuarially determined to provide the plans with sufficient assets to meet future benefit payment requirements. The plans covering foreign employees in certain countries are not funded. The Company also provides postretirement health care, dental benefit and prescription drug coverage to a limited number of current retirees. Postretirement benefits are not available for active employees. Effective January 1, 1998, the Company adopted the Statement of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132). In accordance with SFAS No. 132, the following tables provide a reconciliation of the change in benefit obligation, the change in plan assets and the net amount recognized in the consolidated balance sheets (In Thousands).
Other Postretirement Pension Benefits Benefits ------------------- -------------------- 1998 1997 1998 1997 ------- ------ ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year.... $ 6,573 $5,771 $ 3,800 $ 4,068 Service cost............................... 371 301 -- -- Interest cost.............................. 460 408 255 283 Foreign currency changes................... (3) (9) -- -- Amendments................................. 664 -- -- -- Actuarial (gain) loss...................... 658 227 40 (166) Benefits paid.............................. (151) (125) (321) (385) ------- ------ ------- ------- Benefit obligation at end of year.......... $ 8,572 $6,573 $ 3,774 $ 3,800 ======= ====== ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year..................................... $ 6,617 $5,612 $ -- $ -- Actual return on plan assets............... 519 789 -- -- Employer contributions..................... 216 492 -- -- Foreign currency changes................... (32) (151) -- -- Benefits paid.............................. (151) (125) -- -- ------- ------ ------- ------- Fair value of plan assets at end of year... $ 7,169 $6,617 $ -- $ -- ======= ====== ======= ======= Funded status.............................. $(1,403) $ 44 $(3,774) $(3,800) Unrecognized net actuarial (gain) loss..... 117 (210) (501) (606) Unrecognized net asset at transition....... -- (9) -- -- Unrecognized prior service cost............ 1,613 780 -- -- ------- ------ ------- ------- Net amount recognized...................... $ 327 $ 605 $(4,275) $(4,406) ======= ====== ======= =======
F-16 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS. (continued)
Other Postretirement Pension Benefits Benefits -------------------- -------------------- 1998 1997 1998 1997 ------- ------- ------- ------- AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost...................... $ 1,070 $ 1,083 $ -- $ -- Accrued benefit liability................. (743) (478) (4,275) (4,406) ------- ------- ------- ------- Net amount recognized..................... $ 327 $ 605 $(4,275) $(4,406) ======= ======= ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS Discount rate............................. 6- 6 - 7% 6.75% 7.00% 6.75% Expected return on plan assets............ 6- 6 - 7% -- -- 6.75% Rate of compensation increase............. 2.50- 3% -- -- 3.00%
COMPONENTS OF NET PERIODIC BENEFIT COST Service cost.............................. $ 371 $ 301 $ 255 $ 283 Interest cost............................. 460 408 -- -- Expected return on plan assets............ (455) (404) -- -- Amortization of transition (asset) obligation.............................. (9) (22) -- -- Amortization of prior service cost........ 95 41 -- -- Amortization of unrecognized (gain) loss.................................... -- -- (12) -- Recognized actuarial loss................. (21) -- -- -- ------- ------- ------- ------- Net periodic benefit cost................. $ 441 $ 324 $ 243 $ 283 ======= ======= ======= =======
For measurement purposes, a 6.75% annual rate of increase was assumed in per capita cost of covered health and dental care benefits for 1998. The rate was assumed to gradually decrease to 4.75% by the year 2004 and remain at that level thereafter. The health care cost trend rate assumption has a significant impact on the accumulated postretirement benefit obligation and on future amounts accrued. A one percentage point increase each year in the assumed health care cost would increase the accumulated postretirement benefit obligation at December 31, 1998 by $363,000 and the interest cost component of net periodic postretirement benefit cost for the year ended December 31, 1998 by $24,000. A one percentage point decrease each year in the assumed health care cost would increase the accumulated postretirement benefit obligation at December 31, 1998 by $318,000 and the interest cost component of net periodic postretirement benefit cost for the year ended December 31, 1998 by $21,000. The Company also sponsors a defined contribution plan for non-union domestic employees under which the Company makes matching contributions of 50% of each participant's before-tax contribution of up to 6% of each participant's annual income and retirement contribution of up to 3% (subject to change on an annual basis) of each participant's annual income. The cost of defined contributions charged to earnings during 1998, 1997 and 1996 was approximately $1,808,000, $2,108,000 and $2,252,000, respectively. Certain non-union employees, excluding officers, are eligible to participate in the Walbro Corporation Employee Stock Ownership Plan (ESOP). The Company makes annual contributions to a trust in the form of either cash or common stock of the Company. The amount of the annual contribution is discretionary, except that it must be sufficient to enable the trust to meet its current obligations. Contribution expense related to the ESOP amounted to $408,000, $463,000 and $416,000 during 1998, 1997 and 1996, respectively. Contribution expense is net of dividends of $105,000 in 1997 and 1996. As of December 31, 1998 and 1997, the ESOP held 207,000 and 238,000 shares, respectively, which are all allocated to participant accounts. F-17 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12. DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to help meet financing needs and to reduce exposure to fluctuating foreign currency exchange rates. The Company is exposed to credit loss in the event of nonperformance by the other parties to the financial instruments described below. However, the Company does not anticipate nonperformance by the other parties. The Company does not engage in trading activities with these financial instruments and does not generally require collateral or other security to support these financial instruments. The notional amounts of derivatives summarized below do not represent the amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives. Financial Instruments with Off-Balance Sheet Risk The Company enters into forward currency exchange contracts to manage its foreign currency exchange risk. As of December 31, 1998 and 1997, the notional amounts of contracts outstanding were approximately $2,125,000 and $885,000, respectively. The Company enters into forward currency exchange contracts to reduce its exposure against fluctuations in foreign currency exchange rates. During 1998, the Company had seventy-seven forward currency exchange contracts, sixty-eight of which matured during 1998, which exchanged 65,200,000 Swedish krona, 4,400,000 Norwegian krone and 110,300,000 French francs. During 1997, the Company had seventeen forward currency exchange contracts, thirteen of which matured during 1997, which exchanged 540,000,000 Japanese yen, 1,626,900 Deutsche marks and 7,000,000 Swedish krona. During 1996, the Company had fifteen forward currency exchange contracts, which matured during 1996, which exchanged 939,000,000 Japanese yen and 20,200,000 Deutsche marks. The amounts included in foreign currency exchange (gain) loss in the accompanying consolidated statements of income related to these contracts were zero for the year ended December 31, 1998, a gain of approximately $483,000 for the year ended December 31, 1997 and a gain of approximately $339,000 for the year ended December 31, 1996. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Notes Receivable The fair value is estimated using the expected future cash flows discounted at current interest rates. Marketable Equity Securities The fair value of marketable equity securities is estimated by quoted market prices when the investment is traded on a public stock exchange. For investments not publicly traded, a combination of book value and fair market value of assets is used. Long-Term Debt The fair value of the Company's public debt is estimated using quoted market prices. The fair value of the Company's other long-term debt is estimated using the expected future cash flows discounted at the current interest rates offered to the Company for debt of the same remaining maturities. Forward Currency Exchange Contracts The fair value of forward currency exchange contracts is estimated by obtaining quotes from brokers. F-18 47 Walbro Corporation & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- NOTE 12. DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS. (continued) The estimated fair values of the Company's financial instruments at December 31 are as follows:
1998 1997 ------------------------- ------------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (In Thousands) Notes receivable................ $ 2,023 $ 2,023 $ 140 $ 140 Long-term debt.................. 326,692 319,951 305,353 298,232
- -------------------------------------------------------------------------------- NOTE 13. ACCRUED LIABILITIES. Accrued liabilities consist of the following at December 31:
1998 1997 ------- ------- (In Thousands) Compensation related... $10,911 $13,760 Facilities and employee relocation........... -- 606 Interest............... 6,367 7,385 Restructuring (Note 2)................... 700 5,697 Other.................. 13,031 11,773 ------- ------- $31,009 $39,221 ======= =======
- -------------------------------------------------------------------------------- NOTE 14. BUSINESS SEGMENT INFORMATION. The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Management uses information at the plant level for evaluating performance and allocating resources. Management also uses information from the plants at the product line and geographic levels as the basis for management decisions. The Company's reportable segments are managed separately as each business utilizes different technology and marketing strategies. The Company's reportable segments are grouped as follows: 1. Automotive, which designs, develops and manufactures fuel storage and delivery products for a broad range of U.S. and non-U.S. manufacturers of passenger automobiles and light trucks (including minivans), 2. Small Engine, which designs, develops and manufactures diaphragm carburetors for portable engines, float feed carburetors for ground supported engines and ignition systems and other components for a variety of small engine products, 3. Aftermarket, which provides replacement parts for both the automotive and small engine markets and, 4. Corporate, which includes corporate headquarters and direct investments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on earnings before interest, income taxes, minority interest, equity in income of joint ventures and extraordinary items (EBIT). The Company accounts for intercompany sales as if they were to third parties, that is, at current market prices. The Company accounts for property transfers at net book value. F-19 48 Walbro Corporation & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ----------------------------------------------------------------------- NOTE 14. BUSINESS SEGMENT INFORMATION. (continued) The following tables present financial information at and for the year ended December 31 by reportable segment:
1998 1997 1996 --------- --------- --------- (In Thousands) Net sales to external customers Automotive...................................... $ 497,449 $ 458,057 $ 438,596 Small Engine.................................... 142,406 125,937 117,102 Aftermarket..................................... 33,239 29,466 25,102 Corporate....................................... 4,896 6,445 4,589 --------- --------- --------- Total net sales to external customers............. 677,990 619,905 585,389 --------- --------- --------- Intercompany sales Automotive...................................... 76,465 66,304 64,330 Small Engine.................................... 44,805 38,161 37,357 Aftermarket..................................... 911 1,044 890 Corporate....................................... 1,253 225 634 --------- --------- --------- Total intercompany sales.......................... 123,434 105,734 103,211 Elimination of intercompany sales................. (123,434) (105,734) (103,211) --------- --------- --------- Total net sales................................... $ 677,990 $ 619,905 $ 585,389 ========= ========= ========= Depreciation and amortization Automotive...................................... $ 27,309 $ 24,491 $ 20,779 Small Engine.................................... 6,594 5,553 6,150 Aftermarket..................................... 261 166 184 Corporate....................................... 2,519 1,207 2,623 --------- --------- --------- Total depreciation and amortization............... $ 36,683 $ 31,417 $ 29,736 ========= ========= ========= Restructuring and impairment charges Automotive...................................... $ -- $ 19,608 $ -- Small Engine.................................... -- 750 -- Aftermarket..................................... -- -- -- Corporate....................................... -- 6,642 -- --------- --------- --------- Total restructuring and impairment charges........ $ -- $ 27,000 $ -- ========= ========= ========= EBIT Automotive...................................... $ 45,121 $ 3,291 $ 25,541 Small Engine.................................... 6,651 6,545 5,920 Aftermarket..................................... 8,228 7,003 6,540 Corporate....................................... (17,253) (36,939) (9,780) --------- --------- --------- Total EBIT........................................ 42,747 (20,100) 28,221 --------- --------- --------- Unallocated amounts Interest income.............................. 3,177 674 2,716 Interest expense............................. (31,806) (25,410) (20,535) Minority interest, net of tax................ (5,806) (5,035) (285) Equity in income of joint ventures, net of tax........................................ 846 3,113 4,187 --------- --------- --------- Total income (loss) before income taxes and extraordinary item.............................. $ 9,158 $ (46,758) $ 14,304 ========= ========= ========= Investment in equity method investees Automotive...................................... $ 38,435 $ 26,681 $ 28,955 Small Engine.................................... -- -- -- Aftermarket..................................... -- -- -- Corporate....................................... -- -- -- --------- --------- --------- Total investment in equity method investees....... $ 38,435 $ 26,681 $ 28,955 ========= ========= =========
F-20 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Walbro Corporation & Subsidiaries - ----------------------------------------------------------------------- NOTE 14. BUSINESS SEGMENT INFORMATION. (continued)
1998 1997 1996 --------- --------- --------- (In Thousands) Expenditures for fixed assets Automotive...................................... $ 29,338 $ 46,464 $ 84,293 Small Engine.................................... 10,928 13,107 11,560 Aftermarket..................................... 197 180 209 Corporate....................................... 1,543 2,268 3,085 --------- --------- --------- Total expenditures for fixed assets............... $ 42,006 $ 62,019 $ 99,147 ========= ========= ========= Assets Automotive...................................... $ 448,123 $ 477,238 $ 463,144 Small Engine.................................... 94,621 87,468 67,020 Aftermarket..................................... 9,051 10,574 7,640 Corporate....................................... 96,872 35,313 51,845 --------- --------- --------- Total assets...................................... $ 648,667 $ 610,593 $ 589,649 ========= ========= =========
The following tables present financial information at and for the year ended December 31 by geographic area:
1998 1997 1996 -------- -------- -------- (In Thousands) Net sales to external customers(a) United States...................................... $414,190 $372,600 $321,527 Other(b)........................................... 263,800 247,305 263,862 -------- -------- -------- Total net sales to external customers................ $677,990 $619,905 $585,389 ======== ======== ======== Long-Lived Assets United States...................................... $219,896 $210,062 $215,427 Other (b).......................................... 165,756 151,697 157,292 -------- -------- -------- Total long-lived assets.............................. $385,652 $361,759 $372,719 ======== ======== ========
(a) Net sales to external customers are attributed to countries based on location of Walbro facility. (b) Other includes Walbro facilities in Canada, Mexico, Italy, Netherlands, France, Belgium, Germany, United Kingdom, Spain, Norway, Argentina, Brazil, Korea, Japan, Singapore and China. A majority of the Company's sales are to automobile manufacturing companies. Sales to one customer amounted to $141,942,000, $117,040,000 and $115,090,000 in 1998, 1997 and 1996, respectively. Sales to another customer amounted to $20,793,000, $33,421,000 and $59,176,000 in 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION. In 1998, 1997 and 1996, the Company paid $4,738,000, $4,376,000 and $5,048,000 for income taxes and $31,260,000, $29,957,000 and $21,674,000 for interest, respectively. F-21 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Walbro Corporation & Subsidiaries - -------------------------------------------------------------------------------- NOTE 16. EARNINGS PER SHARE. In 1997, the Company adopted SFAS No. 128, "Earnings per Share," which changes the calculation of earnings per share to be more consistent with countries outside of the United States. In general, SFAS No. 128 requires two calculations of earnings per share to be disclosed, basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) per share is computed using the weighted average common outstanding during the period. Diluted net income (loss) per share is computed using the average share price during the period when calculating the dilutive effect of stock options. The following is the Company's calculation of diluted common shares outstanding:
1998 1997 1996 --------- --------- --------- Weighted average common shares outstanding........... 8,686,213 8,661,432 8,608,837 Dilutive effect of stock options..................... -- 6,664 40,543 --------- --------- --------- Diluted common shares outstanding.................... 8,686,213 8,668,096 8,649,380 ========= ========= =========
- -------------------------------------------------------------------------------- NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED). Selected quarterly financial information for the years ended December 31, 1998 and 1997 is as follows:
Quarter First Second Third Fourth Total -------- -------- -------- -------- -------- (In Thousands, Except Per Share Data) 1998-- Net sales..................... $169,292 $168,136 $165,648 $174,914 $677,990 Cost of sales................. 144,058 139,369 138,682 149,883 571,992 -------- -------- -------- -------- -------- Gross profit............... $ 25,234 $ 28,767 $ 26,966 $ 25,031 $105,998 ======== ======== ======== ======== ======== Income before extraordinary item....................... $ 572 $ 1,568 $ 538 $ 2,513 $ 5,191 ======== ======== ======== ======== ======== Net income.................... $ 572 $ 95 $ 538 $ 2,513 $ 3,718 ======== ======== ======== ======== ======== Basic and Diluted income per share before extraordinary item....................... $ 0.07 $ 0.18 $ 0.06 $ 0.29 $ 0.60 ======== ======== ======== ======== ======== Basic and Diluted income per share...................... $ 0.07 $ 0.01 $ 0.06 $ 0.29 $ 0.43 ======== ======== ======== ======== ======== 1997-- Net sales..................... $154,019 $153,842 $146,523 $165,521 $619,905 Cost of sales................. 129,821 131,437 125,911 151,582 538,751 -------- -------- -------- -------- -------- Gross profit............... $ 24,198 $ 22,405 $ 20,612 $ 13,939 $ 81,154 ======== ======== ======== ======== ======== Net income (loss)............. $ 2,362 $ 1,184 $ (1,190) $(38,983) $(36,627) ======== ======== ======== ======== ======== Basic and Diluted net income (loss) per share........... $ 0.27 $ 0.14 $ (0.14) $ (4.49) $ (4.23) ======== ======== ======== ======== ========
Per share amounts and weighted average shares are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the per share total for the year. F-22 51 [ERNST & YOUNG LETTERHEAD] Mr. Mike Shope Walbro Corporation 6242 Garfield Street Cass City, Michigan 48726-1325 U.S.A. March 31, 1999 Dear Sirs, With respect to the contemplated filing of a registration statement by Walbro Corporation and the inclusion in this filing of the audited financial statements under French GAAP of Marwal Systems for fiscal years ended December 31, 1996, 1997 and 1998, we confirm that our audits of these Marwal Systems financial statements were conducted substantially in accordance with US generally accepted auditing standards. Yours faithfully, ERNST & YOUNG AUDIT /s/ GILLES MEYER Gilles Meyer Partner F-23 *Commissaire aux comptes - Societe d'expertise comptable inscrite au tableau de l'Ordre de la region de Paris - Ile de France. Bureaux en France et en Afrique - Correspondant a Monaco. 52 MARWAL SYSTEMS, S.N.C. STATUTORY AUDITOR'S GENERAL REPORT YEAR ENDED DECEMBER 31, 1998 In our capacity as statutory auditor, we present below our report on - - the accompanying annual accounts of Marwal Systems, - - the specific procedures and disclosures prescribed by law, for the year ended December 31, 1998. These annual accounts are the responsibility of the Company's management. Our responsibility is to express an opinion on these annual accounts based on our audit. I. OPINION ON THE ANNUAL ACCOUNTS We conducted our audit in accordance with French auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall annual account presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the annual accounts present fairly, in all material respects, the financial position of the Company at December 31, 1998 and the results of its operations for the year then ended. II. SPECIFIC PROCEDURES AND DISCLOSURES PRESCRIBED BY LAW We have also carried out, in accordance with professional standards, the specific procedures prescribed by law. We have nothing to report with respect to the fairness of information contained in the Directors' Report and its consistency with the annual accounts and other information presented to shareholders concerning the financial position and annual accounts. The Statutory Auditor ERNST & YOUNG Audit Gilles Meyer March 26, 1999 F-24 53 MARWAL SYSTEMS, S.N.C. Balance Sheet as of December 31, 1998 (in French Francs)
-------------------------------------------------------------- ASSETS ------ December 31, 1998 -------------------------------------------------------------- Gross Accumulated Net book value depreciation amortization and allowances -------------------------------------------------------------- Fixed assets - ------------ Intangible fixed assets 20,460,169 20,237,117 223,052 Tangible fixed assets 238,818,956 140,425,727 98,393,229 Financial investments: - - Associates 22,791,879 60,564 22,731,315 - - Others 7,484,778 7,203,411 281,367 -------------------------------------------------------------- Sub-total 289,555,782 167,926,819 121,628,963 -------------------------------------------------------------- Inventories - ----------- - - Raw materials 26,073,389 2,535,119 23,538,270 - - Work-in-progress 3,691,105 162,419 3,528,686 - - Finished goods 8,830,184 1,001,800 7,828,384 -------------------------------------------------------------- Sub-total 39,594,678 3,699,338 34,895,340 -------------------------------------------------------------- Current assets - --------------- Advances and payments on accounts 732,467 732,467 Trade accounts and notes receivable: - - Customers and related accounts 133,667,070 2,006,909 131,660,161 - - Other 19,311,759 19,311,759 Other receivables 997,654 997,654 Cash and cash equivalent 104,295,959 104,295,959 Payments in advance 458,580 458,580 Deferred Charges - - Foreign exchange translation differences 268,230 268,230 -------------------------------------------------------------- Sub-total 259,731,721 2,006,909 257,724,811 -------------------------------------------------------------- TOTAL ASSETS 587,882,180 173,633,066 414,249,114 --------------------------------------------------------------
F-25 54 MARWAL SYSTEMS, S.N.C. Balance Sheet as of December 31, 1998 (in French Francs)
------------------------------ LIABILITIES AND DECEMBER 31, 1998 --------------- SHAREHOLDERS'EQUITY ------------------- ------------------------------ SHAREHOLDERS' EQUITY -------------------- Share capital 90,660,000 Reserves 4,305,050 Revaluation reserve Retained earnings at January 1st 69,472,276 Result for the year 9,866,415 ------------------------------ Sub-total 174,303,743 ------------------------------ Provisions for contingencies and -------------------------------- charges 11,231,626 ------- Liabilities ----------- Financial debts: - Amounts owed to financial institutions 19,052 - Other financial debts 19,454,834 - Government subsidies 2,300,000 Accounts payable and related accounts 155,127,484 Social charges payable 15,819,413 Taxes 13,413,007 Other 2,993,884 Other creditors - Accounts payable on fixed assets 14,710,508 - Group - - Other 24 Deferred income 4,117,125 Foreign exchange translation differences 758,415 ------------------------------ Sub-total 228,713,746 ------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 414,249,114 ------------------------------
F-26 55 MARWAL SYSTEMS, S.N.C. Income Statement for the year ended December 31, 1998 (in French Francs)
------------------------------------------------- INCOME STATEMENT FOR THE YEAR December 31, 1998 ------------------------------ ------------------------------------------------- Operating revenues: 748,786,511 - ------------------- Sale of goods 711,375,580 Sale of services 27,732,194 Net sales 739,107,774 Movement in finished goods and work-in-progress 2,104,954 In-house production 116,579 Grants 1,255,876 Reversal of provisions and transfer of charges 5,809,857 Other income 391,471 ----------- 748,786,511 Operating expenses 730,820,529 - ------------------ Purchases of raw materials and other supplies 402,455,415 Movements in raw materials stock -2,323,545 Other purchases and external charges 112,862,521 Taxes and similar charges 9,995,423 Wages & salaries 105,844,609 Social charges 45,104,922 Depreciation and amortisation expenses and provisions: - - Fixed assets 32,597,052 - - Current assets 1,611,799 - - Contingencies and charges 10,106,313 Other charges 12,566,021 ----------- 730,820,529 Operating profit 17,965,982 - ---------------- Financial income: 10,205,051 - ----------------- From other investments - Other interest and similar income 2,179,792 Reversal of provisions and transfer of charges 1,273,073 Foreign exchange gains 6,752,186 ---------- 10,205,051 Financial expenses: 19,596,147 - ------------------- Depreciation and provisions 7,532,205 Interest and similar charges 4,773,944 Foreign exchange losses 7,289,997 ---------- 19,596,147 Net financial income/(expenses) -9,391,096 - ------------------------------- -------------------------------------------------
F-27 56 MARWAL SYSTEMS, S.N.C. Income Statement for the year ended December 31, 1998 (in French Francs)
------------------------------------- INCOME STATEMENT FOR THE YEAR December 31, 1998 ------------------------------ ------------------------------------- Profit before taxation 8,574,886 - ----------------------- Exceptional income: 2,879,553 - ------------------- From operating activities 2,464,082 From capital transactions 415,471 Reversal of provisions and transfer 0 of charges ---------- 2,879,553 Exceptional charges: 1,588,024 - -------------------- From operating activities 860,323 From capital transactions 387,701 Depreciation and provisions 340,000 --------- 1,588,024 1,291,530 Exceptional profit (loss) - ------------------------- Profit before taxation 9,866,415 - ---------------------- Profit-Sharing - Income tax - Profit after taxation 9,866,415 - --------------------- -------------------------------------
F-28 57 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) EVENTS DURING THE YEAR All shares and loans to be incorporated to the capital of Marwal Argentina S.A. - - a Company 98% owned by Marwal SNC -, have been fully depreciated, given the current situation of this Company. NOTE 1: ACCOUNTING POLICIES The accounts of the Company have been prepared based upon generally accepted accounting principles in France which conform with the Chart of Accounts as set out in the French law dated April 30, 1983 and the decree of November 29, 1983. 1.1 INTANGIBLE FIXED ASSESTS Intangible fixed assets consist mainly of goodwill which is amortised on a straight line basis over 5 years and totally amortised at the end of 1998. The amortisation methods and the useful lives for other categories are as follows: - - Set-up costs 3 years straight line - - Computer software 1-3 years straight line 1.2 Tangible fixed assets Tangible fixed assets are valued at historical purchase price or cost of production when they have been produced in house. The cost of production is made up of the following elements: purchase price of raw materials, consumables and direct production costs. Assets are depreciated on a straight line basis or declining balance, when applicable, for items purchased during or after 1992. The depreciation methods and the useful lives applied are as follows: Installations 10 years straight line Machinery 5-6 2/3 straight line/declining balance Toolings 1-5 years straight line/declining balance Leasehold improvements - Mac./Toolings 5-6 2/3 straight line/declining balance Vehicles 4-5 years straight line Fixtures and fittings 10 years straight line Computer hardware 4-5 years straight line/declining balance F-29 58 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) 1.3 Financial investments - - The investments in associates are valued at their acquisition cost in the assets of the Company. - - A reserve is recorded when their fair value is less than their book value. 1.4 Inventory and work-in-progress The policies used are as follows: - - Inventory is valued at the total cost of production. - - Raw materials and consumables are valued at the average weighted cost for goods received in the last three months. This method is similar to FIFO. - - The Cost of production includes direct and indirect production expenses and an allocation of the costs of running the Head Office, to the extent that they are related to the production. - - The provision for obsolescence is determined based upon the anticipated sales. 1.5 Allowance for doubtful accounts The receivables are valued at their face value, a provision is recorded when the value recoverable is less than the book value. 1.6 Foreign exchange transactions The receivables and payables denominated in foreign currency are translated into French Francs at the December 31st exchange rate. The resulting differences with amounts translated at historical exchange rates are shown in the balance sheet as "foreign exchange translation differences". A provision for exchange losses is recorded separately for unrealised losses. All translation adjustments relating to the Euroland have been booked in the profit and loss account since they are certain. 1.7 Retirement indemnity liabilities The "Projected Benefit Obligation" has been applied to calculate the retirement obligation. The total obligation is covered by: - - a fund run by La Mondiale, with a value of KFRF. 10,218, - - a provision of KFRF. 1,092 included in the Marwal accounts at December 31, 1998, - - an amount payable to La Mondiale of KFRF.475. F-30 59 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 2: FIXED ASSETS The movements in gross value are as follows:
------------------------------------------------------------------------------------- 12/31/97 Increase Decrease 12/31/98 ------------------------------------------------------------------------------------- Intangible fixed assets 20,730 272 542 20,460 Tangible fixed assets 195,110 45,387 1,678 238,819 Financial investments 29,166 1,111 - 30,277 -------------------------------------------------------------------------------------
The movements in amortisation and depreciation are analysed as follows:
----------------------------------------------------------------------------------- 12/31/97 Increase Decrease 12/31/98 ----------------------------------------------------------------------------------- Intangible fixed assets 20,017 762 542 20,237 Tangible fixed assets 109,881 31,835 1,290 140,426 Financial investments 0 7,264 - 7,264 -----------------------------------------------------------------------------------
NOTE 3. INVENTORIES AND WORK IN PROGRESS The reserve for obsolescence for raw materials, consumables and finished goods at 12/31/98 amounts to KFRF. 3,699. NOTE 4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES At December 31,1999. accounts receivable can be split by maturity date as follows:
------------------------------------------------------------------------ Total Less than 1 year Greater than 1 year ------------------------------------------------------------------------ Long term receivables 7,485 7,415 70 Current assets 154,709 154,709 - ------------------------------------------------------------------------
NOTE 5: SHORT TERM INVESTMENTS N/A. F-31 60 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 6: PREPAYMENTS AND DEFERRED INCOME
12/31/98 -------- Prepayments - ----------- Subscription fees 9 Language tuition fees 25 Transportation and custom 96 Leasing for equipment 63 Maintenance 59 Leasing (building) 207 --- 459 12/31/98 -------- Deferred income - --------------- Long term contracts (tooling) 4,117
NOTE 7: DEFERRED CHARGES N/A NOTE 8: SHAREHOLDERS' EQUITY The capital stock is made up of 906,600 shares with a nominal value of FRF.100, completely paid up. The accounts of the Company are consolidated in the group accounts of the Magneti Marelli Spa Group. F-32 61 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 9: TAX PROVISIONS AND PROVISIONS FOR CONTINGENCIES AND CHARGES The movements in the year are analysed as follows:
------------------------------------------------------------------------- 12/31/97 Additions Reversals 12/31/98 ------------------------------------------------------------------------- Provisions for contingencies and charges of which: 5,266 10,715 4,749 11,232 - -Provision for payments, on retirement 1,000 1,093 1,000 1,093 - -Provision for guarantee 1,948 6,922 1,948 6,922 - -Provision for litigation 548 - 119 429 - -Provision for loss on foreign exchange 1,273 268 1,273 268 - -Provision for charges 409 2,017 409 2,017 - -Miscellaneous 88 415 - 503 -------------------------------------------------------------------------
NOTE 10: CREDITORS At December 31, 1998, debts, excluding advances and deposits received, deferred income and foreign exchange differences, can be analysed by maturity date as follows:
------------------------------------------------------------------------- Total Less than 1 Between 1 and > 5 years year 5 years ------------------------------------------------------------------------- Government subsidy 2,300 2,300 Other financial debts 19,455 19,455 Trade payables and other liabilities* 202,064 202,064 Overdraft 19 19 -------------------------------------------------------------------------
* of which trade bills payable: 59,954 F-33 62 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 11 : INFORMATION ON SUBSIDIARY (In thousands of Pesos)
- --------------------------------------------------------------------------------------------------------------------- Share in % Detailed information Share Equity Last Last capital capital closing closing other than result sales capital - --------------------------------------------------------------------------------------------------------------------- 95% Marwal de Mexico S.A. de C.V. Tepotzotplan 58,891* -3,417* 8,575* 158,711 Estado de Mexico 98% Marwal Argentina S.A. 12,000 348 -339 5,705 Buenos Aires Estado de Argentina - ---------------------------------------------------------------------------------------------------------------------
* after reevaluation (In thousands of Francs)
- ---------------------------------------------------------------------------------------------------------------- Detailed information Gross Net book Loans Guarantee Dividends value value given given received - ---------------------------------------------------------------------------------------------------------------- Marwal de Mexico S.A. de C.V. 22,731 22,731 - - - - ---------------------------------------------------------------------------------------------------------------- Marwal Argentina S.A. 60 0 7,203 - - - ----------------------------------------------------------------------------------------------------------------
Shares and loans to Marwal Argentina have been fully depreciated (100%) at December 31, 1998, given the financial situation of this Company. The exemption of sub-groups enables Marwal Systems to not consolidate its subsidiaries. NOTE 12: RELATED PARTIES The related parties transactions are included in the different accounts in the balance sheet as follows:
- --------------------------------------------------------------------------------------------------------------- ASSETS LIABILITIES - --------------------------------------------------------------------------------------------------------------- Trade receivables 24,195 Trade payables 21,130 Other receivables 815 Other payables - Cash and cash equivalent 104,126 Financial debt - - ---------------------------------------------------------------------------------------------------------------
Interest expenses and financial income with related parties are as follows - --------------------------------------------------------------------------------------------------------------- Operating income 72,022 Operating expenses 46,092 Financial income 2,023 Interest expenses 2,410 - ---------------------------------------------------------------------------------------------------------------
F-34 63 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 13: ACCRUALS AND INCOME RECEIVABLE RELATING TO DIFFERENT BALANCE SHEET ACCOUNTS
- ---------------------------------------------------------------------------------------------------------------- Assets Liabilities - ---------------------------------------------------------------------------------------------------------------- Trade receivables - - Customers 6,524 Trade payables - - Suppliers 216 - Suppliers 6,514 - - Other 482 - Tax and social charges 15,259 - Customers 2,472 - Other 476 Other receivables Other liabilities - Financial debts 3,773 - ----------------------------------------------------------------------------------------------------------------
NOTE 14 : EXCHANGE DIFFERENCES RELATED TO BALANCE SHEET ACCOUNTS
----------------------------------------------------------------------------------- Exchange difference Exchange difference ----------------------------------------------------------------------------------- outside Euroland Inside Euroland ----------------------------------------------------------------------------------- Asset Liability Asset Liability ----------------------------------------------------------------------------------- Assets - ------ Trade receivables 36 246 Liabilities - ------------ Trade payables 232 758 1 15 -----------------------------------------------------------------------------------
NOTE 15. SALES TURNOVER ANALYSIS
1998 1997 ---- ---- Sales 739,108 692,154 - ----- Sales of goods 711,376 676,821 Sales of services 27,732 15,333 Split between export/dornestic - ------------------------------ Domestic 303,016 290,827 Export 436,092 401,327 Sales 739,108 692,154 - -----
F-35 64 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 16: DEFERRED TAX POSITION
------------------------------------------------------------------------------------------------- 12/31/97 Movements 12/31/98 ------------------------------------------------------------------------------------------------- Nature Asset Liability Asset Liability Asset Liability - ------ ------------------------------------------------------------------------------------------------- Timing differences - ------------------ Accrued expenses payable to La Mondiale 450 476 450 476 Organic 797 914 797 914 Provision for contingencies and charges 1,459 1,421 1,459 1,421 Profit sharing 3,640 3,640 0 Reserve on Marwal 0 7,264 7,264 Argentina -------------------------------------------------------------------------------------------------
Elements having an impact on 1998 fiscal result Vehicle leasing 68 Difference on foreign exchange unrealised gains 98 NOTE 17: EMPLOYEE INFORMATION
----------------------------------------------------------------------- Permanent staff Temporary staff ----------------------------------------------------------------------- Executives & Management 84 Employees 156 8 Workers 487 70 ----------------------------------------------------------------------- Total 727 78 -----------------------------------------------------------------------
NOTE 18: LEASE COMMITMENTS The company leases certain of its buildings:
- ------------------------------------------------------------------------------------------------ Depreciation expense Balance sheet Acquisition -------------------------- Net book account cost Period ended Accumulated value - ------------------------------------------------------------------------------------------------ Buildings --------- Chalons 5,000 172 805 4,195 Saint-Martin 8,059 504 604 7,455 - ------------------------------------------------------------------------------------------------ Total 13,059 676 1,409 11,650 - ------------------------------------------------------------------------------------------------
NOTE 19: COMMITMENTS UNDERTAKEN AND RECEIVED Discounted trade bills receivable but not matured 77,711 F-36 65 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) Leasing: * present value of lease payments based on the BT01 index (value at 01.01.98 = 551.1 francs)
- ---------------------------------------------------------------------------------------------------------------------------- Balance Lease payments FUTURE LEASE PAYMENTS Term sheet ------------------------------------------------------------------------------------------- price category Period Accu- Less than 1 Between 1 > 5 years Total ended mulated year and 5 years - ---------------------------------------------------------------------------------------------------------------------------- Buildings Chalons* 600.5 2,760.8 605.3 2,421.2 1,236.0 4,262.5 0 Saint- 569.2 683.0 927.9 3,391.6 5,127.9 9,447.4 0 Martin - ---------------------------------------------------------------------------------------------------------------------------- Total 1,169.7 3,443.8 1,533.2 5,812.8 6,363.9 13,709.9 0 - ----------------------------------------------------------------------------------------------------------------------------
NOTE 20: INFORMATION RELATING TO MANAGEMENT N/A. NOTE 21 - EXCEPTIONAL INCOME Exceptional income from operating activities 2,464 Account payable to Cirflex, liquidated 2,464 Exceptional income from capital transactions 415 Income from the sale of fixed assets 139 Grants received 276 Reversal of provisions and transfer of charges 0 NOTE 22: EXCEPTIONAL CHARGES Exceptional charges on operating activities 860 Redundancy payments 792 Non-refunded IVA 68 Exceptional charges from capital transactions 388 Net book value of fixed assets sold 388 Depreciation and provisions 340 Miscellaneous 340
F-37 66 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 23: CHANGE IN ACCOUNTING POLICIES At December 31, 1998, tooling have been included in the value of raw material and other consumable inventory for an amount of KFRF.2,329. NOTE 24: ANALYSIS OF INCOME TAX As Marwal Systems became a partnership as from 10/01/95, there is no income tax booked.
--------------------------------------------------------- Base Tax --------------------------------------------------------- 12/31/98 --------------------------------------------------------- Operating profit 8,575 0 - ----------------- Exceptional items 1,291 0 - ----------------- ------ --- 9,866 Profit before tax 0 Income tax credit 0 --- TOTAL INCOME TAX FOR THE COMPANY 0 ---------------------------------------------------------
F-38 67 MARWAL SYSTEMS, S.N.C. STATUTORY AUDITOR'S GENERAL REPORT YEAR ENDED DECEMBER 31, 1997 In our capacity as statutory auditor, we present below our report on: - - the accompanying annual accounts of Marwal Systems, - - the specific procedures and disclosures prescribed by law, for the year ended December 31, 1997. These annual accounts are the responsibility of the Company's management. Our responsibility is to express an opinion on these annual accounts based on our audit. 1. OPINION ON THE ANNUAL ACCOUNTS We conducted our audit in accordance with French auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall annual account presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the annual accounts present fairly, in all material respects, the financial position of the Company at December 31, 1997 and the results of its operations for the year then ended. 11. SPECIFIC PROCEDURES AND DISCLOSURES PRESCRIBED BY LAW We have also carried out, in accordance with professional standards, the specific procedures prescribed by law. We have nothing to report with respect to the fairness of information contained in the Directors' Report and its consistency with the annual accounts and other information presented to shareholders concerning the financial position and annual accounts. The Statutory Auditor ERNST & YOUNG Audit /s/ Gilles Meyer March 6, 1998 F-39 68 MARWAL SYSTEMS, S.N.C. Balance Sheet as of December 31, 1997 (in French Francs)
ASSETS December 31, 1997 ------------------------------------------------ Gross Accumulated Net book value depreciation amortization and allowances ------------------------------------------------ Fixed assets Intangible fixed assets 20.729.684,88 20.016.820,12 712.864,76 Tangible fixed assets 195.110.282,11 109.881.452,28 85.228.829,83 Financial investments: - - Associates 22.791.879,00 -- 22.791.879,00 - - Others 6.374.518,03 -- 6.374.518,03 ------------------------------------------------ Sub-total 245.006.364,02 129.898.272,40 115.108.091,62 ------------------------------------------------ Inventories - - Raw materials 23.749.844,00 1.763.056,00 21.986.788,00 - - Work in-progress 2.791.156,00 114.766,00 2.676.390,00 - - Furnished goods 7.625.179,00 760.089,00 6.865.090,00 ------------------------------------------------ Sub-total 34.166.179,00 2.637.911,00 31.528.268,00 ------------------------------------------------ Current assets Advances and payments on accounts 1.890.152,18 1.890.152,18 Trade accounts and notes receivable: - - Customers and related accounts 133.366.850,61 3.783.169,22 129.583.681,39 - - Other 11.275.924,08 11.275.924,08 Other receivables 1.262.790,11 1.262.790,11 Cash and cash equivalent 106.831.529,38 106.831.529,38 Payments in advance 390.780,96 390.780,96 Deferred Charges -- -- Foreign exchange translation differences 1.273.073,37 1.273.073,37 ------------------------------------------------ Sub-total 256.291.100,69 3.783.169,22 252.507.931,47 ------------------------------------------------ TOTAL ASSETS 535.463.643,71 136.319.352,62 399.144.291,09 ================================================
F-40 69 MARWAL SYSTEMS, S.N.C. Balance Sheet as of December 31, 1997 (in French Francs)
--------------------- LIABILITIES AND December 31, 1997 SHAREHOLDERS' EQUITY --------------------- Shareholders' equity Share capital 90.660.000,00 Reserves 4.305.050,83 Revaluation reserve Retained earnings at January 1st 37.762.183,66 Result for the year 41.682.692,84 --------------------- Sub-total 174.409.927,33 --------------------- Provisions for contingencies and charges 5.265.122,88 Liabilities Financial debts: - -Amounts owed to financial institutions 234.153,20 - -Other financial debts 14.812.419,38 - -Government subsidies 2.300.000,00 Accounts payable and related accounts 161.799.190,73 Social charges payable 20.560.799,82 Taxes 3.224.082,14 Other 4.927.588,11 Other creditors: - - Accounts payable on fixed assets 6.164.893,10 - - Group - - - Other 24,00 Deferred income 4.785.923,26 Foreign exchange translation differences 660.167,14 --------------------- Sub-total 219.469.240,88 --------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 399.144.291,09 =====================
F-41 70 MARWAL SYSTEMS, S.N.C. Income Statement for the year ended December 31, 1997 (in French Francs)
--------------------------------- INCOME STATEMENT FOR THE YEAR December 31, 1997 --------------------------------- Operating revenues: 701.704.308,65 Sale of goods 676.820.865,02 Sale of services 15.333.088,92 Net sales 692.153.953,94 Movement in finished goods and work-in progress (2.537.150,00) In-home production 285.562,25 Grants 490.998,85 Reversal of provisions and transfer of charges 10.021.636,96 Other income 1.289.306,65 Operating expenses 652.633.885,77 Purchases of raw materials and other supplies 342.138.752,19 Movements in raw materials stock 4.649.952,00 Other purchases and extend charges 112.782.904,48 Taxes and similar charges 9.511.399,78 Wages & salaries 101.299.556,33 Social charges 42.615.435,07 Depreciation and amortisation expenses and provisions: - - Fixed assets 24.149.418,15 - - Current assets 1.205.055,28 - - Contingencies and charges 3.905.450,94 Other charges 10.377.961,55 -------------- 652.633.885,77 Operating profit 49.070.422,88 Financial income: From other investments -- Other interest and similar income 2.691.468,39 Reversal of provisions and transfer of charges 1.608.447,02 Foreign exchange gains 9.381.457,05 -------------- 13.681.372,46 Financial expenses: Depreciation and provisions 1.425.880,37 Interest and similar charges 4.846.615,22 Foreign gains 10.464.489,91 -------------- 16.736.985,50 Net financial income/(expenses) (3.055.613,84)
F-42 71 MARWAL SYSTEMS, S.N.C. Income Statement for the year ended December 31, 1997 (in French Francs)
----------------------------- INCOME STATEMENT FOR THE YEAR December 31, 1997 ----------------------------- Profit before taxation 46.014.809,84 Exceptional income: 1.904.436,60 From operating activities -- From capital transactions 409.464,60 Reversal of provisions and transfer 1.494.972,00 of charges ------------ 1.904.436,60 Exceptional charges: 2.596.473,60 From operating activities 2.320.049,99 From capital transactions 145.203,61 Depreciation and provisions 131.220,00 ------------ 2.596.473,60 Exceptional profit (loss) (692.037,00) Profit before taxation 45.322.772,84 Profit-Sharing 3.640.080,00 Income Tax -- Profit after taxation 41.682.692,84
F-43 72 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) EVENTS DURING THE YEAR The company owns 98% of the shares of Marwal Argentina S.A. as from 12/30/97 (11.760 shares), for an amount of 60,564 French Francs NOTE 1: ACCOUNTING POLICIES The accounts of the Company have been prepared based upon generally accepted accounting principles in France which conform with the Chart of Accounts as set out in the French law dated April 30, 1983 and the decree of November 29, 1983. 1.1 Intangible fixed assets The intangible fixed assets consist mainly of goodwill which is amortised on a straight line basis over 5 years and totally amortised at the end of 1997. The amortisation methods and the useful lives for other categories are as follows: - - Set-up costs 3 years straight line - - Computer software 1-3 years straight line 1.2 Tangible fixed assets Tangible fixed assets are valued at historical purchase price or cost of production when they have been produced in house. The cost of production is made up of the following elements: purchase price of raw materials, consumables and direct production costs. Assets are depreciated on a straight line basis or declining balance, when applicable, for items purchased during or after 1992. The depreciation methods and the useful lives applied are as follows: Installations 10 years straight line Machinery 5-6 2/3 straight line / declining balance Toolings 1-5 years straight line / declining balance Leasehold improvements - Mac./Toolings 5-6 2/3 straight line / declining balance Vehicles 4-5 years straight line Fixtures and fittings 10 years straight line Computer hardware 4-5 years straight line/ declining balance
F-44 73 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) 1.3 Financial investments The investments in associates are valued at their acquisition cost in the assets of the Company. A reserve is recorded when their fair value is less than their book value. 1.4 Inventory and work in progress The policies used are as follows - - Inventory is valued at the total cost of production. - - Raw materials and consumables are valued at the average weighted cost for goods received in the last three months. This method is similar to FIFO. - - The Cost of production includes direct and indirect production expenses and an allocation of the costs of running the Head Office, to the extent that they are related to the production. - - The provision for obsolescence is determined based upon the anticipated sales. 1.5 Allowance for doubtful accounts The receivables are valued at their face value, a provision is recorded when the value recoverable is less than the book value. 1.6 Foreign exchange transactions The receivables and payables denominated in foreign currency are translated into French Francs at the December 31st exchange rate. The resulting differences with amounts translated at historical exchange rates are shown in the balance sheet as <>. A provision for exchange losses is recorded separately for unrealized losses. 1.7 Retirement indemnity liabilities The <> has been applied to calculate the retirement obligation. The total obligation is covered by: - - a fund run by La Mondiale, with a value of KFRF.9,680, - - a provision of KFRF.1,000 included in the Marwal accounts at December 31, 1997, - - an amount payable to La Mondiale of KFRF.450. F-45 74 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 2: FIXED ASSETS The movements in gross value are as follows:
--------------------------------------------- 12/31/96 Increase Decrease 12/31/97 --------------------------------------------- Intangible fixed assets 19761 969 -- 20730 Tangible fixed assets 156594 42804 4288 195110 Financial investments 27760 2029 623 29166
The movements in amortisation and depreciation are analysed as follows:
--------------------------------------------- 12/31/96 Increase Decrease 12/31/97 --------------------------------------------- Intangible fixed assets 19075 942 -- 20017 Tangible fixed assets 90817 23207 4143 109881
NOTE 3: INVENTORIES AND WORK IN PROGRESS The reserve for obsolescence for raw materials, consumables and finished goods at 12/31/97 amounts to KFRF.2.638. NOTE 4: ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES At December 31, 1997, accounts receivable can be split by maturity date as follows:
--------------------------------------------- Greater than 1 Total Less than 1 year year --------------------------------------------- Long term receivables 6375 6307 68 Current assets 147796 147796 --
NOTE 5: SHORT TERM INVESTMENTS N/A F-46 75 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 6: PREPAYMENTS AND DEFERRED INCOME 12/31/97 -------- Prepayments Fees 159 Prepaid maintenance 29 Leasing 203 --- 391 12/31/97 -------- Deferred income Finished goods sales 74 Long term contracts (tooling) 4712 ---- 4786 NOTE 7: DEFERRED CHARGES ---------------------------------------- Total Charged to 12/31/97 income statement 1997 ---------------------------------------- Deferred charges Amortised over 3 years 497 497 0 NOTE 8: SHAREHOLDERS' EQUITY The capital stock is made up of 906,600 shares with a nominal value of FRF.100, completely paid up. The accounts of the Company are consolidated in the group accounts of the Magneti Marelli Spa Group. F-47 76 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 9: TAX PROVISIONS AND PROVISIONS FOR CONTINGENCIES AND CHARGES The movements in the year are analysed as follows:
-------------------------------------------- 12/31/96 Additions Reversals 12/31/97 -------------------------------------------- Provisions for contingencies and charges of which: 11223 5333 11290 5266 - - Provision for payments on retirement 672 1000 672 1000 - - Provision for guarantee 5812 1948 5218 1948 - - Provision for reorganisation 70 0 70 0 - - Provision for litigation 2586 653 2691 548 - - Provision for loss on foreign exchange 762 1273 762 1273 - - Provision for charges 1283 409 1283 409 - - Provision for unproductive hours 38 50 -- 88
NOTE 10: CREDITORS At December 31, 1997, debts, excluding advances and deposits received, deferred income and foreign exchange differences, can be analysed by maturity date as follows:
------------------------------------------------- Total Less than 1 Between 1 and >5 years year 5 years ------------------------------------------------- Government subsidy 2300 2300 Other financial debts 14812 14812 Trade payables and other liabilities++ 196677 193037 3640 Overdraft 234 234
++ of which trade bills payable: 55338 F-48 77 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 11: INFORMATION ON SUBSIDIARY (In thousands of Pesos)
- ------------------------------------------------------------------------------------------------------------------------------ Equity capital other than Last closing Share in % Detailed information Share capital capital result - ------------------------------------------------------------------------------------------------------------------------------ 95% Marwal de Mexico S.A. de C.V. 49655* (8739)* 8923* Tepotzotplan Estado de Mexico 98% Marwal Argentina S.A. 12000 Non available Non available Buenos Aires Estado de Argentina
++ after reevaluation (In thousands of Francs)
- ----------------------------------------------------------------------------------------------------------------- Gross Net book Loans Guarantee Dividends Detailed information value value given given received - ----------------------------------------------------------------------------------------------------------------- Marwal de Mexico S.A. de C.V. 22731 22731 -- -- -- Marwal Argentina S.A. 60 60 6085 -- --
The exemption of sub-groups enables Marwal Systems to not consolidate its subsidiaries. NOTE 12: RELATED PARTIES The related parties transactions are included in the different accounts in the balance sheet as follows:
- ---------------------------------------------------------------------------- Assets Liabilities - ---------------------------------------------------------------------------- Trade receivables 51778 Trade payables 15020 Other receivables 2953 Other payables 2906 Cash and cash equivalent 106522 Financial debt --
Interest expenses and financial income with related parties are as follows: Operating income 73062 Operating expenses 45322 Financial income 2953 Interest expenses 2812
F-49 78 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 13: ACCRUALS AND INCOME RECEIVABLE RELATING TO DIFFERENT BALANCE SHEET ACCOUNTS - ------------------------------------------------------------------------- Assets Liabilities - ------------------------------------------------------------------------- Trade receivables - - Customers 6092 Trade payables - - Suppliers 240 - Suppliers 12337 - - Other 3100 - Tax and social charges 16248 - Customers 1793 - Other 3135 Other liabilities - Other receivables - Financial debts 2050 NOTE 14: EXCHANGE DIFFERENCES RELATED TO BALANCE SHEET ACCOUNTS ----------------------------- Exchange difference ----------------------------- Asset Liability ----------------------------- Assets Trade receivables 736 85 Liabilities Trade payables 537 575 NOTE 15: SALES TURNOVER ANALYSIS 1996 1997 ---- ---- Sales 610479 692154 Sales of goods 596746 676821 Sales of services 13733 15333 Split between export/domestic Domestic 323428 290827 Export 287051 401327 Sales 610479 692154 F-50 79 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 16: DEFERRED TAX POSITION
-------------------------------------------------------- 12/31/96 Movements 12/31/97 -------------------------------------------------------- Nature Asset Liability Asset Liability Asset Liability - ------ -------------------------------------------------------- Timing differences Accrued expenses payable to La Mondiale 811 811 450 450 Organic 799 799 797 797 Provision for contingencies and charges 1976 1976 1459 1459 Profit sharing 6348 6348 3650 3640 Expenses to amortize 497 497 0 Elements having an impact on 1997 fiscal result Vehicle leasing 4 Difference on foreign exchange unrealised gains (605)
F-51 80 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 17: EMPLOYEE INFORMATION
--------------------------------- Permanent staff Temporary staff --------------------------------- Executives & Management 79 Employees 155 7 Labor and production 475 56 --------------------------------- TOTAL 709 63 =================================
NOTE 18: LEASE COMMITMENTS The company leases certain of its buildings: - -------------------------------------------------------------------- Depreciation expense Balance sheet Acquisition -------------------------- Net book account cost Period ended Accumulated value - -------------------------------------------------------------------- Buildings Chalons 5000 172 632 4368 Saint-Martin 8059 101 101 7958 -------------------------------------------------- Total 13059 273 733 12326 ====================================================================
NOTE 19: COMMITMENTS UNDERTAKEN AND RECEIVED Discounted trade bills receivable but not matured 83007 Leasing: * present value of lease payments based on the BT01 index (value at 01.01.97 = 538.3 francs)
- --------------------------------------------------------------------------------------- Lease payments Future lease payments Term Balance ----------------- -------------------------------------------- price sheet Period Accu- Less than 1 Between 1 > 5 years Total category ended mulated year and 5 years - --------------------------------------------------------------------------------------- Buildings Chalons* 588.4 2160.3 591.0 2364.1 1797.9 4753.0 Saint- 113.8 113.8 535.4 3391.4 6089.8 10016.6 Martin - --------------------------------------------------------------------------------------- Total 702.2 2274.1 1126.4 5755.5 7887.7 14769.6 0 =======================================================================================
NOTE 20: INFORMATION RELATING TO MANAGEMENT N/A F-52 81 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 21: EXCEPTIONAL INCOME Exceptional income from operating activities 0 Exceptional income from capital transactions 409 Income from the sale of fixed assets 409 Reversal of provisions and transfer of charges 1495 Provision for reorganisation 70 Provision for litigation 392 Provision for charges 1033 NOTE 22: EXCEPTIONAL CHARGES Exceptional charges on operating activities 2320 Redundancy payments 1382 Reimplantation costs 531 Non refunded IVA 391 Other 16 Exceptional charges from capital transactions 145 Net book value of fixed assets sold 145 Depreciation and provisions 131 Provisions for risk 131
F-53 82 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 23: CHANGE IN ACCOUNTING POLICIES N/A NOTE 24: ANALYSIS OF INCOME TAX As Marwal Systems became a partnership as from 10/01/95, there is no income tax booked.
--------------------------- Base Tax --------------------------- 12/31/97 --------------------------- Operating profits 46015 0 Exceptional items (692) 0 ----- ---- Profit before tax 45323 0 Income tax credit 0 ---- TOTAL INCOME TAX FOR THE COMPANY 0 ====
NOTE 25: RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accompanying financial statements of Marwal Systems S.N.C. have been prepared in accordance with accounting principles required in France. A reconciliation of these reported results to generally accepted principles in the United States is as follows:
1997 Profit after taxation as shown in the financial statements 41,683 Adjust depreciable life of goodwill (375) Adjust depreciable expense of fixed assets 1,821 Other (416) ------ Net income according to generally accepted 42,713 accounting principles in the United States
F-54 83 MARWAL SYSTEMS, S.N.C. STATUTORY AUDITOR'S GENERAL REPORT YEAR ENDED DECEMBER 31, 1996 In our capacity as statutory auditor, we present below our report on: - - the accompanying annual accounts of Marwal Systems, - - the specific procedures and disclosures prescribed by law, for the year ended December 31, 1996. These annual accounts are the responsibility of the Company's management. Our responsibility is to express an opinion on these annual accounts based on our audit. 1. OPINION ON THE ANNUAL ACCOUNTS We conducted our audit in accordance with French auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall annual account presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the annual accounts present fairly, in all material respects, the financial position of the Company at December 31, 1996 and the results of its operations for the year then ended. II. SPECIFIC PROCEDURES AND DISCLOSURES PRESCRIBED BY LAW We have also carried out, in accordance with professional standards, the specific procedures prescribed by law. We have nothing to report with respect to the fairness of information contained in the Directors' Report and its consistency with the annual accounts and other information presented to shareholders concerning the financial position and annual accounts. The Statutory Auditor ERNST & YOUNG Audit /s/ Gilles Meyer March 7, 1997 F-55 84 MARWAL SYSTEMS, S.N.C. Balance Sheet as of December 31, 1996 (in French Francs)
ASSETS December 31, 1996 ---------------------------------------------------- Gross Accumulated Net book value depreciation amortization and allowances ---------------------------------------------------- Fixed Assets - ------------ Intangible fixed assets 19.761.392,48 19.074.600,32 686.792,16 Tangible fixed assets 156.594.185,63 90.816.990,28 65.777.195,35 Financial investments: - - Associates 22.731.315,00 - 22.731.315,00 - - Others 5.029.079,77 - 5.029.079,77 -------------- -------------- -------------- Sub-total 204.115.972,88 109.891.590,60 94.224.382,28 -------------- -------------- -------------- Inventories - ----------- - - Raw materials 28.365.181,00 2.416.159,00 25.949.022,00 - - Work-in-progress 2.868.378,00 233.271,00 2.635.107,00 - - Finished goods 10.119.722,00 928.075,00 9.191.647,00 -------------- -------------- ------------- Sub-total 41.353.281,00 3.577.505,00 37.775.776,00 -------------- -------------- -------------- Current assets - -------------- Advances and payments on accounts 932.195,00 932.195,00 Trade accounts and notes receivable: - - Customers and related accounts 118.214.952,27 3.803.797,82 114.411.154,45 - - Other 9.530.704,08 9.530.704,08 Other receivables 1.489.686,35 1.489.686,35 Cash and cash equivalent 101.785.260,99 101.785.260,99 Payments in advance 244.063,94 244.063,94 Deferred charges 497.004,94 497.004,94 Foreign exchange translation differences 761.691,02 761.691,02 -------------- -------------- -------------- Sub-total 233.455.558,59 3.803.797,82 229.651.760,77 -------------- -------------- -------------- TOTAL ASSETS 478.924.812,47 117.272.893,42 361.651.919,05 -------------- -------------- --------------
F-56 85 MARWAL SYSTEMS, S.N.C. Balance Sheet as of December 31, 1996 (in French Francs)
DECEMBER 31, 1996 ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity Share capital 90.660.000,00 Reserves 1.470.178,30 Revaluation reserve Retained earnings at January 1st 24.306.987,50 Result for the year 56.697.450,69 ----------------- Sub-total 173.134.616,49 ----------------- Provisions for contingencies and charges 11.222.783,62 Liabilities Financial debts: - - Amounts owed to financial institutions 71.741,14 - - Other financial debts 7.637.640,38 Accounts payable and related accounts 130.236.872,44 Social charges payable 21.804.322,68 Taxes 3.224.512,15 Other 4.710.583,24 Other creditors: - - Accounts payable on fixed assets 7.006.722,04 - - Group 449,84 - - Other 64.874,81 Deferred income 1.271.517,00 Foreign exchange translation differences 1.265.283,22 ----------------- Sub-total 177.294.518,94 ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 361.651.919,05 -----------------
F-57 86 MARWAL SYSTEMS, S.N.C. Income Statement for the year ended December 31, 1996 (in French Francs)
INCOME STATEMENT FOR THE YEAR December 31, 1996 ----------------- Operating revenues: 616.818.427,92 Sale of goods 596.746.296,62 Sale of services 13.732.425,85 Net sales 610.478.722,77 Movement in finished goods and work-in-progress (1.616.414,00) In-house production 568.066,00 Grants 493.725,00 Reversal of provisions and transfer of charges 5.013.288,15 Other income 1.881.040,00 Operating expenses 554.232.751,85 Purchases of raw materials and other supplies 284.395.019,10 Movements in raw materials stock (3.520.706,00) Other purchases and external charges 95.604.496,22 Taxes and similar charges 9.677.879,14 Wages & salaries 91.916.790,49 Social charges 39.787.018,33 Depreciation and amortisation expenses and provisions: - - Fixed assets 23.855.292,82 - - Current assets 2.259.789,97 - - Contingencies and charges 8.262.354,05 Other charges 1.994.817,73 -------------- 554.232.751,85 Operating profit 62.585.676,07 Financial income: From other investments 136,92 Other interest and similar income 2.245.533,46 Reversal of provisions and transfer of charges -- Foreign exchange gains 10.316.211,72 -------------- 12.561.882,10 Financial expenses: Depreciation and provisions 1.022.855,69 Interest and similar charges 3.906.694,57 Foreign exchange losses 4.124.523,99 -------------- 9.054.074,25 Net financial income / (expenses) 3.507.807,85
F-58 87 MARWAL SYSTEMS, S.N.C. Income Statement for the year ended December 31, 1996 (in French Francs)
INCOME STATEMENT FOR THE YEAR December 31, 1996 - ----------------------------- ----------------- Profit before taxation 66.093.483,92 Exceptional income: 3.104.503,48 - ------------------ From operating activities 1.448.388,61 From capital transactions 431.443,87 Reversal of provisions and transfer of charges 1.224.671,00 ------------ 3.104.503,48 Exceptional charges: 6.152.294,71 - ------------------- From operating activites 4.382.238,16 From capital transactions 275.084,55 Depreciation and provisions 1.494.972,00 ------------ 6.152.294,71 Exceptional profit (loss) (3.047.791,23) - ------------------------- Profit before taxation 63.045.692,69 - ------------------------- Profit-Sharing 6.348.242,00 Income Tax -- Profit after taxation 56.697.450,69 - -------------------------
F-59 88 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) EVENTS DURING THE YEAR The financial investment in Marwal de Mexico was raised from 36.369 French Francs to 22.731.315 French Francs, which is 95% of the shares. NOTE 1: ACCOUNTING POLICIES The accounts of the Company have been prepared based upon generally accepted accounting principles in France which conform with the Chart of Accounts as set out in the French law dated April 30, 1983 and the decree of November 29, 1983. 1.1 Intangible fixed assets The intangible fixed assets consist mainly of goodwill which is amortised on a straight line basis over 5 years and totally amortised at the end of 1996. The amortisation methods and the useful lives for other categories are as follows: - -Set-up costs 3 years straight line - -Computer software 1-3 years straight line 1.2 Tangible fixed assets Tangible fixed assets are valued at historical purchase price or cost of production when they have been produced in house. The cost of production is made up of the following elements: purchase price of raw materials, consumables and direct production costs. Assets are depreciated on a straight line basis or declining balance, when applicable, for items purchased during or after 1992. The depreciation methods and the useful lives applied are as follows: Installations 10 years straight line Machinery 5-6 2/3 straight line/declining balance Toolings 1-5 years straight line/declining balance Leasehold improvements-Mac/Toolings 5-6 2/3 straight line/declining balance Vehicles 4-5 years straight line Fixtures and fittings 10 years straight line Computer hardware 4-5 years straight line/declining balance F-60 89 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) 1.3 Financial investments - -The investments in associates are valued at their acquisition cost in the assets of the Company. - -A reserve is recorded when their fair value is less than their book value. 1.4 Inventory and work-in-progress The policies used are as follows: - - Inventory is valued at the total cost of production. - - Raw materials and consumables are valued at the average weighted cost for goods received in the last month. This method is similar to FIFO. - - The Cost of production includes direct and indirect production expenses and an allocation of the costs of running the Head Office, to the extent that they are related to the production. - - The provision for obsolescence is determined based upon the anticipated sales. 1.5 Allowance for doubtful accounts The receivables are valued at their face value, a provision is recorded when the value recoverable is less than the book value. 1.6 Foreign exchange transactions The receivables and payables denominated in foreign currency are translated into French Francs at the December 31st exchange rate. The resulting differences with amounts translated at historical exchange rates are shown in the balance sheet as << foreign exchange translation differences >>. A provision for exchange losses is recorded separately for unrealised losses. 1.7 Retirement indemnity liabilities The << Projected Benefit Obligation >> has been applied to calculate the retirement obligation. The total obligation is covered by: - -a fund run by La Mondiale, with a value of KFRF.9,006, - -a provision of KFRF.652 included in the Marwal accounts at December 31, 1996, - -an amount payable to La Mondiale of KFRF.810. F-61 90 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 2: FIXED ASSETS The movements in gross value are as follows:
------------------------------------------- 12/31/95 Increase Decrease 12/31/96 ------------------------------------------- Intangible fixed assets 18226 1535 - 19761 Tangible fixed assets 128952 28909 1267 156594 Financial investments 1047 26812 99 27760 -------------------------------------------
The movements in amortisation and depreciation are analysed as follows:
------------------------------------------- 12/31/95 Increase Decrease 12/31/96 ------------------------------------------- Intangible fixed assets 16433 2642 - 19075 Tangible fixed assets 70815 21213 1211 90817 -------------------------------------------
NOTE 3: INVENTORIES AND WORK IN PROGRESS The reserve for obsolescence for raw materials, consumables and finished goods at 12/31/96 amounts to KFRF.3,577. NOTE 4: ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES At December 31, 1996, accounts receivable can be split by maturity date as follows:
--------------------------------------------------- Total Less than 1 year Greater than 1 year --------------------------------------------------- Long term receivables 5029 5026 3 Current assets 130167 130167 - ----------------------------------------------------
NOTE 5: SHORT TERM INVESTMENTS N/A. F-62 91 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 6: PREPAYMENTS AND DEFERRED INCOME
12/31/96 -------- Prepayments - ----------- Documentation 2 Prepaid maintenance 43 Leasing 199 --- 244 12/31/96 -------- Deferred income Long term contracts (tooling) 1272
NOTE 7: DEFERRED CHARGES ----------------------------------------- Total Charged to 12/31/96 income statement 1996 ----------------------------------------- Deferred charges Amortised over 3 years 2005 1508 497 ----------------------------------------- NOTE 8: SHAREHOLDERS' EQUITY The capital stock is made up of 906,600 shares with a nominal value of FRF.100, completely paid up. The accounts of the Company are consolidated in the group accounts of the Magneti Marelli Spa Group. F-63 92 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 9: TAX PROVISIONS AND PROVISIONS FOR CONTINGENCIES AND CHARGES The movements in the year are analysed as follows:
12/31/95 Additions Reversals 12/31/96 ------------------------------------------- Provisions for contingencies and charges of which: 5513 10953 5243 11223 - - Provision for payments on retirement 357 672 357 672 - - Provision for guarantee 2523 5812 2523 5812 - - Provision for loss on foreign exchange 433 762 433 762 - - Provision for litigation 455 1892 455 1892 - - Provision for reimplantation - 1033 - 1033 -------------------------------------------
NOTE 10: CREDITORS At December 31, 1996, debts, excluding advances and deposits received, deferred income and foreign exchange differences, can be analysed by maturity date as follows:
Total Less than 1 Between 1 and > 5 years year 5 years ------------------------------------------------ Other financial debts 7638 7638 Trade payables and other liabilities* 167048 160700* 6348 Overdraft 71 71 ------------------------------------------------
*of which trade bills payable: 46031 NOTE 11: INFORMATION ON SUBSIDIARY (In thousands of Pesos)
Share in % Detail information Share capital Equity capital Last closing other than result capital - -------------------------------------------------------------------------------- 95% Marwal de Mexico S.A. de C.V. Tepotzotplan 42870 (5075) 1325 Estado de Mexico
F-64 93 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) (In thousands of Francs)
- ----------------------------------------------------------------------------------------------------- Detailed information Gross Net book Loans Guarantee Dividends value value given given recevied - ----------------------------------------------------------------------------------------------------- Marwal de Mexico S.A. de C.V. 22731 22731 - - - - -----------------------------------------------------------------------------------------------------
The exemption of sub-groups enables Marwal Systems to not consolidate Marwal de Mexico. NOTE 12: RELATED PARTIES The related parties transactions are included in the different accounts in the balance sheet as follows:
- -------------------------------------------------------------------------------- Assets Liabilities ------ ----------- - -------------------------------------------------------------------------------- Trade receivables 42640 Trade payables 12212 Other receivables 1972 Other payables 2069 Cash and cash equivalent 100323 Financial debt - - -------------------------------------------------------------------------------- Interest expenses and financial income with related parties are as follows: - -------------------------------------------------------------------------------- Operating income 57100 Operating expenses 46067 Financial income 1972 Interest expenses 3535 - --------------------------------------------------------------------------------
NOTE 13: ACCRUALS AND INCOME RECEIVABLE RELATING TO DIFFERENT BALANCE SHEET ACCOUNTS
- -------------------------------------------------------------------------------------- Assets Liabililties ------ ------------ - -------------------------------------------------------------------------------------- Trade receivables - - Customers 8442 Trade payables - - Suppliers - - Suppliers 14284 - - State 2000 - Tax and social charges 17107 - Other 1896 - Other receivables Other liabilities - Financial debts 804 - --------------------------------------------------------------------------------------
F-65 94 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 14: EXCHANGE DIFFERENCES RELATED TO BALANCE SHEET ACCOUNTS Exchange difference -------------------------------- Asset Liability Assets Trade receivables 80 1257 Liabilities Trade payables 682 8 -------------------------------- NOTE 15: SALES TURNOVER ANALYSIS 1995 1996 ---- ---- Sales 559587 610479 Sales of goods 540479 596746 Sales of services 19108 13733 Split between export/domestic Domestic 318495 323428 Export 241092 287051 Sales 559587 610479 NOTE 16: DEFERRED TAX POSITION
12/31/95 Movements 12/31/96 ----------------------------------------------------------------- Nature Asset Liability Asset Liability Asset Liability ----------------------------------------------------------------- Timing differences Organic 730 730 799 799 -----------------------------------------------------------------
Elements having an impact on 1996 fiscal result None. NOTE 17: EMPLOYEE INFORMATION Permanent staff Temporary staff ----------------------------------------------- Executives & Management 67 Employees 143 3 Labor and production 468 23 ----------------------------------------------- TOTAL 678 26 ----------------------------------------------- F-66 95 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 18: LEASE COMMITMENTS None. NOTE 19: COMMITMENTS UNDERTAKEN AND RECEIVED Discounted trade bills receivable but not matured 82132 NOTE 20: INFORMATION RELATING TO MANAGEMENT N/A. NOTE 21: EXCEPTIONAL INCOME Exceptional income from operating activities 1448 Grant relating to training 1400 Other 48 Exceptional income from capital transactions 431 Income from the sale of fixed assets 136 Other 295 Reversal of provisions and transfer of charges 1225 Provision for delocalisation 1225 NOTE 22: EXCEPTIONAL CHARGES Exceptional charges on operating activities 4382 Redundancy payments 1543 Training costs 2756 Other 83 Exceptional charges from capital transactions 275 Net book value of fixed assets sold 55 Other 220 Depreciation and provisions 1495 Provision for risk 392 Other 70 Provision for charges 1033 F-67 96 MARWAL SYSTEMS, S.N.C. Notes to the financial statements (in thousands of French Francs) NOTE 23: CHANGE IN ACCOUNTING POLICIES Effective January 1, 1996, the toolings participation with Walbro, that used to be booked in deferred charges and amortized over 3 years, are recorded in fixed assets. The amount involved is KFRF. 4,650 at 1996 year end. Past years participations have not been reclassified and are still shown as deferred charges for an amount of KFRF. 497 at December 31, 1996. NOTE 24: ANALYSIS OF INCOME TAX As Marwal Systems became a partnership as from 10/01/95, there is no income tax booked. Base Tax 12/31/96 -------------------------- Operating profit 66094 0 Exceptional items (3048) 0 -------------------------- Profit before tax 63046 0 Income tax credit 1994 0 -------------------------- TOTAL INCOME TAX FOR THE COMPANY 0 -------------------------- NOTE 25: RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accompanying financial statements of Marwal Systems S.N.C. have been prepared in accordance with accounting principles required in France. A reconciliation of these reported results to generally accepted principles in the United States is as follows:
For the Year Ended December 31, 1996 1995 1994 ---- ---- ---- (In Thousands of French Francs) Profit after taxation as shown in the financial statements 56,697 25,473 15,534 Adjust depreciable life of goodwill 1,375 2,625 2,625 Adjust depreciation expense of fixed assets 1,361 1,597 4,827 Other 537 409 89 Deferred taxes -- 3,582 (1,657) ------ ------ ------ Net income according to generally accepted accounting principles in the United States 59,970 33,686 21,418 ====== ====== ======
F-68 97 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Walbro Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Walbro Corporation and Subsidiaries' annual report to shareholders included or incorporated by reference in this Form 10-K, and have issued our report thereon dated February 17, 1999. Our audits were made for the purpose of forming an opinion on those consolidated statements taken as a whole. The supplemental notes to the consolidated financial statements on pages S-2 to S-12 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic consolidated financial statements. The information contained in these supplemental notes has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Detroit, Michigan, February 17, 1999. S-1 98 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) VALUATION AND QUALIFYING ACCOUNTS Following is a summary of changes in the valuation and qualifying accounts for the three years ended December 31, 1998 (in thousands):
1998 1997 1996 -------- -------- -------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Balance Beginning of Year $ 809 $ 753 $ 978 Additions charged to operations 869 378 302 Other 2,818 -- -- Deductions for uncollectible accounts written off, net of recoveries (470) (238) (508) Currency translation adjustment 133 (84) (19) -------- -------- -------- Balance End of Year $ 4,159 $ 809 $ 753 ======== ======== ======== RESERVE FOR INVENTORY VALUATION: Balance Beginning of Year $ 2,645 $ 668 $ 808 Additions charged to operations 1,033 3,425 724 Deductions for inventory disposal (2,299) (1,380) (870) Currency translation adjustment 33 (68) 6 -------- -------- -------- Balance End of Year $ 1,412 $ 2,645 $ 668 ======== ======== ========
S-2 99 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
DECEMBER 31, 1998 --------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ------------ --------------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash..................................... $ 1,190 $ 18,563 $ (106) $ -- $ 19,647 Accounts receivable, net................. 66,739 55,015 32,662 -- 154,416 Accounts receivable, intercompany........ (103,735) (37,056) 141,663 (872) -- Inventories.............................. 21,898 37,918 1,055 -- 60,871 Prepaid expenses and other............... 1,690 9,007 1,037 -- 11,734 Deferred and refundable income taxes..... -- 1,507 9,228 -- 10,735 ---------- --------- --------- ---------- --------- Total current assets................... (12,218) 84,954 185,539 (872) 257,403 ---------- --------- --------- ---------- --------- PLANT AND EQUIPMENT, NET................... 109,941 160,478 8,014 108 278,541 ---------- --------- --------- ---------- --------- OTHER ASSETS: Assets held for sale..................... -- 3,175 -- -- 3,175 Joint ventures........................... 20,169 18,266 -- -- 38,435 Investments.............................. 134,676 24,766 68,408 (225,160) 2,690 Goodwill, net............................ 13,886 9,460 -- 8,541 31,887 Notes receivable......................... 2,000 8,310 -- (8,287) 2,023 Deferred income taxes.................... -- 5,266 346 -- 5,612 Other.................................... 9,705 4,740 14,456 -- 28,901 ---------- --------- --------- ---------- --------- Total other assets..................... 180,436 73,983 83,210 (224,906) 112,723 ---------- --------- --------- ---------- --------- Total assets............................... $278,159 $319,415 $276,763 $(225,670) $648,667 ========== ========= ========= ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt........ $ 776 $ 134 $ 1,493 $ -- $ 2,403 Bank and other borrowings................ -- 12,012 -- -- 12,012 Accounts payable......................... 28,094 79,454 6,585 -- 114,133 Accrued liabilities...................... 13,164 14,440 2,176 1,229 31,009 Dividends payable........................ -- 920 -- -- 920 ---------- --------- --------- ---------- --------- Total current liabilities.............. 42,034 106,960 10,254 1,229 160,477 ---------- --------- --------- ---------- --------- LONG-TERM LIABILITIES: Long-term debt, less current portion..... 165,617 18,882 181,757 (41,967) 324,289 Pension obligations and other............ -- 3,754 7,831 -- 11,585 Deferred income taxes.................... -- 5,170 (635) -- 4,535 Minority interest........................ -- 1,225 -- -- 1,225 ---------- --------- --------- ---------- --------- Total long-term liabilities............ 165,617 29,031 188,953 (41,967) 341,634 ---------- --------- --------- ---------- --------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF WALBRO CAPITAL TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES..................... -- 69,000 -- -- 69,000 STOCKHOLDERS' EQUITY: Common stock, $.50 par value; authorized 25,000,000; outstanding 8,688,294 in 1998...................... -- 25,678 4,344 (25,678) 4,344 Paid-in capital.......................... -- 73,618 66,088 (73,618) 66,088 Retained earnings........................ 73,816 34,118 37,656 (107,934) 37,656 Deferred compensation.................... -- -- (125) -- (125) Accumulated other comprehensive income... (3,308) (18,990) (30,407) 22,298 (30,407) ---------- --------- --------- ---------- --------- Total stockholders' equity............. 70,508 114,424 77,556 (184,932) 77,556 ---------- --------- --------- ---------- --------- Total liabilities and stockholders' equity............................... $278,159 $319,415 $276,763 $(225,670) $648,667 ========== ========= ========= ========== =========
S-3 100 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
DECEMBER 31, 1997 --------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ------------ --------------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash..................................... $ (744) $ 13,431 $ 852 $ -- $ 13,539 Accounts receivable, net................. 80,936 63,194 855 -- 144,985 Accounts receivable, intercompany........ (144,222) (37,755) 171,052 10,925 -- Inventories.............................. 26,086 29,012 1,109 -- 56,207 Prepaid expenses and other............... 5,988 9,549 1,868 -- 17,405 Deferred and refundable income taxes..... 470 1,253 6,796 -- 8,519 ----------- ---------- ----------- -------------- ---------- Total current assets................... (31,486) 78,684 182,532 10,925 240,655 ----------- ---------- ----------- -------------- ---------- PLANT AND EQUIPMENT, NET................... 123,635 144,423 7,204 108 275,370 ----------- ---------- ----------- -------------- ---------- OTHER ASSETS: Joint ventures........................... 10,739 15,942 -- -- 26,681 Investments.............................. 117,720 24,433 50,959 (189,851) 3,261 Goodwill, net............................ 14,342 11,444 (1,524) 8,541 32,803 Notes receivable......................... -- 6,499 196,198 (202,571) 126 Deferred and refundable income taxes..... -- 4,001 4,178 -- 8,179 Other.................................... 9,045 2,860 11,613 -- 23,518 ----------- ---------- ----------- -------------- ---------- Total other assets..................... 151,846 65,179 261,424 (383,881) 94,568 ----------- ---------- ----------- -------------- ---------- Total assets............................... $ 243,995 $ 288,286 $ 451,160 $ (372,848) $ 610,593 =========== ========== =========== ============== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt........ $ 7,026 $ 76 $ 6,858 $ -- $ 13,960 Bank and other borrowings................ -- 26,204 -- -- 26,204 Accounts payable......................... 21,540 55,730 6,939 -- 84,209 Accrued liabilities...................... 1,103 18,699 20,127 (708) 39,221 Dividends payable........................ -- 920 868 -- 1,788 ----------- ---------- ----------- -------------- ---------- Total current liabilities.............. 29,669 101,629 34,792 (708) 165,382 ----------- ---------- ----------- -------------- ---------- LONG-TERM LIABILITIES: Long-term debt, less current portion..... 164,581 11,818 339,809 (224,815) 291,393 Pension obligations and other............ 2,505 2,625 6,693 -- 11,823 Deferred income taxes.................... -- 2,077 -- -- 2,077 Minority interest........................ -- 1,052 -- -- 1,052 ----------- ---------- ----------- -------------- ---------- Total long-term liabilities............ 167,086 17,572 346,502 (224,815) 306,345 ----------- ---------- ----------- -------------- ---------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF WALBRO CAPITAL TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES.................... -- 69,000 -- -- 69,000 STOCKHOLDERS' EQUITY: Common stock, $.50 par value; authorized 25,000,000; outstanding 8,682,595 in 1997...................... -- 23,935 4,341 (23,935) 4,341 Paid-in capital.......................... -- 72,819 66,151 (72,819) 66,151 Retained earnings........................ 49,827 28,747 33,938 (78,574) 33,938 Deferred compensation.................... -- -- (379) -- (379) Accumulated other comprehensive income... (2,587) (25,416) (34,185) 28,003 (34,185) ----------- ---------- ----------- -------------- ---------- Total stockholders' equity............. 47,240 100,085 69,866 (147,325) 69,866 ----------- ---------- ----------- -------------- ---------- Total liabilities and stockholders' equity............................... $ 243,995 $ 288,286 $ 451,160 $ (372,848) $ 610,593 =========== ========== =========== ============== ==========
S-4 101 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ------------ --------------- ------------- (IN THOUSANDS) NET SALES............................. $357,379 $339,813 $ 2,624 $(21,826) $677,990 COSTS AND EXPENSES: Cost of sales....................... 296,326 295,254 2,238 (21,826) 571,992 Selling, administrative, research and development expenses......... 30,331 26,574 11,621 - 68,526 -------- -------- -------- -------- -------- OPERATING INCOME (LOSS)............... 30,722 17,985 (11,235) - 37,472 OTHER EXPENSE (INCOME): Interest expense.................... 25,649 10,486 26,117 (30,446) 31,806 Interest income..................... (7,809) (6,823) (18,991) 30,446 (3,177) Royalty income, net................ (3,667) 439 - - (3,228) Foreign currency exchange loss (gain)........................... (73) (1,173) (16) - (1,262) Other............................... (721) 490 (554) - (785) -------- -------- -------- -------- -------- Income before (provision) credit for income taxes, minority interest, equity in income (loss) of joint ventures and subsidiaries and extraordinary item.................. 17,343 14,566 (17,791) - 14,118 (Provision) credit for income taxes... (5,496) (3,110) 4,639 - (3,967) Minority interest..................... - (5,806) - - (5,806) Equity in income (loss) of joint ventures............................ (353) 1,199 - - 846 Equity in income (loss) of subsidiaries........................ 8,226 - 18,343 (26,569) - -------- -------- -------- -------- -------- Income before extraordinary item...... 19,720 6,849 5,191 (26,569) 5,191 Extraordinary item.................... - - (1,473) - (1,473) -------- -------- ------- -------- -------- Net income............................ $ 19,720 $ 6,849 $ 3,718 $(26,569) $ 3,718 ======== ======== ======= ======== ======== Net income............................ $ 19,720 $ 6,849 $ 3,718 $(26,569) $ 3,718 Other comprehensive income, net of tax: Unrealized loss on securities for sale.......................... - - (207) - (207) Cumulative translation adjustments.. (721) 6,426 3,985 (5,705) 3,985 -------- -------- -------- -------- -------- Other comprehensive income............ (721) 6,426 3,778 (5,705) 3,778 -------- -------- -------- -------- -------- Comprehensive income.................. $ 18,999 $ 13,275 $ 7,496 $(32,274) $ 7,496 ======== ======== ======== ======== ========
S-5 102 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ------------ --------------- ------------- (IN THOUSANDS) NET SALES............................. $323,189 $316,828 $ 2,302 $ (22,414) $ 619,905 COSTS AND EXPENSES: Cost of sales and restructuring and. impairment charges............... 299,913 286,119 2,133 (22,414) 565,751 Selling, administrative, research and development expenses......... 38,423 27,354 12,298 78,075 -------- -------- -------- --------- --------- OPERATING INCOME (LOSS)............... (15,147) 3,355 (12,129) -- (23,921) OTHER EXPENSE (INCOME): Interest expense.................... 23,060 14,720 22,313 (34,683) 25,410 Interest income..................... (11,671) (6,079) (17,607) 34,683 (674) Royalty income, net................. (4,477) 599 -- -- (3,878) Foreign currency exchange loss (gain)........................... (900) 534 58 -- (308) Other............................... 425 (50) (10) -- 365 -------- -------- -------- --------- --------- Income before (provision) credit for income taxes, minority interest, equity in income (loss) of joint ventures and subsidiaries........... (21,584) (6,369) (16,883) -- (44,836) (Provision) credit for income taxes... 7,818 28 2,285 -- 10,131 Minority interest..................... (450) (4,585) -- -- (5,035) Equity in income of joint ventures............................ 1,007 2,106 -- -- 3,113 Equity in income (loss) of subsidiaries........................ (4,036) -- (22,028) 26,064 -- -------- -------- -------- --------- --------- Net income............................ $(17,245) $ (8,820) $(36,626) $ 26,064 $ (36,627) ======== ======== ======== ========= ========= Net income............................ $(17,245) $ (8,820) $(36,626) $ 26,064 $ (36,627) Other comprehensive income, net of tax: Unrealized loss on securities available for sale................ -- -- (620) -- (620) Cumulative translation adjustments.. (2,607) (23,790) (28,226) 26,397 (28,226) -------- -------- -------- --------- --------- Other comprehensive income............ (2,607) (23,790) (28,846) 26,397 (28,846) -------- -------- -------- --------- --------- Comprehensive income.................. $(19,852) $(32,610) $(65,472) $ 52,461 $ (65,473) ======== ======== ======== ========= =========
S-6 103 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------------ WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ----------- --------------- ------------ (IN THOUSANDS) NET SALES.......................... $325,547 $284,812 $ 1,671 $ (26,641) $585,389 COSTS AND EXPENSES: Cost of sales.................... 264,824 248,589 1,362 (26,641) 488,134 Selling administrative, research and development expenses...... 49,599 21,607 (629) -- 70,577 -------- -------- --------- --------- -------- OPERATING INCOME (LOSS)............ 11,124 14,616 938 -- 26,678 OTHER EXPENSE (INCOME): Interest expense................. 14,824 5,773 22,214 (22,276) 20,535 Interest income.................. (5,416) (1,999) (17,577) 22,276 (2,716) Royalty income, net.............. (2,042) 632 -- -- (1,410) Foreign currency exchange loss (gain)................... (309) (131) 370 -- (70) Other............................ (4) 158 (217) -- (63) -------- -------- --------- --------- -------- Income before (provision) credit for income taxes, minority interest, equity in income of joint ventures and subsidiaries .................... 4,071 10,183 (3,852) -- 10,402 (Provision) credit for income taxes............................ (1,240) (4,155) 2,320 -- (3,075) Minority interest ................. -- (285) -- -- (285) Equity in income of joint ventures......................... 552 3,635 -- -- 4,187 Equity in income of subsidiaries..................... 9,932 518 12,761 (23,211) -- -------- -------- --------- --------- -------- Net income ........................ $ 13,315 $ 9,896 $ 11,229 $ (23,211) $ 11,229 ======== ======== ========= ========= ======== Net income ........................ $ 13,315 $ 9,896 $ 11,229 $ (23,211) $ 11,229 Other comprehensive income, net of tax: Minimum pension liability adjustment...................... -- -- 63 -- 63 Unrealized loss on securities available for sale.............. -- -- (139) -- (139) Cumulative translation adjustments.................... (551) (5,085) (6,580) 5,636 (6,580) -------- -------- --------- --------- -------- Other comprehensive income......... (551) (5,085) (6,656) 5,636 (6,656) -------- -------- --------- --------- -------- Comprehensive income............... $ 12,764 $ 4,811 $ 4,573 $ (17,575) $ 4,573 ======== ======== ========= ========= ========
S-7 104 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 --------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ------------ --------------- ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities.............. $ 33,107 $ 53,196 $(31,701) $-- $ 54,602 --------- --------- --------- ----- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment.................... (16,474) (25,237) (295) -- (42,006) Acquisitions, net of cash acquired..................... -- -- -- -- -- Purchase of other assets....... 12,235 (11,320) (6,391) -- (5,476) Investment in joint ventures and other.................... (22,201) 3,240 7,392 -- (11,569) Proceeds/(payments) of intercompany note receivable................... -- -- -- -- -- Proceeds from disposal of assets....................... 2,211 653 5,515 -- 8,379 -------- -------- -------- ----- -------- Net cash provided by (used in) investing activities.............. (24,229) (32,664) 6,221 -- (50,672) -------- -------- -------- ----- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving line-of-credit agreements................... -- -- 73,344 -- 73,344 Debt repayments................ (6,944) (16,479) (45,408) -- (68,831) Proceeds from issuance of long-term debt............... -- -- -- -- -- Proceeds from issuance of common stock and options..... -- -- 57 -- 57 Financing fees paid............ -- -- (2,603) -- (2,603) Cash dividends paid............ -- -- (868) -- (868) -------- -------- -------- ----- -------- Net cash provided by (used in) financing activities.............. (6,944) (16,479) 24,522 -- 1,099 -------- -------- -------- ----- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................. -- 1,079 -- -- 1,079 -------- -------- -------- ----- -------- NET INCREASE (DECREASE) IN CASH..... 1,934 5,132 (958) -- 6,108 CASH AT BEGINNING OF YEAR........... (744) 13,431 852 -- 13,539 -------- -------- -------- ----- -------- CASH AT END OF YEAR................. $ 1,190 $ 18,563 $ (106) $-- $ 19,647 ========= ======== ======== ===== ========
S-8 105 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 --------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ------------ --------------- ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities.............. $ 25,529 $ 12,845 $(64,600) $ -- $(26,226) -------- -------- -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment.................... (29,952) (31,783) (284) -- (62,019) Acquisitions, net of cash acquired..................... -- -- -- -- -- Purchase of other assets....... (2,974) (27) (86) -- (3,087) Investment in joint ventures and other.................... (2,350) 8,142 (4,036) -- 1,756 Proceeds/(payments) of intercompany note receivable................... -- -- -- -- -- Proceeds from disposal of assets....................... 9,370 (5,247) 1,292 -- 5,415 -------- -------- -------- ------- -------- Net cash provided by (used in) investing activities.............. (25,906) (28,915) (3,114) -- (57,935) -------- -------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving line-of-credit agreements................... -- 8,375 (91,510) -- (83,135) Debt repayments................ (666) (136) (408) -- (1,210) Proceeds from issuance of long-term debt............... -- (63,596) 169,000 -- 105,404 Proceeds from issuance of convertible preferred securities................... -- 69,000 -- -- 69,000 Proceeds from issuance of common stock and options..... -- -- 492 -- 492 Financing fees paid............ -- -- (5,680) -- (5,680) Cash dividends paid............ -- -- (3,463) -- (3,463) -------- -------- -------- ------- -------- Net cash provided by (used in) financing activities.............. (666) 13,643 68,431 -- 81,408 -------- -------- -------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................. -- (1,921) -- -- (1,921) -------- -------- -------- ------- -------- NET INCREASE (DECREASE) IN CASH..... (1,043) (4,348) 717 -- (4,674) CASH AT BEGINNING OF YEAR........... 299 17,779 135 -- 18,213 -------- -------- -------- ------- -------- CASH AT END OF YEAR................. $ (744) $ 13,431 $ 852 $ -- $ 13,539 ======== ======== ======== ======= ========
S-9 106 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------------------------------- WALBRO CORPORATION CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ------------ ------------ ----------- --------------- ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities............... $ 61,606 $ 50,441 $(75,409) $ -- $ 36,638 -------- -------- -------- ----- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment..................... (38,884) (60,417) 154 -- (99,147) Acquisitions, net of cash acquired...................... -- (1,018) -- -- (1,018) Purchase of other assets........ (2,041) (1,297) (96) -- (3,434) Investment in joint ventures and other......................... (22,509) 10,609 10,449 -- (1,451) Proceeds/(payments) of intercompany note receivable.................... -- -- -- -- -- Proceeds from disposal of assets........................ 7 328 3,821 -- 4,156 -------- -------- -------- ----- -------- Net cash provided by (used in) investing activities............... (63,427) (51,795) 14,328 -- (100,894) -------- -------- -------- ----- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving line-of-credit agreements.................... -- 1,189 64,061 -- 65,250 Debt repayments................. (555) (141) (408) -- (1,104) Proceeds from issuance of long-term debt................ 2,600 172 -- -- 2,772 Proceeds from issuance of common stock and options............. -- -- 771 -- 771 Financing fees paid ............ -- -- (508) -- (508) Cash dividends paid ............ -- -- (3,439) -- (3,439) -------- -------- -------- ----- -------- Net cash provided by (used in) financing activities............... 2,045 1,220 60,477 -- 63,742 -------- -------- -------- ----- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH............................... -- (1,306) 241 -- (1,065) -------- -------- -------- ----- -------- NET INCREASE (DECREASE) IN CASH...... 224 (1,440) (363) -- (1,579) CASH AT BEGINNING OF YEAR............ 75 19,219 498 -- 19,792 -------- -------- -------- ----- -------- CASH AT END OF YEAR.................. $ 299 $ 17,779 $ 135 $ -- $ 18,213 ======== ======== ======== ===== ========
S-10 107 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) Basis of Presentation -- In July 1995, the Company issued $110,000,000 in aggregate principal amount of 9.875% Senior Notes due in 2005 (the 2005 Notes). In December 1997, the Company sold $100,000,000 in aggregate principal amount of 10.125% Senior Notes due in 2007 (the 2007 Notes). The 2005 and 2007 Notes are guaranteed on a senior unsecured basis, jointly and severally, by each of the Company's principal wholly-owned domestic operating subsidiaries and certain of its indirect wholly-owned subsidiaries (the Guarantors). The Guarantors include Walbro Automotive Corporation, Walbro Engine Management Corporation, Whitehead Engineered Products, Inc. and Sharon Manufacturing Co. The condensed consolidating financial statements of the Guarantors are presented on pages S-2 through S-10 and should be read in connection with the consolidated financial statements of the Company. Separate financial statements of the Guarantors are not presented because the Guarantors are jointly, severally and unconditionally liable under the guarantees, and the Company believes the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Guarantors. Distributions -- There are no significant restrictions on the ability of the Guarantors to make distributions to Walbro Corporation. Selling and Administrative Expenses -- During 1998, 1997 and 1996 the Parent Corporation allocated $3,399,000, $5,267,000 and $10,422,000, respectively, of corporate selling and administrative expenses to its operating subsidiaries. S-11 108 WALBRO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) Long-term debt of the Parent Corporation and the Guarantors consisted of the following at December 31 (in thousands):
1998 1997 ------ ------- Senior notes due 2005, unsecured, stated interest at 9.875% (9.92% effective interest rate) net of unamortized discount of $331 and $369 as of December 31, 1996 and 1995, respectively. $109,747 $109,708 Senior notes due 2007, unsecured, interest at 10.125%............ 100,000 100,000 New Revolving Credit Facility, secured, interest at the LIBOR or prime rate, plus an additional margin ......................... 93,312 -- New Purchase Money Loan Agreement, secured, interest at the LIBOR or prime rate, plus an additional margin...................................... 2,584 -- Old Revolving Credit Facility, repaid during 1998................ -- 19,700 Old Purchase Money Loan Agreement, repaid during 1998............ -- 2,852 Term loan from the State of Connecticut, secured, interest at 6% per annum, payable in monthly amounts from 1997 to 2005 ....... 3,400 3,400 2004 Senior Notes, repaid during 1998............................ -- 45,000 Industrial revenue bond, issued by Town of Ossian, Indiana, interest at a variable municipal bond rate, due in 2023........ 9,000 9,000 Industrial revenue bond, issued by City of Ligonier, Indiana, repaid during 1998............................................. -- 6,300 Capital lease obligations, interest at 7.5%, payable in monthly installments through February 2002............................. 2,399 3,042 Other............................................................ -- 462 -------- -------- 320,442 299,464 Less -- Current portion.......................................... 2,269 13,884 -------- -------- $318,173 $285,580 ======== ========
For a more detailed description of the above indebtedness, see Note 5 of Notes to Consolidated Financial Statements. Aggregate minimum principal payment requirements on long-term debt, including capital lease obligations, in each of the five years subsequent to December 31, 1998 are as follows (in thousands): 1999 - $2,269; 2000 - $2,447; 2001 - $2,515; 2002 - $1,867; 2003 - $90,199 and thereafter - $221,145. S-12 109 INDEX TO EXHIBITS
SEQUENTIAL EXHIBITS DESCRIPTION PAGE NO. 23.1 Consent of Arthur Andersen LLP, independent public accountants. 23.2 Consent of Ernst & Young Audit.
EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 17, 1999 included (or incorporated by reference) in this Form 10-K/A, into the Company's previously filed Registration Statement File Nos. 33-20841, 33-32068 and 33-48562. /s/ ARTHUR ANDERSEN LLP Detroit, Michigan, April 14, 1999. EX-23.2 3 NO DESCRITPTION 1 [ERNST & YOUNG LETTERHEAD] EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation of our reports dated March 7, 1997, March 6, 1998 and March 26, 1999, with respect to the balance sheets of Marwal Systems as of December 31, 1996, December 31, 1997 and December 31, 1998 and the related statements of income for the years then ended, which reports are included or incorporated by reference in the Form 10-K/A of Walbro Corporation, into the Company's previously filed Registration Statement File Numbers 33-20841, 33-32068 and 33-48562. ERNST & YOUNG Audit /s/ Gilles Meyer Gilles Meyer April 19, 1999 -----END PRIVACY-ENHANCED MESSAGE-----