<PAGE>
As filed with the Securities and Exchange Commission on December 22,
1997.
Registration No. 333-39243
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________
AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________
DELCO REMY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 35-1909253
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
_______________
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
_______________
2902 ENTERPRISE DRIVE
ANDERSON, INDIANA 46013
(765) 778-6499
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
_______________
SUSAN E. GOLDY, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
DELCO REMY INTERNATIONAL, INC.
2902 ENTERPRISE DRIVE
ANDERSON, INDIANA 46013
(765) 778-6799
(Name, address including zip code, and telephone number, including area code, of
agent for service)
_______________
With Copies to:
CHRISTOPHER G. KARRAS, ESQ.
DECHERT PRICE & RHOADS
4000 BELL ATLANTIC TOWER
1717 ARCH STREET
PHILADELPHIA, PENNSYLVANIA 19103
(215) 994-4000
_______________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
_______________
================================================================================
<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
NAME AND ADDRESS, INCLUDING
ZIP CODE AND TELEPHONE STATE OR OTHER PRIMARY STANDARD
NUMBER, INCLUDING AREA CODE, JURISDICTION OF CLASSIFICATION I.R.S. EMPLOYER
OF PRINCIPAL EXECUTIVE OFFICES INCORPORATION CODE NUMBER IDENTIFICATION NO.
- ------------------------------------------ --------------- ---------------- ------------------
<S> <C> <C> <C>
Delco Remy America, Inc. Delaware 3694 35-1909405
2902 Enterprise Drive
Anderson, IN 46013
(765) 778-6499
Remy International, Inc. Delaware 3694 35-2004050
2902 Enterprise Drive
Anderson, IN 46013
(765) 778-6499
Reman Holdings, Inc. Delaware 3694 52-1910536
2902 Enterprise Drive
Anderson, IN 46013
(765) 778-6499
Nabco, Inc. Michigan 3694 38-2105668
591 E. Church Street
P.O. Box 66
Reed City, MI 49677
(616) 832-8104
The A&B Group, Inc. Mississippi 3694 64-0823245
1029 "B" Street
Meridian, MS 39301
(601) 485-8575
A&B Enterprises, Inc. Mississippi 3694 64-0643692
Highway 18, West
P.O. Box 8
Meridian, MS 39153
(601) 782-9922
Dalex, Inc. Mississippi 5013 64-0719018
Bay Springs Industrial Park
P.O. Box 1901
123 Commerce Street
Bay Springs, MS 39422
(601) 764-4168
A&B Cores, Inc. Mississippi 3694 64-0815878
225 White Oak Drive
P.O. Box 339
Raleigh, MS 39153
(601) 782-9922
R&L Tool Company, Inc. Mississippi 3694 64-0701131
R. 1, Box 320
Highway 481, North
Raleigh, MS 39153
(601) 536-2193
MCA, Inc. of Mississippi Mississippi 3694 64-0765216
412 Bay Street
P.O. Box 257
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS, INCLUDING
ZIP CODE AND TELEPHONE STATE OR OTHER PRIMARY STANDARD
NUMBER, INCLUDING AREA CODE, JURISDICTION OF CLASSIFICATION I.R.S. EMPLOYER
OF PRINCIPAL EXECUTIVE OFFICES INCORPORATION CODE NUMBER IDENTIFICATION NO.
- ------------------------------------------ --------------- ---------------- ------------------
<S> <C> <C> <C>
Heidelberg, MS 39439
(601) 787-2688
Power Investments, Inc. Indiana 3714 35-1567602
400 Forsythe Street
P. O. Box 667
Franklin, IN 46131
(317) 738-2117
Franklin Power Products, Inc. Indiana 3714 35-1809762
400 Forsythe Street
P.O. Box 667
Franklin, IN 46131
(317) 738-2117
International Fuel Systems, Inc. Indiana 3714 35-1880654
980 Hurricane Road
Franklin, IN 46131
(317) 738-9408
Marine Drive Systems, Inc. New Jersey 3519 58-0941862
Grisom Aeroplex
1175 N. Hoosier Boulevard
Peru, IN 46970
(765) 689-8176
Marine Corporation of America Indiana 3519 35-1804826
980 Hurricane Road
Franklin, IN 46131
(317) 738-9408
Powrbilt Products, Inc. Texas 3519 75-2398592
617 S. 4/th/ Street
Mansfield, TX 76063
(817) 473-3208
World Wide Automotive, Inc. Virginia 3694 54-1025997
130 Westbrooke Drive
Fort Collier Industrial Park
Winchester, VA 22603
(540) 667-6500
</TABLE>
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-4
<TABLE>
<S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.................................. Forepart of the Registration Statement; Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus... Inside Front Cover Page; Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information......................................... Prospectus Summary; Risk Factors; Selected
Consolidated Historical Financial Data
4. Terms of the Transaction.................................. The Exchange Offer; Description of Notes; Certain
Federal Income Tax Consequences; Plan of Distribution
5. Pro Forma Financial Information........................... Prospectus Summary; Pro Forma Condensed
Consolidated Financial Data; Selected
Consolidated Historical Financial Data
6. Material Contracts With the Company Being Acquired........ Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters............. Not Applicable
8. Interests of Named Experts and Counsel.................... Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................ Not Applicable
10 Information With Respect to S-3 Registrants............... Not Applicable
11. Incorporation of Certain Information by Reference......... Not Applicable
12. Information With Respect to S-2 or S-3 Registrants........ Not Applicable
13. Incorporation of Certain Information by Reference......... Not Applicable
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants.................................... Available Information; Prospectus Summary;
Risk Factors: Use of Proceeds; Capitalization;
Pro Forma Condensed Consolidated Financial
Data; Selected Consolidated Historical Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Stockholders;
Description of Indebtedness; Description of
Notes; Plan of Distribution; Legal Matters;
Experts; Financial Statements
15. Information With Respect to S-3 Companies................. Not Applicable
16. Information With Respect to S-2 or S-3 Companies.......... Not Applicable
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies...................................... Not Applicable
18. Information if Proxies, Consents or Authorizations Are
to be Solicited........................................... Not Applicable
19. Information if Proxies, Consents or Authorizations Are The Exchange Offer; Management; Principal
Not to be Solicited, or in an Exchange Offer.............. Stockholders; Description of Indebtedness;
Description of Notes
</TABLE>
<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
105/8% SENIOR SUBORDINATED NOTES DUE 2006
FOR ALL OUTSTANDING
105/8% SENIOR SUBORDINATED NOTES DUE 2006
OF
DELCO REMY INTERNATIONAL, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON JANUARY 29, 1998, UNLESS EXTENDED
----------
Delco Remy International, Inc., a Delaware corporation (the "Company"),
hereby offers to exchange an aggregate principal amount of up to $140,000,000 of
its 105/8% Senior Subordinated Notes Due 2006 (the "Exchange Notes") for a like
principal amount of its 105/8% Senior Subordinated Notes Due 2006 (the "Existing
Notes") outstanding on the date hereof upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying letter of
transmittal (the "Letter of Transmittal" and, together with this Prospectus, the
"Exchange Offer"). The Exchange Notes and the Existing Notes are hereinafter
collectively referred to as the "Notes." The terms of the Exchange Notes are
identical in all material respects to those of the Existing Notes, except for
certain transfer restrictions and registration rights relating to the Existing
Notes. The Exchange Notes will be issued pursuant to, and be entitled to the
benefits of, the Indenture (as defined) governing the Existing Notes.
The Exchange Notes will bear interest from and including the date of
consummation of the Exchange Offer. Interest on the Exchange Notes will be
payable semi-annually on February 1 and August 1 of each year, commencing
February 1, 1998. Additionally, interest on the Exchange Notes will accrue from
the last interest payment date on which interest was paid on the Existing Notes
surrendered in exchange therefor.
The Exchange Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all present and future Senior Indebtedness
(as defined) of the Company. The Notes will rank pari passu with all present and
future Senior Subordinated Indebtedness (as defined) of the Company and will
rank senior to all subordinated indebtedness of the Company. The Company is a
holding company that derives all of its operating income and cash flow from its
subsidiaries. The Exchange Notes will be fully and unconditionally guaranteed
(collectively, the "Subsidiary Guaranties") by each Domestic Restricted
Subsidiary (as defined; collectively, the "Subsidiary Guarantors"). In addition,
each of the Subsidiary Guarantors will be a borrower under, or guarantor of, the
Senior Credit Facility (as defined), which ranks senior to the Notes, and the
obligations under the Senior Credit Facility will be secured by substantially
all of the assets of the Company and the Subsidiary Guarantors. See "Description
of Notes" and "Description of Indebtedness."
As of October 31, 1997, on a pro forma basis after giving effect to the
Transactions (as defined), the Company and the Subsidiary Guarantors would have
had (i) approximately $210.9 million of outstanding Senior Indebtedness
(excluding the Subsidiary Guaranties and unused commitments and outstanding
letters of credit under the Senior Credit Facility), (ii) substantially no
outstanding Senior Subordinated Indebtedness (other than the Notes), (iii)
approximately $47.5 million of Secured Indebtedness (excluding unused
commitments and outstanding letters of credit under the Senior Credit
Facility) and (iv) approximately $29.4 million of liabilities and preferred
stock of the Company's subsidiaries (excluding the Subsidiary Guarantors). See
"Description of Notes--Subordination." The indenture under which the Existing
Notes were issued permits the Company and the Subsidiary Guarantors to incur
additional indebtedness, including Senior Indebtedness and indebtedness that
will rank pari passu with the Notes.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Agreement dated July
26, 1996 (the "Registration Agreement") by and among the Company, certain of the
Company's subsidiaries signatories thereto, as Guarantors, and Salomon Brothers
Inc and Smith Barney Inc. (the "Initial Purchasers") with respect to the initial
sale of the Existing Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of
Existing Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date (as defined) for the Exchange Offer. In the event the
Company terminates the Exchange Offer and does not accept for exchange any
Existing Notes with respect to the Exchange Offer, the Company will promptly
return such Existing Notes to the holders thereof. See "The Exchange Offer."
The Company is offering the Exchange Notes in reliance on certain
interpretive letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties in unrelated transactions. Based
on such interpretive letters, the Company is of the view that holders of
Existing Notes (other than any holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")) who exchange their Existing Notes for Exchange Notes pursuant
to the Exchange Offer generally may offer such Exchange Notes for resale, resell
such Exchange Notes and otherwise transfer such Exchange Notes without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided such Exchange Notes are acquired in the ordinary course
of the holders' business and such holders have no arrangement or understanding
with any person to participate in a distribution of such Exchange Notes. If any
holder of Existing Notes is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with any person to
participate in the distribution of the Exchange Notes to be acquired in the
Exchange Offer, such holder (i) could not rely on the applicable interpretations
of the Commission and (ii) must comply with the registration requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivery of a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Existing Notes where such Existing Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution." Prior to the
Exchange Offer, there has been no public market for the Existing Notes. If a
market for the Exchange Notes should develop, such Exchange Notes could trade at
a discount from their principal amount. The Company currently does not intend to
list the Exchange Notes on any securities exchange or to seek approval for
quotation through any automated quotation system, and no active public market
for the Exchange Notes is currently anticipated. There can be no assurance that
an active public market for the Exchange Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange pursuant to the Exchange Offer.
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT HOLDERS OF EXISTING NOTES SHOULD CONSIDER IN CONNECTION WITH THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 23, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall encompass all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the Exchange Notes being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement. For further information with respect to the
Company and the Exchange Offer, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. Although this
Prospectus describes the material terms of certain contracts, agreements and
other documents filed as exhibits to the Registration Statement, with respect to
each such contract, agreement or other document reference is made to the exhibit
for a more complete description of the document or matter involved, and each
description thereof contained in this Prospectus shall be deemed qualified in
its entirety by such reference. The Registration Statement, including the
exhibits thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such Web site is:
http://www.sec.gov.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Commission. In
the event the Company ceases to be subject to the informational requirements of
the Exchange Act, the Company will be required under the Indenture, for so long
as any of the Notes remain outstanding, to furnish to the Trustee (as defined),
deliver or cause to be delivered to the holders of the Notes and file with the
Commission (provided that the Commission will accept such filing) copies of its
annual report and the information, documents and other reports which are
required to be filed by U.S. corporations subject to Section 13 or 15(d) of the
Exchange Act.
This Prospectus includes forward-looking statements which involve risks and
uncertainties as to future events. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result of
various factors, including, without limitation, those set forth under "Risk
Factors." See "Disclosure Regarding Forward Looking Statements."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The disclosure contained throughout this Prospectus which is
identified as being presented on a pro forma ("pro forma") basis has been
prepared as if the following transactions (the "Transactions") occurred (a) for
purposes of statement of operations and cash flow data at the beginning of the
period being presented (August 1, 1996 or 1997) and (b) for purposes of balance
sheet data, on October 31, 1997 (except for (i) below, which is included in
the historical balance sheet data): (i) the acquisition by the Company of World
Wide Automotive, Inc. ("World Wide") on May 8, 1997, (ii) the acquisition by the
Company of Ballantrae Corporation ("Ballantrae") for which the Company has
entered into an Agreement and Plan of Merger dated October 30, 1997, (iii)
issuance by the Company in underwritten public offerings of (x) $145.0 million
principal amount of Senior Notes Due 2007 (the "Senior Note Offering") and (y)
4,000,000 shares of the Company's Class A Common Stock (the "Equity Offering"
and, together with the Senior Notes Offering, the "Offerings"), (iv) the payment
in full by the Company of the 10 1/2% Senior Note due July 31, 2003 to World
Subordinated Debt Partners, L.P., (v) the payment in full by the Company of the
11.50% Subordinated Notes due July 31, 2004 to General Motors Corporation, (vi)
the exchange of the 11% Junior Subordinated Notes due July 31, 2004 (the "Junior
Subordinated Notes") for approximately 2.4 million shares of Class A Common
Stock, (vii) the exchange, in accordance with their terms, of the outstanding
shares of 8% preferred stock of Delco Remy America, Inc. ("DRA") to an 8%
subordinated debenture of DRA, (viii) a stock dividend to existing holders of
Common Stock resulting in a 16.8-for-one increase in the outstanding shares of
Common Stock (the "Stock Split"), (ix) the payment in full by the Company of
subordinated notes payable to certain former stockholders of A&B Group and
certain current and former stockholders of Power Investments (as defined) and
(x) the amendment of the Senior Credit Facility (as defined) in connection with
the consummation of the Offerings. For purposes of this Prospectus, the
"Company" shall refer to Delco Remy International, Inc. ("DRI") and all of its
consolidated subsidiaries, unless the context otherwise requires.
THE COMPANY
GENERAL
The Company designs, manufactures, remanufactures and distributes
electrical, powertrain/drivetrain and related components for automobiles and
light trucks, medium and heavy duty trucks and other heavy duty vehicles. The
Company's products include starter motors ("starters"), alternators, engines,
transmissions, traction control systems and fuel systems. The Company serves the
aftermarket and the original equipment manufacturer ("OEM") market, principally
in North America as well as in Europe, Latin America and Asia-Pacific. Net
sales, EBITDA (as defined), Adjusted EBITDA (as defined) and net loss for fiscal
year 1997 were $689.8 million, $50.4 million, $87.3 million and $14.3 million,
respectively. Excluding restructuring charges, net income for fiscal year 1997
would have been $10.5 million. For the same period, the aftermarket accounted
for approximately 45.2% of the Company's net sales and 62.8% of Adjusted EBITDA,
with the OEM market accounting for the balance.
The Company believes that it is the largest manufacturer and remanufacturer
in North America of (i) starters for automobiles and light trucks (including
sport-utility vehicles, minivans and pickup trucks) and (ii) starters and
alternators for medium and heavy duty vehicles. The Company's products are
principally sold or distributed to OEMs for both original equipment manufacture
and aftermarket operations, as well as to warehouse distributors and retail
automotive parts chains. Major customers include General Motors ("GM"), General
Motors Service Parts Operations ("GM SPO"), Navistar, Caterpillar, Freightliner,
PACCAR, Auto Zone, Cummins, Western Auto, Ford, Detroit Diesel, Volvo Trucks,
Mack, Pep Boys, Advance Auto and O'Reilly Automotive.
The Company sells its products principally under the "Delco Remy" brand
name and other major brand names worldwide. In connection with the GM
Acquisition (as defined), the Company obtained perpetual rights to the "Delco
Remy" brand name, which was first used in 1918. The Company also received the
right to use "Delco Remy" as a corporate name until 2004 and the "Remy" name in
perpetuity. In addition, GM entered into a long-
3
<PAGE>
term contract to purchase from the Company substantially all of its North
American requirements for automotive starters until 2004 and its U.S. and
Canadian requirements for heavy duty starters and alternators until 2000. GM
also entered into a distribution agreement to sell the Company's aftermarket
products through the GM SPO distribution system, the term of which extends
until 2009 for automotive products and until 1998 for heavy duty products. See
"Risk Factors---Dependence on General Motors" and "Business---Customers."
Citicorp Venture Capital Ltd. ("CVC") and Harold K. Sperlich, former
president of Chrysler Corporation, together with a subsidiary of MascoTech Inc.
("MascoTech") and certain senior management of the former Delco Remy Division of
GM (the "Former GM Division"), formed the Company for the purpose of acquiring
the assets of the automotive starter and the heavy duty starter and alternator
businesses of the Former GM Division (the "GM Acquisition"). Upon consummation
of the Offerings and the other Transactions, CVC, management of the Company and
other existing stockholders of the Company will beneficially own approximately
82.6% of the Company's outstanding Common Stock (74.3% of the voting power),
and will be able to control the Company and elect its Board of Directors. See
"Management," "Dilution" and "Certain Transactions."
The Original Investors (as defined) in the Company have received a
substantial realized and unrealized return on their investment in the Company.
The following table summarizes the historical investments of CVC, MascoTech and
Messrs. Gerrity, Sperlich and Snyder (the "Original Investors") in the Company
and Ballantrae since July 29, 1994 and the total return, including unrealized
return, on such investments as of December 22, 1997, the expected closing date
for the Offerings (in thousands).
<TABLE>
<CAPTION>
MASCO
-----
CVC TECH GERRITY SPERLICH SNYDER TOTAL
--- ---- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total invested in the Company and
Ballantrae............................. $ 24,082 $ 4,200 $1,270 $ 100 $ 50 $ 29,702
Total cash received and value of shares
of Common Stock held (a)............... $140,745 $33,880 $7,400 $11,440 $6,596 $200,061
</TABLE>
____________
(a) Based on the initial public offering price of $12.00 per share.
For additional details regarding such investment and return, see "Certain
Transactions."
Since the GM Acquisition, the Company has completed five strategic
acquisitions, substantially increasing the Company's aftermarket operations, and
entered into two international joint ventures. The Company is also in the
process of completing the strategic acquisition of Ballantrae, which will expand
the Company's drivetrain product position. Through Ballantrae's wholly owned
subsidiary, Tractech Inc. ("Tractech"), the Company will offer high quality
traction control systems to heavy duty OEMs and the aftermarket. These
acquisitions and joint ventures have broadened the Company's product line,
expanded its remanufacturing capability, extended its participation in
international markets and increased its penetration of the retail automotive
parts channel. As a result of these acquisitions and joint ventures and the
Company's focus on increasing its participation in the aftermarket, the
Company's reliance on GM has declined since the Company's formation. Net sales
to customers other than GM increased from 41.0% in fiscal year 1995 to 56.3% in
fiscal year 1997.
The Company's expanding aftermarket business benefits from the non-
deferrable nature of the repairs for which many of the Company's products are
used. Additionally, the Company's aftermarket business benefits from the design,
manufacturing and technological expertise of the Company's OEM operations. This
OEM expertise provides the Company with advantages over many of its aftermarket
competitors. The Company believes that its participation in both OEM and
aftermarket businesses and its diversified customer base reduce its exposure to
the cyclicality of the automotive industry. The Company's growth strategy is
designed to capitalize on its position as a consolidator in the large and highly
fragmented remanufacturing aftermarket.
GROWTH STRATEGY
The Company plans to continue to increase revenues and profitability of its
aftermarket and OEM businesses through a strategy of internal growth and growth
through acquisitions. Key elements of the Company's growth strategy include:
4
<PAGE>
- --------------------------------------------------------------------------------
INCREASING AFTERMARKET PRESENCE
Strengthening Customer Relationships. The Company intends to increase its
sales to new and existing customers by capitalizing on its balanced coverage of
the key channels of aftermarket distribution and its competitive strengths as an
OEM supplier. The Company plans to strengthen its customer relationships by (i)
continuing to expand its product offerings, (ii) capitalizing on the expansion
of the national automotive retail parts chains and warehouse distributors that
are customers of the Company, (iii) meeting the increasing demands of OEMs and
their dealer networks for high quality remanufactured units, which enable them
to reduce warranty and extended service costs, and (iv) growing sales of
existing and new product lines to OEM dealer networks as dealers continue to
capture an increasing percentage of vehicle repairs, due to longer warranty and
service programs and growing vehicle complexity. Additionally, with the recent
acquisition of World Wide, the Company expanded its product line and now offers
a full line of starters and alternators for domestic and import vehicles. The
acquisition also has improved the Company's distribution capabilities, which now
include a nationwide overnight delivery service.
Consolidating the Fragmented Aftermarket. The portion of the aftermarket in
which the Company participates is large and highly fragmented, with most
participants being small, regional companies offering relatively narrow product
lines. Although the Company believes that it is the largest manufacturer and
remanufacturer of aftermarket starters and alternators in North America, its
sales of these products account for less than 12% of this market. Consolidation
of the aftermarket is occurring as many competitors are finding it difficult to
meet the increasing quality, cost and service demands of customers, who, in
turn, are seeking to rationalize their supplier base. With its OEM capabilities,
remanufacturing expertise, full product line, greater access to "cores" and
ability to capitalize on economies of scale, the Company is well positioned to
benefit from the consolidation of the aftermarket.
EXPANDING GLOBALLY
The Company is expanding its international operations in order to (i)
benefit from the trend toward international standardization of automotive and
heavy duty vehicle platforms and (ii) participate in rapidly growing foreign
markets. The Company has recently been awarded new business by GM, Volkswagen,
Mercedes Benz, Ford and Caterpillar in Brazil; Opel in Europe; Daewoo Motors in
India (in connection with the Company's pending strategic alliance in India);
and Mercedes Benz, Volvo Trucks, John Deere and Dina in Mexico. The Company
intends to supply its existing OEM customers on a global basis as they expand
their operations and require local supply of component parts that meet their
demands for quality, technology, delivery and service. The Company believes that
its global expansion will enable it to gain new international OEM customers who
will also require local production of high quality products. In addition, the
expansion of the Company's OEM business into international markets has provided
the Company with the infrastructure necessary to develop an aftermarket presence
in these countries. The Company has established manufacturing operations and
strategic ventures in Hungary, Korea and Mexico, and plans to complete a
strategic alliance in India and a joint venture in Brazil in fiscal year 1998.
The acquisition of Ballantrae will provide the Company with a European
manufacturing plant which has been in operation since 1983. Aided by this
facility, Ballantrae has developed strong relationships with European customers
for traction control systems, especially in the market for construction
equipment.
INTRODUCING TECHNOLOGICALLY ADVANCED NEW PRODUCTS
As a Tier 1 OEM supplier, the Company continues to provide technologically
advanced products by regularly updating and enhancing its product line. Since
the GM Acquisition, the Company has (i) completed the introduction of a new
family of gear reduction starters that will replace all straight drive starters
in GM vehicles by the end of the 1998 model year and (ii) introduced several
longer-life heavy duty alternators. The Company is also developing a small gear
reduction starter specifically designed for application on world car platforms.
These new products underscore the Company's commitment to developing state-of-
the-art products that address the higher output, lower weight and increased
durability requirements of OEM customers.
OPERATING STRATEGY
The Company's operating strategy is designed to improve manufacturing
efficiency, reduce costs and increase productivity while continuing to achieve
the highest levels of product quality. Key elements of this operating strategy
include:
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5
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"FOCUS" FACTORIES TO DRIVE MANUFACTURING EXCELLENCE
The Company is shifting its OEM production from old, vertically-integrated
manufacturing plants to new, smaller and more efficient "focus" factories. The
Company's focus factories generally produce one product line in a plant designed
to facilitate lean manufacturing techniques. The Company has successfully
launched three new focus factories since 1996. When the currently planned shift
to focus factories is completed, the Company plans TO occupy six focus factories
and expects to have reduced its floor space for OEM production by more than 70%.
The Company believes that the benefits of the focus factories include reduced
overhead costs, enhanced productivity, increased product quality and lower
inventories.
PRODUCTIVITY IMPROVEMENTS
In conjunction with its emphasis on focus factories, the Company continues
to work with its local union representatives to establish best-in-class work
practices, such as reducing the number of job classifications per focus factory
and implementing team-based manufacturing processes. Since the GM Acquisition,
employee productivity has increased by 33%. The Company's labor contract with
the UAW (as defined) contains provisions that are expected to permit the Company
to continue to achieve productivity improvements in the existing and new focus
factories. The increased productivity achieved since the GM Acquisition is due
primarily to continuous improvement initiatives and the significant number of
employees who have exercised their contract rights to return ("flowback") to GM
or to retire.
PRODUCT QUALITY AND CONTINUOUS IMPROVEMENT
In July 1997, the Company received one of the prestigious Supplier of the Year
awards from GM, an award given to fewer than 1% of all GM suppliers. The
Company's commitment to product quality and continuous improvement is further
evidenced by the QS9000 certification received by nine of its manufacturing and
remanufacturing facilities in 1997. The Company expects that the remainder of
its manufacturing and remanufacturing facilities will receive QS9000
certification by the end of fiscal year 1998. In addition, the Company's
powertrain/drivetrain operations that remanufacture products for Ford have
received the Q-1 rating, Ford's highest quality rating, and the Company is a
Ford Authorized Remanufacturer ("Ford FAR") in five of the seven Canadian
provinces. Global purchasing has further enhanced the Company's continuous
improvement efforts. The Company is utilizing its international ventures to
develop new, lower cost sources of materials and is consolidating its vendor
base to fewer, more competitive suppliers.
RECENT DEVELOPMENTS
On October 30, 1997, the Company entered into a definitive agreement to
acquire Ballantrae for $52.8 million (including assumed debt and the estimated
working capital adjustment and fees and expenses of Ballantrae). Ballantrae
operates through two subsidiaries: Tractech, a leading producer of traction
control systems for heavy duty OEMs and the aftermarket; and Kraftube, Inc., a
tubing assembly business which sells products to compressor manufacturers for
commercial air conditioners and refrigeration equipment. In fiscal year 1997,
Tractech accounted for approximately 70% of Ballantrae's $37.6 million of net
sales. The Company's acquisition of Ballantrae strengthens the Company's overall
market position by (i) adding traction control systems to the Company's range of
drivetrain products, (ii) increasing sales to existing heavy duty OEM customers
and (iii) expanding the Company's customer base. The acquisition is expected to
be completed at or prior to the consummation of the Offerings. The terms of the
Ballantrae Acquisition Agreement were not negotiated on an arm's-length basis.
The Company believes, however, that the terms of such agreement are fair to the
Company and its subsidiaries from a financial standpoint. See "Risk Factors--
Acquisition of Ballantrae; Conflicts of Interest," "Company History,"
"Business--Acquisition of Ballantrae" and "Certain Transactions."
OTHER INFORMATION
For purposes of the financial information set forth in this Prospectus, (i)
EBITDA represents the sum of income from continuing operations before interest
expense, income taxes, preferred dividend requirement of subsidiary and minority
interest in income of subsidiaries, plus depreciation and amortization; (ii)
Adjusted EBITDA represents EBITDA plus restructuring charges and non-cash post-
retirement benefits other than pensions less the gain on sale of building, and
(iii) unless otherwise indicated, all references to years are to the twelve
months ended July 31, the Company's fiscal year end.
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6
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The Company's world headquarters are located at 2902 Enterprise Drive,
Anderson, Indiana, 46013, and its telephone number is (765) 778-6499.
THE EXCHANGE OFFER
Securities Offered................... Up to $140,000,000 aggregate principal
amount of 105/8% Senior Subordinated
Notes Due 2006. The terms of the Exchange
Notes and Existing Notes are identical in
all material respects, except for certain
transfer restrictions and registration
rights relating to the Existing Notes.
The Exchange Offer................... The Exchange Notes are being offered in
exchange for a like principal amount of
Existing Notes. Existing Notes may be
exchanged only in integral multiples of
$1,000. The issuance of the Exchange
Notes is intended to satisfy obligations
of the Company contained in the
Registration Agreement.
Expiration Date; Withdrawal of
Tender............................ The Exchange Offer will expire at 5:00
p.m., New York City time, on January 29,
1998, or such later date and time to
which it may be extended by the Company.
The tender of Existing Notes pursuant to
the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
Any Existing Notes not accepted for
exchange for any reason will be returned
without expense to the tendering holder
thereof as promptly as practicable after
the expiration or termination of the
Exchange Offer.
Certain Conditions to the Exchange
Offer............................. The Company's obligation to accept for
exchange, or to issue Exchange Notes in
exchange for, any Existing Notes is
subject to certain customary conditions
relating to compliance with any
applicable law or any applicable
interpretation by the staff of the
Commission, the receipt of any applicable
governmental approvals and the absence of
any actions or proceedings of any
governmental agency or court which could
materially impair the Company's ability
to consummate the Exchange Offer. The
Company currently expects that each of
the conditions will be satisfied and that
no waivers will be necessary. See "The
Exchange Offer--Certain Conditions to the
Exchange Offer."
Procedures for Tendering Existing
Notes............................. Each holder of Existing Notes wishing to
accept the Exchange Offer must complete,
sign and date the Letter of Transmittal,
or a facsimile thereof, in accordance
with the instructions contained herein
and therein, and mail or otherwise
deliver such Letter of Transmittal, or
such facsimile, together with such
Existing Notes and any other required
documentation, to the Exchange Agent (as
defined) at the address set forth herein.
See "The Exchange Offer--Procedures for
Tendering Existing Notes."
Use of Proceeds...................... The Company will not receive any proceeds
from the Exchange Offer.
Exchange Agent....................... National City Bank (the "Exchange Agent")
is serving as the Exchange Agent in
connection with the Exchange Offer.
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Federal Income Tax Consequences...... The exchange of Notes pursuant to the
Exchange Offer should not be a taxable
event for federal income tax purposes.
See "Certain Federal Income Tax
Considerations."
CONSEQUENCES OF EXCHANGING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that
holders of Existing Notes (other than any holder who is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) who exchange
their Existing Notes for Exchange Notes pursuant to the Exchange Offer generally
may offer such Exchange Notes for resale, resell such Exchange Notes and
otherwise transfer such Exchange Notes without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided such Exchange
Notes are acquired in the ordinary course of the holders' business and such
holders have no arrangement or understanding with any person to participate in a
distribution of such Exchange Notes. If any holder of Existing Notes is an
affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes to be acquired in the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the Commission and (ii) must
comply with the registration requirements of the Securities Act in connection
with any resale transaction. Each broker-dealer that receives Exchange Notes for
its own account in exchange for Existing Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the Exchange Notes may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdictions or in compliance with an available exemption from registration or
qualification. The Company has agreed, pursuant to the Registration Agreement
and subject to certain specified limitations therein, to register or qualify the
Exchange Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Notes reasonably requests in writing. If a
holder of Existing Notes does not exchange such Existing Notes for Exchange
Notes pursuant to the Exchange Offer, such Existing Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon. In
general, the Existing Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. Holders
of Existing Notes do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law in connection with the Exchange Offer. See "The
Exchange Offer--Consequences of Failure to Exchange; Resales of Exchange Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the Exchange Notes will not be eligible for
PORTAL trading.
THE EXCHANGE NOTES
The terms of the Exchange Notes and the Existing Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Existing Notes.
Exchange Notes....................... $140,000,000 in aggregate principal
amount of 105/8% Senior Subordinated
Notes Due 2006.
Maturity............................. August 1, 2006.
Interest Payment Dates............... February 1 and August 1, commencing
February 1, 1998.
Subsidiary Guaranties................ The Exchange Notes will be
unconditionally guaranteed by each of the
Subsidiary Guarantors under the
Subsidiary Guaranties.
Subordination of Notes and
Subsidiary Guaranties.............. The Exchange Notes and the Subsidiary
Guaranties will be general unsecured
senior subordinated obligations of the
Company and the Subsidiary Guarantors,
as
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applicable. The Exchange Notes and the
Subsidiary Guaranties are subordinated in
right of payment to the prior payment in
full of all existing and future Senior
Indebtedness, pari passu with all present
and future Senior Subordinated Indebtedness
and senior to all present and future
subordinated indebtedness of the Company or
the relevant Subsidiary Guarantors, as
applicable. The Exchange Notes will also be
effectively subordinated to any Secured
Indebtedness (as defined) to the extent of
the value of the assets securing such
Indebtedness. As of October 31, 1997, on a
pro forma basis after giving effect to the
Transactions (as defined), the Company and
the Subsidiary Guarantors would have had (i)
approximately $210.9 million of outstanding
Senior Indebtedness (excluding the
Subsidiary Guaranties and unused commitments
and outstanding letters of credit under the
Senior Credit Facility), (ii) substantially
no outstanding Senior Subordinated
Indebtedness (other than the Notes), (iii)
approximately $47.5 million of Secured
Indebtedness (excluding unused commitments
and outstanding letters of credit under the
Senior Credit Facility) and (iv)
approximately $29.4 million of liabilities
and preferred stock of the Company's
subsidiaries (excluding the Subsidiary
Guarantors).
Sinking Fund...................... None.
Optional Redemption............... The Exchange Notes will be redeemable at the
option of the Company, in whole or in part,
after August 1, 2001, at the redemption
prices set forth herein plus accrued and
unpaid interest, if any, to the redemption
date. In addition, at any time prior to
August 1, 1999, the Company may redeem, at
its option, up to an aggregate amount of 35%
of the original principal amount of the
Notes with the proceeds of one or more
Public Equity Offerings at a redemption
price of 110% of the principal amount
thereof plus accrued and unpaid interest, if
any, to the redemption date, provided that
at least 50% of the original aggregate
principal amount of the Notes remains
outstanding after each such redemption.
Change of Control................. Upon the occurrence of a Change of Control,
each Holder of Notes will have the right to
require the Company to purchase all or a
portion of such Holder's Notes at a price in
cash equal to 101% of the aggregate
principal amount thereof plus accrued and
unpaid interest, if any, to the date of
purchase. In the event of a Change of
Control, there can be no assurance that the
Company will have the financial resources or
be permitted under the terms of its other
indebtedness to repurchase or redeem the
Notes. See "Description of Notes--Change of
Control." The degree to which the Company is
leveraged could prevent it from repurchasing
Notes tendered to it upon a Change of
Control. See "Risk Factors--Substantial
Leverage; Potential Inability to Service
Indebtedness and Make Payments on the
Notes."
Certain Covenants................. The indenture relating to the Notes (the
"Indenture") contains certain covenants
that, among other things, limit the ability
of the Company and its Restricted
Subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or make
other distributions with respect to Capital
Stock (as defined) of the Company and its
Restricted Subsidiaries, (iii) sell assets
of the Company or its Restricted
Subsidiaries, (iv) issue or sell Restricted
Subsidiary stock, (v) enter into certain
transactions with affiliates, (vi) create
certain liens, (vii) enter into certain
mergers and consolidations and (viii) incur
indebtedness which is subordinate to Senior
Indebtedness and senior to the Notes.
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Defaults.......................... An Event of Default is defined in the
Indenture to include (subject to certain
notice and cure provisions) (i) a default in
the payment of interest, continued for 30
days; (ii) a default in the payment of
principal when due at maturity; (iii) the
failure of the Company to comply with its
obligations under certain covenants in the
Indenture, subject in some cases to such
failure continuing for certain periods of
time; (iv) the failure by the Company to
repay certain indebtedness within applicable
grace periods after final maturity, or after
acceleration because of a default by the
Company under an agreement governing such
indebtedness, and such non-payment or
acceleration continues for 10 days; (v)
certain events of bankruptcy, insolvency or
reorganization by, or if certain judgments
are entered against, the Company; and (vi)
the failure of a Subsidiary Guaranty to
remain in full force and effect in certain
cases, continued for 10 days. See
"Description of Notes--Defaults."
For a more detailed discussion of the Exchange Notes, see "Description of
Notes."
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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of the Company, "Pro Forma Condensed
Consolidated Financial Data," related notes and other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro Forma For
Pro Forma For the For the Three the Three
Year Ended Months Ended Months Ended
For the Year Ended July 31, July 31, October 31, October 31,
-------------------------------------- --------------------- ------------ ------------
1995 1996 1997 1997 1996 1997 1997
---------- --------- --------- -------- -------- ----------- ------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales..................... $ 573,423 $636,852 $ 689,787 776,621 $ 169,766 $209,020 $218,343
Gross profit.................. 98,207 126,774 149,553 178,089 38,394 38,143 41,117
Selling, engineering and
administrative expense...... 61,206 77,994 89,098 108,186 23,335 20,936 22,534
Restructuring charges......... -- 8,101 34,500 34,500 -- -- --
Operating income.............. 37,001 40,679 25,955 35,403 15,059 17,207 18,583
Interest expense.............. 18,432 27,367 38,774 36,840 9,391 10,521 9,305
Income (loss) from continuing
operations................... 9,326 5,796 (10,263) (1,326) 2,834 3,062 5,108
Loss from discontinued
operations, net of tax....... 2,363 10,637 1,682 -- 213 -- --
Net income (loss)............. 6,963 (4,841) (14,296) -- 270 3,062 --
Income (loss) from continuing
operations per share......... $ .56 $ .33 $ (.60) $ (.05) $ .16 $ .18 $ .20
Net income (loss) per share... .42 (.28) (.83) -- .02 .18 --
Financial ratios and other
data:
Depreciation and amortization. $ 14,533 $ 19,555 $ 22,323 $ 25,476 $ 5,300 $ 4,698 $ 5,307
Capital expenditures.......... 11,241 32,741 31,888 33,386 8,910 5,747 6,438
EBITDA (a).................... 51,534 60,234 50,360 63,558 20,359 21,905 23,890
Adjusted EBITDA (b)........... 55,968 72,087 87,269 100,467 21,494 22,970 24,955
Gross margin.................. 17.1% 19.9% 21.7% 22.9% 22.6% 18.2% 18.8%
Cash provided by (used in)
operating activities......... $ 21,921 $ (684) $ 22,537 $ -- $ (6,522) $ 11,415 $ --
Cash used in investing
activities................... (73,251) (79,061) (74,087) -- (10,236) (7,355) --
Cash provided by (used in)
financing activities......... 27,119 80,790 57,786 -- 22,880 (5,063) --
EBITDA margin (c)............. 9.0% 9.5% 7.3% 8.2% 12.0% 10.5% 10.9%
Adjusted EBITDA MARGIN (c).. 9.8% 11.3% 12.7% 12.9% 12.7% 11.0% 11.4%
Ratio of EBITDA to interest
expense...................... 2.8x 2.2x 1.3x 1.7x 2.2x 2.1x 2.6x
Ratio of total debt to EBITDA 3.8x 5.0x 7.2x 5.5x(d) -- -- --
Ratio of Adjusted EBITDA to 3.0x 2.6x 2.3x 2.7x 2.3x 2.2x 2.7x
interest expense.............
Ratio of total debt to
Adjusted EBITDA.............. 3.5x 4.1x 4.2x 3.5x(d) -- -- --
Ratio of earnings to fixed
charges(e)................... 1.8x 1.3x -- (f) 1.0x 1.5x 1.5x 1.9x
</TABLE>
<TABLE>
<CAPTION>
October 31, 1997
---------------
Actual Pro Forma
-----------------------
<S> <C> <C>
Balance Sheet data:
Working capital...................................................................................... $152,432 $173,020
Total assets......................................................................................... 582,505 650,242
Total debt........................................................................................... 358,705 351,643
Total stockholders' (deficit) equity................................................................. (6,976) 80,976
</TABLE>
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(a) EBITDA, represents the sum of income from continuing operations before
interest expense, income taxes, preferred dividend requirement of
subsidiary and minority interest in income of subsidiaries, plus
depreciation and amortization. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities for the purpose of analyzing the Company's operating
performance, financial position and cash flows. The Company has presented
EBITDA because it is commonly used by certain investors to analyze and
compare companies on the basis of operating performance and to determine a
company's ability to service debt. The definition of EBITDA differs from
the definition of EBITDA applicable to the covenants for the Notes and may
not be comparable to EBITDA as defined by other companies. EBITDA amounts
may not be fully available for management's discretionary use, due to
certain requirements to conserve funds for capital replacement, debt
service and other commitments.
(b) Adjusted EBITDA represents EBITDA plus restructuring charges and non-cash
post-retirement benefits other than pensions less the gain on sale of
building. This definition of Adjusted EBITDA conforms with the definition
of EBITDA applicable to the covenants for the Notes. Adjusted EBITDA should
not be construed as a substitute for income from operations, net income or
cash flow from operating activities for the purpose of analyzing the
Company's operating performance, financial position and cash flows.
Adjusted EBITDA amounts may not be fully available for management's
discretionary use, due to certain requirements to conserve funds for
capital replacements, debt service and other commitments.
(c) EBITDA margin and Adjusted EBITDA margin represent EBITDA and Adjusted
EBITDA, respectively, as a percent of net sales.
(d) Reflects pro forma total debt at October 31, 1997 divided by EBITDA or
Adjusted EBITDA, as appropriate, for the year ended July 31, 1997. This
calculation is presented because pro forma total debt was not calculated at
July 31, 1997.
(e) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, fixed
charges and minority interest. Fixed charges include preferred dividend
requirement of subsidiary, interest expense and the portion of operating
rents that is deemed representative of an interest factor.
(f) The deficiency of earnings to fixed charges was $13.5 million. Excluding
restructuring charges, the ratio of earnings to fixed charges would have
been 1.5x.
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RISK FACTORS
Holders of Existing Notes should carefully consider the risk factors set forth
below, which are generally applicable to the Existing Notes as well as the
Exchange Notes.
SUBSTANTIAL LEVERAGE; POTENTIAL INABILITY TO SERVICE INDEBTEDNESS AND MAKE
PAYMENTS ON THE NOTES
The Company incurred substantial indebtedness in connection with the GM
Acquisition. After adjusting for the Transactions and the application of the net
proceeds therefrom, at October 31, 1997, the Company's total indebtedness would
have been $351.6 million (exclusive of unused commitments and outstanding
letters of credit), and the Company would have had common stockholders' equity
of $81.0 million. The degree to which the Company is leveraged could have
important consequences, including the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of interest on its existing indebtedness, thereby reducing the funds
available to the Company for other purposes; (iii) the Company's operations are
restricted by the agreements governing the Company's long-term indebtedness
which contain certain financial and operating covenants; (iv) certain
indebtedness under the Senior Credit Facility will be at variable rates of
interest, which will cause the Company to be vulnerable to increases in interest
rates; (v) all of the indebtedness outstanding under the Senior Credit Facility
will be secured by substantially all the assets of the Company and that
indebtedness, together with the Senior Subordinated Notes (as defined), will
become due prior to the time the principal on the Notes will become due; (vi)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (vii) the Company's substantial degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or in
its business.
The Company may be required to refinance all or a portion of its present
indebtedness at or prior to the maturity of such indebtedness. In the event
that the Company is unable to refinance its existing indebtedness or otherwise
raise funds to repay such indebtedness, the Company's financial condition and
ability to fund its operations would be materially adversely affected. See
"Description of Capital Stock," "Description of Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources."
SUBORDINATION OF NOTES AND THE SUBSIDIARY GUARANTEES; ASSET ENCUMBRANCE; HOLDING
COMPANY STRUCTURE
The Notes are subordinated in right of payment to all present and future
Senior Indebtedness of the Company, including the principal, premium (if any)
and interest with respect to the Senior Indebtedness under the Senior Credit
Facility. The Notes rank pari passu with all present and future Senior
Subordinated Indebtedness of the Company and will rank senior to all other
subordinated indebtedness of the Company. In addition, the Subsidiary Guaranties
are subordinated in right of payment to all existing and future Senior
Indebtedness of the Subsidiary Guarantors, rank pari passu with all existing and
future Senior Subordinated Indebtedness of the Subsidiary Guarantors and rank
senior to all other subordinated indebtedness of the Subsidiary Guarantors. As
of October 31, 1997, on a pro forma basis after giving effect to the
Transactions, the Company and the Subsidiary Guarantors would have had
approximately $210.9 million of Senior Indebtedness outstanding (excluding
unused commitments under the Senior Credit Facility). Consequently, in the event
of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to the Company, assets of the Company will be available to pay
obligations of the Notes only after all Senior Indebtedness of the Company has
been paid in full, and there can be no assurance that there will be sufficient
assets to pay amounts due on all or any of the Notes. See "Description of
Notes--Subordination."
The Notes are also unsecured and will be effectively subordinated to any
Secured Indebtedness of the Company. The indebtedness outstanding under the
Senior Credit Facility is secured by liens on substantially all of the assets of
the Company located within the United States. The ability of the Company to
comply with the provisions of the Senior Credit Facility may be affected by
events beyond the Company's control. The breach of any such provisions could
result in a default under the Senior Credit Facility, in which case such lenders
could elect to declare all amounts borrowed under the Senior Credit Facility,
together with accrued interest, to be due and
13
<PAGE>
payable. If the Company were unable to repay such borrowings, such lenders could
proceed against the collateral. If the maturity of the indebtedness under the
Senior Credit Facility were accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full such indebtedness and
the other indebtedness of the Company, including the Notes. See "Description of
Indebtedness--Senior Credit Facility" and "Description of Notes--Subordination."
The Company is a holding company which derives all of its operating income
from its subsidiaries. The holders of the Notes will have no direct claim
against any such subsidiaries other than the claim created against a Domestic
Restricted Subsidiary by the applicable Subsidiary Guaranty, which may be
subject to legal challenge in the event of the bankruptcy of such subsidiary.
See "Risk Factors--Fraudulent Conveyance." If such a challenge were upheld, the
Subsidiary Guaranty would be invalidated and unenforceable. To the extent that
the Subsidiary Guaranty is not enforceable, the rights of holders of the Notes
to participate in any distribution of assets of the applicable Subsidiary
Guarantor upon liquidation, bankruptcy, reorganization or otherwise may, as is
the case with other unsecured creditors of the Company, be subject to prior
claims of creditors of that Subsidiary Guarantor. The Company must rely on
dividends and other payments from its subsidiaries to generate the funds
necessary to meet its obligations, including the payment of principal and
interest on the Notes. The Indenture contains covenants that restrict the
ability of the Company's subsidiaries to enter into any agreement limiting
distributions and transfers, including dividends to the Company. The ability of
the Company's subsidiaries to pay dividends and make other payments may be
subject to certain statutory, contractual and other restrictions. See
"Description of Indebtedness."
DEPENDENCE ON GENERAL MOTORS
GM accounted for approximately 97% of the Company's 1997 pro forma automotive
OEM net sales and approximately 3.9% of the Company's 1997 pro forma heavy
duty OEM net sales. GM SPO accounted for approximately 23.8% of the Company's
1997 pro forma aftermarket net sales, and GM and GM SPO collectively accounted
for approximately 38.8% of the Company's total 1997 pro forma net sales. In
connection with the GM Acquisition, GM entered into long-term contracts pursuant
to which it has agreed to purchase from the Company 100% of its North American
requirements for automotive starters (other than for Saturn and Geo) and 100% of
its U.S. and Canadian requirements for heavy duty starters and alternators, in
each case to purchase the existing product line (as of August 1994). GM's
obligations to purchase automotive starters and heavy duty starters and
alternators from the Company terminate in 2004 and 2000, respectively, except
for automotive products released in 1996 and 1997, for which GM's obligation
will terminate in 2006 and 2007, respectively. GM's commitments to purchase
products from the Company in the future are subject, however, to the Company's
remaining competitive as to technology, design and price. See
"Business--Customers." There can be no assurance that GM will not develop
alternative sources for components currently produced by the Company and
purchase some or all of its requirements for starters and alternators from these
alternative sources at the expiration of its obligation to purchase such
components from the Company. In addition, GM has been designated as an exclusive
distributor of a significant amount of the Company's automotive and heavy duty
aftermarket products and has agreed to provide the Company with purchasing
support, which enables it to obtain raw materials at competitive prices. The
Company's exclusive distribution arrangements with GM for the Company's heavy
duty aftermarket products and automotive aftermarket products terminate on July
31, 1998 and in 2009, respectively. There can be no assurance that the Company
and GM will negotiate a new arrangement for the distribution of heavy duty
aftermarket products when the current distribution arrangement terminates on
July 31, 1998, or whether the Company or GM will develop alternative
distribution channels.
The loss of GM as a customer of OEM or aftermarket products, the default by GM
on its obligations to act as a distributor or to purchase the Company's OEM or
aftermarket products, a substantial decrease in demand for GM's automobile
models containing the Company's products or the failure of the Company to obtain
supply orders for its products used in GM's new automobile models could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, strikes and work stoppages affecting GM's
operations may postpone GM's need for components produced by the Company, which,
because of the Company's highly leveraged position, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Labor Negotiations."
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RELOCATION OF FACILITIES
The Company is in the process of relocating certain of its manufacturing
facilities. Specifically, the Company has relocated certain production lines
from three of its OEM manufacturing facilities to three focus factories. The
Company has entered into leases for two additional focus factories and expects
to relocate additional production lines to those facilities and two additional
facilities over the next year. At the conclusion of the relocation, the
Company plans to have vacated the three plants leased from GM. In addition,
the Company expects to relocate certain of its aftermarket facilities due to
increased space requirements and the need for a regional presence. The Company's
subsidiaries have conducted these moves in the past without significant
disruption to operations. While the Company believes that it has prepared for
such relocations, there can be no assurance that the complicated nature of such
moves will not result in unforeseen costs or delays or result in disruptions in
the Company's operations at the affected facilities. The Company's gross
profit margin for the first quarter of fiscal 1998 was adversely affected by the
on-going transition to focus factories. There can be no assurance that the
transition to focus factories will not continue to adversely affect the
company's gross profit margins. The restructuring charge recorded by the Company
in 1997 does not include startup costs the Company expects to incur, based on
its prior startups, in connection with the new focus factories. The Company
anticipates start up costs due to the relocation to the three focus factories to
be approximately $1.0 million per factory. See "Risk Factors--Restructuring
Charges; Recent Losses" and "Business--Manufacturing and Facilities."
CONCENTRATION OF OWNERSHIP
Upon completion of the Offering and the Transactions, CVC will own
beneficially approximately 42.2% of the Company's outstanding Common Stock
(including non-voting Class B Common Stock which, subject to applicable law, is
convertible at the holder's option into voting Class A Common Stock and after
giving pro forma effect to the exchange of the Company's Junior Subordinated
Notes for Class A Common Stock) and members of the management of the Company
will own beneficially approximately 14.2% of the Company's outstanding Common
Stock. Certain other existing stockholders of the Company will own beneficially
approximately 26.2% of the Company's outstanding Common Stock. If these
stockholders were to vote all of their shares in a similar manner, they would
effectively control the Company. In most circumstances, they would have
sufficient voting power to elect the entire Board of Directors of the Company
and, in general, to determine (without the consent of the Company's other
stockholders) the outcome of any corporate transaction or other matter submitted
to the stockholders for approval, including mergers, consolidations and the sale
of all or substantially all of the Company's assets, and to prevent or cause a
change in control of the Company. Further, CVC, certain members of management
and other existing stockholders have entered into a Stockholders' Agreement (as
defined) whereby they have agreed to vote their shares in such a manner as to
elect the entire Board of Directors of the Company. See "Principal
Stockholders---Stockholders' Agreement."
RESTRUCTURING CHARGES; RECENT LOSSES
The Company incurred restructuring charges totaling $34.5 million and $8.1
million in fiscal years 1997 and 1996, respectively. These charges contributed
to a loss from continuing operations and a net loss in fiscal year 1997 of $10.3
million and $14.3 million, respectively, and to a net loss in fiscal year 1996
of $4.8 million. These charges substantially reduced the Company's stockholders'
equity. For a discussion of these charges and other factors contributing to such
losses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations." There can be no assurance that the Company (i) will be
able to realize the benefits it anticipates from the restructurings, (ii) will
not incur additional charges in the future in connection with these
restructurings or other actions, (iii) will realize a net profit in 1998 or in
future years or (iv) will not need to seek additional funds through borrowings
or sales of equity or assets to pursue its strategy. See "Risk Factors--
Relocation of Facilities" and "Risk Factors--Labor Negotiations."
RESTRICTIVE DEBT COVENANTS
The agreements governing the Company's bank and other indebtedness include
certain covenants that, among other things, restrict the Company's ability to:
(i) pay dividends and make certain other restricted payments; (ii)
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incur additional indebtedness; (iii) grant liens, other than liens created
pursuant to such agreements and certain permitted liens; and (iv) sell material
assets. The Senior Credit Facility also requires the Company to maintain certain
financial ratios, including interest coverage and leverage ratios, and to
maintain a minimum level of consolidated cash flow. There can be no assurance
that these requirements will be met in the future. If they are not, the holders
of the indebtedness under such agreements would be entitled to declare such
indebtedness immediately due and payable. See "Description of Capital Stock" and
"Description of Indebtedness."
DEPENDENCE ON AUTOMOTIVE INDUSTRY; CYCLICAL BUSINESS
The sale of a significant portion of the Company's products is directly
related to the overall level of automobile, truck and heavy duty vehicle
production in North America, which is cyclical. Consequently, a decline in the
demand for new automobiles and trucks, particularly in North America, could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company has not yet operated during a general
economic downturn, and historical financial information for the Company during
adverse economic conditions is not available.
RISK RELATING TO ACQUISITIONS
To expand its markets and take advantage of the consolidation trend in the
automotive parts industry, the Company's business strategy includes growth
through acquisitions. Although the Company believes that the operations of the
five companies it has acquired since the GM Acquisition are being successfully
integrated with the Company's operations, there can be no assurance that such
integration will continue to be successful, that future acquisitions can be
consummated on acceptable terms or that any acquired companies can be
successfully integrated into the Company's operations. Other than pursuant to
the Ballantrae Acquisition Agreement and the expected completion in fiscal year
1998 of a strategic joint venture in Brazil and a strategic alliance in India
(see "Company History"), the Company currently has no commitments,
understandings or arrangements with respect to any specific acquisitions or
joint ventures. However, the Company has commenced preliminary discussions to
acquire certain small remanufacturing operations in Europe. There can be no
assurance that the Company will complete these proposed transactions. The
Company is continually investigating opportunities for domestic and foreign
acquisitions. In connection with future acquisitions, the Company may incur
additional indebtedness or may issue additional equity. The Company's ability to
make future acquisitions may be constrained by its ability to obtain such
additional financing. To the extent the Company uses equity to finance future
acquisitions, there is a risk of dilution to holders of Class A Common Stock.
See "Risk Factors--Substantial Leverage; Potential Inability to Service
Indebtedness and Make Payments on the Notes," "Risk Factors--Restrictive Debt
Covenants," "Risk Factors--Acquisition of Ballantrae; Conflicts of Interest,"
"Business--Business Strategy" and "Description of Indebtedness."
In addition, acquisitions may involve a number of special risks, including:
initial reductions in the Company's reported operating results; diversion of
management's attention; unanticipated problems or legal liabilities; and a
possible reduction in reported earnings due to amortization of acquired
intangible assets in the event that such acquisitions are made at levels that
exceed the fair market value of net tangible assets. Some or all of these items
could have a material adverse effect on the Company. There can be no assurance
that businesses acquired in the future will achieve sales and profitability that
justify the investment therein. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive acquisition
candidates may increase to unacceptable levels.
LABOR NEGOTIATIONS
As of October 31, 1997, the Company employed 5,137 people, 859 of whom
were in management, engineering, supervision and administration and 4,278 of
whom were hourly employees. Of the Company's hourly employees, 2,068 are
represented by unions. In the United States, 1,477 of the Company's hourly
workers are represented by the International Union, United Automobile,
Aerospace, and Agricultural Implement Workers of America ("UAW") under a master
agreement between DRA (a wholly owned subsidiary of the Company) and the UAW. In
March 1997, the Company signed a new master agreement with the UAW that
stipulated an
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approximately 3.2% annual wage and benefit increase (12.8% over the four year
term of the agreement) for the Company's UAW hourly employees. If employment
levels and productivity remain unchanged, the agreement with the UAW would cause
the Company to experience increases in wage and benefit costs of approximately
2% per year over the next four years (which represents approximately $3.3
million in the first such year). In addition, grow-in provisions under the new
agreement with the UAW will require the Company to move certain lower wage and
benefit employees to higher wage and benefit levels. Under provisions of the
national agreement, the UAW and the Company have recently developed a special
program of incentives for hourly employees who agree to leave the Company, the
cost of which is included in the restructuring charges for fiscal year 1997
described herein. Based on responses to this special incentive plan received to
date, the Company would, if no other cost reductions were realized, experience
as a result of the grow-in provision additional wage and benefit costs that
increase each year of the UAW contract to approximately $10.2 million annually
in additional costs from current levels by the fourth year. The Company expects
the continued implementation of the special incentive plan and other planned
cost reduction initiatives to substantially offset the effects of the grow-in
provision. If the responses to date to the special incentive plan were reversed
(which the Company considers unlikely) and the other cost-savings initiatives
were not implemented, the additional costs referred to above to the Company from
the grow-in provision would approximately double. There can be no assurance that
the Company will be able to effect cost reduction initiatives (including the
continued implementation of the special incentive plan) to offset the effects of
the grow-in provision or that the Company's labor costs will not otherwise
increase significantly, in which case the Company's competitive position and
results of operations would be adversely affected. The master agreement between
UAW and DRA will expire on March 22, 2001.
As of October 31, 1997, 142 of the Company's 448 Canadian employees were
represented by the Canadian Auto Workers and 120 were represented by the
Metallurgists Unis d'Amerique. The agreements with these unions expire on
November 8, 1999 and September 30, 1998, respectively.
As of October 31, 1997, approximately 329 of Autovill's 449 employees were
affiliated with the Hungarian Steel Industry Workers Union. The agreement was
signed July 17, 1996 and is perpetual, subject to termination upon three months'
notice from either party.
The Company's other facilities are primarily non-union. The Company is unaware
of any current efforts to organize any of the Company's facilities. There can be
no assurance that there will not be any labor union efforts to organize
employees at facilities that are not currently unionized.
Since the GM Acquisition, the Company has not experienced any organized work
stoppages. There can be no assurance, however, that any actions taken by the
Company, including the current restructurings, will not adversely affect the
Company's relations with its employees. At the present time, the Company
believes that its relations with its employees are good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General."
COMPETITION
The motor vehicle parts industry in which the Company operates is highly
competitive. Some of the Company's OEM competitors are divisions or subsidiaries
of companies that are larger and have substantially greater resources than the
Company. There can be no assurance that the Company will be able to compete
successfully with its competitors. See "Business--Competition."
FOREIGN MARKETS
Approximately 20.2% of the Company's pro forma net sales in fiscal year 1997
were derived from sales in foreign markets. The Company expects sales from
international markets to represent an increasing portion of total sales. Certain
risks are inherent in international operations, including the following:
agreements may be difficult to enforce and receivables difficult to collect
through a foreign country's legal system; foreign customers may have longer
payment cycles; foreign countries may impose additional withholding taxes or
otherwise tax the Company's foreign income, impose tariffs or adopt other
restrictions
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on foreign trade of investment; U.S. export licenses may be difficult to obtain;
intellectual property rights may be more difficult to enforce in foreign
countries; fluctuations in exchange rates may affect product demand and may
adversely affect the profitability in U.S. dollars of products and services
provided by the Company in foreign markets where payment for the Company's
products and services is made in the local currency; general economic conditions
in the countries in which the Company operates could have an adverse effect on
the Company's earnings from operations in those countries; unexpected changes in
foreign laws or regulatory requirements may occur; compliance with a variety of
foreign laws and regulations; and overlap of different tax structures. Tax rates
in certain foreign countries may exceed those of the United States and foreign
earnings may be subject to withholding requirements or the imposition of
tariffs, exchange controls or other restrictions. There can be no assurance that
any of these factors will not have a material adverse effect on the Company's
business and results of operations. See "Business -- Growth Strategy" and
"Company History."
AVAILABILITY OF CORES
In its remanufacturing operations, the Company obtains used components,
commonly known as "cores," from various sources, principally the Company's
existing aftermarket customers, which generally return cores when they purchase
remanufactured products. As a result, GM SPO and Navistar each supplied greater
than 10% of the cores used by the Company in 1997. The Company also obtains
cores from brokers who specialize in buying and selling cores. No single broker
supplies the Company with more than 10% of those cores purchased by the Company.
The ability to obtain cores of the types and quantities required by the Company
is essential to the Company's ability to meet demand and expand production in
the remanufacturing business.
A sufficient supply of cores may not always be available to the Company to
permit it to respond fully to customer demands for the Company's remanufactured
products. Shortages of cores could result from, among other things, (i) a time
lag between the initial customer order for a remanufactured product and the
return of cores for such products, (ii) an inability to salvage cores for reuse
due to excessive wear or deterioration or (iii) an inability of the Company to
acquire cores because of loss or significant deterioration of the Company's
relationships with its customers. Although the Company believes that its
relationships with several of its customers will continue to provide it with
access to cores, there can be no assurance that the Company will continue to
have an adequate supply of cores for its remanufactured products.
ACQUISITION OF BALLANTRAE; CONFLICTS OF INTEREST
On October 30, 1997, the Company entered into an Agreement and Plan of Merger
to acquire Ballantrae (the "Ballantrae Acquisition Agreement"). Although the
Company has entered into the Ballantrae Acquisition Agreement, the consummation
of the transactions contemplated thereby are subject to customary closing
conditions for a transaction of this type, including termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the lack of any material adverse change in the business of
Ballantrae. Although the Company does not currently foresee any impediments to
the consummation of the acquisition of Ballantrae, the Company cannot offer any
assurances that the acquisition will be consummated. Even if consummated, the
Company cannot guarantee that the businesses conducted by Ballantrae can be
effectively integrated into the Company's other operations or that the Company
will realize the benefits it expects to achieve through the acquisition of
Ballantrae. The Company has incurred due diligence, legal and other expenses in
anticipation of the acquisition of Ballantrae. If the acquisition is not
consummated, these expenses will have to be written off as non-recurring
charges. See "Company History," "Business--Acquisition of Ballantrae," and
"Certain Transactions."
The terms of the Ballantrae Acquisition Agreement were not negotiated on an
arm's-length basis. As of July 31, 1997, CVC owned, on a fully-diluted basis,
71.9% of the outstanding common stock and 74.7% of the outstanding preferred
stock of Ballantrae. At that date, CVC also owned 46.3% of the Company's Common
Stock. See "Risk Factors--Concentration of Ownership." The Company believes,
however, that the terms of such agreement are fair to the Company and its
subsidiaries from a financial standpoint. In considering the acquisition, the
Company's directors owe a fiduciary duty to the Company and its shareholders to
act in good faith and with
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due care. The Company's directors, excluding Messrs. Delaney, Cashin and
Gerrity, have determined that the acquisition of Ballantrae is in the best
interests of the Company and its stockholders and have approved the acquisition
of Ballantrae. Because Mr. Gerrity is a director of Ballantrae and as of July
31, 1997 beneficially owned, on a fully-diluted basis, 20.0% of Ballantrae's
common stock and 15.6% of its preferred stock (including 5.0% and 5.2% of
Ballantrae's common and preferred stock, respectively, beneficially owned by
Susan Gerrity, Mr. Gerrity's wife) and Messrs. Delaney and Cashin are also each
a stockholder and director of Ballantrae, as well as each being a stockholder
and director of the Company, there is a conflict of interest with respect to the
acquisition of Ballantrae. As a consequence, their economic interest in the
transaction may result in decisions that do not reflect the interests of the
Company. Any damages which the Company may suffer which result from a breach of
the Ballantrae Acquisition Agreement will be subject to a $10 million cap and
the Company will be able to recover only a portion of its damages from CVC and
Mr. Gerrity (and, with respect to each of them, only on a pro rata basis). The
Company is also obligated to pay the expenses incurred by Ballantrae in
connection with the acquisition, whether or not the acquisition is consummated.
Approximately $30 million of the net proceeds of the Offerings will be used to
repay certain indebtedness of Ballantrae. See "Company History," "Business--
Acquisition of Ballantrae" and "Certain Transactions."
CVC was one of the original organizers of Ballantrae in 1996. During the
formation of Ballantrae, CVC purchased (i) 32.9% of the newly issued shares of
common stock of Ballantrae for $35,000, (ii) 74.7% of the newly issued shares of
preferred stock of Ballantrae for $2.1 million and (iii) warrants to purchase an
additional 147,500 shares of common stock of Ballantrae for an aggregate
exercise price of $147,500. CVC has exercised warrants for 122,500 shares of
common stock of Ballantrae for an aggregate exercise price of $122,500. Shortly
after CVC'S purchase of its interest in Ballantrae, Kraftube Acquisition
Corporation, a wholly owned subsidiary of Ballantrae, merged into Kraftube
Management, Inc. and during such merger CVC purchased 79.4% of the preferred
stock of Kraftube Management, Inc. for $6.4 million, $4.7 million of which was
paid in cash and $1.7 million of which was paid by cancellation of a note in the
original principal amount of $1.7 million issued by an affiliate of Kraftube
Management, Inc. in favor of CVC. Upon the consummation of the transactions
contemplated under the Ballantrae Acquisition Agreement, CVC will receive 71.9%
of the consideration paid by the Company to Ballantrae's common stockholders and
up to approximately 78.2% of the consideration paid by the Company to
Ballantrae's preferred stockholders (assuming that in connection with the merger
of Kraftube, Inc. into Kraftube Management, Inc., all Kraftube Management, Inc.
preferred stockholders elect to receive Ballantrae preferred stock as opposed to
cash and no dissenters' rights are exercised).
The following table summarizes the history of CVC's investment in Ballantrae
and the payment of merger consideration to CVC in connection with the proposed
acquisition of Ballantrae by the Company.
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<TABLE>
<CAPTION>
Amount Paid
Date Event BY CVC
---- ----- ------------
<C> <S> <C>
10/23/96 Acquisition of 32.9% of Ballantrae common stock................................... $ 35,000
10/23/96 Acquisition of 74.7% of Ballantrae preferred stock................................ 2,100,000
10/23/96 Acquisition of warrants for Ballantrae common stock............................... --
10/23/97 Acquisition of 79.4% of preferred stock of Kraftube Management, Inc. (a).......... 6,400,000
02/07/97 Exercise of warrants for Ballantrae common stock (b).............................. 147,500
-----------
Total CVC investment in Ballantrae................................................ $ 8,682,500
===========
Value of shares of Common Stock of the Company to be received by CVC as merger
consideration in connection with the acquisition of Ballantrae (c)................ $16,514,600
===========
</TABLE>
_________________________
(a) In 1989, CVC invested $1.0 million to purchase Kraftube, Inc. preferred
stock and $2.1 million for which it received a note in the original
principal amount of $2.1 million. In addition, in 1989, CVC purchased 62.8%
of the common stock of Kraftube Management, Inc. for $15,700. In 1993, the
Kraftube, Inc. preferred stock plus accrued and unpaid dividends was
exchanged for a note in the principal amount of $1.7 million and the $2.1
million note was repaid, together with accrued and unpaid interest thereon.
In 1996, the $1.7 million note was exchanged for 1.7 million shares of
Kraftube Management, Inc. preferred stock. The remaining 4.7 million shares
of Kraftube Management, Inc. preferred stock were received upon the
exchange of Kraftube Management, Inc. common stock in a transaction that
valued the common stock held by CVC at $4.7 million.
(b) Includes $25,000 attributable to the exercise of a warrant to purchase
25,000 shares of Ballantrae common stock which CVC intends to exercise
prior to the consummation of the acquisition.
(c) Based on the initial public offering price of $12.00 per share.
ENVIRONMENTAL RISKS
The Company's operations and properties are subject to federal, state, local
and foreign laws, regulations and ordinances relating to the use, storage,
handling, generation, transportation, treatment, emission, release, discharge
and disposal of certain materials, substances and wastes. The nature of the
Company's operations exposes it to the risk of liabilities or claims with
respect to environmental matters, including off-site disposal matters, and there
can be no assurance that material costs will not be incurred in connection with
such liabilities or claims or that the indemnities provided by the sellers of
the various businesses acquired will be applicable or available.
Based upon the Company's experience to date, the Company believes that the
future cost of compliance with existing environmental laws, regulations and
ordinances (or liability for known environmental claims) will not have a
material adverse effect on the Company's business, financial condition and
results of operations. However, future events, such as changes in existing laws
and regulations or their interpretation, may give rise to additional compliance
costs or liabilities that could have a material adverse effect on the Company's
business, financial condition and results of operations. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws,
may require additional expenditures by the Company that may be material. See
""Business--Regulatory Matters."
FRAUDULENT CONVEYANCE
If a court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company as a debtor-in-
possession, were to find under relevant federal or state fraudulent conveyance
statutes that the Company did not receive fair consideration or reasonably
equivalent value for incurring the indebtedness, including the Notes, and that,
at the time of such incurrence, the Company (i) was insolvent, (ii) was rendered
insolvent by reason of such incurrence or grant, (iii) was engaged in a business
or transaction for which the assets remaining with the Company constituted
unreasonably small capital or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, then such
court, subject to applicable statutes of limitations, could void the Company's
obligations under the Notes, subordinate the Notes to other indebtedness of the
Company or take other action detrimental to the holders of the Notes.
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<PAGE>
The measure of insolvency for these purposes will depend upon the governing
law of the relevant jurisdiction. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could void an
incurrence of indebtedness, including the Notes, if it determined that such
transaction was made with the intent to hinder, delay or defraud creditors. In
addition, a court could subordinate the indebtedness, including the Notes, to
the claims of all existing and future creditors on similar grounds. The Company
believes that, after giving effect to the Offerings, the Company will be (i)
neither insolvent nor rendered insolvent by the incurrence of indebtedness in
connection with the Offerings, (ii) in possession of sufficient capital to run
its business effectively and (iii) incurring debts within its ability to pay as
the same mature or become due.
There can be no assurance as to what standard a court would apply in order to
determine whether the Company was "insolvent" upon consummation of the GM
Acquisition, any of the Company's other acquisitions or the sale of the Notes or
that, regardless of the method of valuation, a court would not determine that
the Company was insolvent upon consummation of the GM Acquisition or any of the
other acquisitions or the sale of the Notes.
In addition, any Subsidiary Guaranty may be subject to review under relevant
federal and state fraudulent conveyance and similar laws in a bankruptcy or
reorganization case or a lawsuit brought by or on behalf of creditors of the
applicable Subsidiary Guarantor. In such a case, the analysis set forth above
would generally apply, except that the Subsidiary Guaranty could also be subject
to the claim that, since the Subsidiary Guaranty was incurred for the benefit of
the Company (and only indirectly for the benefit of the Subsidiary Guarantor),
the obligations of the Subsidiary Guarantor thereunder were incurred for less
than reasonably equivalent value or fair consideration. A court could void the
Subsidiary Guarantor's obligation under the Subsidiary Guaranty, subordinate the
Subsidiary Guaranty to other indebtedness of the Subsidiary Guarantor or take
other action detrimental to the holders of the Notes.
CHANGE OF CONTROL
Upon a Change of Control, each holder of the Notes will have the right to
require the Company to repurchase all or any part of such Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. The occurrence of certain of the events that
constitute a Change of Control would constitute a default under the Senior
Credit Facility and would entitle the holders of the Company's Senior
Subordinated Notes (as defined) to require the Company to repurchase all or any
part of such Notes. The Company's failure to purchase the Notes would result in
a default under the Indenture. The inability to repay the indebtedness under the
Senior Credit Facility or the Senior Subordinated Notes, if their maturity is
accelerated, would also constitute an event of default under the Indenture,
which could have adverse consequences for the Company and the holders of the
Notes. In the event of a Change of Control, there can be no assurance the
Company would have sufficient financial resources available to satisfy all of
its obligations under the Senior Credit Facility, the Notes and the Senior
Subordinated Notes. See "Description of Indebtedness" and "Description of
Notes--Change of Control."
LACK OF PUBLIC MARKET
The Existing Notes are currently eligible for trading in the PORTAL Market.
The Exchange Notes are new securities for which there is no established market.
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the Exchange Notes. However, the Initial Purchasers are not obligated to do
so and any market making may be discontinued at any time without notice. There
can be no assurance as to the development of any market or the liquidity of any
market that may develop for the Exchange Notes. See "Description of Notes."
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The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
COMPANY HISTORY
The Company was formed in November 1993 for the purpose of acquiring certain
assets of the automotive starter business and the heavy duty starter and
alternator business of the Former GM Division, which businesses the Company
acquired in July 1994.
Between January 1995 and May 1997, the Company completed five strategic
acquisitions and two international joint ventures. On January 6, 1995, the
Company acquired all of the capital stock of Nabco, Inc. ("Nabco") (the "Nabco
Acquisition"), a producer of remanufactured automotive starters and alternators.
In addition to selling its products to national automotive parts chains
(primarily Western Auto), prior to its acquisition by the Company, Nabco
supplied remanufactured parts in bulk (known as "kits") to the Company and GM
for final assembly and distribution.
On March 31, 1995, the Company acquired all of the capital stock of The A&B
Group, Inc. ("A&B Group") (the "A&B Acquisition"), a remanufacturer of
automotive starters, heavy duty starters and alternators and related
subcomponents and parts. Prior to its acquisition by the Company, the A&B Group
was the Company's contract supplier of all heavy duty and certain automotive
remanufactured products.
On April 14, 1995, the Company acquired 96% of the capital stock of Autovill,
RT Ltd. ("Autovill") (the "Autovill Acquisition" and, together with the Nabco
Acquisition and the A&B Acquisition, the "1995 Acquisitions"), a Budapest,
Hungary-based producer of new and remanufactured heavy duty starters and
alternators both for the OEM market and the aftermarket in Western and Eastern
Europe. Principal customers of Autovill include Caterpillar and Mercedes Benz.
The remaining 4% of the capital stock of Autovill is owned by current and former
employees of Autovill.
On February 6, 1996, the Company acquired 82.5% of the capital stock of Power
Investments, Inc. ("Power Investments") (the "Power Investments Acquisition"), a
remanufacturer of diesel and gasoline engines, transmissions, fuel systems,
alternators and starters for medium and heavy duty trucks and automobiles; and,
to a lesser extent, a remanufacturer of brakes, water pumps, power steering
pumps and various other truck parts and assemblies. Power Investments has 15
facilities located in the United States and in five provinces of Canada and is
designated as a Ford FAR in such provinces. The remaining 17.5% of the capital
stock of Power Investments is owned by current management of Power Investments,
subject to put/call arrangements at a formula price for the purchase by the
Company of the remaining 17.5% of the shares of Power Investments beginning in
2001.
In December 1996, the Company formed a 50/50 joint venture in Korea with
individual Korean investors to purchase the assets related to the starter motor
operations of the Company's former Korean licensee. In April 1997, the Company
and its former Mexican licensee, Sistemas y Electricos Componetos ("Sistemas"),
formed a joint venture, 76% of which is owned by the Company and 24% of which is
owned by an affiliate of Sistemas. Each of these joint ventures have been formed
to manufacture starters and alternators for the OEM market.
On May 8, 1997, the Company acquired 82.5% of the capital stock of World Wide
(the "World Wide Acquisition"), a remanufacturer and distributor of import
automotive starters and alternators. World Wide sells its products to national
automotive parts chains, including Auto Zone, Pep Boys, Advance Auto and
Discount Auto. The remaining 17.5% of the capital stock of World Wide is owned
by current management of World Wide, subject to put/call arrangements at a
formula price for the purchase by the Company of the remaining 17.5% of the
shares beginning in 2000.
On October 30, 1997, the Company entered into the Ballantrae Acquisition
Agreement to acquire Ballantrae for $52.8 million (including assumed debt) and
the estimated working capital adjustment and fees and expenses of Ballantrae).
Ballantrae operates through two subsidiaries: Tractech, a leading producer of
traction control systems for heavy duty OEMs and the aftermarket; and Kraftube,
Inc., a tubing assembly business which sells
22
<PAGE>
products to compressor manufacturers for commercial air conditioners and
refrigeration equipment. In fiscal year 1997, Tractech accounted for
approximately 70% of Ballantrae's $37.6 million of net sales. The Company will
exchange shares of its Common Stock with a value (at the initial public offering
price in the Equity Offering) of approximately $22.1 million for the equity of
Ballantrae and will repay approximately $29.7 million of Ballantrae's debt. The
Common Stock of the Company received by Ballantrae's existing stockholders in
the acquisition will be subject to resale restrictions under applicable
securities laws but will have the benefit of piggyback registration rights. The
acquisition is expected to be completed at or prior to the consummation of the
Offerings. See "Risk Factors--Acquisition of Ballantrae; Conflicts of Interest,"
"Business--Acquisition of Ballantrae" and "Certain Transactions."
On November 11, 1997, the Company entered into a Share Purchase Agreement to
acquire 37% of the outstanding shares of Sahney Paris Rhone limited ("SPRL") a
manufacturer of starters, alternators and related components based in Hyderabad,
India, at a purchase price of approximately $3.7 million in the aggregate. The
Share Purchase Agreement provides that the shares will be acquired by the
Company through a combination of a tender offer for up to 20% of such shares and
the purchase of the remaining shares from the principal shareholder of SPRL and
his affiliates. The acquisition is expected to be completed on or before March
31, 1998.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds to the Company from the sale of the Existing Notes of $135.2 million
were used (i) to repay all indebtedness under the Senior Credit Facility
outstanding at the time of the offering of the Existing Notes, plus accrued and
unpaid interest thereon (approximately $103.5 million); (ii) to prepay one of
the Power Investments Seller Notes (as defined), plus accrued and unpaid
interest thereon (approximately $16.0 million); and (iii) for general corporate
purposes.
23
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of the long-term debt and
the consolidated capitalization of the Company as of October 31, 1997 and pro
forma to give effect to the Transactions, including the Offerings (assuming no
exercise of the over-allotment option in connection with the Equity Offering)
and the application of the net proceeds thereof. See "Use of Proceeds." This
table should be read in conjunction with the unaudited "Pro Forma Condensed
Consolidated Financial Data," "Selected Consolidated Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus. See also "Description of Capital Stock"
and "Description of Indebtedness."`
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
------------------------------------
ACTUAL PRO FORMA
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.................................................. $ 535 $ 535
========== ==========
Long-term debt:
Senior Credit Facility........................................................ $ 30,000 $ 30,000
Power Investments Seller Notes................................................ 8,300 --
World Note.................................................................... 75,000 --
8 5/8% Senior Notes Due 2007.................................................. -- 145,000
8% Subordinated Debenture..................................................... -- 18,354(a)
10 5/8% Senior Subordinated Notes Due 2006.................................... 140,000 140,000
GM Acquisition Note........................................................... 59,155 --
A&B Seller Notes.............................................................. 3,500 --
Ballantrae Subordinated Debt.................................................. -- 750
Other, including capital lease obligations.................................... 17,004 17,004
Junior Subordinated Notes..................................................... 25,211 --
---------- ----------
Total long-term debt..................................................... 358,170 351,108
Minority interest............................................................. 8,570 8,570
Redeemable exchangeable preferred stock of subsidiary.............................. 16,483(a) --
Stockholders' equity (deficit):
Class A Common Stock (par value $.01; authorized
49,400,000; issued and outstanding 8,828,014
historical, 16,073,016 pro forma)........................................... 88 161
Class B Common Stock (par value $.01; authorized
17,600,000; issued and outstanding 6,476,786
historical, 7,733,674 pro forma)............................................ 65 77
Additional paid-in capital.................................................... 6,703 98,270
Retained earnings............................................................. (9,112) (12,812)
Cumulative translation adjustment............................................. (2,173) (2,173)
Stock purchase plan........................................................... (2,547) (2,547)
---------- ----------
Total stockholders' equity (deficit)..................................... (6,976) 80,976
========== ==========
Total capitalization..................................................... $ 376,247 $ 440,654
========== ==========
</TABLE>
_____________________
(a) Reflects the fair value of the 8% Subordinated Debenture exchanged for the
redeemable exchangeable preferred stock of subsidiary as permitted by the
terms of such preferred stock. For details of this exchange, see footnote
(d) to the "Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Three Months Ended October 31, 1997." As of October 31,
1997, the principal amount of the 8% Subordinated Debenture would have
exceeded the fair value by $892.
24
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial data
of the Company for the three years ended July 31, 1997 and the three-month
periods ended October 31, 1996 and 1997. The statement of operations data for
the years ended July 31, 1995, 1996 and 1997 and the balance sheet data as of
July 31, 1995, 1996 and 1997 were derived from audited Consolidated Financial
Statements of the Company, which have been audited by Ernst & Young, LLP,
independent auditors. The financial data for the three-month periods ended
October 31, 1997 and 1996 are derived from unaudited Consolidated Financial
Statements of the Company. The unaudited Consolidated Financial Statements of
the Company include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the three months ended October 31, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending July 31, 1998. The table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements of the Company and related notes and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Three Months
For The Year Ended July 31, Ended October 31,
------------------------------------ ----------------------
1995 1996 1997 1996 1997
---------- ----------- ----------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales............................. $ 573,423 $ 636,852 $ 689,787 $ 169,766 $ 209,020
Gross profit.......................... 98,207 126,774 149,553 38,394 38,143
Selling, engineering and
administrative expenses ............. 61,206 77,994 89,098 23,335 20,936
Restructuring charges.................. --- 8,101 34,500 --- ---
Operating income....................... 37,001 40,679 25,955 15,059 17,207
Interest expense....................... 18,432 27,367 38,774 9,391 10,521
Income (loss) from continuing
operations........................... 9,326 5,796 (10,263) 2,834 3,062
Loss and discontinued operations,
net of tax benefit..................... 2,363 10,637 1,682 213 ---
Net income (loss)...................... 6,963 (4,841) (14,296) 270 3,062
Income (loss) from continuing
operations per share................. $ .56 $ .33 $ (.60) $ .16 $ .18
Net income (loss) per share............ .42 (.28) (.83) .02 .18
Financial ratios and other data:
Depreciation and amortization.......... $ 14,533 $ 19,555 $ 22,323 $ 5,300 $ 4,698
Capital expenditures................... 11,241 32,741 31,888 8,910 5,747
EBITDA(a).............................. 51,534 60,234 50,360 20,359 21,905
Adjusted EBITDA(b)..................... 55,968 72,087 87,269 21,494 22,970
Cash provided by (used in)
operating activities................. 21,921 (684) 22,537 (6,522) 11,415
Cash used in investing activities...... (73,251) (79,061) (74,087) (10,236) (7,355)
Cash provided by (used in)
financing activities................. 27,119 80,790 57,786 22,880 (5,063)
Gross margin........................... 17.1% 19.9% 21.7% 22.6% 18.2%
EBITDA margin(c)....................... 9.0% 9.5% 7.3% 12.0% 10.5%
Adjusted EBITDA margin(c).............. 9.8% 11.3% 12.7% 12.7% 11.0%
Ratio of EBITDA to interest
expense.............................. 2.8x 2.2x 1.3x 2.2x 2.1x
Ratio of total debt to EBITDA.......... 3.8x 5.0x 7.2x -- --
Ratio of Adjusted EBITDA to
interest expense..................... 3.0x 2.6x 2.3x 2.3x 2.2x
Ratio of total debt to Adjusted
EBITDA............................... 3.5x 4.1x 4.2x -- --
Ratio of earnings to fixed charges(d).. 1.8x 1.3x ---(e) 1.5x 1.5x
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of July 31, As of October 31,
-------------------------------------- -------------------------
1995 1996 1997 1997
----- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Balance sheet data:
Working capital................ $ 61,268 $113,801 $154,041 $152,432
Total assets................... 322,527 475,082 570,569 582,505
Total debt..................... 196,988 298,796 363,768 358,705
Redeemable exchangeable
preferred stock of
subsidiary................... 12,903 14,420 16,071 16,483
Total stockholders' equity
(deficit)...................... 8,430 1,589 (9,797) (6,976)
</TABLE>
___________
(a) EBITDA represents the sum of income from continuing operations before
interest expense, income taxes, preferred dividend requirement of
subsidiary and minority interest in income of subsidiaries, plus
depreciation and amortization. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities for the purpose of analyzing the Company's operating
performance, financial position and cash flows. The Company has presented
EBITDA because it is commonly used by certain investors to analyze an
compare companies on the basis of operating performance and to determine a
company's ability to service debt. The definition of EBITDA differs from
the definition of EBITDA applicable to the covenants for the Notes and may
not be comparable to EBITDA as defined by other companies. EBITDA amounts
may not be fully available for management's discretionary use, due to
certain requirements to conserve funds for capital replacement, debt
service and other commitments.
(B) Adjusted EBITDA represents EBITDA plus restructuring charges and non-cash
post-retirement benefits other than pensions less the gain on sale of
building. The definition of Adjusted EBITDA conforms with the definition of
EBITDA applicable to the covenants for the notes. Adjusted EBITDA should
not be construed as a substitute for income from operations, net income or
cash flow from operating activities for the purpose of analyzing the
Company's operating performance, financial position and cash flows.
Adjusted EBITDA amounts may not be fully available for management's
discretionary use, due to certain requirements to conserve funds for
capital replacements, debt service and other commitments.
(c) EBITDA margin and Adjusted EBITDA margin represent EBITDA and Adjusted
EBITDA, respectively, as a percent of net sales.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes , fixed
charges and minority interest. Fixed charges include preferred dividend
requirement of subsidiary, interest expense and the portion of operating
rents that is deemed representative of an interest factor.
(e) The deficiency of earnings to fixed charges was $13.5 million. Excluding
restructuring charges, the ratio of earnings to fixed charges would have
been 1.5x.
26
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
The following unaudited pro forma condensed consolidated financial data are
based on the Consolidated Financial Statements included elsewhere in this
Prospectus, adjusted to give effect to the Transactions, including the
Offerings.
The unaudited pro forma condensed consolidated statement of operations for the
year ended July 31, 1997 and for the three months ended October 31, 1997 have
been adjusted to give effect to the Transactions, including the Offerings, as if
they had occurred on August 1, 1996. The unaudited pro forma condensed
consolidated balance sheet at October 31, 1997 has been adjusted to give effect
to the Transactions, including the Offerings, as if they had occurred on
October 31, 1997 (other than the acquisition of World Wide, which is reflected
in the historical balance sheet data).
The unaudited pro forma financial data do not purport to be indicative of the
results of operations or the financial position that would actually have been
obtained if the Transactions, including the Offerings, had occurred on the dates
indicated or of the results of operations or the financial position that may be
obtained in the future. The unaudited pro forma financial data are presented for
comparative purposes only. The pro forma adjustments, as described in the
accompanying data, are based on available information and certain assumptions
that management believes are reasonable. The unaudited pro forma financial data
should be read in conjunction with the Consolidated Financial Statements of the
Company and related notes thereto included elsewhere in this Prospectus.
The unaudited pro forma financial data with respect to the acquisitions of
World Wide and Ballantrae are based on the historical financial statements of
the businesses acquired and have been accounted for using the purchase method of
accounting. The purchase price, including the related fees and expenses, have
been allocated to the tangible and identifiable intangible assets and
liabilities of the acquired businesses based upon the Company's estimates of
their fair value, with the remainder allocated to goodwill. The pro forma
adjustments directly attributable to the acquisitions of World Wide and
Ballantrae include adjustments to interest expense related to the financing,
charges for amortization of intangible assets and depreciation of property and
equipment relating to the allocation of the purchase price and the related tax
effects.
27
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended July 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Acquisitions
-------------------------------------------------------------------------------------------------
Historical Historical
Twelve Twelve World Wide Ballantrae
Months Months Pro Forma Pro Forma Pro Forma
Ended Ended Adjustments Purchase Purchase
3/31/97 9/30/97 for Accounting Accounting
Historical World Wide Ballantree World Wide(a) Adjustments(b) Adjustments(c)
---------- ---------- ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............ $ 689,787 $ 78,100 $ 36,802 $ (28,068) $ -- $ --
Cost of goods sold... 540,234 53,400 24,276 (19,378) -- --
---------- -------- -------- ----------- --------- ------------
Gross Profit......... 149,553 24,700 12,526 (8,690) -- --
Selling, engineering,
and administrative
expenses............ 89,098 20,600 5,627 (8,078) 456 483
Restructuring
charges............. 34,500 -- -- -- -- --
---------- -------- -------- ----------- --------- ------------
Operating income..... 25,955 4,100 6,899 (612) (456) (483)
Other income
(expense):
Gain on sale of
building....... 2,082 -- -- -- -- --
Interest
expense........ (38,774) (1,969) (2,948) 829 (1,182) (75)
---------- -------- -------- ---------- ---------- ------------
(Loss) income from
continuing operations
before income taxes,
preferred dividend
requirement of
subsidiary, and
minority interest... (10,737) 2,131 3,951 217 (1,638) (558)
Minority interest in
income of
subsidiary.......... 892 -- -- 247 (172) --
Income taxes
(benefit)........... (3,014) 850 912 87 (655) (88)
Preferred dividend
requirement of
subsidiary.......... 1,648 -- 931 -- -- (931)
---------- -------- -------- ---------- --------- ------------
(Loss) income from
continuing
operations.......... $ (10,263) $ 1,281 $ 2,108 $ (117) $ (811) $ 461
========== ======== ======== ========== ========= ============
Loss from continuing
operations per
share............... $ (.60)
===========
<CAPTION>
Pro Forma
for the Pro Forma
Acquisitions Adjustments Pro Forma
of World Wide for Other for
and Ballantrae Transactions Transactions
-------------- ------------ ------------
<S> <C> <C> <C>
Net Sales............ $ 776,621 $ -- $ 776,621
Cost of goods sold... 598,532 -- 598,532
------------ ---------- -----------
Gross Profit......... 178,089 -- 178,089
Selling, engineering,
and administrative
expenses............ 108,186 -- 108,186
Restructuring
charges............. 34,500 -- 34,500
------------ ---------- -----------
Operating income..... 35,403 -- 35,403
Other income
(expense):
Gain on sale of
building....... 2,082 -- 2,082
Interest
expense........ (44,119) 7,279(d) (36,840)
------------ ---------- -----------
(Loss) income from
continuing
operations
before income taxes,
preferred dividend
requirement of
subsidiary, and
minority interest... (6,634) 7,279 645
Minority interest in
income of
subsidiary.......... 967 -- 967
Income taxes
(benefit)........... (1,908) 2,912(e) 1,004
Preferred dividend
requirement of
subsidiary.......... 1,648 (1,648)(f) -
------------ ---------- -----------
(Loss) income from
continuing
operations.......... $ (7,341) $ 6,015 $ (1,326)
============ ========== ===========
Loss from continuing
operations per
share............... $ (.05)
===========
</TABLE>
See Accompanying Notes
28
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended July 31, 1997
(in thousands)
(a) This column adjust the historical results of World Wide by eliminating the
period from April 1, 1996 through June 30, 1996 included in the historical
twelve months ended March 31, 1997. The remaining nine month period ended
March 31, 1997 is thus combined with the three months from the date of
acquisition, May 9, 1997 through July 31, 1997 included in the Company's
historical Statement of Operations. The net sales and net loss for World
Wide for the month of April 1997, which are excluded from the pro forma
results, were $5,1 1 and $692, respectively. The Pro Forma Condensed
Consolidated Statement of Operations includes both July 1996 and 1997 for
World Wide. Net sales and net income for July 1996 were $6,209 and $280,
respectively.
(b) This column gives effect to the acquisition of World Wide as if it had
taken place at the beginning of the year, reflecting the increase in
depreciation, amortization and interest expense offset by the minority
interest's share of the additional expenses and income taxes, as follows:
<TABLE>
<S> <C>
Increase in depreciation and amortization..................... $ (456)
Increase in interest expense to finance the acquisition....... (1,182)
Minority interest's share of additional expenses.............. 172
Income taxes.................................................. 655
-------
Effect on net income.......................................... $ (811)
=======
</TABLE>
(c) This column gives effect to the acquisition of Ballantrae as if it had
taken place at the beginning of the year, reflecting the increase in
depreciation, amortization and interest expense. The preferred dividend
requirement of subsidiary is also eliminated to reflect the exchange of the
preferred stock for common stock in the acquisition as of the beginning of
the year. After the exchange, no further dividends will occur. The months
of August 1997 and September 1997 are included in the pro forma results of
operations for both the year ended July 31, 1997 and the three months ended
October 31, 1997. Sales and net income for August 1997 and September 1997
combined were $5,841 and $66, respectively. Details regarding the pro forma
purchase accounting adjustments are as follows:
<TABLE>
<S> <C>
Increase in depreciation and amortization..................... $ (483)
Increase in interest expense.................................. (75)
Income taxes.................................................. 88
Preferred dividend requirement of subsidiary.................. 931
------
Effect on net income.......................................... $ 461
======
</TABLE>
29
<PAGE>
(d) Reflects decreases (increases) of interest expense and amortization of
deferred financing costs as if the Transactions occurred on August 1, 1996
as follows:
<TABLE>
<CAPTION>
For the Year
Ended July
31, 1997
------------
<S> <C>
Reduced interest from the amendment of the Senior Credit Facility.......... $ 190
Amortization of deferred financing costs associated with the amendment
to the Senior Credit Facility............................................ (30)
Repayment of Power Investments Seller Notes................................ 818
Repayment of World Note.................................................... 7,875
Reversal of 1997 amortization of deferred financing costs associated with
repayment of the World Note.............................................. 454
Interest expense for the 8 5/8% Senior Notes Due 2007...................... (12,506)
Amortization of deferred financing costs associated with the 8 5/8% Senior
Notes Due 2007........................................................... (483)
Repayment of GM Acquisition Note........................................... 6,552
Repayment of A&B Seller Notes.............................................. 350
Repayment of Ballantrae Senior Bank Debt................................... 1,848
Repayment of Ballantrae Subordinated Debt.................................. 1,018
Conversion of Junior Subordinated Notes.................................... 2,593
Interest expense relating to the 8% Subordinated Debenture exchanged for
the redeemable exchangeable preferred stock of subsidiary................ (1,400)
------------
Net reduction of interest expense.......................................... $ 7,279
============
</TABLE>
(e) Represents the income tax expense related to the pro forma interest expense
reduction at 40%.
(f) Represents the reversal of preferred dividend requirements of subsidiary
recorded in 1997 which results from the assumed exchange of the preferred
stock for the 8% Subordinated Debenture effective August 1, 1996.
A deemed preferred dividend of subsidiary arises from the exchange of the
redeemable exchangeable preferred stock of subsidiary for the excess of the
fair value of the 8% Subordinated Debenture over the carrying value of the
redeemable exchangeable preferred stock of subsidiary as shown below. This
nonrecurring charge, which has not been reflected in the pro forma
condensed consolidated statement of operations, will be charged against the
income of the Company in the period of exchange. Upon completion of the
exchange, no further dividends will occur.
<TABLE>
<S> <C>
Fair value of the 8% Subordinated Debenture at October 31, 1997............ $ 18,354
Carrying value of the redeemable exchangeable preferred stock of
subsidiary at October 31, 1997........................................... 16,483
---------
Deemed preferred dividend of subsidiary arising from exchange.............. $ 1,871
=========
</TABLE>
30
<PAGE>
(g) The following nonrecurring items (including the item described in (f)
above) resulting from the Transactions have not been reflected in the
unaudited pro forma condensed consolidated statement of operations for the
year ended July 31, 1997, but will be included in operations within 12
months succeeding the Transactions (amounts are based upon the assumptions
used in preparing the unaudited pro forma condensed consolidated balance
sheets as of october 31, 1997):
<TABLE>
<S> <C>
Early extinguishment penalty on World Note............................. $ (911)
Write-off of World Note deferred financing costs as a result of early
extinguishment....................................................... (2,138)
Tax effect of early extinguishment..................................... 1,220
Deemed dividend of preferred stock of subsidiary....................... (1,871)
----------
Net charge to retained earnings (deficit).............................. $ (3,700)
==========
</TABLE>
31
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended October 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Acquisition
------------------------------------ Pro Forma for Adjustments
Historical Pro Forma the Acquisition for Other
Historical Ballantrae Adjustments(a) of Ballantrae Transactions
----------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 209,020 $ 9,323 $ -- $ 218,343 $ --
Cost of goods sold...... 170,877 6,349 -- 177,226 --
----------- ----------- -------------- --------------- ------------
Gross profit............ 38,143 2,974 -- 41,117 --
Selling, engineering and
administrative
expenses............... 20,936 1,477 121 22,534 --
----------- ----------- -------------- --------------- ------------
Operating income........ 17,207 1,497 (121) 18,583 --
Interest expense........ (10,521) (756) (19) (11,296) 1,991(b)
----------- ----------- -------------- --------------- ------------
(Loss) income from
continuing operations
before income taxes,
preferred dividend
requirement of
subsidiary, and
minority interest...... 6,686 741 (140) 7,287 1,991
Minority interest in
income of
subsidiary............. 538 -- -- 538 --
Income taxes (benefit).. 2,674 21 141 2,836 796(c)
Preferred dividend
requirement of
subsidiary............. 412 263 (263) 412 (412)(d)
----------- ----------- -------------- --------------- ------------
Income from continuing
operations............. $ 3,062 $ 457 $ (18) $ 3,501 $ 1,607
=========== =========== ============== =============== ============
Income from continuing
operations per share... $ .18
===========
<CAPTION>
Pro Forma for
Transactions(e)
---------------
<S> <C>
Net sales............... $ 218,343
Cost of goods sold...... 177,226
---------------
Gross profit............ 41,117
Selling, engineering and
administrative
expenses............... 22,534
---------------
Operating income........ 18,583
Interest expense........ (9,305)
---------------
(Loss) income from
continuing operations
before income taxes,
preferred dividend
requirement of
subsidiary, and
minority interest...... 9,278
Minority interest in
income of
subsidiary............. 538
Income taxes (benefit).. 3,632
Preferred dividend
requirement of
subsidiary............. --
---------------
Income from continuing
operations............. $ 5,108
===============
Income from continuing
operations per share... $ .20
===============
</TABLE>
See Accompanying Notes
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended October 31, 1997
(in thousands)
(a) Represents adjustments for the acquisition of ballantrae as if it had
taken place on August 1, 1996, reflecting the increase in depreciation,
amortization and interest expense for the quarter. The tax adjustment for
the three months ended October 31, 1997 is to adjust the income taxes to an
effective tax rate of 27%. The preferred dividend requirement of subsidiary
is also eliminated to reflect the exchange of the preferred stock for
common stock in the acquisition as of the beginning of the quarter. After
the exchange, no further dividends will occur.
<TABLE>
<S> <C>
Increase in depreciation and amortization...................................... $ (121)
Increase in interest expense................................................... (19)
Income taxes................................................................... (141)
Preferred dividend requirement of subsidiary................................... 263
-------
Effect on net income........................................................... $ (18)
=======
</TABLE>
(b) Reflects decreases (increases) of interest expense and amortization of
deferred financing costs as if the Transactions occurred on August 1, 1996
as follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
OCTOBER 31, 1997
----------------
<S> <C>
Reduced interest from the amendment of the Senior Credit Facility...................... $ 38
Amortization of deferred financing costs associated with the amendment
to the Senior Credit Facility....................................................... (8)
Repayment of Power Investments Seller Notes............................................ 205
Repayment of World Note................................................................ 1,969
Reversal of amortization of deferred financing costs associated with
repayment of the World Note......................................................... 114
Interest expense for the 8 5/8% Senior Notes Due 2007.................................. (3,127)
Amortization of deferred financing costs associated with the 8 5/8%
Senior Notes Due 2007............................................................... (121)
Repayment of GM Acquisition Note....................................................... 1,739
Repayment of A&B Seller Notes.......................................................... 88
Repayment of Ballantrae Senior Bank Debt............................................... 481
Repayment of Ballantrae Subordinated Debt.............................................. 254
Conversion of Junior Subordinated Notes.............................................. 709
Interest expense relating to the 8% Subordinated Debenture exchanged
for the redeemable exchangeable preferred stock of subsidiary....................... (350)
----------------
Net reduction in interest expense...................................................... $ 1,991
================
</TABLE>
(c) Represents the income tax expense related to the pro forma interest
expense reduction at 40%.
33
<PAGE>
(d) Represents the reversal of preferred dividend requirements of subsidiary
recorded in the three months ended October 31, 1997, which results from the
assumed exchange of the preferred stock of the 8% Subordinated Debenture
effective August 1, 1996.
A deemed preferred dividend of subsidiary arises from the exchange of the
redeemable exchangeable preferred stock of subsidiary for the excess of the
fair value of the 8% Subordinated Debentures over the carrying value of the
redeemable exchangeable preferred stock of subsidiary as shown below. This
nonrecurring charge, which has not been reflected in the pro forma
condensed consolidated statement of operations, will be charged against the
income of the Company in the period of exchange. Upon the completion of the
exchange, no further dividends will occur.
<TABLE>
<S> <C>
Fair value of the 8% Subordinated Debenture at October 31, 1997................ $ 18,354
--------
Carrying value of the redeemable exchangeable preferred stock of subsidiary at
October 31, 1997............................................................... 16,483
--------
Deemed preferred dividend of subsidiary arising from exchange.................... $ 1,871
========
</TABLE>
(e) The following nonrecurring items (including the item described in (d)
above) resulting from the Transactions have not been reflected in the
unaudited pro forma condensed consolidated statement of operations for the
three months ended October 31, 1997, but will be included in operations
within the 12 months succeeding the Transactions (amounts are based upon
the assumptions used in preparing the unaudited pro forma condensed
consolidated balance sheet as of October 31, 1997):
<TABLE>
<S> <C>
Early extinguishment penalty on World Note....................................... $ (911)
Write-off of World Note deferred financing costs as a result of early
extinguishments................................................................. (2,138)
Tax effect of early extinguishments.............................................. 1,220
Deemed dividend of preferred stock of subsidiary................................. (1,871)
--------
Net charge to retained earnings (deficit)........................................ $(3,700)
========
</TABLE>
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUISITION PRO FORMA FOR ADJUSTMENTS PRO FORMA
-----------------------------
HISTORICAL PRO FORMA THE ACQUISITION FOR OTHER FOR
HISTORICAL BALLANTRAE ADJUSTMENTS(A) OF BALLANTRAE TRANSACTIONS TRANSACTIONS
----------- ----------- -------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents... $ 8,626 $ 843 $ -- $ 9,469 $ 4,380 (b) $ 13,849
Trade accounts receivable... 125,582 5,342 -- 130,924 -- 130,924
Other receivables........... 3,701 134 -- 3,835 -- 3,835
Recoverable income tax...... 2,889 -- -- 2,889 1,220 (g) 4,109
Inventories................. 167,456 10,337 -- 177,793 -- 177,793
Deferred income taxes....... 20,757 -- -- 20,757 -- 20,757
Other current assets........ 5,210 81 -- 5,291 -- 5,291
-------- -------- --------- -------- --------- ---------
Total current assets....... 334,221 16,737 -- 350,958 5,600 356,558
Property and equipment....... 153,039 17,445 -- 170,484 -- 170,484
Less accumulated
depreciation................ 30,917 3,760 (3,760) 30,917 -- 30,917
-------- -------- --------- -------- --------- ---------
122,122 13,685 3,760 139,567 -- 139,567
Deferred financing costs..... 8,651 -- 750 9,401 2,897 (c) 12,298
Goodwill (less accumulated
amortization)............... 86,760 13,522 9,681 109,963 -- 109,963
Net assets held for
disposal.................... 23,909 -- -- 23,909 -- 23,909
Investment in affiliate...... 4,727 -- -- 4,727 -- 4,727
Other assets................. 2,115 1,105 -- 3,220 -- 3,220
-------- -------- --------- -------- --------- ---------
Total assets............... $582,505 $ 45,049 $ 14,191 $641,745 $ 8,497 $ 650,242
======== ======== ========= ======== ========= =========
Liabilities and
stockholders' (deficit)
equity:
Current liabilities:
Accounts payable............ $ 96,818 $ 2,474 $ -- $ 99,292 $ -- 99,292
Accrued interest payable.... 7,262 -- -- 7,262 (3,134) (h) 4,128
Accrued restructuring
charges.................... 37,922 -- -- 37,922 -- 37,922
Liabilities related to
discontinued
operations................. 2,685 -- -- 2,685 -- 2,685
Other liabilities and
accrued expenses........... 36,567 2,409 -- 38,976 -- 38,976
Current portion of
long-term debt............. 535 -- -- 535 -- 535
-------- -------- --------- -------- --------- ---------
Total current
liabilities............... 181,789 4,883 -- 186,672 (3,134) 183,538
Deferred income taxes........ 1,556 -- 1,015 2,571 -- 2,571
Long-term debt, less
current portion............. 358,170 30,384 -- 388,554 (37,446) (d) 351,108
Post-retirement benefits
other than pension.......... 13,742 -- -- 13,742 -- 13,742
Accrued pension benefit...... 5,272 -- -- 5,272 -- 5,272
Other non-current
liabilities................. 3,899 566 -- 4,465 -- 4,465
Minority interest in
subsidiary.................. 8,570 -- -- 8,570 -- 8,570
Redeemable exchangeable
preferred
Stock of subsidiary......... 16,483 12,205 (12,205) 16,483 (16,483) (e) --
Stockholders' (deficit)
equity:
Common Stock:
Class A Shares............. 88 1 14 103 58 161
Class B Shares............. 65 1 (1) 65 12 77
Paid-in capital............. 6,703 (5,133) 27,510 29,080 69,190 (f) 98,270
Retained earnings
(deficit).................. (9,112) 2,142 (2,142) (9,112) (3,700) (12,812)
Cumulative translation
adjustment................. (2,173) -- -- (2,173) -- (2,173)
Stock purchase plan......... (2,547) -- -- (2,547) -- (2,547)
-------- -------- --------- -------- --------- ---------
Stockholders' (deficit)
equity.................... (6,976) (2,989) 25,381 15,416 65,560 80,976
-------- -------- --------- -------- --------- ---------
Total liabilities and
stockholders'
(deficit) equity......... $582,505 $ 45,049 $ 14,191 $641,745 $ 8,497 $ 650,242
======== ======== ========= ======== ========= =========
</TABLE>
See Accompanying Notes.
35
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of October 31, 1997
(in thousands)
(a) Represents the adjustments for the Ballantrae acquisition as if it had
occurred as of October 31, 1997. The acquisition will be accounted for
by the purchase method of accounting. Using the purchase method of
accounting, the total purchase price will be allocated to tangible and
intangible assets and liabilities of Ballantrae based upon the Company's
estimates of their respective fair values at the date of the
acquisition.
(b) Represents the sources and uses of cash in connection with the Transactions
as follows:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1997
--------------------
<S> <C>
Estimated proceeds from the offerings (net of underwriting discounts
and commissions)............................................................ $186,015
Senior Credit Facility refinancing fee...................................... (210)
Repayment of Power Investments Seller Notes................................. (8,300)
Repayment of World Note..................................................... (75,911)
Repayment of GM Acquisition Note............................................ (59,155)
Repayment of A&B Seller Notes............................................... (3,500)
Repayment of Ballantrae Senior Bank Debt.................................... (20,384)
Repayment of Ballantrae Subordinated Debt................................... (9,250)
Payment of accrued interest for debt repaid................................. (2,425)
Other fees and expenses of the Offerings.................................... (2,500)
--------------------
Cash provided from the Transactions......................................... $ 4,380
====================
</TABLE>
(c) Represents the change in the deferred financing costs and related tax
benefit with respect to the World Note as follows:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1997
----------------
<S> <C>
Deferred financing costs related to the Offerings............................ $ 4,825
Deferred financing costs related to the Senior Credit Facility refinancing... 210
Write-off of World Note deferred financing costs as a result of early
extinguishment.............................................................. (2,138)
------------
$ 2,897
============
</TABLE>
(d) Details regarding the changes to long-term debt are as follows:
<TABLE>
<S> <C>
Total long-term debt (historical)............................................ $ 358,170
Ballantrae Senior Bank Debt.................................................. 20,384
Ballantrae Subordinated Debt................................................. 10,000
----------
Total Ballantrae debt........................................................ 30,384
----------
Pro forma for Ballantrae acquisition......................................... 388,554
----------
Power Investments Seller Notes............................................... (8,300)
World Note................................................................... (75,000)
GM Acquisition............................................................... (59,155)
A&B Seller Notes............................................................. (3,500)
Ballantrae Senior Bank Debt.................................................. (20,384)
Ballantrae Subordinated Debt................................................. (9,250)
Junior Subordinated Notes.................................................... (25,211)
8 5/8% Senior Notes Due 2007................................................. 145,000
8% Subordinated Debenture.................................................... 18,354
----------
Adjusted for other Transactions.............................................. (37,446)
----------
Pro forma for Transactions................................................... $ 351,108
==========
</TABLE>
(e) Reflects the elimination of redeemable exchangeable preferred stock of
subsidiary exchanged for the 8% Subordinated Debenture.
36
<PAGE>
(f) Details regarding the changes to equity, exchange of equity, issuance of
Common Stock and exchange of Junior Subordinated Notes are as follows:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1997
----------------
<S> <C>
Paid in capital (historical)............................................. $ 6,703
Equity exchanged and transaction costs for ballantrae acquisition,
less par value of $12 for shares of common stock received............... 22,377
--------
Pro forma for Ballantrae acquisition..................................... 29,080
--------
Equity Offering.......................................................... 44,600
Exchange for Junior Subordinated Notes................................. 25,890
Fees for Equity Offering................................................. (1,300)
--------
Adjusted for other Transactions.......................................... 69,190
--------
Pro forma for Transactions............................................... $ 98,270
========
</TABLE>
(g) Represents the extraordinary loss relating to the early extinguishment of
the World Note net of taxes at a marginal rate of 40% and the deemed
preferred dividend of subsidiary arising from the exchange of the
redeemable exchangeable preferred stock of subsidiary as follows:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1997
----------------
<S> <C>
Early extinguishment penalty on World Note............................... $ (911)
Write-off of World Note deferred financing costs as a result of
early extinguishment.................................................... (2,138)
Tax effect of early extinguishments...................................... 1,220
Deemed dividend of preferred stock of subsidiary......................... (1,871)
--------
Net charge to retained earnings (deficit)................................ $ (3,700)
========
</TABLE>
(h) Details regarding changes to accrued interest are as follows:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1997
----------------
<S> <C>
Payment of accrued interest for debt repaid.............................. (2,425)
Accrued interest relating to the exchange of the Junior
Subordinated Notes...................................................... (709)
--------
Net charge to accrued interest........................................... $ (3,134)
========
</TABLE>
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company sells its products in the aftermarket and the OEM market,
principally in North America and also in Europe, Latin America and Asia-Pacific.
In addition to purchasing newly manufactured parts for use in new vehicle
production, OEMs are also significant customers of the Company's aftermarket
products. These aftermarket products are distributed through the OEMs'
affiliated dealer networks.
The aftermarket is highly fragmented and competitive. The Company believes
that consolidation of aftermarket suppliers is occurring due, in part, to higher
quality standards for remanufactured products, which may be more expensive or
technically difficult for smaller remanufacturers to meet. The Company plans to
continue to increase its penetration of the aftermarket through internal growth
and strategic acquisitions.
The demand for components in the OEM market is cyclical. The Company believes
that opportunities for growth in the OEM market will come primarily through the
introduction of new products and expansion of the Company's global operations.
The Company believes that its aftermarket and OEM businesses are complementary
and provide the Company with a competitive advantage in meeting customer needs
and maintaining the high levels of expertise necessary to compete successfully
in both markets. The high capability necessary to meet the stringent
requirements for OEM technology and quality are transferable by the Company to
its aftermarket operations.
For 1997, the aftermarket accounted for approximately 45.2% of the Company's
net sales and approximately 62.8% of the Company's Adjusted EBITDA (as defined).
Net sales and Adjusted EBITDA attributable to the OEM market accounted for the
remainder.
The primary components of cost of goods sold in the Company's aftermarket
business include the cost of cores and component parts, labor costs and
overhead. While the availability and cost of cores fluctuate based on supply and
demand, the Company's relationships with dealers and other customers have
historically provided it with sufficient access to cores at favorable prices.
The primary components of cost of goods sold in the Company's OEM business
include material, labor and overhead. The Company is in the process of shifting
OEM production to focus factories, which the Company believes can enhance
operating efficiencies. The Company's domestic OEM labor force is represented
primarily by the UAW. In March 1997, the Company signed a new master agreement
with UAW that stipulated an approximately 3.2% annual wage and benefit
increase (12.8% over the four year term of the agreement) for the Company's UAW
hourly employees. If employment levels and productivity remain unchanged, the
agreement with the UAW would cause the Company to experience increases in wage
and benefit costs of approximately 2% per year over the next four years (which
represents approximately $3.3 million in the first such year). In addition,
grow-in provisions under the new agreement with the UAW will require the Company
to move certain lower wage and benefit employees to higher wage and benefit
levels. Under provisions of the national agreement, the UAW and the Company have
recently developed a special program of incentives for hourly employees who
agree to leave the Company, the cost of which is included in the
restructuring charges for fiscal year 1997 described herein. Based on
responses to this special incentive plan received to date, the Company would, if
no other cost reductions were realized, experience as a result of the grow-in
provision additional wage and benefit costs that increase each year of the UAW
contract to approximately $10.2 million annually in additional costs from
current levels by the fourth year. The Company expects the continued
implementation of the special incentive plan and other planned cost reduction
initiatives to substantially offset the effects of the grow-in provision. If the
responses to date to the special incentive plan were reversed (which the Company
considers unlikely) and the other cost-saving initiatives were not implemented,
the additional costs referred to above to the Company from the grow-in provision
would approximately double. See "Risk Factors--Labor Negotiations."
Since the GM Acquisition, the Company has completed five strategic
acquisitions, substantially increasing the Company's aftermarket operations, and
entered into two international joint ventures. These acquisitions and joint
ventures have broadened the Company's product line, expanded its remanufacturing
capability, extended its participation in international markets and increased
its penetration of the retail automotive parts channel. As a result of these
acquisitions, joint ventures and the Company's focus on increasing its
participation in the aftermarket, the Company's reliance on GM has declined
since the Company's formation. Net sales to customers other than GM increased
from 41.0% in fiscal year 1995 to 56.3% in fiscal year 1997.
The portion of the Company's net sales derived from the aftermarket have
increased significantly over the past two years, from approximately 19.2% in
fiscal year 1995 to 45.2% in fiscal year 1997. For fiscal year 1997, GM
accounted for approximately 43.7%
38
<PAGE>
of the Company's total net sales, of which 31.8% were to GM's OEM businesses and
11.9% were to GM SPO. Substantially all of the Company's fiscal year 1997
automotive OEM sales were to GM.
In connection with the GM Acquisition, GM entered into long-term contracts
(the "Supply Agreements") pursuant to which it has agreed to purchase from the
Company 100% of its North American requirements for automotive starters (other
than for Saturn and Geo) and 100% of its U.S. and Canadian requirements for
heavy duty starters and alternators, in each case with respect to the Company's
existing product line. In addition, GM has been designated as an exclusive
distributor of a significant amount of the Company's automotive and heavy duty
aftermarket products and has agreed to provide the Company with purchasing
support, which enables it to obtain raw materials at competitive prices. GM's
obligations to purchase the Company's automotive starters and heavy duty
starters and alternators under the Supply Agreements are subject to such
products remaining competitive as to price, technology and design. However, GM
may not terminate the Supply Agreement for the Company's prices of automotive
products for failing to be so competitive prior to July 31, 2001. The Supply
Agreements will terminate (i) with respect to automotive products, on July 31,
2004 (except that GM's obligations with respect to automotive products
introduced in 1996 and 1997 will terminate on July 31, 2006 and July 31, 2007,
respectively), and (ii) with respect to heavy duty products, July 31, 2000. GM's
obligations to distribute the Company's heavy duty aftermarket products
terminate on July 31, 1998, and GM's obligations to distribute the Company's
automotive aftermarket products terminate on July 31, 2009. See "Business--
Customers." Although the Company expects that its automotive and heavy duty
products will remain competitive throughout the term of the agreements with GM,
there can be no assurance that GM will not develop alternative sources for such
components and purchase some or all of its requirements from these sources prior
to or following the expiration of the agreements. See "Risk Factors--Dependence
on General Motors."
In fiscal year 1997, the Company decided to restructure its OEM manufacturing
operations, incurring a restructuring charge of $34.5 million and establishing a
reserve for that amount. The Company's OEM business has seven principal
manufacturing operations, two in Meridian, Mississippi and five in Anderson,
Indiana. The Company has announced its intention to close its two facilities in
Meridian, Mississippi by the end of the 1998 fiscal year, including one facility
leased from GM at the time of the GM Acquisition. The balance of the Company's
OEM facilities are located in Anderson, Indiana. Two of the Anderson facilities
are leased from GM and the Company plans to vacate these facilities by the end
of 1999. The Company is operating three new focus factories and intends to have
a total of six in operation by the end of 1999. This restructuring is expected
to provide a reduction of over 70% in square footage from the Company's existing
plants to the focus factories due to streamlining of manufacturing processes,
phasing out of certain manufacturing equipment and elimination of excess
unutilized floor space or floor space used by GM in each of the existing
facilities. The restructuring reserve does not include approximately $3 million
in startup costs the Company expects to incur, based on its prior focus factory
startups, in connection with the three additional focus factories. As discussed
below, the transition to focus factories adversely affected the Company's gross
margins in the first quarter of fiscal 1998. See "Risk Factors--Relocation of
Facilities."
The restructuring plan included accelerating the Company's move to focus
factories and closing the Company's operations in three old, vertically-
integrated factories. These decisions resulted in the impairment of certain
production assets with a carrying amount of $30.3 million, which the Company
plans to dispose of. The Company has estimated the loss on disposal including
related costs at $26.3 million. In addition, the Company has estimated a cost of
$8.2 million for reducing its workforce through several transition programs
related to the restructuring of the operations. The results of operations for
the products which will be discontinued are not separately identifiable. The
1997 restructuring reserve is expected to be utilized throughout 1998 and 1999.
In 1998, the Company expects to reduce the 1997 restructuring reserve balance to
approximately $12.1 million through cash payments of $5.8 million and other
charges of $16.6 million. The remaining balance is expected to be completely
utilized in 1999 through cash payments of $4.5 million and other charges of $7.6
million. As planned, no significant charges have been incurred with respect to
the 1997 restructuring reserve through the first quarter of fiscal 1998. The
plan is on schedule and the Company continues to believe that the reserve
adequately provides for anticipated expenses.
See "Risk Factors--Restructuring Charges; Recent Losses."
In fiscal year 1996, the Company decided to eliminate the production of
certain parts and certain straight drive starter motors and offered a voluntary
retirement transition program to certain eligible salaried employees resulting
in the recognition of a restructuring charge of $8.1 million. The Company
purchased new, more efficient equipment for use in the production of certain
heavy duty alternators resulting in the impairment of certain production
equipment with a carrying amount of approximately $5.2 million, which the
Company plans to dispose of at an estimated loss of $4.4 million, including
disposal costs. The retirement transition program, which was charged to
operations for $3.7 million in 1996, was offered in conjunction with a similar
plan offered by GM which allowed employees special additional benefits not
typically provided upon retirement. These additional benefits included salaried
payments for six months and future supplemental payments under the salaried
retirement plan. Cost savings have been identified and
39
<PAGE>
realized in the decisions to eliminate specific parts and motors and implement
the voluntary retirement transition program. The results of operations for the
parts and straight drive starter motors for which production will be
discontinued are not separately identifiable.
In fiscal year 1996, cash payments of $1.7 million and other charges of $0.9
million reduced the outstanding balance of the restructuring reserves to $5.5
million as of July 31, 1996. In 1997, cash payments of $0.8 million and other
charges of $1.8 million further reduce the outstanding balance to $2.9 million
as of July 31, 1997. This remaining balance is expected to be completely
utilized during 1998.
The following table sets forth certain statement of operations data expressed
as a percentage of sales:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTHS ENDED
ENDED JULY 31, OCTOBER 31,
----------------------------- ------------------
1995 1996 1997 1996 1997
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................................................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold.................................................... 82.9 80.1 78.3 77.4 81.8
----- ----- ----- ----- -----
Gross profit.......................................................... 17.1 19.9 21.7 22.6 18.2
Selling, engineering and administrative expenses...................... 10.7 12.2 12.9 13.7 10.0
Restructuring charges................................................. -- 1.3 5.0 -- --
----- ----- ----- ----- -----
Operating income...................................................... 6.4 6.4 3.8 8.9 8.2
Other income (expenses):
Gain on sale of building............................................. -- -- 0.3 -- --
Interest expense..................................................... (3.2) (4.3) (5.7) (5.6) (5.0)
----- ----- ----- ----- -----
Income (loss) from continuing operations before income taxes
(benefit), preferred divided requirement of subsidiary and
minority interest.................................................. 3.2 2.1 (1.6) 3.3 3.2
Minority interest in income of subsidiaries........................... -- 0.1 0.1 0.1 0.2
Income taxes (benefit)................................................ 1.4 0.9 (0.4) 1.3 1.3
Preferred dividend requirement of subsidiary.......................... 0.2 0.2 0.2 0.2 0.2
----- ----- ----- ----- -----
Income (loss) from continuing operations.............................. 1.6 0.9 (1.5) 1.7 1.5
Discontinued operations:
Loss from operations of discontinued businesses, net of income
taxes of $1,582, $1,042 and $395, respectively...................... 0.4 0.3 0.1 0.1 --
Loss on disposal of businesses, net income taxes of $6,043 and
$426, respectively.................................................. -- 1.4 0.1 -- --
Extraordinary item:
Write-off of debt issuance costs, net of income taxes of $1,147...... -- -- 0.3 1.4 --
----- ----- ----- ----- -----
Net income (loss)..................................................... 1.2 % (0.8)% (2.0)% 0.2 % 1.5 %
===== ===== ===== ===== =====
</TABLE>
Three Months Ended October 31, 1997 Compared to Three Months Ended October 31,
1996
Net Sales. Net sales were $209.0 million for the three months ended October
31, 1997, an increase of $39.3 million, or 23.1%, over the three months ended
October 31, 1996. The increase resulted primarily from the inclusion of $17.6
million of the net sales of World Wide and a $15.2 million increase in OEM sales
volume due to higher production levels at the Company's automotive and heavy
duty OEM customers.
Gross Profit. Gross profit was $38.1 million for the three months ended
October 31, 1997, a decrease of $.3 million compared to the three months ended
October 31, 1996. As a percentage of net sales, gross profit was 18.2% for the
three months ended October 31, 1997 compared to 22.6% for the three months ended
October 31, 1996. This 4.4% decrease as a percentage of net sales was primarily
attributable to a change in the mix of aftermarket sales volume from higher
margin heavy duty to lower margin light duty product lines (2.0%). In addition,
other differences include a change in allocation of certain expenses in the
aftermarket businesses from SE&A to overhead (.9%), transition inefficiencies
and costs associated with focus factory relocations (.6%), the inclusion of
World Wide in 1997, which has lower gross margins than the Company's other
businesses (.3%), and the impact of the startup costs associated with a new
engine remanufacturing program at Power Investments (.3%).
Selling, Engineering and Administrative Expenses. Selling, engineering and
administrative ("SE&A") expenses were $20.9
40
<PAGE>
million for the three months ended October 31, 1997, a decrease of $2.4 million,
or 10.3%, from the three months ended October 31, 1996. As a percentage of net
sales, SE&A expenses decreased to 10.0% for the three months ended October 31,
1997 from 13.7% for the three months ended October 31, 1996. The 3.7% decrease
as a percent of net sales in SE&A expenses resulted primarily from lower
information systems and consulting expenses related to the completion of certain
projects during fiscal year 1997 (1.5%), a change in allocation of certain
expenses in the aftermarket business from SE&A to overhead (.9%), the inclusion
of World Wide in 1997, which has lower SE&A expenses as a percent of net sales
(.6%), and the impact of the higher sales volume in the OEM businesses without a
commensurate increase in SE&A expenses (.6%).
Operating Income. Operating income was $17.2 million for the three months
ended October 31, 1997, an increase of $2.1 million, or 14.3%, over the three
months ended October 31, 1996. As a percent of net sales, operating income
decreased to 8.2% for the three months ended October 31, 1997 from 8.9% for the
three months ended October 31, 1996. This decrease was attributable to the
decrease in gross profit, and was partially offset by the decrease in SE&A
expenses as discussed above.
Interest Expense. Interest expense was $10.5 million for the three months
ended October 31, 1997, an increase of $1.1 million, or 12.0%, over the three
months ended October 31, 1996. The increased interest expense resulted from
additional debt incurred to finance acquisitions.
Income Taxes. Income tax expense was $2.7 million for the three months ended
October 31, 1997, an increase of $.4 million, or 15.9%, from the three months
ended October 31, 1996. The Company's effective tax rate was 40.0% for the
three months ended October 31, 1997 compared to 40.3% for the three months ended
October 31, 1996. The decrease in the effective tax rate is primarily related
to the implementation of certain international tax planning strategies.
Loss from Discontinued Operations. The after-tax loss from discontinued
operations of $.2 million for the three months ended October 31, 1996 reflects
the results of the Company's discontinued large bore diesel remanufacturing
operations and marine operations. These operations were not part of the
Company's core strategic focus. A reserve for the disposal of these operations
of $1.3 million was established at July 31, 1997. Operating losses during the
three months ended October 31, 1997 were charged against this reserve.
Write Off of Debt Issuance Cost. In August 1996, certain debt was retired out
of the proceeds from the issuance of the Senior Subordinated Notes. Unamortized
issuance costs, net of income taxes, of $2.4 million relating to the retired
debt was written off in the three months ended October 31, 1996.
Net Income. Due to the factors noted above, net income was $3.1 million for
the three months ended October 31, 1997 an increase of $2.8 million from the
three months ended October 31, 1996. As a percentage of net sales, net income
increased to 1.5% for the three months ended October 31, 1997, from .2% for the
three months ended October 31, 1996.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Net Sales. Net sales were $689.8 million for 1997, an increase of $52.9
million, or 8.3%, over the prior year. The increase resulted from the inclusion
of the net sales of World Wide from its acquisition date and Power Investments
for the entire 1997 fiscal year. These sales increases were partially offset by
the absence in 1997 of orders for the initial stocking of stores that occurred
when the Company added a new retail customer and one of its existing retail
customers acquired a significant number of retail stores.
Gross Profit. Gross profit was $149.6 million for 1997, an increase of $22.8
million, or 18.0%, over the prior year. As a percentage of net sales, gross
profit increased to 21.7% for the year ended July 31, 1997 from 19.9% for the
prior year. This 1.8% increase as a percentage of net sales was primarily
attributable to the higher gross profit margins resulting from improved
productivity and cost reductions in the Company's OEM operations (1.0%) and the
Power Investments Acquisition and the World Wide Acquisition (together, 8%).
These profitability improvements and cost reductions represent the benefits from
the restructuring actions begun in 1996 and were partially offset by start-up
costs for the focus factories. The Company also launched a family of new gear
reduction starters that initially are generating lower margins than those of the
mature straight drive starters. The continued replacement of the straight drive
starter with the new gear reduction starter is expected to have a less adverse
effect on gross profit margin in 1998.
Selling, Engineering and Administrative Expenses. SE&A expenses were $89.1
million for 1997, an increase of $11.1 million, or 14.2%, over the prior year.
As a percentage of net sales, SE&A expenses increased to 12.9% for 1997 from
12.2% during the prior
41
<PAGE>
year. The .7% increase as a percent of net sales in SE&A expense as a percent of
net sales resulted primarily from higher SE&A expense as a percent of net sales
for costs for information systems (.4%), the acquired companies (.2%), start-up
costs for the focus factories (.2%).
Operating Income. Operating income was $26.0 million for 1997, a decrease of
$14.7 million, or 36.2%, from the prior year. As a percent of net sales,
operating income decreased to 3.8% for the year ended July 31, 1997 from 6.4%
for the prior year. This decrease was attributable to the inclusion of $34.5
million of restructuring charges, as compared to restructuring charges of $8.1
million in 1996, as discussed above. Excluding the restructuring charges,
operating income was 8.8% of sales in 1997 and 7.7% in 1996.
Interest Expense. Interest expense was $38.8 million for 1997, an increase of
$11.4 million, or 41.7%, over the prior year. Approximately $5.3 million of
the increased interest expense was due to additional debt incurred to finance
acquisitions and approximately $6.1 million was due to increased borrowings to
fund working capital requirements.
Income Taxes. The Company had an income tax benefit of $3.0 million in 1997 as
compared to income tax expense of $5.7 million for 1996. The tax benefit was
28.1% of the loss from continuing operations before tax in 1997, and the income
tax expense was 43.1% of income from continuing operations before tax for the
prior year. Due to continuing tax planning initiatives, the Company expects its
effective tax rate to be approximately 38% in future years.
Loss From Discontinued Operations. The after-tax loss from discontinued
operations of $1.7 million for 1997 relates to the Company's plan to divest its
large bore diesel remanufacturing operations and its marine operations. These
operations were not part of the Company's core strategic focus. The loss
reflects the direct costs of production and identifiable SE&A expense expected
to be incurred by these businesses from the date the Company decided to dispose
of them until the expected disposal date, and a loss on disposal of assets and
an allocation of interest expense based on capital employed by the business.
Net Income (Loss). Due to the factors noted above, the net loss was $14.3
million for 1997, compared to a loss of $4.8 million in the prior year.
Excluding restructuring charges and loss on discontinued operations, the
Company's net income for 1997 was $10.5 million and $10.7 million for 1996.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Net Sales. Net sales were $636.9 million for 1996, an increase of $63.4
million, or 11.1%, over the prior year. The increase resulted from the inclusion
of the net sales of the 1995 Acquisitions for the entire 1996 fiscal year and
the net sales of the Power Investments Acquisition for the last six months of
the 1996 fiscal year. Sales increases from these newly-acquired subsidiaries
were partially offset by decreased sales to GM as a result of certain work
actions at GM, GM's high inventory levels at the beginning of 1996, and an
industry-wide softening of OEM heavy duty truck production.
Gross Profit. Gross profit was $126.8 million for 1996, an increase of $28.6
million, or 29.1%, over the prior year. As a percentage of net sales, gross
profit increased to 19.9% for the year ended July 31, 1996 from 17.1% for the
prior year. This 2.8% increase as a percentage of net sales was attributable
primarily to improved productivity and cost reductions in the OEM operations
(2.1%), as well as the higher gross profit margins of the businesses acquired
(.7%). These benefits were partially offset by decreased sales to GM which
negatively affected gross profit margins at certain of the Company's OEM
operations.
Selling, Engineering and Administrative Expenses. SE&A expenses were $78.0
million for 1996, an increase of $16.8 million, or 27.4%, over the prior year.
As a percentage of net sales, SE&A expenses increased to 12.2% for 1996 from
10.7% during the prior year. The increase in SE&A expenses as a percent of net
sales reflects the relatively higher SE&A expenses the acquired businesses
incurred in order to service the aftermarket.
Operating Income. Operating income was $40.7 million for 1996, an increase of
$3.7 million, or 9.9%, over the prior year. As a percentage of net sales,
operating income decreased slightly to 6.4% for the year ended July 31, 1996
from 6.5% for the prior year. This decrease was attributable to the inclusion of
restructuring charges of $8.1 million, as discussed above. Excluding the
restructuring charges, operating income was 7.7% of sales in 1996.
Interest Expense. Interest expense was $27.4 million for 1996, an increase of
$8.9 million, or 48.5% over the prior year. The increase was due primarily to
$5.5 million of interest on additional debt incurred to finance acquisitions and
$3.4 million of interest on increased borrowings to fund working capital
requirements.
Income Taxes. Income taxes were $5.7 million for 1996, a decrease of $2.1
million from the prior year. The Company's effective tax rate was 43.1% for 1996
and 42.3% for the prior year. The increase in the effective tax rate was due, in
part, to the inclusion of Power Investments and higher tax rates in foreign
operations.
42
<PAGE>
Loss From Discontinued Operations. the after-tax loss from discontinued
operations of $10.6 million for 1996 relates principally to the Company's Powder
Metal Forge ("PMF") business. PMF manufactures products that are not part of the
Company's core business. This loss reflects the direct costs of production and
identifiable SE&A expense incurred by the PMF business, and estimated losses
from operations during a transition period from the date the Company decided to
dispose of PMF until production is relocated to the seller's facility, as well
as a loss on disposal of assets and an allocation of interest expense based on
capital employed by the business.
Net Income (Loss). Net loss was $4.8 million for 1996, an earnings decrease of
$11.8 million from the prior year. The decrease in net income was attributable
to the restructuring charges and the loss on discontinued operations discussed
above. Excluding loss from discounted operations and restructuring charges, net
income was $10.7 million in 1996.
QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth, for the periods shown, certain statements of
operations data for the Company:
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
-----------------------------------------------------------
OCT. 31 JAN. 31 APRIL 30 JULY 31
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net sales.............................................. $ 156.7 $ 147.8 $ 165.3 $ 167.1
Gross profit........................................... 31.1 28.3 34.3 33.2
SE&A................................................... 17.8 17.5 21.8 20.9
Restructuring charges.................................. --- 8.1 --- ---
Operating income (loss)................................ 13.3 2.7 12.5 12.3
Income (loss) from continuing operations............... 3.9 (2.0) 2.2 1.7
Net income (loss)...................................... 3.0 (11.4) 2.0 1.6
Income (loss) from continuing operations (per share)... $ .22 $ (.11) $ .12 $ .10
Net income (loss) per share............................ .16 (.64) .11 .09
EBITDA................................................. $ 17.6 $ 7.5 $ 17.2 $ 17.9
Adjusted EBITDA........................................ 18.3 16.4 18.3 19.1
Cash flows from operating activities................... 15.2 (17.5) (13.1) 14.7
Cash flows from investing activities................... (6.7) (6.3) (53.6) (12.5)
Cash flows from financing activities................... (7.7) 22.2 66.6 (0.3)
Ratio of earnings to fixed charges..................... 2.1x -- (a) 1.5x 1.4x
<CAPTION>
FISCAL 1998
QUARTER
FISCAL 1997 QUARTER ENDED ENDED
--------------------------------------------------------- ----------------
OCT.31 JAN. 31 APRIL 30 JULY 31 OCT. 31
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ 169.8 $ 162.2 $ 177.7 $ 180.1 $ 209.0
Gross profit........................................... 38.4 31.6 38.1 41.5 38.1
SE&A................................................... 23.3 19.7 22.7 23.3 20.9
Restructuring charges.................................. --- --- --- 34.5 ---
Operating income (loss)................................ 15.1 11.8 15.4 (16.3) 17.2
Income (loss) from continuing operations............... 2.8 0.9 2.5 (16.5) 3.1
Net income (loss)...................................... 0.3 0.8 2.3 (17.7) 3.1
Income (loss) from continuing operations (per share)... $ .16 $ .05 $ .14 $ (.95) $ .18
Net income (loss) per share............................ .02 .04 .13 (1.02) .18
EBITDA................................................. $ 20.4 $ 17.5 $ 20.9 $ (8.4) $ 21.9
Adjusted EBITDA........................................ 21.5 18.6 22.0 25.2 23.0
Cash flows from operating activities................... (6.5) 5.0 1.4 22.6 11.4
Cash flows from investing activities................... (10.2) (13.8) 0.3 (50.4) (7.4)
Cash flows from financing activities................... 22.9 2.4 (1.3) 33.8 (5.1)
Ratio of earnings to fixed charges..................... 1.5x 1.2x 1.4x --- (a) 1.5x
</TABLE>
(a) The deficiency of earnings to fixed charges with $3.9 million and $24.8
million for the quarters ended January 31, 1996 and July 31, 1997,
respectively. Excluding restructuring charges, the ratio of earnings to
fixed charges would have been 1.6x and 1.9x, respectively.
The following table sets forth, for the periods shown, certain statement of
operations data for the Company, expressed as a percent of sales:
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
--------------------------------------------------------
OCT. 31 JAN. 31 APRIL 30 JULY 31
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0% 100.0%
Gross profit........................................... 19.8% 19.1% 20.7% 19.8%
SE&A................................................... 11.4% 11.8% 13.2% 12.5%
Restructuring charges.................................. 0.0% 5.5% 0.0% 0.0%
Operating income (loss)................................ 8.5% 1.8% 7.5% 7.3%
Income (loss) from continuing operations............... 2.5% (1.4)% 1.3% 1.0%
Net income (loss)...................................... 1.9% (7.7)% 1.2% 1.0%
EBITDA................................................. 11.2% 5.1% 10.4% 10.7%
Adjusted EBITDA........................................ 11.7% 11.1% 11.1% 11.4%
<CAPTION>
FISCAL 1998
QUARTER
FISCAL 1997 QUARTER ENDED ENDED
------------------------------------------------- -------------
OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT.31
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........................................... 22.6% 19.5% 21.4% 23.1% 18.2%
SE&A................................................... 13.7% 12.2% 12.8% 12.9% 10.0%
Restructuring charges.................................. 0.0% 0.0% 0.0% 19.2% 0.0%
Operating income (loss)................................ 8.9% 7.3% 8.7% (9.1)% 8.2%
Income (loss) from continuing operations............... 1.6% 0.6% 1.4% (9.2)% 1.5%
Net income (loss)...................................... 0.2% 0.5% 1.3% (9.8)% 1.5%
EBITDA................................................. 12.0% 10.8% 11.8% (4.7)% 10.5%
Adjusted EBITDA........................................ 12.7% 11.5% 12.4% 14.0% 11.0%
</TABLE>
The Company's business is moderately seasonal, as its major OEM customers
historically have one- to two- week summer shutdowns of operations during July.
In addition, the Company typically has shut down its own operations for one week
each July, depending on backlog, scheduled maintenance and inventory buffers, as
well as an additional week during the December holidays. Consequently, the
Company's second and fourth quarter results reflect the effects of these
shutdowns. The Company's gross profit as a percentage of sales fluctuates with
changes in sales volume, due to the fixed nature of certain expenses. Gross
profit is also impacted by fluctuations in the sales and product mix between the
Company's different business units. The Company's sales and product mix have
fluctuated, and are expected to continue to fluctuate, quarter to quarter.
43
<PAGE>
Liquidity and Capital Resources
The Company's liquidity needs include required debt service, working capital
needs and the funding of capital expenditures. The Company does not currently
have any significant maturities of long-term debt prior to 2006 other than the
Senior Credit Facility, any potential payments under the GM Contingent Note and
the 8% Subordinated Debenture. See "Description of Indebtedness." The Company
anticipates temporary additional working capital requirements for increased
inventories at its existing facilities in connection with the relocation to
focus factories.
The Company estimates that net proceeds from the Offerings will be
approximately $183.5 million, net of fees and related costs and assuming no
exercise of the over-allotment option in the Equity Offering. The net proceeds
will be used to repay (i) the World Note with a principal amount of $75.0
million, a portion of which will be repaid at a price equal to 103% of the
principal amount, (ii) the GM Acquisition Note of $59.2 million, (iii) the Power
Investments Seller Notes and the A&B Seller Notes of in an aggregate of $11.8
million, (iv) the Ballantrae Senior Bank Debt of $20.4 million and (v) the
Ballantrae Subordinated Debt of $9.3 million. Any accrued and unpaid interest on
such indebtedness will also be repaid with the proceeds of the Offerings. The
remaining proceeds of the Offerings (estimated to be approximately $2.2 million)
will be used for general corporate purposes. See "Use of Proceeds."
In connection with the Offerings, the Company will amend and restate its
Senior Credit Facility to provide up to $180 million of revolving credit
availability. Each of the Company's domestic operating subsidiaries will be
parties to the Senior Credit Facility. The obligations under the Senior Credit
Facility of each domestic operating subsidiary will be unconditionally
guaranteed by each other domestic operating subsidiary and each of the Company
and its domestic subsidiaries which are holding companies.
Initially, the amount available to the Company for borrowing under the Senior
Credit Facility (the "Commitment Amount") will be $180 million, all of which
will be available for general corporate purposes including acquisitions (with a
sub-limit for letters of credit equal to the lesser of the Commitment Amount at
the time of issuance of a letter of credit and $30 million). Beginning March
31, 2001, the Commitment Amount will decrease by $11.25 million at the end of
each quarter thereafter through the quarter ending December 31, 2004, at which
time the Senior Credit Facility terminates. As of October 31, 1997, after
giving pro forma effect to the Transactions, approximately $30.0 million in
borrowings would have been outstanding under the Senior Credit Facility,
together with approximately $3.9 million in outstanding stand-by letters of
credit thereunder.
Cash interest expense for 1995, 1996 and 1997 was $10.3 million, $19.5 million
and $30.8 million, respectively. The portion of total interest represented by
non-cash interest for the three years was $8.1 million, $7.9 million and $7.9
million for 1995, 1996 and 1997 respectively. Cash interest expense for the
three months ended October 31, 1996 and 1997 was $7.5 million and $8.8 million,
respectively. The portion of total interest represented by non-cash interest for
the three months ended October 31, 1996 and 1997 was $1.9 million and $1.7
million, respectively. Interest payments under the Company's indebtedness will
continue to result in significant liquidity requirements for the Company.
Following the Offerings, all of the Company's interest payments must be made in
cash.
The Company's capital expenditures were $31.9 million in 1997 and are expected
to be $22.5 million in 1998. Capital expenditures were $5.7 million for the
three months ended October 31, 1997, compared to $8.9 million for the three
months ended October 31, 1996. Planned capital expenditures consist primarily of
new capacity to accommodate the introduction of several new products, including
additional gear reduction starters for automotive applications and alternators
with enhanced features for the medium and heavy duty truck market, as well as
production equipment for the Company's new focus factories. Cost reduction
programs account for a significant portion of planned capital expenditures and
include upgrades in machinery technology, new quality standards and
environmental compliance. The Company's ability to make capital expenditures is
subject to certain restrictions under the Senior Credit Facility.
The Company expects that the purchase price and related costs and expenses of
its pending acquisition of 37% of the outstanding shares of SPRL, a manufacturer
of starters, alternators and related components based in Hyderabad, India, to
equal approximately $4.5 million during fiscal 1998. The Company granted
put/call options in connection with the acquisitions of Power Investments and
World Wide that become exercisable in March 2001 for Power Investments and
November 2000 for World Wide. The exercise prices of the put/call options are
based on an earnings formula and cannot now be estimated. See "Company
History."
44
<PAGE>
The Company's principal sources of cash to fund its liquidity needs will be
net cash from operating activities and borrowings under the Senior Credit
Facility. The Company's cash position increased to $10.0 million at year end
1997 compared to $3.4 million at year end 1996. Cash provided by operating
activities was $22.5 million in 1997 as compared to cash used in operating
activities of $684,000 in 1996. Non-cash items in 1997, including $22.3
million of depreciation and amortization and the $31.8 million restructuring
reserve, more than offset the Company's net loss and increased working capital
requirements. From July 31, 1996 to July 31, 1997, the Company's inventory
increased by $40.8 million. The increase in inventory was attributable primarily
to the Company's expanding aftermarket business, including inventory associated
with the World Wide acquisition as well as higher levels of finished goods
inventory required to service aftermarket customers. Cash used in investing
activities of $74.1 million in 1997 was composed of $42.4 million for the
acquisition of World Wide and $31.9 million of capital expenditures. Cash
provided by financing activities in 1997 was $57.8 million, as debt issuances
exceeded debt repayments. The components of net cash from operating activities
are detailed in the Consolidated Financial Statements and related notes.
The Company's cash position decreased to $8.6 million at October 31, 1997
compared to $11.1 million at October 31, 1996. Cash provided by operations for
the three months ended October 31, 1997 was $11.4 million compared to cash used
in operating activities of $6.5 million for the three months ended October 31,
1996. For the three months ended October 31, 1997 cash was provided by a
working capital decrease of $.2 million, as well as net income of $3.1 million,
non-cash expenses of $4.6 million, and depreciation and amortization of $4.7
million. For the three months ended October 31, 1996, net income of $.3 million,
non-cash expenses of $7.1 million and depreciation and amortization of $5.3
million were offset by a working capital increase of $12.4 million and deferred
financing cost of $6.7 million. Cash used in investing activities was $7.4
million for the three months ended October 31, 1997 compared to $10.2 million
for the three months ended October 31, 1996. The decrease in cash used for
financing activities was primarily due to reductions in property, plant, and
equipment expenditures. Financing activities used $5.1 million during the three
months ended October 31, 1997 and provided $22.9 million during the three months
ended October 31, 1996. Financing activities for the three months ended October
31, 1997 consisted primarily of repayment of borrowings under the Senior Credit
Facility and for the three months ended October 31, 1996 included the net impact
of the issuance of the Senior Subordinated Notes and the use of the proceeds
therefrom.
Under the terms of the GM Acquisition, GM retained the liability for post-
retirement benefits earned by the Company's employees while employed by GM. In
addition, GM retained the liability for post-retirement benefits for all of the
Company's employees that return to GM pursuant to contractual arrangements at
the time of the GM Acquisition. Since relatively senior employees have returned
to GM and have been replaced by the Company with employees who have later
retirement dates, the Company's actual cash expenditures for post-retirement
benefits will be significantly less than the amount recorded as an expense over
the next ten years. The excess of the amount accrued over the cash paid for
post-retirement benefits during 1995, 1996 and 1997 was $4.4 million, $3.8
million and $4.5 million, respectively.
The Company believes that cash generated from operations, together with the
amounts available under the Senior Credit Facility, will be adequate to meet its
debt service requirements, capital expenditures and working capital needs for at
least the next twelve months, although no assurance can be given in this regard.
The Company's future operating performance and ability to extend or refinance
its indebtedness will be dependent on future economic conditions and financial,
business and other factors that are beyond the Company's control.
EFFECTS OF INFLATION
The Company believes that the relatively moderate inflation over the last few
years has not had a significant impact on the Company's revenues or
profitability and that it has been able to offset the effects of inflation by
increasing prices or by realizing improvements in operating efficiency. The
Company has provisions in many of its contracts which provide for the pass
through of fluctuations in the price of certain raw materials, such as copper
and aluminum.
FOREIGN SALES
Approximately 15.9%, 12.4% and 21.1% of the Company's 1995, 1996 and 1997 net
sales, respectively, were derived from sales made to customers in foreign
countries. Because of these foreign sales, the Company's business
45
<PAGE>
is subject to the risks of doing business abroad, including currency exchange
rate fluctuations, limits on repatriation of funds, compliance with foreign laws
and other economic and political uncertainties. see "Risk Factors--Foreign
Markets."
ACCOUNTING PRONOUNCEMENTS
For a discussion of pending accounting pronouncements that may affect the
Company, see Note 2 to the Consolidated Financial Statements included elsewhere
in this Prospectus.
46
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Existing Notes were sold by the Company to the Initial Purchasers on July
26, 1996 (the "Issue Date"). The Initial Purchasers subsequently sold the
Existing Notes to qualified institutional buyers in reliance on Rule 144A under
the Securities Act and to a limited number of institutional "accredited
investors" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act. Because the Existing Notes are subject to certain transfer restrictions, as
an inducement to the Initial Purchasers the Company, the Subsidiary Guarantors
and the Initial Purchasers entered into a registration agreement dated July 26,
1996 (the "Registration Agreement"), pursuant to which the Company agreed (i) to
prepare and file with the Commission the Registration Statement of which this
Prospectus is a part not later than October 31, 1997 and (ii) to cause the
Registration Statement to become effective under the Securities Act not later
than December 31, 1997. The Registration Statement is intended to satisfy in
part the Company's obligations with respect to the Existing Notes under the
Registration Agreement.
Based on certain interpretive letters issued by the staff of the Commission to
third parties in unrelated transactions, management believes that the Exchange
Notes will be freely transferable by holders other than affiliates of the
Company after the Exchange Offer without further registration under the
Securities Act if the holder of the Exchange Notes represents that it is
acquiring the Exchange Notes in the ordinary course of its business, that it has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that it is not an affiliate of the
Company, as such terms are interpreted by the Commission; provided, however,
that broker-dealers ("Participating Broker-Dealers") receiving Exchange Notes in
the Exchange Offer will have a prospectus delivery requirement with respect to
resales of such Exchange Notes. In interpretive letters issued to third parties
in unrelated transactions, the Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to exchange notes (other than a resale of an unsold allotment from
the original sale of existing notes) with the prospectus contained in the
registration statement pursuant to which such exchange notes were registered.
Based on those interpretive letters, the Company is of the view that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes with this Prospectus, although the Commission
has expressed no opinion in this regard. Under the Registration Agreement, the
Company is required to allow Participating Broker-Dealers and other persons, if
any, with similar prospectus delivery requirements to use this Prospectus in
connection with the resale of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Existing Notes,
where such Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a Prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus and
in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Existing Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on January 29, 1998; provided, however, that if the Company has
extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer is
extended.
As of the date of this Prospectus, $140.0 million aggregate principal amount
of the Existing Notes are outstanding. This Prospectus, together with the Letter
of Transmittal, is first being sent on or about December 29, 1997 to all holders
of Existing Notes known to the Company. The Company's obligation to accept
Existing Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Certain Conditions to the Exchange Offer"
below.
The Company expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for any exchange of any Existing Notes, by giving notice of
such extension to the holders thereof. During any such extension, all Existing
Notes previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Existing Notes not accepted for
exchange for any reason will be returned without expense to the tendering holder
thereof as promptly as practicable after the expiration or termination of the
Exchange Offer.
47
<PAGE>
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Existing Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "--Certain Conditions to the Exchange
Offer." The Company will give notice of any extension, amendment, non-acceptance
or termination to the holders of the Existing Notes as promptly as practicable,
such notice in the case of any extension to be issued no later than 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
Holders of Existing Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law in connection with the Exchange
Offer.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to the Company of Existing Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Existing Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to National City Bank at one
of the addresses set forth below under "Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Existing Notes
must be received by the Exchange Agent along with the Letter of Transmittal, or
(ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Existing Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility" or the "Depositary") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or the holder must comply with the guaranteed delivery
procedure described below. THE METHOD OF DELIVERY OF EXISTING NOTES, LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE Company.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Existing Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Existing Notes
who has not completed the box entitled "Special Issuance Instruction" or
"Special Delivery Instruction" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
maybe, are required to be guaranteed, such guarantees must be by a firm which is
a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust Company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Existing Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Existing
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory form
as determined by the Company in its sole discretion, duly executed by, the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Existing Notes not properly tendered or to not accept
any particular Existing Notes which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange Offer
as to any particular Existing Notes either before or after the Expiration
Date(including the right to waive the ineligibility of any holder who seeks to
tender Existing Notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Existing Notes either
before or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
Existing Notes for exchange must be cured within such reasonable period of time
as the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give
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notification of any defect or irregularity with respect to any tender of
Existing Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal or any Existing Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder of Existing Notes will represent to the Company in
writing that, among other things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
holder and any beneficial holder, that neither the holder nor any such
beneficial holder has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and that neither the
holder nor any such other person is an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company. If the holder is not a broker-dealer, the
holder must represent that it is not engaged in nor does it intend to engage in
a distribution of the Exchange Notes. If the holder is a broker-dealer, the
holder must represent that it will receive Exchange Notes for its own account in
exchange for Existing Notes that were acquired as a result of market-making
activities or other trading activities. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (an "Exchanging Dealer"), must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
For each Existing Note accepted for exchange, the holder of such Existing Note
will receive an Exchange Note having a principal amount equal to that of the
surrendered Existing Note. For purposes of the Exchange Offer, the Company shall
be deemed to have accepted properly tendered Existing Notes for exchange when,
as and if the Company has given oral and written notice thereof to the Exchange
Agent.
In all cases, issuance of Exchange Notes for Existing Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Existing Notes or a
timely Book-Entry Confirmation of such Existing Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal and all other required documents. If any tendered
Existing Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Existing Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Existing Notes will be returned without expense to the tendering
holder thereof(or, in the case of Existing Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described below, such non-exchanged
Existing Notes will be credited to an account maintained with such Book-Entry
Transfer Facility) as promptly as practicable after the expiration of the
Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Existing Notes by causing the
Book-Entry Transfer Facility to transfer such Existing Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Existing Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
The Company understands that the Exchange Agent has confirmed with the Book-
Entry Transfer Facility that any financial institution that is a participant in
the Book-Entry Transfer Facility's system may utilize the Book-Entry Transfer
Facility's Automated Tender Offer Program ("ATOP") to tender Existing Notes. The
Company further understands that the Exchange Agent will request, within two
business days after the date the Exchange Offer commences, that the Book-Entry
Transfer Facility establish an account with respect to the Existing Notes for
the purpose of facilitating the Exchange Offer, and any participant may make
book-entry delivery of Existing Notes by causing the Book-Entry Transfer
Facility to transfer such Existing Notes into the Exchange Agent's account in
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accordance with the Book-Entry Transfer Facility's ATOP procedures for transfer.
However, the exchange of the Existing Notes so tendered will only be made after
timely confirmation (a "Book-Entry Confirmation") of such book-entry transfer
and timely receipt by the Exchange Agent of an Agent's Message (as defined in
the next sentence), an appropriate Letter of Transmittal with any required
signature guarantee, and any other documents required. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility and
received by the Exchange Agent and forming part of Book-Entry Confirmation,
which states that the Book-Entry Transfer Facility has received an express
acknowledgment from a participant tendering Existing Notes which are the subject
of such Book-Entry Confirmation and that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Existing Notes desires to tender such Existing
Notes and the Existing Notes are not immediately available, or time will not
permit such holder's Existing Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if (i)
the tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the
Company(by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of Existing Notes and the
amount of Existing Notes tendered, stating that the tender is being made thereby
and guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Existing Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Existing Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time prior to the Expiration
Date. For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Existing Notes to be withdrawn, identify the Existing
Notes to be withdrawn (including the principal amount of such Existing Notes),
and (where certificates for Existing Notes have been transmitted) specify the
name in which such Existing Notes are registered, if different from that of the
withdrawing holder. If certificates for Existing Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Existing Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Existing Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Existing Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Existing Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or in the case of
Existing Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Existing Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Existing Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Existing Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Existing
Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue Exchange Notes in exchange
for, any Existing Notes and may terminate or amend the
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Exchange Offer if at anytime before the acceptance of such Existing Notes for
exchange or the exchange of Exchange Notes for such Existing Notes, the Company
determines that (i) the Exchange Offer does not comply with any applicable law
or any applicable interpretation of the staff of the Commission, (ii) the
Company has not received all applicable governmental approvals or (iii) any
actions or proceedings of any governmental agency or court exist which could
materially impair the Company's ability to consummate the Exchange Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no Exchange Notes will be issued in exchange for any such Existing
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). In any such event the Company is
required to use every reasonable effort to obtain the withdrawal of any stop
order at the earliest possible time.
EXCHANGE AGENT
National City Bank has been appointed as the Exchange Agent for the Exchange
Offer. All executed Letters of Transmittal should be directed to the Exchange
Agent at one of the addresses set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
BY HAND: BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER:
<S> <C> <C>
National City Bank National City Bank National City Bank
4100 West 150th Street 3rd Floor P.O. Box 94720 Cleveland, OH 4100 West 150th Street 3rd Floor North
North Annex - Corporate Trust 44101-4720 Annex - Corporate Trust
Operations Cleveland, OH 44135 Operations Cleveland, OH 44135
BY FACSIMILE:
National City Bank
(216) 476-8508
CONFIRM BY TELEPHONE:
(800) 622-6757
</TABLE>
Delivery other than as set forth above will not constitute a valid delivery.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The expenses to be incurred in connection with the Exchange Offer will be paid
by the Company. Such expenses include fees and expenses of the Exchange Agent
and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying amount as the
Existing Notes, which is the principal amount as reflected in the Company's
accounting records on the date of the exchange and, accordingly, no gain or
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loss will be recognized. The debt issuance costs will be capitalized and
amortized to interest expense over the term of the Exchange Notes.
TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register Exchange Notes in the name of, or request that Existing
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF EXCHANGE NOTES
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of, the Securities Act and applicable state securities laws.
Existing Notes not exchanged pursuant to the Exchange Offer will continue to
accrue interest at 105/8% per annum and will otherwise remain outstanding in
accordance with their terms. Holders of Existing Notes do not have any appraisal
or dissenters' rights under the Delaware General Corporation Law in connection
with the Exchange Offer. In general, the Existing Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Existing Notes under the Securities Act. However, (i) if any
Initial Purchaser so requests with respect to Existing Notes not eligible to be
exchanged for Exchange Notes in the Exchange Offer and held by it following
consummation of the Exchange Offer or (ii) if any holder of Existing Notes(other
than an Exchanging Dealer) is not eligible to participate in the Exchange Offer
or, in the case of any holder of Existing Notes (other than an Exchanging
Dealer) that participates in the Exchange Offer, does not receive Exchange Notes
in exchange for Existing Notes that may be sold without restriction under state
and federal securities laws (other than due solely to the status of such holder
as an affiliate of the Company within the meaning of the Securities Act), the
Company is obligated to file a shelf registration statement on the appropriate
form under the Securities Act relating to the Existing Notes held by such
persons.
Based on certain interpretive letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company is of the view that
Exchange Notes issued pursuant to the Exchange Offer may be offered for resale,
resold or otherwise transferred by holders thereof (other than (i) any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or (ii) any broker-dealer that purchases Notes from the
Company to resell pursuant to Rule 144A or any other available exemption)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
or understanding with any person to participate in the distribution of such
Exchange Notes. If any holder has any arrangement or understanding with respect
to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, such holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. A broker-dealer who holds Existing Notes that were
acquired for its own account as a result of market-making or other trading
activities may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of Exchange
Notes. Each such broker-dealer that receives Exchange Notes for its own account
in exchange for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge in the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution." The Company has not requested the staff of the Commission to
consider the Exchange Offer in the context of a no-action letter, and there can
be no assurance that the staff would take positions similar to those taken in
the interpretive letters referred to above if the Company were to make such a
no-action request.
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Agreement and subject to certain specified
limitations therein, to register or qualify the Exchange Notes
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for offer or sale under the securities or blue sky laws of such jurisdictions in
the United States as any selling holder of the Notes reasonably requests in
writing.
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BUSINESS
GENERAL
The Company designs, manufactures, remanufactures and distributes electrical,
powertrain/drivetrain and related components for automobiles and light trucks,
medium and heavy duty trucks and other heavy duty vehicles. The Company's
products include starters, alternators, engines, transmissions, traction control
systems and fuel systems. The Company serves the aftermarket and the EM market,
principally in North America as well as in Europe, Latin America and Asia-
Pacific. Net sales , EBITDA, adjusted EBITDA and net loss for fiscal year 1997
were $689.8 million , $50.4 million, $87.3 million and $14.3 million,
respectively. Excluding the adjustment for the restructuring charges, net income
for fiscal year 1997 would have been $10.5 million. For the same period, the
aftermarket accounted for approximately 45.2% of the Company's net sales and
62.8% of adjusted EBITDA, with the OEM market accounting for the balance.
The Company believes that it is the largest manufacturer and remanufacturer in
North America of (i) starters for automobiles and light trucks (including sport-
utility vehicles, minivans and pickup trucks) and (ii) starters and alternators
for medium and heavy duty vehicles. The Company's products are principally sold
or distributed to OEMs for both original equipment manufacture and aftermarket
operations, as well as to warehouse distributors and retail automotive parts
chains. Major customers include GM, GM SPO, Navistar, Caterpillar, Freightliner,
PACCAR, Auto Zone, Cummins, Western Auto, Ford, Detroit Diesel, Volvo Trucks,
Mack, Pep Boys, Advance Auto and O'Reilly Automotive.
The Company sells its products principally under the "Delco Remy" brand name
and other major brand names worldwide. In connection with the GM Acquisition,
the Company obtained perpetual rights to the "Delco Remy" brand name, which was
first used in 1918. The Company also received the right to use "Delco Remy" as a
corporate name until 2004 and the "Remy" name in perpetuity. In addition, GM
entered into a long-term contract to purchase from the Company substantially all
of its North American requirements for automotive starters until 2004 and its
U.S. and Canadian requirements for heavy duty starters and alternators until
2000. GM also entered into a distribution agreement to sell the Company's
aftermarket products through the GM SPO distribution system. The term of which
extends until 2009 for automotive products and until 1998 for heavy duty
products. See "Risk Factors--Dependence on General Motors" and
"Business--Customers."
CVC and Harold K. Sperlich, former president of Chrysler Corporation,
together with a subsidiary of MascoTech and certain senior management of the
former GM Division , formed the Company for the purpose of acquiring the assets
of the automotive starter and the heavy duty starter and alternator businesses
of the Former GM Division. Upon consummation of the Offerings and the other
Transactions, CVC, management of the Company and other existing stockholders of
the Company will beneficially own approximately 82.6% of the Company's
outstanding Common Stock (74.3% of the voting power), and will be able to
control the Company and elect its Board of Directors. See "Dilution" and
"Certain Transactions".
The Original Investors in the Company have received a substantial realized and
unrealized return on their investment in the Company. For details regarding
such investment and return, see "Certain Transactions".
Since the GM Acquisition, the Company has completed five strategic
acquisitions, substantially increasing the Company's aftermarket operations, and
entered into two international joint ventures. The Company is also in the
process of completing the strategic acquisition of Ballantrae, which will expand
the Company's drivetrain product position. Through Ballantrae's wholly owned
subsidiary, Tractech , the Company will offer high quality traction control
systems to heavy duty OEMs and the aftermarket. These acquisitions and joint
ventures have broadened the Company's product line, expanded its remanufacturing
capability, extended its participation in international markets and increased
its penetration of the retail automotive parts channel. As a result of these
acquisitions and joint ventures and the Company's focus on increasing its
participation in the aftermarket, the Company's reliance on GM has declined
since the Company's formation. Net sales to customers other than GM increased
from 41.0% in fiscal year 1995 to 56.3% in fiscal year 1997.
The Company's expanding aftermarket business benefits from the non-deferrable
nature of the repairs for which many of the Company's products are used.
Additionally, the Company's aftermarket business benefits from
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the design, manufacturing and technological expertise of the Company's OEM
operations. This OEM expertise provides the Company with advantages over many of
its aftermarket competitors. The Company believes that its participation in both
OEM and aftermarket businesses and its diversified customer base reduce its
exposure to the cyclicality of the automotive industry. The Company's growth
strategy is designed to capitalize on its position as a consolidator in the
large and highly fragmented remanufacturing aftermarket.
GROWTH STRATEGY
The Company plans to continue to increase revenues and profitability of its
aftermarket and OEM businesses through a strategy of internal growth and growth
through acquisitions. Key elements of the Company's growth strategy include:
INCREASING AFTERMARKET PRESENCE
Strengthening Customer Relationships. The Company intends to increase its
sales to new and existing customers by capitalizing on its balanced coverage of
the key channels of aftermarket distribution and its competitive strengths as an
OEM supplier. The Company plans to strengthen its customer relationships by (i)
continuing to expand its product offerings, (ii) capitalizing on the expansion
of the national automotive retail parts chains and warehouse distributors that
are customers of the Company, (iii) meeting the increasing demands of OEMs and
their dealer networks for high quality remanufactured units, which enable them
to reduce warranty and extended service costs, and (iv) growing sales of
existing and new product lines to OEM dealer networks as dealers continue to
capture an increasing percentage of vehicle repairs, due to longer warranty and
service programs and growing vehicle complexity. Additionally, with the recent
acquisition of World Wide, the Company expanded its product line and now offers
a full line of starters and alternators for domestic and import vehicles. The
acquisition also has improved the Company's distribution capabilities, which now
include a nationwide overnight delivery service.
Consolidating the Fragmented Aftermarket. The portion of the aftermarket in
which the Company participates is large and highly fragmented, with most
participants being small, regional companies offering relatively narrow product
lines. Although the Company believes that it is the largest manufacturer and
remanufacturer of aftermarket starters and alternators in North America, its
sales of these products account for less than 12% of this market. Consolidation
of the aftermarket is occurring as many competitors are finding it difficult to
meet the increasing quality, cost and service demands of customers, who, in
turn, are seeking to rationalize their supplier base. With its OEM capabilities,
remanufacturing expertise, full product line, greater access to "cores" and
ability to capitalize on economies of scale, the Company is well positioned to
benefit from the consolidation of the aftermarket.
EXPANDING GLOBALLY
The Company is expanding its international operations in order to (i) benefit
from the trend toward international standardization of automotive and heavy duty
vehicle platforms and (ii) participate in rapidly growing foreign markets. The
Company has recently been awarded new business by GM, Volkswagen, Mercedes Benz,
Ford and Caterpillar in Brazil; Opel in Europe; Daewoo Motors in India (in
connection with the Company's pending strategic alliance in India); and Mercedes
Benz, Volvo Trucks, John Deere and Dina in Mexico. The Company intends to supply
its existing OEM customers on a global basis as they expand their operations and
require local supply of component parts that meet their demands for quality,
technology, delivery and service. The Company believes that its global expansion
will enable it to gain new international OEM customers who will also require
local production of high quality products. In addition, the expansion of the
Company's OEM business into international markets has provided the Company with
the infrastructure necessary to develop an aftermarket presence in these
countries. The Company has established manufacturing operations and strategic
ventures in Hungary, Korea and Mexico, and plans to complete a strategic
alliance in India and a joint venture in Brazil in fiscal year 1998. The
acquisition of Ballantrae will provide the Company with a European manufacturing
plant which has been in operation since 1983. Aided by this facility, Ballantrae
has developed strong relationships with European customers for traction control
systems, especially in the market for construction equipment.
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INTRODUCING TECHNOLOGICALLY ADVANCED NEW PRODUCTS
As a Tier 1 OEM supplier, the Company continues to provide technologically
advanced products by regularly updating and enhancing its product line. Since
the GM Acquisition, the Company has (i) completed the introduction of a new
family of gear reduction starters that will replace all straight drive starters
in GM vehicles by the end of the 1998 model year and (ii) introduced several
longer-life heavy duty alternators. The Company is also developing a small gear
reduction starter specifically designed for application on world car platforms.
These new products underscore the Company's commitment to developing state-of-
the-art products that address the higher output, lower weight and increased
durability requirements of OEM customers.
OPERATING STRATEGY
The Company's operating strategy is designed to improve manufacturing
efficiency, reduce costs and increase productivity while continuing to achieve
the highest levels of product quality. Key elements of this operating strategy
include:
"FOCUS" FACTORIES TO DRIVE MANUFACTURING EXCELLENCE
The Company is shifting its OEM production from old, vertically-integrated
manufacturing plants to new, smaller and more efficient "focus" factories. The
Company's focus factories generally produce one product line in a plant designed
to facilitate lean manufacturing techniques. The Company has successfully
launched three new focus factories since 1996. When the currently planned shift
to focus factories is completed, the Company plans to occupy six focus factories
and expects to have reduced its floor space for OEM production by more than 70%.
The Company believes that the benefits of the focus factories include reduced
overhead costs, enhanced productivity, increased product quality and lower
inventories.
PRODUCTIVITY IMPROVEMENTS
In conjunction with its emphasis on focus factories, the Company continues to
work with its local union representatives to establish best-in-class work
practices, such as reducing the number of job classifications per focus factory
and implementing team-based manufacturing processes. Since the GM Acquisition,
employee productivity has increased by 33%. The Company's labor contract with
the UAW contains provisions that are expected to permit the Company to
continue to achieve productivity improvements in the existing and new focus
factories. The increased productivity achieved since the GM Acquisition is due
primarily to continuous improvement initiatives and the significant number of
employees who have exercised their flowback rights.
PRODUCT QUALITY AND CONTINUOUS IMPROVEMENT
In July 1997, the Company received ONE OF the prestigious Supplier of the Year
awards from GM, an award given to fewer than 1% of all GM suppliers. The
Company's commitment to product quality and continuous improvement is further
evidenced by the QS9000 certification received by nine of its manufacturing and
remanufacturing facilities in 1997. The Company expects that the remainder of
its manufacturing and remanufacturing facilities will receive QS9000
certification by the end of fiscal year 1998. In addition, the Company's
powertrain/drivetrain operations that remanufacture products for Ford have
received the Q-1 rating, Ford's highest quality rating, and the Company is Ford
far in five of the seven Canadian provinces. Global purchasing has further
enhanced the Company's continuous improvement efforts. The Company is utilizing
its international ventures to develop new, lower cost sources of materials and
is consolidating its vendor base to fewer, more competitive suppliers.
ACQUISITION OF BALLANTRAE
Pursuant to the Ballantrae Acquisition Agreement, the Company will acquire all
of the capital stock of Ballantrae in a merger of Ballantrae and a subsidiary of
the Company in which Ballantrae will be the surviving corporation. The aggregate
cost will be $52.8 million (including assumed debt and the estimated working
capital adjustment and fees and expenses of Ballantrae). Ballantrae operates
through two subsidiaries: Tractech, a leading producer of traction control
systems for heavy duty OEMs and the aftermarket; and Kraftube, Inc., a tubing
assembly business which sells products to compressor manufacturers for
commercial air conditioners and
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refrigeration equipment. In fiscal year 1997, Tractech accounted for 70% of
Ballantrae's $37.6 million of net sales. The Company will exchange shares of its
Common Stock with a value (at the initial public offering price in the Equity
Offering) of approximately $22.1 million for the equity of Ballantrae and will
repay approximately $29.7 million of Ballantrae's debt. The Common Stock of the
Company received by Ballantrae's existing stockholders in the merger will be
subject to resale restrictions under applicable securities laws but will benefit
from piggyback registration rights. The merger is expected to be completed at or
prior to the consummation of the Offerings. The Company is obligated to pay the
expenses incurred by Ballantrae in connection with the pending acquisition,
whether or not the acquisition is consummated. Approximately $30 million of the
net proceeds of the Offerings will be used to repay certain indebtedness of
Ballantrae. Any damages which the Company may suffer which result from a breach
of the Ballantrae Acquisition Agreement will be subject to a $10 million cap and
the Company will only be able to recover a portion of its damages from CVC and
James R. Gerrity (and with respect to each of them, only on a pro rata basis).
The Company's acquisition of Ballantrae strengthens the Company's overall market
position by (i) adding traction control systems to the Company's range of
drivetrain products, (ii) increasing sales to existing heavy duty OEM customers
and (iii) expanding the Company's customer base. The acquisition is expected to
be completed at or prior to the consummation of the Offerings. See "Risk
Factors--Acquisition of Ballantrae; Conflicts of Interest," "Company History"
and "Certain Transactions."
INDUSTRY OVERVIEW
In general, the Company's business is influenced by the underlying trends of
the automotive industry. The Company's focus on expanding its remanufacturing
capabilities, however, heightens the importance of the aftermarket.
Aftermarket. The aftermarket consists of the production and sale of both new
and remanufactured parts used in the maintenance and repair of automobiles,
trucks and other vehicles. Remanufacturing is a process through which used
components ("cores") are disassembled into their subcomponents, cleaned,
inspected, tested, combined with new subcomponents and reassembled into finished
products. A remanufactured product can be produced at lower cost than a
comparable individually repaired unit due to effective salvage technology
methods, high volume precision manufacturing techniques and rigorous inspection
and testing procedures. The ability to procure cores is critical to the
remanufacturing process. See "BusinessManufacturing and Facilities."
Aftermarket parts are supplied principally through three distribution
channels: (i) car and truck dealers that obtain parts either through an OEM
parts organization (e.g., GM SPO, Ford Parts & Service, Chrysler Mopar,
Navistar, etc.) or directly from an OEM-authorized remanufacturer; (ii) retail
automotive parts chains and mass merchandisers; and (iii) wholesale distributors
and jobbers who supply independent service stations, specialty and general
repair shops, farm equipment dealers, car dealers and small retailers.
The Company believes that the aftermarket has been and will continue to be
impacted by the following trends: (i) the increasing number and average age of
vehicles in use and the number of miles driven annually; (ii) the increasing
demands of customers that their aftermarket suppliers meet high quality
standards; (iii) the increasing use of remanufactured parts for OEM warranty and
extended service programs; (iv) the growth and consolidation of large retail
automotive parts chains; and (v) particularly with respect to many of the
Company's products, the increasing engine output and durability demands related
to the high temperatures at which engines operate.
According to R. L. Polk, an independent provider of motor vehicle and consumer
marketing statistics, as of 1996 there were approximately 198 million cars and
light trucks registered in the United States, as compared with 162 million cars
and light trucks in 1986. The average age for cars and light trucks in 1996 was
8.5 years, as compared with an average car age of 7.9 years in 1986.
The use of remanufactured components for warranty and extended service repairs
has increased in recent years as OEMs have offered extended warranty and
extended service coverage and dealers have begun to provide extended service
plans and warranties on used vehicles. OEMs have sought to reduce warranty and
extended service costs by using remanufactured components, which generally offer
the same degree of quality and reliability as OEM products at a lower cost. This
trend has resulted in aftermarket customers requiring higher quality standards
for remanufactured products.
Recently, large retail automotive parts chains offering a broad range of new
and remanufactured products have experienced rapid growth at the expense of
small, independent retail stores. The Company has significantly grown
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its sales to this channel and believes that further increasing its sales to
retail chains offers a significant opportunity for growth. Retail chains
generally prefer to deal with large, national suppliers capable of meeting their
cost, quality, volume and service requirements. See "Business--Growth Strategy."
OEM Market. The OEM market consists of the production and sale of new
component parts for use in the manufacture of new vehicles. The OEM market
includes two major classes of customers: (i) automobile and light truck
manufacturers; and (ii) medium and heavy duty truck and engine manufacturers and
other heavy duty vehicle manufacturers.
The OEM market has been impacted by recent fundamental changes in the OEMs'
sourcing strategies. OEMs are consolidating their supplier base, demanding that
their suppliers provide technologically advanced product lines, greater systems
engineering support and management capabilities, just-in-time sequenced delivery
and lower system costs. As a result, each OEM has selected its own preferred
suppliers. OEMs are increasingly requiring that their preferred suppliers
establish global production capabilities to meet their needs as they expand
internationally and increase platform standardization across multiple markets.
OEMs continue to outsource component manufacturing of non-strategic parts.
Outsourcing has taken place in response to competitive pressures on OEMs to
improve quality and reduce capital outlays, production costs, overhead and
inventory levels. In addition, OEMs are increasingly purchasing integrated
systems from suppliers who provide the design, engineering, manufacturing and
project management support for a complete package of integrated products. By
purchasing complete systems, OEMs are able to shift design, engineering and
product management to fewer and more capable suppliers. Integrated systems
suppliers are generally able to design, manufacture and deliver components at a
lower cost than the OEMs due to (i) their lower labor costs and other
manufacturing efficiencies, (ii) their ability to spread research and
development and engineering costs over products provided to multiple OEMs and
(iii) other economies of scale inherent in high volume manufacturing such as the
ability to automate and leverage global purchasing capabilities.
PRODUCTS
Aftermarket. The Company's aftermarket product line includes a diverse array
of remanufactured and new products sold as replacement parts under the "Delco
Remy" brand name or under a private-label brand name specified by the OEM or the
automotive parts retailer. The Company remanufactures parts for both domestic
and imported vehicles.
Products remanufactured by the Company include starters, alternators, engines,
fuel injectors, injection pumps and turbo chargers (fuel systems),
transmissions, torque converters, water pumps, rack and pinions, power steering
pumps and gears and clutches. The Company also remanufactures subcomponents,
such as automotive armatures, rotors and solenoids, as well as component parts
shipped in bulk ("kits") for future assembly. These subcomponents are either
used internally in the remanufacturing process by the Company or sold to outside
customers.
OEM. The Company's starters are used in all cars and trucks manufactured by GM
in North America (except Saturn and Geo). The Company manufactures two types of
starters: straight drive starters and gear reduction starters. Since the
beginning of 1994, the Company has been transitioning its production line from
straight drive starters to more technologically advanced gear reduction
starters. For the 1997 model year, the Company's gear reduction starters were
used on 44% of GM's North American automotive platforms (other than Saturn and
Geo). The balance of GM North American automotive platforms (other than Saturn
and Geo) will be converted to the Company's gear reduction starters by the end
of the 1998 model year, at which time the Company expects to discontinue OEM
production of straight drive starters. The Company's gear reduction starters are
globally competitive and offer greater output at lower weight than comparable
straight drive designs. For example, the Company's principal PG-260 gear
reduction starter offers the highest power to mass ratio in the industry,
producing the same power at 7.7 pounds as a comparable straight drive design
weighing 13.6 pounds. The Company has begun development of a small gear
reduction starter that will enable the Company to offer its OEM customers an
application on their world car platforms. Reduced component weight is important
to OEMs, as total vehicle weight is a critical factor in each OEM's ability to
achieve federal Corporate Average Fuel Economy standards (CAFEs).
The Company manufactures a full line of heavy duty starters and alternators
for use primarily with large diesel engines. The Company's starters and
alternators are specified as part of the standard electrical system by most
North American heavy duty truck and engine manufacturers. The Company's starters
cover a broad range of torque and
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speed requirements. The Company manufactures a full line of alternators, some of
which utilize premium design features that yield increased durability and a
longer service life. Certain of the Company's automotive starters are also
currently being produced under technology licenses by manufacturers in China and
India and by the Company's joint ventures in Mexico and Korea.
The Company has recently developed several new products for heavy duty
applications, including a high output, premium heavy duty brushless alternator
for high vibration applications; a new large frame alternator designed to meet
the increasing demands in the upper power ranges of new heavy duty vehicles; and
a small heavy duty alternator for use in low output, high durability and severe
environmental applications, which the Company expects will be used principally
for agricultural and construction vehicles. The Company's OEM customers and
major truck fleet operators designate it as an electrical system supplier that
provides value-added systems such as the "Road Gang." The Road Gang system
includes a premium starter and brushless alternator produced by the Company and
premium batteries produced by GM and offered by the Company under a long-term
agreement with GM. Engineered as a package, these products provide increased
performance, reliability and durability.
Ballantrae's Tractech subsidiary produces traction control systems for use in
construction, industrial and agricultural equipment and in medium duty trucks.
The traction control systems business combines valuable product engineering
skills with strong machining and fabrication capabilities to manufacture
products with custom designed applications.
Quality Standards. The Company is required to meet numerous quality standards
in order to qualify as a supplier to major OEMs and their dealer networks, as
well as certain automotive parts retailers. The Company has achieved significant
recognition by its customers for its continuous commitment to quality. In July
1997, the Company received one of the prestigious Supplier of the Year awards
from GM, an award given to fewer than 1% of all GM suppliers. The Company's
aftermarket operations that produce products for Ford have received the Q1
rating, which is Ford's highest quality rating. Moreover, the Company is a Ford
FAR in five of the seven Canadian provinces. The Company also has been awarded
Navistar's highest quality rating for its engine remanufacturing operations. In
addition, the Company has received quality awards from certain of its other
customers, including Caterpillar, Cummins, OshKosh and Teledyne.
Ford, Chrysler and GM have initiated quality standards (QS9000) applicable to
suppliers such as the Company. International and domestic automobile and truck
manufacturers developed the QS9000 standards to ensure that their suppliers meet
consistent quality standards that can be independently audited. These quality
standards, which are required by customers to be in place by December 1997,
impose processes and procedures in addition to those in effect prior to December
1997. Management also believes that these standards may have the effect of
accelerating consolidation in the remanufacturing industry, as smaller
remanufacturers may be unable to meet or afford the cost of complying with these
new quality standards. The Company has received QS9000 certification at nine of
its manufacturing and remanufacturing facilities, and expects the balance to be
certified by the end of fiscal 1998.
Ballantrae's traction control systems unit has received several quality
awards, has been designated a Caterpillar "Certified Supplier" in every year
since 1985 and its facility in Ireland holds an ISO9002 certification.
Engineering and Development. The Company's engineering staff works
independently and with OEMs to design new products, improve performance and
technical features of existing products and develop methods to lower
manufacturing costs. The Company's engineering staff includes application
engineers, manufacturing engineers and advanced engineers. Application engineers
are assigned to various platforms or geographic regions to work directly with
customers on product design changes and corrective actions. Manufacturing
engineers are responsible for the planning, layout, design, equipment selection
and global implementation of production capacity for the Company's domestic and
foreign manufacturing facilities. Advanced engineers work in conjunction with
the customer's forward planning or advanced powertrain engineers on product
design and development for products with a five to ten year planning horizon.
In support of its engineering efforts, the Company has formed technical
alliances with a select number of engineering and technology firms to identify
long-term engineering advances and opportunities. In January 1996, the Company
entered into a joint development agreement with SatCon Technology Corporation
with the goal of developing an alternator with substantially higher power output
than the current generation of alternators. The
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Company has also formed technical alliances with EcoAir Corp. and Arthur D.
Little to support the Company's advanced research and development of starters
and alternators.
CUSTOMERS
Aftermarket. The Company's principal aftermarket customers include OEM dealer
networks of GM, Navistar, Ford, Freightliner, Caterpillar and PACCAR and leading
automotive parts retain chains such as Auto Zone, Western Auto, Pep Boys,
Advance Auto, O'Reilly Automotive and Discount Auto. Sales to GM SPO and
Navistar accounted for approximately 23.8% and 15.2%, respectively, of the
Company's 1997 pro forma aftermarket net saleS. No other customer accounted for
more than 10% of aftermarket sales. The Company's products are also used for
warranty replacement under procedures established by certain of the Company's
OEM customers.
In connection with the GM Acquisition, the Company entered into a long-term
agreement pursuant to which it designated GM, through GM SPO, as its exclusive
distributor of "Delco Remy" brand remanufactured automotive and heavy duty
starters and alternators within North America to specified customers, including
certain GM dealers, direct GM accounts, certain warehouse distributors and, with
respect to automotive products, certain retail chains. In consideration of its
being granted the foregoing exclusive distribution rights, GM agreed to purchase
from the Company 100% of its requirements for automotive starters and heavy duty
starters and alternators for sale in the aftermarket and has further agreed not
to sell any competitive products in the aftermarket channels specified above
during the term of the distribution agreement. Sales to GM SPO under the
distribution agreement accounted for approximately 23.8% of the Company's
aftermarket 1997 pro forma net sales. With respect to heavy duty starters and
alternators, the term of the current agreement will end on July 31, 1998. As to
automotive starters, the agreement terminates on July 31, 2009. The agreement,
with respect to either heavy duty or automotive products, may be terminated
prior to the end of the applicable term (i) by mutual agreement of the parties,
(ii) by either party upon a material breach by the other party, (iii) by the
Company if GM fails to achieve certain goals and objectives for reasons other
than a general decline in the economy and (iv) by GM to the extent the Company
fails to meet certain quality standards. See "Risk FactorsDependence on General
Motors."
Ballantrae's traction control systems are offered on an aftermarket basis for
sport utility vehicles ("SUV") through independent wholesale distributors for
installation by the end user after the original vehicle purchase. Aftermarket
sales represent approximately 20.6% of Tractech's total sales.
OEM. The Company's principal customers in its OEM automotive business are GM's
North American Operations and various GM International affiliates, who
collectively accounted for substantially all of the Company's OEM 1997 pro forma
automotive starter sales, approximately 50.7% of total OEM 1997 pro forma net
sales and approximately 28.3% of total 1997 pro forma net sales. No other
customer accounted for more than 10% of such OEM net sales. The GM International
affiliates to which the Company sells products include GM Brazil, GM Holden
(Australia), GM Mexico and Isuzu. Beginning with the 2001 model year, the
Company will also sell products to GM Europe. Remy Korea, a joint venture in
which the Company has a 50% interest, sells automotive starters using the
Company's technology to Daewoo Motors, Kia Motors, Asia Motors and Ssangyong
Motors. The Company will also sell automotive starters to Opel in Europe and,
through its licensee, to Daewoo Motors in India.
Principal customers of the Company's heavy duty OEM business include Navistar,
Freightliner, Cummins, Caterpillar, PACCAR, Detroit Diesel, GM, Ford, Mack and
Volvo Trucks, with the top ten customers accounting for approximately 52.4% of
heavy duty pro forma net sales in 1997. The Company has long-term agreements,
with terms typically ranging from three to five years, to supply starters and
alternators to GM, Navistar, Freightliner, PACCAR, Cummins, Volvo Trucks and
Mack. In addition, the Company is the specified supplier of heavy duty starters
and alternators for trucks manufactured for several major North American truck
fleet operators, including Penske Truck Leasing, Ryder System, Inc., Yellow
Freight System and J.B. Hunt Transport.
Pursuant to long-term supply agreements, GM has agreed to purchase from the
Company 100% of its North American automotive starter requirements (other than
Saturn and Geo) and 100% of its U.S. and Canadian requirements for heavy duty
starters and alternators, in each case with respect to the Company's existing
product line as of August 1994. GM's commitments to purchase such products from
the Company in the future are subject, however, to the Company remaining
competitive as to technology, design and price. Nonetheless, GM may not
terminate the automotive starter supply agreement for failure of the Company to
be price, technology or design
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competitive prior to July 31, 2001. GM's obligations to purchase automotive
starters and heavy duty starters and alternators from the Company terminate on
July 31, 2004 and 2000, respectively, except for automotive products released in
1996 and 1997, for which GM's obligation will terminate on July 31, 2006 and
2007, respectively. GM may cancel either agreement in the event that 35% of the
Company's voting shares become owned, directly or indirectly, by another
manufacturer of passenger cars or light trucks. During the term of the relevant
supply agreement, GM has granted the Company the right to bid on starter and
alternator supply contracts for GM's operations worldwide. See "Risk
FactorsDependence on GM."
Ballantrae's principal customers for traction control systems include OEMs of
construction, industrial and agricultural equipment and medium duty trucks.
Ballantrae's principal traction control systems customers include Caterpillar,
John Deere, Eaton, Dana, Rockwell and Clark Hurth.
The Company employs its own direct sales force, which develops and maintains
sales relationships with major North American truck fleet operators as well as
its OEM customers worldwide. These sales efforts are supplemented by a network
of field service engineers and product service engineers.
MANUFACTURING AND FACILITIES
Aftermarket. The Company's aftermarket business has operations located
principally in 33 production facilities and seven warehouses in the United
States and Canada.
In its remanufacturing operations, the Company obtains used starters,
alternators, engines and related components, commonly known as cores, which are
sorted by make and model and either placed into immediate production or stored
until needed. During remanufacturing, the cores are completely disassembled into
their component parts. Components which can be incorporated into the
remanufactured product are thoroughly cleaned, tested and refinished. All
components subject to major wear as well as those which cannot be remanufactured
are replaced by new components. The unit is then reassembled into a finished
product. Inspection and testing are conducted at various stages of the
remanufacturing process, and each finished product is inspected and tested on
equipment designed to simulate performance under operating conditions.
The majority of the cores remanufactured by the Company are obtained from
customers in exchange for remanufactured units and are credited against the
purchase prices of these units. When the Company has an insufficient number of
components from salvageable cores, the Company's remanufacturing operations may
purchase new parts from the Company's OEM operations. Core prices fluctuate on
the basis of several economic factors, including market availability and demand
and core prices then being paid by other remanufacturers and brokers.
OEM. The Company's OEM business has seven principal manufacturing operations,
two in Meridian, Mississippi and five in Anderson, Indiana. The Company has
announced its intention to close its two facilities in Meridian, Mississippi by
the end of the 1998 fiscal year, including one facility leased from GM at the
time of the GM Acquisition. The balance of the Company's OEM facilities are
located in Anderson, Indiana. Two of the Anderson facilities are leased from GM
and the Company plans to vacate these facilities by the end of 1999. The Company
is operating three new focus factories and intends to have a total of SIX in
operation by the end of 1999. These relations are expected to provide a
reduction of over 70% in square footage from the Company's existing plants to
the focus factories due to streamlining of manufacturing processes, phasing out
of certain manufacturing equipment and elimination of excess unutilized floor
space or floor space used by GM in each of the existing facilities. The
restructuring reserve does not include the startup costs the Company expects,
based on its three prior focus factory startups, to incur in connection with the
three new focus factories. The transition to focus factories adversely affected
the Company's gross margins in the first quarter of fiscal 1998. See "Risk
Factors--Relocation of Facilities."
The manufacturing process of the focus plants varies significantly from the
traditional process flow of existing plants. The Company utilizes a flexible
cell-based manufacturing approach to the production of all new and/or re-
engineered product lines within the focus plants as contrasted with the existing
vertically integrated, primarily synchronous process used in traditional
factories. The cell-based manufacturing system provides flexibility by allowing
efficient changes to the number of operations each operator performs and is
capable of both low- and high-volume production runs. When compared to the more
traditional, less flexible assembly line process, cell
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manufacturing allows the Company to match its production output better to
customers' requirements while reducing required inventory levels and improving
quality.
The Company's focus plants generally produce one product line in a plant
design based on cell-based, semi-automated manufacturing utilizing kaizen
techniques. The focus plant process creates a team-based environment of involved
workers who better understand and control the manufacturing process. In
addition, the Company has worked with the Company's unions to reduce the number
of job classifications so that workers can be shifted among various work areas
as production demands dictate. The Company is presently expanding lean
manufacturing techniques to its aftermarket facilities.
Ballantrae's traction control systems manufacturing facilities are located in
the Detroit suburb of Warren, Michigan, and in Sligo, Ireland.
The Company utilizes frequent communication meetings at all levels of
manufacturing to provide training and instruction as well as to assure a
cohesive, focused effort toward common goals. The Company encourages employee
involvement in all production activity and views such involvement as a key
element toward the success of the Company.
COMPETITION
Aftermarket. The aftermarket is highly fragmented and competitive. Competition
is based primarily on quality of products, service, delivery, technical support
and price. The Company's principal aftermarket competitors include Arrow,
Automotive Parts Exchange (APE), Champion, Genuine Parts (Rayloc), Motorcar
Parts & Accessories (MPA), Prestolite and Unit Parts.
OEM. The automotive parts market is highly competitive. Competition is based
primarily on quality of products, service, delivery, technical support and
price. Most OEMs source parts from one or two suppliers. The Company competes
with a number of companies who supply automobile manufacturers throughout the
world. In the North American automotive market, the Company's principal
competitors include Nippondenso, Valeo, Mitsubishi and Bosch. GM purchases
automotive starters from the Company pursuant to its long-term supply agreement
with the Company. See "BusinessCustomers." Chrysler has eliminated production of
its own starters and currently purchases starters from independent suppliers.
Ford continues to produce certain parts for the majority of its domestic and
international applications and purchases the remainder from independent
suppliers.
The heavy duty parts market is characterized by one or two dominant suppliers
in each major geographic region of the world. No competitor has a substantial
share in all regions. In the North American heavy duty market, where the Company
is the largest manufacturer, the Company's principal competitors include
Prestolite, Nippondenso and Bosch.
EMPLOYEES
As of October 31, 1997, the Company employed 5,137 people, 859 of whom were in
management, engineering, supervision and administration and 4,278 of whom were
hourly employees. Of the Company's hourly employees, 2,068 are represented by
unions. In the United States, 1,477 of the Company's hourly workers are
represented by the UAW under an agreement between the Company and the UAW, the
applicable provisions of which were assumed by the Company in connection with
the GM Acquisition. In March 1997, the Company signed a new master agreement
with the UAW that stipulated an approximately 3.2% annual wage and benefit
increase (12.8% over the four year term of the agreement) for the Company's UAW
hourly employees. If employment levels and productivity remain unchanged, the
agreement with the UAW would cause the Company to experience increases in wage
and benefit costs of approximately 2% per year over the next four years (which
represents approximately $3.3 million in the first such year). In addition,
grow-in provisions under the new agreement with the UAW will require the Company
to move certain lower wage and benefit employees to higher wage and benefit
levels. Under provisions of the natural agreement, the UAW and the Company have
recently developed a special program of incentives four hourly employees who
agree to leave the Company, the cost of which is included in the restructuring
charges for fiscal year 1997 described below. Based on responses to this special
incentive plan received to date, the Company would, if no other cost reductions
were realized, experience as a result of the grow-in provision additional wage
and benefit costs that increase each year of the UAW contract to approximately
$10.2 million annually in additional costs from
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current levels by the fourth year. The Company expects the continued
implementation of the special incentive plan and other planned cost reduction
initiatives to substantially offset the effects of the grow-in provision. If
the responses to date to the special incentive plan were reversed (which the
Company considers unlikely) and the other cost-saving initiatives were not
implemented, the additional costs referred to above to the Company from the
grow-in provision would approximately double. There can be no assurance that
the Company will be able to effect cost reduction initiatives (including the
continued implementation of the special incentive plan) to offset the effects of
the grow-in provision or that the Company's labor costs will not otherwise
increase significantly, in which case the Company's competitive position and
results of operations would be adversely affected. The agreement between the UAW
and the Company expires on September 14, 2000 which will require negotiation of
new agreements. See "Risk Factors--Labor Negotiations".
As of October 31, 1997, 142 of the Company's 448 Canadian employees were
represented by the Canadian Auto Workers and 120 were represented by the
Metallurgists Unis d'Amerique. The agreements with these unions expire on
November 8, 1999 and September 30, 1998, respectively, which will require
negotiation of new agreements.
As of OCtober 31, 1997, approximately 329 of Autovill's 499 employees were
affiliated with the Hungarian Steel Industry Workers Union. The agreement was
signed July 17, 1996 and is perpetual, subject to termination upon three months'
notice from either party.
The Company's other facilities are primarily non-union. The Company is unaware
of any current efforts to organize. There can be no assurance that there will
not be any labor union efforts to organize employees at facilities that are not
currently unionized.
Since the GM Acquisition, the Company has not experienced any organized work
stoppages. There can be no assurance, however, that any actions taken by the
Company, including the current restructurings, will not adversely affect the
Company's relations with its employees. At the present time, the Company
believes that its relations with its employees are good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General."
PATENTS, TRADEMARKS AND LICENSES
Pursuant to a Trademark Agreement between the Company and GM, GM has granted
the Company an exclusive license to use the "Delco Remy" trademark on and in
connection with automotive starters and heavy duty starters and alternators
until July 31, 2004, extendible indefinitely at the Company's option upon
payment of a fixed $100,000 annual licensing fee to GM. The Company has also
been granted a perpetual, royalty-free license to use the "Remy" trademark. The
"Delco Remy" and "Remy" trademarks are registered in the United States, Canada
and Mexico and in most major markets worldwide. GM has agreed with the Company
that, upon the Company's request, GM will register the trademarks in any
jurisdiction where they are not currently registered.
The Company has also been granted an exclusive license to use the "Delco Remy"
name as a tradename and corporate name worldwide until July 31, 2004 pursuant to
a Tradename License Agreement between the Company and GM. In addition, GM has
granted the Company a perpetual license to use the "Remy" name as a tradename
and corporate name worldwide.
The Company owns and has obtained licenses to various domestic and foreign
patents and patent applications related to its products and processes. The
patents expire at various times over the next 16 years. While these patents and
patent applications in the aggregate are important to the Company's competitive
position, no single patent or patent application is material to the Company.
RAW MATERIALS
Principal raw materials for the Company's business include bare copper strap,
insulated copper, aluminum castings, forgings, outer frames, nomex paper, steel
coils, steel bars, copper tube, copper wire, flat steel, coil steel, bar steel,
gray iron castings, ductile iron castings, copper cross-section coils, magnets,
steel shafts, steel cores, steel wire and molding material. All materials are
readily available from a number of suppliers, and management does not foresee
any difficulty in obtaining adequate inventory supplies. The Company and GM have
entered into a long-term worldwide purchasing support agreement that allows the
Company to purchase copper wire and steel, which are used in the manufacture of
starters sold to GM, at prices that the Company believes generally to be lower
than
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<PAGE>
those that would otherwise be obtainable by the Company. This agreement expires
on July 31, 2004, or earlier, upon termination of the automotive and heavy duty
OEM supply agreements between the Company and GM. The Company generally
follows the North American industry practice of passing on to its customers the
costs or benefits of fluctuation in copper and aluminum prices on an annual or
semi-annual basis. See "Business--Customers."
BACKLOG
The majority of the Company's products are not on a backlog status. They are
produced from readily available materials and have a relatively short
manufacturing cycle. For products supplied by outside suppliers, the Company
generally purchases products from more than one source. The Company expects to
be capable of handling the anticipated 1998 sales volumes.
PROPERTIES
The world headquarters of the Company are located at 2902 Enterprise Drive,
Anderson, Indiana 46013. The Company leases its headquarters.
The following table sets forth certain information regarding manufacturing and
certain other facilities operated by the Company as of October 31, 1997. The
designation "F" indicates a focus plant. See "Business--Manufacturing and
Facilities."
<TABLE>
<CAPTION>
OEM or Approx. OWNED/LEASE
LOCATION Aftermarket Use Sq. Ft. Expiration
-------- ----------- --- ------- ----------
<S> <C> <C> <C> <C>
Anderson, IN Headquarters Office 70,000 2000
Anderson, IN OEM Manufacturing 597,000 2004
Anderson, IN OEM Manufacturing 430,000 2004
Anderson, IN(F) OEM Manufacturing 117,000 2001
Anderson, IN(F) OEM Manufacturing 51,000 2001
Anderson, IN(F) OEM Manufacturing 36,695 2006
Anderson, IN OEM Manufacturing 33,500 2007
Anderson, IN OEM/Aftermarket Testing 15,000 2001
Anderson, IN Aftermarket Warehouse 20,220 2000
Anderson, IN Aftermarket Warehouse 50,220 2000
Bay Springs, MS Aftermarket Manufacturing 73,000 2003
Budapest, Hungary Aftermarket Leased to 3rd party 55,709 Owned
Chantilly, VA Aftermarket Manufacturing 120,000 2014
Edmonton, Canada Aftermarket Manufacturing 141,300 Owned
Etobicoke, Canada Aftermarket Manufacturing 114,120 2002
Findlay, OH Aftermarket Manufacturing 6,400 Owned
Franklin, IN Aftermarket Manufacturing 48,400 Owned
Franklin, IN Aftermarket Manufacturing 16,625 Owned
Franklin, IN Aftermarket Manufacturing 15,580 Owned
Gallatin, TN Aftermarket Manufacturing 20,000 Owned
Gallatin, TN Aftermarket Manufacturing 20,000 *
Heidelberg, MS Aftermarket Manufacturing 45,000 2003
Heidelberg, MS Aftermarket Manufacturing 5,000 2003
Indianapolis, IN Aftermarket Manufacturing 5,500 1999
Kaleva, MI Aftermarket Manufacturing 82,000 2000
Mansfield, TX Aftermarket Manufacturing 43,000 2000
Marion, MI Aftermarket Manufacturing 59,400 2000
Memphis, TN Aftermarket Warehouse 7,500 2002
Meridian, MS Aftermarket Office 2,400 2003
Meridian, MS Aftermarket Manufacturing 15,000 1998
Meridian, MS OEM Manufacturing 319,000 2004
Meridian, MS (F) OEM Manufacturing 68,000 2000
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
OEM or Approx. OWNED/LEASE
LOCATION Aftermarket Use Sq. Ft. Expiration
-------- ----------- --- ------- ----------
<S> <C> <C> <C> <C>
Meridian, MS Aftermarket Manufacturing 12,000 2003
Mezokovesd, Hungary Aftermarket Manufacturing 175,598 Owned
Mezokovesd, Hungary Aftermarket Warehouse 8,612 Owned
Peru, IN Aftermarket Manufacturing 30,000 2003
Peru, IN Aftermarket Manufacturing 14,111 2003
Raleigh, MS Aftermarket Manufacturing 43,000 2003
Raleigh, MS Aftermarket Manufacturing 75,000 2003
Raleigh, MS Aftermarket Manufacturing 8,000 Own
Reed City, MI Aftermarket Manufacturing 92,000 2000
Reed City, MI Aftermarket Manufacturing 34,000 2000
Reed City, MI Aftermarket Manufacturing 26,000 2000
Reed City, MI Aftermarket Warehouse 7,350 1999
Reed City, MI OEM/Aftermarket Manufacturing 90,000 Owned**
and Office
San Luis Potosi, Mexico OEM Manufacturing 37,000 2001
Sligo, Ireland OEM/Aftermarket Manufacturing 53,400 2018**
St. Laurent, Canada Aftermarket Warehouse 17,000 1997
Sylvarena, MS Aftermarket Manufacturing 1,300 *
Taylorsville, MS Aftermarket Manufacturing 27,000 2003
Toledo, OH Aftermarket Manufacturing 4,500 2000
Toronto, Canada Aftermarket Manufacturing 36,778 1997
Warren, MI OEM/Aftermarket Manufacturing 100,049 Owned**
and Office
Winchester, VA Aftermarket Warehouse 55,000 2000
Winchester, VA Aftermarket Office/Whse 55,000 2000
Winnepeg, Canada Aftermarket Manufacturing 38,000 Owned
</TABLE>
__________________
* Leased on a month-to-month basis.
** Ballantrae facilities.
LEGAL PROCEEDINGS
From time to time, the Company is party to various legal actions in the normal
course of its business. The Company believes it is not currently party to any
litigation that, if adversely determined, would have a material adverse effect
on the Company's business, financial condition and results of operations.
REGULATORY MATTERS
The Company's facilities and operations are subject to a wide variety of
federal, state, local and foreign environmental laws, regulations and
ordinances, including those related to air emissions, wastewater discharges and
chemical and hazardous waste management and disposal ("Environmental Laws"). The
Company's operations also are governed by laws relating to workplace safety and
worker health, primarily the Occupational Safety and Health Act, and foreign
counterparts to such laws ("Employee Safety Laws"). The Company believes that
its operations are in compliance in all material respects with current
requirements under Environmental Laws and Employee Safety Laws, with the
exception of certain matters of which the Company is aware, including: (i)
failure to timely submit certain filings pursuant to the New Jersey Industrial
Site Recovery Act ("ISRA") in connection with the closure of the Company's
former Edison, New Jersey plant; (ii) air permits or registration requirements
at certain facilities; (iii) one isolated instance of noncompliance with import
requirements of the Hazardous Materials Transportation Act (relating to shipment
of lead-acid batteries) now under review by the United States Department of
Transportation; and (iv) reporting requirements under the Emergency Planning and
Community Right-to-Know Act at the Tractech facility located in Warren,
Michigan, which the Company will acquire pursuant to the Ballantrae Acquisition
Agreement. The Company believes that any costs it may incur to resolve such
matters
65
<PAGE>
will not be material and, with respect to (iv) above, the Company believes that
it would have an indemnity claim for the portion of fines and penalties, if any,
that may result from any violations that occurred prior to October 23, 1996 from
the entities that owned or operated the Warren, Michigan Tractech facility prior
to the present owners' purchase of Ballantrae. The nature of the Company's
operations, however, exposes it to the risk of liabilities or claims with
respect to environmental and worker health and safety matters. There can be no
assurance that material costs will not be incurred in connection with such
liabilities or claims.
In fiscal year 1997, the aggregate cost incurred by the Company with respect
to environmental matters was not material. Based on the Company's experience to
date, the Company believes that the future cost of compliance with existing
environmental laws, regulations and ordinances (or liability for known
environmental claims) will not have a material adverse effect on the Company's
business, financial condition or results of operations. However, future events,
such as changes in existing laws and regulations or their interpretation, may
give rise to additional compliance costs or liabilities that could have a
material adverse effect on the Company's business, financial condition or
results of operations. Compliance with more stringent laws or regulations, as
well as more vigorous enforcement policies of regulatory agencies or stricter or
different interpretations of existing laws, may require additional expenditures
by the Company that may be material.
Certain Environmental Laws hold current owners or operators of land or
businesses liable for their own and for previous owners' or operators' releases
of hazardous or toxic substances, materials or wastes, pollutants or
contaminants, including petroleum and petroleum products ("Hazardous
Substances"). Because of its operations, the long history of industrial uses at
some of its facilities, the operations of predecessor owners or operators of
certain of the businesses, and the use, production and release of Hazardous
Substances at these sites, the Company is affected by such liability provisions
of Environmental Laws. Various of the Company's facilities have experienced some
level of regulatory scrutiny in the past and are or may be subject to further
regulatory inspections, future requests for investigation or liability for past
disposal practices.
During the environmental due diligence performed in connection with the GM
Acquisition, GM and the Company identified certain on-site pre-closing
environmental conditions, including the presence of certain Hazardous Substances
in the soil at the Company's Meridian, Mississippi property and in the soil and
groundwater at the Company's Anderson, Indiana property. GM has reported the
presence of these substances in the groundwater to the United States
Environmental Protection Agency ("EPA") and the Indiana Department of
Environmental Management ("IDEM"), and has notified residents who live
downgradient of the affected GM properties. GM conducted further investigation,
which included the sampling of the residents' water wells and the installation
of an additional well offsite, and is working with EPA to resolve this issue.
Based on the Company's experience to date, the terms of the indemnification in
the GM Acquisition agreement and GM's continuing performance in responding to
these conditions, the Company does not believe that it will expend material
costs in responding to these on-site environmental conditions.
In connection with its acquisition of facilities and businesses from GM,
Nabco, A&B Group, Autovill, World Wide and Ballantrae, the Company obtained
various indemnities for certain claims related to on-site and off-site
environmental conditions and violations of Environmental Laws which arose prior
to such acquisitions. The environmental indemnities are subject to certain
deductibles, caps, cost sharing and time limitations depending on the nature and
timing of the environmental claim. With respect to the Company's acquisition of
Ballantrae, see "Risk Factors--Acquisition of Ballantrae; Conflicts of Interest"
and "Risk Factors--Certain Transactions".
The Comprehensive Environmental Response, Compensation, and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"),
provides for responses to and joint and several liability for releases of
certain Hazardous Substances into the environment. The Company has been
identified as a potentially responsible party ("PRP") under CERCLA for three
off-site locations: the Vickers' Warehouse Site in Anderson, Indiana; the
Memorial Drive Dump Site in Muncie, Indiana; and the RSR Corporation Site in
Dallas, Texas. In addition, the EPA has sent a notice to the Company demanding
payment for certain costs relating to the RSR Corporation Site. At each of
these three sites, the alleged disposal took place prior to the Company's
acquisition of the assets of the Former GM Division. The Company believes that
it is not the appropriate PRP with respect to these sites, which the Company
also believes are subject to the Company's indemnification agreement with GM.
The Company has not incurred any significant costs relating to these matters,
and based on the existence of the indemnification agreement with GM, GM'S
assumption of liabilities
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<PAGE>
to date and other legal defenses, the Company does not believe that it will
incur material costs in the future in responding to conditions at these
sites.
The Company's Meridian, Mississippi facility has been designated by EPA as
requiring no further action under CERCLA and has since been "delisted" from the
Comprehensive Environmental Response, Compensation, and Liability Information
System ("CERCLIS") (a list of sites which may require investigation or
remediation under CERCLA). Although this does not assure that expenditures would
not be required under other federal and/or state programs, as a result of the
indemnifications in the GM Acquisition agreement, the Company does not believe
that it will expend material costs for this site under the CERCLA program or for
any other environmental conditions at this site listing.
The Resource Conservation and Recovery Act ("RCRA") and the regulations
thereunder and similar state counterparts to this law regulate hazardous wastes.
The Company's Anderson, Indiana facilities were once part of a larger industrial
complex owned and operated by GM (the "GM Complex"). Since 1990 (when owned by
GM), the GM Complex has been undergoing corrective action under RCRA. In
connection with the RCRA corrective action requirements, GM is required to
investigate various solid waste management units ("SWMUs") and areas of concern
("AOCs") identified in the federal and state RCRA permits. Some of these SWMUs
and AOCs are located on portions of the Anderson, Indiana properties leased by
the Company from GM and certain SWMUs are used by the Company. The costs of
responding to releases, if any, from those SWMUs used by the Company would
presumptively be borne by the Company. To date, no claims for any such liability
have been made, and GM continues to respond to EPA and IDEM with respect to the
investigation of these AOCs and SWMUs. Subject to the terms and conditions of
GM's environmental indemnity provided in connection with the GM Acquisition, GM
is indemnifying the Company with respect to certain of these areas.
One of the Company's facilities in Franklin, Indiana is undergoing a RCRA site
investigation and clean-up of volatile organic compounds ("VOCs") in the soil
and groundwater pursuant to an EPA Administrative Order on Consent ("EPA Order")
issued to both Franklin Power Products, one of the subsidiaries of the Company,
and Amphenol Corporation, a prior owner of the property. Pursuant to the EPA
Order, Franklin Power Products and Amphenol Corporation have jointly submitted
corrective measures studies which have been approved by EPA, and the parties
expect to enter into a new EPA Administrator Order on Consent in the near future
setting forth the selected remedy (including further investigation). Amphenol
indemnified Franklin Power Products for certain liabilities associated with the
EPA Order and Amphenol has satisfied and continues to satisfy the requirements
of the EPA Order. Based on the Company's experience to date and the indemnities
from Amphenol and the sellers of Franklin Power Products to the Company, the
Company believes that future costs associated with this site will not have a
material adverse effect on the Company's results of operations, business or
financial condition.
The Company's Marion, Michigan facility was listed on Michigan's state list of
sites pursuant to the Michigan version of CERCLA (the "Michigan SCL") in 1993
because of suspected releases of Hazardous Substances, primarily volatile
organic compounds (mineral spirits), to the soils and groundwater at the
facility. An investigation conducted by Nabco prior to its acquisition by the
Company determined that the levels of volatile organic compounds in the soils
and groundwater are below the applicable state clean-up levels. Although the
Company proposed no further action at this facility, the Michigan environmental
authorities are requiring further investigation. Even if the Michigan
environmental authorities were to require remedial action with respect to this
site, the Company does not believe that it will expend material costs in
connection with the conditions giving rise to this Michigan SCL listing.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and senior officers of the Company. Each director of the Company will
hold office until the next annual meeting of stockholders of the Company or
until his successor has been elected and qualified. Officers of the Company and
its subsidiaries serve at the discretion of their respective Boards of
Directors.
<TABLE>
<CAPTION>
NAME Age Positions
---- --- ---------
<S> <C> <C>
Harold K. Sperlich................ 67 Chairman of the Board of Directors
Thomas J. Snyder (1).............. 53 President, Chief Operating Officer and Director
David L. Harbert.................. 55 Executive Vice President and Chief Financial Officer
Susan E. Goldy.................... 43 Vice President and General Counsel
Joseph P. Felicelli............... 51 Group Vice President, Aftermarket
Patrick Mobouck................... 43 Vice President-Managing Director, Europe
Mark W. Kenczyk................... 42 Vice President, Materials Management
M. Lawrence Parker................ 49 Senior Vice President, Quality & Heavy Duty Systems, Delco Remy
America
Richard L. Stanley................ 41 Senior Vice President, Automotive Systems Division, Delco Remy
America
Roderick English.................. 45 Senior Vice President, Human Resources and Communications,
Delco Remy America
Thomas R. Jennett................. 45 Senior Vice President and General Manager, Aftermarket
Division, Delco Remy America
David H. Livingston............... 47 Senior Vice President of Operations, Delco Remy America
John M. Mayfield.................. 43 President of A&B Group
Nicholas J. Bozich................ 53 President of Nabco
J. Michael Jarvis................. 53 President of Power Investments
Richard L. Keister................ 51 President of World Wide
Ralph E. McGee.................... 59 President of Tractech
E.H. Billig (2)................... 70 Vice Chairman of the Board of Directors
Richard M. Cashin, Jr. (1), (2)... 44 Director
James R. Gerrity (1).............. 56 Director
Michael A. Delaney (2)............ 43 Director
Robert J. Schultz................. 67 Director
</TABLE>
_______________________
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
68
<PAGE>
Harold K. Sperlich, Chairman of the Board of Directors. Mr. Sperlich has been
Chairman of the Board of Directors since the Company's inception in 1994. Since
retiring from Chrysler Corporation in 1988, having served as its President, Mr.
Sperlich has served as a consultant to the automotive industry. Before joining
Chrysler in 1977, Mr. Sperlich held several senior administrative and operating
posts with Ford Motor Company.
Thomas J. Snyder, President, Chief Operating Officer and Director. Mr. Snyder
has been President and Chief Operating Officer since the Company's inception in
1994. From 1962 to 1994, Mr. Snyder held several aftermarket and OEM executive
positions with the Delco Remy Division of GM, most recently as Product Manager,
Heavy Duty Systems. He is a member of the board of St. John's Health Systems and
a Director of CLARK Material Handling Company.
David L. Harbert, Executive Vice President and Chief Financial Officer. Mr.
Harbert has been the Executive Vice President and Chief Financial Officer of the
Company since October 1994. Before joining the Company, Mr. Harbert was Senior
Vice President and Chief Financial Officer of Applied Power Inc. since 1992 and,
prior to that, served as Vice President and Chief Financial Officer of System
Software, Inc. since 1990.
Susan E. Goldy, Esquire, Vice President and General Counsel. Ms. Goldy has
been Vice President and General Counsel since February 1997. Before joining the
Company, she was an associate, and since 1993, was a partner in the law firm of
Dechert Price & Rhoads.
Joseph P. Felicelli, Group Vice President, Aftermarket. Mr. Felicelli has been
Group Vice President since September 1997. Prior to joining the Company, Mr.
Felicelli served in various management positions for Cooper Industries.
Patrick Mobouck, Vice President-Managing Director, Europe. Mr. Mobouck has
been Vice President-Managing Director, Europe since August 1997. He has also
been Chairman of Autovill since August 1997. Before joining the Company, Mr.
Mobouck was with Monroe Auto Equipment since 1988, most recently as Managing
Director-Europe, Middle East and Africa.
Mark W. Kenczyk, Vice President, Materials Management. Mr. Kenczyk has been
Vice President, Materials Management since August 1997. Prior to joining the
Company, Mr. Kenczyk was the Vice President of Purchasing and Logistics with
Phillips Electronics in New York. Prior to that, Mr. Kenczyk spent 22 years in
various materials and purchasing capacities with General Motors, including
assignments at the GM/Toyota joint venture (New United Motor) and with Isuzu
Motors in Tokyo, Japan.
M. Lawrence Parker, Sr. Vice President, Quality and Heavy Duty Systems, Delco
Remy America. Mr. Parker has been the Senior Vice President, Quality and Heavy
Duty Systems since June 1995 and, prior to that, was Senior Vice President,
Quality and Customer Satisfaction beginning with the Company's inception in
1994. Before joining the Company, Mr. Parker served in a number of executive
positions at Ford Motor Company since 1967 and at Chrysler Corporation since
1984, most recently as Director, Corporate Quality Programs since 1991.
Richard L. Stanley, Sr. Vice President, Automotive Systems Division, Delco
Remy America. Mr. Stanley has been Senior Vice President, Automotive Systems
since the Company's inception in 1994. Mr. Stanley joined the Delco Remy
Division of GM in 1978, serving most recently as Director of Customer Programs
since 1992 and as European Chief Engineer since 1988.
Roderick English, Sr. Vice President, Human Resources and Communications,
Delco Remy America. Mr. English has been Senior Vice President of Human
Resources and Communications since the Company's inception in 1994. Mr. English
joined the Delco Remy Division of GM in 1976 and became Plant Manager of plant
17 in 1992. Prior to that, Mr. English served as Divisional Manager of Labor
Relations since 1989.
John M. Mayfield, President of A&B Group. Mr. Mayfield has been President of
A&B Group since its acquisition by the Company in March 1995. Mr. Mayfield
joined A&B Group in 1988 as Controller and became its Operations Director in
1991.
Nicholas J. Bozich, President, Nabco. Mr. Bozich has been President of Nabco
since March, 1997. Before joining the Company, Mr. Bozich was with General
Motors for 34 years in various managerial positions, most recently with the
Saturn Division.
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<PAGE>
J. Michael Jarvis, President, Power Investments. Mr. Jarvis has been President
of Power Investments since its formation in 1983.
Richard L. Keister, President, World Wide. Mr. Keister has been President of
World Wide since its formation in 1976.
Ralph F. McGee, President, Tractech. Mr. McGee started as Sales and Marketing
Manager of TracTech in 1968. He was appointed President in 1980, a position he
has held since then except for two years when he served in corporate level
development positions for Titan Wheel International, Inc.
Thomas R. Jennett, Senior Vice President and General Manager, Aftermarket
Division, Delco Remy America. Mr. Jennett joined the Company in October 1996.
Prior to such time he held various management positions with Prestolite Electric
Inc. since 1974, including President of the Aftermarket Division and the Leece-
Neville Heavy Duty Division.
David H. Livingston, Senior Vice President of Operations, Delco Remy
America. Mr. Livingston has been Senior Vice President of Operations since
August 1996. Prior to joining the Company, Mr. Livingston was Vice President
of Operations for United Technologies Automotive-Motor Systems since 1990.
E.H. Billig, Vice Chairman of the Board of Directors. Mr. Billig has been Vice
Chairman of the Board of Directors since the Company's inception in 1994. He was
formerly President and Chief Operating Officer of MascoTech Automotive Systems
Group, Inc., where he continues to serve as Vice Chairman. He is also a director
of Titan Wheel International Inc. and OEA, Inc.
Richard M. Cashin, Jr., Director. Mr. Cashin has been a director since the
Company's inception in 1994. Mr. Cashin has been President since 1994, and a
Managing Director for more than the past five years, of CVC. In addition, Mr.
Cashin serves as a director of Levitz Furniture Incorporated (which filed a
voluntary petition for bankruptcy on September 5, 1997), Lifestyle Furnishing,
Fairchild Semiconductor, Freedom Forge, Cable Systems International, Euromax,
Hoover Group, Thermal Engineering, Gerber Childrenswear, JAC Holdings, GVC
Holdings, Ballantrae Corporation, Delta Terminal Services and Titan Wheel
International, Inc.
James R. Gerrity, Director. Mr. Gerrity has been a director since the
Company's inception in 1994. From 1986 to 1993, Mr. Gerrity was President and a
director of Dyneer Corporation. Mr. Gerrity currently is a director of Palomar
Technologies Corporation, Wescor Graphics, Inc. and Ballantrae Corporation.
Michael A. Delaney, Director. Mr. Delaney has been a director since the
Company's inception in 1994. Mr. Delaney has been a Vice President of CVC since
1989. From 1986 through 1989, he was Vice President of Citicorp Mergers and
Acquisitions. Mr. Delaney is also a director of Sybron Chemicals, Inc., GVC
Holdings, JAC Holdings, CORT Business Services, Inc., Palomar Technologies,
Inc., Enterprise Media Inc., SC Processing, Inc., Triumph Group, Inc., CLARK
Material Handling Inc., MSX International, Ballantrae Corporation, International
Knife and Saw, Inc., Aetna Inc. and AmeriSource Health Corporation.
Robert J. Schultz, Director. Mr. Schultz became a director in 1997. Mr.
Schultz retired as Vice Chairman and a member of the Board of Directors of GM in
1993. Mr. Schultz joined GM in 1955 and served as Group Executive of Chevrolet-
Pontiac-GM of Canada and General Manager of GM's Delco Electronics Division.
Mr. Schultz is also a member of the Board of Trustees of California Institute of
Technology and a director of OEA, Inc. and Texco Communications.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Directors do not receive compensation for their services as directors, except
that Messrs. Gerrity and Billig received $340,608 and $200,000, respectively,
during fiscal year 1997 for services relating to special projects (in connection
with acquisitions and strategic alliances) undertaken by them for the Company in
their capacities as directors, and Mr. Schultz was paid $2,083 in fiscal year
1997 for services rendered as a director of the Company. Mr. Schultz is entitled
to receive an annual fee of $25,000 plus $1,000 for attendance in person at each
quarterly meeting of the Board of Directors. Outside directors of the Company
are also entitled to receive stock options for Class A Common Stock pursuant to
the Directors' Plan (as defined). See "Management- Stock Option Plans." CVC,
certain members of management and other Existing Stockholders have entered into
a Stockholders' Agreement whereby they have agreed to vote their shares in such
a
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<PAGE>
manner so as to elect the entire Board of Directors of the Company. See
"Principal Stockholders--Stockholders' Agreement."
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ending July 31, 1997,
certain information regarding the cash compensation paid by the Company, as well
as certain other compensation paid or accrued for such year, to each of the
executive officers of the Company named below, in all capacities in which they
served:
<TABLE>
<CAPTION>
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
--------------------------- ------ ----- --------------- ------------
<S> <C> <C> <C> <C>
Harold K. Sperlich................... $ 247,500 $ 292,342 $ 13,986 $ --
Chairman of the Board
Thomas J. Snyder.................... 247,500 292,342 3,197 --
President and Chief Operating
Officer
David L. Harbert.................... 235,000 165,925 3,197 --
Executive Vice President and
Chief Financial Officer
J. Michael Jarvis.................. 200,000 111,042 1,409 --
President of Power Investments
M. Lawrence Parker................... 173,250 133,975 1,409 --
Senior Vice President, Quality
&
Heavy Duty Systems, Delco
Remy America
</TABLE>
(1) Represents life insurance premiums paid by the Company for the benefit of
the individuals.
Stock Option Plans. The Company has adopted the 1997 Non-Qualified Stock
Option Plan for Non-Employee Directors (The "Directors' Plan"), which provides
for the granting of stock options to non-employee members of the Board of
Directors of the Company. Options to purchase an aggregate of 100,000 shares may
be granted under the Directors' Plan. Pursuant to the Directors' Plan, each non-
employee director of the Company will be granted, on a non-discretionary basis,
options to purchase 2,000 shares of Common Stock annually, commencing on the
later of the effective date of the Registration Statement of which this
Prospectus is a part and the pricing of the Common Stock to be sold in the
Equity offering, which options will generally vest over a five-year. The
exercise price of each option will be 100% of the fair market value of a share
of Common Stock on the date of grant. The Directors' Plan will be administered
by the Board of Directors. Options granted under the plan may, in certain
circumstances, be transferred to certain permitted transferees specified in the
plan. Messrs. Billig, Cashin, Delaney and Schultz are each expected to be
granted options to acquire 2,000 shares of Common Stock in connection with the
Equity Offering.
The Directors' Plan will permit, with the consent of the Board of Directors,
the exercise of options by delivery of shares of Common Stock owned by the
optionee or by withholding of such shares of Common Stock upon exercise of the
option in lieu of or in addition to cash. The Directors' Plan will permit the
Board of Directors to adjust the number and kind of shares subject to options in
the event of a reorganization, merger, consolidation, recapitalization,
reclassification, stock split, stock dividend or combination of shares. The
Board of Directors may amend the Directors' Plan or terminate the Directors'
Plan without the approval of the stockholders, provided, however, that
stockholder approval is required for an amendment to the Directors' Plan that
increases the number of shares for which options may be granted or changes in
any material respect the limitations or provisions of the options subject to the
Directors' Plan.
The Company also has adopted the 1997 Stock-Based Incentive Compensation Plan
(the "Incentive Plan" and, together with the Directors' Plan, the "Stock Option
Plans") that provides for discretionary grants or awards of options to purchase
stock, stock appreciation rights that reflect the appreciation in the value of
Common Stock ("SARs"), and restricted stock to employees and independent
contractors (other than certain
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<PAGE>
directors) of the Company. Under the Incentive Plan, 1,300,000 shares of Common
Stock may be subject to awards, and no more than 91,000 shares of Common Stock
may be subject to awards to any single individual in any one year. Such options,
SARs and restricted stock will be awarded based on performance and with vesting
schedules to be determined at the time of grant.
The Company expects to grant up to approximately 500,000 options to acquire
shares of Common Stock under the Incentive Plan on the later of the effective
date of the Registration Statement of which this Prospectus is a part and the
pricing of the Common Stock to be sold in the Equity Offering, at an exercise
price equal to the initial public offering price for the Equity Offering.
The Incentive Plan will be administered by a committee of directors, initially
comprised of Messrs. Billig, Cashin and Delaney, which will have the power and
authority, subject to ratification by the Board of Directors, to determine the
persons to whom awards are granted, the number of shares of Common Stock with
respect to such awards, and the terms of such awards, including the exercise
price of stock options, and any vesting or forfeiture provisions with respect to
awards. Options may be transferred to the extent permitted under the terms of
the applicable option agreement. The Incentive Plan will contain such other
provisions, terms and conditions as the committee shall decide.
Under the Incentive Plan, the exercise price of options will not be less than
the fair market value of the Common Stock on the date of grant. Options will be
subject to vesting provisions as specified in an applicable option agreement.
Options granted under the Incentive Plan may be designated, for federal income
tax purposes, either as non-qualified stock options or as incentive stock
options as defined in Sections 422 of the Internal Revenue Code. The Incentive
Plan will permit, with the consent of the committee, the exercise of options by
delivery of shares of Common Stock owned by the optionee or by the withholding
of such shares of Common Stock upon exercise of the option in lieu of, or in
addition to, cash. The Incentive Plan will permit the committee to adjust the
number and kind of shares subject to awards in the event of a reorganization,
merger, consolidation, reclassification, stock split, stock dividend or
combination of shares.
401(k) Plan. The Company established the Salaried 401(k) Savings Plan (the
"401(k) Plan") to allow eligible employees to help meet their long-term savings
needs. Except for eligible employees who transferred to DRA directly from GM and
began immediate participation, generally all employees who are compensated on a
salaried basis are eligible to participate in the 401(k) Plan after completing
six months of continuous employment. The 401(k) Plan is a defined contribution,
tax-qualified plan under section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), with employer and employee pre-tax contributions
deductible by the Company for income tax purposes for the year contributed, and
such contributions and earnings thereon are not taxable to employees until paid
to them.
An employee in the 401(k) Plan may elect to have from 1% to 15% of base salary
contributed from pay to the 401(k) Plan on a pre-tax, after-tax, or combination
of pre-tax and after-tax, basis, and receive a 25% matching contribution on the
sum of the employee's pre-tax and after-tax contributions up to 6% of base
salary. Except for certain GM employees who transferred employment to DRA,
employees also receive a 1% of base salary contribution for their retiree
medical care account under the 401(k) Plan. Under the Code, the total
contributions allocated to an employee's accounts for a plan year cannot exceed
the lesser of $30,000 or 25% of the employee's compensation, and the employee's
pre-tax contributions are limited in a calendar year to $9,500 (subject to cost
of living increases under the Code).
Employees are immediately 100% vested in their 401(k) Plan benefits except for
the matching and retiree medical care contributions, which vest after the
earliest of five years of service, death, attaining age 65, or attaining an
early retirement date under the Retirement Plan. Any forfeitures which may
result under the 401(k) Plan are used to reduce future Company contributions.
Employees generally may withdraw their vested benefits from the 401(k) Plan on
termination of employment, retirement, or death, and may also under certain
circumstances withdraw benefits while still employed (including certain
financial hardship, plan loan and pre- and post-age 59 1/2, withdrawals). Until
fully withdrawn, employees may direct the investment of their 401(k) Plan
benefits among a broad range of investment funds.
72
<PAGE>
Retirement Plan. The Company established the Retirement Plan primarily to
provide eligible employees with a monthly pension benefit after retirement for
life. Except for eligible employees who transferred to DRA directly from GM and
began immediate participation, generally all employees of the Company who are
compensated on a salaried basis are eligible to participate in the Retirement
Plan after completing one year of service and attaining age 21. The Retirement
Plan is a defined benefit, tax-qualified plan under section 401(a) of the Code,
and contributions to the Plan generally are deductible by the companies for
income tax purposes for the year contributed, and benefits are not taxable to
employees until paid.
The standard retirement benefit under the Retirement Plan is a monthly, single
life annuity starting at age 65, equal to 1.25% of an employee's average monthly
pay multiplied by the employee's years of service with the companies. Average
monthly pay is generally based on the employee's 60-consecutive month highest
average base pay during the ten-year period before retirement. The benefit for
certain long-service GM employees who transferred to DRA, however, is not less
than $60 times their years of service with the Company. Under the Code the
annual benefit provided by the Retirement Plan cannot exceed the lesser of
$125,000 or 100% of compensation (subject to certain further limitations under
the Retirement Plan and Code). Eligible employees generally may retire on or
after age 55 with 10 years of service, with their monthly Retirement Plan
benefit actuarially reduced if payment actually starts prior to age 62.
Employees who terminate with less than five years of service forfeit any
benefits which they may have accrued, and such forfeitures are used to offset
future contributions otherwise required to fund the Plan. Certain death and
disability benefits also may be paid under the Retirement Plan.
Executive Incentive Plan. The Company's executives participate in an Executive
Incentive Plan by which they are entitled to receive certain percentages of
their base compensation as a bonus if a designated target or objective is met.
Designated targets related to earnings, return on invested capital and/or
strategic objectives are set at the beginning of each year, based on the prior
year's results. The Executive Incentive Plan provides that if a target is
exceeded, then any bonus payable under the plan is commensurately increased,
subject to a cap. The Company expects to continue the Executive Incentive Plan
and has established a Compensation Committee made up of non-management directors
who will fix the target objectives for each executive for each year.
INSURANCE AND INDEMNIFICATION
The Company has obtained customary directors' and officers' insurance against
certain liabilities such persons may incur on behalf of the Company. For a
discussion of the limitations on liability of the Company's directors and the
indemnification by the Company of such directors set forth in the Company's
Restated Certificate of Incorporation, see "Description of Capital Stock--
Limitation on Liability and Indemnification."
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement with Thomas J. Snyder
which provides for his employment until 1999. Mr. Snyder receives an annual base
salary of $247,500, Subject to merit increases as determined by the Board of
Directors, plus annual performance bonuses as determined by the Board of
Directors. The agreement provides that the executive may not engage in any
business competitive with the Company while employed by the Company and for a
period of one year thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during fiscal year 1997
was composed of Messrs. Delaney, Sperlich and Billig. Upon completion of the
Offerings, the Compensation Committee will be composed of Messrs. Billig,
Cashin and Delaney.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of October 1, 1997 after giving
effect to the Stock Split, with respect to shares of each class of Common Stock
beneficially owned by (i) each person or group that is known to the Company to
be the beneficial owner of more than 5% of each class of outstanding Common
Stock, (ii) each director and senior officer of the Company and (iii) all
directors and senior officers of the Company as a group. Unless otherwise
specified, all shares are directly held. Each share of Class A Common Stock is
convertible into one share of Class B Common Stock, and each share of Class B
Common Stock is convertible into one share of Class A Common Stock. See
"Description of Capital Stock."
<TABLE>
<CAPTION>
CLASS A COMMON STOCK(1) COMBINED(1)
----------------------------------------- --------------------------------------
CLASS B
BEFORE OFFERING AFTER OFFERING COMMON BEFORE OFFERING AFTER OFFERING
AND TRANSACTIONS AND TRANSACTIONS STOCK AND TRANSACTIONS AND TRANSACTIONS
SHARES SHARES SHARES SHARES SHARES
OWNED PERCENT OWNED PERCENT OWNED OWNED PERCENT OWNED PERCENT
--------- -------- --------- -------- ------------ --------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Citicorp Venture
Capital Ltd................ 1,816,116 19.5% 3,190,683 19.9% 6,756,746(2) 7,222,362 46.3% 10,046,929 42.2%
399 Park Avenue
New York, NY 10043
MascoTech Automotive
Systems Group, Inc........... 2,520,000 27.0% 3,025,424 18.8% -- 2,520,000 16.2% 3,025,424 12.7%
275 Rex Boulevard
Auburn Hills, MI 48326
World Equity Partners,
L.P.(3).................... 1,680,000 15.3% 1,680,000 9.5% -- 1,680,000 9.7% 1,680,000 6.6%
399 Park Avenue
New York, NY 10043
Harold K. Sperlich(4)....... 793,464 8.5% 793,464 4.9% -- 793,464 5.1% 793,464 3.3%
Delco Remy
International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
Thomas J. Snyder(5)........... 420,000 4.5% 420,000 2.6% -- 420,000 2.7% 420,000 1.8%
Delco Remy
International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
James R. Gerrity(6)........... 252,000 2.7% 523,533 3.3% -- 252,000 1.6% 523,533 2.2%
E.H. Billig(7)................ 252,000 2.7% 252,000 1.6% -- 252,000 1.6% 252,000 1.1%
Richard M. Cashin, Jr.(8)..... 181,566 1.9% 245,022 1.5% 7,434 189,000 1.2% 252,456 1.1%
Michael A. Delaney(8)......... 36,795 * 63,459 * 10,018 46,813 * 73,477 *
Robert J. Schultz............. 77,280 * 77,280 * -- 77,280 * 77,280 *
All directors and senior
officers as a group
(21 persons)................. 2,987,505 32.1% 3,369,992 21.0% 17,452 3,004,957 19.3% 3,387,444 14.2%
</TABLE>
* Represents less than 1%.
(1) Does not include up to 1,400,000 shares of Class A Common Stock that are
subject to the Stock Option Plans or 1,680,000 shares issuable upon
exercise of the Warrants except that, in the case of the Warrants, with
respect to World Equity Partners, L.P. such 1,680,000 shares are
included.
(2) Includes 1,308,795 shares of Class B Common Stock to be received as merger
consideration in connection with the consummation of the acquisition of
Ballantrae by the Company and the conversion of the Junior Subordinated
Notes.
(3) Represents Warrants to acquire Class A Common Stock.
(4) Held as trustee under agreement dated February 4, 1985, as amended, with
Harold K. Sperlich, as Settlor.
74
<PAGE>
(5) Includes 5,000 shares held by Daisy Farm Limited Partnership of which Mr.
Snyder is General Partner.
(6) Includes 53,519 and 218,014 shares to be received by The Susan Gerrity
Living Trust and James R. Gerrity Living Trust, respectively, in the
acquisition of Ballantrae.
(7) Held by The Billig Family Limited Partnership.
(8) Does not include shares beneficially held by CVC, World Equity Partners,
L.P. OR CCT PARTNERS I, L.P. which may be deemed to be beneficially owned
by Messrs. Delaney and Cashin. Messrs. Delaney and Cashin disclaim
beneficial ownership of shares held by CVC or World Equity Partners,
L.P.
STOCKHOLDERS' AGREEMENT
In connection with the GM Acquisition, certain stockholders of the Company,
including CVC, World Equity Partners, L.P. ("WEP"), MascoTech Automotive Systems
Group, Inc. ("MascoTech"), Harold K. Sperlich, James R. Gerrity and the
individuals named therein as management investors (the "Management Investors")
(collectively the "Investors"), entered into a Securities Purchase and Holders
Agreement (AS AMENDED, the "Stockholders' Agreement") for a ten-year term
containing certain agreements among such stockholders with respect to the
capital stock and corporate governance of the Company. The following is a
summary description of the principal terms of the Stockholders' Agreement and is
subject to and qualified in its entirety by reference to the Stockholders'
Agreement, which has been filed as an exhibit to the Registration Statement
which includes this Prospectus.
Pursuant to the Stockholders' Agreement, the Investors agreed to vote their
shares in favor of the Board of Directors of the Company being composed of seven
directors as follows: Harold K. Sperlich (so long as he continues to serve as
chairman of the Board of Directors); one individual nominated by MascoTech; two
individuals nominated by CVC; James R. Gerrity (so long as he continues to serve
as an officer or a consultant to the Company); Thomas J. Snyder (so long as he
continues to serve as President of the Company); and one independent
director.
The Investors have agreed to vote their shares in favor of any proposal by CVC
or MascoTech (a) to remove directors nominated by CVC or MascoTech or (b) to
fill directorships vacated by directors nominated by CVC or MascoTech. Each of
CVC and MascoTech will retain the right to nominate the number of directors
designated above so long as they own at least 7% of the outstanding shares of
Common Stock; provided that if either CVC or Mascotech owns less than 7% of the
outstanding shares of Common Stock as a result of an event or events other than
the sale of such shares by the holder thereof, then the right to nominate
directors as specified above will continue.
Following the Equity Offering, the Investors will beneficially own over 50% of
the outstanding shares of Class A Common Stock and, pursuant to the foregoing
described provisions, will be able to elect the entire Board of Directors of the
Company.
The Stockholders' Agreement also provides for certain additional restrictions
on transfer by Management Investors, including, subject to certain exemptions,
the right of the Company to repurchase shares held by Management Investors upon
termination of employment (i) prior to July 31, 1999, with respect to Management
Investors who purchased shares prior to February 1996, and (ii) prior to
December 31, 2000 with respect to Management Investors who purchased shares
beginning in February 1996, in each case at a formula price, and the grant of a
right of first refusal in favor of the Company in the event a Management
Investor elects to transfer such Management Investor's shares of Common
Stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the GM Acquisition, the Company entered into a Registration
Rights Agreement with the Investors covering all of the 19.7 million shares of
Common Stock held by the Investors ("Registration Rights Agreement"). The
following description of the Registration Rights Agreement is subject to and
qualified in its entirety by reference to the Registration Rights Agreement,
which has been filed as an exhibit to the Registration Statement which includes
this Prospectus. CVC and, upon consummation of the Equity Offering, WEP and
WEP's permitted transferees have been granted the right one or more times to
require the Company to file one or more registration statements with the
Securities and Exchange Commission (the "Commission") registering the shares
held by them. The Investors have been granted the right, subject to certain
restrictions, to require the Company to include shares held by the Investors in
any registration statements filed by the Company with the Commission
75
<PAGE>
subject to certain limited exceptions. The Company has agreed to pay certain
expenses relating to any registration of shares effected pursuant to the
Registration Rights Agreement and to indemnify the Investors against certain
liabilities in connection with any such registration.
LOCK-UP AGREEMENTS
In connection with the Equity Offering, the Company and each of the Company's
principal stockholders, directors, senior officers and warrantholders have
agreed, subject to certain exceptions, not to offer, sell or transfer any shares
of Common Stock for a period of 180 days after the date of the Equity Offering,
without the prior written consent of Morgan Stanley & Co. Incorporated. This
agreement covers all of the outstanding shares of Common Stock held by the
principal stockholders, directors, senior officers and warrantholders. The
Company expects that certain of its other stockholders, owning approximately 1.1
million shares of Class A Common Stock, will be subject to similar
restrictions.
CERTAIN TRANSACTIONS
CVC and James R. Gerrity, a director of the company, each of whom is an
Existing Stockholder of the Company, beneficially own approximately 71.9% and
20.0% of Ballantrae's issued and outstanding common stock, on a fully-diluted
basis, respectively, and 74.7% and 15.6% of Ballantrae's issued and outstanding
preferred stock, respectively (including, for Mr. Gerrity, 5.0% and 5.2% of
Ballantrae's common and preferred stock, respectively, beneficially owned by
Susan Gerrity, Mr. Gerrity's wife). The Ballantrae Acquisition Agreement
provides that CVC and Mr. Gerrity and their affiliates will receive in
connection with the acquisition of Ballantrae 1,376,218 and 271,533 additional
shares of the Company's Common Stock, respectively, based on the initial public
offering price in the Equity Offering of $12.00 per share of Class A Common
Stock and the estimated working capital adjustment (the "Merger Consideration");
however such stock will be subject to certain restrictions against transfer
under applicable securities laws. The Ballantrae stockholders (other than the
Existing Stockholders) who receive shares of Common Stock pursuant to the
Ballantrae Acquisition Agreement will benefit from piggyback registration rights
with respect to such shares for a period of one year following the consummation
of the acquisition of Ballantrae. The Company believes that the Ballantrae
Acquisition Agreement and in particular the Merger Consideration to be paid to
CVC and Mr. Gerrity and their affiliates are fair to the Company. Messrs.
Delaney and Cashin are also each a stockholder and director of Ballantrae, as
well as each being a stockholder and director of the Company. See "Company
History," "Risk Factors--Acquisition of Ballantrae; Conflicts of Interest" and
"Business--Acquisition of Ballantrae."
The following table summarizes the history of CVC'S investment in Ballantrae
and the payment of merger consideration to CVC in connection with the proposed
acquisition of Ballantrae by the Company.
<TABLE>
<CAPTION>
AMOUNT PAID
DATE EVENT BY CVC
- ---- ----- ------
<S> <C> <C>
12/23/96 Acquisition of 32.9% of Ballantrae common stock............................................. $ 35,000
10/23/96 Acquisition of 74.7% of Ballantrae preferred stock.......................................... 2,100,000
10/23/96 Acquisition of warrants of Ballantrae common stock.......................................... --
10/23/97 Acquisition of 79.4% of preferred stock of Kraftube Management, Inc.(a)...................... 6,400,000
02/07/97 Exercise of warrants for Ballantrae common stock(b).......................................... 147,500
------------
Total CVC investment in Ballantrae........................................................... $ 8,682,500
Value of shares of Common Stock of the Company to be received by CVC as merger
consideration in connection with the acquisition of Ballantrae(c)............................ $ 16,514,600
============
</TABLE>
__________________________
(A) In 1989, CVC invested $1.0 million to purchase Kraftube, Inc. preferred
stock and $2.1 million for which it received a note in the original
principal amount of $2.1 million. In addition, in 1989, CVC purchased 62.8%
of the common stock of Kraftube Management, Inc. for $15,700. In 1993, the
Kraftube, Inc. preferred stock plus accrued and unpaid dividends was
exchanged for a note in the principal amount of $1.7 million and the $2.1
million note was repaid, together with accrued and unpaid interest thereon.
In 1996, the $1.7 million note was exchanged for 1.7 million shares of
Kraftube Management, Inc. preferred stock. The remaining 4.7 million shares
of Kraftube Management, Inc. preferred stock were received upon the
exchange of Kraftube Management, Inc. common stock in a transaction that
valued the common stock held by CVC at $4.7 million.
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<PAGE>
(b) Includes $25,000 attributable to the exercise of a warrant to purchase
25,000 shares of Ballantrae common stock which CVC intends to exercise
prior to the consummation of the acquisition.
(c) Based on the initial public offering of $12.00 per share.
The Company currently leases eight properties in Mississippi from entities
controlled by family members of John M. Mayfield, President of A&B Group. These
leases were entered into in connection with the acquisition of A&B Group by the
Company in March 1995. All leases are triple net leases, five of which expire on
March 31, 2003 and three of which expire on March 31, 2000, each subject to
renewal. Aggregate annual rent payments for these leases for fiscal year 1997,
not including tax and maintenance expenses constituting additional rent, equaled
approximately $479,700. The Company believes that the terms contained in these
leases are at least as favorable as those which could have been obtained from
unaffiliated third parties.
Mr. Richard L. Keister, President of World Wide, borrowed $90,000 from the
Company to purchase 10,000 shares of Class A Common Stock from the Company in
May 1997. Interest on the loan accrues at a rate of 9.25% and the loan is due
May, 2002.
In 1997, Mr. Nicholas J. Bozich, President of Nabco, borrowed $15,000 and
$80,000 from the Company to purchase 1,500 shares of Class A Common Stock and to
purchase a home, respectively. Interest on the $15,000 loan accrues at a rate of
9.25% and the $80,000 loan bears no interest. In 1997, the $15,000 and $80,000
loans are due in September 2002 and on demand, respectively.
The Company will exchange the Junior Subordinated Notes for approximately 2.4
million shares of the Company's Class A Common Stock based on the initial price
to public of $12.00 per share for the Equity Offering and a closing date for the
Offerings of December 22, 1997. The Junior Subordinated Notes were issued in an
aggregate principal amount of $18.2 million to CVC, certain employees and former
employees of CVC and MascoTech in connection with the GM Acquisition. The FINAL
exchange ratio will be based upon the initial PRICE TO public of the Class A
Common Stock of the Company for the Equity Offering less underwriting discounts
and commissions.
CVC, MascoTech, Harold K. Sperlich, James R. Gerrity and Thomas J. Snyder
(collectively, the "Original Investors") invested $19.9 million in the Company
prior to the GM Acquisition in exchange for the Junior Subordinated Notes and
for Common Stock of the Company. Since the GM Acquisition, the Company has not
paid any cash interest on the Junior Subordinated Notes to the Original
Investors although interest at 11% annually has been added to the principal
amount of the Junior Subordinated Notes as it becomes due. The Company has not
declared or paid any dividends on the Common Stock. Other than salaries and
consulting fees paid to Original investors who serve as directors or officers of
or consultants to the Company, no payments have been made by the Company to the
Original Investors since the GM Acquisition. See "Dividend Policy," "Management"
and "Dilution."
The following table summarizes the historical investments of the Original
Investors in the Company and Ballantrae since July 29, 1994 and the total
return, including unrealized return, on such investments as of, except where
otherwise indicated, the expected closing date for the Offerings of December 22,
1997 and based on the initial public offering price of $12.00 per share (in
thousands):
<TABLE>
<CAPTION>
Masco
CVC Tech Gerrity Sperlich Snyder Total
--- ---- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Investment in the Company(a)...................... $ 15,400 $ 4,200 $ 30 $ 100 $ 50 $ 19,780
Investment in Ballantrae.......................... 8,682(b) -- 1,240(c) -- -- 9,922
Total invested in the Company and
Ballantrae..................................... $ 24,082 $ 4,200 $ 1,270 $ 100 $ 50 $ 29,702
Interest on Junior Subordinated
Notes(d)......................................... $ 1,911 $ 520 $ -- $ -- -- $ 2,431
Dividends paid on Common Stock
since issuance................................... -- -- -- -- -- --
Consideration to be received for interest
In Ballantrae.................................... 16,514(E) -- 3,259(F) -- -- 19,773
Salaries and other compensation
paid(g).......................................... -- -- 1,117 1,360 1,556 4,033
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Value of original investment in shares
of Common Stock(h)........................ 122,320 33,360 3,024 10,080 5,040 173,824
Total cash received and value
of Shares of Common Stock
held................................ $ 140,745 $ 33,880 $ 7,400 $ 11,440 $ 6,596 $ 200,061
</TABLE>
(a) Represents the cash paid by the Original Investors for the Junior
Subordinated Notes and Common Stock issued by the Company in July, 1994.
(b) Includes the forgiveness of a note in the principal amount of $1,700 held by
an affiliate of Kraftube Management, Inc. in favor of CVC.
(c) Includes $157 paid for the purchase of common and preferred stock in
Ballantrae by Susan Gerrity, Mr. Gerrity's wife.
(d) Interest on the Junior Subordinated Notes has accrued at a rate of 11% per
annum since the date of issuance and was added to the principal amount of
the Junior Subordinated Notes in lieu of a cash interest payment. The total
principal amount of the Junior Subordinated Notes (including the accrued
interest (will be exchanged for Common Stock at the initial public offering
price of the Common Stock less underwriting discounts and commissions.
(e) Represents the value of the 1,376,218 shares of Common Stock to be received
by CVC as merger consideration, valued at the initital offering price of the
Common Stock, and assuming that, connection with the merger of Kraftube,
Inc. into Kraftube Management, Inc., all Kraftube Management, Inc. preferred
stockholder elect to receive Ballantrae preferred stock and not cash and no
dissenters' rights are exercised.
(f) Represents the value of the 271,533 shares of Common Stock to be received by
Mr. and Mrs. Gerrity as merger consideration valued at an initial offering
price of the Common Stock, and assuming that, in connection with the merger
of Kraftube Inc. into Kraftube Management, Inc., all Kraftube Management,
Inc. preferred stockholders elect to receive Ballantrae preferred stock and
not cash and no dissenters' rights are exercised.
(g) Represents amounts paid as of October 31, 1997.
(h) Represents the total number of shares purchased at the time of the initial
investment described in Note (1) above adjusted by the Stock Split and the
shares to be acquired upon the conversion of the original principal amount
of the Junior Subordinated Notes, in each case valued at the initial
offering price of the Common Stock. These figures do not include the value
of any shares to be received upon conversion of the portion of Junior
Subordinated Notes representing accrued and unpaid interest thereon or in
the acquisition of Ballantrae, all of which are separately stated in the
table.
The net proceeds of the Offerings will be used to, among other things, repay
in full (i) the $75 million 10 1/2% Senior Note, due July 31, 2003 to World
Subordinated Debt Partners, L.P., an affiliate of WEP, the holder of the
Warrants, a portion of which will be repaid at a price equal to 103% of the
principal amount thereof, and (ii) the $8.3 million of 9.86% Subordinated Notes
due February 6, 2001 to certain prior owners of Power Investment, including Mr.
J. Michael Jarvis, who is now one of the senior officers of the Company, in each
case plus accrued and unpaid interest thereon.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
and qualified in its entirety by reference to the Company's Restated Certificate
of Incorporation, which has been filed as an exhibit to the Registration
Statement which includes this Prospectus.
The Company may issue 67,000,000 shares of Common Stock, divided into two
classes consisting of 49,400,000 shares of Class A Common Stock, par value $.01
per share, and 17,600,000 shares of Class B Common Stock, par value $.01 per
share.
As of October 31, 1997, giving effect to the Transactions other than the
Offerings, there would have been 12,073,016 shares of Class A Common Stock
outstanding, held of record by 75 holders, and 7,733,674 shares of Class B
Common Stock outstanding. In addition, Warrants to purchase 1,680,000 shares of
Class A Common
78
<PAGE>
Stock were issued and outstanding and 1,400,000 shares of Class A Common Stock
were available to be issued pursuant to the Stock Option Plan.
CLASS A COMMON STOCK
Holders of Class A Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders and have no
cumulative voting rights. Holders of Class A Common Stock do not have preemptive
rights pursuant to the Restated Certificate of Incorporation. Holders of Class A
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Company's Board of Directors out of legally
available funds therefor; provided, however, that if dividends are declared that
are payable in shares of Class A Common Stock or Class B Common Stock, dividends
must be declared which are payable at the same rate on each class of Common
Stock and the dividends payable in shares of Class A Common Stock must be paid
to holders of Class A Common Stock and the dividends payable in shares of Class
B Common Stock must be paid to holders of Class B Common Stock. All outstanding
shares of Class A Common Stock are fully-paid and nonassessable. Shares of Class
A Common Stock are convertible at any time at the election of the holder thereof
into shares of Class B Common Stock on a one-for-one basis (but only to the
extent that such record holder of Class A Common Stock shall be deemed to be
required to convert such Class A Common Stock into Class B Common Stock pursuant
to applicable law).
Upon liquidation, dissolution or winding up of the Company, holders of Class A
Common Stock, together with holders of Class B Common Stock, are entitled to a
pro rata share of the distribution of assets remaining after the payment of
debts and expenses and after payment of the liquidation preference accorded to
the holders of any preferred stock of the Company which may be issued in the
future. Each share of Class A Common Stock has the same rights, privileges and
preferences as every other share of Class A Common Stock.
CLASS B COMMON STOCK
The rights of holders of Class B Common Stock and holders of Class A Common
Stock are identical and entitle the holders thereof to the same rights,
privileges, benefits and notices, except as otherwise described herein. Holders
of Class B Common Stock generally do not possess the right to vote on any
matters to be voted upon by the stockholders of the Company, except as provided
by law. Under Section 242(b)(2) of the Delaware General Corporation Law
("DGCL"), the holders of the Class B Common Stock shall be entitled to vote as a
class upon any proposed amendment to the Company's Restated Certificate of
Incorporation, if such amendment would increase or decrease the number of shares
or the par value of the shares of such class, or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely. Holders of Class B Common Stock may elect at any time to convert any
and all of such shares into Class A Common Stock, on a share-for-share basis, to
the extent the holder thereof is permitted pursuant to applicable law to hold
the total number of shares of voting securities such holder would hold after
giving effect to such conversion.
WARRANTS
On July 31, 1994, the Company issued to WEP warrants to purchase from the
Company 1,680,000 shares of the Company's Class A Common Stock for an exercise
price of $.0012 per share (the "Warrants"). The Warrants can be exercised in
whole or in part at any time prior to July 31, 2004. The exercise price and the
number of shares of Common Stock issuable upon exercise are subject to
adjustment upon the occurrence of certain events.
DIVIDENDS
The holders of the Company's Class A Common Stock and Class B Common Stock are
entitled to share ratably in dividends declared by the Board of Directors of the
Company out of funds legally available therefor. The Company's ability to pay
dividends is dependent on the ability of the Company's subsidiaries, including
DRA, to pay dividends to the Company. The ability of the Company's subsidiaries
to pay dividends and make other payments are subject to certain statutory,
contractual and other restrictions. The terms of the Company's indebtedness,
including the Senior Credit Facility, will restrict the payment of dividends by
the Company. The Company does not expect to declare or pay cash dividends to
holders of its Class A Common Stock or Class B Common Stock in the foreseeable
future.
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DELAWARE ANTI-TAKEOVER LAW
Section 203 of the DGCL provides, with certain exceptions, that a Delaware
corporation may not engage in certain business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date such person became an interested stockholder
unless: (i) the transaction resulting in the acquiring person's becoming an
interested stockholders, or the business combination, is approved by the board
of directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquires at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (a) by persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66-2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholders. An "interested
stockholder" is defined as any person that is (x) the owner of 15% or more of
the outstanding voting stock of the corporation or (y) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock at any time within the three-year period immediately prior to the date on
which it is sought to be determined whether such person is an interested
stockholder. As permitted by the DGCL, the Company has elected not to be
governed by Section 203.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the DGCL, the Company's Restated Certificate of Incorporation
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, relating to prohibited dividends or
distributions or the repurchase or redemption of stock or (iv) for any
transaction from which the director derives an improper personal benefit. In
addition, the Company's bylaws provide for indemnification of the Company's
officers and directors to the fullest extent permitted under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act Of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Agency.
DESCRIPTION OF INDEBTEDNESS
The following is a summary of the material debt instruments of the Company and
its subsidiaries which will remain outstanding following completion of the
Offerings and the application of the net proceeds thereof. See "Use of
Proceeds." To the extent such summary contains descriptions of credit documents,
such descriptions do not purport to be complete and are subject to and qualified
in their entirety by reference to such documents, which are filed as exhibits to
the Registration Statement which includes this Prospectus.
SENIOR CREDIT FACILITY
General. The Company intends to enter into an amended and restated credit
agreement with a syndicate of lenders led by Bank One, Indiana, N.A. ("Bank
One") concurrently with the consummation of the Offerings, providing for up to
$180 million of revolving credit availability (the "Senior Credit Facility").
Each of the Company's domestic operating subsidiaries (the "Senior Credit
Obligors") will be parties to the Senior Credit Facility. The obligations under
the Senior Credit Facility of each Senior Credit Obligor (the "Obligations")
will be unconditionally guaranteed by each other Senior Credit Obligor and each
of the Company and its domestic subsidiaries which are holding companies (the
"Senior Credit Guaranties"). The Obligations will be secured by a first lien on
substantially all the assets of the Company and its domestic subsidiaries,
including a pledge of the stock
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of such subsidiaries. The Obligations and the Senior Credit Guaranties will rank
pari passu with the Senior Notes and will rank senior to the Exchange Notes and
all other indebtedness of the Company.
Initially, the amount available to the Company for borrowing under the Senior
Credit Facility (the "Commitment Amount") will be $180 million, which will be
available for general corporate purposes (including acquisitions). Beginning
March 31, 2001, the Commitment Amount will decrease by $11.25 million at the end
of each quarter thereafter until December 31, 2004, at which time the Senior
Credit Facility terminates. There is a sub-limit for letters of credit equal to
the lesser of the Commitment Amount at the time of the issuance of a letter of
credit and $30 million.
Interest Rates. Interest on outstanding borrowings under the Senior Credit
Facility will be payable monthly and will accrue at an annual rate equal to
either (i) the Prime Rate (as defined in the Senior Credit Facility) or (ii) the
London Interbank Offered Rate plus the Applicable Spread (a "LIBOR-based Rate"),
at the option of the Company. The Applicable Spread will be based upon the
Company's trailing four quarter Ratio of Total Funded Debt to EBITDA (as defined
in the Senior Credit Facility) as follows:
<TABLE>
<CAPTION>
RATIO OF TOTAL FUNDED DEBT TO EBITDA Over LIBOR
------------------------------------ --------------------
<S> <C>
4.00x or above 200 basis points
3.50-3.99................................................. 175 basis points
3.00-3.49................................................. 150 basis points
2.50-2.99................................................. 125 basis points
</TABLE>
Maturity and Optional Prepayments. All borrowings under the Senior Credit
Facility will mature on December 31, 2004, except that the aggregate principal
amount outstanding may not exceed the Commitment Amount at any time. Borrowings
under the Senior Credit Facility will be prepayable at any time without premium
or penalty, except that any prepayment of a LIBOR-based Rate loan that is made
prior to the end of the applicable interest period will be subject to
reimbursement of breakage costs.
Covenants. The Senior Credit Facility will contain certain customary
covenants, including reporting and other affirmative covenants; financial
covenants, including ratio of senior funded debt to EBITDA, ratio of funded debt
to EBITDA, ratio of EBIT to cash interest, fixed charge coverage ratio, minimum
current ratio and minimum net income excluding extraordinary items (each as
defined in and calculated pursuant to the Senior Credit Facility); and negative
covenants, including restrictions on incurrence of other indebtedness,
amendments with respect to other indebtedness (including the Notes) payment of
cash dividends and other distributions to stockholders, liens in favor of
parties other than the lenders under the Senior Credit Facility, certain
guaranties of obligations of or advances to others, sales of material assets not
in the ordinary course of business, certain acquisitions of assets, making of
certain investments and capital expenditures.
Events of Default. The Senior Credit Facility will contain customary events of
default including non-payment of principal, interest or fees; violation of
covenants; inaccuracy of representations or warranties; cross-default to certain
other indebtedness including the Notes; bankruptcy; a change of control of the
Company or certain domestic subsidiaries; and any failure to apply proceeds of
an underwritten public offering of equity securities of the Company as required
by the Senior Credit Facility.
Fees. The Company will pay, on a quarterly basis, a per annum fee on the
unused Commitment Amount ranging from 1/10% to 1/2% based on certain financial
ratios of the Company.
SENIOR NOTES
The 8 5/8% Senior Notes Due 2007 issued in the Senior Notes Offering are in an
aggregate principal amount of $145 million, accrue interest at the rate of 8
5/8% per annum and are due December 15, 2007. Interest on the Notes is payable
in cash semi-annually. The Senior Notes are fully and unconditionally guaranteed
on a senior basis by each of the Company's domestic Restricted Subsidiaries (as
defined). The indenture governing the Senior Notes contains certain covenants by
the Company in favor of the holders of the Senior Notes ("Senior Note Holders"),
including but not limited to certain restrictions on the ability of the Company
and certain of its subsidiaries to: (i) incur indebtedness, except for permitted
indebtedness; (ii) pay dividends or purchase or redeem their stock or repay
before maturity any obligation subordinate to the Senior Notes; (iii) incur
future restrictions on their ability to
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pay dividends and transfer assets; (iv) sell assets and capital stock of their
subsidiaries; (v) engage in transactions with their affiliates; (vi) incur or
permit to exist liens on their assets, except for permitted liens; and (vii)
engage in mergers, consolidations or transfers of all or substantially all their
assets. The Senior Notes are effectively subordinate in right of payment to all
senior secured indebtedness of the Company, including the Senior Credit
Facility, and rank senior to the Exchange Notes and all other indebtedness of
the Company. The Notes are redeemable in whole or in part at the option of the
Company at any time on or after December 15, 2002, at a price beginning at
104.313% of the aggregate principal amount to be redeemed, declining ratably to
100% on and after December 15, 2005, and up to 40% of the original principal
amount of the Senior Notes may be redeemed by the Company at any time prior to
December 15, 2000, with the proceeds of certain public equity offerings, at a
price equal to 108.625% of such principal amount provided that at least 50% of
the original principal amount of the Notes remains outstanding. Upon the
occurrence of certain changes in control of the Company, each Senior Note Holder
has the right to require the Company to purchase all or a portion of such Senior
Note Holder's notes at a price equal to 101% of the aggregate principal amount
thereof. The failure of the Company and certain of its subsidiaries to pay
certain indebtedness when due constitutes, among other things, an event of
default under the Notes and can lead to the acceleration of the payment of the
Senior Notes.
GM CONTINGENT PURCHASE PRICE NOTE
In connection with the GM Acquisition, DRA issued to GM a Contingent Purchase
Price Note which will be paid beginning in 2004. The amount of the payment will
be based upon a percentage of the average earnings of the Company in the three
year period ending December 31, 2003 in excess of certain imputed earnings. The
principal amount of the Contingent Purchase Price Note (the "Contingent
Payment") is calculated by (A) multiplying five by (i) the three-year average
EBIT (as defined) of the Company for the years ending December 31, 2001, 2002
and 2003 minus (ii) the average three-year Imputed Return (as defined) on
Additional Investments (as defined) made after July 31, 1994 and on the
Company's balance sheet at December 31, 2001, 2002 and 2003, (B) subtracting
therefrom the Senior Obligations (as defined) outstanding on December 31, 2003
and (C) multiplying the result by the percentage obtained by dividing 100,000
(as adjusted for stock splits, reverse splits and stock dividends) by the total
number of shares of all classes of Common Stock outstanding on a fully diluted
basis as of the date of determination, excluding any shares issued subsequent to
July 31, 1994 to the extent the proceeds therefrom have been accounted for as an
Additional Investment. The Contingent Payment, if any, shall be paid in five
equal consecutive annual installments commencing on July 31, 2004. No interest
accrues on the Contingent Payment. The GM Contingent Purchase Price Note is
subordinated in right of payment to the Senior Credit Facility pursuant to the
terms of a Subordination Agreement by and among DRA and the lenders under the
Senior Credit Facility (the "GM Subordination Agreement"). Pursuant to the terms
of the GM Subordination Agreement, DRA may make payments of interest and
principal on the GM Contingent Purchase Price Note when due unless a
representative of the lenders under the Senior Credit Facility gives a notice to
GM that an event of default has occurred under the Senior Credit Facility (a
"Suspension Notice"). GM may not receive any payments or take any legal action
for the collection of the GM Contingent Purchase Note during the 179-day period
following the receipt of a Suspension Notice (or such shorter period if such
event of default under the Senior Credit Facility shall have been waived or
cured). For purposes of this paragraph (i) "EBIT" shall mean net income plus the
provision for income taxes and interest expense, plus or minus any extraordinary
charges or credits or nonrecurring charges or credits, as the case may be,
included in the determination of such net income, as reflected on the Company's
audited consolidated financial statements for the period in question, (ii)
"Imputed Return" for any year shall mean an amount determined by multiplying (A)
0.175 times the Additional Investment times (B) the number of days such
investment(s) was outstanding during such year divided by 365 days, and (iii)
"Senior Obligations" shall mean the sum of the outstanding principal plus
accrued but unpaid interest thereon of all senior, mezzanine, subordinated and
all other debt and redeemable preferred stock as reflected on the audited
consolidated balance sheet of the Company as of December 31, 2003, provided,
however, that Senior Obligations shall not include the outstanding balance of
any of the foregoing as of December 31, 2003 to the extent that the original
proceeds from such debt or redeemable preferred stock was accounted for as an
Additional Investment.
8% SUBORDINATED DEBENTURE OF DRA
In connection with the Offerings, DRA issued to GM an 8% Subordinated
Debenture having a fair value of $18.4 million at October 31, 1997 (the "8%
Subordinated Debenture") in exchange for Series A 8% Preferred
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Stock of DRA held by GM. The 8% Subordinated Debenture will be in the
principal amount of $19.0 million, will be due July 31, 2004 and will bear
interest, payable in cash, at the rate of 8% per year. DRA will be able to
prepay the 8% Subordinated Debenture at any time in whole or in part without
premium or penalty. The 8% Subordinated Debenture is subordinate in right of
payment to the Senior Credit Facility. The 8% Subordinated Debenture contains
default provisions in the event that DRA fails to pay principal or interest on
the 8% Subordinated Debenture when due or upon the occurrence of certain
bankruptcy events.
BALLANTRAE SUBORDINATED DEBT
In 1996, Tractech issued a note in the original principal amount of $10
million in favor of Dyneer Corporation ("Dyneer") that matures on October 31,
2006 (the "Ballantrae Subordinated Debt"). The Ballantrae Subordinated Debt
bears interest at a rate of 11% per annum. Tractech may prepay the Ballantrae
Subordinated Debt at any time in whole or in part without premium or penalty.
Tractech has the right to set-off $750,000 against the outstanding amount of the
Ballantrae Subordinated Debt within thirty days of the entry of a final non-
appealable order by a court of competent jurisdiction in certain patent
litigation, if such order fails to grant tractech the unfettered and exclusive
right to make, manufacture, have made, market and sell a particular line of
differentials without geographic or other restrictions and without cash
payments. The Company expects that Tractech will prepay with proceeds of the
offerings all of the outstanding principal amount of the ballantrae subordinated
debt except for $750,000. Tractech's obligations under the Ballantrae
Subordinated Debt are guaranteed by Ballantrae, and the Ballantrae subordinated
debt is subject to the Subordination Agreement dated as of October 24, 1996
among tractech, Dyneer, Ballantrae and Bank One and the subordinated Pledge
Agreement dated as of october 24, 1996 between Ballantrae and Dyneer, by which
Ballantrae has pledged all of the capital stock of Tractech to Dyneer.
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DESCRIPTION OF NOTES
GENERAL
The Existing Notes were issued under an Indenture dated as of August 1, 1996
(the "Indenture"), among the Company, the Subsidiary Guarantors and National
City Bank, as Trustee (the "Trustee"). The terms of the Indenture apply to the
Existing Notes and to the Exchange Notes to be issued in exchange therefor
pursuant to the Exchange Offer (all such Notes being referred to herein
collectively as the "Notes"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act.
The following is a summary of certain provisions of the Indenture and the
Notes, a copy of which Indenture and the form of Notes is available upon request
to the Company at the address set forth under "Available Information." The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act of 1939,
as amended. Capitalized terms used herein and not otherwise defined have the
meanings set forth in the section "--Certain Definitions."
Principal of, premium, if any, and interest on the Notes are payable, and the
Notes may be exchanged or transferred, at the office or agency of the Company,
which, unless otherwise provided by the Company, will be the offices of the
Trustee. At the option of the Company, payment of interest may be made by check
mailed to the address of the Holders as such address appears in the Note
register.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Company,
limited to $140 million aggregate principal amount, and will mature on August 1,
2006. The Notes bear interest at 105/8% per annum from the most recent date to
which interest has been paid or provided for, payable semi-annually to Holders
of record at the close of business on the January 15 or July 15 immediately
preceding the interest payment date on February 1 and August 1 of each year. The
Company will pay interest on overdue principal at 1% per annum in excess of such
rate, and it will pay interest on overdue installments of interest at such
higher rate to the extent lawful.
The interest rate on the Notes is subject to increase in certain circumstances
if the Company does not file a registration statement relating to the Registered
Exchange Offer on a timely basis, if the registration statement is not declared
effective on a timely basis or if certain other conditions are not satisfied,
all as further described under "Exchange Offer; Registration Rights."
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to August 1, 2001. Thereafter, the
Notes are redeemable, at the Company's option, in whole or in part, at any time
or from time to time, upon not less than 30 nor more than 60 days' prior notice
mailed by first-class mail to each Holder's registered address, at the following
redemption prices (expressed in percentages of principal amount), plus accrued
and unpaid interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
August 1 of the years set forth below:
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<TABLE>
<CAPTION>
Redemption
PERIOD Price
------ ----------
<S> <C>
2001......................................... 105.313%
2002......................................... 103.542
2003......................................... 101.771
2004 and thereafter.......................... 100.000
</TABLE>
In addition, at any time and from time to time prior to August 1, 1999, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price (expressed as a percentage
of principal amount) of 110% plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least 50% of the original aggregate principal amount
of the Notes must remain outstanding after each such redemption.
SELECTION
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
although no Note of $1,000 in original principal amount or less will be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
SUBSIDIARY GUARANTIES
Each of the Company's Domestic Restricted Subsidiaries, as primary obligors
and not merely as sureties, will irrevocably and unconditionally Guarantee on an
unsecured senior subordinated basis the performance and punctual payment when
due, whether at Stated Maturity, by acceleration or otherwise, of all
obligations of the Company under the Indenture and the Notes, whether for
payment of principal of or interest on the Notes, expenses, indemnification or
otherwise (all such obligations guaranteed by the Subsidiary Guarantors being
herein called the "Guaranteed Obligations"). The Subsidiary Guarantors will
agree to pay, in addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the Trustee or the
Holders in enforcing any rights under the Subsidiary Guaranties. Each Subsidiary
Guaranty will be limited in amount to an amount not to exceed the maximum amount
that can be Guaranteed by the applicable Subsidiary Guarantor without rendering
such Subsidiary Guaranty voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally. After the Issue Date, the Company will cause each new
Domestic Restricted Subsidiary to execute and deliver to the Trustee a
supplemental indenture pursuant to which such new Domestic Restricted Subsidiary
will Guarantee payment of the Notes. See "Certain Covenants--Future Subsidiary
Guarantors" below.
Each Subsidiary Guaranty is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed
Obligations,(b) be binding upon each Subsidiary Guarantor and (c) inure to the
benefit of and be enforceable by the Trustee, the Holders and their successors,
transferees and assigns.
A Subsidiary Guaranty will be released upon the sale of all the capital stock,
or all or substantially all of the assets, of the applicable Subsidiary
Guarantor if such sale is made in compliance with the Indenture.
SUBORDINATION
The indebtedness evidenced by the Notes and the Subsidiary Guaranties are
senior subordinated obligations of the Company and the Subsidiary Guarantors, as
the case may be. The payment of the principal of, premium (if any) and interest
on the Notes and the payment of any Subsidiary Guaranty is subordinate in right
of payment, as set forth in the Indenture, to the prior payment in full of all
Senior Indebtedness of the Company or the relevant Subsidiary Guarantor, as the
case may be, whether outstanding on the Issue Date or thereafter incurred,
including the obligations of the Company and such Subsidiary Guarantor under the
Senior Credit Facility and the World Senior Debt. The Notes and the Subsidiary
Guaranties will also be effectively subordinated to any Secured
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Indebtedness of the Company and the Subsidiary Guarantors to the extent of the
value of the assets securing such Indebtedness and to any liabilities of
Subsidiaries other than the Subsidiary Guarantors.
As of October 31, 1997, on a pro forma basis giving after effect to the
Transactions (as defined) the Company and the Subsidiary Guarantors would have
had (i) approximately $210.9 million of outstanding Senior Indebtedness
(excluding the Subsidiary Guaranties and unused commitments and outstanding
letters of credit under the Senior Credit Facility), (ii) substantially no
outstanding Senior Subordinated Indebtedness (other than the Notes), (iii)
approximately $47.5 million of Secured Indebtedness (excluding unused
commitments and outstanding letters of credit under the Senior credit Facility
and (iv) approximately $29.4 million of liabilities and preferred stock of the
Company's Subsidiaries (excluding the Subsidiary Guarantors). Although the
Indenture contains limitations on the amount of additional Indebtedness that the
Company and its Restricted Subsidiaries may incur, under certain circumstances
the amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See "Certain Covenants--Limitation on
Indebtedness."
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the Notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the Indenture. The Notes and each
Subsidiary Guaranty will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company and the relevant Subsidiary Guarantor,
respectively. The Company and each Subsidiary Guarantor has agreed in the
Indenture that it will not Incur, directly or indirectly, any Indebtedness that
is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinated or junior to Secured
Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under "--
Defeasance" below and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Senior Indebtedness is not paid when
due or (ii) any other default on any such Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full. However, the Company may pay the Notes without regard to the foregoing if
the Company and the Trustee receive written notice approving such payment from
the Representative of the Senior Indebtedness with respect to which either of
the events set forth in clause (i) or (ii) of the immediately preceding sentence
has occurred and is continuing. During the continuance of any default (other
than a default described in clause (i) or (ii) of the second preceding sentence)
with respect to any Senior Indebtedness pursuant to which the maturity thereof
may be accelerated immediately without further notice (except such notice as may
be required to effect such acceleration) or the expiration of any applicable
grace periods, the Company may not pay the Notes for a period (a "Payment
Blockage Period") commencing upon the receipt by the Trustee (with a copy to the
Company) of written notice (a "Blockage Notice") of such default from the
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Company from the Person or Persons who gave such Blockage
Notice, (ii) because the default giving rise to such Blockage Notice is no
longer continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness or
the Representative of such holders has accelerated the maturity of such
Designated Senior Indebtedness, the Company may resume payments on the Notes
after the end of such Payment Blockage Period. The Notes shall not be subject to
more than one Payment Blockage Period in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of such Senior Indebtedness before the
Noteholders are entitled to receive any payment, and, until the Senior
Indebtedness is paid in full, any payment or distribution to which Noteholders
would be entitled but for the subordination provisions of the Indenture will be
made to holders of such Senior Indebtedness as their interests may appear. If a
payment or distribution is made to Noteholders that,
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due to the subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration. If any
Designated Senior Indebtedness is outstanding, neither the Company nor any
Subsidiary Guarantor may pay the Notes until five Business Days after the
Representatives of all the issues of Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Notes only if the
Indenture otherwise permits payment at that time.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to the Company's obligations under the Notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Company or a Subsidiary Guarantor who are
holders of Senior Indebtedness of the Company or a Subsidiary Guarantor, as the
case may be, may recover more, ratably, than the Noteholders, and creditors of
the Company who are not holders of Senior Indebtedness may recover less,
ratably, than holders of Senior Indebtedness and may recover more, ratably, than
the Noteholders.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "--Defeasance."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require that the Company repurchase all or a portion of such Holder's Notes
at a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), in accordance with the provisions of the
next paragraph.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase (subject to the right of holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts and relevant financial information regarding
such Change of Control; (3) the repurchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with the covenant described
hereunder, that a Holder must follow in order to have its Notes repurchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between the
Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase
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the amount of indebtedness outstanding at such time or otherwise affect the
Company's capital structure or credit ratings.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Senior Credit Facility. Future
Senior Indebtedness of the Company may contain prohibitions of certain events
which would constitute a Change of Control or require such Senior Indebtedness
to be repurchased upon a Change of Control. Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Senior Indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the Holders upon a repurchase may
be limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
repurchases required in connection with a Change of Control. The Company's
failure to purchase the Notes in connection with a Change in Control would
result in a default under the Indenture which would, in turn, constitute a
default under the Senior Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payment to the
Holders of the Notes.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Notes will be issued
in the form of a Global Note. The Global Note will be deposited with, or on
behalf of, the Depository and registered in the name of the Depository or its
nominee. Except as set forth below, the Global Note may be transferred, in whole
and not in part, only to the Depository or another nominee of the Depository.
Investors may hold their beneficial interests in the Global Note directly
through the Depository if they have an account with the Depository or indirectly
through organizations which have accounts with the Depository.
If a holder tendering Existing Notes so requests, such holder's Exchange Notes
will be issued as described below under "Certificated Notes" in registered form
without coupons (the "Certificated Notes").
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934 (the "Exchange Act"). The Depository was created to hold securities
of institutions that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. The Depository's participants include securities
brokers and dealers (which may include the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its book-
entry registration and transfer system, the principal amount of the Notes
represented by such Global Note to the accounts of participants. The accounts to
be credited shall be designated by the Initial Purchasers of such Notes.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer of
those ownership interests will be effected only through, records maintained by
the Depository (with respect to participants' interest) and such participants
(with respect to the owners of beneficial interests in the Global Note other
than participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and owner
of the Global Note, the Depository or such nominee, as the case may be, will be
considered the sole legal owner and holder of the related Notes for all purposes
of such Notes and the Indenture. Except as set forth below, owners of beneficial
interests in the Global Note will not be entitled to have the Notes represented
by the Global Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated Notes in definitive form and will not
be considered to be the owners or holders of any Notes under the Global Note.
The Company understands that under existing industry
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practice, in the event an owner of a beneficial interest in the Global Note
desires to take any action that the Depository, as the holder of the Global
Note, is entitled to take, the Depository would authorize the participants to
take such action, and that the participants would authorize beneficial owners
owning through such participants to take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Payment of principal of and interest on Notes represented by the Global Note
registered in the name of and held by the Depository or its nominee will be made
to the Depository or its nominee, as the case may be, as the registered owner
and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes in
definitive form, the Global Note may not be transferred except as a whole by the
Depository to a nominee of such Depository or by a nominee of such Depository to
such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depository of
its Global Notes, Certificated Notes will be issued to each person that the
Depository identifies as the beneficial owner of the Exchange Notes represented
by the Global Note. In addition, any person having a beneficial interest in a
Global Note or any holder of Existing Notes whose Existing Notes have been
accepted for exchange may, upon request to the Trustee or the Exchange Agent, as
the case may be, exchange such beneficial interest or Existing Notes for
Certificated Notes. Upon any such issuance, the Trustee is required to register
such Certificated Notes in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness
unless, on the date of such Incurrence, the Consolidated Coverage Ratio exceeds
2.00 to 1 if such Indebtedness is Incurred prior to ,1998 or 2.25 to 1 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness: (1)
Indebtedness Incurred pursuant to the Senior Credit Facility or any Permitted
Receivables Financing; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of such Indebtedness then outstanding
does not exceed the greater of (i) $150 million (less any permanent reductions
in the amount of available borrowings thereunder) and (ii) the sum of (x) 60% of
the book value of the inventory of the Company and its Restricted Subsidiaries
and (y) 85% of the book value of the accounts receivable of the Company and its
Restricted Subsidiaries, in each case determined in accordance with GAAP; (2)
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Indebtedness of the Company owed to and held by any Wholly Owned Subsidiary or
Indebtedness of a Restricted Subsidiary owed to and held by the Company or a
Wholly Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Indebtedness of the
issuer thereof; (3) Indebtedness of the Company or a Restricted Subsidiary owed
to and held by any Non-Wholly Owned Subsidiary; provided, however, that (i) any
such Indebtedness shall be unsecured Subordinated Obligations of the Company or
such Restricted Subsidiary, as applicable and (ii) any subsequent issuance or
transfer of any Capital Stock of such Non-Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company, a Wholly
Owned Subsidiary or another Non-Wholly Owned Subsidiary) shall be deemed to
constitute the Incurrence of such Indebtedness by the issuer thereof; (4)
Indebtedness represented by the Notes; (5) Indebtedness outstanding on the Issue
Date (other than Indebtedness described in clause (1), (2) or (3) of this
covenant); (6) the GM Exchange Debentures; (7) Refinancing Indebtedness in
respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause
(4), (5), (6), (13) or this clause (7); (8) Indebtedness in respect of
performance bonds, bankers' acceptances, letters of credit and surety or appeal
bonds entered into by the Company and the Restricted Subsidiaries in the
ordinary course of their business; (9) Hedging Obligations consisting of
Interest Rate Agreements and Currency Agreements entered into in the ordinary
course of business and not for the purpose of speculation; provided, however,
that, in the case of Currency Agreements and Interest Rate Agreements, such
Currency Agreements and Interest Rate Agreements do not increase the
Indebtedness of the Company outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; (10) Purchase Money
Indebtedness and Capital Lease Obligations Incurred to finance the acquisition
by the Company or a Restricted Subsidiary of any assets in the ordinary course
of business and which do not exceed $20 million in the aggregate at any time
outstanding; (11) Indebtedness represented by the Subsidiary Guaranties and
Guarantees of Indebtedness Incurred pursuant to clause (1), (4), (5) and (7)
above; (12) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in the
case of daylight overdrafts) drawn against insufficient funds in the ordinary
course of business, provided that such Indebtedness is extinguished within five
business days of Incurrence; (13) Indebtedness of the Company and its Restricted
Subsidiaries, to the extent the proceeds thereof are immediately used after the
Incurrence thereof to purchase Notes tendered in an offer to purchase made as a
result of a Change of Control; (14) Indebtedness of the Company and its
Restricted Subsidiaries arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, in any case Incurred in
connection with the disposition of any assets of the Company or any Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such assets for the purpose of financing such
acquisition), in a principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection with such
disposition; and (15) Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company outstanding on the date of
such Incurrence (other than Indebtedness permitted by clauses (1) through (14)
above or paragraph (a)) does not exceed $50 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not permit
any Restricted Subsidiary to, Incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance (i) any Subordinated Obligations unless such Indebtedness shall be
subordinated to the Notes and the Subsidiary Guaranties, as applicable, to at
least the same extent as such Subordinated Obligations or (ii) any Senior
Subordinated Indebtedness unless such Indebtedness shall be Senior Subordinated
Indebtedness or shall be subordinated to the Notes and the Subsidiary
Guaranties, as applicable; provided, however, that clause (ii)above shall not
prohibit the Refinancing of all or any part of the GM Notes with Refinancing
Indebtedness if, at the time of such Incurrence, no Default shall have occurred
and be continuing (or would result therefrom).
(d) For purposes of determining compliance with the foregoing covenant, (i) in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
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(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not, and
shall not permit any Subsidiary Guarantor to, Incur (i) any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness of the Company or such Subsidiary Guarantor, as applicable, unless
such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness or (ii) any
Secured Indebtedness that is not Senior Indebtedness of the Company or such
Subsidiary Guarantor, as applicable, unless contemporaneously therewith
effective provision is made to secure the Notes or the Subsidiary Guaranty, as
applicable, equally and ratably with such Secured Indebtedness for so long as
such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment together with all other Restricted Payments (the amount of any payments
made in property other than in cash to be valued at the fair market value of
such property, as determined in good faith by the Board of Directors) declared
or made since the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter immediately following the
fiscal quarter during which the Notes are originally issued to the end of the
most recent fiscal quarter ending at least 45 days (or, if less, the number of
days after the end of such fiscal quarter as the consolidated financial
statements of the Company shall be provided to the Noteholders pursuant to the
Indenture) prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income accrued during such period (treated as one accounting
period) shall be a deficit, minus 100% of such deficit); (B) the aggregate Net
Cash Proceeds received by the Company from the issuance or sale of its Capital
Stock (other than Disqualified Stock) subsequent to the Issue Date (other than
an issuance or sale to a Subsidiary of the Company and other than an issuance or
sale to an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees to the
extent that the purchase by such plan or trust is financed by Indebtedness of
such plan or trust to the Company or any Subsidiary or for which the Company or
any Subsidiary is liable, directly or indirectly, as a guarantor or otherwise
(including by the making of cash contributions to such plan or trust which are
used to pay interest or principal on such Indebtedness)); (C) the amount by
which Indebtedness of the Company or its Restricted Subsidiaries is reduced on
the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date, of any Indebtedness of
the Company or its Restricted Subsidiaries convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property, distributed by the Company or
any Restricted Subsidiary upon such conversion or exchange); and (D) an amount
equal to the sum of (i) the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, repayments of loans or advances or other
transfers of assets subsequent to the Issue Date, in each case to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the
portion(proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of an Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company or any Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of their
employees to the extent that the purchase by such plan or trust is financed by
Indebtedness of such plan or trust to the Company or any Subsidiary or for which
the Company or any Subsidiary is liable, directly or indirectly, as a guarantor
or otherwise (including by the making of cash contributions to such plan or
trust which are used to pay interest or principal on such Indebtedness));
provided, however, that (A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds
from such sale shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above; (ii) any purchase or redemption of (A)
Subordinated Obligations of the Company made by exchange for, or out of the
proceeds of the substantially
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concurrent sale of, Indebtedness of the Company which is permitted to be
Incurred pursuant to paragraphs (b) and (c) of the covenant described under "--
Limitation on Indebtedness" or (B) Subordinated Obligations of a Restricted
Subsidiary made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of such Restricted Subsidiary or the Company
which is permitted to be Incurred pursuant to paragraphs (b) and (c) of the
covenant described under "--Limitation on Indebtedness"; provided, however, that
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments; (iii) any purchase or redemption of (A) Disqualified
Stock of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Disqualified Stock of the Company, (B)
Disqualified Stock of a Restricted Subsidiary made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Disqualified Stock of such
Restricted Subsidiary or the Company or (C) GM Preferred Stock made by exchange
for GM Exchange Debentures in an aggregate principal amount equal to the stated
amount of the GM Preferred Stock (plus accrued and unpaid dividends thereon);
provided, however, that (1) at the time of such exchange, no Default or Event of
Default shall have occurred and be continuing or would result therefrom and (2)
such purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments; (iv) any purchase or redemption of the A&B Seller Notes or
the Power Seller Notes; provided, however, that (A) at the time of such purchase
or redemption, no Default shall have occurred and be continuing (or would result
therefrom), (B) the Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "--
Limitation on Indebtedness" after giving pro forma effect to such Restricted
Payment, (C) such purchase or redemption is not made, directly or indirectly,
from the proceeds of (or made in anticipation of) any Issuance of Indebtedness
by the Company or any Subsidiary and (D) such purchase or redemption will be
included in the calculation of the amount of Restricted Payments; (v) any
purchase or redemption of Subordinated Obligations from Net Available Cash to
the extent permitted by the covenant described under "--Limitation on Sales of
Assets and Subsidiary Stock"; provided, however, that such purchase or
redemption will be excluded in the calculation of the amount of Restricted
Payments; (vi) upon the occurrence of a Change of Control and within 60 days
after the completion of the offer to repurchase the Notes pursuant to the
covenant described under "--Change of Control" above (including the purchase of
all Notes tendered), any purchase or redemption of Subordinated Obligations
required pursuant to the terms thereof as a result of such Change of Control at
a purchase or redemption price not to exceed the outstanding principal amount
thereof, plus accrued and unpaid interest thereon, if any; provided, however,
that (A) at the time of such purchase or redemption, no Default shall have
occurred and be continuing (or would result therefrom), (B) the Company would be
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of
the covenant described under "--Limitation on Indebtedness" after giving pro
forma effect to such Restricted Payment, (C) such purchase or redemption is not
made, directly or indirectly, from the proceeds of (or made in anticipation of)
any Issuance of Indebtedness by the Company or any Subsidiary and (D) such
purchase or redemption will be included in the calculation of the amount of
Restricted Payments; (vii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that at the time of payment of
such dividend, no other Default shall have occurred and be continuing (or would
result therefrom); provided further, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (viii) the
repurchase of shares of, or options to purchase shares of, common stock of the
Company or any of its Subsidiaries from employees, former employees, directors
or former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former directors),
pursuant to the terms of the agreements (including employment agreements) or
plans (or amendments thereto) approved by the Board of Directors under which
such individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount of
such repurchases shall not exceed the sum of (1) $5 million and (2) the
aggregate amount of cash received by the Company after the Issue Date from the
sale of such shares to, or the exercise of options to purchase such shares by,
employees or directors of the Company or any of its Subsidiaries; provided
further, however, that such repurchases shall be included in the calculation of
the amount of Restricted Payments; or (ix) Investments in Joint Ventures
primarily engaged in a Related Business, provided, however, that the aggregate
amount of all such Investments shall not exceed $25 million at the time any such
Investment is made; provided, however, that (A) the amount referred to above in
this clause (ix) shall be increased to $40 million at the time of any Investment
if, after giving pro forma effect to such Investment, the Consolidated Coverage
Ratio exceeds 3.50 to 1.00 and (B) such Investments shall be included in the
calculation of the amount of Restricted Payments.
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Limitation on Restrictions on Distributions from Restricted Subsidiaries. The
Company shall not, and shall not permit any Restricted Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) to make any loans or advances to the Company or (c) transfer
any of its property or assets to the Company, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary which was entered into on or prior to the date on
which such Restricted Subsidiary was acquired by the Company (other than as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a Refinancing
of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant (or effecting a Refinancing of such Refinancing
Indebtedness pursuant to this clause (iii)) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such refinancing agreement or
amendment are no more restrictive in any material respect than the encumbrances
and restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests to the extent
such provisions restrict the transfer of the lease or the property leased
thereunder; (v) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; (vi) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale or
disposition; and (vii) any encumbrance or restriction with respect to any
Receivables Subsidiary pursuant to an agreement related to Indebtedness of the
Receivables Subsidiary which is permitted under the covenant described under "--
Limitation on Indebtedness" or pursuant to any agreement relating to a Financing
Disposition to or by the Receivables Subsidiary.
Limitation on Sales of Assets and Subsidiary Stock. The Company shall not, and
shall not permit any Restricted Subsidiary to consummate any Asset Disposition
unless the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration), as determined in good
faith by the Board of Directors, of the shares and assets subject to such Asset
Disposition and at least 75% (or 100% in the case of lease payments) of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents. In the event and to the extent that the
Net Available Cash received by the Company or any Restricted Subsidiary from one
or more Asset Dispositions occurring on or after the Issue Date exceeds $10
million, then the Company or such Restricted Subsidiary shall (i) within 360
days after the date such Net Available Cash so received exceeds $10 million and
to the extent the Company or such Restricted Subsidiary elects (or is required
by the terms of any Senior Indebtedness) to (A) apply an amount equal to such
excess Net Available Cash to prepay, repay or purchase Senior Indebtedness of
the Company or such Restricted Subsidiary, in each case owing to a Person other
than the Company or any Affiliate of the Company or (B) invest (or enter into a
binding commitment to invest, provided that such commitment shall be subject
only to customary conditions (other than financing) and such investment shall be
consummated within 360 days after the end of such 360-day period) an equal
amount, or the amount not so applied pursuant to clause (A), in Additional
Assets (including by means of an Investment in Additional Assets by a Restricted
Subsidiary with Net Available Cash received by the Company or another Restricted
Subsidiary) and (ii) apply such excess Net Available Cash (to the extent not
applied pursuant to clause (i)) as provided in the following paragraphs of the
covenant described hereunder; provided, however that in connection with any
prepayment, repayment or purchase of Senior Indebtedness pursuant to clause (A)
above, the Company or such Restricted Subsidiary shall retire such Senior
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased; provided further, however, that the Company or such
Restricted Subsidiary shall not be required to permanently reduce the related
loan commitment in the case of any such prepayment, repayment or purchase with
Net Available Cash from any Asset Disposition of Non-Core Assets, so long as an
amount equal to 100% of such Net Available Cash is invested
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in Additional Assets within the period required pursuant to clause (B) above.
The amount of such excess Net Available Cash required to be applied pursuant to
clause (ii) above and not theretofore so applied shall constitute "Excess
Proceeds." Pending application of Net Available Cash pursuant to this provision,
such Net Available Cash shall be invested in Temporary Cash Investments.
If at any time the aggregate amount of Excess Proceeds not theretofore subject
to an Excess Proceeds Offer (as defined below) totals at least $10 million, the
Company shall, not later than 30 days after the end of the period during which
the Company is required to apply such Excess Proceeds pursuant to clause (i) of
the immediately preceding paragraph (or, if the Company so elects, at any time
within such period), make an offer (an "Excess Proceeds Offer") to purchase from
the Holders on a pro rata basis an aggregate principal amount of Notes equal to
the Excess Proceeds (rounded down to the nearest multiple of $1,000) on such
date, at a purchase price equal to 100% of the principal amount of such Notes,
plus, in each case, accrued interest (if any) to the date of purchase (the
"Excess Proceeds Payment"). Upon completion of an Excess Proceeds Offer, the
amount of Excess Proceeds remaining after application pursuant to such Excess
Proceeds Offer (including payment of the purchase price for Notes duly tendered)
may be used by the Company for any corporate purpose (to the extent not
otherwise prohibited by the Indenture).
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption of Senior Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition and (y)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in the event that such Excess Proceeds are received by the Company
under the covenant described hereunder and the Company is required to repurchase
Notes as described above. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
covenant described hereunder by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $5 million, (i) are set forth in
writing, (ii) comply with clause (1) and (iii) have been approved by a majority
of the disinterested members of the Board of Directors and (3) if such Affiliate
Transaction involves an amount in excess of $10 million, (i) comply with clause
(2) and (ii) have been determined by a nationally recognized investment banking
firm to be fair, from a financial standpoint, to the Company and its Restricted
Subsidiaries; provided, however, that no such opinion shall be required with
respect to any Financing Disposition.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"--Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans in
the ordinary course of business and approved by the Board of Directors, (iii)
the grant of stock options or similar rights to employees and directors of the
Company in the ordinary course of business and pursuant to plans approved by the
Board of Directors, (iv) loans or advances to employees in the ordinary course
of business of the Company or its Restricted Subsidiaries, (v) fees,
compensation or employee benefit arrangements paid to and indemnity provided for
the benefit of directors, officers or employees of the Company or any Subsidiary
in the ordinary course of business, (vi) the payment of interest, principal and
other amounts under the Junior Subordinated Notes and the World Senior Debt when
due in accordance with the terms thereof, (vii) the prepayment or redemption of
any World Senior Debt prior to scheduled maturity in accordance with the terms
thereof or (viii) any Affiliate Transaction between the Company and a Restricted
Subsidiary or between Restricted Subsidiaries in the ordinary course of business
(so long as the other
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stockholders of any participating Restricted Subsidiaries which are not Wholly
Owned Restricted Subsidiaries are not themselves Affiliates of the Company).
Limitation on the Issuance or Sale of Capital Stock of Restricted
Subsidiaries. The Company shall not (i) sell, pledge, hypothecate or otherwise
dispose of any shares of Capital Stock of a Restricted Subsidiary (other than
pledges of Capital Stock securing Designated Senior Indebtedness as in effect on
the Issue Date) or (ii) permit any Restricted Subsidiary, directly or
indirectly, to issue or sell or otherwise dispose of any shares of its Capital
Stock other than (A) to the Company or a Wholly Owned Subsidiary, (B) directors'
qualifying shares, (C) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary or (D) with respect to the common stock of any Restricted Subsidiary,
in a Public Equity Offering as a result of or after which a Public Market
exists. The proceeds of any sale of such Capital Stock permitted hereby will be
treated as Net Available Cash from an Asset Disposition and must be applied in
accordance with the terms of the covenant described under "--Limitation on Sales
of Assets and Subsidiary Stock."
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any property of the Company or any Restricted
Subsidiary (including Capital Stock of a Restricted Subsidiary), whether owned
at the Issue Date or thereafter acquired, which secures Indebtedness that ranks
pari passu with or subordinated to the Notes or the Subsidiary Guaranty unless
(i) if such Lien secures Indebtedness that ranks pari passu with the Notes and
the Subsidiary Guaranty, the Notes are secured on an equal and ratable basis
with the obligations so secured until such time as such obligation is no longer
secured by a Lien or (ii) if such Lien secures Indebtedness that is subordinated
to the Notes and the Subsidiary Guaranty, such Lien shall be subordinated to a
Lien granted to the Holders in the same collateral as that securing such Lien to
the same extent as such subordinated Indebtedness is subordinated to the Note
and the Subsidiary Guaranty.
Merger and Consolidation. The Company shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)the
resulting, surviving or transferee Person (the "Successor Company")shall be a
Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) except in the case of a
merger the sole purpose of which is to change the Company's jurisdiction of
incorporation, immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation on
Indebtedness"; (iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that is not
less than the Consolidated Net Worth of the Company immediately prior to such
transaction; and (v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. Notwithstanding the foregoing clauses (ii), (iii) and
(iv), any Restricted Subsidiary may consolidate with, merge into or transfer all
or part of its properties and assets to the Company.
The Successor Company shall be the successor to the Company and shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company shall not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (if not such Subsidiary) shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
such Subsidiary) shall expressly assume, by a supplemental indenture, in form
satisfactory to the Trustee, all the obligations of such Subsidiary under its
Subsidiary Guaranty; (ii) immediately after giving effect to such transaction on
a pro forma basis (and treating any Indebtedness which becomes an obligation of
the resulting,
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surviving or transferee Person as a result of such transaction as having been
Incurred by such Person at the time of such transaction), no Default shall have
occurred and be continuing; and (iii) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such Guaranty Agreement comply with
the Indenture. The provisions of clauses (i) and (iii) above shall not apply to
any transactions which constitute an Asset Disposition if the Company has
complied with the applicable provisions of the covenant described under "--
Limitation on Sales of Assets and Subsidiary Stock" above.
Future Guarantors. The Company shall cause each Domestic Restricted Subsidiary
to execute and deliver to the Trustee a supplemental indenture pursuant to which
such Restricted Subsidiary will Guarantee payment of the Notes on the same terms
and conditions as those set forth in the Indenture. Each Subsidiary Guaranty
will be limited in amount to an amount not to exceed the maximum amount that can
be Guaranteed by the applicable Subsidiary Guarantor without rendering such
Subsidiary Guaranty void able under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
SEC Reports. Until such time as the Company shall become subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall provide the Trustee, the Initial Purchasers, the Noteholders and
prospective Noteholders (upon request) with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
Sections, such information, documents and other reports to be so provided at the
times specified for the filing of such information, documents and reports under
such Sections. Thereafter, notwithstanding that the Company may not be required
to remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Noteholders and prospective Noteholders (upon request) with such annual reports
and such information, documents and other reports as are specified in such
Sections and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections; provided, however, that the Company shall not be required to file
any report, document or other information with the SEC if the SEC does not
permit such filing.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due (whether or not such payment is
prohibited by the provisions described under "Subordination" above), continued
for 30 days, (ii) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise (whether or not such payment is prohibited by the
provisions described under "Subordination" above), (iii) the failure by the
Company to comply with its obligations under "Certain Covenants-Merger and
Consolidation" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described above
under "--Change of Control" or "--Certain Covenants" (other than a failure to
purchase Notes), (v) the failure by the Company to comply for 30 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Significant Subsidiary is not paid within any applicable
grace period after final maturity or is accelerated by the holders thereof
because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million and such failure continues for 10 days after
notice (the "cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million is rendered against the Company or a Significant
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision"), (ix) a Subsidiary Guaranty ceases to be in full
force and effect (other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guaranty and such Default continues for 10 days. However, a
default under clause (iv) or (v) will not constitute an Event of Default until
the Trustee or the Holders of 25% in principal amount of the outstanding Notes
notify the Company of the default and the Company does not cure such default
within the time specified in clauses (iv) and (v) hereof after receipt of such
notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders of
at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
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payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holders of the Notes. Under certain
circumstances, the Holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the Holders of a
majority in principal amount of the outstanding Notes have not given the Trustee
a direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the Holders of a majority in principal amount of the
outstanding Notes are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is known
to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any Note, the Trustee may withhold notice if and
so long as a committee of its trust officers determines that withholding notice
is not opposed to the interest of the Holders. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the Holders of a majority in principal amount of the
Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected thereby, no amendment may, among other things, (i)
reduce the amount of Notes whose Holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note, (iii)
reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce
the premium payable upon the redemption of any Note or change the time at which
any Note may be redeemed as described under "--Optional Redemption" above, (v)
make any Note payable in money other than that stated in the Note, (vi) impair
the right of any Holder to institute suit for the enforcement of any payment on
or with respect to such Holder's Notes or any Subsidiary Guaranty, (vii) make
any change in the amendment provisions which require each holder's consent or in
the waiver provisions or (viii) make any change to the subordination provisions
of the Indenture that would adversely affect the Noteholders.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add guarantees with respect to the Notes, to release Subsidiary
Guarantors when permitted by the Indenture, to secure the Notes, to
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add to the covenants of the Company for the benefit of the Holders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder or to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the Trust Indenture Act. However, no amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consent to such change.
The consent of the Holders is not necessary under the Indenture to approve the
particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment.
However, the failure to give such notice to all Holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER
Certificated Notes will be issued in registered form and will be transferable
only upon the surrender of the Notes being transferred for registration of
transfer. The Company may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a registrar and paying agent in respect of the Notes. The
Company at any time may terminate its obligations under "--Change of Control"
and under the covenants described under "--Certain Covenants" (other than the
covenant described under "--Merger and Consolidation"), the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under "--
Defaults" above and the limitations contained in clauses (iii) and (iv) under
"Certain Covenants-Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If the Company exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "--Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "Certain
Covenants-Merger and Consolidation" above. If the Company exercises its legal
defeasance option or its covenant defeasance option, each Subsidiary Guarantor
will be released from all of its obligations with respect to its Subsidiary
Guaranty.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
National City Bank is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will
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The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"A&B Seller Notes" means the 10% Subordinated Notes due September 30, 2001, of
A&B Enterprises, Inc., in an original aggregate principal amount of $3.5
million.
"Additional Assets" means (i) any property or assets (other than Indebtedness
and Capital Stock) in a Related Business; (ii) the Capital Stock of a Person
that becomes a Restricted Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Restricted Subsidiary or (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "Certain Covenants-Limitation on
Restricted Payments," "Certain Covenants-Limitation on Affiliate Transactions"
and "Certain Covenants-Limitations on Sales of Assets and Subsidiary Stock"
only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof;
provided further, however, that for purposes of the provisions described under
"Certain Covenants-Limitations on Sales of Assets and Subsidiary Stock" only,
World Debt Partners shall not be deemed an "Affiliate" of the Company.
"Asset Disposition" (x) means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares and, to the
extent required by local ownership laws in foreign countries, shares owned by
foreign shareholders), (ii) all or substantially all the assets of any division,
business segment or comparable line of business of the Company or any Restricted
Subsidiary or (iii) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such Restricted
Subsidiary (other than, in the case of (i), (ii) and (iii) above, (y) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Wholly Owned Subsidiary and (z) for purposes of the
covenant described under "Certain Covenants-Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Permitted Investment or
a Restricted Payment permitted by the covenant described under "Certain
Covenants-Limitation on Restricted Payments").
"Asset Purchase Agreement" means the Asset Purchase Agreement dated July 13,
1994, by and among the Company, DRA and General Motors Corporation.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended).
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"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Senior Credit Facility including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, Guarantees and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following events:
(i) Prior to the first public offering of common stock of the Company,
the Permitted Holders cease to be the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a majority
in the aggregate of the total voting power of the Voting Stock of the Company,
whether as a result of issuance of securities of the Company, any merger,
consolidation, liquidation or dissolution of the Company, any direct or indirect
transfer of securities by the Permitted Holders or otherwise (for purposes of
this clause (i) and clause (ii) below, the Permitted Holders shall be deemed to
beneficially own any Voting Stock of any entity (the "specified entity") held by
any other entity (the "parent entity") so long as the Permitted Holders
beneficially own (as so defined), directly or indirectly, in the aggregate a
majority of the voting power of the Voting Stock of the parent entity);
(ii) after the first public offering of common stock of the Company, any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act),
other than one or more Permitted Holders, is or becomes the beneficial owner (as
defined in clause (i) above, except that for purposes of this clause (ii) such
person shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 35% of the total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in clause (i)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person and
do not have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors (for the purposes
of this clause (ii), such other person shall be deemed to beneficially own any
Voting Stock of a specified entity held by a parent entity, if such other person
is the beneficial owner (as defined in this clause (ii)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of such
parent entity and the Permitted Holders beneficially own (as defined in clause
(i) above), directly or indirectly, in the aggregate a lesser percentage of the
voting power of the Voting Stock of such parent entity and do not have the right
or ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent entity);
(iii) after the first public offering of common stock of the Company,
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors (together with any new directors
whose election by such Board of Directors or whose nomination for election by
the shareholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were
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either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office; or
(iv) after the first public offering of common stock of the Company, the
merger or consolidation of the Company with or into another Person or the merger
of another Person with or into the Company, or the sale of all or substantially
all the assets of the Company to another Person (other than a Person that is
controlled by the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding immediately
prior to such transaction and which represent 100% of the aggregate voting power
of the Voting Stock of the Company are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities are
changed into or exchanged for, in addition to any other consideration,
securities of the surviving corporation that represent immediately after such
transaction, at least a majority of the aggregate voting power of the Voting
Stock of the surviving corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the ratio
of (i) the aggregate amount of EBITDA for the period of the most recent four
consecutive fiscal quarters ending at least 45 days (or, if less, the number of
days after the end of such fiscal quarter as the consolidated financial
statements of the Company shall be provided to the Noteholders pursuant to the
Indenture) prior to the date of such determination (determined, for the four
fiscal quarters ending prior to the Issue Date, or any of such fiscal quarters,
on a pro forma basis to give effect to the Subsequent Acquisitions as if they
occurred on the first day of such period) to (ii) Consolidated Interest Expense
for such four fiscal quarters; provided, however, that (1) if the Company or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of such
period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro forma
basis to such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period
(except that, in the case of Indebtedness used to finance working capital needs
incurred under a revolving credit or similar arrangement, the amount thereof
shall be deemed to be the average daily balance of such Indebtedness during such
four-fiscal-quarter period), (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the EBITDA
(if negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased, assumed by a
third person (to the extent the Company and its Restricted Subsidiaries are no
longer liable for such Indebtedness) or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company shall have consummated a Public Equity Offering following which there is
a Public Market, Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Company and
its Restricted Subsidiaries in connection with such Public Equity Offering for
such period, (4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, which acquisition constitutes all or substantially
all of an operating unit of a business, including any such Investment or
acquisition occurring in connection with a transaction requiring a calculation
to be made hereunder, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period and (5) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition, any Investment or acquisition of
assets
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that would have required an adjustment pursuant to clause (3) or (4) above if
made by the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest of
such Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, (a)
to the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount,
(iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the
Company or a Wholly Owned Subsidiary, (viii) interest incurred in connection
with Investments in discontinued operations, (ix) interest actually paid on any
Indebtedness of any other Person that is Guaranteed by the Company or any
Restricted Subsidiary and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the Company
or any Wholly Owned Subsidiary) in connection with Indebtedness Incurred by such
plan or trust, minus, (b) to the extent included in such total interest expense,
amortization of deferred financing costs, fees and expenses.
"Consolidated Net Income" means, for any period, the net income of the Company
and its consolidated Subsidiaries; provided, however, that there shall not be
included in such Consolidated Net Income: (i) any net income (or loss)of any
Person if such Person is not a Restricted Subsidiary, except that subject to the
exclusion contained in clause (iv) below, the Company's equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause (iii)
below); (ii) for purposes of subclass (a)(3)(A) of the covenant described under
"Certain Covenants --Limitation on Restricted Payments" only, any net income (or
loss) of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been distributed by
such Restricted Subsidiary consistent with such restriction during such period
to the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income; (iv)
any gain (or loss) realized upon the sale or other disposition of any assets of
the Company or its consolidated Subsidiaries (including pursuant to any sale-
and-leaseback arrangement) which is not sold or otherwise disposed of in the
ordinary course of business and any gain (or loss) realized upon the sale or
other disposition of any Capital Stock of any Person; (v) extraordinary gains or
losses; and (vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants-Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
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"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i)the par
or stated value of all outstanding Capital Stock of the Company plus (ii) paid-
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Currency Agreement" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"CVC Investor" means (i) CVC, (ii) Citicorp, N.A. and (iii) any officer,
employee or director of CVC so long as such person shall be an employee, officer
or director of CVC.
"Default" means any event which is, or after notice or passage of time or both
would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness, (ii) the
World Indebtedness and (iii) any other Senior Indebtedness of the Company which,
at the date of determination, has an aggregate principal amount outstanding of,
or under which, at the date of determination, the holders thereof are committed
to lend up to, at least $10 million and is specifically designated by the
Company in the instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable, at the option of the holder thereof, for
Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to the first
anniversary of the Stated Maturity of the Notes.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of the
Company other than a Foreign Restricted Subsidiary.
"DRA" means Delco Remy America, Inc., a Delaware corporation and a Wholly
Owned Subsidiary.
"EBITDA" for any period means the sum of Consolidated Net Income plus
Consolidated Interest Expense plus, without duplication, the following to the
extent deducted in calculating such Consolidated Net Income: (i) income tax
expense, (ii) depreciation expense, (iii) amortization expense and (iv) all
other non-cash items reducing Consolidated Net Income (other than items that
will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made, other than accruals for post-retirement benefits
other than pensions), less all non-cash items increasing Consolidated Net
Income, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary of the Company shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion) that
the net income of such Subsidiary was included in calculating Consolidated Net
Income.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financing Disposition" means any sale of any accounts receivable, or interest
therein, by the Company or any Subsidiary to any Receivables Subsidiary, or by
the Receivables Subsidiary, pursuant to a Permitted Receivables Financing.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of the Company
which is not organized under the laws of the United States of America or any
State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of the Issue Date, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board and (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession.
"GM Acquisition Note" means the 11 1/2% Subordinated Note due July 31, 2004,
in an original principal amount of $45 million, issued by DRA pursuant to the
Asset Purchase Agreement.
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"GM Contingent Note" means the Contingent Purchase Price Note issued by DRA
pursuant to the Asset Purchase Agreement.
"GM Exchange Debentures" means any senior subordinated notes issued by DRA
after the Issue Date in exchange for the GM Preferred Stock in accordance with
the certificate of designation thereof as in effect on the Issue Date.
"GM Notes" means the GM Acquisition Note, the GM Contingent Note and the GM
Exchange Debentures, if issued.
"GM Preferred Stock" means the Series A 8% Preferred Stock of DRA issued
pursuant to the Asset Purchase Agreement, with a stated value of $1,000 per
share.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable for;
provided, however, that any Indebtedness or Capital Stock of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary; provided further, however, that in the case of
a discount security, neither the accrual of interest nor the accretion of
original issue discount shall be considered an Incurrence of Indebtedness, but
the entire face amount of such security shall be deemed Incurred upon the
issuance of such security. The term "Incurrence" when used as a noun shall have
a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of determination
(without duplication), (i) the principal of and premium (if any) in respect of
(A) indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable; (ii) all Capital Lease
Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property or
services, all conditional sale obligations of such Person and all obligations of
such Person under any title retention agreement (but excluding trade accounts
payables arising in the ordinary course of business), which purchase price or
obligation is due more than six months after the date of placing such property
in service or taking delivery and title thereto or the completion of such
services (provided that, in the case of obligations of an acquired Person
assumed in connection with an acquisition of such Person, such obligations would
constitute Indebtedness of such Person); (iv) all obligations of such Person for
the reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit); (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, any Preferred Stock
(but excluding, in each case, any accrued dividends); (vi) all obligations of
the type referred to in clauses (i) through (v) of other Persons and all
dividends of other Persons for the payment of which, in either case, such Person
is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee; (vii) all obligations of the
type referred to in
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clauses (i) through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such Person),
the amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured and (viii) to the
extent not otherwise included in this definition, Hedging Obligations of such
Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations as described above at such
date; provided, however, that the amount outstanding at any time of any
Indebtedness issued with original issue discount shall be deemed to be the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP; provided further, however, that the outstanding principal
amount of the GM Contingent Note shall be deemed to be zero until the last day
of the fiscal year or other period with respect to which the amount due
thereunder shall be determined.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and the
covenant described under "Certain Covenants-Limitation on Restricted Payments,"
(i) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
an Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Joint Venture" means, in respect of any Person, any corporation, association,
partnership or other business entity of which not less than 20% and not more
than 80% of the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i) such
Person, (ii) such Person and one or more Subsidiaries of such Person or (iii)
one or more Subsidiaries of such Person.
"Junior Subordinated Notes" means the Company's 11% junior subordinated notes
due July 31, 2004, in an original aggregate principal amount of $18.2 million.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Investors" means each of the officers, employees and directors of
the Company who own Voting Stock of the Company on the Issue Date, in each case
so long as such person shall remain an officer, employee or director of the
Company.
"MascoTech" means MascoTech Automotive Systems Group, Inc., a Delaware
corporation.
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"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law be,
repaid out of the proceeds from such Asset Disposition, (iii) all distributions
and other payments required to be made to minority interest holders in
Subsidiaries or Joint Ventures as a result of such Asset Disposition and (iv)
the deduction of appropriate amounts provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Core Assets" means any assets of the Company used primarily in the powder
metal forge business of the Company on the Issue Date.
"Non-Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock (other than, to the extent required by local ownership laws in foreign
countries, shares owned by foreign shareholders) of which is owned by (i) the
Company or one or more Wholly Owned Subsidiaries and/or (ii) any of the
directors, officers, employees or former owners of such Restricted
Subsidiary.
"Permitted Holders" means the CVC Investors, MascoTech, World Equity Partners,
the Management Investors and their respective Permitted Transferees; provided,
however, that in no event shall the Management Investors and the CVC Investors
(other than CVC or Citicorp, N.A.), collectively, be deemed "Permitted Holders"
with respect to more than 30% of the total voting power of all classes of Voting
Stock of the Company.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, (ii) a Restricted Subsidiary or a Person that
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Related Business; (iii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Domestic Restricted
Subsidiary; provided, however, that such Person's primary business is a Related
Business; (iv) Temporary Cash Investments; (v) receivables owing to the Company
or any Restricted Subsidiary if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade terms;
provided, however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems reasonable under
the circumstances; (vi) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vii) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary and not exceeding $2 million in the aggregate outstanding at any
time; (viii) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments; and (ix) any Person to
the extent such Investment represents the non-cash portion of the consideration
received for an Asset Disposition as permitted pursuant to the covenant
described under "Certain Covenants-Limitation on Sales of Assets and Subsidiary
Stock".
"Permitted Receivables Financing" means any financing pursuant to which the
Company or any Restricted Subsidiary may sell, convey or other wise transfer to
a Receivables Subsidiary or any other Person (in the case of a transfer by a
Receivables Subsidiary), or grant a security interest in, any accounts
receivable (and related assets) of the Company or any Restricted Subsidiary;
provided, however, that (i) the covenants, events of default and other
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provisions applicable to such financing shall be customary for such transactions
and shall be on market terms (as determined in good faith by the Board of
Directors) at the time such financing is entered into, (ii) the interest rate
applicable to such financing shall be a market interest rate (as determined in
good faith by the Board of Directors) at the time such financing is entered into
and (iii) such financing shall be non-recourse to the Company and its
Subsidiaries (other than a Receivables Subsidiary) except to a limited extent
customary for such transactions.
"Permitted Transferee" means, (a) with respect to any CVC Investor who is an
employee, officer or director of CVC, any spouse or lineal descendent(including
by adoption) of such CVC Investor so long as such CVC Investor shall be an
employee, officer or director of CVC; (b) with respect to MascoTech, MascoTech
Inc.; and (c) with respect to any Management Investor, any spouse or lineal
descendant (including by adoption) of such Management Investor so long as such
Management Investor shall be an employee, officer or director of the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Power Investments" means Power Investments, Inc., an Indiana corporation.
"Power Seller Notes" means the 9.86% Subordinated Notes due February 6, 2001,
of Reman Holdings, Inc., in an original aggregate principal amount of $24.3
million.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company (or, for purposes of the covenant described under
"--Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries," any Restricted Subsidiary) pursuant to an effective registration
statement under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering has been
consummated and (ii) at least 10% of the total issued and outstanding common
stock of the Company (or, for purposes of the covenant described under
"--Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries," any Restricted Subsidiary) has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Purchase Money Indebtedness" mean Indebtedness (i) consisting of the deferred
purchase price of property, conditional sale obligations, obligations under any
title retention agreement, other purchase money obligations and obligations in
respect of industrial revenue bonds or similar Indebtedness, in each case where
the maturity of such Indebtedness does not exceed the anticipated useful life of
the asset being financed, and (ii) incurred to finance the acquisition by the
Company or a Restricted Subsidiary of such asset, including additions and
improvements; provided, however, that any Lien arising in connection with any
such Indebtedness shall be limited to the specified asset being financed or, in
the case of real property or fixtures, including additions and improvements, the
real property on which such asset is attached; and provided further, however,
that such Indebtedness is Incurred within 90 days after such acquisition of such
asset by the Company or Restricted Subsidiary.
"Receivables Subsidiary" means a bankruptcy-remote, special-purpose Wholly
Owned Subsidiary formed in connection with a Permitted Receivables Financing.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness
of the Company or any Restricted Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iii)
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such Refinancing Indebtedness has an aggregate principal amount (or if Incurred
with original issue discount, an aggregate issue price) that is equal to or less
than the aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding or committed (plus fees
and expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary. For purposes of this
definition, the Average Life and the aggregate principal amount of the GM
Contingent Note at the time of any Refinancing thereof shall be determined by a
responsible financial or accounting Officer of the Company based on a good faith
estimate of the amount of the contingent payment that will become due and
payable under such note and the timing of the scheduled installments thereof in
accordance with the terms of such note.
"Related Business" means any business related, ancillary or complementary (as
determined in good faith by the Board of Directors) to the businesses of the
Company and the Restricted Subsidiaries on the Issue Date.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" means, with respect to any Person, (i) the declaration or
payment of any dividends or any other distributions on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the holders of its
Capital Stock, except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable solely to the Company or a Restricted Subsidiary (and, if such
Restricted Subsidiary is not wholly owned, to its other shareholders on a pro
rata basis or on a basis that results in the receipt by the Company or a
Restricted Subsidiary of dividends or distributions of greater value than it
would receive on a pro rata basis), (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held by
any Person or of any Capital Stock of a Restricted Subsidiary held by any
Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien. "Secured Indebtedness" of any Subsidiary Guarantor has a correlative
meaning.
"Senior Credit Facility" means the revolving credit facility made available
pursuant to the Third Amended and Restated Financing Agreement dated as of the
Issue Date, among the Subsidiary Guarantors, as borrowers, the Company, as
guarantor, the lenders from time to time party thereto and Bank One,
Indianapolis, National Association, as Agent, as the same may be amended,
waived, modified, Refinanced or replaced from time to time (except to the extent
that any such amendment, waiver, modification, replacement or Refinancing would
be prohibited by the terms of the Indenture).
"Senior Indebtedness" of the Company means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, including the
Guarantees by the Company of all Bank Indebtedness and all World Indebtedness,
and (ii) accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not a claim for post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of the Company for money borrowed and
(B) indebtedness
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evidenced by notes, debentures, bonds or other similar instruments for the
payment of which the Company is responsible or liable unless, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are subordinate in right of payment to the
Notes; provided, however, that Senior Indebtedness shall not include (1) any
obligation of the Company to any Subsidiary, (2) any liability for Federal,
state, local or other taxes owed or owing by the Company, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of the Company (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect
(other than as a result of the Indebtedness being unsecured) to any other
Indebtedness or other obligation of the Company, including any Senior
Subordinated Indebtedness and any Subordinated Obligations, (5) any obligations
with respect to any Capital Stock or (6) that portion of any Indebtedness which
at the time of Incurrence is Incurred in violation of the Indenture. "Senior
Indebtedness" of any Subsidiary Guarantor has a correlative meaning.
"Senior Subordinated Indebtedness" of the Company means the Notes and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness. "Senior Subordinated
Indebtedness" of any Subsidiary Guarantor has a correlative meaning; provided,
however, that "Senior Subordinated Indebtedness" of DRA shall specifically
include (i) the Subsidiary Guaranty of DRA and (ii) the GM Notes (and any Senior
Subordinated Indebtedness Incurred to Refinance such notes).
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect. "Subordinated Obligation" of any Subsidiary Guarantor has a correlative
meaning.
"Subsequent Acquisitions" means the acquisitions by the Company prior to the
Issue Date of substantially all the Capital Stock or assets of each of Nabco,
Inc., The A&B Group, Inc., Autovill RT Ltd. and Power Investments.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guaranty" means the Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Subsidiary Guarantor" means each Subsidiary designated as such on the
signature pages of the Indenture and any other Subsidiary that has issued a
Subsidiary Guaranty.
"Temporary Cash Investments" means any of the following: (i) any investment in
direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by an registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the
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types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America, any State thereof or the
District of Columbia or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group, and (v) investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "Certain Covenants-Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "Certain
Covenants-Limitation on Indebtedness" and (y) no Default shall have occurred and
be continuing. Any such designation by the Board of Directors shall be by the
Company to the Trustee by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock
of which (other than directors' qualifying shares) is owned by the Company
and/or one or more Wholly Owned Subsidiaries.
"World Indebtedness" means any and all amounts payable under or in respect of
the World Senior Debt (or any Refinancing Indebtedness in respect thereof),
including principal, premium (if any), interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to the borrowers thereunder whether or not a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, Guarantees and all other amounts payable there under or in respect
thereof.
"World Debt Partners" means World Subordinated Debt Partners, L.P., a Delaware
limited partnership.
"World Equity Partners" means World Equity Partners, L.P., a Delaware limited
partnership.
"World Senior Debt" means the 101/2% Senior Notes due July 31, 2003, in an
original aggregate principal amount of $75 million, issued by DRA pursuant to
the Credit Agreement dated as of July 29, 1994, as amended, among DRA, the
Company, and World Debt Partners, as the same may be amended, waived or modified
from time to time (except to the extent that any such amendment, waiver or
modification, would be prohibited by the terms of the Indenture).
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal income
tax consequences of the Exchange Offer to a holder of Existing Notes who is an
individual citizen or resident of the United States or a United States
corporation that purchased the Existing Notes pursuant to their original issue
(a "U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended
to the date hereof (the "Code"), existing and proposed Treasury regulations, and
judicial and administrative determinations, all of which are subject to change
at any time, possibly on a retroactive basis. The following relates only to the
Existing Notes, and the Exchange Notes received therefor, that are held as
"capital assets" within the meaning of Section 1221 of the Code by U.S. Holders.
It does not discuss state, local, or foreign tax consequences, nor does it
discuss tax consequences to subsequent purchasers (persons who did not purchase
the Existing Notes pursuant to their original issue), or to categories of
holders that are subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks and dealers in stocks and securities.
Tax consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service with respect to the
federal income tax consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE EXISTING
NOTES FOR EXCHANGE NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR
CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO
ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE EXISTING NOTES
FOR EXCHANGE NOTES.
THE EXCHANGE OFFER
The exchange of Existing Notes pursuant to the Exchange Offer should be
treated as a continuation of the corresponding Existing Notes because the terms
of the Exchange Notes are not materially different from the terms of the
Existing Notes. Accordingly, such exchange should not constitute a taxable event
to U.S. Holders and, therefore, (i) no gain or loss should be realized by U.S.
Holders upon receipt of an Exchange Note, (ii) the holding period of the
Exchange Note should include the holding period of the Existing Note exchanged
therefor and (iii) the adjusted tax basis of the Exchange Note should be the
same as the adjusted tax basis of the Existing Note exchanged therefor
immediately before the exchange.
STATED INTEREST
Stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes. The Notes are not considered to have been issued with
original issue discount for federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. Holder's tax basis in a Note generally will be its cost. A U.S. Holder
generally will recognize gain or loss on the sale, exchange or retirement of a
Note in an amount equal to the difference between the amount realized on the
sale, exchange or retirement and the tax basis of the Note. Gain or loss
recognized on the sale, exchange or retirement of a Note (excluding amounts
received in respect of accrued interest, which will be taxable as ordinary
interest income) generally will be capital gain or loss and will be long-term
capital gain or loss, if the Note was held for more than one year. Under
recently enacted legislation, capital gain recognized by non-corporate taxpayers
on assets held for more than 18 months is subject to a 20% maximum rate of tax;
while capital gain recognized by such taxpayers on assets held for more than one
year but not for more than 18 months is subject to a 28% maximum rate of
tax.
BACKUP WITHHOLDING
Under certain circumstances, a U.S. Holder of a Note may be subject to "backup
withholding" at a 31% rate with respect to payments of interest thereon or the
gross proceeds from the disposition thereof.
This withholding generally applies if the U.S. Holder fails to furnish his or
her social security number or other taxpayer identification number in the
specified manner and in certain circumstances or fails to properly certify that
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he or she is not subject to backup withholding in general. Any amount withheld
from a payment to a U.S. Holder under the backup withholding rules is allowable
as a credit against such U.S. Holder's federal income tax liability.
Corporations and certain other entities described in the Code and Treasury
regulations are exempt from backup withholding if their exempt status is
properly established.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Existing
Notes where such Existing Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until March 23, 1998, all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers of any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of Exchange Notes and
any commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the Holders of the
Notes) other than commissions or concessions of any brokers or dealers and will
indemnify the Holders of the Securities (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes offered hereby will
be passed upon by Dechert Price & Rhoads, Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of Delco Remy International, Inc. as
July 31, 1997 and 1996, and for each of the three years in the period ended July
31, 1997; the financial statements of the Tractech Division of Titan Wheel
International, Inc. for the nine months ended September 30, 1996 and the year
ended December 31, 1995; and the consolidated financial statements of Ballantrae
corporation as of September 30, 1997 and December 31, 1996, and for the nine
months ended September 30, 1997 and the three months ended December 31, 1996,
appearing in this Prospectus and the Registration Statement (as defined) have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
The financial statements of World Wide Automotive, Inc. (i) as of March 31,
1997, and for the year then ended, appearing in this Prospectus and the
Registration Statement have been audited by Ernst & Young
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LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein which is based in part on the reports of Friedman & Fuller,
P.C., independent auditors, and (ii) as of March 31, 1996, and for each of the
two years in the period ended March 31, 1996, appearing in this Prospectus and
the Registration Statement have been audited by Friedman & Fuller, P.C.,
independent auditors, as set forth in their respective reports thereon appearing
elsewhere herein, and in each case are included in reliance upon such reports
given upon the authority of such firms as experts in accounting and
auditing.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Neither
section applies by its terms to the Exchange Offer or to this Prospectus. All
statements other than statements of historical facts included in this
Prospectus, including without limitation the Unaudited Supplemental Data set
forth in the Pro Forma Condensed Consolidated Financial Data (Unaudited) and
Unaudited Supplemental Data and the statements under "Business--Business
Strategy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "--Liquidity and Capital Resources", are
forward-looking statements. Although management believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
or management's expectations ("Cautionary Statements") are disclosed in this
Prospectus, including without limitation in conjunction with the forward-looking
statements included in this Prospectus and under "Risk Factors." All written and
oral forward-looking statements made following consummation of the Transactions
which are attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
DELCO REMY INTERNATIONAL, INC.
<TABLE>
<S> <C>
Audited Fiscal Year End Financial Statements
Report on Independent Auditors......................................................................... F-2
Consolidated Statements of Operations for the years ended July 31, 1995, 1996 and 1997................. F-3
Consolidated Balance Sheets as of July 31, 1996 and 1997............................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended July 31, 1995,
1996 and 1997....................................................................................... F-6
Consolidated Statements of Cash Flows for the Years ended July 31, 1995, 1996 , 1997................... F-7
Notes to Consolidated Financial Statements............................................................. F-8
Unaudited Quarterly Financial Statements
Condensed Consolidated Statements of Operations for the three months ended October 31,
1996 and 1997........................................................................................ F-36
Condensed Consolidated Balance Sheets as of July 31, 1997 and October 31, 1997......................... F-37
Condensed Consolidated Statements of Cash Flows for the three months ended October 31,
1996 and 1997........................................................................................ F-38
Notes to Condensed Consolidated Financial Statements................................................... F-39
World Wide Automotive, Inc.
Reports of Independent Auditors........................................................................ F-46
Balance Sheets as of the years ended March 31, 1996 and 1997........................................... F-49
Statements of Income for the years ended March 31, 1995, 1996 and 1997................................. F-51
Statement of Stockholders' Equity...................................................................... F-52
Statements of Cash Flows for the years ended March 31, 1995, 1996 and 1997............................. F-53
Notes to Financial Statements.......................................................................... F-54
Tractech Division of Titan Wheel International, Inc.
Report of Independent Auditors......................................................................... F-63
Statements of Operations for the year ended December 31, 1995 and the nine months
ended September 30, 1996............................................................................. F-64
Statements of Stockholders' Equity for the year ended December 31, 1995 and the nine
months ended September 30, 1996...................................................................... F-65
Statements of Cash Flows for the year ended December 31, 1995 and the nine months ended
September 30, 1996................................................................................... F-66
Notes to Financial Statements.......................................................................... F-67
Ballantrae Corporation
Report of Independent Auditors......................................................................... F-71
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997............................. F-72
Consolidated Statements of Operations for the three months ended December 31, 1996 and
the nine months ended September 30, 1997............................................................. F-74
Consolidated Statements of Stockholders' Equity for the three months ended December 31,
1996 and the nine months ended September 30, 1997.................................................... F-75
Consolidated Statements of Cash Flows for the three months ended December 31, 1996 and
the nine months ended September 30, 1997............................................................. F-76
Notes to Consolidated Financial Statements............................................................. F-77
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delco Remy International, Inc.
We have audited the accompanying consolidated balance sheets of Delco Remy
International, Inc. as of July 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended July 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 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Delco Remy International, Inc. at July 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended July 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
September 5, 1997, except for
Note 16, as to which the date is
DECEMBER 16, 1997
F-2
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31
----------------------------------------------------------
1995 1996 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Net sales........................................................ $ 573,423 $ 636,852 $ 689,787
Cost of goods sold............................................... 475,216 510,078 540,234
--------------- -------------- ----------------
Gross profit..................................................... 98,207 126,774 149,553
Selling, engineering, and administrative expenses................ 61,206 77,994 89,098
Restructuring charges............................................ -- 8,101 34,500
--------------- -------------- ----------------
Operating income................................................. 37,001 40,679 25,955
Other income (expense):
Gain on sale of building....................................... -- -- 2,082
Interest expense............................................... (18,432) (27,367) (38,774)
--------------- -------------- ----------------
Income (loss) from continuing operations before income taxes
(benefit), preferred dividend requirement of subsidiary and
minority interest............................................... 18,569 13,312 (10,737)
Minority interest in income of subsidiaries...................... -- 259 892
Income taxes (benefit)........................................... 7,846 5,741 (3,014)
Preferred dividend requirement of subsidiary..................... 1,397 1,516 1,648
--------------- -------------- ----------------
Income (loss) from continuing operations......................... 9,326 5,796 (10,263)
Discontinued operations:
Loss from operations of discontinued businesses (less
applicable income tax benefit of $1,582, $1,042 and
$395, respectively)........................................ 2,363 1,573 808
Loss on disposal of businesses (less applicable income tax -- 9,064 874
benefit of $6,043 and $426)................................
Extraordinary item:
Write-off of debt issuance costs (less applicable income
tax benefit of $1,147)..................................... -- -- 2,351
--------------- -------------- ----------------
Net income (loss)................................................ $ 6,963 $ (4,841) $ (14,296)
=============== ============== ================
Primary earnings (loss) per share:
From continuing operations................................ $ .56 $ .33 $ (.60)
Before extraordinary items................................ .42 (.28) (.70)
Net income (loss)........................................... .42 (.28) (.83)
</TABLE>
See Accompanying Notes
F-3
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA )
<TABLE>
<CAPTION>
JULY 31
-----------------------------------------
1996 1997
------------------ ------------------
<S> <C> <C>
ASSETS:
Current assets:
CASH and cash equivalents................................................ $ 3,406 $ 10,050
Trade accounts receivable (less allowance for doubtful accounts of
$1,209 and $2,935, respectively)........................................ 94,992 110,184
Other receivables........................................................ 10,585 10,487
Recoverable income taxes................................................. 8,674 2,889
Inventories.............................................................. 123,583 164,417
Deferred income taxes.................................................... 15,462 21,474
Other current assets..................................................... 1,213 4,643
------------------ ------------------
Total current assets.................................................. 257,915 324,144
Property and equipment..................................................... 170,391 147,222
Less accumulated depreciation.............................................. 29,235 26,858
------------------ ------------------
141,156 120,364
Deferred financing costs................................................... 6,497 8,803
Goodwill (less accumulated amortization of $4,758 and $7,289,
respectively)............................................................. 66,570 86,612
Net assets held for disposal............................................... -- 25,279
Investment in affiliate.................................................... -- 3,119
Other assets............................................................... 2,944 2,248
------------------ ------------------
Total assets.......................................................... $ 475,082 $ 570,569
================== ==================
</TABLE>
See Accompanying Notes
F-4
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 31
----------------------------------------
1996 1997
----------------- -----------------
<S> <C> <C>
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable.................................................... $ 81,207 $ 88,578
Accrued interest payable............................................ 4,026 3,107
Accrued restructuring charges....................................... 5,541 37,377
Liabilities related to discontinued operations...................... 11,005 3,324
Other liabilities and accrued expenses.............................. 32,683 37,210
Current portion of long-term debt................................... 9,652 507
----------------- -----------------
Total current liabilities....................................... 144,114 170,103
Deferred income taxes................................................. 6,795 1,556
Long-term debt, less current portion.................................. 289,144 363,261
Post-retirement benefits other than pensions.......................... 8,186 12,677
Accrued pension benefit............................................... 950 4,542
Other non-current liabilities......................................... 5,427 4,124
Minority interest in subsidiary....................................... 4,457 8,032
Redeemable exchangeable preferred stock of subsidiary................. 14,420 16,071
Stockholders' equity (deficit):
Common stock:
Class A Shares (par value $.01; authorized 49,400,000; issued
8,697,814 in 1996 and 8,828,014 in 1997)..................... 87 88
Class B Shares (par value $.01; authorized 17,600,000; issued
6,476,786 in 1996 and 1997).................................. 65 65
paid-in capital..................................................... 1,655 6,677
Retained earnings (deficit)......................................... 2,122 (12,174)
Cumulative translation adjustment................................... (2,161) (1,752)
Stock purchase plan................................................. (179) (2,701)
----------------- -----------------
Total stockholders' equity (deficit)............................. 1,589 (9,797)
----------------- -----------------
Total liabilities and stockholders' equity (deficit)............. $475,082 $570,569
================= =================
</TABLE>
See Accompanying Notes
F-5
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B RETAINED CUMULATIVE STOCK
COMMON COMMON PAID-IN EARNINGS TRANSLATION PURCHASE
STOCK STOCK CAPITAL (DEFICIT) ADJUSTMENT PLAN TOTAL
--------- --------- ------------ ------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization at August 1,
1994..................................... $ 79 $ 54 $ 1,448 $ -- $ -- $ (50) $ 1,531
Issuance of common stock................... 20 -- 221 -- -- (124) 117
Net income................................. -- -- -- 6,963 -- -- 6,963
Foreign currency translation
adjustment............................... -- -- -- -- (181) -- (181)
------ ------- ---------- ----------- ------------ --------- -----------
Balance at July 31, 1995................... 99 54 1,669 6,963 (181) (174) 8,430
Repurchase of common stock................. (1) -- (14) -- -- (5) (20)
Conversion of class a common
stock to Class B common stock............. (11) 11 -- -- -- -- --
Net loss................................... -- -- -- (4,841) -- -- (4,841)
Foreign currency translation
adjustment................................ -- -- -- -- (1,980) -- (1,980)
------ ------- ---------- ----------- ------------ --------- -----------
Balance at July 31, 1996................... 87 65 1,655 2,122 (2,161) (179) 1,589
Issuance of common stock................... 3 -- 5,044 -- -- (2,541) 2,506
Repurchase of common stock................. (2) -- (22) -- -- 19 (5)
Net loss................................... -- -- -- (14,296) -- -- (14,296)
Foreign currency translation
adjustment................................ -- -- -- -- 409 -- 409
------ ------- ---------- ----------- ------------ --------- -----------
Balance at July 31, 1997................... $ 88 $ 65 $ 6,677 $ (12,174) $ (1,752) $ (2,701) $ (9,797)
====== ======= ========== =========== ============ ========= ===========
</TABLE>
See Accompanying Notes
F-6
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31
--------------------------------------------------
1995 1996 1997
----------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................................... $ 6,963 $ (4,841) $ (14,296)
Extraordinary item.................................................. -- -- 3,498
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 14,533 19,555 22,323
Gain on sale of building......................................... -- -- (2,082)
Deferred income taxes............................................ (3,580) (2,947) (9,578)
Post-retirement benefits other than pensions..................... 4,434 3,752 4,491
Accrued pension benefits......................................... 4,459 (3,509) 3,592
Non-cash interest expense........................................ 8,069 7,867 7,949
Preferred dividend requirement of subsidiary..................... 1,397 1,516 1,648
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable........................................... (49,320) (24,458) (3,341)
Inventories................................................... (8,035) (25,720) (10,245)
Accounts payable.............................................. 49,613 8,634 (11,036)
Other current assets and liabilities.......................... (6,657) 18,229 (4,538)
Accrued restructuring......................................... -- 5,541 31,836
Other non-current assets and liabilities, net................. 45 (4,303) 2,316
----------- -------------- --------------
Net cash provided by (used in) operating activities................. 21,921 (684) 22,537
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.................................. (62,010) (46,320) (42,442)
Purchase of property and equipment.................................. (11,241) (32,741) (31,888)
Investment in affiliates............................................ -- -- (3,119)
Proceeds from sale of building...................................... -- -- 3,362
----------- -------------- --------------
Net cash used in investing activities............................... (73,251) (79,061) (74,087)
Financing activities:
Proceeds from issuances of long-term debt........................... 31,918 89,652 180,000
Payments on long-term debt.......................................... (4,917) (8,842) (126,200)
Other financing activities.......................................... 118 (20) 3,986
----------- -------------- --------------
Net cash provided by financing activities........................... 27,119 80,790 57,786
----------- -------------- --------------
Effect of exchange rate changes on cash............................. -- 883 408
----------- -------------- --------------
Net (decrease) increase in cash and cash equivalents................ (24,211) 1,928 6,644
Cash and cash equivalents at beginning of year...................... 25,689 1,478 3,406
----------- -------------- --------------
Cash and cash equivalents at end of year............................ $ 1,478 $ 3,406 $ 10,050
=========== ============== ==============
</TABLE>
See Accompanying Notes
F-7
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND ACQUISITIONS
Delco Remy America Acquisition
On August 1, 1994, Delco Remy International, Inc. (the Company or DRI) through
a wholly-owned subsidiary, Delco Remy America, Inc. (DRA), purchased
substantially all of the assets, other than facilities, and assumed certain
liabilities of specific business activities of the Delco Remy Division of
General Motors Corporation (the GM Acquisition). The specific business
activities purchased are engaged in the design, manufacture, remanufacture and
sale of heavy duty starter motors and generators, automotive starter motors, and
related components.
The aggregate purchase price of the GM Acquisition of $155,665 (including fees
and expenses) was accounted for as a purchase. The Company issued (i) common
stock of $1,531, (ii) preferred stock of $11,507 and (iii) debt of $158,200 to
fund the purchase and provide capital for general corporate purposes. The GM
Acquisition resulted in the recording of approximately $17,600 of goodwill which
is being amortized over 15 years. While the GM Acquisition was recorded based on
the best estimates available, certain purchase price adjustments as of the
August 1, 1994 purchase date have not been determined or agreed to by General
Motors Corporation (GM) and DRI. When finalized, The resolution of these items
could result in a charge or credit to operations, which the Company does not
expect to be material. The accompanying consolidated financial statements
reflect the consolidated results of operations and cash flows for the Company
subsequent to the GM Acquisition. The Company had no operations prior to August
1, 1994.
GM is entitled to receive an additional contingent purchase payment which will
be paid beginning in 2004 and will be based upon a percentage of average
earnings of the Company in the three year period ending December 31, 2003 in
excess of certain imputed earnings. Since the additional contingent purchase
price, if any, is based upon future operations of the Company which cannot be
determined at this time, no provision for such payment has been made in the
accompanying consolidated financial statements. The additional contingent
purchase price, if any, will increase the goodwill recorded for the GM
Acquisition and will be amortized over the remaining useful life of the GM
Acquisition goodwill.
Concurrent with the GM Acquisition, the Company entered into certain supply
agreements with GM whereby the Company will be the sole-source supplier to GM
for component parts manufactured by the Company at the date of the GM
Acquisition. The supply agreement for automotive starter motors has an initial
term of ten years, while the supply agreement for heavy duty starter motors and
generators has an initial term of six years.
1997 Acquisition
On May 8, 1997, the Company, through a wholly-owned subsidiary, acquired 82.5%
of the outstanding common stock of World Wide Automotive, Inc. (World Wide).
World Wide is primarily an aftermarket supplier of light duty import starters
and alternators, although it also has a small amount of heavy duty
remanufacturing sales and domestic aftermarket sales. The remaining 17.5%
interest in World Wide is owned by current management of World Wide.
The aggregate purchase price was $40,842, including cash payments of $38,692
and the issuance of Class A Common Stock valued at $2,150. The World Wide
acquisition was treated as a purchase for accounting purposes and is included in
the consolidated financial statements of the Company beginning with the
acquisition date. The World Wide acquisition resulted in goodwill of $21,301
which is being amortized over 35 years.
1996 Acquisition
On February 6, 1996 the Company, through a wholly-owned subsidiary, acquired
82.5% of the outstanding common stock of Power Investments, Inc. and related
companies (Power), a remanufacturer of diesel and gasoline engines, fuel
systems, transmissions, alternators and starters for medium, heavy duty, and
automotive applications. Power also remanufactures and distributes brakes, water
pumps, power steering pumps and various other
F-8
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
remanufactured truck parts and assemblies. Power has fifteen facilities located
in the United States and Canada. The remaining 17.5% interest in Power is owned
by current management of Power.
The aggregate purchase price was $48,422 including cash payments of $23,385
and the issuance of $24,300 of 9.86% Power Investments Seller Notes. The Power
acquisition was treated as a purchase for accounting purposes and is included in
the consolidated financial statements of the Company beginning with the
acquisition date. The Power acquisition resulted in goodwill of $16,267 which is
being amortized over 35 years.
1995 Acquisitions
In 1995, the Company made the following three acquisitions which were treated
as purchases for accounting purposes and are included in the consolidated
financial statements beginning with the respective acquisition date. Each
respective purchase price was allocated to the assets acquired and liabilities
assumed at their estimated fair values. The three acquisitions resulted in
goodwill of $38,864 which is being amortized over 35 years.
On January 6, 1995, the Company purchased all the stock of two related
companies (collectively referred to as Nabco) for an aggregate cash
purchase price of $27,600 and the issuance of 483,000 shares of DRI Class A
Common Stock. Nabco remanufactures automotive starters and
alternators.
On March 31, 1995, the Company, through a newly formed subsidiary,
purchased the shares of six related corporations (collectively referred to
as A&B). The aggregate purchase price of $33,400 included cash payments of
$29,900 and the issuance of $3,500 in 10% subordinated notes. The A&B
acquisition was financed through additional borrowings under the Company's
revolving loan and a new acquisition term loan of $15,000. A&B
remanufactures heavy duty starters and alternators and related sub-
components and parts.
On April 13, 1995, the Company acquired, through a series of stock
purchase transactions, approximately 97% interest in a Hungarian company
(Autovill), a manufacturer of heavy duty starter motors and generators. The
total purchase price was approximately $7,500 which included the assumption
of certain Autovill liabilities of $4,100.
Unaudited Pro Forma Results of Operations
The unaudited pro forma consolidated results of operations, assuming the 1995,
1996 and 1997 acquisitions had been consummated as of the beginning of the
preceding year, are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31
-------------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues......................... $ 655,716 $ 723,633 $ 738,801
Operating income................. 49,334 47,931 27,658
Income (loss) from continuing
operations...................... 13,929 6,212 (10,284)
Net income (loss)................ 11,566 (4,425) (14,317)
</TABLE>
The pro forma consolidated financial information does not purport to present
what the Company's consolidated results of operations would actually have been
if the operations were combined during the periods presented and is not intended
to project future results or trends of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Business Segment
The consolidated financial statements include the accounts of DRI and its
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation. The Company designs, manufactures, remanufactures and distributes
electrical, powertrain/drivetrain and engine-related components for automobiles,
light and heavy duty trucks and other heavy duty vehicles. The Company's
products include starter motors,
F-9
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
alternators, engines, transmissions and fuel systems for the aftermarket and the
original equipment manufacturer market, principally in North America but also in
Europe, Latin America and Asia-Pacific.
Use of Estimates
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes all cash balances and highly liquid
investments held primarily in repurchase agreements collateralized by U.S.
Government securities with a maturity of ninety days or less when purchased. The
carrying amount of cash equivalents approximates fair value.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from customers
in the original equipment and aftermarket automotive industries, both in the
U.S. and internationally. The Company performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral.
Credit losses are provided for in the financial statements and have been
consistently within management's expectations. The Company invests its temporary
cash in high credit quality financial institutions and investment grade short-
term investments and limits the amount of credit exposure to any one entity.
The percentage of the Company's labor force covered by a collective bargaining
agreement (CBA) and covered by a CBA that will expire within one year is 48.0%
and 2.4%, respectively.
Inventories
Inventories are carried at lower of cost or market determined on the first-in,
first-out (FIFO) method. Raw materials also include supplies and repair parts
which consist of material consumed in the manufacturing process but not directly
incorporated into the finished products. Inventories at July 31, 1996 and 1997
consisted of the following:
<TABLE>
<CAPTION>
July 31
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Raw material............................... $ 57,481 $ 84,583
Work in-process............................ 32,790 20,168
Finished goods............................. 33,312 59,666
-------- --------
$123,583 $164,417
======== ========
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
primarily using the straight-line method over the estimated useful lives of the
related assets (15 years for buildings and 3 to 15 years for machinery and
equipment).
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S. dollars
using the exchange rate at each balance sheet date for assets and liabilities
and at the average exchange rate for each year for revenue and expenses.
Translation adjustments are recorded as a separate component of stockholders'
equity.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts to hedge certain foreign
transactions. These contracts reduce currency risk from exchange rate movements.
Gains and losses are deferred and accounted for as part of the underlying
transactions. The contractual amount and related deferred gains and losses from
these contracts are immaterial.
F-10
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Goodwill
Goodwill represents the excess of purchase price over fair value of the net
assets acquired and is being amortized by the straight-line method over 15 to 35
years.
The carrying amount of goodwill is regularly reviewed for indicators of
impairment in value, which in the view of management are other than temporary,
including unexpected or adverse changes in the following: (i) the economic or
competitive environments in which the Company operates; (ii) profitability
analyses and (iii) cash flow analyses. If facts and circumstances suggest that a
subsidiary's net assets are impaired, the Company assesses the fair value of the
underlying business and reduces goodwill to an amount that results in the book
value of the subsidiary approximating fair value.
Investment in Affiliate
Investment in affiliate represents the Company's equity investment in its
Korean joint venture. This investment is accounted for using the equity method.
LONG-TERM ASSETS
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Recognition of Revenue
Substantially all of the Company's revenue is recognized at the time the
product is shipped. The Company's remanufacturing operations obtain used diesel
and gasoline engines, fuel systems, transmissions, starter motors and
generators, commonly known as cores, from its customers as trade-ins. Net sales
and cost of goods sold are reduced by $58,800, $70,000 and $113,100 for 1995,
1996 and 1997, respectively, to reflect the cost of cores returned for credit.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash and cash
equivalents, trade and other receivables, accounts payable, long-term debt and
redeemable convertible preferred stock of subsidiary. The fair value of the
Company's fixed rate debt was estimated using discounted cash flow analyses
based upon the Company's current incremental borrowing rates. With the exception
of the Senior Subordinated Notes, the carrying amounts of these financial
instruments approximated their fair value at July 31, 1996 and 1997. At July 31,
1997, the Senior Subordinated Notes have a face value of $140.0 million and a
fair value of $148.4 million.
Reclassification
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
Impact of Recently Issued Accounting Standards
In February 1997, the FASB issued Statement No. 128, Earnings per Share, which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of warrants to purchase common
stock will be excluded. The impact is expected to result in an increase in
historical primary earnings (loss) per share for the years ended July 31, 1995,
1996 and 1997, of $.04, $.03 and $.12 per share, respectively. The impact of
Statement No. 128 on the calculation of fully diluted earnings per share for
these years is not expected to be material.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is effective for years beginning after December 15, 1997, and will
be adopted by the Company in 1998. The Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Statement will not have any impact
on the results of operations or the financial position of the Company.
F-11
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies are required to report segment information in annual financial
statements and in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Statement is effective for financial statements for
fiscal years beginning after December 15, 1997, and the Company anticipates
adopting the Statement in 1999. The Company is evaluating the impact that this
Statement will have on its financial reporting.
3. DISCONTINUED OPERATIONS
Marine Corporation of America, Marine Drive Systems, and Powrbilt Products
In July 1997, the Company adopted plans for the sale of the marine products
business segment consisting of three non-core businesses. The Company plans to
sell the net assets of Marine Corporation of America, Marine Drive Systems and
Powrbilt Products (the 1997 Discontinued Businesses). These non-core businesses
were acquired in February 1996 in conjunction with the acquisition of Power.
A charge of $874 net of a tax benefit of $426 for operating losses expected
during the disposal period was recorded. The Company does not anticipate a loss
on the disposal of the net assets of the discontinued businesses. It is expected
that the net assets of the businesses will be sold during fiscal 1998.
Summary operating results of the 1997 Discontinued Businesses since their
acquisition are as follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net sales.......................................... $5,624 $10,935
Net loss........................................... (328) (808)
</TABLE>
The net assets of the 1997 Discontinued Businesses included in the
consolidated balance sheet are summarized as follows:
<TABLE>
<CAPTION>
July 31,
1997
------------
<S> <C>
Current assets........................................... $ 6,525
Property and equipment, net.............................. 650
Current liabilities...................................... (1,848)
------------
Net assets............................................... $ 5,327
============
</TABLE>
Powder Metal Forge
In December 1995, the Company adopted plans for sale of its non-core powder
metal forge business segment (PMF) and recorded an initial loss on disposal. A
sale agreement was signed in December 1996 to transfer ownership of net assets
of PMF. Terms of the sale agreement require the Company to continue PMF
operations through a transition period in which the buyer will begin production
at its facility. The Company expects the transition period to be completed by
November 1997. The agreement requires the buyer to reimburse the Company for all
losses incurred from operating the business after December 1997 if the
transition has not been completed. PMF produces various engine components,
primarily for GM, through a forging process.
The Company recorded a charge of $9,064, net of tax benefit of $6,043, for
losses on disposal of the business, operating losses expected during the
transition period, and allocated interest expense. During the fiscal year ended
July 31, 1997, the Company utilized $8,981 of the reserves for discontinued
operations including a loss from operations of $2,171. At July 31, 1997, $2,024
of discontinued operations reserves remained on the balance sheet related to
PMF.
F-12
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Summary operating results of the discontinued operation, excluding the loss on
disposal are as follows for the years ended:
<TABLE>
<CAPTION>
For the Year Ended July 31
------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Net sales.......................................... $ 6,505 $ 4,228
Net loss........................................... (2,363) (1,245)
</TABLE>
Interest expense of $1,014 and $496 in 1995 and 1996, respectively, was
allocated to discontinued operations of PMF based on the ratio of net assets
discontinued to total net assets and debt of the Company. In addition, interest
expense of $986 was allocated for the disposal period and is included in the
1996 loss on disposal of PMF. In 1997, $335 of interest expense was charged
against the reserve.
The net assets of PMF included in the consolidated balance sheet are
summarized as follows:
<TABLE>
<CAPTION>
July 31
1997
-----------
<S> <C>
Current assets......................................................... $ 3,917
Current liabilities.................................................... (610)
-----------
Net assets............................................................. $3,307
===========
</TABLE>
4. RESTRUCTURING CHARGES
In May 1997, the Company decided to restructure the manufacturing operations
of DRA to utilize focus factory manufacturing concepts and to close the
Company's operations in the old vertically-integrated factories that were leased
from GM. These decisions resulted in the impairment of certain production assets
with a carrying amount of $30,321 ($25,279 of which is property and equipment
and $5,042 of which is related tooling and other supplies) which the Company
plans to sell or otherwise dispose. The Company has estimated the loss on
disposal including related costs at $26,260. In addition, the Company has
estimated a cost of $8,240 for reducing its workforce through several transition
programs. The results of operations for the products which will be discontinued
are not separately identifiable. The restructuring reserve is expected to be
utilized throughout 1998 and 1999.
In December 1995, the Company decided to eliminate the production of certain
parts and certain straight-drive starter motors for the original equipment
market. In addition, the Company purchased new, more efficient equipment for use
in the production of certain heavy duty alternators. These decisions resulted in
the impairment of certain production equipment with a carrying amount of
approximately $5,242, which the Company plans to sell or otherwise dispose. The
Company has estimated the loss on disposal, including related costs, at $4,385.
The results of operations for the parts and straight-drive starter motors for
which production will be discontinued are not separately identifiable.
In October 1995, the Company offered to certain eligible salaried employees a
voluntary retirement transition program in conjunction with a similar plan
offered by GM to its employees which allowed such employees special additional
benefits not typically provided upon retirement. These additional benefits
include salaried payments for six months and future supplemental payments under
the salaried retirement plan. As a result, $3,716 was charged to operations in
1996.
F-13
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The following table summarizes the provisions and reserves for restructuring
and non-recurring charges:
<TABLE>
<CAPTION>
Termination Exit/Impairment
Benefits Costs Total
--------------- ------------------- ---------
<S> <C> <C> <C>
Provision in 1996............................... $ 3,716 $ 4,385 $ 8,101
Payments and charges in 1996.................... (1,665) (895) (2,560)
--------------- ------------------- ---------
Reserve at July 31, 1996........................ 2,051 3,490 5,541
Provision in 1997............................... 8,240 26,260 34,500
Change in estimate.............................. (1,230) -- (1,230)
Payments and charges in 1997.................... (821) (613) (1,434)
--------------- ------------------- ---------
Reserve at July 31, 1997........................ $ 8,240 $29,137 $37,377
=============== =================== =========
</TABLE>
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
-----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period............................. $ -- $ 162 $ 1,209
Additions charged to costs and expenses.................... 119 1,091 3,774
Acquisition of certain businesses.......................... 102 308 324
Uncollectible accounts written off, net of recoveries...... (59) (352) (2,372)
---------- ---------- ----------
$ 162 $ 1,209 $ 2,935
========== ============ ==========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
July 31
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Land and buildings.............................. $ 12,213 $ 5,895
Buildings under capital leases.................. 13,931 21,434
Machinery and equipment......................... 144,247 119,893
---------- ----------
$ 170,391 $ 147,222
========== ==========
</TABLE>
F-14
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
7. LONG-TERM DEBT
Borrowings under long-term debt arrangements consists of the following:
<TABLE>
<CAPTION>
July 31
--------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Senior credit facility:
Revolving loans............................... $ 48,530 $ --
Term loans.................................... 54,235 --
Revolving acquisition loans................... -- 34,963
Power seller notes.............................. 24,300 8,300
World note...................................... 75,000 75,000
Senior subordinated notes....................... -- 140,000
GM acquisition note............................. 55,224 59,155
A & B seller notes.............................. 3,500 3,500
Junior subordinated notes....................... 22,619 25,211
Hungarian bank loans............................ 1,141 --
Other, including capital lease obligations...... 14,247 17,639
------------ ------------
298,796 363,768
Less current portion............................ 9,652 507
------------ ------------
$ 289,144 $ 363,261
============ ============
</TABLE>
Senior Credit Facility
Pursuant to the senior credit facility, revolving credit loans of $150,000
are available for general purposes, of which up to $85,000 is available for
acquisitions. The senior credit facility provides for quarterly payments of
$9,400 beginning in the year 1999. The Company has the option of paying an
interest rate of one bank's prime or a LIBOR-based rate. The weighted average
interest on amounts outstanding at July 31, 1997 was 8.02%.
The senior credit facility contains various covenants which include, among
other things: (i) limitations on additional borrowings and encumbrances; (ii)
the maintenance of certain financial ratios and compliance with certain
financial tests and limitations; (iii) limitations on cash dividends paid; (iv)
limitations on investments and capital expenditures; and (v) limitations on
leases and sales of assets.
The senior credit facility is collateralized by a lien on substantially all
assets of the Company and its domestic subsidiaries and by all the capital stock
of such subsidiaries held by the Company or any such other subsidiary.
Power Seller Notes
The Power Seller Notes are due February 6, 2001. Interest, at a rate of
9.86% per annum, is payable monthly for the current month. The notes may be
prepaid without premium or penalty after August 6, 1997. The Power Seller Notes
are secured by letters of credit issued under the senior credit facility.
World Note
The World Note, due on July 31, 2003, is payable to an affiliate of a
stockholder and bears interest at a rate of 10.5% per annum, payable
semiannually.
On any three interest payment dates, the Company may elect to pay up to 50%
of the unpaid accrued interest by issuing additional notes to the holder of the
World Note. At the option of the Company, prepayment of the loan balance may be
made at repayment amounts ranging from 103% in 1997 to 100% of principal after
August 1, 2000. Upon a change in control, certain asset sales, casualty events
or a public offering (all as defined in the debt agreement), the holders have
the right, but not the obligation, to require mandatory redemption of the debt,
without premium or penalty.
The World Note agreement contains certain covenants which are similar to the
provisions of the senior credit facility. The World noteholder has agreed to
subordinate its right to receive payments to the senior credit facility lenders.
DRI and its domestic subsidiaries have guaranteed the payment of principal and
interest on the World Note.
F-15
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Senior Subordinated Notes
On August 2, 1996, the Company issued $140 million of 10 5/8% Senior
Subordinated Notes due August 1, 2006 (the Senior Subordinated Notes). The
proceeds from the Senior Subordinated Notes were $135.8 million (net of issuance
costs). The proceeds were used as follows: (i) to repay all outstanding
indebtedness under the Senior Credit Facility, plus accrued and unpaid interest
thereon, (ii) $16,000 was used to prepay one of the Power Seller Notes, plus
accrued and unpaid interest thereon, and (iii) the remaining net proceeds were
invested temporarily in short-term interest bearing obligations. The Company
recorded an extraordinary loss in 1997 of $2,351, net of tax benefit of $1,147,
related to deferred financing costs associated with the payoff of the Senior
Credit Facility.
The Senior Subordinated Notes are unsecured senior subordinated obligations of
the Company and are subordinated in right of payment to the prior payment in
full of all existing and future senior indebtedness, pari passu with all present
and future senior subordinated indebtedness and senior to all present and future
subordinated indebtedness of the Company or the relevant subsidiary guarantors,
as defined in the indenture. The Senior Subordinated Notes will also be
effectively subordinated to any secured indebtedness to the extent of the value
of the assets securing such indebtedness.
The Senior Subordinated Notes are redeemable at the option of the Company, in
whole or in part, after August 1, 2001, at the redemption prices set forth in
the note agreement plus accrued and unpaid interest, if any, to the redemption
date. In addition, at any time prior to August 1, 1999, the Company may redeem,
at its option, up to an aggregate amount of 35% of the original principal amount
of the Senior Subordinated Notes with the proceeds of one or more public equity
offerings at a redemption price of 110% of the principal amount thereof plus
accrued and unpaid interest, if any, to the redemption date, provided that at
least 50% of the original aggregate principal amount of the notes remains
outstanding after each such redemption.
Upon the occurrence of a change of control (as defined), each holder of the
Senior Subordinated Notes will have the right to require the Company to purchase
all or a portion of such holder's notes at a price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
the date of purchase.
The indenture pursuant to which the Senior Subordinated Notes were issued
contains certain covenants that, among other things, limit the ability of the
Company and its restricted subsidiaries to (i) incur additional indebtedness,
(ii) pay dividends or make other distributions with respect to capital stock (as
defined) of the Company and its restricted subsidiaries, (iii) sell assets of
the Company or its restricted subsidiaries, (iv) issue or sell restricted
subsidiary stock, (v) enter into certain transactions with affiliates, (vi)
create certain liens, (vii) enter into certain mergers and consolidations and
(viii) incur indebtedness which is subordinate to senior indebtedness and senior
to the Senior Subordinated Notes.
Pursuant to a registration agreement among the Company and the initial
purchasers, the Company will commence an exchange offer pursuant to an effective
registration statement or cause the Notes to be registered under the Securities
Act pursuant to a resale shelf registration statement. If an exchange offer
registration statement is not (i) filed by October 31, 1997 or (ii) declared
effective by December 31, 1997, or (iii) if an exchange offer is not consummated
or a resale shelf registration statement is not declared effective by January
31, 1998, special interest will accrue initially at the rate of .25% per annum
increasing to a maximum rate of 1% per annum, payable semi-annually until such
time as an exchange offer is consummated or a resale shelf registration is
declared effective.
GM Acquisition Note
In connection with the GM Acquisition, DRA issued to GM a subordinated note in
the principal amount of $45,000 due 2004. Interest accrues semiannually at a
rate of 11.5% per annum and is added to the unpaid principal balance in amounts
ranging from 60% of the accruing interest in 1997 to 20% in 1999. Beginning in
2000, interest is payable semiannually in cash.
A&B Seller Notes
In connection with the A&B acquisition, a subsidiary of DRI issued
subordinated notes in the principal amount of $3,500 due 2002. Interest is
payable semiannually at 10% per annum. The notes are subordinated to the senior
credit facility, senior subordinated debt, and the World Note. The notes may be
prepaid at any time without penalty.
F-16
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Junior Subordinated Notes
DRI issued $18,200 in an initial principal amount of Junior Subordinated
Notes to two investors, who are also holders of the Company's common stock.
Interest on the junior subordinated notes accrues semiannually at 11% and is
payable entirely in additional principal, through 2004, when the entire balance
is due and payable.
Capital Lease Obligations
In 1996 the Company entered into an aggregate of $13,931 of new capital
leases with respect to three manufacturing facilities and its world headquarters
building. The leases have 15 year terms with options to renew for additional
periods. These leases have been capitalized using interest rates ranging from
12.5% to 14.2%. The carrying value of assets under capital leases was $15,870 at
July 31, 1997.
Other
Total cash interest paid for 1995, 1996 and 1997 was $7,738, $19,895 and
$31,744, respectively.
The following is the required principal payments of long-term debt and
capitalized leases:
<TABLE>
<S> <C>
1998...................................... $ 507
1999...................................... 721
2000...................................... 817
2001...................................... 9,366
2002...................................... 844
Thereafter................................ 351,513
---------
$ 363,768
=========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
Agreements with GM
In connection with the GM Acquisition, the Company and GM agreed to allocate
the responsibility for employee pension benefits and post-retirement health care
and life insurance on a pro-rata basis between DRA and GM. The allocation is
primarily determined upon years of service with DRA and aggregate years of
service with DRA and GM. In addition, GM has agreed to retain complete
responsibility for all pension and post-retirement benefit costs for salaried
and hourly employees who retired from DRA before AugustE1, 1996 and October 1,
1996, respectively. Effective August 1, 1994, DRA established hourly and
salaried pension and post-retirement health care and life insurance plans which
are similar to the respective GM plans.
Pension Plans
DRA has defined benefit pension plans covering substantially all employees.
The plan covering salaried employees provides benefits that are based upon years
of service and final estimated average compensation. Benefits for hourly
employees are based on stated amounts for each year of service. DRA's funding
policy is to contribute amounts to provide the plans with sufficient assets to
meet future benefit payment requirements consistent with actuarial
determinations of the funding requirements of federal laws. DRA made
contributions of $6,454 and $1,085 to the plans in 1996 and 1997, respectively.
No contributions were made in 1995. Plan assets are primarily invested in mutual
funds which invest in both debt and equity instruments.
The components of net periodic cost for the plans are as follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
----------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Service cost - benefits earned during the period.............. $ 4,435 $ 2,935 $ 3,163
Interest costs on projected benefit obligation................ 2 293 544
Actual (gain) loss on assets................................... -- 51 (2,180)
Net amortization and deferral.................................. 22 (316) 1,512
Special charge for early retirement............................ -- -- 1,633
------------ ------------ ------------
Net periodic pension cost...................................... $ 4,459 $ 2,963 $ 4,672
============ ============ ============
</TABLE>
F-17
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
JULY 31, 1997
In 1997, the Company offered retirement incentives to salaried employees. The
program liability of $1,633 was included with the restructuring charge.
The following table sets forth the funded status for DRA's defined benefit
pension plans.
<TABLE>
<CAPTION>
July 31
----------------------------------------
1996 1997
----------------- -----------------
<S> <C> <C>
Actuarial present value of accumulated pension benefit
obligation:
Vested.................................................... $ 5,988 $11,375
Nonvested................................................. 489 1,318
----------------- -----------------
Accumulated benefit obligation................................ $ 6,477 $12,693
================= =================
Projected benefit obligation.................................. $ 7,021 $13,540
Plan assets at fair value..................................... (6,406) (9,664)
----------------- -----------------
Projected benefit obligation in excess of fair value of
plan assets................................................... 615 3,876
Prior service cost not yet recognized......................... (37) (911)
Unrecognized net gain......................................... 372 1,577
----------------- -----------------
Pension liability recognized in the balance sheet............. $ 950 $ 4,542
================= =================
</TABLE>
The measurement of the July 31, 1996 and 1997 projected benefit obligation was
based upon a discount rate of 7.75%. The expected compensation growth rate is 5%
for salaried employees. The expected rate of return on plan assets is 10%.
Defined Contribution Plans
Various subsidiaries of the Company sponsor voluntary savings plans for
eligible salaried and hourly employees. These plans allow participants to make
contributions pursuant to section 401(k) of the Internal Revenue Code. Certain
of these plans have Company matching contribution provisions. Charges to
operations were $452, $686 and $532 for 1995, 1996 and 1997, respectively.
Profit Sharing Plans
DRA sponsors profit sharing plans covering substantially all of its employees.
Distributions are determined based upon formulas established by management and
are made annually. Profit sharing expense for 1995, 1996 and 1997 was $1,700,
$1,300 and $1,400, respectively.
Post-Retirement Health Care and Life Insurance Plans
DRA maintains hourly and salaried benefit plans that provide post-retirement
health care and life insurance to retirees and eligible dependents. The benefits
are payable for life, although DRA retains the right to modify or terminate the
plans providing these benefits. The salaried plan is contributory, with
additional cost sharing features such as deductibles and co-payments. Salaried
employees who were not GM employees prior to 1992 are not eligible for the above
described post-retirement benefits. It is DRA's policy to fund these benefits as
claims are incurred.
F-18
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
JULY 31, 1997
The following table sets forth the status of DRA's post-retirement benefit
plans.
<TABLE>
<CAPTION>
July 31
------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Fully eligible active participants..................... $ 148 $ 160
Active participants not yet fully eligible............. 6,960 11,459
------------------- -------------------
7,108 11,619
Unrecognized net gain.................................. 1,078 1,058
------------------- -------------------
Post-retirement benefit liability...................... $ 8,186 $ 12,677
=================== ===================
</TABLE>
The components of post-retirement benefit expense are as follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
---------------------------------------------------------------------
1995 1996 1997
------------------- -------------------- -------------------
<S> <C> <C> <C>
Service Cost......................................... $ 4,114 $ 3,557 $ 3,959
Interest Cost........................................ 320 254 551
Amortization of gain................................. - (59) (19)
------------------- -------------------- -------------------
$ 4,434 $ 3,752 $ 4,491
=================== ==================== ===================
</TABLE>
Measurement of the accumulated post-retirement benefit obligation was based on
an 8.3% annual rate of increase in the cost of covered health care benefits. The
rate was assumed to decrease ratably to 5.5% through 2002 and remain level at
that rate thereafter. The discount rate used in determining the accumulated
post-retirement benefit obligation was 7.75%. An increase of 1% in assumed
health care cost trend rates would increase the accumulated post-retirement
benefit obligation as of July 31, 1997 by 25.8% and the net periodic cost for
1997 would be increased by 28.6%.
9. STOCKHOLDERS' EQUITY AND REDEEMABLE EXCHANGEABLE PREFERRED STOCK OF DRA
All shares of Class A Common Stock and Class B Common Stock are identical and
will entitle the holders thereof to the same rights and privileges, provided
that except as otherwise required by law, the holders of Class B common stock
shall have no voting rights. Each share of Class A stock is convertible into one
share of Class B stock and each share of Class B stock is convertible into one
share of Class A stock. Pursuant to a Stockholders Agreement dated July 29,
1994, the Company issued 7,905,912 shares of Class A Common Stock and 5,366,088
shares of Class B Common Stock for an aggregate of $1,581. In addition, 483,000
shares of Class A common stock were issued in connection with the Nabco
acquisition. On October 21, 1994, the Company approved a private placement
memorandum whereby the Company is authorized to offer for sale to certain
members of management of DRA up to 1,596,000 shares of Class A Common Stock. As
of July 31, 1997, 1,512,000 shares were outstanding pursuant to the private
placement at a price approximating book value. Shares issued pursuant to this
plan generally vest over three years. During 1997, 361,200 shares were sold
for $2,705 less than the deemed fair market value. As a result, compensation
expense of $354 was recorded during the current year and the balance of the
unearned compensation of $2,351 will be amortized over the remaining vesting
period
The stockholder notes receivable of $179 and $350 at July 31, 1996 and 1997,
respectively, were issued in connection with the sale of Class A Common Stock
and are payable in 1999 through 2002 together with interest at 9.25% accrued
interest per annum. The members of DRA management who are stockholders of the
Company are subject to agreements that impose certain restrictions and grant
rights on their ownership and transfer of Company stock. During the first three
years after issuance, stockholders are generally prohibited from transferring
shares of common stock of the Company owned by them. The Company further has the
right to repurchase such stock at amounts described in the respective agreements
when the management investor is no longer employed by DRA.
F-19
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
JULY 31, 1997
Warrants
In connection with the issuance of the Junior Subordinated Notes, DRI issued
warrants to purchase 1,680,000 shares of DRI Class A Common Stock at a price
of $.0012 per share. The warrants can be exercised, in whole or in part, at
any time through June 31, 2004.
Redeemable Exchangeable Preferred Stock of DRA
In connection with the GM Acquisition, DRA issued 15,000 shares of Class A
Preferred Stock (par value $.01 per share and liquidation preference $1,000 per
share) to GM (DRA Preferred Stock). The provisions of the preferred stock call
for a cumulative cash dividend equal to $80 per share (8%). For financial
statement purposes the preferred stock has been discounted to approximately
$11,500 to reflect fair value at the issuance date based upon an 11.5% dividend
rate. The excess of the preference amount over the carrying value of the DRA
Preferred Stock is being accreted through August 1, 2004, at which time the DRA
Preferred Stock must be redeemed by DRA at $1,000 per share plus accrued and
unpaid dividends. At the option of DRA, the DRA Preferred Stock may be redeemed
at a price per share equal to $1,000 plus accrued and unpaid dividends. In
addition, the DRA Preferred Stock may be exchanged, at the option of DRA, in
whole or in part, for 8% subordinated debentures to be issued by DRA at $1,000
per share plus accrued and unpaid dividends. Dividends which accrue but remain
unpaid for one year accrue additional dividends at the rate of 8%. The carrying
value of the DRA Preferred Stock includes unpaid and accrued dividends of $3,896
as of July 31, 1997.
10. INCOME TAXES
The following is a summary of the components of the provision for income taxes
(benefit) of continuing operations:
<TABLE>
<CAPTION>
For the Year Ended July 31
-------------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal................................ $ 9,529 $ 5,969 $ 3,220
State and Local........................ 1,927 916 2,019
Foreign................................ 61 131 977
----------------- ------------------ ------------------
11,517 7,016 6,216
Deferred:
Federal................................ (3,021) (1,240) (8,615)
State and Local........................ (650) (35) (960)
Foreign................................ -- -- 345
----------------- ----------------- -----------------
$ 7,846 $ 5,741 $ (3,014)
================= ================= =================
</TABLE>
Income (loss) from continuing operations before income taxes (benefit),
preferred dividend requirement of subsidiary and minority interest was taxed in
the following jurisdictions:
<TABLE>
<CAPTION>
For the Year Ended July 31
-----------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic................................................... $ 18,198 $ 10,104 $ (15,640)
Foreign.................................................... 371 3,208 4,903
----------------- ----------------- -----------------
$ 18,569 $ 13,312 $ (10,737)
================= ================= =================
</TABLE>
F-20
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
JULY 31, 1997
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
----------------------------------------------------------------
1995 1996 1997
---------------- ------------------ ------------------
<S> <C> <C> <C>
Federal statutory income tax rate......................... 35.0% 35.0% 35.0%
State and local income taxes- net of federal tax benefit.. 4.5 4.3 (7.7)
Compensation expense...................................... -- -- (6.0)
Other items............................................... 2.7 3.8 6.8
---------------- ------------------ ------------------
Effective income tax rate................................. 42.2% 43.1% 28.1%
================ ================== ==================
</TABLE>
State and local income taxes include provisions for Indiana and Michigan which
do not provide proportional benefit in loss years.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
July 31
------------------------------------
1996 1997
-------------- -----------------
<S> <C> <C>
Deferred tax assets:
Restructuring..................................... $ -- $ 4,424
Employee benefits................................. 7,385 7,157
Inventories....................................... 2,165 7,196
Warranty.......................................... 2,665 3,207
Asset impairment.................................. 1,380 8,480
Discontinued operations........................... 4,352 774
Non-compete agreements............................ -- 789
Alternative minimum tax credits................... 1,244 1,488
Other............................................. 3,054 2,835
-------------- -----------------
22,245 36,350
Deferred tax liabilities:
Depreciation...................................... (11,275) (13,475)
Discount on exchangeable securities............... (1,381) (1,336)
Other............................................. (922) (1,621)
-------------- -----------------
(13,578) (16,432)
-------------- -----------------
Net deferred tax asset................................. $ 8,667 $ 19,918
============== =================
</TABLE>
The Company's alternative minimum tax credit may be carried forward
indefinitely. Income tax payments (refunds), including state taxes, for 1995,
1996 and 1997 were $8,900, $14,000 and ($1,100), respectively.
No provision has been made for United States federal and state or foreign
taxes that may result from future remittances of undistributed earnings of
foreign subsidiaries ($9,336 at July 31, 1997) because it is expected that such
earnings will be reinvested in these foreign operations indefinitely. It is not
practical to estimate the amount of taxes that might be payable on the eventual
remittances of such earnings.
F-21
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
JULY 31, 1997
11. TRANSACTIONS WITH GM
The Company and GM have entered into several transactions and agreements
related to their respective businesses. In addition to the transactions
disclosed elsewhere in the accompanying consolidated financial statements and
related notes, the Company entered into the following transactions with GM:
<TABLE>
<CAPTION>
For the Year Ended July 31
-----------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Sales...................................... $ 338,356 $ 298,084 $ 301,328
Material purchases and costs for services.. 205,874 112,372 97,934
</TABLE>
In addition, the Company had the following balances with GM:
<TABLE>
<CAPTION>
July 31
----------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
Trade accounts receivable............................. $ 27,391 $ 30,286
Other receivables..................................... 9,807 4,886
Accounts payable...................................... 10,752 7,644
</TABLE>
12. LEASE COMMITMENTS
The Company occupies space and uses certain equipment under lease
arrangements. Rent expense was $959, $3,208 and $4,004 for 1995, 1996 and 1997,
respectively. Rental commitments at July 31, 1997 for long-term non-cancelable
operating leases were as follows for the year ending:
<TABLE>
<S> <C>
1998......................................... $ 4,581
1999......................................... 3,855
2000......................................... 2,649
2001......................................... 1,449
2002......................................... 1,387
Thereafter................................... 1,784
--------------
$15,705
==============
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings
and subject to various claims arising in the ordinary course of business. The
Company believes that the disposition of these matters will not have a material
adverse effect on the financial position, results of operations or cash flows of
the Company.
F-22
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
JULY 31, 1997
14. Geographical Information
The Company operates predominantly in a single industry as a designer,
manufacturer, remanufacturer, and distributor of electrical and other engine
related components, including starter motors and alternators for automobiles,
trucks, and other heavy duty vehicles. The Company is a multi-national
corporation with operations in many countries including the United States,
Canada, Mexico, Hungary, Germany, Korea and the Netherlands. Sales, operating
profits and identifiable assets of Canadian, European and other foreign
locations are those sales, operating profits and assets related to the
operations in those locations. Geographical information is shown below:
<TABLE>
<CAPTION>
For the Year Ended July 31
-------------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales:
United States............................................ $ 584,859 $ 657,782 $ 684,790
Canada................................................... -- 26,815 47,240
Europe................................................... 5,090 15,975 14,487
Other foreign............................................ -- -- 7,052
Eliminate intercompany sales............................. (16,526) (63,720) (63,782)
----------------- ----------------- -----------------
Total net sales........................................ $ 573,423 $ 636,852 $ 689,787
================= ================= =================
Operating income:
United States............................................ $ 36,544 $ 36,751 $ 23,196
Canada................................................... -- 2,319 2,341
Europe................................................... 457 1,609 784
Other foreign............................................ -- -- (366)
----------------- ----------------- -----------------
Total operating income................................. $ 37,001 $ 40,679 $ 25,955
================= ================= =================
Identifiable assets:
United States............................................ $ 310,292 $ 427,847 $ 474,991
Canada................................................... -- 29,959 31,197
Europe................................................... 11,523 10,138 13,105
Other foreign............................................ -- -- 16,303
----------------- ----------------- -----------------
Total identifiable assets................................ 321,815 467,944 535,596
Corporate assets......................................... 65,096 119,339 192,458
Elimination.............................................. (64,384) (112,201) (157,485)
----------------- ----------------- -----------------
Total assets............................................ $ $322,527 $ $ 475,082 $ $ 570,569
================= ================= =================
</TABLE>
15. Financial Information for Subsidiary Guarantors and Non-Guarantor
Subsidiaries
The Company conducts a significant portion of its business through
subsidiaries. The Senior Notes and the Senior Subordinated Notes referred to in
Note 16 below are Fully and unconditionally guaranteed, jointly and severally,
by certain direct and indirect subsidiaries (the Subsidiary Guarantors). Certain
of the Company's subsidiaries do not guarantee the Senior Notes and the Senior
Subordinated Notes (the Non-Guarantor Subsidiaries). The claims of creditors of
Non-Guarantor Subsidiaries have priority over the rights of the Company to
receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at July
31, 1997 and 1996 and for the years ended July 31, 1997, 1996 and 1995.
The equity method has been used by the Company with respect to investments in
subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
F-23
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The following table sets forth the Guarantor and direct Non-Guarantor
Subsidiaries:
<TABLE>
<CAPTION>
Guarantor Subsidiaries Non-Guarantor Subsidiaries
- ------------------------------------------------ ----------------------------------------------------
<S> <C>
Delco Remy America, Inc. Autovill RT Ltd.
Remy International, Inc. Power Investments Canada Ltd.
Reman Holdings, Inc. Remy UK Limited
Nabco, Inc. Delco Remy International (Europe) GmbH
The A&B Group, Inc. Remy India Holdings, Inc.
A&B Enterprises, Inc. Remy Mauritius Ltd.
Dalex, Inc. Remy Korea Holdings, Inc.
A&B Cores, Inc. 681287 Alberta Ltd.
R&L Tool Company, Inc. Publitech, Inc.
MCA, Inc. of Mississippi World Wide Automotive Distributors, Inc.
Power Investments, Inc. Autovill Holdings, Inc.
Franklin Power Products, Inc.
International Fuel Systems, Inc.
Marine Drive Systems, Inc.
Marine Corporation of America
Powrbilt Products, Inc.
World Wide Automotive, Inc.
</TABLE>
F-24
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET
-------------------------------------
JULY 31, 1997
------------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............ $ -- $ 1,504 $ 8,546 $ -- $ 10,050
Trade accounts receivable............ -- 99,745 10,439 -- 110,184
Affiliate accounts receivable, net... -- 33,409 2 (33,411)(a) --
Other receivables.................... -- 9,605 882 -- 10,487
Recoverable income taxes............. -- 2,889 -- -- 2,889
Inventories.......................... -- 145,035 19,382 -- 164,417
Deferred income taxes................ 4,315 17,159 -- -- 21,474
Other current assets................. -- 4,163 480 -- 4,643
---------------- -------------- -------------- -------------- ---------------
Total current assets................... 4,315 313,509 39,731 (33,411) 324,144
Property and equipment................. 20 133,769 13,433 -- 147,222
Less accumulated depreciation.......... 13 22,353 4,492 -- 26,858
---------------- -------------- -------------- -------------- ---------------
7 111,416 8,941 -- 120,364
Deferred financing costs............... 5,148 3,655 -- -- 8,803
Goodwill, net.......................... -- 76,437 10,175 -- 86,612
Net assets held for disposal........... -- 25,279 -- -- 25,279
Investment in affiliates............... 171,614 -- -- (168,495)(b)(c) 3,119
Other assets........................... 1,953 (1,463) 1,758 -- 2,248
---------------- -------------- -------------- -------------- ---------------
Total assets......................... $ 183,037 $ 528,833 $ 60,605 $ (201,906) $ 570,569
================ ============== ============== ============== ===============
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
</TABLE>
F-25
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31, 1997
----------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Accounts payable............................ $ 195 $ 82,585 $ 5,798 $ -- $ 88,578
Affiliate accounts payable.................. 15,684 6,152 11,575 (33,411)(a) --
Accrued interest payable.................... -- 3,107 -- -- 3,107
Accrued restructuring charges............... -- 37,377 -- -- 37,377
Liabilities related to discontinued
operations................................. -- 3,324 -- -- 3,324
Other liabilities and accrued expenses...... (9,815) 41,034 5,991 -- 37,210
Current portion of long-term debt........... -- 506 1 -- 507
---------------- -------------- -------------- -------------- --------------
Total current liabilities................ 6,064 174,085 23,365 (33,411) 170,103
Deferred income taxes......................... 10,631 (9,114) 39 -- 1,556
Long-term debt, less current portion.......... 173,511 189,669 81 -- 363,261
Post-retirement benefits other than pensions.. -- 12,677 -- -- 12,677
Accrued pension benefit....................... -- 4,542 -- -- 4,542
Other non-current liabilities................. 876 3,231 17 -- 4,124
Minority interest in subsidiary............... -- 6,504 1,528 -- 8,032
Redeemable exchangeable preferred stock of
subsidiary................................... -- 16,071 -- -- 16,071
Stockholders' equity (deficit):
Common stock:
Class A Shares......................... 88 -- -- -- 88
Class B Shares......................... 65 -- -- -- 65
Paid-in capital............................. 6,677 -- -- -- 6,677
Subsidiary investment....................... -- 127,665 31,970 (159,635)(b) --
Retained earnings (deficit)................. (12,174) 3,503 5,357 (8,860)(c) (12,174)
Cumulative translation
adjustment............................. -- -- (1,752) -- (1,752)
Stock purchase plan......................... (2,701) -- -- -- (2,701)
---------------- -------------- -------------- -------------- --------------
Total stockholders' equity
(deficit).............................. (8,045) 131,168 35,575 (168,495) (9,797)
---------------- -------------- -------------- -------------- --------------
Total liabilities and stockholders' equity
(deficit)................................... $ 183,037 $ 528,833 $ 60,605 $ (201,906) $ 570,569
================ ============== ============== ============== ==============
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
</TABLE>
F-26
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1997
----------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------- ---------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ -- $684,790 $ 68,779 $ (63,782)(a) $ 689,787
Cost of goods sold................................ -- 548,875 55,141 (63,782)(a) 540,234
----------------- ---------- ------------ --------------- ------------
Gross profit...................................... -- 135,915 13,638 -- 149,553
Selling, engineering, and administrative
expenses........................................ 6,325 71,933 10,840 -- 89,098
Restructuring charges............................. -- 34,500 -- -- 34,500
----------------- ---------- ------------ --------------- ------------
Operating (loss) income........................... (6,325) 29,482 2,798 -- 25,955
Other income (expense):
Gain on sale of building........................ -- -- 2,082 -- 2,082
Interest expense................................ (18,815) (19,997) 38 -- (38,774)
----------------- ---------- ------------ --------------- ------------
(Loss) income from continuing operations
before income tax (benefit), preferred
dividend requirement of subsidiary,
and minority interest........................... (25,140) 9,485 4,918 -- (10,737)
Minority interest in income of subsidiaries....... -- 921 (29) -- 892
Equity in earnings of subsidiaries................ 1,821 -- -- (1,821)(b) --
Income taxes (benefit)............................ (9,023) 4,042 1,967 -- (3,014)
Preferred dividend requirement of subsidiary...... -- -- -- 1,648(c) 1,648
----------------- ---------- ------------ --------------- ------------
(Loss) income from continuing operations.......... (14,296) 4,522 2,980 (3,469) (10,263)
Discontinued operations:
Loss from operations of discontinued
businesses (less applicable income tax
benefit)..................................... -- 808 -- -- 808
Loss on disposal of businesses (less
applicable income tax benefit)............... -- 874 -- -- 874
Extraordinary item:
Write-off of debt issuance costs (less
applicable income tax benefit)............... -- 2,351 -- -- 2,351
----------------- ---------- ------------ --------------- ------------
Net (loss) income................................. $ (14,296) $ 489 $ 2,980 $ (3,469) $ (14,296)
================= ========== ============ =============== ============
</TABLE>
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-27
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended July 31, 1997
---------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................. $(14,296) $ 489 $ 2,980 $(3,469)(a) $ (14,296)
Extraordinary item................................ 375 3,123 -- -- 3,498
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.................. 1,629 19,942 752 -- 22,323
Gain on sale of building....................... -- -- (2,082) -- (2,082)
Equity in earnings of subsidiary............... (1,821) -- -- 1,821(a) --
Deferred income taxes.......................... 7,864 (17,481) 39 -- (9,578)
Post-retirement benefits other than
pensions....................................... -- 4,491 -- -- 4,491
Accrued pension benefits....................... -- 3,592 -- -- 3,592
Non-cash interest expense...................... 3,337 4,612 -- -- 7,949
Preferred dividend requirement of
subsidiary.................................... -- -- -- 1,648(b) 1,648
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable.......................... -- (1,715) (1,626) -- (3,341)
Inventories.................................. -- (4,950) (5,295) -- (10,245)
Accounts payable............................. (67) (10,970) 1 -- (11,036)
Intercompany accounts........................ (74,450) 65,730 8,720 -- --
Other current assets and liabilities......... (8,727) 995 3,194 -- (4,538)
Accrued restructuring........................ -- 31,836 -- -- 31,836
Other non-current assets and liabilities,
net......................................... (12,209) 16,180 (1,655) -- 2,316
---------------- ---------- ------------ ------------ ------------
Net cash (used in) provided by operating
activities..................................... (98,365) 115,874 5,028 -- 22,537
INVESTING ACTIVITIES:
Acquisition, net of cash acquired................. (45,284) 135 2,707 -- (42,442)
Purchase of property and equipment................ -- (27,025) (4,863) -- (31,888)
Investment in affiliates.......................... (3,119) -- -- -- (3,119)
Proceeds from sale of building.................... -- -- 3,362 -- 3,362
---------------- ---------- ------------ ------------ ------------
Net cash (used in) provided by investing
activities..................................... (48,403) (26,890) 1,206 -- (74,087)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt......... 162,700 17,300 -- -- 180,000
Payments on long-term debt........................ (16,000) (110,200) -- -- (126,200)
Other financing activities........................ -- 3,986 -- -- 3,986
---------------- ---------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 146,700 (88,914) -- -- 57,786
Effect of exchange rate changes on cash........... -- -- 408 -- 408
---------------- ---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents...................................... (68) 70 6,642 -- 6,644
Cash and cash equivalents at beginning of year.... 68 1,434 1,904 -- 3,406
---------------- ---------- ------------ ------------ ------------
Cash and cash equivalents at end of year.......... $ -- $ 1,504 $ 8,546 $ -- $ 10,050
================ ========== ============ ============ ============
</TABLE>
_________________
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
F-28
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
July 31, 1996
------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------ ---------- ------------ ---------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 68 $ 1,434 $ 1,904 $ -- $ 3,406
Trade accounts receivable, net..................... -- 87,161 7,831 -- 94,992
Affiliate accounts receivable...................... -- 80,650 -- (80,650)(a) --
Other receivables.................................. -- 10,265 320 -- 10,585
Recoverable income taxes........................... 825 7,013 836 -- 8,674
Inventories........................................ -- 111,631 11,952 -- 123,583
Deferred income taxes.............................. 1,548 13,914 -- -- 15,462
Other current assets............................... -- 790 423 -- 1,213
------------------ ---------- ------------ ---------------- -----------
Total current assets............................ 2,441 312,858 23,266 (80,650) 257,915
Property and equipment............................... 20 162,963 7,408 -- 170,391
Less accumulated depreciation........................ -- 28,207 1,028 -- 29,235
------------------ ---------- ------------ ---------------- -----------
20 134,756 6,380 -- 141,156
Deferred financing costs............................. 481 6,016 -- -- 6,497
Goodwill, net........................................ -- 58,174 8,396 -- 66,570
Investment in affiliate.............................. 119,240 -- -- (119,240)(b)(c) --
Other assets......................................... 544 345 2,055 -- 2,944
------------------ ---------- ------------ ---------------- -----------
Total assets.................................... $122,726 $512,149 $40,097 $(199,890) $475,082
================== ========== ============ ================ ===========
</TABLE>
F-29
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31, 1996
-------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ---------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable................................... $ 262 $ 75,509 $ 5,436 $ -- $ 81,207
Affiliate accounts payable......................... 73,322 4,968 2,360 (80,650)(a) --
Accrued interest payable........................... -- 4,026 -- -- 4,026
Accrued restructuring charges...................... -- 5,541 -- -- 5,541
Liabilities related to discontinued operations..... -- 11,005 -- -- 11,005
Other liabilities and accrued expenses............. (1,524) 31,151 3,056 -- 32,683
Current portion of long-term
debt.............................................. -- 8,511 1,141 -- 9,652
---------------- ---------- ------------- ---------------- ------------
Total current liabilities....................... 72,060 140,711 11,993 (80,650) 144,114
Deferred income taxes................................ -- 6,795 -- -- 6,795
Long-term debt, less current portion................. 46,919 242,225 -- -- 289,144
Post-retirement benefits other than pensions......... -- 8,186 -- -- 8,186
Accrued pension benefit.............................. -- 950 -- -- 950
Other non-current liabilities........................ (3) 2,582 2,848 -- 5,427
Minority interest in subsidiary...................... -- 4,457 -- -- 4,457
Redeemable exchangeable preferred stock of
subsidiary......................................... -- 14,420 -- -- 14,420
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock:
Class A Shares................................ 87 -- -- -- 87
Class B Shares................................ 65 -- -- -- 65
Paid-in capital.................................... 1,655 -- -- -- 1,655
Subsidiary investment.............................. -- 87,161 25,040 (112,201)(b) --
Retained earnings (deficit)........................ 2,122 4,662 2,377 (7,039)(c) 2,122
Cumulative translation
adjustment.................................... -- -- (2,161) -- (2,161)
Notes receivable from
stockholders.................................. (179) -- -- -- (179)
---------------- ---------- ------------- ---------------- ------------
Total stockholders' equity
(deficit)..................................... 3,750 91,823 25,256 (119,240) 1,589
---------------- ---------- ------------- ---------------- ------------
Total liabilities and stockholders' equity
(deficit)..................................... $122,726 $512,149 $40,097 $(199,890) $475,082
================ ========== ============= ================ ============
</TABLE>
(a) Elimination of Intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-30
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1996
---------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ -- $657,782 $42,790 $(63,720)(a) $636,852
Cost of goods sold................................ -- 541,363 32,435 (63,720)(a) 510,078
----------------- ---------- ------------ ------------ ------------
Gross profit...................................... -- 116,419 10,355 -- 126,774
Selling, engineering, and administrative
expenses......................................... 1,923 69,644 6,427 -- 77,994
Restructuring charges............................. -- 8,101 -- -- 8,101
----------------- ---------- ------------ ------------ ------------
Operating (loss) income........................... (1,923) 38,674 3,928 -- 40,679
Interest expense.................................. (4,503) (22,477) (387) -- (27,367)
----------------- ---------- ------------ ------------ ------------
(Loss) income from continuing operations before
income taxes (benefit), preferred dividend
requirement of subsidiary and minority interest.. (6,426) 16,197 3,541 -- 13,312
Minority interest in income of subsidiary......... -- -- 259 -- 259
Equity in earnings of subsidiary.................. (1,904) -- -- 1,904(b) --
Income taxes (benefit)............................ (3,489) 8,014 1,216 -- 5,741
Preferred dividend requirement of subsidiary...... -- -- -- 1,516(c) 1,516
----------------- ---------- ------------ ------------ ------------
(Loss) income from continuing operations.......... (4,841) 8,183 2,066 388 5,796
Discontinued operations:
Loss from operations of discontinued businesses
(less applicable income tax benefit)........... -- 1,573 -- -- 1,573
Loss on disposal of businesses (less applicable
income tax benefit)............................ -- 9,064 -- -- 9,064
----------------- ---------- ------------ ------------ ------------
Net (loss) income................................. $ (4,841) $ (2,454) $ 2,066 $388 $ (4,841)
================= ========== ============ ============ ============
</TABLE>
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-31
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1996
---------------------------------------------------------------------------------
DELCO REMY NON-
INTERNATIONAL SUBSIDIARY GUARANTOR
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ----------- --------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................. $ (4,841) $ (2,454) $ 2,066 $ 388 $ (4,841)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ -- 18,569 986 -- 19,555
Equity in earnings of subsidiary............. 1,904 -- -- (1,904)(a) --
Deferred income taxes........................ (620) (3,328) 1,001 -- (2,947)
Post-retirement benefits other than
pensions.................................... -- 3,752 -- -- 3,752
Accrued pension benefits..................... -- (3,509) -- -- (3,509)
Non-cash interest expense.................... 2,333 5,534 -- -- 7,867
Preferred dividend requirement of
subsidiary.................................. -- -- -- 1,516(b) 1,516
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable.......................... -- (24,724) 266 -- (24,458)
Inventories.................................. -- (27,048) 1,328 -- (25,720)
Accounts payable............................. 262 7,339 1,033 -- 8,634
Intercompany accounts........................ 27,650 (29,070) 1,420 -- --
Other current assets and liabilities......... (2,679) 21,702 (794) -- 18,229
Accrued restructuring........................ -- 5,541 -- -- 5,541
Other non-current assets and liabilities,
net......................................... (1,148) 1,248 (4,403) -- (4,303)
--------------- ----------- --------------- -------------- ---------------
Net cash provided by (used in) operating
activities....................................... 22,861 (26,448) 2,903 -- (684)
Investing activities:
Acquisition, net of cash acquired................. (47,685) 1,365 -- -- (46,320)
Purchase of property and equipment................ (1) (32,740) -- -- (32,741)
--------------- ----------- --------------- -------------- ---------------
Net cash used in investing activities............. (47,686) (31,375) -- -- (79,061)
Financing activities:
Proceeds from issuances of long-term
debt............................................. 24,300 65,352 -- -- 89,652
Payments on long-term debt........................ -- (6,466) (2,376) -- (8,842)
Other financing activities........................ -- (20) -- -- (20)
--------------- ----------- --------------- -------------- ---------------
Net cash provided by (used in) financing
activities....................................... 24,300 58,866 (2,376) -- 80,790
Effect of exchange rate changes on cash........... -- -- 883 -- 883
--------------- ----------- --------------- -------------- ---------------
Net (decrease) increase in cash and cash
equivalents...................................... (525) 1,043 1,410 -- 1,928
Cash and cash equivalents at beginning of year.... 593 391 494 -- 1,478
--------------- ----------- --------------- -------------- ---------------
Cash and cash equivalents at end of
year............................................. $ 68 $ 1,434 $ 1,904 $ -- $ 3,406
=============== =========== =============== =============== ==============
</TABLE>
(a) Elimination of investment in affiliates earnings.
(b) Elimination of preferred dividend requirement of subsidiary.
F-32
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1995
---------------------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $ -- $584,859 $5,090 $(16,526)(a) $573,423
Cost of goods sold................... -- 488,406 3,336 (16,526)(a) 475,216
----------------- --------------- --------------- --------------- ---------------
Gross profit......................... -- 96,453 1,754 -- 98,207
Selling, engineering, and
administrative expenses............. 825 59,084 1,297 -- 61,206
----------------- --------------- --------------- --------------- ---------------
Operating (loss) income.............. (825) 37,369 457 -- 37,001
Interest expense..................... (2,083) (16,263) (86) -- (18,432)
----------------- --------------- --------------- --------------- --------------
(Loss) income from continuing
operations before income taxes
(benefit), preferred dividend
requirement of subsidiary, and
minority interest................... (2,908) 21,106 371 -- 18,569
Equity in earnings of subsidiary..... 8,943 -- -- (8,943)(b) --
Income taxes (benefit)............... (928) 8,713 61 -- 7,846
Preferred dividend requirement of
subsidiary.......................... -- -- -- 1,397(c) 1,397
----------------- --------------- --------------- --------------- ---------------
Income (loss) from continuing
operations.......................... 6,963 12,393 310 (10,340) 9,326
Discontinued operations:
Loss from operations of discontinued
businesses (less applicable income
tax benefit)....................... -- 2,363 -- -- 2,363
----------------- --------------- --------------- --------------- ---------------
Net income (loss)..................... $ 6,963 $ 10,030 $ 310 $(10,340) $ 6,963
================= =============== =============== =============== ===============
</TABLE>
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-33
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1995
--------------------------------------------------------------------------------
DELCO REMY NON-
INTERNATIONAL SUBSIDIARY GUARANTOR
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss)................................. $ 6,963 $ 10,030 $ 310 $(10,340)(a)(b) $ 6,963
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.................. -- 14,491 42 -- 14,533
Equity in earnings of subsidiary............... (8,943) -- -- 8,943(a) --
Deferred income taxes.......................... (927) (2,653) -- -- (3,580)
Post-retirement benefits other than pensions... -- 4,434 -- -- 4,434
Accrued pension benefits....................... -- 4,459 -- -- 4,459
Non-cash interest expense...................... 2,086 5,983 -- -- 8,069
Preferred dividend requirement of subsidiary... -- -- -- 1,397(b) 1,397
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable......................... -- (49,270) (50) -- (49,320)
Inventories................................. -- (7,212) (823) -- (8,035)
Accounts payable............................ -- 48,862 751 -- 49,613
Intercompany accounts....................... 62,733 (63,674) 941 -- --
Other current assets and liabilities........ 330 (6,450) (537) -- (6,657)
Other non-current assets and liabilities,
net........................................ 3,578 (3,797) 264 -- 45
-------------- ------------ ------------- ----------------- ------------
Net cash provided by (used in) operating
activities....................................... 65,820 (44,797) 898 -- 21,921
Investing activities:
Acquisitions, net of cash acquired................ (64,429) 1,824 595 -- (62,010)
Purchase of property and equipment................ (19) (11,129) (93) -- (11,241)
-------------- ------------ ------------- ----------------- -------------
Net cash (used in) provided by investing
activities....................................... (64,448) (9,305) 502 -- (73,251)
Financing activities:
Proceeds from issuances of long-term
debt.............................................. -- 31,918 -- -- 31,918
Payments on long-term debt........................ (848) (3,163) (906) -- (4,917)
Other financing activities........................ -- 118 -- -- 118
-------------- ------------ ------------- ----------------- -------------
Net cash (used in) provided by financing
activities....................................... (848) 28,873 (906) -- 27,119
-------------- ------------ ------------- ----------------- -------------
Net increase (decrease) in cash and cash
equivalents...................................... 524 (25,229) 494 -- (24,211)
Cash and cash equivalents at beginning of year.... 69 25,620 -- -- 25,689
-------------- ------------ ------------- ----------------- -------------
Cash and cash equivalents at end of
year.............................................. $ 593 $ 391 $ 494 $ -- $ 1,478
============== ============ ============= =================== ============
</TABLE>
(a) Elimination of investment in affiliate earnings.
(b) Recording of preferred dividend requirement of subsidiary.
F-34
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997
16. SUBSEQUENT EVENTS
Offerings
In October 1997, the Company filed Registration Statements to offer
approximately $48,000 of Class A Common Stock and $145,000 of Senior Notes Due
2007 (the Senior Notes). Net proceeds to the Company from such Offerings, after
deduction of associated expenses, are expected to be approximately $183,500. The
Company filed another Registration Statement in October 1997, the purpose of
which is to register an exchange offer for the Company's 10-5/8% senior
Subordinated Notes due 2006.
Planned Acquisition
On October 30, 1997, the Company entered into the Ballantrae Acquisition
Agreement to acquire all of the capital stock of Ballantrae (the Planned
Acquisition) for $52,800 (including assumed debt and the estimated working
capital adjustment and fees and expenses of Ballantrae). Ballantrae operates
through two subsidiaries: Tractech, a leading producer of traction control
systems for heavy duty original equipment manufacturers and the aftermarket; and
Kraftube, Inc., a tubing assembly business which sells products to compressor
manufacturers for commercial air conditioners and refrigeration equipment. In
fiscal year 1997, Tractech accounted for approximately 70% of Ballantrae's
$37,600 of net sales. The Company will exchange shares of its Common Stock with
a value (at the initial public offering price in the Equity Offering) of
approximately $22,100 for the equity of Ballantrae and will repay approximately
$29,700 of Ballantrae's debt. The acquisition is expected to be completed at or
prior to the consummation of the Offerings.
Recapitalization
In connection with the above-mentioned Offerings and Planned Acquisition, the
Company plans to complete several transactions pursuant to which the Company's
outstanding debt and preferred stock will be restructured (the
Recapitalization). Significant components of the Recapitalization, together with
the applicable accounting effects, will be as follows:
The payment in full of the World Note.
The early extinguishment of the World Note will result in a write-off of the
unamortized debt issue costs of $1,350, net of income taxes, which will be
accounted for as an extraordinary loss on this transaction.
The payment in full of the GM Acquisition Note.
The exchange of the Junior Subordinated Notes for 1,621,399 shares of Class A
Common Stock.
The exchange of the outstanding shares of 8% preferred stock of DRA to an 8%
subordinated debenture of DRA.
The payment in full of $11,800 principal amount of subordinated notes payable
to certain former stockholders of A&B Group and Power.
The amendment of the senior credit facility in connection with the
consummation of the Offerings.
Payment of Ballantrae debt assumed in the Planned Acquisition.
Share and Per Share Information
On November 20, 1997, the Company authorized a 16.8-to-one stock split subject
to consummation of the Offerings. All share and per share amounts have been
adjusted to reflect this split. The primary earnings (loss) per share is based
on the weighted average number of shares of common stock and common stock
equivalents outstanding during the year, adjusted to reflect all common stock
issued within one year prior to the initial public offering of common stock as
if those shares issued had been outstanding for all periods presented.
F-35
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
OCTOBER 31
----------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Net sales.................................................................... $ 169,766 $ 209,020
Cost of goods sold........................................................... 131,372 170,877
-------------- --------------
Gross profit................................................................. 38,394 38,143
Selling, engineering, and administrative expenses............................ 23,335 20,936
-------------- --------------
Operating income............................................................. 15,059 17,207
Interest expense............................................................. (9,391) (10,521)
-------------- --------------
Income from continuing operations before income taxes, preferred dividend
requirement of subsidiary and minority interest............................. 5,668 6,686
Minority interest in income and subsidiary................................... 137 538
Income taxes................................................................. 2,282 2,674
Preferred dividend requirement of subsidiary................................. 415 412
Income from continuing operations............................................ 2,834 3,062
Discontinued operations:
Loss from operations of discontinued business (less applicable income tax
benefit).................................................................. 213 --
Extraordinary item:
Write-off of debt issuance costs (less applicable income tax benefit)........ 2,351 --
-------------- --------------
Net income................................................................... $ 270 $ 3,062
============== ==============
Primary earnings per share:
From continuing operations................................................. $ .16 $ .18
Before extraordinary item.................................................. .15 .18
Net income................................................................. .02 .18
</TABLE>
See Accompanying Notes
F-36
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
July 31, October 31,
1997 1997
---------------- ----------------
Assets: (Note 1) (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents.................................................. $ 10,050 $ 8,626
Trade accounts receivable.................................................. 110,184 125,582
Other receivables.......................................................... 13,376 6,590
Inventories................................................................ 164,417 167,456
Deferred income taxes...................................................... 21,474 20,757
Other current assets....................................................... 4,643 5,210
---------------- ----------------
Total current assets.................................................... 324,144 334,221
Property and equipment....................................................... 147,222 153,039
Less accumulated depreciation................................................ 26,858 30,917
---------------- ----------------
120,364 122,122
Deferred financing costs..................................................... 8,803 8,651
Goodwill (less accumulated amortization)..................................... 86,612 86,760
Net assets held for disposal................................................. 25,279 23,909
Investment in affiliate...................................................... 3,119 4,727
Other assets................................................................. 2,248 2,115
Total assets............................................................ $ 570,569 $ 582,505
================ ================
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable........................................................... $ 88,578 $ 96,818
Accrued interest payable................................................... 3,107 7,262
Accrued restructuring charges.............................................. 37,377 37,922
Liabilities related to discontinued operations............................. 3,324 2,685
Other liabilities and accrued expenses..................................... 37,210 36,567
Current portion of long-term debt.......................................... 507 535
---------------- ----------------
Total current liabilities............................................... 170,103 181,789
Deferred income taxes........................................................ 1,556 1,556
Long-term debt, less current portion......................................... 363,261 358,170
Post-retirement benefits other than pension.................................. 12,677 13,742
Accrued pension benefits..................................................... 4,542 5,272
Other non-current liabilities................................................ 4,124 3,899
Minority interest in subsidiary.............................................. 8,032 8,570
Redeemable exchangeable preferred stock of a subsidiary...................... 16,071 16,483
Stockholders' equity (deficit):
Common stock:
Class A Shares........................................................ 88 88
Class B Shares........................................................ 65 65
Paid-in capital............................................................ 6,677 6,703
Retained earnings (deficit)................................................ (12,174) (9,112)
Cumulative translation adjustment.......................................... (1,752) (2,173)
Stock purchase plan........................................................ (2,701) (2,547)
Total stockholders' equity (deficit).................................... (9,797) (6,976)
---------------- ----------------
Total liabilities and stockholders' equity (deficit).................... $ 570,569 $ 582,505
================ ================
</TABLE>
See Accompanying Notes
F-37
<PAGE>
DELCO REMY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
ENDED OCTOBER 31
----------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Operating activities:
Net income...................................................................... $ 270 $ 3,062
Extraordinary item.............................................................. 3,498 --
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.............................................. 5,300 4,698
Deferred income taxes...................................................... (832) 717
Post-retirement benefits other than pensions............................... 1,135 1,065
Accrued pension benefits................................................... 1,018 730
Non-cash interest expense.................................................. 1,883 1,693
Preferred dividend requirement of subsidiary............................... 415 412
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................................... (14,241) (15,398)
Inventories........................................................... (9,342) (3,039)
Accounts payable...................................................... (1,743) 8,240
Other current assets and liabilities.................................. 12,269 8,949
Accrued restructuring................................................. (516) 545
Other non-current assets and liabilities, net......................... (5,636) (259)
-------------- --------------
Net cash (used in) provided by operating activities............................. (6,522) 11,415
Investing activities:
Purchase of property and equipment.............................................. (8,910) (5,747)
Investment in affiliates........................................................ (1,326) (1,608)
-------------- --------------
Net cash used in investing activities........................................... (10,236) (7,355)
Financing activities:
Proceeds from issuances of long-term debt....................................... 140,000 --
Payments on long-term debt...................................................... (126,200) --
Other financing activities...................................................... 9,080 (5,063)
-------------- --------------
Net cash provided by (used in) financing activities............................. 22,880 (5,063)
-------------- --------------
Effect of exchange rate changes on cash......................................... 1,534 (421)
-------------- --------------
Net increase (decrease) in cash and cash equivalents............................ 7,656 (1,424)
Cash and cash equivalents at beginning of year 3,406 10,050
-------------- --------------
Cash and cash equivalents at end of year........................................ $ 11,062 $ 8,626
============== ==============
</TABLE>
F-38
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements contain all adjustments consisting of normal recurring adjustments,
which are, in the opinion of the management of Delco Remy International, Inc.
(the Company), necessary to present fairly the condensed consolidated financial
position of the Company as of July 31, 1997 and October 31, 1997, and the
condensed consolidated results of operations and cash flows of the Company for
the three months ended October 31, 1997 and 1996, respectively. Results of
operations for the periods presented are not necessarily indicative of the
results for the full fiscal year. The balance sheet at July 31, 1997 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended July 31, 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1997
------------ ------------
<S> <C> <C>
Raw materials............................... $ 84,583 $ 82,676
Work in-process............................. 20,168 23,997
Finished goods.............................. 59,666 60,783
------------ ------------
$164,417 $167,456
============ ============
</TABLE>
3. EARNINGS PER SHARE
The primary earnings per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the year,
adjusted to reflect all common stock issued within one year prior to the initial
public offering of common stock as if those shares issued had been outstanding
for all periods presented.
F-39
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OCTOBER 31, 1997
4. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. Certain debt securities are unconditionally guaranteed, jointly
and severally, by certain direct and indirect subsidiaries (the Subsidiary
Guarantors). Certain of the Company's subsidiaries do not guarantee the debt
securities (the Non-Guarantor Subsidiaries). The claims of creditors of Non-
Guarantor Subsidiaries have priority over the rights of the Company to receive
dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at October
31, 1997 and for the three months ended October 31, 1996 and 1997.
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, 1997
-----------------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ---------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents......... $ -- $ 2,461 $ 6,165 $ -- $ 8,626
Trade accounts receivable......... -- 114,982 10,600 -- 125,582
Affiliate accounts receivables,
net............................ -- 38,816 -- (38,816)(a) --
Other receivables................. -- 5,130 1,460 -- 6,590
Inventories....................... -- 145,459 21,997 -- 167,456
Deferred income taxes............. 4,315 16,442 -- -- 20,757
Other current assets.............. -- 4,725 485 -- 5,210
------------------- ---------------- ---------------- ------------------ ---------------
Total current assets........... 4,315 328,015 40,707 (38,816) 334,221
Property and equipment.............. 20 138,319 14,700 -- 153,039
Less accumulated depreciation....... 13 29,006 1,898 -- 30,917
------------------- ---------------- ---------------- ------------------ ---------------
7 109,313 12,802 -- 122,122
Deferred financing costs............ 5,148 3,503 -- -- 8,651
Goodwill, net....................... 2,122 76,516 8,122 -- 86,760
Net assets held for disposal........ -- 23,909 -- -- 23,909
Investment in affiliates............ 177,430 -- -- (172,703)(b)(c) 4,727
Other assets........................ 1,847 (1,504) 1,772 -- 2,115
------------------- ---------------- ---------------- ------------------ ---------------
Total assets................... $ 190,869 $ 539,752 $ 63,403 $ (211,519) $ 582,505
=================== ================ ================ ================== ===============
</TABLE>
____________________
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-40
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
October 31, 1997
Condensed Consolidating Balance Sheet
<TABLE>
<CAPTION>
October 31, 1997
--------------------------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Liabilities and stockholders'
equity (deficit):
Current Liabilities:..............
Accounts payable................ $ 195 $ 89,859 $ 6,764 $ -- $ 96,818
Affiliate accounts payable...... 19,740 6,154 12,922 (38,816)(a) --
Accrued interest payable........ 4,428 2,834 -- -- 7,262
Accrued restructuring charges... -- 37,922 -- -- 37,922
Liabilities related to
discontinued operations........ -- 2,685 -- -- 2,685
Other liabilities and accrued
expenses....................... (13,204) 44,718 5,053 -- 36,567
Current portion of long term
debt........................... -- 535 -- -- 535
---------------- ---------- ------------ ----------- -----------
Total current liabilities.... 11,159 184,707 24,739 (38,816) 181,789
Deferred income taxes............. 10,629 (9,746) 673 -- 1,556
Long-term debt, less current
portion.......................... 173,511 184,577 82 -- 358,170
Post-retirement benefits other
than pensions.................... -- 13,742 -- -- 13,742
Accrued pension benefit........... -- 5,272 -- -- 5,272
Other non-current liabilities..... 373 1,225 2,301 -- 3,899
Minority interest in subsidiary... -- 7,011 1,559 -- 8,570
Redeemable exchangeable preferred
stock of subsidiary.............. -- 16,483 -- -- 16,483
Stockholders' equity (deficit):
Common stock:
Class A Shares............... 88 -- -- -- 88
Class B Shares............... 65 -- -- -- 65
Paid-in capital................. 6,703 -- -- -- 6,703
Subsidiary investment........... -- 127,666 29,917 (157,583) (b) --
Retained earnings (deficit)..... (9,112) 8,815 6,305 (15,120) (c) (9,112)
Cumulative translation
adjustment..................... -- -- (2,173) -- (2,173)
Stock purchase plan............. (2,547) -- -- -- (2,547)
------------------- ----------- -------------- ------------- ------------
Total stockholders' equity
(deficit)................... (4,803) 136,481 34,049 (172,703) (6,976)
------------------- ----------- -------------- ------------- ------------
Total liabilities and
stockholders' equity
(deficit)................... $ 190,869 $ 539,752 $ 63,403 $ (211,519) $ 582,505
=================== =========== ============== ============= ==============
</TABLE>
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
See Accompanying Notes
F-41
<PAGE>
DELCO REMY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
----------------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC.
(PARENT NON-
COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ -- $ 206,031 $ 25,812 $(22,823)(a) $ 209,020
Cost of goods sold................................ -- 171,872 21,828 (22,823)(a) 170,877
--------- ----------- ----------- ------------ ------------
Gross profit...................................... -- 34,159 3,984 -- 38,143
Selling, engineering, and administrative
expenses...................................... 860 17,583 2,493 -- 20,936
--------- ----------- ----------- ------------ ------------
Operating (loss) income........................... (860) 16,576 1,491 -- 17,207
Interest expense.................................. ( 4,808) ( 5,701) (12) -- (10,521)
--------- ----------- ----------- ------------ ------------
(Loss) income from continuing operations before
income taxes (benefit), preferred dividend
requirement of subsidiary and minority interest (5,668) 10,875 1,479 -- 6,686
Minority interest in income of subsidiaries....... -- 507 31 -- 538
Equity in earnings of subsidiaries................ 6,260 -- -- (6,260)(b) --
Income taxes (benefit)............................ (2,470) 4,644 500 -- 2,674
Preferred dividend requirement of subsidiary...... -- -- -- 412(c) 412
--------------- ----------- ------------ ------------ -----------
Net income (loss)................................. $ 3,062 $ 5,724 $ 948 $ (6,672) $ 3,062
=============== =========== ============ ============ ===========
</TABLE>
___________
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated
subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-42
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
Condensed Consolidating Statement of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended October 31, 1997
-------------------------------------------------------------------------------
Delco Remy
International Inc. Non-
(Parent Company Subsidiary Guarantor
Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss).................................. $ 3,062 $ 5,724 $ 948 $ (6,672) $ 3,062
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization...................... 36 4,305 357 -- 4,698
Equity in earnings of subsidiary................... (6,260) -- -- 6,260 (a) --
Deferred income taxes.............................. 4,376 (3,291) (368) -- 717
Post-retirement benefits other than pensions....... -- 1,065 -- -- 1,065
Accrued pension benefits........................... -- 730 -- -- 730
Non-cash interest expense.......................... 853 840 -- -- 1,693
Preferred dividend requirement of subsidiary....... -- -- -- 412 (b) 412
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable................................ -- (15,237) (161) -- (15,398)
Inventories........................................ -- (424) (2,615) -- (3,039)
Accounts payable................................... -- 7,274 966 -- 8,240
Intercompany accounts.............................. 4,056 (5,405) 1,349 -- --
Other current assets and liabilities............... 1,591 8,879 (1,521) -- 8,949
Accrued restructuring.............................. -- 545 -- -- 545
Other non-current assets and liabilities, net...... (6,106) 5,362 485 -- (259)
------------------- ------------ ------------- -------------- ---------
Net cash provided by (used in) operating
activities......................................... 1,608 10,367 (560) -- 11,415
Investing activities:
Purchase of property and equipment................. -- (4,347) (1,400) -- (5,747)
Investment in affiliates........................... (1,608) -- -- -- (1,608)
------------------- ------------ ------------- -------------- ---------
Net cash used in investing activities.............. (1,608) (4,347) (1,400) -- (7,355)
Financing activities:
Other financing activities......................... -- (5,063) -- -- (5,063)
------------------- ------------ ------------- -------------- ---------
Net cash used in financing activities.............. -- (5,063) -- -- (5,063)
Effect of exchange rate changes on
cash............................................... -- -- (421) -- (421)
------------------- ------------ ------------- -------------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ -- 957 (2,381) -- (1,424)
Cash and cash equivalents at beginning of year..... -- 1,504 8,546 -- 10,050
------------------- ------------ ------------- -------------- ---------
Cash and cash equivalents at end of year........... $ -- $ 2,461 $ 6,165 $ -- $ 8,626
=================== ============ ============= ============== =========
</TABLE>
__________________________
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
F-43
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 31, 1997
Condensed Consolidating Statement of Operations
<TABLE>
<CAPTION>
For the Three Months Ended October 31, 1997
---------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. (PARENT SUBSIDIARY NON-GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES
---------------- -------------- ---------------
<S> <C> <C> <C>
Net sales........................ $ --- $169,128 $14,237
Cost of goods sold............... --- 134,117 10,854
---------------- -------------- ---------------
Gross profit..................... --- 35,011 3,383
Selling, engineering, and
administrative expenses......... 674 20,414 2,247
---------------- ------------- ---------------
Operating (loss) income.......... (674) 14,597 1,136
Interest expense................. (4,690) (4,650) (51)
---------------- ------------- ---------------
(Loss) income from continuing
operations before income taxes
(benefit), preferred dividend
requirement of subsidiary and
minority interest............... (5,364) 9,947 1,085
Minority interest in income of
subsidiaries.................... --- 137 ---
Equity in earnings of
subsidiaries.................... 3,745 --- ---
Income taxes (benefit)........... (2,141) 4,066 357
Preferred dividend requirement
of subsidiary................... --- --- ---
---------------- ------------- ---------------
Income (loss) from continuing
operations...................... 522 5,744 728
Discontinued operations:
Loss from operations of
discontinued business (less
applicable income tax benefit). --- 213 ---
Extraordinary item:
Write-off of debt issuance
costs (less applicable income
tax benefit)................... 252 2,099 ---
---------------- ------------- ---------------
Net income (loss)................ $ 270 $ 3,432 $ 728
================ ============= ===============
<CAPTION>
For the Three Months Ended October 31, 1997
--------------------------------------------
ELIMINATIONS CONSOLIDATED
----------------- ------------------
<S>.............................. <C> <C>
Net sales........................ $ (13,599)(a) $169,766
Cost of goods sold............... (13,599)(a) 131,372
----------------- ------------------
Gross profit..................... --- 38,394
Selling, engineering, and........ 23,335
administrative expenses......... ---
---------------- ------------------
Operating (loss) income.......... --- 15,059
Interest expense................. --- (9,391)
---------------- ------------------
(Loss) income from continuing
operations before income taxes
(benefit), preferred dividend
requirement of subsidiary and
minority interest............... --- 5,668
Minority interest in income of
subsidiaries.................... --- 137
Equity in earnings of
subsidiaries.................... (3,745)(b) ---
Income taxes (benefit)........... --- 2,282
Preferred dividend requirement
of subsidiary................... 415(c) 415
---------------- ------------------
Income (loss) from continuing
operations...................... (4,160) 2,834
Discontinued operations:
Loss from operations of
discontinued business (less
applicable income tax benefit). --- 213
Extraordinary item:
Write-off of debt issuance
costs (less applicable income
tax benefit)................... --- 2,351
---------------- ------------------
Net income (loss)................ $(4,160) $ 270
================ ==================
</TABLE>
___________________
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-44
<PAGE>
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended October 31, 1996
---------------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. (PARENT NON-
COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss)................................. $ 270 $ 3,432 $ 728 $ (4,160) $ 270
Extraordinary item................................ 375 3,123 --- --- 3,498
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization..................... 43 5,093 164 --- 5,300
Equity in earnings of subsidiary.................. (3,745) --- --- 3,745(a) ---
Deferred income taxes............................. (4,465) 4,430 (797) --- (832)
Post-retirement benefits other than
pensions....................................... --- 1,135 --- --- 1,135
Accrued pension benefits.......................... --- 1,018 --- --- 1,018
Non-cash interest expense......................... 765 1,118 --- --- 1,883
Preferred dividend requirement of
subsidiary..................................... --- --- --- 415(b) 415
Changes in operating assets and
liabilities, net acquisitions:
Accounts receivable............................ --- (14,083) (158) --- (14.241)
Inventories.................................... --- (8,104) (1,238) --- (9,342)
Accounts payable............................... (2) (2,437) 696 --- (1,743)
Intercompany accounts.......................... (116,645) 118,941 (2,296) --- ---
Other current asset and liabilities............ 2,805 5,955 3,509 --- 12,269
Accrued restructuring.......................... --- (516) --- --- (516)
Other non-current assets and
liabilities, net............................ 15,177 (19,568) (1,245) --- (5,636)
---------- ---------- -------- ------------ ----------
Net cash (used in) provided by operating
activities........................................ (105,422) 99,537 (637) --- (6,522)
INVESTING ACTIVITIES:
Purchase of property and equipment.................. --- (8,345) (565) --- (8,910)
Investment in affiliates............................ (1,326) --- --- --- (1,326)
---------- ---------- -------- ------------ ----------
Net cash used in investing activities............... (1,326) (8,345) (565) --- (10,236)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt........... 122,700 17,300 --- --- 140,000
Payments on long-term debt.......................... (16,000) (110,200) --- --- (126,200)
Other financing activities.......................... --- 9,080 --- --- 9,080
---------- ---------- -------- ------------ ----------
Net cash provided by financing activities........... 106,700 (83,820) --- --- 22,880
Effect of exchange rate changes on cash............. --- --- 1,534 --- 1,534
---------- ---------- -------- ------------ ----------
Net (decrease) increase in cash net cash
equivalents...................................... (48) 7,372 332 --- 7,656
Cash and cash equivalents at beginning of
year............................................. 68 1,434 1,904 --- 3,406
---------- ---------- -------- ------------ ----------
Cash and cash equivalents at end of year............ $ 20 $ 8,806 $ 2,236 $ --- $ 11,062
========== ========== ======== ============ ==========
</TABLE>
__________
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
World Wide Automotive, Inc. (formerly Precision Alternator and Starter, Inc.)
We have audited the accompanying balance sheet of World Wide Automotive, Inc.
(formerly Precision Alternator and Starter, Inc.) as of March 31, 1997 and the
related statements of income, stockholders' equity, and cash flows for the year
then ended. 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 audit. We did not audit the financial statements of
CertiPro, a division of the Company, which statements reflect total assets of
$7,907,945 as of March 31, 1997, and total revenues of $18,744,026 for the year
then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for CertiPro, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of World Wide Automotive, Inc. (formerly Precision
Alternator and Starter, Inc.) at March 31, 1997, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Vienna, Virginia
October 16, 1997, except for Note 10,
as to which the date is December 16, 1997
F-46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Precision Alternator and Starter, Inc.
We have audited the accompanying balance sheet of Precision Alternator and
Starter, Inc. as of March 31, 1996, and the related statements of income,
stockholders' equity, and cash flows for each of the two years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Precision Alternator and
Starter, Inc. at March 31, 1996, and the results of its operations and its cash
flows for each of the two years ended March 31, 1996, in conformity with
generally accepted accounting principles.
FRIEDMAN & FULLER, P.C.
Rockville, Maryland
October 15, 1997
F-47
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Precision Alternator and Starter, Inc.
We have audited the balance sheet of Certipro Division of Precision Alternator
and Starter, Inc. as of March 31, 1997, and the related statements of
operations, changes in division equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Certipro Division of Precision
Alternator and Starter, Inc. at March 31, 1997, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
FRIEDMAN & FULLER, P.C.
Rockville, Maryland
August 19, 1997
F-48
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(formerly Precision Alternator and Starter, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash............................................................................ $ 251,466 $ 52,089
Trade accounts receivable, less allowance for doubtful accounts
of $101,682 and $211,065, respectively........................................ 10,523,827 12,326,336
Accounts receivable, other...................................................... 9,235 35,447
Inventory, less reserves of $295,881 and $780,760, respectively................. 27,139,396 31,568,338
Prepaid expenses................................................................ 300,774 436,009
Current portion of deferred tax asset........................................... 569,000 1,569,000
------------ ------------
Total current assets......................................................... 38,793,698 45,987,219
Property, plant and equipment..................................................... 3,608,217 3,864,719
Less accumulated depreciation..................................................... (2,215,971) (2,377,067)
------------ ------------
1,392,246 1,487,652
Other assets:
Deposits........................................................................ 132,700 78,638
Goodwill, net of accumulated amortization of $274,126
and $309,881, respectively.................................................... 798,538 762,783
Other intangibles, net of accumulated amortization of $103,360 and
$231,027, respectively........................................................ 133,211 215,133
Deferred tax asset, net of current portion...................................... 669,000 424,000
Investment in SKB, Inc.......................................................... 350,000 --
------------ ------------
Total other assets........................................................... 2,083,449 1,480,554
------------ ------------
Total assets................................................................. $ 42,269,393 $ 48,955,425
============ ============
</TABLE>
See Accompanying Notes
F-49
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(formerly Precision Alternator and Starter, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Liabilities and stockholders' equity:
Current liabilities:
Line of credit.................................................................. $ 17,664,012 $ 17,445,110
Accounts payable................................................................ 13,335,509 17,775,992
Warranty reserve................................................................ 305,233 478,371
Accrued compensation............................................................ 1,380,165 1,511,875
Accrued commissions............................................................. 205,741 481,799
Accrued freight................................................................. 209,311 236,267
Accrued interest................................................................ 152,530 161,491
Other accrued expenses.......................................................... 130,668 450,195
Current portion of long-term debt............................................... 526,324 836,105
Current portion of capital lease obligations.................................... 23,790 59,652
Income taxes payable............................................................ 851,146 46,302
------------ ------------
Total current liabilities.................................................... 34,784,429 39,483,159
Long-term debt, less current portion.............................................. 157,784 638,986
Capital lease obligations, less current portion................................... 20,856 127,442
Deferred rent..................................................................... 302,567 421,201
------------ ------------
Total liabilities............................................................ 35,265,636 40,670,788
Commitments
Stockholders' equity:
Common stock, $.01 par; 150,000 shares authorized,
120,000 shares issued and outstanding........................................ 1,200 1,200
Additional capital.............................................................. 2,784,450 2,784,450
Retained earnings............................................................... 4,218,107 5,498,987
------------ ------------
Total stockholders' equity................................................... 7,003,757 8,284,637
------------ ------------
Total liabilities and stockholders' equity................................... $ 42,269,393 $ 48,955,425
============ ============
</TABLE>
See Accompanying Notes
F-50
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(formerly Precision Alternator and Starter, Inc.)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended March 31
--------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Sales......................................... $ 53,929,452 $ 64,951,886 $ 78,099,809
Cost of sales..................................... 37,385,345 43,933,876 53,399,411
---------------- ---------------- ----------------
Gross profit...................................... 16,544,107 21,018,010 24,700,398
Selling, general and administrative............... 13,502,315 16,630,082 19,541,106
---------------- ---------------- ----------------
Income from operations............................ 3,041,792 4,387,928 5,159,292
Interest expense.................................. 1,249,828 1,631,218 1,968,744
Other expense..................................... 437,159 516,949 1,059,668
---------------- ---------------- ----------------
Income before income taxes........................ 1,354,805 2,239,761 2,130,880
Income tax expense (benefit):
Current......................................... 700,000 1,149,433 1,566,000
Deferred........................................ (114,000) (321,000) (716,000)
---------------- ---------------- ----------------
586,000 828,433 850,000
---------------- ---------------- ----------------
Net income........................................ $ 768,805 $ 1,411,328 $ 1,280,880
================ ================ ================
</TABLE>
See Accompanying Notes.
F-51
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(formerly Precision Alternator and Starter, Inc.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Capital Retained Earnings Total
------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994........ $ 1,200 $ 2,784,450 $ 2,037,974 $ 4,823,624
Net income....................... -- -- 768,805 768,805
------------------- ---------------------- ------------------- -------------------
Balance at March 31, 1995........ 1,200 2,784,450 2,806,779 5,592,429
Net income...................... -- -- 1,411,328 1,411,328
------------------- ---------------------- ------------------- -------------------
Balance at March 31, 1996........ 1,200 2,784,450 4,218,107 7,003,757
Net income....................... -- -- 1,280,880 1,280,880
------------------- ---------------------- ------------------- -------------------
Balance at March 31, 1997........ $ 1,200 $ 2,784,450 $ 5,498,987 $ 8,284,637
=================== ====================== =================== ===================
</TABLE>
See Accompanying Notes.
F-52
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................. $ 768,805 $ 1,411,328 $ 1,280,880
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................ 325,574 372,044 495,182
Equity in net income of investment................... (5,837) (32,082) --
Write-down of investment to fair market value -- 63,640 --
Gain on sale of assets............................... (6,786) (60,250) (42,770)
Deferred rent........................................ 60,513 242,054 118,634
Provision for deferred income tax expense............ (114,000) (321,000) (716,000)
Changes in operating assets and liabilities:
Trade accounts receivable and other accounts
receivable......................................... (2,145,316) 1,251,838 (1,812,721)
Inventory........................................... (3,818,557) (8,197,203) (4,428,942)
Prepaid expenses and other assets................... (31,809) (105,354) (339,691)
Accounts payable and accrued expenses............... 3,110,662 1,949,702 5,376,833
Income taxes payable................................ (247,192) 269,421 (804,844)
------------ ------------ ------------
Net cash used in operating activities................... (2,103,943) (3,155,862) (873,439)
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment............ 21,241 60,250 250,595
Purchase of property and equipment...................... (789,403) (424,064) (433,415)
Sale of Investment in SKB, Inc.......................... -- -- 350,000
------------ ------------ ------------
Net cash provided by (used in) investing activities..... (768,162) (363,814) 167,180
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit........... 3,000,574 3,946,313 (218,902)
Proceeds from issuance of long-term debt................ 303,126 -- 1,950,000
Payments on long-term debt.............................. (389,395) (409,136) (1,159,007)
Payments on capital lease obligations................... (25,796) (22,511) (65,209)
------------ ------------ ------------
Net cash provided by financing activities............... 2,888,509 3,514,666 506,882
------------ ------------ ------------
Increase (decrease) in cash............................. 16,404 (5,010) (199,377)
Cash at beginning of year............................... 240,072 256,476 251,466
------------ ------------ ------------
Cash at end of year..................................... $ 256,476 $ 251,466 $ 52,089
============ ============ ============
Supplemental Cash Flow Disclosures
Interest paid during the year $ 1,180,143 $ 1,594,311 $ 1,959,783
============ ============ ============
Income taxes paid during the year $ 947,192 $ 880,012 $ 1,654,844
============ ============ ============
Non-Cash Investing and Financing Activities
Capitalized leases $ -- $ -- $ 207,647
============ ============ ============
</TABLE>
See Accompanying Notes
F-53
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(formerly Precision Alternator and Starter, Inc.)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
World Wide Automotive, Inc. (formerly Precision Alternator and Starter,
Inc.) (the "Company") is a re-manufacturer and distributor of automotive
components. The Company sells its products to retail and wholesale distributors,
jobbers and dealers located throughout the continental U.S. and Canada. The
Company is primarily an aftermarket supplier of light duty import starters and
alternators.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Transactions
As a result of purchasing inventory from foreign vendors, the Company is
exposed to the effect of foreign exchange rate fluctuations. It is the practice
of the Company to hedge these transactions with foreign currency futures
contracts. The Company does not engage in speculation. At March 31, 1997 the
Company has forward exchange contract commitments through September 1997 to
purchase approximately 621,724,000 Japanese Yen for approximately $5.4 million.
Exchange gains and losses are realized during the year upon settlement and are
included in operations.
If the financial counter party failed to perform according to the terms of
the foreign currency futures contracts, the Company would have to settle the
purchase commitments at the exchange rate at the dates of settlement and incur
related gain or loss. Management expects the financial counter party to fully
perform under the contracts.
Revenue Recognition
The Company's revenue is recognized at the time the product is shipped. The
Company's remanufacturing operations obtain used starters and alternators,
commonly known as cores, from its customers as trade-ins. Net sales and cost of
goods sold are reduced to reflect the cost of cores returned for credit.
Cash
The Company considers cash and liquid investments with original or
remaining maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from
customers in the original equipment and after-market automotive industries, both
in the U.S. and internationally. Credit is granted to substantially all of the
Company's customers. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral. Credit
losses are provided for in the financial statements and have been consistently
within management's expectations.
Net sales for the years ended March 31, 1995, 1996 and 1997, included sales
to three major customers totaling approximately $21,400,000, $21,500,000 and
$38,300,000, respectively. Approximately $4,000,000 and $7,000,000,
respectively, is included in account receivable from these same three customers
as of March 31, 1996 and 1997.
F-54
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
Purchases from significant vendors for the years ended March 31, 1995, 1996
and 1997, included purchases from one major vendor totaling approximately 27%,
19% and 17% of total purchases, respectively. Approximately $5.4 million is
included in accounts payable due to this major vendor as of both March 31, 1996
and 1997.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash, trade and
other receivables, accounts payable and long-term debt. The carrying amounts of
these financial instruments approximated their fair values at March 31, 1996 and
1997.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
by the weighted average method, which approximates the first-in, first-out
(FIFO) method. Raw materials also include supplies and repair parts which
consist of material consumed in the manufacturing process but not directly
incorporated into the finished products. Inventory consists of the following:
<TABLE>
<CAPTION>
March 31
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Raw materials...................... $ 2,389,258 $ 2,020,122
Cores.............................. 7,490,594 10,458,116
Finished goods..................... 17,555,425 19,870,860
Less reserves...................... (295,881) (780,760)
------------ ------------
$27,139,396 $31,568,338
============ ============
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost and are
depreciated using the straight-line method over the shorter of the asset's
estimated useful life or the lease term (for equipment held under capital
leases). Useful lives are primarily 5 years, except for buildings which are 25
years. Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Land and buildings.................... $ 176,603 $ 176,603
Machinery and equipment............... 1,611,074 1,439,472
Computer equipment.................... 648,692 846,275
Leasehold improvements................ 546,302 549,987
Furniture and fixtures................ 512,661 531,850
Equipment under capital leases........ 112,885 320,532
------------ ------------
$3,608,217 $3,864,719
============ ============
</TABLE>
Depreciation/amortization expense for the years ended March 31, 1995, 1996
and 1997, was approximately, $258,000, $293,000 and $332,000, respectively.
Goodwill and Other Intangibles
F-55
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
Goodwill represents the excess of purchase price over fair value of net
assets acquired and is being amortized on a straight-line basis over 30 years.
Other intangibles consist of acquisition and loan costs. Acquisition costs
are being amortized on a straight-line basis over 30 years. Loan costs are being
amortized over the loan periods which range from 15 to 60 months, or the
expected life of the asset which in all instances is equal to, or less than the
loan period. Other intangibles consists of the following:
<TABLE>
<CAPTION>
March 31
------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Acquisition costs..................... $ 127,515 $ 127,515
Loan costs............................ 109,056 318,645
Less accumulated amortization......... (103,360) (231,027)
------------- -------------
$ 133,211 $ 215,133
============= =============
</TABLE>
The carrying values of intangible assets are regularly reviewed for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the following: (i)
the economic or competitive environments in which the Company operates; (ii)
profitability analyses and (iii) cash flow analyses. If facts and circumstances
suggest that the carrying value of an intangible asset is impaired, the Company
assesses the fair value and reduces the asset to an amount that results in the
book value approximating fair value.
Long-Term Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Warranty Reserve
The Company warrants to original purchasers of its products that all
products will be free from defects in materials and workmanship for as long as
the products are used on vehicles for which they were purchased. The Company
does not warrant installation, abused or disassembled products or products that
have been tampered with or used in a manner not in keeping with the original
intent of the product. Additionally, the warranty extends only to products and
the replacement thereof. The Company does not assume responsibility for any
incidental or consequential damages. The Company has provided a warranty reserve
in conjunction with this policy.
Deferred Rent
The Company has two facility lease agreements which contain rent abatement
periods and rent escalations which are straight-lined over the life of the
leases.
Income Taxes
Deferred income taxes are provided for timing differences in recognizing
certain income, expense and credit items for financial reporting purposes and
tax reporting purposes.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is effective for years beginning after December 15, 1997, which
the Company anticipates adopting in 1998. The Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of
F-56
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
general purpose financial statements. The Statement will not have any impact on
the results of operations or the financial position of the Company.
F-57
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(formerly Precision Alternator and Starter, Inc.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
March 31, 1997
Reclassification
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
2. INVESTMENT IN SKB, INC.
The Company accounted for its 50% investment in SKB, Inc. ("SKB") by the
equity method of accounting. During the year ended March 31, 1996, the Company
recorded a charge of $63,640 to reduce its investment in SKB to fair market
value. The Company sold its interest in SKB on October 1, 1996 at a price of
$350,000, resulting in no gain or loss on the transaction. For the years ended
March 31, 1995 and 1996 and for the period from April 1, 1996 through October 1,
1996, the Company had net sales to SKB of $836,838, $774,420 and $142,651,
respectively.
3. LINE OF CREDIT AGREEMENT
In October 1996, the Company amended its agreement to increase its line of
credit to $20,000,000. The line of credit expires on December 31, 1997, and
bears interest at the prime rate plus one and one half percent. Interest is
payable monthly. The amount available under the line of credit is limited to
specified percentages of inventory and eligible receivables less a standby
letter of credit provision of $630,000. The line of credit is collateralized by
substantially all of the Company's assets. Under the agreement terms, the
Company is obligated to meet certain loan covenants. As of March 31, 1997, the
Company was not in compliance with these covenants, however all of the
violations were cured when the debt was repaid on May 8, 1997 in connection with
the acquisition of the Company by Delco Remy International, Inc. (see Note 10).
4. LONG-TERM DEBT
Borrowings under long-term debt arrangements consist of the following:
<TABLE>
<CAPTION>
March 31
------------------------------------------
1996 1997
------------------ -------------------
<S> <C> <C>
Notes payable to bank in monthly installments through December 1997 of
principal and interest at the prime rate plus 1 1/2%; collateralized by
equipment.................................................................. $ 120,266 $ 45,091
$1,300,000 term note to bank expiring in December 1997 with monthly
principal payments of $86,667 plus interest at the prime rate plus 1 1/2%;
collateralized by substantially all of the Company's assets................ -- 780,000
Unsecured subordinated debenture payable to a financial institution with
interest only payments at 19% for the first 18 months and equal principal
and interest payments thereafter for the remaining 42 months through
August 2001................................................................ -- 650,000
Note payable to bank repaid in December 1996................................ 272,000 --
Subordinated notes repaid to shareholders in November 1996.................. 291,842 --
-------------- ---------------
684,108 1,475,091
Less current portion........................................................ (526,324) (836,105)
-------------- ---------------
$ 157,784 638,986
============== ===============
</TABLE>
F-58
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
Aggregate maturities of long-term debt at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending March 31 Amount
-------------------- ------
<S> <C>
1998 $ 836,105
1999 146,597
2000 177,009
2001 213,729
2002 101,651
----------
Total $1,475,091
==========
</TABLE>
5. LEASES AND COMMITMENTS
The Company is currently obligated under certain non-cancelable operating
leases for the rental of facilities, vehicles and equipment which expire at
various dates through October 2014. The Company also leases trucks under
cancelable operating leases. Total rent expense under all operating leases for
the years ended March 31, 1995, 1996 and 1997, was approximately $941,000,
$1,455,000 and $1,945,000, respectively.
The Company leases certain equipment under capital leases. Amortization of
leased assets is included in depreciation expense.
Aggregate future minimum lease payments under capital and non-cancelable
operating leases having remaining terms in excess of one year as of March 31,
1997 are as follows:
<TABLE>
<CAPTION>
Capital
Year ended March 31 Leases Operating Leases
- --------------------------- --------------------- ---------------------
<S> <C> <C>
1998......................................................... $ 75,147 $ 1,178,031
1999......................................................... 49,479 965,271
2000......................................................... 49,479 766,049
2001......................................................... 49,479 572,316
2002......................................................... 6,872 469,962
Thereafter................................................... -- 7,293,136
----------------- -----------------
Total minimum lease payments................................. 230,456 $11,244,765
=================
Less amounts representing interest........................... (43,362)
-----------------
Present value of future minimum lease payments............... $187,094
=================
</TABLE>
Under terms of a management consulting agreement, the Company was obligated to
pay an affiliate a fee for management and consulting services through March 31,
1998. This agreement was terminated at the time of the sale of the Company in
May 1997 (see Note 10). Management fee expense under this agreement was
$180,000, $195,000 and $250,000 for the years ended March 31, 1995, 1996 and
1997, respectively.
F-59
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
6. INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amount in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
SFAS 109 provides that deferred tax assets be reduced by a valuation allowance
if it is more likely than not that some portion of the deferred tax asset will
not be realized. Management believes, based on the weight of available evidence,
that no allowance is necessary.
The following is a summary of the components of the provision for income taxes
(benefit) of continuing operations:
<TABLE>
<CAPTION>
For the Year Ended March 31
--------------------------------------------------------------
1995 1996 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Current:
Federal................................ $590,000 $ 974,433 $1,319,000
State and Local........................ 110,000 175,000 247,000
------------ ------------- ------------
700,000 1,149,433 1,566,000
Deferred:
Federal................................ (99,000) (271,000) (603,000)
State and Local........................ (15,000) (50,000) (113,000)
------------ ------------- ------------
$586,000 $ 828,433 $ 850,000
============ ============= ============
</TABLE>
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
<TABLE>
<CAPTION>
For the Year Ended March 31
------------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal statutory income tax (34% rate)... $461,000 $762,000 $725,000
State and local income taxes,
net of federal tax benefit............... 73,000 89,000 98,000
Other items............................... 52,000 (22,567) 27,000
------------ ------------- ------------
Effective income tax rate................. $586,000 $828,433 $850,000
============ ============= ============
</TABLE>
F-60
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
March 31
--------------------------------------------
1996 1997
------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Inventory capitalization............................ $ 436,000 $ 764,000
Compensated absences................................ 172,000 175,000
Inventory reserves.................................. 112,000 316,000
Warranty liability.................................. 116,000 182,000
Reserve for sales returns........................... 57,000 53,000
Deferred compensation............................... 61,000 189,000
Allowance for doubtful accounts..................... 39,000 80,000
Leases.............................................. 115,000 160,000
Other............................................... 150,000 157,000
------------- --------------
1,258,000 2,076,000
Deferred tax liabilities:
Fixed and intangible assets......................... (20,000) (83,000)
------------- --------------
(20,000) (83,000)
------------- --------------
Net deferred tax asset............................... $1,238,000 $1,993,000
============= ==============
</TABLE>
7. 401(K) PLAN
The Company maintains a 401(k) plan which covers all employees who meet the
Plan's eligibility requirements. Under the terms of the Plan, both the Company's
contributions to the Plan and the level of matching voluntary employee
contributions by the Company is discretionary on an annual basis. Plan expense
for the years ended March 31, 1995, 1996 and 1997, was approximately $36,000,
$64,000 and $44,000, respectively.
8. STOCK RIGHTS PLAN
During 1989 the Company established a non-qualified stock rights plan. Each
right represents the Company's obligation to pay either cash or a stock right
equal to a portion of the Company' s book value at that date. Granting of stock
rights is at the discretion of the Stock Rights Committee, and the amount
granted cannot exceed ten percent of income before management fees, interest,
taxes, and any other non-operating expenses. One-half of stock rights granted
vest on the last day of the fiscal year during which the grant was made and the
remaining one half vests on the last day of the succeeding fiscal year.
Employees may elect to receive cash in lieu of stock rights.
For the years ended March 31, 1995, 1996 and 1997, the Company granted
$53,000, $140,000 and $127,000, of stock rights. Total stock rights outstanding
at March 31, 1995, 1996 and 1997, are valued at approximately $260,000, $464,000
and $454,000, respectively. The total unvested portion as of March 31, 1995,
1996 and 1997, was $33,000, $189,000 and $197,000, respectively. Effective in
October 1996, the stock rights plan was terminated, however vested and unvested
portions were uneffected. Upon the sale of the Company, the vested/unvested
amounts were paid to the holders of these stock rights (see Note 10).
F-61
<PAGE>
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
9. OTHER EXPENSE
Other expense consists of the following:
<TABLE>
<CAPTION>
For the Year Ended March 31
-----------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Management consulting fees................ $180,000 $195,000 $ 466,000
Vendor finance charges.................... 214,075 159,033 278,267
Other..................................... 43,084 162,916 315,401
---------------- ---------------- ----------------
$437,159 $516,949 $1,059,668
================ ================ ================
</TABLE>
10. SUBSEQUENT EVENTS
On May 8, 1997, a wholly owned subsidiary of Delco Remy International ("DRI")
acquired 82.5% of the outstanding common stock of the Company for approximately
$42.0 million which includes assumed debt. The current management of the Company
retained the remaining 17.5% interest in the Company. A portion of the proceeds
was used to retire substantially all of the Company's debt.
In conjunction with the acquisition, the Company divested itself of its route
sale division (CertiPro) via a distribution of assets, relinquished its rights
to certain intellectual property including the rights to the name "Precision
Alternator and Starter" and effected a Corporate Charter Amendment to change its
name to World Wide Automotive, Inc.
The acquisition was treated as a purchase for accounting purposes and is
included in the consolidated financial statements of DRI beginning with the
acquisition date. DRI filed Registration Statements with the Securities and
Exchange Commission in connection with DRI's planned sale of common stock and
$145,000,000 of Senior Notes Due in 2007. It is anticipated that the Company
will be an unconditional joint and several guarantor of the senior notes of DRI,
along with all of DRI's other domestic subsidiaries.
F-62
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ballantrae Corporation
(Successor to Tractech Division of Titan Wheel International, Inc.)
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Tractech Division of Titan Wheel International, Inc.
(predecessor to Ballantrae Corporation) for the nine months ended September 30,
1996 and the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Tractech
Division of Titan Wheel International, Inc. for the nine months ended September
30, 1996 and the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
Detroit, Michigan ERNST & YOUNG LLP
October 17, 1997
F-63
<PAGE>
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the Nine
Year Ended Months Ended
December 31, September 30,
1995 1996
-------------------- ---------------------
<S> <C> <C>
Net sales............................................ $26,395,431 $18,432,740
Cost of sales........................................ 16,731,310 11,920,057
-------------------- ---------------------
Gross profit......................................... 9,664,121 6,512,683
Selling expenses..................................... 688,681 424,817
General and administrative expenses.................. 3,182,504 2,560,968
-------------------- --------------------
3,871,185 2,985,785
-------------------- ---------------------
Income from operations............................... 5,792,936 3,526,898
Other income......................................... 351,975 252,134
-------------------- --------------------
Income before taxes.................................. 6,144,911 3,779,032
Income taxes (Note 2)................................ 1,627,261 871,760
-------------------- --------------------
Net income $ 4,517,650 $ 2,907,272
==================== =====================
</TABLE>
See Accompanying Notes
F-64
<PAGE>
Tractech Division of Titan Wheel International, Inc.
Statements of Stockholders' Equity
For The year ended December 31, 1995 and the
Nine months ended September 30, 1996
<TABLE>
<CAPTION>
Accumulated
Retained Subsidiary Translation
Earnings Investment Adjustments Total
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........... $28,272,462 $18,418,510 $509,267 $47,200,239
Net income for 1995.................... 4,517,650 -- -- 4,517,650
Translation adjustments................ -- -- 282,598 282,598
------------------- ------------------- ------------------- -------------------
Balance at December 31, 1995........... 32,790,112 18,418,510 791,865 52,000,487
Net income for 1996.................... 2,907,272 -- -- 2,907,272
Translation adjustments................ -- -- 23,289 23,289
------------------- ------------------- ------------------- -------------------
Balance at September 30, 1996.......... $35,697,384 $18,418,510 $815,154 $54,931,048
=================== =================== =================== ===================
</TABLE>
See Accompanying Notes
F-65
<PAGE>
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Year Ended Ended
December 31, September 30,
1995 1996
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 4,517,650 $ 2,907,272
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization.......................................... 1,145,510 914,148
Gain on sale of fixed assets........................................... -- (8,937)
Changes in operating assets and liabilities:
Accounts receivable................................................. (898,139) (274,136)
Inventories......................................................... (1,171,422) 1,737,878
Other assets........................................................ 523,095 (76,788)
Accounts payable.................................................... (361,431) (168,683)
Accrued interest and liabilities.................................... (129,086) 111,023
Income taxes payable................................................ (542,632) (78,878)
Intercompany liabilities............................................ (873,556) (5,306,167)
Equity adjustments from foreign currency............................ 168,294 21,515
--------------------- --------------------
Net cash provided by operating activities................................ 2,378,283 (221,753)
Cash flows from investing activities:
Purchase of property, plant and equipment................................ (2,279,759) (418,597)
Proceeds from sale of capital assets..................................... 77,749 47,204
--------------------- --------------------
Net cash used in investing activities.................................... (2,202,010) (371,393)
Net increase (decrease) in cash.......................................... 176,273 (593,146)
Cash and cash equivalents at beginning of period......................... 1,408,488 1,584,761
--------------------- --------------------
Cash and cash equivalents at end of period............................... $ 1,584,761 $ 991,615
===================== ====================
</TABLE>
See Accompanying Notes
F-66
<PAGE>
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tractech Division of Titan Wheel International, Inc. (the Company) is the
predecessor of Ballantrae Corporation (see Note 6). The Company consists of
domestic operations and the operations of a company in Ireland, and is engaged
in the engineering, manufacturing, and marketing of mechanical transmission
components and systems used in transportation vehicles and mobile equipment.
Principles of Reporting
The financial statements include the accounts of Tractech Division of Titan
Wheel International, Inc. (Titan). All significant intercompany and
interdivisional transactions and balances have been eliminated. The financial
statements do not reflect any of the purchase accounting adjustments made by
Titan resulting from the acquisition of the Company by Titan in 1993. These
financial statements have been prepared to include only the operating results,
changes in stockholders' equity and cash flows of the Company. Accordingly, all
disclosures related to the balance sheet have been omitted.
Titan has allocated certain general and administrative charges to the Company
totaling $675,000 and $674,000 for the nine months ended September 30, 1996
(1996) and the year ended December 31, 1995 (1995), respectively. These charges
were allocated by Titan based upon sales. Management believes that this method
of allocation is reasonable.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from
manufacturers of mobile equipment, trucks and specialized vehicles, both in the
U.S. and internationally. The Company performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral.
Credit losses are provided for in the financial statements and have been
consistently within management's expectations. The Company invests its temporary
cash in high credit quality financial institutions and investment grade short-
term investments and limits the amount of credit exposure to any one entity.
The percentage of the Company's labor force covered by a collective bargaining
agreement (CBA) is 57%. The CBA expires on August 31, 1999.
Inventories
Inventories are carried at the lower of cost or market, using the last-in,
first-out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets (40 years
for buildings and improvements and 12 years for machinery and equipment). Costs
of maintenance and repairs are charged to expense when incurred.
F-67
<PAGE>
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
Other Assets
Patents are amortized using the straight-line method over their estimated
lives.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S. dollars
using the exchange rate at each balance sheet date for assets and liabilities
and at the average exchange rate for each period for revenue and expenses.
Translation adjustments are recorded as a separate component of stockholders'
equity. Losses resulting from foreign exchange transactions totaling $15,867 and
$23,445 for the year ended December 31, 1995 and for the nine months ended
September 30, 1996, respectively, are included in net income.
2. FEDERAL INCOME TAXES
The Company is included in the consolidated tax returns of Titan. The tax
expense recorded by the Company is the amount allocated to it by Titan. This
amount approximates the tax expense that would result from using a separate
return basis. Titan did not allocate any deferred tax assets or liabilities to
the Company. The following is a summary of the components of the provision for
income taxes:
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1995 1996
------------------ ------------------
<S> <C> <C>
Federal................................................ $1,106,000 $457,000
State and Local........................................ 165,357 110,000
Foreign................................................ 355,904 304,760
------------------ ------------------
$1,627,261 $871,760
================== ==================
</TABLE>
Income before income taxes was taxed in the following jurisdictions:
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1995 1996
------------------ ------------------
<S> <C> <C>
Domestic............................................... $3,873,575 $1,417,153
Foreign................................................ 2,271,336 2,361,879
------------------ ------------------
$6,144,911 $3,779,032
================== ==================
</TABLE>
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
1995 1996
------------------ ------------------
<S> <C> <C>
Federal statutory income tax rate...................... 34.0% 34.0%
Favorable foreign tax rate............................. (6.8) (12.9)
Other Items............................................ (0.7) 2.0
------------------ ------------------
Effective income tax rate.............................. 26.5% 23.1%
================== ==================
</TABLE>
The favorable foreign tax rate is the result of an inducement offered by the
Irish government to encourage the Company to establish their foreign
manufacturing facility in Ireland. The favorable rate expires in 2010.
F-68
<PAGE>
TRATECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
No provision has been made for United States federal and state or foreign
taxes that may result from future remittances of undistributed earnings of
foreign operations ($10,466,851 at September 30, 1996) because it is expected
that such earnings will be reinvested in these foreign operations indefinitely.
It is not practical to estimate the amount of taxes that might be payable on the
eventual remittances of such earnings.
3. COMMITMENTS AND CONTINGENCIES
The Company leases a building under a noncancellable operating lease which
provides for a renewal option every five years. The operating lease has rental
payments due of approximately $58,900 in the remaining months of 1996, $235,600
in 1997 and 1998, and $78,533 in 1999.
Total rental expense under all operating leases aggregated $285,953 and
$214,220 for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 respectively. Included in rental expense is $1 per year for
the lease of equipment having an original cost of approximately $2,350,000
pursuant to an incentive lease arrangement sponsored by the Irish Development
Authority. The Company has the right to continue this lease indefinitely.
The Company is party to legal actions and claims arising in the ordinary
course of business. The Company believes that the disposition of these matters
will not have a material adverse effect on financial position, results of
operations or cash flows of the Company.
4. RETIREMENT PLANS AND BENEFITS
The Company is a participant in two defined contribution 401(k) savings plans
sponsored by Titan that cover substantially all domestic salary and hourly
employees. Company contributions to the plans are based on employee
contributions and compensation. The Company may also make discretionary
contributions annually. Company contributions for these two plans totaled
$43,281 and $32,213 for the year ended December 31, 1995 and for the nine months
ended September 30, 1996, respectively.
The Company sponsors a defined contribution retirement savings plan that
covers substantially all of its employees at its foreign location. Company
contributions to the plan are based on employee contributions and compensation.
Company contributions totaled $52,082 and $30,932 for the year ended December
31, 1995 and for the nine months ended September 30, 1996, respectively.
The Company contributes to the Central States Pension Fund, which covers all
eligible bargaining employees of one of its plants. The benefits are principally
based on years of service and a benefit formula as defined in the plan. The
Company currently contributes $37 per week per eligible employee, which is
specified in the Bargaining Agreement. Company contributions totaled $65,305 and
$46,472 for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 respectively.
F-69
<PAGE>
5. SEGMENT AND GEOGRAPHIC DATA
The Company operates in one business segment--manufacturing engineered metal
products and systems for original equipment manufacturers and end users of
transportation mobile equipment. Geographical region information for the year
ended December 31, 1995 and for the nine months ended September 30, 1996 is as
follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1995 September 30, 1996
-------------------- ---------------------
<S> <C> <C>
Net sales:
United States.................................. $21,806,188 $14,117,885
International.................................. 10,647,278 7,554,012
Eliminate intercompany sales................... (6,058,035) (3,239,157)
--------------------- ---------------------
Total net sales.............................. $26,395,431 $18,432,740
==================== =====================
Operating income:
United States.................................. $ 3,873,575 $ 1,417,153
International.................................. 2,271,336 2,361,879
-------------------- ---------------------
Total operating income....................... $ 6,144,911 $ 3,779,032
==================== =====================
</TABLE>
International sales are principally from operations located in Ireland and do
not include export sales of domestic operations. Export sales from domestic
operations were not significant for the year ended December 31, 1995 or for the
nine months ended September 30, 1996.
During the year ended December 31, 1995 and the nine months ended September
30, 1996, there were sales to one customer that amounted to $3,656,599 and
$2,674,869, respectively.
6. SUBSEQUENT EVENT
Effective October 1, 1996, the Company was sold to Tractech, Inc., a
subsidiary of Ballantrae Corporation.
F-70
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ballantrae Corporation
We have audited the accompanying consolidated balance sheets of Ballantrae
Corporation as of September 30, 1997 and December31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1997 and the three months ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ballantrae Corporation at September 30, 1997 and December31, 1996, and the
consolidated results of its operations and its cash flows for the nine months
ended September 30, 1997 and the three months ended December 31, 1996, in
conformity with generally accepted accounting principles.
Detroit, Michigan ERNST & YOUNG LLP
October 17, 1997, except for Note 12,
as to which the date is December 16, 1997
F-71
<PAGE>
BALLANTRAE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------------- -------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.......................................... $ 783,966 $ 460,605
Accounts receivable, less allowance of $65,000 in 1997 and 1996,
respectively...................................................... 4,923,871 5,696,717
Inventories (Note 1)............................................... 9,708,513 10,426,534
Recoverable income taxes........................................... 163,000 --
Deferred income tax................................................ 46,000 452,000
Other.............................................................. 45,520 51,865
------------------- -------------------
Total current assets............................................ 15,670,870 17,087,721
Property, plant and equipment:
Land............................................................... 272,490 272,490
Buildings and improvements......................................... 4,022,144 4,034,313
Machinery and equipment............................................ 12,010,783 13,049,576
------------------- -------------------
16,305,417 17,356,379
Less accumulated depreciation and amortization..................... 2,569,028 3,628,851
------------------- -------------------
Net property, plant and equipment............................... 13,736,389 13,727,528
Other assets:
Goodwill, net of amortization of $92,516 and $261,542 in 1996 and
1997, respectively................................................ 13,790,739 13,572,110
Deferred financing costs, net of amortization of $17,550 and
$52,650 in 1996 and 1997, respectively............................ 473,569 421,419
Patents, net of amortization of $4,623 and $21,239 in 1996 and
1997, respectively................................................ 210,438 216,475
------------------- -------------------
Total other assets.............................................. 14,474,746 14,210,004
------------------- -------------------
Total Assets.................................................... $43,882,005 $45,025,253
=================== ===================
</TABLE>
See Accompanying Notes
F-72
<PAGE>
BALLANTRAE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------------- --------------------
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable............................................... $ 2,614,925 $ 2,793,599
Accrued liabilities............................................ 1,889,740 1,721,457
Accrued interest............................................... 539,575 609,872
Income taxes payable........................................... 193,032 629,232
-------------- --------------
Total current liabilities..................................... 5,237,272 5,754,160
Long-term debt (Note 4)......................................... 32,239,100 29,934,100
Deferred income taxes (Note 6).................................. 277,000 566,000
Redeemable exchangeable preferred stock of subsidiary (Note 5).. 8,242,048 8,981,800
Redeemable exchangeable preferred stock (Note 5)................ 2,814,192 3,109,287
Stockholders' equity (deficit):
Class A common stock, $.01 par value, 1,000,000 shares
authorized, 106,453 shares issued and outstanding............. 1,065 1,065
Class B common stock, $.01 par value, 1,000,000 shares
authorized, 122,500 shares issued and outstanding............ -- 1,225
Paid-in capital................................................ 105,388 226,663
Retained earnings.............................................. 305,960 1,790,973
Predecessor carryover basis.................................... (5,340,020) (5,340,020)
-------------- --------------
Total stockholders' equity (deficit).......................... (4,927,607) (3,320,094)
-------------- --------------
Total liabilities and stockholders equity (deficit).......... $43,882,005 $45,025,253
============== ==============
</TABLE>
See Accompanying Notes
F-73
<PAGE>
BALLANTRAE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
December 31, 1996 September 30, 1997
-------------------------- --------------------------
<S> <C> <C>
Net sales............................................ $7,924,259 $28,877,686
Cost of sales........................................ 5,246,791 19,028,791
------------------------ ------------------------
Gross profit......................................... 2,677,468 9,848,895
Selling expenses..................................... 203,561 752,895
General and administrative expenses.................. 1,074,181 3,365,179
------------------------ ------------------------
1,277,742 4,118,074
------------------------ ------------------------
Income from operations............................... 1,399,726 5,730,821
Other income (expense):
Interest expense.................................... (651,712) (2,296,290)
Interest income..................................... 19,985 7,650
Deferred financing charges.......................... (17,550) (52,650)
Foreign exchange gain or loss and other............. (4,251) (184,302)
------------------------ ------------------------
(653,528) (2,525,592)
------------------------ ------------------------
Income before income taxes and preferred dividend
requirement of subsidiary........................... 746,198 3,205,229
Income taxes (Note 6)................................ 185,458 727,207
Preferred dividend requirement of subsidiary......... 190,588 739,752
------------------------ ------------------------
Net income........................................... $ 370,152 $ 1,738,270
======================== ========================
</TABLE>
See Accompanying Notes
F-74
<PAGE>
BALLANTRAE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Three Months Ended December 31, 1996 and the
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Class A Class B Additional Predecessor
Common Common Paid-In Retained Carryover
Stock Stock Capital Earnings Basis Total
-------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996.............. $1,065 $ $105,388 $ $(5,340,020) $(5,233,567)
Preferred stock dividends............... -- -- -- (64,192) -- (64,192)
Net income for 1996..................... -- -- -- 370,152 -- 370,152
------- ------- ---------- ---------- ----------- -----------
Balance at December 31, 1996............ 1,065 -- 105,388 305,960 (5,340,020) (4,927,607)
------- ------- ---------- ---------- ----------- -----------
Warrants redeemed....................... -- 1,225 121,275 -- -- 122,500
Preferred stock dividends............... -- -- -- (253,257) -- (253,257)
Net income for 1997..................... -- -- -- 1,738,270 -- 1,738,270
------- ------- ---------- ---------- ----------- -----------
Balance at September 30, 1997........... $1,065 $1,225 $226,663 $1,790,973 $(5,340,020) $(3,320,094)
======= ======= ========== ========== =========== ===========
</TABLE>
See Accompanying Notes
F-75
<PAGE>
BALLANTRAE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
December 31, 1996 September 30, 1997
-------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 370,152 $ 1,738,270
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization..................................... 447,782 1,395,253
Deferred income taxes............................................. 12,000 (117,000)
Preferred dividend requirement of subsidiary...................... 190,588 739,752
Changes in operating assets and liabilities:
Accounts receivable.............................................. (866,534) (617,228)
Recoverable income taxes......................................... (163,000) 163,000
Inventories...................................................... (363,341) (718,021)
Other current assets............................................. 80,303 (161,963)
Accounts payable................................................. 676,324 178,674
Accrued interest and liabilities................................. 838,103 (97,985)
Income taxes payable............................................. 67,972 436,200
-------------- ---------------
Net cash provided by operating activities........................... 1,290,349 2,938,952
Cash flows from investing activities:
Increase in acquisition costs....................................... (600,997) (43,413)
Purchase of property, plant and equipment........................... (121,994) (1,050,962)
Increase in patents................................................. (20,112) (27,276)
-------------- ---------------
Net cash used in investing activities............................... (743,103) (1,121,651)
Cash flows from financing activities:
Principal payments on long-term debt................................ (450,000) (2,305,000)
Issuance of preferred stock......................................... -- 41,838
Issuance of common stock............................................ -- 122,500
Net cash used in financing activity................................. (450,000) (2,140,662)
-------------- ---------------
Net increase (decrease) in cash and cash equivalents................ 97,246 (323,361)
Cash and cash equivalents at beginning of period.................... 686,720 783,966
Cash and cash equivalents at end of period.......................... $ 783,966 $ 460,605
============== ===============
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 119,690 $ 1,366,000
Income taxes paid.................................................. $ 163,000 $ 350,000
</TABLE>
See Accompanying Notes
F-76
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Ballantrae Corporation and its subsidiaries (collectively, the "Company") are
engaged in the engineering, manufacturing, and marketing of mechanical power
transmission components and systems used in transportation vehicles and mobile
equipment, and fabricated tubing assemblies used in air conditioning and
refrigeration compressors.
Principles of Consolidation
The consolidated financial statements include the accounts of Ballantrae
Corporation and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from original
equipment manufacturers of mobile equipment, trucks and specialized vehicles,
and manufacturers of air conditioners and refrigeration compressors, both in the
U.S. and internationally. The Company performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral.
Credit losses are provided for in the financial statements and have been
consistently within management's expectations. The Company invests its temporary
cash in high credit quality financial institutions and investment grade short-
term investments and limits the amount of credit exposure to any one entity.
The percentage of the Company's labor force covered by a collective bargaining
agreement (CBA) is 29%. The CBA expires on August 31, 1999.
Inventories
Inventories are carried at the lower of cost or market, using the first-in,
first-out (FIFO) method. The components of inventories are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---------------- --------------
<S> <C> <C>
Raw Materials............................ $4,993,363 $ 5,094,424
Work in process.......................... 2,910,757 3,494,447
Finished goods........................... 1,804,393 1,837,663
---------------- --------------
$9,708,513 $10,426,534
================ ==============
</TABLE>
F-77
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets (25 to 40
years for buildings and improvements and 5 to 12 years for machinery and
equipment). Costs of maintenance and repairs are charged to expense when
incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized by the straight line method over 40
years.
The carrying amount of goodwill is regularly reviewed for indicators of
impairment in value, which in the view of management are other than temporary,
including unexpected or adverse changes in the following: (i) the economic or
competitive environments in which the Company operates; (ii) profitability
analyses and (iii) cash flow analyses. If facts and circumstances suggest that a
subsidiary's net assets are impaired, the Company assesses the fair value of the
underlying business and reduces goodwill to an amount that results in the book
value of the subsidiary approximating fair value.
Deferred Financing Costs and Patents
Deferred financing costs are primarily costs incurred in connection with the
Company's acquisition and are being amortized over the term of the related debt
using the straight-line method. Patents are amortized using the straight-line
method over their estimated lives.
Foreign Currency Translation
Financial statements of the Company's foreign subsidiary are translated into
U.S. dollars using a combination of historical and current exchange rates for
assets and liabilities. The related translation gain or (loss) of $22,669 and
$(342,436) for the three months ended December 31, 1996 and the nine months
ended September 30, 1997, respectively, are included in net income.
Long-Term Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of these assets.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash and cash
equivalents, accounts receivable, accounts payable, long-term debt and
redeemable convertible preferred stock. The fair value of the Company's fixed
rate debt was estimated using discounted cash flow analyses based upon the
Company's current incremental borrowing rates. The carrying amounts of financial
instruments approximated their fair value at December 31, 1996 and September 30,
1997.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is effective for years beginning after December 15, 1997, and will
be adopted by the Company in 1998. The Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Statement will not have any impact
on the results of operations or the financial position of the Company.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies are required to report segment information in annual financial
statements and in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Statement is effective for
F-78
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
financial statements for fiscal years beginning after December 15, 1997, and
will be adopted by the Company in 1998. The Company is evaluating the impact
that this Statement will have on its financial reporting.
2. ACQUISITION
On October 1, 1996, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets of the Tractech Division of Dyneer Corporation
and Tractech Limited (Tractech). The aggregate purchase price was $33.9 million
including cash payments of $23.9 million and the issuance of $10 million in a
11% subordinated promissory note payable on October 31, 2006. The Tractech
acquisition resulted in goodwill of $ 11.7 million which is being amortized over
40 years.
On October 24, 1996, the Company, through a wholly-owned subsidiary, acquired
Kraftube, Inc. (Kraftube) for an aggregate cash purchase price of $6,992,000.
Kraftube produces fabricated tubing assemblies used in air conditioning and
refrigeration compressors. The Kraftube acquisition resulted in goodwill of
$1,506,000 which is being amortized over 40 years.
The predecessor carryover basis included in the present equity structure
results from the purchase of Kraftube. Prior to the purchase, two current
stockholders of the Company were the majority shareholders of Kraftube (78%). At
the date of purchase, the assets and liabilities were recorded at their fair
market value, less the previous stockholders' carryover basis of the new
corporation's assets at the date of purchase. The cost of assets acquired in
excess of Kraftube's basis prior to the acquisition for continuing stockholders
interest was recorded as a charge to equity.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1996 1997
----------------- ----------------
<S> <C> <C>
Balance at beginning of period........................ $25,000 $65,000
Additions charged to costs and expenses............... 39,753 103
Uncollectible accounts written off,
net of recoveries.................................... 247 (103)
----------------- ----------------
$65,000 $65,000
================= ================
</TABLE>
4. DEBT
In October, 1996, the Company entered into a Group Credit Agreement (the
Agreement) with a bank that expires on December 31, 2003. Under the Agreement,
the financial institution agreed to extend the Company $26.5 million in
revolving loans ($22,239,100 and $19,934,100 outstanding at December 31, 1996
and September 30, 1997, respectively). The term loan calls for mandatory
quarterly principal reductions with the annual aggregate reductions of the
outstanding amount at September 30, 1997 as follows:
<TABLE>
<S> <C>
1999........................................ $ 634,100
2000........................................ 3,612,500
2001........................................ 4,387,500
2002........................................ 4,900,000
Thereafter.................................. 6,400,000
----------------
$19,934,100
================
</TABLE>
F-79
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
The bank also agreed to extend the Company $6,000,000 in pooled revolving
loans (no amounts were outstanding at September 30, 1997 or December 31, 1996).
In addition, the Company may obtain letters of credit up to $500,000 in
aggregate which would be treated as an advance on the pooled revolving loan.
Borrowings under the Agreement bear interest at the prime base lending rate or
LIBOR base rate plus an applicable spread that ranges from zero to .75% for the
prime based rate or 2.0% to 3.25% for the LIBOR based rate. The average interest
rate at December 31, 1996 and September 30, 1997 was 8.75% and 8.93%,
respectively. The Company pays a commitment fee that ranges from .25% to .625%
annually on the unused revolving and pooled loans. The Company's inventory,
accounts receivable, personal property, certain real estate and intangibles are
pledged as collateral under the Agreement. The Company is also required to
maintain a minimum net worth and meet certain financial ratios on a consolidated
basis.
Tractech Inc., a subsidiary of the Company, issued to Dyneer Corporation a
subordinated note for $10 million with a fixed annual interest of 11% due semi-
annually in connection with the acquisition discussed above. The note matures
October 31, 2006. The Company has guaranteed Tractech Inc.'s obligation to
Dyneer Corporation. Titan Wheel International, Inc. (Titan Wheel), the parent
company of Dyneer Corporation, was a defendant in an unresolved lawsuit at the
time Tractech was sold to the Company. If Titan Wheel prevails in this lawsuit,
the Company is to pay Titan Wheel $750,000. If Titan Wheel loses or no decision
is reached by September 30, 2001, the subordinated note to Dyneer Corporation
will be reduced by $750,000.
5. REDEEMABLE EXCHANGEABLE PREFERRED STOCK OF PARENT AND SUBSIDIARY
Ballantrae Corporation and Kraftube have 2,791,838 preferred shares
outstanding, (3,250,000 shares authorized, par value $.01 per share and
liquidation preference of $1.00 per share) and 80,514 preferred shares
outstanding, (150,000 shares authorized, par value $.01 per share and
liquidation preference of $100 per share), respectively, designated as 12%
Exchangeable Preferred Stock (12% Preferred Stock). The provisions of the 12%
Preferred Stock call for a cumulative cash dividend equal to 12% per share. The
12% Preferred Stock must be redeemed by September 30, 2006, at the liquidation
preference amount plus accrued and unpaid dividends. At the option of the
issuer, the 12% Preferred Stock may be redeemed at a price per share equal to
the liquidation preference plus accrued and unpaid dividends. In addition, the
12% Preferred Stock may be exchanged, at the option of the issuer, in whole or
in part, for 12% junior subordinated debentures to be issued by the respective
company at the liquidation preference amount plus accrued and unpaid dividends.
Dividends which accrue but remain unpaid for one year accrue additional
dividends at the rate of 12%. If the Company or Kraftube is liquidated or merged
and is not the surviving entity, the holders of the 12% Preferred Stock will
receive in cash the liquidation preference amount per share plus an amount equal
to full cumulative dividends. The holders of the 12% Preferred Stock have no
voting rights except on matters relating to the preferred stock. The carrying
value of the 12% Preferred Stock includes cumulative unpaid and accrued
dividends of $64,192 and $317,449 for Ballantrae Corporation and $190,587 and
$930,340 for Kraftube at December 31, 1996 and September 30, 1997, respectively.
6. INCOME TAXES
The following is a summary of the components of the provision for income
taxes:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, 1996 September 30, 1997
-------------------- --------------------
<S> <C> <C>
Current:
Federal............................ $ 57,183 $ 645,900
Foreign............................ 116,275 198,307
-------------------- --------------------
173,458 844,207
Deferred federal (credit):............ 12,000 (117,000)
-------------------- --------------------
$185,458 $ 727,207
==================== ====================
</TABLE>
F-80
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Income before income taxes and preferred dividend requirement of subsidiary
was taxed in the following jurisdictions:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1996 1997
---------------- -----------------
<S> <C> <C>
Domestic.................................. $ 181,562 $ 1,579,390
Foreign................................... 564,636 1,625,839
---------------- -----------------
$ 746,198 $ 3,205,229
================ =================
</TABLE>
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1996 1997
---------------- -----------------
<S> <C> <C>
Federal statutory income tax rate............................ 34.0% 34.0%
Favorable foreign tax rate................................... (11.4) (12.7)
Other items.................................................. 2.3 1.4
---------------- -----------------
Effective income tax rate.................................... 24.9% 22.7%
================ =================
</TABLE>
The favorable foreign tax rate is the result of an inducement offered by the
Irish government to encourage the Company to establish their foreign
manufacturing facility in Ireland. The favorable rate expires in 2010.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1996 1997
---------------- -----------------
<S> <C> <C>
Deferred tax assets:
Employee benefits......................................... $ 46,000 $ 202,000
Inventories............................................... -- 207,000
Other..................................................... -- 43,000
---------------- -----------------
46,000 452,000
Deferred tax liabilities:
Depreciation.............................................. 252,000 420,000
Goodwill.................................................. 17,000 113,000
Other..................................................... 8,000 33,000
---------------- -----------------
277,000 566,000
---------------- -----------------
Net deferred tax liability................................... $ (231,000) $ (114,000)
================ =================
</TABLE>
F-81
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
No provision has been made for United States federal and state or foreign
taxes that may result from future remittances of undistributed earnings of
foreign subsidiaries ($2,485,116 at September 30, 1997) because it is expected
that such earnings will be reinvested in these foreign operations indefinitely.
It is not practical to estimate the amount of taxes that might be payable on the
eventual remittances of such earnings.
7. COMMITMENTS AND CONTINGENCIES
The Company leases a building under a noncancellable operating lease which
provides for a renewal option every five years. The operating lease has rental
payments due of approximately $235,000 in 1998 and $137,083 in 1999.
Total rental expense under all operating leases aggregated $98,263 and
$229,953 for the three months ended December 31, 1996 and the nine months ended
September 30, 1997, respectively. Included in rental expense is $1 per year for
the lease of equipment having an original cost of approximately $2,350,000
pursuant to an incentive lease arrangement sponsored by the Irish Development
Authority. The Company has the right to continue this lease indefinitely.
An officer of Kraftube has been granted an option to purchase up to 3.5% of
the outstanding common shares of Kraftube. The option vests in 2002. At that
time, the officer has the option to sell (the put option) and Kraftube has the
option to buy (the call option) the shares of stock issued upon the exercise of
the option, for a formula based price. The formula is based on the average
earnings before interest and taxes for the three years ended December 31, 2001
and the amount of debt outstanding. The call and put options expire on December
31, 2002.
The Company is party to legal actions and claims arising in the ordinary
course of business. The Company believes that the disposition of these matters
will not have a material adverse effect on financial position, results of
operations or cash flows.
8. RETIREMENT PLANS AND BENEFITS
The Company sponsors two defined contribution 401(k) savings plans that cover
substantially all domestic salary and hourly employees. Company contributions to
the plans are based on employee contributions and compensation. The Company may
also make discretionary contributions annually. Company contributions for these
two plans totaled $33,137 and $119,573 for the three months ended December 31,
1996 and the nine months ended September 30, 1997, respectively.
The Company also sponsors a defined contribution retirement savings plan that
covers substantially all of its employees at its foreign subsidiary. Company
contributions to the plan are based on employee contributions and compensation.
Company contributions totaled $13,018 and $33,810 for the three months ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
The Company contributes to the Central States Pension Fund, which covers all
eligible bargaining employees of one of its subsidiaries. The benefits are
principally based on years of service and a benefit formula as defined in the
plan. The Company currently contributes $37 per week per eligible employee,
which is specified in the Bargaining Agreement. Company contributions totaled
$14,911 and $72,406 for the three months ended December 31, 1996 and the nine
months ended September 30, 1997, respectively.
F-82
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
9. SEGMENT AND GEOGRAPHIC DATA
The Company operates in one business segment--manufacturing engineered metal
products and systems for original equipment manufacturers and end users of
transportation mobile equipment. Geographical region information is as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, September 30,
1996 1997
---------------- -----------------
<S> <C> <C>
Net sales:
United States............................................ $ 6,540,936 $ 23,998,968
International............................................ 2,710,626 9,613,309
Eliminate intercompany sales............................. (1,327,303) (4,734,591)
---------------- -----------------
Total net sales.......................................... $ 7,924,259 $ 28,877,686
================ =================
Operating income:
United States............................................ $ 671,274 $ 3,359,245
International............................................ 728,452 2,371,576
---------------- -----------------
Total operating income................................... $ 1,399,726 $ 5,730,821
================ =================
Identifiable assets:
United States............................................ $ 27,334,081 $ 29,748,081
International............................................ 16,380,904 15,620,116
---------------- -----------------
Total identifiable assets................................ 43,714,985 45,368,197
Corporate assets......................................... 248,193 263,110
Elimination.............................................. (81,173) (606,054)
---------------- -----------------
Total assets............................................. $ 43,882,005 $ 45,025,253
================ =================
</TABLE>
International sales are principally from operations located in Ireland and
do not include export sales of domestic operations. Export sales from domestic
operations were not significant for either period presented.
Sales to the two customers exceeded 10% of total sales which were $951,000
and $838,000 during the three months ended December 31, 1996 and $4,022,000 and
$2,920,000 during the nine months ended September 30, 1997.
10. RELATED PARTY TRANSACTION
The Company has entered into a consulting agreement with the Chairman and
President of Ballantrae Corporation. The agreement amounts to $100,000 annually,
with $25,000 accrued as of December 31, 1996 and September 30, 1997.
In February, 1997, the principal shareholder exercised stock warrants to
purchase 122,500 shares of common stock for $1.00 per share. Warrants
outstanding totaled 25,000 at December 31, 1996 and September 30, 1997.
11. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. As discussed in Note 12 below, the Company has reached a
definitive agreement to be acquired. It is anticipated that the domestic legal
entities of the Company, with the exception of Kraftube Management, Inc. and
Kraftube, Inc., will be full and unconditional, joint and several guarantors of
the senior notes and the Senior Subordinate Notes of the acquiring company
discussed in Note 12 along with all other domestic subsidiaries of the acquiring
company.
F-83
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, both as
listed below, at December 31, 1996 and September 30, 1997 and for the three
months ended December 31, 1996 and the nine months ended September 30, 1997.
The equity method has been used by the Company with respect to investments in
subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
The following table sets forth the Guarantor and direct Non-Guarantor
Subsidiaries:
Guarantor Subsidiary Non-Guarantor Subsidiaries
------------------------ ------------------------------
Tractech Inc. Kraftube Management, Inc.
Kraftube, Inc.
Tractech Limited
Lissaphuca Limited
F-84
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
Condensed Consolidating Balance Sheet
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------------------------------------------
BALLANTRAE
CORPORATION
(PARENT NON-
COMPANY SUBSIDIARY GUARANTOR
ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents....... $ 46,635 $ 224,989 $ 188,981 $ -- $ 460,605
Accounts receivable, net........ -- 3,387,162 2,309,555 -- 5,696,717
Inventories..................... -- 7,315,572 3,717,016 (606,054)(a) 10,426,534
Deferred income tax............. -- 301,000 151,000 -- 452,000
Other........................... -- -- 51,865 -- 51,865
--------------- ------------ ------------ ---------------- ---------------
Total current assets............. 46,635 11,228,723 6,418,417 (606,054) 17,087,721
Investment in affiliates......... 9,414,736 10,000 1,948,176 11,372,912(b) --
Property, plant and equipment:
Land............................ -- 190,660 81,830 -- 272,490
Buildings and improvements...... -- 2,139,340 1,894,973 -- 4,034,313
Machinery and equipment......... -- 4,863,880 8,185,696 -- 13,049,576
Less accumulated depreciation... -- (594,722) (3,034,129) (3,628,851
--------------- ------------ ------------ ---------------- ---------------
Net property, plant and equipment -- 6,599,158 7,128,370 -- 13,727,528
Other assets:
Goodwill, net................... -- 6,125,110 7,447,000 -- 13,572,110
Deferred financing costs net.... -- 360,000 61,419 -- 421,419
Patents, net.................... 216,475 -- -- -- 216,475
--------------- ------------ ------------ ---------------- ---------------
Total other assets............... 216,475 6,485,110 7,508,419 -- 14,210,004
=============== ============ ============ ================ ===============
Total assets..................... $ 9,677,846 $ 24,322,991 $ 23,003,382 $(11,978,966) $ 45,025,253
=============== ============ ============ ================ ===============
</TABLE>
_______________
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investments in subsidiaries.
F-85
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Liabilities and stockholders'
equity (deficit)
Current liabilities:
Accounts payable.......................... $ 27,516 $ 1,541,463 $ 1,224,620 $ -- $ 2,793,599
Accrued liabilities....................... 28,000 996,647 696,810 -- 1,721,457
Accrued interest.......................... -- 507,072 102,800 -- 609,872
Income taxes payable...................... -- 20,000 609,232 -- 629,232
-------------- ----------- ------------ ----------------- ------------
Total current liabilities................ 55,516 3,065,182 2,633,462 -- 5,754,160
Intercompany liabilities.................... 4,493,117 1,497,884 (5,991,001) -- --
Long-term debt.............................. -- 12,545,000 17,389,100 -- 29,934,100
Deferred income taxes....................... -- 343,000 223,000 -- 566,000
Redeemable exchangeable
preferred stock of subsidiary............. -- -- 8,981,800 -- 8,981,800
Redeemable exchangeable
preferred stock........................... 3,109,287 -- -- -- 3,109,287
Stockholders' equity (deficit):
Class A common stock...................... 1,065 1 36,000 (36,001)(b) 1,065
Class B common stock...................... 1,225 -- -- -- 1,225
Paid-in capital........................... 226,663 6,199,999 2,382,906 (8,582,905)(b) 226,663
Retained earnings......................... 1,790,973 671,925 2,688,135 (3,360,060)(a,b) 1,790,973
Predecessor carryover basis............... -- -- (5,340,020) -- (5,340,020)
-------------- ----------- ------------ ----------------- ------------
Total stockholders' equity (deficit)..... 2,019,926 6,871,925 (232,979) (11,978,966) (3,320,094)
-------------- ----------- ------------ ----------------- ------------
Total liability and stockholders' equity
(deficit)............................... $9,677,846 $24,322,991 $23,003,382 $(11,978,966) $45,025,253
============== =========== ============ ================= ============
</TABLE>
_________________
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investments in subsidiaries.
F-86
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $ -- $ 15,974,980 $ 17,637,297 $ (4,734,591)(a) $ 28,877,686
Cost of sales........................... -- 11,731,273 11,507,228 (4,209,710)(a) 19,028,791
---------------- ------------- -------------- ----------------- ---------------
Gross profit............................ -- 4,243,707 6,130,069 (524,881)(a) 9,848,895
Selling expenses........................ -- 570,701 182,194 -- 752,895
General and administrative expenses..... 141,620 1,766,188 1,457,371 -- 3,365,179
---------------- ------------- -------------- ----------------- ---------------
141,620 2,336,889 1,639,565 -- 4,118,074
---------------- ------------- -------------- ----------------- ---------------
Income from operations.................. (141,620) 1,906,818 4,490,504 (524,881) 5,730,821
Equity in earnings of subsidiaries...... 2,145,562 -- -- (2,145,562)(b) --
Other income (expense):
Interest expense....................... (265,780) (1,288,508) (742,002) -- (2,296,290)
Interest income........................ -- -- 7,650 -- 7,650
Deferred financing charges............. -- (45,000) (7,650) -- (52,650)
Foreign exchange gain or loss and
other................................. 108 17,089 (201,499) -- (184,302)
---------------- ------------- -------------- ----------------- ---------------
(265,672) (1,316,419) (943,501) -- (2,525,592)
---------------- ------------- -------------- ----------------- ---------------
Income before income taxes and
preferred dividend requirement of
subsidiary............................. 1,738,270 590,399 3,547,003 (2,670,443) 3,205,229
Income taxes............................ -- 61,855 665,352 -- 727,207
Preferred dividend requirement of
subsidiary............................. -- -- -- (739,752)(c) (739,752)
---------------- ------------- -------------- ----------------- ---------------
Net income.............................. $1,738,270 $ 528,544 $ 2,881,651 $(3,410,195) $ 1,738,270
================ ============= ============== ================= ===============
</TABLE>
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-87
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- --------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income................................... $ 1,738,270 $ 528,544 $ 2,881,651 $(3,410,195) $ 1,738,270
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization............. 14,623 614,915 765,715 -- 1,395,253
Equity in earnings of subsidiaries........ (2,145,562) -- -- 2,145,562(a) --
Deferred income taxes..................... -- 30,000 (147,000) -- (117,000)
Preferred dividend requirement of
subsidiary................................ -- -- -- 739,752(b) 739,752
Changes in operating assets and
liabilities:
Accounts receivable..................... -- (742,715) 125,487 -- (617,228)
Recoverable income taxes................ -- 163,000 -- -- 163,000
Inventories............................. -- (1,042,344) (200,558) 524,881(c) (718,021)
Other current assets.................... -- (180,613) 18,650 -- (161,963)
Accounts payable........................ 27,516 491,496 (340,338) -- 178,674
Accrued interest and liabilities........ 2,300 3,015 (103,300) -- (97,985)
Income taxes payable.................... -- 20,000 416,200 -- 436,200
Intercompany liabilities................ 228,055 1,667,037 (1,895,092) -- --
--------------- --------------- -------------- ------------------ ---------------
Net cash provided by (used in ) operating
activities................................ (134,798) 1,552,335 1,521,415 -- 2,938,952
Cash flows from investing activities:
Increase in acquisition costs................ -- (9,869) (33,544) -- (43,413)
Purchase of property, plant and equipment.... -- (814,885) (236,077) -- (1,050,962)
Increase in patents.......................... (27,276) -- -- -- (27,276)
--------------- --------------- -------------- ------------------ ---------------
Net cash (used in) provided by investing
activities.................................. (27,276) (824,754) (269,621) -- (1,121,651)
Cash flows from financing activities:
Principle payments on long-term debt......... -- (755,000) (1,550,000) -- (2,305,000)
Issuance of preferred stock.................. 41,838 -- -- -- 41,838
Issuance of common stock..................... 122,500 -- -- -- 122,500
--------------- --------------- -------------- ------------------ ---------------
Net cash provided by (used in) financing
activity.................................... 164,338 (755,000) (1,550,000) -- (2,140,662)
Net increase (decrease) in cash.............. 2,264 (27,419) (298,206) -- (323,361)
Cash and cash equivalents at beginning of
period...................................... 44,371 252,408 487,187 -- 783,966
--------------- --------------- -------------- ------------------ ---------------
Cash and cash equivalents at end of period... $ 46,635 $ 224,989 $ 188,981 $ -- $ 460,605
=============== =============== ============== ================== ===============
</TABLE>
_________________
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
(c) Elimination of intercompany profit in inventory.
F-88
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- --------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents................... $ 44,371 $ 252,408 $ 487,187 $ -- $ 783,966
Accounts receivable, net.................... -- 2,536,234 2,387,637 -- 4,923,871
Inventories................................. -- 6,192,055 3,597,631 (81,173)(a) 9,708,513
Recoverable income taxes.................... -- 90,000 73,000 -- 163,000
Deferred income tax......................... -- -- 46,000 -- 46,000
Other....................................... -- 600 44,920 -- 45,520
--------------- --------------- -------------- ------------------ ---------------
Total current assets...................... 44,371 9,071,297 6,636,375 81,173) 15,670,870
Investment in affiliates..................... 7,269,174 10,000 -- (7,279,174)(b) --
Property, plant and equipment:
Land........................................ -- 190,660 81,830 -- 272,490
Buildings and improvements.................. -- 2,139,340 1,882,804 -- 4,022,144
Machinery and equipment..................... -- 4,048,995 7,961,788 -- 12,010,783
Less accumulated depreciation............... -- (142,659) (2,426,369) -- (2,569,028)
--------------- --------------- -------------- ------------------ ---------------
Net property, plant and
equipment.................................... -- 6,236,336 7,500,053 -- 13,736,389
Other assets:
Goodwill, net............................... (6,616) 6,233,094 7,564,261 -- 13,790,739
Deferred financing costs, net............... -- 405,000 68,569 -- 473,569
Patents, net................................ 210,438 -- -- -- 210,438
--------------- --------------- -------------- ------------------ ---------------
Total other assets........................ 203,822 6,638,094 7,632,830 -- 14,474,746
--------------- --------------- -------------- ------------------ ---------------
$7,517,367 $21,955,727 $21,769,258 $(7,360,347) $43,882,005
=============== =============== ============== ================== ===============
</TABLE>
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investment in subsidiaries.
F-89
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- --------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable............................ $ -- $1,049,967 $1,564,958 $ -- $2,614,925
Accrued liabilities......................... 25,700 1,175,927 688,113 -- 1,889,740
Accrued interest............................ -- 324,777 214,798 -- 539,575
Income taxes payable........................ -- -- 193,032 -- 193,032
--------------- --------------- -------------- ------------------ ---------------
Total current
liabilities............................... 25,700 2,550,671 2,660,901 -- 5,237,272
Intercompany liabilities...................... 4,265,062 (19,152) (4,245,910) -- --
Long-term debt................................ -- 13,150,000 19,089,100 -- 32,239,100
Deferred income taxes......................... 12,000 265,000 -- 277,000
Redeemable exchangeable preferred stock of
subsidiary................................... -- -- 8,242,048 -- 8,242,048
Redeemable exchangeable preferred stock....... 2,814,192 -- -- -- 2,814,192
Stockholders' equity (deficit):
Class A common stock........................ 1,065 1 11,000 (11,001)(b) 1,065
Paid-in capital............................. 105,388 6,199,999 661,723 (6,861,722)(b) 105,388
Retained earnings........................... 305,960 62,208 425,416 (487,624)(a,b) 305,960
Predecessor carryover basis................. -- -- (5,340,020) -- (5,340,020)
--------------- --------------- -------------- ------------------ ---------------
Total stockholders'
equity (deficit).............................. 412,413 6,262,208 (4,241,881) (7,360,347) (4,927,607)
--------------- --------------- -------------- ------------------ ---------------
Total liabilities and stockholders' equity
(deficit).................................... $7,517,367 $21,955,727 $21,769,258 $(7,360,347) $43,882,005
=============== ============== ============== ================== ===============
</TABLE>
_______________
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investment in subsidiaries.
F-90
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Condensed Consolidating Statement of Operations
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ -- $4,849,072 $4,402,488 $(1,327,301)(a) $7,924,259
Cost of sales.............................. -- 3,469,667 3,023,252 (1,246,128)(a) 5,246,791
------------- ------------ ------------ ---------------- --------------
Gross profit............................... 1,379,405 1,379,236 (81,173) 2,677,468
Selling expenses........................... -- 150,723 52,838 -- 203,561
General and administrative
expenses................................... 36,939 675,831 361,411 -- 1,074,181
------------- ------------ ------------ ---------------- --------------
36,939 826,554 414,249 -- 1,277,468
------------- ------------ ------------ ---------------- --------------
Income from operations..................... (36,939) 552,851 964,987 (81,173) 1,399,726
Equity in earnings of subsidiaries......... 406,451 -- -- (406,451)(b) --
Other income (expense):
Interest expense.......................... -- (394,321) (257,391) -- (651,712)
Interest income........................... 640 -- 19,345 -- 19,985
Deferred financing charges................ -- (15,000) (2,550) -- (17,550)
Foreign exchange gain or loss and other...
-- 13,165 (17,416) -- (4,251)
------------- ------------ ------------ ---------------- --------------
640 (396,156) (258,012) -- (653,528)
------------- ------------ ------------ ---------------- --------------
Income (loss) before income taxes and
preferred dividend requirement of
subsidiary................................ 370,152 156,695 706,975 (487,624) 746,198
Income taxes............................... -- 13,314 172,144 -- 185,458
Preferred dividend requirement of
subsidiary................................ -- -- -- (190,588)(c) 190,588
------------- ------------ ------------ ---------------- --------------
Net income................................. $370,152 $ 143,381 $ 534,831 $(678,212) $ 370,152
============ ============ ============ ================ ==============
</TABLE>
_______________
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-91
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 370,152 $ 143,381 $ 534,831 $(678,212) $ 370,152
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization........................ 11,239 196,860 239,683 -- 447,782
Equity in earnings of subsidiaries................... (406,451) -- -- 406,451(a) --
Deferred income taxes................................ -- 12,000 -- -- 12,000
Preferred dividend requirement of subsidiary.........
-- -- -- 190,588(b) 190,588
Changes in operating assets and liabilities:
Accounts receivable............................... -- 60,116 (926,650) -- (866,534)
Recoverable income taxes.......................... -- (163,000) -- -- (163,000)
Inventories....................................... -- (117,953) (326,561) 81,173(c) (363,341)
Other current assets.............................. -- 72,400 7,900 -- 80,303
Accounts payable.................................. -- 188,677 487,647 -- 676,324
Accrued interest and liabilities.................. 25,700 902,554 (90,151) -- 838,103
Intercompany liabilities.......................... 215,062 (19,152) (195,910) -- --
Income tax payable................................ -- -- 67,972 -- 67,972
------------ ----------- ------------ ----------- ----------
Net cash provided by (used in) operating activities.... 215,702 1,275,883 (201,236) -- 1,290,349
Cash flows from investing activities:
Increase in acquisition costs........................ -- (518,611) (82,386) -- (600,997)
Purchase of property and equipment................... -- (47,992) (74,002) -- (121,994)
Increase in patents.................................. (215,063) 194,951 -- -- (20,112)
------------ ----------- ------------ ----------- ----------
Net cash used in investing activities.................. (215,063) (371,652) (156,388) -- (743,103)
Cash flows from financing activities:
Principal payments on long-term
debt................................................ -- (850,000) 400,000 -- (450,000)
------------ ----------- ------------ ----------- ----------
Net increase in cash and cash equivalents.............. 639 54,231 42,376 -- 97,246
Cash and cash equivalents at beginning of period....... 43,739 198,177 444,813 -- 686,720
------------ ----------- ------------ ----------- ----------
Cash and cash equivalents at end
of period........................................... $ 44,369 $ 252,408 $ 487,189 $ -- $ 783,966
============ =========== ============ =========== ==========
</TABLE>
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
(c) Elimination of intercompany profit in inventory.
F-92
<PAGE>
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
12. Subsequent Event
On October 30, 1997, the Company entered into a definitive agreement with
Delco Remy International, Inc. (DRI) whereby DRI would acquire all of the
capital stock of the Company for approximately $52,800,000 (including assumed
debt and the estimated working capital adjustment and fees and expenses of the
Company), subject to a working capital adjustment. DRI will exchange shares of
its common stock with a value of approximately $22,100,000 for the equity of the
Company and will repay approximately $29,700,000 of the Company's debt. DRI
filed Registration Statements with the Securities and Exchange Commission in
connection with DRI's planned sale of common stock and $145,000,000 of Senior
Notes Due in 2007 (the Offerings) and the registration of an exchange offer for
the Company's 10 5/8% Senior Subordinated Notes due 2006 that described the
planned acquisition of the Company. The acquisition of the Company is expected
to be completed at or prior to the consummation of the Offerings.
F-93
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information................................................................... 2
Prospectus Summary...................................................................... 3
Risk Factors............................................................................ 13
Use of Proceeds......................................................................... 23
Capitalization.......................................................................... 24
Selected Consolidated Historical Financial Data......................................... 25
Pro Forma Condensed Consolidated Financial Data......................................... 27
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 38
The Exchange Offer...................................................................... 47
Business................................................................................ 54
Management.............................................................................. 68
Principal Stockholders.................................................................. 74
Certain Transactions.................................................................... 76
Description of Capital Stock............................................................ 78
Description of Indebtedness............................................................. 80
Description of Notes.................................................................... 84
Certain Federal Income Tax Consequences................................................. 111
Plan of Distribution.................................................................... 112
Legal Matters........................................................................... 112
Experts................................................................................. 112
Disclosure Regarding Forward Looking Statements......................................... 113
Index to Financial Statements........................................................... F-1
</TABLE>
________________________
Until March 23, 1998 (90 days after the date of this Prospectus), all dealers
effecting transactions in the Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
DELCO REMY
INTERNATIONAL, INC.
$140,000,000
105/8% SENIOR SUBORDINATED
Notes Due 2006
PROSPECTUS
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware Law, the Company's Certificate of Incorporation
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts of omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, relating
to prohibited dividends or distributions or the repurchase or redemption of
stock, or (iv) for any transaction from which the director derives an improper
personal benefit. In addition, the Company's By-laws provide for indemnification
of the Company's officers and directors to the fullest extent permitted under
Delaware law. Section 145 of the Delaware Law provides that a corporation may
indemnify any persons, including officers and directors, who were or are, or are
threatened to be made, parties to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation or is or was serving at the request of such corporation as
an officer, director, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, for criminal proceedings, had no reasonable cause to believe that his
conduct was unlawful. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses that such officer or director actually and reasonably
incurred. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
The directors and officers of the registrant are insured against certain
liabilities under the registrant's directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------------------------
<S> <C>
3.1+ Form Certificate of Incorporation of the Company, as amended
3.2+ By-laws of the Company
4.1++ Indenture, dated as of August 1, 1996, among the Company, certain of the Company's subsidiaries
signatories thereto and National City Bank, as trustee
5.1 Opinion of Dechert Price & Rhoads, counsel to the Company
5.2 Opinion of Porteous & White, counsel to Nabco, Inc.
5.3 Opinion of Young, Williams, Henderson & Fuselier P.A., counsel to The A&B Group, Inc.; A&B
Enterprises, Inc.; Dalex, Inc.; A&B Cores, Inc.; R&L Tool Company, Inc.; and MCA, Inc. of
Mississippi
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
5.4 Opinion of Stephen E. Plopper & Associates, counsel to Franklin Power Products, Inc.;
Power Investments, Inc.; International Fuel Systems, Inc.; Marine Corporation of America;
and Powerbilt Products, Inc.
5.5 Opinion of Hunton & Williams, counsel to World Wide Automotive, Inc.
10.1+ Light Duty Starter Motor Supply Agreement, dated July 31, 1994, by and between Delco Remy
America, Inc. ("DRA") and General Motors Corporation ("GM")
10.2+ Heavy Duty Component Supply Agreement, dated July 31, 1994, by and between DRA and GM
10.3+ Distribution and Supply Agreement, dated July 31, 1994, by and between DRA and GM
10.4+ Trademark License, dated July 31, 1994, by and among DRA, DR International, Inc. and GM
10.5+ Tradename License Agreement, dated July 31, 1994, by and among DRA, DR International, Inc.
and GM
10.6+ Partnership Agreement of Delco Remy Mexico S. de R.L. de C.V., dated April 17, 1997
10.7+ Joint Venture Agreement, dated , by and between Remy Korea Holdings, Inc. and
S.C. Kim
10.8+ Securities Purchase and Holders Agreement, dated July 29, 1994, by and among the Company,
CVC, WEP, MascoTech, Harold K. Sperlich, James R. Gerrity and the individuals named therein
as Management Investors
10.9+ Registration Rights Agreement, dated July 29, 1994, by and among the Company, CVC, WEP,
MascoTech, Harold K. Sperlich, James R. Gerrity and the individuals named therein as
Management Investors
10.10+ Employment Agreement, dated July 31, 1994 by and between Delco Remy International, Inc. and
Thomas J. Snyder
10.11+ Form of Fourth Amended and Restated Financing Agreement, dated as of , 1997,
among the Company, certain of the Company's subsidiaries signatories thereto and Bank One,
Indianapolis, National Association, The CIT Group/Business Credit, Inc.
10.13+ 8% Subordinated Debenture of DRA, due July 31, 2004 in favor of GM
10.14+ Contingent Purchase Price Note of DRA, in favor of GM, dated July 31, 1994
10.15+ Lease by and between ANDRA L.L.C. and DRA, dated February 9, 1995
10.16+ Lease by and between Eagle I L.L.C. and DRA, Inc. dated August 11, 1995
10.17** Form of Indenture governing 85/8% Senior Notes Due 2007 among the Company, the Subsidiary
Guarantors and United States Trust Company of New York, as trustee, including form of Note
11.1 Computation of Per Share Earnings
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1+ Subsidiaries of Registrant
23.1 Consent of Ernst & Young (see page II-5)
23.2 Consent of Friedman & Fuller P.C. (see page II-6)
23.3 Consent of Dechert Price & Rhoads included in Exhibit 5.1
24.1* Power of Attorney included on Signature Page
25.1* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
</TABLE>
__________________
* Previously filed.
++ Incorporated by reference to Exhibit 10.12 to the Registration Statement on
Form S-1 (Registration No. 333-37675) (the "Form S-1 Registration
Statement") filed by the Company on October 10, 1997, registering the
issuance of the Company's Class A Common Stock, par value $.01 per share,
and Amendment Nos. 1, 2, 3, 4 and 5 thereto filed October 22, 1997,
November 21, 1997, November 26, 1997, December 9, 1997 and December 12,
1997, respectively.
+ Incorporated by reference to the Exhibit of the same number to the Form S-1
Registration Statement and Amendment Nos. 1, 2, 3, 4 and 5 thereto filed
October 22, 1997, November 21, 1997, November 26, 1997, December 9, 1997
and December 12, 1997, respectively.
II-2
<PAGE>
** Incorporated by reference to Exhibit 4.1 to Amendment No. 3, filed November
26, 1997, to the Registration Statement on Form S-1 (Registration No. 333-
37703) filed by the Company on October 10, 1997 registering the issuance in
an underwritten public offering of $145,000,000 aggregate principal amount
of the Company's Senior Notes Due 2007.
(b) Financial Statement Schedules:
Schedules not listed above are omitted because of the absence of the
conditions under which they are require or because the information required
by such omitted schedules is set forth in the financial statements or the
notes thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in the
registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which
was registered) and any deviation from the low
or high end of the estimated maximum offering
range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20%
change in the maximum aggregate offering price
set forth in the "Calculation of Registration
Fee" table in the effective registration
statement; and
(iii) to include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
(2) that, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) to remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrants pursuant to the foregoing provisions, or otherwise,
the registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business
II-3
<PAGE>
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Historical Financial Data" and to the use of our reports
on the consolidated financial statements of Delco Remy International, Inc. dated
September 5, 1997 (except for Note 16, as to which the date is December 16,
1997); on the financial statements of World Wide Automotive, Inc. dated October
16, 1997 (except for Note 10, as to which the date is December 16, 1997); on the
consolidated financial statements of Ballantrae Corporation dated October 17,
1997 (except for Note 12, as to which the date is December 16, 1997); and on the
financial statements of the Tractech Division of Titan Wheel International, Inc.
dated October 17, 1997, in the Amendment No. 1 to the Registration Statement on
Form S-4 and related Prospectus of Delco Remy International, Inc. for the
registration of the 10% Senior Subordinated Notes Due 2006.
ERNST & YOUNG LLP
Indianapolis, Indiana
December 22, 1997
II-5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report, dated October 15, 1997, on the financial statements of
Precision Alternator and Starter, Inc. as of and for the two years in the period
ended March 31, 1996, and our report, dated August 19, 1997, on the financial
statements of Certipro Division of Precision Alternator and Starter, Inc. as of
and for the year ended March 31, 1997, in the Amendment No. 1 to the
Registration Statement on Form S-4 and the related Prospectus of Delco Remy
International, Inc. for the registration of the Notes.
FRIEDMAN & FULLER, P.C.
December 19, 1997
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this Amendment No. 1 to the Registration Statement to be signed
on their behalf by the undersigned, thereunto duly authorized, in the City of
Anderson and State of Indiana on December 18, 1997.
DELCO REMY INTERNATIONAL, INC.
By: /s/ Harold K. Sperlich
-----------------------------
Harold K. Sperlich
Chairman
FOR THE REGISTRANTS AS SET FORTH ON THE TABLE OF
ADDITIONAL REGISTRANTS
By: /s/ David L. Harbert
-----------------------------
David L. Harbert
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on December 18, 1997.
<TABLE>
<CAPTION>
Delco Remy International, Inc.
<S> <C>
Harold K. Sperlich* Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer (principal
financial and principal
accounting officer)
E.H. Billig* Director
Richard M. Cashin, Jr.* Director
Michael A. Delaney* Director
James R. Gerrity* Director
Robert J. Schultz* Director
Thomas J. Snyder* Director
</TABLE>
__________
*For manual signature, see page II-13.
II-7
<PAGE>
<TABLE>
<CAPTION>
DELCO REMY AMERICA, INC.
<S> <C>
Harold K. Sperlich* Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer (principal
financial and principal
accounting officer)
E.H. Billig* Director
Richard M. Cashin, Jr. * Director
Michael A. Delaney * Director
James R. Gerrity* Director
Thomas J. Snyder* Director
REMY INTERNATIONAL, INC.
Harold K. Sperlich* Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer (principal
financial and principal
accounting officer)
E.H. Billig* Director
Richard M. Cashin, Jr.* Director
Michael A. Delaney* Director
James R. Gerrity* Director
Thomas J. Snyder* Director
</TABLE>
_______________________________
*For manual signature, see page II-13.
II-8
<PAGE>
<TABLE>
<CAPTION>
REMAN HOLDINGS, INC.
<S> <C>
Harold K. Sperlich* Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer (principal
financial and principal
accounting officer)
E.H. Billig* Director
Richard M. Cashin, Jr.* Director
Michael A. Delaney* Director
James R. Gerrity* Director
Thomas J. Snyder* Director
NABCO, INC.
Nicholas J. Bozich* President and Chief Executive
Officer (principal executive
officer)
David L. Harbert* Vice President, Treasurer
(principal financial and principal
accounting officer) and Director
Thomas J. Snyder* Director
THE A&B GROUP, INC.
John M. Mayfield * President (principal executive
officer)
David L. Harbert* Vice President, Treasurer
(principal financial and principal
accounting officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
</TABLE>
_______________________________
*For manual signature, see page II-13.
II-9
<PAGE>
<TABLE>
<CAPTION>
A&B ENTERPRISES, INC.
<S> <C>
John M. Mayfield* President (principal executive
officer)
David L. Harbert* Vice President, Treasurer
(principal financial and principal
accounting officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
DALEX, INC.
John M. Mayfield* President (principal executive
officer)
David L. Harbert* Vice President, Treasurer
(principal financial and principal
accounting officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
A&B CORES, INC.
John M. Mayfield* President (principal executive officer)
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
</TABLE>
_______________________________
*For manual signature, see page II-13.
II-10
<PAGE>
<TABLE>
<CAPTION>
R&L Tool Company, Inc.
<S> <C>
John M. Mayfield* President (principal executive officer)
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
MCA, INC. OF MISSISSIPPI
John M. Mayfield* President (principal executive officer)
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
POWER INVESTMENTS, INC.
J. Michael Jarvis* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
</TABLE>
______________________________
*For manual signature, see page II-13.
II-11
<PAGE>
<TABLE>
<CAPTION>
Franklin Power Products, Inc.
<S> <C>
J. Michael Jarvis* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
International Fuel Systems, Inc.
J. Michael Jarvis* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
MARINE DRIVE SYSTEMS, INC.
J. Michael Jarvis* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
</TABLE>
_______________________________
*For manual signature, see page II-13.
II-12
<PAGE>
<TABLE>
<CAPTION>
MARINE CORPORATION OF AMERICA
<S> <C>
J. Michael Jarvis* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer
(principal financial and principal
accounting officer) and Director
Thomas J. Snyder* Director
POWERBILT PRODUCTS, INC.
J. Michael Jarvis* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer (principal
financial and principal accounting
officer) and Director
Thomas J. Snyder* Director
WORLD WIDE AUTOMOTIVE, INC.
Richard L. Keister* President (principal executive officer)
and Director
David L. Harbert* Vice President, Treasurer
(principal financial and principal
accounting officer) and Director
Thomas J. Snyder* Director
By: /s/ Thomas J. Snyder
-----------------------------------
Thomas J. Snyder, Attorney-in-Fact
</TABLE>
________________________________
*For manual signature, see page II-13.
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------- ------------------
<S> <C> <C>
3.1+ Form Certificate of Incorporation of the Company, as amended
3.2+ By-laws of the Company
4.1++ Indenture, dated as of August 1, 1996, among the Company, certain of the
Company's subsidiaries signatories thereto and National City Bank, as trustee
5.1 Opinion of Dechert Price & Rhoads, counsel to the Company
5.2 Opinion of Porteous & White, counsel to Nabco, Inc.
5.3 Opinion of Young, Williams, Henderson & Fuselin P.A., counsel to The A&B
Group, Inc.; A&B Enterprises, Inc.; Dalex, Inc.; A&B Cores, Inc.; R&L Tool Company, Inc.; and MCA, Inc.
of Mississippi
5.4 Opinion of Stephen E. Plopper & Associates, counsel to Franklin Power Products, Inc.; Power Investments, Inc.;
International Fuel Systems, Inc.; Marine Corporation of America; and Powerbilt Products, Inc.
5.5 Opinion of Hunton & Williams, counsel to World Wide Automotive, Inc.
10.1+ Light Duty Starter Motor Supply Agreement, dated July 31, 1994, by and between Delco Remy America, Inc. ("DRA") and
General Motors Corporation ("GM")
10.2+ Heavy Duty Component Supply Agreement, dated July 31, 1994, by and between DRA and GM
10.3+ Distribution and Supply Agreement, dated July 31, 1994, by and between DRA and GM
10.4+ Trademark License, dated July 31, 1994, by and among DRA, DR International, Inc. and GM
10.5+ Tradename License Agreement, dated July 31, 1994, by and among DRA, DR International, Inc. and GM
10.6+ Partnership Agreement of Delco Remy Mexico S. de R.L. de C.V., dated April 17, 1997
10.7+ Joint Venture Agreement, dated , by and between Remy Korea Holdings, Inc. and S.C. Kim
10.8+ Securities Purchase and Holders Agreement, dated July 29, 1994, by and among the Company, CVC, WEP, MascoTech,
Harold K. Sperlich, James R. Gerrity and the individuals named therein as Management Investors
10.9+ Registration Rights Agreement, dated July 29, 1994, by and among the Company, CVC, WEP, MascoTech, Harold K.
Sperlich, James R. Gerrity and the individuals named therein as Management Investors
10.10+ Employment Agreement, dated July 31, 1994 by and between Delco Remy International, Inc. and Thomas J. Snyder
10.11+ Form of Fourth Amended and Restated Financing Agreement, dated as of , 1997, among the Company, certain of the
Company's subsidiaries signatories thereto and Bank One, Indianapolis, National Association, The CIT Group/Business
Credit, Inc.
10.13+ 8% Subordinated Debenture of DRA, due July 31, 2004 in favor of GM
10.14+ Contingent Purchase Price Note of DRA, in favor of GM, dated July 31, 1994
10.15+ Lease by and between ANDRA L.L.C. and DRA, dated February 9, 1995
10.16+ Lease by and between Eagle I L.L.C. and DRA, Inc. dated August 11, 1995
10.17** Form of Indenture governing 85/8% Senior Notes Due 2007 among the Company, the Subsidiary Guarantors and United
States Trust Company of New York, as trustee, including form of Note
11.1 Computation of Per Share Earnings
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1+ Subsidiaries of Registrant
23.1 Consent of Ernst & Young (see page II-5)
23.2 Consent of Friedman & Fuller P.C. (See page II-6)
23.3 Consent of Dechert Price & Rhoads included in Exhibit 5.1
24.1* Power of Attorney included on Signature Page
25.1* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
</TABLE>
________________
* Previously filed.
++ Incorporated by reference to Exhibit 10.12 to the Registration Statement on
Form S-1 (Registration No. 333-37675) (the "Form S-1 Registration
Statement") filed by the Company on October 10, 1997, registering the
issuance of the Company's Class A Common Stock, par value $.01 per share,
and Amendment Nos. 1, 2, 3, 4 and 5 thereto filed October 22, 1997,
November 21, 1997, November 26, 1997, December 9, 1997 and December 12,
1997, respectively.
+ Incorporated by reference to the Exhibit of the same number to the Form S-1
Registration Statement and Amendment Nos. 1, 2, 3, 4 and 5 thereto filed
October 22, 1997, November 21, 1997, November 26, 1997, December 9, 1997
and December 12, 1997, respectively.
** Incorporated by reference to Exhibit 4.1 to Amendment No. 3, filed November
26, 1997, to the Registration Statement on Form S-1 (Registration No. 333-
37703) (the "Debt Registration Statement") filed by the Company on October
10, 1997 registering the issuance in an underwritten public offering of
$145,000,000 aggregate principal amount of the Company's Senior Notes Due
2007.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF DECHERT PRICE & RHOADS]
December 19, 1997
Delco Remy International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
Re: Form S-4 Registration Statement
Registration No. 333-39243
--------------------------
Gentlemen and Ladies:
We have acted as counsel to Delco Remy International, Inc., a Delaware
corporation (the "Company"), Delco Remy America, Inc., a Delaware corporation
("DRA"), Reman Holdings, Inc., a Delaware corporation ("Reman"), Remy
International, Inc., a Delaware corporation ("Remy"), Marine Drive Systems,
Inc., a New Jersey corporation ("Marine Drive" and collectively with DRA, Reman,
and Remy, the "Relevant Subsidiaries"), The A&B Group, Inc., a Mississippi
corporation, A&B Enterprises, Inc., a Mississippi corporation, Dalex, Inc. a
Mississippi corporation, A&B Cores, Inc., a Mississippi corporation, MCA, Inc.
of Mississippi, a Mississippi corporation, R&L Tool Company, Inc., a Mississippi
corporation, Nabco, Inc. a Michigan corporation, Power Investments, Inc., an
Indiana corporation, Franklin Power Products, Inc., an Indiana corporation,
International Fuel Systems, Inc., an Indiana corporation, Marine Corporation of
America, Inc., an Indiana corporation, Powrbilt Products, Inc., a Texas
<PAGE>
corporation, and World Wide Automotive, Inc., a Virginia corporation (such
companies collectively with the Relevant Subsidiaries, the "Guarantors") in
connection with the preparation and filing of the Registration Statement on Form
S-4 (Registration No. 333-39243), originally filed on October 31, 1997, with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
and the Trust Indenture Act of 1939, as amended, as subsequently amended by an
amendment to be filed today (the "Registration Statement"), relating to the
proposed issuance of an aggregate of up to $140,000,000 principal amount of
105/8% Senior Subordinated Notes Due 2006 (the "Exchange Notes") of the Company
and guaranteed by the Guarantors (the "Exchange Guaranties"). The Exchange Notes
are to be issued in exchange for an equal aggregate principal amount of
Company's outstanding 105/8% Senior Subordinated Notes due 2006 (the "Existing
Notes") and the Guarantors' guaranties thereof pursuant to the Registration
Agreement among the Company, the Guarantors, Salomon Brothers Inc and Smith
Barney Inc. The Exchange Notes are to be issued pursuant to the terms of an
Indenture filed as Exhibit 4.1 to the Registration Statement (the "Indenture"),
among the Company, the Guarantors and National City Bank.
We have participated in the preparation of the Registration Statement
and have made such legal and factual examination and inquiry which we have
deemed advisable for the rendering of this opinion. In making our examination
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to all authentic
original documents of all documents submitted to us as copies. Based on the
foregoing, it is our opinion that:
1. The Exchange Notes have been duly authorized by the Company, and
when the Registration Statement has been declared effective, when the Exchange
Notes have been duly executed, authenticated and delivered in accordance with
the terms of the Indenture, and issued and delivered against exchange of the
Existing Notes in accordance with the terms set forth in the prospectus included
in the Registration Statement, the Exchange Notes will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, moratorium, reorganization or other similar laws
affecting creditors' rights or debtors' obligations and to general principles of
equity.
2. Each Exchange Guaranty issued by a Relevant Subsidiary has been
duly authorized by the respective Relevant Subsidiary and when the Registration
Statement has been declared effective, when the Exchange Notes have been duly
executed, authenticated and delivered in accordance with the terms of the
Indenture and when the Senior Notes have been issued and delivered against the
exchange of the Existing Notes in accordance with the terms set forth in the
prospectus included in the Registration Statement, the Exchange Guaranties will
constitute the legal, valid and binding obligation of each Relevant Subsidiary,
enforceable against each Relevant Subsidiary in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance, moratorium,
reorganization or other similar laws affecting creditors' rights or debtors'
obligations and to general principles of equity.
<PAGE>
The opinion expressed herein is rendered for your benefit in
connection with the transaction contemplated herein. The opinion expressed
herein may not be used or relied upon by any other person, nor may this letter
or any copies hereof be furnished to a third party, filed with a governmental
agency, quoted, cited or otherwise referred to without our prior written
consent, except as noted below.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus contained
therein, under the caption "Legal Matters." In giving such consent we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE>
Exhibit 5.2
[LETTERHEAD OF PORTEOUS & WHITE P.C.]
December 19, 1997
Delco Remy International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
Re: Form S-4 Registration Statement
Registration No. 333-39243
--------------------------
Gentlemen and Ladies:
We have acted as counsel to Nabco, Inc., a Michigan corporation, in
connection with the preparation and filing of the Registration Statement on Form
S-4 (Registration No. 333-39243), originally filed on October 31, 1997, with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
and the Trust Indenture Act of 1939, as amended, as subsequently amended by an
amendment to be filed today (the "Registration Statement"), relating to the
proposed issuance of an aggregate of up to $140,000,000 principal amount of
105/8% Senior Subordinated Notes Due 2006 (the "Exchange Notes") of the Company
and guaranteed by Delco Remy International, Inc., a Delaware corporation (the
"Company"), Delco Remy America, Inc., a Delaware corporation ("DRA"), Reman
Holdings, Inc., a Delaware corporation ("Reman"), Remy International, Inc., a
Delaware corporation ("Remy"), Marine Drive Systems, Inc., a New Jersey
corporation ("Marine Drive" and collectively with DRA,
<PAGE>
Reman, and Remy, the "Relevant Subsidiaries"), The A&B Group, Inc., a
Mississippi corporation, A&B Enterprises, Inc., a Mississippi corporation,
Dalex, Inc. a Mississippi corporation, A&B Cores, Inc., a Mississippi
corporation, MCA, Inc. of Mississippi, a Mississippi corporation, R&L Tool
Company, Inc., a Mississippi corporation, Nabco, Inc. a Michigan corporation,
Power Investments, Inc., an Indiana corporation, Franklin Power Products, Inc.,
an Indiana corporation, International Fuel Systems, Inc., an Indiana
corporation, Marine Corporation of America, Inc., an Indiana corporation,
Powrbilt Products, Inc., a Texas corporation, and World Wide Automotive, Inc., a
Virginia corporation (such companies collectively with the Relevant
Subsidiaries, the "Guarantors") (the "Exchange Guaranties"). The Exchange Notes
are to be issued in exchange for an equal aggregate principal amount of
Company's outstanding 105/8% Senior Subordinated Notes due 2006 (the "Existing
Notes") and the Guarantors' guaranties thereof pursuant to the Registration
Agreement among the Company, the Guarantors, Salomon Brothers Inc and Smith
Barney Inc. The Exchange Notes are to be issued pursuant to the terms of an
Indenture filed as Exhibit 4.1 to the Registration Statement (the "Indenture"),
among the Company, the Guarantors and National City Bank.
We have participated in the preparation of the Registration Statement
and have made such legal and factual examination and inquiry which we have
deemed advisable for the rendering of this opinion. In making our examination
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to all authentic
original documents of all documents submitted to us as copies. Based on the
foregoing, it is our opinion that:
1. The Exchange Notes have been duly authorized by the Company, and
when the Registration Statement has been declared effective, when the Exchange
Notes have been duly executed, authenticated and delivered in accordance with
the terms of the Indenture, and issued and delivered against exchange of the
Existing Notes in accordance with the terms set forth in the prospectus included
in the Registration Statement, the Exchange Notes will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, moratorium, reorganization or other similar laws
affecting creditors' rights or debtors' obligations and to general principles of
equity.
2. Each Exchange Guaranty issued by a Relevant Subsidiary has been
duly authorized by the respective Relevant Subsidiary and when the Registration
Statement has been declared effective, when the Exchange Notes have been duly
executed, authenticated and delivered in accordance with the terms of the
Indenture and when the Senior Notes have been issued and delivered against the
exchange of the Existing Notes in accordance with the terms set forth in the
prospectus included in the Registration Statement, the Exchange Guaranties will
constitute the legal, valid and binding obligation of each Relevant Subsidiary,
enforceable against each Relevant Subsidiary in accordance with its terms,
subject to applicable bankruptcy,
<PAGE>
insolvency, fraudulent conveyance, moratorium, reorganization or other similar
laws affecting creditors' rights or debtors' obligations and to general
principles of equity.
The opinion expressed herein is rendered for your benefit in
connection with the transaction contemplated herein. The opinion expressed
herein may not be used or relied upon by any other person, nor may this letter
or any copies hereof be furnished to a third party, filed with a governmental
agency, quoted, cited or otherwise referred to without our prior written
consent, except as noted below.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus contained
therein, under the caption "Legal Matters." In giving such consent we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
Very truly yours,
/s/ Porteous & White P.C.
<PAGE>
EXHIBIT 5.3
[LETTERHEAD OF YOUNG, WILLIAMS, HENDERSON & FUSELIER, P.A.]
December 19, 1997
Delco Remy International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
Re: Form S-4 Registration Statement
Registration No. 333-39243
--------------------------
Gentlemen and Ladies:
We have acted as counsel to The A&B Group, Inc., a Mississippi
corporation, A&B Enterprises, Inc., a Mississippi corporation, Dalex, Inc. a
Mississippi corporation, A&B Cores, Inc., a Mississippi corporation, MCA, Inc.
of Mississippi, a Mississippi corporation, R&L Tool Company, Inc., a Mississippi
corporation (each a "Subsidiary Guarantor" and collectively the "Subsidiary
Guarantors") in connection with the guarantee of up to $140,000,000 principal
amount of 10 5/8% Senior Subordinated Note Due 2006 (the "Exchange Notes") of
Delco Remy International, Inc. (the "Company") and guaranteed by the Subsidiary
Guarantors (each an :Exchange Guaranty: and collectively the "Exchange
Guaranties") in connection with which the Company has prepared and filed a
Registration Statement on Form S-4 (Registration No. 333-39243), originally
filed on October 31, 1997, with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Trust Indenture Act of 1939, as
amended,
<PAGE>
as subsequently amended by an amendment to be filed today (the "Registration
Statement"). The Exchange Notes are to be issued in exchange for an equal
aggregate principal amount of Company's outstanding 105/8% Senior Subordinated
Notes due 2006 (the "Existing Notes") and the Subsidiary Guarantors' guaranties
thereof. The Exchange Notes are to be issued pursuant to the terms of an
Indenture filed as Exhibit 4.1 to the Registration Statement (the "Indenture"),
among the Company, the Subsidiary Guarantors and National City Bank.
In making our examination we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to all authentic original documents of all documents submitted to
us as copies. Based on the foregoing, it is our opinion that:
1. The Exchange Notes have been duly authorized by the Company, and
when the Registration Statement has been declared effective, when the Exchange
Notes have been duly executed, authenticated and delivered in accordance with
the terms of the Indenture, and issued and delivered against exchange of the
Existing Notes in accordance with the terms set forth in the prospectus included
in the Registration Statement, the Exchange Notes will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, moratorium, reorganization or other similar laws
affecting creditors' rights or debtors' obligations and to general principles of
equity.
2. Each Exchange Guaranty issued by a Subsidiary Guarantor has been
duly authorized by the respective Subsidiary Guarantor and when the Registration
Statement has been declared effective, when the Exchange Notes have been issued
and delivered in accordance with the terms of the Indenture and when the Senior
Notes have been issued and delivered against the exchange of the Existing Notes
in accordance with the terms set forth in the prospectus included in the
Registration Statement, the Exchange Guaranties will constitute the legal, valid
and binding obligation of each Subsidiary Guarantor, enforceable against each
Subsidiary Guarantor in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization or
other similar laws affecting creditors' rights or debtors' obligations and to
general principles of equity.
The opinion expressed herein is rendered for your benefit in
connection with the transaction contemplated herein. The opinion expressed
herein may not be used or relied upon by any other person, nor may this letter
or any copies hereof be furnished to a third party, filed with a governmental
agency, quoted, cited or otherwise referred to without our prior written
consent, except as noted below.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus contained
therein, under the caption
<PAGE>
"Legal Matters." In giving such consent we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act.
Very truly yours,
/s/ Young, Williams, Henderson & Fuselier, P.A.
<PAGE>
EXHIBIT 5.4
[LETTERHEAD OF STEPHEN PLOPPER & ASSOCIATES, P.C.]
December 19, 1997
Delco Remy International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
Re: Form S-4 Registration Statement
Registration No. 333-39243
--------------------------
Gentlemen and Ladies:
We have acted as counsel to Power Investments, Inc., an Indiana
corporation, Franklin Power Products, Inc., an Indiana corporation,
International Fuel Systems, Inc., an Indiana corporation, Marine Corporation of
America, Inc., an Indiana corporation, and Powrbilt Products, Inc., a Texas
corporation (such companies collectively with the Relevant Subsidiaries, the
"Guarantors") in connection with the preparation and filing of the Registration
Statement on Form S-4 (Registration No. 333-39243), originally filed on October
31, 1997, with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and the Trust Indenture Act of 1939, as amended, as
subsequently amended by an amendment to be filed today (the "Registration
Statement"), relating to the proposed issuance of an aggregate of up to
$140,000,000 principal amount of 105/8% Senior Subordinated Notes Due 2006 (the
"Exchange Notes") of the Delco Remy International, Inc., a Delaware corporation
(the "Company") and
<PAGE>
guaranteed by the Guarantors (the "Exchange Guaranties"). The Exchange Notes are
to be issued in exchange for an equal aggregate principal amount of Company's
outstanding 105/8% Senior Subordinated Notes due 2006 (the "Existing Notes") and
the Guarantors' guaranties thereof pursuant to the Registration Agreement among
the Company, the Guarantors, Salomon Brothers Inc and Smith Barney Inc. The
Exchange Notes are to be issued pursuant to the terms of an Indenture filed as
Exhibit 4.1 to the Registration Statement (the "Indenture"), among the Company,
the Guarantors and National City Bank.
We have reviewed the Registration Statement and have made such legal
and factual examination and inquiry which we have deemed advisable for the
rendering of this opinion. In making our examination we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity to all authentic original documents of all
documents submitted to us as copies. Based on the foregoing, it is our opinion
that:
1. The Exchange Notes have been duly authorized by the Company, and
when the Registration Statement has been declared effective, when the Exchange
Notes have been duly executed, authenticated and delivered in accordance with
the terms of the Indenture, and issued and delivered against exchange of the
Existing Notes in accordance with the terms set forth in the prospectus included
in the Registration Statement, the Exchange Notes will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, moratorium, reorganization or other similar laws
affecting creditors' rights or debtors' obligations and the general principles
of equity.
2. Each Exchange Guaranty issued by a Guarantor has been duly
authorized by the respective Guarantor and when the Registration Statement has
been declared effective, when the Exchange Notes have been duly executed,
authenticated and delivered in accordance with the terms of the Indenture and
when the Senior Notes have been issued and delivered against the exchange of the
Existing Notes in accordance with the terms set forth in the prospectus included
in the Registration Statement, the Exchange Guaranties will constitute the
legal, valid and binding obligation of each Guarantor, enforceable against each
Guarantor in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, moratorium, reorganization or other similar
laws affecting creditors' rights or debtors' obligations and to general
principles of equity.
The opinion expressed herein is rendered for your benefit in
connection with the transaction contemplated herein. The opinion expressed
herein may not be used or relied upon by any other person, nor may this letter
or any copies hereof be furnished to a third party, filed with a governmental
agency, quoted, cited or otherwise referred to without our prior written
consent, except as noted below.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus contained
therein, under the caption "Legal Matters." In giving such consent we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
Very truly yours,
/s/ Stephen Plopper & Associates, P.C.
<PAGE>
Exhibit 5.5
[LETTERHEAD OF HUNTON & WILLIAMS]
December 22, 1997
Delco Remy International, Inc.
2909 Enterprise Drive
Anderson, IN 46013
World Wide Automotive, Inc.
Winchester, VA 22601
FORM S-4 REGISTRATION STATEMENT
-------------------------------
Gentlemen and Ladies:
We have acted as Virginia counsel to World Wide Automotive, Inc., a
Virginia corporation ("Guarantor") in connection with the preparation and filing
by Delco Remy International, Inc., a Delaware corporation (the "Company"), the
Guarantor and other guarantors of the Registration Statement on Form S-4 filed
on October 31, 1997, with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Trust Indenture Act of 1939, as
amended, as subsequently amended by an amendment to be filed today (the
"Registration Statement") relating to the proposed issuance of an aggregate of
$140,000,000 principal amount of 105/8% Senior Subordinated Notes Due 2006 (the
"Notes") of the Company to be guaranteed by the Guarantor (the "Guaranty") and
by other guarantors. The Notes are to be
<PAGE>
issued pursuant to the terms of an Indenture substantially in the form filed as
Exhibit 4.1 to the Registration Statement, as supplemented prior to the date
hereof (the "Indenture") between the Company, certain of the Company's
subsidiaries and National City Bank, as Trustee. The Guaranty is contained in
the Indenture.
We have made such legal and factual examination and inquiry as we have
deemed advisable for the rendering of this opinion. In making our examination we
have assumed the genuiness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to all authentic original
documents of all documents submitted to us as copies. Based on the foregoing, it
is our opinion that the Guarantor has authorized the issuance of the Guaranty
and when the Guaranty has been approved, executed, authenticated and delivered
in accordance with the terms of the Indenture and when the Notes have been
issued in the manner and for the consideration set forth in the Registration
Statement, the Guaranty will constitute the legal, valid and binding obligation
of the Guarantor, enforceable against the Guarantor in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
moratorium, reorganization or other similar laws affecting creditors' rights or
debtors' obligations and to general principles of equity.
The opinions expressed herein are rendered for your benefit in
connection with the transactions contemplated hereby. The opinions expressed
herein may not be used or relied upon by any person nor may this letter or any
copies hereof be furnished to a third party, filed with a governmental agency,
quoted, cited or otherwise referred to without our prior written consent, except
as provided below.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
Exhibit 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED
FOR THE YEAR ENDED JULY 31 OCRTOBER 31
-----------------------------------------------------------------------------------
1995 1996 1997 1996 1997
------------- -------------- -------------- ---------------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Primary
Average shares outstanding..................... 14,462 15,271 15,081 15,175 15,081
Net effect of dilutive stock warrants--based
on the treasury stock method using the
offering price................................ 1,677 1,677 1,677 1,677 1,677
Net effect of stock compensation-- based on
the treasury stock method using the offering
price......................................... 587 587 391 587 404
Total.......................................... 16,726 17,535 17,149 17,439 17,162
=========== =========== ============= ============= ==========
Net income..................................... $ 6,963 $ (4,841) $ (14,296) $ 270 $ 3,062
=========== =========== ============= ============= ==========
Per share amount............................... $ .42 $ (.28) $ (.83) $ 0.02 $ .18
=========== =========== ============= ============= ==========
Pro Forma
Average shares outstanding..................... 15,081 15,081
Net effect of dilutive stock warrants--based
on the treasury stock method using the
offering price................................ 1,677 1,677
Net effect of stock compensation--based on the
treasury stock method using the offering
price......................................... 391 404
Assumed conversion of 11% junior subordinated
notes......................................... 2,027 2,027
Assumed issuance of Class A common shares as a
result of the acquisition of Ballantrae
Corporation................................... 1,845 1,845
Assumed issuance of Class A common shares as a
result of the Offering........................ 4,000 4,000
------------- ----------
Total.......................................... 25,021 25,034
============= ==========
Income (loss) from continuing operations....... (1,326) 5,108
============= ==========
Per share amount............................... (.05) .20
============= ==========
</TABLE>
Note: Fully diluted earnings per share is not presented as there are no
differences from the primary earnings per share.
<PAGE>
Exhibit 12.1
DELCO REMY INTERNATIONAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED JULY 31 ENDED OCTOBER 31
------------------------------------------------------- ----------------------------------------
Pro Forma Pro Forma
1995 1996 1997 1997 1996 1997 1997
---------- ----------- ------------- --------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from
continuing operations
before income taxes
(benefit), preferred
dividend requirement of
subsidiary and minority
interest.................. $18,569 $13,312 $(10,737) $ 645 $ 5,668 $ 6,686 $ 9,278
Total fixed charges........ 21,076 31,346 42,842 38,751 10,413 11,538 9,783
Less preferred stock
dividend requirement...... (2,328) (2,527) (2,747) -- (692) (687) --
Less interest capitalized
during period............. -- (393) -- -- -- -- --
---------- ----------- ------------ -------------- ---------- ----------- ------------
Total earnings $37,317 $41,738 $ 29,358 $39,396 $15,389 $17,537 $19,061
========== =========== ============ ============== ========== =========== ============
FIXED CHARGES:
Interest expense........... $18,432 $27,367 $ 38,774 $36,840 $ 9,391 $10,521 $ 9,305
Interest capitalized
during period............. -- 393 -- -- -- -- --
Preferred stock dividend
requirement............... 2,328 2,527 2,747 -- 692 687 --
Implicit interest in rent
expense................... 316 1,059 1,321 1,911 330 330 478
--------- ----------- ------------ --------------- ---------- ----------- ------------
Total fixed charges......... $21,076 $31,346 $ 42,842 $38,751 $10,413 $11,538 $ 9,783
========== =========== ============ =============== ========== =========== ============
RATIO OF EARNINGS TO FIXED 1.8x 1.3x --(a) 1.0x 1.5x 1.5x 1.9x
CHARGES....................
========== =========== ============ =============== ========== =========== ============
</TABLE>
(a) The deficiency of earnings to fixed charges was $13.5 million.
Excluding the restructuring charge, the ratio of earnings to fixed
charges would have been 1.5x.
<PAGE>
EXHIBIT 99.1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 PM., NEW YORK CITY TIME, ON JANUARY 29,
1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF EXISTING NOTES
MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
DELCO REMY INTERNATIONAL, INC.
LETTER OF TRANSMITTAL
105/8% SENIOR SUBORDINATED NOTES DUE 2006
TO: NATIONAL CITY BANK, THE EXCHANGE AGENT
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
National City Bank National City Bank
P.O. Box 94720 4100 West 150/th/ Street
Cleveland, OH 44101-4720 3/rd/ Floor North Annex - Corporate Trust Operations
Cleveland, OH 44135
By Hand: By Facsimile:
National City Bank (216) 476-8508
4100 West 150/th/ Street
3/rd/ Floor North Annex - Corporate Trust Operations Confirm by telephone:
Cleveland, OH 44135 (800) 622-6757
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF
INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT
CONSTITUTE
A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL
SHOULD
BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR EXISTING NOTES
PURSUANT TO THE
EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR EXISTING NOTES TO
THE
EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
The undersigned acknowledges receipt of the Prospectus dated December 23,
1997 (the "Prospectus") of DELCO REMY INTERNATIONAL, INC. (the "Company") and
this Letter of Transmittal (the "Letter of Transmittal"), which together
constitute the Company's Offer to Exchange (the "Exchange Offer") $1,000
principal amount of its 105/8% Senior Subordinated Notes Due 2006 (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which the
Prospectus is a part, for each $1,000 principal amount of its outstanding 105/8%
Senior Subordinated Notes Due 2006 (the "Existing Notes"), of which $140,000,000
principal amount is outstanding, upon the terms and conditions set forth in the
Prospectus. Other capitalized terms used but not defined herein have the meaning
given to them in the Prospectus.
For each Existing Note accepted for exchange, the holder of such Existing
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Existing Note. Interest on the Exchange Notes will accrue from
the last interest payment date on which interest was paid on the Existing Notes
surrendered in exchange therefor or, if no interest has been paid on the
Existing Notes, from the date of original issue of the Existing Notes. Holders
of Existing Notes accepted for exchange will be deemed to have waived the right
to receive any other payments or accrued interest on the Existing Notes. The
Company reserves the right, at any time or from time to time, to extend the
Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date to which the Exchange Offer is extended. The
Company shall notify holders of the Existing Notes of any extension by means of
a press release or other public announcement prior to 9:00 A.M., New York City
time, on the next business day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be used by Holders if: (i) certificates
representing Existing Notes are to be physically delivered to the Exchange Agent
herewith by Holders; (ii) tender of Existing Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company
("DTC"), pursuant to the procedures set forth in the Prospectus under "The
Exchange Offer--Procedures for Tendering Existing Notes" by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Existing Notes; or (iii) tender of Existing
Notes is to be made according to the guaranteed delivery procedures set forth in
the prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term "Holder" with respect to the Exchange Offer means any person: (i)
in whose name Existing Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered Holder; or (ii) whose Existing Notes are held of record by DTC who
desires to deliver such Existing Notes by book-entry transfer at DTC. The
undersigned has completed, executed and delivered this Letter of Transmittal to
indicate the action the undersigned desires to take with respect to the Exchange
Offer.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 11 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER
AND TENDER THEIR EXISTING NOTES MUST COMPLETE THIS
LETTER OF TRANSMITTAL IN ITS ENTIRETY.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF 10-5/8% SENIOR SUBORDINATED NOTES DUE 2006 (EXISTING NOTES)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGREGATE
PRINCIPAL PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE AMOUNT AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* REGISTERED BY TENDERED (IF
CERTIFICATE(S) LESS THAN
ALL)**
- ----------------------------------------------------------------------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by Holders tendering by book-entry transfer.
** Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Existing Notes will be deemed to have tendered the
entire aggregate principal amount represented by the column labeled
"Aggregate Principal Amount Represented by Certificate(s)." If the space
provided above is inadequate, list the certificate numbers and principal
amounts on a separate signed schedule and affix the list to this Letter of
Transmittal.
- --------------------------------------------------------------------------------
The minimum permitted tender is $1,000 in principal amount of Existing Notes.
All other tenders must be integral multiples of $1,000.
<PAGE>
________________________________________________________________________________
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Existing Notes in a principal amount
not tendered or not accepted for exchange, or Exchange Notes issued in exchange
for Existing Notes accepted for exchange, are to be issued in the name of
someone other than the undersigned, or if the Existing Notes tendered by book-
entry transfer that are not accepted for exchange are to be credited to an
account maintained by DTC.
Issue Certificate(s) to:
Name:___________________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
(include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security No.)
________________________________________________________________________________
________________________________________________________________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be accepted ONLY if certificates for Existing Notes in a principal amount not
tendered or not accepted for exchange, are to be sent to someone other than the
undersigned, or to the undersigned at an address other than that shown above.
Mail to:
Name:___________________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
(include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security No.)
________________________________________________________________________________
CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_____________________________________________
DTC Book-Entry Account No.:________________________________________________
Transaction Code No.:______________________________________________________
CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s):___________________________________________
Window Ticket Number (if any):_____________________________________________
Date of Execution of Notice of Guaranteed Delivery:________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number:____________ Transaction Code Number:_______________
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:______________________________________________________________________
Address:___________________________________________________________________
CHECK HERE IF YOU ARE A BROKER-DEALER AND ARE RECEIVING EXCHANGE NOTES
FOR YOUR OWN ACCOUNT IN EXCHANGE FOR EXISTING NOTES THAT WERE ACQUIRED AS
A RESULT OF MARKET MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES.
Name:______________________________________________________________________
Address:___________________________________________________________________
<PAGE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Existing Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Existing Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to the Existing Notes
tendered hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent its agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as the agent of the Company and as Trustee under the
Indenture for the Existing Notes and Exchange Notes) with respect to the
tendered Existing Notes with full power of substitution to (i) deliver
certificates for such Existing Notes to the Company, or transfer ownership of
such Existing Notes on the account books maintained by DTC and deliver all
accompanying evidence of transfer and authenticity to, or upon the order of, the
Company and (ii) present such Existing Notes for transfer on the books of the
Company and receive all benefits and otherwise exercise all rights of beneficial
ownership of such Existing Notes, all in accordance with the terms and subject
to the conditions of the Exchange Offer. The power of attorney granted in this
paragraph shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Existing Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, when the same are acquired by the Company. The
undersigned hereby further represents that any Exchange Notes acquired in
exchange for Existing Notes tendered hereby will have been acquired in the
ordinary course of business of the Holder receiving such Exchange Notes, whether
or not such person is the Holder, that neither the Holder nor any such other
person has any arrangement or understanding with any person to participate in
the distribution of such Exchange Notes and that neither the Holder nor any such
other person is an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company or any of its subsidiaries.
The undersigned also acknowledges that this Exchange Offer is being made
based on certain interpretations issued by the staff of the Securities and
Exchange Commission (the "SEC") to third parties in unrelated transactions.
Based on those interpretations, the Company believes that the Exchange Notes
issued in exchange for the Existing Notes pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangements or understandings with any person to
participate in the distribution of such Exchange Notes. If the undersigned is
not a broker-dealer, the undersigned represents that it is not engaged in, and
does not intend to engage in, a distribution of Exchange Notes. If the
undersigned is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Existing Notes that were acquired as a result of market-
making activities or other trading activities, it acknowledges that it will
deliver a prospectus in connection with any resale of such Exchange Notes:
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete. the assignment, transfer and purchase of the Existing
Notes tendered hereby. All authority conferred or agreed to be conferred by this
Letter of Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns, trustees in bankruptcy or other legal
representatives of the undersigned. This tender may be withdrawn only in
accordance with the procedures set forth in "The Exchange Offer--Withdrawal
Rights" section of the Prospectus.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Existing Notes when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
If any tendered Existing Notes are not accepted for exchange pursuant to
the Exchange Offer for any reason, certificates for any such unaccepted Existing
Notes will be returned (except as noted below with respect to tenders through
DTC), without expense, to the undersigned at the address shown below or at a
different address as may be indicated under "Special Delivery Instructions" as
promptly as practicable after the Expiration Date.
The undersigned acknowledges that tenders of Existing Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering Existing Notes" in the Prospectus and in the instructions hereto will
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Payment Instructions," please
issue the certificates representing the Exchange Notes issued in exchange for
the Existing Notes accepted for exchange and return any Existing Notes not
tendered or not exchanged in the name(s) of the undersigned (or in either such
event in the case of the Existing Notes tendered through DTC, by credit to the
undersigned's account, at DTC). Similarly, unless otherwise indicated under
"Special Delivery Instructions," please send the certificates representing the
Exchange Notes issued in exchange for the Existing Notes accepted for exchange
and any certificates for Existing Notes not tendered or not exchanged (and
accompanying documents, as appropriate) to the undersigned at the address shown
below the undersigned's signature(s), unless, in either event, tender is being
made through DTC. In the event that both "Special Payment Instructions" and
"Special Delivery Instructions" are completed, please issue the certificates
representing the Exchange Notes issued in exchange for the Existing Notes
accepted for exchange and return any Existing Notes not tendered or not
exchanged in the name(s) of, and send said certificates to, the person(s) so
indicated. The Company has no obligation pursuant to the "Special Payment
Instructions" and "Special Delivery Instructions" to transfer any Existing Notes
from the name of the registered Holder(s) thereof if the Company does not accept
for exchange any of the Existing Notes so tendered.
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT
EXISTING NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X___________________________________________________ ____________
Date
X___________________________________________________ ____________
Signature(s) of Registered Holder(s) Date
Or Authorized Signatory
Area Code and Telephone Number______________________
The above lines must be signed by the registered Holder(s) of Existing
Notes as their name(s) appear(s) on the Existing Notes or, if the Existing Notes
are tendered by a participant in DTC, as such participant's name appears on a
security position listing as the owner of Existing Notes, or by person(s)
authorized to become registered Holder(s) by a properly completed bond power
from the registered Holder(s), a copy of which must be transmitted with this
Letter of Transmittal. If Existing Notes to which this Letter of Transmittal
relates are held of record by two or more joint Holders, then all such holders
must sign this Letter of Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person must (i)
set forth his or her full title below and (ii) unless waived by the Company,
submit evidence satisfactory to the Company of such person's authority to act.
See Instruction 4 regarding the completion of this Letter of Transmittal printed
below.
Name:___________________________________________________________________________
(Please Print)
Capacity:_______________________________________________________________________
Address:________________________________________________________________________
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 4)
_____________________________________________________________
(Authorized Signature)
_____________________________________________________________
(Title)
_____________________________________________________________
(Name of Firm)
Dated:__________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND EXISTING NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter is to be completed by noteholders, either if
certificates are to be forwarded herewith or if tenders are to be made pursuant
to the procedures for delivery by book-entry transfer set forth in "The Exchange
Offer--Book-Entry Transfer" section of the Prospectus. Certificates for all
physically tendered Existing Notes, or Book-Entry Confirmation, as the case may
be, as well as a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile hereof) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at the address set
forth herein on or prior to the Expiration Date, or the tendering holder must
comply with the guaranteed delivery procedures set forth below. Existing Notes
tendered hereby must be in denominations of principal amount of maturity of
$1,000 and any integral multiple thereof.
Noteholders whose certificates for Existing Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Existing Notes pursuant to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined in Instruction 4 below), (ii) prior to the
Expiration Date, the Exchange Agent must receive from such Eligible Institution
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Existing Notes and the amount of Existing
Notes tendered, stating that the tender is being made thereby and guaranteeing
that within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Existing Notes, or a Book-Entry Confirmation, and any other
documents required by this Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Existing Notes, in proper form for transfer, or Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter of Transmittal, the Existing Notes
and all other required documents is at the election and risk of the tendering
holders, but the delivery will be deemed made only when actually received or
confirmed by the Exchange Agent. If Existing Notes are sent by mail, it is
suggested that the mailing be made sufficiently in advance of the Expiration
Date to permit the delivery to the Exchange Agent prior to 5:00 p.m. New York
City time, on the Expiration Date.
See "The Exchange Offer" section in this Prospectus.
2. TENDER BY HOLDER. Only a holder of Existing Notes may tender such
Existing Notes in the Exchange Offer. Any beneficial holder of Existing Notes
who is not the registered holder and who wishes to tender should arrange with
the registered holder to execute and deliver this Letter of Transmittal on his
or her behalf or must, prior to completing and executing this Letter of
Transmittal and delivering his or her Existing Notes, either make appropriate
arrangements to register ownership of the Existing Notes in such holder's name
or obtain a properly completed bond power from the registered holder.
3. PARTIAL TENDERS. Tenders of Existing Notes will be accepted only in
integral multiples of $1,000. If less than the entire principal amount of any
Existing Notes is tendered, the tendering holder should fill in the principal
amount tendered in the fourth column of the box entitled "Description of 105/8%
Senior Subordinated Notes Due 2006 (Existing Notes)" above. The entire principal
amount of Existing Notes delivered to the Exchange Agent will be deemed to have
been tendered unless otherwise indicated. If the entire principal amount of all
Existing Notes is not tendered, then Existing Notes for the principal amount of
Existing Notes not tendered and a certificate or certificates representing
Exchange Notes issued in exchange for any Existing Notes accepted will be sent
to the Holder at his or her registered address, unless a different address is
provided in the appropriate box on this Letter of Transmittal promptly after the
Existing Notes are accepted for exchange.
4. SIGNATURES ON THIS LETTER OF TRANSMITTAL; POWERS OF ATTORNEY AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the registered holder of the Existing Notes tendered hereby, the signature
must correspond exactly with the name as written on the face of the certificates
without any change whatsoever.
If any tendered Existing Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates.
When this Letter of Transmittal is signed by the registered holder or
holders of the Existing Notes specified herein and tendered hereby, no
endorsements of certificates or separate powers of attorney are required. If,
however, the Exchange Notes are to be issued, or any untendered Existing Notes
are to be reissued, to a person other than the registered holder, then
endorsements of any certificates transmitted hereby or separate powers of
attorney are required. Signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the names on the registered holder or
holders appear(s) on the certificate(s) and signatures on such certificate(s)
must be guaranteed by an Eligible Institution.
<PAGE>
If this Letter of Transmittal or any certificates or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted.
Endorsements on certificates for Existing Notes or signatures on powers of
attorney required by this Instruction 4 must be guaranteed by a firm which is a
participant in a recognized signature guarantee medallion program ("Eligible
Institutions").
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Existing Notes are tendered (i) by a registered holder of
Existing Notes (which term, for purposes of the Exchange Offer, includes any
participant in the Book-Entry Transfer Facility system whose name appears on a
security position listing as the holder of such Existing Notes) who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter of Transmittal, or (ii) for the account of an
Eligible Institution.
5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which Exchange
Notes or substitute Existing Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal (or in the case of
tender of Existing Notes through DTC, if different from DTC). In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated. Noteholders tendering
Existing Notes by book-entry transfer may request that Existing Notes not
exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such noteholder may designate hereon. If no such instructions are
given, such Existing Notes not exchanged will be returned to the name and
address of the person signing this Letter of Transmittal.
6. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
holder whose offered Existing Notes are accepted for exchange must provide the
Company (as payer) with his, her or its correct Taxpayer Identification Number
("TIN"), which, in the case of an exchanging holder who is an individual, is his
or her social security number. If the Company is not provided with the correct
TIN or an adequate basis for exemption, such holder may be subject to a $50
penalty imposed by the Internal Revenue Service (the "IRS"), and payments made
with respect to Existing Notes purchased pursuant to the Exchange Offer may be
subject to backup withholding at a 31 % rate. If withholding results in an
overpayment of taxes, a refund may be obtained. Exempt holders (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and reporting requirements. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9."
To prevent backup withholding, each exchanging holder must provide his, her
or its correct TIN by completing the Substitute Form W-9 enclosed herewith,
certifying that the TIN provided is correct (or that such Holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has been notified by the IRS that he, she or it is subject to backup withholding
as a result of a failure to report all interest or dividends, or (iii) the IRS
has notified the holder that he, she or it is no longer subject to backup
withholding. In order to satisfy the Exchange Agent that a foreign individual
qualifies as an exempt recipient, such holder must submit a statement signed
under penalty of perjury attesting to such "exempt" status. Such statements may
be obtained from the Exchange Agent. If the Existing Notes are in more than one
name or are not in the name of the actual owner, consult the Substitute Form W-9
for information on which TIN to report. If you do not provide your TIN to the
Company within 60 days, backup withholding will begin and continue until you
furnish your TIN to the Company.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Existing Notes pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Existing Notes for
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be registered or issued in the name of, any person other than the
registered holder of the Existing Notes tendered hereby, or if tendered Existing
Notes are registered in the name of any person other than the person signing
this Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Existing Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
on any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted
herewith, the amount of such transfer taxes will be billed directly to such
tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Existing Notes listed in this letter.
8. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify specified conditions in the Exchange Offer in the case of any
Existing Notes tendered.
9. NO CONDITIONAL TRANSFERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Existing Notes, by
execution of this Letter of Transmittal, shall waive any right to receive notice
of the acceptance of their Existing Notes for "exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of
Existing Notes nor shall any of them incur any liability for failure to give any
such notice.
10. MUTILATED, LOST, STOLEN OR DESTROYED EXISTING NOTES. Any tendering
holder whose Existing Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated herein for further
instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance for additional copies of the Prospectus, this Letter of
Transmittal and the Notice of Guaranteed Delivery may be directed to the
Exchange Agent at the address specified in the Prospectus.
<PAGE>
(DO NOT WRITE IN THE SPACE BELOW)
CERTIFICATE Entering Notes Existing Notes
Surrendered Tendered Accepted
----------- -------- --------
_________________________ ________________________ ________________________
_________________________ ________________________ ________________________
_________________________ ________________________ ________________________
Delivery Prepared
___________________ Checked By
___________________ Date
________________________________
PAYER'S NAME: DELCO REMY INTERNATIONAL, INC.
<TABLE>
<CAPTION>
<S> <C>
___________________________________________________________________________________________________________________________________
Name (if joint names, list first and circle the name of the person or entity whose
number you enter in Part I below. See instructions if your name has changed.)
______________________________________________________________________________________
Address_____________________________________________________________________________
SUBSTITUTE City, state and ZIP code____________________________________________________________
Form W-9 List account number(s) here (optional)______________________________________________
______________________________________________________________________________________
DEPARTMENT OF THE TREASURY PART 1-- PLEASE PROVIDE YOUR TAXPAYER Social security number
INTERNAL REVENUE SERVICE IDENTIFICATION NUMBER ("TIN") IN THE BOX AT or TIN
RIGHT AND CERTIFY BY SIGNING AND DATING
BELOW. ________________________
______________________________________________________________________________________
PART 2--Check the box if you are NOT subject to backup withholding under the
provisions of section 3408(a)(1)(C) of the Internal Revenue Code because (1) you
PAYER'S REQUEST FOR TIN have not been notified that you are subject to backup withholding as a result of
failure to report all interest or dividends or (2) the Internal Revenue Service has
notified you that you are no longer subject to backup withholding.
______________________________________________________________________________________
CERTIFICATION--UNDER THE PENALTY OF PERJURY, PART 3 -- AWAITING TIN
I CERTIFY THAT THE INFORMATION PROVIDED ON
THIS FORM IS TRUE, CORRECT AND COMPLETE.
Signature___________________________________
Date________________________________________
___________________________________________________________________________________________________________________________________
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER OR SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
105/8% SENIOR SUBORDINATED NOTES DUE 2006
DELCO REMY INTERNATIONAL, INC.
As set forth in the Prospectus dated December 23, 1997 (the "Prospectus")
of DELCO REMY INTERNATIONAL, INC. (the "Company") and in the accompanying Letter
of Transmittal and instructions thereto (the "Letter of Transmittal"), this form
or one substantially equivalent hereto must be used to accept the Company's
offer to exchange (the "Exchange Offer") all of its outstanding 105/8% Senior
Subordinated Notes Due 2006 (the "Existing Notes") for its 105/8% Senior
Subordinated Notes Due 2006, which have been registered under the Securities Act
of 1933, as amended (the "Exchange Notes"), if certificates for the Existing
Notes are not immediately available or if the Existing Notes, the Letter of
Transmittal or any other documents required thereby cannot be delivered to the
Exchange Agent, or the procedure for book-entry transfer cannot be completed,
prior to 5:00P.M., New York City time, on the Expiration Date (as defined in the
Prospectus). This form may be delivered by an Eligible Institution by hand or
transmitted by facsimile transmission, overnight courier or mail to the Exchange
Agent as set forth below. Capitalized terms used but not defined herein have the
meaning given to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON JANUARY 29,
1998, UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF EXISTING
NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION
DATE.
TO: NATIONAL CITY BANK, THE EXCHANGE AGENT
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
National City Bank National City Bank
P.O. Box 94720 4100 West 150th Street
Cleveland, OH 44101-4720 3rd Floor North Annex - Corporate
Trust Operations
Cleveland, OH 44135
By Hand: By Facsimile:
National City Bank (216) 476-8508
4100 West 150th Street
3rd Floor North Annex - Corporate
Trust Operations Confirm by telephone:
Cleveland, OH 44135 (800) 622-6757
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID
DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal to be used to tender Existing Notes is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the Letter
of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to DELCO REMY INTERNATIONAL, INC., a
Delaware corporation (the "Company"), upon the terms and subject to the
conditions set forth in the Prospectus and the Letter of Transmittal (which
together constitute the "Exchange Offer"), receipt of which is hereby
acknowledged, $ principal amount of Existing Notes pursuant to the
guaranteed delivery procedures set forth in Instruction 1 of the Letter of
Transmittal.
The undersigned acknowledges that tenders of Existing Notes will be
accepted only in principal amounts equal to $1,000 or integral multiples
thereof. The undersigned acknowledges that tenders of Existing Notes pursuant to
the Exchange Offer may not be withdrawn after 5:00 p.m., New York City time, on
the Expiration Date.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assignees, trustees in bankruptcy and
other legal representatives of the undersigned.
NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW.
<TABLE>
<S> <C>
Certificate No(s). for Existing Notes (if available) Name(s) of Record Holder(s)
__________________________________________________________ ______________________________________________________________
__________________________________________________________ ______________________________________________________________
PLEASE PRINT OR TYPE
Principal Amount of Existing Notes Address_______________________________________________________
__________________________________________________________ ______________________________________________________________
Area Code and Tel. No.________________________________________
Signature(s)
______________________________________________________________
Dated:________________________________________________________
If Existing Notes will be delivered by book-entry
transfer at the Depository Trust Company, Depository
Account No.
______________________________________________________________
</TABLE>
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Existing Notes exactly as its (their) name(s) appear on
certificates for Existing Notes or on a security position listing as the owner
of Existing Notes, or by person(s) authorized to become registered holder(s) by
endorsements and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer or other person acting in a fiduciary or representative capacity,
such person must provide the following information:
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):________________________________________________________________________
Capacity:_______________________________________________________________________
Address(es):____________________________________________________________________
2
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., or a commercial bank
or trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby (a)
represents that the above named person(s) "own(s)" the Existing Notes tendered
hereby within the meaning of Rule 14e-4 under the Exchange Act, (b) represents
that such tender of Existing Notes complies with Rule 14e-4 under the Exchange
Act and (c) guarantees that delivery to the Exchange Agent of certificates for
the Existing Notes tendered hereby, in proper form for transfer (or confirmation
of the book-entry transfer of such Existing Notes into the Exchange Agent's
Account at the Depository Trust Company, pursuant to the procedures for book-
entry transfer set forth in the Prospectus), with delivery of a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) with any required signatures and any other required documents, will be
received by the Exchange Agent at one of its addresses set forth above within
five New York Stock Exchange ("NYSE") trading days after the execution of this
Notice of Guaranteed Delivery.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL
AND EXISTING NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME PERIOD
SET FORTH AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE
UNDERSIGNED.
<TABLE>
<S> <C>
Name of Firm ________________________ ________________________________________
Authorized Signature
Address ____________________________ Name ___________________________________
Please Print or Type
____________________________________ Title __________________________________
Zip Code
Area Code and Tel. No. _____________ Date ___________________________________
Dated: _____________________________
</TABLE>
NOTE: DO NOT SEND EXISTING NOTES WITH THIS FORM; EXISTING NOTES SHOULD BE SENT
WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE AGENT
WITHIN FIVE NYSE TRADING DAYS AFTER THE EXECUTION OF THIS NOTICE OF GUARANTEED
DELIVERY.
3
