-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qmj1dg5IYjtNjy6o6MOxqREpq2GTGxG/sqMg8Qbks/fLB4bN80AcPm4hG+40fLCX G5lBoDc/a1UM6AQH7dPpqQ== 0001021408-02-007807.txt : 20020530 0001021408-02-007807.hdr.sgml : 20020530 20020530150319 ACCESSION NUMBER: 0001021408-02-007807 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELCO REMY INTERNATIONAL INC CENTRAL INDEX KEY: 0001046859 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 351909253 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13683 FILM NUMBER: 02666191 BUSINESS ADDRESS: STREET 1: 2902 ENTERPRISE DRIVE CITY: ANDERSON STATE: IN ZIP: 46013 BUSINESS PHONE: 7657786499 MAIL ADDRESS: STREET 1: 2902 ENTERPRISE DRIVE CITY: ANDERSON STATE: IN ZIP: 46013 10-K/A 1 d10ka.txt FORM 10-K/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 1 to Form 10-K originally filed April 1, 2002 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For the Fiscal Year Ended December 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 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) TITLE OF EACH SECURITY: 8 5/8% Senior Notes Due 2007 10 5/8% Senior Subordinated Notes Due 2006 11% Senior Subordinated Notes Due 2009 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] STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT. 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, 2002 ----------------- Common Stock -- Class A 1,000 Common Stock -- Class B 2,497,337.49 Common Stock -- Class C 16,687 DOCUMENTS INCORPORATED BY REFERENCE: None This amendment reflects a change in the classification of dividends on preferred stock presented in the Consolidated Statement of Stockholders' Equity for the twelve month period ended December 31, 2001 included under Item 8. 1 DELCO REMY INTERNATIONAL, INC. FORM 10-K DECEMBER 31, 2001 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 23 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 63 - ------------------------------------------------------------------------------------------------------------------------ PART III - ------------------------------------------------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant 64 Item 11. Executive Compensation 66 Item 12. Security Ownership of Certain Beneficial Owners and Management 70 Item 13. Certain Relationships and Related Transactions 71 - ------------------------------------------------------------------------------------------------------------------------ PART IV - ------------------------------------------------------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 74 SIGNATURES 77
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, traction control systems 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 North America 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, Caterpillar, Delphi, Autozone, Cummins, PACCAR, O'Reilly, Volvo Trucks, Mack, Pep Boys and NAPA. Since the Company's separation from GM in 1994, the Company has successfully acquired and integrated 17 strategic businesses and entered into seven joint ventures. These acquisitions and joint ventures have enabled the Company to broaden its product line, expand its manufacturing and remanufacturing capability, extend its participation in international markets and increase 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 75% in fiscal year 2001. 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 96% in fiscal year 2001. The Company changed its fiscal year 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 2001 pertain to years ending on July 31 of such year. 3 GOING PRIVATE TRANSACTION 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 Exchange Act. ACQUISITIONS On June 28, 2001, the Company acquired the North American remanufacturing business of Mazda North American Operations for approximately $17.1 million, including fees and expenses and excluding future contingent payments. 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. On May 4, 2001, the Company completed the acquisition of 100% of the stock of Auto Matic Transmission International A/S ("AMT") and its wholly-owned subsidiary, Mr. Transmission ApS., for approximately $0.5 million. AMT is based in Soborg, which is a suburb of Copenhagen, Denmark. AMT will expand the Company's existing business of remanufacturing automatic transmissions for passenger cars and commercial vehicles. On February 12, 2001, the Company expanded its aftermarket product line by acquiring the business and assets of XL Component Distribution Limited ("XL") for approximately $2.4 million. Since 1985, XL, with headquarters in Droitwich, Worcestershire, England, has been involved in the remanufacturing, packaging and distribution of steering racks, brake calipers, ignition distributors, ignition leads, transmission components and rotating electrics. These products are distributed under the XL brand, with the exception of rotating electrics, which are branded under the Autostart name. 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 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. Remanufacturing is a process through which cores 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 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 either through an OEM parts organization (e.g., GM Service Parts Operations ("GM SPO"), Ford Parts & Service, Chrysler Mopar and Navistar) or directly from an OEM-authorized remanufacturer; . retail automotive parts chains and mass merchandisers; and . wholesale distributors and jobbers who supply independent service stations, specialty and general repair shops, farm equipment dealers, car dealers and small retailers. 4 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 product 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 and . medium and heavy duty truck and engine manufacturers and other heavy duty vehicle manufacturers. 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 automate and leverage global purchasing capabilities. 5 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 year ended December 31, 2001, the five months ended December 31, 2000 and the two prior fiscal years ended July 31, 2000 and 1999*:
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ----------------------- Product Categories 2001 2000 2000 1999 ------------------------------------------------------- Electrical systems 70.4% 76.2% 78.7% 83.2% Powertrain/drivetrain 23.6 17.5 17.8 15.7 Other 6.0 6.3 3.5 1.1 ------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% =======================================================
* Reference is 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 all cars and trucks manufactured by GM in North America (except for its Saturn and Geo divisions). 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. With the Company's acquisition of M&M Knopf Auto Parts, Inc. ("M&M Knopf") on March 10, 2000, the Company expanded its role as a provider of core acquisition services. Products within the powertrain/drivetrain category include gas, diesel and marine engines, fuel injectors, injection pumps and turbo chargers (fuel systems), transmissions, torque converters, water pumps, rack and pinions, power steering pumps, gears and clutches, and traction control systems. The Company produces traction control systems for use in construction, industrial and agricultural equipment and in medium duty trucks. The traction control systems business combines valuable product engineering skills with strong machining and fabrication capabilities to manufacture products with custom designed applications. 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, Caterpillar, Delphi, Autozone, Cummins, PACCAR, O'Reilly, Volvo Trucks, Mack, Pep Boys and NAPA. The Company has long-term agreements, with terms typically ranging from three to five years, to supply heavy duty starters and alternators to GM and PACCAR. Total sales to GM and related affiliates accounted for approximately 24.5%, of which approximately 17.2% are OEM sales, and sales to Navistar accounted for approximately 11.1% of the Company's sales in 2001. 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 6 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 starters 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. 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. Until July 1998, the Company had a long-term contract with GM to distribute exclusively the Company's heavy duty aftermarket products. The Company and GM have entered into an amendment to that agreement which is continuously renewable on an annual basis for non-exclusive distribution of heavy duty products to the independent aftermarket. As part of this agreement, heavy duty replacement parts will continue to be supplied to the independent aftermarket through existing AC Delco distributors and newly appointed Delco Remy distributors. As a result of this agreement, the Company is developing a distribution network of independent warehouse distributors to expand the sales volume previously covered by the expired agreement for heavy duty aftermarket product distribution. The Company expects that it will be able to expand its market share through this more direct channel of distribution. Although the Company expects that its automotive and heavy duty products will remain competitive throughout the term of the agreements with GM, it cannot be sure that GM will not develop alternative sources for those components and purchase some or all of its requirements from these sources prior to or following the expiration of the agreements. 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 North American automotive market, the Company's principal competitors include Denso, Valeo, Mitsubishi, Bosch, Visteon, Rayloc, Units Parts and Motorcar Parts & Accessories. 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 North America and in Europe. 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. 7 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 7% over the next five years. Currently, the Company's manufacturing base includes a presence in nine 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: . an integrated starter and alternator product scheduled for production in GM vehicles beginning in 2004; . 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. PATENTS, TRADEMARKS AND LICENSES Pursuant to a Trademark 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. 8 The Company owns and 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 14 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. RAW MATERIALS Principal raw materials for the Company's business include bare copper strap, insulated copper, aluminum castings, forgings, outer frames, nomex paper, steel coils, steel bars, copper tube, copper wire, gray iron castings, ductile iron castings, copper cross-section coils, magnets, steel shafts, steel cores, steel wire and molding material. 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 and GM have entered into a long-term worldwide purchasing support agreement that allows the Company to purchase copper wire and steel, which are used in the manufacture of starters sold to GM, at prices that the Company believes generally to be lower than those that would otherwise be obtainable by the Company. This agreement expires on July 31, 2004, or earlier, upon termination of the automotive and heavy duty supply OEM agreements between the Company and GM. 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, 2001, the Company employed 7,422 people, 1,938 of whom were salaried and administrative employees and 5,484 of whom were hourly employees. Of the Company's hourly employees, 25% are represented by unions. In the United States, 550 of the Company's hourly workers are represented by the United Auto Workers Union (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. In addition, 42 of the Company's hourly employees are represented by the International Brotherhood of Teamsters (the "Teamsters"). The agreement between the Teamsters and the Company expires on August 31, 2003. As of December 31, 2001, 52 of the Company's 151 Canadian hourly employees are represented by the Canadian Auto Workers Union and 8 are represented by the United Steel Workers Union. The agreements with these unions expire in November 2002 and December 2002, respectively. As of December 31, 2001, approximately 170 of Delco Remy Hungary's 388 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, 2001, approximately 542 of Elmot's 649 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 has entered into a joint venture with Continental AG for the joint industrialization of the Integrated Starter Alternator Damper motor in Europe. This new technology combines the starter and alternator functions in one compact, high performance unit integrated between the engine and gearbox. The Company also 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. Consistent with its strategy to introduce technologically advanced and improved products, the Company spent approximately $15.5 million in 2001, approximately $7.2 million in the five month period ended December 31, 2000 and approximately $16.3 million and $13.5 million in fiscal years 2000 and 1999, 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 14 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 its 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. In connection with those reviews, the Remy Reman facilities in Mississippi and the World Wide Automotive facility in Virginia identified certain possible violations of Environmental Law of which they have notified the Environmental Protection Agency ("EPA") and/or the applicable state agencies under federal or state voluntary audit disclosure rules, and the subsidiaries have taken or are taking steps to correct the violations. The Company does not believe that the costs of the matters will have a material adverse effect on the Company's results of operations, business or financial condition. 10 Based on the Company's experience to date, the Company believes that the future costs 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 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 is implementing modifications to eliminate 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 Meridian, Mississippi facility and in the soil and groundwater at the 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 ("IDEM"), 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 effect 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 Investments, World Wide Automotive, Ballantrae, Lucas Varity, Electro Diesel Rebuild, Electro Rebuild Tunisia, Atlantic Reman Limited, Williams Technologies, Elmot, Mazda, PAS and M&M 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. 11 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. Franklin Power Co., Inc. in Franklin, Indiana has been undergoing a RCRA site investigation and clean-up of volatile organic compounds ("VOCs") 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. 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, 2001.
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 Leased Bay Springs, MS 1 Manufacturing Leased Brooklyn, NY 2 Warehouse Leased Brusque, Brazil 1 Manufacturing Leased Budapest, Hungary 1 Office Leased Budapest, Hungary 1 Warehouse Owned Buffalo, NY 2 Warehouse Leased Chantilly, VA 1 Manufacturing Leased Cradler Health, United Kingdom 1 Manufacturing Leased Dallas, TX 1 Manufacturing/Office Leased Droitwick, Worcestshire, United Kingdom 1 Warehouse/Office Leased Edinburgh, IN 1 Manufacturing Leased Edmonton, Canada 2 Manufacturing Leased Findlay, OH 1 Manufacturing Leased Flint, MI 1 Warehouse Leased
12
Number Location Of Facilities Use Owned/Leased - ------------------------------------------------------------------------------------------------------------------------- Fort Wayne, IN 1 Office Leased Fradley, West Midland, United Kingdom 1 Manufacturing Leased Franklin, IN 3 Manufacturing Owned Hancock, MD 1 Warehouse Leased Haverlee, United Kingdom 1 Office Leased Heidelberg, MS 2 Manufacturing Leased Heist Op Den Berg, Belgium 1 Office Leased Holbrook, NY 1 Warehouse Leased Indaiatuba, Brazil 1 Manufacturing Leased Indianapolis, IN 3 Manufacturing Leased Jemmel, Tunisia 1 Manufacturing Leased Kaleva, IN 1 Manufacturing Leased Kearny, NJ 1 Manufacturing Leased Kings Winford, Leicester, United Kingdom 1 Manufacturing Leased Kyoungnam, South Korea 2 Manufacturing Leased Laredo, TX 1 Warehouse Leased Lavant, West Sussex, United Kingdom 1 Manufacturing Leased Mansfield, TX 1 Manufacturing Leased Marion, MI 1 Manufacturing Leased Memphis, TN 1 Warehouse Leased Meridian, MS 3 Manufacturing/Warehouse Leased Mezokovesd, Hungary 1 Manufacturing Owned Miskolc, Hungary 1 Manufacturing Leased Moncton, Canada 1 Manufacturing Leased North Kansas City, MO 2 Manufacturing Leased Peru, IN 2 Manufacturing Leased Philadelphia, PA 2 Warehouse Leased Piscataway, NJ 1 Office/Warehouse Leased Plainfield, IN 1 Warehouse Leased Raleigh, MS 3 Manufacturing Leased/Owned Reed City, MI 3 Manufacturing/Warehouse Leased Ridgeville, SC 1 Manufacturing Leased San Luis Potosi, Mexico 4 Manufacturing Leased Saskatoon, Canada 1 Manufacturing Leased Seoul, South Korea 1 Office Leased Sligo, Ireland 1 Manufacturing Leased Spartanburg, SC 1 Warehouse Leased St. Laurent, Canada 1 Warehouse Leased Summerville, SC 5 Manufacturing/Warehouse Leased Swidnica, Poland 1 Manufacturing Leased Sylvarena, MS 2 Manufacturing Leased Taylorsville, MS 1 Manufacturing Leased Toledo, OH 1 Retail Leased Toronto, Canada 1 Manufacturing/Warehouse Leased Troy, MI 1 Office Leased Warren, MI 1 Manufacturing Owned Winchester, VA 1 Office/Distribution Leased Winnepeg, Canada 2 Manufacturing Leased/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 ("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 certain of the agreements alleging that RMH failed to conduct the business of the partnership as contemplated therein. In August 2001, GCID instituted an arbitration proceeding before the American Arbitration Association seeking damages for the alleged breaches of certain of the agreements between the parties. RMH has denied any such breaches. RMH, GCID and affiliates of GCID continue to maintain an ongoing relationship. On March 11, 2002, GCID filed an application to file a First Amended Arbitration Demand adding additional claims and parties, including DRM, Remy Componentes, S. de R.L. de C.V., an indirect subsidiary of the Company, and Delco Remy America, Inc., a wholly owned subsidiary of the Company (together with RMH, the "Named Parties"). The First Amended Arbitration Demand seeks damages for breach of fiduciary duty, breaches of contracts between and among the various parties, and tortious interference with contractual relations. The damages include a claim for the $13,000,000 termination payment and a claim for $17,000,000 for alleged breach of a Services Agreement between DRM, Remy Componentes and GCI Services, S.A. de C.V. ("Services"), an affiliate of GCID, pursuant to which Services provides labor to the partnership. The Company disputes all the claims alleged in the First Amended Arbitration Demand and denies any liability for damages to GCID or any of its affiliates. Services 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. On March 26, 2002, the Company filed an Objection to the Application to File a First Amended Arbitration Demand, wherein the Company maintained that the arbitration panel lacks jurisdiction over certain of the claims asserted and certain of the Named Parties and that GCID does not have standing to assert certain of those claims. On March 27, 2002, the arbitration panel set a discovery schedule and scheduled the arbitration hearing for November 4, 2002 through November 8, 2002. 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. Remy Reman and World Wide Automotive, subsidiaries of the Company, have identified certain possible violations of Environmental Law regarding air emissions at the Remy Reman facilities in Mississippi and the World Wide Automotive facility in Virginia. The subsidiaries have notified the EPA and/or the applicable state agencies under federal or state voluntary audit disclosure rules regarding these violations, and they have taken or are taking steps to correct the violations. Remy Reman has been informed that the state environmental agency is contemplating a proceeding for the Mississipi facilities (by issuing a notice of violation), and given the nature of the World Wide Automotove violations in Virginia, a proceeding may be initiated at that facility as well. We are unable at this time to evaluate what penalties, if any will be imposed or whether they 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, 2001. 14 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Upon completion of the going private transaction with Court Square and the subsequent merger that eliminated the remaining common stock not owned by Court Square, 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 (the "Exchange Act"). 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, 2002 were as follows: Class A Common Stock 1 Class B Common Stock 15 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 senior subordinated notes. ITEM 6 SELECTED FINANCIAL DATA The following table presents selected consolidated financial data of the Company for fiscal years ending July 31, 1997 through 2000, the five month transition period ended December 31, 2000, and fiscal year ended December 31, 2001.
Five Months Ended Year Ended December 31 Year Ended July 31 December 31 ------------------------------------------------------------------------ 2001 2000 1999 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- (Unaudited) (In thousands except per share data) Net sales $1,053,452 $442,737 $446,806 $1,091,097 $953,706 $815,313 $689,787 Income (loss) from continuing operations(a) (72,647) 9,699 11,246 12,418 28,346 (2,187) (10,263) Total assets 947,405 924,470 816,757 889,240 782,663 684,997 570,569 Long-term obligations and redeemable preferred stock 593,656 519,284 447,475 484,270 434,931 393,806 379,332 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, 1998 and 1997 include restructuring charges of $30,616, $22,190, $16,227 and $20,700, respectively, after income taxes. Results for the year ended December 31, 2001 include special charges totaling $30,405 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 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 and five months ended December 31, 2000 have been provided for management's discussion and analysis of results of operations. CRITICAL ACCOUNTING POLICIES It is important to understand the Company's significant accounting policies in order to understand its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results are likely to differ from those estimates, but the Company does not believe such differences will materially affect the Company's financial position or results of operations for the periods presented in this report. We believe the critical accounting policies that are most important to the presentation of the Company's financial statements and require the most difficult, subjective and complex judgments are discussed in Note 2 to the consolidated financial statements. 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. 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 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 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 M&M Knopf, one of the world's largest automotive components recovery and exchange companies, will provide 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. In June 2000, the Company signed a new two-year extension to the previous four-year master agreement with the UAW. Wage and benefit increases under the agreement generally follow the same pattern as the prior agreement and, as a result, the Company will experience higher wage and benefit rates in future periods. Under provisions of the 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. 16 Since 1994, the Company has completed seventeen strategic acquisitions and entered into seven joint ventures. These acquisitions and joint ventures 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 75% in 2001. Sales outside of the Class 8 heavy duty truck market have increased from 87% of total sales in fiscal year 1995 to 96% in 2001. GM accounted for about 42% of the Company's total OEM sales in 2001. GM SPO accounted for about 12% of total after-market sales in 2001. 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 for starters and alternators from alternative sources. In addition, GM SPO has been designated as an exclusive distributor of a significant amount of the Company's automotive and as a distributor of the Company's heavy duty aftermarket products. GM SPO has agreed to provide the Company with purchasing support, which enables the Company to obtain raw materials at competitive prices. 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 continuously renewable on an annual basis for the Company's heavy duty aftermarket products. 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 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 was paid in the fourth quarter of 2001 and $15.1 million, $4.6 million and $4.5 million are estimated to be paid in 2002, 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 one-time charge of $35.2 million was recorded in the fourth quarter of fiscal year 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 and $3.1 million in fiscal 2000, the five months ended December 31, 2000 and the year 2001, respectively. Payments are expected to approximate $2.9 million and $0.1 million in 2002 and 2003, respectively. 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 Months Ended Ended Ended Ended December 31 Year Ended July 31 Dec. 31 Dec. 31 Dec. 31 ---------------------------------- 2000 2001 2000 2000 1999 2000 1999 ----------------------------------------------------------------- $ in millions (unaudited) Net sales $1,087.0 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold 861.3 83.3 79.2 80.3 79.8 79.0 80.8 Special charges-cost of goods sold -- 2.1 -- -- -- -- -- ----------------------------------------------------------------- Gross profit 225.7 14.6 20.8 19.7 20.2 21.0 19.2 Selling, general and administrative expenses 106.8 10.0 9.8 10.0 10.2 9.9 9.3 Special charges-SG&A -- 1.6 -- -- -- -- -- Amortization of goodwill and intangibles 6.2 0.7 0.6 0.6 0.5 0.6 0.6 Restructuring charges 35.2 3.7 3.3 -- -- 3.2 -- ----------------------------------------------------------------- Operating income (loss) 77.5 (1.4) 7.1 9.1 9.5 7.3 9.3 Interest expense and other non-operating items (50.2) (6.0) (4.6) (4.8) (4.4) (4.5) (4.8) ----------------------------------------------------------------- Income (loss) before income taxes (benefit), minority interest in income of subsidiaries, income (loss) from unconsolidated joint ventures and extraordinary item 27.3 (7.4) 2.5 4.3 5.1 2.8 4.5 Income taxes (benefit) 8.9 (1.6) 0.8 1.4 1.9 1.1 1.7 Minority interest in income of subsidiaries (6.7) (0.9) (0.6) (0.6) (0.7) (0.6) (0.4) Income (loss) from unconsolidated joint ventures (0.8) (0.3) (0.1) (0.1) -- -- 0.6 ----------------------------------------------------------------- Income (loss) before extraordinary item 10.9 (7.0) 1.0 2.2 2.5 1.1 3.0 Extraordinary item: Gain on early extinguishment of debt, net of tax -- 0.1 -- -- -- -- -- ----------------------------------------------------------------- Net income (loss) $ 10.9 (6.9)% 1.0% 2.2% 2.5% 1.1% 3.0% =================================================================
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 In 2001, the Company recorded special charges totaling $38.8 million, $21.6 million of which was reported as a deduction to gross profit and $17.2 million of which was charged to 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 OE alternators. The design and production issues, which caused the unusually high level of claims, have been corrected. The special warranty charge includes $8.2 million for claims in 2001 and $5.6 million for anticipated claims in 2002 and 2003. An additional $7.8 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. The $17.2 million charged to operating expenses consists 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 Automotive Systems Corporation. Net Sales. Net sales of $1,053.5 million declined $33.6 million, or 3.1%, due to reduced orders from GM and other customers in the OEM automotive products market ($66.7 million), lower demand in the heavy duty OEM market ($56.3 million) and lower sales by M&M Knopf and other ($7.8 million). These factors were partially offset by sales of previously consigned inventory ($40.0 million), the effect of the acquisitions of XL, Mazda and AMT in 2001 and Knopf and Elmot in 2000 ($37.4 million) and higher demand for aftermarket powertrain/drivetrain and electrical products ($19.8 million). Gross Profit. Gross profit of $154.2 million declined $71.5 million, or 31.7%, in 2001 from $225.7 million in 2000. Excluding the special charges of $21.6 million discussed above, gross profit was $175.8 million in 2001, down $49.9 million from 2000, and as a percentage of sales was 16.7% versus 20.8% in 2000. This year over year decline was due to lower sales volume, partially offset by productivity improvements in the OEM automotive market ($19.2 million), lower product mix and fixed manufacturing leverage, partially offset by higher volume in the powertrain/drivetrain aftermarket ($11.8 million), lower volume offset by improved productivity in the heavy duty OEM market ($10.8 million), reduced fixed manufacturing leverage in the electrical aftermarket ($9.0 million), and reduced third party core sales ($6.5 million). These factors were partially offset by the effect of acquisitions in 2001 and 2000 ($7.4 million). 18 Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses declined $0.9 million, or 0.9%, and as a percentage of net sales were 10.0% in 2001 compared with 9.8% in 2000. Cost reduction efforts were mostly offset by the effect of 2001 acquisitions. Operating Income. An operating loss of $14.9 million in 2001 compares with operating income of $77.5 million in 2000. Excluding restructuring and special charges, operating income of $63.1 million declined $49.7 million, or 44.1%, from $112.8 million in 2000, and as a percentage of sales was 6.0% in 2001 compared with 10.4% in 2000. These declines were due primarily to the sales volume issues discussed above. Interest Expense. Interest expense increased $10.0 million, or 19.6%, in 2001 due to higher levels of debt to fund operations ($3.9 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). Non-operating Income. Non-operating income of $1.8 million in 2001 consisted primarily of net foreign currency transaction gains. Non-operating income of $1.8 million in 2000 included net foreign currency transaction gains, primarily in Korea ($1.2 million) and a business dissolution fee from a customer ($0.6 million). Income Taxes. The Company's consolidated effective income tax rate was 21.7% in 2001 compared with 32.8% in 2000. At December 31, 2001, the Company had unrecognized tax net operating loss carryovers, research credits and alternative minimum tax credits totaling approximately $45.0 million. 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. Net Income (Loss). The net loss of $72.6 million in 2001 compares with net income of $10.9 million in 2000. This decline reflects the lower sales volume and unusual charges discussed above. Excluding these items, the Company's net loss in 2001 was $11.6 million. FIVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO FIVE MONTHS ENDED DECEMBER 31, 1999 Net Sales. Net sales of $442.7 million declined $4.1 million, or 0.9%, due to lower demand from customers in the heavy duty OEM market ($23.6 million), reduced orders from GM and other customers in the OEM automotive products market ($4.7 million) and lower demand for powertrain/drivetrain products in the aftermarket ($3.1 million). These factors were mostly offset by sales of M&M Knopf ($23.9 million), which was acquired in March 2000, and increased volume in the electrical products aftermarket ($3.4 million). Gross Profit. Gross profit of $87.2 million declined $3.2 million, or 3.6%, and as a percentage of sales declined to 19.7% in the five month period of 2000 from 20.2% in the comparable period of 1999. The decline in gross profit was due to lower volume and product mix in the heavy duty OEM market ($9.4 million), lower volume in the powertrain/drivetrain aftermarket ($1.8 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 the June 2000 manufacturing realignment. Gross profit was favorably impacted by increased volume in the electrical aftermarket ($5.3 million) and the acquisition of M&M Knopf ($4.1 million). The decline in gross profit as a percentage of sales reflects the effect of lower volume on fixed manufacturing costs and unfavorable product mix, largely offset by cost improvements throughout the Company. Selling, General and Administrative Expenses. SG&A expenses declined $1.3 million, or 2.9%, and as a percentage of sales improved from 10.2% in 1999 to 10.0% in 2000. The realization of cost reductions associated with the June 2000 realignment were partially offset by costs associated with the acquisition of M&M Knopf. Operating Income. Operating income of $40.5 million declined $2.1 million, or 4.8%, from $42.5 million in the five-month period of 1999. This decrease reflects the sales volume, product mix and cost issues discussed above. Interest Expense. Interest expense increased $2.1 million, or 10.9%. This increase was due primarily to higher levels of debt incurred to finance acquisitions ($2.1 million) and higher rates reflecting increases by the Federal Reserve. Non-operating Income. Non-operating income in the five-month period of 2000 included net foreign currency transaction gains, primarily in Korea ($1.2 million) and a business disolution fee from a customer ($0.6 million). Income Taxes. The Company's consolidated effective income tax rate of 32.0% in the five-month period ended December 31, 2000 compares with 37.9% in the comparable period of 1999. This decrease reflects implementation of various tax planning initiatives and acquisitions of foreign subsidiaries with lower rates. 19 Net Income. Net income of $9.7 million compares with $11.2 million. This decline reflects lower sales volume, partially offset by cost improvements, non- operating income and the lower effective income tax rate. FISCAL YEAR ENDED JULY 31, 2000 COMPARED TO FISCAL YEAR ENDED JULY 31, 1999 Net Sales. Net sales of $1,091.1 million increased $137.4 million, or 14.4%, due primarily to the effect of fiscal year 2000 and 1999 acquisitions ($93.1 million) and increased demand for electrical and powertrain/drivetrain products in the aftermarket ($26.5 million) and automotive products in the OEM market ($17.8 million). Sales in the heavy duty OEM market were down marginally due to lower customer production. Price increases did not have a significant effect on year-over-year sales as the Company continued to face price pressures in most of its markets. Gross Profit. Gross profit of $228.9 million increased $46.1 million, or 25.2%, and as a percentage of sales improved from 19.2% in 1999 to 21.0% in 2000. The increase in gross profit was due primarily to acquisitions ($30.7 million) and sales growth in the electrical aftermarket ($13.6 million) and automotive OEM market ($7.1 million), partially offset by lower demand and margins in the heavy duty OEM market ($4.8 million). The improvement in gross profit as a percentage of sales was due to the integration of strategic acquisitions, productivity improvements realized from lean manufacturing initiatives and the leveraging of higher production volume on fixed costs. Selling, General and Administrative Expenses. SG&A expenses increased $19.3 million, or 21.7%, and as a percentage of net sales were 9.9% in fiscal 2000 compared to 9.3% in fiscal 1999. These increases were the result of acquisitions and costs related to implementation of enterprise-wide systems. Operating Income. Operating income of $79.6 million declined $9.2 million, or 10.4%, from $88.8 million in 1999. Excluding the effect of the non-recurring charge of $35.2 million in 2000, operating income increased $26.0 million, or 29.3%, and as a percentage of sales improved from 9.3% in 1999 to 10.5% in 2000. This increase reflects the sales growth, gross margin improvement and SG&A expense issues discussed above. Interest Expense. Interest expense increased $3.3 million, or 7.2%, in fiscal year 2000. This increase was due primarily to higher average levels of debt incurred to finance acquisitions ($2.7 million) and higher rates reflecting increases by the Federal Reserve. Income Taxes. The Company's consolidated effective income tax rate of 37.0% in fiscal year 2000 compares with 38.0% reported in fiscal year 1999. This decrease reflects implementation of various tax planning initiatives and acquisitions of foreign subsidiaries with lower rates. Minority Interest in Income of Subsidiaries. Minority interests' share of earnings of the Company's consolidated subsidiaries were $6.7 million in 2000 compared with $3.9 million in 1999. This increase reflects the consolidation of Delco Remy Korea effective in the fourth quarter of 1999. Income (Loss) From Unconsolidated Joint Ventures. The loss of $0.4 million in 2000 compares to income of $5.4 million in 1999. This change reflects the consolidation of Delco Remy Korea, which was previously accounted for under the equity method. Net Income. Net income of $12.4 million compares with $28.3 million. Excluding the after-tax effect of the non-recurring charge, net income of $34.6 million, or $1.33 per share, increased 22.1% and 22.0%, respectively. 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. Cash interest payments are expected to approximate $67.9 million in 2002. Long-term liquidity requirements include principal payments of long-term debt and the funding of acquisitions. The Company's principal payments on long-term debt and capital lease obligations are presented in Note 6 to Consolidated Financial Statements. The Company's principal sources of cash to fund its short-term liquidity needs consist of cash generated by operations and borrowings under the Senior Credit Facility. At December 31, 2001, borrowings under the Senior Credit Facility were $117.1 million, leaving $71.0 million unused and approximately $22.0 million available under the $200 million facility, 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 M&M Knopf, Delco Remy Mexico, Delco Remy Korea and AMT. The Company expects that the aggregate amount of these additional payments will be in the range of $15 million to $25 million, payable over about four years. The Company granted put/call options in connection with the acquisitions of World Wide Automotive and Power Investments that became exercisable in February 2001 for World Wide Automotive and March 2001 for Power Investments. The exercise prices that the Company would be required to pay in 2002 and 2003 upon exercise of the put options, which are based on earnings formulas, are currently estimated to be about $21 million in total for the two acquisitions. Cash used in operating activities during 2001 of $2.6 million consisted of net income excluding non-cash items of $38.0 million, working capital investments of $32.4 million, excluding restructuring and special charges, and cash restructuring payments of $8.2 million. The increase in working capital was primarily a result of a $28.0 million decrease in accounts payable due to timing of vendor payments. 20 Cash used in investing activities included the acquisitions of Mazda ($17.1 million), XL ($2.4 million) and AMT ($0.5 million). In addition, the Company increased its ownership position in World Wide Automotive, Inc. ($6.4 million) and Power Investments, Inc. ($2.4 million). Capital expenditures of $20.4 million consisted primarily of production equipment and tooling. Investments in joint ventures included iPower Technologies, L.L.C. ($5.0 million), Hitachi Remy Automotive GmbH ($2.0 million) and Continental ISAD ($1.6 million). Cash provided by financing activities 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 and a $66.6 million net reduction in the Senior Credit Facility and other debt. Cash used in operating activities during the five months ended December 31, 2000 of $13.5 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 $11.8 million during the transition period were for production equipment, tooling and enterprise-wide systems. Cash provided by financing activities was generated entirely from the Company's Senior Credit Facility. Cash provided by operating activities of $70.9 million in fiscal year 2000 compares with $43.1 million in fiscal year 1999. This improvement was due primarily to increased earnings excluding the non-recurring charge and non-cash items. Earnings growth of $6.3 million excluding the non-recurring charge included the results of Delco Remy Korea, which was reported as an unconsolidated joint venture in fiscal 1999, a $8.6 million increase in depreciation and amortization expense, a $2.8 million increase in minority interest and a $5.8 million decline in earnings of joint ventures. Excluding the amounts recorded from acquisitions, net working capital increased $19.3 million in fiscal 2000 compared to a $6.1 million increase in fiscal 1999. Accounts receivable increased $1.6 million due primarily to very strong shipments in the fourth quarter. Collections improved overall in fiscal year 2000. The $4.6 million decline in fiscal year 1999 was due to strong fourth quarter collections. Inventories increased $18.2 million in fiscal year 2000 due primarily to delayed product pull from aftermarket customers. The $17.7 million increase in fiscal year 1999 reflected support for sales growth in the electrical aftermarket. Accounts payable increased $15.8 million in fiscal year 2000 and $13.6 million in fiscal year 1999. The $15.4 million increase in other current assets in fiscal year 2000 reflects non-cash charges to the reserve for non-recurring items and decreases in other accrued expenses. Cash used in investing activities was $107.6 million in fiscal year 2000 compared to $73.4 million in fiscal year 1999. Acquisitions in fiscal year 2000 included Knopf, Engine Master and Elmot, all of which were funded with proceeds from the Senior Credit Facility. Capital expenditures, consisting primarily of production equipment and tooling, were $38.4 million in fiscal year 2000 and $25.1 million in fiscal year 1999. This increase reflects implementation of enterprise-wide systems and projects to facilitate the global manufacturing realignment. Investments in joint ventures in fiscal year 2000 included Continental ISAD ($0.8 million) and Sahney Paris Rhone Ltd. ($0.4 million). Cash provided by financing activities in fiscal year 2000 and fiscal year 1999 were generated entirely from the Company's Senior Credit Facility. In fiscal year 2000, a $1.2 million cash distribution was made to the minority shareholders of Delco Remy Korea. 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, together with the amounts available under the Senior Credit Facility, will be adequate to meet its debt service requirements, capital expenditures 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. 21 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, 2001 and 2000 and the five-month periods ended December 31, 2000 and 1999 and the results in the second and fourth quarters in the fiscal years ended July 31, 2000 and 1999 reflect the effects of these shutdowns. Refer to Note 17 to Consolidated Financial Statements which pertains to quarterly (unaudited) financial information. 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 22.6% of the Company's net sales in 2001, approximately 22.0% of the Company's net sales in the five-month period ended December 31, 2000 and approximately 22.3% and 21.3% of the Company's fiscal year 2000 and 1999 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 2 to the Company's financial statements included under Item 8. EURO CONVERSION In January 1999, eleven European nations adopted a common currency, the EURO, and formed the European Economic and Monetary Union ("EMU"). The EURO has now become the sole legal tender for EMU countries. The adoption of the EURO will affect a multitude of financial systems and business applications as the commerce of these nations will be transacted in the EURO and the existing national currency. The Company is currently addressing these issues and their potential effect on information systems, currency exchange rate risk, taxation, contracts, competition and pricing. Plans will be developed and implemented which are expected to result in compliance with all laws and regulations. However, there can be no certainty that such plans will be successfully implemented or that external factors will not have an adverse effect on the Company's operations. Any costs of compliance associated with the adoption of the EURO will be expensed as incurred and the Company does not expect these costs to be material to its results of operations, financial condition or liquidity. 22 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 (95% at December 31, 2001). In November 2000, the Company entered into an interest rate swap on a notional amount of $100.0 million of the Senior Credit Facility. Under this transaction, the Company swapped a variable rate for a fixed rate. The $100.0 million notional amount is included in the fixed rate debt for purposes of analyzing a change in market interest rates. 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, 2001 under the Senior Credit Facility would result in an increase in the Company's annual interest expense of approximately $0.6 million. The Company's foreign currency risk exposure results from fluctuating currency exchange rates, primarily the strengthening of the U.S. dollar against the 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 (primarily the South Korean Won against the U.S. dollar) over a one-year period would decrease earnings by approximately $3.6 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, 2001 by approximately $4.8 million. In order to reduce the uncertainty of price movements with respect to the purchase of certain commodities, primarily copper, the Company enters into forward purchase contracts and various supply and purchase agreements with its customers and vendors. Based on the Company's overall commodity hedge exposure at December 31, 2001 and 2000 and July 31, 2000, a hypothetical 10 percent change in market rates applied to the fair value of the instruments, would not have a material effect on the Company's earnings, cash flows or financial position in 2001, the five month transition period ended December 31, 2000 or in fiscal year 2000. 23 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF DELCO REMY INTERNATIONAL, INC.: Page ---- Report of Independent Auditors 25 Consolidated Statements of Operations for the year ended December 31, 2001, the five months ended December 31, 2000 and 1999 and two years ended July 31, 2000 26 Consolidated Balance Sheets at December 31, 2001 and 2000, and July 31, 2000 27 Consolidated Statements of Stockholders' Equity for the year ended December 31, 2001, the five months ended December 31, 2000 and two years ended July 31, 2000 28 Consolidated Statements of Cash Flows for the year ended December 31, 2001, the five months ended December 31, 2000 and 1999 and two years ended July 31, 2000 29 Notes to Consolidated Financial Statements 30
24 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, 2001 and 2000 and July 31, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2001, the five months ended December 31, 2000 and for each of the two years in the period 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, 2001 and 2000 and July 31, 2000, and the consolidated results of its operations and cash flows for the year ended December 31, 2001, the five months ended December 31, 2000 and for each of the two years in the period ended July 31, 2000, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG LLP Indianapolis, Indiana March 18, 2002 25 CONSOLIDATED STATEMENTS OF OPERATIONS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands)
Five Months Ended Year Ended December 31 Year Ended July 31 December 31 --------------------------------------------------- 2001 2000 1999 2000 1999 ------------------------------------------------------------------ (Unaudited) Net sales $1,053,452 $442,737 $446,806 $1,091,097 $953,706 Cost of goods sold 877,626 355,515 356,369 862,172 770,902 Special charges-cost of goods sold 21,586 -- -- -- -- ------------------------------------------------------------------- Gross profit 154,240 87,222 90,437 228,925 182,804 Selling, general and administrative expenses 105,798 44,146 45,460 108,051 88,795 Special charges-selling, general and administrative expenses 17,246 -- -- -- -- Amortization of goodwill and intangibles 6,978 2,625 2,475 6,043 5,203 Restructuring charges 39,101 -- -- 35,222 -- ------------------------------------------------------------------- Operating income (loss) (14,883) 40,451 42,502 79,609 88,806 Interest expense (60,877) (21,790) (19,650) (48,766) (45,505) Non-recurring merger and tender offer expenses (4,194) (1,124) -- -- -- Non-operating income (expense) 1,849 1,501 (147) 129 -- ------------------------------------------------------------------- Income (loss) before income taxes (benefit), minority interest in income of subsidiaries, income (loss) from unconsolidated joint ventures and extraordinary item (78,105) 19,038 22,705 30,972 43,301 Income taxes (benefit) (16,939) 6,094 8,605 11,460 16,454 Minority interest in income of subsidiaries (9,254) (2,778) (2,841) (6,742) (3,921) Income (loss) from unconsolidated joint ventures (2,925) (467) (13) (352) 5,420 ------------------------------------------------------------------- Income (loss) before extraordinary item (73,345) 9,699 11,246 12,418 28,346 Extraordinary item: Gain on early extinguishment of debt (less applicable income taxes of $428) 698 -- -- -- -- ------------------------------------------------------------------- Net income (loss) (72,647) 9,699 11,246 12,418 28,346 Preferred dividends 20,971 -- -- -- -- ------------------------------------------------------------------- Income (loss) attributable to common stockholders $ (93,618) $ 9,699 $ 11,246 $ 12,418 $ 28,346 ===================================================================
See Accompanying Notes 26 CONSOLIDATED BALANCE SHEETS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands, except for share and per share data)
December 31 July 31 ------------------------------------- 2001 2000 2000 ------------------------------------- Assets: Current assets: Cash and cash equivalents $ 24,355 $ 24,380 $ 17,822 Trade accounts receivable (less allowance for doubtful accounts of $4,678, $3,115 and $2,970) 160,380 173,466 169,563 Other receivables 10,316 16,205 15,233 Inventories 303,355 293,824 268,153 Deferred income taxes 21,175 16,539 18,145 Other current assets 13,755 8,909 8,864 ------------------------------------- Total current assets 533,336 533,323 497,780 Property and equipment 307,074 305,583 297,574 Less accumulated depreciation 124,006 105,743 95,663 ------------------------------------- Property and equipment, net 183,068 199,840 201,911 Deferred financing costs 12,640 8,694 9,432 Goodwill (less accumulated amortization of $30,380, $23,485 and $20,891) 186,531 169,238 171,032 Investments in joint ventures 11,144 7,016 5,333 Deferred income taxes 10,476 -- -- Other assets 10,210 6,359 3,752 ------------------------------------- Total assets $ 947,405 $ 924,470 $ 889,240 ===================================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 132,149 $ 156,075 $ 141,944 Accrued interest payable 10,100 9,133 10,858 Accrued restructuring charges 32,424 7,692 24,778 Other liabilities and accrued expenses 57,015 33,790 40,085 Current debt 6,771 8,107 7,454 ------------------------------------- Total current liabilities 238,459 214,797 225,119 Deferred income taxes -- 10,155 10,027 Long-term debt, less current portion 593,656 519,284 484,270 Post-retirement benefits other than pensions 25,812 22,794 21,639 Accrued pension benefits 10,216 4,424 1,286 Accrued preferred dividends 20,971 -- -- Other non-current liabilities 6,655 3,884 3,886 Commitments and contingencies Minority interest in subsidiaries 30,107 28,014 25,187 Stockholders' equity: Preferred stock - Series A (par value $.01; authorized 3,500,000; issued 2,237,275.36 in 2001) 223,728 -- -- Common stock: Class A Shares (par value $.001; authorized 1,000; issued 1,000 in 2001) -- 182 182 Class B Shares (par value $.001; authorized 6,000,000; issued 2,497,337.49 in 2001) 3 63 63 Class C Shares (par value $.001; authorized 6,000,000; issued 16,687 in 2001) -- -- -- Paid-in capital -- 104,176 104,176 Retained earnings (deficit) (178,762) 34,269 24,570 Accumulated other comprehensive loss (23,440) (17,236) (10,837) Stock purchase plan -- (336) (328) ------------------------------------- Total stockholders' equity 21,529 121,118 117,826 ------------------------------------- Total liabilities and stockholders' equity $ 947,405 $ 924,470 $ 889,240 =====================================
See Accompanying Notes 27 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands)
Accumulated Class A Class B Class C Class A Retained Other Stock Common Common Common Preferred Paid-In Earnings Comprehensive Purchase Stock Stock Stock Stock Capital (Deficit) Loss Plan Total ------------------------------------------------------------------------------------------------ Balance at July 31, 1998 $ 182 $ 63 $ -- $ -- $106,392 $(16,194) $ (4,074) $ (2,129) $ 84,240 Repurchase of common stock -- -- -- -- (340) -- -- (284) (624) Other -- -- -- -- (1,876) -- -- 1,876 -- Net income -- -- -- -- -- 28,346 -- -- 28,346 Currency translation adjustment -- -- -- -- -- -- (2,442) -- (2,442) -------- Comprehensive income -- -- -- -- -- -- -- -- 25,904 ------------------------------------------------------------------------------------------------ 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) -- 209,255 (103,953) (105,164) -- 336 232 Issuance of preferred stock from warrant exercise -- -- -- 14,473 -- (14,472) -- -- 1 Dividends on preferred stock -- -- -- -- (223) (20,748) -- -- (20,971) Net loss -- -- -- -- -- (72,647) -- -- (72,647) Currency translation adjustment -- -- -- -- -- -- (5,624) -- (5,624) Unrealized losses on derivative instruments -- -- -- -- -- -- 2,155 -- 2,155 Minimum pension liability -- -- -- -- -- -- (2,735) -- (2,735) -------- Comprehensive loss -- -- -- -- -- -- -- -- (78,851) ------------------------------------------------------------------------------------------------ Balance at December 31, 2001 $ -- $ 3 $ -- $223,728 $ -- $(178,762) $(23,440) $ -- $ 21,529 ================================================================================================
See Accompanying Notes 28 CONSOLIDATED STATEMENTS OF CASH FLOWS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES (in thousands)
Five Months Ended Year Ended December 31 Year Ended July 31 December 31 ------------------------------------------------------ 2001 2000 1999 2000 1999 ------------------------------------------------------------------- (Unaudited) Operating Activities: Net income (loss) $ (72,647) $ 9,699 $ 11,246 $ 12,418 $ 28,346 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 28,176 10,978 11,147 26,126 18,358 Amortization 6,978 2,625 2,475 6,043 5,203 Minority interest in income of subsidiaries 9,254 2,778 2,841 6,742 3,921 (Income) loss from unconsolidated joint ventures 2,925 467 13 352 (5,420) Deferred income taxes (25,272) 1,680 1 2,310 9,983 Post-retirement benefits other than pensions 3,018 1,155 1,646 589 4,555 Accrued pension benefits 5,792 3,138 (133) (1,433) (1,909) Non-cash interest expense 1,802 740 733 1,763 1,648 Changes in operating assets and liabilities, net of acquisitions and non-cash special charges: Accounts receivable (3,792) (3,903) (18,575) (1,580) 4,621 Inventories (4,861) (25,671) (9,019) (18,212) (17,705) Accounts payable (27,994) 14,131 11,140 15,835 13,634 Other current assets and liabilities 4,279 (9,300) 1,542 (15,391) (6,645) Restructuring charges 39,101 -- -- 35,222 -- Cash payments for restructuring charges (8,245) (16,839) (717) (8,900) (14,941) Non-cash special charges 38,832 -- -- -- -- Other non-current assets and liabilities, net 70 (5,182) 2,215 9,013 (563) ------------------------------------------------------------------- Net cash provided by (used in) operating activities (2,584) (13,504) 16,555 70,897 43,086 Investing Activities: Acquisitions, net of cash acquired (28,888) -- (5,733) (68,005) (48,321) Purchases of property and equipment (20,400) (11,824) (20,175) (38,371) (25,066) Investments in joint ventures (8,662) (1,892) -- (1,179) -- ------------------------------------------------------------------- Net cash used in investing activities (57,950) (13,716) (25,908) (107,555) (73,387) Financing Activities: Proceeds from issuance of long-term debt 157,291 -- -- -- -- Retirement of long-term debt (17,790) -- -- -- -- Net borrowings (repayments) under revolving line of credit and other (66,648) 35,305 5,514 41,006 38,048 Deferred financing costs (5,561) -- -- -- -- Merger and tender offer costs (5,318) -- -- -- -- Distributions to minority interests (762) (322) -- (1,200) -- ------------------------------------------------------------------- Net cash provided by financing activities 61,212 34,983 5,514 39,806 38,048 Effect of exchange rate changes on cash (703) (1,205) (108) (635) (551) ------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (25) 6,558 (3,947) 2,513 7,196 Cash and cash equivalents at beginning of year 24,380 17,822 15,309 15,309 8,113 ------------------------------------------------------------------- Cash and cash equivalents at end of year $ 24,355 $ 24,380 $ 11,362 $ 17,822 $ 15,309 ===================================================================
See Accompanying Notes 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES December 31, 2001 (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 3). 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 has 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. 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 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"). 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. 30 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 Automotive, Inc. ("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 Investments, Inc. ("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. 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 which is being amortized over 35 years. 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 of approximately $37,000 is being amortized over 30 years. The purchase price is subject to an additional contingent payment of cash and/or common stock of the Company in fiscal year 2005, 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. 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. FISCAL YEAR 1999 ACQUISITIONS On November 13, 1998, the Company, through a wholly-owned subsidiary, purchased all of the common stock of Williams Technologies, Inc. ("Williams") for $38,840 in cash, net of cash acquired and less Williams' intercompany and third-party debt. The purchase was funded through proceeds from the Company's Senior Credit Facility. The acquisition was treated as a purchase for accounting purposes and resulted in goodwill of $21,104 which was being amortized over 35 years through 2001. Williams is a remanufacturer of automatic transmissions and torque converters for automotive and medium and heavy duty truck applications. Its primary market is the dealer network of major North American and foreign original equipment vehicle manufacturers. Results of operations for Williams are included in the Company's consolidated results from the acquisition date. 31 On June 25, 1999, the Company, through a wholly-owned subsidiary, purchased 31% of the capital shares of Delco Remy Korea (formerly Remy Korea Limited) from certain shareholders for $6,204 in cash, net of cash acquired. The purchase was funded through proceeds from the Company's Senior Credit Facility. This investment increased the Company's ownership position in Delco Remy Korea to 81%. The acquisition was treated as a purchase for accounting purposes with no resulting goodwill. During fiscal year 1997, the Company acquired a 50% interest in Delco Remy Korea for approximately $5,300. Effective June 25, 1999, the Company accounted for Delco Remy Korea as a consolidated subsidiary. It was accounted for under the equity method prior to that date. Delco Remy Korea is a manufacturer of automotive starter motors and parts for the U.S. original equipment market, as well as customers in Asian markets. UNAUDITED PRO FORMA RESULTS OF OPERATIONS The unaudited pro forma consolidated results of operations, assuming the Williams, Delco Remy Korea and Knopf acquisitions had been consummated as of the beginning of the preceding fiscal year, are as follows: Year Ended July 31 ------------------------------ 2000 1999 ------------------------------ Net sales $ 1,132,506 $ 1,052,335 Operating income 87,190 114,965 Net income 15,123 32,270 The acquisitions in the year ended December 31, 2001 did not have a significant effect on the Company's consolidated results of operations. There were no acquisitions in the five month period ended December 31, 2000. The pro forma consolidated financial information has been prepared for comparative purposes only and does not purport to present what the Company's consolidated results of operations would actually have been if the operations were combined during the periods presented and is not intended to project future results or trends of operations. 2. 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 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 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, fuel systems and traction control systems. The Company serves the aftermarket and original equipment manufacturer market, principally in North America, as well as Europe, Latin America and Asia Pacific. 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. 32 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 percentage of the Company's labor force covered by a collective bargaining agreement and covered by such an agreement that will expire within one year is 24.9% and 1.1%, respectively. The Company conducts a significant portion of its business with GM. See Note 11. 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. 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. 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. 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. At maturity, each contract was 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 10). Realized gains and losses recorded upon settlement were charged to earnings in the periods in which earnings are impacted by the variability of the cash flows of the settled intercompany sale. The final contract was settled in December 2001. 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 converts the libor-based rate into a fixed rate of 6.51% on debt of $100,000 for a period of two years. This swap has been designated as a cash flow hedge and changes in fair value are charged to other comprehensive income (loss) (see Note 10). Realized gains and losses are charged to earnings as interest expense in the periods in which earnings are impacted by the variability of the cash flows of the interest paid. The notional amounts of the Company's foreign exchange contracts are summarized as follows:
December 31 ------------------------------------------- July 31 2001 2000 2000 ------------------------------------------------------------------- Notional Fair Notional Fair Notional Fair Amount Value Amount Value Amount Value -------- ------- -------- ------- -------- ------- Forwards $ 2,716 $ 2,750 $ 6,353 $ 5,914 $ 6,436 $ 6,048 Non-deliverable forwards -- -- 37,536 33,152 62,602 62,829
The market value of the interest rate swap at December 31, 2001 and 2000 was $(4,028) and $(1,505), respectively. 33 INVENTORIES Inventories are carried at lower of cost or market determined on the first-in, first-out (FIFO) method. 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 ----------------------- July 31 2001 2000 2000 ------------------------------------- Raw materials $ 176,704 $ 154,550 $ 132,713 Work-in-process 50,131 51,668 52,605 Finished goods 76,520 87,606 82,835 ------------------------------------- $ 303,355 $ 293,824 $ 268,153 ===================================== 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 about market conditions and future demand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company provides an allowance for the estimated cost of product warranties, based on management's estimate of future product failure rates. If actual product failure rates differ from management's estimates, revisions to the estimated warranty liability may be required. 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 (15 to 40 years for buildings and 3 to 15 years for machinery and equipment). GOODWILL AND LONG-LIVED ASSETS Goodwill represents the excess of purchase price over fair value of the net assets acquired and is amortized by the straight-line method over 15 to 35 years through 2001. The carrying amount of goodwill and long-lived assets are regularly reviewed for indicators of impairment in value, which in the view of management are other than temporary, including unexpected or adverse changes in the following: (i) the economic or competitive environments in which the Company operates; (ii) profitability analysis and (iii) cash flow analysis. If facts and circumstances suggest that a subsidiary's goodwill and long-lived assets are impaired, the Company assesses the fair value of the underlying business and reduces goodwill and long-lived assets to an amount that results in the book value of the subsidiary approximating fair value. 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, 2001, the Company's ownership interest and carrying value of these investments were: Sahney Paris Rhone Ltd. (47.5%, $4.7 million); iPower (50%, $3.9 million); Hitachi Remy Automotive GmbH (49%, $1.8 million) and Continental ISAD (49%, $.7 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 are reduced by $198,603, $83,558, $185,324, and $156,383 for the year 2001, the five months ended December 31, 2000 and fiscal years 2000 and 1999, 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). 34 EARNINGS PER SHARE As a result of the recapitalization of the Company (see Note 8), 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, 2001 and 2000 and at July 31, 2000. At December 31, 2001, the Senior Notes have a face value of $145,000 and a fair value of $141,042, the 10 5/8% Senior Subordinated Notes have a face value of $140,000 and a fair value of $144,452 and the 11% Senior Subordinated Notes have a face value of $165,000 and a fair value of $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. 35 RECENTLY ISSUED ACCOUNTING STANDARDS On October 3, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and also supersedes the accounting and reporting provisions of APB Opinion Number 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. Among its many provisions, SFAS No. 144 retains the fundamental requirements of both previous standards, however, it resolves significant implementation issues related to FASB Statement No. 121 and broadens the separate presentation of discontinued operations in the income statement required by APB Opinion Number 30 to include a component of an entity (rather than a segment of a business). The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 with early application encouraged. The Company does not believe the adoption of SFAS No. 144 will have a material affect on its results of operations, financial position or cash flows. However, the Company is evaluating the impact, if any, the changes in the presentation of discontinued operations will have on its financial statements. On June 29, 2001, the FASB issued Statement of Financial Accounting Standards 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 must be adopted by the Company with an effective date of January 1, 2002. In addition, 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. Upon adoption, goodwill will no longer be amortized and will be tested for impairment at least annually. For the year ended December 31, 2001, the Company recorded amortization of goodwill and other intangible assets of approximately $7.0 million and the Company believes the adoption of the standard will result in the avoidance of annual amortization expense of approximately $7.7 million beginning in 2002. At December 31, 2001, the Company had goodwill and other intangible assets totaling approximately $190.0 million, net of accumulated amortization. Any goodwill or other intangible assets impairment losses recognized from the initial impairment test are required to be reported as a cumulative effect of a change in accounting principle in the Company's financial statements. The Company is evaluating the impact, if any, SFAS No. 142 will have on its financial statements upon adoption in 2002. On June 29, 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141). SFAS 141 must be applied to all business combinations that are completed after June 30, 2001. Among its many provisions, SFAS No. 141 eliminated the pooling-of-interests method of accounting for business combinations, requires the purchase method of accounting for business combinations and changes the criteria to recognize intangible assets separately from goodwill. The adoption of SFAS No. 141 did not have a material affect on the Company's financial statements. 3. RESTRUCTURING AND SPECIAL CHARGES 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 was paid in the fourth quarter of 2001 and $15,066, $4,593 and $4,586 are estimated to be paid in 2002, 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 OE alternators. The design and production issues which caused the unusually high level of claims, have been corrected. The special warranty charge includes $8,148 for claims in 2001 and $5,647 for anticipated claims in 2002 and 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 and $3,087 were paid in fiscal year 2000, the five months ended December 31, 2000 and the year ended December 31, 2001, respectively. An additional $2,907 and $132 are expected to be paid in 2002 and 2003, respectively. 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. 36 The following table summarizes the provisions and reserves for restructuring charges:
Termination Exit/Impairment Benefits Costs Total -------------------------------------- Reserve at July 31, 1998 $ 20,783 $ 14,736 $ 35,519 Payments and charges in fiscal year 1999 (15,808) (13,845) (29,653) -------------------------------------- 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 1,801 191 1,992 -------------------------------------- Reserve at December 31, 2001 $ 28,081 $ 4,343 $ 32,424 ======================================
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS The activity in the allowance for doubtful accounts is as follows:
Year Ended Five Months Ended Year Ended July 31 December 31 December 31 ------------------------- 2001 2000 2000 1999 -------------------------------------------------------- Balance at beginning of period $ 3,115 $ 2,970 $ 2,105 $ 2,083 Additions charged to costs and expenses 2,449 1,334 1,401 1,984 Acquisition of certain businesses -- -- 1,049 50 Uncollectible accounts written off, net of recoveries (886) (1,189) (1,585) (2,012) -------------------------------------------------------- Balance at end of period $ 4,678 $ 3,115 $ 2,970 $ 2,105 ========================================================
5. PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31 ------------------------ July 31 2001 2000 2000 ---------------------------------------- Land and buildings $ 21,720 $ 21,228 $ 19,231 Buildings under capital leases 23,813 25,585 25,312 Leasehold improvements 12,478 10,459 10,409 Machinery and equipment 249,063 248,311 242,622 ---------------------------------------- $ 307,074 $ 305,583 $ 297,574 ======================================== 37 6. LONG-TERM DEBT Borrowings under long-term debt arrangements consist of the following:
December 31 ------------------------ July 31 2001 2000 2000 ---------------------------------------- Senior Credit Facility $ 117,087 $ 182,403 $ 146,884 Senior Notes 145,000 145,000 145,000 10 5/8 Senior Subordinated Notes 140,000 140,000 140,000 11% Senior Subordinated Notes 163,037 -- -- GM Subordinated Debenture -- 18,873 18,802 Other, including capital lease obligations 35,303 41,115 41,038 ---------------------------------------- 600,427 527,391 491,724 Less current portion 6,771 8,107 7,454 ---------------------------------------- $ 593,656 $ 519,284 $ 484,270 ========================================
SENIOR CREDIT FACILITY Though December 31, 2001, the Senior Credit Facility provided revolving loans in the aggregate principal amount of $300,000 for general purposes (including acquisitions) and terminated on October 31, 2003. On March 15, 2002, the Senior Credit Facility was amended. Among other things, the amendment reduced the aggregate maximum principal amount to $200,000; changed the maturity date to March 31, 2003 and adjusted certain covenants retrospectively at December 31, 2001 and going forward. The Company is in compliance with the amended covenants. The Company has the option of paying an interest rate of one bank's prime rate or a LIBOR-based rate. The weighted average interest on amounts outstanding at December 31, 2001 and 2000, and July 31, 2000 were 8.28%, 8.67% and 8.15%, respectively. At December 31, 2001, approximately $71,000 was unused and approximately $22,000 was available under the Senior Credit Facility. The Senior Credit Facility contains various 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 a lien on substantially all assets of the Company and its domestic subsidiaries and by all the capital stock of such subsidiaries held by the Company or any such other subsidiary. 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. 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. 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. The Company recorded an extraordinary gain of $698 (net of tax of $428) on the early retirement of the GM Subordinated Debenture. 38 GM SUBORDINATED DEBENTURE On December 22, 1997, the Company converted preferred stock into a subordinated debenture with General Motors (the "GM Subordinated Debenture"). The debenture bore interest at the rate of 8% annually and would have matured on July 31, 2004. The GM Subordinated Debenture was retired in connection with the issuance of the 11% Senior Subordinated Notes in April 2001. CAPITAL LEASE OBLIGATIONS Capital leases have been capitalized using interest rates ranging from 8.1% to 15.2%. The net book value of assets under capital leases were $13,634, $15,322 and $16,026 at December 31, 2001 and 2000 and July 31, 2000, respectively. OTHER Total cash interest paid for fiscal year 2001, the transition period and fiscal years 2000 and 1999 was $57,901, $22,636, $46,835, and $41,502, respectively. Required principal payments of long-term debt and capitalized leases are as follows: 2002 $ 6,771 2003 120,913 2004 3,464 2005 3,756 2006 143,002 Thereafter 322,521 --------- $ 600,427 ========= 39 7. 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. 40 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 Five Months Year Five Months Ended Ended Year Ended July 31 Ended Ended Year Ended July 31 Dec. 31 Dec. 31 -------------------- Dec. 31 Dec. 31 --------------------- 2001 2000 2000 1999 2001 2000 2000 1999 ----------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligation at beginning of year $ 25,447 $ 24,444 $ 18,406 $ 17,656 $ 18,000 $ 15,734 $ 15,040 $ 13,006 Service cost 2,450 711 2,618 2,111 2,579 959 2,782 3,538 Interest cost 2,105 749 1,584 1,237 1,402 524 1,028 924 Amendments 117 636 2,496 -- -- -- -- -- Actuarial loss (gain) 4,078 (334) 752 (1,636) 2,140 1,021 (404) (2,428) Benefits paid (1,521) (759) (1,202) (962) (824) (238) (330) -- Curtailment gains -- -- (210) -- -- -- (2,382) -- ----------------------------------------------------------------------------------------- Benefit obligation at end of year $ 32,676 $ 25,447 $ 24,444 $ 18,406 $ 23,297 $ 18,000 $ 15,734 $ 15,040 ========================================================================================= Change in plan assets Fair value of plan assets at beginning of year $ 20,736 $ 21,551 $ 16,749 $ 12,516 $ -- $ -- $ -- $ -- Actual return on plan assets (1,271) (170) 1,687 1,635 -- -- -- -- Employer contributions 1,587 -- 4,317 3,560 824 238 -- -- Benefits paid (1,521) (645) (1,202) (962) (824) (238) -- -- ----------------------------------------------------------------------------------------- Fair value of plan assets at end of year $19,531 $ 20,736 $ 21,551 $ 16,749 $ -- $ -- $ -- $ -- ========================================================================================= Funded status $(13,145) $ (4,711) $ (2,893) $ (1,657) $ (23,297) $(18,000) $(15,734) $(15,040) Unrecognized actuarial loss (gain) 7,124 (304) (1,014) (1,819) (2,515) (4,794) (5,905) (6,010) Unrecognized prior service cost 3,128 3,276 2,621 757 -- -- -- -- ----------------------------------------------------------------------------------------- Net amount recognized $ (2,893) $ (1,739) $ (1,286) $ (2,719) $ (25,812) $(22,794) $(21,639) $(21,050) ========================================================================================= Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability $(10,216) $ (4,424) $ (3,262) $ (2,719) $(25,812) $(22,794) $(21,639) $(21,050) Intangible asset 2,913 2,685 1,976 -- -- -- -- -- Accumulated other comprehensive loss 4,410 -- -- -- -- -- -- -- ----------------------------------------------------------------------------------------- Net amount recognized $ (2,893) $ (1,739) $ (1,286) $ (2,719) $(25,812) $(22,794) $(21,639) $(21,050) ========================================================================================= Components of expense Service costs $ 2,450 $ 711 $ 2,618 $ 2,111 $ 2,579 $ 959 $ 2,782 $ 3,538 Interest costs 2,105 749 1,584 1,237 1,402 524 1,028 924 Expected return on plan assets (2,082) (866) (1,802) (1,331) -- -- -- -- Amortization of prior service cost 265 110 158 77 -- -- -- -- Recognized net actuarial loss (gain) 2 (8) -- 8 (139) (91) (314) 93 Curtailments -- -- 266 -- -- -- -- -- ----------------------------------------------------------------------------------------- Net periodic pension cost $ 2,740 $ 696 $ 2,824 $ 2,102 $ 3,842 $ 1,392 $ 3,496 $ 4,555 =========================================================================================
Post-Retirement Health Care Pension Benefits and Life Insurance Plans --------------------------------------------------------------------------------------- Year Five Months Year Five Months Ended Ended Year Ended July 31 Ended Ended Year Ended July 31 Dec. 31 Dec. 31 -------------------- Dec. 31 Dec. 31 --------------------- 2001 2000 2000 1999 2001 2000 2000 1999 --------------------------------------------------------------------------------------- Weighted-average assumptions Discount rate 7.25% 7.75% 8.00% 7.75% 7.25% 7.75% 8.00% 7.75% Expected return on plan assets 10.00% 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%
41 Measurement of the accumulated post-retirement benefit obligation was based on a 10.00% annual rate of increase in the cost of covered health care benefits. The rate was assumed to decrease ratably to 4.75% through 2007 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, 2001 and the accumulated post-retirement benefit obligation at December 31, 2001.
1% Increase 1% Decrease -------------------------------- Effect on total of service and interest cost components of net periodic post-retirement health care benefit cost $ 1,012 $ (762) Effect on the health care component of the accumulated post- retirement benefit obligation 5,511 (4,185)
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 $2,234 in the fiscal year 2001, $911 in the five month period ended December 31, 2000 and $1,731 and $1,227 in fiscal years 2000 and 1999, respectively. 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 year ended December 31, 2001, the five month period ended December 31, 2000 and the fiscal years ended July 31, 2000 and 1999 was $--, $728, $2,514 and $1,804, respectively. 8. STOCKHOLDERS' EQUITY 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) has been 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, neither Court Square nor DRI Group may 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, 2001, 2,237,257.23 shares of preferred stock were outstanding. 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 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. 42 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, 2001, 1,000 shares of Class A Common Stock, 2,497,337.49 shares of Class B Common Stock and 16,687 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. SECURITIES TRANSFER, RECAPITALIZATION AND HOLDERS AGREEMENT In connection with the Company's recapitalization, our 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 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, neither Court Square nor DRI Acquisition Group LLC ("DRI Group") may 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. 43 REGISTRATION RIGHTS AGREEMENT In connection with their entry into the Stockholders Agreement, the Company, Court Square, World Equity Partners, L.P., DRI Group, the management investors and certain other 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 our 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 selling stockholder). 44 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. 45 9. INCOME TAXES The following is a summary of the components of the provision for income taxes (benefit):
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ------------------------- 2001 2000 2000 1999 ---------------------------------------------------- Current: Federal $ - $ 62 $ 669 $ 257 State and local 1,727 597 1,323 1,478 Foreign 3,480 3,289 7,157 5,214 ---------------------------------------------------- 5,207 3,948 9,149 6,949 Deferred: Federal (19,963) 4,180 1,280 7,146 State and local (3,258) 54 3,350 1,703 Foreign 1,075 (2,088) (2,319) 656 ---------------------------------------------------- (22,146) 2,146 2,311 9,505 ---------------------------------------------------- $ (16,939) $ 6,094 $ 11,460 $ 16,454 ====================================================
Income (loss) before income taxes (benefit), minority interest in income of subsidiaries, income (loss) from unconsolidated joint ventures and extraordinary items was taxed in the following jurisdictions: 46
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ------------------------ 2001 2000 2000 1999 ---------------------------------------------------- Domestic $(100,033) $ 11,659 $ 8,031 $ 25,101 Foreign 23,308 7,888 23,174 19,844 Eliminations (1,380) (509) (233) (1,644) ---------------------------------------------------- $ (78,105) $ 19,038 $ 30,972 $ 43,301 ====================================================
A reconciliation of income taxes at the United States federal statutory rate to the effective income tax rate follows:
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ------------------------ 2001 2000 2000 1999 --------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% 35.0% State and local income taxes-- net of federal tax benefit 1.3 2.2 7.9 4.8 Foreign operations 12.1 (6.8) (10.6) (2.3) Goodwill (1.3) 2.2 2.4 .7 Provision for or release of valuation allowance for net deferred tax assets (21.6) -- -- 2.7 Other items (3.8) (0.6) 2.3 (2.9) --------------------------------------------------- Effective income tax rate 21.7% 32.0% 37.0% 38.0% ===================================================
State and local income taxes include provisions for Indiana and Michigan which do not provide proportional benefit in loss years. The following is a summary of the significant components of the Company's deferred tax assets and liabilities:
December 31 ---------------------- July 31 2001 2000 2000 ------------------------------------ Deferred tax assets: Restructuring charges $ 21,969 $ 5,358 $ 11,079 Employee benefits 13,709 10,514 10,096 Inventories 5,049 4,326 4,609 Warranty 3,579 2,418 2,625 Non-compete agreements 824 824 824 Alternative minimum tax credits 3,937 3,937 3,825 Foreign deferred assets 5,022 4,338 2,321 Net operating loss carryforwards 39,594 15,025 12,414 Other 6,104 3,901 4,335 ------------------------------------ Total deferred tax assets 99,787 50,641 52,128 Valuation allowance (25,745) (7,779) (7,779) ------------------------------------ Deferred tax assets net of valuation allowance 74,042 42,862 44,349 Deferred tax liabilities: Depreciation (19,462) (21,280) (20,674) Foreign deferred liabilities (1,586) -- -- Research expenses (6,985) (7,274) (6,894) Other (14,358) (8,562) (8,663) ------------------------------------ Total deferred tax liabilities (42,391) (37,116) (36,231) ------------------------------------ Net deferred tax asset $ 31,651 $ 5,746 $ 8,118 ====================================
At December 31, 2001, the Company had unused Federal net operating loss carryforwards of approximately $63,800 that expire during 2018 through 2021. The Company also had unused alternative minimum tax credit carryforwards of $3,937 that may be carried forward indefinitely. While management is optimistic that all net deferred tax assets will be utilized, such realization is dependent upon future taxable earnings. 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 year ended December 31, 2001, five month period ended December 31, 2000 and years ended July 31, 2000 and 1999 were $1,277, $743, $10,726 and $617, 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 ($73,850 at December 31, 2001) 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. 47 10. 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) Losses on Pension Other Translation Currency Interest Rate Liability Comprehensive Adjustment Instruments Swaps Adjustments Loss --------------------------------------------------------------- Balance at July 31, 1998 $ (4,074) $ -- $ -- $ -- $ (4,074) Before tax loss (3,939) -- -- -- (3,939) Income tax effect (1,497) -- -- -- (1,497) --------------------------------------------------------------- Other comprehensive loss (2,442) -- -- -- (2,442) --------------------------------------------------------------- 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) ===============================================================
11. 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:
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ------------------------ 2001 2000 2000 1999(a) --------------------------------------------------- Sales $ 258,105 $ 124,596 $ 332,665 $ 359,162 Material purchases and costs for services 16,619 2,002 4,500 34,273
(a) Includes transactions with Delphi Automotive Systems Corporation which was divested by GM in fiscal 1999. In addition, the Company had the following balances with GM: December 31 ------------------------- July 31 2001 2000 2000 ------------------------------------- Trade accounts receivable $ 24,411 $ 36,406 $ 32,722 Other receivables 207 5,704 4,768 48 12. LEASE COMMITMENTS The Company occupies space and uses certain equipment under lease arrangements. Rent expense was $9,879, $4,064, $9,091 and $7,793 for the year ended December 31, 2001, five month period ended December 31, 2000 and years ended July 31, 2000 and 1999, respectively. Rental commitments at December 31, 2001 for long-term non-cancelable operating leases were as follows: Year ending 2002 $ 7,209 Year ending 2003 5,737 Year ending 2004 5,038 Year ending 2005 4,266 Year ending 2006 3,442 Thereafter 7,612 ---------- $ 33,304 ========== 13. 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. Two subsidiaries of the Company have identified certain possible violations of Environmental Law regarding air emissions. The subsidiaries have notified the EPA and/or the applicable state agencies under federal or state voluntary audit disclosure rules regarding these violations, and they have taken or are taking steps to correct the violations. One of the subsidiaries has been informed that the state environmental agency is contemplating a proceeding (by issuing a notice of violation), and given the nature of the other subsidiary's violations, a proceeding may be initiated at that facility as well. The Company is unable at this time to evaluate what penalties, if any, will be imposed. 14. 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 July 31 December 31 December 31 ------------------------- 2001 2000 2000 1999 ---------------------------------------------------------- Net sales to external customers: United States $ 889,010 $ 381,077 $ 937,451 $ 845,945 Europe 91,587 27,303 62,427 46,325 Canada 33,971 14,350 43,811 47,270 Asia Pacific 13,690 10,934 33,854 3,386 Latin America 25,194 9,073 13,554 10,780 ---------------------------------------------------------- Total net sales $ 1,053,452 $ 442,737 $ 1,091,097 $ 953,706 ==========================================================
49 December 31 ----------------------------- July 31 2001 2000 2000 ----------------------------------------- Long-lived assets: United States $ 308,585 $ 296,974 $ 300,785 Europe 37,985 27,148 27,015 Canada 11,832 13,759 12,342 Asia Pacific 28,993 28,766 29,843 Latin America 26,674 24,500 21,475 ----------------------------------------- Total long-lived assets $ 414,069 $ 391,147 $ 391,460 ========================================= Customers that accounted for a significant portion of consolidated net sales were as follows:
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ------------------------- 2001 2000 2000 1999 ------------------------------------------------------- General Motors Corporation: North American OE Operations $ 180,958 $ 93,696 $ 257,684 $ 241,288 Other 77,147 30,900 74,981 117,874 International Truck and Engine Corporation 117,345 53,433 141,443 127,842
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 July 31 December 31 December 31 ------------------------- 2001 2000 2000 1999 ------------------------------------------------------- Electrical systems $ 741,641 $337,308 $ 859,204 $ 793,727 Powertrain/drivetrain 248,693 77,313 194,303 149,279 Other 63,118 28,116 37,590 10,700 ------------------------------------------------------- Total $ 1,053,452 $442,737 $ 1,091,097 $ 953,706 =======================================================
15. OTHER INFORMATION SUPPLEMENTAL CASH FLOW INFORMATION
Five Year Ended Months Ended Year Ended July 31 December 31 December 31 ------------------------ 2001 2000 2000 1999 ------------------------------------------------------- Cash paid for interest $ 57,901 $ 22,636 $ 46,835 $ 41,502 Cash paid for income taxes, net of refunds received 1,277 743 10,726 617 Detail of acquisitions: Fair value of assets acquired $ 9,119 $ -- $ 45,219 $ 63,786 Liabilities assumed (10,152) -- (15,783) (33,398) Goodwill recorded 24,146 -- 38,569 23,383 Minority interest 5,775 -- -- (5,450) ------------------------------------------------------- Net cash paid for acquisitions 28,888 -- 68,005 48,321 Cash acquired 82 -- 1,669 4,571 ------------------------------------------------------- Total $ 28,970 $ -- $ 69,674 $ 52,892 =======================================================
50 RESEARCH AND DEVELOPMENT COSTS The Company spent approximately $15,500, $7,200, $16,300 and $13,500 in the year ended December 31, 2001, five month period ended December 31, 2000 and fiscal years ended July 31, 2000 and 1999, respectively, on research and development activities. All expenditures were Company funded. 16. 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 6, 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, 2001 and 2000 and July 31, 2000 and for the year ended December 31, 2001, five month period ended December 31, 2000 and the fiscal years ended July 31, 2000 and 1999. 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
51 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 $ 24,123 $ -- $ 24,355 Trade accounts receivable -- 133,952 26,428 -- 160,380 Other receivables -- 2,871 7,445 -- 10,316 Inventories -- 247,953 57,489 (2,087)(c) 303,355 Deferred income taxes 17,184 -- 3,991 -- 21,175 Other current assets 4,759 3,572 5,424 -- 13,755 ------------------------------------------------------------------------------ Total current assets 21,943 388,580 124,900 (2,087) 533,336 Property and equipment 57 205,640 101,377 -- 307,074 Less accumulated depreciation 25 100,921 23,060 -- 124,006 ------------------------------------------------------------------------------ Property and equipment, net 32 104,719 78,317 -- 183,068 Deferred financing costs 11,431 1,209 -- -- 12,640 Goodwill, net -- 160,328 26,203 -- 186,531 Investment in affiliates 526,038 -- -- (514,894)(a) 11,144 Deferred income taxes 11,121 12 (657) -- 10,476 Other assets 2,531 3,263 4,416 -- 10,210 ------------------------------------------------------------------------------ Total assets $ 573,096 $ 658,111 $ 233,179 $ (516,981) $ 947,405 ============================================================================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 1,304 $ 98,691 $ 32,154 $ -- $ 132,149 Intercompany accounts (59,671) 53,781 6,491 (601)(c) -- Accrued interest payable 9,927 -- 173 -- 10,100 Accrued restructuring charges -- 27,519 4,905 -- 32,424 Other liabilities and accrued expenses 7,568 32,881 16,566 -- 57,015 Current debt -- 804 5,967 -- 6,771 ------------------------------------------------------------------------------ Total current liabilities (40,872) 213,676 66,256 (601) 238,459 Long-term debt, less current portion 548,683 34,580 10,393 -- 593,656 Post-retirement benefits other than pensions -- 25,812 -- -- 25,812 Accrued pension benefits -- 9,035 1,181 -- 10,216 Accrued preferred dividends 20,971 -- -- -- 20,971 Other non-current liabilities 1,842 4,089 724 -- 6,655 Minority interest in subsidiaries -- 12,696 17,411 -- 30,107 Stockholders' equity: Common stock: Preferred stock-Series A 223,728 -- -- -- 223,728 Class A Shares -- -- -- -- -- Class B Shares 3 -- -- -- 3 Class C Shares -- -- -- -- -- Paid-in capital -- -- -- -- -- Subsidiary investment -- 291,416 93,099 (384,515)(a) -- Retained earnings (deficit) (178,762) 69,542 62,323 (131,865)(b) (178,762) Accumulated other comprehensive loss (2,497) (2,735) (18,208) -- (23,440) ------------------------------------------------------------------------------ Total stockholders' equity 42,472 358,223 137,214 (516,380) 21,529 ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 573,096 $ 658,111 $ 233,179 $ (516,981) $ 947,405 ==============================================================================
_______________ (a) Elimination of investments in subsidiaries. (b) Elimination of investments in subsidiaries' earnings. (c) Elimination of intercompany profit in inventory. 52 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 $ -- $ 1,061,654 $ 425,063 $ (433,265)(a) $ 1,053,452 Cost of goods sold -- 939,199 371,692 (433,265)(a) 877,626 Special charges - cost of goods sold -- 16,086 5,500 21,586 ------------------------------------------------------------------------------ Gross profit -- 106,369 47,871 -- 154,240 Selling, general and administrative expenses 14,502 63,753 27,543 -- 105,798 Special charges - SG & A -- 16,206 1,040 17,246 Amortization of goodwill and intangibles -- 6,248 730 -- 6,978 Restructuring charges -- 36,691 2,410 -- 39,101 ------------------------------------------------------------------------------ Operating (loss) income (14,502) (16,529) 16,148 -- (14,883) Interest expense (42,822) (17,024) (1,031) -- (60,877) Non-recurring merger and tender offer expenses (4,194) -- -- -- (4,194) Non-operating income (expense) (900) 192 2,557 -- 1,849 ------------------------------------------------------------------------------ Income (loss) before income tax (benefit), minority interest in income of subsidiaries, loss from unconsolidated joint ventures and equity in earnings of subsidiaries (62,418) (33,361) 17,674 -- (78,105) Income taxes (benefit) (7,697) (13,616) 4,374 -- (16,939) Minority interest in income of subsidiaries -- (4,072) (5,182) -- (9,254) Loss from unconsolidated joint ventures -- -- (2,925) -- (2,925) Equity in earnings of subsidiaries (17,926) -- -- 17,926(b) -- ------------------------------------------------------------------------------ Income (loss) before extraordinary item (72,647) (23,817) 5,193 17,926 (73,345) Extraordinary item: Gain on early extinguishment of debt (loss applicable income taxes of $428) -- 698 -- -- 698 ------------------------------------------------------------------------------ Net income (loss) (72,647) (23,119) 5,193 17,926 (72,647) Preferred dividends 20,971 -- -- -- 20,971 ------------------------------------------------------------------------------ Income (loss) available to common stockholders $ (93,618) $ (23,119) $ 5,193 $ 17,926 $ (93,618) ==============================================================================
_______________ (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net loss from consolidated subsidiaries. 53 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) $ (23,119) $ 5,193 $ 17,926 (a) $ (72,647) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 5 19,942 8,229 -- 28,176 Amortization -- 6,248 730 -- 6,978 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 17,926 -- -- (17,926)(a) -- Deferred income taxes (24,751) -- (521) -- (25,272) Post-retirement benefits other than pensions -- 3,018 -- -- 3,018 Accrued pension benefits -- 5,284 508 -- 5,792 Non-cash interest expense 1,017 785 -- -- 1,802 Changes in operating assets and liabilities, net of acquisitions and non-cash special charges: Accounts receivable -- (8,804) 5,012 -- (3,792) Inventories -- (2,382) (2,479) -- (4,861) Accounts payable 339 (11,036) (17,297) -- (27,994) Intercompany accounts (150,098) 135,247 14,851 -- -- Other current assets and liabilities 8,745 (1,144) (3,322) -- 4,279 Restructuring charges -- 36,691 2,410 -- 39,101 Cash payments for restructuring charges -- (8,245) -- -- (8,245) Non-cash special charges -- 32,292 6,540 -- 38,832 Other non-current assets and liabilities, net (16,187) 16,711 (454) -- 70 ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities (235,651) 205,560 27,507 -- (2,584) Investing Activities: Acquisitions, net of cash acquired (17,116) (8,856) (2,916) -- (28,888) Purchases of property and equipment (37) (10,808) (9,555) -- (20,400) Investments in joint ventures -- -- (8,662) -- (8,662) ------------------------------------------------------------------------------ Net cash used in investing activities (17,153) (19,664) (21,133) -- (57,950) Financing Activities: Proceeds from issuance of long-term debt 157,291 -- -- -- 157,291 Retirement of long-term debt -- (17,790) -- -- (17,790) Net borrowing (repayment) under revolving line of credit and other 106,392 (167,618) (5,422) -- (66,648) 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 (185,408) (6,184) -- 61,212 Effect of exchange rate changes on cash -- -- (703) -- (703) ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents -- 488 (513) -- (25) Cash and cash equivalents at beginning of year -- (256) 24,636 -- 24,380 ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ -- $ 232 $ 24,123 $ -- $ 24,355 ==============================================================================
_______________ (a) Elimination of equity in earnings of subsidiary. 54 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet December 31, 2000 ------------------------------------------------------------------------------ Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------ Assets: Current assets: Cash and cash equivalents $ -- $ (256) $ 24,636 $ -- $ 24,380 Trade accounts receivable -- 141,028 32,438 -- 173,466 Other receivables -- 9,886 6,319 -- 16,205 Inventories -- 243,410 52,465 (2,051)(c) 293,824 Deferred income taxes 14,256 -- 2,283 -- 16,539 Other current assets 2,667 2,694 3,548 -- 8,909 ------------------------------------------------------------------------------ Total current assets 16,923 396,762 121,689 (2,051) 533,323 Property and equipment 40 217,644 87,899 -- 305,583 Less accumulated depreciation 40 90,536 15,167 -- 105,743 ------------------------------------------------------------------------------ Property and equipment, net -- 127,108 72,732 -- 199,840 Deferred financing costs 6,806 1,888 -- -- 8,694 Goodwill, net -- 146,163 23,075 -- 169,238 Investment in affiliates 515,616 -- -- (508,600)(a) 7,016 Other assets 770 3,087 2,502 -- 6,359 ------------------------------------------------------------------------------ Total assets $ 540,115 $ 675,008 $ 219,998 $ (510,651) $ 924,470 ============================================================================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 965 $ 109,727 $ 45,383 $ -- $ 156,075 Intercompany accounts 90,427 (81,466) (8,360) (601)(c) -- Accrued interest payable 6,719 919 1,495 -- 9,133 Accrued non-recurring charges -- 6,798 894 -- 7,692 Other liabilities and accrued expenses 5,256 20,623 7,911 -- 33,790 Current debt -- 1,526 6,581 -- 8,107 ------------------------------------------------------------------------------ Total current liabilities 103,367 58,127 53,904 (601) 214,797 Deferred income taxes 12,209 -- (2,054) -- 10,155 Long-term debt, less current portion 285,000 219,266 15,018 -- 519,284 Post-retirement benefits other than pensions -- 22,794 -- -- 22,794 Accrued pension benefits -- 3,751 673 -- 4,424 Other non-current liabilities 2,208 971 705 -- 3,884 Minority interest in subsidiaries -- 11,351 16,663 -- 28,014 Stockholders' equity: Common stock: Class A Shares 182 -- -- -- 182 Class B Shares 63 -- -- -- 63 Paid-in capital 104,176 -- -- -- 104,176 Subsidiary investment -- 266,087 94,172 (360,259)(a) -- Retained earnings 34,269 92,661 57,130 (149,791)(b) 34,269 Accumulated other comprehensive loss (1,023) -- (16,213) -- (17,236) Stock purchase plan (336) -- -- -- (336) ------------------------------------------------------------------------------ Total stockholders' equity 137,331 358,748 135,089 (510,050) 121,118 ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 540,115 $ 675,008 $ 219,998 $ (510,651) $ 924,470 ==============================================================================
_______________ (a) Elimination of investments in subsidiaries. (b) Elimination of investments in subsidiaries' earnings. (c) Elimination of intercompany profit in inventory. 55 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 $ -- $ 456,628 $ 170,952 $ (184,843)(a) $ 442,737 Cost of goods sold -- 392,758 147,600 (184,843)(a) 355,515 ------------------------------------------------------------------------------- Gross profit -- 63,870 23,352 -- 87,222 Selling, general and administrative expenses 5,275 23,472 15,399 -- 44,146 Amortization of goodwill and intangibles 26 2,228 371 -- 2,625 ------------------------------------------------------------------------------- Operating (loss) income (5,301) 38,170 7,582 -- 40,451 Interest expense (13,753) (7,661) (376) -- (21,790) Non-recurring merger and tender offer expenses (1,124) -- -- -- (1,124) Non-operating income -- 602 899 -- 1,501 ------------------------------------------------------------------------------- (Loss) income before income tax (benefit), minority interest in income of subsidiaries, loss from unconsolidated joint ventures and equity in earnings of subsidiaries (20,178) 31,111 8,105 -- 19,038 Income taxes (benefit) (7,331) 12,276 1,149 -- 6,094 Minority interest in income of subsidiaries -- (1,589) (1,189) -- (2,778) Loss from unconsolidated joint ventures -- -- (467) -- (467) Equity in earnings of subsidiaries 22,546 -- -- (22,546)(b) -- ------------------------------------------------------------------------------- Net income (loss) $ 9,699 $ 17,246 $ 5,300 $ (22,546) $ 9,699 ================================================================================
_______________ (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net income from consolidated subsidiaries. 56 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 (loss) $ 9,699 $ 17,246 $ 5,300 $ (22,546)(a) $ 9,699 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation -- 7,255 3,723 -- 10,978 Amortization 26 2,228 371 -- 2,625 Minority interest in income of subsidiaries -- 1,589 1,189 -- 2,778 Loss from unconsolidated joint ventures -- -- 467 -- 467 Equity (loss) in earnings of subsidiaries (22,546) -- -- 22,546(a) -- Deferred income taxes 1,188 -- 492 -- 1,680 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 -- (758) (3,145) -- (3,903) Inventories -- (22,513) (3,158) -- (25,671) Accounts payable (291) 4,032 10,390 -- 14,131 Intercompany accounts 16,998 (25,808) 8,810 -- -- Other current assets and liabilities (3,508) (2,467) (3,325) -- (9,300) Cash payments for restructuring charges -- (14,103) (2,736) -- (16,839) Other non-current assets and liabilities, net (2,021) 362 (3,523) -- (5,182) ------------------------------------------------------------------------------- Net cash provided by (used in) operating activities -- (28,408) 14,904 -- (13,504) Investing Activities: Purchases of property and equipment -- (4,752) (7,072) -- (11,824) Investments in joint ventures -- (1,892) -- -- (1,892) ------------------------------------------------------------------------------- Net cash used in investing activities -- (6,644) (7,072) -- (13,716) Financing Activities: Net borrowing under revolving line of credit and other -- 34,130 1,175 -- 35,305 Distributions to minority interests -- -- (322) -- (322) ------------------------------------------------------------------------------- Net cash provided by financing activities -- 34,130 853 -- 34,983 Effect of exchange rate changes on cash -- -- (1,205) -- (1,205) ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- (922) 7,480 -- 6,558 Cash and cash equivalents at beginning of year -- 666 17,156 -- 17,822 ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ -- $ (256) $ 24,636 $ -- $ 24,380 ===============================================================================
_______________ (a) Elimination of equity in earnings of subsidiary. 57 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet July 31, 2000 ------------------------------------------------------------------------------- Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------- Assets: Current assets: Cash and cash equivalents $ -- $ 666 $ 17,156 $ -- $ 17,822 Trade accounts receivable -- 140,270 29,293 -- 169,563 Other receivables -- 7,982 7,251 -- 15,233 Inventories -- 220,944 49,258 (2,049)(c) 268,153 Deferred income taxes 15,370 -- 2,775 -- 18,145 Other current assets 1,613 2,643 4,608 -- 8,864 ------------------------------------------------------------------------------- Total current assets 16,983 372,505 110,341 (2,049) 497,780 Property and equipment 40 212,528 85,006 -- 297,574 Less accumulated depreciation 40 81,865 13,758 -- 95,663 ------------------------------------------------------------------------------- Property and equipment, net -- 130,663 71,248 -- 201,911 Deferred financing costs 7,261 2,171 -- -- 9,432 Goodwill, net (185) 148,045 23,172 -- 171,032 Investment in affiliates 488,843 -- -- (483,510)(a) 5,333 Other assets 671 612 2,469 -- 3,752 ------------------------------------------------------------------------------- Total assets $ 513,573 $ 653,996 $ 207,230 $ (485,559) $ 889,240 =============================================================================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 1,256 $ 105,695 $ 34,993 $ -- $ 141,944 Intercompany accounts 73,912 (56,141) (17,170) (601)(c) -- Accrued interest payable 9,001 132 1,725 -- 10,858 Accrued non-recurring charges -- 21,148 3,630 -- 24,778 Other liabilities and accrued expenses 3,924 23,163 12,998 -- 40,085 Current debt -- 1,868 5,586 -- 7,454 ------------------------------------------------------------------------------- Total current liabilities 88,093 95,865 41,762 (601) 225,119 Deferred income taxes 9,574 -- 453 -- 10,027 Long-term debt, less current portion 285,000 184,283 14,987 -- 484,270 Post-retirement benefits other than pensions -- 21,639 -- -- 21,639 Accrued pension benefits -- 662 624 -- 1,286 Other non-current liabilities 2,243 985 660 (2) 3,886 Minority interest in subsidiaries -- 9,060 16,127 -- 25,187 Stockholders' equity: Common stock: Class A Shares 182 -- -- -- 182 Class B Shares 63 -- -- -- 63 Paid-in capital 104,176 -- -- -- 104,176 Subsidiary investment -- 266,087 91,624 (357,711)(a) -- Retained earnings 24,570 75,415 51,830 (127,245)(b) 24,570 Accumulated other comprehensive loss -- -- (10,837) -- (10,837) Stock purchase plan (328) -- -- -- (328) ------------------------------------------------------------------------------- Total stockholders' equity 128,663 341,502 132,617 (484,956) 117,826 ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 513,573 $ 653,996 $ 207,230 $ (485,559) $ 889,240 ===============================================================================
_______________ (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 July 31, 2000 ------------------------------------------------------------------------------- Delco Remy International Non- Inc.(Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------ Net sales $ -- $ 1,098,395 $ 384,044 $ (391,342)(a) $ 1,091,097 Cost of goods sold -- 928,770 324,744 (391,342)(a) 862,172 ------------------------------------------------------------------------------ Gross profit -- 169,625 59,300 -- 228,925 Selling, general and administrative expenses 13,922 67,152 26,977 -- 108,051 Amortization of goodwill and intangibles 108 5,064 871 -- 6,043 Non-recurring charge -- 30,133 5,089 -- 35,222 ------------------------------------------------------------------------------ Operating (loss) income (14,030) 67,276 26,363 -- 79,609 Interest expense (30,259) (16,646) (1,861) -- (48,766) Non-operating income -- -- 129 -- 129 ------------------------------------------------------------------------------ (Loss) income before income tax (benefit), minority interest in income of subsidiaries, loss from unconsolidated joint ventures and equity in earnings of subsidiaries (44,289) 50,630 24,631 -- 30,972 Income taxes (benefit) (13,966) 20,553 4,873 -- 11,460 Minority interest in income of subsidiaries -- (3,244) (3,498) -- (6,742) Loss from unconsolidated joint ventures -- -- (352) -- (352) Equity in earnings of subsidiaries 42,741 -- -- (42,741)(b) -- ------------------------------------------------------------------------------ Net income $ 12,418 $ 26,833 $ 15,908 $ (42,741) $ 12,418 ==============================================================================
_______________ (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net income from consolidated subsidiaries. 59 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 $ 12,418 $ 26,833 $ 15,908 $ (42,741)(a) $ 12,418 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation -- 19,044 7,082 -- 26,126 Amortization 108 5,064 871 -- 6,043 Minority interest in income of subsidiaries -- 3,244 3,498 -- 6,742 Loss from unconsolidated joint ventures -- -- 352 -- 352 Equity (loss) in earnings of subsidiaries (42,741) -- -- 42,741(a) -- Deferred income taxes (373) 5,458 (2,775) -- 2,310 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 -- (2,046) 466 -- (1,580) Inventories -- (15,245) (2,967) -- (18,212) Accounts payable 620 11,180 4,035 -- 15,835 Intercompany accounts 75,521 (76,633) 1,112 -- -- Other current assets and liabilities 3,904 (14,184) (5,111) -- (15,391) Restructuring charges -- 30,133 5,089 -- 35,222 Cash payments for restructuring charges -- (8,230) (670) -- (8,900) Other non-current assets and liabilities, net 18,619 (12,429) 2,823 -- 9,013 ------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 69,168 (28,608) 30,337 -- 70,897 Investing Activities: Acquisitions, net of cash acquired (69,168) -- 1,163 -- (68,005) Purchases of property and equipment -- (17,365) (21,006) -- (38,371) Investments in joint ventures -- (1,179) -- -- (1,179) ------------------------------------------------------------------------------- Net cash used in investing activities (69,168) (18,544) (19,843) -- (107,555) Financing Activities: Net borrowing (repayments) under revolving line of credit and other -- 48,060 (7,054) -- 41,006 Distributions to minority interests -- -- (1,200) -- (1,200) ------------------------------------------------------------------------------- Net cash provided by (used in) financing activities -- 48,060 (8,254) -- 39,806 Effect of exchange rate changes on cash -- -- (635) -- (635) ------------------------------------------------------------------------------- Net increase in cash and cash equivalents -- 908 1,605 -- 2,513 Cash and cash equivalents at beginning of year -- (242) 15,551 -- 15,309 ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ -- $ 666 $ 17,156 $ -- $ 17,822 ===============================================================================
_______________ (a) Elimination of equity in earnings of subsidiary. 60 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations For the Year Ended July 31, 1999 ------------------------------------------------------------------------------ Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------ Net sales $ -- $ 953,652 $ 266,447 $ (266,393)(a) $ 953,706 Cost of goods sold -- 811,669 223,982 (264,749)(a) 770,902 ------------------------------------------------------------------------------ Gross profit -- 141,983 42,465 (1,644)(c) 182,804 Selling, general and administrative expenses 11,241 58,242 19,312 -- 88,795 Amortization of goodwill and intangibles 5 4,680 518 -- 5,203 ------------------------------------------------------------------------------ Operating (loss) income (11,246) 79,061 22,635 (1,644) 88,806 Interest expense (27,693) (16,390) (1,422) -- (45,505) ------------------------------------------------------------------------------ (Loss) income before income tax (benefit), minority interest in income of subsidiaries, income from unconsolidated joint ventures and equity in earnings of subsidiaries (38,939) 62,671 21,213 (1,644) 43,301 Income taxes (benefit) (4,528) 15,584 5,997 (599)(c) 16,454 Minority interest in income of subsidiaries -- (2,898) (1,023) -- (3,921) Income from unconsolidated joint ventures -- -- 5,420 -- 5,420 Equity in earnings of subsidiaries 62,757 -- -- (62,757)(b) -- ------------------------------------------------------------------------------ Net income (loss) $ 28,346 $ 44,189 $ 19,613 $ (63,802) $ 28,346 ==============================================================================
__________________ (a) Elimination of intercompany sales and cost of sales. (b) Elimination of equity in net income from consolidated subsidiaries. (c) Elimination of intercompany profit in inventory. 61 DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows For the Year Ended July 31, 1999 ------------------------------------------------------------------------------ Delco Remy International Non- Inc. (Parent Subsidiary Guarantor Company Only) Guarantors Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------------ Operating Activities: Net income $ 28,346 $ 44,189 $ 19,613 $ (63,802)(a) $ 28,346 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 20 15,010 3,328 -- 18,358 Amortization 5 4,680 518 -- 5,203 Minority interest in income of subsidiaries -- 2,898 1,023 -- 3,921 Income from unconsolidated joint ventures -- -- (5,420) -- (5,420) Equity (loss) in earnings of subsidiaries (62,757) -- -- 62,757(a) -- Deferred income taxes 6,428 3,555 -- -- 9,983 Post-retirement benefits other than pensions -- 4,555 -- -- 4,555 Accrued pension benefits -- (1,909) -- -- (1,909) Non-cash interest expense -- 1,648 -- -- 1,648 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable -- (2,634) 7,255 -- 4,621 Inventories -- (13,500) (5,849) 1,644(b) (17,705) Accounts payable 506 6,479 6,649 -- 13,634 Intercompany accounts 48,638 (38,324) (9,715) (599)(b) -- Other current assets and liabilities (4,001) (1,662) (982) -- (6,645) Cash payments for restructuring charges -- (14,941) -- -- (14,941) Other non-current assets and liabilities, net 27,877 (23,302) (5,138) -- (563) ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 45,062 (13,258) 11,282 -- 43,086 Investing Activities: Acquisitions, net of cash acquired (45,042) -- (3,279) -- (48,321) Purchase of property and equipment (20) (19,267) (5,779) -- (25,066) ------------------------------------------------------------------------------ Net cash used in investing activities (45,062) (19,267) (9,058) -- (73,387) Financing Activities: Net borrowing under revolving line of credit and other -- 32,158 5,890 -- 38,048 ------------------------------------------------------------------------------ Net cash provided by financing activities -- 32,158 5,890 -- 38,048 Effect of exchange rate changes on cash -- -- (551) -- (551) ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents -- (367) 7,563 -- 7,196 Cash and cash equivalents at beginning of year -- 125 7,988 -- 8,113 ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ -- $ (242) $ 15,551 $ -- $ 15,309 ==============================================================================
___________________ (a) Elimination of equity in earnings of subsidiary. (b) Elimination of intercompany profit in inventory. 62 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended: 3/31/01 6/30/01 9/30/01 12/31/01 Total Year -------------------------------------------------------------------- As Restated: Net sales $259,900 268,918 270,304 254,330 1,053,452 Gross profit 41,000 49,805 44,995 18,440 154,240 Net income (loss) (5,830) 3,942 (3,014) (67,745) (72,647) As Initially Reported: Net sales $261,663 $271,316 $271,090 Gross profit 48,287 54,961 47,694 Net income (loss) (1,888) 5,818 (1,713)
The Company restated net sales and earnings in the first three quarter of 2001 for the reclassification of certain currency hedging activities to net sales from non-operating expense, retiming of special charges-cost of goods sold relative to the unusual warranty claims and to correct the recording of certain intercompany transactions.
Two Months Three Months Five Months Ended Ended Ended Transition Period Ended: 9/30/00 12/31/00 12/31/00 --------------------------------------- Net sales $183,333 $259,404 $442,737 Gross profit 32,872 54,350 87,222 Net income 1,325 8,374 9,699
Quarter Ended: 10/31/99 1/31/00 4/30/00 7/31/00 Total Year -------------------------------------------------------------------- Net sales $277,189 $260,012 $274,928 $278,968 $1,091,097 Gross profit 56,471 52,801 60,669 58,984 228,925 Net income (loss) 7,974 6,907 10,199 (12,662) 12,418
ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with the independent accountants. 63 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: 72 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: 57 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: 74 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 Lifestyle Furnishings International Ltd., Fairchild Semiconductor Corporation, Freedom Forge, Hoover Group, Inc., Gerber Childrenswear Inc., JAC Holdings, GVC Holdings, Titan Wheel International, Inc., and Flender AG. Age: 48 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, Gardenburger, Gateway HomeCare and Sharkrack. Age: 35 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 director of GVC Holdings, JAC Holdings, SC Processing, Inc., MSX Internatinal, Inc., International Knife and Saw Inc., Great Lakes Dredge and Dock Corporation, Trianon Industries Inc., ChipPac Inc. and Strategic Industries Inc. Age: 47 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. and Flender AG. Age: 60 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 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: 71 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, MacDermid, and ISG Resources. Age: 40 Susan E. Goldy, Esquire, Senior Vice President and General Counsel. Ms. Goldy has been Senior Vice President and General Counsel since February 2000. Prior to that, she had been Vice President and General Counsel since 1997. Before joining the Company, she was a partner in the law firm of Dechert. Age: 48 64 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: 50 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: 56 David E. Stoll, Vice President, Treasurer and Secretary, and, since November 9, 2001, Acting Chief Financial Officer. 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 of Dyneer Corporation since 1987 and, prior to that, served as corporate controller since 1973. Age: 59 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: 51 Richard L. Reinhart, Vice President and Controller. Mr. Reinhart joined Delco Remy in January 2001. Prior to that, Mr. Reinhart had been with Lear Corporation since November 1996, most recently as Financial Director of Lear's Ford European Group in Coventry, England. Prior to Lear, Mr. Reinhart had been with Allied Signal since 1978 in various management positions, most recently as Group Controller of the Filter and Spark Plug Group in Allied Signal's Automotive Sector. Age: 46 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: 47 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 45 65 ITEM 11 EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth, for the year ending December 31, 2001, the five-month transition period ending December 31, 2000 and the two years ending July 31, 2000 and 1999, 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. Summary Compensation Table
Long Term Compensation /(1)/ ------------------ Compensation Securities -------------------------- Underlying All Other Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($) - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Thomas J. Snyder 2001 425.0 268.3 -- 21.2/(3)/ President and Chief 2000/(2)/ 158.3 244.7 52,100 5.5/(3)/ Executive Officer 2000 350.0 387.3 7,000 17.3/(3)/ 1999 295.0 292.4 7,000 13.8/(3)/ Richard L. Keister, 2001 260.0 182.0 -- 10.0/(4)/ President, Aftermarket 2000/(2)/ 101.6 97.3 -- 2.1/(4)/ 2000 230.3 99.5 3,500 8.6/(4)/ 1999 218.1 154.2 3,500 7.5/(4)/ Richard L. Stanley 2001 291.5 110.5 -- 10.2/(5)/ President, Delco Remy 2000/(2)/ 117.3 143.4 17,550 1.2/(5)/ America 2000 275.0 218.6 5,000 11.2/(5)/ 1999 220.0 135.6 5,000 7.0/(5)/ Roderick English, 2001 262.5 99.6 -- 10.4/(6)/ Senior Vice President, 2000/(2)/ 105.0 106.6 12,500 1.7/(6)/ Human Resources and 2000 237.7 161.8 5,000 9.9/(6)/ Communications 1999 214.2 156.6 5,000 4.5/(6)/ Susan E. Goldy 2001 257.5 97.6 -- 21.7/(7)/ Senior Vice President 2000/(2)/ 104.2 102.9 12,150 9.2/(7)/ and General Counsel 2000 245.0 162.8 3,500 22.5/(7)/ 1999 230.0 136.7 3,500 23.1/(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) $9,437, $7,778 and $5,875 in matching contributions under the Company's 401(k) Plan in fiscal years 2001, 2000 and 1999, respectively; and (ii) $11,785, $5,512, $9,542 and $7,947 in premiums paid under a life insurance policy in fiscal year 2001, the five-month transition period ending December 31, 2000 and fiscal years 2000 and 1999, respectively. /(4)/ Includes the following: (i) $4,658, $3,615 and $2,285 in matching contributions under the Company's 401(k) Plan in fiscal years 2001, 2000 and 1999, respectively; (ii) $1,995, $523, $1,203 and $1,019 in premiums paid under a life insurance policy in fiscal year 2001, the five-month period ending December 31, 2000 and fiscal years 2000 and 1999, respectively; and (iii) $3,517, $1,315, $3,157 and $3,517 in premiums paid under a disability insurance policy in fiscal year 2001, the five-month period ending December 31, 2000 and fiscal years 2000 and 1999, respectively. 66 /(5)/ Includes the following: (i) $8,429 $9,216 and $5,826 in matching contributions under the Company's 401(k) Plan in fiscal years 2001, 2000 and 1999, respectively; and (ii) $1,777, $1,178, $1,958 and $1,138 in premiums paid under a life insurance policy in fiscal year 2001, the five-month transition period ending December 31, 2000 and fiscal years 2000 and 1999 respectively. /(6)/ Includes the following: (i) $7,027, $7,007 and $2,575 in matching contributions under the Company's 401(k) Plan in fiscal years 2001, 2000 and 1999, respectively; and (ii) $3,371, $1,654, $2,925 and $1,907 in premiums paid under a life insurance policy in fiscal year 2001, the five-month period ending December 31, 2000 and the fiscal years 2000 and 1999, respectively. /(7)/ Includes the following: (i) $3,419, $3,683 and $4,211 in matching contributions under the Company's 401(k) Plan in fiscal years 2001, 2000 and 1999, respectively; (ii) $2,000, $2,000, $2,000 and $2,000 in salaried medical retiree benefits in fiscal year 2001, the five-month transition period ending December 31, 2000 and fiscal years 2000 and 1999, respectively; (iii) $1,508, $1,294, $2,310 and $2,240 in premiums paid under a life insurance policy in fiscal year 2001, the five-month transition period ending December 31, 2000 and fiscal years 2000 and 1999 respectively; and (iv) $14,808, $5,939, $14,525 and $14,622 in living allowances in fiscal year 2001, the five-month transition period ending December 31, 2000 and fiscal years 2000 and 1999, respectively. 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, 2001, the named executive officers of the Company have been credited with the following amounts of service under the Retirement Plan: Harold K. Sperlich - 7.4 years; Thomas J. Snyder - 39.4 years; Richard L. Stanley - 23.8 years, and Susan E. Goldy - 5 years. CHANGE OF CONTROL AGREEMENTS The Company executed change of control agreements with the following executive officers: Mr. Snyder, Mr. Stanley, Ms. Goldy, 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. 67 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. 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 and Ms. Goldy 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. 68 EMPLOYMENT AGREEMENT The Company entered into an employment agreement with Mr. Snyder which provides for his employment until July 2002. Mr. Snyder's agreement will automatically extend for successive additional 12-month periods after July 2002 until notice by either the Company or Mr. Snyder. Mr. Snyder receives an annual base salary of $425,000, 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. DIRECTOR COMPENSATION Mr. Sperlich received $337,650 in directors fees during 2001 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 2001, Mr. Billig, Mr. Cashin, Mr. Gerrity 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. In addition to the fees discussed above, Mr. Gerrity received $163,334 during 2001 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. In connection with the going private transaction and the merger that followed, the Company's Board of Directors formed a special committee (the "Special Committee") to evaluate the terms of the tender offer and merger. The members of the Special Committee were Mr. Sperlich and Mr. Schultz. In connection with Mr. Sperlich's and Mr. Schultz's service on the Special Committee, each of them received $1,000 per meeting of the Special Committee attended as compensation, such amount being the standard compensation the Company pays directors for attendance at meetings of the Board, plus reimbursement for all of their out of pocket expenses incurred in attending meetings of the Special Committee. 69 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. The preferred stock will be entitled to semi-annual dividends commencing September 15, 2001, 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, 2,497,337.49 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 14, 2002 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 common stock, (ii) each director and named executive officer of the Company and (iii) all directors and executive officers of the Company as a group.
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 Equity Partners, L.P. 1,650,910.36 73.79% -- -- 1,785,072.63 71.48% -- -- 399 Park Avenue New York, New York 10043 Berkshire Hathaway Inc. 460,404.96 20.58% -- -- 498,098.94 19.94% -- -- 1440 Kiewit Plaza Omaha, Nebraska 68131 Court Square Capital Limited /(2)/ -- -- 1,000 100% -- -- 16,687 100% 399 Park Avenue New York, NY 10043 Harold K. Sperlich -- -- -- -- -- -- -- -- Thomas J. Snyder /(3)/ 9,174.50 .41% -- -- 51,425.69 2.06% -- -- Susan E. Goldy 1,921.06 .09% -- -- 14,078.34 .56% -- -- Roderick English 2,618.14 .12% -- -- 14,833.25 .59% -- -- Patrick C. Mobouck 327.36 .01% -- -- 13,354.16 .53% -- -- Richard Stanley 5,728.72 .26% -- -- 19,697.73 .79% -- -- E.H. Billig -- -- -- -- -- -- -- -- Richard M. Cashin, Jr. 8,614.61 .39% -- -- 9,319.90 .37% -- -- Michael A. Delaney -- -- -- -- -- -- -- -- James R. Gerrity /(4)/ 4,307.30 .19% -- -- 4,659.94 .19% -- -- Robert J. Schultz -- -- -- -- -- -- -- -- Joseph M. Silvestri -- -- -- -- -- -- -- -- All directors and executive officers as a group (12 persons)31,400.26 1.40% -- -- 112,971.03 4.52% -- --
___________________________________ /(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)/ 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, a Delaware corporation, owns all of the outstanding capital stock of Citicorp Banking Corporation. Citigroup Holdings Company, a Delaware corporation, owns all of the outstanding common stock of Citicorp. Citigroup Inc., a Delaware corporation, or Citigroup, owns all the outstanding common stock of Citigroup Holdings Company. /(3)/ 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. /(4)/ 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. 70 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On February 7, 2001, the Company agreed to a going private transaction with 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 Exchange Act. In connection with the going private transaction and the merger that followed, the Company amended its Certificate of Incorporation to recapitalize its capital stock into three classes of common stock, Class A, Class B and Class C, and one class of preferred stock. 71 Also, the Company: . issued a new warrant to World Equity Partners, L.P., which has since been exercised and the shares obtained have been sold to Berkshire Hathaway Inc.; . executed change of control agreements with some of its then current executive officers; . amended some of its benefit plans; and . entered into Collateral Assignment Split-Dollar Insurance Agreements with some members of its key management. See Item 11, "Change of Control Agreements," "Amendments to Benefit Plans" and "Split-Dollar Insurance Agreements" for a description of these agreements. Also 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 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, none of Court Square, World Equity Partners, L.P. or DRI Group may 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. 72 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, none of Court Square, World Equity Partners, L.P. or DRI Group may 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 World Equity Partners, L.P. 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 either Court Square or World Equity Partners' L.P. 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. 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 connection with the separation from GM in July 1994, Thomas J. Snyder, President, Chief Executive Officer and a director, received a loan from the Company to purchase old Class A Common Stock of the Company. The outstanding balance of the loan and accrued interest was about $89,000 and was fully repaid in March 2001. Court Square provided advisory services to the Company. Pursuant to the terms of the advisory agreement, Court Square was paid about $300,000 upon consummation of the offering of senior subordinated notes by the Company in April 2001. An investment fund administered by an affiliate of Court Square acquired an aggregate principal amount of $15 million of the senior subordinated notes in connection with the offering by the Company in April 2001. 73 PART IV ITEM 14 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 Capital Limited, 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 (14) 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 General Motors Corporation ("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 (4) 10.7 Joint Venture Agreement, dated, by and between Remy Korea Holdings, Inc. and S.C. Kim 74 (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 (6) 10.11 Form of Fourth Amended and Restated Financing Agreement, dated as of December 16, 1997, among the Company, certain of the Company's subsidiaries signatories thereto and Bank One, Indianapolis, National Association and The CIT Group/Business Credit, Inc. (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. (10) 10.23 Letter Agreement by and between the Company and Thomas J. Snyder, dated as of February 6, 2001 (11) 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 (12) 10.25 Amendment Number Two to the Delco Remy International, Inc. Supplemental Executive Retirement Plan, dated as of February 6, 2001 (13) 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 (15) 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. (15) 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. (15) 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. (16) 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 (16) 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 (16) 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 Hathawway Inc. and Dresdner Kleinwort Capital Partners 2001 LP (16) 21 Subsidiaries of the Registrant (9) 99.1 Supplement to the Offer to Purchase * 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 75 (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 (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 13, 1999 (9) Incorporated by reference to Exhibit (a)(1)(I) to Amendment No. 3 to Transition Statement filed on Schedule 13E-3 on February 9, 2001 (10) 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 (11) 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 (12) 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 (13) 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 (14) 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 (15) 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 (16) Incorporated by reference to the Exhibit of the same number to the Company's Form 10-K for the year ended December 31, 2001. (a) Reports on Form 8-K: 1. Press release dated January 19, 2001 regarding the Company's earnings expectations. 2. Press release dated February 26, 2001 regarding completion of the tender offer for the Company's Class A Common Stock. 76 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/ Rajesh K. Shah -------------------------------- Rajesh K. Shah Executive Vice President and Chief Financial Officer Date: May 24, 2002 77 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. 78 -----END PRIVACY-ENHANCED MESSAGE-----