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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999 COMMISSION FILE NO. 1-13683
DELCO REMY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1909253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2902 ENTERPRISE DRIVE
ANDERSON, INDIANA 46013
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (765)778-6499
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock - Class A New York Stock Exchange
8 5/8% Senior Note Due 2007 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes X No___
-
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-
AFFILIATES OF THE REGISTRANT.
Market value of common shares outstanding
As of September 23, 1999
------------------------
Common Stock - Class A $81,456,259
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Number of common shares outstanding
As of September 23, 1999
------------------------
Common Stock - Class A 18,118,058
Common Stock - Class B 6,278,055
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the 1999 Proxy Statement furnished to Shareholders -- Part III.
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DELCO REMY INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
JULY 31, 1999
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 88
PART III
Item 10. Directors and Executive Officers of the Registrant 88
Item 11. Executive Compensation 88
Item 12. Security Ownership of Certain Beneficial Owners and Management 88
Item 13. Certain Relationships and Related Transactions 88
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 89
SIGNATURES 91
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PART I
ITEM 1 BUSINESS
Delco Remy International, Inc. (the "Company"), headquartered in Anderson,
Indiana, is a leading global manufacturer and remanufacturer of original
equipment manufacturer ("OEM") and aftermarket 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, torque convertors,
traction control systems and fuel systems which are principally sold or
distributed to OEMs for both original equipment manufacture and aftermarket
operations, as well as to warehouse distributors and retail automotive parts
chains. The Company serves the aftermarket and the OEM market, principally in
North America, Europe, Latin America and Asia- Pacific.
In 1994, 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"). The Company completed its initial public offering on December
22,1997 (the "Offering").
Since the GM Acquisition, the Company has completed eleven strategic
acquisitions, substantially increasing the Company's aftermarket remanufacturing
operations, and entered into five global joint ventures.
During fiscal year 1999, the Company completed several strategic
acquisitions and alliances, as follows:
. In November 1998, the Company purchased 100% of the common stock of
Williams Technologies, Inc. ("Williams"), a leading remanufacturer of
automatic transmissions and torque converters for automotive and
medium and heavy duty truck applications. The acquisition of Williams
will expand the Company's sales of powertrain/drivetrain components by
taking advantage of the growing use of remanufactured automatic
transmissions for vehicle repair.
. In December 1998, the Company formed a joint venture with Navistar
International Corporation to provide remanufactured engines and
component parts for service replacement. Under the agreement, Magnum
Power Products, the newly named joint venture, will be the worldwide
remanufacturer for designated International (R) brand diesel engines
and certain private label brand engines designed and manufactured by
Navistar.
. In May 1999, the Company entered into a joint venture with Continental
AG for the exclusive production of motors in Europe for use in the
newly developed ISAD (R) system (Integrated Starter Alternator
Damper). The starter/alternator combination provides a more powerful
basic platform, offering vehicle engineers unique possibilities for
redesigning many under-the-hood functions.
. In June 1999, the Company acquired a controlling interest in its
subsidiary, Remy Korea Limited ("RKL"), increasing its investment from
50 percent to 81 percent. The increased investment was made to expand
Delco Remy's interests and opportunities in the Asian markets. RKL
manufactures automotive starters and heavy duty starters and
alternators for Korean customers such as Daewoo, Asia Motors, Kia,
Hyundai, and others as well as exporting product primarily to the U.S.
OEM market.
As a result of these strategic acquisitions and alliances, the Company
believes that it has established itself as a market leader in providing
electrical system and powertrain/drivetrain products in the aftermarket and OEM
marketplace. 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 key
aftermarket channels of distribution - OEM dealers, retail chains and warehouse
distributors.
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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 and reduces
its dependence on the cyclical OEM business.
Aftermarket
The aftermarket consists of the production and sale of both new and
remanufactured parts used in the maintenance and repair of automobiles, trucks
and other vehicles. Remanufacturing is a process through which used components
("cores") are disassembled into their sub-components, cleaned, inspected,
tested, combined with new subcomponents and reassembled into finished products.
A remanufactured product can be produced at lower cost than a comparable
individually repaired unit due to effective salvage technology methods, high
volume precision manufacturing techniques and rigorous inspection and testing
procedures. The ability to procure cores is critical to the remanufacturing
process.
Aftermarket parts are supplied principally through three distribution
channels: (i) car and truck dealers that obtain parts either through an OEM
parts organization (e.g., GM Service Parts Operations ("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 and
service 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 warehouse distributors; 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.
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 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.
OEM Markets
The OEM market consists of the production and sale of new component parts
for use in the manufacture of new vehicles. The OEM market includes two major
classes of customers: (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
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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
The Company's product line includes a diverse array of manufactured and
remanufactured products for the aftermarket and OEM markets under the "Delco
Remy" brand name or under a private-label brand name specified by the OEM or the
aftermarket customer. The product line is classified into two product
categories: Electrical Systems and Powertrain/Drivetrain.
The following table sets forth the approximate composition by product
category of the Company's revenues for the last three fiscal years:
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Product Categories 1999 1998 1997
- ----------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Electrical systems................................... 83.2% 85.5% 87.7%
Powertrain/drivetrain................................ 15.7 13.5 12.3
Other................................................ 1.1 1.0 --
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Total................................................ 100.0% 100.0% 100.0%
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Products within the electrical systems category include manufactured and
remanufactured starters and alternators. The starters are used in all cars and
trucks manufactured by GM in North America (except Saturn and Geo). The Company
manufactures a full line of heavy duty starters and alternators for use
primarily with large diesel engines. The Company's starters and alternators are
specified as part of the standard electrical system by most North American heavy
duty truck and engine manufacturers. The Company believes that it is the largest
manufacturer and remanufacturer in North America of (i) starters for automobiles
and light trucks (including sport-utility vehicles, minivans and pickup trucks)
and (ii) starters and alternators for medium and heavy duty vehicles.
Products within the powertrain/drivetrain category include engines, fuel
injectors, injection pumps and turbo chargers (fuel systems), transmissions,
torque converters, water pumps, rack and pinions, power steering pumps, gears
and clutches, and traction control systems. The Company produces traction
control systems for use in construction, industrial and agricultural equipment
and in medium duty trucks. The traction control systems business combines
valuable product engineering skills with strong machining and fabrication
capabilities to manufacture products with custom designed applications.
Customers
The Company's principal customers include OEM automotive and heavy duty
manufacturers, OEM dealer networks, leading automotive parts retail chains and
warehouse distributors. The Company's major customers include GM, Navistar, GM
SPO, Freightliner, Caterpillar, Paccar, Ford, Mack and Volvo Trucks, Autozone,
Advance Auto Parts, O'Reilly, Pep Boys, and Discount Auto Parts.
The Company has long-term agreements, with terms typically ranging from
three to five years, to supply starters and
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alternators to GM, Navistar, Freightliner, PACCAR, Cummins, Volvo Trucks and
Mack. Total sales to GM and related affiliates accounted for approximately
37.7%, of which approximately 25.3% is OE sales, and sales to Navistar accounted
for approximately 13.4% of the Company's 1999 sales. No other customer accounted
for more than 10% of consolidated net sales.
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. 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. In fiscal year 1999, the Company and GM extended the terms of the Supply
Agreement for the Company to supply starting motors for new engines introduced
to support GM North American Operations to August 31, 2008. The amendment also
provides that DRA and its international operations will be the supplier of
starting motors for those engines for the life of production. The Supply
Agreement with respect to heavy duty products terminates on July 31, 2000. GM's
obligations to distribute the Company's automotive aftermarket products
terminates on July 31, 2009. Although GM's obligations to distribute the
Company's heavy duty aftermarket products terminated on July 31, 1998, GM and
the Company have entered into an agreement for continued distribution of heavy
duty products to the independent aftermarket. As part of this agreement, heavy
duty replacement parts will continue to be supplied to the independent
aftermarket through existing AC Delco distributors and newly appointed Delco
Remy distributors. As a result of this agreement, the Company is developing a
distribution network of independent warehouse distributors to expand the sales
volume previously covered by the expired agreement for heavy duty aftermarket
product distribution. The Company expects that it will be able to expand its
market share through this more direct channel of distribution. Although the
Company expects that its automotive and heavy duty products will remain
competitive throughout the term of the agreements with GM, 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.
The Company employs its own direct sales force, which develops and
maintains sales relationships with major North American truck fleet operators as
well as its OEM customers worldwide. These sales efforts are supplemented by a
network of field service engineers and product service engineers.
Distribution
The Company's products are distributed to its customers primarily by
common carrier.
Competition
The automotive parts market is highly competitive. Competition is based
primarily on quality of products, service, delivery, technical support and
price. Most OEM manufacturers and aftermarket distributors source parts from one
or two suppliers. The Company competes with a number of companies who supply
automobile manufacturers throughout the world. In the North American automotive
market, the Company's principal competitors include Denso, Valeo, Mitsubishi and
Bosch, Prestolite, Units Parts and Motorcar Parts & Accessories.
Strategy
The Company plans to continue to strengthen its strategic positioning and
strong market position through increasing revenue profitably (Growth Strategy)
and achieving improved manufacturing efficiency, cost reduction and increased
productivity while continuing to achieve the highest levels of quality
(Operating Strategy).
Growth Strategy
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
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OEM supplier. Additionally, the acquisition of Williams in fiscal 1999 expanded
the Company's sales of powertrain/drivetrain components.
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. Most have no OEM capability. 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 approximately 12% of
this fragmented 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. In fiscal 1999, the Company strengthened its global
presence in the Asian market by increasing its investment in Remy Korea Limited,
a manufacturer of automotive and heavy-duty starters.
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 replaced all straight drive starters in GM vehicles for 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. Recent aftermarket product initiatives include the remanufactured 7.3
liter direct injected engine, which is the Ford FQR product for warranty
replacement on the F250, 350 and 450 pickup trucks, and new or expanded
transmission warranty business with Hyundai America Motor and Allison.
Operating Strategy
"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 five new
focus factories since 1996. 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. In the fourth quarter of fiscal 1999, the Company launched a company-
wide "lean manufacturing" initiative. Concepts applied in its recently opened
focus factories will be implemented throughout the organization.
Product Quality and Continuous Improvement. The Company's commitment to
product quality and continuous improvement is evidenced by the QS9000
certification received by the majority of its manufacturing and remanufacturing
facilities. In addition, the Company's powertrain/drivetrain operations that
remanufacture products for Ford are Ford Qualified Manufacturers (FQR) suppliers
and Ford Authorized Remanufacturer ("Ford FAR") in six of the seven Ford
Canadian territories. 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. In August 1999, DRA was
named by Automotive Industries magazine as "Best of the Best" in the Electrical
systems category in the magazine's "Second Annual Quest for Excellence." The
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award is based on a survey of the Company's customers judging performance in
quality, price, innovation, delivery and service.
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, 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 those that would
otherwise be obtainable by the Company. This agreement expires on July 31, 2004,
or earlier, upon termination of the automotive and heavy duty supply OEM
agreements between the Company and GM. The Company generally follows the North
American industry practice of passing on to its customers the costs or benefits
of fluctuation in copper and aluminum prices on an annual or semi-annual basis.
Employees
As of July 31, 1999, the Company employed 6,845 people, 1,324 of whom were
salaried and administrative employees and 5,521 of whom were hourly employees.
Of the Company's hourly employees, 25% are represented by unions. In the United
States, 780 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. The agreement
between the UAW and the Company expires on March 22, 2001 and will require
negotiation of a new agreement. In addition, 73 of the Company's hourly
employees are represented by the Teamsters. The agreement between the Teamsters
and the Company expires on August 31, 2003.
As of July 31, 1999, 198 of the Company's 404 Canadian hourly employees are
represented by the Canadian Auto Workers and 123 are represented by the
Metallurgists Unis d'Amerique. The agreements with these unions expire in
calendar year 1999, which will require negotiation of new agreements.
As of July 31, 1999, approximately 183 of Autovill's 384 hourly employees
are affiliated with the Hungarian Steel Industry Workers Union. The agreement
was signed July 17, 1996 and is perpetual, subject to termination upon three
months' notice from either party.
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The Company's other facilities are primarily non-union. The Company is
unaware of any current efforts to organize the employees in its other
facilities. There can be no assurance that there will not be any labor union
efforts to organize employees at facilities that are not currently unionized. At
the present time, the Company believes that its relations with its employees are
good.
Research and Development
The Company's engineering staff works independently and with OEMs to design
new products, improve performance and technical features of existing products
and develop methods to lower manufacturing costs. In support of its engineering
efforts, the Company has formed technical alliances with a select number of
engineering and technology firms to identify long-term engineering advances and
opportunities. The Company has entered into a joint venture with continental AG
for the joint industrialization of the ISAD (Integrated Starter Alternator
Damper) motor in Europe. This new technology combines the starter and alternator
functions in one compact, high performance unit integrated between the engine
and gearbox. The Company also is a participant at Electricore Incorporated, a
consortium for advanced transportation technologies. Through this participation,
the Company is working on developing the technical alliances to develop the next
generation motor and alternators. Most recently, the Company has entered into an
alliance with Lynx Motion Technologies to develop a family of electric drive
motors which will be integral components of the propulsion system, needed for
advanced hybrid gas-electric, diesel-electric and fuel cell vehicles.
Consistent with its strategy to introduce technologically advanced new and
improved products, the Company spent approximately $19.5 million, $13.3 million
and $16.7 million in 1999, 1998, and 1997, respectively, on research and
development activities. All expenditures were Company funded.
Foreign Operations
Information about the Company's foreign operations is set forth in tables
relating to geographic information in Note 15 to Consolidated Financial
Statements "Business Segments and Geographic Area Information", which statements
are included under Item 8, Financial Statements and Supplementary Data.
Environmental Regulation
The Company's 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 air
permitting or registration requirements at certain facilities. The Company
believes that any costs it may incur to resolve such matters will not be
material. 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.
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 opertors' 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
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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.
The Company is in the process of vacating the Anderson and Meridian facilities
and terminating its leases or subleases as applicable with GM. 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, Power Investments, World Wide, Ballantrae, Lucas,
Electro Diesel Rebuild, Electro Rebuild Tunisia, Atlantic Reman Limited and
Williams Technologies, 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.
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
received requests for information or notifications of potential liability from
EPA under CERCLA for certain off-site locations. The Company has not incurred
any significant costs relating to these matters, and based on the existence of
certain indemnification agreements from its predecessors and their assumption of
liabilities to date and other legal defenses, believes that it will not incur
material costs in the future in responding to conditions at these sites.
The Resource Conservation and Recovery Act ("RCRA") and the regulations
thereunder and similar state counterparts to this law regulate hazardous wastes.
The 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 had been 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
entered into a new EPA Administrator Order on Consent in setting forth the
selected remedy (including further investigation and the imposition of a deed
restriction limiting future use of industrial or commercial activities).
Amphenol indemnified Franklin Power Products for certain liabilities associated
with the EPA Order and Amphenol has satisfied and continues to satisfy the
requirements of
10
<PAGE>
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.
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 fiscal 2000 sales volumes.
ITEM 2 PROPERTIES
The world headquarters of the Company are located at 2902 Enterprise
Drive, Anderson, Indiana 46013. The Company leases its headquarters. The
following table sets forth certain information regarding manufacturing and
certain other facilities operated by the Company as of July 31, 1999.
<TABLE>
<CAPTION>
Number
Location Of Facilities Use Owned/Leased
-------------------------------------- ---------------- ------------------------------ --------------------
<S> <C> <C> <C>
Anderson, IN 1 Office Leased
Anderson, IN 7 Manufacturing Leased
Anderson, IN 1 Testing Leased
Anderson, IN 1 Warehouse Leased
Bay Springs, MS 1 Manufacturing Leased
Budapest, Hungary 1 Office Owned
Budapest, Hungary 1 Warehouse Owned
Chantilly, VA 1 Manufacturing Leased
Edmonton, Canada 2 Manufacturing Leased/Owned
Etobicoke, Canada 1 Manufacturing Leased
Findlay, OH 1 Manufacturing Owned
Fradley, United Kingdom 1 Manufacturing Leased
Franklin, IN 2 Manufacturing Owned
Hapsenburg, Belgium 1 Manufacturing Leased
Heidelberg, MS 1 Manufacturing Leased
Indianapolis, IN 1 Manufacturing Leased
Jemmel, Tunisia 1 Manufacturing Leased
Kaleva, MI 1 Manufacturing Leased
Kyoungnam, South Korea 2 Manufacturing Leased
Laredo, TX 1 Warehouse Leased
Mansfield, TX 1 Manufacturing Leased
Marion, MI 1 Manufacturing Leased
Memphis, TN 1 Warehouse Leased
Meridian, MS 3 Manufacturing/Warehouse Leased
Mezokovesd, Hungary 1 Manufacturing Owned
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Miskolc, Hungary 1 Manufacturing Leased
Moncton, Canada 1 Manufacturing Leased
Peru, IN 2 Manufacturing Leased
Plainfield, IN 1 Warehouse Leased
Raleigh, MS 3 Manufacturing Leased/Owned
Reed City, MI 3 Manufacturing/Warehouse Leased
San Luis Potosi, Mexico 1 Manufacturing Leased
Saskatoon, Canada 1 Manufacturing Leased
Seoul, South Korea 1 Office Leased
Shabuta, MS 1 Manufacturing Leased
Sligo, Ireland 1 Manufacturing Leased
St. Laurent, Canada 1 Warehouse Leased
Summerville, SC 3 Manufacturing/Warehouse Leased
Sylvarena, MA 1 Manufacturing *
Taylorsville, MS 1 Manufacturing Leased
Troy, MI 1 Office Leased
Toledo, OH 1 Manufacturing Leased
Warren, MI 1 Manufacturing Owned
Winchester, VA 3 Manufacturing/Warehouse Leased
Winnepeg, Canada 3 Manufacturing Leased/Owned
</TABLE>
*Leased on a month-to-month basis.
All facilities are suitable for their intended purpose, are being
efficiently utilized and are believed to provide adequate capacity to meet
demand for the next several years.
ITEM 3 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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended July 31, 1999.
12
<PAGE>
PART II
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
From time to time, the Company makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules,
regulations and releases. The Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking statements relating to
the future performance of the Company contained in Management's Discussion and
Analysis (under Items 7 and 7A on Form 10-K), and Notes to Consolidated
Financial Statements (under Item 8 on Form 10-K) and other statements made in
this Form 10-K and in other filings with the SEC including, but not limited to
risks associated with the uncertainty of future financial results, acquisitions,
additional financing requirements, development of new products and services, the
effect of competitive products or pricing, the effect of economic conditions and
other uncertainties. Due to these uncertainties, the Company cannot assure
readers that any forward-looking statements will prove to have been correct.
The Company cautions readers that any such forward-looking statements are
based on assumptions that the Company believes are reasonable, but are subject
to a wide range of risks.
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
The Company made its initial public offering of Class A Common Stock on December
22, 1997. The Company's Class A Common Stock is traded in the New York Stock
Exchange (NYSE) under the ticker symbol "RMY". There is no public market for the
Company's Class B Common Stock. The following table reflects the high and low
selling prices of the Company's Class A Common Stock for each quarter in which
it was publicly traded.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
------------------- -------------------
Quarter Ended: High Low High Low
<S> <C> <C> <C> <C>
October 31 14 9 1/8 NA NA
January 31 12 9 5/16 13 1/2 12 1/4
April 30 10 11/16 8 1/16 16 1/4 12 9/16
July 31 11 1/8 8 11/16 17 1/2 12 1/8
</TABLE>
Holders
The approximate number of record holders of each of the classes of the
Company's common stock as of September 23, 1999, were as follows:
Class A Common Stock 1,960
Class B Common Stock 1
Dividends
The Company has never paid dividends on its common stock. Payment of dividends
is within the discretion of the Company's Board of Directors and will depend,
among other factors, upon the Company's earnings, financial condition and
capital requirements and the terms of the Company's financing agreements. The
Company plans to retain future earnings for use in the business in the
foreseeable future. The ability of the Company to make dividend payments is also
restricted by the terms of certain of its debt instruments.
13
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of Delco
Remy International, Inc., for fiscal years 1995 through 1999.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $953,706 $815,313 $689,787 $636,852 $573,423
Income (loss) from continuing operations (a) 28,346 (2,187) (10,263) 5,796 9,326
Income (loss) from continuing operations
per common share
Basic 1.19 (0.11) (0.71) 0.38 0.64
Diluted 1.09 (0.11) (0.71) 0.34 0.57
Total assets 782,663 684,997 570,569 475,082 322,527
Long-term obligations and redeemable
preferred stock 434,931 393,806 379,332 303,564 202,657
Cash dividends declared per common share -- -- NA NA NA
</TABLE>
(a) The results of acquired companies are included in operations from date of
acquisition. Pro forma results of operations for acquisitions are presented
in Note 1 to the consolidated financial statements. Results in 1998, 1997
and 1996 include restructuring charges of $16,227, $20,700 and $4,609,
respectively, after income taxes. See Notes to Consolidated Financial
Statements.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and accompanying notes.
General
The Company manufactures and remanufactures electrical and
powertrain/drivetrain components for the aftermarket and OEM market. The Company
sells its products principally in North America and also in Europe, Latin
America and Asia-Pacific to OEMs, warehouse distributors and retail automotive
parts chains.
The aftermarket is highly fragmented and competitive. The Company believes
that 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 continue to come
primarily through the introduction of new products and expansion of the
Company's global operations. The Company believes that its aftermarket and OEM
products are complementary and provide the Company with a competitive advantage
in meeting customer needs and maintaining the high levels of expertise necessary
to compete successfully in both markets. The high capability and expertise
required to meet the stringent technology and quality requirements of the
Company's OEM customers provides a competitive advantage to the development and
production of products for the aftermarket.
The primary components of cost of goods sold in the Company's products
include component parts, material, labor costs, overhead and the cost of cores.
While the availability and cost of cores fluctuate based on supply and demand,
the Company's relationships with dealers and other customers have historically
provided it with sufficient access to cores at favorable prices.
14
<PAGE>
Approximately 18% of the Company's domestic hourly labor force is
represented by the United Auto Workers (UAW). In March 1997, the Company signed
a new four-year master agreement with the UAW. Wage and benefit increases under
the new agreement generally follow the same pattern as the prior agreement and
continue to track the wages and benefits paid by GM and, as a result, the
Company will experience higher wage and benefit rates in future periods. In
addition, grow-in provisions under the new agreement require the Company to move
lower wage and benefit employees to higher wage and benefit levels. Under
provisions of the national agreement, the UAW and the Company developed special
programs of incentives for hourly employees who agree to leave the Company. The
cost of these programs is included in the restructuring charges for both fiscal
years 1997 and 1998 as described below. The Company has implemented its strategy
of shifting production to focus factories, which the Company believes has
reduced costs and will continue to reduce costs as these focus factories
continually improve and implement lean manufacturing concepts.
Since the GM Acquisition, the Company has completed eleven strategic
acquisitions, and entered into five 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 OEM dealers, warehouse
distributors and 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% in fiscal year 1995, the Company's first complete fiscal year of
operations, to 62% in fiscal year 1999. Sales to GM North American OE operations
constituted 25% of consolidated net sales in fiscal year 1999.
In fiscal year 1999, the Company acquired Williams Technologies, Inc., a
leading remanufacturer of automatic transmissions and torque converters for
automotive and medium and heavy duty truck applications. It also increased its
ownership position in Remy Korea Limited from 50% to 81%. Remy Korea
manufactures automotive starters and heavy duty starters and alternators for the
Korean market and the U.S. OEM market. The acquisitions completed in fiscal year
1998, including Ballantrae, provided a full year contribution to the Company's
results in fiscal 1999.
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. 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. In fiscal year 1999, the Light Duty Starter Motor
Component Supply Agreement was amended extending the Agreement's termination
date with respect to automotive products from July 31, 2004 to August 31, 2008.
The Company will be the supplier of starting motors for the life of production
of engines introduced through August 31, 2008. The Supply Agreement for heavy
duty products terminates on July 31, 2000. GM's obligations to distribute the
Company's automotive aftermarket products terminates on July 31, 2009.
In fiscal year 1998, the Company developed a plan to restructure its
workforce to a level that should enable it to realize better efficiency. The
plan included a buyout plan for the hourly workforce to assist employees with
their transition from the Company. This program was completed in fiscal 1999 and
is expected to provide positive benefits to the Company. A restructuring charge
of $26.5 million was incurred as a result of this action, and a reserve was
established in that amount. The Company reduced this reserve through cash
payments of $10.0 million in fiscal 1998 and $11.6 million in fiscal 1999. The
remaining balance is expected to be utilized through cash payments of, $3.6
million in fiscal 2000 and $1.3 million in fiscal 2001.
In fiscal year 1997, the Company implemented a restructuring plan at its
OEM manufacturing operations, incurring a restructuring charge of $34.5 million.
During fiscal years 1998 and 1999, operations previously located in Meridian,
Mississippi and in two facilities in Anderson, Indiana, which were leased from
GM, were transferred to new focus factories in Anderson, Indiana. In fiscal year
1998, the reserve established for this charge was reduced $5.4 million to
reflect the utilization of certain assets previously targeted for disposal. In
addition, the reserve for termination benefits was increased $5.2 million to
reflect greater than anticipated participation in the various workforce
transition programs. The net effect of these two changes in estimate was
credited to current year earnings. At July 31, 1999, this restructuring plan had
been essentially completed.
15
<PAGE>
The following table sets forth certain statement of operations data
expressed as a percentage of sales:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 79.7 80.7 78.3
------------- -------------- -------------
Gross profit 20.3 19.3 21.7
Selling, engineering and administrative expenses 10.5 10.7 12.5
Amortization of goodwill and intangibles 0.5 0.4 0.4
Restructuring charges -- 3.2 5.0
------------- -------------- -------------
Operating income 9.3 5.0 3.8
Other income (expense):
Non-operating income -- -- 0.3
Interest expense (4.8) (5.0) (5.7)
------------- -------------- -------------
Income (loss) from continuing operations before income
taxes (benefit), minority interest in income of
subsidiaries, income from unconsolidated joint ventures,
preferred dividend requirement of subsidiary, and deemed
dividend on preferred stock conversion 4.5 -- (1.6)
Income taxes (benefit) 1.7 -- (0.4)
Minority interest in income of subsidiaries (0.4) (0.3) (0.1)
Income from unconsolidated joint ventures 0.6 0.3 --
Preferred dividend requirement of subsidiary -- (0.1) (0.2)
Deemed dividend on preferred stock conversion -- (0.2) --
------------- -------------- -------------
Income (loss) from continuing operations 3.0 (0.3) (1.5)
Discontinued operations:
Loss from operations of discontinued businesses, net of
applicable income tax benefit -- -- (0.1)
Loss of disposal of businesses, net of applicable income
tax benefit -- -- (0.1)
Extraordinary item:
Write-off of debt issuance costs, net of applicable
income tax benefit -- (0.2) (0.3)
------------- -------------- -------------
Net income (loss) 3.0% (0.5)% (2.0)%
============= ============== =============
</TABLE>
16
<PAGE>
Fiscal Year Ended July 31, 1999 Compared To Fiscal Year Ended July 31, 1998
Net Sales. Net sales of $953.7 million increased $138.4 million, or 17.0%,
due to increased demand for both automotive and heavy duty electrical products
in the OEM market, the effect of the fiscal year 1999 and 1998 acquisitions and
increased demand for electrical and powertrain/drivetrain products in the
aftermarket. Price increases did not have a significant effect on year-over-year
sales as the Company continues to face price pressures in most of its markets. A
prolonged strike by GM reduced fiscal year 1998 sales by approximately $22.3
million.
Gross Profit. Gross profit of $193.9 million increased $36.4 million, or
23.1%, and as a percentage of sales improved from 19.3% in 1998 to 20.3% in
1999. The increase in gross profit dollars was due to sales growth in the
aftermarket and OEM market (including the effect of the GM strike in 1998) and
the effect of acquisitions in 1999 and 1998. The improvement in gross profit as
a percentage of sales reflects the realization of cost efficiencies generated by
the OEM restructuring, including successful integration of the new focus
factories, and the effect of certain aftermarket and foreign acquisitions which
generate higher gross profit percentages.
Selling, Engineering and Administrative Expenses. Selling, engineering and
administrative (SE&A) expenses increased $13.0 million, or 15.0%, and as a
percentage of net sales were 10.5% in fiscal 1999 compared to 10.7% in fiscal
1998. Sales growth and effective control of costs was partially offset by the
cost structure of certain acquisitions completed in 1999 and 1998.
Operating Income. Operating income of $88.8 million in 1999 compares with
$40.6 million in 1998. Excluding the effect of the restructuring charge in 1998,
operating income increased $21.7 million, or 32.3%, and as a percentage of sales
improved from 8.2% in 1998 to 9.3% in 1999. This increase reflects the sales
growth, profitability improvements and cost control items discussed above. It is
estimated that the GM strike reduced operating income by $8.6 million in 1998.
Interest Expense. Interest expense increased $5.2 million, or 12.9%, in
fiscal 1999. This increase was due to higher average levels of debt incurred to
finance acquisitions. Sufficient cash was generated by operations to otherwise
reduce utilization of the Company's Senior Credit Facility. In addition, the
Company's overall average interest rate declined year over year.
Income Taxes. The Company's consolidated effective income tax rate of 38.0%
in fiscal 1999 was marginally lower than the 38.8% reported in fiscal 1998 due
primarily to implementation of various tax planning initiatives. The acquisition
of certain foreign entities could have a favorable impact on the Company's
effective tax rate in future years. At July 31, 1999, the Company believed it
was more likely than not that future taxable income would be sufficient to
realize the net deferred tax asset.
Income From Unconsolidated Joint Ventures. The Company's share of the
earnings of its unconsolidated joint ventures was $5.4 million in fiscal 1999
versus $2.6 million in fiscal 1998. The increase was primarily attributable to
Remy Korea.
Net Income (Loss). As a result of the foregoing factors, net income of
$28.3 million in 1999 compares with the net loss of $4.0 million in 1998.
Excluding non-recurring charges, net income was $15.6 million in 1998.
Fiscal Year Ended July 31, 1998 Compared To Fiscal Year Ended July 31, 1997
Net Sales. Net sales were $815.3 million for 1998, an increase of $125.5
million, or 18.2%, over the prior year. The increase resulted from the inclusion
of the net sales of Ballantrae Corporation ("Ballantrae") from its acquisition
date and World Wide Automotive, Inc. ("World Wide") for the entire 1998 fiscal
year. In addition to these increases, heavy duty OEM sales were up due to the
high demand from truck manufacturers and strong sales at Power Investments Inc.
("Power") principally due to a new engine remanufacturing program. A prolonged
strike by GM in the fourth quarter reduced sales in fiscal 1998 by approximately
$22.3 million.
Gross Profit. Gross profit was $157.5 million for 1998, an increase of $7.9
million, or 5.3%, over the prior year. As a
17
<PAGE>
percentage of net sales, gross profit decreased to 19.3% for the year ended July
31, 1998 from 21.7% for the prior year. The increase in gross profit was
attributable to the inclusion of the Ballantrae and World Wide acquisitions. The
margin from heavy duty OEM volume improvement and increased sales at Power were
offset by higher costs attributable to the start-up costs of the new focus
factories and from inefficiencies in the operations that were shut down.
Selling, Engineering and Administrative Expenses. SE&A expenses were $86.9
million for 1998, an increase of $0.9 million, or 1.1%, over the prior year. As
a percentage of sales, SE&A expenses decreased to 10.7% for 1998 from 12.5%
during the prior year. The reduction in SE&A expense as a percent of net sales
resulted primarily from the higher level of sales while holding SE&A expenses
nearly constant.
Operating Income. Operating income was $40.6 million for 1998, an
improvement of $14.6 million, or 56.4%, from the prior year. As a percent of net
sales, operating income increased to 5.0% for the year ended July 31, 1998 from
3.8% for the prior year. This increase was attributable to the Ballantrae and
World Wide acquisitions and a reduction in restructuring charges to $26.5
million as compared to restructuring charges of $34.5 million in 1997, as
discussed above. Excluding the restructuring charges, operating income was 8.2%
of sales in 1998 and 8.8% in 1997. It is estimated that the GM strike reduced
operating income by $8.6 million in 1998.
Interest Expense. Interest expense was $40.3 million for 1998, an increase
of $1.5 million, or 3.9%, over the prior year. The increase was due primarily to
the additional debt incurred to finance acquisitions and increased borrowings to
fund working capital requirements, partially offset by the recapitalization
through the Company's initial public offering of common stock (IPO) and issuance
of the Company's 8 5/8% Senior Notes to reduce leverage and refinance
outstanding debt at lower rates.
Income Taxes. The Company had an income tax benefit of $0.1 million in 1998
versus an income tax benefit of $3.0 million in 1997. The tax benefit was 38.8%
of the loss from continuing operations before tax in 1998, as compared with a
tax benefit of 28.1% of the loss from continuing operations before tax for the
prior year. At July 31, 1998 the Company believed it was more likely than not
that future taxable income would be sufficient to realize the net deferred tax
asset.
Net Income (Loss). As a result of the foregoing factors, the net loss was
$4.0 million for 1998, compared to a net loss of $14.3 million in the prior
year. Excluding non-recurring charges, the Company's net income for 1998 was
$15.6 million and $10.5 million for 1997.
Liquidity and Capital Resources
The Company's short-term liquidity needs include required debt service,
including capital lease payments, day to day operating expenses, working capital
requirements and the funding of capital expenditures. Cash interest payments are
expected to exceed $40.0 million in fiscal year 2000. Long-term liquidity
requirements include principal payments of long-term debt and the funding of
acquisitions. The Company's principal payments on long-term debt and capital
lease obligations are presented in Note 7 to the Consolidated Financial
Statements. The Company's principal sources of cash to fund its short-term
liquidity needs consist of cash generated by operations and borrowings under the
Senior Credit Facility. At July 31, 1999, borrowings under the Senior Credit
Facility were $96.8 million, leaving $192.8 million available under the $300
million facility, net of lines of credit.
Cash provided by operating activities of $43.1 million in 1999 compares to
cash used of $11.3 million in 1998. This improvement was due primarily to
increased earnings excluding non-cash items. Earnings growth of $32.4 million
included a $6.9 million increase in depreciation and amortization expense and a
$4.9 million increase in deferred taxes. 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 who returned 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 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 expense over the next nine years. No cash payments were made
in fiscal years 1999, 1998 and 1997. Excluding the amounts recorded from
acquisitions, net working capital increased $6.1 million in 1999 compared to a
$29.1 million increase in 1998. Accounts receivable declined $4.6 million in
1999 versus an $8.4 million increase in 1998 due to strong
18
<PAGE>
collections. Inventory increased $17.7 million in 1999 and $17.4 million in 1998
primarily to support sales growth in the electrical aftermarket. Accounts
payable increased $13.6 in 1999 compared to a decline of $7.6 million in 1998
due primarily to the timing of payments. Cash payments totaling $14.9 million
were made in 1999 with respect to employee termination benefits under the
Company's 1997 and 1998 restructuring plans.
Cash used in investing activities was $73.4 million in 1999 compared to
$69.3 million in 1998. Acquisitions in 1999 included Williams Technologies and
an additional 31% (81% in total) of Remy Korea, both of which were funded with
proceeds from the Senior Credit Facility. The Company granted put/call options
in connection with the acquisitions of World Wide and Power Investments that
become exercisable in November 2000 for World Wide and March 2001 for Power
Investments. The exercise prices of the put/call options are based on an
earnings formula and are not currently estimable. Capital expenditures,
consisting primarily of production equipment and tooling, was $25.1 million in
1999 and $24.2 million in 1998. The Company currently expects capital spending
to approximate $30.0 million in fiscal year 2000 to support lean manufacturing
initiatives, 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.
Cash provided by financing activities in 1999 was generated entirely from
the Company's Senior Credit Facility. Cash provided by financing activities in
1998 was composed of the proceeds from the IPO of $51.3 million and $27.8
million from the amount debt issuances exceeded debt repayments.
Instruments governing the Company's indebtedness restrict the ability of
the Company's subsidiaries to make distributions to the Company.
The Company believes that cash generated from operations, together with the
amounts available under the Senior Credit Facility, will be adequate to meet its
debt service requirements, capital expenditures and working capital needs for at
least the next twelve months, although no assurance can be given in this regard.
The Company's future operating performance and ability to extend or refinance
its indebtedness will be dependent on future economic conditions and financial,
business and other factors that are beyond the Company's control.
Seasonality
The Company's business is moderately seasonal, as its major OEM customers
historically have one or two week shutdowns of operations during July. In
response, the Company typically has shut down its own operations for one week
each July, depending on backlog, scheduled maintenance and inventory buffers, as
well as an additional week during the December holidays. Consequently, the
Company's second and fourth quarter results reflect the effects of these
shutdowns. Refer to Note 18 to Consolidated Financial Statements which pertain
to quarterly (unaudited) financial information.
Effects of Inflation
The Company believes that the relatively moderate inflation over the last
few years has not had a significant impact on the Company's revenues or
profitability and that it has been able to offset the effects of inflation by
increasing prices or by realizing improvements in operating efficiency. The
Company has provisions in many of its contracts which provide for the pass
through of fluctuations in the price of certain raw materials, such as copper
and aluminum.
Foreign Sales
Approximately 23.8%, 23.9%, and 21.1% of the Company's 1999, 1998, and 1997
net sales, respectively, were derived from sales made to customers in foreign
countries. Because of these foreign sales, the Company's business is subject to
the risks of doing business abroad, including currency exchange rate
fluctuations, limits on repatriation of funds, compliance with foreign laws and
other economic and political uncertainties.
Accounting Pronouncements
For a discussion of pending accounting pronouncements that may affect the
Company, see Note 2 to the Company's financial statements included under Item 8.
19
<PAGE>
Euro Conversion
In January 1999, eleven European nations adopted a common currency, the
euro, and formed the European Economic and Monetary Union (EMU). For a three-
year transition period, both the euro and individual participants' currencies
will remain in circulation. After July 1, 2002, at the latest, the euro will be
the sole legal tender for EMU countries. The adoption of the euro will affect a
multitude of financial systems and business applications as the commerce of
these nations will be transacted in the euro and the existing national currency.
The Company is currently addressing these issues and their potential effect on
information systems, currency exchange rate risk, taxation, contracts,
competition and pricing. Plans will be developed and implemented which are
expected to result in compliance with all laws and regulations. However, there
can be no certainty that such plans will be successfully implemented or that
external factors will not have an adverse effect on the Company's operations.
Any costs of compliance associated with the adoption of the euro will be
expensed as incurred and the Company does not expect these costs to be material
to its results of operations, financial condition or liquidity.
Year 2000 Readiness Disclosure
Many existing computer programs use only two digits to identify years.
These programs were designed without consideration for the affect of the
upcoming change in century, and if not corrected, could fail or create erroneous
results by, at or beyond the year 2000. Essentially all of the Company's
information technology-based systems, as well as many non-information technology
based systems are affected by the "Year 2000" issue. Technology-based systems
reside on mainframes, servers and personal computers in the U.S. and in the
foreign countries where the Company has operations. Specific systems include
accounting, payroll, financial reporting, product development, inventory
tracking and control, business planning, tax, accounts receivable, accounts
payable, purchasing, distribution and numerous word processing applications.
Non-information technology-based systems include equipment and services
containing imbedded microprocessors, such as clocks, security systems and
building management systems. All of the Company's businesses have relationships
with numerous third parties, including material suppliers, utility companies,
transportation companies, banks and brokerage firms, that may be affected by the
Year 2000 issue.
Remediation plans have been established for all material mission-
critical systems potentially affected by the Year 2000 issue. The primary phases
and current status of the plans for internal systems are summarized as follows:
Enterprise awareness and planning. This phase involved the
establishment of project teams and plans for each subsidiary and
joint venture. This phase has been completed for all subsidiaries and
the Company is in the process of determining the status of the joint
ventures.
Inventory of all hardware and software. This phase has been
completed.
Impact analysis/assessment. This phase has been completed.
Planning and scheduling. Plans have been implemented for all mission-
critical applications.
Conversion. The organizations are at various points in their
conversion process. 95% of the material mission- critical
applications have been converted. The remaining 5% are expected to be
converted by October 1999.
Testing. Each system is tested based on the specific requirements.
These are included as part of the overall project plans.
Implementation. Each system within the organization is at a different
point. 95% of the material mission- critical applications have been
implemented. The remaining 5% are expected to be implemented by
October 1999.
Assessment of the Company's third-party risk involves the identification of
critical vendors, Year 2000 confirmation correspondence, evaluations and
selected vendor reviews. Remediation plans are being developed for identified
areas of third-party risk.
The Company is in the process of determining the risks it would face in
the event certain aspects of its Year 2000 remediation plan fail. It is also
developing contingency plans for all mission-critical processes. Under a "worst
case" scenario, the Company's manufacturing operations would be unable to build
and deliver product due to internal system failures and/or the inability of
vendors to deliver raw materials and components. While virtually all internal
systems can be replaced with manual systems on a temporary basis, the failure of
any mission-critical system will have at least a short-
20
<PAGE>
term negative effect on operations. The failure of national and worldwide
banking systems could result in the inability of many businesses, including the
Company, to conduct business. The Company is continuously revising its plans as
a result of third party Year 2000 reviews and additional information from third
parties.
The total cost to the Company of achieving Year 2000 compliance is not
expected to exceed $2.0 million, including the cost of both internal and
external resources. Spending through July 31, 1999 totaled approximately $1.8
million.
While the Company believes the estimated cost of becoming Year 2000
compliant will not be significant to its results of operations, failure to
complete all work in a timely manner could have a material adverse effect on the
Company's results of operations. While the Company expects all planned work to
be completed, it cannot guarantee that all systems will be in compliance by the
year 2000, that the systems of suppliers and other third parties on which the
Company relies will be converted in a timely manner or that the Year 2000
contingency planning will be able to fully address all potential interruptions.
Therefore, date related issues could cause delays in the Company's ability to
produce or ship products, process transactions or otherwise conduct business in
any of the Company's markets.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in foreign currency values, interest rates and commodity
prices that can affect the cost of operating, investing and financing.
Accordingly, the Company addresses a portion of these risks through a controlled
program of risk management that includes the use of derivative financial
instruments. The Company's objective is to reduce earnings and cash flow
volatility associated with these fluctuations. The Company's derivative
activities, all of which are for purposes other than trading, are initiated
within the guidelines of established policies and procedures designed to manage
market risk. The Company does not enter into any derivative transactions for
speculative purposes.
The Company's primary interest rate risk exposure results from changes in
short-term U. S. dollar interest rates. In an effort to manage interest rate
exposures, the Company strives to achieve an acceptable balance between fixed
and variable rate debt positions. A sensitivity analysis has been prepared to
estimate the Company's exposure to market risk of its fixed and variable rate
debt positions. A hypothetical 10 percent adverse change in interest rates would
have decreased earnings by approximately $2.7 million in 1999 and approximately
$2.4 million in 1998. A hypothetical 10 percent favorable change in interest
rates would have increased earnings by approximately $2.7 million in 1999 and
approximately $2.4 million in 1998. The carrying value of the Company's variable
rate debt, consisting primarily of the Senior Credit Facility, approximated fair
value at July 31, 1999. The fair value of the Company's fixed rate debt is
estimated using a discounted cash flow analysis based upon the Company's current
incremental borrowing rates. The fair value of the Senior Notes and the Senior
Subordinated Notes approximated $286.9 million at July 31, 1999. Assuming a
hypothetical 10 percent increase in market interest rates, the estimated fair
value of these instruments on July 31, 1999 would decline approximately $2.7
million. Assuming a hypothetical 10 percent decrease in market interest rates,
the estimated fair value of these instruments on July 31, 1999 would increase
approximately $4.9 million.
The Company's foreign currency risk exposure results from fluctuating
currency exchange rates, primarily the strengthening of the U. S. dollar against
the Korean Won and certain European currencies. The Company faces transactional
currency exposures that arise when its foreign subsidiaries (or the Company
itself) enter into transactions, generally on an intercompany basis, denominated
in currencies other than their local currency. The Company also faces currency
exposure that arises from translating the results of its global operations to
the U. S. dollar at exchange rates that have fluctuated from the beginning of
the period. Exposure to variability in foreign currency exchange rates is
managed primarily through the use of natural hedges, whereby funding obligations
and assets are both denominated in the local currency. From time to time, the
Company enters into exchange agreements to manage its exposure arising from
fluctuating exchange rates related to specific transactions. A hypothetical 10
percent weakening in the exchange rates (primarily the Korean Won against the
U.S. dollar) over a one-year period would decrease earnings by approximately
$2.2 million, while a 10 percent strengthening in the exchange rates would
increase earnings by approximately $1.8 million. A hypothetical 10 percent
weakening in exchange rates would reduce the carrying value of the Company's net
investment in its foreign subsidiaries at July 31, 1999 by approximately $1.4
million. Alternatively, a hypothetical 10 percent strengthening in exchange
rates would increase the Company's net investment by approximately $1.7 million.
In order to reduce the uncertainty of price movements with respect to the
purchase of certain commodities, primarily copper, the Company enters into
forward purchase contracts and various supply and purchase agreements with its
customers and vendors. Based on the Company's overall commodity hedge exposure
at July 31, 1999 and 1998, a hypothetical 10 percent change in market rates
applied to the fair value of the instruments, would not have material effect on
the Company's earnings, cash flows or financial position in fiscal years 1999
and 1998.
21
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Delco Remy International, Inc.:
Page
----
Report of Independent Auditors 23
Consolidated Statements of Operations for the three years ended July 31, 1999 24
Consolidated Balance Sheets at July 31, 1999 and July 31, 1998 25
Consolidated Statements of Stockholders' Equity (Deficit) for the three years ended July 31, 1999 27
Consolidated Statements of Cash Flows for the three years ended July 31, 1999 28
Notes to Consolidated Financial Statements 29
Financial Statements of Williams Technologies, Inc.:
Independent Auditors' Report 60
Balance Sheets as of December 31, 1997 and 1996 61
Statements of Income and Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 62
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 63
Notes to Financial Statements 64
Financial Statements of Remy Korea, Ltd.:
Independent Auditors' Report 66
Balance Sheets as of December 31, 1998 and 1997 67
Statements of Income for the years ended December 31, 1998 and 1997 69
Statements of Appropriations of Unappropriated Retained Earnings for the years ended December 31, 1998 and 1997 70
Statements of Cash Flows for the years ended December 31, 1998 and 1997 71
Notes to Financial Statements 73
Independent Auditors' Report 81
Balance Sheet as of December 31, 1996 82
Statement of Income for the period from September 9, 1996 (inception) to December 31, 1996 83
Statement of Appropriations of Unappropriated Retained Earnings for the period from September 9, 1996 (inception)
to December 31, 1996 83
Statement of Cash Flows for the period from September 9, 1996 (inception) to December 31, 1996 84
Notes to Financial Statements 85
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and
Board of Directors of
Delco Remy International, Inc.
We have audited the accompanying consolidated balance sheets of Delco Remy
International, Inc. as of July 31, 1999 and 1998, 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, 1999. 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 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, 1999 and 1998, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended July 31, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
August 23, 1999
23
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
(in thousands, except for per share data)
<TABLE>
<CAPTION>
For The Year Ended July 31
---------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales................................................. $953,706 $815,313 $689,787
Cost of goods sold........................................ 759,815 657,862 540,234
---------------- ---------------- ----------------
Gross profit.............................................. 193,891 157,451 149,553
Selling, engineering and administrative expenses.......... 99,882 86,873 85,944
Amortization of goodwill and intangibles.................. 5,203 3,478 3,154
Restructuring charges..................................... -- 26,515 34,500
---------------- ---------------- ----------------
Operating income.......................................... 88,806 40,585 25,955
Other income (expense):
Non-operating income (expense) ........................ -- (428) 2,082
Interest expense....................................... (45,505) (40,291) (38,774)
---------------- ---------------- ----------------
Income (loss) from continuing operations before income
taxes (benefit), minority interest in income of
subsidiaries, income from unconsolidated
joint ventures, preferred dividend requirement of
subsidiary and deemed dividend on
preferred stock conversion............................. 43,301 (134) (10,737)
Income taxes (benefit) ................................... 16,454 (52) (3,014)
Minority interest in income of subsidiaries............... (3,921) (2,389) (892)
Income from unconsolidated joint ventures................. 5,420 2,568 --
Preferred dividend requirement of subsidiary.............. -- (645) (1,648)
Deemed dividend on preferred stock conversion............. -- (1,639) --
---------------- ---------------- ----------------
Income (loss) from continuing operations.................. 28,346 (2,187) (10,263)
Discontinued operations:
Loss from operations of discontinued businesses (less
applicable income tax benefit of $395).............. -- -- (808)
Loss on disposal of businesses (less applicable income tax
benefit of $426).................................... -- -- (874)
Extraordinary item:
Write-off of debt issuance costs (less applicable income
tax benefit of $1,172 and $1,147) .................. -- (1,833) (2,351)
---------------- ---------------- ----------------
Net income (loss)......................................... $ 28,346 $ (4,020) $(14,296)
================ ================ ================
Basic earnings (loss) per share:
Income (loss) from continuing operations............... $ 1.19 $ (.11) $ (.71)
Discontinued operations................................ -- -- (.12)
Extraordinary item..................................... -- (.09) (.17)
---------------- ---------------- ----------------
Net income (loss)...................................... $ 1.19 $ (.20) $ (1.00)
================ ================ ================
Diluted earnings (loss) per share:
Income (loss) from continuing operations............... $ 1.09 $ (.11) $ (.71)
Discontinued operations................................ -- -- (.12)
Extraordinary item..................................... -- (.09) (.17)
---------------- ---------------- ----------------
Net income (loss)...................................... $ 1.09 $ (.20) $ (1.00)
================ ================ ================
</TABLE>
See Accompanying Notes
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
July 31
-----------------------------------------------
1999 1998
---------------------- -----------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents..................................... $ 15,309 $ 8,113
Trade accounts receivable (less allowance for doubtful accounts
of $2,105 and $2,083)...................................... 147,988 126,896
Other receivables............................................. 15,496 9,846
Recoverable income taxes...................................... -- 1,802
Inventories................................................... 232,165 198,437
Deferred income taxes......................................... 14,997 21,653
Other current assets.......................................... 2,903 2,883
---------------------- -----------------------
Total current assets.......................................... 428,858 369,630
Property and equipment........................................ 258,727 208,537
Less accumulated depreciation................................. 63,532 50,568
---------------------- -----------------------
Property and equipment, net................................... 195,195 157,969
Deferred financing costs...................................... 11,192 10,786
Goodwill (less accumulated amortization of $15,296 and $10,586)
.............................................. 137,429 115,446
Net assets held for disposal.................................. 182 14,894
Investments in joint ventures................................. 4,756 12,474
Other assets.................................................. 5,051 3,798
---------------------- -----------------------
Total assets.................................................. $ 782,663 $ 684,997
====================== =======================
</TABLE>
See Accompanying Notes
25
<PAGE>
CONSOLIDATED BALANCE SHEETS
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
(in thousands, except share and per share data)
<TABLE>
<CAPTION> July 31
----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Liabilities and stockholders' equity :
Current liabilities:
Accounts payable.......................................... $ 119,339 $ 85,804
Accrued interest payable.................................. 11,603 9,581
Accrued restructuring charges............................. 5,866 35,519
Other liabilities and accrued expenses.................... 37,105 37,318
Current debt.............................................. 12,596 1,948
--------------------- ---------------------
Total current liabilities.................................... 186,509 170,170
Deferred income taxes........................................ 4,568 1,241
Long-term debt, less current portion......................... 434,931 393,806
Post-retirement benefits other than pensions................. 21,050 16,495
Accrued pension benefits..................................... 2,719 4,628
Other non-current liabilities................................ 3,545 3,967
Commitments and contingencies
Minority interest in subsidiaries............................ 19,821 10,450
Stockholders' equity :
Common stock:
Class A Shares (par value $.01; authorized 49,400,000;
issued 18,168,456 in 1999 and 1998) .................. 182 182
Class B Shares (par value $.01; authorized 17,600,000;
issued 6,278,055 in 1999 and 1998) 63 63
Paid-in capital........................................... 104,176 106,392
Retained earnings (deficit)............................... 12,152 (16,194)
Accumulated other comprehensive income (loss)............. (6,516) (4,074)
Stock purchase plan....................................... (537) (2,129)
--------------------- ---------------------
Total stockholders' equity .................................. 109,520 84,240
--------------------- ---------------------
Total liabilities and stockholders' equity .................. $ 782,663 $ 684,997
===================== =====================
</TABLE>
See Accompanying Notes
26
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Class A Class B Retained Other Stock
Common Common Paid In Earnings Comprehensive Purchase
Stock Stock Capital (Deficit) Income (Loss) Plan Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 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)
Currency translation adjustment -- -- -- -- 409 -- 409
----------
Comprehensive loss -- -- -- -- -- -- (13,887)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1997 88 65 6,677 (12,174) (1,752) (2,701) (9,797)
Issuance of common stock 92 -- 99,715 -- -- -- 99,807
Repurchase of common stock -- -- -- -- -- 572 572
Conversion of Class B common
stock to Class A common
stock 2 (2) -- -- -- -- --
Net loss -- -- -- (4,020) -- -- (4,020)
Currency translation adjustment -- -- -- -- (2,322) -- (2,322)
----------
Comprehensive loss -- -- -- -- -- -- (6,342)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1998 182 63 106,392 (16,194) (4,074) (2,129) 84,240
Repurchase of common stock -- -- (340) -- -- (284) (624)
Other -- -- (1,876) -- -- 1,876 --
Net income -- -- -- 28,346 -- -- 28,346
Currency translation adjustment -- -- -- -- (2,442) -- (2,442)
----------
Comprehensive income -- -- -- -- -- -- 25,904
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1999 $ 182 $ 63 $ 104,176 $ 12,152 $ (6,516) $ (537) $ 109,520
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See Accompanying Notes
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
For The Year Ended July 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)................................................. $ 28,346 $ (4,020) $ (14,296)
Extraordinary item................................................ -- 2,095 3,498
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.................................................. 18,358 13,591 17,923
Amortization.................................................. 6,851 4,756 4,400
Minority interest in income of subsidiaries................... 3,921 2,389 892
Income from unconsolidated joint ventures..................... (5,420) (2,568) --
Gain on sale of building...................................... -- -- (2,082)
Deferred income taxes......................................... 6,656 1,713 (9,578)
Post-retirement benefits other than pensions.................. 4,555 3,818 4,491
Accrued pension benefits...................................... (1,909) 86 3,592
Non-cash interest expense..................................... 1,648 2,387 7,949
Deemed dividend on preferred stock conversion................. -- 1,639 --
Preferred dividend requirement of subsidiary.................. -- 645 1,648
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable......................................... 4,621 (8,432) (3,341)
Inventories................................................. (17,705) (17,400) (10,245)
Accounts payable............................................ 13,634 (7,573) (11,036)
Other current assets and liabilities........................ (6,645) 4,280 (4,538)
Accrued restructuring....................................... (14,941) (1,857) 31,836
Other non-current assets and liabilities, net............... 1,116 (6,855) 1,424
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities.............. 43,086 (11,306) 22,537
Investing Activities:
Acquisitions, net of cash acquired............................... (48,321) (35,722) (42,442)
Purchase of property and equipment............................... (25,066) (24,190) (31,888)
Investment in joint ventures..................................... -- (9,355) (3,119)
Proceeds from sale of building................................... -- -- 3,362
---------------- ---------------- ----------------
Net cash used in investing activities............................ (73,387) (69,267) (74,087)
Financing Activities:
Proceeds from initial public offering............................ -- 51,336 --
Proceeds from issuances of long-term debt........................ -- 141,375 180,000
Payments on long-term debt....................................... -- (145,786) (126,200)
Net borrowing under revolving line of credit and other........... 38,048 32,198 3,986
---------------- ---------------- ----------------
Net cash provided by financing activities........................ 38,048 79,123 57,786
Effect of exchange rate changes on cash.......................... (551) (487) 408
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents............. 7,196 (1,937) 6,644
Cash and cash equivalents at beginning of year................... 8,113 10,050 3,406
---------------- ---------------- ----------------
Cash and cash equivalents at end of year......................... $ 15,309 $ 8,113 $ 10,050
================ ================ ================
</TABLE>
See Accompanying Notes
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
July 31, 1999
(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. In fiscal year 1999, the Company
and GM amended the agreement for the Company's price of automotive products and
extended the agreement term to August 31, 2008.
1999 Acquisitions
On November 13, 1998, the Company, through a wholly-owned subsidiary,
purchased all of the common stock of Williams Technologies, Inc. ("Williams")
for $38,840 in cash, net of cash acquired and less Williams' intercompany and
third-party debt. The purchase was funded through proceeds from the Company's
Senior Credit Facility. The acquisition was treated as a purchase for accounting
purposes and resulted in goodwill of $21,104 which is being amortized over 35
years. Williams is a remanufacturer of automatic transmissions and torque
converters for automotive and medium and heavy duty truck applications. Its
primary market is the dealer network of major North American and foreign
original equipment vehicle manufacturers. The Company does not currently
anticipate any significant changes in the operation of the business of Williams.
Results of operations for Williams are included in the Company's consolidated
results from the acquisition date.
On June 25, 1999, the Company, through a wholly-owned subsidiary, purchased
31% of the capital shares of Remy Korea Limited ("Remy Korea") from certain
shareholders for $6,204 in cash, net of cash acquired. The purchase was funded
through proceeds
29
<PAGE>
from the Company's Senior Credit Facility. This investment increased the
Company's ownership position in Remy Korea to 81%. The acquisition was treated
as a purchase for accounting purposes with no resulting goodwill. During fiscal
year 1997, the Company acquired a 50% interest in Remy Korea for approximately
$5,300. Effective June 25, 1999, the Company accounted for Remy Korea as a
consolidated subsidiary. It was accounted for under the equity method prior to
that date. Remy Korea is a manufacturer of automotive starter motors and parts
for the U.S. original equipment market, as well as customers in Asian markets.
The Company does not currently anticipate any significant changes in the
operation of the business of Remy Korea.
1998 Acquisitions and Investments
On December 22, 1997, the Company acquired all of the capital stock of
Ballantrae for $53,900, including assumed debt, a working capital adjustment and
fees and expenses. The Company exchanged 1,918,623 shares of its Common Stock
with a value of approximately $23,023 for the equity of Ballantrae and repaid
approximately $29,500 of Ballantrae's debt. The 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 acquisition
resulted in goodwill of $24,580, which is being amortized over 35 years.
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.
On March 5, 1998, the Company acquired certain assets from Atlantic Reman
Limited, which is a Canadian Ford Authorized Remanufacturer for the Maritime
Provinces in Canada for $1,277. It remanufactures and distributes engines,
starters, alternators and water pumps to Ford, General Motors, and Chrysler
dealers in Canada.
In March 1998, the Company acquired 37% of Sahney Paris Rhone Ltd. (SPR),
an Indian remanufacturer of starters and alternators which sells principally to
the Indian market. SPR is accounted for under the equity method.
The Company acquired the starter and alternator remanufacturing operations
of Lucas Varity in the United Kingdom on April 6, 1998. The purchase price was
$4,773 (including fees and expenses), and resulting goodwill of $535 is being
amortized over 35 years. The acquisition is being accounted for as a purchase
and is included in the consolidated financial statements from date of
acquisition. Located in England, the Lucas line of remanufactured starters and
alternators is a market leader in the U.K. independent aftermarket. Pro forma
consolidated results are not presented for this acquisition because the effect
on the Company is not material.
On July 16, 1998, the Company acquired Electro Diesel Rebuild (EDR) in
Belgium and Electro Rebuild Tunisia located in Tunisia, which produce heavy duty
and automotive starters and alternators for the European replacement market. The
purchase price was $7,586 (including fees and expenses) and was funded by the
proceeds from a loan facility. Resulting goodwill of $4,663 is being amortized
over 35 years. The acquisition is being accounted for as a purchase and is
included in the consolidated financial statements from the date of acquisition.
Pro forma consolidated results are not presented for this acquisition because
the effect on the Company is not material.
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). The remaining 17.5% interest in World Wide is owned by management of
World Wide. The aggregate purchase price was $40,842, including cash payments of
$38,692 and the issuance of 168,000 shares 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. 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.
30
<PAGE>
Unaudited Pro Forma Results of Operations
The unaudited pro forma consolidated results of operations, assuming the
Williams, Remy Korea and Ballantrae acquisitions had been consummated as of the
beginning of the preceding year, are as follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Revenues......................................... $987,317 $ 863,812
Operating income................................. 103,512 52,201
Income from continuing operations................ 28,799 207
Net income (loss)................................ 28,799 (1,626)
Basic income (loss) per share.................... 1.21 (.08)
Diluted income (loss) per share.................. 1.11 (.08)
</TABLE>
The pro forma consolidated financial information has been prepared for
comparative purposes only and does not purport to present what the Company's
consolidated results of operations would actually have been if the operations
were combined during the periods presented and is not intended to project future
results or trends of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DRI and its
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations
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, alternators, engines, transmissions, traction
control devices, torque convertors and fuel systems for the aftermarket and the
original equipment manufacturer market, principally in North America but also in
Europe, Latin America, Asia- Pacific, India, and Africa.
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 24.6% and 5.8%, respectively.
The Company conducts a significant portion of its business with GM. See
Note 12.
31
<PAGE>
Derivative Financial Instruments
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in foreign currency values, interest rates and commodity
prices that can affect the cost of operating, investing and financing.
Accordingly, the Company addresses a portion of these risks through a controlled
program of risk management that includes the use of derivative financial
instruments. The Company's objective is to reduce earnings and cash flow
volatility associated with these fluctuations. The Company's derivative
activities, all of which are for purposes other than trading, are initiated
within the guidelines of established policies and procedures designed to manage
market risk. The Company does not enter into any derivative transactions for
speculative purposes. From time to time, the Company enters into foreign
currency exchange agreements to manage its exposure arising from fluctuating
exchange rates related to specific transactions. Gains and losses from hedges
are classified in the statement of operations in cost of goods sold when the
contracts are closed. Cash flows from hedges are classified in the consolidated
statement of cash flows under the same category as the anticipated transactions.
The Company had foreign exchange contracts outstanding in the amount of $6,179
and $3,804 at July 31, 1999 and 1998, respectively. The fair value of these
contracts was $6,259 and $3,463 at July 31, 1999 and 1998, 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 materials consumed in the manufacturing process but not
directly incorporated into the finished products. Inventories at July 31, 1999
and 1998 consist of the following:
<TABLE>
<CAPTION>
July 31
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Raw material................. $ 121,725 $ 102,281
Work-in-process.............. 50,725 36,742
Finished goods............... 59,715 59,414
--------- ---------
$ 232,165 $ 198,437
========= =========
</TABLE>
Property and Equipment
Property and equipment are stated at cost and include certain expenditures
for leased facilities. Depreciation is calculated primarily using the straight-
line method over the estimated useful lives of the related assets (15 to 40
years for buildings and 3 to 15 years for machinery and equipment).
Goodwill
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
analysis and (iii) cash flow analysis. 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.
Investments in Joint Ventures
Investments in companies representing an ownership interest of 20% to 50%
are accounted for by the equity method. Joint ventures consisted of a 37%
interest in Sahney Paris Rhone Ltd. (SPR) in fiscal 1998 and fiscal 1999 and a
50% interest Remy Korea Ltd. (RKL) in fiscal 1998 and fiscal 1999 through June
25. Subsequent to that date, RKL was accounted for as a consolidated subsidiary
(see Note 1). Due to the significance of the Company's equity in the earnings
32
<PAGE>
of RKL, the financial statements for RKL are presented on pages 66 to 87. The
Company's investment in SPR and its share of SPR's earnings were not significant
relative to consolidated assets and earnings in fiscal years 1999 and 1998.
Long-Term Assets
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 $156,383, $160,731, and $113,100 for 1999,
1998 and 1997, respectively, to reflect the cost of cores returned for credit.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and at the average exchange rate for each year for revenue and
expenses. Translation adjustments are recorded as a separate component of
stockholders' equity and reflected in comprehensive income (loss).
Earnings Per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted earnings per share is computed by dividing
net income available to common stockholders by the weighted-average number of
common stock shares outstanding during the year plus potential dilutive
instruments including stock options, warrants and the stock purchase plan. The
effect of warrants and the stock purchase plan on diluted earnings per share is
determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price during
the period. Stock options did not affect the calculation of diluted earnings per
share in fiscal year 1999 because the exercise price of stock options
outstanding were greater than the market price. Stock options, warrants, and
stock purchase plans did not affect the calculation of the weighted average
shares for the diluted loss per share in fiscal years 1998 and 1997 because
their effect would have been antidilutive.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
For the Year Ended July 31
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations............... $ 28,346 $ (2,187) $ (10,263)
Loss from operations of discontinued businesses........ -- -- (808)
Loss on disposal of businesses......................... -- -- (874)
Extraordinary items.................................... -- (1,833) (2,351)
----------------- ------------------ ------------------
Numerator for basic and diluted earnings (loss) per
share.................................................. $ 28,346 $ (4,020) $ (14,296)
================= ================== ==================
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares.............................. 23,913,848 19,981,240 14,319,943
Effect of dilutive securities:
Warrants............................................ 1,679,804 NA NA
Stock purchase plan................................. 351,335 NA NA
----------------- ------------------ ------------------
Denominator for diluted earnings (loss) per share...... 25,944,987 19,981,240 14,319,943
================= ================== ==================
</TABLE>
33
<PAGE>
On November 20, 1997, the Company authorized a 16.8-to-one stock split
which occurred on December 19, 1997. All share and per share amounts have been
adjusted to reflect this split.
Comprehensive Income
In fiscal 1999, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS
No. 130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income includes certain items that historically
have been excluded from the calculation of net income. The Company's other
comprehensive income consists of unrealized gains and losses on the translation
of the assets and liabilities of its foreign operations. See Note 11.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash and cash
equivalents, trade and other receivables, accounts payable and long-term debt.
The fair value of the Company's fixed rate debt was estimated using a discounted
cash flow analysis based upon the Company's current incremental borrowing rates.
With the exception of the Senior Notes and the Senior Subordinated Notes, the
carrying amounts of these financial instruments approximated their fair value at
July 31, 1999 and 1998. At July 31, 1999, the Senior Notes have a face value of
$145.0 million and a fair value of $144.1 million and the Senior Subordinated
Notes have a face value of $140.0 million and a fair value of $142.8 million.
Use of Estimates
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expense during the year. Actual results could differ from those estimates.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that all derivatives be
recognized on the balance sheet at fair value. Changes in fair values of
derivatives will be accounted for based upon their intended use and designation.
SFAS No. 137 deferred the effective date of SFAS No. 133 to fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company is required to adopt
this standard not later than the first quarter of fiscal year 2001. Since the
Company's holdings in such instruments are minimal, adoption of this standard is
not expected to have a material effect on the financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5). This statement requires the cost
of start-up activities and organization costs to be expensed as incurred.
Initial application of this SOP is to be reported as the cumulative effect of a
change in accounting principle. The Company is required to adopt this statement
in fiscal year 2000. It is not currently expected that adoption will have a
material effect on the Company's financial position or results of operations.
3. DISCONTINUED OPERATIONS
In fiscal year 1997 , the Company adopted plans to sell certain non-core
businesses acquired in connection with the acquisition of Power Investments,
Inc. Charges totaling $1,682, net of tax benefits of $821, for expected losses
on disposal and operating losses during the transition period were recorded in
fiscal year 1997. The reserves were utilized and all discontinued businesses
were sold or otherwise liquidated during fiscal years 1998 and 1999. Summary
operating results of the discontinued operations in fiscal 1997 consisted of net
sales of $10,935 and net losses of $808. Net assets of
34
<PAGE>
$1,719 were included in the consolidated balance sheet at July 31, 1998.
4. RESTRUCTURING CHARGES
In May 1998, the Company offered an incentive separation payment to DRA
hourly employees through a voluntary employee termination program (VTEP). By the
program's completion date on July 10, 1998, 337 employees had accepted the
Company's offer. A charge of $26,515 was recorded for these separation costs,
$9,974 of which were paid in fiscal year 1998 and $11,565 of which were paid in
fiscal year 1999. $3,649 are to be paid in 2000 and $1,326 are to be paid in
fiscal year 2001.
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 was property and
equipment and $5,042 of which was related tooling and other supplies) which the
Company sold or otherwise disposed of. In fiscal year 1998, the reserve
established for this charge was reduced $5.4 million to reflect the utilization
of certain assets previously targeted for disposal. The Company estimated the
loss on disposal including related costs at $26,260. In addition, the Company
estimated a cost of $8,240 for reducing its workforce through several transition
programs. In fiscal year 1998, this charge was increased $5.2 million to reflect
greater than anticipated participation in the various workforce transition
programs. Some of the operations for the closed facilities were transferred to
the new focus factories; others were outsourced.
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>
Reserve at August 1, 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
Provision in 1998.................................... 26,515 -- 26,515
Change in estimate................................... 5,232 (5,366) (134)
Payments and charges in 1998......................... (19,204) (9,035) (28,239)
-------------------- ------------------- -------------------
Reserve at July 31,1998.............................. 20,783 14,736 35,519
Payments and charges in 1999......................... (15,808) (13,845) (29,653)
-------------------- ------------------- -------------------
Reserve at July 31,1999.............................. $ 4,975 $ 891 $ 5,866
==================== =================== ===================
</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
---------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Balance at beginning of year............................. $2,083 $2,935 $1,209
Additions charged to costs and expenses.................. 1,984 1,037 3,774
Acquisition of certain businesses........................ 50 28 324
Uncollectible accounts written off, net of recoveries (2,012) (1,917) (2,372)
--------------------- -------------------- --------------------
Balance at end of year................................... $2,105 $2,083 $2,935
===================== ==================== ====================
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
July 31
----------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Land and buildings..................... $ 16,281 $ 7,290
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
Buildings under capital leases......... 22,304 22,336
Leasehold improvements................. 10,737 6,088
Machinery and equipment................ 209,405 172,823
------------------- -------------------
$ 258,727 $ 208,537
=================== ===================
</TABLE>
7. LONG-TERM DEBT
Borrowings under long-term debt arrangements consist of the following:
<TABLE>
<CAPTION>
July 31
----------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Senior credit facility:
Revolving acquisition loans................. $ 96,784 $ 64,845
Senior Subordinated Notes...................... 140,000 140,000
Senior Notes................................... 145,000 145,000
GM Subordinated Debentures..................... 18,630 18,459
Other, including capital lease obligations..... 47,113 27,450
------------------- -------------------
447,527 395,754
Less current portion........................... 12,596 1,948
------------------- -------------------
$ 434,931 $ 393,806
=================== ===================
</TABLE>
Senior Credit Facility
On November 13, 1998, the Company amended its Senior Credit Facility.
Pursuant to the Senior Credit Facility, as amended, revolving loans are
available in the aggregate principal amount of $300 million for general purposes
(including acquisitions). The Senior Credit Facility terminates on October 31,
2003. The Company has the option of paying an interest rate of one bank's prime
rate or a LIBOR-based rate. The weighted average interest on amounts outstanding
at July 31, 1999 was 7.21%.
The Senior Credit Facility contains various covenants which include, among
other things: (i) limitations on additional borrowings and encumbrances; (ii)
the maintenance of certain financial ratios and compliance with certain
financial tests and limitations; (iii) limitations on cash dividends paid; (iv)
limitations on investments and capital expenditures; and (v) limitations on
leases and sales of assets.
The Senior Credit Facility is collateralized by a lien on substantially all
assets of the Company and its domestic subsidiaries and by all the capital stock
of such subsidiaries held by the Company or any such other subsidiary.
Senior 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
Company recorded an extraordinary loss in 1997 of $2,351, net of a tax benefit
of $1,147, related to deferred financing costs associated with the payoff of a
previous 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
36
<PAGE>
date.
Upon the occurrence of a change of control, 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.
Senior Notes
On December 22, 1997, the Company issued $145 million of 8 5/8% Senior
Notes due December 15, 2007 (the Senior Notes). The proceeds from the Senior
Notes were $141.4 million, net of issuance costs. The proceeds were used to
repay higher interest bearing debt.
The Senior Notes are general unsecured senior obligations of the Company
and rank pari passu in right of payment with all existing and future senior
indebtedness of the Company and senior in right of payment to all existing and
future subordinated obligations of the Company. In addition, the obligations of
the Company under the Senior Notes will be fully and unconditionally guaranteed
on a joint and several basis by each of the Company's existing and future
domestic restricted subsidiaries. The subsidiary guaranties will rank pari passu
in right of payment with all existing and future senior indebtedness of the
subsidiary guarantors and senior in right of payment to all existing and future
subordinate obligations of the subsidiary guarantors. The Senior Notes and the
subsidiary guaranties will be effectively subordinated to all existing and
future secured indebtedness of the Company and the subsidiary guarantors and to
any liabilities of subsidiaries other than subsidiary guarantors.
The Senior Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after December 15, 2002, at the redemption prices set
forth in the note agreement plus accrued and unpaid interest, if any, to the
date of redemption. In addition, prior to December 15, 2000, the Company may use
the proceeds of one or more public equity offerings to redeem up to 40% of the
original principal amount of the Senior Notes at a redemption price of 108.625%
of the original aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption; provided that not less than 50% of
the original aggregate principal amount of the Senior Notes remains outstanding
following any such redemption.
Upon the occurrence of a change of control (as defined), each holder of the
Senior Notes will have the right to require the Company to purchase all or a
portion of such holder's notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase.
The indenture pursuant to which the Senior Notes were issued contains
certain covenants that, among other things, limit the ability of the Company and
its restricted subsidiaries to (i) incur additional indebtedness, (ii) pay
dividends or make other distributions with respect to capital stock (as defined)
of the Company and its restricted subsidiaries, (iii) sell assets of the Company
or its restricted subsidiaries, (iv) issue or sell restricted subsidiary stock,
(v) enter into certain transactions with affiliates, (vi) create certain liens,
(vii) enter into certain mergers and consolidations and (viii) incur
indebtedness which is subordinate to senior indebtedness and senior to the
Senior Subordinate Notes.
GM Subordinated Debenture
On December 22, 1997, the Company converted preferred stock into a
subordinated debenture with General Motors
37
<PAGE>
(the GM Subordinated Debenture). The debenture bears interest at the rate of 8%
annually and will mature on July 31, 2004. The Company is amortizing the
discount from the maturity value of $19,488 using the straight-line method.
Capital Lease Obligations
Capital leases have been capitalized using interest rates ranging from 8.1%
to 15.2%. The carrying value of assets under capital leases was $17,832 at July
31, 1999.
Other
Total cash interest paid for 1999, 1998 and 1997 was $41,502, $33,397, and
$31,744, respectively.
Required principal payments of long-term debt and capitalized leases are as
follows:
<TABLE>
<S> <C>
2000............................. $ 12,596
2001............................. 6,772
2002............................. 3,151
2003............................. 3,120
2004............................. 118,715
Thereafter....................... 303,173
---------
$ 447,527
=========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
Effective in 1999, the Company adopted SFAS No. 132, Employers' Disclosures
about Pensions and Other Post-retirement Benefits. SFAS No. 132 revises the
disclosure requirements for the Company's benefit plans.
Agreements with GM
In connection with the GM Acquisition, the Company and GM agreed to
allocate the responsibility for employee pension benefits and post-retirement
health care and life insurance on a pro-rata basis between DRA and GM. The
allocation is primarily determined upon years of service with DRA and aggregate
years of service with DRA and GM. Effective August 1, 1994, DRA established
hourly and salaried pension and post-retirement health care and life insurance
plans which are similar to the respective GM plans.
Pension and Post-Retirement Health Care and Life Insurance Plans
DRA has defined benefit pension plans covering substantially all employees.
The plan covering salaried employees provides benefits that are based upon years
of service and final estimated average compensation. Benefits for hourly
employees are based on stated amounts for each year of service. DRA's funding
policy is to contribute amounts to provide the plans with sufficient assets to
meet future benefit payment requirements consistent with actuarial
determinations of the funding requirements of federal laws. Plan assets are
primarily invested in mutual funds which invest in both debt and equity
instruments.
DRA maintains hourly and salaried benefit plans that provide post-
retirement health care and life insurance to retirees and eligible dependents.
The benefits are payable for life, although DRA retains the right to modify or
terminate the plans providing these benefits. The salaried plan 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.
The changes in benefit obligations and plan assets, components of expense,
and assumptions for the plans are as follows:
38
<PAGE>
<TABLE>
<CAPTION>
Post-Retirement Health Care and Life
Pension Benefits Insurance Plans
----------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligations
Benefit obligation at beginning of year.... $ 17,656 $ 12,575 $ 7,021 $ 13,006 $ 11,619 $ 7,109
Service cost............................... 2,111 2,012 3,163 3,538 3,384 3,959
Interest cost.............................. 1,237 930 544 924 637 551
Amendments................................. -- (430) 879 -- -- --
Actuarial (gain)/losses.................... (1,636) 3,077 (966) (2,428) (2,634) --
Benefits paid.............................. (962) (508) (3) -- -- --
Curtailment charges and other.............. -- -- 1,937 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Benefit obligation at end of year.......... $ 18,406 $ 17,656 $ 12,575 $ 15,040 $ 13,006 $ 11,619
============= ============= ============= ============= ============= =============
Change in plan assets
Fair value of plan assets at beginning of
year....................................... $ 12,516 $ 9,663 $ 6,406 $ -- $ -- $ --
Actual return on plan assets............... 1,635 1,158 2,180 -- -- --
Employer contributions..................... 3,560 2,203 1,080 -- -- --
Benefits paid.............................. (962) (508) (3) -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Fair value of plan assets at end of year... $ 16,749 $ 12,516 $ 9,663 $ -- $ -- $ --
============= ============= ============= ============= ============= =============
Funded status.............................. $ (1,657) $ (5,140) $ (2,912) $ (15,040) $ (13,006) $ (11,619)
Unrecognized actuarial loss................ (1,819) (322) (1,577) (6,010) (3,488) (1,058)
Unrecognized prior service cost............ 757 834 911 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net amount recognized...................... $ (2,719) $ (4,628) $ (3,578) $ (21,050) $ (16,494) $ (12,677)
============= ============= ============= ============= ============= =============
Amounts recognized in the
consolidated balance sheets consist
of:
Accrued benefit liability.................. $ (2,719) $ (4,206) $ (3,578) $ (21,050) $ (16,494) $ (12,677)
Minimum pension liability adjustment....... -- (422) -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net amount recognized...................... $ (2,719) $ (4,628) $ (3,578) $ (21,050) $ (16,494) $ (12,677)
============= ============= ============= ============= ============= =============
Components of Expense
Service costs.............................. $ 2,111 $ 2,012 $ 3,163 $ 3,538 $ 3,384 $ 3,959
Interest costs............................. 1,237 930 544 924 637 551
Expected return on plan assets............. (1,331) (1,016) (672) -- -- --
Amortization of prior service cost......... 77 77 4 -- -- --
Recognized net actuarial loss/(gain)....... 8 (103) -- 93 (203) (19)
Curtailments, settlements and other........ -- -- 1,633 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net periodic pension cost.................. $ 2,102 $ 1,900 $ 4,672 $ 4,555 $ 3,818 $ 4,491
============= ============= ============= ============= ============= =============
Weighted-average assumptions
Discount rate.............................. 7.75% 7.00% 7.75% 7.75% 7.00% 7.75%
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Expected return on plan assets............. 10.00% 10.00% 10.00% -- -- --
Rate of compensation increase.............. 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
</TABLE>
In 1997, the Company offered retirement incentives to salaried employees.
The program liability of $1,633 was included with the restructuring charge.
The measurement of the July 31, 1999 and 1998 projected benefit obligation
was based upon a discount rate of 7.75% and 7.00%, respectively. The expected
compensation growth rate is 5% for salaried employees. The expected rate of
return on plan assets is 10%.
Measurement of the accumulated post-retirement benefit obligation was
based on a 6.85% annual rate of increase in the cost of covered health care
benefits. The rate was assumed to decrease ratably to 5.0% through 2004 and
remain level at that rate thereafter. The discount rate used in determining the
accumulated post-retirement benefit obligation was 7.75%, 7.00% and 7.75% in
1999, 1998, 1997, respectively. An increase and decrease of one-percentage-
point in the assumed health care trend rates would have the following effects on
1999 service and interest cost and the accumulated post-retirement benefit
obligation at July 31, 1999.
<TABLE>
<CAPTION>
1% Increase 1% Decrease
------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Effect on total of service and interest cost components of net
periodic post-retirement health care benefit cost.................... $ 1,265 $ (934)
Effect on the health care component of the accumulated post-retirement
benefit obligation................................................... 3,722 (2,798)
</TABLE>
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 $1,227, $953, and $532 in 1999, 1998 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 1999, 1998 and 1997
was $1,804, $918, and $1,400, respectively.
9. STOCKHOLDERS' EQUITY
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 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.
Stock Purchase Plan
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,
1999, 310,800 shares were outstanding pursuant to the private placement at a
price approximating book value. Shares issued pursuant to this plan generally
vest over three to five years. The balance of the unearned compensation of $215
is being amortized over the remaining vesting period. The stockholder notes
receivable of $322 and $414 at July 31, 1999 and 1998, respectively, are
associated with the sale of Class A Common Stock and are payable in 1999 through
2002 together with interest at 9.25% per annum.
40
<PAGE>
Initial Public Offering
On December 22, 1997, the Company issued 4,000,000 shares of Class A
Common Stock in an initial public offering at $12.00 per share. Also, on January
16, 1998, the Company issued an additional 600,000 shares of Class A Common
Stock at $12.00 per share as a result of the underwriters' exercise of their
over-allotment option. Net proceeds to the Company from such offerings, after
deduction of associated expense, were approximately $51,336.
Warrants
DRI has 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 shares and liquidation preference $1,000 per
share) to GM (DRA Preferred Stock). The DRA Preferred Stock was exchangeable, 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. As a part
of the December 22, 1997 initial offering and recapitalization, the DRA
Preferred Stock was exchanged for the 8% Subordinated Debenture. As a result,
$1,639 in deemed dividend on the preferred stock conversion was incurred in
fiscal year 1998.
Dividends
The Company has never paid dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend, among other factors, upon the Company's earnings, financial condition
and capital requirements and the terms of the Company's financing agreements.
The Company plans to retain future earnings for use in the business in the
foreseeable future. The ability of the Company to make dividend payments is also
restricted by the terms of certain of its debt instruments.
Stock Options
The Company has two fixed stock option plans which reserve shares of common
stock for issuance to executives, key employees, and directors.
In December 1997, the Company adopted the Stock-Based Incentive
Compensation Plan whereby employees of the Company are eligible to be granted
incentive stock options or non-qualified stock options. As of July 31, 1999, an
aggregate total of 1,224,000 shares are reserved for grants of stock options,
stock appreciation rights, and restricted stock awards under the plan.
In December 1997, the Company adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors whereby non-employee directors are eligible to be
granted non-qualified stock options. As of July 31, 1999, a total of 100,000
shares were reserved for grant under the plan. On December 16, 1997, each non-
employee director of the Company was granted options to purchase 2,000 shares.
On December 16, 1999, and through December 16, 2001, an additional 2,000 options
will be granted annually to non-employee directors. The non-employee directors
waived their right to the December 16, 1998 grant of 2,000 shares each.
The exercise price of stock options granted may not be less than the fair
market value of a share of common stock on the date of the grant. Options become
exercisable in periods ranging from one to five years and vest ratably over a
period of five years from the date of the grant. Information regarding these
option plans for 1999 and 1998 is as follows:
41
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Exercise
Shares Price
---------------------------------------
<S> <C> <C>
Initial grant of options (weighted average fair value of $5.56)....................... 258,700 $12.00
Cancelled............................................................................. (7,600) 12.00
-------------------
Outstanding as of July 31, 1998....................................................... 251,100 12.00
Granted (weighted average fair value of $5.45)........................................ 224,100 11.75
Cancelled............................................................................. (39,460) 11.92
-------------------
Outstanding as of July 31, 1999....................................................... 435,740 $11.88
===================
</TABLE>
At July 31, 1999, there were approximately 888,260 additional shares
available for grant under the Company's plans.
No options were exercised during 1999 or 1998. The exercise prices for all
outstanding options are $11.75 and $12.00 for 1999 and 1998, respectively. The
remaining contractual life of all options is approximately 8.9 years.
Disclosure of pro forma information regarding net income and earnings per
share is required by FASB Statement No. 123 as if the Company has accounted for
its stock options under the fair value method as defined by that Statement. The
fair value for options granted by the Company was estimated as of the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Risk-free interest rate.......................................................... 5.00% 5.00%
Dividend yield................................................................... 0.00% 0.00%
Volatility factor of the expected market price of the Company's common stock..... 0.30 0.30
Expected life of the options (years)............................................. 8 8
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purpose of pro forma disclosures, the estimated fair value of the
options are amortized to expense over the related vesting period. Because
compensation expense is recognized over the vesting period, the initial impact
on pro forma net income may not be representative of compensation expense in
future years, when the effect of amortization of multiple awards would be
reflected in the consolidated statements of operations. The Company's pro forma
information giving effect to the estimated compensation expense related to stock
options is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
<S> <C> <C>
Pro forma net income (loss).............................. $28,109 $(4,128)
Pro forma earnings (loss) per share:
Basic................................................. $ 1.18 $ (.21)
Diluted............................................... $ 1.08 $ (.21)
</TABLE>
10. INCOME TAXES
The following is a summary of the components of the provision for income
taxes (benefit) of continuing operations:
42
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended July 31
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal................................................ $ 257 $ (2,916) $ 3,220
State and local........................................ 1,478 2,276 2,019
Foreign................................................ 5,214 2,834 977
----------------- ------------------ ------------------
6,949 2,194 6,216
----------------- ------------------ ------------------
Deferred:
Federal................................................ 7,146 (1,019) (8,615)
State and local........................................ 1,703 (1,227) (960)
Foreign................................................ 656 -- 345
----------------- ------------------ ------------------
9,505 (2,246) (9,230)
----------------- ------------------ ------------------
$ 16,454 $ (52) $(3,014)
================= ================== ==================
</TABLE>
Income (loss) from continuing operations before income taxes (benefit),
minority interest in income of subsidiaries, income from unconsolidated joint
ventures, preferred dividend requirement of subsidiary and deemed dividend on
preferred stock conversion was taxed in the following jurisdictions:
<TABLE>
<CAPTION>
For the Year Ended July 31
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Domestic.................................................. $25,101 $ (10,789) $(15,640)
Foreign................................................... 19,844 10,655 4,903
Eliminations.............................................. (1,644)(a) -- --
----------------- ------------------ ------------------
$ 43,301 $ (134) $(10,737)
================= ================== ==================
</TABLE>
(a) Represents elimination of intercompany profit in inventory.
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
--------------------------------------------------------
1999 1998 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... 4.8 (21.7) (7.7)
Compensation expense...................................... -- -- (6.0)
Foreign operations........................................ (2.3) 43.0 4.0
Goodwill.................................................. .7 (13.3) (0.1)
Other items............................................... (.2) (4.2) 2.9
----------------- ------------------ ------------------
Effective income tax rate................................. 38.0% 38.8% 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
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Restructuring............................................................... $ 2,244 $ 11,912
Employee benefits........................................................... 9,648 8,779
Inventories................................................................. 4,576 5,852
Warranty.................................................................... 3,350 4,387
Asset impairment............................................................ -- 1,215
Discontinued operations..................................................... -- 283
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
Non-compete agreements...................................................... 789 722
Alternative minimum tax credits............................................. 5,309 6,503
Net operating loss carryforwards............................................ 7,925 1,403
Other....................................................................... 1,615 2,702
----------------- -----------------
Total deferred tax assets...................................................... 35,456 43,758
Valuation allowance......................................................... (2,507) (530)
----------------- -----------------
Deferred tax assets net of valuation allowance................................. 32,949 43,228
Deferred tax liabilities:
Depreciation................................................................ (17,633) (16,689)
Other....................................................................... (4,887) (6,127)
----------------- -----------------
Total deferred tax liabilities............................................ (22,520) (22,816)
----------------- -----------------
Net deferred tax asset after valuation allowance.......................... $ 10,429 $ 20,412
================= =================
</TABLE>
The Company's alternative minimum tax credit may be carried forward
indefinitely. The Company's net operating loss carryforwards expire between 2018
and 2019. Income tax payments (refunds), including state taxes, for 1999, 1998,
and 1997 were $617, $(483), 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 ($34,749 at July 31, 1999) 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.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
In fiscal year 1999, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income (SFAS No. 130). SFAS No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income includes certain items that historically have been excluded from the
calculation of net income.
The Company's other comprehensive income consists of unrealized gains and
losses on the translation of the assets and liabilities of its foreign
operations. The before tax gain(loss), related income tax expense (benefit) and
accumulated balance are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Foreign currency translation adjustment:
Before tax gain (loss) $ (3,939) $ (3,794) $ 569
Income tax expense (benefit) (1,497) (1,472) 160
---------------- ---------------- ----------------
After tax gain (loss) $ (2,442) $ (2,322) $ 409
================ ================ ================
Accumulated other comprehensive
income (loss) $ (6,516) $ (4,074) $ (1,752)
================ ================ ================
</TABLE>
12. 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
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Sales................................................ $359,162 $307,048 $301,328
Material purchases and costs for services............ 34,273 52,273 97,934
In addition, the Company had the following balances with GM:
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
July 31
-------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Trade accounts receivable............................ $43,490 $34,449
Other receivables.................................... 4,990 3,711
</TABLE>
13. LEASE COMMITMENTS
The Company occupies space and uses certain equipment under lease
arrangements. Rent expense was $7,793, $8,207 and $4,004 for 1999, 1998 and
1997, respectively. Rental commitments at July 31, 1999 for long-term non-
cancelable operating leases were as follows:
<TABLE>
<S> <C>
Year ending 2000................................. $ 6,831
Year ending 2001................................. 5,397
Year ending 2002................................. 3,597
Year ending 2003................................. 2,046
Year ending 2004................................. 1,772
Thereafter....................................... 10,484
-----------------
$ 30,127
=================
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative
proceedings and subject to various claims arising in the ordinary course of
business, including those relating to commercial transactions, product
liability, safety, health, taxes, environmental and other matters. The Company
believes that the ultimate liability, if any, in excess of amounts already
provided or covered by insurance on the disposition of these matters will not
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
15. BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and related disclosures about products and geographic areas.
The Company is a global vehicular parts designer, manufacturer,
remanufacturer, marketer and distributor. Products include starter motors,
alternators, engines, transmissions, traction control systems, torque convertors
and fuel systems which are principally sold or distributed to OEMs for both
original equipment manufacture and aftermarket operations, as well as to
warehouse distributors and retail automotive parts chains. It manages its
business and operates in a single reportable business segment. Because of the
similar economic characteristics of the operations, including the nature of
products, production processes, customers and methods of distribution, those
operations have been aggregated following the provisions of SFAS No. 131 for
segment reporting purposes.
The Company is a multi-national corporation with operations in many
countries, including the United States, Canada, Mexico, Hungary, Germany, Korea,
the United Kingdom, Belgium and the Netherlands. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products. The Company's operating
results are exposed to changes in exchange rates between the U.S. dollar and the
Korean Won, the Mexican Peso and various European currencies. Exposure to
variability in foreign currency exchange rates is managed primarily through the
use of natural hedges, whereby funding obligations and assets are both
denominated in the local currency. From time to time, the Company enters into
exchange agreements to manage its exposure arising from fluctuating exchange
rates related to specific transactions. Sales are attributed to geographic
locations based on the location of product production.
45
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended July 31
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Net sales to external customers:
United States............................................ $ 845,945 $ 733,551 $ 625,178
Canada................................................... 47,270 44,660 47,234
Europe................................................... 46,325 23,547 14,206
Other.................................................... 14,166 13,555 3,169
----------------- ------------------ ------------------
Total net sales....................................... $ 953,706 $ 815,313 $ 689,787
================= ================== ==================
</TABLE>
<TABLE>
<CAPTION>
July 31
-------------------------------------
Long-lived assets: 1999 1998
----------------- ------------------
<S> <C> <C>
United States............................................ $ 280,785 $ 274,329
Canada................................................... 11,361 9,964
Europe................................................... 23,960 19,566
Other.................................................... 37,699 11,508
----------------- ------------------
Total long-lived assets............................... $ 353,805 $ 315,367
================= ==================
</TABLE>
Customers that accounted for a significant portion of consolidated net sales
were as follows:
<TABLE>
<CAPTION>
For the Year Ended July 31
--------------------------------------------------------
1999 1998 1997
----------------- ---------------- ------------------
<S> <C> <C> <C>
General Motors Corporation:
North American OE Operations.......................... $ 241,288 $ 209,695 $ 219,285
Other................................................. 117,874 97,353 82,043
Navistar International Corporation...................... 127,842 NA NA
</TABLE>
Sales to Navistar International Corporation accounted for less than 10% of
consolidated net sales in 1998 and 1997.
Following is a summary of the composition by product category of the Company's
sales to external customers:
<TABLE>
<CAPTION>
For the Year Ended July 31
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Electrical systems.................................... $ 793,727 $ 697,448 $ 605,255
Powertrain/drivetrain................................. 149,279 110,370 84,532
Other................................................. 10,700 7,495 --
----------------- ----------------- ------------------
Total................................................. $ 953,706 $ 815,313 $ 689,787
================= ================= ==================
</TABLE>
46
<PAGE>
16. OTHER INFORMATION
Supplemental Cash Flow Information
Supplemental cash flow information is as follow:
<TABLE>
<CAPTION>
For the Year Ended July 31
----------------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Cash paid for interest, net of amounts capitalized. $ 41,502 $ 33,397 $ 31,744
Cash paid for income taxes, net of refunds received 617 (483) (1,100)
Detail of acquisitions:
Fair value of assets acquired.................... $ 63,786 $ 35,135 $ 44,801
Liabilities assumed.............................. (33,398) (6,168) (20,481)
Goodwill recorded................................ 23,383 29,778 21,301
Minority interest................................ (5,450) -- (1,029)
Common stock issued.............................. -- (23,023) (2,150)
---------------- ----------------- -----------------
Net cash paid for acquisitions .................. 48,321 35,722 42,442
Cash acquired.................................... 4,571 189 150
---------------- ----------------- -----------------
Total............................................ $ 52,892 $ 35,911 $ 42,592
================ ================= =================
</TABLE>
Research and Development Costs
The Company spent approximately $19,500, $13,300 and $16,700 in 1999, 1998
and 1997, respectively, on research and development activities. All expenditures
were Company funded.
17. 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
the notes are fully and unconditionally guaranteed, jointly and severally, by
certain direct and indirect wholly-owned subsidiaries (the Subsidiary
Guarantors). Certain of the Company's subsidiaries do not guarantee the Senior
Notes and the Senior Subordinated Notes (the Non-Guarantor Subsidiaries). The
claims of creditors of Non-Guarantor Subsidiaries have priority over the rights
of the Company to receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at July
31, 1999 and 1998 and for the years ended July 31, 1999, 1998 and 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, except for Williams
Technologies, Inc., based on management's determination that they do not provide
additional information that is material to investors. Separate financial
statements for Williams Technologies, Inc. are included as required by
Securities and Exchange Commission rules and regulations due to significance in
year of acquisition.
47
<PAGE>
The following table sets forth the Guarantor and direct Non-Guarantor
Subsidiaries:
<TABLE>
<S> <C>
Guarantor Subsidiaries Non-Guarantor Subsidiaries
Delco Remy America, Inc. Delco Remy Hungary RT (formerly Autovill RT Ltd.)
Nabco, Inc. Power Investments Canada Ltd.
The A&B Group, Inc. Remy UK Limited
A&B Enterprises, Inc Delco Remy International (Europe) GmbH
Dalex, Inc. Remy India Holdings, Inc.
A&B Cores, Inc. Remy Korea Holdings, Inc
R&L Tool Company, Inc. Alberta Ltd.
MCA, Inc. of Mississippi World Wide Automotive Distributors, Inc.
Power Investments, Inc. KraftTube, Inc.
Franklin Power Products, Inc. Tractech (Ireland) Ltd.
International Fuel Systems, Inc Central Precision Limited
Marine Drive Systems, Inc. Electro Diesel Rebuild
Marine Corporation of America Electro Rebuild Tunisia S.A.R.L. (Tunisia)
Powrbilt Products, Inc. Delco Remy Mexico, S. de R.L. de C.V.
World Wide Automotive, Inc. Publitech, Inc.
Ballantrae Corporation Delco Remy Brazil, Ltda.
Tractech Inc. Western Reman Ltd. (Canada)
Williams Technologies, Inc. Engine Rebuilders Ltd.
Western Reman, Inc. Reman Transport Ltd.
Delco Remy Remanufacturing
</TABLE>
48
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
July 31, 1999
----------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents..... $ -- $ (291) $ 15,600 $ -- $ 15,309
Trade accounts receivable..... -- 118,371 29,617 -- 147,988
Other receivables............. -- 6,626 8,870 -- 15,496
Inventories................... -- 189,893 43,916 (1,644)(b) 232,165
Deferred income taxes......... -- 14,997 -- -- 14,997
Other current assets.......... -- 2,125 778 -- 2,903
------------- ------------ ------------ ------------ ------------
Total current assets............ -- 331,721 98,781 (1,644) 428,858
Property and equipment.......... 40 195,403 63,284 -- 258,727
Less accumulated depreciation... 40 54,754 8,738 -- 63,532
------------- ------------ ------------ ------------ ------------
-- 140,649 54,546 -- 195,195
Deferred financing costs........ 8,352 2,840 -- -- 11,192
Goodwill, net................... -- 114,799 22,630 -- 137,429
Net assets held for disposal.... -- -- 182 -- 182
Investment in affiliates........ 381,246 -- 19 (376,509)(a) 4,756
Other assets.................... 2,411 295 2,345 -- 5,051
------------- ------------ ------------ ------------ ------------
Total assets.................... $ 392,009 $ 590,304 $ 178,503 $ (378,153) $ 782,663
============= ============ ============ ============ ============
</TABLE>
________________
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory.
49
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
July 31, 1999
-----------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Liabilities And Stockholders'
Equity:
Current liabilities:
Accounts payable................... $ 636 $ 85,590 $ 33,113 $ -- $ 119,339
Intercompany accounts.............. (19,630) 43,825 (23,596) (599)(c) --
Accrued interest payable........... 9,001 2,592 10 -- 11,603
Accrued restructuring charges...... -- 5,866 -- -- 5,866
Other liabilities and accrued
expenses......................... (1,250) 24,684 13,671 -- 37,105
Current debt....................... -- 1,227 11,369 -- 12,596
------------- ------------ ------------ ------------ ------------
Total current liabilities............ (11,243) 163,784 34,567 (599) 186,509
Deferred income taxes................ -- 4,560 8 -- 4,568
Long-term debt, less current
portion.............................. 285,000 138,117 11,814 -- 434,931
Post-retirement benefits other
than pensions...................... -- 21,050 -- -- 21,050
Accrued pension benefits............. -- 2,719 -- -- 2,719
Other non-current liabilities........ 2,216 1,328 1 -- 3,545
Minority interest in subsidiaries.... -- 10,112 9,709 -- 19,821
Stockholders' equity:
Common stock:
Class A Shares.................. 182 -- -- -- 182
Class B Shares.................. 63 -- -- -- 63
Paid-in capital.................... 104,176 -- -- -- 104,176
Subsidiary investment.............. -- 200,052 92,998 (293,050)(a) --
Retained earnings.................. 12,152 48,582 35,922 (84,504)(b) 12,152
Accumulated other comprehensive
income............................. -- -- (6,516) -- (6,516)
Stock purchase plan................ (537) -- -- -- (537)
------------- ------------ ------------ ------------ ------------
Total stockholders' equity........... 116,036 248,634 122,404 (377,554) 109,520
------------- ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity............... $ 392,009 $ 590,304 $ 178,503 $ (378,153) $ 782,663
============= ============ ============ ============ ============
</TABLE>
_______________
(a) Elimination of investments in subsidiaries.
(b) Elimination of investments in subsidiaries' earnings.
(c) Elimination of intercompany profit in inventory.
50
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Year Ended July 31, 1999
-------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $ -- $ 953,652 $ 266,447 $ (266,393)(a) $ 953,706
Cost of goods sold...................... -- 802,324 222,240 (264,749)(a) 759,815
------------- ------------ ------------ ------------ ------------
Gross profit............................ 151,328 44,207 (1,644)(c) 193,891
Selling, engineering, and
administrative expenses............... 11,241 67,587 21,054 -- 99,882
Amortization of goodwill and intangibles 5 4,680 518 -- 5,203
------------- ------------ ------------ ------------ ------------
Operating (loss) income................. (11,246) 79,061 22,635 (1,644) 88,806
Interest expense........................ (27,693) (16,390) (1,422) -- (45,505)
------------- ------------ ------------ ------------ ------------
(Loss) income from continuing
operations before income tax
(benefit), minority interest in
income of subsidiaries, income from
unconsolidated joint ventures and
equity earnings of subsidiaries..... (38,939) 62,671 21,213 (1,644) 43,301
Income taxes (benefit).................. (4,528) 15,584 5,997 (599)(c) 16,454
Minority interest in income of
subsidiaries ......................... -- (2,898) (1,023) -- (3,921)
Income from unconsolidated joint
ventures.............................. -- -- 5,420 -- 5,420
Equity in earnings of subsidiaries...... 62,757 -- -- (62,757)(b) --
------------- ------------ ------------ ------------ ------------
Net income (loss)....................... $ 28,346 $ 44,189 $ 19,613 $ (63,802) $ 28,346
============= ============ ============ ============ ============
</TABLE>
__________
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Elimination of intercompany profit in inventory.
51
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Year Ended July 31, 1999
-----------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss).................... $ 28,346 $ 44,189 $ 19,613 $ (63,802)(a) $ 28,346
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation......................... 20 15,010 3,328 -- 18,358
Amortization......................... 1,153 5,180 518 -- 6,851
Minority interest in income of
subsidiaries....................... -- 2,898 1,023 -- 3,921
Income from unconsolidated joint
ventures........................... -- -- (5,420) -- (5,420)
Equity (loss) in earnings of
subsidiaries....................... (62,757) -- -- 62,757 (a) --
Deferred income taxes................ 6,428 228 -- -- 6,656
Post-retirement benefits other
than pensions...................... -- 4,555 -- -- 4,555
Accrued pension benefits............. -- (1,909) -- -- (1,909)
Non-cash interest expense ........... -- 1,648 -- -- 1,648
Changes in operating assets and
liabilities, net of
acquisitions:
Accounts receivable.................. -- (2,634) 7,255 -- 4,621
Inventories.......................... -- (13,500) (5,849) 1,644 (b) (17,705)
Accounts payable..................... 506 6,479 6,649 -- 13,634
Intercompany accounts................ 48,638 (38,373) (9,666) (599) (b) --
Other current assets and
liabilities........................ (4,001) (1,662) (982) -- (6,645)
Accrued restructuring................ -- (14,941) -- -- (14,941)
Other non-current assets and
liabilities, net................... 26,729 (20,475) (5,138) -- 1,116
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities............... 45,062 (13,307) 11,331 -- 43,086
Investing Activities:
Acquisitions, net of cash acquired... (45,042) -- (3,279) -- (48,321)
Purchase of property and equipment... (20) (19,267) (5,779) -- (25,066)
------------- ------------ ------------ ------------ ------------
Net cash used in investing
activities......................... (45,062) (19,267) (9,058) -- (73,387)
Financing Activities:
Net borrowing under revolving
line of credit and other........... -- 32,158 5,890 -- 38,048
------------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities......................... -- 32,158 5,890 -- 38,048
Effect of exchange rate changes
on cash............................ -- -- (551) -- (551)
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............... -- (416) 7,612 -- 7,196
Cash and cash equivalents at
beginning of year.................. -- 125 7,988 -- 8,113
============= ============ ============ ============ ============
Cash and cash equivalents at end
of year............................ $ -- $ (291) $ 15,600 $ -- $ 15,309
============= ============ ============ ============ ============
</TABLE>
________________
(a) Elimination of equity in earnings.of subsidiary.
(b) Elimination of intercompany profit in inventory.
52
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
July 31, 1998
---------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents..... $ -- $ 125 $ 7,988 $ -- $ 8,113
Trade accounts receivable..... -- 106,543 20,353 -- 126,896
Other receivables............. -- 8,161 1,685 -- 9,846
Recoverable income taxes...... -- 1,802 -- -- 1,802
Inventories................... -- 165,150 33,287 -- 198,437
Deferred income taxes......... 6,428 15,225 -- -- 21,653
Other current assets.......... -- 2,405 478 -- 2,883
------------- ------------ ------------ ------------ ------------
Total current assets............ 6,428 299,411 63,791 -- 369,630
Property and equipment.......... 20 178,146 30,371 -- 208,537
Less accumulated depreciation... 20 44,769 5,779 -- 50,568
------------- ------------ ------------ ------------ ------------
-- 133,377 24,592 -- 157,969
Deferred financing costs........ 9,437 1,312 37 -- 10,786
Goodwill, net................... -- 93,673 21,773 -- 115,446
Net assets held for disposal.... -- 14,894 -- -- 14,894
Investment in affiliates........ 261,541 -- -- (249,067)(a)(b) 12,474
Other assets.................... 2,523 876 399 -- 3,798
------------- ------------ ------------ ------------ ------------
Total assets.................... $ 279,929 $ 543,543 $ 110,592 $ (249,067) $ 684,997
============= ============ ============ ============ ============
</TABLE>
____________________
(a) Elimination of investments in subsidiaries.
(b) Elimination of investments in subsidiaries' earnings.
53
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
July 31, 1998
---------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Liabilities And Stockholders'
Equity:
Current liabilities:
Accounts payable ............. $ 130 $ 71,180 $ 14,494 $ -- $ 85,804
Intercompany accounts......... (79,839) 82,869 (3,030) -- --
Accrued interest payable...... 9,001 580 -- -- 9,581
Accrued restructuring charges. -- 35,519 -- -- 35,519
Other liabilities and accrued
expenses.................... 2,751 30,505 4,062 -- 37,318
Current debt.................. -- 961 987 -- 1,948
------------- ------------ ------------ ------------ ------------
Total current liabilities....... (67,957) 221,614 16,513 -- 170,170
Deferred income taxes........... (25,431) 23,755 2,917 -- 1,241
Long-term debt, less current
portion....................... 285,000 101,218 7,588 -- 393,806
Post-retirement benefits other
than pensions................. -- 16,495 -- -- 16,495
Accrued pension benefits........ -- 4,628 -- -- 4,628
Other non-current liabilities... 3 3,802 162 -- 3,967
Minority interest in
subsidiaries.................. -- 8,650 1,800 -- 10,450
Stockholders' equity:
Common stock:
Class A Shares............. 182 -- -- -- 182
Class B Shares............. 63 -- -- -- 63
Paid-in capital............... 106,392 -- -- -- 106,392
Subsidiary investment......... -- 158,988 69,377 (228,365)(a) --
Retained earnings (deficit) .. (16,194) 4,393 16,309 (20,702)(b) (16,194)
Accumulated other
comprehensive income (loss)... -- -- (4,074) -- (4,074)
Stock purchase plan........... (2,129) -- -- -- (2,129)
============= ============ ============ ============ ============
Total stockholders' equity...... 88,314 163,381 81,612 (249,067) 84,240
============= ============ ============ ============ ============
Total liabilities and
stockholders' equity $ 279,929 $ 543,543 $ 110,592 $ (249,067) $ 684,997
============= ============ ============ ============ ============
</TABLE>
____________
(a) Elimination of investments in subsidiaries.
(b) Elimination of investments in subsidiaries' earnings.
54
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
July 31, 1998
--------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................. $ -- $ 833,952 $ 138,016 $ (156,655)(a) $ 815,313
Cost of goods sold.................... -- 700,080 114,437 (156,655)(a) 657,862
------------- ---------- ------------ ------------ ------------
Gross profit.......................... -- 133,872 23,579 -- 157,451
Selling, engineering, and
administrative expenses............. 175 75,616 11,082 -- 86,873
Amortization of goodwill and
intangibles......................... 191 3,088 199 -- 3,478
Restructuring charges................. -- 26,515 -- -- 26,515
------------- ---------- ------------ ------------ ------------
Operating (loss) income............... (366) 28,653 12,298 -- 40,585
Other income (expense):
Non-operating expense ................ -- -- (428) -- (428)
Interest expense...................... (24,911) (15,179) (201) -- (40,291)
------------- ---------- ------------ ------------ ------------
(Loss) income from continuing
operations before income tax
(benefit), preferred dividend
requirement of subsidiary,
minority interest and deemed
dividend............................ (25,277) 13,474 11,669 -- (134)
Income taxes (benefit)................ (9,415) 6,440 2,923 -- (52)
Minority interest in income of
subsidiaries........................ -- (2,027) (362) -- (2,389)
Equity in earnings of subsidiaries.... 11,842 -- -- (11,842)(b) --
Income from unconsolidated joint
ventures............................ -- -- 2,568 -- 2,568
Preferred dividend requirement of
subsidiary.......................... -- -- -- (645)(c) (645)
Deemed dividend on preferred
stock conversion.................... -- -- -- (1,639) (1,639)
------------- ---------- ------------ ------------ ------------
(Loss) income from continuing
operations.......................... (4,020) 5,007 10,952 (14,126) (2,187)
Extraordinary item:
Write-off of debt issuance costs
(net of applicable income tax
benefit)............................ -- (1,833) -- -- (1,833)
------------- ---------- ------------ ------------ ------------
Net (loss) income..................... $ (4,020) $ 3,174 $ 10,952 $ (14,126) $ (4,020)
============= ========== ============ ============ ============
</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.
55
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Year Ended July 31, 1998
--------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net (loss) income.................... $ (4,020) $ 3,174 $ 10,952 $ (14,126)(a) $ (4,020)
Extraordinary item................... -- 2,095 -- -- 2,095
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation......................... 7 12,634 950 -- 13,591
Amortization......................... 1,076 3,473 207 -- 4,756
Minority interest in income of
subsidiaries....................... -- 2,027 362 -- 2,389
Income from unconsolidated joint
ventures........................... -- -- (2,568) -- (2,568)
Equity in earnings of subsidiary..... (11,842) -- -- 11,842(a) --
Deferred income taxes................ (10,325) 12,012 26 -- 1,713
Post-retirement benefits other
than pensions...................... -- 3,818 -- -- 3,818
Accrued pension benefits............. -- 86 -- -- 86
Non-cash interest expense ........... -- 2,387 -- -- 2,387
Preferred dividend requirement of
subsidiary......................... -- -- -- 645(b) 645
Deemed dividend requirement of
subsidiary......................... -- -- -- 1,639 1,639
Changes in operating assets and
liabilities, net of
acquisitions:
Accounts receivable.................. -- (4,136) (4,296) -- (8,432)
Inventories.......................... -- (15,428) (1,972) -- (17,400)
Accounts payable..................... (65) (12,621) 5,113 -- (7,573)
Intercompany accounts................ (98,447) 113,029 (14,582) -- --
Other current assets and
liabilities........................ (6,283) 13,119 (2,556) -- 4,280
Accrued restructuring................ -- (1,857) -- -- (1,857)
Other non-current assets and
liabilities, net................... (10,799) (7,297) 11,241 -- (6,855)
------------- ------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities............... (140,698) 126,515 2,877 -- (11,306)
Investing Activities:
Acquisitions, net of cash acquired... (34,358) -- (1,364) -- (35,722)
Purchase of property and equipment... -- (22,545) (1,645) -- (24,190)
Investment in joint ventures......... (9,355) -- -- -- (9,355)
------------- ------------ ------------ ------------ ------------
Net cash (used in) provided by
investing activities............... (43,713) (22,545) (3,009) -- (69,267)
Financing Activities:
Proceeds from initial public
offering........................... 51,336 -- -- -- 51,336
Proceeds from issuances of
long-term debt..................... 141,375 -- -- -- 141,375
Payments on long-term debt........... (8,300) (137,486) -- -- (145,786)
Net borrowing under revolving
line of credit and other........... -- 32,137 61 -- 32,198
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities............... 184,411 (105,349) 61 -- 79,123
Effect of exchange rate changes
on cash............................ -- -- (487) -- (487)
------------- ------------ ------------ ------------ ------------
Net decrease in cash and cash
equivalents........................ -- (1,379) (558) -- (1,937)
Cash and cash equivalents at
beginning of year.................. -- 1,504 8,546 -- 10,050
------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of year............................ $ -- $ 125 $ 7,988 $ -- $ 8,113
============= ============ ============ ============ ============
</TABLE>
____________
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
56
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
July 31, 1997
--------------------------------------------------------------------------------
Delco Remy
International Non-
Inc. (Parent Subsidiary Guarantor
Company 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............ 5,259 69,845 10,840 -- 85,944
Amortization of goodwill and
intangibles........................ 1,066 2,088 -- -- 3,154
Restructuring charges................ -- 34,500 -- -- 34,500
------------- ------------ ------------ ------------ ------------
Operating (loss) income.............. (6,325) 29,482 2,798 -- 25,955
Other income (expense):
Non-operating income................. -- -- 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)
Income taxes (benefit)............... (9,023) 4,042 1,967 -- (3,014)
Minority interest in income of
subsidiaries....................... -- (921) 29 -- (892)
Equity in earnings of subsidiaries... 1,821 -- -- (1,821)(b) --
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
(net of applicable income
tax benefit).................... -- (808) -- -- (808)
Loss on disposal of businesses
(net of applicable income
tax benefit).................... -- (874) -- -- (874)
Extraordinary item:
Write-off of debt issuance
costs (net of 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.
57
<PAGE>
DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Year Ended July 31, 1997
------------------------------------------------------------------------------------
Delco Remy
International Inc. Non-
(Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------ --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net (loss) income......................... $(14,296) $ 489 $ 2,980 $ (3,469) $(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.............................. -- 17,171 752 -- 17,923
Amortization.............................. 1,629 2,771 -- -- 4,400
Minority interest in income of
subsidiaries............................ -- 892 -- -- 892
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) 15,288 (1,655) -- 1,424
------------------ --------------- -------------- -------------- ---------------
Net cash (used in) provided by operating
activities.............................. (98,365) 115,874 5,028 -- 22,537
Investing Activities:
Acquisitions, net of cash acquired........ (45,284) 135 2,707 -- (42,442)
Purchase of property and equipment........ -- (27,025) (4,863) -- (31,888)
Investment in joint ventures.............. (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)
Net borrowing under revolving line of
credit and other........................ -- 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.
58
<PAGE>
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
10/31/98 1/31/99 4/30/99 7/31/99 Total Year
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 232,785 $ 222,324 $ 248,826 $ 249,771 $ 953,706
Gross profit................................ 41,772 46,710 52,521 52,888 193,891
Net income.................................. 5,389 5,856 8,174 8,927 28,346
Basic earnings per common share............. .23 .25 .34 .37 1.19
Diluted earnings per common share........... .21 .23 .32 .33 1.09
<CAPTION>
10/31/97 1/31/98 4/30/98 7/31/98 Total Year
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 209,020 $ 193,259 $ 217,083 $ 195,951 $ 815,313
Gross profit................................ 38,143 39,198 44,734 35,376 157,451
Extraordinary item.......................... -- 1,803 -- 30 1,833
Net income (loss)........................... 3,061 661 5,927 (13,669) (4,020)
Basic earnings (loss) from continuing.......
operations per common share............ .21 .13 .25 (.57) (.11)
Diluted earnings (loss) from continuing.....
operations per common share............ .18 .12 .23 (.57) (.11)
Basic earnings (loss) per common share...... .21 .04 .25 (.57) (.20)
Diluted earnings (loss) per common share.... .18 .03 .23 (.57) (.20)
</TABLE>
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Directors of
Williams Technologies, Inc.
We have audited the accompanying balance sheets of Williams Technologies, Inc.
(a wholly owned subsidiary of The W. W. Williams Company) as of December 31,
1997 and 1996, and the related statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
The 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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Columbus, Ohio
March 26, 1998
60
<PAGE>
WILLIAMS TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------- -------------------------
(thousands)
<S> <C> <C>
Assets:
Current Assets:
Cash.............................................................. $ 5 $ 5
Accounts receivable - less allowance for doubtful accounts:
1997 - $50; 1996 - $25............................................ 9,301 4,300
Inventories:
Finished goods.................................................... 1,682 1,819
Parts for remanufacturing......................................... 11,169 7,589
Prepaid expenses and other........................................ 67 64
Deferred income taxes............................................. 305 407
--------------------------- -------------------------
Total current assets.............................................. 22,529 14,184
--------------------------- -------------------------
Property and Equipment - at cost:
Leasehold improvements............................................ 293 166
Equipment......................................................... 8,580 7,088
--------------------------- -------------------------
Total............................................................. 8,873 7,254
Less accumulated depreciation..................................... 4,348 3,425
--------------------------- -------------------------
Property and equipment - net...................................... 4,525 3,829
Total............................................................. $ 27,054 $ 18,013
=========================== =========================
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable - trade.......................................... $ 9,262 $ 8,095
Accrued liabilities............................................... 1,129 1,223
Current portion of long - term debt............................... 160 160
--------------------------- -------------------------
Total current liabilities......................................... 10,551 9,478
--------------------------- -------------------------
Long - Term Debt:
Parent company.................................................... 9,375 3,005
Equipment - net of current portion................................ 320 480
--------------------------- -------------------------
Net long - term debt.............................................. 9,695 3,485
--------------------------- -------------------------
Commitments and contingencies ( Note 4)
Stockholders' Equity:
Common stock: $1 par value; authorized and outstanding
100,000 shares.................................................... 100 100
Retained earnings................................................. 6,708 4,950
--------------------------- -------------------------
Total stockholders' equity........................................ 6,808 5,050
--------------------------- -------------------------
Total............................................................ $ 27,054 $ 18,013
=========================== =========================
</TABLE>
See Notes to Financial Statements
61
<PAGE>
WILLIAMS TECHNOLOGIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years ended December 31
---------------------------------------------------------
1997 1996 1995
---------------- ---------------- -----------------
(thousands)
<S> <C> <C> <C>
Gross revenue........................................ $ 49,424 $ 36,894 $ 23,420
Cost of purchased parts sold......................... 22,493 14,076 7,259
---------------- ---------------- -----------------
Net revenue.......................................... 26,931 22,818 16,161
Labor and other direct remanufacturing costs......... 20,784 17,133 13,447
---------------- ---------------- -----------------
Gross margin......................................... 6,147 5,685 2,714
Selling, general and administrative expenses......... 2,759 2,082 1,504
---------------- ---------------- -----------------
Income from operations............................... 3,388 3,603 1,210
Interest expense..................................... (692) (337) (236)
---------------- ---------------- -----------------
Income before income taxes........................... 2,696 3,266 974
Income tax provision................................. 938 1,142 351
--------------- ---------------- -----------------
Net income........................................... $ 1,758 $ 2,124 $ 623
================ ================ =================
</TABLE>
See Notes to Financial Statements
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
Shares $1.00 Par Retained
Outstanding Value Earnings Total
----------------- ------------ ------------- ------------
(thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1994.................. 100,000 $ 100 $ 3,239 $ 3,339
Net income.................................. 623 623
Dividends to Parent......................... (151) (151)
----------------- ------------ ------------- ------------
Balance, December 31, 1995.................. 100,000 100 3,711 3,811
Net Income.................................. 2,124 2,124
Dividends to Parent......................... (885) (885)
----------------- ------------ ------------- ------------
Balance, December 31, 1996.................. 100,000 100 4,950 5,050
Net income.................................. 1,758 1,758
----------------- ------------ ------------- ------------
Balance, December 31,1997................... 100,000 $ 100 $ 6,708 $ 6,808
================= ============ ============= ============
</TABLE>
See Notes to Financial Statements
62
<PAGE>
WILLIAMS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
1997 1996 1995
------------ ----------- ------------
(thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................. $ 1,758 $ 2,124 $ 623
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization............................ 934 766 490
Deferred income taxes.................................... 102 (111)
76
Gain on sale of assets................................... (2) (6) --
Change in assets and liabilities:
Accounts receivable..................................... (5,001) (413) (2,153)
Inventories............................................. (3,443) (5,926) (1,900)
Prepaid expenses and other.............................. (3) (39) --
Accounts payable - trade................................ 1,167 3,745 2,667
Accrued liabilities..................................... (94) 494 (75)
------------ ----------- ------------
Net cash provided (used) by operating activities............. (4,582) 634 (272)
------------ ------------ ------------
Cash Flows From Investing Activities:
Property and equipment additions........................... (1,633) (1,519) (1,719)
Proceed from sale of property and equipment................ 5 7 -
------------ ------------ ------------
Net cash used by investing activities........................ (1,628) (1,512) (1,719)
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from long-term debt............................... - - 800
Payments of long-term debt................................. (160) (160) -
Net change in debt to Parent company....................... 6,370 1,923 1,339
Dividends.................................................. - (885) (151)
------------ ------------ --------------
Net cash provided by financing activities.................... 6,210 878 1,988
------------ ------------ --------------
Net Increase (Decrease) in Cash.............................. - - (3)
Cash at Beginning of Year.................................... 5 5 8
------------ ------------ --------------
Cash at End of Year.......................................... $ 5 $ 5 $ 5
============ ============ ==============
Supplemental Cash Flow Disclosure:
Interest paid.............................................. $ 683 $ 337 $ 236
Income taxes paid to Parent................................ 1,017 1,023 341
Income taxes paid to (refunded by) state and
local governments......................................... (79) 119 10
</TABLE>
See Notes to Financial Statements
63
<PAGE>
WILLIAMS TECHNOLOGIES, INC.
Notes to Financial Statements
For the Years Ended December 31, 1997, 1996 and 1995
1. Summary of Significant Accounting Policies
General
The Company is a wholly-owned subsidiary of The W.W. Williams Company
("Parent"). The Company remanufactures transmissions, parts and components on a
contract basis for original equipment manufacturers primarily for use in the
United States. The Company is incorporated in South Carolina with 100,000 shares
of $1 par value stock that is authorized, issued, and outstanding.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost or market. The cost of inventory is
determined using the first-in, first-out (FIFO) method.
Revenue Recognition
The Company recognizes revenue at the time product is shipped or service is
completed. During 1997, 1996 and 1995, approximately 94%, 97% and 99%
respectively, of gross revenue consisted of sales to four customers.
Parent Allocations
Records of the Company are maintained separately from the Parent company;
however, costs incurred by the Parent for employee pension and group self-
insurance plans, on the Company's behalf, are allocated to the Company, based on
the number of employees for pension and actual net cost for group insurance.
Amounts allocated to the Company for such expenses were $1,046,000, $949,000,
and $864,000 in 1997, 1996 and 1995, respectively. In addition, the Company was
charged $118,000, $118,000, and $106,000 during 1997, 1996 and 1995,
respectively, for certain administrative functions performed for it by the
Parent. Allocation of such costs are based on underlying costs or comparative
volumes. The Company is not charged for any of the Parent company's executive
officers' cost. Interest expense of $653,000, $287,000, and $236,000 in 1997,
1996 and 1995, respectively, was charged on Parent company debt. The Company
leases its manufacturing facility from its Parent. The lease is for a 10 year
term commencing January 1, 1995, and includes annual escalators tied to the
Consumer Price Index. Rent expense of $458,000, $438,000, and $425,000 in 1997,
1996 and 1995, respectively, was charged by the Parent. Management believes the
manner of allocating costs to the Company by the Parent is reasonable.
Pension Plan
The Company's employees participate in the Parent's pension plan. The plan is a
defined benefit pension plan covering full-time employees. Benefits are based on
years of service and the employees' highest consecutive five years' average
compensation. Contributions to the plan are made to the extent deductible for
Federal income tax purposes.
The projected benefit obligation was determined using an assumed long-term rate
of return on assets of 8%, future salary increases of 4%, and a discount rate of
6.5% for 1997, 1996 and 1995.
64
<PAGE>
The Company recorded pension expense of $265,000, $263,000, and $269,000 during
1997, 1996 and 1995, respectively.
Depreciation
Depreciation on property and equipment (1997 - $936,000; 1996 - $767,000; 1995 -
$490,000) is computed based on the estimated useful lives of the assets using
accelerated and straight-line methods for financial reporting purposes.
2. Income From Operations
During 1997, the Company incurred a $500,000 charge to fully reserve certain
parts variance receivables due to a contract dispute with a customer. In 1998,
the Company and the customer amended the contract which management believes
includes terms more favorable to the Company. During 1996, a special project
added $1,253,000 to income from operations.
3. Long-Term Debt
Equipment debt matures in 2000 and bears interest at variable rates with an
effective interest rate of 7.0% and 6.8% for 1997 and 1996, respectively, and
7.0% as of December 31, 1997. Equipment debt is guaranteed by the Parent and is
collateralized by certain equipment of the Company. Long-term debt maturities
are $160,000 per year in 1998, 1999 and 2000.
4. Commitments and Contingencies
The Company has operating leases for its manufacturing and warehouse facilities
through December 31, 2004 and March 31, 2002, respectively. The warehouse has a
lease purchase option and a renewal option. Future annual rental amounts
(including amounts to Parent), subject to annual escalators tied to the Consumer
Price Index, are as follows:
1998 - $926,000; 1999 - $940,000; 2000 - $954,000; 2001 - $969,000; 2002 -
$638,000; thereafter - $1,093,000. Annual rental expense (including amounts to
Parent) was approximately $744,000, $671,000 and $563,000 in 1997, 1996 and
1995, respectively.
5. Income Taxes
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal..................................... $ 836 $ 1,207 $ 261
State....................................... -- 43 17
---------------- ----------------- -----------------
Subtotal.................................... 836 1,250 278
---------------- ----------------- -----------------
Deferred (Federal and state)................ 102 (108) 73
---------------- ----------------- -----------------
Total income tax provision.................. $ 938 $ 1,142 $ 351
================ ================= =================
</TABLE>
Company results are included in the Parent's consolidated Federal Income Tax
return. The Company computes its income tax provision as if it filed a separate
income tax return. The effective income tax rate differs from the federal
statutory rate due to the effect of state income taxes, net of state tax
credits, and certain nondeductible expenses. Unused state tax credits at
December 31, 1997 amounted to $45,000.
The net deferred tax asset of $305,000 and $407,000 at December 31, 1997 and
1996 includes deferred tax assets of $404,000 and $450,000 and deferred tax
liabilities of $99,000 and $43,000, respectively. Deferred taxes related
primarily to valuation and other reserves, and depreciation.
65
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Remy Korea, Ltd.
We have audited the accompanying balance sheets of Remy Korea, Ltd. ("the
Company") as of December 31, 1998 and 1997, and the related statements of
income, appropriations of unappropriated retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion, as
independent auditors, on these financial statements based on our audits. For
this purpose, we conducted our audits in accordance with auditing standards
generally accepted in the Republic of Korea.
As fully described in Note 10, the Company has had transactions with affiliated
companies.
In our opinion, the financial statements referred to above present fairly the
financial position of Remy Korea, Ltd. as of December 31, 1998 and 1997, and the
results of its operations, appropriations of unappropriated retained earnings
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the Republic of Korea.
The operations of the Company, and those of other companies in the Republic of
Korea have been significantly affected, and will continue to be affected for the
foreseeable future, by the country's unstable economy caused in part by the
currency volatility in the Asia-Pacific region. While the Korean economy has
recently shown signs of improvement, there are still uncertainties that may
affect future operations. The financial statements do not include any
adjustments that might result from those uncertainties.
The accompanying financial statements are not intended to present the financial
position, results of operations and cash flows in accordance with accounting
principles and practices generally accepted in countries and jurisdictions other
than the Republic of Korea. Accordingly, the accompanying financial statements
are not designed for those who are not informed about Korean accounting
principles, procedures and practices. The standards, procedures and practices
utilized in the Republic of Korea to audit such financial statements may differ
from those generally accepted in other countries and jurisdictions.
Young Wha
February 13, 1999
66
<PAGE>
REMY KOREA, LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Assets 1998 1997
-------------------------------------------------------------------- ------------------------ ---------------------
<S> <C> <C>
Currents Assets:
Cash on hand and in banks (Notes 3 and 9)..................... W 6,466,632,571 W 4,582,019,613
Marketable securities......................................... -- 159,190,000
Accounts receivable - trade, less allowance for doubtful
accounts of W116,500,530 in 1998 and W38,092,094 in 1997
(notes 9 and 10)............................................. 11,533,552,574 3,771,117,376
Accounts receivable - other (Notes 9 and 10).................. 1,044,886,402 619,891,139
Accrued interest receivable................................... 133,877,316 52,808,560
Advance payments.............................................. 322,062,600 13,687,411
Inventories (Notes 4 and 5)................................... 4,871,099,662 622,022,571
Prepaid expenses.............................................. 47,572,138 1,827,075
--------------------- ---------------------
Total current assets.......................................... 24,419,683,263 9,822,563,745
Investments and other assets:
Long - term deposits (Note 3)................................. 600,000,000 500,000,000
Long - term loans............................................. 156,800,000 20,000,000
Investment securities......................................... 188,317,652 --
Restricted bank deposits (Note3).............................. 5,500,000 2,500,000
Leasehold key money and other refundable deposits............. 417,220,200 98,504,000
Deposits for employees' severance indemnities................. 49,500,000 --
--------------------- ---------------------
Total investments and other assets............................ 1,417,337,852 621,004,000
Property, plant and equipment (Notes 4, 5 and 10):
Land.......................................................... 2,247,015,100 2,018,149,850
Buildings..................................................... 4,308,937,152 --
Structures.................................................... 1,172,165,996 --
Machinery and equipment....................................... 14,900,812,648 1,010,611,006
Vehicles and transportation equipment......................... 169,963,713 84,622,730
Tools......................................................... 522,920,370 --
Furniture and fixtures........................................ 866,091,756 36,942,271
Construction in progress...................................... 2,310,412,949 5,896,479,938
--------------------- ---------------------
26,498,319,684 9,046,805,795
Less accumulated depreciation................................. 2,847,462,162 125,125,161
--------------------- ---------------------
Property, plant and equipment - net........................... 23,650,857,522 8,921,680,634
Intangible assets................................................ 35,021,385 38,725,282
--------------------- ---------------------
Total assets..................................................... W 49,522,900,022 W 19,403,973,661
===================== =====================
</TABLE>
See accompanying notes.
67
<PAGE>
REMY KOREA, LTD.
BALANCE SHEETS (CONT'D)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1998 1997
- ---------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Current liabilities:
Accounts payable - trade...................................... W 8,402,949,573 W 3,512,158,381
Accounts payable - other (Notes 9 and 10)..................... 6,812,355,327 3,739,718,137
Short term borrowings......................................... 2,000,000,000 --
Current portion of long-term debt and long-term accounts payable,
net of discount (Notes 6 and 7)............................... 285,776,929 87,850,218
Income taxes payable (Note 11)................................ 2,311,538,497 113,476,010
Advance receipts (Notes 9 and 10)............................. 94,649,028 --
Accrued expenses.............................................. 249,265,370 47,447,963
Other current liabilities..................................... 54,561,227 9,343,760
--------------------- ---------------------
Total current liabilities..................................... 20,211,095,951 7,509,994,469
Long-term liabilities:
Long-term debt (Notes 6 and 9)................................ 6,612,500,000 3,072,465,280
Long-term accounts payable, net of current portion and discount
(Notes 7 and 9)............................................... 819,830,786 161,472,918
Accrued severance and retirement benefits..................... 94,526,740 --
Prepayment of severance indemnities........................... (6,024,900) --
--------------------- ---------------------
Total long-term liabilities................................... 7,520,832,626 3,233,938,198
--------------------- ---------------------
Total liabilities............................................. 27,731,928,577 10,743,932,667
Stockholders' equity:
Common stock, W5,000 par value:
Authorized - 1,600,000 shares...............................
Issued and outstanding - 1,600,000 shares................... 8,000,000,000 8,000,000,000
Retained earnings (Note 8):
Reserve for business rationalization.......................... 2,200,000,000 100,000,000
Reserve for enterprise development............................ 9,500,000,000 --
Reserve for business expansion................................ 1,900,000,000 400,000,000
Unappropriated retained earnings.............................. 190,971,445 160,040,994
--------------------- ---------------------
Total retained earnings....................................... 13,790,971,445 660,040,994
--------------------- ---------------------
Total stockholders' equity.................................... 21,790,971,445 8,660,040,994
--------------------- ---------------------
Total liabilities and stockholders' equity.................... W 49,522,900,022 W 19,403,973,661
===================== =====================
</TABLE>
See accompanying notes.
68
<PAGE>
REMY KOREA, LTD.
STATEMENTS OF INCOME
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
<S> <C> <C>
Sales (Note 10)............................................... W 86,896,956,993 W 3,912,480,614
Cost of sales................................................. 68,476,615,628 2,890,067,197
--------------------- ---------------------
Gross profit.................................................. 18,420,341,365 1,022,413,417
Selling and administrative expenses........................... 1,579,165,241 77,724,207
--------------------- ---------------------
Operating income.............................................. 16,841,176,124 944,689,210
Non-operating income:
Interest income............................................. 924,808,145 398,199,510
Realized foreign exchange gains............................. 2,270,711,469 673
Unrealized foreign currency translation gains............... 115,195,042 219,334,301
Commission.................................................. 2,796,333 --
Miscellaneous............................................... 144,805,385 2,929,940
--------------------- ---------------------
Total non-operating income.................................. 3,458,316,374 620,464,424
Non-operating expenses:
Interest expenses........................................... 954,166,221 11,872,530
Amortization of deferred charges............................ 1,053,348,843 429,699,654
Unrealized foreign currency translation losses.............. 21,718,696 336,685,017
Realized foreign exchange losses............................ 2,495,036,477 --
Donations................................................... 2,388,100 --
Loss on sales of property, plant and equipment.............. 113,254,523 --
Miscellaneous............................................... 2,565,603 23,902
--------------------- ---------------------
Total non-operating expenses................................ 4,642,478,463 778,281,103
--------------------- ---------------------
Income before income taxes.................................... 15,657,014,035 786,872,531
Provision for income taxes (Note 11).......................... 2,526,083,584 194,941,057
--------------------- ---------------------
Net income.................................................... W 13,130,930,451 W 591,931,474
===================== =====================
Ordinary income per share and earnings per share (Note 12).... W 8,207 W 574
===================== =====================
</TABLE>
See accompanying notes.
69
<PAGE>
REMY KOREA, LTD.
STATEMENTS OF APPROPRIATIONS
OF UNAPPROPRIATED RETAINED EARNINGS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
<S> <C> <C>
Retained earnings before appropriations:
Beginning of year........................................... W 160,040,994 W 68,109,520
Net income.................................................. 13,130,930,451 591,931,470
------------------------ ------------------------
Total retained earnings before appropriations............... 13,290,971,445 660,040,990
Appropriations:
Reserve for business rationalization (Note 8)............... 2,100,000,000 100,000,000
Reserve for enterprise development (Note 8)................. 9,500,000,000 --
Reserve for business expansion.............................. 1,500,000,000 400,000,000
------------------------ ------------------------
Total appropriations........................................ 13,100,000,000 500,000,000
------------------------ ------------------------
Balance of unappropriated retained earnings at the end of year W 190,971,445 W 160,040,990
======================== ========================
</TABLE>
See accompanying notes.
70
<PAGE>
REMY KOREA, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ W 13,130,930,451 W 591,931,474
Additions of expenses not involving cash outflows:
Depreciation.................................................... 2,699,115,399 127,163,333
Amortization of deferred charges................................ 1,053,348,843 429,699,654
Interest expenses (amortization of discount on long-term
accounts payable)............................................... 119,049,727 11,872,530
Unrealized foreign currency translation losses.................. 21,718,696 336,032,697
Loss on sales of property, plant and equipment.................. 113,254,523 --
Provision for severance and retirement benefits................. 85,007,040 --
------------------------ ------------------------
Subtotal........................................................ 4,091,494,228 904,768,214
Deduction of revenues not involving cash inflows:
Unrealized foreign currency translation gains................... (114,440,786) (219,334,301)
Interest income................................................. (1,060,652) --
------------------------ ------------------------
Subtotal........................................................ (115,501,438) (219,334,301)
Changes in assets and liabilities resulting from operations:
Accounts receivable - trade..................................... (7,685,120,246) (3,874,387,847)
Accounts receivable - other..................................... (426,307,208) (619,891,139)
Accrued interest receivable..................................... (81,068,756) 15,091,735
Advance payments................................................ (308,375,189) (13,687,411)
Inventories..................................................... (4,249,077,091) (622,022,571)
Prepaid expenses................................................ (45,745,063) (1,827,075)
Prepayment of severance indemnities............................. (6,024,900) --
Accounts payable - trade........................................ 4,902,449,356 3,512,158,381
Accounts payable - other........................................ 3,072,637,190 3,838,973,692
Income taxes payable............................................ 2,198,062,487 113,433,115
Advance receipts................................................ 99,709,947 --
Accrued expenses and other current liabilities.................. 244,034,874 56,791,723
------------------------ ------------------------
Subtotal........................................................ (2,284,824,599) 2,404,632,603
------------------------ ------------------------
Net cash provided by operating activities......................... 14,822,098,642 3,681,997,990
Investing activities:
Cash inflows from investing activities:
Decrease in long-term deposits.................................. 500,000,000 --
Decrease in machinery and equipment............................. 690,000 --
------------------------ ------------------------
500,690,000 --
</TABLE>
71
<PAGE>
REMY KOREA, LTD.
STATEMENTS OF CASH FLOWS (CONT'D)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Cash outflows from investing activities:
Increase in marketable securities............................... W 15,425,000 W 157,190,000
Increase in long-term deposits.................................. 600,000,000 500,000,000
Increase in long-term loans..................................... 136,800,000 20,000,000
Increase in investment securities............................... 12,642,000 --
Increase in restricted deposits................................. 3,000,000 2,500,000
Increase in leasehold key money and other refundable deposits 318,716,200 98,504,000
Increase in deposits for employees' severance indemnities....... 49,500,000 --
Acquisition of property, plant and equipment.................... 5,549,334,415 1,132,176,007
Expenditures for construction in progress....................... 12,095,433,216 7,914,629,788
Increase in intangible assets................................... 1,265,560 40,763,454
Increase in deferred charges.................................... 936,328,865 388,776,944
------------------- -------------------
19,718,445,256 10,254,540,193
------------------- -------------------
Net cash used in investing activities............................. (19,217,755,256) (10,254,540,193)
Financing activities:
Cash inflows from financing activities:
Issue of stocks................................................. -- 6,000,000,000
Increase in short-term borrowings............................... 3,000,000,000 --
Increase in other current liabilities........................... 3,000,000 --
Increase in long-term debt...................................... 3,972,000,000 2,959,781,800
Increase in long-term accounts payable.......................... 812,585,070 237,450,606
------------------- -------------------
7,787,585,070 9,197,232,406
Cash outflows from financing activities:
Increase in deferred charges.................................... -- 32,136,710
Decrease in current portion of long-term debt................... 87,850,218 --
Decrease in short-term borrowings............................... 1,000,000,000 --
Decrease in long-term debt...................................... 419,465,280 --
------------------- -------------------
1,507,315,498 32,136,710
------------------- -------------------
Net cash provided by financing activities........................ 6,280,269,572 9,165,095,696
------------------- -------------------
Increase in cash on hand and in banks............................. 1,884,612,958 2,592,553,493
Cash on hand and in banks at beginning of the year................ 4,582,019,613 1,989,466,120
------------------- -------------------
Cash on hand and in banks at end of the year...................... W 6,466,632,571 W 4,582,019,613
=================== ===================
</TABLE>
See accompanying notes.
72
<PAGE>
REMY KOREA, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Organization and business
-------------------------
Remy Korea, Ltd. ("the Company") was incorporated on September 9, 1996
under the laws of the Republic of Korea to engage in manufacturing,
assembling and selling electric parts for cars. It was organized under a
joint venture agreement between Remy Korea Holdings Inc., a company
incorporated in the United States of America and several domestic investors
on a 50/50 basis.
On November 4, 1997, the Company was registered with the Ministry of
Finance and Economy under the Foreign Capital Inducement Law. Under this
registration, profits attributable to the foreign partner are fully
remittable. Further, repatriation of the foreign stockholder's capital
contribution is guaranteed after satisfying certain conditions.
2. Basis of financial statements and summary of significant accounting
-------------------------------------------------------------------
policies
--------
Basis of financial statements - The Company maintains its books of accounts
-----------------------------
and prepares its financial statements in conformity with accounting
principles generally accepted in the Republic of Korea ("Korean GAAP"),
which may differ from accounting principles generally accepted in countries
and jurisdictions other than the Republic of Korea. Accordingly, the
accompanying financial statements are not primarily intended to present the
Company's financial position, results of operations and cash flows for
those who are not informed about Korean GAAP, procedures and practices.
For the convenience of the reader, in preparing the accompanying financial
statements, certain reclassifications, and changes in statement format and
extent of disclosures have been made to the financial statements issued in
the Korean language for domestic statutory purposes. Certain supplementary
information included in the statutory Korean language financial statements,
but not required for a fair presentation of the Company's financial
position, results of operations and cash flows, is not presented in the
accompanying financial statements.
Investment securities - Investment securities, consisting of mandatory
---------------------
government bonds, are stated at acquisition cost.
Allowance for doubtful accounts - The Company provides allowance for
-------------------------------
doubtful accounts to cover estimated losses that may arise from non-
collection of its receivables.
Inventories - Inventories are stated at the lower of cost (total average
-----------
cost for finished goods and work in-process, and moving average cost for
raw materials and supplies) or market; materials in transit are stated at
cost by specific identification.
Property, plant and equipment and depreciation - Property, plant and
----------------------------------------------
equipment are stated at cost. Improvements that significantly extend the
life of an asset or add to its productive capacity are capitalized, while
expenditures for maintenance and repairs are charged to current operations
as incurred. Interest expenses and financing charges on borrowings relating
to the construction of property, plant and equipment are capitalized during
the asset construction period. The capitalized interest expenses were
W180,554,645 and W34,268,793 in 1998 and 1997, respectively.
Depreciation is computed by the straight-line method over the following
useful lives of assets as stipulated in the Korean Corporate Income Tax
Law.
73
<PAGE>
Useful lives of assets
----------------------
Buildings................................... 40 Years
Structures.................................. 40
Machinery and equipment..................... 7
Vehicles and transportation equipment....... 7
Tools....................................... 7
Furniture and fixtures...................... 7
Deferred charges and amortization - Expenditures for organization costs,
---------------------------------
pre-operating costs and stock issuance costs are first charged to deferred
charges during the year, and are all written off as amortization of
deferred charges at the end of the year.
Discount of long-term accounts payable to present value - Long-term
-------------------------------------------------------
accounts payable are stated at discounted net present value. The discount
is being amortized as interest expense over the repayment period of the
long-term accounts payable, using the effective interest rate method (see
Note 7).
Accrued severance and retirement benefits - In accordance with the Korean
-----------------------------------------
Labor Standards Law and the Company's regulations, employees with at least
one year of service are entitled to severance and retirement benefits upon
termination of their employment, based on the rates of pay in effect at the
time of termination, years of service and certain other factors. Severance
and retirement benefits are calculated based on services performed to and
at rates of pay in effect at year-end. Funding of this liability is not
required by Korean Law. In accordance with the Korean National Pension Law,
the Company prepays a portion of its severance and retirement benefits
obligation to the Korean National Pension Corporation (KNPC) at a certain
rate of payroll expense. Such accumulated prepayments amounting to
W6,024,900 as of December 31, 1998 (nil as of December 31, 1997), are
deducted from accrued severance and retirement benefits. In accordance with
the revised Korean National Pension Law, however, such prepayments will no
longer be required effective April 1, 1999.
To obtain tax benefits, the Company has deposited a portion of its
severance and retirement benefits obligation with a life insurance company.
Such deposits are refundable upon demand. However, since refunding the
deposits for purposes other than the payment of benefits would result in a
reversal of the tax benefits, the Company has no intention of seeking a
refund except for the purpose of paying benefits. Accordingly, the deposits
are shown in the balance sheet as non-current under investments and other
assets.
Foreign currency transactions - The Company's books and records are
-----------------------------
maintained in Korean won. Transactions conducted in foreign currencies are
recorded in Korean won based on the prevailing rates of exchange at the
dates of the transactions. Accounts with balances denominated in foreign
currencies are restated into Korean won at the year-end mid rates of
W1,207.80 per US$1 as of December 31, 1998 and W1,415.20 per US$1 as of
December 31, 1997. The resulting unrealized foreign currency translation
gains or losses are credited or charged to current operations.
Intangibles - Intangibles are stated at cost, less amortization computed
-----------
under the straight-line method, over the service lives provided by the
Korean Corporation Tax Law:
Years of service lives
----------------------
Right to use electrical installation........ 10
Trademarks.................................. 5
Income taxes - The Company provides for taxes on income that are currently
------------
payable. In conformity with accounting practices prevailing in the Republic
of Korea, the Company does not provide for deferred income taxes arising
from
74
<PAGE>
temporary differences between income before income taxes for
accounting purposes and taxable income for income tax purposes.
Per share amounts - Earnings per share of common stock is calculated by
-----------------
dividing net income by the weighted average number of shares of common
stock outstanding during the year. Ordinary income per share is also
required to be disclosed and is computed by reversing the effect of
extraordinary items (net of effect of income tax), if any.
Korean GAAP revisions from 1999 - On December 11, 1998, the Financial
-------------------------------
Supervisory Commission announced certain changes in accounting principles
generally accepted in the Republic of Korea with the intention to revise
Korean GAAP and disclosure rules to meet international practices. The
revised accounting standards will apply to companies (subject to external
audit) for the first fiscal year starting after December 12, 1998. Early
adoption of the revised accounting standards is allowed; partial adoption
is not allowed. The cumulative effect on prior years of the changes in
accounting policies will be charged or credited to opening retained
earnings with disclosure made on the effect of the change. The revisions
include changes in the areas of accounting for foreign currency
translation, intangibles and deferred charges, investments using the equity
method, derivatives, asset impairment, interest capitalization, income
taxes, and disclosure concerning segment information and discontinued
operations.
The Company plans to adopt the revised accounting standards from January 1,
1999. The Company is currently evaluating the impact that adoption of the
revised accounting standards will have on its financial position and
results of operations.
3. Cash on hand and in banks and other bank deposits
-------------------------------------------------
At December 31, 1998 and 1997, cash on hand and in banks and other
bank deposits consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ -------------------------------
Interest rate Amount Interest rate Amount
per annum per annum
(%) (%)
-------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cash on hand and in banks:
Cash on hand..................................... -- W 860,420 -- W 1,039,260
Current account.................................. -- 1,939,099 -- 100,000
Passbook account................................. 1 - 2 79,075,127 1.8 - 6.0 7,566,539
Time deposits.................................... 9.3 - 13.3 6,384,757,925 12.7 - 21.0 4,573,313,814
----------------- ----------------
W 6,466,632,571 W 4,582,019,613
================= ================
Long-term deposits:
Time deposits.................................... 12.7 W 600,000,000 19.05 W 500,000,000
================= ===============
Restricted bank deposits required to maintain
checking accounts................................ -- W 5,500,000 -- W 2,500,000
================= ===============
</TABLE>
75
<PAGE>
4. Inventories
-----------
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Finished goods................... W 1,416,644,699 W 223,350,030
Raw materials.................... 673,803,451 347,414,249
Work in-process.................. 2,284,194,742 51,258,292
Supplies......................... 483,288,263 --
Material in-transit.............. 13,168,507 --
================= =================
W 4,871,099,662 W 622,022,571
================= =================
</TABLE>
5. Property, plant and equipment
-----------------------------
At December 31, 1998, a substantial portion of the Company's land,
buildings and machinery and equipment are mortgaged to secure long-term
debts (see Note 6)
At December 31, 1998, buildings, machinery and equipment, and inventories
were insured against fire and other casualty losses up to W27,580,478,648.
At December 31, 1998, the total value of the Company's land as determined
by the Korean government for tax purpose is W1,576,361,900.
6. Short-term borrowings and long-term debt
----------------------------------------
The short-term borrowing at December 31, 1998 is from Korea Exchange Bank,
which bears interest at 12.25% a year.
The long-term debt at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
Interest in Amount
-----------------------------------
1998 (%) Maturity 1998 1997
----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Korea Exchange Bank
Long - term facility loan (U.S.
Dollars denominated)................ -- -- W -- W 419,465,280
Long - term facility loan........... 12.50% Dec. 1, 2004 6,225,000,000 2,653,000,000
Shihan Bank
Long - term facility loan........... 10.00% Sep. 30, 2006 300,000,000 --
Long - term general loan............ 9.25% Sep. 30, 2001 100,000,000 --
---------------- ---------------
Total............................... 6,625,000,000 3,072,465,280
Current portion..................... (12,500,000) --
---------------- ---------------
Long - term portion................. W 6,612,500,000 W 3,072,465,280
================ ===============
</TABLE>
At December 31, 1998, the Company's land, buildings, and machinery and
equipment, to the extent of W11,500,000,000, were mortgaged to Korea
Exchange Bank to secure the short-term borrowings and the long term
facility loan, and Korea Technology Credit Guarantee Fund provided payment
guarantee of W400,000,000 to
76
<PAGE>
Shinhan Bank to secure the long term debt.
As of December 31, 1998, the long-term debts are scheduled to be repaid as
follows:
<TABLE>
<CAPTION>
Year Amount
--------------------------------------------------------- -----------------
<S> <C>
1999................................................. W 12,500,000
2000................................................. 1,282,200,000
2001................................................. 1,300,700,000
2002................................................. 1,308,200,000
2003 and after....................................... 2,721,400,000
-----------------
W 6,625,000,000
=================
</TABLE>
7. Long term accounts payable
--------------------------
Under certain agreements for machinery and equipment purchase, inventory
purchase and license purchase, entered into between the Company and Daewoo
Automotive Components, Ltd. on December 5, 1996, the Company has entered
into a detailed agreement for the purchase of manufacturing facilities to
produce certain car parts, for the total amount of W11,865,756,033,
including interest. Under this agreement, W10,444,716,006 was paid as of
December 31, 1998 and the balance, scheduled to be repaid as follows, is
recorded in long-term accounts payable:
<TABLE>
<CAPTION>
Year Amount
--------------------------------------------------------- -----------------
<S> <C>
1999................................................. W 404,449,854
2000................................................. 371,656,623
2001................................................. 338,863,391
2002................................................. 306,070,159
-----------------
1,421,040,027
Discount to present value............................ (327,932,312)
Current portion...................................... (273,276,929)
-----------------
W 819,830,786
=================
</TABLE>
8. Retained earnings
-----------------
The amount of tax credits claimed in accordance with the Korean Tax
Exemption and Reduction Control Law is required to be appropriated as a
reserve for business rationalization. In accordance with the Korean
Corporate Tax Law, the Company has provided for a reserve for enterprise
development to reduce its exposure to accumulated earnings tax. These
reserves may not be utilized for cash dividends but may only be used to
offset a deficit, if any, or be transferred to capital.
9. Foreign currency denominated assets and liabilities
---------------------------------------------------
Foreign currency denominated assets and liabilities at December 31, 1998
and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- -------------------------------------
Denominated in Equivalent Korean Denominated in Equivalent Korean
US Dollars Won US Dollars Won
-------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Assets:
Cash on hand in banks.......... $ 48,793 W 58,931,640 $ 2,160 W 3,056,832
Accounts receivable - trade.... 5,750,208 6,945,101,223 2,691,640 3,809,209,470
Account receivable - other..... 22,546 27,230,514 -- --
-------------- ----------------- --------------- -----------------
$ 5,821,547 W 7,031,263,377 $ 2,693,800 W 3,812,266,302
============== ================= =============== =================
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Liabilities:
Accounts payable - other....... $ 140,713 W 169,953,329 $ 463,100 W 655,379,120
Advance receipt................ 78,365 94,649,028 -- --
Long - term debt............... -- -- 296,400 419,465,280
-------------- ----------------- --------------- -----------------
$ 219,078 W 264,602,357 $ 759,500 W 1,074,844,400
============== ================= =============== =================
</TABLE>
10. Related party transactions
--------------------------
At December 31, 1998 and 1997 and for the years then ended, the Company's
transactions and related outstanding balances with Delco Remy America Inc.
were as follows:
<TABLE>
<CAPTION>
Amount
----------------------------------------
1998 1997
----------------- ---------------
<S> <C> <C>
Accounts receivable - trade...................... W 6,945,101,223 * W --
Account receivable - other....................... 27,230,514 --
Accounts payable - other......................... 109,568,571 650,284,000
Advance receipt.................................. 94,649,028 --
Sales............................................ 66,410,596,680 * 3,912,480,604
Purchase of machinery and equipment.............. -- 748,769,040
</TABLE>
* Exports to Delco Remy America Inc. are made mainly through Daewoo
Corporation ("Daewoo"). Accordingly, accounts receivable from Daewoo at
December 31, 1998 amounting to W6,844,194,418 and sales to Daewoo in 1998
amounting to W66,153,395,833 (W3,912,480,604 in 1997) comprise the bulk of
these amounts.
11. Income taxes
------------
The Company is subject to corporate income tax, including resident surtax,
at the aggregate rates of 17.6% on taxable income up to W 100 million and
30.8% on taxable income exceeding W100 million.
Reconciliation between income before income taxes as per the accompanying
financial statements and taxable income for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
(Preliminary) (Final)
------------------- -------------------
<S> <C> <C>
Income before income taxes per the financial statements..... W 15,657,014,035 W 786,872,531
Temporary differences:
Unrealized foreign currency translation loss - net.......... (110,478,325) 110,478,325
Accrued interest receivable - net........................... (81,068,756) 15,091,735
Other....................................................... 541,168 --
------------------- -------------------
Sub - total................................................. (191,005,913) 125,570,060
Permanent differences....................................... 140,000 3,883
------------------- -------------------
Taxable income.............................................. W 15,466,148,122 W 912,446,474
------------------- -------------------
Income tax.................................................. 4,318,521,474 243,485,002
Tax credit.................................................. (2,022,081,850) (66,265,852)
Resident tax................................................ 229,643,960 17,721,907
------------------- -------------------
Total provision for income tax.............................. W 2,526,083,584 W 194,941,057
=================== ===================
Effective tax rate.......................................... 16.1% 24.8%
=================== ===================
</TABLE>
78
<PAGE>
12. Per share amounts
-----------------
Earnings per share for the years ended December 31, 1998 and 1997 are
computed as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- ----------------
<S> <C> <C>
Net income and ordinary income (*).......................... W 13,130,903,451 W 591,931,474
Weighted average number of shares outstanding during the
year........................................................ 1,600,000 1,031,781
------------------- ----------------
Ordinary income per share................................... W 8,207 W 574
=================== ================
Earnings per share.......................................... W 8,207 W 574
=================== ================
</TABLE>
(*) Ordinary income is computed by reversing the effect of extraordinary
items (net of effect of income taxes), if any. There were no
extraordinary items in 1998 and 1997.
13. Statements of cash flows
------------------------
Significant transactions which did not involve cash flows are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Transfer of investment securities from marketable securities... W 174,615,000 W --
Transfer of construction in progress to appropriate property,
plant and equipment............................................ 17,135,604,581 --
Transfer of current portion of long - term debt................ 12,500,000 87,850,218
Transfer of current portion of long - term accounts payable.... 404,449,854 --
</TABLE>
14. Subsequent event
----------------
Pursuant to a business transfer agreement with Dongjin Electric Co., Ltd.
("Dongjin") dated January 4, 1999, the Company acquired from Dongjin certain
fixed assets and inventories related to manufacturing and supply of car
starters and alternators for the total price of W3,772 million.
15. Korean economy
--------------
Starting in late 1997, the affects of adverse economic conditions in the
Republic of Korea included national liquidity crisis, significant
depreciation of the value of the Korean Won, higher domestic interest rate,
reduced opportunities for refinancing of maturing debts, and a general
reduction in spending across the country. In order to partially address this
situation, the Government of the Republic of Korea decided to seek
assistance from the International Monetary Fund and announced a
comprehensive policy package intended to address the structural weaknesses
in the Korean economy and financial sector. While the reform policies were
intended to alleviate the economic crisis in Korea and improve the economy
over time, the effects included, among others, slower economic growth, a
reduction in availability of credit, volatility in interest rates, an
increased rate of inflation due to the devaluation of the Korean Won, an
increase in the number of bankruptcies of Korean companies and individuals,
and labor unrests resulting from the increase in unemployment. The effect on
the Company's financial position of future developments with respect to the
Korean economy can not presently be determined.
16. Differences Between Korean and United States Generally Accepted
---------------------------------------------------------------
Accounting Principles
---------------------
The Company's accounts are prepared in accordance with accounting principles
generally accepted in the Republic of Korea ("Korean GAAP") which differ
from United States generally accepted accounting principles ("US GAAP"). The
significant differences applicable to the company are summarized below.
79
<PAGE>
Depreciation of Freehold Property
---------------------------------
Useful lives of property, plant and equipment under Korean GAAP are
different from those of US GAAP as follows:
<TABLE>
<CAPTION>
Useful lives
----------------------------------------------------------
Description Per Korean GAAP Per US GAAP
-------------------------------------------------------- ------------------------- -----------------------------
<S> <C> <C>
Building.......................................... 40 40
Structures........................................ 40 40
Machinery......................................... 7 15
Vehicles.......................................... 7 3
Tools............................................. 7 3
Furniture and fixtures............................ 7 3 - 5
</TABLE>
Deferred Taxation
-----------------
The Company provides for taxes on income that are currently payable. Under
Korean GAAP, the Company does not provide for deferred income taxes arising
from temporary differences between income before income taxes for
accounting purposes and taxable income for income tax purposes.
Under US GAAP, recognition of deferred tax assets and liabilities created
by temporary differences between the financial statements and tax bases of
assets and liabilities is required. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is provided on deferred tax assets to the
extent that it is more likely than not that such deferred tax assets will
be realized.
The following is a summary of the significant adjustments to income and
shareholders' equity which would be required if US GAAP were to be applied
instead of Korean GAAP.
<TABLE>
<CAPTION>
Stockholders' Stockholders'
Equity - beginning Increase ( Decrease) 1997 Net Income Equity - ending
-------------------- ----------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1997
Balance per Company's books....... W 2,068,109,520 W 6,000,000,000 W 591,931,474 W 8,660,040,994
Adjustments:
Depreciation...................... -- -- 73,640,469 73,640,469
Deferred income taxes............. (10,456,645) -- (3,343,475) (13,800,120)
-------------------- ----------------------- -------------------- ----------------------
Balance per US GAAP............... W 2,057,652,875 W 6,000,000,000 W 662,228,468 W 8,719,881,343
==================== ======================= ==================== ======================
1998
Balance per Company's books....... W 8,660,040,994 W -- W 13,130,930,451 W 21,790,971,445
Adjustments:
Depreciation...................... 73,640,469 -- 1,441,676,901 1,515,317,370
Deferred income taxes............. (13,800,120) -- (473,451,397) (487,251,517)
-------------------- ----------------------- -------------------- ----------------------
Balance per US GAAP............... W 8,719,881,343 W -- W 14,099,155,955 W 22,819,037,298
==================== ======================= ==================== ======================
</TABLE>
80
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Remy Korea, Ltd.
We have audited the accompanying balance sheet of Remy Korea, Ltd. ("the
Company") as of December 31, 1996, and the related statements of income,
appropriations of unappropriated retained earnings and cash flows for the period
from September 9, 1996 to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion, as independent auditors, on these financial statements based on our
audit. For this purpose, we conducted our audit in accordance with auditing
standards generally accepted in the Republic of Korea.
In our opinion, the financial statements referred to above present fairly the
financial position of Remy Korea, Ltd. as of December 31, 1996, and the results
of its operations, appropriations of unappropriated retained earnings and its
cash flows for the period from September 9, 1996 to December 31, 1996 in
conformity with accounting principles generally accepted in the Republic of
Korea.
Without qualifying our opinion, we draw attention to Note 7 to the financial
statements. Starting in late 1997, the operations of the Company, and those of
similar companies in the Republic of Korea have been significantly affected, and
will continue to be affected for the foreseeable future, by the country's
unstable economy caused in part by the currency volatility in the Asia-Pacific
region. While the Korean economy has recently shown signs of improvement, there
are still significant uncertainties that may affect future operations, the
recoverability of the Company's assets and the ability of the Company to pay its
debts as they mature. The financial statements do not include any adjustments
that might result from those uncertainties.
The accompanying financial statements are not intended to present the financial
position, results of operations and cash flows in accordance with accounting
principles and practices generally accepted in countries and jurisdictions other
than the Republic of Korea. Accordingly, the accompanying financial statements
are not designed for those who are not informed about Korean accounting
principles, procedures and practices. The standards, procedures and practices
utilized in the Republic of Korea to audit such financial statements may differ
from those generally accepted in other countries and jurisdictions.
Young Wha
August 27, 1999
81
<PAGE>
REMY KOREA, LTD.
BALANCE SHEET
December 31,1996
<TABLE>
<CAPTION>
1996
----------------------------------------
<S> <C>
Assets
Current assets:
Cash on hand and in banks (Note 3)................. W 1,989,466,120
Marketable securities.............................. 2,000,000
Accrued interest receivable (Note 4)............... 67,900,295
----------------------------------------
Total current assets................................. 2,059,366,415
Organization costs................................... 8,786,000
----------------------------------------
Total Assets......................................... W 2,068,152,415
========================================
Liabilities and Stockholders' Equity:
Current liabilities:
Income taxes payable (Note 4)...................... W 42,895
----------------------------------------
Total Liabilities.................................... 42,895
----------------------------------------
Stockholders' equity (Note 5):
Common stock, W5,000 par value:
Authorized - 1,600,000 shares
Issued and outstanding - 400,000 shares......... 2,000,000,000
Retained earnings:
Unappropriated retained earnings................ 68,109,520
----------------------------------------
Total stockholders' equity........................... 2,068,109,520
========================================
Total liabilities and stockholders' equity........... W 2,068,152,415
========================================
</TABLE>
82
<PAGE>
REMY KOREA, LTD.
STATEMENT OF INCOME
FOR THE PERIOD FROM SEPTEMBER 9, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
----------------------------------------
<S> <C>
Sales................................................ W --
Cost of sales........................................ --
----------------------------------------
Gross profit......................................... --
Selling and administrative expenses.................. --
----------------------------------------
Operating income..................................... --
Non-operating income:
Interest income...................................... 72,056,298
Realized foreign exchange gains...................... 490,907
----------------------------------------
Total non-operating income........................... 72,547,205
----------------------------------------
Non-operating expenses:
Amortization of organization costs................... 4,393,000
----------------------------------------
Income before income taxes........................... 68,154,205
Provision for income taxes (Note 4).................. 44,685
----------------------------------------
Net income........................................... W 68,109,520
========================================
Earnings per share (Note 6).......................... W 170
========================================
</TABLE>
See accompanying notes.
STATEMENT OF APPROPRIATIONS OF UNAPPROPRIATED RETAINED EARNINGS
FOR THE PERIOD FROM SEPTEMBER 9, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
----------------------------------------
<S> <C>
Unappropriated retained earnings at inception........ W --
Net income........................................... 68,109,520
----------------------------------------
Unappropriated retained earnings at end of period before
appropriations....................................... 68,109,520
Appropriations....................................... --
----------------------------------------
Unappropriated retained earnings at end of period to be
carried forward...................................... W 68,109,520
========================================
</TABLE>
See accompanying notes.
83
<PAGE>
REMY KOREA, LTD
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 9, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
----------------------------------------
<S> <C>
Cash flows from operating activities:
Net income......................................... W 68,109,520
Additions of expenses not involving cash outflows:
Amortization of organization costs.............. 4,393,000
Deductions of revenues not involving cash inflows:
Realized foreign exchange gains................. (490,907)
Changes in assets and liabilities resulting from
operations:
Accrued interest receivable..................... (67,900,295)
Income taxes payable............................ 42,895
----------------------------------------
Sub-total.......................................... (67,857,400)
----------------------------------------
Net cash provided by operating activities.......... 4,154,213
Investing activities:
Cash inflows from investing activities............. --
Cash outflows from investing activities:
Increase in marketable securities............... 2,000,000
Increase in organization costs.................. 13,179,000
----------------------------------------
Net cash used in investing activities.............. (15,179,000)
----------------------------------------
Financing activities:
Cash inflows from financing activities:
Issuance of shares.............................. 2,000,490,907
Cash outflows from financing activities............ --
----------------------------------------
Net cash provided by financing activities.......... 2,000,490,907
----------------------------------------
Increase in cash on hand and in banks............... 1,989,466,120
Cash on hand and in banks at inception.............. --
========================================
Cash on hand and in banks at end of the period...... W 1,989,466,120
========================================
</TABLE>
See accompanying notes.
84
<PAGE>
REMY KOREA, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. General
-------
Remy Korea, Ltd. ("the Company") was incorporated on September 9, 1996
under the laws of the Republic of Korea to engage in manufacturing,
assembling and selling electric parts for cars. The Company was organized
under a joint venture agreement between Remy Korea Holdings Inc., a company
incorporated in the United States of America, and several domestic
investors on a 50% / 50% ownership basis.
2. Summary of significant accounting policies
------------------------------------------
Basis of financial statements - The Company maintains its books of accounts
-----------------------------
and prepares its financial statements in conformity with accounting
principles generally accepted in the Republic of Korea ("Korean GAAP"),
which may differ from accounting principles generally accepted in countries
and jurisdictions other than the Republic of Korea. Accordingly, the
accompanying financial statements are not primarily intended to present the
Company's financial position, results of operations and cash flows for
those who are not informed about Korean GAAP, procedures and practices.
Marketable securities - Marketable securities are stated at acquisition
---------------------
cost.
Organization costs and amortization - Organization costs are amortized
-----------------------------------
equally over 3 years starting from the year of establishment.
Foreign currency transactions - The Company's books and records are
-----------------------------
maintained in Korean won. Transactions conducted in foreign currencies are
recorded in Korean won based on the prevailing rates of exchange at the
dates of the transactions. Accounts with balances denominated in foreign
currencies are restated into Korean won at the year-end middle exchange
rate of W844.20 per US$1 as of December 31, 1996. The resulting unrealized
foreign currency translation gains (losses) are credited (charged) to
current operations.
Income taxes - The Company provides for taxes on income that are currently
------------
payable. In conformity with accounting practices prevailing in the Republic
of Korea, the Company does not provide for deferred income taxes arising
from temporary differences between income before income taxes for
accounting purposes and taxable income for income tax purposes.
Earnings per share - Earnings per share are calculated by dividing net
------------------
income by the weighted average number of shares outstanding during the
year.
3. Cash on hand and in banks
-------------------------
At December 31, 1996, cash on hand and in banks consisted of the following:
<TABLE>
<CAPTION>
Interest rate per annum
Cash on hand and in banks (%) 1996
----------------------------------------------- ---------------------------- ------------------------------
<S> <C> <C>
Passbook account.................................. 3 W 208,533
Cash Management Account........................... 12 1,989,257,587
==============================
W 1,989,466,120
==============================
</TABLE>
4. Income taxes
------------
The Company is subject to corporate income tax, including resident surtax,
at the rates of 17.6% of taxable income up to W100 million. The Company's
effective tax rate for 1996 was 0.07% mainly because the accrued interest
income of W67,900,295 as of December 31, 1996 was not included as taxable
income for tax purposes.
85
<PAGE>
5. Common stock
------------
The paid-in capital at the time of establishment of the Company was
W2,000,000,000 representing 400,000 common shares.
6. Earnings per share
------------------
Earnings per share for the period from inception to December 31, 1996 are
computed as follows:
<TABLE>
<CAPTION>
1996
--------------------------
<S> <C>
Net income.......................................................... W 68,109,520
Weighted average number of shares outstanding during this fiscal year 400,000
==========================
Earnings per share.................................................. W 170
==========================
</TABLE>
7. Korean economy
---------------
Starting in late 1997, the affects of adverse economic conditions in the
Republic of Korea included national liquidity crisis, significant
depreciation of the value of the Korean won, higher domestic interest
rates, reduced opportunities for refinancing of maturing debts, and a
general reduction in spending across the country. In order to partially
address this situation, the Government of the Republic of Korea decided to
seek assistance from the International Monetary Fund and announced a
comprehensive policy package intended to address the structural weaknesses
in the Korean economy and financial sector. While the reform policies were
intended to alleviate the economic crisis in Korea and improve the economy
over time, the effects included, among others, slower economic growth, a
reduction in availability of credit, volatility in interest rates, an
increased rate of inflation due to the devaluation of the Korean won, an
increase in the number of bankruptcies of Korean companies and individuals,
and labor unrest resulting from the increase in unemployment. The effect on
the Company's financial position of future developments with respect to the
Korean economy can not presently be determined.
8. Differences Between Korean and United States Generally Accepted
---------------------------------------------------------------
Accounting Principles
---------------------
The company's accounts are prepared in accordance with accounting
principles generally accepted in the Republic of Korea ("Korean GAAP")
which differ from United States generally accepted accounting principles
("US GAAP"). The significant differences applicable to the company are
summarized below.
Depreciation of Freehold Property
---------------------------------
Useful lives of property, plant and equipment under Korean GAAP are
different from those of US GAAP as follows:
<TABLE>
<CAPTION>
Useful lives
---------------------------------------------------------
Description Per Korean GAAP Per US GAAP
- ------------------------------------------------------ ------------------------ -----------------------------
<S> <C> <C>
Building.......................................... 40 40
Structures........................................ 40 40
Machinery......................................... 7 15
Vehicles.......................................... 7 3
Tools............................................. 7 3
Furniture and fixtures............................ 7 3 - 5
</TABLE>
86
<PAGE>
Deferred Taxation
-----------------
The Company provides for taxes on income that are currently payable. Under
Korean GAAP, the Company does not provide for deferred income taxes arising
from temporary differences between income before income taxes for
accounting purposes and taxable income for income tax purposes.
Under US GAAP, recognition of deferred tax assets and liabilities created
by temporary differences between the financial statements and tax bases of
assets and liabilities is required. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is provided on deferred tax assets to the
extent that it is more likely than not that such deferred tax assets will
be realized.
The following is a summary of the significant adjustments to income and
shareholders' equity which would be required if US GAAP were to be applied
instead of Korean GAAP.
<TABLE>
<CAPTION>
Stockholders' Stockholders'
Equity - beginning Increase ( Decrease) 1996 Net Income Equity - ending
-------------------- ----------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Balance per Company's books.... W -- W -- W 68,109,520 W 2,068,109,520
Adjustments:
Depreciation................... -- -- -- --
Deferred income taxes.......... -- -- (10,456,645) (10,456,645)
------------------ ------------------- -------------- ------------------
W -- W -- W 57,652,875 W 2,057,652,875
================== =================== ============== ==================
</TABLE>
87
<PAGE>
ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the independent accountants.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to executive officers and directors will appear in the
definitive Proxy Statement to be filed with the Commission relating to the
Company's 1999 Annual Meeting of Shareholders, which section is incorporated
herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The definitive Proxy Statement to be filed with the Commission relating to
the Company's 1999 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The definitive Proxy Statement to be filed with the Commission relating to
the Company's 1999 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The definitive Proxy Statement to be filed with the Commission relating to
the Company's 1999 Annual Meeting of Shareholders, are incorporated herein by
reference.
88
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents have been filed as a part of this report or, where
noted, incorporated by reference:
(1) Financial Statements
The financial statements of the Company and its
consolidated subsidiaries listed on the index to
Consolidated Financial Statements.
(2) Financial Statement Schedules
Financial statement schedules have not been filed
because they are not applicable or the required
information is shown in the financial statements or the
notes thereto.
(3) Exhibits
The following exhibits have been filed as part of this
report in response to Item 14(c) of Form 10-K:
+++++++ 3.1 Restated Certificate of Incorporation
++++++++ 3.2 By-laws of the Registrant
+ 4.1 Indenture, dated as of August 1, 1996, among
the Company, certain of the Company's
subsidiaries signatories thereto and
National City Bank of Indiana, as trustee
+++++ 4.2 Indenture governing 8 5/8% Senior Notes Due
2007 among the Company, the Subsidiary
Guarantors and United States Trust Company
of New York, as trustee, dated December 22,
1997
++++ 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, DRI 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 Second Amended and Restated Securities
Purchase and Holders Agreement 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
Managment Investors
89
<PAGE>
+++ 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 December
16, 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.L. and DRA,
dated February 9, 1995
++ 10.16 Lease by and between Eagle I L.L.C. and DRA,
dated August 11, 1995
* 10.20 Starter Motor Pricing Agreement, dated March
17, 1999, by and between DRA and GM
("Pricing Adjustment Agreement").
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Young Wha
27 Financial Data Schedule (Filed via EDGAR
only)
* Portions of this exhibit have been omitted
pursuant to a request for confidential
treatment.
+ Incorporated by reference to the Exhibit of
the same number to the Registration
Statement on Form S-1 previously filed by
the Company on October 10, 1997, registering
the issuance of the Company's Class A Common
Stock, par value $.01 per share (the "Equity
Registration Statement")
++ Incorporated by reference to the Exhibit of
the same number to Amendment No. 1 to the
Equity Registration Statement which was
filed by the Company on October 22, 1997
+++ Incorporated by reference to the Exhibit of
the same number to Amendment No. 2 to the
Equity Registration Statement which was
filed by the Company on November 21, 1997
++++ Incorporated by reference to the Exhibit of
the same number to Amendment No. 3 to the
Equity Registration Statement which was
filed by the Company on November 26, 1997
+++++ Incorporated by reference to the Exhibit of
the same number to Amendment No. 4 to the
Equity Registration Statement which was
filed by the Company on December 8, 1997
++++++ Incorporated by reference to Exhibit 4.1 to
the Company's Form 10-Q for the quarter
ended January 31, 1998
+++++++ Incorporated by reference to Exhibit 2.1 to
the Company's Form 10-Q for the quarter
ended January 31, 1998
++++++++ Incorporated by reference to Exhibit 2.2 to
the Company's Form 10-Q for the quarter
ended January 31, 1998
+++++++++ Incorporated by reference to Exhibit 10.8 to
the Company's Form 10-K for the year ended
July 31, 1998
(b) The Company filed one report on Form 8-K relative to the acquisition of
Remy Korea Ltd. during the quarter end July 31, 1998. This report was
subsequently amended on September 8, 1999.
90
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DELCO REMY INTERNATIONAL, INC.
By: /s/ Thomas J. Snyder
--------------------------------
Thomas J. Snyder President,
Chief Operating Officer and
Director
Date: October 1, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By: /s/ Harold K Sperlich By: /s/ Thomas J. Snyder
------------------------------ ------------------------------
Harold K. Sperlich Thomas J. Snyder
Chairman of the Board President, Chief Operating
(Principal Executive Officer) Officer and Director
By: /s/ David L. Harbert By: /s/ David E. Stoll
------------------------------ ------------------------------
David L. Harbert David E. Stoll
Executive Vice President Vice President and Controller
and Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
By: /s/ E. H. Billig
------------------------------
E .H. Billig
Vice Chairman of the
Board of Directors Date: October 1, 1999
By: /s/ Richard M. Cashin, Jr
------------------------------
Richard M. Cashin, Jr.
Director
By: /s/ Michael A. Delaney
------------------------------
Michael A. Delaney
Director
By: /s/ James R. Gerrity
------------------------------
James R. Gerrity
Director
By:
------------------------------
Robert J. Schultz
Director
91
<PAGE>
EXHIBIT 10.20*
General Motors and Delco Remy America-
Starter Motor Pricing Adjustment
March 17, 1999
INCLUDED IN THIS AGREEMENT:
--------------------------
. ATTACHMENT I - SUMMARY
. ATTACHMENT II - STARTER MOTOR SUPPLY DETAIL
. ATTACHMENT III - BASE PRICE BY MOTOR FAMILY
. ATTACHMENT IV - GM/DRA NON-FERROUS METALS PROCEDURE
. ATTACHMENT V - RISK/REWARD PHASE IN
- --------------------------------------------------------------------------------
/s/ Helmut Kittler /s/ Robert Lawson
------------------------------- --------------------------------
General Motors Corporation Delco Remy America
Helmut Kittler, Robert Lawson, Vice President
Director - Electrical/Chemical
Powertrain Purchasing
Dated: 4/16/99 Dated: 4/16/99
------------------------- -------------------------
/s/ Kim Darrah
--------------------------------
Delco Remy America
Kim Darrah, Director of Sales
Dated: 4/16/99
-------------------------
- --------------------------------------------------------------------------------
*Portions of this Exhibit 10.20 were omitted and filed separately with the
Secretary of the Securities and Exchange Commission (the "Commission") pursuant
to an application for confidential treatment filed with the Commission pursuant
to Rule 24b-2 promulgated under the Securities Exchange Act of 1934. Such
portions are marked by the word "Redacted."
<PAGE>
ATTACHMENT I
General Motors and Delco Remy America -
Starter Motor Pricing Adjustment
Dated March 17, 1999
- --------------------------------------------------------------------------------
1. Subject to the provisions of Section 1.2 of the Light Duty Starter Motor
Component Supply Agreement (the "Component Supply Agreement"), including,
without limitation, Section 1.2 (d), any NAO engine, derivative, or replacement
will use a Delco Remy "starter motor" for the life of the engine at the
established agreed upon contract pricing between General Motors and Delco Remy
America as shown in Attachment II.
For years 2008 and beyond, Delco Remy America must demonstrate
competitiveness in terms of quality, service, technology, and price and special
or preferential supply processes, including, without limitation, 1.2(d)(i),
(ii), (iii), of the Component Supply Agreement will not apply and standard
market competitive relationship and process execution steps or procedures will
apply. In short, the Component Supply Agreement will expire on August 31, 2008.
Any brand new "base up" engine design not listed in Attachment II ("base
up" would mean new block design) is excluded. However, DRA will be allowed a
fair opportunity to quote on any of these new programs.
ATTACHMENT II- ............................................VOLUME/ENGINE DETAIL
ATTACHMENT III-......................................BASE PRICE BY MOTOR FAMILY
2. The base price for each starter motor family was established using the May
1, 1998, metals adjustment for copper and aluminum and will be adjusted per the
"Non-Ferrous Metals Price Adjustment Procedure". [Redacted]
ATTACHMENT IV-.............................GM/DRA NON-FERROUS METALS PROCEDURE
Page 1 of 2
<PAGE>
GM & DRA Starter Motor Pricing Adjustment
- --------------------------------------------------------------------------------
3. As new starter motor applications are introduced into production, General
Motors will be responsible for (and own) any nose housing tooling not to exceed
[Redacted]. All such tooling will be held by Delco Remy America on a bailment
basis.
4. As new starter motor applications are introduced into production, General
Motors will be responsible for (and own) any returnable dunnage, if required.
All such dunnage will be held by Delco Remy America on a bailment basis.
5. The prices herein reflect all previous negotiations.
6. Delco Remy America will participate in supplier integration and will
provide onsite engineering personnel to support starter motor application
engineering activities. Delco Remy America will provide the services requested
by General Motors, potentially including, but not limited to design,
development, validation, application, and systems support.
7. The provisions of Sections 4.3 (a) and (b) of the Component Supply
Agreement are modified to the extent necessary to allow the Risk and Reward
program set forth in Attachment V.
ATTACHMENT V-...............................RISK/REWARD PHASE IN
8. Except as specifically modified hereby, the Light Duty Starter Motor
Component Agreement is ratified, confirmed, and remains in full force and
effect.
Page 2 of 2
<PAGE>
Starter Motor Supply Detail - ATTACHMENT II
-------------------------------------------
Current Engines and RPO's:
[Redacted]
Page 1 of 1
<PAGE>
ATTACHMENT III
GM/DRA AGREEMENT
Model
Year
Pricing 1999 2000 2001 2002 2003 2004 2005 2006 2007
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ----
MQ
L
F2 [Redacted]
F1
G
D
<PAGE>
ATTACHMENT IV
General Motors/Delco Remy America Non-ferrous Metals
Price Adjustment Procedure
The following procedure is consistent with the GM/DRA Light Duty Starter Motors
Component Supply Agreement, dated July 31, 1994, and should in no way be used to
modify or alter the terms and conditions of said agreement. This procedure is
solely intended to clarify the method of calculating the price change due to
metals market fluctuations of aluminum and copper.
The metals market barometer of Platt's Metals Week will be used. Aluminium
prices will be calculated by using the MW a-380 Alloy published price. Copper
prices will be calculated by using the MW US Prod. Cathode published price.
Adjustments to the selling price of each part will be made every other month (6
times/year) as determined by the change in the average of the prices published
during the first ten (10) calender days of the month prior to the two month
price effective period. For example, the average of the prices published during
the first ten (10) calender days of December would be used to determine the
metal price change effective January 1. Likewise, the average of the first ten
(10) calender days published prices for February would be used to determine the
metals price change effective March 1. (For Aluminum, the high and low of the
day will be averaged and that average will then be used as the value for that
day).
The part weight file will be maintained by Delco Remy America and is to be made
available to General Motors upon request. The calculations should be made as
follows:
[Redacted]
Price will be adjusted January 1, March 1, May 1, July 1, September 1, and
November 1. These price adjustments will be based on the Platt's Metals Week
average of the first 10 calender days of December, February, April, June,
August, and October.
/s/ David Reeck /s/ Robert Lawson
- ---------------------------- -----------------------------
David Reeck Robert Lawson
Commodity Manager Vice President Sales & Marketing
General Motors Powertrain Delco Remy America
Dated: 9/28/95 Dated: 9/20/95
---------------------- --------------------------
<PAGE>
ATTACHMENT V
[LOGO OF DELCO REMY APPEARS HERE]
RISK/REWARD PHASE IN
March 17, 1999
1. Delco Remy America will agree to the following Risk/Reward targets for
displacements under and including 6.0L engine starter motors on vehicles
produced according to the following schedule at 360 days in service:
[Redacted]
2. This target IPTV is calculated by using failures only due to DRA
hardware. It does not include DRA accepting risk for "no trouble found",
"GM Assembly Plant issues", or "system problems" not in control of DRA.
(DRA and GM estimate hardware issues at [Redacted] of total IPTV
typically).
3. DRA agrees to the risk, however, requires a "phase in" period for time
to:
a. Implement changes to current designs and processes with the timely
support of GM engineering and required engine testing.
b. Participate in on-site supplier integration as soon as practical.
c. Introduce new product programs per the planned new product launches
2001-2004.
d. Support GM engineering with design of experiments to enable
reduction of system/hardware complex failure modes.
4. The "phase in" will provide GM with the following cost sharing by DRA,
if DRA does not meet the above targets:
[Redacted]
a. By 2004 calendar year, DRA will participate at [Redacted] at agreed
upon targets.
b. Should DRA exceed the agreed upon targets above, DRA will share in
the "rewards" [Redacted].
Page 1 of 1
<PAGE>
EXHIBIT 21
Delco Remy International, Inc.
Subsidiaries of the Registrant
Delco Remy International, Inc. (Delaware)
Delco Remy America, Inc. (Delaware)
Delco Remy International (Europe) GmbH (Germany)
Reman Holdings, Inc. (Delaware)
Nabco, Inc. (Michigan)
The A & B Group, Inc. (Mississippi)
A & B Cores, Inc. (Mississippi)
A & B Enterprises, Inc. (Mississippi)
Dalex, Inc. (Mississippi)
MCA, Inc. of Mississippi (Mississippi)
R & L Tool Company, Inc. (Mississippi)
Power Investments, Inc. (Indiana)
Western Reman, Inc. (Indiana)
Franklin Power Products, Inc. (Indiana)
Magnum Power Products, LLC (Delaware)
International Fuel Systems, Inc. (Indiana)
Marine Corporation of America (Indiana)
Power Investments Marine, Inc. (New Jersey)
Powrbilt Products, Inc. (Texas)
Power Investments Canada Ltd. (Alberta)
Alberta Ltd. (Alberta)
Central Precision (1988) Limited (Canada)
Western Reman Ltd. (Canada)
Alvin Morris Holdings Ltd. (Alberta)
Morris Manufacturing Co. Ltd. (Alberta)
Engine Rebuilders Ltd. (Alberta)
Reman Transport Ltd. (Alberta)
World Wide Automotive Inc. (Virginia)
Publitech, Inc. (Virginia)
World Wide Automotive Distributors, Inc. (Virginia)
Williams Technologies, Inc. (South Carolina)
HSG I, Inc. (Delaware)
HSG II, Inc. (Delaware)
Remy International, Inc. (Delaware)
DR Sales, Inc. (Delaware)
Remy Holding Limited (UK)
Delco Remy Hungary RT (formerly Autovill RT)
Delco Remy UK Limited (UK)
Remy Holdings do Brasil Ltda. (Brazil)
Remy Auto Parts Holdings B.V. (Netherlands)
Delco Remy Germany GmbH (Germany)
Continental ISAD Electric Motors Verwaltungs GmbH
(Germany)
Continental ISAD Electric Motors GmbH & Co. OHG
(Germany)
Delco Remy Holding Belgium bvba (Belgium)
Delco Remy Belgium bvba (Belgium)
Electro Diesel Rebuild bvba
Electro-Rebuild Tunisie S.A.R.L. (Tunisia)
Remy Mexico Holdings, S. de R.L. de C.V. (Mexico)
Delco Remy Mexico, S. de R.L. de C.V. (Mexico)
Remy Mexico Services, S. de R.L. de C.V. (Mexico)
Remy Componentes S. De R.L. de C.V. (Mexico)
Remy Components Holdings, Inc. (Delaware)
Remy India Holdings, Inc. (Delaware)
Sahney Paris Rhone Limited (India)
Remy Korea Holdings, Inc. (Delaware)
Remy Korea LTD (Korea)
Delco Remy International Limited (Barbados)
Remy South America Holdings, Inc. (Delaware)
Autovill Holdings, Inc. (Delaware)
Delco Remy International Limited (Barbados)
Ballantrae Corporation
Kraftube, Inc. (Michigan)
Tractech, Inc. (Delaware)
Trachech, Inc. Limited (Ireland)
A.P. Acquisition (Delaware)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Forms
S-8 Nos. 333-75359, 333-69713, and 333-69715) of Delco Remy International, Inc.
pertaining to the 1997 Stock-Based Incentive Compensation Plan and 1997
Non-Qualified Stock Option Plan for Non-Employee Directors, the Delco Remy
America Personal Savings Plan for Hourly-Rate Employees in the United States of
Delco Remy International, Inc., and the Delco Remy International 401(k)
Retirement and Savings Plan of Delco Remy International, Inc. of our report
dated August 23, 1999 with respect to the consolidated financial statements of
Delco Remy International, Inc. included in this Annual Report (Form 10-K) for
the year ended July 31, 1999.
/s/ Ernst & Young LLP
Indianapolis, Indiana
October 1, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Annual Report on Form 10-K of Delco Remy
International, Inc. for the year ended July 31, 1999, of our report dated March
26, 1998 related to the financial statements of Williams Technologies, Inc. as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, which are included in the annual report on Form 10-K of
Delco Remy International, Inc. for the year ended July 31, 1999.
DELOITTE & TOUCHE LLP
Columbus, Ohio
September 30, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Forms
S-8 Nos. 333-75359, 333-69713, and 333-69715) of Delco Remy International, Inc.
pertaining to the 1997 Stock-Based Incentive Compensation Plan and 1997
Non-Qualified Stock Option Plan for Non-Employees Directors, the Delco Remy
America Personal Savings Plan for Hourly-Rate Employees in the United States of
Delco Remy International, Inc., and the Delco Remy International 401(k)
Retirement and Savings Plan of Delco Remy International, Inc. of our reports
dated February 13, 1999 and August 27, 1999 with respect to the financial
statements of Remy Korea, Ltd. as of and for the years ended December 31, 1998
and 1997, and as of December 31, 1996 and for the period from September 9, 1996
to December 31, 1996 prepared in conformity with accounting principles generally
accepted in the Republic of Korea included in this Annual Report (Form 10-K) for
the year ended July 31, 1999.
/s/ Young Wha
Seoul, Korea
October 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
FOR DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 15,309
<SECURITIES> 0
<RECEIVABLES> 150,093
<ALLOWANCES> 2,105
<INVENTORY> 232,165
<CURRENT-ASSETS> 428,858
<PP&E> 258,727
<DEPRECIATION> 63,532
<TOTAL-ASSETS> 782,663
<CURRENT-LIABILITIES> 186,509
<BONDS> 434,931
0
0
<COMMON> 245
<OTHER-SE> 109,275
<TOTAL-LIABILITY-AND-EQUITY> 782,663
<SALES> 953,706
<TOTAL-REVENUES> 953,706
<CGS> 759,815
<TOTAL-COSTS> 759,815
<OTHER-EXPENSES> 105,085
<LOSS-PROVISION> 1,984
<INTEREST-EXPENSE> 45,505
<INCOME-PRETAX> 43,301
<INCOME-TAX> 16,454
<INCOME-CONTINUING> 28,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,346
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.09
</TABLE>
