10-K 1 d10k.txt FORM 10-K ================================================================================ United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K For Annual and transition Reports PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES Exchange ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities exchange Act of 1934 For the Transition Period from ________ to _________. Commission File Number 1-13683 DELCO REMY INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 35-1909253 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2902 Enterprise Drive Anderson, Indiana 46013 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (765) 778-6499 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes [X] NO [_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12B-2). YES [_] NO [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE COMMON EQUITY WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH COMMON EQUITY, AS OF THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER. Not Applicable INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Outstanding as of March 15, 2003 Common Stock-- Class A 1,000.00 Common Stock-- Class B 2,485,337.49 Common Stock-- Class C 16,687.00 DOCUMENTS INCORPORATED BY REFERENCE: None. DELCO REMY INTERNATIONAL, INC. FORM 10-K DECEMBER 31, 2002 TABLE OF CONTENTS
PART I Page ---- Item 1. Business 3 Item 2. Properties 12 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 69 PART III Item 10. Directors and Executive Officers of the Registrant 70 Item 11. Executive Compensation 71 Item 12. Security Ownership of Certain Beneficial Owmers and Management 75 Item 13. Certain Relationships and Related Transactions 77 Item 14. Controls and Procedures 78 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 79 SIGNATURES 83 CERTIFICATIONS 85
2 PART I From time to time, Delco Remy International, Inc. (the "Company") makes oral and written statements that may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange Commission ("SEC") in its rules, regulations and releases. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements relating to the future performance of the Company contained in this Form 10-K and in other filings with the SEC. Any statements set forth below or otherwise made in writing or orally by the Company with regard to its expectations as to financial results and other aspects of its business may constitute forward-looking statements. These statements relate to the Company's future plans, objectives, expectations and intentions and may be identified by words like "believe," "expect," "may," "will," "should," "seek," or "anticipate," and similar expressions. The Company cautions readers that any such forward-looking statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks including, but not limited to, risks associated with the uncertainty of future financial results, acquisitions, additional financing requirements, development of new products and services, the effect of competitive products or pricing, the effect of economic conditions and other uncertainties. Due to these uncertainties, the Company cannot assure readers that any forward-looking statements will prove to have been correct. ITEM 1 BUSINESS The Company is a leading global manufacturer and remanufacturer of original equipment and aftermarket electrical, powertrain/drivetrain and related components for automobiles, light trucks, medium and heavy duty trucks and other heavy duty vehicles. The Company's products are sold worldwide primarily under the "Delco Remy" brand name, as well as other widely recognized private label brands. The Company's products include starter motors ("starters"), alternators, engines, transmissions, torque converters and fuel systems which are principally sold or distributed to original equipment manufacturers ("OEMs") for both original equipment manufacture and aftermarket operations, as well as to warehouse distributors and retail automotive parts chains. The Company sells its products principally in North America, Europe, Latin America and Asia-Pacific. The Company believes that it is the largest producer in North America of OEM starters for automobiles and light trucks and starters and alternators for medium and heavy duty vehicles. The Company believes it is also the largest producer in the world of remanufactured starters and alternators for the aftermarket. The Company provides exchange services for cores for third party aftermarket remanufacturers. The Company's largest customers include General Motors ("GM"), International Truck and Engine Corporation ("Navistar"), Advance Auto Parts, Daimler Chrysler, Caterpillar, Ford, AutoZone, Delphi, PACCAR, O'Reilly, Cummins, Volvo/Mack Trucks, and Mazda. Since the Company's separation from GM in 1994, the Company has seen significant growth through strategic acquisitions and joint ventures which have broadened its product line, expanded its manufacturing and remanufacturing capability, extended its participation in international markets and increased its penetration of the retail automotive parts channel. As a result, sales to its customers other than GM have increased from 41% of the Company's total sales in fiscal year 1995 to 77% in fiscal year 2002. The Company has also increased sales outside of the Class 8 heavy duty truck market from 87% of its total sales in fiscal year 1995 to 95% in fiscal year 2002. The Company changed its fiscal year end to December 31, effective August 1, 2000. Prior to August 1, 2000, the fiscal year ended on July 31. References to "fiscal year" other than fiscal year 2002 and 2001 pertain to years ending July 31 of such year. 3 Acquisitions During fiscal year 2002, the Company made payments totaling $5.398 million under contractual put agreements to purchase additional shares from the minority shareholders of World Wide Automotive, Inc. ("World Wide"), which was acquired in 1997. These payments increased the Company's ownership percentage of World Wide from 88.2% to 94.0%. Also during fiscal year 2002, the Company made payments totaling $5.625 million under contractual put agreements to purchase additional shares from the minority shareholder of Power Investments, Inc. ("Power"), which was acquired in 1996. These payments increased the Company's ownership percentage of Power from 85.8% to 93.4%. The Company also made cash payments totaling $5.485 million and issued notes in the amount of $9.918 million in fiscal year 2002 to purchase additional shares from the minority shareholders of Delco Remy Korea, which was acquired in 1999. This transaction increased the Company's ownership percentage in Delco Remy Korea from 81.0% to 100%. At December 31, 2002, the Company was in negotiations with Delphi Corporation to purchase certain portions of its generator business. In the fourth quarter of 2002, the Company completed the acquisition of intellectual property rights for the light duty alternator product line and certain other assets for production of automotive alternators. Additional agreements are expected to be completed in 2003. Divestiture of Non-Core Businesses and Joint Ventures On March 7, 2003 and on March 19, 2003, the Company successfully completed the sale of two non-core businesses that were engaged in the manufacturing of traction control devices and components for the air-conditioning industry. The net proceeds of the sales were approximately $29 million. These non-core businesses will be treated as discontinued operations beginning in the first quarter of 2003. The sale of these non-core businesses is not expected to have a material effect on the Company's results of operations. The Company's joint venture, Continental ISAD Electric Systems GmbH & Co. that was formed with Continental AG in January 2000, was terminated in 2002. Plant Closures On January 7, 2003, the Company announced that it will close its Delco Remy America starter and alternator manufacturing operations in Anderson, Indiana during the first quarter of 2003. Production at these plants will be absorbed by other Company plants globally. The wind down of the Anderson manufacturing operations will affect approximately 350 hourly United Autoworkers Union ("UAW") represented employees and approximately 50 salaried employees currently supporting these plants. On March 18, 2003, the Company announced it would close, by year-end, its electrical remanufacturing business, NABCO, located in Reed City, Michigan. The wind down of the Reed City remanufacturing operations will affect approximately 200 employees. The NABCO facilities in Kaleva and Marion, Michigan will continue to remanufacture components for Delphi and other selected customers. Discontinued Operations In the second quarter of 2002, the Company concluded that its retail aftermarket gas engine business does not fit with its strategic objectives and completed plans to exit the business. In connection with the discontinuance of the business, a charge of $28.2 million was recorded to write down the relevant assets to their estimated realizable value. An additional charge of $2.824 million was recorded for the estimated cost of employee termination benefits and closure of the facilities. Operating losses during the wind-down period are reported in results from discontinued operations. Industry Overview In general, the Company's business is influenced by the underlying trends of the automotive industry. However, the Company believes that its focus on expanding its remanufacturing capabilities heightens the importance of the aftermarket business and reduces its dependence on the cyclical OEM business. Aftermarket The aftermarket consists of the production and sale of both new and remanufactured parts used in the maintenance and repair of automobiles, trucks and other vehicles. 4 Remanufacturing is a process through which cores (used non-functional parts) are disassembled into their sub-components, cleaned, inspected, tested, combined with new subcomponents and reassembled into finished products. A remanufactured product can be produced at lower cost and higher quality than a comparable individually repaired unit due to effective salvage technology methods, high volume precision manufacturing techniques and rigorous inspection and testing procedures. The ability to procure cores is critical to the remanufacturing process. Aftermarket parts are supplied principally through three distribution channels: . car and truck dealers that obtain parts through their OEM parts organizations (e.g., GM Service Parts Operations ("GM SPO"), Ford Parts and Service Division, Freightliner, Caterpillar Service Parts, and International Truck Parts Organization) or directly from an OEM-authorized remanufacturer; . retail automotive parts chains and mass merchandisers; and . independent warehouse distributors and jobbers who supply independent service stations, installers, specialty and general repair shops, farm equipment dealers, car dealers and small retailers. The Company believes that the aftermarket and the Company's opportunity in the aftermarket have been, and will continue to be, impacted by the following trends: . the increasing number and average age of vehicles in use and the number of miles driven annually; . the increasing demands of customers that their aftermarket suppliers meet high quality and service standards; . the increasing use of remanufactured parts for OEM warranty and extended service programs, especially on larger, more complex components such as engines, transmissions and fuel system components; . the growth and consolidation of large retail automotive parts chains and warehouse distributors requiring larger, nationally capable suppliers; . the increasing engine output and durability demands related to the high temperatures at which engines operate; . the increased high-technology content of replacement components which requires more factory manufacturing compared with in-vehicle repair; and . the increasing service lives of automotive parts. The use of remanufactured components for warranty and extended service repairs has increased in recent years as OEMs have offered extended warranty and extended service coverage and dealers have begun to provide extended service plans and warranties on used vehicles. OEMs have sought to reduce warranty and extended service costs by using remanufactured components, which generally offer the same degree of quality and reliability as OEM products at a lower cost. This trend has also resulted in independent aftermarket customers requiring higher quality standards for remanufactured products. Recently, large retail automotive parts chains offering a broad range of new and remanufactured products have experienced rapid growth at the expense of small, independent retail and wholesale stores. The Company has significantly grown its sales to these large retail channels and believes that further increasing its sales to retail chains offers a significant opportunity for growth. Retail chains generally prefer to deal with large, national suppliers capable of meeting their cost, quality, volume and service requirements. OEM Markets The OEM market consists of the production and sale of new component parts for use in the manufacture of new vehicles. The OEM market includes two major classes of customers: . automobile and light truck manufacturers, marine and industrial manufacturers; . medium and heavy duty truck and engine manufacturers and other heavy duty vehicle manufacturers. 5 The OEM market has been impacted by recent fundamental changes in the OEMs' sourcing strategies. OEMs are consolidating their supplier base, demanding that their suppliers provide technologically advanced product lines, greater systems engineering support and management capabilities, just-in-time sequenced delivery and lower system costs. As a result, each OEM has selected its own preferred suppliers. OEMs are increasingly requiring that their preferred suppliers establish global production capabilities to meet their needs as they expand internationally and increase platform standardization across multiple markets. As OEM global alliances increase, global pricing for automotive components is becoming the norm. OEMs continue to outsource component manufacturing of non-strategic parts. Outsourcing has taken place in response to competitive pressures on OEMs to improve quality and reduce capital outlays, production costs, overhead and inventory levels. In addition, OEMs are increasingly purchasing integrated systems from suppliers who provide the design, engineering, manufacturing and project management support for a complete package of integrated products. By purchasing complete systems, OEMs are able to shift design, engineering and product management to fewer and more capable suppliers. Integrated systems suppliers are generally able to design, manufacture and deliver components at a lower cost than the OEMs due to: . their lower labor costs and other manufacturing efficiencies; . their ability to spread research and development and engineering costs over products provided to multiple OEMs; and . other economies of scale inherent in high volume manufacturing such as the ability to leverage global purchasing capabilities. Products The Company's product line includes a diverse range of manufactured and remanufactured products for the aftermarket and OEM markets under the "Delco Remy" brand name or under a private-label brand name specified by the OEM or the aftermarket customer. The Company also provides core acquisition services for third party aftermarket remanufacturers as well as its own subsidiaries. The product line is classified into two product categories: Electrical Systems and Powertrain/Drivetrain. Third-party sales for core acquisition services are included in the "Other" category. The following table sets forth the approximate composition by product category of the Company's revenues for the fiscal years ended December 31, 2002 and 2001, the five months ended December 31, 2000 and the prior fiscal year ended July 31, 2000*:
Year Ended Five December 31 Months Ended Year Ended ------------------------ December 31 July 31 Product Categories 2002 2001 2000 2000 ------------------------------------------------------- Electrical systems 74.6% 73.6% 79.9% 83.2% Powertrain/drivetrain 19.4 20.1 13.4 13.2 Other 6.0 6.3 6.7 3.6 ------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% =======================================================
* Reference is hereby made to the consolidated financial statements and the notes relating thereto for a more detailed presentation of revenues from external customers, a breakdown of foreign revenues, measure of profit (loss) and total assets. Products within the electrical systems category include manufactured and remanufactured starters and alternators. The starters are used in cars and trucks manufactured by GM in North America. Starters and alternators are also used in marine and industrial applications. The Company manufactures a full line of heavy duty starters and alternators for use primarily with large diesel engines. The Company's starters and alternators are specified as part of the standard electrical system by most North American heavy duty truck and engine manufacturers. The Company believes that it is the largest manufacturer and remanufacturer in North America of (i) starters for automobiles and light trucks (including sport-utility vehicles, minivans and pickup trucks) and (ii) starters and alternators for medium and heavy duty vehicles. Products within the powertrain/drivetrain category include diesel and marine engines, fuel injectors, injection pumps and turbo chargers (fuel systems), transmissions, torque converters, water pumps, rack and pinions, power steering pumps, and gears. 6 Customers The Company's principal customers include OEM automotive and heavy duty manufacturers, OEM dealer networks, leading automotive parts retail chains and warehouse distributors. The Company's major customers include GM, Navistar, GM SPO, Advance Auto Parts, Daimler Chrysler, Caterpillar, Ford, AutoZone, Delphi, PACCAR, O'Reilly, Cummins, Volvo/Mack Trucks, and Mazda. The Company has long-term agreements, with terms typically ranging from three to five years, to supply heavy duty starters and alternators to GM, Daimler Chrysler Commercial Trucks, PACCAR, Volvo/Mack Trucks, and Cummins. Total sales to GM and related affiliates accounted for approximately 23.7%, of which approximately 18.7% are OEM sales in 2002. No other customer accounted for more than 10% of consolidated net sales. In connection with the Company's separation from GM in July 1994, GM entered into long-term contracts with the Company to purchase 100% of its North American requirements for automotive starters (other than for Saturn and Geo) and 100% of its U.S. and Canadian requirements for heavy duty starters and alternators, at fixed prices which are scheduled to decline over the life of the contracts. GM's obligations to purchase the Company's automotive starters and heavy duty starters and alternators under these agreements are subject to those products remaining competitive as to price, technology and design. In fiscal year 1999, the Company and GM extended the terms of these agreements for the Company to supply automotive starting motors for existing and planned new engines introduced to support GM North American Operations to August 31, 2008. The amendment also provides that Delco Remy America and its international operations will be the supplier of starting motors for the life of production of those engines. In April 2002, price and product offering was adjusted in accordance with the competitive (as to price, technology and design) clause of the original agreement. The contracts relating to heavy duty products terminated on July 31, 2000. In 1994, GM also entered into a long-term contract with the Company to distribute exclusively the Company's automotive aftermarket products. Prices to GM under this agreement are driven by the market. This agreement terminates on July 31, 2009. The Company has developed a network of independent distributors to expand sales volume not served by previous sales channels. The independent distributors continue to be a growth market for the Company through expanded product offerings and increased Aftermarket market share. The Company expects to continue sales growth in this channel. The Company employs its own direct sales force which develops and maintains sales relationships with major North American truck fleet operators as well as its OEM customers worldwide. These sales efforts are supplemented by a network of field service engineers and product service engineers. Distribution The Company's products are distributed to its customers primarily by common carrier. Competition The automotive parts market is highly competitive. Competition is based primarily on quality of products, service, delivery, technical support and price. Most OEM manufacturers and aftermarket distributors source parts from one or two suppliers. The Company competes with a number of companies who supply automobile manufacturers throughout the world. In the automotive market, the Company's principal competitors include Denso, Valeo, Mitsubishi, Bosch, Visteon, Rayloc, Units Parts and Motorcar Parts & Accessories. 7 Business Strategy Exploit Leading Market Share in Fragmented Aftermarket The Company participates in a portion of the aftermarket that is large and highly fragmented. Most participants are small, regional companies offering relatively narrow product lines. A key element of the Company's growth strategy is to capitalize on its position as a consolidator. The Company believes that it is the largest manufacturer and remanufacturer of aftermarket starters and alternators in the world. Today, remanufacturing is less prevalent in Europe than in the U.S. The Company believes it is well-positioned to capitalize on the increasing trend towards remanufacturing from repair. Consolidation of the aftermarket is occurring as many competitors are finding it difficult to meet the increasing quality, cost and service demands of customers, who, in turn, are seeking to reduce the number of their suppliers. With its OEM capabilities, remanufacturing expertise, full product line, access to cores and ability to capitalize on economies of scale, the Company is well positioned to benefit from the consolidation of the aftermarket. Strengthen Customer Relationships The Company intends to increase its sales to new and existing customers by capitalizing on its balanced coverage of the key aftermarket distribution channels and its competitive strengths as an OEM supplier. The Company plans to strengthen its customer relationships by: . meeting the increasing demands of OEMs and their dealer networks for high-quality remanufactured units, which enable them to reduce warranty and extended service costs; . growing sales of existing and new product lines to OEM dealer networks as dealers continue to capture an increasing percentage of vehicle repairs primarily due to longer warranty and service programs and growing vehicle complexity; . continuing to expand its product offerings; and . capitalizing on the expansion of the national automotive retail parts chains and warehouse distributors that are its customers. Increase Global Presence OEMs are increasingly requiring suppliers to provide components on a global basis as vehicle platforms are standardized across geographic markets. Additionally, the Western European market for automotive components is expected to grow at a greater rate than the North American market over the next few years due to higher levels of OEM outsourcing. The emerging markets also should benefit from long-term growth as demand for automotive vehicles in these markets is expected to increase at a compounded annual rate of almost 6% over the next five years. Currently, the Company's manufacturing base includes a presence in eight countries on four continents. It plans to seek out collaborative opportunities in order to expand its OEM starter and alternator product lines and its international marketing and distribution capability. The Company believes that continued global expansion will enable it to continue to grow to meet these demands. Increase Focus on Technologically Advanced Products The Company continues to produce technologically advanced products by regularly updating and enhancing its product line. These products help it to compete successfully in the global marketplace. Since 1994, the Company has completed the introduction of a new family of gear reduction starters that replaced all straight drive starters in GM automobiles and light duty trucks by the 1998 model year and introduced several longer-life heavy duty alternators. It is also in various stages of development on a number of new products including: . a new family of gear reduction starters for the medium and heavy duty truck and industrial market; . a new family of light duty passenger car/light truck alternators; . a small gear reduction starter specifically designed for application on world automobile platforms; and . high-technology products in the distributed generation and hybrid electric vehicle markets. 8 Patents, Trademarks and Licenses Pursuant to a Trademark License Agreement between the Company and GM, GM has granted the Company an exclusive license to use the "Delco Remy" trademark on and in connection with automotive starters and heavy duty starters and alternators until July 31, 2004, extendable indefinitely at the Company's option upon payment of a fixed $100,000 annual licensing fee to GM. The Company has also been granted a perpetual, royalty-free license to use the "Remy" trademark. The "Delco Remy" and "Remy" trademarks are registered in the United States, Canada and Mexico and in most major markets worldwide. GM has agreed with the Company that, upon the Company's request, GM will register the trademarks in any jurisdiction where they are not currently registered. The Company has also been granted an exclusive license to use the "Delco Remy" name as a tradename and corporate name worldwide until July 31, 2004 pursuant to a Tradename License Agreement between the Company and GM. In addition, GM has granted the Company a perpetual license to use the "Remy" name as a tradename and corporate name worldwide. The Company owns and/or has obtained licenses to various domestic and foreign patents and patent applications related to its products and processes. The patents expire at various times over the next 17 years. While these patents and patent applications in the aggregate are important to the Company's competitive position, no single patent or patent application is material to the Company. The Company and Delphi Technologies, Inc. ("Delphi Technologies") entered into a license agreement dated November 30, 2002, by which the Company licensed from Delphi Technologies certain patents and technical information used in the manufacture and remanufacture of belt-driven automotive generators and alternators. Purchased Materials Principal purchased materials for the Company's business include: aluminum castings, gray and ductile iron castings, armatures, solenoids, copper wire, injectors, electronics, steel shafts, forgings, bearings, commutators, pumps and carbon brushes. All materials are readily available from a number of suppliers, and the Company does not foresee any difficulty in obtaining adequate inventory supplies. The Company generally follows the North American industry practice of passing on to its customers the costs or benefits of fluctuation in copper and aluminum prices on an annual or semi-annual basis. Employees As of December 31, 2002, the Company employed 6,338 people, 1,537 of whom were salaried and administrative employees and 4,801 of whom were hourly employees. In the United States, 350 of the Company's hourly workers are represented by the UAW under an agreement between the Company and the UAW, the applicable provisions of which were assumed by the Company in connection with the separation from GM. The agreement between the UAW and the Company, originally scheduled to expire on March 22, 2001, was extended an additional two years. On January 7, 2003, the Company announced that it will close its Delco Remy America starter and alternator manufacturing operations in Anderson, Indiana during the first quarter of 2003. The plant closure will effect the 350 hourly workers represented by the UAW and approximately 50 salaried employees currently supporting these plants. As of December 31, 2002, approximately 127 of Delco Remy Hungary's 384 hourly employees are affiliated with the Hungarian Steel Industry Workers Union. The agreement was signed July 17, 1996 and is perpetual, subject to termination upon three months' notice from either party. As of December 31, 2002, approximately 391 of Elmot's 480 hourly workers are affiliated with The Intercompany Trade Union or the Intercompany Union Organization NSZZ. Agreements with these unions were signed on August 23, 2000 and are perpetual. The Company's other facilities are primarily non-union. The Company is unaware of any current efforts to organize the employees in its other facilities. There can be no assurance that there will not be any labor union efforts to organize employees at facilities that are not currently unionized. At the present time, the Company believes that its relations with its employees are good. 9 Research and Development The Company's engineering staff works independently and with OEMs to design new products, improve performance and technical features of existing products and develop methods to lower manufacturing costs. In support of its engineering efforts, the Company has formed technical alliances with a select number of engineering and technology firms to identify long-term engineering advances and opportunities. The Company is a participant in Electricore Incorporated, a consortium for advanced transportation technologies. Through this participation, the Company is working on developing the technical alliances to develop the next generation motors and alternators. The Company has also entered into an alliance with Lynx Motion Technologies to develop a family of electric drive motors which will be integral components of the propulsion system, needed for advanced hybrid gas-electric, diesel-electric and fuel cell vehicles. The Company has obtained new business with Allison Electric Drive, a unit of GM Powertrain, for producing the electric machine integral to the development of the transmission used in hybrid vehicles. Consistent with its strategy to introduce technologically advanced and improved products, the Company spent approximately $15.2 million in 2002, $15.5 million in 2001, approximately $7.2 million in the five month period ended December 31, 2000 and approximately $16.3 million in fiscal year 2000, respectively, on research and development activities. All expenditures were Company funded. Foreign Operations Information about the Company's foreign operations is set forth in tables relating to geographic information in Note 16 to Consolidated Financial Statements, "Business Segments and Geographic Area Information," which statements are included under Item 8, Financial Statements and Supplementary Data. Environmental Regulation The Company's subsidiaries' facilities and operations are subject to a wide variety of federal, state, local and foreign environmental laws, regulations, ordinances and directives, including those related to air emissions, wastewater discharges and chemical and hazardous waste management and disposal ("Environmental Laws"). The Company's subsidiaries' operations also are governed by laws relating to workplace safety and worker health, primarily the Occupational Safety and Health Act, and foreign counterparts to such laws ("Employee Safety Laws"). The Company believes that it and its subsidiaries' operations are in compliance with current requirements under Environmental Laws and Employee Safety Laws, except for non-compliance where the cost that might be incurred to resolve the non-compliance would not have a material adverse effect on the Company's results of operations, business or financial condition. The nature of the Company's and its subsidiaries' operations, however, exposes it to the risk of liabilities or claims with respect to environmental and worker health and safety matters. There can be no assurance that such costs will not be incurred in connection with such liabilities or claims. The Company has commenced a series of environmental, health and safety reviews to enable the subsidiaries to confirm their compliance with Environmental Laws and Employee Safety Laws. Two subsidiaries of the Company, Remy Reman and World Wide, identified past violations of the Emergency Planning & Community Right to Know Act of 1986 ("EPCRA") and notified the Environmental Protection Agency ("EPA") under the federal voluntary audit disclosure rules. The EPA notified the two subsidiaries that EPA would not seek any penalties for the disclosed EPCRA violations, and therefore those matters are resolved. In addition, the Remy Reman facilities in Mississippi and the World Wide facility in Virginia identified certain possible violations of state air laws and notified the applicable state agencies under the state voluntary audit disclosure rules. The state agencies have either requested further information or have not responded to the subsidiaries. The subsidiaries have or are in the process of responding to the information requests, and they are currently in compliance with the air permit requirements. At this time, it is unknown whether the state environmental agencies intend to pursue enforcement actions for the past violations or whether penalties, if sought, will be material. The Company does not believe that the costs of the matters, if any, will have a material adverse effect on the Company's results of operations, business or financial condition. Based on the Company's experience to date, the Company believes that the future cost of compliance with existing Environmental Laws (or liability for known environmental claims) will not have a material adverse effect on the Company's business, financial condition or results of operations. However, future events, such as changes in existing Environmental Laws or their interpretation, may give rise to additional compliance costs or liabilities for the subsidiaries that could have a 10 material adverse effect on the Company's business, financial condition or results of operations. Compliance with more stringent Environmental Laws, as well as more vigorous enforcement policies of regulatory agencies or stricter or different interpretations of existing Environmental Laws, may require additional expenditures by the Company or its subsidiaries that may be material. Certain Environmental Laws hold current owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances, materials or wastes, pollutants or contaminants, including petroleum and petroleum products ("Hazardous Substances"). Because of their operations, the long history of industrial uses at some of its facilities, the operations of predecessor owners or operators of certain of the businesses, and the use, production and release of Hazardous Substances at these sites, the Company's subsidiaries are affected by such liability provisions of Environmental Laws. Various of the Company's subsidiaries' facilities have experienced in the past or are currently undergoing some level of regulatory scrutiny and are, or may become, subject to further regulatory inspections, future requests for investigation or liability for past disposal practices. In September 2000, one of Franklin Power Product Inc.'s (a subsidiary of the Company) Indiana facilities received a Finding of Violation and Order for Compliance from the EPA requiring the facility to correct violations of its wastewater discharge permits. Franklin Power Products, Inc. is in compliance with the terms of the order and has eliminated the discharge. During the environmental due diligence performed in connection with the separation from GM, GM and the Company identified certain on-site pre-closing environmental conditions, including the presence of certain Hazardous Substances in the soil at the former GM Meridian, Mississippi facility and in the soil and groundwater at the former GM Anderson, Indiana facilities. At the time, GM reported the presence of these substances in the groundwater to the EPA and the Indiana Department of Environmental Management, and we understand that GM continues to be responsible for working with the EPA to resolve these issues. The Company has vacated one of the former GM Anderson facilities and the Meridian, Mississippi facility and has ceased manufacturing at the other former GM Anderson facility. Based on the Company's experience to date, the terms of the indemnification in the GM acquisition agreement and GM's continuing performance in responding to these conditions, the Company does not believe any future costs of responding to these on-site environmental conditions would have a material adverse affect on the Company's operations, business or financial condition. In connection with its acquisition of facilities and businesses from GM, Nabco, A&B Group, Autovill, Power, World Wide, Ballantrae, Lucas Varity, Electro Diesel Rebuild, Electro Rebuild Tunisia, Atlantic Reman Limited, Williams Technologies, Elmot, Mazda, PAS and M&M Knopf Autoparts, Inc. ("Knopf"), the Company and/or its subsidiaries obtained various indemnities for certain claims related to on-site and/or off-site environmental conditions and violations of Environmental Laws which arose prior to such acquisitions. The environmental indemnities are subject to certain deductibles, caps, cost sharing and time limitations depending on the nature and timing of the environmental claim. The Comprehensive Environmental Response, Compensation, and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), imposes joint and several liability for releases of certain Hazardous Substances into the environment. The Company has received requests for information or notifications of potential liability from the EPA under CERCLA for certain off-site locations. The Company has not incurred any significant costs relating to these matters, and based on the existence of certain indemnification agreements from its predecessors and their assumption of liabilities to date and other legal defenses, the Company believes that it will not incur material costs in the future in responding to conditions at these sites. The Resource Conservation and Recovery Act ("RCRA") and the regulations thereunder and similar state counterparts to this law regulate hazardous wastes. The Anderson, Indiana facilities that the Company originally leased from GM were once part of a larger industrial complex owned and operated by GM (the "GM Complex"). Since 1990 (when owned by GM), the GM complex has been undergoing investigation and corrective action under RCRA. Based on the indemnities from GM and the lack of any claim to date by GM for any compensation by the Company, the Company believes that any future costs associated with the RCRA corrective action will not have a material adverse effect on the Company's results of operations, business or financial condition. The Company's subsidiaries are in the process of terminating various leases and/or shutting down operations at various redundant facilities. In connection with this activity, the subsidiaries evaluate environmental conditions as required under the applicable lease and intend to address any discovered conditions for which they are responsible. The Company does not believe the environmental obligations in connection with these terminations or closures will result in costs that will have a material adverse effect on the Company's results of operations, business or financial condition. 11 Franklin Power Co., Inc. in Franklin, Indiana has been undergoing a RCRA site investigation and clean-up of volatile organic compounds in the soil and groundwater pursuant to an EPA Administrative Order on Consent ("EPA Order") issued to both Franklin Power Products, one of the subsidiaries of the Company, and Amphenol Corporation, a prior owner of the property. Pursuant to the EPA Order, Franklin Power Products and Amphenol Corporation are jointly addressing this matter. Amphenol indemnified Franklin Power Products for certain liabilities associated with the EPA Order and Amphenol has satisfied and continues to satisfy the requirements of the EPA Order. Based on the experience to date and the indemnities from Amphenol and the sellers of Franklin Power Products to the Company, the Company believes that future costs associated with this site will not have a material adverse effect on the Company's results of operations, business or financial condition. Nabco Inc.'s (a subsidiary of the Company) Marion, Michigan facility was listed on Michigan's state list of contaminated sites since 1993 because of Hazardous Substances in the soils and groundwater at the facility. Based on recent sampling results submitted to the Michigan environmental authority in September 2001, Nabco believes that no further work will be required and requested that the site be removed from the state list. Even if the Michigan environmental authority was to require further investigation or remedial action with respect to this matter, the Company does not believe that costs in connection with this matter will have a material adverse effect on the Company's results of operations, business or financial condition. Backlog The majority of the Company's products are not on a backlog status. They are produced from readily available materials and have a relatively short manufacturing cycle. For products supplied by outside suppliers, the Company generally purchases products from more than one source. The Company expects to be capable of handling the anticipated sales volumes for the next fiscal year. Seasonality The Company's business is seasonal, as its major OEM customers historically have one or two week shutdowns of operations during July. In response, the Company typically has shut down its own operations for one week each July, depending on backlog, scheduled maintenance and inventory buffers, as well as an additional week during the December holidays. Consequently, the Company's results in the third and fourth quarters reflect the effects of these shutdowns. ITEM 2 PROPERTIES The world headquarters of the Company are located at 2902 Enterprise Drive, Anderson, Indiana 46013. The Company leases its headquarters. The following table sets forth certain information regarding manufacturing and certain other facilities operated by the Company as of December 31, 2002.
Number Location Of Facilities Use Owned/Leased -------------------------------------------------------------------------------------------------------- Anderson, IN 3 Office Leased Anderson, IN 7 Manufacturing Leased Anderson, IN 1 Testing Leased Anderson, IN 1 Warehouse Leased Atlanta, GA 1 Warehouse/Office Leased Bay Springs, MS 1 Manufacturing Leased Brooklyn, NY 2 Warehouse/Office Leased Brusque, Brazil 1 Manufacturing Leased Budapest, Hungary 1 Warehouse Owned Buffalo, NY 2 Warehouse Leased Chantilly, VA 1 Manufacturing/Office/Warehouse Leased Cradler Health, United Kingdom 1 Manufacturing/Warehouse Leased Dallas, TX 1 Manufacturing/Office Leased Droitwick, Worcestshire, United Kingdom 1 Office Leased Edinburgh, IN 1 Manufacturing Leased
12
Number Location Of Facilities Use Owned/Leased ----------------------------------------------------------------------------------------------------------------- Edmonton, Canada 3 Manufacturing/Warehouse Leased Findlay, OH 1 Manufacturing Leased Flint, MI 1 Warehouse/Office Leased Fort Wayne, IN 1 Warehouse Leased Fradley, United Kingdom 1 Manufacturing/Office/Warehouse Leased Franklin, IN 4 Manufacturing/Office/Warehouse Owned Hancock, MD 1 Warehouse/Office Leased Heverlee, Belgium 1 Office Leased Heidelberg, MS 1 Warehouse Leased Heist Op Den Berg, Belgium 4 Office/Manufacturing/Warehouse Leased Indianapolis, IN 2 Warehouse Leased Jacksonville, FL 1 Manufacturing/Office/Warehouse Leased Menzel Harb, Tunisia 1 Manufacturing Leased Kaleva, MI 1 Manufacturing Leased S. Kearny, NJ 1 Warehouse Leased Kings Winford, United Kingdom 1 Manufacturing Leased Kyoungnam, South Korea 2 Manufacturing/Warehouse Owned Laredo, TX 1 Warehouse Leased Lavant, United Kingdom 1 Manufacturing Leased Leicester, United Kingdom 1 Manufacturing/Warehouse Leased Mansfield, TX 1 Manufacturing Leased Marion, MI 1 Manufacturing Leased Memphis, TN 1 Warehouse Leased Meridian, MS 2 Warehouse/Office Leased Mezokovesd, Hungary 1 Manufacturing Owned Miskolc, Hungary 1 Manufacturing Leased Moncton, Canada 1 Warehouse Leased Peru, IN 7 Manufacturing Leased Philadelphia, PA 2 Warehouse Leased Piscataway, NJ 1 Office/Warehouse Leased Plainfield, IN 1 Warehouse Leased Raleigh, MS 4 Manufacturing/Warehouse Leased/Owned Reed City, MI 3 Manufacturing/Warehouse Owned Ridgeville, SC 2 Manufacturing Leased/Owned Sao Paulo, Brazil 1 Warehouse Leased San Luis Potosi, Mexico 5 Manufacturing Leased Saskatoon, Canada 1 Warehouse Leased Seoul, South Korea 1 Office Leased Shubuta, MS 1 Warehouse Leased Sligo, Ireland 1 Manufacturing/Office Leased Spartanburg, SC 1 Warehouse Leased Summerville, SC 6 Manufacturing/Warehouse/Office Leased Swidnica, Poland 1 Manufacturing Leased Sylvarena, MS 1 Office/Testing Leased Taylorsville, MS 1 Manufacturing Leased Toledo, OH 1 Retail Leased Troy, MI 1 Office Leased Warren, MI 1 Manufacturing Owned Winchester, VA 2 Office/Manufacturing/Warehouse Leased Winnepeg, Canada 3 Manufacturing/Warehouse Owned
The Company believes all facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the next several years. 13 ITEM 3 LEGAL PROCEEDINGS From time to time, the Company is party to various legal actions in the normal course of its business. Remy Mexico Holdings, S. de R.L. de C.V. ("RMH"), an indirect subsidiary of the Company, and GCID Autopartes, S.A. de C.V. ("GCID") are parties to a series of agreements, including a partnership agreement. The partnership agreement created Delco Remy Mexico, S. de R.L. de C.V. ("DRM") which operates certain manufacturing facilities in Mexico. GCID is the minority partner with a 24% ownership interest. RMH and GCID signed a letter of intent on or about May 3, 2000, whereby GCID agreed to terminate certain of the agreements in exchange for a $13,000,000 termination payment by RMH to GCID, but the transaction was never finalized. In June 2001, GCID declared RMH in default under the partnership agreement, alleging that RMH failed to conduct the business of the partnership in accordance with that agreement. In August 2001, GCID instituted an arbitration proceeding before the American Arbitration Association seeking damages for the alleged breaches of the partnership agreement and breaches of fiduciary duty. RMH has denied any such breaches. On January 2, 2002, GCID notified RMH that it was terminating the partnership for the alleged breach of the partnership agreement by RMH and demanded that RMH purchase GCID's partnership interest in DRM. On March 11, 2002, GCID filed the First Amended Arbitration Demand adding additional claims and parties, including DRM and other affiliates of RMH: Remy Componentes. S. de R.L. de C.V. and Delco Remy America, Inc. (together with RMH, the "Named Parties"). The First Amended Demand seeks damages for breach of fiduciary duty, breaches of various contracts between and among the various parties, and tortious interference with contractual relations. The damages include a claim of approximately $13,000,000 for the purchase of GCID's interest in the Company and a claim for $17,000,000 for the alleged breach of a Service Agreement between the Company and GCI Services, S.A. de C.V. ("GCIS"), an affiliate of GCID, pursuant to which GCIS provides labor to the Partnership. On September 30, 2002, GCID and GCIS served expert reports claiming that GCID is owed approximately $23,300,000 for the purchase of its partnership interest in DRM and that GCIS is owed approximately $17,650,000 under the Service Agreement. On January 24, 2003, GCID and GCIS filed a Second Amended Arbitration Demand adding additional claims of breach of contract against the Named Parties. On January 31, 2003, the Named Parties filed an Answer to the Second Amended Demand denying liability for all claims. The arbitration hearing is scheduled to begin May 19, 2003. The Company disputes all of the claims alleged in both the First and Second Amended Arbitration Demands and denies any liability for damages to GCID or any of its affiliates. GCIS continues to provide services to DRM. In addition, another affiliate of GCID, Sistemas y Componentes Electricos, S.A. de C.V., continues to be the leaseholder of the premises occupied by DRM. The Company believes that the Named Parties have meritorious defenses to the action, but it is unable to predict whether the proceeding will have a material adverse effect on the Company. Remy Reman facilities in Mississippi and the World Wide facility in Virginia have identified certain possible violations of state air laws and notified the applicable state agencies under the state voluntary audit disclosure rules. The state agencies have either requested further information or have not responded to the subsidiaries. The subsidiaries have or are in the process of responding to the information requests, and they are currently in compliance with the air permit requirements. At this time, it is unknown whether the state environmental agencies intend to pursue enforcement actions for the past violations or whether penalties, if sought, will be less than $100,000. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 2002. 14 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information On February 7, 2001, the Company agreed to a going private transaction with its largest stockholder, Court Square Capital Limited ("Court Square"), pursuant to which Court Square made a cash tender offer for all of the Company's common stock not owned by Court Square. Following completion of the tender offer on February 23, 2001, an affiliate of Court Square merged with the Company and the merger eliminated the remaining common stock not owned by Court Square. The aggregate consideration for the shares purchased in the tender offer and the merger was about $104.2 million. The Company did not incur any indebtedness in connection with the tender offer and merger. Following completion of the merger on March 14, 2001, the New York Stock Exchange delisted the Company's common stock, and the Company terminated the registration of its common stock under the Securities Exchange Act of 1934. There is currently no established public market for the outstanding common equity of the Company. Holders The approximate number of record holders of each of the classes of the Company's common stock as of March 15, 2003 were as follows: Class A Common Stock 1 Class B Common Stock 16 Class C Common Stock 1 Dividends The ability of the Company to pay dividends is restricted by certain covenants contained in the Company's Senior Credit Facility, as well as certain restrictions contained in the Company's indentures relating to its senior notes and its subordinated notes. ITEM 6 SELECTED FINANCIAL DATA The following table presents selected consolidated financial data of the Company for the fiscal years ending July 31, 1998 through 2000, the five month transition period ended December 31, 2000, and the years ended December 31, 2002 and 2001 (dollars in thousands).
Year Ended Five Months Ended December 31 December 31 Year Ended July 31 -------------------------------------------------------------------------------------- 2002 2001 2000 1999 2000 1999 1998 -------------------------------------------------------------------------------------- (Unaudited) Net sales $ 1,069,352 $ 1,007,152 $ 442,200 $ 421,203 $ 1,032,854 $ 882,478 $ 765,397 Income (loss) from continuing operations (a) 579 (47,861) 10,336 9,915 14,159 23,133 (5,649) Total assets 849,460 947,231 924,470 816,757 889,240 782,663 684,997 Long-term obligations and redeemable preferred stock 870,456 837,877 519,284 447,475 484,270 434,931 393,806 Cash dividends declared per common share NA NA -- -- -- -- --
(a) The results of acquired companies are included in operations from date of acquisition. Pro forma results of operations for acquisitions are presented in Note 1 to the consolidated financial statements. Results for the year ended December 31, 2001 and fiscal years ending July 31, 2000 and 1998 include restructuring charges of $20,724, $22,190 and $16,227, respectively, after income taxes. Results for the year ended December 31, 2001 include special charges totaling $20,114 after income taxes. See Notes to Consolidated Financial Statements. 15 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with and is qualified in its entirety by reference to the Company's consolidated financial statements and accompanying notes. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below. The Company changed its fiscal year end to December 31, effective August 1, 2000. Prior to August 1, 2000, the fiscal year ended on July 31. Accordingly, the Company's audited financial statements include a balance sheet at December 31, 2000 and statements of operations, stockholders' equity and cash flows for the five-month transition period ended December 31, 2000. Unaudited statements of operations for the year ended December 31, 2000 and the five months ended December 31, 1999, have been provided for management's discussion and analysis of results of operations. General The Company manufactures and remanufactures electrical and powertrain/drivetrain components for the aftermarket and OEM market and provides core exchange services. The Company sells its products principally in North America, Europe, Latin America and Asia-Pacific to OEMs, warehouse distributors and retail automotive parts chains. Results for Tractech, which manufactures traction control devices, and Kraftube, which manufactures components for the air-conditioning industry, are referred to as non-core businesses. These non-core businesses were sold in the first quarter of 2003 (see Note 21 to the financial statements) and will be reported as discontinued operations beginning in 2003. Prior period results will be reclassified accordingly. The demand for components in the OEM market is cyclical. The Company believes that opportunities for growth in the OEM market will continue to come primarily through the introduction of new products and expansion of the Company's global operations. The Company believes that its aftermarket and OEM products are complementary and provide the Company with a competitive advantage in meeting customer needs and maintaining the high levels of expertise necessary to compete successfully in both markets. The Company believes that the high capability and expertise required to meet the stringent technology and quality requirements of OEM customers provides the Company with a competitive advantage in the development and production of products for the aftermarket. The aftermarket is highly fragmented and competitive. The Company believes that aftermarket suppliers are consolidating. The Company believes that this consolidation is occurring, in part, because of higher quality standards for remanufactured products, which may be more expensive or technically difficult for smaller remanufacturers to meet. The Company plans to continue to increase its penetration of the aftermarket through internal growth and strategic acquisitions. The primary components of cost of goods sold in the Company's products include component parts, material, labor costs, overhead and the cost of cores. While the availability and cost of cores fluctuate based on supply and demand, the Company's relationships with dealers and other customers have historically provided it with sufficient access to cores at favorable prices. The Company believes that the acquisition of Knopf, one of the world's largest automotive components recovery and exchange companies, provides a key competitive advantage in the area of core management. Approximately 14% of the Company's domestic hourly labor force is represented by the UAW. The Company's current agreement with the UAW ends in March 2003. On January 7, 2003, the Company announced that it will close its Delco Remy America starter and alternator manufacturing operations in Anderson, Indiana during the first quarter of 2003. The plant closure will effect the 350 hourly workers represented by the UAW and approximately 50 salaried employees currently supporting these plants. The Company is currently in negotiations with the UAW concerning the severance payments to be made by the Company to the hourly labor force represented by the UAW. Under provisions of the current agreement, the UAW and the Company developed special programs of incentives for hourly employees who agree to leave the Company. The cost of these programs is included in the restructuring charges in fiscal years 2001 and 2000. The Company has implemented its strategy of shifting production to focus factories, which the Company believes has reduced costs and will continue to reduce costs as these focus factories continually improve and implement lean manufacturing concepts (See Note 21 to the financial statements). Since 1994, the Company has seen significant growth through strategic acquisitions and joint ventures which have broadened the Company's product line, expanded its manufacturing and remanufacturing capability, extended its participation in international markets and increased its penetration of the retail automotive parts channel. As a result, net sales to customers other than GM increased from 41% of total sales in fiscal year 1995 to 77% in 2002. Sales outside of the Class 8 heavy duty truck market have increased from 87% of total sales in fiscal year 1995 to 95% in 2002. 16 GM accounted for about 43% of the Company's total OEM sales in 2002. GM SPO accounted for about 9% of total after-market sales in 2002. In connection with the Company's separation from GM, GM entered into long-term contracts to purchase from the Company 100% of GM's North American requirements for automotive starters (other than for Saturn and Geo) and 100% of GM's U.S. and Canadian requirements for heavy duty starters and alternators. GM's obligations to purchase the Company's products in the future are subject to such products remaining competitive as to price, technology and design. GM's obligation to purchase automotive starters from the Company terminates on August 31, 2008. GM's obligation to purchase heavy duty starters and alternators from the Company terminated on July 31, 2000. The Company cannot be sure that GM will not develop alternative sources for components currently produced by the Company and purchase some or all of GM's requirements from alternative sources. In addition, GM SPO has been designated as an exclusive distributor of a significant amount of the Company's automotive aftermarket products and as a distributor of the Company's heavy duty aftermarket products. The Company's exclusive distribution arrangements with GM SPO for the Company's automotive aftermarket products terminates on July 31, 2009. The Company distribution arrangement with GM SPO is renewable on an annual basis for the Company's heavy duty aftermarket products. On January 7, 2003, the Company announced that it will close its Delco Remy America starter and alternator manufacturing operations in Anderson, Indiana during the first quarter of 2003. Production at these plants will be absorbed by other Company plants globally. The wind down of the Anderson manufacturing operations will affect approximately 350 hourly UAW represented employees and approximately 50 salaried employees currently supporting these plants. On March 18, 2003, the Company announced it would close, by year-end, its electrical remanufacturing business, NABCO, located in Reed City, Michigan. The wind down of the Reed City remanufacturing operations will affect approximately 200 employees. The NABCO facilities in Kaleva and Marion, Michigan, will continue to remanufacture components for Delphi and other selected customers. In the second quarter of 2002, the Company concluded that its retail aftermarket gas engine business did not fit with its strategic objectives and completed plans to exit the business. In connection with discontinuing the business, a charge of $28.2 million was recorded in 2002 to write down the relevant assets to their estimated realizable value. An additional charge of $2.8 million was recorded in 2002 for the estimated cost of employee termination benefits and closure of facilities. Operating results for this business are reported under discontinued operations on the Company's consolidated statements of operations, balance sheets and consolidated statements of cash flows. In the fourth quarter of 2001, the Company completed plans for the closure and realignment of certain manufacturing facilities and administrative functions in the United States, Canada and Europe. These actions were in response to anticipated OEM and aftermarket volume declines and support the Company's ongoing efforts to reduce cost and improve efficiencies. A one-time charge of $39.3 million was recorded in the fourth quarter of 2001 for the estimated cost of the plan. The charge included $26.7 million for the estimated cost of various voluntary and involuntary employee separation programs associated with the resulting workforce reductions of approximately 820 employees. A total of $2.5 million and $15.0 million were paid in 2001 and 2002, respectively, and $4.6 million and $4.7 million are estimated to be paid in 2003 and 2004, respectively for these programs. The charge also included $8.2 million, net of salvage value, for the write-down of certain assets which will no longer be used as a result of the closures and realignments, and $4.4 million of other costs. In May 2000, the Company completed plans for the realignment of certain manufacturing facilities in the United States, Canada and the United Kingdom. A charge of $35.2 million was recorded in the fourth quarter of fiscal 2000 for the estimated cost of the plan, which included various employee separation programs and the write-down of certain production assets. Cash payments relative to this charge were $5.0 million, $16.0 million, $3.1 million and $2.9 million in fiscal 2000, the five months ended December 31, 2000 and the years 2001 and 2002, respectively. Payments are expected to be approximately $0.1 million in 2003. At December 31, 2002, the Company was in negotiations with Delphi Corporation to purchase certain portions of its generator business. In the fourth quarter of 2002, the Company completed the acquisition of intellectual property rights for the light duty alternator product line and certain other assets for production of automotive alternators. Additional agreements are expected to be completed in 2003. 17 The following table sets forth unaudited results of operations for the year ended December 31, 2000 and certain statements of operations data expressed as a percentage of sales:
As a Percentage of Net Sales --------------------------------------------- Five Year Year Year Year Months Ended Ended Ended Ended Ended December 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 ---------------- 2000 2002 2001 2000 2000 1999 -------------------------------------------------------------- $ in millions (unaudited) Net sales $ 1,033.9 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold 813.3 83.3 81.6 78.7 79.7 80.0 Special charges - cost of goods sold -- -- 1.6 -- -- -- -------------------------------------------------------------- Gross profit 220.6 16.7 16.8 21.3 20.3 20.0 Selling, general and administrative expenses 101.9 9.5 9.9 9.8 10.1 10.1 Special charges - SG&A -- -- 1.6 -- -- -- Amortization of goodwill and intangibles 5.9 0.1 0.7 0.6 0.6 0.5 Restructuring charges 31.4 -- 3.3 3.0 -- -- -------------------------------------------------------------- Operating income 81.4 7.1 1.3 7.9 9.6 9.4 Interest expense and other non-operating items (48.0) (5.6) (5.8) (4.7) (4.9) (4.5) -------------------------------------------------------------- Income (loss) from continuing operations before income taxes, minority interest in income of subsidiaries, loss from unconsolidated joint ventures, extraordinary items and cumulative effect of change in accounting principle 33.4 1.5 (4.5) 3.2 4.7 4.9 Income taxes (benefit) 11.3 0.7 (0.9) 1.1 1.5 1.8 Minority interest in income of subsidiaries (6.7) (0.4) (0.9) (0.6) (0.7) (0.7) Loss from unconsolidated joint ventures (0.8) (0.4) (0.3) (0.1) (0.1) -- ------------------------------------------------------------- Net income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle 14.6 -- (4.8)% 1.4% 2.4% 2.4% =============================================================
Results of Operations Year Ended December 31, 2002 Compared To Year Ended December 31, 2001 In 2001, the Company recorded special charges totaling $32.4 million, $16.2 million of which was reported as a deduction to gross profit and $16.2 million of which was charged to other operating expenses. The deduction to gross profit included $13.8 million attributable to higher than anticipated warranty costs relative to a limited class of heavy-duty OEM alternators. The design and production issues, which caused the unusually high level of claims, were corrected. The special warranty charge included $8.2 million for claims in 2001 and $5.6 million for anticipated future claims. The charge was adequate to cover all relevant claims. An additional $2.4 million was charged to gross profit to record the write down of inventory and certain customer claims relative to the Company's 2001 restructuring actions in non-core businesses. The $16.2 million charged to operating expenses consisted primarily of disputed items related to the GM acquisition. In the fourth quarter of 2001, the Company conceded these claims in connection with the negotiation of other long-term agreements with GM and Delphi. Net Sales Net sales of $1,069.4 million in 2002 increased $62.2 million, or 6.2%, from $1,007.2 million in 2001. Automotive OEM sales increased $24.8 million due primarily to volume growth driven by strong customer demand. Heavy duty OEM sales were up $1.1 million due to customer pull ahead of Class 8 products in the third quarter in advance of forthcoming changes in engine technology required by Environmental Protection Agency regulations and sales incentives initiated by certain customers in the fourth quarter, partially offset by lower volume in Europe. Electrical aftermarket sales grew $26.5 million due to retail market share gains, partially offset by lower OEM service parts volume. Sales of remanufactured 18 transmissions and diesel engines increased $5.3 million due to the acquisition of Mazda North American Operations ("Mazda NA"), and AutoMatic Transmissions International A/S ("AMT") in 2001 ($10.1 million), partially offset by lower sales as a result of market softness. Third party sales in the core services business increased $1.9 million in 2002. Sales in non-core businesses increased $2.6 million in 2002. Gross Profit Gross profit of $179.1 million increased $10.4 million, or 6.2%, in 2002 from $168.7 million in 2001, and as a percentage of net sales was 16.7% in both years. Excluding a post-employment benefit curtailment gain recorded in 2002 and special charges recorded in 2001, gross profit decreased $10.2 million, or 5.5%, and as a percentage of net sales declined from 18.4% in 2001 to 16.3% in 2002. Automotive OEM gross profit increased $16.7 million due to higher sales volume, improved operating efficiency and a $1.8 million curtailment gain recorded in the first quarter of 2002, offset by the negative impact of strengthening foreign currencies on costs in foreign production facilities. Excluding the curtailment gain, Automotive OEM gross profit increased $14.9 million. Heavy duty OEM gross profit increased $15.0 million and, excluding the $2.6 million curtailment gain recorded in the first quarter of 2002 and the special warranty charges of $13.8 million in 2001, decreased $1.4 million in 2002 due to lower sales volume in Europe. Electrical aftermarket gross profit decreased $20.3 million in 2002 due to a higher ratio of retail sales (which generate lower margins) to OEM service parts sales, price reductions and start-up costs of new programs. Gross profit on remanufactured transmissions and diesel engines decreased $5.9 million in 2002 due to lower sales and the resulting negative impact on overhead absorption and labor efficiency, partially offset by the effect of the acquisitions of Mazda NA and AMT in 2001 ($3.9 million). Margins in the aftermarket overall were depressed by the emphasis on increased usage of cores in remanufacturing. While this has helped to conserve cash, it generated higher levels of scrappage of the underlying cores. Gross profit on core services increased $3.2 million in 2002 due to higher sales volume. Gross profit from non-core businesses increased $1.6 million due to higher sales and improved operating efficiencies. In all business units, the Company realized the initial benefits of the restructuring actions initiated in the fourth quarter of 2001. Selling, General and Administrative Expense Selling, general and administrative expenses ("SG&A"), excluding the $16.2 million special charge in 2001, increased $2.0 million, or 2.1%, in 2002 compared with 2001. As a percentage of net sales, SG&A expenses improved to 9.5% in 2002 from 9.8% in 2001. The increase in year over year spending reflects investments in marketing programs, particularly in Europe. Offsetting these increases were the effects of cost and business process improvement programs initiated in the fourth quarter of 2001 and overall spending reductions throughout the Company. Operating Income Operating income of $76.6 million in 2002 compares with operating income of $13.1 million in 2001. Excluding the $4.4 million curtailment gain in 2002 and the special charges totaling $32.4 million, the restructuring charge of $33.4 million and goodwill amortization of $6.7 million in 2001, operating income of $72.2 million in 2002 declined $13.5 million, or 15.7%, from $85.7 million in 2001, and as a percentage of net sales was 6.8% compared with 8.5% in 2001. This change was the result of sales, gross profit and SG&A expense factors discussed above. Interest Expense, Net Interest expense, net, increased $2.4 million to $58.9 million in 2002 compared to $56.6 million in 2001. This increase was due to higher levels of debt to fund acquisitions ($1.8 million), the higher rate associated with the 11% Senior Subordinated Notes Due 2009 issued on April 26, 2001 ($1.5 million) and increased funding requirements for investing and financing activities ($1.2 million). These increases were partially offset by increased cash from operating activities ($0.6) and $1.6 million of interest income relative to a Federal income tax refund received in 2002. Interest expense included in results of discontinued operations was $6.5 million in 2002 and $4.3 million in 2001. Non-operating Income (Expense) Non-operating expense, net, of $1.8 million in 2002 compares with non-operating income, net, of $1.8 million in 2001. Net foreign currency transaction losses of $0.5 million were recorded in 2002 compared with net gains of $0.4 million recorded in 2001. This year over year decline was due primarily to strengthening foreign currencies versus functional currencies in 2002, particularly in the fourth quarter. In addition, the Company recorded charges of $1.7 million in 2002 to write off deferred costs relative to acquisition projects that were terminated. 19 Income Taxes The Company's consolidated effective income tax rate was 45.4% in 2002 compared with 22.0% benefit in 2001. At December 31, 2002, the Company had unrecognized tax net operating loss carryover, research credits and alternative minimum tax credits of $162.1 million, $1.7 million and $2.9 million, respectively. The increase in the effective income tax rate year over year was due primarily to taxable dividends (primarily intercompany) paid in 2002 which are not deductible for financial reporting purposes and an $18.0 million addition to the reserve for the value of tax assets in excess of their estimated future recognizable value in 2001. Minority Interest in Income of Subsidiaries Minority interests' share of earnings of the Company's consolidated subsidiaries were $4.2 million in 2002 compared with $9.3 million in 2001. This year over year decrease reflects the Company's purchase of additional shares from the minority shareholders of World Wide, Power and Delco Remy Korea. In addition, earnings in 2002 for Delco Remy Korea were negatively affected by a change in transfer pricing between Delco Remy Korea and a U.S. subsidiary of the Company, which, accordingly, reduced the minority interests' earnings. Loss From Unconsolidated Joint Ventures The loss from unconsolidated joint ventures increased by $0.9 million to $3.8 million in 2002 compared with $2.9 million in 2001 due primarily to increased research and development activity at iPower Technologies, L.L.C. ("iPower"). Discontinued Operations The loss from discontinued operations before income tax in 2002 of $57.8 million consisted of operating losses of $20.3 million, interest expense of $6.5 million, restructuring charges for closure of facilities and employee separation costs totaling $2.8 million and the estimated loss on disposal of $28.2 million. Estimated future taxable income relative to discontinued operations, both in the United States and Canada, and reversing taxable temporary differences, are not sufficient to absorb the losses recorded in 2002. Therefore, a valuation allowance equal to the 2002 income tax effect of losses was established. The loss from discontinued operations before income tax in 2001 of $32.3 million consisted of operating losses of $22.3 million, interest expense of $4.3 million and restructuring charges of $5.7 million. Extraordinary Items In 2002, the Company recorded an extraordinary charge of $1.1 million, net of income taxes of $0.7 million, in connection with the early retirement of its $200 million revolving credit facility. In 2001, the Company recorded an extraordinary gain of $0.7 million, net of income taxes of $0.4 million, in connection with the early retirement of the 8% Subordinated Debenture ("GM Subordinated Debenture") issued to GM by Delco Remy America. Cumulative Effect of Change in Accounting Principle In accordance with the provisions of Statement of Financial Accounting Standards No. 142, the Company recorded a $74.2 million charge to write down goodwill in certain of its operations, effective in the first quarter of 2002. There was no income tax effect on this charge. Year Ended December 31, 2001 Compared To Year Ended December 31, 2000 Net Sales Net sales of $1,007.2 million in 2001 declined $26.7 million, or 2.6%, from $1,033.9 million in 2000. Automotive OEM sales decreased $62.9 million due to reduced orders from GM, partially offset by the acquisition of Elmot-DR Sp z.o.o. ("Elmot") in the first quarter of 2000, and heavy duty OEM sales decreased $53.8 million due to lower demand. Electrical aftermarket sales increased $45.8 million due to higher demand and the acquisition of XL in the first quarter of 2001 ($13.9 million). Sales of remanufactured transmissions and diesel engines increased $45.1 million due to sales of previously consigned inventory ($40.0 million), the acquisitions of Mazda NA and AMT in the second quarter of 2001 ($10.5 million), partially offset by lower volume. Third party sales in the core services business increased $2.3 million due to the acquisition of Knopf in the second quarter of 2000 ($9.2 million), offset by lower volume on a comparable period basis. Sales in non-core businesses declined $3.2 million in 2002 due to lower demand. 20 Gross Profit Gross profit of $168.7 million declined $51.9 million, or 23.5%, in 2001 from $220.6 million in 2000. Excluding the special charges of $16.2 million discussed above, gross profit declined $35.7 million, or 16.2%, and as a percentage of sales declined from 21.3% to 18.4%. Automotive OEM gross profit declined $18.5 million due to lower sales volume, offset by productivity improvements. Heavy duty OEM gross profit declined $22.7 million due to the $13.8 million special warranty charge and lower volume, partially offset by productivity improvements. Electrical aftermarket gross profit was down $2.9 million due to reduced fixed manufacturing leverage, offset by the acquisition of XL in 2001. Gross profit on remanufactured transmissions and diesel engines increased $2.8 million due to the acquisitions of Mazda NA and AMT, partially offset by lower volume. Gross profit on core services declined $4.3 million due to lower volume on a comparable period basis, partially offset by the acquisition of Knopf in 2000. Gross profit from non-core businesses was down $6.3 million in 2001 compared with 2000 due primarily to lower sales volume. Selling, General and Administrative Expense SG&A expenses, excluding the $16.2 million special charge in 2001, declined $2.8 million, or 2.7%, in 2001 compared with 2000, and as a percentage of net sales were 9.8% in 2001 and 9.9% in 2000. Successful cost reduction efforts were partially offset by the effect of 2001 acquisitions. Operating Income Operating income of $13.1 million in 2001 compares with operating income of $81.4 million in 2000. Excluding the special charges totaling $32.4 million, the restructuring charge of $33.4 million and goodwill amortization of $6.7 million in 2001 and the restructuring charge of $31.4 million and goodwill amortization of $5.8 million in 2000, operating income of $85.7 million in 2001 declined $32.8 million from $118.5 million in 2000, and as a percentage of net sales was 8.5% compared with 11.5% in 2000. This change was the result of the sales, gross profit and SG&A expense issues discussed above. Interest Expense, Net Interest expense, net, of $56.6 million in 2001 increased $7.9 million compared to $48.7 million in 2000. This increase was due to higher levels of debt to fund operations ($1.9 million), the higher interest rate and fees associated with the 11% senior subordinated debt issued in April 2001 ($4.8 million) and debt to fund acquisitions ($1.2 million). Interest expense included in results of discontinued operations was $4.3 million in 2001 and $2.2 million in 2000. Non-operating Income (Expense) Non-operating income, net, of $1.8 million in 2001 compares with $0.7 in 2000. The year over year increase was due primarily to foreign currency transaction gains. Income Taxes The Company's consolidated effective income tax rate was 22.0% in 2001 compared with 33.8% in 2000. At December 31, 2001, the Company had unrecognized tax net operating loss carryovers, research credits and alternative minimum tax credits of $95.8 million, $1.5 million and $2.9 million, respectively. The decrease in the effective income tax rate year over year was due primarily to an $18.0 million addition to the reserve for the value of these tax assets that is in excess of their estimated future recognizable value. Minority Interest in Income of Subsidiaries Minority interests' share of earnings of the Company's consolidated subsidiaries were $9.3 million in 2001 compared with $6.7 million in 2000. This year over year increase reflects higher earnings in the relevant subsidiaries, offset by the Company's purchase of additional shares from the minority shareholders of World Wide and Power during 2001. Loss From Unconsolidated Joint Ventures The loss from unconsolidated joint ventures increased from $0.8 million in 2000 to $2.9 million in 2001 due to the formation of a joint venture between the Company and Hitachi Ltd. in July 2001 and the formation the iPower joint venture in December 2000. 21 Discontinued Operations The loss from discontinued operations before income tax in 2001 of $32.3 million consisted of operating losses of $22.3 million, interest expense of $4.3 million and restructuring charges of $5.7 million. The loss from discontinued operations before income tax in 2000 of $6.1 million consisted of restructuring charges of $3.9 million and interest expense of $2.2 million. Five Months Ended December 31, 2000 Compared to Five Months Ended December 31, 1999 Net Sales Net sales of $442.2 million increased $1.0 million, or 0.2%, due to sales of Knopf ($23.9 million), which was acquired in March 2000, increased volume in the electrical products aftermarket ($3.4 million) and higher sales of remanufactured transmissions and diesel engines ($2.0 million). These increases were offset by lower demand from customers in the heavy duty OEM market ($23.6 million) and reduced orders from GM and other customers in the OEM automotive products market ($4.7 million). Gross Profit Gross profit of $85.6 million increased $1.1 million, or 1.4%, and as a percentage of sales was 20.3% in the five month period of 2000 and 20.0% in the comparable period of 1999. The increase in gross profit was due to increased volume in the electrical aftermarket ($5.3 million), the acquisition of Knopf ($4.1 million) and higher volume of remanufactured transmissions and diesel engines ($2.5 million). These increases were offset by lower volume and product mix in the heavy duty OEM market ($9.4 million) and lower volume and product mix in the OEM automotive market ($1.4 million). These volume and product mix declines were mitigated by cost improvements, including realization of cost savings associated with June 2000 manufacturing realignment. Selling, General and Administrative Expenses SG&A expenses of $42.6 million in the five months ended December 31, 2000 were unchanged from the comparable period in 1999, and, as a percentage of net sales, were 10.1% in both periods. The realization of cost reductions associated with the June 2000 realignment were partially offset by costs associated with the acquisition of Knopf. Operating Income Operating income of $40.5 million increased $1.2 million, or 2.9%, and as a percentage of net sales improved to 9.6% in the five months of 2000 compared with 9.3% in the five months of 1999. This improvement reflects the sales, gross profit and SG&A issues discussed above. Interest Expense, Net Interest expense, net, increased $2.1 million in the five months of 2000 due primarily to higher levels of debt incurred to finance acquisitions and higher rates reflecting increases by the Federal Reserve. Interest expense included in results of discontinued operations was $0.9 million in both the five months of 2000 and 1999. Non-operating Income (Expense) Non-operating income in the five month period of 2000 consisted primarily of foreign currency transaction gains. Income Taxes The Company's consolidated effective income tax rate of 32.2% in the five month period ended December 31, 2000 compares with 37.5% in the comparable period of 1999. This decrease reflects implementation of various tax planning initiatives and acquisitions of foreign subsidiaries with lower rates. 22 Liquidity and Capital Resources The Company's short-term liquidity needs include required debt service (including capital lease payments) day-to-day operating expenses, working capital requirements and the funding of capital expenditures and restructuring actions. Cash interest payments are expected to approximate $60.0 million in 2003. Long-term liquidity requirements include principal payments of long-term debt and the funding of acquisitions, including arrangements to buy out minority interests. The Company's principal payments on long-term debt and capital lease obligations are presented in Note 8 to Consolidated Financial Statements. The Company's principal sources of cash to fund its short-term liquidity needs consist of cash generated by operations, divestitures and borrowings under the $250 million Senior Credit Facility. At December 31, 2002, borrowings under the Senior Credit Facility were $120.9 million ($120.4, net of cash), and letters of credit totaled $6.8 million, leaving $122.3 million unused. Based on the collateral supporting the Senior Credit Facility at December 31, 2002, $50.7 million was available, net of lines of credit. In connection with the separation from GM, one of the Company's subsidiaries issued a contingent purchase price note to GM payable beginning in 2004. The amount of the payment will be based upon a percentage of the Company's average earnings over the three-year period ending December 31, 2003 in excess of certain imputed earnings. It is not currently possible to estimate the amount of payments, if any, payable under this note. The Company will also be required to make additional payments in connection with its acquisitions of Knopf, Delco Remy Mexico, Delco Remy Korea, Mazda NA and AMT. The Company expects that the aggregate amount of these additional payments will be in the range of $25 million to $38 million, payable over about four years. The Company granted put/call options in connection with the acquisitions of World Wide and Power that became exercisable in February 2001 for World Wide and March 2001 for Power. The exercise prices that the Company will be required to pay in 2003 upon exercise of the put options, which are based on earnings formulas, are currently estimated to be about $11 million in total for the two acquisitions. Year Ended December 31, 2002 Cash provided by operating activities of continuing operations of $46.5 million in 2002 reflects net income from continuing operations, excluding non-cash items, of $44.6 million, a reduction in working capital of $18.8 million and cash restructuring payments of $16.9 million. Accounts receivable declined $5.8 million in 2002 due to accelerated collections through arrangements with certain financial institutions ($16.7 million), partially offset by increased fourth quarter sales. Inventories increased $5.5 million in 2002 due primarily to higher product returns in the aftermarket during the fourth quarter, largely offset by increased core usage and other inventory management efforts. Accounts payable increased $14.6 million year over year due to timing of vendor payments. Cash restructuring payments consisted primarily of employee termination benefits. Cash used in investing activities of continuing operations included payments under contractual put agreements for Power ($5.6 million), World Wide ($5.4 million) and Delco Remy Korea ($5.5 million), a contingent purchase price payment of $0.5 million relative to the acquisition of Mazda NA and $0.3 million relative to the acquisition of certain parts of the Delphi alternator business. Capital expenditures of $20.4 million consisted primarily of production equipment and tooling. In 2002, the Company contributed $3.0 million to its iPower joint venture. Cash provided by financing activities of continuing operations in 2002 consisted of net borrowings under its revolving line of credit and increased borrowings in certain foreign operations. Deferred financing cost payments totaling $7.8 million were made in 2002 in conjunction with the replacement of the Company's prior senior credit facility. Cash payments of $1.8 million were made to the minority shareholders of Delco Remy Korea in 2002. Cash outflows of discontinued operations of $24.7 million in 2002 consisted of operating losses $26.8 million, excluding impairment and restructuring charges and cash restructuring payments of $4.0 million, partially offset by decreases in working capital. Year Ended December 31, 2001 Cash provided by operating activities of continuing operations in 2001 of $15.8 million reflects income from continuing operations, excluding non-cash items, of $53.4 million, an increase in working capital of $31.1 million and cash restructuring payments of $6.5 million. The increase in working capital was due to higher accounts receivable reflecting sales growth and a reduction of accounts payable due to timing of vendor payments. Cash restructuring payments consisted primarily of employee termination benefits. 23 Cash used in investing activities of continuing operations included the acquisitions of Mazda NA ($17.1 million), XL ($2.4 million) and AMT ($0.5 million). In addition, the Company increased its ownership position in World Wide ($6.4 million) and Power ($2.4 million). Capital expenditures of $20.0 million consisted primarily of production equipment and tooling. Investments in joint ventures included iPower ($5.0 million), Hitachi Remy Automotive GmbH ($2.0 million) and Continental ISAD ($1.6 million). Cash provided by financing activities of continuing operations consisted of proceeds of $157.3 million, net of discount, fees and expenses, on the issuance of the 11% senior subordinated debt on April 26, 2001, payment of $17.8 million on the early retirement of the GM Subordinated Debenture issued in connection with the separation from GM and a $64.5 million net reduction in the Senior Credit Facility and other debt. Five Months Ended December 31, 2000 Cash used in operating activities of continuing operations during the five months ended December 31, 2000 of $9.9 million reflects cash generated from earnings adjusted for non-cash items offset by increased working capital (primarily inventory) and cash payments relative to the manufacturing realignment. The inventory increase was due primarily to higher average return rates on cores and lower customer demand. Capital expenditures of $11.2 million during the transition period were for production equipment, tooling and enterprise-wide systems. Cash provided by financing activities of continuing operations was generated entirely from the Company's revolving line of credit. Fiscal Year Ended July 31, 2000 Cash provided by operating activities of continuing operations of $64.5 million in fiscal year 2000 reflects net income from continuing operations, excluding non-cash items, of $88.1 million, reduced by an increase in working capital of $14.7 million and cash restructuring payments of $8.9 million. The increase in working capital includes a $14.3 million increase in inventory as a result of delayed product pull from aftermarket customers. Cash restructuring payments consisted primarily of employee termination benefits. Cash used in investing activities of continuing operations of $97.3 million in fiscal year 2000 included the acquisitions of Knopf and Elmot, both of which were funded with proceeds from the Senior Credit Facility. Capital expenditures, consisting primarily of production equipment and tooling, reflected implementation of enterprise-wide systems and projects to facilitate the global manufacturing realignment. Investments in unconsolidated joint ventures in included Continental ISAD ($0.8 million) and Sahney Paris Rhone Ltd. ($0.4 million). Cash provided by financing activities in fiscal year 2000 were generated entirely from the Company's revolving line of credit. A $1.2 million cash distribution was made to the minority shareholders of Delco Remy Korea. Cash outflows of discontinued operations of $5.7 million in fiscal year 2000 consisted primarily of the acquisition of Engine Master. Instruments governing the Company's indebtedness restrict the ability of the Company's subsidiaries to make distributions to the Company. The Company believes that cash generated from operations and divestitures, together with the amounts available under the Senior Credit Facility, will be adequate to meet its debt service requirements, capital expenditures, restructuring actions and working capital needs for at least the next twelve months, although no assurance can be given in this regard. The Company's future operating performance and ability to extend or refinance its indebtedness will be dependent on future economic conditions and financial, business and other factors that are beyond the Company's control. 24 Contingencies The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. For more information, see Part I, Item 3 - Legal Proceedings, and Note 15 to the Company's financial statements included under item 8. Contractual Obligations and Contingent Liabilities and Commitments The Company's contractual obligations as of December 31, 2002 are provided in the following table (dollars in millions):
Payments Due by Period ---------------------------------------------------- Less than 1 - 3 4 - 5 After 5 Contractual Obligations Total 1 year years years Years ---------------------------------------------------- Long-Term Debt $ 608 $ 28/(1)/ $ 270 $ 145 $ 165 Capital Lease Obligations 19 3 4 3 9 Operating Leases 36 9 18 7 2 Put/call Agreements 11 11 -- -- -- Employee Termination Benefits 10/(2)/ 5 5 -- -- ---------------------------------------------------- Total Contractual Cash Obligations/(3)/ $ 684 $ 56 $ 297 $ 155 $ 176 ====================================================
(1) Includes $17 million due relative to foreign revolving credit facilities which were renewed in January 2003 with a maturity date of January 2004. (2) Excludes future payments relative to the closure of the Anderson, Indiana starter and alternator operations announced in January 2003 and the closure of certain Reed City, Michigan electrical remanufacturing facilities announced in March 2003, the costs of which actions have not yet been determined. See Note 21 to the Consolidated Financial Statements. (3) Excludes payments of approximately $4 million made in March 2003 relative to the acquisition of Hubei Delphi Automotive Generators Company, Ltd. See Note 21 to the Consolidated Financial Statements. In addition to the contractual obligations disclosed above, the Company also has a variety of other contractual agreements related to the procurement of materials and other commitments. With respect to these agreements, the Company is not subject to any contracts which commit the Company to material non-cancelable commitments. While certain of these contractual agreements are long-term supply agreements, the Company is not committed under these agreements to accept or pay for requirements which are not needed to meet production needs. The Company has no material minimum purchase commitments or "take-or-pay" type agreements or arrangements. With respect to capital expenditures, the Company expects capital spending in 2003 to approximate $27.0 million. The Company may also be required to make additional payments in connection with its acquisitions of Knopf, Delco Remy Mexico, Mazda NA and AMT. The Company expects that the aggregate amount of these additional payments will be in the range of $15 million to $28 million payable in 2003 to 2006. Seasonality The Company's business is seasonal, as its major OEM customers historically have one or two week shutdowns of operations during July. In response, the Company typically has shut down its own operations for one week each July, depending on backlog, scheduled maintenance and inventory buffers, as well as an additional week during the December holidays. Consequently, the Company's results in the third and fourth quarters in the years ended December 31, 2002 and 2001 and the five-month periods ended December 31, 2000 and 1999 and the results in the second and fourth quarters in the fiscal year ended July 31, 2000 reflect the effects of these shutdowns. Refer to Note 19 to Consolidated Financial Statements which pertains to quarterly (unaudited) financial information. 25 Effects of Inflation The Company believes that the relatively moderate inflation over the last few years has not had a significant impact on the Company's revenues or profitability and that it has been able to offset the effects of inflation by increasing prices or by realizing improvements in operating efficiency. The Company has provisions in many of its contracts which provide for the pass through of fluctuations in the price of certain raw materials, such as copper and aluminum. Foreign Sales Approximately 20.6% of the Company's net sales in 2002, 20.3% of the Company's net sales in 2001, approximately 18.1% of the Company's net sales in the five-month period ended December 31, 2000 and approximately 17.7% of the Company's fiscal year 2000 net sales, respectively, were derived from sales made to customers in foreign countries. Because of these foreign sales, the Company's business is subject to the risks of doing business abroad, including currency exchange rate fluctuations, limits on repatriation of funds, compliance with foreign laws and other economic and political uncertainties. Accounting Pronouncements For a discussion of pending accounting pronouncements that may affect the Company, see Note 3 to the Company's financial statements included under Item 8. Critical Accounting Policies The accounting policies of the Company, including those described below, require management to make significant estimates and assumptions using information available at the time the estimates are made. Actual amounts could differ significantly from these estimates. See Note 3 to the Company's Consolidated Financial Statements for a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. The Company believes the following are some of the more critical judgment areas in the application of accounting policies that currently affect the consolidated financial condition and results of operations. Inventory Inventories are valued at the lower of cost or market determined by the first-in, first-out (FIFO) method. Estimates of lower of cost or market value of inventory are determined at the operating unit level and are based upon the inventory at that location taken as a whole. The cost of returned cores included in inventory is based on the deposit value charged to customers on the sale of aftermarket products. The Company evaluates inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand. For inventory deemed to be obsolete, the company provides a reserve on the full value of the inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates the estimate of future demand. Goodwill And Other Intangible Assets The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized; however, it must be tested for impairment at least annually. Amortization continues to be recorded for other intangible assets with definite lives. The Company is subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired. Employee Benefit Plans The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions such as discount rates, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The expected return on plan assets is based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds. The Company reviews its actuarial assumptions on an annual 26 basis and makes modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or amortized over future periods. Based on information provided by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance that represents operating loss carryforwards for which utilization is uncertain. Management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the Company's net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, operations of the Company are exposed to continuing fluctuations in foreign currency values, interest rates and commodity prices that can affect the cost of operating, investing and financing. Accordingly, the Company addresses a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The Company's objective is to reduce earnings and cash flow volatility associated with these fluctuations. The Company's derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of established policies and procedures designed to manage market risk. The Company does not enter into any derivative transactions for speculative purposes. The Company's primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, the Company strives to achieve an acceptable balance between fixed and variable rate debt positions. In order to limit the effect of interest rate changes on earnings and cash flows, the Company maintains a significant percentage of fixed rate debt (80% at December 31, 2002). As such, the Company is exposed to U.S. changes in interest rates only on the Senior Credit Facility. A 100 basis point increase in U.S. market interest rates on the amounts outstanding at December 31, 2002 under the Senior Credit Facility would result in an increase in the Company's annual interest expense of approximately $1.2 million. The Company's foreign currency risk exposure results from fluctuating currency exchange rates, primarily the strengthening of the U.S. dollar against the South Korean Won and certain European currencies. The Company faces transactional currency exposures that arise when its foreign subsidiaries (or the Company itself) enter into transactions, generally on an intercompany basis, denominated in currencies other than their local currency. The Company also faces currency exposure that arises from translating the results of its global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. Exposure to variability in foreign currency exchange rates is managed primarily through the use of natural hedges, whereby funding obligations and assets are both denominated in the local currency. From time to time, the Company enters into exchange agreements to manage its exposure arising from fluctuating exchange rates related to specific transactions. A hypothetical 10 percent strengthening in the exchange rates over a one-year period would decrease earnings by approximately $0.6 million. A hypothetical 10 percent weakening in exchange rates would reduce the carrying value of the Company's net investment in its foreign subsidiaries at December 31, 2002 by approximately $3.9 million. 27 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Delco Remy International, Inc.: Page ---- Report of Independent Auditors 29 Consolidated Statements of Operations for the years ended December 31, 2002 and 2001, the five months ended December 31, 2000 and 1999 and year ended July 31, 2000 30 Consolidated Balance Sheets at December 31, 2002 and 2001 31 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2002 and 2001, the five months ended December 31, 2000 and year ended July 31, 2000 32 Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001, the five months ended December 31, 2000 and year ended July 31, 2000 33 Notes to Consolidated Financial Statements 34
28 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Delco Remy International, Inc. We have audited the accompanying consolidated balance sheets of Delco Remy International, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 2002 and 2001, the five months ended December 31, 2000 and the year ended July 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delco Remy International, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and cash flows for the years ended December 31, 2002 and 2001, the five months ended December 31, 2000 and the year ended July 31, 2000, in conformity with accounting principles generally accepted in the United States. As discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" in 2002. /S/ ERNST & YOUNG LLP Indianapolis, Indiana March 4, 2003, except for Note 21, as to which the date is March 19, 2003 29 CONSOLIDATED STATEMENTS OF OPERATIONS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands)
Year Ended Five Months Ended December 31 December 31 Year Ended -------------------------- ------------------------- July 31 2002 2001 2000 1999 2000 ------------------------------------------------------------------- (Unaudited) Net sales $ 1,069,352 $ 1,007,152 $ 422,200 $ 421,203 $ 1,032,854 Cost of goods sold 890,261 822,227 336,645 336,792 813,410 Special charges - cost of goods sold -- 16,236 -- -- -- ------------------------------------------------------------------- Gross profit 179,091 168,689 85,555 84,411 219,444 Selling, general and administrative expenses 101,200 99,166 42,551 42,666 102,064 Special charges - selling, general and administrative expenses -- 16,206 -- -- -- Amortization of goodwill and intangibles 1,302 6,755 2,498 2,392 5,817 Restructuring charges -- 33,425 -- -- 31,366 ------------------------------------------------------------------- Operating income 76,589 13,137 40,506 39,353 80,197 Interest expense, net (58,914) (56,557) (20,842) (18,764) (46,586) Non-recurring merger and tender offer expenses -- (4,194) (1,124) -- -- Other non-operating income (expense) (1,832) 1,849 1,501 (147) 129 ------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (benefit), minority interest in income of subsidiaries, loss from unconsolidated joint ventures, extraordinary items and cumulative effect of change in accounting principle 15,843 (45,765) 20,041 20,442 33,740 Income tax expense (benefit) 7,189 (10,083) 6,460 7,673 12,487 Minority interest in income of subsidiaries (4,245) (9,254) (2,778) (2,841) (6,742) Loss from unconsolidated joint ventures (3,830) (2,925) (467) (13) (352) ------------------------------------------------------------------- Net income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle 579 (47,861) 10,336 9,915 14,159 Discontinued operations: Income (loss) from discontinued operations (including estimated loss on disposal of $28,248 in 2002) (57,831) (32,341) (1,002) 2,263 (2,769) Income tax expense (benefit) -- (6,857) (365) 932 (1,028) ------------------------------------------------------------------- Net income (loss) from discontinued operations (57,831) (25,484) (637) 1,331 (1,741) Extraordinary items: Gain (loss) on early extinguishment of debt, net of income tax (1,108) 698 -- -- -- Cumulative effect of change in accounting principle, net (74,176) -- -- -- -- ------------------------------------------------------------------- Net income (loss) (132,536) (72,647) 9,699 11,246 12,418 Redeemable preferred stock dividends 29,375 20,971 -- -- -- ------------------------------------------------------------------- Income (loss) attributable to common stockholders $ (161,911) $ (93,618) $ 9,699 $ 11,246 $ 12,418 ===================================================================
See Accompanying Notes 30 CONSOLIDATED BALANCE SHEETS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands, except for share and per share data)
December 31 ------------------------- 2002 2001 ------------------------- Assets: Current assets: Cash and cash equivalents $ 12,896 $ 23,868 Trade accounts receivable (less allowance for doubtful accounts of $5,140 and $2,972) 149,610 155,404 Other receivables 12,931 8,944 Inventories 289,895 283,859 Deferred income taxes 14,423 21,175 Assets of discontinued operations 3,561 41,434 Other current assets 15,435 12,895 ------------------------- Total current assets 498,751 547,579 Property and equipment 311,957 294,582 Less accumulated depreciation (142,230) (118,727) ------------------------- Property and equipment, net 169,727 175,855 Deferred financing costs, net 17,268 12,640 Goodwill, net 122,933 180,188 Investments in joint ventures 11,891 11,144 Deferred income taxes 12,248 10,476 Other assets 16,642 9,349 ------------------------- Total assets $ 849,460 $ 947,231 ========================= Liabilities and stockholders' deficit: Current liabilities: Accounts payable $ 143,402 $ 128,781 Accrued interest 9,743 10,100 Accrued restructuring 10,815 27,944 Liabilities of discontinued operations 6,533 8,605 Other liabilities and accrued expenses 66,947 56,562 Current portion of long-term debt 30,190 6,771 ------------------------- Total current liabilities 267,630 238,763 Long-term debt 596,382 593,178 Post-retirement benefits other than pensions 23,553 25,812 Accrued pension benefits 14,427 10,216 Other non-current liabilities 12,282 6,655 Commitments and contingencies Minority interest in subsidiaries 17,850 30,107 Redeemable preferred stock 274,074 244,699 Stockholders' deficit: Common stock: Class A Shares (par value $.001; authorized 1,000; -- -- issued 1,000 in 2002) Class B Shares (par value $.001; authorized 6,000,000; 3 3 issued 2,485,337.49 in 2002) Class C Shares (par value $.001; authorized 6,000,000; -- -- issued 16,687 in 2002) Retained deficit (340,673) (178,762) Accumulated other comprehensive loss (16,068) (23,440) ------------------------- Total stockholders' deficit (356,738) (202,199) ------------------------- Total liabilities and stockholders' deficit $ 849,460 $ 947,231 =========================
See Accompanying Notes 31 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' Equity (Deficit) DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands)
Accumulated Class A Class B Class C Retained Other Stock Common Common Common Paid-In Earnings Comprehensive Purchase Stock Stock Stock Capital (Deficit) Loss Plan Total ---------------------------------------------------------------------------------- Balance at July 31, 1999 $ 182 $ 63 $ -- $ 104,176 $ 12,152 $ (6,516) $ (537) $ 109,520 Other -- -- -- -- -- -- 209 209 Net income -- -- -- -- 12,418 -- -- 12,418 Currency translation adjustment -- -- -- -- -- (4,321) -- (4,321) --------- Comprehensive income 8,097 ---------------------------------------------------------------------------------- Balance at July 31, 2000 182 63 -- 104,176 24,570 (10,837) (328) 117,826 Cumulative effect of accounting change for derivative instruments -- -- -- -- -- 241 -- 241 Other -- -- -- -- -- -- (8) (8) Net income -- -- -- -- 9,699 -- -- 9,699 Currency translation adjustment -- -- -- -- -- (1,747) -- (1,747) Unrealized losses on derivative instruments -- -- -- -- -- (4,893) -- (4,893) --------- Comprehensive income 3,059 --------------------------------------------------------------------------------- Balance at December 31, 2000 182 63 -- 104,176 34,269 (17,236) (336) 121,118 Recapitalization (182) (60) -- (103,953) (105,164) -- 336 (209,023) Issuance of preferred stock from warrant exercise -- -- -- -- (14,472) -- -- (14,472) Dividends on preferred stock -- -- -- (223) (20,748) -- -- (20,971) Net loss -- -- -- -- (72,647) -- -- (72,647) Currency translation adjustment -- -- -- -- -- (5,624) -- (5,624) Unrealized gains on derivative instruments -- -- -- -- -- 2,155 -- 2,155 Minimum pension liability -- -- -- -- -- (2,735) -- (2,735) --------- Comprehensive loss (78,851) --------------------------------------------------------------------------------- Balance at December 31, 2001 -- 3 -- -- (178,762) (23,440) -- (202,199) Dividends on preferred stock -- -- -- -- (29,375) -- -- (29,375) Net loss -- -- -- -- (132,536) -- -- (132,536) Currency translation adjustment -- -- -- -- -- 7,739 -- 7,739 Unrealized gains on derivative instruments -- -- -- -- -- 2,832 -- 2,832 Minimum pension liability -- -- -- -- -- (3,199) -- (3,199) --------- Comprehensive loss (125,164) --------------------------------------------------------------------------------- Balance at December 31, 2002 $ -- $ 3 $ -- $ -- $(340,673) $ (16,068) $ -- $(356,738) =================================================================================
See Accompanying Notes 32 CONSOLIDATED STATEMENTS OF CASH FLOWS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands)
Year Ended December 31 Five Months Ended Year Ended --------------------------- December 31 July 31 2002 2001 2000 2000 ----------------------------------------------------------- Operating Activities: Net income (loss) $ (132,536) $ (72,647) $ 9,699 $ 12,418 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of change in accounting principle 74,176 -- -- -- Loss from discontinued operations 29,583 25,484 637 1,741 Loss on disposal of discontinued operations 28,248 -- -- -- Extraordinary items 1,108 (698) -- -- Depreciation 29,287 26,481 10,169 24,998 Amortization 1,302 6,755 2,498 5,817 Minority interest in income of subsidiaries 4,245 9,254 2,778 6,742 Loss from unconsolidated joint ventures 3,830 2,925 467 352 Deferred income taxes 5,555 (26,700) 1,652 3,775 Post-retirement benefits other than pensions (2,259) 3,018 1,155 589 Accrued pension benefits 4,211 5,792 3,138 (1,433) Non-cash interest expense 4,093 1,802 740 1,763 Changes in operating assets and liabilities, net of acquisitions and non-cash special charges: Accounts receivable 5,794 (15,226) (1,103) 2,383 Inventories (5,548) (3,823) (26,588) (14,250) Accounts payable 14,621 (10,956) 13,822 11,651 Other current assets and liabilities 3,523 (1,146) (9,189) (14,460) Restructuring charges -- 33,425 -- 31,366 Cash payments for restructuring charges (16,888) (6,457) (15,133) (8,900) Non-cash special charges -- 32,442 -- -- Other non-current assets and liabilities, net (5,834) 6,080 (4,678) (74) ---------------------------------------------------------- Net cash provided by (used in) operating activities of continuing operations 46,511 15,805 (9,936) 64,478 Investing Activities: Acquisitions, net of cash acquired (17,258) (28,888) -- (62,161) Purchases of property and equipment (20,427) (20,011) (11,214) (33,944) Investments in joint ventures (3,000) (8,662) (1,892) (1,179) ---------------------------------------------------------- Net cash used in investing activities of continuing (40,685) (57,561) (13,106) (97,284) operations Financing Activities: Proceeds from issuance of long-term debt 144,769 157,291 -- -- Retirement of long-term debt (144,769) (17,790) -- -- Net borrowings (repayments) under revolving line of credit and other 15,330 (64,478) 35,542 40,268 Deferred financing costs (7,816) (5,561) -- -- Merger and tender offer costs -- (5,318) -- -- Distributions to minority interests (1,800) (762) (322) (1,200) --------------------------------------------------------- Net cash provided by financing activities of continuing operations 5,714 63,382 35,220 39,068 Effect of exchange rate changes on cash 2,159 (715) (1,151) (637) Cash flows of discontinued operations (24,671) (19,389) (3,290) (5,718) --------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (10,972) 1,522 7,737 (93) Cash and cash equivalents at beginning of year 23,868 22,346 14,609 14,702 --------------------------------------------------------- Cash and cash equivalents at end of year $ 12,896 $ 23,868 $ 22,346 $ 14,609 =========================================================
See Accompanying Notes 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES December 31, 2002 (dollars in thousands) 1. ORGANIZATION AND ACQUISITIONS Delco Remy America Acquisition On July 31, 1994, Delco Remy International, Inc. (the "Company" or "DRI") through a wholly-owned subsidiary, Delco Remy America, Inc. ("DRA"), purchased substantially all of the assets, other than facilities, and assumed certain liabilities of specific business activities of the Delco Remy Division of General Motors Corporation (the "GM Acquisition"). The specific business activities purchased are engaged in the design, manufacture, remanufacture and sale of heavy duty starter motors and generators, automotive starter motors, and related components. The GM Acquisition was recorded based on the best estimates available, however, certain purchase price adjustments remained unresolved between General Motors Corporation ("GM") and the Company. In 2001, the Company recorded a charge of $16,081 to operations under the caption "special charges - selling, general and administrative expenses" related to the unresolved issues (see Note 5). GM is entitled to receive an additional contingent purchase payment which will be paid beginning in 2004 and will be based upon a percentage of average earnings of the Company in the three year period ending December 31, 2003 in excess of certain imputed earnings. Since the additional contingent purchase price, if any, is based upon future operations of the Company which cannot be determined at this time, no provision for such payment has been made in the accompanying consolidated financial statements. The additional contingent purchase price, if any, will increase the goodwill recorded for the GM Acquisition. Concurrent with the GM Acquisition, the Company entered into certain supply agreements with GM whereby the Company would be the sole-source supplier to GM for component parts manufactured by the Company at the date of the GM Acquisition. The supply agreement for automotive starter motors had an initial term of ten years, while the supply agreement for heavy duty starter motors and generators had an initial term of six years. In fiscal year 1999, the Company and GM amended the agreement for the Company's price of automotive products and extended the agreement term to August 31, 2008. In April 2002, price and product offering was adjusted in accordance with the competitive (as to price, technology and design) clause of the original agreement. The Supply Agreement for heavy duty products terminated on July 31, 2000. Sales to GM were not adversely affected and the Company now has the ability to provide an expanded heavy duty product offering to GM and other customers. GM's obligations to distribute the Company's automotive aftermarket products terminates on July 31, 2009. Calendar Year 2002 Acquisitions During the year ended December 31, 2002, the Company made payments totaling $5,398 under contractual put agreements to purchase additional shares from the minority shareholders of World Wide Automotive, Inc. ("World Wide"), which was acquired in 1997. These payments increased the Company's ownership percentage of World Wide from 88.2% to 94.0%. Also during 2002, the Company made payments totaling $5,625 under contractual put agreements to purchase additional shares from the minority shareholders of Power Investments, Inc. ("Power"), which was acquired in 1996. These payments increased the Company's ownership percentage of Power from 85.8% to 93.4%. The Company also made cash payments totaling $5,485 and issued notes in the amount of $9,918 ($5,196 of which is payable in 2003 and $4,722 of which is payable in 2004) in 2002, to purchase additional shares from the minority shareholders of Delco Remy Korea, which was acquired in 1999. This transaction increased the Company's ownership percentage in Delco Remy Korea from 81.0% to 100%. At December 31, 2002, the Company was in negotiations with Delphi Corporation to purchase certain portions of its generator business. In the fourth quarter of 2002, the Company completed the acquisition of intellectual property rights for the light duty alternator product line and certain other assets for production of automotive alternators. Additional agreements are expected to be completed in 2003. 34 Calendar Year 2001 Acquisitions and Investments In July 2001, the Company and Hitachi Ltd. formed Hitachi Remy Automotive GmbH to develop, manufacture and market automotive starting motors and alternators in European and North American markets. The Company's ownership position in this business is 49%. This investment is accounted for under the equity method. In June 2001, the Company, through a wholly-owned subsidiary, purchased the North American remanufacturing business of Mazda North American Operations ("Mazda NA"). The purchase price of $17,116, including expenses and excluding future contingent payments, was funded through proceeds from the Company's Senior Credit Facility. The acquisition was accounted for as a purchase with resulting goodwill of $17,116. Amortization of goodwill in 2001 was based on an amortization period of 20 years. The business, located in Jacksonville, Florida, is responsible for the remanufacturing of Mazda automatic transmissions, transaxles and rotary engines for Mazda's service requirements in North America. The Company will continue to remanufacture these components to support Mazda's service and replacement parts needs in North America. In May 2001, the Company acquired 100% of the capital stock of Auto Matic Transmission International A/S ("AMT") for approximately $500. AMT, based in Soborg, Denmark, remanufactures automatic transmissions for passenger cars and commercial vehicles. In February 2001, the Company acquired the assets of XL Component Distribution Limited ("XL") for approximately $2,416. Goodwill of $2,416 was recorded in connection with the acquisition. XL, headquartered in Droitwich, Worcestershire, England, is involved in the remanufacturing, packaging and distribution of steering racks, brake calipers, ignition distributors, ignition leads, transmission components and rotating electrics. Payments totaling $6,434 were made in 2001 to acquire additional shares from the minority shareholders of World Wide, which was acquired in 1997. These payments increased the Company's ownership percentage of World Wide from 82.5% to 88.2%. Payments totaling $2,422 were made in 2001 to acquire additional shares from the minority shareholders of Power, which was acquired in 1996. These payments increased the Company's ownership percentage of Power from 82.5% to 85.8%. Five Month Transition Period Investment In December 2000, the Company and Aero Vironment, Inc. formed iPower Technologies, L.L.C. ("iPower") to pursue the development and commercialization of high-technology products in the distributed generation and hybrid electric vehicle markets. The Company owned 50% of iPower on December 31, 2001 and 42.8% on December 31, 2002. This investment is accounted for under the equity method. Fiscal Year 2000 Acquisitions and Investments In August 1999, the Company, through a wholly-owned subsidiary, purchased the assets of Engine Master, a remanufacturer of gasoline engines located in Dallas, Texas, for $5,844 in cash. The acquisition was treated as a purchase for accounting purposes and resulted in goodwill of $1,076. In the second quarter of 2002, the Company completed plans to exit the retail aftermarket gas engine business (See Note 3). In March 2000, the Company, through a wholly-owned subsidiary, purchased 100% of the capital shares of M&M Knopf Auto Parts, Inc. ("Knopf") from certain shareholders. The purchase price of $61,322, net of cash acquired and including the payoff of certain debt of Knopf, was funded through proceeds from the Company's Senior Credit Facility and is subject to certain adjustments. The acquisition was accounted for as a purchase. Resulting goodwill was approximately $37,000. The purchase price is subject to an additional contingent payment of cash and/or common stock of the Company in 2004, subject to the achievement by Knopf of certain earnings goals. The amount of this payment cannot currently be determined. This additional contingent purchase price, if any, will increase the goodwill recorded for the acquisition. 35 In April 2000, the Company, through a wholly-owned subsidiary, purchased 100% of the capital shares of Elmot-DR Sp z.o.o, a Polish manufacturer of starters and alternators for the OEM and aftermarket in Europe, for $839 in cash, net of cash acquired. The acquisition was treated as a purchase for accounting purposes with no resulting goodwill. In January 2000, the Company and Continental AG formed Continental ISAD Electric Systems GmbH & Co. ("Continental ISAD") to develop and produce an integrated starter and alternator product. The Company's ownership position in this business is 49%. This investment is accounted for under the equity method. This venture was terminated in 2002. 2. Discontinued Operations In the second quarter of 2002, the Company concluded that its retail aftermarket gas engine business does not fit with its strategic objectives and completed plans to exit the business. The wind-down of operations will be completed in 2003. Results for this business are reported as discontinued operations in the Company's consolidated financial statements. All periods presented have been reclassified accordingly. In connection with the discontinuance of the business, a charge of $28,248 was recorded in 2002 to write down the relevant assets to their estimated realizable value. An additional charge of $2,824 was recorded for the estimated cost of employee termination benefits and closure of the facilities. Estimated future taxable income relative to discontinued operations, both in the United States and Canada, and reversing taxable temporary differences, are not sufficient to absorb the losses recorded. Therefore, a valuation allowance equal to the 2002 income tax effect of the losses is included with the charge. Assets of $3.6 million at December 31, 2002 consisted primarily of inventories. Liabilities of $6.5 million at December 31, 2002 consisted primarily of accounts payable and accrued restructuring charges. Net sales, interest expense and loss before income tax from the discontinued operation are as follows:
Year Ended Five Months Ended Year Ended December 31 December 31 July 31 --------------------------------------------------------- 2002 2001 2000 1999 2000 --------------------------------------------------------- Net sales $ 14,428 $ 49,563 $ 20,536 $ 25,604 $ 58,150 Interest expense 6,517 4,320 948 887 2,180 Income (loss) before tax (57,831) (32,341) (1,002) 2,263 (2,769)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of DRI and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation. The Company changed its fiscal year end to December 31, effective August 1, 2000. Prior to August 1, 2000, the fiscal year ended on July 31. Accordingly, the Company's audited financial statements include statements of operations, stockholders' equity (deficit) and cash flows for the five-month transition period ended December 31, 2000. Nature of Operations The Company designs, manufactures, remanufactures and distributes electrical, powertrain/drivetrain and related components and provides core exchange services for automobiles and light trucks, medium- and heavy-duty trucks and other heavy-duty and industrial applications. Products include starter motors, alternators, engines, transmissions, torque converters, and fuel systems. The Company serves the aftermarket and original equipment manufacturer market, principally in North America, as well as Europe, Latin America and Asia Pacific. 36 Cash and Cash Equivalents Cash and cash equivalents includes all cash balances and highly liquid investments held primarily in repurchase agreements collateralized by U.S. Government securities with a maturity of ninety days or less when purchased. The carrying amount of cash equivalents approximates fair value. Concentrations of Credit Risk and Other Risks Substantially all of the Company's accounts receivable are due from customers in the original equipment and aftermarket automotive industries, both in the U.S. and internationally. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. The Company maintains allowances for doubtful customer accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company conducts a significant portion of its business with GM. See Note 13. Derivative Financial Instruments Effective August 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that all derivatives be recognized on the balance sheet at fair value. Changes in fair values of derivatives are accounted for based upon their intended use and designation. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the designation of the contract. Accordingly, changes in the market value of the derivative contract must be highly correlated with changes in the market value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Any derivative instrument terminated, designated but no longer effective as a hedge or initially not effective as a hedge would be recorded at market value and the related gains and losses would be recognized in earnings. Derivatives not designated as hedges are adjusted to fair value through the consolidated statement of operations. Gains and losses from hedges of anticipated transactions are classified in the statement of operations consistent with the accounting treatment of the items being hedged. In the normal course of business, operations of the Company are exposed to continuing fluctuations in foreign currency values, interest rates and commodity prices that can affect the cost of operating, investing and financing. Accordingly, the Company addresses a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The Company's objective is to reduce earnings and cash flow volatility associated with these fluctuations. The Company's derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of established policies and procedures designed to manage market risk. Management routinely reviews the effectiveness of the use of derivative instruments. The Company does not enter into any derivative transactions for speculative purposes. From time to time, the Company enters into foreign currency exchange agreements to manage its exposure arising from fluctuating exchange rates related to specific transactions. 37 In order to hedge anticipated U.S. dollar-denominated intercompany sales of inventory by its South Korean subsidiary to a U.S. subsidiary against fluctuations between the South Korean Won and U.S. dollar, the Company entered into a series of non-deliverable currency forward contracts. The critical terms of the hedges are the same as the underlying forecasted transactions, and the hedges are considered highly effective to offset the change in the fair value of the cash flows from the hedged transactions. These contracts normally mature within a year. At maturity, each contract is settled at the difference between fair value and contract value. These derivative contracts were designated as cash flow hedges and, accordingly, changes in fair value were charged to other comprehensive income (loss) (see Note 12). Gains and losses arising from the use of the non-deliverable forwards are recorded in the consolidated statement of operations when gains and losses arising from the underlying hedged transactions affect consolidated earnings. In November 2000, the Company entered into an interest rate swap to hedge the exposure on a portion of its variable rate debt. The swap converted the libor-based rate into a fixed rate of 6.51% on debt of $100,000 for a period of two years. This swap was designated as a cash flow hedge and changes in fair value were charged to other comprehensive income (loss) (see Note 12). Realized gains and losses were charged to earnings as interest expense in the periods in which earnings were impacted by the variability of the cash flows of the interest paid. The interest rate swap hedge expired in November 2002. The notional amounts of the Company's foreign exchange contracts are summarized as follows: December 31 -------------------------------------------- 2002 2001 -------------------------------------------- Notional Fair Notional Fair Amount Value Amount Value -------------------------------------------- Forwards $ 111 $ 127 $ 2,716 $ 2,750 Non-deliverable forwards 10,400 11,411 -- -- Inventories Inventories are carried at lower of cost or market determined on the first-in, first-out (FIFO) method. The cost of returned cores included in inventory is principally based on the deposit value charged to customers on the sale of aftermarket products. Raw materials also include supplies and repair parts which consist of materials consumed in the manufacturing process but not directly incorporated into the finished products. Inventories consist of the following: December 31 --------------------------- 2002 2001 --------------------------- Raw materials $ 153,732 $ 158,015 Work-in-process 43,906 49,668 Finished goods 92,257 76,176 --------------------------- $ 289,895 $ 283,859 =========================== The Company writes down its inventory for estimated obsolescence or unmarketable inventory by the difference between the cost of the inventory and the estimated market value of the inventory based upon assumptions concerning market conditions and future demand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Warranty The Company provides an allowance for the estimated future cost of product warranties, based on management's estimate of product failure rates and customer eligibility. If these factors differ from management's estimates, revisions to the estimated warranty liability may be required. Accrued warranty expense was $17,027 at December 31, 2002 and $16,403 at December 31, 2001. Property and Equipment Property and equipment are stated at cost and include certain expenditures for leased facilities. Depreciation is calculated primarily using the straight-line method over the estimated useful lives of the related assets, including leased facilities (15 to 40 years for buildings and 3 to 15 years for machinery and equipment). 38 Goodwill and Long-Lived Assets Goodwill represents the excess of purchase price over fair value of the net assets acquired and was amortized by the straight-line method over 15 to 35 years through 2001. In accordance with Statement of Financial Accounting Standards Goodwill and Other Intangible Assets, SFAS 142, which was adopted by the Company effective January 1, 2002, goodwill and other intangible assets are not amortized, but tested for impairment at least annually. For more information on goodwill, see Note 4, Goodwill and Other Intangible Assets - Adoption of SFAS 142. Investments in Joint Ventures Investments in companies representing an ownership interest of 20% to 50% are accounted for by the equity method. At December 31, 2002, the Company's ownership interest and carrying value of these investments were: Sahney Paris Rhone Ltd. (47.5%, $4.8 million); iPower (42.8%, $5.1 million); and Hitachi Remy Automotive GmbH (49%, $1.6 million). Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company's forecast of future taxable income and available tax planning strategies that could be implemented to support the realization of certain deferred tax assets. Failure to achieve forecasted taxable income may affect the ultimate realization of certain deferred tax assets. Factors that may affect the Company's ability to achieve sufficient forecasted taxable income include, but are not limited to, general economic conditions, increased competition, or delays in product availability. Pension and Post-Retirement Plans The Company sponsors various defined benefit pension and post-retirement plans which produce significant costs developed from actuarial valuations. Inherent in these valuations are key assumptions regarding discount rates, expected return on plan assets, rates of compensation increases, and the rates of health care benefit increases. The Company is required to consider current market conditions in determining these assumptions. If future trends in these assumptions prove to differ from management's assumptions, revisions to the plan assets, benefit obligations and components of expense may be required. Recognition of Revenue Substantially all of the Company's revenue is recognized at the time product is shipped to customers. The Company's remanufacturing operations obtain used diesel and gasoline engines, fuel systems, transmissions, starter motors and generators, commonly known as cores, from its customers as trade-ins. Net sales and cost of goods sold were reduced by $250,420, $193,247, $81,649, and $182,003 for the years 2002, 2001, the five months ended December 31, 2000 and fiscal year 2000, respectively, to reflect the cost of cores for remanufactured product shipped. Foreign Currency Translation Financial statements of foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and at the average exchange rate for each year for revenue and expenses. Translation adjustments are recorded as a separate component of stockholders' equity and reflected in comprehensive income (loss). 39 Earnings Per Share As a result of the recapitalization of the Company (see Note 10), the Company's publicly traded common stock was delisted. Consequently, the Company has not presented earnings per share in its consolidated financial statements as it believes its presentation is not meaningful to investors. Fair Value of Financial Instruments The Company's financial instruments generally consist of cash and cash equivalents, trade and other receivables, accounts payable and long-term debt. The fair value of the Company's fixed rate debt was estimated using a discounted cash flow analysis based upon the Company's current incremental borrowing rates. With the exception of the Senior Notes and the Senior Subordinated Notes, the carrying amounts of these financial instruments approximated their fair value at December 31, 2002 and 2001. December 31 Face --------------------- Value 2002 2001 --------------------------------- Senior Notes $ 145,000 $116,363 $ 141,042 10 5/8% Senior Subordinated Notes 140,000 71,225 144,452 11% Senior Subordinated Notes 165,000 83,531 169,950 Use of Estimates Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the year. Actual results could differ from those estimates. Implementation of New Financial Accounting Pronouncements In 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 applies to all acquired intangible assets. It requires that goodwill and other identifiable intangible assets with an indefinite useful life not be amortized but instead be tested for impairment at least annually. Identifiable intangible assets are amortized when their useful life is determined to no longer be indefinite. The Company adopted this statement on January 1, 2002. The results of adoption are listed in Note 4. Goodwill and Other Intangible Assets - Adoption of SFAS No. 142 below. In 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, which is adjusted to its present value each subsequent period. In addition, companies must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which is depreciated over the useful life of the related long-lived asset. The Company will adopt SFAS 143 effective as of January 1, 2003, and does not expect that this statement will have a material impact on our consolidated financial position or results of operations. In 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 provides additional restrictive criteria that are required to be met to classify an asset as held-for-sale. This statement also requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred (rather than as of the date management commits to a formal plan to dispose of a segment as previously required). In addition, more dispositions will qualify for discontinued operations treatment in the income statement. The Company adopted SFAS 144 effective January 1, 2002. The presentation of the Company's retail aftermarket gas engine business as a discontinued operation is in accordance with the provision of SFAS 144. In 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 eliminates the classification of debt extinguishments as extraordinary items. The provisions of SFAS No. 145 related to the rescission of FASB Statements No. 44 and 64 and amendment of SFAS No. 13 and Technical Corrections were adopted by the Company in the second quarter of 2002. Adoption of these provisions did 40 not have a material effect on the Company's results of operations, financial position or cash flows. The provisions of SFAS No. 145 related to rescission of SFAS No. 4 are required to be adopted by the first quarter of 2003. The Company will adopt this statement effective January 1, 2003, and the extraordinary items resulting from debt extinguishments in 2002 and 2001 will be reclassified as interest expense. Accordingly, interest expense, net, will increase $1.8 million and income from continuing operations will decrease $1.1 million in 2002 and interest expense, net, will decrease $1.1 million and the loss from continuing operations will decrease $0.7 million in 2001. In 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Severance pay under SFAS 146, in many cases, would be recognized over the remaining service period rather than at the time the plan is communicated. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company will adopt SFAS 146 for any actions initiated after January 1, 2003, and any future exit costs or disposal activities will be subject to this statement. In 2002, the FASB issued FASB Interpretation (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires an issuer of a guarantee to recognize an initial liability for the fair value of the obligations covered by the guarantee. FIN 45 also addresses the disclosures required by a guarantor in interim and annual financial statements regarding obligations under guarantees. The Company does not have any guarantees under FIN 45; therefore the adoption of this interpretation will not have an impact on the Company's consolidated financial position or results of operations. In 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 defines a variable interest entity (VIE) as a corporation, partnership, trust, or any other legal structure that does not have equity investors with a controlling financial interest or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires consolidation of a VIE by the primary beneficiary of the assets, liabilities, and results of activities effective in 2003. FIN 46 also requires certain disclosures by all holders of a significant variable interest in a VIE that are not the primary beneficiary. The Company does not have any material investments in variable interest entities; therefore, the adoption of this interpretation will have no impact on the Company's consolidated financial position or results of operations. 4. GOODWILL AND OTHER INTANGIBLE ASSETS-ADOPTION OF SFAS NO. 142. On June 29, 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 addresses accounting and reporting of acquired goodwill and other intangible assets and was adopted by the Company effective January 1, 2002. The goodwill impairment testing provisions of SFAS No. 142 must be applied to any goodwill or other intangible assets that are recognized in the Company's financial statements at the time of adoption. Also upon adoption, goodwill is no longer amortized and is tested for impairment at least annually. Excluding goodwill amortization of $6,672, $2,465 and $5,369 for the year ended December 31, 2001, the five months ended December 31, 2000 and the fiscal year ended July 31, 2000, respectively, the Company's net income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle would have been $(42,659), $12,006 and $17,541 for each period respectively. At December 31, 2002, the Company had goodwill and other intangible assets totaling $122,933, net of accumulated amortization. The Company completed step one of the transitional impairment test required by SFAS No. 142 during the second quarter of 2002. The test indicated potential impairment losses in certain of its original equipment and aftermarket businesses. During the fourth quarter of 2002, the Company, with the assistance of an outside valuation firm, performed the impairment tests of its goodwill required by SFAS No. 142. As a result of this assessment, the Company recorded a non-cash charge of $74,176, to reduce the carrying value of its goodwill to its estimated fair value. In accordance with SFAS No. 142, the charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations in the first quarter of 2002. The Company will perform an impairment review on an annual basis (or more frequently if impairment indicators arise). The first annual review was completed in the fourth quarter of 2002 and indicated no additional impairment at that time. 41 5. RESTRUCTURING AND SPECIAL CHARGES The following disclosures about restructuring and special charges include amounts related to discounted operations. In 2002, the Company recorded a charge of $2,824 in conjunction with plans for the closure of the manufacturing and administrative functions of its discontinued retail aftermarket gas engine business. The charge, which was reported as a component of the loss from discontinued operations, included $1,053 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 165 production and administrative employees. A total of $300 was paid under these programs in 2002 and the balance will be paid in 2003. The charge also included $1,771 for the estimated cost of closing facilities. In the fourth quarter of 2001, the Company completed plans for the closure and realignment of certain manufacturing facilities and administrative functions in the United States, Canada and Europe. These actions were in response to anticipated OE and aftermarket volume declines and to support the Company's ongoing efforts to reduce cost and improve efficiencies. A one-time charge of $39,349 was recorded in the fourth quarter of 2001 for the estimated cost of the plan. The charge included $26,727 for the estimated cost of various voluntary and involuntary employee separation programs associated with the resulting workforce reductions of approximately 820 employees. A total of $2,482 and $15,001 was paid in 2001 and 2002, respectively. An additional $4,593 and $4,651 is estimated to be paid in 2003 and 2004, respectively, for these programs. The charge also included $8,192, net of salvage value, for the write-down of certain assets which will no longer be used as a result of the closures and realignments, and $4,430 of other costs. In addition, a reserve of $1,992 was established in connection with the acquisition of XL in February 2001. In 2001, the Company recorded special charges-cost of goods sold of $21,586 and special charges-selling, general and administrative expenses of $17,246. The special charges included a write down of $7,791 for inventories and customer claims, and $1,165 for accounts receivable related to operations being closed in the 2001 restructuring plan, classified with the cost of goods sold and selling, general and administrative expenses, respectively. The special charges-cost of goods sold also included $13,795 for higher than expected warranty returns for a limited class of heavy-duty OEM alternators. The design and production issues which caused the unusually high level of claims, have been corrected. The special warranty charge includes $8,148 and $5,647 for claims in 2001 and 2002 and for anticipated claims in 2003 for the problems identified as part of the unexpected returns. The special charge-selling, general and administrative expenses also included $16,081 for disputed items related to the GM acquisition. In the fourth quarter of 2001, the Company conceded these claims in connection with the negotiation of other long-term agreements with GM and Delphi Automotive Systems Corporation. In May 2000, the Company completed plans for the realignment of certain manufacturing facilities in the United States, Canada and the United Kingdom. A one-time charge of $35,222 was recorded in June 2000 for the estimated cost of the plan. The reserve included $27,098 for the estimated cost of various voluntary and involuntary employee separation programs associated with the resulting workforce reductions of approximately 860 employees. A total of $5,011, $15,961, $3,087 and $2,931 were paid in fiscal year 2000, the five months ended December 31, 2000 and the year ended December 31, 2001 and 2002, respectively. An additional $108 is expected to be paid in 2003. The reserve also included $8,124, net of salvage value, for the write-down of certain production assets which will no longer be used as a result of the realignment. Additionally, a reserve of $1,050 was established in connection with the acquisition of Elmot in March 2000. In May 1998, the Company offered an incentive separation payment to DRA hourly employees through an employee termination program. A total of 337 employees accepted the Company's offer. A reserve of $26,515 was established for these separation costs, $9,974 of which were paid in fiscal year 1998, $11,565 of which were paid in fiscal year 1999, and $3,889 of which were paid in fiscal year 2000. An additional $900 was paid in the five months ended December 31, 2000 and $187 was paid in 2001. 42 The following table summarizes the provisions and reserves for restructuring charges:
Termination Exit/Impairment Benefits Costs Total --------------------------------------- Reserve at July 31, 1999 $ 4,975 $ 891 $ 5,866 Provision in fiscal year 2000 27,098 8,124 35,222 Payments and charges in fiscal year 2000 (8,900) (8,460) (17,360) Reserve established in connection with acquisition 1,050 -- 1,050 --------------------------------------- Reserve at July 31, 2000 24,223 555 24,778 Payments and charges in the five month transition period (16,861) (225) (17,086) --------------------------------------- Reserve at December 31, 2000 7,362 330 7,692 Provision in 2001 26,727 12,622 39,349 Payments and charges in 2001 (7,809) (8,800) (16,609) Reserve established in connection with acquisition 1,477 191 1,668 --------------------------------------- Reserve at December 31, 2001 27,757 4,343 32,100 Provision in 2002 1,053 1,771 2,824 Payments and charges in 2002 (18,248) (3,030) (21,278) --------------------------------------- Reserve at December 31, 2002 $ 10,562 $ 3,084 $ 13,646 =======================================
The reserve balance includes $2,831, $4,156, and $538 at December 31, 2002, December 31, 2001, and December 31, 2000, respectively, related to discontinued operations. 6. ALLOWANCE FOR DOUBTFUL ACCOUNTS The activity in the allowance for doubtful accounts is as follows:
Year Ended Five Months Ended Year Ended December 31 December 31 July 31 -------------------------------------------------------- 2002 2001 2000 2000 -------------------------------------------------------- Balance at beginning of period $ 2,972 $ 2,751 $ 2,703 $ 2,105 Additions charged to costs and expenses 4,498 1,107 1,237 1,134 Acquisition of certain businesses -- -- -- 1,049 Uncollectible accounts written off, net of recoveries (2,330) (886) (1,189) (1,585) -------------------------------------------------------- Balance at end of period $ 5,140 $ 2,972 $ 2,751 $ 2,703 ========================================================
The allowance does not include amounts related to discontinued operations of $4,039, $1,706, $364 and $ 267 for the years ending December 31, 2002 and 2001, the five months ended December 31, 2000 and the year ended July 31, 2000, respectively. 7. PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31 --------------------------- 2002 2001 --------------------------- Land and buildings $ 26,614 $ 21,424 Buildings under capital leases 26,800 23,813 Leasehold improvements 11,769 11,507 Machinery and equipment 246,774 237,838 --------------------------- $ 311,957 $ 294,582 =========================== 43 8. LONG-TERM DEBT Borrowings under long-term debt arrangements consist of the following: December 31 ------------------------ 2002 2001 ------------------------ $250,000 Senior Credit Facility $ 120,400 $ -- $200,000 Senior Credit Facility -- 117,087 Senior Notes 145,000 145,000 10 5/8 Senior Subordinated Notes 140,000 140,000 11% Senior Subordinated Notes 163,310 163,037 Other, including capital lease obligations 57,862 34,825 ------------------------ 626,572 599,949 Less current portion 30,190 6,771 ------------------------ $ 596,382 $ 593,178 ======================== Senior Credit Facility On June 28, 2002 the Company entered into a $250,000 secured, asset based, revolving credit facility (the "Senior Credit Facility") with a syndicate of banks led by Wachovia Bank, National Association and its subsidiary Congress Financial Corporation. The Senior Credit Facility replaced the Company's then-existing secured revolving credit facility of $200,000, which was due to expire on March 31, 2003. The Senior Credit Facility extends through March 31, 2006 and has provisions for annual extensions thereafter. The Senior Credit Facility contains various restrictive covenants, which include, among other things: (i) limitations on additional borrowings and encumbrances; (ii) the maintenance of certain financial ratios and compliance with certain financial tests and limitations; (iii) limitations on cash dividends paid; (iv) limitations on investments and capital expenditures; and (v) limitations on leases and sales of assets. The Senior Credit Facility is collateralized by liens on substantially all assets of the Company and its domestic and certain foreign subsidiaries and by the capital stock of such subsidiaries. At December 31, 2002, borrowings under the Senior Credit Facility were $120,909 ($120,400, net of cash) and utilization of letters of credit totaled $6,800, leaving $122,291 unused. Based on the collateral supporting the senior credit facility at December 31, 2002, $50,710 was available. In 2002, the Company recorded an extraordinary loss of $1.1 million (net of income taxes of $0.7 million) in connection with the early retirement of the $200,000 revolving credit facility. Senior Notes On December 22, 1997, the Company issued $145,000 of 8 5/8% Senior Notes due December 15, 2007 (the "Senior Notes"). The proceeds from the Senior Notes were $141,375, net of issuance costs. The proceeds were used to repay higher interest bearing debt. The Senior Notes are general unsecured senior obligations of the Company and rank pari passu in right of payment with all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated obligations of the Company. In addition, the obligations of the Company under the Senior Notes will be fully and unconditionally guaranteed on a joint and several basis by each of the Company's existing and future domestic restricted subsidiaries. The subsidiary guarantees will rank pari passu in right of payment with all existing and future senior indebtedness of the subsidiary guarantors and senior in right of payment to all existing and future subordinate obligations of the subsidiary guarantors. The Senior Notes and the subsidiary guarantees will be effectively subordinated to all existing and future secured indebtedness of the Company and the subsidiary guarantors as well as to any liabilities of subsidiaries other than subsidiary guarantors. The Senior Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 15, 2002, at the redemption prices set forth in the note agreement plus accrued and unpaid interest, if any, to the date of redemption. Interest is payable semi-annually on June 15 and December 15 of each year. 44 Upon the occurrence of a change of control (as defined), each holder of the Senior Notes will have the right to require the Company to purchase all or a portion of such holder's notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The indenture pursuant to which the Senior Notes were issued contains certain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions with respect to capital stock (as defined) of the Company and its restricted subsidiaries, (iii) sell assets of the Company or its restricted subsidiaries, (iv) issue or sell restricted subsidiary stock, (v) enter into certain transactions with affiliates, (vi) create certain liens, (vii) enter into certain mergers and consolidations and (viii) incur indebtedness which is subordinate to senior indebtedness and senior to the Senior Subordinated Notes and the 10 5/8% Senior Subordinated Notes. 10 5/8% Senior Subordinated Notes On August 2, 1996, the Company issued $140,000 of 10 5/8% Senior Subordinated Notes due August 1, 2006 (the "10 5/8% Senior Subordinated Notes"). The 10 5/8% Senior Subordinated Notes are unsecured senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness, pari passu with all present and future senior subordinated indebtedness and senior to all present and future subordinated indebtedness of the Company or the relevant subsidiary guarantors, as defined in the indenture. The 10 5/8% Senior Subordinated Notes are also effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. The 10 5/8% Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, on or after August 1, 2001, at the redemption prices set forth in the note agreement plus accrued and unpaid interest, if any, to the redemption date. Interest is payable semi-annually on February 1 and August 1 of each year. Upon the occurrence of a change of control, each holder of the 10 5/8% Senior Subordinated Notes will have the right to require the Company to purchase all or a portion of such holder's notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The indenture pursuant to which the 10 5/8% Senior Subordinated Notes were issued contains certain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions with respect to capital stock (as defined) of the Company and its restricted subsidiaries, (iii) sell assets of the Company or its restricted subsidiaries, (iv) issue or sell restricted subsidiary stock, (v) enter into certain transactions with affiliates, (vi) create certain liens, (vii) enter into certain mergers and consolidations and (viii) incur indebtedness which is subordinate to senior indebtedness and senior to the Senior Subordinated Notes. 11% Senior Subordinated Notes On April 26, 2001, the Company issued $165,000 of 11% Senior Subordinated Notes due May 1, 2009 (the "11% Senior Subordinated Notes"). Net proceeds (after discounts, commissions, and expenses) of approximately $157,000 were used to retire the GM Subordinated Debenture of approximately $19,000 and repay approximately $138,000 outstanding under the Company's Senior Credit Facility. The 11% Senior Subordinated Notes are unsecured senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness, pari passu with all present and future senior subordinated indebtedness and senior to all present and future subordinated indebtedness of the Company or the relevant subsidiary guarantor, as defined in the indenture. The 11% Senior Subordinated Notes are also effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. The 11% Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 2005, at the redemption prices set forth in the note agreement plus accrued and unpaid interest, if any, to the redemption date. Interest is payable semi-annually in arrears on May 1 and November 1, and commenced on November 1, 2001. Upon the occurrence of a change in control, each holder of the 11% Senior Subordinated Notes will have the right to require the Company to purchase all or a portion of such holder's notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. 45 The indenture pursuant to which the 11% Senior Subordinated Notes were issued contains certain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to (i) incur additional indebtedness unless a coverage ratio is met, (ii) make restricted payments, as defined, (iii) make dividend payments or make other distributions on its capital stock, (iv) sell assets of the Company or its restricted subsidiaries, (v) enter into certain transactions with affiliates, (vi) create certain liens, and (vii) enter into certain mergers and consolidations. In 2001, the Company recorded an extraordinary gain of $698 (net of income taxes of $428) on the early retirement of the GM Subordinated Debenture. Capital Lease Obligations Capital leases have been capitalized using nominal interest rates ranging from 10.7% to 14.2%. The net book value of assets under capital leases were $12,745 and $13,634 at December 31, 2002 and 2001, respectively. Other Required principal payments of long-term debt and capitalized leases are as follows: 2003 $ 30,189* 2004 6,500 2005 4,500 2006 263,200 2007 146,800 Thereafter 175,383 ---------- $ 626,572 ========== * Includes $16,868 due relative to foreign revolving credit facilities which were renewed in January 2003 with a maturity date of January 2004. 9. EMPLOYEE BENEFIT PLANS Agreements with GM In connection with the GM Acquisition, the Company and GM agreed to allocate the responsibility for employee pension benefits and post-retirement health care and life insurance on a pro-rata basis between DRA and GM. The allocation is primarily determined upon years of service with DRA and aggregate years of service with DRA and GM. Effective August 1, 1994, DRA established hourly and salaried pension and post-retirement health care and life insurance plans which are similar to the respective GM plans. Pension and Post-Retirement Health Care and Life Insurance Plans DRA has defined benefit pension plans covering substantially all employees. The plan covering salaried employees provides benefits that are based upon years of service and final estimated average compensation. Benefits for hourly employees are based on stated amounts for each year of service. DRA's funding policy is to contribute amounts to provide the plans with sufficient assets to meet future benefit payment requirements consistent with actuarial determinations of the funding requirements of federal laws. Plan assets are primarily invested in mutual funds which invest in both debt and equity instruments. DRA maintains hourly and salaried benefit plans that provide post-retirement health care and life insurance to retirees and eligible dependents. The benefits are payable for life, although DRA retains the right to modify or terminate the plans providing these benefits. The salaried plan has cost sharing features such as deductibles and co-payments. Salaried employees who were not GM employees prior to 1992 are not eligible for the above described post-retirement benefits. It is DRA's policy to fund these benefits as claims are incurred. 46 The changes in benefit obligations and plan assets, components of expense, and assumptions for the plans are as follows:
Post-Retirement Health Care Pension Benefits and Life Insurance Plans ---------------------------------------- --------------------------------------- Year Ended Five Months Year Year Ended Five Months Year December 31 Ended Ended December 31 Ended Ended ------------------- Dec. 31 July 31 ------------------ Dec. 31 July 31 2002 2001 2000 2000 2002 2001 2000 2000 ---------------------------------------- --------------------------------------- Change in benefit obligations Benefit obligation at beginning of year $ 32,676 $ 25,447 $ 24,444 $ 18,406 $ 23,297 $ 18,000 $ 15,734 $ 15,040 Service cost 1,913 2,450 711 2,618 2,081 2,579 959 2,782 Interest cost 2,221 2,105 749 1,584 1,407 1,402 524 1,028 Amendments -- 117 636 2,496 3,832 -- -- -- Actuarial loss (gain) 2,562 4,078 (334) 752 6,282 2,140 1,021 (404) Benefits paid (2,811) (1,521) (759) (1,202) (830) (824) (238) (330) Curtailment gains -- -- -- (210) -- -- -- (2,382) ---------------------------------------- --------------------------------------- Benefit obligation at end of year $ 36,561 $ 32,676 $ 25,447 $ 24,444 $ 36,069 $ 23,297 $ 18,000 $ 15,734 ======================================== ======================================= Change in plan assets Fair value of plan assets at beginning of year $ 19,531 $ 20,736 $ 21,551 $ 16,749 $ -- $ -- $ -- $ -- Actual return on plan assets (1,762) (1,271) (170) 1,687 -- -- -- -- Employer contributions 2,382 1,587 -- 4,317 830 824 238 -- Benefits paid (1,630) (1,521) (645) (1,202) (830) (824) (238) -- ---------------------------------------- --------------------------------------- Fair value of plan assets at end of year $ 18,521 $ 19,531 $ 20,736 $ 21,551 $ -- $ -- $ -- $ -- ======================================== ======================================= Funded status $(18,040) $(13,145) $ (4,711) $ (2,893) $(36,069) $(23,297) $(18,000) $(15,734) Unrecognized actuarial loss (gain) 12,887 7,124 (304) (1,014) 12,516 (2,515) (4,794) (5,905) Unrecognized prior service cost 2,356 3,128 3,276 2,621 -- -- -- -- ---------------------------------------- --------------------------------------- Net amount recognized $ (2,797) $ (2,893) $ (1,739) $ (1,286) $(23,553) $(25,812) $(22,794) $(21,639) ======================================== ======================================= Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability $(14,427) $(10,216) $ (4,424) $ (3,262) (23,553) $(25,812) $(22,794) $(21,639) Intangible asset 2,061 2,913 2,685 1,976 -- -- -- -- Accumulated other comprehensive loss 9,569 4,410 -- -- -- -- -- -- ---------------------------------------- --------------------------------------- Net amount recognized $ (2,797) $ (2,893) $ (1,739) $ (1,286) $(23,553) $(25,812) $(22,794) $(21,639) ======================================== ======================================= Components of expense Service costs $ 1,913 $ 2,450 $ 711 $ 2,618 $ 2,081 $ 2,579 $ 959 $ 2,782 Interest costs 2,221 2,105 749 1,584 1,407 1,402 524 1,028 Expected return on plan assets (1,772) (2,082) (866) (1,802) -- -- -- -- Amortization of prior service cost 231 265 110 158 -- -- -- -- Recognized net actuarial loss (gain) 334 2 (8) -- -- (139) (91) (314) Curtailments 541 -- -- 266 (4,916) -- -- -- ---------------------------------------- --------------------------------------- Net periodic pension cost $ 3,468 $ 2,740 $ 696 $ 2,824 $ (1,428) $ 3,842 $ 1,392 $ 3,496 ======================================== ======================================= Post-Retirement Health Care Pension Benefits and Life Insurance Plans ---------------------------------------- --------------------------------------- Year Ended Five Months Year Year Ended Five Months Year December 31 Ended Ended December 31 Ended Ended ------------------- Dec. 31 July 31 ------------------- Dec. 31 July 31 2002 2001 2000 2000 2002 2001 2000 2000 ---------------------------------------- --------------------------------------- Weighted-average assumptions Discount rate 6.75% 7.25% 7.75% 8.00% 6.75% 7.25% 7.75% 8.00% Expected return on plan assets 9.00% 10.00% 10.00% 10.00% -- -- -- -- Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
47 A post-retirement health care curtailment gain of $4,916 was recorded in 2002 related to a workforce reduction (see note 5). Measurement of the accumulated post-retirement benefit obligation was based on a 13.00% annual rate of increase in the cost of covered health care benefits. The rate was assumed to decrease ratably to 4.75% through 2011 and remain level at that rate thereafter. An increase and decrease of one-percentage-point in the assumed health care trend rates would have the following effects on service and interest cost in the year ended December 31, 2002 and the accumulated post-retirement benefit obligation at December 31, 2002.
1% Increase 1% Decrease ----------------------------- Effect on total of service and interest cost components of net periodic post-retirement health care benefit cost $ 826 $ (627) Effect on the health care component of the accumulated post- retirement benefit obligation 8,128 (6,211)
Defined Contribution Plans The Company sponsors two voluntary savings plans. One plan is for eligible salaried employees and the other plan is for UAW hourly employees. These plans allow participants to make contributions pursuant to section 401(k) of the Internal Revenue Code. The salaried plan has Company matching contribution provisions, while the hourly UAW plan does not. Charges to operations were $2,513 in the fiscal year 2002, $2,234 in the fiscal year 2001, $911 in the five month period ended December 31, 2000 and $1,731 in fiscal year 2000. Profit Sharing Plans DRA sponsors a profit sharing plan covering UAW union employees. Distributions are determined based upon formulas established by management and are made annually. Profit sharing expense for the years ended December 31, 2002 and 2001, the five month period ended December 31, 2000 and the fiscal year ended July 31, 2000 was $198, $0, $728 and $2,514, respectively. 10. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK On February 7, 2001, the Company agreed to a going private transaction with its largest stockholder, Court Square Limited ("Court Square"), pursuant to which Court Square made a cash tender offer for all of the Company's common stock not owned by it. Following completion of the merger on March 14, 2001, the New York Stock Exchange delisted the Company's common stock and the Company terminated the registration of its common stock under the Exchange Act. For financial accounting purposes the transaction was treated as a leveraged recapitalization whereby the assets are not revalued and the excess purchase price of the redeemed shares over the par value and paid-in capital of the common stock and the redemption value of the preferred stock ($105,164) was charged to the Company's retained earnings. Preferred Stockholders Agreement In connection with the Company's recapitalization, the stockholders entered into a Preferred Stockholders Agreement dated March 14, 2001 (the "Preferred Stockholders Agreement"), containing additional agreements among the stockholders regarding the Company's preferred stock. Subject to certain limitations, certain stockholders may not sell any of their shares of preferred stock without offering the other stockholders a pro rata opportunity to participate in the sale. Subject to certain conditions, if holders of at least 50% of the common stock approve the sale of the Company, each stockholder has agreed to consent to the sale and, if the sale includes the sale of stock, each stockholder has agreed to sell all of the stockholder's preferred stock on the terms and conditions approved by holders of a majority of the common stock then outstanding. Preferred Stock The Company's Amended and Restated Certificate of Incorporation provides for the issuance of 3,500,000 shares of preferred stock, all of which will be designated as 12% Series A Cumulative Compounding Preferred Stock. The preferred stock has a stated value of $100 per share and is entitled to semi-annual dividends which commenced September 15, 2001. Dividends, which are cumulative, accrue at a rate of 12%, compounding annually. As of December 31, 2002, 2,237,257.23 shares of preferred stock were outstanding. Accrued preferred dividends and the preferred stock are reflected in the Consolidated Balance Sheet as Redeemable Preferred Stock at the current redemption value. The vote of a majority of the outstanding shares of the preferred stock, voting as a separate class, will be required to (1) create, authorize or issue any other 48 class or series of stock entitled to a preference prior to the preferred stock upon any dividend or distribution or any liquidation, distribution of assets, dissolution or winding up of the Company, or increase the authorized amount of any such other class or series, or (2) amend the Certificate of Incorporation if the amendment would adversely affect the relative rights and preferences of the holders of the preferred stock. Except as described above or as otherwise required by law, the preferred stock is not entitled to vote. The Company may not pay any dividend upon capital stock junior to the preferred stock, except for a dividend payable in capital stock junior to the preferred stock (including the common stock or junior stock), or redeem or otherwise acquire shares of junior stock, unless all cumulative dividends on the preferred stock have been paid in full. Upon liquidation, dissolution or winding up, holders of preferred stock are entitled to receive out of the Company's legally available assets, before any amount is paid to holders of junior stock, an amount equal to $100 per share of preferred stock, plus all accrued and unpaid dividends to the date of final distribution. If available assets are insufficient to pay the holders of the outstanding shares of preferred stock in full, the assets, or proceeds from the sale of the assets, will be distributed ratably among the holders of the preferred stock. The preferred stock is not mandatorily redeemable prior to April 16, 2021. The Company anticipates that the dividends on the preferred stock will be declared and accrued but not paid. The Company's ability to pay cash dividends, and to redeem the preferred stock, is subject to restrictions contained in the senior credit facility, the 8 5/8% Senior Notes due 2007, the 10 5/8% Senior Subordinated Notes due 2006 and the 11% Senior Subordinated Notes due 2009. Common Stock The Company's Amended and Restated Certificate of Incorporation provides for the issuance of 12,001,000 shares of common stock, divided into three classes consisting of 1,000 shares of Class A Common Stock, 6,000,000 shares of Class B Common Stock and 6,000,000 shares of Class C Common Stock. As of December 31, 2002, 1,000.00 shares of Class A Common Stock, 2,485,337.49 shares of Class B Common Stock and 16,687.00 shares of Class C Common Stock were outstanding. The holders of Class A Common Stock are entitled to vote on all matters submitted to a vote of the stockholders. The original holders of Class A Common Stock, or Court Square, Citicorp or Citibank, N.A. or any direct or indirect subsidiary of Citicorp or Citibank, N.A., in each case, to the extent that the entity is the owner of Class A Common Stock, are entitled to that number of votes equal to, in the aggregate, 51% of the total number of votes entitled to be cast by the holders collectively owning all of the outstanding shares of Class A Common Stock and Class B Common Stock. The number of votes to be cast by the holder of Class A Common Stock may vary and is determined, in each instance, prior to a vote of stockholders. If at any time the aggregate principal amount of indebtedness outstanding under the (1) Indenture dated August 1, 1996 among the Company, certain of its subsidiaries and National City Bank of Indiana; and (2) Indenture dated December 22, 1997 among the Company, certain of the Company's subsidiary guarantors and United States Trust Company of New York is less than $50,000,000, the holder of Class A Common Stock will be entitled to one vote for each share of Class A Common Stock held. So long as the holders of the Class A Common Stock are entitled to more than one vote per share, in any election of Company directors, 21% (rounded up to the nearest whole director) of the directors to be elected shall be elected by a majority of the votes cast by the holders of shares of outstanding Class B Common Stock other than Court Square or any person that is or is deemed to be in the consolidated tax group of which Court Square is a member. The holders of Class B Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The Company cannot amend the Amended and Restated Certificate of Incorporation, enter into any plan of liquidation, recapitalization, reorganization, reclassification, consolidation or merger, sell all or substantially all of the Company's assets or stock or enter into any other business combination without the approval of a majority of the holders of Class B Common Stock. Except as required by law, the holders of Class C Common Stock have no voting rights. Under the Company's Amended and Restated Certificate of Incorporation, shares of Class A Common Stock are convertible into an equal number of shares of Class B Common Stock. Shares of Class B Common Stock are convertible into an equal number of shares of Class C Common Stock. Shares of Class C Common Stock are convertible into an equal number of shares of Class B Common Stock. In the case of a conversion from Class C Common Stock, which is nonvoting, into Class B Common Stock, which is voting, the holder of shares to be converted would be permitted under applicable law to hold the total number of shares of Class B Common Stock which would be held upon conversion. 49 Securities Transfer, Recapitalization and Holders Agreement In connection with the Company's recapitalization, the stockholders entered into the Securities Transfer, Recapitalization and Holders Agreement dated March 14, 2001 (the "Stockholders Agreement"), containing certain agreements among the stockholders regarding the Company's capital stock and corporate governance. According to the Stockholders Agreement, so long as Court Square and its permitted transferees owns at least 5% of the Company's common stock outstanding, Court Square has the right to designate observers to attend meetings of the Board of Directors. The Stockholders Agreement contains provisions which, with certain exceptions, restrict the ability of the stockholders to transfer any of the Company's common stock or preferred stock. Subject to certain conditions, if holders of at least 50% of the common stock approve the sale of the Company, each stockholder has agreed to consent to the sale and, if the sale includes the sale of stock, each stockholder has agreed to sell all of the stockholder's common stock on the terms and conditions approved by holders of a majority of the common stock then outstanding. Subject to some limitations, certain stockholders may not sell any of their shares of common stock without offering the other stockholders a pro rata opportunity to participate in the sale. The Stockholders Agreement also provides for certain additional restrictions on transfer of shares by the Company's executive officers and other employees ("management investors"), including the Company's right to repurchase certain shares upon termination of the management investor's employment prior to March 14, 2006, at a formula price, and the grant of a right of first refusal in the Company's favor in the event a management investor elects to transfer his shares of common stock. Registration Rights Agreement In connection with their entry into the Stockholders Agreement, the stockholders entered into a Registration Rights Agreement dated March 14, 2001 (the "Registration Rights Agreement"). In accordance with the Registration Rights Agreement, upon the written request of Court Square the Company will prepare and file a registration statement with the SEC concerning the distribution of all or part of the shares held by that party and its best efforts to cause the registration statement to become effective. If at any time the Company files a registration statement for common stock pursuant to a request by Court Square or otherwise, it will allow the other parties to the Registration Rights Agreement to have their shares of common stock (or a portion of their shares under certain circumstances) included in the registered offering of the Company's common stock. The Company is not bound by this requirement if it is filing a registration statement on Form S-8, Form S-4 or any similar form, a registration statement filed in connection with a share exchange or an offering solely to its employees or existing stockholders, or a registration statement registering a unit offering. The Company will pay the registration expenses of the selling stockholders (other than underwriting commissions, brokerage fees and transfer taxes applicable to the shares sold by the stockholders or the fees and expenses of any accountants or other representatives retained by the selling stockholder). In June 2001, Berkshire Hathaway Inc. ("Berkshire") purchased shares of preferred stock and Class C Common Stock of the Company from Court Square and shares of preferred stock and Class B Common Stock of the Company from World Equity Partners, L.P. In November 2001, Dresdner Kleinwort Capital Partners 2001 LP ("Dresdner") purchased shares of preferred stock and Class C Common Stock of the Company from Court Square. In connection with these transactions, the Securities Holders Agreement, the Preferred Stockholders Agreement and the Registration Rights Agreement were amended to make Berkshire and Dresdner parties to those agreements pursuant to the terms specified in such amendments. Dividends Payment of dividends is dependent upon certain factors, including the Company's earnings, financial condition and capital requirements and the terms of the Company's financing agreements. The ability of the Company to make dividend payments is also restricted by the terms of certain of its debt instruments. 50 11. INCOME TAXES The following is a summary of the components of the provision for income taxes (benefit):
Year Ended Five December 31 Months Ended Year Ended ---------------------------- December 31 July 31 2002 2001 2000 2000 ------------------------------------------------------ Current: Federal $ -- $ -- $ 62 $ 669 State and local 1,026 1,727 597 1,323 Foreign 6,544 3,480 3,188 7,279 ------------------------------------------------------ 7,570 5,207 3,847 9,271 Deferred: Federal (6,244) (13,107) 4,619 1,280 State and local (918) (3,258) 54 2,799 Foreign 6,781 1,075 (2,060) (863) ------------------------------------------------------ (381) (15,290) 2,613 3,216 ------------------------------------------------------ $ 7,189 $ (10,083) $ 6,460 $ 12,487 ======================================================
Income (loss) from continuing operations before income taxes, minority interest in income of subsidiaries, loss from unconsolidated joint ventures, extraordinary items and cumulative effect of change in accounting principle was taxed in the following jurisdictions:
Year Ended Five December 31 Months Ended Year Ended ---------------------------- December 31 July 31 2002 2001 2000 2000 ------------------------------------------------------ Domestic $ (16,745) $ (83,989) $ 12,241 $ 6,749 Foreign 32,588 38,224 7,800 26,991 ------------------------------------------------------ $ 15,843 $ (45,765) $ 20,041 $ 33,740 ======================================================
A reconciliation of income taxes at the United States federal statutory rate to the effective income tax rate follows:
Year Ended Five December 31 Months Ended Year Ended ----------------------- December 31 July 31 2002 2001 2000 2000 ----------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% 35.0% State and local income taxes-- net of federal tax benefit 0.4 1.3 2.2 7.9 Foreign operations (3.1) 12.4 (6.6) (10.6) Goodwill -- (1.3) 2.2 2.4 Provision for or release of valuation allowance for net deferred tax assets -- (21.6) -- -- Settlement of IRS audit (5.9) -- -- -- Sub part F and other permanent items 19.0 -- -- -- Other items -- (3.8) (0.6) 2.3 ---------------------------------------------- Effective income tax rate 45.4% 22.0% 32.2% 37.0% ==============================================
State and local income taxes include provisions for Indiana and Michigan which do not provide proportional benefit in loss years. 51 The following is a summary of the significant components of the Company's deferred tax assets and liabilities:
December 31 ------------------------ 2002 2001 ------------------------ Deferred tax assets: Restructuring charges $ 11,406 $ 21,969 Employee benefits 14,454 13,709 Inventories 4,927 5,049 Warranty 4,689 3,579 Non-compete agreements 824 824 Alternative minimum tax credits 2,905 3,937 Foreign deferred assets 1,823 3,692 Net operating loss carryforwards 53,990 35,783 Other 7,620 6,104 ------------------------ Total deferred tax assets 102,638 94,646 Valuation allowance (34,153) (20,604) ------------------------ Deferred tax assets net of valuation allowance 68,485 74,042 Deferred tax liabilities: Depreciation (14,807) (19,462) Foreign deferred liabilities (3,418) (1,586) Research expenses (6,663) (6,985) Other (16,926) (14,358) ------------------------ Total deferred tax liabilities (41,814) (42,391) ------------------------ Net deferred tax asset $ 26,671 $ 31,651 ========================
At December 31, 2002, the Company had unused Federal net operating loss carryforwards of approximately $102,078 that expire during 2018 through 2022. The Company also had unused alternative minimum tax credit carryforwards of $2,905 that may be carried forward indefinitely. Management expects that future taxable earnings, primarily in the U.S., will be adequate to allow for realization of all net deferred tax assets. The Company's carryforwards expire at specific future dates, and utilization of certain carryforwards is limited to specific amounts each year. Accordingly, the Company has recorded a valuation allowance against a portion of these net deferred tax assets. Income tax payments (refunds), including state taxes, for the years ended December 31, 2002 and 2001, five month period ended December 31, 2000 and year ended July 31, 2000 were $5,332, $1,277, $743 and $10,726, respectively. No provision has been made for United States federal and state or foreign taxes that may result from future remittances of undistributed earnings of foreign subsidiaries ($82,768 at December 31, 2002) because it is expected that such earnings will be reinvested in these foreign operations indefinitely. It is not practical to estimate the amount of taxes that might be payable on the eventual remittances of such earnings. 52 12. ACCUMULATED OTHER COMPREHENSIVE LOSS The Company's other comprehensive loss consists of unrealized net gains and losses on the translation of the assets and liabilities of its foreign operations, currency instruments and interest rate swaps and minimum pension liability adjustments. The before tax income (loss), related income tax effect and accumulated balance are as follows:
Foreign Unrealized Unrealized Minimum Accumulated Currency Gains/(Losses)on Losses on Pension Other Translation Currency Interest Rate Liability Comprehensive Adjustment Instruments Swaps Adjustments Loss ---------------------------------------------------------------------- Balance at July 31, 1999 $ (6,516) -- -- -- $ (6,516) Before tax loss (6,859) -- -- -- (6,859) Income tax effect (2,538) -- -- -- (2,538) --------------------------------------------------------------------- Other comprehensive loss (4,321) -- -- -- (4,321) --------------------------------------------------------------------- Balance at July 31, 2000 (10,837) -- -- -- (10,837) Cumulative effect of accounting change for derivative instruments -- 241 -- 241 Before tax loss (2,569) (4,561) (1,505) -- (8,635) Income tax effect (822) (691) (482) -- (1,995) --------------------------------------------------------------------- Other comprehensive loss (1,747) (3,870) (1,023) -- (6,640) --------------------------------------------------------------------- Balance at December 31, 2000 (12,584) (3,629) (1,023) -- (17,236) Before tax (loss) income (8,322) 4,320 (2,523) (4,410) (10,935) Income tax effect (2,698) 691 (1,049) (1,675) (4,731) --------------------------------------------------------------------- Other comprehensive (loss) income (5,624) 3,629 (1,474) (2,735) (6,204) --------------------------------------------------------------------- Balance at December 31, 2001 (18,208) -- (2,497) (2,735) (23,440) Before tax (loss) income 10,038* 398 4,027 (5,159) 9,304 Income tax effect 2,299 63 1,530 (1,960) 1,932 --------------------------------------------------------------------- Other comprehensive (loss) income 7,739 335 2,497 (3,199) 7,372 --------------------------------------------------------------------- Balance at December 31, 2002 $ (10,469) $ 335 $ -- $ (5,934) $ (16,068) =====================================================================
* Includes a loss of $3,394 associated with the substantial liquidation of the discontinued retail aftermarket gas engine business. 13. TRANSACTIONS WITH GM The Company and GM have entered into several transactions and agreements related to their respective businesses. In addition to the transactions disclosed elsewhere in the accompanying consolidated financial statements and related notes, the Company entered into the following transactions with GM:
Year Ended Five December 31 Months Ended Year Ended ---------------------------- December 31 July 31 2002 2001 2000 2000 ----------------------------------------------------------------- Sales $ 253,567 $ 254,058 $ 120,326 $ 322,418 Material purchases and costs for services 12,123 16,619 2,002 4,500
In addition, the Company had the following balances with GM: Year Ended Year Ended December 31 December 31 2002 2001 ------------- ------------ Trade accounts receivable $ 9,578 $ 23,825 Other receivables -- 207 53 14. LEASE COMMITMENTS The Company occupies space and uses certain equipment under lease arrangements. Rent expense was $11,012 for 2002, $9,879 for 2001, $4,064 for the 5 months ending December 31, 2000, and $9,091 for the fiscal year ending 2000, respectively. Rental commitments at December 31, 2002 for long-term non-cancelable operating leases were as follows: Year ending 2003 $ 9,034 Year ending 2004 7,388 Year ending 2005 6,128 Year ending 2006 4,234 Year ending 2007 3,633 Thereafter 5,863 ---------- $ 36,280 ========== 15. COMMITMENTS AND CONTINGENCIES The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. The Company believes that the ultimate liability, if any, in excess of amounts already provided for in the financial statements or covered by insurance on the disposition of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Remy Mexico Holdings, S. de R.L. de C.V. ("RMH"), an indirect subsidiary of the Company, and GCID Autopartes, S.A. de C.V. ("GCID") are parties to a series of agreements, including a partnership agreement. The partnership agreement created Delco Remy Mexico, S. de R.L. de C.V. ("DRM") which operates certain manufacturing facilities in Mexico. GCID is the minority partner with a 24% ownership interest. RMH and GCID signed a letter of intent on or about May 3, 2000, whereby GCID agreed to terminate certain of the agreements in exchange for a $13,000,000 termination payment by RMH to GCID, but the transaction was never finalized. In June 2001, GCID declared RMH in default under the partnership agreement, alleging that RMH failed to conduct the business of the partnership in accordance with that agreement. In August 2001, GCID instituted an arbitration proceeding before the American Arbitration Association seeking damages for the alleged breaches of the partnership agreement and breaches of fiduciary duty. RMH has denied any such breaches. On January 2, 2002, GCID notified RMH that it was terminating the partnership for the alleged breach of the partnership agreement by RMH and demanded that RMH purchase GCID's partnership interest in DRM. On March 11, 2002, GCID filed the First Amended Arbitration Demand adding additional claims and parties, including DRM and other affiliates of RMH: Remy Componentes. S. de R.L. de C.V. and Delco Remy America, Inc. (together with RMH, the "Named Parties"). The First Amended Demand seeks damages for breach of fiduciary duty, breaches of various contracts between and among the various parties, and tortious interference with contractual relations. The damages include a claim of approximately $13,000,000 for the purchase of GCID's interest in the Company and a claim for $17,000,000 for the alleged breach of a Service Agreement between the Company and GCI Services, S.A. de C.V. ("GCIS"), an affiliate of GCID, pursuant to which GCIS provides labor to the Partnership. On September 30, 2002, GCID and GCIS served expert reports claiming that GCID is owed approximately $23,300,000 for the purchase of its partnership interest in DRM and that GCIS is owed approximately $17,650,000 under the Service Agreement. On January 24, 2003, GCID and GCIS filed a Second Amended Arbitration Demand adding additional claims of breach of contract against the Named Parties. On January 31, 2003, the Named Parties filed an Answer to the Second Amended Demand denying liability for all claims. The arbitration hearing is scheduled to begin May 19, 2003. The Company disputes all of the claims alleged in both the First and Second Amended Arbitration Demands and denies any liability for damages to GCID or any of its affiliates. GCIS continues to provide services to DRM. In addition, another affiliate of GCID, Sistemas y Componentes Electricos, S.A. de C.V., continues to be the leaseholder of the premises occupied by DRM. The Company believes that the Named Parties have meritorious defenses to the action, but it is unable to predict whether the proceedings will have a material adverse effect on the Company. 54 Remy Reman facilities in Mississippi and the World Wide facility in Virginia have identified certain possible violations of state air laws and notified the applicable state agencies under the state voluntary audit disclosure rules. The state agencies have either requested further information or have not responded to the subsidiaries. The subsidiaries have or are in the process of responding to the information requests, and they are currently in compliance with the air permit requirements. At this time, it is unknown whether the state environmental agencies intend to pursue enforcement actions for the past violations or whether penalties, if sought, will be material. The Company may also be required to make additional payments in connection with its acquisitions of Knopf, Delco Remy Mexico, Mazda and AMT. The Company expects that the aggregate amount of these additional payments will be in the range of $15 million to $28 million payable in 2003 to 2006. 16. BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION The Company is a global vehicular parts designer, manufacturer, remanufacturer, marketer and distributor, and a provider of core exchange services. Products include starter motors, alternators, engines, transmissions, traction control systems, torque converters and fuel systems which are principally sold or distributed to OEMs for both original equipment manufacture and aftermarket operations, as well as to warehouse distributors and retail automotive parts chains. It manages its business and operates in a single reportable business segment. Because of the similar economic characteristics of the operations, including the nature of products, production processes, customers and methods of distribution, those operations have been aggregated following the provisions of SFAS No. 131 for segment reporting purposes. The Company is a multi-national corporation with operations in many countries, including the United States, Canada, Mexico, Brazil, Hungary, Poland, Germany, South Korea, the United Kingdom, Ireland, Belgium, Tunisia and the Netherlands. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and the South Korean Won, the Mexican Peso and various European currencies. Exposure to variability in foreign currency exchange rates is managed primarily through the use of natural hedges, whereby funding obligations and assets are both denominated in the local currency. From time to time, the Company enters into exchange agreements to manage its exposure arising from fluctuating exchange rates related to specific transactions. Sales are attributed to geographic locations based on the location of product production.
Five Year Ended Months Ended Year Ended December 31 December 31 July 31 2002 2001 2000 2000 --------------------------------------------------------- Net sales to external customers: United States $ 915,521 $ 873,378 $ 373,757 $ 919,329 Europe 94,687 91,587 27,303 62,427 Canada 3,655 3,303 1,133 3,633 Asia Pacific 22,210 13,690 10,934 33,854 Latin America 33,279 25,194 9,073 13,611 --------------------------------------------------------- Total net sales $ 1,069,352 $ 1,007,152 $ 422,200 $ 1,032,854 =========================================================
December 31 --------------------------- 2002 2001 --------------------------- Long-lived assets: United States $ 242,655 $ 281,669 Europe 47,197 62,131 Canada 187 185 Asia Pacific 32,904 28,993 Latin America 27,766 26,674 --------------------------- Total long-lived assets $ 350,709 $ 399,652 =========================== 55 Customers that accounted for a significant portion of consolidated net sales were as follows:
Five Year Ended Months Ended Year Ended December 31 December 31 July 31 ------------------------- 2002 2001 2000 2000 ------------------------------------------------------- General Motors Corporation: North American OE Operations $ 200,305 $ 193,969 $ 96,399 $ 258,076 Other 53,262 60,089 23,927 64,342 International Truck and Engine Corporation 84,584 117,345 53,433 141,443
Following is a summary of the composition by product category of the Company's sales to external customers. Third-party sales for core exchange services are included in the "Other" category.
Five Year Ended Months Ended Year Ended December 31 December 31 July 31 ------------------------- 2002 2001 2000 2000 ------------------------------------------------------- Electrical systems $ 796,713 $ 741,641 $ 337,308 $ 859,111 Powertrain/drivetrain 207,964 202,392 56,776 136,154 Other 64,675 63,119 28,116 37,589 ------------------------------------------------------ Total $ 1,069,352 $ 1,007,152 $ 422,200 $ 1,032,854 ======================================================
17. OTHER INFORMATION Supplemental Cash Flow Information
Five Year Ended Months Ended Year Ended December 31 December 31 July 31 ------------------------- 2002 2001 2000 2000 ------------------------------------------------------- Cash paid for interest $ 63,298 $ 57,901 $ 22,636 $ 46,835 Cash paid for income taxes, net of refunds received 5,332 1,277 743 10,726 Detail of acquisitions: Fair value of assets acquired $ 1,774 $ 9,119 $ -- $ 39,703 Liabilities assumed -- (10,152) -- (15,035) Notes issued (10,942) -- -- -- Goodwill recorded 9,918 24,146 -- 37,493 Minority interest 16,508 5,775 -- -- ------------------------------------------------------ Net cash paid for acquisitions 17,258 28,888 -- 62,161 Cash acquired -- 82 -- 1,669 ------------------------------------------------------ Total $ 17,258 $ 28,970 $ -- $ 63,830 ======================================================
Research and Development Costs The Company spent approximately $15,200, $15,500, $7,200 and $16,300 in the years ended December 31, 2002 and 2001, five month period ended December 31, 2000 and fiscal year ended July 31, 2000, respectively, on research and development activities. All expenditures were Company funded. 56 18. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR SUBSIDIARIES The Company conducts a significant portion of its business through subsidiaries. The Senior Notes and the Senior Subordinated Notes referred to in Note 8, Long-term Debt, are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect wholly-owned subsidiaries (the Subsidiary Guarantors). Certain of the Company's subsidiaries do not guarantee the Senior Notes and the Senior Subordinated Notes (the Non-Guarantor Subsidiaries). The claims of creditors of Non-Guarantor Subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is condensed consolidating financial information for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at December 31, 2002 and 2001 and for the years ended December 31, 2002 and 2001, five month period ended December 31, 2000 and the fiscal year ended July 31, 2000. The equity method has been used by the Company with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented. The following table sets forth the Guarantor and direct Non-Guarantor Subsidiaries: Guarantor Subsidiaries Non-Guarantor Subsidiaries Delco Remy America, Inc. Delco Remy Hungary RT (formerly Autovill RT Ltd.) Nabco, Inc. Power Investments Canada Ltd. The A&B Group, Inc. Remy UK Limited A&B Enterprises, Inc. Delco Remy International (Europe) GmbH Dalex, Inc. Remy India Holdings, Inc. A&B Cores, Inc. Remy Korea Holdings, Inc. R&L Tool Company, Inc. World Wide Automotive Distributors, Inc. MCA, Inc. of Mississippi Kraftube, Inc. Power Investments, Inc. Tractech (Ireland) Ltd. Franklin Power Products, Inc. Central Precision Limited International Fuel Systems, Inc. Electro Diesel Rebuild BVBA Power Investments Marine, Inc. Electro-Rebuild Tunisia S.A.R.L. Marine Corporation of America Delco Remy Mexico, S. de R.L. de C.V. Powrbilt Products, Inc. Publitech, Inc. World Wide Automotive, Inc. Delco Remy Brazil, Ltda. Ballantrae Corporation Western Reman Ltd. Tractech, Inc. Engine Rebuilders Ltd. Williams Technologies, Inc. Reman Transport Ltd. Western Reman, Inc. Delco Remy Remanufacturing Engine Master, L.P. Delco Remy Germany GmbH M & M Knopf Auto Parts, Inc. Remy Componentes S. de R.L. de C.V. Reman Holdings, Inc. Delco Remy Belgium BVBA Remy International, Inc. Magnum Power Products, LLC Jax Reman, LLC Elmot-DR, Sp.z.o.o XL Component Distribution Ltd. Automatic Transmission International A/S
57 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet December 31, 2002 ------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------- Assets: Current assets: Cash and cash equivalents $ 1 $ 203 $ 12,692 $ -- $ 12,896 Trade accounts receivable -- 118,070 31,540 -- 149,610 Other receivables -- 3,596 9,335 -- 12,931 Inventories -- 233,124 57,880 (1,109)/(c)/ 289,895 Deferred income taxes 14,924 (1,567) 1,066 -- 14,423 Assets of discontinued operations -- 2,319 1,242 -- 3,561 Other current assets 6,039 1,423 7,973 -- 15,435 ------------------------------------------------------------------------ Total current assets 20,964 357,168 121,728 (1,109) 498,751 Property and equipment 57 205,075 106,825 -- 311,957 Less accumulated depreciation 36 111,596 30,598 -- 142,230 ------------------------------------------------------------------------ Property and equipment, net 21 93,479 76,227 -- 169,727 Deferred financing costs 17,268 -- -- -- 17,268 Goodwill, net -- 115,461 7,472 -- 122,933 Investment in affiliates 451,616 -- -- (439,725)/(a)/ 11,891 Deferred income taxes 16,686 (1,777) (2,661) -- 12,248 Other assets 9,581 4,886 2,175 -- 16,642 ------------------------------------------------------------------------ Total assets $ 516,136 $ 569,217 $ 204,941 $(440,834) $ 849,460 ======================================================================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 790 $ 91,982 $ 50,630 $ -- $ 143,402 Intercompany accounts (9,592) 37,113 (26,920) (601)/(c)/ -- Accrued interest payable 9,743 -- -- -- 9,743 Accrued restructuring charges -- 10,260 555 -- 10,815 Liabilities of discontinued operations -- 1,579 4,954 -- 6,533 Other liabilities and accrued expenses 7,709 45,292 13,946 -- 66,947 Current portion of long term debt -- 991 29,199 -- 30,190 ------------------------------------------------------------------------ Total current liabilities 8,650 187,217 72,364 (601) 267,630 Long-term debt, less current portion 568,710 17,861 9,811 -- 596,382 Post-retirement benefits other than pensions -- 23,553 -- -- 23,553 Accrued pension benefit 454 13,973 -- -- 14,427 Other non-current liabilities 4,918 6,402 962 -- 12,282 Minority interest in subsidiary -- 9,456 8,394 -- 17,850 Redeemable preferred stock 274,074 -- -- -- 274,074 Stockholders' equity: Common stock: Class A Shares -- -- -- -- -- Class B Shares 3 -- -- -- 3 Class C Shares -- -- -- -- -- Subsidiary investment -- 291,416 108,650 (400,066)/(a)/ -- Retained earnings (deficit) (340,673) 25,326 14,841 (40,167)/(b)/ (340,673) Accumulated other comprehensive loss -- (5,987) (10,081) -- (16,068) ------------------------------------------------------------------------ Total stockholders' equity (deficit) (340,670) 310,755 113,410 (440,233) (356,738) ------------------------------------------------------------------------ Total liabilities and stockholders' equity (deficit) $ 516,136 $ 569,217 $ 204,941 $(440,834) $ 849,460 ========================================================================
_________ (a) Elimination of investments in subsidiaries. (b) Elimination of investments in subsidiaries' earnings. (c) Elimination of intercompany profit in inventory. 58 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations For the Year Ended December 31, 2002 ------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------- Net sales $ -- $1,060,115 $ 436,623 $ (427,386)/(a)/ $ 1,069,352 Cost of goods sold -- 926,790 390,857 (427,386)/(a)/ 890,261 ------------------------------------------------------------------------ Gross profit -- 133,325 45,766 -- 179,091 Selling, general and administrative expenses 13,531 68,753 18,916 -- 101,200 Amortization of goodwill and intangibles 1,000 97 205 -- 1,302 ------------------------------------------------------------------------ Operating (loss) income (14,531) 64,475 26,645 -- 76,589 Interest expense (49,182) (8,580) (1,152) -- (58,914) Other non-operating income (expense) (4,133) 438 1,863 -- (1,832) ------------------------------------------------------------------------ Income (loss) from continuing operations before income tax (benefit), minority interest in income of subsidiaries, income from unconsolidated joint ventures and equity in earnings of subsidiaries: (67,846) 56,333 27,356 -- 15,843 Income taxes (benefit) (28,115) 21,879 13,425 -- 7,189 Minority interest in income of subsidiaries -- (2,169) (2,076) -- (4,245) Income from unconsolidated joint ventures -- -- (3,830) -- (3,830) Equity in earnings of subsidiaries (91,697) -- -- 91,697/(b)/ -- ------------------------------------------------------------------------ Income (loss) before extraordinary item (131,428) 32,285 8,025 91,697 579 Loss on discontinued operations -- (27,352) (30,479) -- (57,831) Income tax (benefit) -- -- -- -- -- ------------------------------------------------------------------------ Net loss on discontinued operations -- (27,352) (30,479) -- (57,831) Extraordinary item: Gain on early extinguishment of debt, net of income tax (1,108) -- -- -- (1,108) Cumulative effect of change in accounting principle -- (50,909) (23,267) -- (74,176) ------------------------------------------------------------------------ Net loss (132,536) (45,976) (45,721) 91,697 (132,536) Preferred dividends 29,375 -- -- -- 29,375 ------------------------------------------------------------------------ Loss available to common stockholders $ (161,911) $ (45,976) $ (45,721) $ 91,697 $ (161,911) ========================================================================
__________ (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net income (loss) from consolidated subsidiaries. 59 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2002 ---------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ---------------------------------------------------------------------- Operating Activities: Net loss $ (132,536) $ (45,976) $ (45,721) $ 91,697 $(132,536) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of change in accounting principle -- 50,909 23,267 -- 74,176 Loss from discontinued operations -- 15,783 13,800 -- 29,583 Loss on disposal of discontinued operations -- 11,569 16,679 -- 28,248 Extraordinary item 1,108 -- -- -- 1,108 Depreciation 11 19,740 9,536 -- 29,287 Amortization 1,000 97 205 -- 1,302 Minority interest in income of subsidiaries -- 2,169 2,076 -- 4,245 Loss from unconsolidated joint ventures -- -- 3,830 -- 3,830 Equity (loss) in earnings of subsidiaries 91,697 -- -- (91,697) -- Deferred income taxes (1,187) 1,238 5,504 -- 5,555 Post retirement benefits other than pensions -- (2,259) -- -- (2,259) Accrued pension benefits 454 4,938 (1,181) -- 4,211 Non-cash interest expense 3,754 339 -- -- 4,093 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable -- 12,964 (7,170) -- 5,794 Inventories -- 5,440 (10,988) -- (5,548) Accounts payable (514) (4,757) 19,892 -- 14,621 Intercompany accounts 50,080 (15,395) (34,685) -- -- Other current assets and liabilities (1,323) 10,098 (5,252) -- 3,523 Cash payments for restructuring charges -- (12,639) (4,249) -- (16,888) Other non-current assets and liabilities, net (21,754) 8,822 7,098 -- (5,834) ------------------------------------------------------------------ Net cash provided by (used in) operating activities (9,210) 63,080 (7,359) -- 46,511 Investing Activities: Acquisition, net of cash acquired -- (17,005) (253) -- (17,258) Purchases of property and equipment -- (12,551) (7,876) -- (20,427) Investments in joint ventures (3,000) -- -- -- (3,000) ------------------------------------------------------------------ Net cash used in investing activities (3,000) (29,556) (8,129) -- (40,685) Financing Activities: Proceeds from issuances of long-term debt 144,769 -- -- -- 144,769 Retirement of long-term debt (144,769) -- -- -- (144,769) Net borrowings (repayments) under revolving line of credit and other 20,027 (16,386) 11,689 -- 15,330 Deferred financing costs (7,816) -- -- -- (7,816) Distributions to minority interests -- -- (1,800) -- (1,800) ------------------------------------------------------------------ Net cash provided by (used in) financing activities 12,211 (16,386) 9,889 -- 5,714 Effect of exchange rate changes on cash -- -- 2,159 -- 2,159 Cash flows of discontinued operation -- (17,167) (7,504) -- (24,671) ------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 1 (29) (10,944) -- (10,972) Cash and cash equivalents at beginning of year -- 232 23,636 -- 23,868 ------------------------------------------------------------------ Cash and cash equivalents at end of year $ 1 $ 203 $ 12,692 $ -- $ 12,896 ==================================================================
__________ (a) Elimination of equity in earnings of subsidiary. (b) Recording of preferred dividend requirement of subsidiary. 60 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet December 31, 2001 ------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------ Assets: Current assets: Cash and cash equivalents $ -- $ 232 $ 23,636 $ -- $ 23,868 Trade accounts receivable -- 131,033 24,371 -- 155,404 Other receivables -- 2,711 6,233 -- 8,944 Inventories -- 239,540 46,406 (2,087)/(c)/ 283,859 Deferred income taxes 17,184 -- 3,991 -- 21,175 Assets of discontinued operations -- 15,664 25,770 -- 41,434 Other current assets 4,759 2,829 5,307 -- 12,895 --------------------------------------------------------------------- Total current assets 21,943 392,009 135,714 (2,087) 547,579 Property and equipment 57 201,673 92,852 -- 294,582 Less accumulated depreciation 25 99,383 19,319 -- 118,727 --------------------------------------------------------------------- Property and equipment, net 32 102,290 73,533 -- 175,855 Deferred financing costs 11,431 1,209 -- -- 12,640 Goodwill, net -- 160,034 20,154 -- 180,188 Investment in affiliates 526,037 -- -- (514,893)/(a)/ 11,144 Deferred income taxes 11,121 12 (657) -- 10,476 Other assets 2,531 3,263 3,555 -- 9,349 --------------------------------------------------------------------- Total assets $ 573,095 $ 658,817 $ 232,299 $(516,980) $ 947,231 ===================================================================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 1,304 $ 96,739 $ 30,738 $ -- $ 128,781 Intercompany accounts (59,672) 52,508 7,765 (601)/(c)/ -- Accrued interest 9,927 -- 173 -- 10,100 Accrued restructuring charges -- 26,595 1,349 -- 27,944 Liabilities of discontinued operations -- 3,736 4,869 -- 8,605 Other liabilities and accrued expenses 7,568 32,240 16,754 -- 56,562 Current debt -- 804 5,967 -- 6,771 --------------------------------------------------------------------- Total current liabilities (40,873) 212,622 67,615 (601) 238,763 Deferred income taxes -- -- -- -- -- Long-term debt, less current portion 548,683 34,580 9,915 -- 593,178 Post-retirement benefits other than pensions -- 25,812 -- -- 25,812 Accrued pension benefits -- 9,035 1,181 -- 10,216 Other non-current liabilities 1,842 4,089 724 -- 6,655 Minority interest in subsidiaries -- 12,696 17,411 -- 30,107 Redeemable preferred stock 244,699 -- -- -- 244,699 Stockholders' equity: Preferred stock - Series A -- -- -- -- -- Common stock: Class A Shares -- -- -- -- -- Class B Shares 3 -- -- -- 3 Class C Shares -- -- -- -- -- Subsidiary investment -- 291,416 93,099 (384,515)/(a)/ -- Retained earnings (deficit) (178,762) 71,302 60,562 (131,864)/(b)/ (178,762) Accumulated other comprehensive loss (2,497) (2,735) (18,208) -- (23,440) --------------------------------------------------------------------- Total stockholders' equity (deficit) (181,256) 359,983 135,453 (516,379) (202,199) --------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 573,095 $ 658,817 $ 232,299 $(516,980) $ 947,231 =====================================================================
______________ (a) Elimination of investments in subsidiaries. (b) Elimination of investments in subsidiaries' earnings. (c) Elimination of intercompany profit in inventory. 61 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations For the Year Ended December 31, 2001 ------------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------- Net sales $ -- $ 1,045,914 $ 391,241 $ (430,003)/(a)/ $ 1,007,152 Cost of goods sold -- 914,647 337,583 (430,003)/(a)/ 822,227 Special charges - cost of goods sold -- 16,236 -- 16,236 ------------------------------------------------------------------------------ Gross profit -- 115,031 53,658 -- 168,689 Selling, general and administrative expenses 14,502 61,891 22,773 -- 99,166 Special charges - SG&A -- 16,206 -- 16,206 Amortization of goodwill and intangibles -- 6,217 538 -- 6,755 Restructuring charges -- 31,285 2,140 -- 33,425 ------------------------------------------------------------------------------ Operating (loss) income (14,502) (568) 28,207 -- 13,137 Interest expense, net (42,822) (12,746) (989) -- (56,557) Non-recurring merger and tender offer expenses (4,194) -- -- -- (4,194) Other non-operating income (expense) (900) 192 2,557 -- 1,849 ------------------------------------------------------------------------------ Income (loss) from continuing operations before income taxes (benefit), minority interest in loss of subsidiaries, loss from unconsolidated joint ventures, equity in earnings of subsidiaries, and extraordinary items (62,418) (13,122) 29,775 -- (45,765) Income tax expense (benefit) (7,698) (6,014) 3,629 -- (10,083) Minority interest in loss of subsidiaries -- (4,072) (5,182) -- (9,254) Loss from unconsolidated joint ventures -- -- (2,925) -- (2,925) Equity in earnings of subsidiaries (17,927) -- -- 17,927/(b)/ -- ------------------------------------------------------------------------------ Net income (loss) from continuing operations before extraordinary items (72,647) (11,180) 18,039 17,927 (47,861) Discontinued operations: Loss from discontinued operations -- (17,400) (14,941) -- (32,341) Income tax expense (benefit) -- (6,523) (334) -- (6,857) ------------------------------------------------------------------------------ Net loss from discontinued operations -- (10,877) (14,607) -- (25,484) Extraordinary items: Gain on early extinguishment of debt, net of income tax -- 698 -- -- 698 ------------------------------------------------------------------------------ Net income (loss) (72,647) (21,359) 3,432 17,927 (72,647) Redeemable preferred stock dividends 20,971 -- -- -- 20,971 ------------------------------------------------------------------------------ Income (loss) available to common stockholders $ (93,618) $ (21,359) $ 3,432 $ 17,927 $ (93,618) ==============================================================================
----------- (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net loss from consolidated subsidiaries. 62 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2001 --------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ---------------------------------------------------------------------------- Operating Activities: Net income (loss) $ (72,647) $ (21,359) $ 3,432 $ 17,927/(a)/ $ (72,647) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss from discontinued operations -- 10,877 14,607 -- 25,484 Extraordinary item -- (698) -- -- (698) Depreciation 5 19,281 7,195 -- 26,481 Amortization -- 6,217 538 -- 6,755 Minority interest in income of subsidiaries -- 4,072 5,182 -- 9,254 Loss from unconsolidated joint ventures -- -- 2,925 -- 2,925 Equity (loss) in earnings of subsidiaries 17,927 -- -- (17,927) -- Deferred income taxes (25,944) (326) (430) -- (26,700) Post retirement benefits other than pensions -- 3,018 -- -- 3,018 Accrued pension benefits -- 5,284 508 -- 5,792 Non-cash interest expense 1,079 723 -- -- 1,802 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable -- (9,415) (5,811) -- (15,226) Inventories -- (43) (3,780) -- (3,823) Accounts payable 339 (11,127) (168) -- (10,956) Intercompany accounts (150,098) 135,247 14,851 -- -- Other current assets and liabilities 3,427 (3,593) (980) -- (1,146) Restructuring charges -- 31,285 2,140 -- 33,425 Cash payments for restructuring charges -- (7,798) 1,341 -- (6,457) Non-cash special charges -- 32,292 150 -- 32,442 Other non-current assets and liabilities, net (4,727) 29,964 (19,157) -- 6,080 --------------------------------------------------------------------------- Net cash provided by (used in) operating activities of continuing operations (230,639) 223,901 22,543 -- 15,805 Investing Activities: Acquisitions, net of cash acquired (17,116) (8,856) (2,916) -- (28,888) Purchases of property and equipment (37) (13,519) (6,455) -- (20,011) Investments in joint ventures (5,012) -- (3,650) -- (8,662) --------------------------------------------------------------------------- Net cash used in investing activities (22,165) (22,375) (13,021) -- (57,561) Financing Activities: Proceeds from issuance of long-term debt 157,291 -- -- -- 157,291 Retirement of long-term debt -- (17,790) -- -- (17,790) Net borrowings (repayments) under revolving line of credit and other 106,392 (165,448) (5,422) -- (64,478) Deferred financing costs (5,561) -- -- -- (5,561) Merger and tender offer costs (5,318) -- -- -- (5,318) Distributions to minority interests -- -- (762) -- (762) --------------------------------------------------------------------------- Net cash provided by (used in) financing activities 252,804 (183,238) (6,184) -- 63,382 Effect of exchange rate changes on cash -- -- (715) -- (715) Cash flows of discontinued operations -- (17,973) (1,416) -- (19,389) --------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- 315 1,207 -- 1,522 Cash and cash equivalents at beginning of year -- (83) 22,429 -- 22,346 ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ -- $ 232 $ 23,636 $ -- $ 23,868 ============================================================================
------------- (a) Elimination of equity in earnings of subsidiary. (b) Recording of preferred dividend requirement of subsidiary. 63 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations For the Five Months Ended December 31, 2000 ------------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------- Net sales $ -- $ 450,259 $ 155,028 $(183,087)/(a)/ $ 422,200 Cost of goods sold -- 386,611 133,121 (183,087)/(a)/ 336,645 ------------------------------------------------------------------------------- Gross profit -- 63,648 21,907 -- 85,555 Selling, general and administrative expenses 5,302 23,233 14,016 -- 42,551 Amortization 26 2,185 287 -- 2,498 ------------------------------------------------------------------------------- Operating (loss) income (5,328) 38,230 7,604 -- 40,506 Interest expense (13,753) (6,721) (368) -- (20,842) Non-recurring merger/tender offer expenses (1,124) -- -- -- (1,124) Non-operating expense (income) -- 602 899 -- 1,501 ------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax (benefit), minority interest in income of subsidiaries, income from unconsolidated joint ventures and equity in earnings of subsidiaries (20,205) 32,111 8,135 -- 20,041 Income tax expense (benefit) (7,331) 12,625 1,166 -- 6,460 Minority interest in income of subsidiaries -- (1,590) (1,188) -- (2,778) Income from unconsolidated joint ventures -- -- (467) -- (467) Equity in earnings of subsidiaries 22,573 -- -- (22,573)/(b)/ -- ------------------------------------------------------------------------------- Income before extraordinary item 9,699 17,896 5,314 (22,573) 10,336 Loss on discontinued operations -- (337) (665) -- (1,002) Income tax benefit -- (130) (235) -- (365) ------------------------------------------------------------------------------- Net loss on discontinued operations -- (207) (430) -- (637) ------------------------------------------------------------------------------- Net income $ 9,699 $ 17,689 $ 4,884 $ (22,573) $ 9,699 ===============================================================================
--------------- (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net income (loss) from consolidated subsidiaries. 64 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows For the Five Months Ended December 31, 2000 ---------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ---------------------------------------------------------------------------- Operating Activities: Net income $ 9,699 $ 17,689 $ 4,884 $ (22,573) $ 9,699 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss from discontinued operations -- 207 430 -- 637 Depreciation -- 6,996 3,173 -- 10,169 Amortization 26 2,185 287 -- 2,498 Minority interest in income of subsidiaries -- 1,590 1,188 -- 2,778 Loss from unconsolidated joint ventures -- -- 467 -- 467 Equity (loss) in earnings of subsidiaries (22,573) -- -- 22,573 -- Deferred income taxes 3,749 -- (2,097) -- 1,652 Post retirement benefits other than pensions -- 1,155 -- -- 1,155 Accrued pension benefits -- 3,089 49 -- 3,138 Non-cash interest expense 455 285 -- -- 740 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable -- (195) (908) -- (1,103) Inventories -- (20,982) (5,606) -- (26,588) Accounts payable (291) 4,465 9,648 -- 13,822 Intercompany accounts 16,998 (25,808) 8,810 -- -- Other current assets and liabilities (2,003) (3,091) (4,095) -- (9,189) Cash payments for restructuring charges -- (10,884) (4,249) -- (15,133) Other non-current assets and liabilities, net (6,060) (3,030) 4,412 -- (4,678) ---------------------------------------------------------------------------- Net cash provided by (used in) operating activities -- (26,329) 16,393 -- (9,936) Investing Activities: Purchases of property and equipment -- (4,510) (6,704) -- (11,214) Investments in joint ventures -- -- (1,892) -- (1,892) ---------------------------------------------------------------------------- Net cash used in investing activities -- (4,510) (8,596) -- (13,106) Financing Activities: Net borrowings (repayments) under revolving line of credit and other -- 34,278 1,264 -- 35,542 Distributions to minority interests -- -- (322) -- (322) ---------------------------------------------------------------------------- Net cash provided by (used in) financing activities -- 34,278 942 -- 35,220 Effect of exchange rate changes on cash -- -- (1,151) -- (1,151) Cash flows of discontinued operations -- (4,168) 878 -- (3,290) ---------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- (729) 8,466 -- 7,737 Cash and cash equivalents at beginning of year -- 646 13,963 -- 14,609 ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ -- $ (83) $ 22,429 $ -- $ 22,346 ============================================================================
_________________ (a) Elimination of equity in earnings of subsidiary. (b) Recording of preferred dividend requirement of subsidiary. 65 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations For the Year Ended July 31, 2000 ------------------------------------------------------------------------------ Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------ Net sales $ -- $ 1,087,187 $ 330,429 $ (384,762)/(a)/ $1,032,854 Cost of goods sold -- 919,607 278,565 (384,762)/(a)/ 813,410 ------------------------------------------------------------------------------ Gross profit -- 167,580 51,864 -- 219,444 Selling, general and administrative expenses 13,922 66,822 21,320 -- 102,064 Amortization of goodwill and intangibles 108 5,033 676 -- 5,817 Restructuring charges -- 30,133 1,233 -- 31,366 ------------------------------------------------------------------------------ Operating (loss) income (14,030) 65,592 28,635 -- 80,197 Interest expense (30,259) (14,502) (1,825) -- (46,586) Non-recurring merger/tender offer expenses -- -- -- -- -- Other non-operating income -- -- 129 -- 129 ------------------------------------------------------------------------------ Income (loss) from continuing operations before income tax (benefit), minority interest in income of subsidiaries, loss from unconsolidated joint ventures and equity in earnings of subsidiaries (44,289) 51,090 26,939 -- 33,740 Income tax expense (benefit) (13,966) 20,793 5,660 -- 12,487 Minority interest in income of subsidiaries -- (3,243) (3,499) -- (6,742) Loss from unconsolidated joint ventures -- -- (352) -- (352) Equity in earnings of subsidiaries 42,741 -- -- (42,741)/(b)/ -- ------------------------------------------------------------------------------ Income from continuing operations 12,418 27,054 17,428 (42,741) 14,159 Discontinued operations: Loss from discontinued operations (including estimated loss on disposal of $33.5 million in the second quarter of 2002) -- 1,076 (3,845) -- (2,769) Income tax expense (benefit) -- 392 (1,420) -- (1,028) ------------------------------------------------------------------------------ Net loss from discontinued operations -- 684 (2,425) -- (1,741) ------------------------------------------------------------------------------ Net income $ 12,418 $ 27,738 $ 15,003 $ (42,741) $ 12,418 ==============================================================================
--------------- (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net income (loss) from consolidated subsidiaries. 66 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows For the Year Ended July 31, 2000 ------------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------- Operating Activities: Net income (loss) $ 12,418 $ 27,738 $ 15,003 $ (42,741)/(a)/ $ 12,418 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss from discontinued operations -- (684) 2,425 -- 1,741 Depreciation -- 18,458 6,540 -- 24,998 Amortization 108 5,033 676 -- 5,817 Minority interest in income of subsidiaries -- 3,243 3,499 -- 6,742 Loss from unconsolidated joint ventures -- -- 352 -- 352 Equity (loss) in earnings of subsidiaries (42,741) -- -- 42,741/(a)/ -- Deferred income taxes 4,640 1 (866) -- 3,775 Post-retirement benefits other than pensions -- 589 -- -- 589 Accrued pension benefits -- (2,057) 624 -- (1,433) Non-cash interest expense 1,092 671 -- -- 1,763 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable -- 1,125 1,258 -- 2,383 Inventories -- (10,624) (3,626) -- (14,250) Accounts payable 620 8,828 2,203 -- 11,651 Intercompany accounts 75,521 (76,633) 1,112 -- -- Other current assets and liabilities 3,561 (13,705) (4,316) -- (14,460) Restructuring charges -- 30,133 1,233 -- 31,366 Cash payments for restructuring charges -- (8,230) (670) -- (8,900) Other non-current assets and liabilities, net 8,105 (20,044) 11,865 -- (74) ------------------------------------------------------------------------------- Net cash provided by (used in) operating activities of continuing operations 63,324 (36,158) 37,312 -- 64,478 Investing Activities: Acquisitions, net of cash acquired (63,324) 30 1,133 -- (62,161) Purchases of property and equipment -- (13,930) (20,014) -- (33,944) Investments in joint ventures -- -- (1,179) -- (1,179) ------------------------------------------------------------------------------- Net cash used in investing activities of continuing operations (63,324) (13,900) (20,060) -- (97,284) Financing Activities: Net borrowing (repayments) under revolving line of credit and other -- 48,058 (7,790) -- 40,268 Distributions to minority interests -- -- (1,200) -- (1,200) ------------------------------------------------------------------------------- Net cash provided by (used in) financing activities of continuing operations -- 48,058 (8,990) -- 39,068 Effect of exchange rate changes on cash -- -- (637) -- (637) Cash flows of discontinued operations -- 2,690 (8,408) -- (5,718) ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- 690 (783) -- (93) Cash and cash equivalents at beginning of year -- (44) 14,746 -- 14,702 ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ -- $ 646 $ 13,963 $ -- $ 14,609 ===============================================================================
----------------- (a) Elimination of equity in earnings of subsidiary. (b) Recording of preferred dividend requirement subsidiary. 67 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) RESTATED
Quarter Ended: 3/31/02 6/30/02 9/30/02 12/31/02 Total Year --------------------------------------------------------------------- Net sales $ 258,651 $ 282,482 $ 268,453 $ 259,766 $ 1,069,352 Gross profit 49,619 49,031 45,601 34,840 179,091 Income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle 4,139 3,016 942 (7,518) 579 Net loss (73,275) (27,584) (14,547) (17,130) (132,536) Loss from discontinued operations (3,238) (6,558) (11,950) (7,837) (29,583) Loss on disposal of discontinued operation -- (22,933) (3,539) (1,776) (28,248) Extraordinary items -- (1,108) -- -- (1,108) Cumulative effect of change in accounting principle (74,176) -- -- -- (74,176) As Initially Reported: 3/31/02 6/30/02 ----------------------- Net sales $ 263,804 $ 282,482 Gross profit 47,172 49,031 Income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle 902 3,016 Net loss 902 (34,585) Loss from discontiued operations -- (6,558) Loss on disposal of discontinued operations -- (29,935)
The Company restated the income statement for the first quarter of 2002 for the classification of the Company's gas engine business as a discontinued operation effective in the second quarter and to record the $74,176 charge relative to the adoption of SFAS 142. The second quarter of 2002 was restated to reclassify the write-down of goodwill initially included in the loss on the disposal of the gas engine business to the SFAS 142 charge recorded in the first quarter.
Quarter Ended: 3/31/01 6/30/01 9/30/01 12/31/01 Total Year --------------------------------------------------------------------- Net sales $ 245,640 $ 255,557 $ 259,166 $ 246,789 $ 1,007,152 Gross profit 41,133 48,762 47,469 31,325 168,689 Income (loss) from continuing operations before extraordinary items (4,123) 4,079 305 (48,122) (47,861) Net income (loss) (5,830) 3,942 (3,014) (67,745) (72,647) Restructuring and special charges 2,098 2,184 1,785 59,800 65,867 Loss from discontinued operations (1,707) (835) (3,319) (19,623) (25,484) Extraordinary items -- 698 -- -- 698
20. RELATED PARTY TRANSACTIONS In 2002 the Company entered into to an advisory agreement with CVC Management LLC (the "Advisor"), an affiliate of Court Square and CVC Equity Partners. Under the terms of the agreement, the Advisor is required to provide executive, management, consulting and support services to the Company and certain of its subsidiaries. The Advisor is entitled to receive an initial advisory fee of $1 million for 2002 and an advisory fee of $1 million for each year thereafter, payable in equal quarterly installments. The advisory agreement continues until December 31, 2006 and is automatically renewed from year to year thereafter unless terminated by either of the parties. The Advisor is also entitled to receive a transaction fee of $2.5 million for services provided in connection with the refinancing of the Company's senior credit facilities in 2002 and may receive additional transaction fees under the advisory agreement in amounts to be agreed upon by the parties for services provided in connection with future financings, acquisitions and divestitures. The Advisor has agreed to defer payment of the initial $3.5 million payable under the agreement until June 27, 2003. 68 21. SUBSEQUENT EVENTS (a) Anderson Plant Closures On January 7, 2003, the Company announced that it will close its Delco Remy America starter and alternator manufacturing operations in Anderson, Indiana during the first quarter of 2003. Production at these plants will be absorbed by other Company plants globally. The wind down of the Anderson manufacturing operations will affect approximately 350 hourly UAW represented employees and approximately 50 salaried employees currently supporting these plants. (b) Divestiture of Non-Core Businesses On March 7, 2003 and on March 19, 2003 the Company successfully completed the sale of two non-core businesses that were engaged in the manufacturing of traction control devices and components for the air-conditioning industry. The net proceeds of the sales were approximately $29,000. These non-core businesses will be treated as discontinued operations beginning in the first quarter of 2003. The sale of these non-core businesses is not expected to have a material effect on the Company's results of operations. (c) NABCO Plant Closure On March 18, 2003, the Company announced it would close, by year-end, its electrical remanufacturing business, NABCO, located in Reed City, Michigan. The wind down of the Reed City remanufacturing operations will affect approximately 200 employees. The NABCO facilities in Kaleva and Marion, Michigan, will continue to remanufacture components for Delphi and other selected customers. (d) Acquisition of Hubei Joint Venture In March 2003, the Company substantially completed the acquisition of 51% of Hubei Delphi Automotive Generators Company, Ltd. ("Hubei"), a manufacturer of OE automotive generators based in China. The purchase price was approximately $3.6 million. Completion of the acquisition is subject to receiving final approval of the Chinese government. This acquisition will be accounted for as a purchase and the results of Hubei will be included in the Company's financial statements as of the acquisition date. ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with the independent accountants. 69 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Harold K. Sperlich, Chairman of the Board of Directors. Mr. Sperlich has been Chairman of the Board of Directors since the Company's inception in 1994. Since retiring from Chrysler Corporation in 1988, having served as its President, Mr. Sperlich has served as a consultant to the automotive industry. Before joining Chrysler in 1977, Mr. Sperlich held several senior administrative and operating posts with Ford Motor Company. Age: 73 Thomas J. Snyder, President, Chief Executive Officer and Director. Mr. Snyder was elected Chief Executive Officer effective January 1, 2000. He was elected President, Chief Operating Officer and Director when the Company was founded in 1994. From 1973 to 1994, he held a variety of managerial and executive positions with the Delco Remy Division of GM. He is a member of the Board of the Indiana Chamber of Commerce and of Saint John's Health Systems. He is a member of the Board of Visitors of Hudson Institute and of Indiana University's Kelley School of Business in Indianapolis. Age: 58 E.H. Billig, Vice Chairman of the Board of Directors. Mr. Billig has been Vice Chairman of the Board of Directors since the Company's inception in 1994. Mr. Billig has been Chairman of the Board of MSX International, Inc. since 1997, where he was also Chief Executive Officer until January 2000. He was formerly President and Chief Operating Officer of MascoTech, Inc. He is also a director of Titan Wheel International, Inc. Age: 76 Richard M. Cashin, Jr., Director. Mr. Cashin has been a director since the Company's inception in 1994. Mr. Cashin was President from 1994 to April 2000 and a Managing Director for more than five years of Citicorp Venture Capital Ltd., ("CVC"). From April 2000 to April 2001, he was a partner of Cashin Capital Partners, a private equity investment firm. Since April 2001, he has been the Chairman of One Equity Partners, the private equity arm of Bank One. In addition, Mr. Cashin serves as a director of Fairchild Semiconductor Corporation and Titan Wheel International, Inc. Age: 49 Alexander P. Coleman, Director. Mr. Coleman has been a director since 2001. Mr. Coleman is a Managing Investment Partner of Dresdner Kleinwort Benson Private Equity LLC, Dresdner Bank A.G.'s U.S. private equity arm, and a Managing Director of Dresdner Kleinwort Wasserstein. Mr. Coleman joined Dresdner Kleinwort Benson in January 1996. Mr. Coleman is a director of KMC Telecom, Inc. and Gardenburger, Inc. Age: 36 Michael A. Delaney, Director. Mr. Delaney has been a director since the Company's inception in 1994. Mr. Delaney has been a Managing Director of CVC since 1995 and a Vice President for the past six years. Mr. Delaney is Vice President and Managing Director of Court Square. He is also a director of JAC Holdings, Inc., MSX International, Inc., Great Lakes Dredge and Dock Corporation, ChipPac Inc. and Erico Corporation. Age: 48 James R. Gerrity, Director. Mr. Gerrity has been a director since the Company's inception in 1994. From 1986 to 1993, Mr. Gerrity was President and a director of Dyneer Corporation. Mr. Gerrity currently is a director of Wescor Graphics, Inc., Ballantrae Corporation, Inc., Palomar Technologies, Inc. and Flender AG. Age: 61 Robert J. Schultz, Director. Mr. Schultz became a director in 1997. Mr. Schultz retired as Vice Chairman and a member of the Board of Directors of GM in 1993. Mr. Schultz joined GM in 1955 and served as General Manger of GM's Delco Electronics Division and Group Executive of Chevrolet-Pontiac-GM of Canada. Mr. Schultz is also Chairman of the Board of Advanced Electron Beams, Inc., a director of MCT Corporation, and was Chairman of the Board of OEA, Inc. until its sale earlier last year. He is also a member of the Board of Trustees of California Institute of Technology. Age: 72 Joseph M. Silvestri, Director. Mr. Silvestri has been a director since 2001. Mr. Silvestri has been a Vice President of CVC since 1990. Mr. Silvestri is also Vice President of Court Square. Moreover, Mr. Silvestri is also a director of Triumph Group, Euramax International, and MacDermid. Age: 41 Rajesh K. Shah, Executive Vice President, Chief Financial Officer. Mr. Shah has been the Chief Financial Officer of the Company since March 2002. Prior to joining the Company, Mr. Shah was the Chief Financial Officer and Executive Vice President of Finance for Collins & Aikman Corp. since 1999, and prior to that he served as Vice President of Finance for United Technologies Automotive Division since 1994. Age: 51 70 Roderick English, Senior Vice President, Human Resources and Communications. Mr. English has been Senior Vice President of Human Resources and Communications since November 1997. Prior to that Mr. English had been Senior Vice President of Human Resources and Communications at Delco Remy America since the Company's inception in 1994. Mr. English joined the Delco Remy Division of GM in 1976 and became Plant Manager of plant 17 in 1992. Prior to that, Mr. English served as Divisional Manager of Labor Relations since 1989. Age: 51 Richard L. Keister, President, Aftermarket. Mr. Keister has been President of Aftermarket since October 2001. Prior to that, Mr. Keister was President of the Electrical Aftermarket Division since 1997. Prior to 1997, he was President of World Wide Automotive, which was founded by Mr. Keister in 1976 and acquired by the Company in 1997. Age: 57 David E. Stoll, Vice President, Treasurer and Secretary. Mr. Stoll was Vice President, Controller and Secretary since the Company's inception in 1994. During fiscal year 2000, he was elected to the position of treasurer. Prior to joining the Company, he was Vice President of Finance and Administration of Dyneer Corporation since 1987 and, prior to that, served as Corporate Controller since 1973. Age: 60 Allen R. Wilkie, Vice President and Operations Controller. Mr. Wilkie has been Vice President and Operations Controller since June 2000 and Operations Controller since March 1996. Prior to that, Mr. Wilkie served as Vice President, Controller of Ameron International, Inc. from March 1994 through March 1996. Age: 52 Patrick C. Mobouck, Vice President-Managing Director, Europe. Mr. Mobouck has been Vice President-Managing Director, Europe since July 1997. He has also been Chairman of Autovill since August 1997. Before joining the Company, Mr. Mobouck was with Monroe Auto Equipment since 1987, most recently as Managing Director-Europe, Middle East and Africa. Age: 48 Richard L. Stanley, President, Delco Remy America. Mr. Stanley has been President of Delco Remy America since November 1998. Prior to that, Mr. Stanley had been Senior Vice President, Automotive Systems since the Company's inception in 1994. Mr. Stanley joined the Delco Remy Division of GM in 1978, serving most recently as Director of Customer Programs since 1992 and as European Chief Engineer since 1988. Age 46 ITEM 11 EXECUTIVE COMPENSATION Executive Compensation The following table sets forth, for the years ending December 31, 2002 and 2001, the five-month transition period ending December 31, 2000 and the year ending July 31, 2000, the information regarding the cash compensation paid by the Company, as well as other compensation paid or accrued for that period, to each of the executive officers of the Company named below, in all capacities in which they served. 71 Summary Compensation Table
Long Term Compensation/(1)/ Annual ------------------- Compensation Securities ---------------------------- Underlying All Other Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($) ---------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Thomas J. Snyder 2002 481.2 97.9 -- 20.7/(3)/ President and Chief 2001 425.0 268.3 -- 21.2/(3)/ Executive Officer 2000/(2)/ 158.3 244.7 52,100 5.5/(3)/ 2000 350.0 387.3 7,000 17.3/(3)/ Rajesh K. Shah 2002 336.4 231.3 -- 1.8/(4)/ Executive Vice President and 2001 -- -- -- -- Chief Financial Officer 2000/(2)/ -- -- -- -- 2000 -- -- -- -- Richard L. Keister 2002 291.5 34.2 -- 8.2/(5)/ President, Aftermarket 2001 260.0 182.0 -- 10.0/(5)/ 2000/(2)/ 101.6 97.3 -- 2.1/(5)/ 2000 230.3 99.5 3,500 8.6/(5)/ Richard L. Stanley 2002 306.2 34.2 -- 10.3/(6)/ President, Delco Remy 2001 291.5 110.5 -- 10.2/(6)/ America 2000/(2)/ 117.3 143.4 17,550 1.2/(6)/ 2000 275.0 218.6 5,000 11.2/(6)/ Roderick English 2002 271.7 30.8 -- 11.4/(7)/ Senior Vice President, 2001 262.5 99.6 -- 10.4/(7)/ Human Resources and 2000/(2)/ 105.0 106.6 12,500 1.7/(7)/ Communications 2000 237.7 161.8 5,000 9.9/(7)/
(1) All options held by the executive officers and directors listed in this table were subsequently cancelled on March 14, 2001. See the Section below entitled "Stock Options" for more information. (2) For the five-month transition period ending December 31, 2000. (3) Includes the following: (i) $8,500, $9,437 and $7,778 in matching contributions under the Company's 401(k) Plan in fiscal years 2002, 2001 and 2000, respectively; and (ii) $12,166, $11,785, $5,512 and $9,542 in premiums paid under a life insurance policy in fiscal years 2002 and 2001, the five-month transition period ending December 31, 2000 and the fiscal year 2000, respectively. (4) Includes the following: (i) $1,840 in premiums paid under a life insurance policy in fiscal year 2002. (5) Includes the following: (i) $6,364, $4,658 and $3,615 in matching contributions under the Company's 401(k) Plan in fiscal years 2002, 2001 and 2000, respectively; (ii) $1,834, $1,995, $523 and $1,203 in premiums paid under a life insurance policy in fiscal years 2002 and 2001, the five-month period ending December 31, 2000 and fiscal year 2000, respectively; and (iii) $3,517, $1,315 and $3,157 in premiums paid under a disability insurance policy in fiscal year 2001, the five-month period ending December 31, 2000 and fiscal year 2000, respectively. (6) Includes the following: (i) $8,000, $8,429 and $9,216 in matching contributions under the Company's 401(k) Plan in fiscal years 2002, 2001 and 2000, respectively; and (ii) $2,262, $1,177, $1,178 and $1,958 in premiums paid under a life insurance policy in fiscal years 2002 and 2001, the five-month transition period ending December 31, 2000 and fiscal year 2000, respectively. (7) Includes the following: (i) $7,685, $7,027 and $7,007 in matching contributions under the Company's 401(k) Plan in fiscal years 2002, 2001 and 2000, respectively; and (ii) $3,752, $3,371, $1,654 and $2,925 in premiums paid under a life insurance policy in fiscal years 2002 and 2001, the five-month period ending December 31, 2000 and the fiscal year 2000, respectively. 72 Stock Options In conjunction with the going private transaction and the merger that followed, all previously existing stock options held by executive officers and directors of the Company were cancelled and both the Company's 1997 Stock-Based Incentive Compensation Plan and the Company's 1997 Non-Qualified Stock Option Plan for Non-Employee Directors were terminated. Furthermore, no options were exercised during the period from August 1, 2000 to the date of the merger. There are currently no options outstanding to purchase securities of the Company. See Item 13, "Certain Relationships and Related Transactions", for a description of other agreements entered into between the Company and its executive officers and directors as a result of the going private transaction and the merger. Retirement Plans Delco Remy America, Inc., a wholly owned subsidiary of the Company, established the Delco Remy America Salaried Retirement Plan (the "Retirement Plan") primarily to provide eligible salaried employees with a monthly pension benefit after retirement for life. As of December 31, 2002, the named executive officers of the Company have been credited with the following amounts of service under the Retirement Plan: Thomas J. Snyder - 40.4 years; and Richard L. Stanley - 24.8 years. Change of Control Agreements The Company executed change of control agreements with the following executive officers: Mr. Snyder, Mr. Shah, Mr. Stanley, Mr. English and Mr. Mobouck. These agreements entitle each of the eligible executive officers to receive payments and benefits upon the occurrence of a change of control of the Company followed by termination of the executive's employment within the two years immediately following the change of control under specified circumstances. In case of Mr. Snyder, the total payment will be equal to $2.7 million, and he will be entitled to receive continuation of medical, dental and life insurance benefits until his sixty-fifth birthday. Each eligible executive officer other than Mr. Snyder will receive a payment of $1.0 million (or if the termination occurs after the first two years following execution of the change of control agreements, his or her average compensation in the three full calendar years immediately preceding the termination of employment) and continuation of medical, dental and life insurance benefits for a period of one year after the termination of employment with the Company. Payments and other benefits received by Mr. Snyder will be subject to gross-up tax treatment so that the Company will compensate Mr. Snyder for any excise taxes applicable to payments and other benefits, including the gross-up payment, received by him upon a change of control. Payments and other benefits received by the other eligible executives will be subject to cut-back treatment so that any payments or other benefits to be received by any of them will be reduced to a level which eliminates any excise taxes. Under some circumstances, the present value of the payments and other benefits to be provided to the executives in connection with a change of control will not be deductible by the Company. Amendments to Benefit Plans As a condition to the execution of the change of control agreements, the Company required the applicable executive officers to agree to amendments to the Company's benefit plans. The Company amended the definition of "Change in Control" in the Delco Remy International, Inc. Supplemental Executive Retirement Plan (the "Executive Retirement Plan") to conform to the definition contained in the change of control agreements. In addition, the Company amended the Executive Retirement Plan to provide that, upon a change in control, the Company will not be required to place any funds in trust unless the board of directors determines in good faith that the change in control or any related or contemplated financing transaction will impair in any material respect the financial condition or creditworthiness of the Company or any other surviving successor or entity. The Company further amended the Executive Retirement Plan to remove the provision providing for accelerated vesting of benefits upon a change in control. All affected persons consented to the amendments. 73 Split-Dollar Insurance Agreements The Company entered into Collateral Assignment Split-Dollar Insurance Agreements, effective as of August 1, 2000, with certain key management employees. The employees own the life insurance policies. However, they have assigned the policies to the Company as security for the repayment of premiums paid by the Company. The Company's interest in the cash value of the policy is equal to the premium paid by the Company, and the employees have a remaining interest in the cash value. If an employee dies while the collateral assignment is in place, the Company has a right to receive a portion of the death benefit equal to the amount of the premiums previously paid by the Company, with any excess payable to designated beneficiaries of the employee. Under the agreements, the employee is provided with life insurance protection under a universal life insurance product (the "Policy"). The collateral assignment will terminate on the first to occur of the following events: . total cessation of the business of the Company; . bankruptcy, receivership or dissolution of the Company; . surrender or cancellation of the Policy by the employee; . employee entering into Competition (as defined by the agreements) with the Company or an affiliated Employer; . the delivery by the employee of a written notice terminating the agreement; . death of the employee; . termination of the employee's employment with the Company for Cause (as defined by the agreements); or . as of the date the employee turns 65 (a "Termination Event"). Upon the occurrence of any of these events other than death of an employee, the employee has an option to tender an amount equal to the amount of the premiums paid by the Company under the agreements, and upon receipt of the repayment the Company will release the assignment of the Policy by the employee. Messrs. Snyder, English and Stanley are parties to the agreements. As a condition to execution of the change of control agreements, the Company required the applicable executives to agree to amend the agreements to conform the definition of Change in Control to the definition included in the Change of Control Agreements. The Company also amended the agreements to provide that the Company's obligations to place substantial sums in trust for the benefit of the beneficiaries in connection with a Change in Control will be triggered only if the Board of Directors of the Company determines in good faith that the Change in Control or any related or contemplated financing transaction will impair in any material respect the financial condition or creditworthiness of the Company or any other surviving or successor entity. Employment Agreement The Company entered into an employment agreement with Mr. Snyder which provides for his employment until July 2003. Mr. Snyder's agreement automatically extended through July 2003 and will continue to automatically extend for successive additional 12-month periods after July 2003 until notice by either the Company or Mr. Snyder. Mr. Snyder receives an annual base salary of $481,200, subject to merit increases as determined by the Board of Directors, plus annual performance bonuses as determined by the Board of Directors. The agreement provides that Mr. Snyder may not engage in any business competitive with the Company while employed by the Company and for a period of one year thereafter. Separation Agreement The Company executed a separation agreement with Mr. Shah. If the Company terminates Mr. Shah's employment other than for cause or Mr. Shah terminates his employment for good reason, Mr. Shah is entitled to receive from the Company his accrued salary to the date of termination, his accrued pro-rata bonus to the date of termination, reimbursement for relocation expenses, twelve months of executive outplacement services, and, for eighteen months after the date of termination, his base salary at the date of termination, a bonus equal to 60% of his salary at the date of termination, and continued medical, dental and vision benefits. 74 Director Compensation Mr. Sperlich received $335,067 in directors fees during 2002 for services related to special projects (in connection with acquisitions and strategic alliances) undertaken by him at the direction of the Board of Directors in their capacity as Directors. Mr. Gerrity received $233,867 in directors fees during 2002 for services related to special projects (in connection with acquisitions and strategic alliances) undertaken by him at the direction of the Board of Directors in their capacity as Directors. During 2002, Mr. Billig, Mr. Cashin, and Mr. Schultz each received an annual fee of $40,000, and Mr. Billig, Mr. Cashin and Mr. Schultz each received a fee of $1,200 for each Board of Directors meeting attended and $1,000 for each meeting of a committee of the Board of Directors attended. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In connection with the going private transaction and the merger that followed, the Company adopted its Amended and Restated Certificate of Incorporation, which is attached hereto as Exhibit 3.1 and the terms of which are incorporated herein by reference. The Company recapitalized its capital stock into three classes of common stock, Class A, Class B and Class C, and one class of preferred stock. The Amended and Restated Certificate of Incorporation provides that the Company may issue 3,500,000 shares of preferred stock, all of which has been designated as 12% Series A Cumulative Compounding Preferred Stock. Since September 15, 2001, the preferred stock has been entitled to semi-annual dividends each September 15th and March 15th, which accrue at a rate of 12%. As of the date hereof, 2,237,257.23 shares of the Company's preferred stock were outstanding. The vote of a majority of the outstanding shares of the preferred stock is required to authorize or issue any other class or series of stock entitled to any preferences prior to the preferred stock or to amend the Amended and Restated Certificate of Incorporation if the amendment would adversely affect the rights and preferences of the holders of the preferred stock. Except as described in the immediately preceding sentence or as otherwise required by law, the preferred stock is not entitled to vote. The Amended and Restated Certificate of Incorporation provides that the Company may issue 12,001,000 shares of common stock, divided into three classes consisting of one thousand shares of Class A Common Stock, 6 million shares of Class B Common Stock, and 6 million shares of Class C Common Stock. As of the date hereof, 1,000 shares of Class A Common Stock, 2,485,337.49 shares of Class B Common Stock and 16,687 shares of Class C Common Stock were issued and outstanding. The following table sets forth as of March 15, 2003 the number and percentage of shares of each class of common stock and preferred stock beneficially owned by (i) each person or group that is known to the Company to be the beneficial owner of more than 5% of each class of Capital stock, (ii) each director and named executive officer of the Company and (iii) all directors and executive officers of the Company as a group. 75
Number and Percent of Shares -------------------------------------------------------------------------------------------------- Preferred Stock Class A Stock /(1)/ Class B Stock /(1)/ Class C Stock /(1)/ Name of Beneficial Owner Number Percent Number Percent Number Percent Number Percent -------------------------------------------------------------------------------------------------------------------------------- Citicorp Venture Capital /(2)/ Equity Partners, L.P. 399 Park Avenue New York, New York 10043 1,620,406.51 72.43% -- -- -- -- 16,687.00 100% Harney Investment Trust c/o Berkshire Hathaway Inc. 1440 Kiewit Plaza Omaha, Nebraska 68131 460,404.96 20.58% -- -- 498,098.94 20.04% -- -- Court Square Capital Limited /(3)/ 399 Park Avenue New York, New York 10043 -- -- 1,000 100% -- -- -- -- Harold K. Sperlich -- -- -- -- -- -- -- -- Thomas J. Snyder /(4)/ 9,174.56 0.41% -- -- 51,425.69 2.07% -- -- Rajesh K. Shah -- -- -- -- -- -- -- -- Roderick English 2,618.84 0.12% -- -- 14,833.25 0.60% -- -- Richard L. Keister -- -- -- -- -- -- -- -- Patrick C. Mobouck 327.36 0.01% -- -- 13,354.16 0.54% -- -- Richard Stanley 5,728.72 0.26% -- -- 19,697.73 0.79% -- -- E.H. Billig -- -- -- -- -- -- -- -- Richard M. Cashin, Jr. 8,614.61 0.39% -- -- 9,319.90 0.37% -- -- Alexander P. Coleman -- -- -- -- -- -- -- -- Michael A. Delaney -- -- -- -- -- -- -- -- James R. Gerrity /(5)/ 4,307.30 0.19% -- -- 4,659.94 0.19% -- -- Robert J. Schultz -- -- -- -- -- -- -- -- Joseph M. Silvestri -- -- -- -- -- -- -- -- All directors and executive officers as a group (13 persons) 35,535.26 1.59% -- -- 121,044.58 4.87% -- --
-------------- (1) The original holders of the voting Class A Common Stock are entitled to a number of votes equal to 51% of the total number of votes entitled to be cast by the holders collectively owning all of the Class A Common Stock and the Class B Common Stock. The holders of Class B Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Except as required by law, the holders of Class C Common Stock have no voting rights. The Class A Common is convertible into an equal number of shares of Class B Common Stock, the Class B Common Stock is convertible into an equal number of shares of Class C Common Stock and the Class C Common Stock is convertible into an equal number of shares of Class B Common Stock. (2) Citicorp Venture Capital Equity Partners, L.P. ("CVC Equity Partners") is a Delaware limited partnership managed by CVC Management LLC, a Delaware limited liability company. Citicorp Partners LLC, a Delaware limited liability company ("Citicorp Partners"), is the general manager of CVC Equity Partners. Citicorp Partners is owned 35% by Citigroup Venture Capital GP Holdings Ltd., a Delaware limited partnership ("CVC GP"), and 65% by certain investment professionals employed by Citigroup Inc., a Delaware corporation ("Citigroup"). Court Square owns all of the outstanding equity interests of CVC GP. (3) Court Square is a Delaware corporation principally engaged in the business of making leveraged acquisitions. Court Square is owned by Citicorp Banking Corporation, a Delaware corporation ("Citicorp Banking"). Citicorp, a Delaware corporation, owns all of the outstanding capital stock of Citicorp Banking. Citigroup Holdings Company, a Delaware corporation, owns all of the outstanding common stock of Citicorp. Citigroup owns all the outstanding common stock of Citigroup Holdings Company. (4) Includes 1,292.19 shares of preferred stock and 14,397.98 shares of Class B Common Stock held by Daisy Farm Limited Partnership of which Mr. Snyder is the general partner. (5) Includes 4,194 shares of Class B Common Stock and 3,876.57 shares of preferred stock and 466 shares of Class B Common Stock and 430.73 shares of preferred stock held by The James R. Gerrity Living Trust and The Susan Gerrity Living Trust, respectively. 76 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the going private transaction and the merger that followed, the Company executed the Securities Transfer, Recapitalization and Holders Agreement (the "Securities Holders Agreement") with DRI Acquisition Corporation, Court Square, DRI Group, World Equity Partners, L.P., Thomas J. Snyder, J. Timothy Gargaro, Joseph P. Felicelli, Richard L. and Sandra Stanley, Susan E. Goldy, Roderick English, Patrick C. Mobouck, Richard Keister, Daisy Farm Limited Partnership, the James R. Gerrity Living Trust dated March 6, 1990 and the Susan Gerrity Living Trust dated March 6, 1990. The Securities Holders Agreement is attached hereto as Exhibit 10.8 and the terms of the Securities Holders Agreement are incorporated herein by reference. In the descriptions of the Securities Holders Agreement, Preferred Stockholders Agreement and Registration Rights Agreement that follow, each of the parties, other than the Company, are sometimes referred to as the "Company's stockholders." According to the Securities Holders Agreement, so long as Court Square and its permitted transferees owns at least 5% of the common stock outstanding, Court Square has the right to designate observers to attend meetings of the Board of Directors of the Company. The Securities Holders Agreement contains provisions which, with certain exceptions, restrict the ability of the Company's stockholders to transfer any of the common stock or preferred stock. If holders of at least 50% of the Company's common stock approve the sale of the Company, each Company stockholder has agreed to consent to the sale and, if the sale includes the sale of stock, each Company stockholder has agreed to sell all of such stockholder's common stock on the terms and conditions approved by holders of a majority of the common stock then outstanding. Subject to some limitations, certain of the Company's shareholders may not sell any of their shares of common stock without offering the other Company stockholders a pro rata opportunity to participate in such sale. The Securities Holders Agreement also provides for certain additional restrictions on transfer of shares by the Company's stockholders, including the Company's right to repurchase certain shares from those stockholders employed by the Company, upon termination of such person's employment prior to 2006 at a formula price, and the grant of a right of first refusal in favor of the Company in the event such person elects to transfer its shares of common stock. The Company's stockholders also entered into a Preferred Stockholders Agreement (the "Preferred Stockholders Agreement") containing certain additional agreements among the Company's stockholders regarding the Company's preferred stock. Subject to some limitations, certain of the Company's shareholders may not sell any of their shares of preferred stock without offering the Company's stockholders a pro rata opportunity to participate in such sale. If holders of at least 50% of the common stock approve the sale of the Company, each Company stockholder has agreed to consent to the sale and, if the sale includes the sale of stock, each Company stockholder has agreed to sell all of such Company stockholder's preferred stock on the terms and conditions approved by holders of a majority of the Company's common stock then outstanding. The Preferred Stockholders Agreement is attached hereto as Exhibit 10.21 and the terms of the Preferred Stockholders Agreement are incorporated herein by reference. In connection with the foregoing, the Company and the Company's stockholders also entered into a Registration Rights Agreement. According to the Registration Rights Agreement, upon the written request of Court Square, or certain of its permitted transferees, the Company will prepare and file a registration statement with the Securities and Exchange Commission concerning the distribution of all or part of the shares held by such party and use its best efforts to cause such registration statement to become effective. If at any time the Company files a registration statement for common stock pursuant to a request by Court Square or otherwise, the Company will allow the other parties to the Registration Rights Agreement to have their shares of common stock (or a portion of their shares under certain circumstances) included in the registered offering of the common stock. The Company is not bound by this requirement if it is filing a registration statement on Form S-8, Form S-4 or any similar form, a registration statement filed in connection with a share exchange or an offering solely to the Company's employees or existing stockholders, or a registration statement registering a unit offering. The Company will pay the registration expenses of the selling stockholders (other than underwriting commissions, brokerage fees and transfer taxes applicable to the shares sold by such stockholders or the fees and expenses of any accountants or other representatives retained by a selling stockholder). The Registration Rights Agreement is attached hereto as Exhibit 10.9 and the terms of the Registration Rights Agreement are incorporated herein by reference. 77 In June 2001, Berkshire Hathaway Inc. ("Berkshire") purchased shares of preferred stock and Class C Common Stock of the Company from Court Square and shares of preferred stock and Class B Common Stock of the Company from World Equity Partners, L.P. In November 2001, Dresdner Kleinwort Capital Partners 2001 LP ("Dresdner") purchased shares of preferred stock and Class C Common Stock of the Company from Court Square. In connection with these transactions, the Securities Holders Agreement, the Preferred Stockholders Agreement and the Registration Rights Agreement were amended to make Berkshire and Dresdner parties to those agreements pursuant to the terms specified in such amendments. Also in connection with these transactions, Court Square agreed to vote its shares in favor of electing a designee of Dresdner to the Company's Board of Directors until December 1, 2002, provided that the designee resigns from the Board of Directors at such time. The amendments are attached hereto as Exhibits 10.27 through 10.32 and the terms thereof are incorporated herein by reference. In 2002 the Company entered into to an advisory agreement with CVC Management LLC (the "Advisor"), an affiliate of Court Square and CVC Equity Partners. Under the terms of the agreement, the Advisor is required to provide executive, management, consulting and support services to the Company and certain of its subsidiaries. The Advisor is entitled to receive an initial advisory fee of $1 million for 2002 and an advisory fee of $1 million for each year thereafter, payable in equal quarterly installments. The advisory agreement continues until December 31, 2006 and is automatically renewed from year to year thereafter unless terminated by either of the parties. The Advisor is also entitled to receive a transaction fee of $2.5 million for services provided in connection with the refinancing of the Company's senior credit facilities in 2002 and may receive additional transaction fees under the advisory agreement in amounts to be agreed upon by the parties for services provided in connection with future financings, acquisitions and divestitures The Advisor has agreed to defer payment of the initial $3.5 million payable under the agreement until June 27, 2003. ITEM 14 CONTROLS AND PROCEDURES (a) Within 90 days prior to the date of the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective in timely alerting it to material information required to be included in the Company's periodic SEC reports. (b) In addition, the Company reviewed its internal controls, and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. 78 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents have been filed as a part of this report or, where noted, incorporated by reference: 1. Financial Statements The Consolidated Financial Statements and related Notes thereto as set forth under Item 8 of this Report on Form 10-K are incorporated herein by reference. 2. Financial Statement Schedules Financial statement schedules have not been filed because they are not applicable or the required information is shown in the financial statements or the notes thereto. 3. Exhibits The following exhibits have been filed as part of this report in response to Item 14(c) of Form 10-K: (1) 2.1 Agreement and Plan of Merger dated as of February 7, 2001 by and among Court Square, DRI Acquisition LLC and the Company (2) 2.2 Amendment No. 1 to Agreement and Plan of Merger (2) 3.1 Amended and Restated Certificate of Incorporation (2) 3.2 By-laws of the Company (6) 4.1 Indenture, dated as of August 1, 1996, among the Company, certain of the Company's subsidiaries signatories thereto and National City Bank of Indiana, as trustee (7) 4.2 Indenture governing 8 5/8% Senior Notes Due 2007 among the Company, the Subsidiary Guarantors and United States Trust Company of New York, as trustee, dated December 22, 1997 (13) 4.3 Indenture governing 11% Senior Subordinated Notes Due 2009 among the Company, the Subsidiary Guarantors and First Union National Bank, as trustee, dated April 26, 2001. (6)* 10.1 Light Duty Starter Motor Supply Agreement, dated July 31, 1994, by and between Delco Remy America, Inc. ("DRA") and GM. (6) 10.2 Heavy Duty Component Supply Agreement, dated July 31, 1994, by and between DRA and GM (6) 10.3 Distribution and Supply Agreement, dated July 31, 1994, by and between DRA and GM (3) 10.4 Trademark License, dated July 31, 1994, by and among DRA, DR International, Inc. and GM (3) 10.5 Tradename License Agreement, dated July 31, 1994, by and among DRA, DR International, Inc. and GM (3) 10.6 Partnership Agreement of Delco Remy Mexico S. de R.L. de C.V., dated April 17, 1997 79 (4) 10.7 Joint Venture Agreement by and between Remy Korea Holdings, Inc. and S.C. Kim (2) 10.8 Securities Transfer, Recapitalization and Holders Agreement dated March 14, 2001 by and among the Company, DRI Acquisition Corporation, Court Square Capital Limited, World Equity Partners, L.P., DRI Group LLC and the Continuing Investors named therein (2) 10.9 Registration Rights Agreement for Common Stock dated March 14, 2001 by and among the Company, Court Square Capital Limited, World Equity Partners, L.P., DRI Group LLC and the Continuing Investors named therein (5) 10.10 Employment Agreement, dated July 31, 1994, by and between Delco Remy International, Inc. and Thomas J. Snyder (16) 10.11 Loan and Security Agreement by and among Delco Remy International, Inc. and certain Subsidiaries of Delco Remy International, Inc. named therein as Borrowers, Congress Financial Corporation (Central), as Administrative Agent and US Collateral Agent, Wachovia Bank, National Association as Documentation Agent and the Financial Institutions named therein dated June 28, 2002. (4) 10.15 Lease by and between ANDRA L.L.C. and DRA, dated February 9, 1995 (4) 10.16 Lease by and between Eagle I L.L.C. and DRA, dated August 11, 1995 (8) 10.20 Starter Motor Pricing Agreement, dated March 17, 1999, by and between DRA and GM. (2) 10.21 Preferred Stockholders Agreement dated March 14, 2001 by and among Court Square Capital Limited, World Equity Partners, L.P., DRI Group LLC and the Continuing Investors named therein (2) 10.22 Stock Purchase Warrant dated March 14, 2001 issued by the Company to World Equity Partners, L.P. (9) 10.23 Letter Agreement by and between the Company and Thomas J. Snyder, dated as of February 6, 2001 (10) 10.24 Form of Letter Agreement by and between the Company and each of J. Timothy Gargaro, Joseph P. Felicelli, Richard L. Stanley, Susan E. Goldy, Roderick English and Patrick Mobouck, each dated as of February 6, 2001 (11) 10.25 Amendment Number Two to the Delco Remy International, Inc. Supplemental Executive Retirement Plan, dated as of February 6, 2001 (12) 10.26 Form of Amendment Number Two to the Collateral Assignment Split- Dollar Insurance Agreement by and between the Company and each of Thomas J. Snyder, J. Timothy Gargaro, Joseph P. Felicelli, Richard L. Stanley, Susan E. Goldy and Roderick English (14) 10.27 Amendment No. 1 to the Securities Transfer, Recapitalization and Holders Agreement, dated June 27, 2001, by and among the Company, Court Square Capital Limited, DRI Group LLC, the Individual Investors named therein and Berkshire Hathaway Inc. (14) 10.28 Amendment No. 1 to the Registration Rights Agreement, dated June 27, 2001, by and among the Company, Court Square Capital Limited, DRI Group LLC, the Individual Investors named therein and Berkshire Hathaway Inc. 80 (14) 10.29 Amendment No. 1 to the Preferred Stockholders Agreement, dated June 27, 2001, by and among the Company, Court Square Capital Limited, DRI Group LLC, the Individual Investors named therein and Berkshire Hathaway Inc. (15) 10.30 Amendment No. 2 to the Securities Transfer, Recapitalization and Holders Agreement, dated November 29, 2001, by and among the Company, Court Square Capital Limited, DRI Group LLC, the Individual Investors named therein, Berkshire Hathaway Inc. and Dresdner Kleinwort Capital Partners 2001 LP (15) 10.31 Amendment No. 2 to the Registration Rights Agreement, dated November 29, 2001, by and among the Company, Court Square Capital Limited, DRI Group LLC, the Individual Investors named therein, Berkshire Hathaway Inc. and Dresdner Kleinwort Capital Partners 2001 LP (15) 10.32 Amendment No. 2 to the Preferred Stockholders Agreement, dated November 29, 2001, by and among the Company, Court Square Capital Limited, DRI Group LLC, the Individual Investors named therein, Berkshire Hathaway Inc. and Dresdner Kleinwort Capital Partners 2001 LP 10.33 Letter Agreement dated March 18, 2002 by and between the Company and Rajesh K. Shah 10.34 Separation Agreement and Release dated March 18, 2002 by and between the Company and Rajesh K. Shah 10.35 Advisory Agreement dated December 10, 2002 by and among the Company, certain of the Company's subsidiaries and CVC Management LLC 10.36 Side Letter Agreement dated December 10, 2002 by and among the Company, certain of the Company's subsidiaries and CVC Management LLC (15) 21 Subsidiaries of the Registrant * Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (1) Incorporated by reference to Exhibit (a)(8) to Amendment No. 1 to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on February 9, 2001 (2) Incorporated by reference to the Exhibit of the same number to the Company's Form 10-K for the transition period from August 1, 2000 to December 31, 2000 filed by the Company on March 30, 2001 (3) Incorporated by reference to the Exhibit of the same number to the Registration Statement on Form S-1 previously filed by the Company on October 10, 1997, registering the issuance of the Company's Class A Common Stock, par value $.01 per share (the "Equity Registration Statement") (4) Incorporated by reference to the Exhibit of the same number to Amendment No. 1 to the Equity Registration Statement which was filed by the Company on October 22, 1997 (5) Incorporated by reference to the Exhibit of the same number to Amendment No. 2 to the Equity Registration Statement which was filed by the Company on November 21, 1997 81 (6) Incorporated by reference to the Exhibit of the same number to Amendment No. 3 to the Equity Registration Statement which was filed by the Company on November 26, 1997 (7) Incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended January 31, 1998 (8) Incorporated by reference to Exhibit 10.20 to the Company's Form 10-K for the year ended July 31, 1999 (9) Incorporated by reference to Exhibit (e)(4) to Amendment No. 1 to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on February 9, 2001 (10) Incorporated by reference to Exhibit (e)(5) to Amendment No. 1 to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on February 9, 2001 (11) Incorporated by reference to Exhibit (e)(6) to Amendment No. 1 to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on February 9, 2001 (12) Incorporated by reference to Exhibit (e)(7) to Amendment No. 1 to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on February 9, 2001 (13) Incorporated by reference to the Exhibit of the same number to the Registration Statement on Form S-4 previously filed by the Company on July 20, 2001. (14) Incorporated by reference to the Exhibit of the same number to Amendment No. 1 to the Registration Statement on Form S-4 filed by the Company on July 31, 2001 (15) Incorporated by reference to the Exhibit of the same number to the Company's Form 10-K for the year ended December 31, 2001. (16) Incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated July 3, 2002. (b) Reports on Form 8-K: None. 82 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. DELCO REMY INTERNATIONAL, INC. By: /S/ Thomas J. Snyder ------------------------------- Thomas J. Snyder President, Chief Executive Officer and Director Date: March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. By: /S/ Harold K. Sperlich By: /S/ Thomas J. Snyder ----------------------------- ---------------------------------- Harold K. Sperlich Thomas J. Snyder Chairman of the Board President, Chief Executive Officer and Director (Principal Executive Officer) By: /S/ Rajesh K. Shah By: /S/ Allen R. Wilkie ----------------------------- ---------------------------------- Rajesh K. Shah Allen R. Wilkie Executive Vice President and Vice President and Chief Financial Officer Operations Controller (Principal Financial Officer) (Principal Accounting Officer) By: /S/ E.H. Billig ----------------------------- E.H. Billig Vice Chairman of the Board of Directors Date: March 28, 2003 By: ----------------------------- Richard M. Cashin, Jr. Director By: /S/ Alexander P. Coleman ----------------------------- Alexander P. Coleman Director By: /S/ Michael A. Delaney ----------------------------- Michael A. Delaney Director By: /S/ James R. Gerrity ----------------------------- James R. Gerrity Director By: /S/ Robert J. Schultz ----------------------------- Robert J. Schultz Director By: /S/ Joseph M. Silvestri ----------------------------- Joseph M. Silvestri Director 83 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE EXCHANGE ACT. (a) (1) No annual report is provided to the noteholders other than copies of Registrant's Annual Report on Form 10-K. (a) (2) No proxy statement, form of proxy or other proxy soliciting material has been sent to more than 10 of the Registrant's security holders with respect to any annual or other meeting of Registrant's security holders. 84 CERTIFICATIONS I, Thomas J. Snyder, certify that: 1. I have reviewed this annual report on Form 10-K of Delco Remy International, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether, or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Thomas J. Snyder -------------------- Thomas J. Snyder President and Chief Executive Officer 85 CERTIFICATIONS I, Rajesh K. Shah, certify that: 1. I have reviewed this annual report on Form 10-K of Delco Remy International, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether, or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Rajesh K. Shah -------------------------------- Rajesh K. Shah Executive Vice President and Chief Financial Officer 86