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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-6955
WALBRO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-1358966
(STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.)
6242 Garfield Street, Cass City, Michigan 48726
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(517) 872-2131
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of
the registrant's Common Stock on April 3, 1998.
$93,208,006
The number of shares outstanding of the registrant's Common Stock, par
value $.50, as of April 3, 1998.
8,682,914
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Notice of Annual Meeting of
Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be
held on May 20, 1998 are incorporated by reference into Part III of this report.
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PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The statements contained in this discussion that are not historical
facts are forward-looking statements subject to the safe harbor created by the
Securities Litigation Reform Act of 1995. Whenever possible, the Company has
identified these forward-looking statements by words such as "anticipating,"
"believes," "estimates," "expects," and similar expressions. Walbro
Corporation cautions readers of this discussion that a number of important
factors could cause Walbro's actual consolidated results for 1998 and beyond to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, Walbro. These important factors include, without
limitation, changes in demand for automobiles and light trucks, relationships
with significant customers, price pressures, the timing and structure of future
acquisitions or dispositions including the restructuring program announced
during the fourth quarter of 1997, impact of environmental regulations, the
year 2000 issue, continued availability of adequate funding sources, currency
and other risks inherent in international sales, and general economic and
business conditions. These important factors and other factors which could
affect Walbro's results are more fully discussed in Walbro's filings with the
Securities and Exchange Commission. Readers of this discussion are referred to
such filings. The Company assumes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. BUSINESS
GENERAL
Walbro Corporation is a global leader in the design, development and
manufacture of precision fuel storage and delivery systems and products for
automotive and small engine markets worldwide. The Company manufactures
plastic fuel tanks, fuel pumps, fuel modules, plastic fuel rails and fuel level
sensors for sale to automotive OEMs. Products manufactured for the small
engine market include carburetors and ignitions for chain saws, outboard marine
engines, two-wheeled vehicles, industrial engines and lawn and garden
equipment, such as lawn mowers and weed trimmers. From 1992 to 1997, the
Company increased net sales at the compound rate of approximately 21% per year.
This growth was primarily due to the introduction of new automotive products,
penetration of additional automotive platforms and a recovery in the small
engine industry from depressed levels in the late 1980s. The Company had net
sales of $585.4 million and $619.9 million in 1996 and 1997.
Approximately 74% of the Company's net sales for 1997 were generated
by Walbro Automotive. Through Walbro Automotive, the Company designs, develops
and manufactures fuel storage and delivery systems and components for a broad
range of U.S. and foreign manufacturers of passenger automobiles and light
trucks (including minivans). The Company and its joint ventures hold a strong
market position in North America, Europe and South America and a growing market
presence in Asia. In July 1995, the Company substantially expanded its
European automotive business by acquiring the fuel systems business of Dyno
Industrier A.S. ("Dyno"). In 1997, management estimates that the Company
supplied Chrysler with approximately 79% of its fuel pump and fuel module
requirements, including all requirements for Chrysler's passenger cars and
minivans and approximately 48% of the requirements for Chrysler's light trucks.
Management believes that the Company manufactures substantially all of the fuel
tank systems for Saab and Volvo light vehicles and all of the fuel tanks for
the Mercedes-Benz C Class, Volkswagen
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Polo and Renault Twingo. Other automotive customers of the Company and its
joint ventures include Audi, Daewoo, Fiat, Ford, General Motors, Hyundai, Kia,
Nedcar, Peugeot and Rover.
Approximately 20% of the Company's net sales for 1997 were generated
by Walbro Engine Management. Through Walbro Engine Management, the Company
designs, develops and manufactures diaphragm carburetors for portable engines
(such as those used in chain saws and weed trimmers), float feed carburetors
for ground supported engines (such as those used in lawn mowers and marine
engines) and ignition systems and other components for a variety of small
engine products. The Company believes that it is the world's largest
independent manufacturer of small engine carburetors, with an approximate 72%
share of the global diaphragm carburetor market including sales to such leading
chain saw and weed trimmer manufacturers as Poulan/Weedeater, Deere and Company
(Homelite), Stihl Incorporated, McCulloch Corporation, Ryobi Ltd. and Kioritz
(Echo) Corporation. The Company believes it has an approximate 10% share of
the global float feed carburetor market, including sales to Briggs & Stratton
Corporation, the world's largest small engine manufacturer, Kohler Company,
Tecumseh Products Co., and Mercury Marine, a major manufacturer of outboard
marine engines. The Company produces substantial volumes of float feed
carburetors for the Chinese two-wheeled vehicle market.
The remaining 6% of the Company's net sales for 1997 were primarily
related to replacement products for both the automotive and small engine
aftermarkets. The Company has recently begun pursuing initiatives to expand
its aftermarket customer base and product lines in an effort to grow this
segment of its business.
The Company was incorporated in Michigan in 1950 and reincorporated in
Delaware in 1972. The Company's principal executive offices are located at
6242 Garfield Street, Cass City, Michigan 48726-1325, and its telephone number
is (517) 872-2131.
WALBRO AUTOMOTIVE
AUTOMOTIVE INDUSTRY OVERVIEW
A number of trends within the global automotive market have had and
will continue to have a fundamental impact on the Company's future
profitability and growth prospects, including: the shift by OEMs to the
purchase of "systems" rather than individual components, the globalization of
the OEM supplier base, the expansion of OEM supplier responsibilities and
increased emissions regulation. These trends have contributed to a
consolidation of OEM suppliers which the Company expects will continue.
Purchase of Integrated Systems. Automotive OEMs are relying
increasingly on suppliers who can provide entire systems rather than a number
of different parts. OEMs can reduce their own internal engineering efforts and
the number of suppliers by purchasing systems rather than components.
Management believes the engineering and technological challenges facing systems
suppliers will continue to grow as these systems become more complex. To
strengthen the Company's position as a major supplier of automotive fuel
systems, the Company is investing in its engineering and testing capabilities
and actively pursuing its systems philosophy. The Company believes that the
systems approach is being adopted outside North America and that the Company
will be able to provide systems to the European market in the future.
Globalization of the OEM Supplier Base. Several OEMs, including Ford,
General Motors and Volkswagen, are introducing automobile models which are
designed for the world automotive market ("World Cars"). This departure from
the historical practice of designing separate models for each regional market
is requiring suppliers to establish international development and manufacturing
facilities capable of providing system components with consistent quality on a
worldwide basis. The Company
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believes it is well positioned as a major supplier of fuel storage and delivery
systems ("FSDS") to the world automotive markets.
Expansion of OEM Supplier Responsibilities. Since the 1980s, Ford,
Chrysler and General Motors have been actively reducing their respective
supplier bases to those who accept significant responsibility for product
management and meet increasingly strict standards for product quality, on time
delivery and manufacturing costs. These suppliers are expected to control all
aspects of production of system components, including design, development,
component sourcing, manufacturing, quality assurance, testing and delivery to
the customer's assembly plant. The Company believes that many suppliers do not
have the resources to meet these OEM requirements and that the automotive OEM
supplier market will be divided among a smaller group of key suppliers. The
Company has received a number of quality awards from its OEM customers,
including the Ford Q1 Award, Chrysler QE Award and General Motors Supplier of
the Year Award, and believes that this supplier consolidation provides an
opportunity for the Company's increased penetration of the OEM market.
Increasing Emissions Regulation. Beginning in the late 1970s, U.S.
environmental regulations, including fuel economy regulations and the Clean Air
Act and its Amendments, have had a significant impact on fuel systems and the
controls placed on mobile source emissions. As a result, U.S. automotive fuel
systems have evolved from mechanically controlled carbureted systems to more
sophisticated, electronically controlled fuel injection systems. Governmental
action in many other parts of the world is forcing a similar transition to
engine management systems which produce less emissions. For example, the
European Economic Community, which previously had less stringent automotive
exhaust regulations, adopted exhaust standards effective January 1, 1993 which
are comparable to 1983 U.S. requirements.
Compliance with these regulations has resulted in efforts to reduce
evaporative emissions and the development of new "flexible" fuels such as
ethanol and methanol blends. In response to these changes, the Company has
developed a number of products including electric pumps designed for electronic
fuel injection systems, onboard running and vapor recovery ("ORVR") systems and
plastic fuel tanks which reduce hydrocarbon permeation and are corrosion
resistant to flexible fuels.
AUTOMOTIVE BUSINESS STRATEGY
The Company intends to capitalize on trends in the automotive industry
through the development of its fuel systems technology and expansion of its
product line and customer base. The key elements of the Company's strategy
include:
Systems Approach to Product Development. The Company is utilizing its
expertise to develop integrated FSDS which reduce evaporative emissions, are
compatible with the corrosive nature of flexible fuels and provide customers
with the cost savings and convenience of purchasing complete systems rather
than numerous individual components. The Company's "systems" approach to
product development is designed to allow the Company to increase product
content on each vehicle in which its products are installed while providing
customers with substantial performance and cost benefits. This systems
approach has made possible an increase in the dollar value of the Company's
products per vehicle. For example, the new Dodge Durango, which began volume
production in the third quarter of 1997, is equipped with the Company's fuel
storage and delivery system. These products have a selling price of greater
than $150, compared to a typical 1987 vehicle equipped with only $15 of the
Company's products. The Company's ability to assume responsibility for the
development of FSDS allows OEMs to reduce internal engineering efforts and use
fewer suppliers through the purchase of systems rather than components.
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Global Capabilities. The Company's international manufacturing and
market presence allows the Company to offer its current and future FSDS
technology to the global automotive market. The Company's presence in Europe
provides it with additional resources and marketing contacts to supply
integrated fuel systems to both European and North American OEMs assembling
vehicles in Europe and European OEMs assembling vehicles in the United States.
The Company's international sales for 1997 were 50% of the Company's net sales
(excluding joint ventures) compared to 52% in 1996. The Company's plastic tank
manufacturing capability allows it to pursue its systems strategy in Europe and
serve OEM customers as they confront new environmental and regulatory
challenges worldwide and introduce World Cars designed for sale to the global
automotive market. In addition, the Company has a market presence in Brazil,
South Korea and Japan and it has entered into joint ventures with manufacturers
in Brazil, France, Japan, Mexico, Argentina and South Korea which enable the
Company to access those foreign markets.
Technical and Product Development Capabilities. The Company's
engineers focus their research and development efforts to respond to the
technical challenges facing their customers. The Company has designed its
current line of FSDS products in response to U.S. fuel economy and emission
regulations and changing consumer demands over the past two decades.
Management believes that the Company is well positioned to capitalize on the
emergence of more stringent global emission regulations through the development
of a new generation of products and systems with greater fuel efficiency,
reduced component weight, improved durability, fuel vapor control and flexible
fuel compatibility. An example of these products is the ORVR system which
captures fuel vapors from the fuel system and routes them to a carbon canister
for storage and reuse.
The Company has made substantial investments in fuel systems
technology, product design and test capability and technical personnel to
advance FSDS technology and respond to customer needs. A state-of-the-art
systems center in Auburn Hills, Michigan provides the Company with the
full-service product management capability which OEMs require of key suppliers
and provides the Company with a competitive advantage in the development of
proprietary fuel systems technology. Similarly, the Company has begun
construction of a new systems center in Europe to provide product design and
test capabilities.
AUTOMOTIVE PRODUCTS
The Company's product development engineers design fuel storage and
delivery systems in response to customer needs and in anticipation of evolving
trends in the market. Today's electronic fuel injected engines demand an
uninterrupted supply of fuel under pressure and some vehicles require complex
fuel tank configurations. The Company specializes in technology employed in
the FSDS and currently manufactures and sells fuel pumps, fuel modules, fuel
level sensors, plastic fuel tanks, bracket assemblies and plastic fuel rails.
In response to the environmental and fuel efficiency demands on
today's automobiles, the Company has developed, and is continually taking steps
to improve, an electric pump designed to deliver fuel under pressure to
electronic fuel injection equipped engines. The pump is fastened to a bracket
and flange assembly, which allows the pump to be mounted in the fuel tank. The
assembly has been increasingly replaced with a single integrated unit, called a
fuel module, which performs all of the functions of the assembly described
above. The fuel module is a complete, value-added package for specific
applications composed of a fuel pump, plastic reservoir, fuel level sensor and
related parts. These injection-molded plastic units fit inside the fuel tank,
ensuring continuous fuel delivery under low fuel conditions, maximum vehicle
driving range and enhanced fuel delivery under high temperature conditions, all
at a reduced noise level. Although vehicles were not equipped with fuel
modules until
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1988, approximately 75% of cars and light trucks sold by General Motors, Ford
and Chrysler in North America in 1997 used fuel modules. In 1997, the Company
supplied approximately 20% of all of the fuel modules purchased in North
America, principally to Ford and Chrysler.
Approximately 25% of North American vehicles and 72% of European
vehicles produced in 1997 contained plastic fuel tanks. Plastic fuel tanks
offer several advantages over conventional steel tanks, including lighter
weight, greater corrosion resistance to new, cleaner-burning fuels like
methanol and the ability to be produced in unusual shapes to better use
available space. In anticipation of customer demand in North America for more
sophisticated fuel tanks, the Company built a new facility in Ossian, Indiana
in 1993 to produce plastic multi-layer fuel tanks. The Company produced
three-layer plastic fuel tanks during the fourth quarter of 1994, and during
1995 and 1996 for the Ford Windstar. The multi-layer construction of the
Company's new, six-layer plastic tank substantially eliminates fuel permeation,
making this one of the first plastic tanks which complies with the EPA
permeability requirements which became effective beginning in model year 1996.
The first production run of six-layer tanks began in 1996 for the GM T600 and
was followed in 1997 by production of fuel tanks for the 1998 Saturn, the 1998
GM Yukon/Tahoe and the 1998 Chassis Cab. In addition a new facility in
Meriden, Connecticut began production of the fuel tanks for the 1998 Dodge
Durango in September, 1997.
The Company is currently producing mono-layer plastic fuel tanks,
which include coatings and permeation barriers that meet European emission
requirements, for Audi, Mercedes-Benz, Nedcar, Peugeot, Renault, Rover, Saab,
Volkswagen and Volvo. As these customers require more sophisticated fuel
tanks, the Company will likely supplement a portion of its mono-layer blow
molding machines with multi-layer blow molding machines to provide the
Company's OEM customers in Europe with advanced, plastic fuel tank technology.
The Company also produces plastic fuel rails suitable for a variety of
engine applications. An extension of the FSDS concept, these under-hood
components, located on the engine, deliver fuel to the individual fuel
injectors used in electronic multi-point fuel injection systems. The Company
has designed a plastic fuel rail which is superior to metal fuel rails in cost,
weight and handling of more corrosive flexible fuels. In 1994, Ford began to
install this new rail on the 3.0 liter engine in the Windstar. In 1997 Ford
began to install this new fuel rail on 3.0 liter 2-valve engines for Taurus and
Sable vehicles, as well as the 3.0 liter engines in the Windstar vans.
An important advantage of the Company's systems approach is that it
assists customers in responding to developments in safety and environmental
standards. For example, current environmental regulations call for a FSDS that
minimizes or eliminates the escape of fuel vapors during refueling, storage and
operation. In January 1994, the EPA announced regulations governing ORVR
systems as mandated by the 1990 Clean Air Act. The regulations require
installation of devices which trap hydrocarbon vapors on a phase-in basis for
passenger cars beginning in model year 1998 and for light trucks in model year
2001. In anticipation of these regulations, the Company has developed a
variety of ORVR devices which help prevent fuel vapor loss from fuel delivery
systems. The first of these devices entered production during 1997.
AUTOMOTIVE MARKETS AND CUSTOMER BASE
The Company currently provides a wide variety of products to a diverse
customer base in a number of geographic areas.
North America. Net sales to Chrysler, General Motors and Ford for
1997 accounted for 19%, 5% and 5% of the Company's consolidated net sales,
respectively. These customers have ongoing supply
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relationships with the Company which are subject to continued satisfactory
price, quality and delivery. The Company is the primary outside supplier of
fuel pumps, the core of the FSDS, to Chrysler. In the past, the Company has
capitalized on its fuel system components penetration to supply additional fuel
system products, such as fuel modules and fuel rails, to Chrysler and Ford, and
to assume a key role in the development of new fuel system products, such as
ORVR devices. General Motors historically developed and produced substantially
all of its fuel storage and delivery systems internally but recently has
sourced a significant portion of plastic fuel tank programs to outside
suppliers, including the Company.
The Company has formed a joint venture with two minority business
owners to produce automotive components in Detroit's Empowerment Zone
("VITEC"). VITEC is expected to manufacture FSDS products (including
blow-molded plastic fuel tanks). General Motors has awarded $450 million of
new business to the joint venture over a five-year period commencing in 1998.
Chrysler has also awarded new business to the joint venture. In September
1996, the Company received a tax credit worth an estimated $13.6 million from
the Michigan Economic Growth Authority for this new facility.
Europe. In 1991, the Company began operations in Europe with the
establishment of its Marwal Systems joint venture in France with Magneti
Marelli S.p.A. of Italy to serve customers that include Fiat, Nissan, Peugeot,
Renault, Rover, Saab and Volvo. The Company is the only integrated FSDS
supplier in Europe, which has provided the Company with the immediate
opportunity to increase its participation in the European automotive market.
In addition, the Company is using its relationships in the U.S. to increase its
sales to North American manufacturers in Europe. Similarly, the Company is
leveraging its relationships with Mercedes-Benz, Peugeot, Renault, Saab,
Volkswagen, Volvo and other European manufacturers to enhance the Company's
marketing efforts with these European manufacturers around the world.
Approximately 72% of the European light duty vehicles and 25% of the North
American light duty vehicles are equipped with plastic fuel tanks. Management
estimates that operations in Europe produced plastic fuel tanks accounting for
approximately 19% of the European plastic fuel tank market in 1997.
South America. In January 1993, operations began at the Company's
Marwal do Brasil joint venture, which targets the South American automotive
market of approximately two million units per year. In September 1995, the
Company established Walbro Automotive do Brasil to manufacture plastic fuel
tanks for the Brazilian automotive market. It began production of plastic fuel
tanks for Volkswagen in November 1996. In 1996, the Company received an order
from Ford for a supply of plastic fuel tanks for Ranger trucks to be produced
in Argentina.
Asia. In December 1986, the Company entered into a joint venture in
Japan known as Mitsuba-Walbro, Inc. with Mitsuba Electric Manufacturing Company
to manufacture fuel pump components. In November 1994, the Company established
Korea Automotive Fuel Systems Ltd., a joint venture with Daewoo Precision
Industries Ltd. in South Korea, to manufacture and market fuel modules for the
domestic Korean automotive market and additional export markets established by
Korean OEMs. As part of the Restructuring, management is currently reviewing
alternatives to reduce the Company's investment in this joint venture.
AUTOMOTIVE COMPETITION
The Company competes with several other manufacturers, including the
OEMs themselves, many of which have greater sales and financial resources than
the Company. In the fuel pump market, the Company's major competitors include
Robert Bosch GmbH, Denso Corp., Ltd., VDO (a division of Mannesmann), Visteon
(Ford's component group) and Delphi Automotive Systems (GM's component
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group). In the fuel rail market, the Company's major competitors include
Delphi, Visteon, Echlin Inc. and Siemens A.G. The Company has competition in
the fuel module market from Delphi, Robert Bosch GmbH, Denso Corp., VDO and
Visteon. The Company's largest competitors in the plastic fuel tank market
include Kautex Werke Reinold Hagen A.G. (which was acquired by Textron Inc. in
January 1997), Solvay S.A., Plastic Omnium Industries, Inc. and Visteon. Steel
tanks, manufactured primarily by the OEMs, also compete with the Company's
plastic fuel tanks.
The Company competes for new business both at the beginning of the
development of new models and upon the redesign of existing models. New model
development generally begins two to three years prior to a product
introduction. Once a producer has been designated to supply parts for a new
program, an OEM usually will continue to purchase those parts from the
designated producer for the life of the program, although not necessarily for a
redesign. Competitive factors in the market for fuel storage and delivery
products include product quality and reliability, cost and timely delivery,
technical expertise and development capability and new product innovation.
AUTOMOTIVE SALES AND ENGINEERING SUPPORT
Sales of the Company's FSDS products to automotive OEMs are made
directly by the Company's sales/engineering force, who not only sell the
products but assist customers with related engineering matters. Because of the
automobile design process, the Company is generally able to determine a few
years in advance the models for which it will supply products. The Company's
sales force works closely with the Company's engineering departments and
systems center in Auburn Hills in the research, design, development and
improvement of its products. When the Company's systems center in Europe is
completed in 1998, the Company will also have additional design and research
capabilities to provide OEMs in Europe with full-service product management.
Because the Company has the capability to provide comprehensive engineering
resources with respect to its product line and assume increasing responsibility
for the development of FSDS products, the Company has been successful in
responding to the decisions by OEMs to consolidate suppliers and reduce
internal engineering resources.
AUTOMOTIVE WARRANTY AND OTHER PRODUCT EXPOSURE
The design and manufacture of fuel systems entails an inherent risk
that a governmental authority or a customer may require the recall of one of
the Company's products or a product in which one of the Company's products has
been installed. The Company has taken and intends to continue to take all
reasonable precautions to avoid the risk of exposure to an expensive recall
campaign which could have a material adverse effect on the business and
financial condition of the Company.
WALBRO ENGINE MANAGEMENT
SMALL ENGINE INDUSTRY OVERVIEW
The small engine industry is facing a number of environmentally-driven
changes which will require an increased emphasis on fuel systems technology and
the development of new fuel systems products. Growth opportunities outside of
the U.S. are expected to be driven by growth in the use of two-wheeled vehicles
and the increased use of gasoline-powered portable equipment in developing
countries.
Emphasis on Engine Management Systems and New Product Development.
Historically, exhaust emissions of gasoline-powered small engines were
unregulated. In 1992, the California Air Resources Board promulgated
comprehensive air quality regulations limiting small engine emissions, which
regulations became effective in August 1995. A more stringent phase is
scheduled to become effective in 1999. In addition, the EPA has implemented
similar regulations that became effective in August 1996, with a more stringent
phase expected to be phased in beginning 2002. The products designed to meet
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these new emission standards in the small engine market will require more
sophisticated product research and new production capabilities. The increased
technological content and sophistication required to meet emission regulations
is expected to result in lower unit sales with greater value added per product
and higher unit prices.
Growing Demand in Developing Countries. The Company expects
significant growth in the demand for float feed carburetors in developing
countries as per capita income increases and two-wheeled vehicles become more
affordable. Production of two-wheeled vehicles in the People's Republic of
China, for example, increased from approximately 49,000 units in 1980 to
approximately 3.4 million in 1993, 5.2 million in 1994, 7.8 million in 1995 and
management estimates 1996 and 1997 production to have been approximately 9.3
million units each year. In addition, management believes demand for diaphragm
carburetors used in gasoline-powered portable tools will grow in these
developing countries. The inaccessibility of electrical power distribution and
geographic isolation of many projects, such as the clearing of land and highway
construction, hinder the use of electric-powered equipment.
SMALL ENGINE BUSINESS STRATEGY
To respond to the promulgation of increasingly strict emission
regulations in the small engine industry, the Company is working to develop a
small engine management system which will comply with new emission standards.
As the leading developer of fuel systems technology for portable engines, the
Company is well positioned to draw upon its expertise in carburetor and
ignition system design and development, as well as its experience in responding
to emissions-driven challenges in the automotive sector. The Company's
advanced product design and development facilities in Michigan and Japan, which
are equipped with sophisticated emission measurement instruments, provide the
Company with the facilities necessary to develop more sophisticated small
engine management systems.
In addition to developing new technologies, the Company intends to
grow its small engine business through expansion into foreign markets. The
Company's presence in developing countries such as the People's Republic of
China will allow it to benefit from the growing market for carburetors for
two-wheeled vehicles and from infrastructure development which requires
portable power tools.
SMALL ENGINE PRODUCTS
The Company was founded as a manufacturer of carburetors for small
engine products such as lawn mowers and marine engines, and later expanded its
customer base to include manufacturers of chain saws, weed trimmers, snow
blowers and two-wheeled vehicles. The Company's carburetor technology has
continually evolved, with the Company now manufacturing diaphragm and float
feed carburetors, ignition systems and other components for small engine
products and aftermarket applications. The Company's diaphragm carburetor,
float feed carburetor and ignition system sales accounted for 57%, 29% and 14%,
respectively, of the Company's 1997 small engine net sales.
The diaphragm carburetor uses a diaphragm and a series of
interconnected passages to draw and regulate the amount of fuel delivered to
the engine from the fuel tank. The Company manufactures several basic models
of diaphragm carburetors from which are derived numerous variations. Diaphragm
carburetors are used on chain saw and weed trimmer engines because they will
operate in any position and minimize vapor lock. The Company believes that it
is the world's largest manufacturer of small engine diaphragm carburetors.
The float feed carburetor uses a float in a reservoir of fuel to
regulate the amount of fuel delivered to the engine. In contrast to the
diaphragm carburetor, which operates in all positions, the float feed
carburetor operates only in an upright position. The Company manufactures
several basic models
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of float feed carburetors from which are derived numerous variations. The
Company's float feed carburetors are used on engines for lawn mowers, garden
tractors, two-wheeled vehicles, marine outboard engines, generators and
industrial engines.
The ignition system uses rotating magnets in a flywheel, which induce
an electrical charge in the ignition module. The ignition module releases this
charge to the spark plug. The Company's ignition systems are used
predominantly in chain saw and weed trimmer applications.
In response to California and proposed EPA air quality regulations,
the Company is integrating its carburetor and ignition technology to develop an
engine management system which will electronically control both fuel delivery
and ignition functions to limit exhaust emissions. The Company has
successfully refined existing carburetors through the incorporation of
extremely close tolerances which provide more accurate control of the fuel/air
mixture to meet the first set of standards that became effective in California
in 1995 and nationwide in 1996. Company engineers are developing new
technology to meet the subsequent requirements which will become effective in
California in 1999 and nationwide during the period 2002 to 2005. This
development effort focuses on complete engine management systems that control
air flow, fuel delivery and ignition timing to enhance fuel efficiency and
reduce pollution.
SMALL ENGINE MARKETS AND CUSTOMER BASE
The Company sells its small engine products in a global market.
Carburetors and small engine ignitions are sold by the Company's sales and
engineering staff directly to engine manufacturers. The Company sells a major
portion of its diaphragm carburetors to most of the leading chain saw and weed
trimmer manufacturers, including Poulan/Weedeater, Deere and Company
(Homelite), Stihl Incorporated, McCulloch Corporation, Ryobi Ltd. and Kioritz
(Echo) Corporation. The Company sells float feed carburetors to several of the
leading manufacturers of small engines, including Briggs & Stratton
Corporation, the world's largest small engine manufacturer. Mercury Marine, a
major outboard engine manufacturer, buys approximately 73% of its outboard
engine carburetors from the Company.
One of the Company's opportunities for growth in the small engine
industry is the Chinese market. In January 1994, the Company acquired a 60%
interest, increased to 70% in 1995, in Fujian Hualong Carburetor Co., Ltd.
(Fujian) which manufactures and markets carburetors for two-wheeled vehicles in
the People's Republic of China. In addition, the Company has built a new
manufacturing facility in Tianjin to provide additional capacity to take
advantage of growth in the two-wheeled vehicle market. This new facility began
production in October 1996.
SMALL ENGINE COMPETITION
The Company has several competitors that manufacture diaphragm
carburetors for the global small engine market, including Zama Industries,
Ltd., Tillotson Commercial Motors Ltd. and Dell' Orto, some of which are
divisions of large diversified organizations which have total sales and
financial resources exceeding those of the Company. In the market for float
feed carburetors, the Company has several competitors, including Briggs &
Stratton and Tecumseh Products, both of which have greater sales and financial
resources than the Company. The Company's major competitors in the ignition
systems market are R.E. Phelon Company Inc. in the U.S.; Ikeda Denki, Oppama
Kougyou, Iida Denki, Kokusan Denki in Japan; and other internal suppliers to
engine manufacturers
AFTERMARKET PRODUCTS
The Company sells automotive aftermarket products for both carbureted
vehicle applications and electronic fuel injection vehicle applications through
independent distributors, such as Federal-Mogul
9
<PAGE> 11
Corporation and Standard Motor Products, Inc., and jobbers and dealers
worldwide. Some automotive products are also sold to national manufacturing
and distribution organizations for sale under private brand names or to
industrial customers for use in special applications. The Company has recently
begun pursuing initiatives to expand its aftermarket customer base and product
lines in an effort to grow this segment of its business. Such initiatives
include entry into components for performance vehicles and recreational
vehicles, as well as broader coverage of fuel pumps and fuel modules.
The Company sells automotive aftermarket products to support its OEM
customers and to benefit from higher margins on aftermarket sales. Management
believes that the overall market size for automotive electronic fuel injection
systems components sold to the aftermarket will continue to grow as the
population of vehicles equipped with electronic fuel injection systems ages.
The Company sells its own brand name small engine aftermarket products
through independent distributors, jobbers and dealers worldwide. Some of these
products are also sold to national manufacturing and distribution organizations
for sale under private brand names or to industrial customers for use in
special applications.
ACQUISITION AND JOINT VENTURE STRATEGY
As part of a long-term strategy for growth and expansion into new
geographic and product markets, the Company may undertake select acquisitions
and strategic alliances in the form of joint ventures. The Company may make
select acquisitions of companies which can enhance the Company's traditional
products and technologies and can provide additional growth opportunities.
These acquisitions would contribute new product technology and open new markets
to the Company. In evaluating these acquisitions, the Company seeks high
quality operations which fit with the Company's expertise in markets where it
has an established customer base and a clear vision of opportunities, thus
decreasing transition costs and other financial risks associated with corporate
acquisitions. Similarly, each of the Company's joint ventures provides the
Company with the opportunity to benefit from established customer relationships
or a unique technological advancement which the Company could not develop on
its own without the risk and expense of establishing marketing and
manufacturing organizations alone. In management's opinion, the Company's
joint ventures ultimately reduce the cost of penetrating new markets and limit
the Company's financial exposure with respect to these operations. At the
present time the Company has no specific agreements with respect to any new
acquisitions or joint ventures.
MANUFACTURING AND FACILITIES
The Company conducts operations in approximately 2.3 million square
feet of space in 28 locations. Six additional sites are operated as joint
venture operations. The Company believes that substantially all of its
property and equipment are in good condition. The Company has not experienced
significant limitations on its ability to transfer products between, or sell
products in, various countries.
Each of the Company's manufacturing facilities practices advanced
inventory control procedures and has installed statistical process controls to
insure high levels of quality. In that regard, some of the Company's factories
have received the Ford Q1 Award and the Chrysler QE Award. In connection with
its sales to Saab, which is partially owned by General Motors, the Company's
Norway facility has been named a General Motors supplier of the year five years
in a row beginning in 1991. In 1995, Walbro Automotive was named Supplier of
the Year by General Motors. Various other Company factories have been
recognized by customers such as Mercury Marine, Stihl and Federal-Mogul
Corporation for excellence in product quality and delivery.
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<PAGE> 12
In addition, the Company's domestic automotive customers have
cooperated in the development of a broad based quality procedure for which
their suppliers are required to be certified. The procedure, known as QS 9000,
has been derived from the International Standards Organization's ISO 9000
procedure. Approximately half of the Company's manufacturing locations around
the world have been certified.
When justified by volume, the Company has invested in labor-saving
automated machining, assembly and testing equipment. For example, the
operation in Meriden, Connecticut employs computer controlled molding machines
to form the Company's plastic in-tank reservoirs. These machines are
individually programmable so that variations can be reduced and refined as part
of the continuous control process. Another example is the Caro, Michigan
manufacturing facility's automated fuel pump assembly line, which is capable of
producing 1,000 pumps per hour using only six persons. Over the past several
years, the Company has reduced the cost to manufacture its fuel pumps at this
facility by reducing both labor and material costs. In Ettlingen, Germany, the
Company uses a fully automated assembly line for production of plastic fuel
tanks for the Mercedes-Benz C Class. In addition to these examples of
purchased automation, the Company designs and builds major portions of its own
machining and assembly equipment. This in-house capability permits close
control over the manufacturing process and helps the Company stay competitive
in both cost and quality.
PATENTS, RESEARCH AND PRODUCT DEVELOPMENT
The Company owns approximately 165 U.S. patents and 600 international
patents in the fuel systems field and has a number of applications pending.
These patents include proprietary ownership of designs for control devices for
engines and engine systems, fuel pumps, fuel rails, fuel regulators, fuel level
sensors, fuel reservoirs and fuel system vapor control devices, carburetors and
throttle bodies, as well as ancillary devices for engine and vehicle
applications.
Although these patents are significant to the Company, management
believes that in many cases the adaptation and use of the technology involved
and the proprietary process technology employed to manufacture these products
are more important. The Company maintains a systems center in Michigan for the
research, design and development of new products. The Company began
construction of its new European engineering center in June 1997. The
Company's engineering departments also engage in design, development and
testing. In 1997, 1996, and 1995, the Company spent approximately $17.3
million, $18.4 million and $16.7 million, respectively, for engineering and
research and product development.
COMPONENTS, MATERIALS AND INVENTORY
The Company has a number of sources for the components used in
manufacturing its products. The suppliers who manufacture components often use
tools and dies owned by the Company. If a supplier were to discontinue
supplying any component, it could take the Company some time to replace the
supplier; however, the Company believes its operations would not be materially
adversely affected.
The Company's principal customers provide it with estimates of their
annual needs and make monthly purchase commitments. As a result, the Company
does not experience material backlog. Consequently, the Company manages its
manufacturing facilities on a just-in-time production basis.
EMPLOYEES
As of December 31, 1997, the Company had approximately 5,028
employees. The Company believes that its relations with its employees are
satisfactory. All of the Company's approximately 600 European plant employees
are unionized under their traditional national organizations. All of the
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<PAGE> 13
Company's United States plant employees are non-unionized except approximately
400 employees at both of its Michigan manufacturing locations. The Company's
three-year contract with the bargaining unit for these Michigan plants expires
in November 1998.
REGULATION
The Company's operations are subject to increasingly stringent
environmental laws and regulations governing air emissions, waste water
discharges, the generation, treatment, storage, disposal and remediation of
hazardous substances and wastes, and employee health and safety. Certain of
these laws can impose joint and several liability for releases or threatened
releases of material upon certain statutorily defined parties, including the
Company, regardless of fault or the lawfulness of the original activity or
disposal.
The Company believes it is currently in material compliance with
applicable environmental laws and regulations. The Company's compliance with
environmental laws and regulations has not materially affected the results of
its operations or the conduct of its business; however, the Company cannot
predict the future effects of such laws and regulations.
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<PAGE> 14
ITEM 2. PROPERTIES
The Company conducts operations in approximately 2.3 million square
feet of space in a total of 28 locations. Six additional sites are operated as
joint venture operations. The Company believes that substantially all of its
property and equipment is in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation, and is not aware of any
pending or threatened litigation, that would have a material adverse effect on
the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
QUARTERS ENDED Market Price Dividends
High Low Per Share
-------- -------- ---------
<S> <C> <C> <C>
December 31, 1997.......................... 24 1/8 12 $.10
September 30, 1997......................... 24 1/4 19 1/2 .10
June 30, 1997.............................. 21 1/2 15 .10
March 31, 1997............................. 19 1/4 16 1/2 .10
----
$.40
====
December 31, 1996.......................... 21 1/4 18 1/4 $.10
September 30, 1996......................... 21 18 1/4 .10
June 30, 1996.............................. 22 1/2 19 5/8 .10
March 31, 1996............................. 20 3/4 17 3/4 .10
----
$.40
====
</TABLE>
On February 24, 1998, the closing per share price was $13.125. The above prices
do not include retail markup, markdown, or commission. As of February 24, 1998,
the approximate number of shareholders was 1,005. Walbro is traded on the NASDAQ
National Market ("NNM") and reported by NNM under the symbol "WALB".
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The results of operations and balance sheet data of the Company for each
of the years in the three-year period ended December 31, 1997 and as of
December 31, 1997 and 1996, respectively, were derived from the audited
Consolidated Financial Statements of the Company, and the notes thereto,
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
From Continuing Operations:
Net Sales...................... $619,905 $585,389 $459,272 $325,205 $273,463
Cost of Sales.................. 538,751 488,134 377,755 261,501 216,804
Income (Loss) Before Cumulative
Effect of Accounting
Change...................... (36,627) 11,229 13,830 14,595 12,567
Income (Loss) Per Share Before
Cumulative Effect of
Accounting Change
(diluted)................... (4.23) 1.30 1.61 1.70 1.47
Cash Dividends Per Share......... 0.40 0.40 0.40 0.40 0.40
Working Capital.................. 75,273 68,275 95,713 58,378 50,187
Total Assets..................... 610,593 589,649 493,473 257,366 215,295
Long-Term Debt................... 291,393 291,723 233,389 66,136 52,392
Stockholders' Equity............. 69,866 137,733 135,427 127,915 114,146
</TABLE>
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1995, 1996 and 1997.
The information contained in the following discussion reflects the results of
the Fuel Systems Business of Dyno Industrier A.S ("Dyno" or "Walbro Europe")
subsequent to its acquisition on July 27, 1995.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996, 1996 COMPARED TO 1995
SALES - The Company reported sales in 1997 of $619.9 million, an increase of
5.9% from $585.4 million. The 1997 sales increase was generated by additional
sales to the automotive market in North and South America and additional sales
to the small engine market partially offset by lower sales to the Europe
automotive market due to lower foreign currency exchange rates. Sales in 1996
were $585.4 million compared to sales of $459.3 million in 1995, an increase of
27.5% mostly because of the Dyno acquisition. On a percentage basis, sales to
the automotive market increased 4.4% in 1997 compared to a 37.9% increase in
1996. Sales to the small engine market increased 7.5% in 1997 compared to a 4.0%
increase in 1996. Aftermarket sales increased 17.5% in 1997 compared to flat
sales in 1996 compared to 1995.
Sales of the Company's original equipment automotive products were
$458.0 million in 1997 compared to $438.6 million in 1996 and $318.1 million in
1995. The 1997 increase in automotive product sales resulted from increased
sales of plastic fuel tank systems to both North American and South American
OEM customers partially offset by lower sales of steel fuel rails in the U.S.
and lower plastic fuel tank sales to European OEM customers. The entire
European sales decline was due to foreign currency exchange rates which were
off 16% compared to the U.S. dollar causing a $37 million decrease in sales.
The increased sales of plastic fuel tank systems resulted from the launch of
four new programs in the U.S. during 1997 and one new program launched in late
1996 in Brazil. The sales growth was lower in 1997 due to (i) insourcing of
fuel pumps and fuel modules by one of the Company's largest customers which was
completed during the first half of 1997; (ii) lower shipments to Chrysler in
the second quarter because of a strike at Chrysler's Mound Road Engine Plant;
and (iii) lower production of passenger cars in the U.S. In addition, 1997
sales were lower due to the delay of one new plastic tank program and the
cancellation of another new plastic tank program by a customer who decided to
delay the conversion from a steel to plastic fuel tank.
In 1996, all of the automotive product sales increase was generated by
sales in Europe, as U.S. based automotive product sales declined by 2.4%. The
increase was primarily the result of including a full year of Walbro Europe
sales in 1996, $214.4 million, versus including only five months of Walbro
Europe sales in 1995 of $88.5 million. U.S. based automotive product sales were
lower in 1996 because of insourcing of fuel pumps and fuel modules by one of
the Company's largest customers. The decline in U.S. based automotive product
sales was substantially offset by increased sales of fuel modules to the
Company's largest customer and sales of the Company's new plastic fuel rails.
Sales of the Company's small engine products were $125.9 million in
1997, up from $117.1 million in 1996 and $112.6 million in 1995. During 1997,
ignition system sales had the largest increase of 25.9% followed by float feed
carburetor sales in The People's Republic of China ("PRC") with a 6.4%
increase. Diaphragm carburetor sales increased 5.3% and float feed carburetor
sales in the U.S. increased by 4.1%. Most of the diaphragm carburetor sales
increase was in Japan which increased by 15.7% in spite of a 10% decline in the
yen-dollar exchange rate. The 6.4% increase in PRC sales was less than expected
because sales suffered in the second half of 1997 from a significant reduction
in orders as customers were forced to reduce excess motorcycle inventories.
In 1996, much of the increase in small engine product sales came from
increased sales of ignition systems (up $6.4 million or 81.0%) and to a lesser
extent float feed carburetors in the U.S. (up $1.7 million or 5.8%) and float
feed carburetors in the PRC (up $1.1 million or 23.9%). These increases were
partially offset by a decline in diaphragm carburetors of $4.6 million or 6.3%
due to reduced demand for handheld power equipment caused by drought in the
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<PAGE> 17
Southeast and Southwest U.S. and cold, wet spring conditions in other parts of
the U.S. Sales declined in Japan because of lower demand and the lower
yen-dollar exchange rate.
Sales of small engine ignition systems were $18.0 million in 1997
compared to $14.3 million in 1996 and $7.9 million in 1995 as customer demand
has grown for this expanding family of products. Management believes that
ignition systems will play a more significant role in the future as small
engines become subject to more stringent emissions regulations.
In 1992, the California Air Resources Board promulgated comprehensive
air quality regulations limiting small engine emissions, which became effective
in August 1995. A more stringent phase is scheduled to become effective in
1999. In addition, the Environmental Protection Agency ("EPA") has imposed
similar regulations which became effective in August 1996, with a more
stringent phase expected to become effective during the 2002 to 2005 period.
The more stringent regulations could significantly reduce the number of units
currently sold, especially diaphragm carburetors, as these regulations could
force manufacturers to replace low cost gasoline-powered lawn and garden
equipment with electric-powered equipment.
In response to the more stringent regulations, the Company is
integrating its carburetor and ignition technology to develop an engine
management system which will electronically control both fuel delivery and
ignition functions to limit exhaust emissions. The Company has successfully
refined existing carburetors to meet the first set of standards and company
engineers are developing new technology to meet the subsequent requirements.
The Company's aftermarket business includes both automotive and small
engine products. Aftermarket sales were $29.5 million in 1997 compared to $25.1
million in 1996 and $25.2 million in 1995. The increase in 1997 sales was due
to adding new customers during the year and the addition of several new
products offered to aftermarket customers. Aftermarket sales declined slightly
in 1996 because of increased in-house production by one of the Company's larger
aftermarket customers.
COST OF SALES - Cost of sales was $538.8 million in 1997 compared to $488.1
million in 1996 and $377.8 million in 1995. Cost of sales as a percent of sales
was 86.9% in 1997 compared to 83.4% in 1996 and 82.3% in 1995 and consequently
gross margin was 13.1% in 1997 compared to 16.6% in 1996 and 17.7% in 1995.
Gross margin declined in 1997 because of lower margins in both automotive and
small engine products. The lower automotive gross margin was due to a change in
the mix of products sold in the U.S.; the launch costs of four new multi-layer
plastic fuel tank programs; start-up costs for new plants in Argentina and South
Korea; relocation of two plants in Europe; and increased warranty costs.
The change in mix of products sold involved lower steel fuel rail
volume; lower volume of fuel pumps and fuel modules from customer insourcing;
the Chrysler Mound Road facility strike; and lower production of U.S. passenger
cars. At the same time, volume increased for new plastic fuel tank systems
which carry lower gross margins because they include a high level of purchased
components.
Increased warranty costs in 1997 included $5.7 million for four product
warranty issues. The warranty issues included a steel fuel rail, two plastic
fuel tanks in Europe and an ignition module for the small engine market.
Management believes that the technical issues have been resolved and does not
expect additional charges related to these warranty claims.
The lower gross margin in 1997 for small engine products was related
primarily to lower volume in the two facilities in the PRC; the warranty cost
for an ignition module previously discussed and one-time costs of moving two
plants. The Mexico carburetor plant and the Mexico ignition system plant were
relocated to a new larger facility in Mexico that supports both operations with
lower overhead costs.
Gross margin declined in 1996 because of lower margins in both
automotive and small engine products. Lower margins in automotive products
resulted from lower volumes at all of the North American facilities, new plant
start-up costs in Brazil and from an increased share of European plastic fuel
tank volume which carry lower margins than the Company's other automotive
products. During 1996, Walbro Europe gross margins were 11.7% compared to 13.1%
in 1995 and were lower primarily because of the new plant
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<PAGE> 18
start-up costs in Belgium, lower volume at the United Kingdom plant and the
Norway plant. Lower margins in small engine products resulted primarily from
lower volumes of diaphragm carburetors, the new plant start-up costs in Tianjin,
PRC and the weaker yen-dollar exchange rate.
SELLING AND ADMINISTRATIVE EXPENSES - Selling and administrative ("S&A")
expenses were $60.8 million in 1997, an increase of 16.5% compared to $52.2
million in 1996. The 1997 increase in S&A was due to new plants in South Korea
and the PRC and due to higher professional fees. The increased professional fees
included financing fees for modifications to bank loan agreements, legal fees,
settlement of legal claims and other one-time charges. In 1996, S&A expenses
increased by 28.6% (12.7% without Europe) compared to $40.6 million in 1995. The
full year of Walbro Europe S&A expenses in 1996 compared to only five months in
1995 caused a large portion of the increase and the remainder of the 1996 S&A
increase came primarily from new plants in Brazil, the PRC and the new Tucson
Precision Products plant. As a percent of sales, S&A expenses were 9.8% in 1997,
8.9% in 1996 and 8.9% in 1995.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development ("R&D") expenses
were $17.3 million in 1997, a decrease of 6.0% compared to $18.4 million in
1996. In 1997, R&D resources to support small engine product development were
increased because of emission regulations but overall expenses declined because
automotive R&D resources were used to support many new production launches of
plastic fuel tank programs and their expenses were charged to Cost of Sales. In
1996, Walbro Europe R&D expenses accounted for all of the 10.2% increase as R&D
expenses excluding Europe decreased by 1.0%.
RESTRUCTURING AND IMPAIRMENT CHARGES - During the fourth quarter of 1997, the
Company recorded a $27 million pretax charge for restructuring its operations
and other actions. The charge was comprised of a $17 million charge for
restructuring and a $10 million charge associated with asset impairments. The
restructuring actions include divestiture of the Company's Ligonier, Indiana
steel fuel rail manufacturing facility and disposition of its interest in U.S.
Coexcell Inc., a manufacturer of blow-molded plastic drums in Maumee, Ohio. In
addition, the Company will consolidate its small engine operations in the
Asia-Pacific region and restructure its European automotive fuel tank
operations. The asset impairment charge included the write off of obsolete
equipment and tooling, write off of its interest in Saginaw Plastics, an
injection molder in Saginaw, Michigan and charges related to its Korean
automotive activities. Lastly, the restructuring charge included a
corporate-wide headcount reduction of approximately 10 percent including
reductions related to the divestitures and restructuring. See Note 5 of the
Notes to the Consolidated Financial Statements.
LOSS ON FOREIGN EXCHANGE TRANSACTIONS - The Company entered into forward foreign
exchange contracts to hedge the Company's foreign currency exposure related to a
sales commitment to a foreign customer. The loss on these contracts was treated
as a hedge for accounting purposes and recorded as a deferred asset, which was
amortized as foreign currency exchange loss in 1995 and 1996. The foreign
currency exchange result was a $1.5 million loss in 1995 compared to a small
gain in 1996 and 1997. See Note 12 of the Notes to the Consolidated Financial
Statements.
NET INTEREST EXPENSE - Net interest expense was $25.4 million in 1997 compared
to $20.5 million in 1996 and $12.4 million in 1995. To finance the Dyno
acquisition in July 1995, the Company sold $110 million in aggregate principal
amount of its 9.875% senior notes and obtained a new $135 million secured Credit
Facility. In December 1997, the Company sold $100 million of its 10.125% senior
notes and used the proceeds to repay a significant part of the secured credit
facility. Borrowing levels were higher in both 1997 and 1996 to support capital
expenditures for facility expansions and for additional equipment and tooling.
The additional borrowings and the shift to a higher percentage of long-term
fixed rate debt raised the average cost of capital and caused the higher
interest expense. The average cost of borrowing was 8.8% in 1997, 8.1% in 1996
and 7.4 % in 1995. See Note 6 of the Notes to Consolidated Financial Statements
for details of the borrowings.
INCOME TAXES - The provision for income taxes was a credit of $10.1 million in
1997
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<PAGE> 19
compared to expense of $3.1 million in 1996 and $1.3 million in 1995. The 1997
provision was a credit because of negative taxable income related to the
restructuring charge and other actions with an effective tax rate of 22.6%. The
provision was higher in 1996 compared to 1995 because of a lower research and
development (R&D) tax credit recorded in 1996 of $1.1 million compared to $3.0
million recorded in 1995. These R&D tax credits resulted from a change by the
Internal Revenue Service in defining the R&D activities which qualify for the
tax credit. The $3.0 million credit in 1995 and lower taxable income caused the
lower provision for income taxes in 1995. The R&D tax credits resulted in an
effective tax rate of 29.6% for 1996 compared to 10.8% for 1995.
JOINT VENTURE INCOME - The Company's equity in income of joint ventures was $3.1
million in 1997 compared to $4.2 million in 1996 and $3.9 million in 1995. The
decrease in 1997 resulted from lower income at Marwal Systems (France) due to
payment of royalties to the Company, start-up costs for Marwal Argentina and
losses at Korea Automotive Fuel Systems. The increase in 1996 compared to 1995
resulted from increased income at Marwal Systems partially offset by losses at
Korea Automotive Fuel Systems.
MINORITY INTEREST - Minority interest was $5.0 million in 1997 compared to $0.3
million in 1996 and $0.5 million in 1995. The 1997 increase was due to the sale
of $69 million of Convertible Preferred Securities of Walbro Capital Trust in
February 1997. The preferred dividends are included as minority interest.
NET INCOME (LOSS) AND INCOME (LOSS) PER SHARE - Net loss for 1997 was $36.6
million compared to net income of $11.2 million in 1996 and $13.8 million in
1995. Net loss per share was $4.23 for 1997 compared with net income per share
of $1.30 for 1996 and $1.61 for 1995. The net loss for 1997 was the result of
the reasons stated above including the restructuring charge and warranty
reserve.
INFLATION - Inflation potentially affects the Company in two principal ways.
First, a portion of the Company's debt is tied to prevailing short-term interest
rates which may change as a result of inflation rates, translating into changes
in interest expense. Second, general inflation can impact material purchases,
labor and other costs. In many cases, the Company has limited ability to pass
through inflation-related cost increases due to the competitive nature of the
markets that the Company serves. In the past three years, however, inflation has
not been a significant factor for the Company.
FOREIGN CURRENCY TRANSACTIONS - Approximately 50% of the Company's sales during
1997 were derived from international manufacturing operations in Europe, Asia,
South America and Mexico. The financial position and the results of operations
of the Company's subsidiaries in Europe (32% of sales), Japan and South Korea
(5% of sales), South America (2% of sales) and PRC (1% of sales) are measured in
local currency of the countries in which they operate and translated into U.S.
dollars. The effects of foreign currency fluctuations in Europe, Japan, PRC,
South America and South Korea are somewhat mitigated by the fact that expenses
are generally incurred in the same currencies in which sales are generated and
the reported income of these subsidiaries will be higher or lower depending on a
weakening or strengthening of the U.S. dollar.
For the Company's subsidiaries in Singapore and Mexico (10% of sales)
the expenses are generally incurred in the local currency, but sales are
generated in U.S. dollars; therefore, results of operations are more directly
influenced by a weakening or strengthening of the local currency versus the
U.S. dollar.
Approximately 49% of the Company's net assets at December 31, 1997,
are based in its foreign operations and are translated into U.S. dollars at
foreign currency exchange rates in effect as of the end of each period.
Accordingly, the Company's consolidated shareholders' equity will fluctuate
depending upon the weakening or strengthening of the U.S. dollar. In addition,
the Company has equity investments in unconsolidated joint ventures in
Argentina, Brazil, France, Japan, Korea and Mexico. The Company's reported
income from these joint ventures will be higher or lower depending upon a
weakening or strengthening of the U.S. dollar.
The Company's strategy for management of currency risk relies primarily
upon the use of forward currency exchange contracts to manage its exposure to
foreign currency fluctuations related to its operations in foreign
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<PAGE> 20
countries and to manage its firm transaction commitments in foreign currencies.
THE YEAR 2000 ISSUE - The year 2000 issue is the result of computer programs
that were written using two digits (rather than four) to define the applicable
year. Any of the Company's computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
which could result in miscalculations or system failures. The Company is working
to resolve the potential impact of the year 2000 on the processing of
date-sensitive information and is in the process of conducting an evaluation of
the impact of the issue at all locations. The evaluation includes computer
programs used for management information systems and computer programs used to
electronically control manufacturing equipment and other devices. The evaluation
has not progressed enough to allow management to assess whether the cost of
addressing this issue will have a material impact on the Company's financial
position, results of operations or cash flows in future periods. Management
expects this evaluation to be completed during 1998.
LIQUIDITY AND CAPITAL RESOURCES - As of December 31, 1997, the Company had $40.2
million outstanding in short-term debt, including current portion of long-term
debt, and $291.4 million in long-term debt. The approximate minimum principal
payments required on the Company's long-term debt in each of the five fiscal
years subsequent to December 31, 1997 are $14.0 million in 1998, $7.4 million in
1999, $30.0 million in 2000, $7.5 million in 2001, $6.8 million in 2002 and
$239.6 million thereafter.
In February 1997, the Company completed an offering of 2,760,000 shares
or $69 million of Convertible Preferred Securities of Walbro Capital Trust and
the proceeds were used to pay down borrowings on the $135 million secured bank
credit facility (the "Credit Facility"). In December 1997, the Company issued
$100 million of its 10.125% Senior Notes due 2007 and the proceeds were used to
pay down borrowings on the Credit Facility. With the issuance of the 2007
Senior Notes the amount currently available under the Credit Facility was
reduced to $30 million. At February 1, 1998, the Company had approximately $11
million of funds available to it under the Credit Facility. In April 1998, the
Company received a commitment for a $150 million line of credit (the "New
Credit Facility") consisting of a $125 million revolving line of credit and a
$25 million capital expenditure facility. The New Credit Facility will be
available for five years after closing. Proceeds of the New Credit Facility
will be used to pay off $30 million under the Credit Facility, the Purchase
Money Loan Agreement, and the 2004 Notes (described below) including an early
retirement premium of approximately $2.3 million, to finance capital
expenditures, and to meet working capital needs. Closing of the New Credit
Facility is subject to customary conditions and is expected to occur by May
31, 1998. Failure to close the New Credit Facility would have a material
adverse effect on the Company's liquidity. See Notes 6 and 21 of the Notes to
Consolidated Financial Statements for further discussion.
The Company is a party to an Intercreditor Agreement (the "Intercreditor
Agreement") dated as of July 26, 1995 and executed by and among the Company, the
holders (the "2004 Noteholders") of the Senior Notes due October 1, 2004 (the
"2004 Notes") and the banks which are a party to the Credit Facility (the
"Banks"). The Company and the Banks and the 2004 Noteholders disagree with the
interpretation of certain provisions of the Intercreditor Agreement. As a
result, the Company has agreed to use its best efforts to retire the 2004 Notes
by no later the May 31, 1998 and the 2004 Noteholders have agreed that, until
May 31, 1998, they will forbear from taking any action under the 2004 Notes. The
Company will use the New Credit Facility to provide the financing to retire the
2004 Notes.
As of December 31, 1997, accounts receivable amounted to $145.0
million, an increase of $18.5 million, compared to $126.5 million at December
31, 1996. The average collection period at December 31, 1997 was 85.3 days
compared to 81.3 days at December 31, 1996. The increase in accounts receivable
was due to higher sales, larger amounts of accounts receivable for customer
tooling and the addition of foreign customers with longer payment terms.
The Company's plans for 1998 capital expenditures for facilities,
equipment and tooling total approximately $50 million. The 1998 capital
expenditure plan includes new processing equipment and tooling. The Company
intends to finance the capital expenditures with borrowings under the New
Credit
19
<PAGE> 21
Facility, potential lease financing, access to capital markets and cash from
operations.
Management believes that the Company's long-term cash needs will
continue to be provided principally by operating activities supplemented, to
the extent required, by borrowing under the Company's existing and future
credit facilities and by access to the capital markets. Management expects to
replace these credit facilities as they expire with comparable facilities.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of December 31, 1997 and 1996
and the consolidated statements of income, cash flows and stockholders' equity
are for each of the years ended December 31, 1997, 1996 and 1995.
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets, page F-2.
Consolidated Statements of Income, page F-3.
Consolidated Statements of Stockholders' Equity, page F-4.
Consolidated Statements of Cash Flows, page F-5.
Notes to Consolidated Financial Statements, pages F-6 through F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to "Election of Directors" on pages 2
through 4, "Identification of Other Executive Officers" on page 8 and "Section
16(a) Beneficial Ownership Reporting Compliance" on page 9 of the Company's
Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual
Meeting of Stockholders to be held on May 20, 1998 (the "1998 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to "Executive Compensation" on pages 9
through 11 and "Compensation of the Board of Directors" on page 5 of the 1998
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to "Security Ownership of Certain Beneficial
Owners and Management" on pages 6 and 7 of the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to "Indebtedness of Management" on page 8 of
the 1998 Proxy Statement.
22
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following consolidated financial statements of
the Company and its subsidiaries, together with the applicable
report of independent public accountants, are included in
Item 8:
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets at December 31, 1997 and
1996, page F-2.
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995, page F-3.
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995,
page F-4.
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995, page F-5.
Notes to Consolidated Financial Statements, page F-6
through F-25.
2. The following consolidated financial information of
the Company and its subsidiaries for the three years ended
December 31, 1997, 1996 and 1995 is filed as part of this Form
10-K.
Report of Independent Public Accountants, page S-1.
Supplemental Notes to Consolidated Financial
Statements, page S-2 through S-12.
(1) Valuation and Qualifying Accounts.
(2) Supplemental Guarantor Condensed
Consolidating Financial Statements.
The information required to be submitted in Schedule
II is included in the Supplemental Note 1 to
Consolidated Financial Statements.
3. The following exhibits are filed with this report or
incorporated by reference as set forth below.
EXHIBIT NO.
3.1 Restated Certificate of Incorporation of the Company, filed
as Exhibit 3.1 to the Company's Registration Statement on
Form S-3, File No. 333-18317. (2)
3.2 By-laws of the Company, as amended, filed as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989. (2)
23
<PAGE> 25
EXHIBIT NO.
3.3 Amendment to Section 2.9 of the By-laws of the Company, filed
as Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994. (2)
4.1 Indenture for the 10 1/8% Senior Notes due 2007 dated as
of December 15, 1997 among the Company, Walbro Automotive
Corporation, Walbro Engine Management Corporation,
Sharon Manufacturing Company, Whitehead Engineered Products,
Inc. and Bankers Trust Company, as Trustee (including form
of the Exchange Note and form of Guarantee), filed as Exhibit
4.1 to the Company's Registration Statement on Form S-4, File
No. 333-45693. (2)
4.2 Purchase Agreement dated December 11, 1997 among the
Company, Walbro Automotive Corporation, Walbro Engine
Management Corporation, Sharon Manufacturing Company,
Whitehead Engineered Products, Inc. and Salomon Brothers
Inc., filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-4, File No. 333-45693. (2)
4.3 Registration Rights Agreement dated December 11, 1997 among
the Company, Walbro Automotive Corporation, Walbro Engine
Management Corporation, Sharon Manufacturing Company,
Whitehead Engineered Products, Inc. and Salomon Brothers
Inc., filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-4, File No. 333-45693. (2)
4.4 Form of the Exchange Note (included in Exhibit 4.1).
4.5 Form of Guarantee (included in Exhibit 4.1).
4.6 Shareholder Rights Plan dated December 8, 1988, filed as
the Exhibit to the Company's Registration Statement on
Form 8-A for Shareholder Stock Purchase Rights filed
December 12, 1988. (2)
4.7 First Amendment to Rights Agreement dated February 6,
1991, filed as Exhibit 4.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990. (2).
4.8 Loan Agreement between City of Ligonier, Indiana, and Sharon
Manufacturing Company dated as of June 1, 1992, filed as
Exhibit 4.12 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992. (2)
4.9 Loan Agreement between Walbro Automotive Corporation and the
Town of Ossian, Indiana, dated as of December 1, 1993, filed
as Exhibit 4.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993. (2)
4.10 Note Agreement among the Company and the purchasers named
therein dated as of October 1, 1994 relating to the 7.68%
Senior Notes of the Company, filed as Exhibit 4.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994. (2)
4.11 Indenture for the 9 7/8% Senior Notes due 2005 dated as of
July 27, 1995 among the Company, Walbro Automotive
Corporation, Walbro Engine Management Corporation, Sharon
Manufacturing Company, Whitehead Engineered Products, Inc. and
Bankers Trust Company, as Trustee (including form of
Exchange Note), filed as Exhibit 2.3 to the Company's
Current Report on Form 8-K dated July 27, 1995. (2)
4.12 Amended and Restated Credit Agreement dated as of
September 22, 1995 among the Company, certain of its
subsidiaries, Comerica Bank, as agent, and Harris Bank, as
co-agent, filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-4, filed September 27, 1995. (2)
24
<PAGE> 26
EXHIBIT NO.
4.13 First Amendment dated March 8, 1996 to the Amended and
Restated Credit Agreement among the Company, certain of its
subsidiaries, Comerica Bank, as agent, and Harris Bank, as
co-agent, filed as Exhibit 4.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995. (2)
4.14 First Amendment dated as of July 26, 1995 to the Note
Agreement among the Company and the purchasers named
therein, relating to the 7.68% Senior Notes of the Company,
filed as Exhibit 4.9 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. (2)
4.15 Certificate of Trust of Walbro Capital Trust dated December
17, 1996 filed as Exhibit 4.10 to the Company's Registration
Statement on Form S-3, File No. 333-18317. (2)
4.16 Amended and Restated Declaration of Trust of Walbro Capital
Trust dated as of February 3, 1997 among Walbro Corporation,
as Sponsor, Bankers Trust (Delaware), as Delaware Trustee,
and Lambert E. Althaver, Daniel L. Hittler and Michael A.
Shope, as Regular Trustees, filed as Exhibit 4.11 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. (2)
4.17 Indenture between Walbro Corporation and Bankers Trust
Company, as Indenture Trustee, dated as of February 3, 1997,
filed as Exhibit 4.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996. (2)
4.18 Form of Preferred Security issued by Walbro Capital Trust,
included as Exhibit A-1 to Exhibit 4.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996. (2)
4.19 Convertible Debenture issued by Walbro Corporation to
Walbro Capital Trust, included as Exhibit A to Exhibit
4.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. (2)
4.20 Preferred Securities Guarantee Agreement between Walbro
Corporation, as Guarantor, and Bankers Trust Company, as
Guarantee Trustee, with respect to the Preferred Securities
of Walbro Capital Trust dated as of February 3, 1997, filed
as Exhibit 4.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)
4.21 Second Amendment dated as of March 17, 1997 to Credit
Agreement among the Company, Comerica Bank, as agent, and
Harris Bank, as co-agent, filed as Exhibit 4.21 to the
Company's Registration Statement on Form S-4, File No.
333-45693. (2)
4.22 Third Amendment dated as of August 27, 1997 to Credit
Agreement among the Company, Comerica Bank, as agent, and
Harris Bank, as co-agent, filed as Exhibit 4.22 to the
Company's Registration Statement on Form S-4, File No.
333-45693. (2)
4.23 Purchase Money Loan Agreement dated as of August 27, 1997
among the Company, Comerica Bank, as agent, and Harris Bank,
as co-agent, filed as Exhibit 4.23 to the Company's
Registration Statement on Form S-4, File No. 333-45693. (2)
4.24 Purchase Money Guaranty dated as of August 27, 1997 by
the Company and certain of its subsidiaries to Comerica
Bank, as agent, filed as Exhibit 4.24 to the Company's
Registration Statement on Form S-4, File No. 333-45693. (2)
4.25 Purchase Money Security Agreement dated as of August 27, 1997
among the Company, and certain of its subsidiaries and
Comerica Bank, as agent, filed as Exhibit 4.25 to the
Company's Registration Statement on Form S-4, File
No. 333-45693. (2)
25
<PAGE> 27
EXHIBIT NO.
4.26 Amended and Restated Second Amendment and Waiver Agreement
dated as of March 3, 1998 to the Note Agreement among the
Company and the purchasers named therein, relating to the
7.68% Senior Notes of the Company. (1)
10.1 The Company's 1983 Incentive Stock Option Plan, filed as
the Exhibit to the Company's Registration Statement on Form
S-8 filed November 15, 1989. (2)(3)
10.2 Joint Venture Agreement between the Company and Mitsuba
Electric Manufacturing Company, Ltd. dated December 12,
1986, filed as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986. (2)
10.3 The Company's Equity Based Long-Term Incentive Plan, filed
as Exhibit 4.5 to the Company's Registration Statement on
Form S-8 filed June 15, 1992. (2)(4)
10.4 Retirement Income Plan for Directors dated February 9, 1988,
filed as Exhibit 10.11 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988. (2)(3)
10.5 The Company's Employee Stock Ownership Plan dated August 15,
1989, filed as Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989. (2)
10.6 Walbro Engine Management Incentive Compensation Plan, filed as
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990. (2)(3)
10.7 Joint Venture Agreement dated June 17, 1991 between the
Company and Jaeger S.A., an indirect, majority-controlled
subsidiary of Magneti Marelli S.p.A., relating to the Marwal
Systems S.A. joint venture, filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-2, File No.
33-41425. (2)
10.8 Joint Venture Agreement between the Company and Jaeger
S.A. dated as of January 1, 1993 relating to the Marwal
do Brasil joint venture, filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992. (2)
10.9 The Company's Advantage Plan, filed as the Exhibit to the
Company's Registration Statement on Form S-8 filed October 28,
1991. (2)(3)
10.10 Aircraft Lease Agreement between the Company and C.I.T.
Leasing Corporation dated as of October 27, 1992, filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992. (2)
26
<PAGE> 28
EXHIBIT NO.
10.11 Joint Venture Contract among Walbro Engine Management
Corporation, Fujian Fuding Carburetor Factory and Twin
Winner Trading Co., Ltd. dated December 30, 1993 relating
to the Fujian Hualong Carburetor Co. Ltd. joint venture,
filed as Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994. (2)
10.12 Agreement among the Company, Walbro Automotive Corporation
and Magneti Marelli France S.A. dated February 7, 1995,
filed as Exhibit 10.24 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994. (2)
10.13 Joint Venture Agreement between the Company and Daewoo
Precision Industries, Ltd. dated November 30, 1994, filed
as Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994. (2)
10.14 Purchase and Sale Agreement dated as of April 7, 1995 between
the Company and Dyno Industrier AS, filed as Exhibit 2.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995. (2)
10.15 Addendum to Purchase and Sale Agreement between the Company
and Dyno Industrier AS dated as of July 27, 1995, filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K dated
July 27, 1995. (2)
10.16 General Partnership Agreement dated August 18, 1995 between
Iwaki Diecast U.S.A., Inc. and Walbro Tucson Corp., filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995. (2)
10.17 Employment Agreement between the Company and L.E. Althaver
dated August 16, 1996, filed as Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. (2)(3)
10.18 Termination and Change of Control Agreement between the
Company and L.E. Althaver dated August 16, 1996, filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)(3)
10.19 Employment Agreement between the Company and Daniel L.
Hittler dated August 16, 1996, filed as Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. (2)(3)
10.20 Termination and Change of Control Agreement between the
Company and Daniel L. Hittler dated August 16, 1996, filed
as Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)(3)
10.21 Employment Agreement between the Company and Michael A. Shope
dated August 16, 1996, filed as Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. (2)(3)
10.22 Termination and Change of Control Agreement between the
Company and Michael A. Shope dated August 16, 1996, filed
as Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)(3)
10.23 Employment Agreement between the Company and Robert H.
Walpole dated August 16, 1996, filed as Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. (2)(3)
27
<PAGE> 29
EXHIBIT NO.
10.24 Termination and Change of Control Agreement between the
Company and Robert H. Walpole dated August 16, 1996, filed
as Exhibit 10.28 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)(3)
10.25 Employment Agreement between the Company and R.H. Whitehead
III dated August 16, 1996, filed as Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. (2)(3)
10.26 Termination and Change of Control Agreement between the
Company and R.H. Whitehead III dated August 16, 1996, filed
as Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)(3)
10.27 Employment Agreement between the Company and Frank E.
Bauchiero dated October 3, 1996, filed as Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. (2)(3)
10.28 Termination and Change of Control Agreement between the
Company and Frank E. Bauchiero dated October 3, 1996, filed
as Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (2)(3)
10.29 The Company's Broad-Based Long Term Incentive Plan, filed as
Exhibit 10.33 to the Company's Registration Statement on Form
S-4, File No. 333-45693. (2)
21.1 Subsidiaries of the Company. (1)
23.1 Consent of Arthur Andersen LLP. (1)
23.2 Consent of Ernst & Young Audit. (1)
27.1 Financial Data Schedule. (1)
- -------------------
(1) Filed herewith.
(2) Incorporated by reference.
(3) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
During the last quarter of the period covered by this Form 10-K, the
Company filed a Current Report on Form 8-K dated December 12, 1997 reporting
Items 5 and 7.
(d) (1) The following Financial Statements of Marwal Systems
S.N.C. as of December 31, 1997, 1996 and 1995, and for the
years ended December 31, 1997, 1996 and 1995 are included as
part of this Form 10-K on pages F-26 through F-68:
Letter of Confirmation . . . . . . . . . . . . . . . . . . . . .F-26
Report of Independent Public Accountants for 1997 . . . . . . . .F-27
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . .F-28
Income Statement for the year ended December 31, 1997 . . . . . .F-30
Notes to the Financial Statements for 1997 . . . . . . . . . . .F-32
Report of Independent Public Accountants for 1996 . . . . . . . .F-43
Balance Sheet as of December 31, 1996 . . . . . . . . . . . . . .F-44
Income Statement for the year ended December 31, 1996 . . . . . .F-46
Notes to the Financial Statements for 1996 . . . . . . . . . . .F-48
Report of Independent Public Accountants for 1995 . . . . . . . .F-57
Balance Sheet as of December 31, 1995 . . . . . . . . . . . . . .F-58
Income Statement for the year ended December 31, 1995 . . . . . .F-60
Notes to the Financial Statements for 1995 . . . . . . . . . . .F-62
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 15th day
of April, 1998.
WALBRO CORPORATION
By: /s/ MICHAEL A. SHOPE
-----------------------------
Michael A. Shope, Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board, April 15, 1998
/s/ LAMBERT E. ALTHAVER Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
Lambert E. Althaver
/s/ FRANK E. BAUCHIERO President, Chief Operating Officer April 15, 1998
- ------------------------- and Director
Frank E. Bauchiero
/s/ ROBERT H. WALPOLE Vice President and Director April 15, 1998
- -------------------------
Robert H. Walpole
/s/ MICHAEL A. SHOPE Chief Financial Officer and Treasurer April 15, 1998
- ------------------------- (Principal Financial
Michael A. Shope and Accounting Officer)
/s/ WILLIAM T. BACON, JR. Director April 15, 1998
- -------------------------
William T. Bacon, Jr.
/s/ J. DWAYNE BAUMGARDNER Director April 15, 1998
- -------------------------
J. Dwayne Baumgardner
/s/ VERNON E. OECHSLE Director April 15, 1998
- -------------------------
Vernon E. Oechsle
/s/ ROBERT D. TUTTLE Director April 15, 1998
- -------------------------
Robert D. Tuttle
/s/ JOHN E. UTLEY Director April 15, 1998
- -------------------------
John E. Utley
29
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Walbro Corporation:
We have audited the accompanying consolidated balance sheets of Walbro
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Marwal Systems, S.N.C. and Marwal do Brasil Ltda., the investments in which are
reflected in the accompanying consolidated financial statements using the equity
method of accounting. The investments in Marwal Systems, S.N.C. and Marwal do
Brasil Ltda. together represent 3.7% and 4.1% of consolidated total assets in
1997 and 1996, respectively, and the equity in their net income represents
income of $3,710,000, $4,560,000 and $3,570,000 in 1997, 1996 and 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us and our opinion, insofar as it relates to the amounts
included for those entities, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Walbro Corporation and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Detroit, Michigan,
February 11, 1998
(except with respect to the
matters discussed in Notes 6
and 21, as to which the
date is April 13, 1998).
F-1
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
ASSETS -------- --------
(In Thousands,
Except Share Data)
<S> <C> <C>
Current Assets:
Cash...................................................... $ 13,539 $ 18,213
Accounts receivable, net.................................. 144,985 126,509
Inventories............................................... 56,207 50,588
Prepaid expenses and other................................ 17,405 11,235
Deferred and refundable income taxes...................... 8,519 4,971
-------- --------
Total Current Assets................................... 240,655 211,516
-------- --------
Plant and Equipment, at cost:
Land...................................................... 5,230 5,190
Buildings and improvements................................ 90,099 69,741
Machinery and equipment................................... 297,032 288,369
-------- --------
392,361 363,300
Less--Accumulated depreciation............................ 116,991 83,413
-------- --------
Net Plant and Equipment................................ 275,370 279,887
-------- --------
Other Assets:
Funds held for construction............................... -- 1,140
Joint ventures............................................ 26,681 28,955
Investments............................................... 3,261 5,727
Goodwill, net............................................. 32,803 35,998
Notes receivable.......................................... 126 1,268
Deferred and refundable income taxes...................... 8,179 5,414
Other..................................................... 23,518 19,744
-------- --------
Total Other Assets..................................... 94,568 98,246
-------- --------
Total Assets........................................... $610,593 $589,649
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 13,960 $ 1,089
Bank and other borrowings................................. 26,204 22,072
Accounts payable.......................................... 84,209 77,939
Accrued liabilities....................................... 39,221 41,276
Dividends payable......................................... 1,788 865
-------- --------
Total Current Liabilities.............................. 165,382 143,241
-------- --------
Long-Term Liabilities:
Long-term debt, less current portion...................... 291,393 291,723
Pension obligations and other............................. 11,823 10,718
Deferred income taxes..................................... 2,077 4,914
Minority interest......................................... 1,052 1,320
-------- --------
Total Long-Term Liabilities............................ 306,345 308,675
-------- --------
Company-obligated mandatorily redeemable convertible
preferred securities of Walbro Capital Trust holding
solely convertible debentures............................. 69,000 --
Stockholders' Equity:
Common stock, $.50 par value; authorized 25,000,000;
outstanding 8,682,595 in 1997 and 8,652,737 in 1996.... 4,341 4,326
Paid-in capital........................................... 66,151 65,674
Retained earnings......................................... 33,938 74,039
Deferred compensation..................................... (379) (967)
Unrealized gain on securities available for sale.......... 68 688
Cumulative translation adjustments........................ (34,253) (6,027)
-------- --------
Total Stockholders' Equity............................. 69,866 137,733
-------- --------
Total Liabilities and Stockholders' Equity............. $610,593 $589,649
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 33
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net Sales................................... $619,905 $585,389 $459,272
Costs and Expenses:
Cost of sales............................. 538,751 488,134 377,755
Selling and administrative expenses....... 60,786 52,177 40,641
Research and development expenses......... 17,289 18,400 16,742
Restructuring and impairment charges...... 27,000 -- --
-------- -------- --------
Operating Income (Loss)..................... (23,921) 26,678 24,134
Other Expense (Income):
Interest expense, net of capitalized
interest of $1,207 in 1997 and $3,683
in 1996................................ 25,410 20,535 12,420
Interest income........................... (674) (2,716) (960)
Royalty income, net....................... (3,878) (1,410) (237)
Foreign currency exchange (gain) loss..... (308) (70) 1,483
Other..................................... 365 (63) (255)
-------- -------- --------
Income (Loss) Before (Provision) Credit for
Income Taxes, Minority Interest and Equity
in Income of Joint Ventures............... (44,836) 10,402 11,683
(Provision) Credit for Income Taxes......... 10,131 (3,075) (1,258)
Minority Interest........................... (5,035) (285) (472)
Equity in Income of Joint Ventures.......... 3,113 4,187 3,877
-------- -------- --------
Net Income (Loss)........................... $(36,627) $ 11,229 $ 13,830
======== ======== ========
Basic Net Income (Loss) Per Share........... $ (4.23) $ 1.30 $ 1.61
======== ======== ========
Diluted Net Income (Loss) Per Share......... $ (4.23) $ 1.30 $ 1.61
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain on
Minimum Securities Cumulative
Common Paid-in Retained Deferred Pension Available Translation
Stock Capital Earnings Compensation Liability for Sale Adjustments
------ ------- -------- ------------ --------- ---------- -----------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
December 31, 1994......... $4,282 $64,221 $55,855 $(1,225) $ -- $1,428 $ 3,354
Exercise of stock
options................. 8 160 -- -- -- -- --
ESOP debt payments........ -- -- -- 408 -- -- --
Net income................ -- -- 13,830 -- -- -- --
Additional minimum pension
liability............... -- -- -- -- (63) -- --
Cash dividends ($.40 per
share).................. -- -- (3,429) -- -- -- --
Change in market value of
securities available for
sale.................... -- -- -- -- -- (601) --
Translation adjustments... -- -- -- -- -- -- (2,801)
------ ------- ------- ------- ----- ------ --------
Balance--
December 31, 1995......... 4,290 64,381 66,256 (817) (63) 827 553
Exercise of stock
options................. 21 750 -- -- -- -- --
ESOP debt payments........ -- -- -- 408 -- -- --
Restricted stock issued... 15 543 -- (558) -- -- --
Net income................ -- -- 11,229 -- -- -- --
Adjust minimum pension
liability............... -- -- -- -- 63 -- --
Cash dividends ($.40 per
share).................. -- -- (3,446) -- -- -- --
Change in market value of
securities available for
sale.................... -- -- -- -- -- (139) --
Translation adjustments... -- -- -- -- -- -- (6,580)
------ ------- ------- ------- ----- ------ --------
Balance--
December 31, 1996......... 4,326 65,674 74,039 (967) -- 688 (6,027)
Exercise of stock
options................. 15 477 -- -- -- -- --
ESOP debt payments........ -- -- -- 408 -- -- --
Change in restricted
stock................... -- -- -- 180 -- -- --
Net loss.................. -- -- (36,627) -- -- -- --
Cash dividends ($.40 per
share).................. -- -- (3,474) -- -- -- --
Change in market value of
securities available for
sale.................... -- -- -- -- -- (620) --
Translation adjustments... -- -- -- -- -- -- (28,226)
------ ------- ------- ------- ----- ------ --------
Balance--
December 31, 1997......... $4,341 $66,151 $33,938 $ (379) $ -- $ 68 $(34,253)
====== ======= ======= ======= ===== ====== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).......................... $(36,627) $ 11,229 $ 13,830
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization......... 31,417 29,736 22,451
(Gain) loss on disposition of
assets............................. 1,459 774 (29)
Minority interest..................... (624) (238) 472
Equity in income of joint ventures.... (3,113) (4,187) (3,877)
Restructuring and impairment
charges............................ 27,000 -- --
Change in assets and liabilities, net
of effects of acquisitions--.......
Deferred and refundable income
taxes......................... (8,631) (762) 1,721
Pension obligations and other.... (1,888) (2,049) 3,327
Accounts payable and accrued
liabilities................... 12,687 25,507 4,870
Accounts receivable, net......... (28,299) (16,956) (3,236)
Inventories...................... (8,674) (473) (2,034)
Prepaid expenses and other....... (10,933) (5,943) (6,607)
-------- --------- --------
Total adjustments.................. 10,401 25,409 17,058
-------- --------- --------
Net cash provided by (used in)
operating activities............. (26,226) 36,638 30,888
-------- --------- --------
Cash Flows From Investing Activities:
Purchase of plant and equipment............ (62,019) (99,147) (46,240)
Acquisitions, net of cash acquired......... -- (1,018) (116,238)
Purchase of other assets................... (3,087) (3,434) (7,263)
Investment in joint ventures and other..... 1,756 (1,451) (2,054)
Proceeds from disposal of assets........... 5,415 4,156 4,127
-------- --------- --------
Net cash used in investing
activities....................... (57,935) (100,894) (167,668)
-------- --------- --------
Cash Flows From Financing Activities:
Borrowings under revolving
lines-of-credit......................... 199,981 200,548 161,114
Repayments under revolving
lines-of-credit......................... (283,116) (135,298) (97,317)
Debt repayments............................ (1,210) (1,104) (13,541)
Proceeds from issuance of long-term debt... 105,404 2,772 110,550
Proceeds from issuance of convertible
preferred securities.................... 69,000 -- --
Proceeds from issuance of common stock and
options................................. 492 771 168
Financing fees paid........................ (5,680) (508) (4,778)
Cash dividends paid........................ (3,463) (3,439) (3,428)
-------- --------- --------
Net cash provided by financing
activities....................... 81,408 63,742 152,768
-------- --------- --------
Effect of Exchange Rate Changes on Cash...... (1,921) (1,065) (736)
-------- --------- --------
Net Increase (Decrease) in Cash.............. (4,674) (1,579) 15,252
Cash at Beginning of Year.................... 18,213 19,792 4,540
-------- --------- --------
Cash at End of Year.......................... $ 13,539 $ 18,213 $ 19,792
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Principles of Consolidation:
The consolidated financial statements include the accounts of Walbro Corporation
and its wholly-owned and majority-owned subsidiaries (the Company). Investments
in joint ventures are accounted for under the equity method (Note 2).
Significant transactions and balances among the Company and its subsidiaries
have been eliminated in the consolidated financial statements.
Foreign Currency Translation:
The assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments are reflected as a separate component of stockholders'
equity.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of an identifiable foreign
currency commitment or as a hedge of a foreign currency investment position, are
included in the results of operations as incurred.
Accounts Receivable:
Accounts receivable are net of allowances for doubtful accounts of $809,000 and
$753,000 as of December 31, 1997 and 1996, respectively.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories include raw materials and component parts, work-in-process and
finished products. Work-in-process and finished products inventories include
material, labor and manufacturing overhead costs.
Inventory at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Raw materials and
components.......... $30,857 $23,964
Work-in-process....... 6,545 10,620
Finished products..... 18,805 16,004
------- -------
$56,207 $50,588
======= =======
</TABLE>
Plant and Equipment:
The Company provides for depreciation of plant and equipment based upon the
acquisition costs and the estimated service lives of depreciable assets. The
straight-line method is the principal method used to compute depreciation for
financial reporting purposes. However, the units-of-production method is used to
compute depreciation of certain equipment. Estimated service lives of
depreciable assets are as follows: buildings and improvements - 10 to 40 years,
machinery and equipment - 5 to 15 years.
Investments:
The carrying value of marketable equity securities is market value.
The Company classifies certain investments in common stock securities as
"available-for-sale", recording these investments at fair market value with the
gross unrealized holding gains and losses, after-tax, included as a separate
component of stockholders' equity.
At December 31, 1997 and 1996, the fair market value of the Company's
investments classified as "trading" was $687,000 and $2,594,000, respectively.
The change in net unrealized holding gain included in earnings was not
significant.
Goodwill:
Goodwill consists of purchase price and related acquisition costs in excess of
the fair value of the identifiable net assets acquired. Goodwill is amortized on
a straight-line basis over 15 to 40 years. The Company evaluates the carrying
value of goodwill for potential impairment on an ongoing basis. Such evaluations
compare the undiscounted expected future cash flows of the operations to which
goodwill relates to the carrying value of the goodwill. The Company also
considers future anticipated operating results, trends and other circumstances
in making such evaluations.
Goodwill consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Goodwill.............. $39,449 $40,234
Less: Accumulated
amortization........ (6,646) (4,236)
------- -------
$32,803 $35,998
======= =======
</TABLE>
Income Taxes:
Deferred income taxes represent the effect of cumulative temporary differences
between income and expense items reported for financial statement and tax
purposes, and between the bases of various assets and liabilities for financial
statement and tax
F-6
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (continued)
purposes. Deferred tax assets are reduced by a valuation allowance if, based on
the weight of evidence, it is deemed more likely than not that the asset will
not be realized.
Financial Instruments:
In order to manage exposure to fluctuations in foreign currency exchange rates,
the Company enters into forward currency exchange contracts. Gains and losses on
contracts that hedge specific foreign currency commitments are deferred and
recognized in net income in the period in which the related transaction is
consummated. Gains and losses on contracts that hedge net investments in foreign
joint ventures or subsidiaries are recognized as cumulative translation
adjustments in stockholders' equity. Gains and losses on forward currency
exchange contracts that do not qualify as hedges are recognized as foreign
currency exchange gain or loss.
Reclassifications:
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform with the presentation used in 1997.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
NOTE 2. JOINT VENTURES.
The investments in joint ventures as of December 31 are as follows:
<TABLE>
<CAPTION>
Percent Beneficial
Ownership
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Marwal Systems, S.N.C.
(France)............. 49% 49% 49%
Mitsuba-Walbro, Inc.
(Japan).............. 50% 50% 50%
Marwal do Brasil,
Ltda................. 49% 49% 49%
Korea Automotive Fuel
Systems, Ltd......... 49% 49% 49%
Marwal de Mexico S.A.
de C.V............... 52% 52% --
Marwal Argentina
S.A. ................ 49% -- --
</TABLE>
The above joint ventures are generally involved in the design and manufacture of
precision fuel systems products for the global automotive market.
All of the above investments in joint ventures are accounted for using the
equity method. Certain adjustments are made to the joint ventures' income so
that recorded income is stated in accordance with United States generally
accepted accounting principles. At December 31, 1997 and 1996, the cumulative
effect of these adjustments was to increase the Company's equity in its joint
ventures by approximately $3,158,000 and $2,631,000, respectively. At December
31, 1997, the amount included in retained earnings as undistributed earnings of
foreign joint ventures was approximately $11,680,000.
In 1996, the Company entered into a joint venture (Marwal de Mexico S.A. de
C.V.) with its 49% owned joint venture, Marwal Systems, S.N.C. The Company owns
5% of the venture directly and Marwal Systems S.N.C. owns the remaining 95%.
Marwal de Mexico S.A. de C.V. manufactures fuel pumps and fuel modules for the
Central American and Mexican automotive markets.
In the 4th Quarter 1996, the Company expanded its Marwal joint venture
locations to include Marwal Argentina S.A. This is a joint venture 1% owned by
Walbro, 1% by Magneti Marelli, and 98% owned by Marwal Systems S.N.C. Marwal
Argentina builds fuel sending units for the Argentinean automotive market.
Summarized combined financial information for joint ventures accounted for
under the
F-7
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 2. JOINT VENTURES. (continued)
equity method is as follows (unaudited, in thousands):
<TABLE>
<CAPTION>
As of
December 31,
1997 1996
------- -------
<S> <C> <C>
Balance sheet data:
Current assets............................................ $90,358 $54,030
Non-current assets........................................ 44,365 65,088
Current liabilities....................................... 65,162 52,038
Non-current liabilities................................... 13,355 9,493
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income statement data:
Net sales.................................... $248,527 $200,276 $170,902
Gross margin................................. 31,846 24,806 20,500
Income before provision for income taxes..... 12,769 14,510 11,641
Net income................................... 5,978 7,515 7,366
</TABLE>
Dividends from joint ventures of approximately $40,000 and $415,000 were
received by the Company during 1997 and 1995, respectively. No dividends were
received from joint ventures in 1996. The Company had sales to joint ventures of
approximately $64,109,000, $42,413,000 and $29,280,000 for 1997, 1996 and 1995,
respectively. Included in accounts receivable are trade receivables from joint
ventures of approximately $12,741,000 and $11,967,000 as of December 31, 1997
and 1996, respectively and royalty receivables of $1,674,000 and $1,162,000 as
of December 31, 1997 and 1996, respectively. The Company had purchases from
joint ventures of approximately $41,447,000, $33,149,000 and $22,977,000 for
1997, 1996 and 1995, respectively. Included in accounts payable are trade
payables to joint ventures of approximately $5,277,000 and $5,580,000 as of
December 31, 1997 and 1996, respectively.
NOTE 3. DYNO ACQUISITION.
On July 27, 1995, the Company acquired the plastic fuel tank business of Dyno
Industrier A.S (Dyno), Oslo, Norway for $128,774,000 in cash. Dyno is a leading
designer, manufacturer and marketer of plastic fuel tank systems and components
to many European vehicle manufacturers and has operations in Belgium, France,
Germany, Norway, Spain and the United Kingdom.
The acquisition was accounted for under the purchase method, and accordingly,
the assets purchased and liabilities assumed in the acquisition are reflected in
the accompanying consolidated balance sheets as of December 31, 1997 and 1996
and the operations since the date of acquisition are included in the
accompanying consolidated statements of income and cash flows for the years
ended December 31, 1997, 1996 and 1995. Goodwill resulting from this transaction
is being amortized over 40 years using the straight-line method. The purchase
price was allocated to the purchased assets and liabilities as follows (in
thousands):
<TABLE>
<S> <C>
Cash consideration paid to
seller, net of cash
acquired of $15,669........ $113,105
Fees and expenses............ 3,212
--------
Cost of acquisition, net of
cash acquired.............. $116,317
========
Accounts receivable.......... $ 42,237
Inventory.................... 16,330
Plant and equipment.......... 90,792
Accounts payable and accrued
liabilities................ (44,095)
Notes payable................ (5,663)
Other assets purchased and
liabilities assumed, net... (1,432)
Goodwill..................... 18,148
--------
Total cost allocation........ $116,317
========
</TABLE>
F-8
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 3. DYNO ACQUISITION. (continued)
In connection with the acquisition, the Company was required to relocate certain
facilities, incur costs to move to the new facilities and involuntarily
terminate or relocate employees in addition to other costs directly associated
with the acquisition. The Company recorded a liability of approximately
$12,021,000 related to these costs in purchase accounting and approximately
$11,721,000 of costs have been paid and charged against the liability as of
December 31, 1997.
Assuming the acquisition had taken place as of the beginning of 1995, the
consolidated pro forma results of operations of the Company would have been as
follows, after giving effect to certain adjustments, including
depreciation and amortization adjustments, increased interest expense,
elimination of certain costs assumed by the seller and the related income tax
effects:
<TABLE>
<CAPTION>
1995
--------
(Unaudited,
In Thousands)
<S> <C>
Net sales..................... $581,291
Net income.................... $ 12,336
Net income per common share... $ 1.43
</TABLE>
The pro forma information above does not purport to be indicative of the results
that actually would have been achieved if the operations were combined during
the period presented, and is not intended to be a projection of future results
or trends.
NOTE 4. OTHER ACQUISITIONS.
In January 1995, the Company acquired an 80% interest in U.S. CoExcell, Inc. for
$60,000 in cash plus the forgiveness of debt owed to Walbro of $3,113,000. U.S.
CoExcell, Inc. manufactures and markets blow molded plastic drums. The
acquisition was accounted for under the purchase method, and accordingly, the
assets purchased and liabilities assumed in the acquisition have been reflected
in the accompanying consolidated balance sheets as of December 31, 1997 and 1996
and the operations since the acquisition are included in the accompanying
consolidated statements of income and cash flows for the years ended December
31, 1997, 1996 and 1995. Goodwill resulting from this transaction was being
amortized over 40 years using the straight-line method until 1997. In 1997, the
remaining balance of goodwill was written off as part of the restructuring (Note
5).
Pro forma results of this acquisition, assuming it had taken place at the
beginning of each year presented, would not be materially different from the
results reported.
NOTE 5. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS.
During the fourth quarter of 1997, the Company recorded a $27 million pretax
charge for restructuring its operations and other actions. The charge was
comprised of a $17 million charge for restructuring and a $10 million charge
associated with asset impairments. In addition, the Company took a pretax charge
of $5.7 million for warranty costs (included in cost of sales) which became
known in the fourth quarter.
The restructuring actions include divestiture of the Company's Ligonier,
Indiana, steel fuel rail manufacturing facility and disposition of its interest
in U.S. Coexcell Inc., a manufacturer of blow-molded plastic drums in Maumee,
Ohio. In addition, the Company will consolidate its small engine operations in
the Asia-Pacific region and restructure its European automotive fuel tank
operations. The asset impairment charge included the write off of obsolete
equipment and tooling, write off of its interest in Saginaw Plastics, an
injection molder in Saginaw, Michigan and charges related to its Korean
automotive activities. Lastly, the restructuring charge included a
corporate-wide headcount reduction of approximately 10 percent including
reductions related to the divestitures and restructuring.
The net sales of activities that will not be continued totaled approximately
$30.2 million, $32.0 million and $31.3 million for the years ended December 31,
1997, 1996 and 1995, respectively, with accompanying operating (losses) income
of approximately $(4.6) million, $1.5 million, and $(4.1) million for the same
periods.
F-9
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 6. LONG-TERM DEBT AND LINES OF CREDIT.
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Senior notes due 2005, unsecured, stated interest at 9.875%
(9.92% effective interest rate) net of unamortized
discount of $292,000 and $331,000 at December 31, 1997 and
1996, respectively(a)..................................... $109,708 $109,669
Senior notes due 2007, unsecured, interest at 10.125%(a).... 100,000 --
Revolving credit facility, secured, interest at the agent's
base rate plus an additional margin (see below)(b)........ 19,700 114,062
Purchase money loan agreement, secured, interest payable
quarterly at the agent's base rate plus an additional
margin (see below)(c)..................................... 2,852 --
Senior notes, secured, interest at 7.68%, payable in annual
amounts from 1998 to 2004(d).............................. 45,000 45,000
Industrial revenue bond, secured, issued by Town of Ossian,
Indiana, interest at a variable municipal bond rate, due
in 2023................................................... 9,000 9,000
Industrial revenue bond, issued by City of Ligonier,
Indiana, interest at a variable municipal bond rate plus
1%, payable in annual amounts from 2003 to 2007........... 6,300 6,300
Term loan payable in Belgian Francs, interest at 5.44%
payable in quarterly amounts from 2003 to 2007............ 5,163 --
Term loan from the State of Connecticut, secured, interest
at 6% per annum, payable in monthly amounts from 1998 to
2005...................................................... 3,400 3,400
Capital lease obligations, interest at 7.5%, payable in
monthly amounts through February 2002..................... 3,042 3,640
Other....................................................... 1,188 1,741
-------- --------
305,353 292,812
Less--current portion....................................... 13,960 1,089
-------- --------
$291,393 $291,723
======== ========
</TABLE>
The Company is party to an Intercreditor Agreement (Intercreditor Agreement)
dated as of July 26, 1995 and executed by and among the Company, the holders
(2004 Noteholders) of the 2004 Notes (as defined below) and the banks which are
a party to the Credit Facility (as defined below) (Banks). The Company and the
Banks and the 2004 Noteholders disagree with the interpretation of certain
provisions of the Intercreditor Agreement. As a result, the Company has agreed
to use its best efforts to retire the 2004 Notes by no later than May 31, 1998
and the 2004 Noteholders have agreed that, until May 31, 1998, they will forbear
from taking any action under the 2004 Notes. The Company will use proceeds of
the New Credit Facility (see Note 21 to Consolidated Financial Statements for
further discussion) to provide the financing to retire the 2004 Notes. The New
Credit Facility is expected to be used to retire the debt instruments identified
below as (b), (c) and (d).
(a) In July 1995, the Company sold $110,000,000 in aggregate principal amount
of 9.875% Senior Notes due 2005 (the 2005 Notes). In December 1997, the Company
sold $100,000,000 in aggregate principal amount of 10.125% Senior Notes due 2007
(the 2007 Notes). The 2005 Notes and 2007 Notes are general unsecured
obligations of the Company with interest payable semi-annually. The 2005 Notes
and 2007 Notes are guaranteed on a senior unsecured basis, jointly and
severally, by each of the Company's principal wholly-owned domestic operating
subsidiaries and certain of its indirect wholly-owned subsidiaries. Except as
noted below, the 2005 Notes and 2007 Notes are not redeemable at the Company's
option prior to July 15, 2000 and December 15, 2002, respectively. Thereafter,
the 2005 Notes and 2007 Notes will be redeemable, in whole or part, at the
option of the Company at various redemption prices as set forth in the 2005 Note
Indenture and 2007 Note Indenture. In the event of a change in control, the
Company will be obligated to make an offer to purchase all of the outstanding
2005 Notes and 2007 Notes at a premium. Also, in certain circumstances, the
Company will be required to make an offer to repurchase the 2005 Notes at a
price equal to 100% of the principal amount thereof, plus accrued interest to
the date of
F-10
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 6. LONG-TERM DEBT AND LINES OF CREDIT. (continued)
repurchase, with the net cash proceeds of certain asset sales.
(b) In July 1995, the Company executed a new $135,000,000 multi-currency
revolving credit facility (Credit Facility) for the Company and certain of its
wholly-owned domestic and foreign subsidiaries. The Credit Facility has a
maturity of July 2000. By amendment in December 1997, the aggregate advances
under the Credit Facility are limited to $30,000,000. Borrowings under the
Credit Facility bear interest at a per annum rate equal to the agent's base rate
or the prevailing interbank offered rate in the applicable offshore currency
market, plus an additional margin ranging from 0.5% to 1.75% based on the
specific financial ratios of the Company. Borrowings under the Credit Facility
bore interest at 8.5% as of December 31, 1997 and rates ranging from 8.25% to
8.5% as of December 31, 1996. The Company is also required to pay a quarterly
facility fee of 0.2% to 0.625%, based on the Company's funded debt ratio.
Borrowings under the Credit Facility are secured by first liens on the
inventory, accounts receivable and certain intangibles of the Company and its
wholly-owned domestic subsidiaries and by a pledge of 100% of the stock of
wholly-owned domestic subsidiaries and 65% of the stock of wholly-owned foreign
subsidiaries. Collateral for the Credit Facility secures the 2004 Notes (as
defined below) on an equal and ratable basis. The Company and its wholly-owned
domestic subsidiaries guarantee payment of domestic and foreign borrowings under
the Credit Facility. The Company's wholly-owned foreign subsidiaries guarantee
payment of foreign borrowings under the Credit Facility.
(c) In August 1997, the Company executed a new $25,000,000 purchase money loan
agreement. Under this agreement, the Company may borrow 70% of the cost of new
purchases of machinery, equipment and other fixed assets, which assets also
collateralize the loan. Borrowings under this facility bear the same rate of
interest as borrowings under the Credit Facility and reduce the Company's
availability under the Credit Facility. The purchase money loans are subject to
a call option under which all or any portion of the principal balance then
outstanding shall become due and payable within 30 days of the notice of the
call option.
(d) In October 1994, the Company sold $45,000,000 of 7.68% senior notes (2004
Notes). The 2004 Notes require quarterly interest payments due January 1, April
1, July 1 and October 1. The agreement requires the Company to maintain a funded
debt to total capital ratio not greater than .65 to 1, among other measures.
The Credit Facility contains numerous restrictive covenants including, but not
limited to, the following matters: (i) maintenance of certain financial ratios
and compliance with certain financial tests and limitations which become
increasingly restrictive with the passage of time; (ii) limitations on payment
of dividends, incurrence of additional indebtedness and granting of certain
liens; (iii) restrictions on mergers, acquisitions, asset sales, sales of
subsidiary stock, capital expenditures and investments; (iv) issuance of
preferred stock by subsidiaries and (v) sale and leaseback transactions. The
Company received waivers to certain financial covenants from its lenders at
December 31, 1997 due to non-compliance with such covenants.
As of December 31, 1997 and 1996, assets recorded under a capital lease were
approximately $5,127,000 and $4,733,000, respectively, net of accumulated
amortization of approximately $806,000 and $394,000, respectively.
Aggregate minimum principal payment requirements on long-term debt, including
capital lease obligations, in each of the five years subsequent to December 31,
1997 are as follows: 1998 - $13,960,000; 1999 - $7,406,000; 2000 - $30,026,000;
2001 - $7,548,000; 2002 - $6,844,000; thereafter - $239,569,000.
Included in the current portion of long-term debt is $6,300,000 which is
required to be paid if the Ligonier, IN facility is sold as planned during 1998,
otherwise the obligation is not due until 2003 and thereafter as described in
the table above.
In addition to long-term debt, the Company and its subsidiaries have line of
credit arrangements with foreign banks for short-term borrowings of
approximately $27,600,000, $36,340,000, and $17,191,000 at December 31, 1997,
1996 and 1995, respectively. The weighted average interest rate on short-term
bank borrowings outstanding under these arrangements was 4.1%, 3.1% and 6.1% as
of December 31, 1997, 1996 and 1995, respectively.
F-11
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 7. COMMITMENTS AND CONTINGENCIES.
The manufacture of automotive components entails the risk that a customer or
governmental authority may require the recall of one of the Company's products
or a product in which one of the Company's products has been installed. The
Company has taken and will continue to take all reasonable precautions to avoid
the risk of exposure to a recall or warranty claim that would have a material
effect on the financial position of the Company. The Company does not believe
that significant insurance coverage is available to protect against potential
product recall/warranty liability. The Company provides for warranty claims on
its products on a specific identification basis.
While there can be no assurance that the Company will not incur substantial
warranty or recall expense in the future, management believes that any liability
resulting from these matters will not have a material impact on the financial
position or future results of operations of the Company.
NOTE 8. INCOME TAXES.
A summary of income (loss) before (provision) credit for income taxes, minority
interest and equity in income of joint ventures, and components of the
(provision) credit are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Income (loss) before (provision) credit for
income taxes, minority interest and equity in
income of joint ventures:
Domestic...................................... $(31,095) $ 1,774 $ 4,268
Foreign....................................... (13,741) 8,628 7,415
-------- ------- -------
$(44,836) $10,402 $11,683
======== ======= =======
(Provision) credit for income taxes:
Currently payable--
Domestic...................................... $ (3,297) $ (384) $ (843)
Foreign....................................... (1,334) (2,456) (2,977)
Utilization of tax credits.................... 1,000 2,517 3,182
-------- ------- -------
(3,631) (323) (638)
-------- ------- -------
Deferred--
Domestic...................................... 14,053 (988) (945)
Foreign....................................... 3,264 (1,544) 325
Change in beginning of year valuation
allowance.................................. (3,555) (220) --
-------- ------- -------
13,762 (2,752) (620)
-------- ------- -------
$ 10,131 $(3,075) $(1,258)
======== ======= =======
</TABLE>
Reconciliations of the U.S. Federal statutory income tax rates to the
Company's consolidated effective income tax rates applicable to continuing
operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
U.S. Federal statutory income tax rate.............. (35.0)% 35.0% 35.0%
Increase (decrease) in effective income tax rate
resulting from--
Differences between U.S. and foreign income tax
rates............................................. 6.4 9.4 2.1
Utilization of tax credits........................ (2.2) (15.9) (27.2)
Increase in valuation allowance................... 7.9 2.1 --
Goodwill amortization............................. .4 1.5 1.4
Write off of foreign tax credits.................. 3.4 -- --
Tax benefit on deductible preferred stock
dividends...................................... (3.9) -- --
Other, net........................................ .4 (2.5) (.5)
----- ----- ------
Effective income tax rates.......................... (22.6)% 29.6% 10.8%
===== ===== ======
</TABLE>
F-12
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES. (continued)
The components of the net deferred income tax (asset) liability at December 31
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
(In Thousands)
<S> <C> <C>
Deferred income tax liabilities:
Depreciation and basis difference......................... $ 8,715 $13,311
Unrealized gain on securities available for sale.......... 37 371
Other..................................................... 242 181
-------- -------
8,994 13,863
-------- -------
Deferred income tax assets:
Estimated net operating loss carryforwards................ (5,533) (2,966)
Employee benefits......................................... (2,802) (3,380)
Foreign tax credit carryforward........................... (980) (440)
Accruals.................................................. (3,444) (217)
Other tax credit carryforwards............................ (5,783) --
Inventory................................................. (931) (600)
Accounts and notes receivable reserve..................... (114) (22)
Write-down of investment.................................. (368) (368)
Loss on joint ventures.................................... (1,086) (1,052)
Other..................................................... (1,936) (649)
-------- -------
(22,977) (9,694)
Valuation allowance....................................... 4,519 964
-------- -------
(18,458) (8,730)
-------- -------
Net deferred income tax (asset) liability................... $ (9,464) $ 5,133
======== =======
</TABLE>
At December 31, 1997, the cumulative amount of undistributed earnings of foreign
subsidiaries was approximately $18,898,000. No deferred U.S. income taxes have
been provided on these earnings as such amounts are deemed to be permanently
reinvested. If such earnings were remitted, the impact of additional U.S. income
taxes or foreign withholding taxes would not be significant.
As of December 31, 1997, the Company has net operating loss carryforwards of
approximately $17,190,000, which expire in varying amounts between 2003 and
2011, available from certain of its subsidiaries. The Company has recorded a
deferred tax asset of $5,533,000 associated with these carryforwards.
Realization is dependent on generating sufficient taxable income in specific
countries prior to the expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
Provisions (credits) for state income taxes are included in selling and
administrative expenses and amounted to $(22,000) in 1997, $197,000 in 1996 and
$1,369,000 in 1995.
NOTE 9. STOCK OPTION PLANS AND LONG-TERM INCENTIVE PLANS.
The Company has 17,400 stock options outstanding under the Walbro Corporation
1983 Incentive Stock Option Plan (1983 Plan) which were granted at market value
on the date of grant. There are no options available for grant remaining under
this plan.
Under the Walbro Corporation Equity Based Long Term Incentive Plan (Equity
Plan), 856,457 shares of common stock are reserved for issuance to officers,
directors and key employees. Options are granted yearly based on certain
financial performance criteria as compared to the annual business plan and other
factors. In addition, Stock Performance Award Grants (Grants) are awarded
annually when the common stock price appreciates and Grants are exchanged for
common stock at the end of the five-year
F-13
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 9. STOCK OPTION PLANS AND LONG-TERM INCENTIVE PLANS. (continued)
term. If the Company's common stock price appreciates at a 17% compounded rate
over the term, the number of Grants awarded, valued at the common stock price,
will equal the dollar amount necessary to exercise the stock options.
Participants will receive a greater or lesser number of Grants based on the
actual market performance of the stock over the term. The number of grants
outstanding was 4,900 and 6,754 as of December 31, 1997 and 1996, respectively.
Effective December 1997, the Company approved a Broad-Based Long Term
Incentive Plan (Broad-Based Plan), which consists of 572,129 shares of common
stock that are reserved and available for distribution to employees and
consultants to the Company, its Subsidiaries and Affiliates. The purpose of the
plan is to enable these persons to participate in the Company's future and to
aid in retaining employees of merit. Under the new plan, 5,200 options were
granted in 1997. Of the 5,200 options granted, 3,000 remain unexercisable as of
December 31, 1997.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation (SFAS No. 123)." The Company continues to apply
Accounting Principles Board Opinion No. 25 for expense recognition. All stock
options issued by the Company are exercisable at a price equal to the market
price at the date of the grant. Accordingly, no compensation cost has been
recognized for any of the options granted under the Plans.
A summary of the stock option transactions of the 1983 Plan, the Equity Plan,
and the Broad-Based Plan for the years ended December 31, 1997, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
Number of Shares
Exercisable Outstanding Option price (per share)
----------- ----------- ------------------------
<S> <C> <C> <C>
December 31, 1994.................... 184,410 273,111 $ 9.25-33.25
Granted............................ 174,881 18.00-25.25
Exercised.......................... (15,400) 10.88
Canceled........................... (500) 33.25
-------
December 31, 1995.................... 321,695 432,092 9.25-33.25
Granted............................ 117,385 18.19-21.75
Exercised.......................... (12,279) 9.25-18.00
Canceled........................... (5,458) 26.00-33.25
-------
December 31, 1996.................... 418,936 531,740 9.25-33.25
Granted............................ 19,804 13.75-22.75
Exercised.......................... (29,480) 9.25-19.125
Canceled........................... (83,698) 9.25-33.25
-------
December 31, 1997.................... 424,016 438,366 $ 9.25-33.25
=======
</TABLE>
The weighted-average fair value of options granted during the year is $5.01 and
$7.63 for the years ended December 31, 1997 and 1996, respectively.
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<S> <C> <C> <C> <C>
Options Outstanding:
Range of Exercise Prices............. $ 9.25 $13.75-19.75 $20.00-27.13 $ 33.25
Number Outstanding at 12/31/97....... 12,875 283,322 124,769 17,400
Weighted-Average:
Remaining Contractual Life
(years)......................... 3.1 7.8 6.5 0.1
Exercise Price.................... $ 9.25 $ 18.03 $ 25.59 $ 33.25
Options Exercisable:
Number Exercisable at 12/31/97....... 12,875 272,260 121,481 17,400
Weighted Average Exercise Price...... $ 9.25 $ 18.05 $ 25.68 $ 33.25
</TABLE>
F-14
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 9. STOCK OPTION PLANS AND LONG-TERM INCENTIVE PLANS. (continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions by year:
<TABLE>
<CAPTION>
ASSUMPTIONS 1997 1996
- ------------------------- ------- -------
<S> <C> <C>
Risk-free interest
rate................... 5.7% 6.4%
Expected life............ 10 yrs. 10 yrs.
Expected volatility...... 34.6% 35.2%
Expected dividends....... 2.0% 2.0%
</TABLE>
Had compensation cost for the Plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method
described in SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C> <C>
Net income (loss).... As reported $(36,627) $11,229
Pro forma (36,644) 10,601
Basic net income
(loss) per share... As reported (4.23) 1.30
Pro forma (4.23) 1.23
</TABLE>
The Company cautions that the pro forma net income and per share result in the
initial years of adoption are overstated due to the recognition of pro forma
compensation cost over the vesting period.
During 1996, the Walbro Engine Management Corporation Incentive Compensation
Plan reached the end of its five-year measurement term, and the first of three
annual payments was made. The second of three payments was made during 1997. The
Company has accrued approximately $3,287,000 and $4,472,000 as of December 31,
1997 and 1996, respectively, under this plan. Participants can elect to receive
their payments in either cash or common stock of the Company.
NOTE 10. POSTRETIREMENT HEALTH BENEFITS.
The Company provides postretirement health care, dental benefit and prescription
drug coverage to a limited number of current retirees. Postretirement benefits
are not available for active employees.
The following table reconciles the status of the accrued postretirement
benefit obligation at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Accumulated
postretirement benefit
obligation (APBO)..... $3,800 $4,068
Plan assets at fair
value................. -- --
------ ------
APBO in excess of plan
assets................ 3,800 4,068
Unrecognized net gain... 606 331
------ ------
Accrued postretirement
benefit obligation.... $4,406 $4,399
====== ======
</TABLE>
The discount rates used in 1997 and 1996 were 7.00% and 7.25%, respectively.
Net periodic postretirement benefit cost relates to interest costs of
$283,000, $319,000 and $350,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
For measurement purposes, a 7.19% annual rate of increase was assumed in per
capita cost of covered health and dental care benefits for 1997. The rate was
assumed to gradually decrease to 5% by the year 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant impact
on the accumulated postretirement benefit obligation and on future amounts
accrued. A one percentage point increase each year in the assumed health care
cost would increase the accumulated postretirement benefit obligation at
December 31, 1997 by $336,000 and the interest cost component of net periodic
postretirement benefit cost for the year ended December 31, 1997 by $27,000.
F-15
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 11. PENSION PLANS.
The Company sponsors pension plans covering substantially all domestic
collectively bargained employees and certain foreign employees. The plan
covering domestic collectively bargained employees provides benefits of stated
amounts for each year of service. Plans covering certain foreign employees
provide payments at termination which are based upon length of service,
compensation rate and whether termination was voluntary or involuntary. The
Company annually contributes to the plans covering domestic employees and
certain foreign employees amounts which are actuarially determined to provide
the plan with sufficient assets to meet future benefit payment requirements. The
plans covering foreign employees in certain countries are not funded.
Total pension expense amounted to $330,000 in 1997, $325,000 in 1996 and
$251,000 in 1995. The Company recognizes currently the amount which would be
payable if employees covered by certain foreign plans terminated voluntarily.
Pension expense for the other plans is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Service cost........................................... $ 300 $ 285 $ 136
Interest on projected benefit obligation............... 408 345 263
Actual return on assets................................ (397) (324) (240)
Net amortization and deferral.......................... 19 19 12
----- ----- -----
$ 330 $ 325 $ 171
===== ===== =====
</TABLE>
The following table summarizes the funded status of the Company's defined
benefit pension plans and the related amounts recognized in the Company's
consolidated balance sheets as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
PBO< PBO> PBO< PBO>
ASSETS Assets Assets Assets
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation--
Vested................................... $(5,952) $ (535) $(5,237) $ (511)
Nonvested................................ (30) -- (50) --
------- ------- ------- -------
Accumulated benefit obligation........... (5,982) (535) (5,287) (511)
Effects of salary progression............ -- (56) -- (116)
------- ------- ------- -------
Projected benefit obligation (PBO)....... (5,982) (591) (5,287) (627)
------- ------- ------- -------
Plan assets--
Cash equivalents......................... 1,309 -- 1,247 --
Equity securities........................ 5,306 -- 4,365 --
------- ------- ------- -------
6,615 -- 5,612 --
------- ------- ------- -------
Projected benefit obligation under (over)
plan assets.............................. 633 (591) 325 (627)
Unamortized net asset at transition........ (9) -- (31) --
Unamortized net (gain) loss................ (224) -- (77) --
Unrecognized prior service cost............ 768 -- 823 --
------- ------- ------- -------
Pension asset (liability) recorded in the
consolidated balance sheets.............. $ 1,168 $ (591) $ 1,040 $ (627)
======= ======= ======= =======
</TABLE>
F-16
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 11. PENSION PLANS. (continued)
The assumptions used in determining the funded status information shown above
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate................................ 6.0-7.0% 6.0-7.5% 7.25-7.5%
Long-term rate of return on assets........... 6.0-7.0% 6.0-7.25% 8.5%
</TABLE>
The Company also sponsors a defined contribution plan for non-union domestic
employees under which the Company will make matching contributions of 50% of
each participant's before-tax contribution (up to 6% of the participant's annual
income) and retirement contribution of up to 3% (subject to change on an annual
basis) of a participant's annual income. The cost of defined contributions
charged to earnings during 1997, 1996 and 1995 was approximately $2,108,000,
$,2,252,000 and $2,255,000, respectively.
Certain non-union employees, excluding officers, are eligible to participate
in the Walbro Corporation Employee Stock Ownership Plan (ESOP). The Company will
make annual contributions to a trust in the form of either cash or common stock
of the Company. The amount of the annual contribution is discretionary, except
that it must be sufficient to enable the trust to meet its current obligations.
The Company has guaranteed the ESOP's loan and is obligated to contribute
sufficient cash to the trust to repay the loan. Contribution expense related to
the ESOP amounted to $463,000, $416,000 and $515,000 in 1997, 1996 and 1995,
respectively. Contribution expense is net of dividends of $105,000 in 1997, 1996
and 1995. As of December 31, 1997 and 1996, the following are held by the ESOP:
238,000 and 218,000 allocated shares, respectively, and zero and 28,000 suspense
(unallocated) shares, respectively.
NOTE 12. DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to help meet financing needs and to reduce
exposure to fluctuating foreign currency exchange rates. The Company is exposed
to credit loss in the event of nonperformance by the other parties to the
financial instruments described below. However, the Company does not anticipate
nonperformance by the other parties. The Company does not engage in trading
activities with these financial instruments and does not generally require
collateral or other security to support these financial instruments. The
notional amounts of derivatives summarized below do not represent the amounts
exchanged by the parties and, thus, are not a measure of the exposure of the
Company through its use of derivatives. The amounts exchanged are calculated on
the basis of the notional amounts and the other terms of the derivatives.
Financial Instruments with Off-Balance Sheet Risk
- -------------------------------------------------
The Company enters into forward currency exchange contracts to manage its
foreign currency exchange risk. As of December 31, 1997 and 1996, the notional
amounts of contracts outstanding were approximately $885,000 and $5,975,000,
respectively.
The Company enters into forward currency exchange contracts to reduce its
exposure against fluctuations in foreign currency exchange rates. During 1997,
the Company had seventeen forward currency exchange contracts, thirteen of which
matured during 1997, which exchanged 540,000,000 Japanese yen, 1,626,900
Deutsche marks and 7,000,000 Swedish krona. During 1996, the Company had fifteen
forward currency exchange contracts which matured during 1996, which exchanged
939,000,000 Japanese
F-17
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 12. DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS. (continued)
yen and 20,200,000 Deutsche marks. During 1995, the Company had twenty-one
forward currency exchange contracts which matured during 1995 and exchanged
1,015,000,000 Japanese yen and 15,300,000 Singapore dollars. The amounts
included in foreign currency exchange (gain) loss in the accompanying
consolidated statements of income related to these contracts were a gain of
approximately $483,000 for the year ending December 31, 1997, a gain of
approximately $339,000 for the year ending December 31, 1996 and a gain of
approximately $929,000 for the year ending December 31, 1995.
Fair Value of Financial Instruments
- --------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Notes Receivable
- -------------------
The fair value is estimated using the expected future cash flows discounted at
current interest rates.
Marketable Equity Securities
- -------------------------------
The fair value of marketable equity securities is estimated by quoted market
prices when the investment is traded on a public stock exchange. For investments
not publicly traded, a combination of book value and fair market value of assets
is used.
Long-Term Debt
- ------------------
The fair value of the Company's public debt is estimated using quoted market
prices. The fair value of the Company's other long-term debt is estimated using
the expected future cash flows discounted at the current interest rates offered
to the Company for debt of the same remaining maturities.
Forward Currency Exchange Contracts
- ------------------------------------------
The fair value of forward currency exchange contracts is estimated by obtaining
quotes from brokers.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING Fair Carrying Fair
VALUE Value Value Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Notes receivable................ $ 140 $ 140 $ 1,268 $ 1,268
Long-term debt.................. 305,353 298,232 292,812 293,212
Forward currency exchange
contracts..................... -- -- -- (258)
</TABLE>
NOTE 13. LEASES.
The Company has leased certain of its buildings, equipment and vehicles under
operating leases. The leases involving buildings contain options enabling the
Company to renew the leases at the end of the respective lease terms. Rent
expense was approximately $6,178,000, $7,702,000 and $4,761,000 in 1997, 1996
and 1995, respectively.
F-18
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 13. LEASES. (continued)
Aggregate minimum future rentals under noncancellable leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In Thousands)
<S> <C> <C>
1998.................. $ 871 $ 6,331
1999.................. 873 6,218
2000.................. 865 5,496
2001.................. 850 3,921
2002.................. 142 3,700
Thereafter............ -- 25,539
------ -------
Total minimum lease
payments......... 3,601 $51,205
=======
Amount representing
interest............ 418
------
Present value of net
future minimum
lease payments... $3,183
======
</TABLE>
NOTE 14. ACCRUED LIABILITIES.
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Compensation
related............. $13,760 $10,336
Facilities and
employee
relocation.......... 606 7,471
Interest.............. 7,385 7,449
Restructuring......... 5,697 --
Other................. 11,773 16,020
------- -------
$39,221 $41,276
======= =======
</TABLE>
The restructuring liability consists of severance related costs, loan guarantees
and other costs associated with the announced activities. There were no
significant costs paid and charged against the liability during 1997.
NOTE 15. CONVERTIBLE TRUST PREFERRED SECURITIES.
In February 1997, the Company sold 2,760,000 Convertible Trust Preferred
Securities of Walbro Capital Trust, a wholly-owned subsidiary of the Company, at
a face value of $25 per share and an interest rate of 8% per annum. The
preferred securities are convertible into common stock of the Company at the
option of the security-holder anytime after April 4, 1997. Net proceeds of the
offering were approximately $66,000,000 and were used to repay a portion of the
Company's revolving credit facility. Each preferred security is convertible, at
the option of the holder, into shares of common stock of the Company at the rate
of 1.1737 shares of common stock for each preferred security.
NOTE 16. STOCKHOLDERS' EQUITY.
The Company has a stock rights plan which entitles the holder of each right,
upon the occurrence of certain events, to purchase one one-hundredth of a share
of a new series of preferred stock for $75. Furthermore, if the Company is
involved in a merger or other business combination at any time after the rights
become exercisable, the rights will entitle the holder to buy the number of
shares of common stock of the acquiring company having a market value of twice
the then current exercise price of each right.
F-19
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 16. STOCKHOLDERS' EQUITY. (continued)
Alternatively, if a 15% or more shareholder acquires the Company by means of a
reverse merger in which the Company and its stock survives, or engages in
self-dealing transactions with the Company, or if any person acquires 50% or
more of the Company's common stock, then each right not owned by a 15% or more
shareholder will become exercisable for the number of shares of common stock of
the Company having a market value of twice the then current exercise price of
each right. The rights, which do not have voting rights, expire in December 1998
and may be redeemed by the Company at a price of $.01 per right at any time
prior to their expiration or the time they become exercisable.
The Company has authorized 1,000,000 shares of $1.00 par value preferred
stock.
NOTE 17. BUSINESS SEGMENT INFORMATION.
The Company operates through its subsidiaries in the following industry
segments:
1. Automotive, which designs, develops and manufactures fuel storage and
delivery products for a broad range of U.S. and foreign manufacturers of
passenger automobiles and light trucks (including minivans),
2. Small Engine, which designs, develops and manufactures diaphragm
carburetors for portable engines, float feed carburetors for ground supported
engines and ignition systems and other components for a variety of small engine
products and
3. Aftermarket and Corporate which includes aftermarket operations for both
the automotive and small engine markets and the Corporate headquarters,
including its direct investments.
F-20
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continue)
- --------------------------------------------------------------------------------
NOTE 17. BUSINESS SEGMENT INFORMATION. (continued)
Selected financial information about the Company's business and geographic
segments are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Financial Information by Business Segment
Net sales to customers:
Automotive......................................... $467,821 $444,239 $324,963
Small Engine....................................... 130,015 127,914 116,743
Aftermarket and Corporate.......................... 35,911 29,689 28,562
-------- -------- --------
633,747 601,842 470,268
Eliminations......................................... (13,842) (16,453) (10,996)
-------- -------- --------
Total net sales...................................... $619,905 $585,389 $459,272
======== ======== ========
Operating profit (loss):
Automotive......................................... $(15,105) $ 24,909 $ 20,167
Small Engine....................................... 2,145 6,851 11,345
Aftermarket and Corporate.......................... (10,961) (5,082) (7,378)
-------- -------- --------
Operating profit (loss).............................. $(23,921) $ 26,678 $ 24,134
======== ======== ========
Identifiable assets:
Automotive......................................... $477,238 $463,144 $377,975
Small Engine....................................... 87,468 67,020 52,798
Aftermarket and Corporate.......................... 45,887 59,485 62,700
-------- -------- --------
Total identifiable assets............................ $610,593 $589,649 $493,473
======== ======== ========
Depreciation and amortization:
Automotive......................................... $ 23,907 $ 20,779 $ 12,967
Small Engine....................................... 5,984 6,334 6,090
Aftermarket and Corporate.......................... 1,526 2,623 3,394
-------- -------- --------
Total depreciation and amortization.................. $ 31,417 $ 29,736 $ 22,451
======== ======== ========
Capital expenditures:
Automotive......................................... $ 46,464 $ 84,293 $ 35,609
Small Engine....................................... 13,107 11,769 9,692
Aftermarket and Corporate.......................... 2,448 3,085 939
-------- -------- --------
Total capital expenditures........................... $ 62,019 $ 99,147 $ 46,240
======== ======== ========
</TABLE>
F-21
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 17. BUSINESS SEGMENT INFORMATION. (continued)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Financial Information by Geographic Segment
Net sales to customers:
United States...................................... $372,013 $342,883 $314,697
Europe............................................. 201,377 214,400 88,736
Far East and Other Foreign......................... 46,515 28,106 55,839
-------- -------- --------
619,905 585,389 459,272
Net sales between geographic areas................. 28,856 30,034 27,663
-------- -------- --------
648,761 615,423 486,935
Eliminations......................................... (28,856) (30,034) (27,663)
-------- -------- --------
Total net sales...................................... $619,905 $585,389 $459,272
======== ======== ========
Operating profit (loss):
United States...................................... $(23,305) $ 16,328 $ 14,313
Europe............................................. (922) 7,595 3,335
Far East and Other Foreign......................... 306 2,755 6,486
-------- -------- --------
Operating Profit (loss).............................. $(23,921) $ 26,678 $ 24,134
======== ======== ========
Identifiable assets:
United States...................................... $339,516 $324,988 $262,020
Europe............................................. 191,630 194,017 193,876
Far East and Other Foreign......................... 79,447 70,644 37,577
-------- -------- --------
Total identifiable assets............................ $610,593 $589,649 $493,473
======== ======== ========
</TABLE>
The Europe geographic segment includes operations in Belgium, France, Germany,
Norway, Spain and the United Kingdom. The Far East and Other Foreign geographic
segment includes operations in Japan, Singapore, Korea, China, Brazil, Mexico
and Canada. Sales between geographic areas are accounted for at cost plus a
margin for profit. Identifiable assets are those assets used in the operations
in each geographic area. Export sales from domestic locations were approximately
$119,300,000, $127,248,000 and $78,985,000 for 1997, 1996 and 1995,
respectively.
A majority of the Company's sales are to automobile manufacturing companies.
Sales to certain major customers which exceeded 10% of consolidated sales are as
follows. Sales to one such customer amounted to 19%, 20% and 19% of consolidated
sales in 1997, 1996 and 1995, respectively. Sales to another such customer
amounted to 5%, 10% and 21% of consolidated sales in 1997, 1996 and 1995,
respectively.
Several other factors could have a significant impact on the continuing
operations of the Company. These factors include changes in demand for
automobiles and light trucks, relationships with significant customers, price
pressures, the timing and structure of future acquisitions or dispositions, the
integration of the Dyno acquisition into Walbro's overall business, impact of
environmental regulations, continued availability of adequate funding sources,
currency and other risks inherent in international sales, and general economic
and business conditions.
F-22
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 18. SUPPLEMENTAL CASH FLOW INFORMATION.
In 1997, 1996 and 1995, the Company paid $4,376,000, $5,048,000 and $3,290,000
for income taxes and $29,957,000, $21,674,000 and $7,191,000 for interest,
respectively.
NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
Selected quarterly financial information for the years ended December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
Quarter
First Second Third Fourth Total
-------- -------- -------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
1997--
Net sales..................... $154,019 $153,842 $146,523 $165,521 $619,905
Cost of sales................. 129,821 131,437 125,911 151,582 538,751
-------- -------- -------- -------- --------
Gross profit............... $ 24,198 $ 22,405 $ 20,612 $ 13,939 $ 81,154
======== ======== ======== ======== ========
Net income (loss)............. $ 2,362 $ 1,184 $ (1,190) $(38,983) $(36,627)
======== ======== ======== ======== ========
Basic net income (loss) per
share...................... $ .27 $ .14 $ (.14) $ (4.49) $ (4.23)
======== ======== ======== ======== ========
Diluted net income (loss) per
share...................... $ .27 $ .14 $ (.14) $ (4.49) $ (4.23)
======== ======== ======== ======== ========
1996--
Net sales..................... $152,966 $155,086 $132,545 $144,792 $585,389
Cost of sales................. 124,178 126,752 111,116 126,088 488,134
-------- -------- -------- -------- --------
Gross profit............... $ 28,788 $ 28,334 $ 21,429 $ 18,704 $ 97,255
======== ======== ======== ======== ========
Net income (loss)............. $ 4,534 $ 4,824 $ 2,346 $ (475) $ 11,229
======== ======== ======== ======== ========
Basic net income (loss) per
share...................... $ .53 $ .56 $ .27 $ (.05) $ 1.30
======== ======== ======== ======== ========
Diluted net income (loss) per
share...................... $ .53 $ .56 $ .27 $ (.05) $ 1.30
======== ======== ======== ======== ========
</TABLE>
Net income per share and weighted average shares are computed independently for
each of the quarters presented. Therefore, the sum of the quarterly net income
per share may not equal the per share total for the year.
F-23
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 20. EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," which was
effective December 15, 1997. The statement changes the calculation of earnings
per share to be more consistent with countries outside of the United States. In
general, the statement requires two calculations of earnings per share to be
disclosed, basic EPS and diluted EPS. Basic EPS is computed using only weighted
average shares outstanding. Diluted EPS is computed using the average share
price for the period when calculating the dilution of stock options. The
following is the Company's calculation of earnings per share.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (in thousands)........................ $ (36,627) $ 11,229 $ 13,830
========== ========== ==========
Weighted average share outstanding............... 8,661,432 8,608,837 8,579,976
Dilutive options issued to executives............ 6,664 40,543 29,455
---------- ---------- ----------
Diluted shares outstanding....................... 8,668,096 8,649,380 8,609,431
========== ========== ==========
Basic net income (loss) per share................ $ (4.23) $ 1.30 $ 1.61
========== ========== ==========
Diluted net income (loss) per share.............. $ (4.23) $ 1.30 $ 1.61
========== ========== ==========
</TABLE>
F-24
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Walbro Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTE 21. SUBSEQUENT EVENT
In April 1998, the Company received a commitment (Commitment) for a $150,000,000
line of credit, consisting of a $125,000,000 revolving line of credit (Revolving
Credit Facility) and a $25,000,000 capital expenditure facility (Capital
Expenditure Facility). Closing of the transaction contemplated by the Commitment
is subject to various terms and conditions.
Under the terms of the Commitment, for the first year of the transaction, the
Revolving Credit Facility will bear interest at either the London Interbank
Offered Rate (LIBOR), plus 2.25% or at the Prime Rate, plus 0.25%. Availability
under the Revolving Credit Facility is subject to a borrowing base, consisting
of 85% of the eligible accounts receivable of the Company and certain of its
subsidiaries, 60% of certain raw materials and finished goods inventory and 70%
of commodity raw material resin inventory, less customary reserves. In addition,
the Revolving Credit Facility provides for a $25,000,000 sub-facility for the
issuance of letters of credit. The Capital Expenditure Facility initially bears
interest at the rate equal to the Prime Rate, plus 0.50% or LIBOR, plus 2.50%.
Amounts drawn under the Capital Expenditure Facility are repayable in 20 equal
quarterly principal installments, beginning one quarter after such draw.
Each of the Revolving Credit Facility and the Capital Expenditure Facility
(collectively, the New Credit Facility) is available for a period of five years
after the closing. If the Revolving Credit Facility is terminated by the Company
during the first three years, certain pre-payment fees may be applicable.
The New Credit Facility will contain numerous covenants, including financial
covenants such as a fixed charge ratio and a senior secured funded indebtedness
to EBITDA (earnings before interest, taxes, depreciation and amortization)
ratio, and restrictions on additional indebtedness, liens, capital expenditures,
mergers and sales of assets, and events of default. Obligations outstanding
under the Revolving Credit Facility will be secured by accounts receivable,
inventory and general intangibles of the Company and certain of its
subsidiaries, and also will be secured by a pledge of the stock of certain of
the material domestic subsidiaries of the Company and 65% of the stock of the
material foreign subsidiaries of the Company. Each advance under the Capital
Expenditure Facility will be secured by the item of equipment purchased with
the proceeds of such advance. The collateral for the Capital Expenditure
Facility will not constitute collateral for the Revolving Credit Facility. In
addition, certain of the subsidiaries of the Company will provide guarantees of
the obligations under the New Credit Facility. The proceeds of the New Credit
Facility will be used to replace the existing Credit Facility and the existing
purchase money loan agreement, to refinance the 2004 Notes including an early
retirement premium of approximately $2.3 million, for capital expenditures and
for general working capital purposes.
F-25
<PAGE> 56
[ERNST & YOUNG LETTERHEAD]
Mr. Mike Shope
Walbro Corporation
6242 Garfield Street
Cass City, Michigan 48726-1325
April 14, 1998
Dear Sirs,
With respect to the contemplated filing of a registration statement by Walbro
Corporation and the inclusion in this filing of the audited financial
statements under French GAAP of Marwal Systems for fiscal years ended December
31, 1995, 1996, and 1997, we confirm that our audits of these Marwal Systems
financial statements were conducted substantially in accordance with US
generally accepted auditing standards.
Yours faithfully,
ERNST & YOUNG Audit
/s/ Gilles Meyer
--------------------
Gilles Meyer
Partner
F-26
<PAGE> 57
MARWAL SYSTEMS, S.N.C.
STATUTORY AUDITOR'S GENERAL REPORT
YEAR ENDED DECEMBER 31, 1997
In our capacity as statutory auditor, we present below our report on:
- - the accompanying annual accounts of Marwal Systems,
- - the specific procedures and disclosures prescribed by law,
for the year ended December 31, 1997.
These annual accounts are the responsibility of the Company's management. Our
responsibility is to express an opinion on these annual accounts based on our
audit.
1. OPINION ON THE ANNUAL ACCOUNTS
We conducted our audit in accordance with French auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the annual accounts are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the annual accounts. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall annual account presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the annual accounts present fairly, in all material respects,
the financial position of the Company at December 31, 1997 and the results of
its operations for the year then ended.
11. SPECIFIC PROCEDURES AND DISCLOSURES PRESCRIBED BY LAW
We have also carried out, in accordance with professional standards, the
specific procedures prescribed by law.
We have nothing to report with respect to the fairness of information contained
in the Directors' Report and its consistency with the annual accounts and other
information presented to shareholders concerning the financial position and
annual accounts.
The Statutory Auditor
ERNST & YOUNG Audit
/s/ Gilles Meyer
March 6, 1998
F-27
<PAGE> 58
MARWAL SYSTEMS, S.N.C.
Balance Sheet as of
December 31, 1997
(in French Francs)
<TABLE>
<CAPTION>
ASSETS December 31, 1997
------------------------------------------------
Gross Accumulated Net book value
depreciation
amortization and
allowances
------------------------------------------------
<S> <C> <C> <C>
Fixed assets
Intangible fixed assets 20.729.684,88 20.016.820,12 712.864,76
Tangible fixed assets 195.110.282,11 109.881.452,28 85.228.829,83
Financial investments:
- - Associates 22.791.879,00 -- 22.791.879,00
- - Others 6.374.518,03 -- 6.374.518,03
------------------------------------------------
Sub-total 245.006.364,02 129.898.272,40 115.108.091,62
------------------------------------------------
Inventories
- - Raw materials 23.749.844,00 1.763.056,00 21.986.788,00
- - Work in-progress 2.791.156,00 114.766,00 2.676.390,00
- - Furnished goods 7.625.179,00 760.089,00 6.865.090,00
------------------------------------------------
Sub-total 34.166.179,00 2.637.911,00 31.528.268,00
------------------------------------------------
Current assets
Advances and payments on accounts 1.890.152,18 1.890.152,18
Trade accounts and notes receivable:
- - Customers and related accounts 133.366.850,61 3.783.169,22 129.583.681,39
- - Other 11.275.924,08 11.275.924,08
Other receivables 1.262.790,11 1.262.790,11
Cash and cash equivalent 106.831.529,38 106.831.529,38
Payments in advance 390.780,96 390.780,96
Deferred Charges -- --
Foreign exchange translation differences 1.273.073,37 1.273.073,37
------------------------------------------------
Sub-total 256.291.100,69 3.783.169,22 252.507.931,47
------------------------------------------------
TOTAL ASSETS 535.463.643,71 136.319.352,62 399.144.291,09
================================================
</TABLE>
F-28
<PAGE> 59
MARWAL SYSTEMS, S.N.C.
Balance Sheet as of
December 31, 1997
(in French Francs)
<TABLE>
<CAPTION>
---------------------
LIABILITIES AND December 31, 1997
SHAREHOLDERS' EQUITY ---------------------
<S> <C>
Shareholders' equity
Share capital 90.660.000,00
Reserves 4.305.050,83
Revaluation reserve
Retained earnings at January 1st 37.762.183,66
Result for the year 41.682.692,84
---------------------
Sub-total 174.409.927,33
---------------------
Provisions for contingencies and
charges 5.265.122,88
Liabilities
Financial debts:
- -Amounts owed to financial
institutions 234.153,20
- -Other financial debts 14.812.419,38
Government subsidies 2.300.000,00
Accounts payable and related
accounts 161.799.190,73
Social charges payable 20.560.799,82
Taxes 3.224.082,14
Other 4.927.588,11
Other creditors:
- - Accounts payable on fixed
assets 6.164.893,10
- - Group -
- - Other 24,00
Deferred income 4.785.923,26
Foreign exchange translation
differences 660.167,14
---------------------
Sub-total 219.469.240,88
---------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 399.144.291,09
=====================
</TABLE>
F-29
<PAGE> 60
MARWAL SYSTEMS, S.N.C.
Income Statement for the
year ended December 31, 1997
(in French Francs)
<TABLE>
<CAPTION>
---------------------------------
INCOME STATEMENT FOR THE YEAR December 31, 1997
---------------------------------
<S> <C> <C>
Operating revenues: 701.704.308,65
Sale of goods 676.820.865,02
Sale of services 15.333.088,92
Net sales 692.153.953,94
Movement in finished goods and work-in progress (2.537.150,00)
In-home production 285.562,25
Grants 490.998,85
Reversal of provisions and transfer of charges 10.021.636,96
Other income 1.289.306,65
Operating expenses 652.633.885,77
Purchases of raw materials and other supplies 342.138.752,19
Movements in raw materials stock 4.649.952,00
Other purchases and extend charges 112.782.904,48
Taxes and similar charges 9.511.399,78
Wages & salaries 101.299.556,33
Social charges 42.615.435,07
Depreciation and amortisation expenses and
provisions:
- - Fixed assets 24.149.418,15
- - Current assets 1.205.055,28
- - Contingencies and charges 3.905.450,94
Other charges 10.377.961,55
--------------
652.633.885,77
Operating profit 49.070.422,88
Financial income:
From other investments --
Other interest and similar income 2.691.468,39
Reversal of provisions and transfer of charges 1.608.447,02
Foreign exchange gains 9.381.457,05
--------------
13.681.372,46
Financial expenses:
Depreciation and provisions 1.425.880,37
Interest and similar charges 4.846.615,22
Foreign gains 10.464.489,91
--------------
16.736.985,50
Net financial income/(expenses) (3.055.613,84)
</TABLE>
F-30
<PAGE> 61
MARWAL SYSTEMS, S.N.C.
Income Statement for the
year ended December 31, 1997
(in French Francs)
<TABLE>
<CAPTION>
-----------------------------
INCOME STATEMENT FOR THE YEAR December 31, 1997
-----------------------------
<S> <C> <C>
Profit before taxation 46.014.809,84
Exceptional income: 1.904.436,60
From operating activities --
From capital transactions 409.464,60
Reversal of provisions and transfer 1.494.972,00
of charges
------------
1.904.436,60
Exceptional charges: 2.596.473,60
From operating activities 2.320.049,99
From capital transactions 145.203,61
Depreciation and provisions 131.220,00
------------
2.596.473,60
Exceptional profit (loss) (692.037,00)
Profit before taxation 45.322.772,84
Profit-Sharing 3.640.080,00
Income Tax --
Profit after taxation 41.682.692,84
</TABLE>
F-31
<PAGE> 62
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
EVENTS DURING THE YEAR
The company owns 98% of the shares of Marwal Argentina S.A. as from 12/30/97
(11.760 shares), for an amount of 60,564 French Francs
NOTE 1: ACCOUNTING POLICIES
The accounts of the Company have been prepared based upon generally accepted
accounting principles in France which conform with the Chart of Accounts as set
out in the French law dated April 30, 1983 and the decree of November 29, 1983.
1.1 Intangible fixed assets
The intangible fixed assets consist mainly of goodwill which is amortised on
a straight line basis over 5 years and totally amortised at the end of 1997.
The amortisation methods and the useful lives for other categories are as
follows:
- - Set-up costs 3 years straight line
Computer software 1-3 years straight line
1.2 Tangible fixed assets
Tangible fixed assets are valued at historical purchase price or cost of
production when they have been produced in house. The cost of production is
made up of the following elements: purchase price of raw materials, consumables
and direct production costs.
Assets are depreciated on a straight line basis or declining balance, when
applicable, for items purchased during or after 1992.
The depreciation methods and the useful lives applied are as follows:
<TABLE>
<S> <C>
Installations 10 years straight line
Machinery 5-6 2/3 straight line / declining balance
Toolings 1-5 years straight line / declining balance
Leasehold improvements - Mac./Toolings 5-6 2/3 straight line / declining balance
Vehicles 4-5 years straight line
Fixtures and fittings 10 years straight line
Computer hardware 4-5 years straight line/ declining balance
</TABLE>
F-32
<PAGE> 63
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
1.3 Financial investments
The investments in associates are valued at their acquisition cost in the
assets of the Company. A reserve is recorded when their fair value is less
than their book value.
1.4 Inventory and work in progress
The policies used are as follows
- - Inventory is valued at the total cost of production.
- - Raw materials and consumables are valued at the average weighted cost for
goods received in the last three months. This method is similar to FIFO.
- - The Cost of production includes direct and indirect production expenses and
an allocation of the costs of running the Head Office, to the extent that
they are related to the production.
- - The provision for obsolescence is determined based upon the anticipated
sales.
1.5 Allowance for doubtful accounts
The receivables are valued at their face value, a provision is recorded when
the value recoverable is less than the book value.
1.6 Foreign exchange transactions
The receivables and payables denominated in foreign currency are translated
into French Francs at the December 31st exchange rate. The resulting
differences with amounts translated at historical exchange rates are shown in
the balance sheet as <<foreign exchange translation differences>>.
A provision for exchange losses is recorded separately for unrealized losses.
1.7 Retirement indemnity liabilities
The <<Projected Benefit Obligation>> has been applied to calculate the
retirement obligation.
The total obligation is covered by:
- - a fund run by La Mondiale, with a value of KFRF.9,680,
a provision of KFRF.1,000 included in the Marwal accounts at December 31,
1997, an amount payable to La Mondiale of KFRF.450.
F-33
<PAGE> 64
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 2: FIXED ASSETS
The movements in gross value are as follows:
<TABLE>
<CAPTION>
---------------------------------------------
12/31/96 Increase Decrease 12/31/97
---------------------------------------------
<S> <C> <C> <C> <C>
Intangible fixed assets 19761 969 -- 20730
Tangible fixed assets 156594 42804 4288 195110
Financial investments 27760 2029 623 29166
</TABLE>
The movements in amortisation and depreciation are analysed as follows:
<TABLE>
<CAPTION>
---------------------------------------------
12/31/96 Increase Decrease 12/31/97
---------------------------------------------
<S> <C> <C> <C> <C>
Intangible fixed assets 19075 942 -- 20017
Tangible fixed assets 90817 23207 4143 109881
</TABLE>
NOTE 3: INVENTORIES AND WORK IN PROGRESS
The reserve for obsolescence for raw materials, consumables and finished goods
at 31/12/97 amounts to KFRF.2.638.
NOTE 4: ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
At December 31, 1997, accounts receivable can be split by maturity date as
follows:
<TABLE>
<CAPTION>
---------------------------------------------
Greater than 1
Total Less than 1 year year
---------------------------------------------
<S> <C> <C>
Long term receivables 6375 6307 68
Current assets 147796 147796 --
</TABLE>
NOTE 5: SHORT TERM INVESTMENTS
N/A
F-34
<PAGE> 65
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 6: PREPAYMENTS AND DEFERRED INCOME
12/31/97
--------
Prepayments
Fees 159
Prepaid maintenance 29
Leasing 203
---
391
12/31/97
--------
Deferred income
Finished goods sales 74
Long term contracts (tooling) 4712
----
4786
NOTE 7: DEFERRED CHARGES
----------------------------------------
Total Charged to 12/31/97
income statement
1997
----------------------------------------
Deferred charges
Amortised over 3 years 497 497 0
NOTE 8: SHAREHOLDERS' EQUITY
The capital stock is made up of 906,600 shares with a nominal value of FRF.100,
completely paid up.
The accounts of the Company are consolidated in the group accounts of the
Magneti Marelli Spa Group.
F-35
<PAGE> 66
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 9: TAX PROVISIONS AND PROVISIONS FOR CONTINGENCIES AND CHARGES
The movements in the year are analysed as follows:
<TABLE>
<CAPTION>
--------------------------------------------
12/31/96 Additions Reversals 12/31/97
--------------------------------------------
<S> <C> <C> <C> <C>
Provisions for contingencies and
charges of which: 11223 5333 11290 5266
- - Provision for payments on
retirement 672 1000 672 1000
- - Provision for guarantee 5812 1948 5218 1948
- - Provision for reorganisation 70 0 70 0
- - Provision for litigation 2586 653 2691 548
- - Provision for loss on foreign
exchange 762 1273 762 1273
- - Provision for charges 1283 409 1283 409
- - Provision for unproductive
hours 38 50 -- 88
</TABLE>
NOTE 10: CREDITORS
At December 31, 1997, debts, excluding advances and deposits received, deferred
income and foreign exchange differences, can be analysed by maturity date as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------
Total Less than 1 Between 1 and >5 years
year 5 years
-------------------------------------------------
<S> <C> <C> <C> <C>
Government subsidy 2300 2300
Other financial debts 14812 14812
Trade payables and other
liabilities++ 196677 193037 3640
Overdraft 234 234
</TABLE>
++ of which trade bills payable: 55338
F-36
<PAGE> 67
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 11: INFORMATION ON SUBSIDIARY
(In thousands of Pesos)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Equity capital
other than Last closing
Share in % Detailed information Share capital capital result
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
95% Marwal de Mexico S.A. de C.V. 49655* (8739)* 8923*
Tepotzotplan
Estado de Mexico
98% Marwal Argentina S.A. 12000 Non available Non available
Buenos Aires
Estado de Argentina
</TABLE>
++ after reevaluation
(In thousands of Francs)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Gross Net book Loans Guarantee Dividends
Detailed information value value given given received
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marwal de Mexico S.A. de C.V. 22731 22731 -- -- --
Marwal Argentina S.A. 60 60 6085 -- --
</TABLE>
The exemption of sub-groups enables Marwal Systems to not consolidate its
subsidiaries.
NOTE 12: RELATED PARTIES
The related parties transactions are included in the different accounts in the
balance sheet as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Assets Liabilities
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Trade receivables 51778 Trade payables 15020
Other receivables 2953 Other payables 2906
Cash and
cash equivalent 106522 Financial debt --
</TABLE>
Interest expenses and financial income with related parties are as follows:
<TABLE>
<S> <C> <C> <C>
Operating income 73062 Operating expenses 45322
Financial income 2953 Interest expenses 2812
</TABLE>
F-37
<PAGE> 68
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 13: ACCRUALS AND INCOME RECEIVABLE RELATING TO DIFFERENT BALANCE SHEET
ACCOUNTS
- -------------------------------------------------------------------------
Assets Liabilities
- -------------------------------------------------------------------------
Trade receivables
- - Customers 6092 Trade payables
- - Suppliers 240 - Suppliers 12337
- - Other 3100 - Tax and social charges 16248
- Customers 1793
- Other 3135
Other liabilities -
Other receivables - Financial debts 2050
NOTE 14: EXCHANGE DIFFERENCES RELATED TO BALANCE SHEET ACCOUNTS
-----------------------------
Exchange difference
-----------------------------
Asset Liability
-----------------------------
Assets
Trade receivables 736 85
Liabilities
Trade payables 537 575
NOTE 15: SALES TURNOVER ANALYSIS
1996 1997
---- ----
Sales 610479 692154
Sales of goods 596746 676821
Sales of services 13733 15333
Split between export/domestic
Domestic 323428 290827
Export 287051 401327
Sales 610479 692154
F-38
<PAGE> 69
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 16: DEFERRED TAX POSITION
<TABLE>
<CAPTION>
--------------------------------------------------------
12/31/96 Movements 12/31/97
--------------------------------------------------------
Nature Asset Liability Asset Liability Asset Liability
- ------ --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Timing differences
Accrued expenses
payable to La
Mondiale 811 811 450 450
Organic 799 799 797 797
Provision for
contingencies and
charges 1976 1976 1459 1459
Profit sharing 6348 6348 3650 3640
Expenses to amortize 497 497 0
Elements having an impact on 1997 fiscal result
Vehicle leasing 4
Difference on foreign exchange unrealised gains (605)
</TABLE>
F-39
<PAGE> 70
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 17: EMPLOYEE INFORMATION
<TABLE>
<CAPTION>
---------------------------------
Permanent staff Temporary staff
---------------------------------
<S> <C> <C>
Executives & Management 79
Employeees 155 7
Labor and production 475 56
---------------------------------
TOTAL 709 63
=================================
</TABLE>
NOTE 18: LEASE COMMITMENTS
The company leases certain of its buildings:
<TABLE>
<Capion>
- --------------------------------------------------------------------
Depreciation expense
Balance sheet Acquisition -------------------------- Net book
account cost Period ended Accumulated value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Buildings
Chalons 5000 172 632 4368
Saint-Martin 8059 101 101 7958
--------------------------------------------------
Total 13059 273 733 12326
====================================================================
</TABLE>
NOTE 19: COMMITMENTS UNDERTAKEN AND RECEIVED
Discounted trade bills receivable but not matured 83007
Leasing:
* present value of lease payments based on the BT01 index (value at 01.01.97 =
538.3 francs)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Lease payments Future lease payments Term
Balance ----------------- -------------------------------------------- price
sheet Period Accu- Less than 1 Between 1 > 5 years Total
category ended mulated year and 5 years
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Buildings
Chalons* 588.4 2160.3 591.0 2364.1 1797.9 4753.0
Saint- 113.8 113.8 535.4 3391.4 6089.8 10016.6
Martin
- ---------------------------------------------------------------------------------------
Total 702.2 2274.1 1126.4 5755.5 7887.7 14769.6 0
=======================================================================================
</TABLE>
NOTE 20: INFORMATION RELATING TO MANAGEMENT
N/A
F-40
<PAGE> 71
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 21: EXCEPTIONAL INCOME
<TABLE>
<S> <C> <C>
Exceptional income from operating activities 0
Exceptional income from capital transactions 409
Income from the sale of fixed assets 409
Reversal of provisions and transfer of charges 1495
Provision for reorganisation 70
Provision for litigation 392
Provision for charges 1033
NOTE 22: EXCEPTIONAL CHARGES
Exceptional charges on operating activities 2320
Redundancy payments 1382
Reimplantation costs 531
Non refunded IVA 391
Other 16
Exceptional charges from capital transactions 145
Net book value of fixed assets sold 145
Depreciation and provisions 131
Provisions for risk 131
</TABLE>
F-41
<PAGE> 72
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 23: CHANGE IN ACCOUNTING POLICIES
N/A
NOTE 24: ANALYSIS OF INCOME TAX
As Marwal Systems became a partnership as from 10/01/95, there is no income tax
booked.
<TABLE>
<CAPTION>
---------------------------
Base Tax
---------------------------
12/31/97
---------------------------
<S> <C> <C>
Operating profits 46015 0
Exceptional items (692) 0
----- ----
Profit before tax 45323 0
Income tax credit 0
----
TOTAL INCOME TAX FOR THE COMPANY 0
====
</TABLE>
NOTE 25: RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying financial statements of Marwal Systems S.N.C. have been
prepared in accordance with accounting principles required in France. A
reconciliation of these reported results to generally accepted principles in
the United States is as follows:
<TABLE>
<CAPTION>
1997
<S> <C>
Profit after taxation as shown in the financial statements 41,683
Adjust depreciable life of goodwill (375)
Adjust depreciable expense of fixed assets 1,821
Other (416)
------
Net income according to generally accepted 42,713
accounting principles in the United States
</TABLE>
F-42
<PAGE> 73
MARWAL SYSTEMS, S.N.C.
STATUTORY AUDITOR'S GENERAL REPORT
YEAR ENDED DECEMBER 31, 1996
In our capacity as statutory auditor, we present below our report on:
- - the accompanying annual accounts of Marwal Systems,
- - the specific procedures and disclosures prescribed by law,
for the year ended December 31, 1996.
These annual accounts are the responsibility of the Company's management. Our
responsibility is to express an opinion on these annual accounts based on our
audit.
1. OPINION ON THE ANNUAL ACCOUNTS
We conducted our audit in accordance with French auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the annual accounts are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the annual accounts. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall annual account presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the annual accounts present fairly, in all material respects,
the financial position of the Company at December 31, 1996 and the results of
its operations for the year then ended.
II. SPECIFIC PROCEDURES AND DISCLOSURES PRESCRIBED BY LAW
We have also carried out, in accordance with professional standards, the
specific procedures prescribed by law.
We have nothing to report with respect to the fairness of information contained
in the Directors' Report and its consistency with the annual accounts and other
information presented to shareholders concerning the financial position and
annual accounts.
The Statutory Auditor
ERNST & YOUNG Audit
/s/ Gilles Meyer
March 7, 1997
F-43
<PAGE> 74
MARWAL SYSTEMS, S.N.C.
Balance Sheet as of
December 31, 1996
(in French Francs)
<TABLE>
<CAPTION>
ASSETS
December 31, 1996
----------------------------------------------------
Gross Accumulated Net book value
depreciation
amortization and
allowances
----------------------------------------------------
Fixed Assets
- ------------
<S> <C> <C> <C>
Intangible fixed assets 19.761.392,48 19.074.600,32 686.792,16
Tangible fixed assets 156.594.185,63 90.816.990,28 65.777.195,35
Financial investments:
- - Associates 22.731.315,00 - 22.731.315,00
- - Others 5.029.079,77 - 5.029.079,77
-------------- -------------- --------------
Sub-total 204.115.972,88 109.891.590,60 94.224.382,28
-------------- -------------- --------------
Inventories
- -----------
- - Raw materials 28.365.181,00 2.416.159,00 25.949.022,00
- - Work-in-progress 2.868.378,00 233.271,00 2.635.107,00
- - Finished goods 10.119.722,00 928.075,00 9.191.647,00
-------------- -------------- -------------
Sub-total 41.353.281,00 3.577.505,00 37.775.776,00
-------------- -------------- --------------
Current assets
- --------------
Advances and payments on
accounts 932.195,00 932.195,00
Trade accounts and notes
receivable:
- - Customers and related accounts 118.214.952,27 3.803.797,82 114.411.154,45
- - Other 9.530.704,08 9.530.704,08
Other receivables 1.489.686,35 1.489.686,35
Cash and cash equivalent 101.785.260,99 101.785.260,99
Payments in advance 244.063,94 244.063,94
Deferred charges 497.004,94 497.004,94
Foreign exchange translation
differences 761.691,02 761.691,02
-------------- -------------- --------------
Sub-total 233.455.558,59 3.803.797,82 229.651.760,77
-------------- -------------- --------------
TOTAL ASSETS 478.924.812,47 117.272.893,42 361.651.919,05
-------------- -------------- --------------
</TABLE>
F-44
<PAGE> 75
MARWAL SYSTEMS, S.N.C.
Balance Sheet as of
December 31, 1996
(in French Francs)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Shareholders' equity
Share capital 90.660.000,00
Reserves 1.470.178,30
Revaluation reserve
Retained earnings at January 1st 24.306.987,50
Result for the year 56.697.450,69
-----------------
Sub-total 173.134.616,49
-----------------
Provisions for contingencies and charges 11.222.783,62
Liabilities
Financial debts:
- - Amounts owed to financial institutions 71.741,14
- - Other financial debts 7.637.640,38
Accounts payable and related accounts 130.236.872,44
Social charges payable 21.804.322,68
Taxes 3.224.512,15
Other 4.710.583,24
Other creditors:
- - Accounts payable on fixed assets 7.006.722,04
- - Group 449,84
- - Other 64.874,81
Deferred income 1.271.517,00
Foreign exchange translation differences 1.265.283,22
-----------------
Sub-total 177.294.518,94
-----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 361.651.919,05
-----------------
</TABLE>
F-45
<PAGE> 76
MARWAL SYSTEMS, S.N.C.
Income Statement for the
year ended December 31, 1996
(in French Francs)
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THE YEAR December 31, 1996
-----------------
<S> <C> <C>
Operating revenues: 616.818.427,92
Sale of goods 596.746.296,62
Sale of services 13.732.425,85
Net sales 610.478.722,77
Movement in finished goods and work-in-progress (1.616.414,00)
In-house production 568.066,00
Grants 493.725,00
Reversal of provisions and transfer of charges 5.013.288,15
Other income 1.881.040,00
Operating expenses 554.232.751,85
Purchases of raw materials and other supplies 284.395.019,10
Movements in raw materials stock (3.520.706,00)
Other purchases and external charges 95.604.496,22
Taxes and similar charges 9.677.879,14
Wages & salaries 91.916.790,49
Social charges 39.787.018,33
Depreciation and amortisation expenses and
provisions:
- - Fixed assets 23.855.292,82
- - Current assets 2.259.789,97
- - Contingencies and charges 8.262.354,05
Other charges 1.994.817,73
--------------
554.232.751,85
Operating profit 62.585.676,07
Financial income:
From other investments 136,92
Other interest and similar income 2.245.533,46
Reversal of provisions and transfer of charges --
Foreign exchange gains 10.316.211,72
--------------
12.561.882,10
Financial expenses:
Depreciation and provisions 1.022.855,69
Interest and similar charges 3.906.694,57
Foreign exchange losses 4.124.523,99
--------------
9.054.074,25
Net financial income / (expenses) 3.507.807,85
</TABLE>
F-46
<PAGE> 77
MARWAL SYSTEMS, S.N.C.
Income Statement for the
year ended December 31, 1996
(in French Francs)
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THE YEAR December 31, 1996
- ----------------------------- -----------------
<S> <C> <C>
Profit before taxation 66.093.483,92
Exceptional income: 3.104.503,48
- ------------------
From operating activities 1.448.388,61
From capital transactions 431.443,87
Reversal of provisions and transfer
of charges 1.224.671,00
------------
3.104.503,48
Exceptional charges: 6.152.294,71
- -------------------
From operating activites 4.382.238,16
From capital transactions 275.084,55
Depreciation and provisions 1.494.972,00
------------
6.152.294,71
Exceptional profit (loss) (3.047.791,23)
- -------------------------
Profit before taxation 63.045.692,69
- -------------------------
Profit-Sharing 6.348.242,00
Income Tax --
Profit after taxation 56.697.450,69
- -------------------------
</TABLE>
F-47
<PAGE> 78
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
EVENTS DURING THE YEAR
The financial investment in Marwal de Mexico was raised from 36.369 French
Francs to 22.731.315 French Francs, which is 95% of the shares.
NOTE 1: ACCOUNTING POLICIES
The accounts of the Company have been prepared based upon generally accepted
accounting principles in France which conform with the Chart of Accounts as set
out in the French law dated April 30, 1983 and the decree of November 29, 1983.
1.1 Intangible fixed assets
The intangible fixed assets consist mainly of goodwill which is amortised on a
straight line basis over 5 years and totally amortised at the end of 1996.
The amortisation methods and the useful lives for other categories are as
follows:
- -Set-up costs 3 years straight line
- -Computer software 1-3 years straight line
1.2 Tangible fixed assets
Tangible fixed assets are valued at historical purchase price or cost of
production when they have been produced in house. The cost of production is
made up of the following elements: purchase price of raw materials, consumables
and direct production costs.
Assets are depreciated on a straight line basis or declining balance, when
applicable, for items purchased during or after 1992.
The depreciation methods and the useful lives applied are as follows:
Installations 10 years straight line
Machinery 5-6 2/3 straight line/declining balance
Toolings 1-5 years straight line/declining balance
Leasehold improvements-Mac/Toolings 5-6 2/3 straight line/declining balance
Vehicles 4-5 years straight line
Fixtures and fittings 10 years straight line
Computer hardware 4-5 years straight line/declining balance
F-48
<PAGE> 79
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
1.3 Financial investments
- -The investments in associates are valued at their acquisition cost in the
assets of the Company.
- -A reserve is recorded when their fair value is less than their book value.
1.4 Inventory and work-in-progress
The policies used are as follows:
- - Inventory is valued at the total cost of production.
- - Raw materials and consumables are valued at the average weighted cost for
goods received in the last month. This method is similar to FIFO.
- - The Cost of production includes direct and indirect production expenses and
an allocation of the costs of running the Head Office, to the extent that
they are related to the production.
- - The provision for obsolescence is determined based upon the anticipated
sales.
1.5 Allowance for doubtful accounts
The receivables are valued at their face value, a provision is recorded when
the value recoverable is less than the book value.
1.6 Foreign exchange transactions
The receivables and payables denominated in foreign currency are translated
into French Francs at the December 31st exchange rate. The resulting differences
with amounts translated at historical exchange rates are shown in the balance
sheet as << foreign exchange translation differences >>.
A provision for exchange losses is recorded separately for unrealised losses.
1.7 Retirement indemnity liabilities
The << Projected Benefit Obligation >> has been applied to calculate the
retirement obligation.
The total obligation is covered by:
- -a fund run by La Mondiale, with a value of KFRF.9,006,
- -a provision of KFRF.652 included in the Marwal accounts at December 31, 1996,
- -an amount payable to La Mondiale of KFRF.810.
F-49
<PAGE> 80
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 2: FIXED ASSETS
The movements in gross value are as follows:
<TABLE>
<CAPTION>
-------------------------------------------
12/31/95 Increase Decrease 12/31/96
-------------------------------------------
<S> <C> <C> <C> <C>
Intangible fixed assets 18226 1535 - 19761
Tangible fixed assets 128952 28909 1267 156594
Financial investments 1047 26812 99 27760
-------------------------------------------
</TABLE>
The movements in amortisation and depreciation are analysed as follows:
<TABLE>
<CAPTION>
-------------------------------------------
12/31/95 Increase Decrease 12/31/96
-------------------------------------------
<S> <C> <C> <C> <C>
Intangible fixed assets 16433 2642 - 19075
Tangible fixed assets 70815 21213 1211 90817
-------------------------------------------
</TABLE>
NOTE 3: INVENTORIES AND WORK IN PROGRESS
The reserve for obsolescence for raw materials, consumables and finished goods
at 31/12/96 amounts to KFRF.3,577.
NOTE 4: ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
At December 31, 1996, accounts receivable can be split by maturity date as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------
Total Less than 1 year Greater than 1 year
---------------------------------------------------
<S> <C> <C> <C>
Long term receivables 5029 5026 3
Current assets 130167 130167 -
----------------------------------------------------
</TABLE>
NOTE 5: SHORT TERM INVESTMENTS
N/A.
F-50
<PAGE> 81
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 6: PREPAYMENTS AND DEFERRED INCOME
<TABLE>
<CAPTION>
12/31/96
--------
<S> <C>
Prepayments
- -----------
Documentation 2
Prepaid maintenance 43
Leasing 199
---
244
12/31/96
--------
Deferred income
Long term contracts (tooling) 1272
</TABLE>
NOTE 7: DEFERRED CHARGES
-----------------------------------------
Total Charged to 12/31/96
income statement
1996
-----------------------------------------
Deferred charges
Amortised over 3 years 2005 1508 497
-----------------------------------------
NOTE 8: SHAREHOLDERS' EQUITY
The capital stock is made up of 906,600 shares with a nominal value of FRF.100,
completely paid up.
The accounts of the Company are consolidated in the group accounts of the
Magneti Marelli Spa Group.
F-51
<PAGE> 82
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 9: TAX PROVISIONS AND PROVISIONS FOR CONTINGENCIES AND CHARGES
The movements in the year are analysed as follows:
<TABLE>
<CAPTION>
12/31/95 Additions Reversals 12/31/96
-------------------------------------------
<S> <C> <C> <C> <C>
Provisions for contingencies and
charges of which: 5513 10953 5243 11223
- - Provision for payments on
retirement 357 672 357 672
- - Provision for guarantee 2523 5812 2523 5812
- - Provision for loss on foreign
exchange 433 762 433 762
- - Provision for litigation 455 1892 455 1892
- - Provision for reimplantation - 1033 - 1033
-------------------------------------------
</TABLE>
NOTE 10: CREDITORS
At December 31, 1996, debts, excluding advances and deposits received, deferred
income and foreign exchange differences, can be analysed by maturity date as
follows:
<TABLE>
<CAPTION>
Total Less than 1 Between 1 and > 5 years
year 5 years
------------------------------------------------
<S> <C> <C> <C>
Other financial debts 7638 7638
Trade payables and other
liabilities* 167048 160700* 6348
Overdraft 71 71
------------------------------------------------
</TABLE>
*of which trade bills payable: 46031
NOTE 11: INFORMATION ON SUBSIDIARY
(In thousands of Pesos)
<TABLE>
<CAPTION>
Share in % Detail information Share capital Equity capital Last closing
other than result
capital
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
95% Marwal de Mexico S.A.
de C.V.
Tepotzotplan 42870 (5075) 1325
Estado de Mexico
</TABLE>
F-52
<PAGE> 83
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
(In thousands of Francs)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Detailed information Gross Net book Loans Guarantee Dividends
value value given given recevied
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Marwal de Mexico S.A. de C.V. 22731 22731 - - -
- -----------------------------------------------------------------------------------------------------
</TABLE>
The exemption of sub-groups enables Marwal Systems to not consolidate Marwal de
Mexico.
NOTE 12: RELATED PARTIES
The related parties transactions are included in the different accounts in the
balance sheet as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Assets Liabilities
------ -----------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trade receivables 42640 Trade payables 12212
Other receivables 1972 Other payables 2069
Cash and
cash equivalent 100323 Financial debt -
- --------------------------------------------------------------------------------
Interest expenses and financial income with related parties are as follows:
- --------------------------------------------------------------------------------
Operating income 57100 Operating expenses 46067
Financial income 1972 Interest expenses 3535
- --------------------------------------------------------------------------------
</TABLE>
NOTE 13: ACCRUALS AND INCOME RECEIVABLE RELATING TO DIFFERENT BALANCE SHEET
ACCOUNTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Assets Liabililties
------ ------------
- --------------------------------------------------------------------------------------
Trade receivables
<S> <C> <C>
- - Customers 8442 Trade payables
- - Suppliers - - Suppliers 14284
- - State 2000 - Tax and social charges 17107
- Other 1896
-
Other receivables Other liabilities -
Financial debts 804
- --------------------------------------------------------------------------------------
</TABLE>
F-53
<PAGE> 84
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 14: EXCHANGE DIFFERENCES RELATED TO BALANCE SHEET ACCOUNTS
Exchange difference
--------------------------------
Asset Liability
Assets
Trade receivables 80 1257
Liabilities
Trade payables 682 8
--------------------------------
NOTE 15: SALES TURNOVER ANALYSIS
1995 1996
---- ----
Sales 559587 610479
Sales of goods 540479 596746
Sales of services 19108 13733
Split between export/domestic
Domestic 318495 323428
Export 241092 287051
Sales 559587 610479
NOTE 16: DEFERRED TAX POSITION
<TABLE>
<CAPTION>
12/31/95 Movements 12/31/96
-----------------------------------------------------------------
Nature Asset Liability Asset Liability Asset Liability
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Timing differences
Organic 730 730 799 799
-----------------------------------------------------------------
</TABLE>
Elements having an impact on 1996 fiscal result
None.
NOTE 17: EMPLOYEE INFORMATION
Permanent staff Temporary staff
-----------------------------------------------
Executives & Management 67
Employees 143 3
Labor and production 468 23
-----------------------------------------------
TOTAL 678 26
-----------------------------------------------
F-54
<PAGE> 85
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 18: LEASE COMMITMENTS
None.
NOTE 19: COMMITMENTS UNDERTAKEN AND RECEIVED
Discounted trade bills receivable but not matured 82132
NOTE 20: INFORMATION RELATING TO MANAGEMENT
N/A.
NOTE 21: EXCEPTIONAL INCOME
Exceptional income from operating activities 1448
Grant relating to training 1400
Other 48
Exceptional income from capital transactions 431
Income from the sale of fixed assets 136
Other 295
Reversal of provisions and transfer of charges 1225
Provision for delocalisation 1225
NOTE 22: EXCEPTIONAL CHARGES
Exceptional charges on operating activities 4382
Redundancy payments 1543
Training costs 2756
Other 83
Exceptional charges from capital transactions 275
Net book value of fixed assets sold 55
Other 220
Depreciation and provisions 1495
Provision for risk 392
Other 70
Provision for charges 1033
F-55
<PAGE> 86
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 23: CHANGE IN ACCOUNTING POLICIES
Effective January 1, 1996, the toolings participation with Walbro, that used to
be booked in deferred charges and amortized over 3 years, are recorded in
fixed assets. The amount involved is KFRF. 4,650 at 1996 year end. Past years
participations have not been reclassified and are still shown as deferred
charges for an amount of KFRF. 497 at December 31, 1996.
NOTE 24: ANALYSIS OF INCOME TAX
As Marwal Systems became a partnership as from 10/01/95, there is no income
tax booked.
Base Tax
12/31/96
--------------------------
Operating profit 66094 0
Exceptional items (3048) 0
--------------------------
Profit before tax 63046 0
Income tax credit 1994 0
--------------------------
TOTAL INCOME TAX FOR THE COMPANY 0
--------------------------
NOTE 25: RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying financial statements of Marwal Systems S.N.C. have been
prepared in accordance with accounting principles required in France. A
reconciliation of these reported results to generally accepted principles in
the United States is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
(In Thousands of French Francs)
<S> <C> <C> <C>
Profit after taxation as shown in the financial
statements 56,697 25,473 15,534
Adjust depreciable life of goodwill 1,375 2,625 2,625
Adjust depreciation expense of fixed assets 1,361 1,597 4,827
Other 537 409 89
Deferred taxes -- 3,582 (1,657)
------ ------ ------
Net income according to generally accepted
accounting principles in the United States 59,970 33,686 21,418
====== ====== ======
</TABLE>
F-56
<PAGE> 87
MARWAL SYSTEMS, S.N.C.
(MARWAL SYSTEMS, S.A. UNTIL
SEPTEMBER 30, 1995)
STATUTORY AUDITOR'S GENERAL REPORT
YEAR ENDED DECEMBER 31, 1995
In our capacity as statutory auditor, we present below our report on:
* the accompanying annual accounts of Marwal Systems,
* the specific procedures and disclosures prescribed by law,
for the year ended December 31, 1995.
These annual accounts are the responsibility of the Company's management. Our
responsibility is to express an opinion on these annual accounts based on our
audit.
I. OPINION ON THE ANNUAL ACCOUNTS
We conducted our audit in accordance with French auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the annual accounts are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the annual accounts. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall annual account presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the annual accounts present fairly, in all material respects,
the financial position of the Company at December 31, 1995 and the results of
its operations for the year then ended.
II. SPECIFIC PROCEDURES AND DISCLOSURES PRESCRIBED BY LAW
We have also carried out, in accordance with professional standards, the
specific procedures prescribed by law.
We have nothing to report with respect to the fairness of information contained
in the Directors' Report and its consistency with the annual accounts and other
information presented to shareholders concerning the financial position and
annual accounts.
The Statutory Auditor
ERNST & YOUNG Audit
/s/ Gilles Meyer
February 26, 1996
F-57
<PAGE> 88
MARWAL SYSTEMS, S.N.C.
Balance Sheet as of
December 31, 1995
(in French Francs)
<TABLE>
<CAPTION>
ASSETS December 31, 1995
------------------------------------------------------------------
Accumulated
depreciation
amortization and
Gross allowances Net book value
------------------------------------------------------------------
<S> <C> <C> <C>
Fixed assets
Intangible fixed assets 18.226.005,10 16.433.332,65 1.792.672,45
Tangible fixed assets 128.951.636,21 70.814.996,81 58.136.639,40
Financial investments:
- - Associates 36.369,00 36.369,00
- - Others 1.011.340,15 1.011.340,15
-------------- -------------- --------------
Sub-total 148.225.350,46 87.248.329,46 60.977.021,00
-------------- -------------- --------------
Inventories
- - Raw materials 24.844.475,00 2.489.620,00 22.354.855,00
- - Work-in-progress 2.910.543,00 258.005,00 2.652.538,00
- - Finished goods 11.693.971,00 1.057.171,00 10.636.800,00
-------------- -------------- --------------
Sub-total 39.448.989,00 3.804.796,00 35.644.193,00
-------------- -------------- --------------
Current assets
Advances and payments on accounts 823.782,34 823.782,34
Trade accounts and notes receivable:
- - Customers and related accounts 109.941.372,93 3.971.285,50 105.970.087,43
- - Other 13.189.440,94 13.189.440,94
Other receivables 2.327.218,02 2.327.218,02
Cash and cash equivalent 67.163.748,22 67.163.748,22
Payments in advance 2.113,74 2.113,74
Deferred Charges 2.004.784,97 2.004.784,97
Foreign exchange translation differences 432.784,33 432.784,33
-------------- -------------- --------------
Sub-total 195.885.245,49 3.971.285,50 191.913.959,99
-------------- -------------- --------------
TOTAL ASSETS 383.559.584,95 95.024.410,96 288.535.173,99
-------------- -------------- --------------
</TABLE>
F-58
<PAGE> 89
MARWAL SYSTEMS, S.N.C.
Balance Sheet as of
December 31, 1995
(in French Francs)
<TABLE>
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY DECEMBER 31, 1995
<S> <C>
Shareholders' equity
Share capital 90.660.000,00
Reserves 196.550,23
Revaluation reserve 0
Retained earnings at January 1st 108.054,10
Result for the year 25.472.561,45
--------------
Sub-total 116.437.165,78
--------------
Provisions for contingencies and charges 5.513.067,65
Liabilities
Financial debts:
- - Amounts owed to financial institutions 0
- - Other financial debts 2.695.629,49
Accounts payable and related accounts 130.472.854,90
Social charges payable 19.810.842,99
Taxes 2.808.171,90
Other 2.115.551,85
Other creditors:
- - Accounts payable on fixed assets 6.502.143,36
- - Group 0
- - Other 128.985,44
Deferred income 1.112.983,10
Foreign exchange translation differences 937.777,53
--------------
Sub-total 166.584.940,56
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 288.535.173,99
--------------
</TABLE>
F-59
<PAGE> 90
MARWAL SYSTEMS, S.N.C.
Income Statement for the
year ended December 31, 1995
(in French Francs)
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------
<S> <C> <C>
Operating revenues: 565.719.064,53
Sale of goods 540.478.654,89
Sale of services 19.107.848,98
--------------
Net sales 559.586.503,87
Movement in finished goods and
work-in-progress (957.292,00)
In-house production 958.322,00
Grants 1.004.628,42
Reversal of provisions and transfer
of charges 4.277.496,90
Other income 849.405,34
--------------
565.719.064,53
Operating expenses 515.796.687,06
Purchases of raw materials and
other supplies 267.809.549,46
Movements in raw materials stock 4.985.449,00
Other purchases and external
charges 81.354.762,36
Taxes and similar charges 9.142.104,58
Wages & salaries 85.212.941,72
Social charges 37.218.880,73
Depreciation and amortisation
expenses and provisions:
* Fixed assets 23.363.492,27
* Current assets 1.571.179,46
* Contingencies and charges 4.826.888,73
Other charges 311.438,75
--------------
515.796.687,06
Operating profit 49.922.377,47
Financial income: 14.072.141,78
From other investments 521,35
Other interest and similar income 2.887.113,46
Reversal of provisions and transfer
of charges 3.136.636,82
Foreign exchange gains 8.047.870,15
--------------
14.072.141,78
22.428.209,50
Financial expenses:
Depreciation and provisions 924.032,56
Interest and similar charges 6.080.465,40
Foreign exchange losses 15.423.711,54
--------------
22.428.209,50
Net financial income/(expenses) (8.356.067,72)
</TABLE>
F-60
<PAGE> 91
MARWAL SYSTEMS, S.N.C.
Income Statement for the
year ended December 31, 1995
(in French Francs)
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C> <C>
Profit before taxation 41.566.309,75
Exceptional income: 8.712.352,95
From operating activities 2.897.314,03
From capital transactions 1.072.032,92
Reversal of provisions and
transfer of charges 4.743.006,00
------------
8.712.352,95
Exceptional charges: 9.209.111,25
From operating activities 7.178.141,85
From capital transactions 1.217.422,40
Depreciation and provisions 813.547,00
------------
9.209.111,25
Exceptional profit (loss) (496.758,30)
Profit before taxation 41.069.551,45
Profit-Sharing 4.750.000,00
Income tax 10.846.990,00
Profit after taxation 25.472.561,45
Total income 588.503.559,26
Total expenditure 563.030.997,81
Profit 25.472.561,45
</TABLE>
F-61
<PAGE> 92
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
EVENTS DURING THE YEAR
The Marwal branch based in Italy was closed on December 31, 1995.
An extraordinary shareholders' meeting held on September 29, 1995 decided the
transformation of the Company into a "Societe en Nom Collectif", a partnership,
with effect from October 1 , 1995.
NOTE 1: ACCOUNTING POLICIES
The accounts of the Company have been prepared based upon generally accepted
accounting principles in France which conform with the Chart of Accounts as set
out in the French law dated April 30, 1983 and the decree of November 29, 1983.
1.1 Intangible fixed assets
The intangible fixed assets consist mainly of goodwill which is amortised on a
straight line basis over 5 years.
The amortisation methods and the useful lives for other categories are as
follows:
- - Set-up costs 3 years straight line
- - Computer software 1-3 years straight line
1.2 Tangible fixed assets
Tangible fixed assets are valued at historical purchase price or cost of
production when they have been produced in house. The cost of production is
made up of the following elements: purchase price of raw materials, consumables
and direct production costs.
Assets are depreciated on a straight line basis or declining balance, when
applicable, for items purchased during or after 1992.
The depreciation methods and the useful lives applied are as follows:
<TABLE>
<S> <C>
Installations 10 years straight line
Machinery 5-6 2/3 straight line / declining balance
Toolings 1-5 years straight line / declining balance
Leasehold improvements - Mac./Toolings 5-6 2/3 straight line / declining balance
Vehicles 4-5 years straight line
Fixtures and fittings 10 years straight line
Computer hardware 4-5 years straight line / declining balance
</TABLE>
F-62
<PAGE> 93
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
1.3 Financial investments
- - The investments in associates are valued at their acquisition cost in the
assets of the Company.
- - A reserve is recorded when their fair value is less than their book value.
1.4 Inventory and work-in-progress
The policies used are as follows:
* Inventory is valued at the total cost of production.
* Raw materials and consumables are valued at the average weighted cost for
goods received in the last month. This method is similar to FIFO.
* The Cost of production includes direct and indirect production expenses and
an allocation of the costs of running the Head Office, to the extent that
they are related to the production.
* The provision for obsolescence is determined based upon the sales.
1.5 Allowance for doubtful accounts
The receivables are valued at their face value, a provision is recorded when
the value recoverable is less than the book value.
1.6 Foreign exchange transactions
The receivables and payables denominated in foreign currency are translated
into French Francs at the December 31st exchange rate. The resulting differences
with amounts translated at historical exchange rates are shown in the balance
sheet as "foreign exchange translation differences".
A provision for exchange losses is recorded separately for unrealised losses.
1.7 Retirement indemnity liabilities
The "Projected Benefit Obligation" has been applied to calculate the
retirement obligation.
The total obligation is covered by:
- - a fund run by La Mondiale, with a value of KFRF.8,343,
- - a provision of KFRF.357 included in the Marwal accounts at December 31, 1995.
NOTE 2: FIXED ASSETS
The movements in gross value are as follows:
<TABLE>
<CAPTION>
12/31/94 Increase Decrease 12/31/95
<S> <C> <C> <C> <C>
Intangible fixed assets 18519 307 600 18226
Tangible fixed assets 107067 24751 2866 128952
Financial investments 1122 852 927 1047
</TABLE>
F-63
<PAGE> 94
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
The movements in amortisation and depreciation are analysed as follows:
<TABLE>
<CAPTION>
12/31/94 Increase Decrease 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Intangible fixed assets 13658 3375 600 16433
Tangible fixed assets 52431 19988 1604 70815
</TABLE>
NOTE 3: INVENTORIES AND WORK IN PROGRESS
The reserve for obsolescence for raw materials, consumables and finished goods
at 31/12/95 amounts to KFRF. 3,805.
NOTE 4: ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
At December 31, 1995, accounts receivable can be split by maturity date as
follows:
<TABLE>
<CAPTION>
Greater
Total Less than 1 year than 1 year
----- ---------------- -----------
<S> <C> <C> <C>
Long term receivables 1011 1008 3
Current assets 126284 126284 -
</TABLE>
NOTE 5: SHORT TERM INVESTMENTS
N/A.
NOTE 6: PREPAYMENTS AND DEFERRED INCOME
<TABLE>
<CAPTION>
12/31/95
--------
<S> <C>
Prepayments
Other 2
<CAPTION>
12/31/95
--------
<S> <C>
Deferred income
Long term contracts (tooling) 1089
Other 24
----
1113
====
</TABLE>
NOTE 7: DEFERRED CHARGES
<TABLE>
<CAPTION>
Charged to
income statement
Total 1995 12/31/95
---- ---------------- --------
<S> <C> <C> <C>
Deferred charges
Amortised over 3 years 3921 1916 2005
</TABLE>
F-64
<PAGE> 95
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 8: SHAREHOLDERS' EQUITY
The capital stock is made up of 906,600 shares with a nominal value of FRF.100,
completely paid up.
The accounts of the Company are consolidated in the group accounts of the
Magneti Marelli Spa Group.
NOTE 9: TAX PROVISIONS AND PROVISIONS FOR CONTINGENCIES AND CHARGES
The movements in the year are analysed as follows:
<TABLE>
<CAPTION>
12/31/94 Additionals Reversals 12/31/95
-------- ----------- --------- --------
<S> <C> <C> <C> <C>
Provisions for contingencies
and charges of which: 10058 5104 9649 5513
* Provision for payments 357 357
on retirement
* Provision for guarantee 1000 2523 1000 2523
* Provision for loss on 3136 433 3136 433
foreign exchange
</TABLE>
NOTE 10: CREDITORS
At December 31, 1995, debts, excluding advances and deposits received, deferred
income and foreign exchange differences, can be analysed by maturity date as
follows:
<TABLE>
<CAPTION>
Less than Between
Total 1 year 1 and 5 years > 5 years
----- --------- ------------- ---------
<S> <C> <C> <C> <C>
Other financial debts 2696 2696
Trade payables and other
liabilities* 161839 157089* 4750
* of which trade bills payable: 27225
</TABLE>
NOTE 11: RELATED PARTIES
The related parties transactions are included in the different accounts in the
balance sheet as follows:
<TABLE>
<CAPTION>
Assets Liabilities
------ -----------
<S> <C> <S> <C>
Trade receivables 16856 Trade payables 14716
Other receivables 198 Other payables 8
Cash and
cash equivalent 73017 Financial debt 432
</TABLE>
Interest expenses and financial income with related parties are as follows:
Operating income 47440 Operating expenses 54317
Financial income 2373 Interest expenses 5991
F-65
<PAGE> 96
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 12: ACCRUALS AND INCOME RECEIVABLE RELATING TO DIFFERENT BALANCE SHEET
ACCOUNTS
<TABLE>
<CAPTION>
Assets Liabilities
------ -----------
<S> <C> <C> <C>
Trade receivables Trade payables
* Customers 6558 * Suppliers 14246
* Suppliers 2354 * Tax and social charges 14641
* State 2490 * Other 1283
Other receivables 534 Other liabilities 390
</TABLE>
NOTE 13: EXCHANGE DIFFERENCES RELATED TO BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
Exchange difference
-----------------------
Asset Liability
----- ---------
<S> <C> <C>
Asset
Trade receivables 431 3
Liabilities
Trade payables 1 935
</TABLE>
NOTE 14: SALES TURNOVER ANALYSIS
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Sales 565671 559587
Sales of goods 535259 540479
Sales of services 30412 19108
Split between export/domestic
Domestic 353114 318495
Export 212557 241092
Sales 565671 559587
</TABLE>
NOTE 15: DEFERRED TAX POSITION
<TABLE>
<CAPTION>
12/31/94 Movements 12/31/95
---------------- ---------------- ----------------
Nature Asset Liability Asset Liability Asset Liability
- ------ ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Timing differences
Organic 559 559 730 730
</TABLE>
F-66
<PAGE> 97
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 16: EMPLOYEE INFORMATION
<TABLE>
<CAPTION>
Permanent staff Temporary staff
--------------- ---------------
<S> <C> <C>
Executives & Management 55
Employees 135 4
Labor and production 476 10
--------------- --------------
Total 666 14
NOTE 17: LEASE COMMITMENTS
None.
NOTE 18: COMMITMENTS UNDERTAKEN AND RECEIVED
Discounted trade bills receivable but not matured 89827
NOTE 19: INFORMATION RELATING TO MANAGEMENT
N/A.
NOTE 20: EXCEPTIONAL INCOME
Exceptional income from operating activities 2897
Redundancy payments reinvoiced to Jaeger S.A. 251
Grant relating to training 2565
Other 81
Exceptional income from capital transactions 1072
Income from the sale of fixed assets 1066
Other 6
Reversal of provisions and transfer of charges 4743
Provision for delocalisation 1700
Provision for the starting of pumps 1304
Other 1739
NOTE 21: EXCEPTIONAL CHARGES
Exceptional charges on operating activities 7178
Redundancy payments 3378
Training costs 3056
Other 744
Exceptional charges from capital transactions 1217
Net book value of fixed assets sold 1217
Depreciation and provisions 813
Provision for delocalisation and other 813
</TABLE>
F-67
<PAGE> 98
MARWAL SYSTEMS, S.N.C.
Notes to the financial statements
(in thousands of French Francs)
NOTE 22: CHANGE IN ACCOUNTING POLICIES
N/A.
NOTE 23: ANALYSIS OF INCOME TAX
The income tax accounted for is that which is calculated for the accounts to
9/30/1995, Marwal Systems becoming a partnership as from 10/01/95.
BASE BASE TAX
12/31/95 9/30/95 9/30/95
Operating profit 41566 28083 10977
Exceptional items (497) (156) (61)
----- ----- -----
Profit before tax 41069 27927 10916
Income tax credit 1994 69
-----
TOTAL INCOME TAX FOR THE
COMPANY (10847)
F-68
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Walbro Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Walbro Corporation and
Subsidiaries' annual report to shareholders included or incorporated by
reference in this Form 10-K, and have issued our report thereon dated February
11, 1998 (except with respect to the matters discussed in Notes 6 and 21, as to
which the date is April 13, 1998). Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The supplemental notes
to the consolidated financial statements on pages S-2 to S-12 are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not a
required part of the basic consolidated financial statements. The information
contained in these supplemental notes has been subjected to the auditing
procedures applied in our audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Detroit, Michigan,
February 11, 1998
S-1
<PAGE> 100
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) VALUATION AND QUALIFYING ACCOUNTS
Following is a summary of changes in the valuation and qualifying
accounts for the three years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance Beginning of Year $ 753 $ 978 $ 368
Additions charged to operations 378 302 327
Additions due to acquisition -- -- 309
Deductions for uncollectible accounts
written off, net of recoveries (238) (508) (51)
Currency translation adjustment (84) (19) 25
-------- -------- --------
Balance End of Year $ 809 $ 753 $ 978
======== ======== ========
RESERVE FOR INVENTORY VALUATION:
Balance Beginning of Year $ 668 $ 808 $ 238
Additions charged to operations 3,425 724 182
Additions due to acquisition -- -- 376
Deductions for inventory disposal (1,380) (870) (--)
Currency translation adjustment (68) 6 12
-------- -------- --------
Balance End of Year $ 2,645 $ 668 $ 808
======== ======== ========
ALLOWANCE FOR NOTES RECEIVABLE:
Balance Beginning of Year $ -- $ -- $ 454
Additions charged to operations -- -- --
Deductions -- -- (454)
-------- -------- --------
Balance End of Year $ -- $ -- $ --
======== ======== ========
</TABLE>
S-2
<PAGE> 101
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ------------ --------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash..................................... $ (744) $ 13,431 $ 852 $ -- $ 13,539
Accounts receivable, net................. 80,936 63,194 855 -- 144,985
Accounts receivable, intercompany........ (144,222) (37,755) 171,052 10,925 --
Inventories.............................. 26,086 29,012 1,109 -- 56,207
Prepaid expenses and other............... 5,988 9,549 1,868 -- 17,405
Deferred and refundable income taxes..... 470 1,253 6,796 -- 8,519
----------- ---------- ----------- -------------- ----------
Total current assets................... (31,486) 78,684 182,532 10,925 240,655
----------- ---------- ----------- -------------- ----------
PLANT AND EQUIPMENT, NET................... 123,635 144,423 7,204 108 275,370
----------- ---------- ----------- -------------- ----------
OTHER ASSETS:
Funds held for construction.............. -- -- -- -- --
Joint ventures........................... 10,739 15,942 -- -- 26,681
Investments.............................. 117,720 24,433 50,959 (189,851) 3,261
Goodwill, net............................ 14,342 11,444 (1,524) 8,541 32,803
Notes receivable......................... -- 6,499 196,198 (202,571) 126
Deferred and refundable income taxes..... -- 4,001 4,178 -- 8,179
Other.................................... 9,045 2,860 11,613 -- 23,518
----------- ---------- ----------- -------------- ----------
Total other assets..................... 151,846 65,179 261,424 (383,881) 94,568
----------- ---------- ----------- -------------- ----------
Total assets............................... $ 243,995 $ 288,286 $ 451,160 $ (372,848) $ 610,593
=========== ========== =========== ============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........ $ 7,026 $ 76 $ 6,858 $ -- $ 13,960
Bank and other borrowings................ -- 26,204 -- -- 26,204
Accounts payable......................... 21,540 55,730 6,939 -- 84,209
Accrued liabilities...................... 1,103 18,699 20,127 (708) 39,221
Dividends payable........................ -- 920 868 -- 1,788
----------- ---------- ----------- -------------- ----------
Total current liabilities.............. 29,669 101,629 34,792 (708) 165,382
----------- ---------- ----------- -------------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current portion..... 164,581 11,818 339,809 (224,815) 291,393
Pension obligations and other............ 2,505 2,625 6,693 -- 11,823
Deferred income taxes.................... -- 2,077 -- -- 2,077
Minority interest........................ -- 1,052 -- -- 1,052
----------- ---------- ----------- -------------- ----------
Total long-term liabilities............ 167,086 17,572 346,502 (224,815) 306,345
----------- ---------- ----------- -------------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED SECURITIES OF
WALBRO CAPITAL TRUST HOLDING SOLELY
CONVERTIBLE DEBENTURES.................... -- 69,000 -- -- 69,000
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value;
authorized 25,000,000; outstanding
8,579,976 in 1995...................... -- 23,935 4,341 (23,935) 4,341
Paid-in capital.......................... -- 72,819 66,151 (72,819) 66,151
Retained earnings........................ 49,827 28,747 33,938 (78,574) 33,938
Deferred compensation.................... -- -- (379) -- (379)
Minimum pension liability adjustment..... -- -- -- -- --
Unrealized gain on securities
available for sale..................... -- -- 68 -- 68
Cumulative translation adjustments....... (2,587) (25,416) (34,253) 28,003 (34,253)
----------- ---------- ----------- -------------- ----------
Total stockholders' equity............. 47,240 100,085 69,866 (147,325) 69,866
----------- ---------- ----------- -------------- ----------
Total liabilities and stockholders'
equity............................... $ 243,995 $ 288,286 $ 451,160 $ (372,848) $ 610,593
=========== ========== =========== ============== ==========
</TABLE>
S-3
<PAGE> 102
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ------------ --------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash..................................... $ 299 $ 17,779 $ 135 $ -- $ 18,213
Accounts receivable, net................. 67,944 57,823 742 -- 126,509
Accounts receivable, intercompany........ (81,610) 115 101,752 (20,257) --
Inventories.............................. 25,219 22,884 2,485 -- 50,588
Prepaid expenses and other............... 4,464 5,851 920 -- 11,235
Deferred and refundable income taxes..... 509 1,016 3,446 -- 4,971
-------- -------- -------- --------- --------
Total current assets................... 16,825 105,468 109,480 (20,257) 211,516
-------- -------- -------- --------- --------
PLANT AND EQUIPMENT, NET 121,084 150,699 7,995 109 279,887
-------- -------- -------- --------- --------
OTHER ASSETS:
Funds held for construction.............. 1,140 -- -- -- 1,140
Joint ventures........................... 10,629 18,326 -- -- 28,955
Investments.............................. 118,673 24,723 104,084 (241,753) 5,727
Goodwill, net............................ 23,238 12,877 (117) -- 35,998
Notes receivable......................... 1,074 -- 204,884 (204,690) 1,268
Deferred and refundable income taxes..... -- 543 4,871 -- 5,414
Other.................................... 8,890 2,926 7,928 -- 19,744
-------- -------- -------- --------- --------
Total other assets..................... 163,644 59,395 321,650 (446,443) 98,246
-------- -------- -------- --------- --------
Total assets............................... $301,553 $315,562 $439,125 $(466,591) $589,649
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........ $ 598 $ 82 $ 409 $ -- $ 1,089
Bank and other borrowings................ -- 22,072 -- -- 22,072
Accounts payable......................... 34,690 61,068 8,981 (26,800) 77,939
Accrued liabilities...................... 17,046 16,498 10,633 (2,901) 41,276
Dividends payable........................ -- -- 865 -- 865
-------- -------- -------- --------- --------
Total current liabilities.............. 52,334 99,720 20,888 (29,701) 143,241
-------- -------- -------- --------- --------
LONG-TERM LIABILITIES:
Long-term debt, less current portion..... 171,675 83,820 269,141 (232,913) 291,723
Pension obligations and other............ -- 2,826 7,892 -- 10,718
Deferred income taxes.................... -- 1,443 3,471 -- 4,914
Minority interest........................ -- 1,320 -- -- 1,320
-------- -------- -------- --------- --------
Total long-term liabilities............ 171,675 89,409 280,504 (232,913) 308,675
-------- -------- -------- --------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value; authorized
25,000,000; outstanding 8,652,737 in
1996 .................................. -- 19,853 4,326 (19,853) 4,326
Paid-in capital.......................... -- 74,637 65,674 (74,637) 65,674
Retained earnings........................ 77,524 33,569 74,039 (111,093) 74,039
Deferred compensation.................... -- -- (967) -- (967)
Minimum pension liability adjustment..... -- -- -- -- --
Unrealized gain on securities
available for sale..................... -- -- 688 -- 688
Cumulative translation adjustments....... 20 (1,626) (6,027) 1,606 (6,027)
-------- -------- -------- --------- --------
Total stockholders' equity............. 77,544 126,433 137,733 (203,977) 137,733
-------- -------- -------- --------- --------
Total liabilities and stockholders'
equity................................... $301,553 $315,562 $439,125 $(466,591) $589,649
======== ======== ======== ========= ========
</TABLE>
S-4
<PAGE> 103
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ------------ --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET SALES............................. $323,189 $316,828 $ 2,302 $ (22,414) $ 619,905
COSTS AND EXPENSES:
Cost of sales....................... 299,913 286,119 2,133 (22,414) 565,751
Selling and administrative
expenses......................... 38,423 27,354 12,298 78,075
-------- -------- -------- --------- ---------
OPERATING INCOME (LOSS)............... (15,147) 3,355 (12,129) -- (23,921)
OTHER EXPENSE (INCOME):
Interest expense.................... 23,060 14,720 22,313 (34,683) 25,410
Interest income..................... (11,671) (6,079) (17,607) 34,683 (674)
Royalty income, net................. (4,477) 599 -- -- (3,878)
Foreign currency exchange loss
(gain)........................... (900) 534 58 -- (308)
Other............................... 425 (50) (10) -- 365
-------- -------- -------- --------- ---------
Income before (provision) credit for
income taxes, minority interest,
equity in income (loss) of joint
ventures and subsidiaries........... (21,584) (6,369) (16,883) -- (44,836)
(Provision) credit for income taxes... 7,818 28 2,285 -- 10,131
Minority interest..................... (450) (4,585) -- -- (5,035)
Equity in income of joint
ventures............................ 1,007 2,106 -- -- 3,113
Equity in income (loss) of
subsidiaries........................ (4,036) -- (22,028) 26,064 --
-------- -------- -------- --------- ---------
Net income............................ $(17,245) $ (8,820) $(36,626) $ 26,064 $ (36,627)
======== ======== ======== ========= =========
</TABLE>
S-5
<PAGE> 104
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ----------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET SALES.......................... $325,547 $284,812 $ 1,671 $ (26,641) $585,389
COSTS AND EXPENSES:
Cost of sales.................... 264,824 248,589 1,362 (26,641) 488,134
Selling and administrative
expenses...................... 49,599 21,607 (629) -- 70,577
-------- -------- --------- --------- --------
OPERATING INCOME (LOSS)............ 11,124 14,616 938 -- 26,678
OTHER EXPENSE (INCOME):
Interest expense................. 14,824 5,773 22,214 (22,276) 20,535
Interest income.................. (5,416) (1,999) (17,577) 22,276 (2,716)
Royalty income, net.............. (2,042) 632 -- -- (1,410)
Foreign currency exchange
loss (gain)................... (309) (131) 370 -- (70)
Other............................ (4) 158 (217) -- (63)
-------- -------- --------- --------- --------
Income before (provision) credit
for income taxes, minority
interest, equity in income
of joint ventures and
subsidiaries .................... 4,071 10,183 (3,852) -- 10,402
(Provision) credit for income
taxes............................ (1,240) (4,155) 2,320 -- (3,075)
Minority interest ................. -- (285) -- -- (285)
Equity in income of joint
ventures......................... 552 3,635 -- -- 4,187
Equity in income of
subsidiaries..................... 9,932 518 12,761 (23,211) --
-------- -------- --------- --------- --------
Net income ........................ $ 13,315 $ 9,896 $ 11,229 $ (23,211) $ 11,229
======== ======== ========= ========= ========
</TABLE>
S-6
<PAGE> 105
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ----------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET SALES......................... $335,896 $156,280 $ 2,091 $(34,995) $459,272
COSTS AND EXPENSES:
Cost of sales................... 277,196 134,219 1,335 (34,995) 377,755
Selling and administrative
expenses..................... 40,598 12,766 4,019 -- 57,383
-------- -------- --------- -------- --------
OPERATING INCOME (LOSS)........... 18,102 9,295 (3,263) -- 24,134
OTHER EXPENSE (INCOME):
Interest expense................ 10,387 4,300 10,852 (13,119) 12,420
Interest income................. (2,974) (797) (10,308) 13,119 (960)
Royalty income, net............. (938) 701 -- -- (237)
Foreign currency exchange
loss (gain).................. (324) (68) 1,875 -- 1,483
Other........................... 3 (255) (3) -- (255)
-------- -------- --------- -------- --------
Income before (provision) credit
for income taxes, minority
interest, equity in income
of joint ventures and
subsidiaries.................... 11,948 5,414 (5,679) -- 11,683
(Provision) credit for income
taxes........................... (1,237) (1,958) 1,937 -- (1,258)
Minority interest................. -- (472) -- -- (472)
Equity in income of joint
ventures........................ 1,222 2,655 -- -- 3,877
Equity in income of
subsidiaries.................... 6,417 -- 17,572 (23,989) --
-------- -------- --------- -------- --------
Net income........................ $ 18,350 $ 5,639 $ 13,830 $(23,989) $ 13,830
======== ======== ========= ======== ========
</TABLE>
S-7
<PAGE> 106
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 37, 1997
---------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ------------ --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities.............. $ 25,529 $ 12,845 $(64,600) $ -- $(26,226)
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of plant and
equipment.................... (29,952) (31,783) (284) -- (62,019)
Acquisitions, net of cash
acquired..................... -- -- -- -- --
Purchase of other assets....... (2,974) (27) (86) -- (3,087)
Investment in joint ventures
and other.................... (2,350) 8,142 (4,036) -- 1,756
Proceeds/(payments) of
intercompany note
receivable................... -- -- -- -- --
Proceeds from disposal of
assets....................... 9,370 (5,247) 1,292 -- 5,415
-------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities.............. (25,906) (28,915) (3,114) -- (57,935)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments)
under revolving
line-of-credit
agreements................... -- 8,375 (91,510) -- (83,135)
Debt repayments................ (666) (136) (408) -- (1,210)
Proceeds from issuance of
long-term debt............... -- (63,596) 169,000 -- 105,404
Proceeds from issuance of
convertible preferred
securities................... -- 69,000 -- -- 69,000
Proceeds from issuance of
common stock and options..... -- -- 492 -- 492
Financing fees paid............ -- -- (5,680) -- (5,680)
Cash dividends paid............ -- -- (3,463) -- (3,463)
-------- -------- -------- ------- --------
Net cash provided by (used in)
financing activities.............. (666) 13,643 68,431 -- 81,408
-------- -------- -------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH.............................. -- (1,921) -- -- (1,921)
-------- -------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH..... (1,043) (4,348) 717 -- (4,674)
CASH AT BEGINNING OF YEAR........... 299 17,779 135 -- 18,213
-------- -------- -------- ------- --------
CASH AT END OF YEAR................. $ (744) $ 13,431 $ 852 $ -- $ 13,539
======== ======== ======== ======= ========
</TABLE>
S-8
<PAGE> 107
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------
WALBRO
CORPORATION CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ----------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 61,606 $ 50,441 $(75,409) $ -- $ 36,638
-------- -------- -------- ----- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and
equipment..................... (38,884) (60,417) 154 -- (99,147)
Acquisitions, net of cash
acquired...................... -- (1,018) -- -- (1,018)
Purchase of other assets........ (2,041) (1,297) (96) -- (3,434)
Investment in joint ventures and
other......................... (22,509) 10,609 10,449 -- (1,451)
Proceeds/(payments) of
intercompany note
receivable.................... -- -- -- -- --
Proceeds from disposal of
assets........................ 7 328 3,821 -- 4,156
-------- -------- -------- ----- --------
Net cash provided by (used in)
investing activities............... (63,427) (51,795) 14,328 -- (100,894)
-------- -------- -------- ----- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments)
under revolving line-of-credit
agreements.................... -- 1,189 64,061 -- 65,250
Debt repayments................. (555) (141) (408) -- (1,104)
Proceeds from issuance of
long-term debt................ 2,600 172 -- -- 2,772
Proceeds from issuance of common
stock and options............. -- -- 771 -- 771
Financing fees paid ............ -- -- (508) -- (508)
Cash dividends paid ............ -- -- (3,439) -- (3,439)
-------- -------- -------- ----- --------
Net cash provided by (used in)
financing activities............... 2,045 1,220 60,477 -- 63,742
-------- -------- -------- ----- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH............................... -- (1,306) 241 -- (1,065)
-------- -------- -------- ----- --------
NET INCREASE (DECREASE) IN CASH...... 224 (1,440) (363) -- (1,579)
CASH AT BEGINNING OF YEAR............ 75 19,219 498 -- 19,792
-------- -------- -------- ----- --------
CASH AT END OF YEAR.................. $ 299 $ 17,779 $ 135 $ -- $ 18,213
======== ======== ======== ===== ========
</TABLE>
S-9
<PAGE> 108
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------
WALBRO CONSOLIDATION
CORPORATION AND
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............ $ 50,509 $ 11,254 $ (30,875) $ -- $ 30,888
--------- ---------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of plant and
equipment.................... (31,237) (14,531) (472) -- (46,240)
Acquisitions, net of cash
acquired..................... (131,952) 15,774 (60) -- (116,238)
Purchase of other assets........ (6,398) (608) (257) -- (7,263)
Investment in joint ventures and
other........................ 118,704 3,901 (124,659) -- (2,054)
Proceeds/(payments) of
intercompany note
receivable................... -- 500 (500) -- --
Proceeds from disposal of
assets....................... 167 7 3,953 -- 4,127
--------- ---------- ----------- ----------- ----------
Net cash provided by (used in)
investing activities............ (50,716) 5,043 (121,995) -- (167,668)
--------- ---------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments)
under revolving
line-of-credit
agreements................... -- 13,797 50,000 -- 63,797
Debt repayments................. (516) (12,659) (366) -- (13,541)
Proceeds from issuance of long -
term debt.................... 815 120 109,615 -- 110,550
Proceeds from issuance of common
stock and options............ -- -- 168 -- 168
Financing fees paid............. -- -- (4,778) -- (4,778)
Cash dividends paid............. -- -- (3,428) -- (3,428)
--------- ---------- ----------- ----------- ----------
Net cash provided by (used in)
financing activities............ 299 1,258 151,211 -- 152,768
--------- ---------- ----------- ----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH............................ (92) (861) 217 -- (736)
--------- ---------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH... -- 16,694 (1,442) -- 15,252
CASH AT BEGINNING OF YEAR......... 75 2,525 1,940 -- 4,540
--------- ---------- ----------- ----------- ----------
CASH AT END OF YEAR............... $ 75 $ 19,219 $ 498 $ -- $ 19,792
========= ========== =========== =========== ==========
</TABLE>
S-10
<PAGE> 109
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
Basis of Presentation -- In July 1995, the Company issued
$110,000,000 in aggregate principal amount of 9.875% Senior Notes due in 2005
(the 2005 Notes). In December 1997, the Company sold $100,000,000 in aggregate
principal amount of 10.125% Senior Notes due in 2007 (the 2007 Notes). The
2005 and 2007 Notes are guaranteed on a senior unsecured basis, jointly and
severally, by each of the Company's principal wholly-owned domestic operating
subsidiaries and certain of its indirect wholly-owned subsidiaries (the
Guarantors). The Guarantors include Walbro Automotive Corporation, Walbro
Engine Management Corporation, Whitehead Engineered Products, Inc. and Sharon
Manufacturing Co. The condensed consolidating financial statements of the
Guarantors are presented on pages 24 through 31 and should be read in
connection with the consolidated financial statements of the Company. Separate
financial statements of the Guarantors are not presented because the Guarantors
are jointly, severally and unconditionally liable under the guarantees, and the
Company believes the condensed consolidating financial statements presented are
more meaningful in understanding the financial position of the Guarantors.
Distributions -- There are no significant restrictions on the ability
of the Guarantors to make distributions to Walbro Corporation.
Selling and Administrative Expenses -- During 1997, 1996 and 1995, the
Parent Corporation allocated $5,267,000, $10,422,000 and $3,637,000,
respectively, of corporate selling and administrative expenses to its operating
subsidiaries.
S-11
<PAGE> 110
WALBRO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
Long-term debt of the Parent Corporation and the Guarantors consisted of
the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Senior notes due 2005, unsecured, stated interest at 9.875%
(9.92% effective interest rate) net of unamortized discount
of $331 and $369 as of December 31, 1996 and 1995,
respectively. $109,708 $109,669
Senior notes due 2007, unsecured, interest at 10.125%............ 100,000 --
Revolving credit facility, secured, interest at the agent's base
rate plus an additional margin ................................ 19,700 114,062
Purchase money loan agreement, secured, interest payable
quarterly at the agents base rate plus an additional
margin (see below) ............................................ 2,852 --
Term loan from the State of Connecticut, secured, interest at 6%
per annum, payable in monthly amounts from 1997 to 2005 ....... 3,400 3,400
Senior notes, secured, interest at 7.68%, payable in annual
amounts from 1998 to 2004...................................... 45,000 45,000
Industrial revenue bond, issued by Town of Ossian, Indiana,
interest at a variable municipal bond rate, due in 2023........ 9,000 9,000
Industrial revenue bond, issued by City of Ligonier, Indiana,
interest at a variable municipal bond rate plus 1%, payable in
annual amounts from 2003 to 2007............................... 6,300 6,300
Capital lease obligations, interest at 7.5%, payable in monthly
installments through February 2002............................. 3,042 3,640
Other............................................................ 462 884
-------- --------
299,464 291,955
Less -- Current portion.......................................... 13,884 1,007
-------- --------
$285,580 $290,948
======== ========
</TABLE>
For a more detailed description of the above indebtedness, see Note 5 of
Notes to Consolidated Financial Statements.
Aggregate minimum principal payment requirements on long-term debt,
including capital lease obligations, in each of the five years subsequent to
December 31, 1997 are as follows (in thousands): 1998 - $13,884 ; 1999 -
$7,349 ; 2000 - $29,965 ; 2001 - $7,484 ; 2002 - $6,844 and thereafter
- - $233,938.
S-12
<PAGE> 111
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBITS DESCRIPTION PAGE NO.
-------- ----------- ----------
4.26 Amended and Restated Second Amendment and
Waiver Agreement dated as of March 3, 1998 to
the Note Agreement among the Company and the
purchasers named therein, relating to the 7.68%
Senior Notes of the Company.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young Audit.
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 4.26
WALBRO CORPORATION
AMENDED AND RESTATED
SECOND AMENDMENT AND
WAIVER AGREEMENT
$45,000,000 Principal Amount
Senior Notes
Due October 1, 2004
Dated as of March 3, 1998
Principal Mutual Life Insurance Company
711 High Street
Des Moines, Iowa 50392-0800
Attention: Investment Department,
Securities Division
The Mutual Life Insurance Company of New York
MONY Life Insurance Company of America
1740 Broadway
New York, New York 10019
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215-2220
Ladies and Gentlemen:
Reference is made to the Note Agreement dated as of October 1, 1994, as
amended by the First Amendment to Note Agreement dated as of July 25, 1995 (the
"Note Agreement") between Walbro Corporation, a Delaware corporation (the
"Company") and you pursuant to which the Company issued $45,000,000 principal
amount of its 7.68% Senior Notes due October 1, 2004 (the "Notes"). You are
sometimes referred to hereafter as the "Holders."
Certain events have occurred under the Note Agreement as to which the
Company is requesting your waiver and in consideration thereof is requesting and
agreeing to certain modifications to the Note Agreement which are embodied in
this Amended and Restated Second Amendment and Waiver Agreement (the "Second
Amendment").
In consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which is acknowledged, the Company
and the Holders agree as follows:
<PAGE> 2
SECTION 1. WAIVER
1.1. Waiver Period. In accordance with the notice given to the Company
by the Holders in their letter to the Company dated January 20, 1998 (the
"January 20 Letter") the Defaults asserted in the January 20 Letter (which the
Company denies, but the Holders continue to assert) would become Events of
Default under the Note Agreement on March 4, 1998 which date was confirmed by
the last paragraph of Dewey B. Crawford's Letter to the Company dated February
13, 1998 (the "February 13 Letter"). The Holders agree that the March 4, 1998
date is hereby waived until the earlier of May 31, 1998 (the "Waiver Expiration
Date") or the occurrence of an event described in Section 1.2.
1.2. Termination of Waiver. Upon the occurrence of any of the
following, the waiver contained in Section 1.1 above shall immediately
terminate:
(a) Any default by the Company or any subsidiary in the performance or
compliance with any of the provisions of this Second Amendment, the Security
Agreements, the Intercreditor Agreement, the Guarantees, the Credit Agreement,
or that certain Purchase Money Loan Agreement dated as of August 27, 1997 among
the Company and the Banks (the "Purchase Money Agreement");
(b) Any representation or warranty made by or on behalf of the Company
or any subsidiary in or in connection with this Second Amendment, the Security
Agreements, or the Intercreditor Agreement proves incorrect as of the date of
issuance or making;
(c) The occurrence of an Event of Default under the Note Agreement;
provided, however, that solely for purposes of this Section 1.2(c) and without
amending the Note Agreement, any period during which a Default may be cured
before becoming an Event of Default and thereby terminating the waiver contained
in Section 1 shall be deemed to be ten Business Days; and provided further, that
the foregoing proviso shall not be deemed to provide a cure period to the
Company where one has not heretofore existed;
(d) The occurrence of an Event of Default under the Intercreditor
Agreement;
(e) The institution by any of the Banks or the Agent of any of their
rights or remedies under the Credit Agreement, the Purchase Money Agreement, the
Security Agreements, the Intercreditor Agreement or of any other proceedings
against the Company;
(f) The Banks refusal to advance money under the terms of the Credit
Agreement;
(g) The Company's auditors, Arthur Andersen & Company, either refuse
to issue their audit opinion or issue a qualified audit opinion, in connection
with the Company's financial statements for its fiscal year ended December 31,
1997;
(h) The Banks fail to deliver their written consent to Section 2.3
(the "Bank Consent") to the Holders on or before 4:00 p.m., Chicago Time, March
13, 1998, which consent
2
<PAGE> 3
shall be in form and content acceptable to the Holders and shall contain a
waiver of any Events of Defaults (as defined the Credit Agreement) through the
date thereof.
(i) By action of the Holders of at least 66-2/3% in principal amount
of the outstanding Notes following receipt of a notice pursuant to the second
sentence of Section 2.2.
SECTION 2. UNDERTAKINGS AND REPRESENTATIONS OF THE COMPANY
2.1. Payments under the Note Agreement. The Company will use its best
efforts to pay all of the Lender Indebtedness evidenced by the Notes and the
Note Agreement, including but not limited to all accrued and unpaid interest,
outstanding principal, Make-Whole Amounts and outstanding expenses (including
attorneys fees) related thereto, no later than the Waiver Expiration Date.
2.2. Modification of Lender Indebtedness. Without the prior written
consent of the Holders, which consent may be granted or withheld in the sole and
exclusive discretion of the Holders, neither the Company nor any of its
subsidiaries shall enter into, acquiesce in, consent to, request or seek to
obtain, any waiver, amendment, modification, extension, forbearance, consent or
other alteration of the Credit Agreement, the Purchase Money Agreement or any
other agreements entered into pursuant to or in furtherance thereof, provided
that any such waiver, amendment, modification, extension, forbearance, consent
or other alteration requires the approval of any Holder under or otherwise be
restricted by the Intercreditor Agreement, as determined by such Holder.
Furthermore, the Company shall give the Holders reasonable prior written notice
of the Company's or any subsidiary's intention to enter into, acquire in,
consent to, request or seek to obtain any waiver, amendment, modification,
extension, forbearance, consent or other alteration of the Credit Agreement, the
Purchase Money Agreement or any other agreements entered into pursuant to or in
furtherance thereof (whether or not restricted by the Intercreditor Agreement),
which notice shall describe in reasonable detail the terms and conditions of any
of the foregoing.
2.3. Interest. Commencing on March 3, 1998, the interest rate on the
Notes shall be 9.68% per annum and shall be payable monthly on the first day of
each month commencing April 1, 1998. Notwithstanding the foregoing, the Make
Whole Amount, if any, shall be calculated using the original interest rate on
the Notes.
2.4. Commitment Letters. The Company will deliver promptly to the
Holders copies of any final form of commitment letter or term sheet (prior to
execution or acceptance thereof) and of any executed commitment letter for any
financings of any sort by the Company or any of its subsidiaries or Affiliates.
Subject to any restrictions on disclosure imposed by the financial
institution(s) involved, the Company will provide you promptly with copies of
any draft or preliminary term sheets or commitment letters as they are received
by the Company.
2.5. Limitation on Additional Borrowings under the Purchase Money
Agreement. The Company will not incur any Indebtedness under the Purchase Money
Agreement without the
3
<PAGE> 4
prior written consent of the Holders, which consent may be granted or withheld
in the sole and exclusive discretion of the Holders.
2.6. Status Reporting. On each Thursday commencing Thursday, March 12,
1998, the Company will update the Holders either orally or in writing as to the
progress of the Company's efforts toward the payment referred to in Section 2.1
hereof and with respect to the Company's overall financial and business
situation.
2.7. Representations and Warranties. The Company represents and
warrants to the Holders as follows:
(a) Except as asserted in the January 20 Letter and the February 13
Letter (which the Company does not admit), no defaults, events of default or
circumstances which but for the passage of time or the giving of notice would
constitute defaults or events of default exist under the Note Agreement, the
Intercreditor Agreement, the Credit Agreement, the Purchase Money Agreement or
the Security Agreements.
(b) Since December 12, 1997, neither the Company nor the Banks have
requested or entered into any waiver, consent, amendment, modification,
extension, or alteration of or with respect to the Credit Agreement or the
Purchase Money Agreement.
(c) The representations and warranties contained in the Note Agreement
and the Intercreditor Agreement remain in full force and effect and are hereby
ratified, confirmed, remade and approved in all respects as of the date hereof
except for changes to those representations and warranties set forth on the
attached Schedule 2.5.
SECTION 3. EFFECTIVE DATE
Condition to Effectiveness. This Second Amendment shall become
effective, retroactive to the date hereof, upon receipt by the Holders of each
of the following items:
3.1. Second Amendment. A counterpart of this Second Amendment duly
executed by the Company.
3.2. Other Documents. Such other documents and instruments incident to
this Second Amendment, the Security Agreements or the Intercreditor Agreement as
the Holders may reasonably request.
3.3. Consent of Banks. Notwithstanding the foregoing, Section 2.3 shall
become effective, retroactive to the date hereof, upon the satisfaction of the
conditions contained in Sections 3.1 and 3.2 above and receipt of the Bank
Consent.
4
<PAGE> 5
SECTION 4. MISCELLANEOUS
4.1. Ratification. Except to the extent expressly waived, amended,
modified, deleted or added to hereby, the terms and provisions of the Note
Agreement and the Intercreditor Agreement are ratified, confirmed, remade and
approved in all respects as of the date hereof.
4.2. Reference to and Effect on the Note Agreement. Upon the
effectiveness of this Second Amendment, each reference in the Note Agreement and
in other documents describing or referencing the Note Agreement to the
"Agreement," "Note Agreement," "hereunder," "hereof," "herein," or words of like
import referring to the Note Agreement, shall mean and be a reference to the
Note Agreement, as amended hereby.
4.3. Expenses. The Company confirms its agreement to pay within ten
Business Days of receipt of a statement therefor all reasonable fees and
expenses of special counsel to the Holders and all other fees and expenses
incurred by the Holders in connection with the negotiation and execution of this
Second Amendment, including but not limited costs of transportation and
accommodations for meetings.
4.4. Binding Effect. This Second Amendment shall be binding upon and
inure to the benefit of the respective successors and assigns of the parties
hereto.
4.5. Governing Law. This Second Amendment shall be governed by and
construed in accordance with Illinois law.
4.6. Counterparts. This Second Amendment may be executed in any number
of counterparts, each executed counterpart constituting an original but
altogether only one instrument.
4.7. Facsimile. This Second Amendment may be executed by facsimile
signature.
4.8. No Third Party Beneficiary. This Second Amendment is intended only
for the benefit of the Company and the Holders and no other party shall be
entitled to rely on any of the benefits and rights conferred hereunder.
5
<PAGE> 6
IN WITNESS WHEREOF, the Company and the Holders have caused this Second
Amendment to be executed and delivered by their respective officer or officers
thereunto duly authorized.
WALBRO CORPORATION
By: /s/ Michael A. Shope
--------------------------------------
Title: Michael A. Shope, Treasurer, CFO
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Clint Woods
--------------------------------------
Title: Clint Woods, Counsel
By: /s/ Christopher J. Henderson
--------------------------------------
Title: Christopher J. Henderson, Counsel
J. ROMEO & CO.
By: /s/ Thomas Finn
--------------------------------------
Title: Thomas Finn, V.P.
NATIONWIDE LIFE INSURANCE
COMPANY
By: /s/ Thomas A. Glisson
--------------------------------------
Title: Sr. Investment Manager
NATIONWIDE LIFE AND ANNUITY
INSURANCE COMPANY
By: /s/ Thomas A. Glisson
--------------------------------------
Title: Sr. Investment Manager
6
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF WALBRO CORPORATION
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Auburn Diecast Corporation Michigan
U.S. Coexcell, Inc. Ohio
Walbro Asia Pacific, Inc. Japan
Walbro Capital Pte. Ltd. Republic of Singapore
Walbro Detroit Corporation Delaware
Walbro Automotive Corporation Delaware
Walbro Automotive A.S Norway
Walbro Automotive do Brasil Ltda. Brazil
Walbro Automotive Europe S.A. France
Walbro Automotive FSC, Inc. U.S. Virgin Islands
Walbro Automotive GmbH Germany
Walbro Automotive Limited Great Britain
Walbro Automotive N.V. Belgium
Walbro Automotive S.A. France
Walbro Automotive S.A. Spain
Walbro Korea, Ltd. Republic of Korea
Walbro Netherlands B.V. Netherlands
Sharon Manufacturing Company Michigan
Whitehead Engineered Products, Inc. Delaware
Walbro Engine Management Corporation Delaware
Walbro de Mexico, S.A. de C.V. Mexico
Walbro GmbH Germany
Walbro Japan, Inc. Japan
Walbro Singapore Pte. Ltd. Republic of Singapore
Walbro Tucson Corporation Delaware
Tucson Precision Products Delaware
Fujian Hualong Carburetor Co., Ltd. People's Republic of China
Tianjin Walbro Industries, Ltd. People's Republic of China
Mutual Walbro P. Ltd. India
Walbro Capital Trust Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated February 11, 1998 (except with respect to the matters
discussed in Notes 6 and 21, as to which the date is April 13, 1998)
included (or incorporated by reference) in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-20841, 33-32068
and 33-48562.
/s/ Arthur Andersen LLP
Detroit, Michigan
April 13, 1998
<PAGE> 1
EXHIBIT 23.2
[LETTERHEAD OF ERNST & YOUNG]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation of our reports dated February 26, 1996, March
7, 1997 and March 6, 1998 with respect to the balance sheets of Marwal Systems
as of December 31, 1995, December 31, 1996 and December 31, 1997, and the
related statements of income for the years then ended, which reports are
included or incorporated by reference in the Form 10-K of Walbro
Corporation, into the Company's previously filed Registration Statement File
Numbers 33-20841, 33-32068 and 33-48562.
ERNST & YOUNG Audit
/s/ Gilles Meyer
--------------------
Gilles Meyer
April 14, 1998
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