AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997.
REGISTRATION NO. 333-37703
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DELCO REMY INTERNATIONAL, INC.
DELCO REMY AMERICA, INC. REMY INTERNATIONAL, INC.
REMAN HOLDINGS, INC. NABCO, INC.
THE A&B GROUP, INC. A&B ENTERPRISES, INC.
DALEX, INC. A&B CORES, INC.
R&L TOOL COMPANY, INC. MCA, INC. OF MISSISSIPPI
POWER INVESTMENTS, INC. FRANKLIN POWER PRODUCTS, INC.
INTERNATIONAL FUEL SYSTEMS, INC. MARINE DRIVE SYSTEMS, INC.
MARINE CORPORATION OF AMERICA POWRBILT PRODUCTS, INC.
WORLD WIDE AUTOMOTIVE, INC.
(EXACT NAMES OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
----------------
2902 ENTERPRISE DRIVE, ANDERSON, INDIANA 46013, TELEPHONE: (765) 778-6499
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
SUSAN E. GOLDY, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
DELCO REMY INTERNATIONAL, INC.
2902 ENTERPRISE DRIVE, ANDERSON, INDIANA, 46013, TELEPHONE (765) 778-6799
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
CHRISTOPHER G. KARRAS, ESQ. MARC S. ROSENBERG, ESQ.
DECHERT PRICE & RHOADS CRAVATH, SWAINE & MOORE
4000 BELL ATLANTIC TOWER WORLDWIDE PLAZA
1717 ARCH STREET 825 EIGHTH AVENUE
PHILADELPHIA, PENNSYLVANIA 19103-2793 NEW YORK, NEW YORK 10019
(215) 994-4000 (212) 474-1000
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- --------------------------------------------------------------------------------
DELCO REMY INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
FORM S-1 PART I ITEM CAPTION OR LOCATION IN PROSPECTUS
-------------------- ---------------------------------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds................. Use of Proceeds
5. Determination of Offering
Price.......................... Underwriting
6. Dilution........................ Not Applicable
7. Selling Security Holders........ Not Applicable
8. Plan of Distribution............ Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered..................... Description of Notes
10. Interests of Named Experts and
Counsel........................ Not Applicable
11. Information with Respect to the
Registrants.................... Prospectus Summary; Risk Factors;
Company History; Use of Proceeds;
Capitalization; Selected Consolidated
Historical Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock;
Description of Indebtedness; Index to
Financial Statements
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS DECEMBER 9, 1997
$130,000,000 [LOGO OF DELCO REMY INTERNATIONAL
APPEARS HERE]
DELCO REMY INTERNATIONAL, INC.
% SENIOR NOTES DUE 2007
The % Senior Notes Due 2007 (the "Notes") are being offered (this "Offering"
or the "Notes Offering") by Delco Remy International, Inc. (the "Company") and
will mature on December , 2007. Interest on the Notes is payable semiannually
on each January and July , commencing July , 1998. The Notes are
redeemable at the option of the Company, in whole or in part, on or after
December , 2002, at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the redemption date. In addition, prior to December
, 2000, the Company may use the proceeds of one or more Public Equity
Offerings (as defined) to redeem up to 40% of the original principal amount of
the Notes at a redemption price of % of the 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 Notes remains outstanding following any such redemption. Upon a Change of
Control (as defined), each holder of the Notes will have the right to require
the Company to repurchase such holder's Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the repurchase date. See
"Description of Notes--Change of Control."
Concurrently with this Offering, the Company is offering 4,000,000 shares
(without giving effect to the over-allotment option) of the Company's Class A
Common Stock (the "Equity Offering" and, together with the Notes Offering, the
"Offerings"). See "Prospectus Summary--The Offering--Concurrent Offerings." The
Notes Offering and the Equity Offering are each contingent upon consummation of
the other.
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future Senior Indebtedness
(as defined) of the Company and senior in right of payment to all existing and
future Subordinated Obligations (as defined) of the Company. In addition, the
obligations of the Company under the Notes will be fully and unconditionally
guaranteed on a joint and several basis (each, a "Subsidiary Guaranty") by each
of the Company's existing and future Domestic Restricted Subsidiaries (as
defined; collectively, the "Subsidiary Guarantors"). 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 Subordinated Obligations of the Subsidiary Guarantors. The
Notes and the Subsidiary Guaranties will be effectively subordinated to all
existing and future Secured Indebtedness (as defined) of the Company and the
Subsidiary Guarantors (to the extent of the assets securing such Indebtedness)
and to any liabilities of subsidiaries other than Subsidiary Guarantors. The
Senior Credit Facility (as defined) will be secured by substantially all of the
Company's U.S. assets. As of October 31, 1997, after giving pro forma effect to
the Offerings and the other Transactions (as defined), the Company would have
had approximately $336.6 million of consolidated indebtedness outstanding, of
which approximately $47.5 million would have ranked effectively senior to the
Notes and the Subsidiary Guaranties (excluding unused commitments, outstanding
letters of credit and liabilities of subsidiaries other than subsidiary
Guaranty). Although the Indenture (as defined) contains limitations on the
amount of additional indebtedness that the Company and its Restricted
Subsidiaries may incur, under certain circumstances the amount of such
indebtedness could be substantial and, in any case, such indebtedness may be
Secured Indebtedness or indebtedness of subsidiaries other than the Subsidiary
Guarantors. See "Description of Notes."
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance under the symbol RMY07.
SEE "RISK FACTORS" ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT COMPANY (1)(2)
Per Note................................. % % %
Total.................................... $ $ $
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(1) Plus accrued interest, if any, from December , 1997, to the date of
delivery.
(2) Before deducting expenses payable by the Company, estimated to be $ .
The Notes are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the order without notice. It is expected
that delivery of the Notes will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about December , 1997.
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
The date of this Prospectus is December , 1997.
Inside Spread
(Title) A World of Solutions
(Sub Title) Delco Remy International
[PHOTOGRAPH OMITTED]
A broad line of automotive and heavy duty
remanufactured starters and alternators
[PHOTOGRAPH OMITTED]
Navistar 7.3 liter remanufactured diesel engine
[PHOTOGRAPH OMITTED]
Ford authorized engine remanufactured in five
Canadian provinces
[PHOTOGRAPH OMITTED]
Winchester, VA World Wide Automotive
[PHOTOGRAPH OMITTED]
Aftermarket private branding for major retail
customers
[PHOTOGRAPH OMITTED]
Dodge transmission
[PHOTOGRAPH OMITTED]
Front wheel drive Chrysler transmission
[PHOTOGRAPH OMITTED]
Family of planetary gear reduction starters for light
duty applications
[PHOTOGRAPH OMITTED]
A General Motors Corporation 1996 Supplier
of the Year
[PHOTOGRAPH OMITTED]
The Road Gang(TM) heavy duty electrical system
[PHOTOGRAPH OMITTED]
Live engine test room
[PHOTOGRAPH OMITTED]
Cold room testing
[PHOTOGRAPH OMITTED]
Corrosion testing
[PHOTOGRAPH OMITTED]
Alliance Park alternator focus factory
Back Cover
[PHOTOGRAPH OMITTED]
Light duty starters for a wide variety of automotive,
light trucks, marine and industrial engines
[PHOTOGRAPH OMITTED]
A broad line of automotive and heavy duty
remanufactured starters and alternators
[PHOTOGRAPH OMITTED]
Heavy duty starters and alternators perform in
transportation, agricultural and industrial
applications
The WORLD of DELCO REMY
(Title) A World of Challenges
Inside Front Cover
[PHOTOGRAPH OMITTED]
Delco Remy International World Headquarters
[PHOTOGRAPH OMITTED]
Nine facilities QS9000 Certified
[PHOTOGRAPH OMITTED]
A General Motors Corporation 1996 Supplier
of the Year
[PHOTOGRAPH OMITTED]
One of three new "Focus" Factories
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT RELATED TO
HISTORICAL RESULTS ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
FURTHER, CERTAIN FORWARD-LOOKING STATEMENTS ARE BASED UPON ASSUMPTIONS AS TO
FUTURE EVENTS THAT MAY NOT PROVE TO BE ACCURATE. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO,
THOSE SET FORTH UNDER "RISK FACTORS."
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the securities offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain items of which are omitted as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any agreement or other document referred to
herein are not necessarily complete, and reference is made to the copy of such
agreement or other document filed as an exhibit or schedule to the
Registration Statement and each such statement shall be deemed qualified in
its entirety by such reference. For further information, reference is made to
the Registration Statement and to the exhibits and schedules filed therewith,
which are available for inspection without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W,
Washington, D.C. 20549. Copies of the material containing this information may
be obtained from the Commission upon payment of the prescribed fees.
After consummation of this Offering, the Company will be subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, will be
required to file proxy statements, reports and other information with the
Commission. The Registration Statement, as well as any such report, proxy
statement and other information filed by the Company with the Commission, may
be inspected and copied at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm accompanied by an opinion expressed by such independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information in each case prepared
in accordance with generally accepted accounting principles.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The disclosure contained throughout this Prospectus which is
identified as being presented on a pro forma ("pro forma") basis has been
prepared as if the following transactions (the "Transactions") occurred (a) for
purposes of statement of operations and cash flow data at the beginning of the
period being presented (August 1, 1996 or 1997) and (b) for purposes of balance
sheet data, on October 31, 1997 (except for (i) below, which is included in the
historical balance sheet data): (i) the acquisition by the Company of World
Wide Automotive, Inc. ("World Wide") on May 8, 1997, (ii) the acquisition by
the Company of Ballantrae Corporation ("Ballantrae") for which the Company has
entered into an Agreement and Plan of Merger dated October 30, 1997, (iii) the
completion of both Offerings, (iv) the payment in full by the Company of the 10
1/2% Senior Note due July 31, 2003 to World Subordinated Debt Partners, L.P.,
(v) the payment in full by the Company of the 11.50% Subordinated Notes due
July 31, 2004 to General Motors Corporation, (vi) the exchange of the 11%
Junior Subordinated Notes due July 31, 2004 (the "Junior Subordinated Notes")
for approximately 1.8 million shares of Class A Common Stock, (vii) the
exchange, in accordance with their terms, of the outstanding shares of 8%
preferred stock of Delco Remy America, Inc. ("DRA") to an 8% subordinated
debenture of DRA, (viii) a stock dividend to existing holders of Common Stock
resulting in a 16.8-for-one increase in the outstanding shares of Common Stock
(the "Stock Split"), (ix) the payment in full by the Company of subordinated
notes payable to certain former stockholders of A&B Group and certain current
and former stockholders of Power Investments (as defined) and (x) the amendment
of the Senior Credit Facility (as defined) in connection with the consummation
of the Offerings. Unless otherwise indicated, the information contained in this
Prospectus assumes no exercise of the over-allotment option in connection with
the Equity Offering. For purposes of this Prospectus, the "Company" shall refer
to Delco Remy International, Inc. ("DRI") and all of its consolidated
subsidiaries, unless the context otherwise requires.
THE COMPANY
GENERAL
The Company designs, manufactures, remanufactures and distributes electrical,
powertrain/drivetrain and related components for automobiles and light trucks,
medium and heavy duty trucks and other heavy duty vehicles. The Company's
products include starter motors ("starters"), alternators, engines,
transmissions, traction control systems and fuel systems. The Company serves
the aftermarket and the original equipment manufacturer ("OEM") market,
principally in North America as well as in Europe, Latin America and Asia-
Pacific. Net sales, EBITDA (as defined), Adjusted EBITDA (as defined) and net
loss for fiscal year 1997 were $689.8 million, $50.4 million, $87.3 million and
$14.3 million, respectively. Excluding restructuring charges, net income for
fiscal year 1997 would have been $10.5 million. For the same period, the
aftermarket accounted for approximately 45.2% of the Company's net sales and
62.8% of Adjusted EBITDA, with the OEM market accounting for the balance.
The Company believes that it is the largest manufacturer and remanufacturer
in North America of (i) starters for automobiles and light trucks (including
sport-utility vehicles, minivans and pickup trucks) and (ii) starters and
alternators for medium and heavy duty vehicles. The Company's products are
principally sold or distributed to OEMs for both original equipment manufacture
and aftermarket operations, as well as to warehouse distributors and retail
automotive parts chains. Major customers include General Motors ("GM"), General
Motors Service Parts Operations ("GM SPO"), Navistar, Caterpillar,
Freightliner, PACCAR, Auto Zone, Cummins, Western Auto, Ford, Detroit Diesel,
Volvo Trucks, Mack, Pep Boys, Advance Auto and O'Reilly Automotive.
The Company sells its products principally under the "Delco Remy" brand name
and other major brand names worldwide. In connection with the GM Acquisition
(as defined), the Company obtained perpetual rights
4
to the "Delco Remy" brand name, which was first used in 1918. The Company also
received the right to use "Delco Remy" as a corporate name until 2004 and the
"Remy" name in perpetuity. In addition, GM entered into a long-term contract to
purchase from the Company substantially all of its North American requirements
for automotive starters until 2004 and its U.S. and Canadian requirements for
heavy duty starters and alternators until 2000. GM also entered into a
distribution agreement to sell the Company's aftermarket products through the
GM SPO distribution system, the term of which extends until 2009 for automotive
products and until 1998 for heavy duty products. See "Risk Factors--Dependence
on General Motors" and "Business--Customers."
Citicorp Venture Capital Ltd. ("CVC") and Harold K. Sperlich, former
president of Chrysler Corporation, together with a subsidiary of MascoTech Inc.
("MascoTech") and certain senior management of the former Delco Remy Division
of GM (the "Former GM Division"), formed the Company for the purpose of
acquiring the assets of the automotive starter and the heavy duty starter and
alternator businesses of the Former GM Division (the "GM Acquisition"). Upon
consummation of the Offerings and the other Transactions, CVC, management of
the Company and other existing stockholders of the Company will beneficially
own approximately 82.1% of the Company's outstanding Common Stock (73.8% of the
voting power), and will be able to control the Company and elect its Board of
Directors. See "Management," "Dilution" and "Certain Transactions."
The Original Investors (as defined) in the Company have received a
substantial realized and unrealized return on their investment in the Company.
The following table summarizes the historical investments of CVC, MascoTech and
Messrs. Gerrity, Sperlich and Snyder (the "Original Investors") in the Company
and Ballantrae since July 29, 1994 and the total return, including unrealized
return, on such investments as of an assumed closing date for the Offerings of
December 22, 1997 (in thousands).
MASCO
CVC TECH GERRITY SPERLICH SNYDER TOTAL
-------- ------- ------- -------- ------ --------
Total invested in the Com-
pany and Ballantrae........ $ 24,082 $ 4,200 $1,270 $ 100 $ 50 $ 29,702
Total cash received and
value of shares of Common
Stock held(a).............. $171,325 $42,220 $8,156 $13,960 $7,856 $243,517
- --------
(a) Assumes an initial public offering price of $15.00 per share.
For additional details regarding such investment and return, see "Certain
Transactions."
Since the GM Acquisition, the Company has completed five strategic
acquisitions, substantially increasing the Company's aftermarket operations,
and entered into two international joint ventures. The Company is also in the
process of completing the strategic acquisition of Ballantrae, which will
expand the Company's drivetrain product position. Through Ballantrae's wholly
owned subsidiary, Tractech Inc. ("Tractech"), the Company will offer high
quality traction control systems to heavy duty OEMs and the aftermarket. These
acquisitions and joint ventures have broadened the Company's product line,
expanded its remanufacturing capability, extended its participation in
international markets and increased its penetration of the retail automotive
parts channel. As a result of these acquisitions and joint ventures and the
Company's focus on increasing its participation in the aftermarket, the
Company's reliance on GM has declined since the Company's formation. Net sales
to customers other than GM increased from 41.0% in fiscal year 1995 to 56.3% in
fiscal year 1997.
The Company's expanding aftermarket business benefits from the non-deferrable
nature of the repairs for which many of the Company's products are used.
Additionally, the Company's aftermarket business benefits from the design,
manufacturing and technological expertise of the Company's OEM operations. This
OEM expertise provides the Company with advantages over many of its aftermarket
competitors. The Company believes that its participation in both OEM and
aftermarket businesses and its diversified customer base reduce its exposure to
the cyclicality of the automotive industry. The Company's growth strategy is
designed to capitalize on its position as a consolidator in the large and
highly fragmented remanufacturing aftermarket.
5
GROWTH STRATEGY
The Company plans to continue to increase revenues and profitability of its
aftermarket and OEM businesses through a strategy of internal growth and growth
through acquisitions. Key elements of the Company's growth strategy include:
INCREASING AFTERMARKET PRESENCE
Strengthening Customer Relationships. The Company intends to increase its
sales to new and existing customers by capitalizing on its balanced coverage of
the key channels of aftermarket distribution and its competitive strengths as
an OEM supplier. The Company plans to strengthen its customer relationships by
(i) continuing to expand its product offerings, (ii) capitalizing on the
expansion of the national automotive retail parts chains and warehouse
distributors that are customers of the Company, (iii) meeting the increasing
demands of OEMs and their dealer networks for high quality remanufactured
units, which enable them to reduce warranty and extended service costs, and
(iv) growing sales of existing and new product lines to OEM dealer networks as
dealers continue to capture an increasing percentage of vehicle repairs, due to
longer warranty and service programs and growing vehicle complexity.
Additionally, with the recent acquisition of World Wide, the Company expanded
its product line and now offers a full line of starters and alternators for
domestic and import vehicles. The acquisition also has improved the Company's
distribution capabilities, which now include a nationwide overnight delivery
service.
Consolidating the Fragmented Aftermarket. The portion of the aftermarket in
which the Company participates is large and highly fragmented, with most
participants being small, regional companies offering relatively narrow product
lines. Although the Company believes that it is the largest manufacturer and
remanufacturer of aftermarket starters and alternators in North America, its
sales of these products account for less than 12% of this market. Consolidation
of the aftermarket is occurring as many competitors are finding it difficult to
meet the increasing quality, cost and service demands of customers, who, in
turn, are seeking to rationalize their supplier base. With its OEM
capabilities, remanufacturing expertise, full product line, greater access to
"cores" and ability to capitalize on economies of scale, the Company is well
positioned to benefit from the consolidation of the aftermarket.
EXPANDING GLOBALLY
The Company is expanding its international operations in order to (i) benefit
from the trend toward international standardization of automotive and heavy
duty vehicle platforms and (ii) participate in rapidly growing foreign markets.
The Company has recently been awarded new business by GM, Volkswagen, Mercedes
Benz, Ford and Caterpillar in Brazil; Opel in Europe; Daewoo Motors in India
(in connection with the Company's pending strategic alliance in India); and
Mercedes Benz, Volvo Trucks, John Deere and Dina in Mexico. The Company intends
to supply its existing OEM customers on a global basis as they expand their
operations and require local supply of component parts that meet their demands
for quality, technology, delivery and service. The Company believes that its
global expansion will enable it to gain new international OEM customers who
will also require local production of high quality products. In addition, the
expansion of the Company's OEM business into international markets has provided
the Company with the infrastructure necessary to develop an aftermarket
presence in these countries. The Company has established manufacturing
operations and strategic ventures in Hungary, Korea and Mexico, and plans to
complete a strategic alliance in India and a joint venture in Brazil in fiscal
year 1998. The acquisition of Ballantrae will provide the Company with a
European manufacturing plant which has been in operation since 1983. Aided by
this facility, Ballantrae has developed strong relationships with European
customers for traction control systems, especially in the market for
construction equipment.
6
INTRODUCING TECHNOLOGICALLY ADVANCED NEW PRODUCTS
As a Tier 1 OEM supplier, the Company continues to provide technologically
advanced products by regularly updating and enhancing its product line. Since
the GM Acquisition, the Company has (i) completed the introduction of a new
family of gear reduction starters that will replace all straight drive starters
in GM vehicles by the end of the 1998 model year and (ii) introduced several
longer-life heavy duty alternators. The Company is also developing a small gear
reduction starter specifically designed for application on world car platforms.
These new products underscore the Company's commitment to developing state-of-
the-art products that address the higher output, lower weight and increased
durability requirements of OEM customers.
OPERATING STRATEGY
The Company's operating strategy is designed to improve manufacturing
efficiency, reduce costs and increase productivity while continuing to achieve
the highest levels of product quality. Key elements of this operating strategy
include:
"FOCUS" FACTORIES TO DRIVE MANUFACTURING EXCELLENCE
The Company is shifting its OEM production from old, vertically-integrated
manufacturing plants to new, smaller and more efficient "focus" factories. The
Company's focus factories generally produce one product line in a plant
designed to facilitate lean manufacturing techniques. The Company has
successfully launched three new focus factories since 1996. When the currently
planned shift to focus factories is completed, the Company plans to occupy six
focus factories and expects to have reduced its floor space for OEM production
by more than 70%. The Company believes that the benefits of the focus factories
include reduced overhead costs, enhanced productivity, increased product
quality and lower inventories.
PRODUCTIVITY IMPROVEMENTS
In conjunction with its emphasis on focus factories, the Company continues to
work with its local union representatives to establish best-in-class work
practices, such as reducing the number of job classifications per focus factory
and implementing team-based manufacturing processes. Since the GM Acquisition,
employee productivity has increased by 33%. The Company's labor contract with
the UAW (as defined) contains provisions that are expected to permit the
Company to continue to achieve productivity improvements in the existing and
new focus factories. The increased productivity achieved since the GM
Acquisition is due primarily to continuous improvement initiatives and the
significant number of employees who have exercised their contract rights to
return ("flowback") to GM or to retire.
PRODUCT QUALITY AND CONTINUOUS IMPROVEMENT
In July 1997, the Company received one of the prestigious Supplier of the
Year awards from GM, an award given to fewer than 1% of all GM suppliers. The
Company's commitment to product quality and continuous improvement is further
evidenced by the QS9000 certification received by nine of its manufacturing and
remanufacturing facilities in 1997. The Company expects that the remainder of
its manufacturing and remanufacturing facilities will receive QS9000
certification by the end of fiscal year 1998. In addition, the Company's
powertrain/drivetrain operations that remanufacture products for Ford have
received the Q-1 rating, Ford's highest quality rating, and the Company is a
Ford Authorized Remanufacturer ("Ford FAR") in five of the seven Canadian
provinces. Global purchasing has further enhanced the Company's continuous
improvement efforts. The Company is utilizing its international ventures to
develop new, lower cost sources of materials and is consolidating its vendor
base to fewer, more competitive suppliers.
RECENT DEVELOPMENTS
On October 30, 1997, the Company entered into a definitive agreement to
acquire Ballantrae for $52.8 million (including assumed debt and the estimated
working capital adjustment and fees and expenses of
7
Ballantrae). Ballantrae operates through two subsidiaries: Tractech, a leading
producer of traction control systems for heavy duty OEMs and the aftermarket;
and Kraftube, Inc., a tubing assembly business which sells products to
compressor manufacturers for commercial air conditioners and refrigeration
equipment. In fiscal year 1997, Tractech accounted for approximately 70% of
Ballantrae's $37.6 million of net sales. The Company's acquisition of
Ballantrae strengthens the Company's overall market position by (i) adding
traction control systems to the Company's range of drivetrain products, (ii)
increasing sales to existing heavy duty OEM customers and (iii) expanding the
Company's customer base. The acquisition is expected to be completed at or
prior to the consummation of the Offerings. The terms of the Ballantrae
Acquisition Agreement were not negotiated on an arm's-length basis. The Company
believes, however, that the terms of such agreement are fair to the Company and
its subsidiaries from a financial standpoint. See "Risk Factors--Acquisition of
Ballantrae; Conflicts of Interest," "Company History," "Business--Acquisition
of Ballantrae" and "Certain Transactions."
OTHER INFORMATION
For purposes of the financial information set forth in this Prospectus, (i)
EBITDA represents the sum of income from continuing operations before interest
expense, income taxes, preferred dividend requirement of subsidiary and
minority interest in income of subsidiaries, plus depreciation and
amortization; (ii) Adjusted EBITDA represents EBITDA plus restructuring charges
and non-cash post-retirement benefits other than pensions less the gain on sale
of building; and (iii) unless otherwise indicated, all references to years are
to the twelve months ended July 31, the Company's fiscal year end.
The Company's world headquarters are located at 2902 Enterprise Drive,
Anderson, Indiana, 46013, and its telephone number is (765) 778-6499.
THE OFFERING
Notes Offered....................... $130,000,000 principal amount of %
Senior Notes Due 2007.
Maturity ........................... , 2007.
Interest Payment Dates.............. and , commencing , 1998.
Subsidiary Guaranties............... The 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.
Optional Redemption................. The Notes will be redeemable at the
option of the Company, in whole or in
part, at any time on or after ,
2002, at the redemption prices set
forth herein, plus accrued and unpaid
interest, if any, to the date of
redemption. In addition, prior to
, 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 Notes
at a redemption price of % of the
original aggregate principal amount
thereof, plus accrued and unpaid
interest, if any, to the date of
redemption; provided
8
that not less than 50% of the original
aggregate principal amount of the Notes
remains outstanding following any such
redemption. See "Description of Notes--
Optional Redemption."
Sinking Fund........................ None.
Change of Control................... Upon a Change of Control, each holder
of Notes will have the right to require
the Company to repurchase all or a
portion of such holders' 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. In the event of a
Change of Control, there can be no
assurance that the Company will have
the financial resources or be permitted
under the terms of its other
indebtedness to repurchase the Notes.
See "Description of Notes--Change of
Control."
Ranking............................. The Notes and the Subsidiary Guaranties
will be general unsecured obligations
of the Company and the Subsidiary
Guarantors and will rank pari passu in
right of payment with all existing and
future Senior Indebtedness of the
Company and the Subsidiary Guarantors
and senior in right of payment to all
existing and future Subordinated
Obligations of the Company and the
Subsidiary Guarantors. The Notes and
the Subsidiary Guaranties will be
effectively subordinated to all
existing and future Secured
Indebtedness of the Company and the
Subsidiary Guarantors (to the extent of
the assets securing such Indebtedness)
and to any liabilities or preferred
stock of Subsidiaries (as defined)
other than Subsidiary Guarantors. The
Senior Credit Facility will be secured
by substantially all the U.S. assets of
the Company. As of October 31, 1997,
after giving pro forma effect to the
Offerings and the other Transactions,
(i) Senior Indebtedness of the Company
and the Subsidiary Guarantors would
have been approximately $65.9 million
(excluding the Notes, the Subsidiary
Guaranties and unused commitments and
outstanding letters of credit), (ii)
Subordinated Obligations of the Company
and the Subsidiary Guarantors would
have been approximately $140.8 million
(substantially all of which mature
before the Notes), (iii) Secured
Indebtedness of the Company and the
Subsidiary Guarantors would have been
approximately $47.5 million (excluding
unused commitments and outstanding
letters of credit under the Senior
Credit Facility) and (iv) all
liabilities and
9
preferred stock of the Company's
Subsidiaries (excluding the Subsidiary
Guarantors) would have been
approximately $29.4 million. Although
the Indenture contains limitations on
the amount of additional Indebtedness
(as defined) that the Company and its
Restricted Subsidiaries may Incur (as
defined), under certain circumstances
the amount of such Indebtedness could
be substantial and, in any case, such
Indebtedness may be Secured
Indebtedness or Indebtedness of
Subsidiaries other than Subsidiary
Guarantors. See "Description of Notes."
Certain Covenants................... The Indenture for the Notes will
contain limitations on, among other
things, (a) the ability of the Company
and its Restricted Subsidiaries to
Incur additional Indebtedness, (b) the
payment of dividends and other
distributions with respect to the
Capital Stock of the Company and its
Restricted Subsidiaries and the
purchase, redemption or retirement of
Capital Stock and Subordinated
Obligations of the Company and its
Restricted Subsidiaries, (c) the
Incurrence of certain Liens, (d) the
issuance or sale of Restricted
Subsidiary stock, (e) the sale of
assets of the Company or its Restricted
Subsidiaries, (f) transactions with
Affiliates and (g) certain
consolidations, mergers and transfers
of assets. All of these limitations are
subject to a number of important
qualifications. See "Description of
Notes--Certain Covenants" and "--
Certain Definitions."
Concurrent Offerings................ Concurrently with the Notes Offering,
the Company is offering 4,000,000
shares of Class A Common Stock (without
giving effect to the over-allotment
option). The Notes Offering and the
Equity Offering are each contingent
upon the consummation of the other. See
"Use of Proceeds" and "Description of
Capital Stock."
Use of Proceeds..................... The net proceeds of the Offerings
(estimated to be approximately $180.1
million) will be used primarily to
repay outstanding indebtedness. See
"Use of Proceeds."
Risk Factors........................ See "Risk Factors" beginning on page 13
for a discussion of certain factors
that should be considered by
prospective purchasers of the Notes.
10
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of the Company, "Pro Forma Condensed
Consolidated Financial Data," related notes and other financial information
included elsewhere in this Prospectus.
PRO FORMA
FOR THE
PRO FORMA FOR THE THREE MONTHS THREE MONTHS
FOR THE YEAR ENDED JULY 31, FOR THE YEAR ENDED OCTOBER 31, ENDED
------------------------------- ENDED JULY 31, ---------------------- OCTOBER 31,
1995 1996 1997 1997 1996 1997 1997
--------- --------- --------- -------------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $ 573,423 $ 636,852 $ 689,787 $776,621 $ 169,766 $ 209,020 $218,343
Gross profit........... 98,207 126,774 149,553 178,089 38,394 38,143 41,117
Selling, engineering
and administrative
expense............... 61,206 77,994 89,098 108,186 23,335 20,936 22,534
Restructuring charges.. -- 8,101 34,500 34,500 -- -- --
Operating income....... 37,001 40,679 25,955 35,403 15,059 17,207 18,583
Interest expense....... 18,432 27,367 38,774 35,346 9,391 10,521 8,931
Income (loss) from
continuing
operations............ 9,326 5,796 (10,263) (429) 2,834 3,062 5,332
Loss from discontinued
operations, net of
tax................... 2,363 10,637 1,682 -- 213 -- --
Net income (loss)...... 6,963 (4,841) (14,296) -- 270 3,062 --
Income (loss) from
continuing operations
per share............. $ .56 $ .33 $ (.59) $ (.02) $ .16 $ .18 $ .23
Net income (loss) per
share................. .42 (.28) (.82) -- .02 .18 --
FINANCIAL RATIOS AND
OTHER DATA:
Depreciation and
amortization.......... $ 14,533 $ 19,555 $ 22,323 $ 25,476 $ 5,300 $ 4,698 $ 5,307
Capital expenditures... 11,241 32,741 31,888 33,386 8,910 5,747 6,438
EBITDA (a)............. 51,534 60,234 50,360 63,558 20,359 21,905 23,890
Adjusted EBITDA (b) ... 55,968 72,087 87,269 100,467 21,494 22,970 24,955
Gross margin........... 17.1% 19.9% 21.7% 22.9% 22.6% 18.2% 18.8%
Cash provided by (used
in) operating
activities............ $ 21,921 $ (684) $ 22,537 $ -- $ (6,522) $ 11,415 $ --
Cash used in investing
activities............ (73,251) (79,061) (74,087) -- (10,236) (7,355) --
Cash provided by (used
in) financing
activities............ 27,119 80,790 57,786 -- 22,880 (5,063) --
EBITDA margin (c)...... 9.0% 9.5% 7.3% 8.2% 12.0% 10.5% 10.9%
Adjusted EBITDA margin
(c)................... 9.8% 11.3% 12.7% 12.9% 12.7% 11.0% 11.4%
Ratio of EBITDA to
interest expense...... 2.8x 2.2x 1.3x 1.8x 2.2x 2.1x 2.7x
Ratio of total debt to
EBITDA................ 3.8x 5.0x 7.2x 5.3x(d) -- -- --
Ratio of Adjusted
EBITDA to interest
expense............... 3.0x 2.6x 2.3x 2.8x 2.3x 2.2x 2.8x
Ratio of total debt to
Adjusted EBITDA....... 3.5x 4.1x 4.2x 3.4x(d) -- -- --
Ratio of earnings to
fixed charges(e)...... 1.8x 1.3x -- (f) 1.1x 1.5x 1.5x 2.0x
OCTOBER 31, 1997
-------------------
ACTUAL PRO FORMA
-------- ---------
BALANCE SHEET DATA:
Working capital............................................ $152,432 $169,047
Total assets............................................... 582,505 647,353
Total debt................................................. 358,705 336,643
Total stockholders' (deficit) equity....................... (6,976) 92,378
11
(a) EBITDA represents the sum of income from continuing operations before
interest expense, income taxes, preferred dividend requirement of
subsidiary and minority interest in income of subsidiaries, plus
depreciation and amortization. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities for the purpose of analyzing the Company's operating
performance, financial position and cash flows. The Company has presented
EBITDA because it is commonly used by certain investors to analyze and
compare companies on the basis of operating performance and to determine a
company's ability to service debt. The definition of EBITDA differs from
the definition of EBITDA applicable to the covenants for the Notes and may
not be comparable to EBITDA as defined by other companies. EBITDA amounts
may not be fully available for management's discretionary use, due to
certain requirements to conserve funds for capital replacement, debt
service and other commitments.
(b) Adjusted EBITDA represents EBITDA plus restructuring charges and non-cash
post-retirement benefits other than pensions less the gain on sale of
building. This definition of Adjusted EBITDA conforms with the definition
of EBITDA applicable to the covenants for the Notes. Adjusted EBITDA should
not be construed as a substitute for income from operations, net income or
cash flow from operating activities for the purpose of analyzing the
Company's operating performance, financial position and cash flows.
Adjusted EBITDA amounts may not be fully available for management's
discretionary use, due to certain requirements to conserve funds for
capital replacements, debt service and other commitments.
(c) EBITDA margin and Adjusted EBITDA margin represent EBITDA and Adjusted
EBITDA, respectively, as a percent of net sales.
(d) Reflects pro forma total debt at October 31, 1997 divided by EBITDA or
Adjusted EBITDA, as appropriate, for the year ended July 31, 1997. This
calculation is presented because pro forma total debt was not calculated at
July 31, 1997.
(e) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, fixed
charges and minority interest. Fixed charges include preferred dividend
requirement of subsidiary, interest expense and the portion of operating
rents that is deemed representative of an interest factor.
(f) The deficiency of earnings to fixed charges was $13.5 million. Excluding
restructuring charges, the ratio of earnings to fixed charges would have
been 1.5x.
12
RISK FACTORS
In evaluating an investment in the securities offered hereby, prospective
investors should carefully consider the following risk factors, as well as the
other information set forth elsewhere in this Prospectus.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the GM
Acquisition. After adjusting for the Transactions and the application of the
net proceeds therefrom, at October 31, 1997, the Company's total indebtedness
would have been $336.6 million (exclusive of unused commitments and
outstanding letters of credit), and the Company would have had common
stockholders' equity of $92.4 million. The degree to which the Company is
leveraged could have important consequences, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its existing indebtedness, thereby
reducing the funds available to the Company for other purposes; (iii) the
Company's operations are restricted by the agreements governing the Company's
long-term indebtedness which contain certain financial and operating
covenants; (iv) certain indebtedness under the Senior Credit Facility will be
at variable rates of interest, which will cause the Company to be vulnerable
to increases in interest rates; (v) all of the indebtedness outstanding under
the Senior Credit Facility will be secured by substantially all the assets of
the Company and that indebtedness, together with the Senior Subordinated Notes
(as defined), will become due prior to the time the principal on the Notes
will become due; (vi) the Company may be hindered in its ability to adjust
rapidly to changing market conditions; and (vii) the Company's substantial
degree of leverage could make it more vulnerable in the event of a downturn in
general economic conditions or in its business.
The Company may be required to refinance all or a portion of its present
indebtedness, substantially all of which, including the Senior Subordinated
Notes, matures prior to the maturity of the Notes, at or prior to the maturity
of such indebtedness. In the event that the Company is unable to refinance its
existing indebtedness or otherwise raise funds to repay such indebtedness, the
Company's financial condition and ability to fund its operations would be
materially adversely affected. See "Description of Capital Stock,"
"Description of Indebtedness" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ASSET ENCUMBRANCE; HOLDING COMPANY STRUCTURE
The Notes are unsecured and will be effectively subordinated to any Secured
Indebtedness of the Company. The indebtedness outstanding under the Senior
Credit Facility will be secured by liens on substantially all of the assets of
the Company located within the United States. The ability of the Company to
comply with the provisions of the Senior Credit Facility may be affected by
events beyond the Company's control. The breach of any such provisions could
result in a default under the Senior Credit Facility, in which case such
lenders could elect to declare all amounts borrowed under the Senior Credit
Facility, together with accrued interest, to be due and payable. If the
Company were unable to repay such borrowings, such lenders could proceed
against the collateral. If the maturity of the indebtedness under the Senior
Credit Facility were accelerated, there can be no assurance that the assets of
the Company would be sufficient to repay in full such indebtedness and the
other indebtedness of the Company, including the Notes.
The Company is a holding company which derives all of its operating income
from its subsidiaries. The holders of the Notes will have no direct claim
against any such subsidiaries other than the claim created against a Domestic
Restricted Subsidiary by the applicable Subsidiary Guaranty, which may be
subject to legal challenge in the event of the bankruptcy of such subsidiary.
See "Risk Factors--Fraudulent Conveyance." If such a challenge were upheld,
the Subsidiary Guaranty would be invalidated and unenforceable. To the extent
that the Subsidiary Guaranty is not enforceable, the rights of holders of the
Notes to participate in any distribution of assets of the applicable
Subsidiary Guarantor upon liquidation, bankruptcy, reorganization or otherwise
may, as
13
is the case with other unsecured creditors of the Company, be subject to prior
claims of creditors of that Subsidiary Guarantor. The Company must rely on
dividends and other payments from its subsidiaries to generate the funds
necessary to meet its obligations, including the payment of principal and
interest on the Notes. The Indenture contains covenants that restrict the
ability of the Company's subsidiaries to enter into any agreement limiting
distributions and transfers, including dividends to the Company. The ability
of the Company's subsidiaries to pay dividends and make other payments are
subject to certain statutory, contractual and other restrictions. See
"Description of Indebtedness" and "Description of Notes--Ranking."
DEPENDENCE ON GENERAL MOTORS
GM accounted for approximately 97% of the Company's 1997 pro forma
automotive OEM net sales and approximately 3.9% of the Company's 1997 pro
forma heavy duty OEM net sales. GM SPO accounted for approximately 23.8% of
the Company's 1997 pro forma aftermarket net sales, and GM and GM SPO
collectively accounted for approximately 38.8% of the Company's total 1997 pro
forma net sales. In connection with the GM Acquisition, GM entered into long-
term contracts pursuant to which it has agreed to purchase from the Company
100% of its North American requirements for automotive starters (other than
for Saturn and Geo) and 100% of its U.S. and Canadian requirements for heavy
duty starters and alternators, in each case to purchase the existing product
line (as of August 1994). GM's obligations to purchase automotive starters and
heavy duty starters and alternators from the Company terminate in 2004 and
2000, respectively, except for automotive products released in 1996 and 1997,
for which GM's obligation will terminate in 2006 and 2007, respectively. GM's
commitments to purchase products from the Company in the future are subject,
however, to the Company's remaining competitive as to technology, design and
price. See "Business--Customers." There can be no assurance that GM will not
develop alternative sources for components currently produced by the Company
and purchase some or all of its requirements for starters and alternators from
these alternative sources at the expiration of its obligation to purchase such
components from the Company. In addition, GM has been designated as an
exclusive distributor of a significant amount of the Company's automotive and
heavy duty aftermarket products and has agreed to provide the Company with
purchasing support, which enables it to obtain raw materials at competitive
prices. The Company's exclusive distribution arrangements with GM for the
Company's heavy duty aftermarket products and automotive aftermarket products
terminate on July 31, 1998 and in 2009, respectively. There can be no
assurance that the Company and GM will negotiate a new arrangement for the
distribution of heavy duty aftermarket products when the current distribution
arrangement terminates on July 31, 1998, or whether the Company or GM will
develop alternative distribution channels.
The loss of GM as a customer of OEM or aftermarket products, the default by
GM on its obligations to act as a distributor or to purchase the Company's OEM
or aftermarket products, a substantial decrease in demand for GM's automobile
models containing the Company's products or the failure of the Company to
obtain supply orders for its products used in GM's new automobile models could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, strikes and work stoppages affecting
GM's operations may postpone GM's need for components produced by the Company,
which, because of the Company's highly leveraged position, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Labor Negotiations."
RELOCATION OF FACILITIES
The Company is in the process of relocating certain of its manufacturing
facilities. Specifically, the Company has relocated certain production lines
from three of its OEM manufacturing facilities to three focus factories. The
Company has entered into leases for two additional focus factories and expects
to relocate additional production lines to those facilities and two additional
facilities over the next year. At the conclusion of the relocation, the
Company plans to have vacated the three plants leased from GM. In addition,
the Company expects to relocate certain of its aftermarket facilities due to
increased space requirements and the need for a regional presence. The
Company's subsidiaries have conducted these moves in the past without
significant disruption to operations. While the Company believes that it has
prepared for such relocations, there can be no assurance that the complicated
nature of such moves will not result in unforeseen costs or delays or result
in
14
disruptions in the Company's operations at the affected facilities. The
Company's gross profit margin for the first quarter of fiscal 1998 was
adversely affected by the on-going transition to focus factories. There can be
no assurance that the transition to focus factories will not continue to
adversely affect the Company's gross profit margins. The restructuring charge
recorded by the Company in 1997 does not include startup costs the Company
expects to incur, based on its prior startups, in connection with the new
focus factories. The Company anticipates start up costs due to the relocation
to the three focus factories to be approximately $1.0 million per factory. See
"Risk Factors--Restructuring Charges; Recent Losses" and "Business--
Manufacturing and Facilities."
CONCENTRATION OF OWNERSHIP
Upon completion of the Offering and the Transactions, CVC will own
beneficially approximately 41.3% of the Company's outstanding Common Stock
(including non-voting Class B Common Stock which, subject to applicable law,
is convertible at the holder's option into voting Class A Common Stock and
after giving pro forma effect to the exchange of the Company's Junior
Subordinated Notes for Class A Common Stock) and members of the management of
the Company will own beneficially approximately 14.6% of the Company's
outstanding Common Stock. Certain other existing stockholders of the Company
will own beneficially approximately 27.4% of the Company's outstanding Common
Stock. If these stockholders were to vote all of their shares in a similar
manner, they would effectively control the Company. In most circumstances,
they would have sufficient voting power to elect the entire Board of Directors
of the Company and, in general, to determine (without the consent of the
Company's other stockholders) the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of the Company's
assets, and to prevent or cause a change in control of the Company. Further,
CVC, certain members of management and other existing stockholders have
entered into a Stockholders' Agreement (as defined) whereby they have agreed
to vote their shares in such a manner as to elect the entire Board of
Directors of the Company. See "Principal Stockholders--Stockholders'
Agreement."
RESTRUCTURING CHARGES; RECENT LOSSES
The Company incurred restructuring charges totaling $34.5 million and $8.1
million in fiscal years 1997 and 1996, respectively. These charges contributed
to a loss from continuing operations and a net loss in fiscal year 1997 of
$10.3 million and $14.3 million, respectively, and to a net loss in fiscal
year 1996 of $4.8 million. These charges substantially reduced the Company's
stockholders' equity. For a discussion of these charges and other factors
contributing to such losses, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance that
the Company (i) will be able to realize the benefits it anticipates from the
restructurings, (ii) will not incur additional charges in the future in
connection with these restructurings or other actions, (iii) will realize a
net profit in 1998 or in future years or (iv) will not need to seek additional
funds through borrowings or sales of equity or assets to pursue its strategy.
See "Risk Factors--Relocation of Facilities" and "Risk Factors--Labor
Negotiations."
RESTRICTIVE DEBT COVENANTS
The agreements governing the Company's bank and other indebtedness include
certain covenants that, among other things, restrict the Company's ability to:
(i) pay dividends and make certain other restricted payments; (ii) incur
additional indebtedness; (iii) grant liens, other than liens created pursuant
to such agreements and certain permitted liens; and (iv) sell material assets.
The Senior Credit Facility also requires the Company to maintain certain
financial ratios, including interest coverage and leverage ratios, and to
maintain a minimum level of consolidated cash flow. There can be no assurance
that these requirements will be met in the future. If they are not, the
holders of the indebtedness under such agreements would be entitled to declare
such indebtedness immediately due and payable. See "Description of Capital
Stock" and "Description of Indebtedness."
DEPENDENCE ON AUTOMOTIVE INDUSTRY; CYCLICAL BUSINESS
The sale of a significant portion of the Company's products is directly
related to the overall level of automobile, truck and heavy duty vehicle
production in North America, which is cyclical. Consequently, a
15
decline in the demand for new automobiles and trucks, particularly in North
America, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has not yet
operated during a general economic downturn, and historical financial
information for the Company during adverse economic conditions is not
available.
RISK RELATING TO ACQUISITIONS
To expand its markets and take advantage of the consolidation trend in the
automotive parts industry, the Company's business strategy includes growth
through acquisitions. Although the Company believes that the operations of the
five companies it has acquired since the GM Acquisition are being successfully
integrated with the Company's operations, there can be no assurance that such
integration will continue to be successful, that future acquisitions can be
consummated on acceptable terms or that any acquired companies can be
successfully integrated into the Company's operations. Other than pursuant to
the Ballantrae Acquisition Agreement and the expected completion in fiscal
year 1998 of a strategic joint venture in Brazil and a strategic alliance in
India (See "Company History"), the Company currently has no commitments,
understandings or arrangements with respect to any specific acquisitions or
joint ventures. However, the Company has commenced preliminary discussions to
acquire certain small remanufacturing operations in Europe. There can be no
assurance that the Company will complete these proposed transactions. The
Company is continually investigating opportunities for domestic and foreign
acquisitions. In connection with future acquisitions, the Company may incur
additional indebtedness or may issue additional equity. The Company's ability
to make future acquisitions may be constrained by its ability to obtain such
additional financing. To the extent the Company uses equity to finance future
acquisitions, there is a risk of dilution to holders of Class A Common Stock.
See "Risk Factors--Substantial Leverage and Debt Service Obligations," "Risk
Factors--Restrictive Debt Covenants," "Risk Factors--Acquisition of
Ballantrae; Conflicts of Interest," "Business--Business Strategy" and
"Description of Indebtedness."
In addition, acquisitions may involve a number of special risks, including:
initial reductions in the Company's reported operating results; diversion of
management's attention; unanticipated problems or legal liabilities; and a
possible reduction in reported earnings due to amortization of acquired
intangible assets in the event that such acquisitions are made at levels that
exceed the fair market value of net tangible assets. Some or all of these
items could have a material adverse effect on the Company. There can be no
assurance that businesses acquired in the future will achieve sales and
profitability that justify the investment therein. In addition, to the extent
that consolidation becomes more prevalent in the industry, the prices for
attractive acquisition candidates may increase to unacceptable levels.
LABOR NEGOTIATIONS
As of October 31, 1997, the Company employed 5,137 people, 859 of whom were
in management, engineering, supervision and administration and 4,278 of whom
were hourly employees. Of the Company's hourly employees, 2,068 are
represented by unions. In the United States, 1,477 of the Company's hourly
workers are represented by the International Union, United Automobile,
Aerospace, and Agricultural Implement Workers of America ("UAW") under a
master agreement between DRA (a wholly owned subsidiary of the Company) and
the UAW. In March 1997, the Company signed a new master agreement with the UAW
that stipulated an approximately 3.2% annual wage and benefit increase (12.8%
over the four year term of the agreement) for the Company's UAW hourly
employees. If employment levels and productivity remain unchanged, the
agreement with the UAW would cause the Company to experience increases in wage
and benefit costs of approximately 2% per year over the next four years (which
represents approximately $3.3 million in the first such year). In addition,
grow-in provisions under the new agreement with the UAW will require the
Company to move certain lower wage and benefit employees to higher wage and
benefit levels. Under provisions of the national agreement, the UAW and the
Company have recently developed a special program of incentives for hourly
employees who agree to leave the Company, the cost of which is included in the
restructuring charges for fiscal year 1997 described herein. Based on
responses to this special incentive plan received to date, the Company would,
if no other cost reductions were realized, experience as a result of the grow-
in provision additional wage and benefit
16
costs that increase each year of the UAW contract to approximately $10.2
million annually in additional costs from current levels by the fourth year.
The Company expects the continued implementation of the special incentive plan
and other planned cost reduction initiatives to substantially offset the
effects of the grow-in provision. If the responses to date to the special
incentive plan were reversed (which the Company considers unlikely) and the
other cost-savings initiatives were not implemented, the additional costs
referred to above to the Company from the grow-in provision would approximately
double. There can be no assurance that the Company will be able to effect cost
reduction initiatives (including the continued implementation of the special
incentive plan) to offset the effects of the grow-in provision or that the
Company's labor costs will not otherwise increase significantly, in which case
the Company's competitive position and results of operations would be adversely
affected. The master agreement between the UAW and DRA will expire on March 22,
2001.
As of October 31, 1997, 142 of the Company's 448 Canadian employees were
represented by the Canadian Auto Workers and 120 were represented by the
Metallurgists Unis d'Amerique. The agreements with these unions expire on
November 8, 1999 and September 30, 1998, respectively.
As of October 31, 1997, approximately 329 of Autovill's 449 employees were
affiliated with the Hungarian Steel Industry Workers Union. The agreement was
signed July 17, 1996 and is perpetual, subject to termination upon three
months' notice from either party.
The Company's other facilities are primarily non-union. The Company is
unaware of any current efforts to organize any of the Company's facilities.
There can be no assurance that there will not be any labor union efforts to
organize employees at facilities that are not currently unionized.
Since the GM Acquisition, the Company has not experienced any organized work
stoppages. There can be no assurance, however, that any actions taken by the
Company, including the current restructurings, will not adversely affect the
Company's relations with its employees. At the present time, the Company
believes that its relations with its employees are good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General."
COMPETITION
The motor vehicle parts industry in which the Company operates is highly
competitive. Some of the Company's OEM competitors are divisions or
subsidiaries of companies that are larger and have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to compete successfully with its competitors. See "Business--Competition."
FOREIGN MARKETS
Approximately 20.2% of the Company's pro forma net sales in fiscal year 1997
were derived from sales in foreign markets. The Company expects sales from
international markets to represent an increasing portion of total sales.
Certain risks are inherent in international operations, including the
following: agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system; foreign customers may have
longer payment cycles; foreign countries may impose additional withholding
taxes or otherwise tax the Company's foreign income, impose tariffs or adopt
other restrictions on foreign trade or investment; U.S. export licenses may be
difficult to obtain; intellectual property rights may be more difficult to
enforce in foreign countries; fluctuations in exchange rates may affect product
demand and may adversely affect the profitability in U.S. dollars of products
and services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; general economic
conditions in the countries in which the Company operates could have an adverse
effect on the Company's earnings from operations in those countries; unexpected
changes in foreign laws or regulatory requirements may occur; compliance with a
variety of foreign laws and regulations; and overlap of different tax
structures. Tax rates in certain foreign countries may exceed those of the
United States and foreign earnings may be subject to withholding requirements
or the imposition of tariffs, exchange controls or other restrictions. There
can be no assurance that any of these factors
17
will not have a material adverse effect on the Company's business and results
of operations. See "Business--Growth Strategy" and "Company History."
AVAILABILITY OF CORES
In its remanufacturing operations, the Company obtains used components,
commonly known as "cores," from various sources, principally the Company's
existing aftermarket customers, which generally return cores when they purchase
remanufactured products. As a result, GM SPO and Navistar each supplied greater
than 10% of the cores used by the Company in 1997. The Company also obtains
cores from brokers who specialize in buying and selling cores. No single broker
supplies the Company with more than 10% of those cores purchased by the
Company. The ability to obtain cores of the types and quantities required by
the Company is essential to the Company's ability to meet demand and expand
production in the remanufacturing business.
A sufficient supply of cores may not always be available to the Company to
permit it to respond fully to customer demands for the Company's remanufactured
products. Shortages of cores could result from, among other things, (i) a time
lag between the initial customer order for a remanufactured product and the
return of cores for such products, (ii) an inability to salvage cores for reuse
due to excessive wear or deterioration or (iii) an inability of the Company to
acquire cores because of loss or significant deterioration of the Company's
relationships with its customers. Although the Company believes that its
relationships with several of its customers will continue to provide it with
access to cores, there can be no assurance that the Company will continue to
have an adequate supply of cores for its remanufactured products.
ACQUISITION OF BALLANTRAE; CONFLICTS OF INTEREST
On October 30, 1997, the Company entered into an Agreement and Plan of Merger
to acquire Ballantrae (the "Ballantrae Acquisition Agreement"). Although the
Company has entered into the Ballantrae Acquisition Agreement, the consummation
of the transactions contemplated thereby are subject to customary closing
conditions for a transaction of this type, including termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the lack of any material adverse change in the business of
Ballantrae. Although the Company does not currently foresee any impediments to
the consummation of the acquisition of Ballantrae, the Company cannot offer any
assurances that the acquisition will be consummated. Even if consummated, the
Company cannot guarantee that the businesses conducted by Ballantrae can be
effectively integrated into the Company's other operations or that the Company
will realize the benefits it expects to achieve through the acquisition of
Ballantrae. The Company has incurred due diligence, legal and other expenses in
anticipation of the acquisition of Ballantrae. If the acquisition is not
consummated, these expenses will have to be written off as non-recurring
charges. See "Company History," "Business--Acquisition of Ballantrae" and
"Certain Transactions."
The terms of the Ballantrae Acquisition Agreement were not negotiated on an
arm's-length basis. As of July 31, 1997, CVC owned, on a fully-diluted basis,
71.9% of the outstanding common stock and 74.7% of the outstanding preferred
stock of Ballantrae. At that date, CVC also owned 46.3% of the Company's Common
Stock. See "Risk Factors--Concentration of Ownership." The Company believes,
however, that the terms of such agreement are fair to the Company and its
subsidiaries from a financial standpoint. In considering the acquisition, the
Company's directors owe a fiduciary duty to the Company and its shareholders to
act in good faith and with due care. The Company's directors, excluding Messrs.
Delaney, Cashin and Gerrity, have determined that the acquisition of Ballantrae
is in the best interests of the Company and its stockholders and have approved
the acquisition of Ballantrae. Because Mr. Gerrity is a director of Ballantrae
and as of July 31, 1997 beneficially owned, on a fully-diluted basis, 20.0% of
Ballantrae's common stock and 15.6% of its preferred stock (including 5.0% and
5.2% of Ballantrae's common and preferred stock, respectively, beneficially
owned by Susan Gerrity, Mr. Gerrity's wife) and Messrs. Delaney and Cashin are
also each a stockholder and director of Ballantrae, as well as each being a
stockholder and director of the Company, there is a conflict of interest with
respect to the acquisition of Ballantrae. As a consequence, their economic
interest in the transaction may result in decisions that do not reflect the
interests of the Company. Any damages which the Company may
18
suffer which result from a breach of the Ballantrae Acquisition Agreement will
be subject to a $10 million cap and the Company will be able to recover only a
portion of its damages from CVC and Mr. Gerrity (and, with respect to each of
them, only on a pro rata basis). The Company is also obligated to pay the
expenses incurred by Ballantrae in connection with the acquisition, whether or
not the acquisition is consummated. Approximately $30 million of the net
proceeds of the Offerings will be used to repay certain indebtedness of
Ballantrae. See "Company History," "Business--Acquisition of Ballantrae" and
"Certain Transaction."
CVC was one of the original organizers of Ballantrae in 1996. During the
formation of Ballantrae, CVC purchased (i) 32.9% of the newly issued shares of
common stock of Ballantrae for $35,000, (ii) 74.7% of the newly issued shares
of preferred stock of Ballantrae for $2.1 million and (iii) warrants to
purchase an additional 147,500 shares of common stock of Ballantrae for an
aggregate exercise price of $147,500. CVC has exercised warrants for 122,500
shares of common stock of Ballantrae for an aggregate exercise price of
$122,500. Shortly after CVC's purchase of its interest in Ballantrae, Kraftube
Acquisition Corporation, a wholly owned subsidiary of Ballantrae, merged into
Kraftube Management, Inc. and during such merger CVC purchased 79.4% of the
preferred stock of Kraftube Management, Inc. for $6.4 million, $4.7 million of
which was paid in cash and $1.7 million of which was paid by cancellation of a
note in the original principal amount of $1.7 million issued by an affiliate of
Kraftube Management, Inc. in favor of CVC. Upon the consummation of the
transactions contemplated under the Ballantrae Acquisition Agreement, CVC will
receive 71.9% of the consideration paid by the Company to Ballantrae's common
stockholders and approximately up to 78.2% of the consideration paid by the
Company to Ballantrae's preferred stockholders (assuming that in connection
with the merger of Kraftube, Inc. into Kraftube Management, Inc., all Kraftube
Management, Inc. preferred stockholders elect to receive Ballantrae preferred
stock as opposed to cash and no dissenters' rights are exercised).
The following table summarizes the history of CVC's investment in Ballantrae
and the payment of merger consideration to CVC in connection with the proposed
acquisition of Ballantrae by the Company.
AMOUNT PAID
DATE EVENT BY CVC
---- ----- -----------
10/23/96 Acquisition of 32.9% of Ballantrae common stock........ $ 35,000
10/23/96 Acquisition of 74.7% of Ballantrae preferred stock..... 2,100,000
10/23/96 Acquisition of warrants for Ballantrae common stock.... --
Acquisition of 79.4% of preferred stock of Kraftube
10/23/97 Management, Inc.(a).................................... 6,400,000
02/07/97 Exercise of warrants for Ballantrae common stock(b).... 147,500
-----------
Total CVC investment in Ballantrae..................... $ 8,682,500
===========
Value of shares of Common Stock of the Company to be
received by CVC as merger consideration in connection
with the acquisition of Ballantrae(c) ................. $16,514,600
===========
- --------
(a) In 1989, CVC invested $1.0 million to purchase Kraftube, Inc. preferred
stock and $2.1 million for which it received a note in the original
principal amount of $2.1 million. In addition, in 1989, CVC purchased 62.8%
of the common stock of Kraftube Management, Inc. for $15,700. In 1993, the
Kraftube, Inc. preferred stock plus accrued and unpaid dividends was
exchanged for a note in the principal amount of $1.7 million and the $2.1
million note was repaid, together with accrued and unpaid interest thereon.
In 1996, the $1.7 million note was exchanged for 1.7 million shares of
Kraftube Management, Inc. preferred stock. The remaining 4.7 million shares
of Kraftube Management, Inc. preferred stock were received upon the
exchange of Kraftube Management, Inc. common stock in a transaction that
valued the common stock held by CVC at $4.7 million.
(b) Includes $25,000 attributable to the exercise of a warrant to purchase
25,000 shares of Ballantrae common stock which CVC intends to exercise
prior to the consummation of the acquisition.
(c) Assumes an initial public offering price of $15.00 per share.
19
ENVIRONMENTAL RISKS
The Company's operations and properties are subject to federal, state, local
and foreign laws, regulations and ordinances relating to the use, storage,
handling, generation, transportation, treatment, emission, release, discharge
and disposal of certain materials, substances and wastes. The nature of the
Company's operations exposes it to the risk of liabilities or claims with
respect to environmental matters, including off-site disposal matters, and
there can be no assurance that material costs will not be incurred in
connection with such liabilities or claims or that the indemnities provided by
the sellers of the various businesses acquired will be applicable or available.
Based upon the Company's experience to date, the Company believes that the
future cost of compliance with existing environmental laws, regulations and
ordinances (or liability for known environmental claims) will not have a
material adverse effect on the Company's business, financial condition and
results of operations. However, future events, such as changes in existing laws
and regulations or their interpretation, may give rise to additional compliance
costs or liabilities that could have a material adverse effect on the Company's
business, financial condition and results of operations. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws,
may require additional expenditures by the Company that may be material. See
"Business--Regulatory Matters."
FRAUDULENT CONVEYANCE
If a court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company as a debtor-in-
possession, were to find under relevant federal or state fraudulent conveyance
statutes that the Company did not receive fair consideration or reasonably
equivalent value for incurring the indebtedness, including the Notes, and that,
at the time of such incurrence, the Company (i) was insolvent, (ii) was
rendered insolvent by reason of such incurrence or grant, (iii) was engaged in
a business or transaction for which the assets remaining with the Company
constituted unreasonably small capital or (iv) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they
matured, then such court, subject to applicable statutes of limitations, could
void the Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the Company or take other action detrimental to the holders of
the Notes.
The measure of insolvency for these purposes will depend upon the governing
law of the relevant jurisdiction. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property or if the present
fair salable value of that company's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could void an
incurrence of indebtedness, including the Notes, if it determined that such
transaction was made with the intent to hinder, delay or defraud creditors. In
addition, a court could subordinate the indebtedness, including the Notes, to
the claims of all existing and future creditors on similar grounds. The Company
believes that, after giving effect to the Offerings, the Company will be (i)
neither insolvent nor rendered insolvent by the incurrence of indebtedness in
connection with the Offerings, (ii) in possession of sufficient capital to run
its business effectively and (iii) incurring debts within its ability to pay as
the same mature or become due.
There can be no assurance as to what standard a court would apply in order to
determine whether the Company was "insolvent" upon consummation of the GM
Acquisition, any of the Company's other acquisitions or the sale of the Notes
or that, regardless of the method of valuation, a court would not determine
that the Company was insolvent upon consummation of the GM Acquisition or any
of the other acquisitions or the sale of the Notes.
In addition, any Subsidiary Guaranty may be subject to review under relevant
federal and state fraudulent conveyance and similar laws in a bankruptcy or
reorganization case or a lawsuit brought by or on behalf of creditors of the
applicable Subsidiary Guarantor. In such a case, the analysis set forth above
would generally apply, except that the Subsidiary Guaranty could also be
subject to the claim that, since the Subsidiary Guaranty
20
was incurred for the benefit of the Company (and only indirectly for the
benefit of the Subsidiary Guarantor), the obligations of the Subsidiary
Guarantor thereunder were incurred for less than reasonably equivalent value or
fair consideration. A court could void the Subsidiary Guarantor's obligation
under the Subsidiary Guaranty, subordinate the Subsidiary Guaranty to other
indebtedness of the Subsidiary Guarantor or take other action detrimental to
the holders of the Notes.
CHANGE OF CONTROL
Upon a Change of Control, each holder of the Notes will have the right to
require the Company to repurchase all or any part of such Notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The occurrence of certain of the
events that constitute a Change of Control would constitute a default under the
Senior Credit Facility and would entitle the holders of the Company's Senior
Subordinated Notes (as defined) to require the Company to repurchase all or any
part of such Notes. The Company's failure to purchase the Notes would result in
a default under the Indenture. The inability to repay the indebtedness under
the Senior Credit Facility or the Senior Subordinated Notes, if their maturity
is accelerated, would also constitute an event of default under the Indenture,
which could have adverse consequences for the Company and the holders of the
Notes. In the event of a Change of Control, there can be no assurance the
Company would have sufficient financial resources available to satisfy all of
its obligations under the Senior Credit Facility, the Notes and the Senior
Subordinated Notes. See "Description of Indebtedness" and "Description of
Notes--Change of Control."
LACK OF PUBLIC MARKET
The Notes are a new issue of securities for which there is currently no
active trading market. If the Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities and other factors,
including general economic conditions and the financial condition of the
Company. The Underwriters have informed the Company that they currently intend
to make a market in the Notes. However, the Underwriters are not obligated to
do so, and any such market making may be discontinued at any time without
notice. Although the Notes have been approved for listing on the New York Stock
Exchange (subject to official notice of issuance), no assurance can be given as
to the development or liquidity of any trading market for the Notes.
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
COMPANY HISTORY
The Company was formed in November 1993 for the purpose of acquiring certain
assets of the automotive starter business and the heavy duty starter and
alternator business of the Former GM Division, which businesses the Company
acquired in July 1994.
Between January 1995 and May 1997, the Company completed five strategic
acquisitions and two international joint ventures. On January 6, 1995, the
Company acquired all of the capital stock of Nabco, Inc. ("Nabco") (the "Nabco
Acquisition"), a producer of remanufactured automotive starters and
alternators. In addition to selling its products to national automotive parts
chains (primarily Western Auto), prior to its acquisition by the Company, Nabco
supplied remanufactured parts in bulk (known as "kits") to the Company and GM
for final assembly and distribution.
On March 31, 1995, the Company acquired all of the capital stock of The A&B
Group, Inc. ("A&B Group") (the "A&B Acquisition"), a remanufacturer of
automotive starters, heavy duty starters and alternators and related
subcomponents and parts. Prior to its acquisition by the Company, the A&B Group
was the Company's contract supplier of all heavy duty and certain automotive
remanufactured products.
21
On April 14, 1995, the Company acquired 96% of the capital stock of Autovill,
RT Ltd. ("Autovill") (the "Autovill Acquisition" and, together with the Nabco
Acquisition and the A&B Acquisition, the "1995 Acquisitions"), a Budapest,
Hungary-based producer of new and remanufactured heavy duty starters and
alternators both for the OEM market and the aftermarket in Western and Eastern
Europe. Principal customers of Autovill include Caterpillar and Mercedes Benz.
The remaining 4% of the capital stock of Autovill is owned by current and
former employees of Autovill.
On February 6, 1996, the Company acquired 82.5% of the capital stock of Power
Investments, Inc. ("Power Investments") (the "Power Investments Acquisition"),
a remanufacturer of diesel and gasoline engines, transmissions, fuel systems,
alternators and starters for medium and heavy duty trucks and automobiles; and,
to a lesser extent, a remanufacturer of brakes, water pumps, power steering
pumps and various other truck parts and assemblies. Power Investments has 15
facilities located in the United States and in five provinces of Canada and is
designated as a Ford FAR in such provinces. The remaining 17.5% of the capital
stock of Power Investments is owned by current management of Power Investments,
subject to put/call arrangements at a formula price for the purchase by the
Company of the remaining 17.5% of the shares of Power Investments beginning in
2001.
In December 1996, the Company formed a 50/50 joint venture in Korea with
individual Korean investors to purchase the assets related to the starter motor
operations of the Company's former Korean licensee. In April 1997, the Company
and its former Mexican licensee, Sistemas y Electricos Componetos ("Sistemas"),
formed a joint venture, 76% of which is owned by the Company and 24% of which
is owned by an affiliate of Sistemas. Each of these joint ventures have been
formed to manufacture starters and alternators for the OEM market.
On May 8, 1997, the Company acquired 82.5% of the capital stock of World Wide
(the "World Wide Acquisition"), a remanufacturer and distributor of import
automotive starters and alternators. World Wide sells its products to national
automotive parts chains, including Auto Zone, Pep Boys, Advance Auto and
Discount Auto. The remaining 17.5% of the capital stock of World Wide is owned
by current management of World Wide, subject to put/call arrangements at a
formula price for the purchase by the Company of the remaining 17.5% of the
shares beginning in 2000.
On October 30, 1997, the Company entered into the Ballantrae Acquisition
Agreement to acquire Ballantrae for $52.8 million (including assumed debt and
the estimated working capital adjustment and fees and expenses of Ballantrae).
Ballantrae operates through two subsidiaries: Tractech, a leading producer of
traction control systems for heavy duty OEMs and the aftermarket; and Kraftube,
Inc., a tubing assembly business which sells products to compressor
manufacturers for commercial air conditioners and refrigeration equipment. In
fiscal year 1997, Tractech accounted for approximately 70% of Ballantrae's
$37.6 million of net sales. The Company will exchange shares of its Common
Stock with a value (at the initial public offering price in the Equity
Offering) of approximately $22.1 million for the equity of Ballantrae and will
repay approximately $29.7 million of Ballantrae's debt. The Common Stock of the
Company received by Ballantrae's existing stockholders in the acquisition will
be subject to resale restrictions under applicable securities laws but will
have the benefit of piggyback registration rights. The acquisition is expected
to be completed at or prior to the consummation of the Offerings. See "Risk
Factors--Acquisition of Ballantrae; Conflicts of Interest," "Business--
Acquisition of Ballantrae" and "Certain Transactions."
On November 11, 1997, the Company entered into a Share Purchase Agreement to
acquire 37% of the outstanding shares of Sahney Paris Rhone Limited ("SPRL") a
manufacturer of starters, alternators and related components based in
Hyderabad, India, at a purchase price of approximately $3.7 million in the
aggregate. The Share Purchase Agreement provides that the shares will be
acquired by the Company through a combination of a tender offer for up to 20%
of such shares and the purchase of the remaining shares from the principal
shareholder of SPRL and his affiliates. The acquisition is expected to be
completed on or before March 31, 1998.
22
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be
approximately $180.1 million (approximately $188.4 million if the over-
allotment option in the Equity Offering is exercised in full) assuming an
initial public offering price of $15 per share in the Equity Offering and
after deduction of underwriting discounts and commissions and estimated
offering expenses. The proceeds of the Offerings, together with $.9 million of
available cash, will be used to repay in full (except as indicated in (vi)
below) the following indebtedness, which was incurred by the Company in
connection with the GM Acquisition and certain of the Company's subsequent
acquisitions: (i) the $75 million 10 1/2% Senior Note due July 31, 2003 to
World Subordinated Debt Partners, L.P., an affiliate of the holder of the
Warrants (the "World Note"), a portion of which will be prepaid at a 3%
premium to principal amount, (ii) the $59.2 million 11 1/2% Subordinated Note
due July 31, 2004 to GM (the "GM Acquisition Note"), (iii) the $8.3 million
9.86% Subordinated Notes due February 6, 2001 to the selling stockholders of
Power Investments (the "Power Investments Seller Notes"), (iv) the $3.5
million 10% Subordinated Notes due September 30, 2001 to the selling
stockholders of A&B Group (the "A&B Seller Notes"), (v) the $20.4 million of
borrowings outstanding under Ballantrae's senior credit facility (the
"Ballantrae Senior Bank Debt") and (vi) $9.2 million of Tractech's $10.0
million 11% Subordinated Note due October 31, 2006 to Dyneer Corporation (the
"Ballantrae Subordinated Debt"). Any accrued and unpaid interest on such
indebtedness will also be repaid with the proceeds of the Offerings.
The following table sets forth a summary of the expected sources and uses of
the estimated net proceeds from the Offerings, assuming no exercise of the
over-allotment option in the Equity Offering and including interest accrued to
December 22, 1997, the assumed date of the consummation of the Offerings (in
millions):
SOURCES OF FUNDS (net of underwriting discounts and commissions)
Equity Offering................................................... $ 55.8
Notes Offering.................................................... 126.8
Available Cash.................................................... 0.9
------
Total sources of funds.......................................... $183.5
======
USES OF FUNDS
Repayment of Indebtedness Due to Non-Affiliates of the Company
Repayment of GM Acquisition Note................................ $ 61.8
Repayment of A&B Seller Notes................................... 3.6
Repayment of Indebtedness of Entities Controlled by Affiliates of
the Company
Repayment of Ballantrae Senior Bank Debt........................ 20.5
Repayment of Ballantrae Subordinated Debt....................... 9.4
Repayment of Indebtedness Due to Affiliates of the Company
Repayment of Power Investments Seller Notes..................... 8.3
Repayment of World Note......................................... 77.4
Fees and expenses for the Offerings............................... 2.5
------
Total uses of funds............................................. $183.5
======
23
CAPITALIZATION
The following table sets forth the current portion of the long-term debt and
the consolidated capitalization of the Company as of October 31, 1997 and pro
forma to give effect to the Transactions, including the Offerings (assuming no
exercise of the over-allotment option in connection with the Equity Offering),
and the application of the net proceeds thereof. See "Use of Proceeds." This
table should be read in conjunction with the unaudited "Pro Forma Condensed
Consolidated Financial Data," "Selected Consolidated Historical Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements and related
notes thereto included elsewhere in this Prospectus. See also "Description of
Capital Stock" and "Description of Indebtedness."
AS OF OCTOBER 31, 1997
---------------------------
ACTUAL PRO FORMA
----------- ------------
(IN THOUSANDS)
Current portion of long-term debt............. $ 535 $ 535
=========== ===========
Long-term debt:
Senior Credit Facility...................... $ 30,000 $ 30,000
Power Investments Seller Notes.............. 8,300 --
World Note.................................. 75,000 --
% Senior Notes Due 2007................... -- 130,000
8% Subordinated Debenture................... -- 18,354(a)
10 5/8% Senior Subordinated Notes Due 2006.. 140,000 140,000
GM Acquisition Note......................... 59,155 --
A&B Seller Notes............................ 3,500 --
Ballantrae Subordinated Debt................ -- 750
Other, including capital lease obligations.. 17,004 17,004
Junior Subordinated Notes................... 25,211 --
----------- -----------
Total long-term debt...................... 358,170 336,108
Minority interest............................. 8,570 8,570
Redeemable exchangeable preferred stock of
subsidiary................................... 16,483(a) --
Stockholders' equity (deficit):
Class A Common Stock (par value $.01;
authorized 49,400,000,
issued and outstanding 525,477 historical,
15,246,268 pro forma)...................... 88 103
Class B Common Stock (par value $.01;
authorized 17,600,000,
issued and outstanding 385,523 historical,
7,592,465 pro forma)....................... 65 65
Additional paid-in capital.................. 6,703 109,541
Retained earnings........................... (9,112) (12,611)
Cumulative translation adjustment........... (2,173) (2,173)
Stock purchase plan......................... (2,547) (2,547)
----------- -----------
Total stockholders' equity (deficit) ..... (6,976) 92,378
----------- -----------
Total capitalization...................... $ 376,247 $ 437,056
=========== ===========
- --------
(a) Reflects the fair value of the 8% Subordinated Debenture exchanged for the
redeemable exchangeable preferred stock of subsidiary as permitted by the
terms of such preferred stock. For details of this exchange, see footnote
(d) to the "Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Three Months Ended October 31, 1997." As of October 31,
1997, the principal amount of the 8% Subordinated Debenture would have
exceeded the fair value by $892.
24
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company for the three years ended July 31, 1997 and the three-
month periods ended October 31, 1996 and 1997. The statement of operations
data for the years ended July 31, 1995, 1996 and 1997 and the balance sheet
data as of July 31, 1995, 1996 and 1997 were derived from audited Consolidated
Financial Statements of the Company, which have been audited by Ernst & Young,
LLP, independent auditors. The financial data for the three-month periods
ended October 31, 1997 and 1996 are derived from unaudited Consolidated
Financial Statements of the Company. The unaudited Consolidated Financial
Statements of the Company include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended October 31, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending July 31, 1998. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company and related
notes and the other financial information included elsewhere in this
Prospectus.
FOR THE THREE MONTHS
FOR THE YEAR ENDED JULY 31, ENDED OCTOBER 31,
------------------------------- ----------------------
1995 1996 1997 1996 1997
--------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales............. $573,423 $636,852 $689,787 $169,766 $209,020
Gross profit.......... 98,207 126,774 149,553 38,394 38,143
Selling, engineering
and administrative
expenses............. 61,206 77,994 89,098 23,335 20,936
Restructuring
charges.............. -- 8,101 34,500 -- --
Operating income...... 37,001 40,679 25,955 15,059 17,207
Interest expense...... 18,432 27,367 38,774 9,391 10,521
Income (loss) from
continuing
operations........... 9,326 5,796 (10,263) 2,834 3,062
Loss from discontinued
operations, net of
tax benefit ......... 2,363 10,637 1,682 213 --
Net income (loss)..... 6,963 (4,841) (14,296) 270 3,062
Income (loss) from
continuing operations
per share............ $ .56 $ .33 $ (.59) $ .16 $ .18
Net income (loss) per
share................ .42 (.28) (.82) .02 .18
FINANCIAL RATIOS AND
OTHER DATA:
Depreciation and
amortization......... $ 14,533 $ 19,555 $ 22,323 $ 5,300 $ 4,698
Capital expenditures.. 11,241 32,741 31,888 8,910 5,747
EBITDA(a)............. 51,534 60,234 50,360 20,359 21,905
Adjusted EBITDA(b).... 55,968 72,087 87,269 21,494 22,970
Cash provided by (used
in) operating
activities........... 21,921 (684) 22,537 (6,522) 11,415
Cash used in investing
activities .......... (73,251) (79,061) (74,087) (10,236) (7,355)
Cash provided by (used
in) financing
activities .......... 27,119 80,790 57,786 22,880 (5,063)
Gross margin.......... 17.1% 19.9% 21.7% 22.6% 18.2%
EBITDA margin(c)...... 9.0% 9.5% 7.3% 12.0% 10.5%
Adjusted EBITDA margin
(c).................. 9.8% 11.3% 12.7% 12.7% 11.0%
Ratio of EBITDA to
interest expense..... 2.8x 2.2x 1.3x 2.2x 2.1x
Ratio of total debt to
EBITDA............... 3.8x 5.0x 7.2x -- --
Ratio of Adjusted
EBITDA to interest
expense.............. 3.0x 2.6x 2.3x 2.3x 2.2x
Ratio of total debt to
Adjusted EBITDA...... 3.5x 4.1x 4.2x -- --
Ratio of earnings to
fixed charges(d)..... 1.8x 1.3x --(e) 1.5x 1.5x
25
AS OF JULY 31,
-------------------------- AS OF OCTOBER 31,
1995 1996 1997 1997
-------- -------- -------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................ $ 61,268 $113,801 $154,041 $152,432
Total assets................... 322,527 475,082 570,569 582,505
Total debt..................... 196,988 298,796 363,768 358,705
Redeemable exchangeable
preferred stock of
subsidiary.................... 12,903 14,420 16,071 16,483
Total stockholders' equity
(deficit)..................... 8,430 1,589 (9,797) (6,976)
- --------
(a) EBITDA represents the sum of income from continuing operations before
interest expense, income taxes, preferred dividend requirement of
subsidiary and minority interest in income of subsidiaries, plus
depreciation and amortization. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities for the purpose of analyzing the Company's operating
performance, financial position and cash flows. The Company has presented
EBITDA because it is commonly used by certain investors to analyze and
compare companies on the basis of operating performance and to determine a
company's ability to service debt. The definition of EBITDA differs from
the definition of EBITDA applicable to the covenants for the Notes and may
not be comparable to EBITDA as defined by other companies. EBITDA amounts
may not be fully available for management's discretionary use, due to
certain requirements to conserve funds for capital replacement, debt
service and other commitments.
(b) Adjusted EBITDA represents EBITDA plus restructuring charges and non-cash
post-retirement benefits other than pensions less the gain on sale of
building. The definition of Adjusted EBITDA conforms with the definition
of EBITDA applicable to the covenants for the Notes. Adjusted EBITDA
should not be construed as a substitute for income from operations, net
income or cash flow from operating activities for the purpose of analyzing
the Company's operating performance, financial position and cash flows.
Adjusted EBITDA amounts may not be fully available for management's
discretionary use, due to certain requirements to conserve funds for
capital replacements, debt service and other commitments.
(c) EBITDA margin and Adjusted EBITDA margin represent EBITDA and Adjusted
EBITDA, respectively, as a percent of net sales.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, fixed
charges and minority interest. Fixed charges include preferred dividend
requirement of subsidiary, interest expense and the portion of operating
rents that is deemed representative of an interest factor.
(e) The deficiency of earnings to fixed charges was $13.5 million. Excluding
restructuring charges, the ratio of earnings to fixed charges would have
been 1.5x.
26
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
The following unaudited pro forma condensed consolidated financial data are
based on the Consolidated Financial Statements included elsewhere in this
Prospectus, adjusted to give effect to the Transactions, including the
Offerings.
The unaudited pro forma condensed consolidated statement of operations for
the year ended July 31, 1997 and for the three months ended October 31, 1997
have been adjusted to give effect to the Transactions, including the
Offerings, as if they had occurred on August 1, 1996. The unaudited pro forma
condensed consolidated balance sheet at October 31, 1997 has been adjusted to
give effect to the Transactions, including the Offerings, as if they had
occurred on October 31, 1997 (other than the acquisition of World Wide, which
is reflected in the historical balance sheet data).
The unaudited pro forma financial data do not purport to be indicative of
the results of operations or the financial position that would actually have
been obtained if the Transactions, including the Offerings, had occurred on
the dates indicated or of the results of operations or the financial position
that may be obtained in the future. The unaudited pro forma financial data are
presented for comparative purposes only. The pro forma adjustments, as
described in the accompanying data, are based on available information and
certain assumptions that management believes are reasonable. The unaudited pro
forma financial data should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto included
elsewhere in this Prospectus.
The unaudited pro forma financial data with respect to the acquisitions of
World Wide and Ballantrae are based on the historical financial statements of
the businesses acquired and have been accounted for using the purchase method
of accounting. The purchase price, including the related fees and expenses,
have been allocated to the tangible and identifiable intangible assets and
liabilities of the acquired businesses based upon the Company's estimates of
their fair value, with the remainder allocated to goodwill. The pro forma
adjustments directly attributable to the acquisitions of World Wide and
Ballantrae include adjustments to interest expense related to the financing,
charges for amortization of intangible assets and depreciation of property and
equipment relating to the allocation of the purchase price and the related tax
effects.
27
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACQUISITIONS
-----------------------------------------------------------------
HISTORICAL HISTORICAL
TWELVE TWELVE WORLD WIDE BALLANTRAE PRO FORMA
MONTHS MONTHS PRO FORMA PRO FORMA PRO FORMA FOR THE PRO FORMA
ENDED ENDED ADJUSTMENTS PURCHASE PURCHASE ACQUISITIONS ADJUSTMENTS
3/31/97 9/30/97 FOR ACCOUNTING ACCOUNTING OF WORLD WIDE FOR OTHER
HISTORICAL WORLD WIDE BALLANTRAE WORLD WIDE(A) ADJUSTMENTS(B) ADJUSTMENTS(C) AND BALLANTRAE TRANSACTIONS
---------- ---------- ---------- ------------- -------------- -------------- -------------- ------------
Net sales......... $689,787 $78,100 $36,802 $(28,068) $ -- $ -- $776,621 $ --
Cost of goods
sold............. 540,234 53,400 24,276 (19,378) -- -- 598,532 --
-------- ------- ------- -------- ------ ----- -------- -------
Gross profit...... 149,553 24,700 12,526 (8,690) -- -- 178,089 --
Selling,
engineering, and
administrative
expenses......... 89,098 20,600 5,627 (8,078) 456 483 108,186 --
Restructuring
charges.......... 34,500 -- -- -- -- -- 34,500 --
-------- ------- ------- -------- ------ ----- -------- -------
Operating income.. 25,955 4,100 6,899 (612) (456) (483) 35,403 --
Other income
(expense):
Gain on sale of
building....... 2,082 -- -- -- -- -- 2,082 --
Interest
expense........ (38,774) (1,969) (2,948) 829 (1,182) (75) (44,119) 8,773 (d)
-------- ------- ------- -------- ------ ----- -------- -------
(Loss) income from
continuing
operations before
income taxes,
preferred
dividend
requirement of
subsidiary, and
minority
interest......... (10,737) 2,131 3,951 217 (1,638) (558) (6,634) 8,773
Minority interest
in income of
subsidiary....... 892 -- -- 247 (172) -- 967 --
Income taxes
(benefit)........ (3,014) 850 912 87 (655) (88) (1,908) 3,509 (e)
Preferred dividend
requirement of
subsidiary....... 1,648 -- 931 -- -- (931) 1,648 (1,648)(f)
-------- ------- ------- -------- ------ ----- -------- -------
(Loss) income from
continuing
operations....... $(10,263) $ 1,281 $ 2,108 $ (117) $(811) $ 461 $ (7,341) $ 6,912
======== ======= ======= ======== ====== ===== ======== =======
Loss from
continuing
operations
per share........ $ (.59)
========
PRO FORMA
FOR
TRANSACTIONS
------------
Net sales......... $776,621
Cost of goods
sold............. 598,532
------------
Gross profit...... 178,089
Selling,
engineering, and
administrative
expenses......... 108,186
Restructuring
charges.......... 34,500
------------
Operating income.. 35,403
Other income
(expense):
Gain on sale of
building....... 2,082
Interest
expense........ (35,346)
------------
(Loss) income from
continuing
operations before
income taxes,
preferred
dividend
requirement of
subsidiary, and
minority
interest......... 2,139
Minority interest
in income of
subsidiary....... 967
Income taxes
(benefit)........ 1,601
Preferred dividend
requirement of
subsidiary....... --
------------
(Loss) income from
continuing
operations....... $ (429)
============
Loss from
continuing
operations
per share........ $ (.02)
============
See Accompanying Notes
28
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
(IN THOUSANDS)
(a) This column adjusts the historical results of World Wide by eliminating
the period from April 1, 1996 through June 30, 1996 included in the
historical twelve months ended March 31, 1997. The remaining nine month
period ended March 31, 1997 is thus combined with the three months from
the date of acquisition, May 9, 1997 through July 31, 1997 included in the
Company's historical Statement of Operations. The net sales and net loss
for World Wide for the month of April 1997, which are excluded from the
pro forma results, were $5,191 and $692, respectively. The Pro Forma
Condensed Consolidated Financial Statement of Operations includes both
July 1996 and 1997 for World Wide. Net sales and net income for July 1996
were $6,209 and $280, respectively.
(b) This column gives effect to the acquisition of World Wide as if it had
taken place at the beginning of the year, reflecting the increase in
depreciation, amortization and interest expense offset by the minority
interest's share of the additional expenses and income taxes, as follows:
Increase in depreciation and amortization........................ $ (456)
Increase in interest expense to finance the acquisition.......... (1,182)
Minority interest's share of additional expenses................. 172
Income taxes..................................................... 655
-------
Effect on net income............................................. $ (811)
=======
(c) This column gives effect to the acquisition of Ballantrae as if it had
taken place at the beginning of the year, reflecting the increase in
depreciation, amortization and interest expense. The preferred dividend
requirement of subsidiary is also eliminated to reflect the exchange of
the preferred stock for common stock in the acquisition as of the
beginning of the year. After the exchange no further dividends will occur.
The months of August 1997 and September 1997 are included in the pro forma
results of operations for both the year ended July 31, 1997 and the three
months ended October 31, 1997. Sales and net income for August 1997 and
September 1997 combined were $5,841 and $66, respectively. Details
regarding the pro forma purchase accounting adjustments are as follows:
Increase in depreciation and amortization.......................... $(483)
Increase in interest expense....................................... (75)
Income taxes....................................................... 88
Preferred dividend requirement of subsidiary....................... 931
-----
Effect on net income............................................... $ 461
=====
29
(d) Reflects decreases (increases) of interest expense and amortization of
deferred financing costs as if the Transactions occurred on August 1, 1996
as follows:
FOR THE
YEAR ENDED
JULY 31, 1997
-------------
Reduced interest from the amendment of the Senior Credit
Facility.................................................. $ 190
Amortization of deferred financing costs associated with
the amendment to the Senior Credit Facility............... (30)
Repayment of Power Investments Seller Notes................ 818
Repayment of World Note.................................... 7,875
Reversal of 1997 amortization of deferred financing costs
associated with repayment of the World Note............... 454
Interest expense for the % Senior Notes Due 2007.......... (11,050)
Amortization of deferred financing costs associated with
the % Senior Notes Due 2007.............................. (445)
Repayment of GM Acquisition Note........................... 6,552
Repayment of A&B Seller Notes.............................. 350
Repayment of Ballantrae Senior Bank Debt................... 1,848
Repayment of Ballantrae Subordinated Debt.................. 1,018
Conversion of Junior Subordinated Notes.................... 2,593
Interest expense relating to the 8% Subordinated Debenture
exchanged for the redeemable exchangeable preferred stock
of subsidiary............................................. (1,400)
--------
Net reduction in interest expense.......................... $ 8,773
========
The interest rate on the % Senior Notes Due 2007 is assumed to be 8 1/2%.
For each 1/4% difference in the interest rate, the annual interest expense
would change by $325.
(e) Represents the income tax expense related to the pro forma interest
expense reduction at 40%.
(f) Represents the reversal of preferred dividend requirements of subsidiary
recorded in 1997 which results from the assumed exchange of the preferred
stock for the 8% Subordinated Debenture effective August 1, 1996.
A deemed preferred dividend of subsidiary arises from the exchange of the
redeemable exchangeable preferred stock of subsidiary for the excess of the
fair value of the 8% Subordinated Debenture over the carrying value of the
redeemable exchangeable preferred stock of subsidiary as shown below. This
nonrecurring charge, which has not been reflected in the pro forma
condensed consolidated statement of operations, will be charged against the
income of the Company in the period of exchange. Upon completion of the
exchange, no further dividends will occur.
Fair value of the 8% Subordinated Debenture at October 31, 1997
................................................................ $18,354
Carrying value of the redeemable exchangeable preferred stock of
subsidiary at October 31, 1997 ................................. 16,483
-------
Deemed preferred dividend of subsidiary arising from exchange.... $ 1,871
=======
(g) The following nonrecurring items (including the item described in (f)
above), resulting from the Transactions have not been reflected in the
unaudited pro forma condensed consolidated statement of operations for the
year ended July 31, 1997, but will be included in operations within 12
months succeeding the Transactions (amounts are based upon the assumptions
used in preparing the unaudited pro forma condensed consolidated balance
sheet as of October 31, 1997):
Early extinguishment penalty on World Note...................... $ (576)
Write-off of World Note deferred financing costs as a result of
early extinguishment........................................... (2,138)
Tax effect of early extinguishments............................. 1,086
Deemed dividend of preferred stock of subsidiary................ (1,871)
-------
Net charge to retained earnings (deficit)....................... $(3,499)
=======
30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACQUISITION
-------------------------
PRO FORMA FOR ADJUSTMENTS PRO FORMA
HISTORICAL PRO FORMA THE ACQUISITION FOR OTHER FOR
HISTORICAL BALLANTRAE ADJUSTMENTS(A) OF BALLANTRAE TRANSACTIONS TRANSACTIONS
---------- ---------- -------------- --------------- ------------ ------------
Net sales............... $209,020 $9,323 $ -- $218,343 $ -- $218,343
Cost of goods sold...... 170,877 6,349 -- 177,226 -- 177,226
-------- ------ ----- -------- ------ --------
Gross profit............ 38,143 2,974 -- 41,117 -- 41,117
Selling, engineering,
and administrative
expenses............... 20,936 1,477 121 22,534 -- 22,534
-------- ------ ----- -------- ------ --------
Operating income........ 17,207 1,497 (121) 18,583 -- 18,583
Interest expense........ (10,521) (756) (19) (11,296) 2,365 (b) (8,931)
-------- ------ ----- -------- ------ --------
(Loss) income from
continuing operations
before income taxes,
preferred dividend
requirement of
subsidiary, and
minority interest...... 6,686 741 (140) 7,287 2,328 9,652
Minority interest in
income of subsidiary... 538 -- -- 538 -- 538
Income taxes (benefit).. 2,674 21 141 2,836 946 (c) 3,782
Preferred dividend
requirement of
subsidiary............. 412 263 (263) 412 (412)(d) --
-------- ------ ----- -------- ------ --------
Income from continuing
operations............. $ 3,062 $ 457 $ (18) $ 3,501 $1,831 $ 5,332
======== ====== ===== ======== ====== ========
Income from continuing
operations per share... $ .18 $ .22
======== ========
See Accompanying Notes
31
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
(IN THOUSANDS)
(a) Represents adjustments for the acquisition of Ballantrae as if it had
taken place on August 1, 1996, reflecting the increase in depreciation,
amortization and interest expense for the quarter. The tax adjustment for
the three months ended October 31, 1997 is to adjust the income taxes to
an effective tax rate of 27%. The preferred dividend requirement of
subsidiary is also eliminated to reflect the exchange of the preferred
stock for common stock in the acquisition as of the beginning of the
quarter. After the exchange no further dividends will occur.
Increase in depreciation and amortization............................ $(121)
Increase in interest expense......................................... (19)
Income taxes......................................................... (141)
Preferred dividend requirement of subsidiary......................... 263
-----
Effect on net income................................................. $ (18)
=====
(b) Reflects decreases (increases) of interest expense and amortization of
deferred financing costs as if the Transactions occurred on August 1, 1996
as follows:
FOR THE
THREE MONTHS ENDED
OCTOBER 31, 1997
------------------
Reduced interest from the amendment of the Senior Credit
Facility............................................... $ 38
Amortization of deferred financing costs associated with
the amendment to the Senior Credit Facility............ (8)
Repayment of Power Investments Seller Notes............. 205
Repayment of World Note................................. 1,969
Reversal of amortization of deferred financing costs
associated with repayment of the World Note............ 114
Interest expense for the % Senior Notes Due 2007...... (2,763)
Amortization of deferred financing costs associated with
the % Senior Notes Due 2007.......................... (111)
Repayment of GM Acquisition Note........................ 1,739
Repayment of A&B Seller Notes........................... 88
Repayment of Ballantrae Senior Bank Debt................ 481
Repayment of Ballantrae Subordinated Debt............... 254
Conversion of Junior Subordinated Notes................. 709
Interest expense relating to the 8% Subordinated
Debenture exchanged for the redeemable exchangeable
preferred stock of subsidiary.......................... (350)
------
Net reduction in interest expense....................... $2,365
======
The interest on the % Senior Notes Due 2007 is assumed to be 8 1/2%. For
each 1/4% difference in the interest rate, interest expense would increase
by $81 for each three month period.
(c) Represents the income tax expense related to the pro forma interest
expense reduction at 40%.
(d) Represents the reversal of preferred dividend requirements of subsidiary
recorded in the three months ended October 31, 1997, which results from
the assumed exchange of the preferred stock for the 8% Subordinated
Debenture effective August 1, 1996.
A deemed preferred dividend of subsidiary arises from the exchange of the
redeemable exchangeable preferred stock of subsidiary for the excess of the
fair value of the 8% Subordinated Debentures over the
32
carrying value of the redeemable exchangeable preferred stock of subsidiary
as shown below. This nonrecurring charge, which has not been reflected in
the pro forma condensed consolidated statement of operations, will be
charged against the income of the Company in the period of exchange. Upon
the completion of the exchange, no further dividends will occur.
Fair value of the 8% Subordinated Debenture at October 31, 1997.... $18,354
Carrying value of the redeemable exchangeable preferred stock of
subsidiary at October 31, 1997.................................... 16,483
-------
Deemed preferred dividend of subsidiary arising from exchange...... $ 1,871
=======
(e) The following nonrecurring items (including the item described in (d)
above) resulting from the Transactions have not been reflected in the
unaudited pro forma condensed consolidated statement of operations for the
three months ended October 31, 1997, but will be included in operations
within the 12 months succeeding the Transactions (amounts are based upon
the assumptions used in preparing the unaudited pro forma condensed
consolidated balance sheet as of October 31, 1997):
Early extinguishment penalty on World Note........................ $ (576)
Write-off of World Note deferred financing costs as a result of
early extinguishment............................................. (2,138)
Tax effect of early extinguishments............................... 1,086
Deemed dividend of preferred stock of subsidiary.................. (1,871)
-------
Net charge to retained earnings (deficit)......................... $(3,499)
=======
33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997
(IN THOUSANDS)
ACQUISITION
-------------------------
PRO FORMA FOR ADJUSTMENTS PRO FORMA
HISTORICAL PRO FORMA THE ACQUISITION FOR OTHER FOR
HISTORICAL BALLANTRAE ADJUSTMENTS(A) OF BALLANTRAE TRANSACTIONS TRANSACTIONS
---------- ---------- -------------- --------------- ------------ ------------
ASSETS:
Current Assets:
Cash and cash
equivalents.......... $ 8,626 $ 843 $ -- $ 9,469 $ 1,250 (b) $ 10,719
Trade accounts
receivable........... 125,582 5,342 -- 130,924 -- 130,924
Other receivables..... 3,701 134 -- 3,835 -- 3,835
Recoverable income
tax.................. 2,889 -- -- 2,889 1,086 (g) 3,975
Inventories........... 167,456 10,337 -- 177,793 -- 177,793
Deferred income
taxes................ 20,757 -- -- 20,757 -- 20,757
Other current assets.. 5,210 81 -- 5,291 -- 5,291
-------- ------- -------- -------- -------- --------
Total current
assets............. 334,221 16,737 -- 350,958 2,336 353,294
Property and equipment.. 153,039 17,445 -- 170,484 -- 170,484
Less accumulated
depreciation........... 30,917 3,760 (3,760) 30,917 -- 30,917
-------- ------- -------- -------- -------- --------
122,122 13,685 3,760 139,567 -- 139,567
Deferred financing
costs.................. 8,651 -- 750 9,401 2,522 (c) 11,923
Goodwill (less
accumulated
amortization).......... 86,760 13,522 10,431 110,713 -- 110,713
Net assets held for
disposal............... 23,909 -- -- 23,909 -- 23,909
Investment in
affiliate.............. 4,727 -- -- 4,727 -- 4,727
Other assets............ 2,115 1,105 -- 3,220 -- 3,220
-------- ------- -------- -------- -------- --------
Total assets........ $582,505 $45,049 $ 14,941 $642,495 $ 4,858 $647,353
======== ======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY:
Current liabilities:
Accounts payable...... $ 96,818 $ 2,474 $ -- $ 99,292 $ -- 99,292
Accrued interest
payable.............. 7,262 -- -- 7,262 (2,425)(b) 4,837
Accrued restructuring
charges.............. 37,922 -- -- 37,922 -- 37,922
Liabilities related to
discontinued
operations........... 2,685 -- -- 2,685 -- 2,685
Other liabilities and
accrued expenses..... 36,567 2,409 -- 38,976 -- 38,976
Current portion of
long-term debt....... 535 -- -- 535 -- 535
-------- ------- -------- -------- -------- --------
Total current
liabilities........ 181,789 4,883 -- 186,672 (2,425) 184,247
Deferred income taxes... 1,556 -- 1,015 2,571 -- 2,571
Long-term debt, less
current portion........ 358,170 30,364 -- 388,554 (52,446)(d) 336,108
Post-retirement benefits
other than pension..... 13,742 -- -- 13,742 -- 13,742
Accrued pension
benefit................ 5,272 -- -- 5,272 -- 5,272
Other non-current
liabilities............ 3,899 566 -- 4,465 -- 4,465
Minority interest in
subsidiary............. 8,570 -- -- 8,570 -- 8,570
Redeemable exchangeable
preferred stock of
subsidiary............. 16,483 12,205 (12,205) 16,483 (16,483)(e) --
Stockholders' (deficit)
equity:
Common Stock:
Class A Shares...... 88 1 14 103 -- 103
Class B Shares...... 65 1 (1) 65 -- 65
Paid-in capital....... 6,703 (5,113) 28,260 29,830 79,711 (f) 109,541
Retained earnings
(deficit)............ (9,112) 2,142 (2,142) (9,112) (3,499)(g) (12,611)
Cumulative translation
adjustment........... (2,173) -- -- (2,173) -- (2,173)
Stock purchase plan... (2,547) -- -- (2,547) -- (2,547)
-------- ------- -------- -------- -------- --------
Stockholders'
(deficit) equity... (6,976) (2,989) 26,131 16,166 76,212 92,378
-------- ------- -------- -------- -------- --------
Total liabilities
and stockholders'
(deficit) equity... $582,505 $45,049 $ 14,941 $642,495 $ 4,858 $647,353
======== ======= ======== ======== ======== ========
See Accompanying Notes
34
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997
(IN THOUSANDS)
(a) Represents the adjustments for the Ballantrae acquisition as if it had
occurred as of October 31, 1997. The acquisition will be accounted for by
the purchase method of accounting. Using the purchase method of
accounting, the total purchase price will be allocated to tangible and
intangible assets and liabilities of Ballantrae based upon the Company's
estimates of their respective fair values at the date of the acquisition.
(b) Represents the sources and uses of cash in connection with the
Transactions as follows:
AS OF
OCTOBER 31, 1997
----------------
Estimated proceeds from the Offerings (net of
underwriting discounts and commissions)............... $182,550
Senior Credit Facility refinancing fee................. (210)
Repayment of Power Investments Seller Notes............ (8,300)
Repayment of World Note................................ (75,576)
Repayment of GM Acquisition Note....................... (59,155)
Repayment of A&B Seller Notes.......................... (3,500)
Repayment of Ballantrae Senior Bank Debt............... (20,384)
Repayment of Ballantrae Subordinated Debt.............. (9,250)
Payment of accrued interest for debt repaid............ (2,425)
Other fees and expenses of the Offerings............... (2,500)
--------
Cash provided from the Transactions.................... $ 1,250
========
(c) Represents the change in the deferred financing costs and related tax
benefit with respect to the World Note as follows:
AS OF
OCTOBER 31, 1997
----------------
Deferred financing costs related to the Offerings....... $ 4,450
Deferred financing costs related to the Senior Credit
Facility refinancing................................... 210
Write-off of World Note deferred financing costs as a
result of early extinguishment......................... (2,138)
-------
$ 2,522
=======
35
(d) Details regarding the changes to long-term debt are as follows:
Total long-term debt (historical)................................ $358,170
Ballantrae Senior Bank Debt...................................... 20,384
Ballantrae Subordinated Debt..................................... 10,000
--------
Total Ballantrae Debt............................................ 30,384
--------
Pro forma for Ballantrae acquisition............................. 388,554
--------
Power Investments Seller Notes................................... (8,300)
World Note....................................................... (75,000)
GM Acquisition................................................... (59,155)
A&B Seller Notes................................................. (3,500)
Ballantrae Senior Bank Debt...................................... (20,384)
Ballantrae Subordinated Debt..................................... (9,250)
Junior Subordinated Notes........................................ (25,211)
% Senior Notes Due 2007......................................... 130,000
8% Subordinated Debenture........................................ 18,354
--------
Adjusted for other Transactions.................................. (52,446)
--------
Pro forma for Transactions....................................... $336,108
========
(e) Reflects the elimination of redeemable exchangeable preferred stock of
subsidiary exchanged for the 8% Subordinated Debenture.
(f) Details regarding the changes to equity, exchange of equity, issuance of
Common Stock and exchange of Junior Subordinated Notes are as follows:
AS OF
OCTOBER 31, 1997
----------------
Paid in capital (historical)............................. $ 6,703
Equity exchanged and transaction costs for Ballantrae
acquisition, less par value of $15 for shares of Common
Stock received.......................................... 23,127
--------
Pro forma for Ballantrae acquisition..................... 29,830
--------
Equity Offering.......................................... 55,800
Exchange of Junior Subordinated Notes.................... 25,211
Fees for Equity Offering................................. (1,300)
--------
Adjusted from other Transactions......................... 79,711
--------
Pro forma for Transactions............................... $109,541
========
(g) Represents the extraordinary loss relating to the early extinguishment of
the World Note net of taxes at a marginal rate of 40% and the deemed
preferred dividend of subsidiary arising from the exchange of the
redeemable exchangeable preferred stock of subsidiary as follows:
AS OF
OCTOBER 31, 1997
----------------
Early extinguishment penalty on World Note.............. $ (576)
Write-off of World Note deferred financing costs as a
result of early extinguishment......................... (2,138)
Tax effect of early extinguishments..................... 1,086
Deemed dividend of preferred stock of subsidiary........ (1,871)
-------
Net charge to retained earnings (deficit)............... $(3,499)
=======
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company sells its products in the aftermarket and the OEM market,
principally in North America and also in Europe, Latin America and Asia-
Pacific. In addition to purchasing newly manufactured parts for use in new
vehicle production, OEMs are also significant customers of the Company's
aftermarket products. These aftermarket products are distributed through the
OEMs' affiliated dealer networks.
The aftermarket is highly fragmented and competitive. The Company believes
that consolidation of aftermarket suppliers is occurring due, in part, to
higher quality standards for remanufactured products, which may be more
expensive or technically difficult for smaller remanufacturers to meet. The
Company plans to continue to increase its penetration of the aftermarket
through internal growth and strategic acquisitions.
The demand for components in the OEM market is cyclical. The Company
believes that opportunities for growth in the OEM market will come primarily
through the introduction of new products and expansion of the Company's global
operations. The Company believes that its aftermarket and OEM businesses are
complementary and provide the Company with a competitive advantage in meeting
customer needs and maintaining the high levels of expertise necessary to
compete successfully in both markets. The high capability necessary to meet
the stringent requirements for OEM technology and quality are transferable by
the Company to its aftermarket operations.
For 1997, the aftermarket accounted for approximately 45.2% of the Company's
net sales and approximately 62.8% of the Company's Adjusted EBITDA (as
defined). Net sales and Adjusted EBITDA attributable to the OEM market
accounted for the remainder.
The primary components of cost of goods sold in the Company's aftermarket
business include the cost of cores and component parts, labor costs and
overhead. While the availability and cost of cores fluctuate based on supply
and demand, the Company's relationships with dealers and other customers have
historically provided it with sufficient access to cores at favorable prices.
The primary components of cost of goods sold in the Company's OEM business
include material, labor and overhead. The Company is in the process of
shifting OEM production to focus factories, which the Company believes can
enhance operating efficiencies. The Company's domestic OEM labor force is
represented primarily by the UAW. In March 1997, the Company signed a new
master agreement with the UAW that stipulated an approximately 3.2% annual
wage and benefit increase (12.8% over the four year term of the agreement) for
the Company's UAW hourly employees. If employment levels and productivity
remain unchanged, the agreement with the UAW would cause the Company to
experience increases in wage and benefit costs of approximately 2% per year
over the next four years (which represents approximately $3.3 million in the
first such year). In addition, grow-in provisions under the new agreement with
the UAW will require the Company to move certain lower wage and benefit
employees to higher wage and benefit levels. Under provisions of the national
agreement, the UAW and the Company have recently developed a special program
of incentives for hourly employees who agree to leave the Company, the cost of
which is included in the restructuring charges for fiscal year 1997 described
herein. Based on responses to this special incentive plan received to date,
the Company would, if no other cost reductions were realized, experience as a
result of the grow-in provision additional wage and benefit costs that
increase each year of the UAW contract to approximately $10.2 million annually
in additional costs from current levels by the fourth year. The Company
expects the continued implementation of the special incentive plan and other
planned cost reduction initiatives to substantially offset the effects of the
grow-in provision. If the responses to date to the special incentive plan were
reversed (which the Company considers unlikely) and the other cost-saving
initiatives were not implemented, the additional costs referred to above to
the Company from the grow-in provision would approximately double. See "Risk
Factors--Labor Negotiations."
37
Since the GM Acquisition, the Company has completed five strategic
acquisitions, substantially increasing the Company's aftermarket operations,
and entered into two international joint ventures. These acquisitions and
joint ventures have broadened the Company's product line, expanded its
remanufacturing capability, extended its participation in international
markets and increased its penetration of the retail automotive parts channel.
As a result of these acquisitions, joint ventures and the Company's focus on
increasing its participation in the aftermarket, the Company's reliance on GM
has declined since the Company's formation. Net sales to customers other than
GM increased from 41.0% in fiscal year 1995 to 56.3% in fiscal year 1997.
The portion of the Company's net sales derived from the aftermarket have
increased significantly over the past two years, from approximately 19.2% in
fiscal year 1995 to 45.2% in fiscal year 1997. For fiscal year 1997, GM
accounted for approximately 43.7% of the Company's total net sales, of which
31.8% were to GM's OEM businesses and 11.9% were to GM SPO. Substantially all
of the Company's fiscal year 1997 automotive OEM sales were to GM.
In connection with the GM Acquisition, GM entered into long-term contracts
(the "Supply Agreements") pursuant to which it has agreed to purchase from the
Company 100% of its North American requirements for automotive starters (other
than for Saturn and Geo) and 100% of its U.S. and Canadian requirements for
heavy duty starters and alternators, in each case with respect to the
Company's existing product line. In addition, GM has been designated as an
exclusive distributor of a significant amount of the Company's automotive and
heavy duty aftermarket products and has agreed to provide the Company with
purchasing support, which enables it to obtain raw materials at competitive
prices. GM's obligations to purchase the Company's automotive starters and
heavy duty starters and alternators under the Supply Agreements are subject to
such products remaining competitive as to price, technology and design.
However, GM may not terminate the Supply Agreement for the Company's prices of
automotive products for failing to be so competitive prior to July 31, 2001.
The Supply Agreements will terminate (i) with respect to automotive products,
on July 31, 2004 (except that GM's obligations with respect to automotive
products introduced in 1996 and 1997 will terminate on July 31, 2006 and July
31, 2007, respectively), and (ii) with respect to heavy duty products, July
31, 2000. GM's obligations to distribute the Company's heavy duty aftermarket
products terminate on July 31, 1998, and GM's obligations to distribute the
Company's automotive aftermarket products terminate on July 31, 2009. See
"Business--Customers." Although the Company expects that its automotive and
heavy duty products will remain competitive throughout the term of the
agreements with GM, there can be no assurance that GM will not develop
alternative sources for such components and purchase some or all of its
requirements from these sources prior to or following the expiration of the
agreements. See "Risk Factors--Dependence on General Motors."
In fiscal year 1997, the Company decided to restructure its OEM
manufacturing operations, incurring a restructuring charge of $34.5 million
and establishing a reserve for that amount. The Company's OEM business has
seven principal manufacturing operations, two in Meridian, Mississippi and
five in Anderson, Indiana. The Company has announced its intention to close
its two facilities in Meridian, Mississippi by the end of the 1998 fiscal
year, including one facility leased from GM at the time of the GM Acquisition.
The balance of the Company's OEM facilities are located in Anderson, Indiana.
Two of the Anderson facilities are leased from GM and the Company plans to
vacate these facilities by the end of 1999. The Company is operating three new
focus factories in Anderson and intends to begin operations in three
additional focus factories by the end of 1999. This restructuring is expected
to provide a reduction of over 70% in square footage from the Company's
existing plants to the focus factories due to streamlining of manufacturing
processes, phasing out of certain manufacturing equipment and elimination of
excess unutilized floor space or floor space used by GM in each of the
existing facilities. The restructuring reserve does not include approximately
$3 million in startup costs the Company expects to incur, based on its prior
focus factory startups, in connection with the three additional focus
factories. As discussed below, the transition to focus factories adversely
affected the Company's gross margins in the first quarter of fiscal 1998. See
"Risk Factors--Relocation of Facilities."
The restructuring plan included accelerating the Company's move to focus
factories and closing the Company's operations in three old, vertically-
integrated factories. These decisions resulted in the impairment of certain
production assets with a carrying amount of $30.3 million, which the Company
plans to dispose of. The
38
Company has estimated the loss on disposal including related costs at $26.3
million. In addition, the Company has estimated a cost of $8.2 million for
reducing its workforce through several transition programs related to the
restructuring of the operations. The results of operations for the products
which will be discontinued are not separately identifiable. The 1997
restructuring reserve is expected to be utilized throughout 1998 and 1999. In
1998, the Company expects to reduce the 1997 restructuring reserve balance to
approximately $12.1 million through cash payments of $5.8 million and other
charges of $16.6 million. The remaining balance is expected to be completely
utilized in 1999 through cash payments of $4.5 million and other charges of
$7.6 million. As planned, no significant charges have been incurred with
respect to the 1997 restructuring reserve through the first quarter of fiscal
1998. The plan is on schedule and the Company continues to believe that the
reserve adequately provides for anticipated expenses. See "Risk Factors--
Restructuring Charges; Recent Losses."
In fiscal year 1996, the Company decided to eliminate the production of
certain parts and certain straight drive starter motors and offered a
voluntary retirement transition program to certain eligible salaried employees
resulting in the recognition of a restructuring charge of $8.1 million. The
Company purchased new, more efficient equipment for use in the production of
certain heavy duty alternators resulting in the impairment of certain
production equipment with a carrying amount of approximately $5.2 million,
which the Company plans to dispose of at an estimated loss of $4.4 million,
including disposal costs. The retirement transition program, which was charged
to operations for $3.7 million in 1996, was offered in conjunction with a
similar plan offered by GM which allowed employees special additional benefits
not typically provided upon retirement. These additional benefits included
salaried payments for six months and future supplemental payments under the
salaried retirement plan. Cost savings have been identified and realized in
the decisions to eliminate specific parts and motors and implement the
voluntary retirement transition program. The results of operations for the
parts and straight drive starter motors for which production will be
discontinued are not separately identifiable.
In fiscal year 1996, cash payments of $1.7 million and other charges of $0.9
million reduced the outstanding balance of the restructuring reserves to $5.5
million as of July 31, 1996. In 1997, cash payments of $0.8 million and other
charges of $1.8 million further reduce the outstanding balance to $2.9 million
as of July 31, 1997. This remaining balance is expected to be completely
utilized during 1998.
The following table sets forth certain statement of operations data
expressed as a percentage of sales:
FOR THE THREE
FOR THE YEAR MONTHS ENDED
ENDED JULY 31, OCTOBER 31,
------------------- --------------
1995 1996 1997 1996 1997
----- ----- ----- ------ ------
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................... 82.9 80.1 78.3 77.4 81.8
----- ----- ----- ------ ------
Gross profit............................. 17.1 19.9 21.7 22.6 18.2
Selling, engineering and administrative
expenses................................ 10.7 12.2 12.9 13.7 10.0
Restructuring charges.................... -- 1.3 5.0 -- --
----- ----- ----- ------ ------
Operating income......................... 6.4 6.4 3.8 8.9 8.2
Other income (expense):
Gain on sale of building................ -- -- 0.3 -- --
Interest expense........................ (3.2) (4.3) (5.7) (5.6) (5.0)
----- ----- ----- ------ ------
Income (loss) from continuing operations
before income taxes (benefit), preferred
divided requirement of subsidiary and
minority interest....................... 3.2 2.1 (1.6) 3.3 3.2
Minority interest in income of
subsidiaries............................ -- 0.1 0.1 0.1 0.2
Income taxes (benefit)................... 1.4 0.9 (0.4) 1.3 1.3
Preferred dividend requirement of
subsidiary.............................. 0.2 0.2 0.2 0.2 0.2
----- ----- ----- ------ ------
Income (loss) from continuing
operations.............................. 1.6 0.9 (1.5) 1.7 1.5
Discontinued operations:
Loss from operations of discontinued
businesses, net of income taxes of
$1,582, $1,042 and $395, respectively.. 0.4 0.3 0.1 0.1 --
Loss on disposal of businesses, net of
income taxes of $6,043 and $426,
respectively........................... -- 1.4 0.1 -- --
Extraordinary item:
Write-off of debt issuance costs, net of
income taxes of $1,147................. -- -- 0.3 1.4 --
----- ----- ----- ------ ------
Net income (loss)........................ 1.2% (0.8)% (2.0)% 0.2% 1.5%
===== ===== ===== ====== ======
39
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1996
Net Sales. Net sales were $209.0 million for the three months ended October
31, 1997, an increase of $39.3 million, or 23.1%, over the three months ended
October 31, 1996. The increase resulted primarily from the inclusion of $17.6
million of the net sales of World Wide and a $15.2 million increase in OEM
sales volume due to higher production levels at the Company's automotive and
heavy duty OEM customers.
Gross Profit. Gross profit was $38.1 million for the three months ended
October 31, 1997, a decrease of $.3 million compared to the three months ended
October 31, 1996. As a percentage of net sales, gross profit was 18.2% for the
three months ended October 31, 1997 compared to 22.6% for the three months
ended October 31, 1996. This 4.4% decrease as a percentage of net sales was
primarily attributable to a change in the mix of aftermarket sales volume from
higher margin heavy duty to lower margin light duty product lines (2.0%). In
addition, other differences include a change in allocation of certain expenses
in the aftermarket businesses from SE&A to overhead (.9%), transition
inefficiencies and costs associated with focus factory relocations (.6%), the
inclusion of World Wide in 1997, which has lower gross margins than the
Company's other businesses (.3%), and the impact of the startup costs
associated with a new engine remanufacturing program at Power Investments
(.3%).
Selling, Engineering and Administrative Expenses. Selling, engineering and
administrative ("SE&A") expenses were $20.9 million for the three months ended
October 31, 1997, a decrease of $2.4 million, or 10.3%, from the three months
ended October 31, 1996. As a percentage of net sales, SE&A expenses decreased
to 10.0% for the three months ended October 31, 1997 from 13.7% for the three
months ended October 31, 1996. The 3.7% decrease as a percent of net sales in
SE&A expenses resulted primarily from lower information systems and consulting
expenses related to the completion of certain projects during fiscal year 1997
(1.5%), a change in allocation of certain expenses in the aftermarket business
from SE&A to overhead (.9%), the inclusion of World Wide in 1997, which has
lower SE&A expenses as a percent of net sales (.6%), and the impact of the
higher sales volume in the OEM businesses without a commensurate increase in
SE&A expenses (.6%).
Operating Income. Operating income was $17.2 million for the three months
ended October 31, 1997, an increase of $2.1 million, or 14.3%, over the three
months ended October 31, 1996. As a percent of net sales, operating income
decreased to 8.2% for the three months ended October 31, 1997 from 8.9% for
the three months ended October 31, 1996. This decrease was attributable to the
decrease in gross profit, and was partially offset by the decrease in SE&A
expenses as discussed above.
Interest Expense. Interest expense was $10.5 million for the three months
ended October 31, 1997, an increase of $1.1 million, or 12.0%, over the three
months ended October 31, 1996. The increased interest expense resulted from
additional debt incurred to finance acquisitions.
Income Taxes. Income tax expense was $2.7 million for the three months ended
October 31, 1997, an increase of $.4 million, or 15.9%, from the three months
ended October 31, 1996. The Company's effective tax rate was 40.0% for the
three months ended October 31, 1997 compared to 40.3% for the three months
ended October 31, 1996. The decrease in the effective tax rate is primarily
related to the implementation of certain international tax planning
strategies.
Loss from Discontinued Operations. The after-tax loss from discontinued
operations of $.2 million for the three months ended October 31, 1996 reflects
the results of the Company's discontinued large bore diesel remanufacturing
operations and marine operations. These operations were not part of the
Company's core strategic focus. A reserve for the disposal of these operations
of $1.3 million was established at July 31, 1997. Operating losses during the
three months ended October 31, 1997 were charged against this reserve.
Write Off of Debt Issuance Cost. In August 1996, certain debt was retired
out of the proceeds from the issuance of the Senior Subordinated Notes.
Unamortized issuance costs, net of income taxes, of $2.4 million relating to
the retired debt was written off in the three months ended October 31, 1996.
Net Income. Due to the factors noted above, net income was $3.1 million for
the three months ended October 31, 1997 an increase of $2.8 million from the
three months ended October 31, 1996. As a percentage of
40
net sales, net income increased to 1.5% for the three months ended October 31,
1997, from .2% for the three months ended October 31, 1996.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Net Sales. Net sales were $689.8 million for 1997, an increase of $52.9
million, or 8.3%, over the prior year. The increase resulted from the
inclusion of the net sales of World Wide from its acquisition date and Power
Investments for the entire 1997 fiscal year. These sales increases were
partially offset by the absence in 1997 of orders for the initial stocking of
stores that occurred when the Company added a new retail customer and one of
its existing retail customers acquired a significant number of retail stores.
Gross Profit. Gross profit was $149.6 million for 1997, an increase of $22.8
million, or 18.0%, over the prior year. As a percentage of net sales, gross
profit increased to 21.7% for the year ended July 31, 1997 from 19.9% for the
prior year. This 1.8% increase as a percentage of net sales was primarily
attributable to the higher gross profit margins resulting from improved
productivity and cost reductions in the Company's OEM operations (1.0%) and
the Power Investments Acquisition and the World Wide Acquisition (together,
.8%). These profitability improvements and cost reductions represent the
benefits from the restructuring actions begun in 1996 and were partially
offset by start-up costs for the focus factories. The Company also launched a
family of new gear reduction starters that initially are generating lower
margins than those of the mature straight drive starters. The continued
replacement of the straight drive starter with the new gear reduction starter
is expected to have a less adverse effect on gross profit margin in 1998.
Selling, Engineering and Administrative Expenses. SE&A expenses were $89.1
million for 1997, an increase of $11.1 million, or 14.2%, over the prior year.
As a percentage of net sales, SE&A expenses increased to 12.9% for 1997 from
12.2% during the prior year. The .7% increase as a percent of net sales in
SE&A expense as a percent of net sales resulted primarily from higher SE&A
expense as a percent of net sales for costs for information systems (.4%), the
acquired companies (.2%) and start-up costs for the focus factories (.2%).
Operating Income. Operating income was $26.0 million for 1997, a decrease of
$14.7 million, or 36.2%, from the prior year. As a percent of net sales,
operating income decreased to 3.8% for the year ended July 31, 1997 from 6.4%
for the prior year. This decrease was attributable to the inclusion of $34.5
million of restructuring charges, as compared to restructuring charges of $8.1
million in 1996, as discussed above. Excluding the restructuring charges,
operating income was 8.8% of sales in 1997 and 7.7% in 1996.
Interest Expense. Interest expense was $38.8 million for 1997, an increase
of $11.4 million, or 41.7%, over the prior year. Approximately $5.3 million of
the increased interest expense was due to additional debt incurred to finance
acquisitions and approximately $6.1 million was due to increased borrowings to
fund working capital requirements.
Income Taxes. The Company had an income tax benefit of $3.0 million in 1997
as compared to income tax expense of $5.7 million for 1996. The tax benefit
was 28.1% of the loss from continuing operations before tax in 1997, and the
income tax expense was 43.1% of income from continuing operations before tax
for the prior year. Due to continuing tax planning initiatives, the Company
expects its effective tax rate to be approximately 38% in future years.
Loss From Discontinued Operations. The after-tax loss from discontinued
operations of $1.7 million for 1997 relates to the Company's plan to divest
its large bore diesel remanufacturing operations and its marine operations.
These operations were not part of the Company's core strategic focus. The loss
reflects the direct costs of production and identifiable SE&A expense expected
to be incurred by these businesses from the date the Company decided to
dispose of them until the expected disposal date, and a loss on disposal of
assets and an allocation of interest expense based on capital employed by the
business.
41
Net Income (Loss). Due to the factors noted above, the net loss was $14.3
million for 1997, compared to a loss of $4.8 million in the prior year.
Excluding restructuring charges and loss on discontinued operations, the
Company's net income for 1997 was $10.5 million and $10.7 million for 1996.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Net Sales. Net sales were $636.9 million for 1996, an increase of $63.4
million, or 11.1%, over the prior year. The increase resulted from the
inclusion of the net sales of the 1995 Acquisitions for the entire 1996 fiscal
year and the net sales of the Power Investments Acquisition for the last six
months of the 1996 fiscal year. Sales increases from these newly-acquired
subsidiaries were partially offset by decreased sales to GM as a result of
certain work actions at GM, GM's high inventory levels at the beginning of
1996, and an industry-wide softening of OEM heavy duty truck production.
Gross Profit. Gross profit was $126.8 million for 1996, an increase of $28.6
million, or 29.1%, over the prior year. As a percentage of net sales, gross
profit increased to 19.9% for the year ended July 31, 1996 from 17.1% for the
prior year. This 2.8% increase as a percentage of net sales was attributable
primarily to improved productivity and cost reductions in the OEM operations
(2.0%), as well as the higher gross profit margins of the businesses acquired
(.7%). These benefits were partially offset by decreased sales to GM which
negatively affected gross profit margins at certain of the Company's OEM
operations.
Selling, Engineering and Administrative Expenses. SE&A expenses were $78.0
million for 1996, an increase of $16.8 million, or 27.4%, over the prior year.
As a percentage of net sales, SE&A expenses increased to 12.2% for 1996 from
10.7% during the prior year. The increase in SE&A expenses as a percent of net
sales reflects the relatively higher SE&A expenses the acquired businesses
incurred in order to service the aftermarket.
Operating Income. Operating income was $40.7 million for 1996, an increase
of $3.7 million, or 9.9%, over the prior year. As a percentage of net sales,
operating income decreased slightly to 6.4% for the year ended July 31, 1996
from 6.5% for the prior year. This decrease was attributable to the inclusion
of restructuring charges of $8.1 million, as discussed above. Excluding the
restructuring charges, operating income was 7.7% of sales in 1996.
Interest Expense. Interest expense was $27.4 million for 1996, an increase
of $8.9 million, or 48.5% over the prior year. The increase was due primarily
to $5.5 million of interest on additional debt incurred to finance
acquisitions and $3.4 million of interest on increased borrowings to fund
working capital requirements.
Income Taxes. Income taxes were $5.7 million for 1996, a decrease of $2.1
million from the prior year. The Company's effective tax rate was 43.1% for
1996 and 42.3% for the prior year. The increase in the effective tax rate was
due, in part, to the inclusion of Power Investments and higher tax rates in
foreign operations.
Loss From Discontinued Operations. The after-tax loss from discontinued
operations of $10.6 million for 1996 relates principally to the Company's
Powder Metal Forge ("PMF") business. PMF manufactures products that are not
part of the Company's core business. This loss reflects the direct costs of
production and identifiable SE&A expense incurred by the PMF business, and
estimated losses from operations during a transition period from the date the
Company decided to dispose of PMF until production is relocated to the
seller's facility, as well as a loss on disposal of assets and an allocation
of interest expense based on capital employed by the business.
Net Income (Loss). Net loss was $4.8 million for 1996, an earnings decrease
of $11.8 million from the prior year. The decrease in net income was
attributable to the restructuring charges and the loss on discontinued
operations discussed above. Excluding loss from discounted operations and
restructuring charges, net income was $10.7 million in 1996.
42
QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth, for the periods shown, certain statements of
operations data for the Company:
FISCAL
1998
FISCAL 1996 QUARTER ENDED FISCAL 1997 QUARTER ENDED QUARTER
------------------------------------- ---------------------------------- ENDED
OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- ------- -------- ------- ------- ------- -------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net sales............... $156.7 $147.8 $165.3 $167.1 $169.8 $162.2 $177.7 $180.1 $209.0
Gross profit............ 31.1 28.3 34.3 33.2 38.4 31.6 38.1 41.5 38.1
SE&A.................... 17.8 17.5 21.8 20.9 23.3 19.7 22.7 23.3 20.9
Restructuring charges... -- 8.1 -- -- -- -- -- 34.5 --
Operating income
(loss)................. 13.3 2.7 12.5 12.3 15.1 11.8 15.4 (16.3) 17.2
Income (loss) from
continuing operations.. 3.9 (2.0) 2.2 1.7 2.8 0.9 2.5 (16.5) 3.1
Net income (loss)....... 3.0 (11.4) 2.0 1.6 0.3 0.8 2.3 (17.7) 3.1
Income (loss) from
continuing operations
per share.............. $ .22 $ (.11) $ .12 $ .10 $ .16 $ .05 $ .15 $ (.95) $ .18
Net income (loss) per
share.................. .17 (.65) .11 .09 .02 .05 .13 (1.03) .18
EBITDA.................. $ 17.6 $ 7.5 $ 17.2 $ 17.9 $ 20.4 $ 17.5 $ 20.9 $ (8.4) $ 21.9
Adjusted EBITDA......... 18.3 16.4 18.3 19.1 21.5 18.6 22.0 25.2 23.0
Cash flows from
operating activities... 15.2 (17.5) (13.1) 14.7 (6.5) 5.0 1.4 22.6 11.4
Cash flows from
investing activities... (6.7) (6.3) (53.6) (12.5) (10.2) (13.8) 0.3 (50.4) (7.4)
Cash flows from
financing activities... (7.7) 22.2 66.6 (0.3) 22.9 2.4 (1.3) 33.8 (5.1)
Ratio of earnings to
fixed charges.......... 2.0x -- (a) 1.4x 1.3x 1.5x 1.1x 1.4x -- (a) 1.5x
- --------
(a) The deficiency of earnings to fixed charges was $3.9 million and $24.8
million for the quarters ended January 31, 1996 and July 31, 1997,
respectively. Excluding restructuring charges, the ratio of earnings to
fixed charges would have been 1.6x and 1.9x, respectively.
The following table sets forth, for the periods shown, certain statement of
operations data for the Company, expressed as a percent of sales:
FISCAL
1998
FISCAL 1996 QUARTER ENDED FISCAL 1997 QUARTER ENDED QUARTER
-------------------------------- -------------------------------- ENDED
OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- ------- -------- ------- ------- ------- -------- ------- -------
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 19.8% 19.1% 20.7% 19.8% 22.6% 19.5% 21.4% 23.1% 18.2%
SE&A.................... 11.4% 11.8% 13.2% 12.5% 13.7% 12.2% 12.8% 12.9% 10.0%
Restructuring charges... 0.0% 5.5% 0.0% 0.0% 0.0% 0.0% 0.0% 19.2% 0.0%
Operating income
(loss)................. 8.5% 1.8% 7.5% 7.3% 8.9% 7.3% 8.7% (9.1)% 8.2%
Income (loss) from
continuing operations.. 2.5% (1.4)% 1.3% 1.0% 1.6% 0.6% 1.4% (9.2)% 1.5%
Net income (loss)....... 1.9% (7.7)% 1.2% 1.0% 0.2% 0.5% 1.3% (9.8)% 1.5%
EBITDA.................. 11.2% 5.1% 10.4% 10.7% 12.0% 10.8% 11.8% (4.7)% 10.5%
Adjusted EBITDA ........ 11.7% 11.1% 11.1% 11.4% 12.7% 11.5% 12.4% 14.0% 11.0%
The Company's business is moderately seasonal, as its major OEM customers
historically have one- to two-week summer shutdowns of operations during July.
In addition, the Company typically has shut down its own operations for one
week each July, depending on backlog, scheduled maintenance and inventory
buffers, as well as an additional week during the December holidays.
Consequently, the Company's second and fourth quarter results reflect the
effects of these shutdowns. The Company's gross profit as a percentage of
sales fluctuates with changes in sales volume, due to the fixed nature of
certain expenses. Gross profits is also impacted by fluctuations in the sales
mix between the Company's different business units. The Company's sales and
product mixes have fluctuated, and are expected to continue to fluctuate,
quarter to quarter.
43
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs include required debt service, working capital
needs and the funding of capital expenditures. The Company does not currently
have any significant maturities of long-term debt prior to 2006 other than the
Senior Credit Facility, any potential payments under the GM Contingent Note
and the 8% Subordinated Debenture. See "Description of Indebtedness." The
Company anticipates temporary additional working capital requirements for
increased inventories at its existing facilities in connection with the
relocation to focus factories.
The Company estimates that net proceeds from the Offerings will be
approximately $181.1 million, net of fees and related costs and assuming no
exercise of the over-allotment option in the Equity Offering. The net proceeds
will be used to repay (i) the World Note with a principal amount of $75.0
million at a price equal to 103% of the principal amount, (ii) the GM
Acquisition Note of $59.2 million, (iii) the Power Investments Seller Notes
and the A&B Seller Notes of in an aggregate of $11.8 million, (iv) the
Ballantrae Senior Bank Debt of $20.8 million and (v) the Ballantrae
Subordinated Debt of $9.3 million. Any accrued and unpaid interest on such
indebtedness will also be repaid with the proceeds of the Offerings. See "Use
of Proceeds."
In connection with the Offerings, the Company will amend and restate its
Senior Credit Facility to provide up to $180 million of revolving credit
availability. Each of the Company's domestic operating subsidiaries will be
parties to the Senior Credit Facility. The obligations under the Senior Credit
Facility of each domestic operating subsidiary will be unconditionally
guaranteed by each other domestic operating subsidiary and each of the Company
and its domestic subsidiaries which are holding companies.
Initially, the amount available to the Company for borrowing under the
Senior Credit Facility (the "Commitment Amount") will be $180 million, all of
which will be available for general corporate purposes including acquisitions
(with a sub-limit for letters of credit equal to the lesser of the Commitment
Amount at the time of issuance of a letter of credit and $30 million).
Beginning March 31, 2001, the Commitment Amount will decrease by $11.25
million at the end of each quarter thereafter through the quarter ending
December 31, 2004, at which time the Senior Credit Facility terminates. As of
October 31, 1997, after giving pro forma effect to the Transactions,
approximately $30.0 million in borrowings would have been outstanding under
the Senior Credit Facility, together with approximately $3.9 million in
outstanding stand-by letters of credit thereunder.
Cash interest expense for 1995, 1996 and 1997 was $10.3 million, $19.5
million and $30.8 million, respectively. The portion of total interest
represented by non-cash interest for the three years was $8.1 million, $7.9
million and $7.9 million for 1995, 1996 and 1997 respectively. Cash interest
expense for the three months ended October 31, 1996 and 1997 was $7.5 million
and $8.8 million, respectively. The portion of total interest represented by
non-cash interest for the three months ended October 31, 1996 and 1997 was
$1.9 million and $1.7 million, respectively. Interest payments under the
Company's indebtedness will continue to result in significant liquidity
requirements for the Company. Following the Offerings, all of the Company's
interest payments must be made in cash.
The Company's capital expenditures were $31.9 million in 1997 and are
expected to be $22.5 million in 1998. Capital expenditures were $5.7 million
for the three months ended October 31, 1997, compared to $8.9 million for the
three months ended October 31, 1996. Planned capital expenditures consist
primarily of new capacity to accommodate the introduction of several new
products, including additional gear reduction starters for automotive
applications and alternators with enhanced features for the medium and heavy
duty truck market, as well as production equipment for the Company's new focus
factories. Cost reduction programs account for a significant portion of
planned capital expenditures and include upgrades in machinery technology, new
quality standards and environmental compliance. The Company's ability to make
capital expenditures is subject to certain restrictions under the Senior
Credit Facility.
The Company expects that the purchase price and related costs and expenses
of its pending acquisition of 37% of the outstanding shares of SPRL, a
manufacturer of starters, alternators and related components based in
44
Hyderabad, India, to equal approximately $4.5 million during fiscal year 1998.
The Company granted put/call options in connection with the acquisitions of
Power Investments and World Wide that become exercisable in March 2001 for
Power Investments and November 2000 for World Wide. The exercise prices of the
put/call options are based on an earnings formula and cannot now be estimated.
See "Company History."
The Company's principal sources of cash to fund its liquidity needs will be
net cash from operating activities and borrowings under the Senior Credit
Facility. The Company's cash position increased to $10.0 million at year end
1997 compared to $3.4 million at year end 1996. Cash provided by operating
activities was $22.5 million in 1997 as compared to cash used in operating
activities of $684,000 in 1996. Non-cash items in 1997, including $22.3
million of depreciation and amortization and the $31.8 million restructuring
reserve, more than offset the Company's net loss and increased working capital
requirements. From July 31, 1996 to July 31, 1997, the Company's inventory
increased by $40.8 million. The increase in inventory was attributable
primarily to the Company's expanding aftermarket business, including inventory
associated with the World Wide acquisition as well as higher levels of
finished goods inventory required to service aftermarket customers. Cash used
in investing activities of $74.1 million in 1997 was composed of $42.4 million
for the acquisition of World Wide and $31.9 million of capital expenditures.
Cash provided by financing activities in 1997 was $57.8 million, as debt
issuances exceeded debt repayments. The components of net cash from operating
activities are detailed in the Consolidated Financial Statements and related
notes.
The Company's cash position decreased to $8.6 million at October 31, 1997
compared to $11.1 million at October 31, 1996. Cash provided by operations for
the three months ended October 31, 1997 was $11.4 million compared to cash
used in operating activities of $6.5 million for the three months ended
October 31, 1996. For the three months ended October 31, 1997 cash was
provided by a working capital decrease of $.2 million, as well as net income
of $3.1 million, non-cash expenses of $4.6 million, and depreciation and
amortization of $4.7 million. For the three months ended October 31, 1996, net
income of $.3 million, non-cash expenses of $7.1 million and depreciation and
amortization of $5.3 million were offset by a working capital increase of
$12.4 million and deferred financing cost of $6.7 million. Cash used in
investing activities was $7.4 million for the three months ended October 31,
1997 compared to $10.2 million for the three months ended October 31, 1996.
The decrease in cash used for financing activities was primarily due to
reductions in property, plant, and equipment expenditures. Financing
activities used $5.1 million during the three months ended October 31, 1997
and provided $22.9 million during the three months ended October 31, 1996.
Financing activities for the three months ended October 31, 1997 consisted
primarily of repayment of borrowings under the Senior Credit Facility and for
the three months ended October 31, 1996 included the net impact of the
issuance of the Senior Subordinated Notes and the use of the proceeds
therefrom.
Under the terms of the GM Acquisition, GM retained the liability for post-
retirement benefits earned by the Company's employees while employed by GM. In
addition, GM retained the liability for post-retirement benefits for all of
the Company's employees that return to GM pursuant to contractual arrangements
at the time of the GM Acquisition. Since relatively senior employees have
returned to GM and have been replaced by the Company with employees who have
later retirement dates, the Company's actual cash expenditures for post-
retirement benefits will be significantly less than the amount recorded as an
expense over the next ten years. The excess of the amount accrued over the
cash paid for post-retirement benefits during 1995, 1996 and 1997 was $4.4
million, $3.8 million and $4.5 million, respectively.
The Company believes that cash generated from operations, together with the
amounts available under the Senior Credit Facility, will be adequate to meet
its debt service requirements, capital expenditures and working capital needs
for at least the next twelve months, although no assurance can be given in
this regard. The Company's future operating performance and ability to extend
or refinance its indebtedness will be dependent on future economic conditions
and financial, business and other factors that are beyond the Company's
control.
EFFECTS OF INFLATION
The Company believes that the relatively moderate inflation over the last
few years has not had a significant impact on the Company's revenues or
profitability and that it has been able to offset the effects of inflation by
45
increasing prices or by realizing improvements in operating efficiency. The
Company has provisions in many of its contracts which provide for the pass
through of fluctuations in the price of certain raw materials, such as copper
and aluminum.
FOREIGN SALES
Approximately 15.9%, 12.4% and 21.1% of the Company's 1995, 1996 and 1997
net sales, respectively, were derived from sales made to customers in foreign
countries. Because of these foreign sales, the Company's business 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 Consolidated Financial Statements included
elsewhere in this Prospectus. See "Risk Factors--Foreign Markets."
46
BUSINESS
GENERAL
The Company designs, manufactures, remanufactures and distributes
electrical, powertrain/drivetrain and related components for automobiles and
light trucks, medium and heavy duty trucks and other heavy duty vehicles. The
Company's products include starters, alternators, engines, transmissions,
traction control systems and fuel systems. The Company serves the aftermarket
and the OEM market, principally in North America as well as in Europe, Latin
America and Asia-Pacific. Net sales, EBITDA, Adjusted EBITDA and net loss for
fiscal year 1997 were $689.8 million, $50.4 million, $87.3 million and $14.3
million, respectively. Excluding the adjustment for the restructuring charges,
net income for fiscal year 1997 would have been $10.5 million. For the same
period, the aftermarket accounted for approximately 45.2% of the Company's net
sales and 62.8% of Adjusted EBITDA, with the OEM market accounting for the
balance.
The Company believes that it is the largest manufacturer and remanufacturer
in North America of (i) starters for automobiles and light trucks (including
sport-utility vehicles, minivans and pickup trucks) and (ii) starters and
alternators for medium and heavy duty vehicles. The Company's products are
principally sold or distributed to OEMs for both original equipment
manufacture and aftermarket operations, as well as to warehouse distributors
and retail automotive parts chains. Major customers include GM, GM SPO,
Navistar, Caterpillar, Freightliner, PACCAR, Auto Zone, Cummins, Western Auto,
Ford, Detroit Diesel, Volvo Trucks, Mack, Pep Boys, Advance Auto and O'Reilly
Automotive.
The Company sells its products principally under the "Delco Remy" brand name
and other major brand names worldwide. In connection with the GM Acquisition
(as defined), the Company obtained perpetual rights to the "Delco Remy" brand
name, which was first used in 1918. The Company also received the right to use
"Delco Remy" as a corporate name until 2004 and the "Remy" name in perpetuity.
In addition, GM entered into a long-term contract to purchase from the Company
substantially all of its North American requirements for automotive starters
until 2004 and its U.S. and Canadian requirements for heavy duty starters and
alternators until 2000. GM also entered into a distribution agreement to sell
the Company's aftermarket products through the GM SPO distribution system, the
term of which extends until 2009 for automotive products and until 1998 for
heavy duty products. See "Risk Factors--Dependence on General Motors" and
"Business--Customers."
CVC and Harold K. Sperlich, former president of Chrysler Corporation,
together with a subsidiary of MascoTech and certain senior management of the
Former GM Division, formed the Company for the purpose of acquiring the assets
of the automotive starter and the heavy duty starter and alternator businesses
of the Former GM Division. Upon consummation of the Offerings and the other
Transactions, CVC, management of the Company and other existing stockholders
of the Company will beneficially own approximately 82.1% of the Company's
outstanding Common Stock (73.8% of the voting power), and will be able to
control the Company and elect its Board of Directors. See "Dilution" and
"Certain Transactions."
The Original Investors (as defined) in the Company have received a
substantial realized and unrealized return on their investment in the Company.
For details regarding such investment and return, see "Certain Transactions."
Since the GM Acquisition, the Company has completed five strategic
acquisitions, substantially increasing the Company's aftermarket operations,
and entered into two international joint ventures. The Company is also in the
process of completing the strategic acquisition of Ballantrae, which will
expand the Company's drivetrain product position. Through Ballantrae's wholly
owned subsidiary, Tractech, the Company will offer high quality traction
control systems to heavy duty OEMs and the aftermarket. These acquisitions and
joint ventures have broadened the Company's product line, expanded its
remanufacturing capability, extended its participation in international
markets and increased its penetration of the retail automotive parts channel.
As a result of these acquisitions and joint ventures and the Company's focus
on increasing its participation in the aftermarket, the Company's reliance on
GM has declined since the Company's formation. Net sales to customers other
than GM increased from 41.0% in fiscal year 1995 to 56.3% in fiscal year 1997.
47
The Company's expanding aftermarket business benefits from the non-
deferrable nature of the repairs for which many of the Company's products are
used. Additionally, the Company's aftermarket business benefits from the
design, manufacturing and technological expertise of the Company's OEM
operations. This OEM expertise provides the Company with advantages over many
of its aftermarket competitors. The Company believes that its participation in
both OEM and aftermarket businesses and its diversified customer base reduce
its exposure to the cyclicality of the automotive industry. The Company's
growth strategy is designed to capitalize on its position as a consolidator in
the large and highly fragmented remanufacturing aftermarket.
GROWTH STRATEGY
The Company plans to continue to increase revenues and profitability of its
aftermarket and OEM businesses through a strategy of internal growth and
growth through acquisitions. Key elements of the Company's growth strategy
include:
INCREASING AFTERMARKET PRESENCE
Strengthening Customer Relationships. The Company intends to increase its
sales to new and existing customers by capitalizing on its balanced coverage
of the key channels of aftermarket distribution and its competitive strengths
as an OEM supplier. The Company plans to strengthen its customer relationships
by (i) continuing to expand its product offerings, (ii) capitalizing on the
expansion of the national automotive retail parts chains and warehouse
distributors that are customers of the Company, (iii) meeting the increasing
demands of OEMs and their dealer networks for high quality remanufactured
units, which enable them to reduce warranty and extended service costs, and
(iv) growing sales of existing and new product lines to OEM dealer networks as
dealers continue to capture an increasing percentage of vehicle repairs, due
to longer warranty and service programs and growing vehicle complexity.
Additionally, with the recent acquisition of World Wide, the Company expanded
its product line and now offers a full line of starters and alternators for
domestic and import vehicles. The acquisition also has improved the Company's
distribution capabilities, which now include a nationwide overnight delivery
service.
Consolidating the Fragmented Aftermarket. The portion of the aftermarket in
which the Company participates is large and highly fragmented, with most
participants being small, regional companies offering relatively narrow
product lines. Although the Company believes that it is the largest
manufacturer and remanufacturer of aftermarket starters and alternators in
North America, its sales of these products account for less than 12% of this
market. Consolidation of the aftermarket is occurring as many competitors are
finding it difficult to meet the increasing quality, cost and service demands
of customers, who, in turn, are seeking to rationalize their supplier base.
With its OEM capabilities, remanufacturing expertise, full product line,
greater access to "cores" and ability to capitalize on economies of scale, the
Company is well positioned to benefit from the consolidation of the
aftermarket.
EXPANDING GLOBALLY
The Company is expanding its international operations in order to (i)
benefit from the trend toward international standardization of automotive and
heavy duty vehicle platforms and (ii) participate in rapidly growing foreign
markets. The Company has recently been awarded new business by GM, Volkswagen,
Mercedes Benz, Ford and Caterpillar in Brazil; Opel in Europe; Daewoo Motors
in India (in connection with the Company's pending strategic alliance in
India); and Mercedes Benz, Volvo Trucks, John Deere and Dina in Mexico. The
Company intends to supply its existing OEM customers on a global basis as they
expand their operations and require local supply of component parts that meet
their demands for quality, technology, delivery and service. The Company
believes that its global expansion will enable it to gain new international
OEM customers who will also require local production of high quality products.
In addition, the expansion of the Company's OEM business into international
markets has provided the Company with the infrastructure necessary to develop
an aftermarket presence in these countries. The Company has established
manufacturing operations and strategic ventures in Hungary, Korea and Mexico,
and plans to complete a strategic alliance in India and a joint venture in
Brazil in fiscal year 1998. The acquisition of Ballantrae will provide the
Company with a European manufacturing plant which has been in operation since
1983. Aided by this facility, Ballantrae has
48
developed strong relationships with European customers for traction control
systems, especially in the market for construction equipment.
INTRODUCING TECHNOLOGICALLY ADVANCED NEW PRODUCTS
As a Tier 1 OEM supplier, the Company continues to provide technologically
advanced products by regularly updating and enhancing its product line. Since
the GM Acquisition, the Company has (i) completed the introduction of a new
family of gear reduction starters that will replace all straight drive
starters in GM vehicles by the end of the 1998 model year and (ii) introduced
several longer-life heavy duty alternators. The Company is also developing a
small gear reduction starter specifically designed for application on world
car platforms. These new products underscore the Company's commitment to
developing state-of-the-art products that address the higher output, lower
weight and increased durability requirements of OEM customers.
OPERATING STRATEGY
The Company's operating strategy is designed to improve manufacturing
efficiency, reduce costs and increase productivity while continuing to achieve
the highest levels of product quality. Key elements of this operating strategy
include:
"FOCUS" FACTORIES TO DRIVE MANUFACTURING EXCELLENCE
The Company is shifting its OEM production from old, vertically-integrated
manufacturing plants to new, smaller and more efficient "focus" factories. The
Company's focus factories generally produce one product line in a plant
designed to facilitate lean manufacturing techniques. The Company has
successfully launched three new focus factories since 1996. When the currently
planned shift to focus factories is completed, the Company plans to occupy six
focus factories and expects to have reduced its floor space for OEM production
by more than 70%. The Company believes that the benefits of the focus
factories include reduced overhead costs, enhanced productivity, increased
product quality and lower inventories.
PRODUCTIVITY IMPROVEMENTS
In conjunction with its emphasis on focus factories, the Company continues
to work with its local union representatives to establish best-in-class work
practices, such as reducing the number of job classifications per focus
factory and implementing team-based manufacturing processes. Since the GM
Acquisition, employee productivity has increased by 33%. The Company's labor
contract with the UAW contains provisions that are expected to permit the
Company to continue to achieve productivity improvements in the existing and
new focus factories. The increased productivity achieved since the GM
Acquisition is due primarily to continuous improvement initiatives and the
significant number of employees who have exercised their flowback rights.
PRODUCT QUALITY AND CONTINUOUS IMPROVEMENT
In July 1997, the Company received one of the prestigious Supplier of the
Year awards from GM, an award given to fewer than 1% of all GM suppliers. The
Company's commitment to product quality and continuous improvement is further
evidenced by the QS9000 certification received by nine of its manufacturing
and remanufacturing facilities in 1997. The Company expects that the remainder
of its manufacturing and remanufacturing facilities will receive QS9000
certification by the end of fiscal year 1998. In addition, the Company's
powertrain/drivetrain operations that remanufacture products for Ford have
received the Q-1 rating, Ford's highest quality rating, and the Company is
Ford FAR in five of the seven Canadian provinces. Global purchasing has
further enhanced the Company's continuous improvement efforts. The Company is
utilizing its international ventures to develop new, lower cost sources of
materials and is consolidating its vendor base to fewer, more competitive
suppliers.
ACQUISITION OF BALLANTRAE
Pursuant to the Ballantrae Acquisition Agreement, the Company will acquire
all of the capital stock of Ballantrae in a merger of Ballantrae and a
subsidiary of the Company in which Ballantrae will be the surviving
49
corporation. The aggregate cost will be $52.8 million (including assumed debt
and the estimated working capital adjustment and fees and expenses of
Ballantrae). Ballantrae operates through two subsidiaries: Tractech, a leading
producer of traction control systems for heavy duty OEMs and the aftermarket;
and Kraftube, Inc., a tubing assembly business which sells products to
compressor manufacturers for commercial air conditioners and refrigeration
equipment. In fiscal year 1997, Tractech accounted for 70% of Ballantrae's
$37.6 million of net sales. The Company will exchange shares of its Common
Stock with a value (at the initial public offering price in the Equity
Offering) of approximately $22.1 million for the equity of Ballantrae and will
repay approximately $29.7 million of Ballantrae's debt. The Common Stock of
the Company received by Ballantrae's existing stockholders in the merger will
be subject to resale restrictions under applicable securities laws but will
benefit from piggyback registration rights. The merger is expected to be
completed at or prior to the consummation of the Offerings. The Company is
obligated to pay the expenses incurred by Ballantrae in connection with the
pending acquisition, whether or not the acquisition is consummated.
Approximately $30 million of the net proceeds of the Offerings will be used to
repay certain indebtedness of Ballantrae. Any damages which the Company may
suffer which result from a breach of the Ballantrae Acquisition Agreement will
be subject to a $10 million cap and the Company will only be able to recover a
portion of its damages from CVC and James R. Gerrity (and with respect to each
of them, only on a pro rata basis). The Company's acquisition of Ballantrae
strengthens the Company's overall market position by (i) adding traction
control systems to the Company's range of drivetrain products, (ii) increasing
sales to existing heavy duty OEM customers and (iii) expanding the Company's
customer base. The acquisition is expected to be completed at or prior to the
consummation of the Offerings. See "Risk Factors--Acquisition of Ballantrae;
Conflicts of Interest," "Company History" and "Certain Transactions."
INDUSTRY OVERVIEW
In general, the Company's business is influenced by the underlying trends of
the automotive industry. The Company's focus on expanding its remanufacturing
capabilities, however, heightens the importance of the aftermarket.
Aftermarket. The aftermarket consists of the production and sale of both new
and remanufactured parts used in the maintenance and repair of automobiles,
trucks and other vehicles. Remanufacturing is a process through which used
components ("cores") are disassembled into their subcomponents, cleaned,
inspected, tested, combined with new subcomponents and reassembled into
finished products. A remanufactured product can be produced at lower cost than
a comparable individually repaired unit due to effective salvage technology
methods, high volume precision manufacturing techniques and rigorous
inspection and testing procedures. The ability to procure cores is critical to
the remanufacturing process. See "Business--Manufacturing and Facilities."
Aftermarket parts are supplied principally through three distribution
channels: (i) car and truck dealers that obtain parts either through an OEM
parts organization (e.g., GM SPO, Ford Parts & Service, Chrysler Mopar,
Navistar, etc.) or directly from an OEM-authorized remanufacturer; (ii) retail
automotive parts chains and mass merchandisers; and (iii) wholesale
distributors and jobbers who supply independent service stations, specialty
and general repair shops, farm equipment dealers, car dealers and small
retailers.
The Company believes that the aftermarket has been and will continue to be
impacted by the following trends: (i) the increasing number and average age of
vehicles in use and the number of miles driven annually; (ii) the increasing
demands of customers that their aftermarket suppliers meet high quality
standards; (iii) the increasing use of remanufactured parts for OEM warranty
and extended service programs; (iv) the growth and consolidation of large
retail automotive parts chains; and (v) particularly with respect to many of
the Company's products, the increasing engine output and durability demands
related to the high temperatures at which engines operate.
According to R. L. Polk, an independent provider of motor vehicle and
consumer marketing statistics, as of 1996 there were approximately 198 million
cars and light trucks registered in the United States, as compared with 162
million cars and light trucks in 1986. The average age for cars and light
trucks in 1996 was 8.5 years, as compared with an average car age of 7.9 years
in 1986.
50
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. See "Business--Growth Strategy."
OEM Market. The OEM market consists of the production and sale of new
component parts for use in the manufacture of new vehicles. The OEM market
includes two major classes of customers: (i) automobile and light truck
manufacturers; and (ii) medium and heavy duty truck and engine manufacturers
and other heavy duty vehicle manufacturers.
The OEM market has been impacted by recent fundamental changes in the OEMs'
sourcing strategies. OEMs are consolidating their supplier base, demanding
that their suppliers provide technologically advanced product lines, greater
systems engineering support and management capabilities, just-in-time
sequenced delivery and lower system costs. As a result, each OEM has selected
its own preferred suppliers. OEMs are increasingly requiring that their
preferred suppliers establish global production capabilities to meet their
needs as they expand internationally and increase platform standardization
across multiple markets.
OEMs continue to outsource component manufacturing of non-strategic parts.
Outsourcing has taken place in response to competitive pressures on OEMs to
improve quality and reduce capital outlays, production costs, overhead and
inventory levels. In addition, OEMs are increasingly purchasing integrated
systems from suppliers who provide the design, engineering, manufacturing and
project management support for a complete package of integrated products. By
purchasing complete systems, OEMs are able to shift design, engineering and
product management to fewer and more capable suppliers. Integrated systems
suppliers are generally able to design, manufacture and deliver components at
a lower cost than the OEMs due to (i) their lower labor costs and other
manufacturing efficiencies, (ii) their ability to spread research and
development and engineering costs over products provided to multiple OEMs and
(iii) other economies of scale inherent in high volume manufacturing such as
the ability to automate and leverage global purchasing capabilities.
PRODUCTS
Aftermarket. The Company's aftermarket product line includes a diverse array
of remanufactured and new products sold as replacement parts under the "Delco
Remy" brand name or under a private-label brand name specified by the OEM or
the automotive parts retailer. The Company remanufactures parts for both
domestic and imported vehicles.
Products remanufactured by the Company include starters, alternators,
engines, fuel injectors, injection pumps and turbo chargers (fuel systems),
transmissions, torque converters, water pumps, rack and pinions, power
steering pumps and gears and clutches. The Company also remanufactures
subcomponents, such as automotive armatures, rotors and solenoids, as well as
component parts shipped in bulk ("kits") for future assembly. These
subcomponents are either used internally in the remanufacturing process by the
Company or sold to outside customers.
OEM. The Company's starters are used in all cars and trucks manufactured by
GM in North America (except Saturn and Geo). The Company manufactures two
types of starters: straight drive starters and gear reduction starters. Since
the beginning of 1994, the Company has been transitioning its production line
from
51
straight drive starters to more technologically advanced gear reduction
starters. For the 1997 model year, the Company's gear reduction starters were
used on 44% of GM's North American automotive platforms (other than Saturn and
Geo). The balance of GM North American automotive platforms (other than Saturn
and Geo) will be converted to the Company's gear reduction starters by the end
of the 1998 model year, at which time the Company expects to discontinue OEM
production of straight drive starters. The Company's gear reduction starters
are globally competitive and offer greater output at lower weight than
comparable straight drive designs. For example, the Company's principal PG-260
gear reduction starter offers the highest power to mass ratio in the industry,
producing the same power at 7.7 pounds as a comparable straight drive design
weighing 13.6 pounds. The Company has begun development of a small gear
reduction starter that will enable the Company to offer its OEM customers an
application on their world car platforms. Reduced component weight is
important to OEMs, as total vehicle weight is a critical factor in each OEM's
ability to achieve federal Corporate Average Fuel Economy standards (CAFEs).
The Company manufactures a full line of heavy duty starters and alternators
for use primarily with large diesel engines. The Company's starters and
alternators are specified as part of the standard electrical system by most
North American heavy duty truck and engine manufacturers. The Company's
starters cover a broad range of torque and speed requirements. The Company
manufactures a full line of alternators, some of which utilize premium design
features that yield increased durability and a longer service life. Certain of
the Company's automotive starters are also currently being produced under
technology licenses by manufacturers in China and India and by the Company's
joint ventures in Mexico and Korea.
The Company has recently developed several new products for heavy duty
applications, including a high output, premium heavy duty brushless alternator
for high vibration applications; a new large frame alternator designed to meet
the increasing demands in the upper power ranges of new heavy duty vehicles;
and a small heavy duty alternator for use in low output, high durability and
severe environmental applications, which the Company expects will be used
principally for agricultural and construction vehicles. The Company's OEM
customers and major truck fleet operators designate it as an electrical system
supplier that provides value-added systems such as the "Road Gang." The Road
Gang system includes a premium starter and brushless alternator produced by
the Company and premium batteries produced by GM and offered by the Company
under a long-term agreement with GM. Engineered as a package, these products
provide increased performance, reliability and durability.
Ballantrae's Tractech subsidiary produces traction control systems for use
in construction, industrial and agricultural equipment and in medium duty
trucks. The traction control systems business combines valuable product
engineering skills with strong machining and fabrication capabilities to
manufacture products with custom designed applications.
Quality Standards. The Company is required to meet numerous quality
standards in order to qualify as a supplier to major OEMs and their dealer
networks, as well as certain automotive parts retailers. The Company has
achieved significant recognition by its customers for its continuous
commitment to quality. In July 1997, the Company received one of the
prestigious Supplier of the Year awards from GM, an award given to fewer than
1% of all GM suppliers. The Company's aftermarket operations that produce
products for Ford have received the Q1 rating, which is Ford's highest quality
rating. Moreover, the Company is a Ford FAR in five of the seven Canadian
provinces. The Company also has been awarded Navistar's highest quality rating
for its engine remanufacturing operations. In addition, the Company has
received quality awards from certain of its other customers, including
Caterpillar, Cummins, OshKosh and Teledyne.
Ford, Chrysler and GM have initiated quality standards (QS9000) applicable
to suppliers such as the Company. International and domestic automobile and
truck manufacturers developed the QS9000 standards to ensure that their
suppliers meet consistent quality standards that can be independently audited.
These quality standards, which are required by customers to be in place by
December 1997, impose processes and procedures in addition to those in effect
prior to December 1997. Management also believes that these standards may have
the effect of accelerating consolidation in the remanufacturing industry, as
smaller remanufacturers may be
52
unable to meet or afford the cost of complying with these new quality
standards. The Company has received QS9000 certification at nine of its
manufacturing and remanufacturing facilities, and expects the balance to be
certified by the end of fiscal 1998.
Ballantrae's traction control systems unit has received several quality
awards, has been designated a Caterpillar "Certified Supplier" in every year
since 1985 and its facility in Ireland holds an ISO9002 certification.
Engineering and Development. The Company's engineering staff works
independently and with OEMs to design new products, improve performance and
technical features of existing products and develop methods to lower
manufacturing costs. The Company's engineering staff includes application
engineers, manufacturing engineers and advanced engineers. Application
engineers are assigned to various platforms or geographic regions to work
directly with customers on product design changes and corrective actions.
Manufacturing engineers are responsible for the planning, layout, design,
equipment selection and global implementation of production capacity for the
Company's domestic and foreign manufacturing facilities. Advanced engineers
work in conjunction with the customer's forward planning or advanced
powertrain engineers on product design and development for products with a
five to ten year planning horizon.
In support of its engineering efforts, the Company has formed technical
alliances with a select number of engineering and technology firms to identify
long-term engineering advances and opportunities. In January 1996, the Company
entered into a joint development agreement with SatCon Technology Corporation
with the goal of developing an alternator with substantially higher power
output than the current generation of alternators. The Company has also formed
technical alliances with EcoAir Corp. and Arthur D. Little to support the
Company's advanced research and development of starters and alternators.
CUSTOMERS
Aftermarket. The Company's principal aftermarket customers include OEM
dealer networks of GM, Navistar, Ford, Freightliner, Caterpillar and PACCAR
and leading automotive parts retain chains such as Auto Zone, Western Auto,
Pep Boys, Advance Auto, O'Reilly Automotive and Discount Auto. Sales to GM SPO
and Navistar accounted for approximately 23.8% and 15.2%, respectively, of the
Company's 1997 pro forma aftermarket net sales. No other customer accounted
for more than 10% of aftermarket sales. The Company's products are also used
for warranty replacement under procedures established by certain of the
Company's OEM customers.
In connection with the GM Acquisition, the Company entered into a long-term
agreement pursuant to which it designated GM, through GM SPO, as its exclusive
distributor of "Delco Remy" brand remanufactured automotive and heavy duty
starters and alternators within North America to specified customers,
including certain GM dealers, direct GM accounts, certain warehouse
distributors and, with respect to automotive products, certain retail chains.
In consideration of its being granted the foregoing exclusive distribution
rights, GM agreed to purchase from the Company 100% of its requirements for
automotive starters and heavy duty starters and alternators for sale in the
aftermarket and has further agreed not to sell any competitive products in the
aftermarket channels specified above during the term of the distribution
agreement. Sales to GM SPO under the distribution agreement accounted for
approximately 23.8% of the Company's aftermarket 1997 pro forma net sales.
With respect to heavy duty starters and alternators, the term of the current
agreement will end on July 31, 1998. As to automotive starters, the agreement
terminates on July 31, 2009. The agreement, with respect to either heavy duty
or automotive products, may be terminated prior to the end of the applicable
term (i) by mutual agreement of the parties, (ii) by either party upon a
material breach by the other party, (iii) by the Company if GM fails to
achieve certain goals and objectives for reasons other than a general decline
in the economy and (iv) by GM to the extent the Company fails to meet certain
quality standards. See "Risk Factors--Dependence on General Motors."
53
Ballantrae's traction control systems are offered on an aftermarket basis
for sport utility vehicles ("SUV") through independent wholesale distributors
for installation by the end user after the original vehicle purchase.
Aftermarket sales represent approximately 20.6% of Tractech's total sales.
OEM. The Company's principal customers in its OEM automotive business are
GM's North American Operations and various GM International affiliates, who
collectively accounted for substantially all of the Company's OEM 1997 pro
forma automotive starter sales, approximately 50.7% of total OEM 1997 pro
forma net sales and approximately 28.3% of total 1997 pro forma net sales. No
other customer accounted for more than 10% of such OEM net sales. The GM
International affiliates to which the Company sells products include GM
Brazil, GM Holden (Australia), GM Mexico and Isuzu. Beginning with the 2001
model year, the Company will also sell products to GM Europe. Remy Korea, a
joint venture in which the Company has a 50% interest, sells automotive
starters using the Company's technology to Daewoo Motors, Kia Motors, Asia
Motors and Ssangyong Motors. The Company will also sell automotive starters to
Opel in Europe and, through its licensee, to Daewoo Motors in India.
Principal customers of the Company's heavy duty OEM business include
Navistar, Freightliner, Cummins, Caterpillar, PACCAR, Detroit Diesel, GM,
Ford, Mack and Volvo Trucks, with the top ten customers accounting for
approximately 52.4% of heavy duty pro forma net sales in 1997. The Company has
long-term agreements, with terms typically ranging from three to five years,
to supply starters and alternators to GM, Navistar, Freightliner, PACCAR,
Cummins, Volvo Trucks and Mack. In addition, the Company is the specified
supplier of heavy duty starters and alternators for trucks manufactured for
several major North American truck fleet operators, including Penske Truck
Leasing, Ryder System, Inc., Yellow Freight System and J.B. Hunt Transport.
Pursuant to long-term supply agreements, GM has agreed to purchase from the
Company 100% of its North American automotive starter requirements (other than
Saturn and Geo) and 100% of its U.S. and Canadian requirements for heavy duty
starters and alternators, in each case with respect to the Company's existing
product line as of August 1994. GM's commitments to purchase such products
from the Company in the future are subject, however, to the Company remaining
competitive as to technology, design and price. Nonetheless, GM may not
terminate the automotive starter supply agreement for failure of the Company
to be price, technology or design competitive prior to July 31, 2001. GM's
obligations to purchase automotive starters and heavy duty starters and
alternators from the Company terminate on July 31, 2004 and 2000,
respectively, except for automotive products released in 1996 and 1997, for
which GM's obligation will terminate on July 31, 2006 and 2007, respectively.
GM may cancel either agreement in the event that 35% of the Company's voting
shares become owned, directly or indirectly, by another manufacturer of
passenger cars or light trucks. During the term of the relevant supply
agreement, GM has granted the Company the right to bid on starter and
alternator supply contracts for GM's operations worldwide. See "Risk Factors--
Dependence on GM."
Ballantrae's principal customers for traction control systems include OEMs
of construction, industrial and agricultural equipment and medium duty trucks.
Ballantrae's principal traction control systems customers include Caterpillar,
John Deere, Eaton, Dana, Rockwell and Clark Hurth.
The Company employs its own direct sales force, which develops and maintains
sales relationships with major North American truck fleet operators as well as
its OEM customers worldwide. These sales efforts are supplemented by a network
of field service engineers and product service engineers.
MANUFACTURING AND FACILITIES
Aftermarket. The Company's aftermarket business has operations located
principally in 33 production facilities and seven warehouses in the United
States and Canada.
In its remanufacturing operations, the Company obtains used starters,
alternators, engines and related components, commonly known as cores, which
are sorted by make and model and either placed into immediate production or
stored until needed. During remanufacturing, the cores are completely
disassembled into their
54
component parts. Components which can be incorporated into the remanufactured
product are thoroughly cleaned, tested and refinished. All components subject
to major wear as well as those which cannot be remanufactured are replaced by
new components. The unit is then reassembled into a finished product.
Inspection and testing are conducted at various stages of the remanufacturing
process, and each finished product is inspected and tested on equipment
designed to simulate performance under operating conditions.
The majority of the cores remanufactured by the Company are obtained from
customers in exchange for remanufactured units and are credited against the
purchase prices of these units. When the Company has an insufficient number of
components from salvageable cores, the Company's remanufacturing operations
may purchase new parts from the Company's OEM operations. Core prices
fluctuate on the basis of several economic factors, including market
availability and demand and core prices then being paid by other
remanufacturers and brokers.
OEM. The Company's OEM business has seven principal manufacturing
operations, two in Meridian, Mississippi and five in Anderson, Indiana. The
Company has announced its intention to close its two facilities in Meridian,
Mississippi by the end of the 1998 fiscal year, including one facility leased
from GM at the time of the GM Acquisition. The balance of the Company's OEM
facilities are located in Anderson, Indiana. Two of the Anderson facilities
are leased from GM and the Company plans to vacate these facilities by the end
of 1999. The Company is operating three new focus factories and intends to
have a total of six in operation by the end of 1999. These relocations are
expected to provide a reduction of over 70% in square footage from the
Company's existing plants to the focus factories due to streamlining of
manufacturing processes, phasing out of certain manufacturing equipment and
elimination of excess unutilized floor space or floor space used by GM in each
of the existing facilities. The restructuring reserve does not include the
startup costs the Company expects, based on its three prior focus factory
startups, to incur in connection with the three new focus factories. The
transition to focus factories adversely affected the Company's gross margins
in the first quarter of fiscal 1998. See "Risk Factors--Relocation of
Facilities."
The manufacturing process of the focus plants varies significantly from the
traditional process flow of existing plants. The Company utilizes a flexible
cell-based manufacturing approach to the production of all new and/or re-
engineered product lines within the focus plants as contrasted with the
existing vertically integrated, primarily synchronous process used in
traditional factories. The cell-based manufacturing system provides
flexibility by allowing efficient changes to the number of operations each
operator performs and is capable of both low- and high-volume production runs.
When compared to the more traditional, less flexible assembly line process,
cell manufacturing allows the Company to match its production output better to
customers' requirements while reducing required inventory levels and improving
quality.
The Company's focus plants generally produce one product line in a plant
design based on cell-based, semi-automated manufacturing utilizing kaizen
techniques. The focus plant process creates a team-based environment of
involved workers who better understand and control the manufacturing process.
In addition, the Company has worked with the Company's unions to reduce the
number of job classifications so that workers can be shifted among various
work areas as production demands dictate. The Company is presently expanding
lean manufacturing techniques to its aftermarket facilities.
Ballantrae's traction control systems manufacturing facilities are located
in the Detroit suburb of Warren, Michigan, and in Sligo, Ireland.
The Company utilizes frequent communication meetings at all levels of
manufacturing to provide training and instruction as well as to assure a
cohesive, focused effort toward common goals. The Company encourages employee
involvement in all production activity and views such involvement as a key
element toward the success of the Company.
55
COMPETITION
Aftermarket. The aftermarket is highly fragmented and competitive.
Competition is based primarily on quality of products, service, delivery,
technical support and price. The Company's principal aftermarket competitors
include Arrow, Automotive Parts Exchange (APE), Champion, Genuine Parts
(Rayloc), Motorcar Parts & Accessories (MPA), Prestolite and Unit Parts.
OEM. The automotive parts market is highly competitive. Competition is based
primarily on quality of products, service, delivery, technical support and
price. Most OEMs source parts from one or two suppliers. The Company competes
with a number of companies who supply automobile manufacturers throughout the
world. In the North American automotive market, the Company's principal
competitors include Nippondenso, Valeo, Mitsubishi and Bosch. GM purchases
automotive starters from the Company pursuant to its long-term supply
agreement with the Company. See "Business--Customers." Chrysler has eliminated
production of its own starters and currently purchases starters from
independent suppliers. Ford continues to produce certain parts for the
majority of its domestic and international applications and purchases the
remainder from independent suppliers.
The heavy duty parts market is characterized by one or two dominant
suppliers in each major geographic region of the world. No competitor has a
substantial share in all regions. In the North American heavy duty market,
where the Company is the largest manufacturer, the Company's principal
competitors include Prestolite, Nippondenso and Bosch.
EMPLOYEES
As of October 31, 1997, the Company employed 5,137 people, 859 of whom were
in management, engineering, supervision and administration and 4,278 of whom
were hourly employees. Of the Company's hourly employees, 2,068 are
represented by unions. In the United States, 1,477 of the Company's hourly
workers are represented by the UAW under an agreement between the Company and
the UAW, the applicable provisions of which were assumed by the Company in
connection with the GM Acquisition. In March 1997, the Company signed a new
master agreement with the UAW that stipulated an approximately 3.2% annual
wage and benefit increase (12.8% over the four year term of the agreement) for
the Company's UAW hourly employees. If employment levels and productivity
remain unchanged, the agreement with the UAW would cause the Company to
experience increases in wage and benefit costs of approximately 2% per year
over the next four years (which represents approximately $3.3 million in the
first such year). In addition, grow-in provisions under the new agreement with
the UAW will require the Company to move certain lower wage and benefit
employees to higher wage and benefit levels. Under provisions of the national
agreement, the UAW and the Company have recently developed a special program
of incentives for hourly employees who agree to leave the Company, the cost of
which is included in the restructuring charges for fiscal year 1997 described
below. Based on responses to this special incentive plan received to date, the
Company would, if no other cost reductions were realized, experience as a
result of the grow-in provision additional wage and benefit costs that
increase each year of the UAW contract to approximately $10.2 million annually
in additional costs from current levels by the fourth year. The Company
expects the continued implementation of the special incentive plan and other
planned cost reduction initiatives to substantially offset the effects of the
grow-in provision. If the responses to date to the special incentive plan were
reversed (which the Company considers unlikely) and the other cost-saving
initiatives were not implemented, the additional costs referred to above to
the Company from the grow-in provision would approximately double. There can
be no assurance that the Company will be able to effect cost reduction
initiatives (including the continued implementation of the special incentive
plan) to offset the effects of the grow-in provision or that the Company's
labor costs will not otherwise increase significantly, in which case the
Company's competitive position and results of operations would be adversely
affected. The agreement between the UAW and the Company expires on September
14, 2000 which will require negotiation of new agreements. See "Risk Factors--
Labor Negotiations."
56
As of October 31, 1997, 142 of the Company's 448 Canadian employees were
represented by the Canadian Auto Workers and 120 were represented by the
Metallurgists Unis d'Amerique. The agreements with these unions expire on
November 8, 1999 and September 30, 1998, respectively.
As of October 31, 1997, approximately 329 of Autovill's 499 employees were
affiliated with the Hungarian Steel Industry Workers Union. The agreement was
signed July 17, 1996 and is perpetual, subject to termination upon three
months' notice from either party.
The Company's other facilities are primarily non-union. The Company is
unaware of any current efforts to organize. There can be no assurance that
there will not be any labor union efforts to organize employees at facilities
that are not currently unionized.
Since the GM Acquisition, the Company has not experienced any organized work
stoppages. There can be no assurance, however, that any actions taken by the
Company, including the current restructurings, will not adversely affect the
Company's relations with its employees. At the present time, the Company
believes that its relations with its employees are good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General."
PATENTS, TRADEMARKS AND LICENSES
Pursuant to a Trademark Agreement between the Company and GM, GM has granted
the Company an exclusive license to use the "Delco Remy" trademark on and in
connection with automotive starters and heavy duty starters and alternators
until July 31, 2004, extendible indefinitely at the Company's option upon
payment of a fixed $100,000 annual licensing fee to GM. The Company has also
been granted a perpetual, royalty-free license to use the "Remy" trademark.
The "Delco Remy" and "Remy" trademarks are registered in the United States,
Canada and Mexico and in most major markets worldwide. GM has agreed with the
Company that, upon the Company's request, GM will register the trademarks in
any jurisdiction where they are not currently registered.
The Company has also been granted an exclusive license to use the "Delco
Remy" name as a tradename and corporate name worldwide until July 31, 2004
pursuant to a Tradename License Agreement between the Company and GM. In
addition, GM has granted the Company a perpetual license to use the "Remy"
name as a tradename and corporate name worldwide.
The Company owns and has obtained licenses to various domestic and foreign
patents and patent applications related to its products and processes. The
patents expire at various times over the next 16 years. While these patents
and patent applications in the aggregate are important to the Company's
competitive position, no single patent or patent application is material to
the Company.
RAW MATERIALS
Principal raw materials for the Company's business include bare copper
strap, insulated copper, aluminum castings, forgings, outer frames, nomex
paper, steel coils, steel bars, copper tube, copper wire, flat steel, coil
steel, bar steel, gray iron castings, ductile iron castings, copper cross-
section coils, magnets, steel shafts, steel cores, steel wire and molding
material. All materials are readily available from a number of suppliers, and
management does not foresee any difficulty in obtaining adequate inventory
supplies. The Company and GM have entered into a long-term worldwide
purchasing support agreement that allows the Company to purchase copper wire
and steel, which are used in the manufacture of starters sold to GM, at prices
that the Company believes generally to be lower than those that would
otherwise be obtainable by the Company. This agreement expires on July 31,
2004, or earlier, upon termination of the automotive and heavy duty OEM supply
agreements between the Company and GM. The Company generally follows the North
American industry practice of passing on to its customers the costs or
benefits of fluctuation in copper and aluminum prices on an annual or semi-
annual basis. See "Business--Customers."
57
BACKLOG
The majority of the Company's products are not on a backlog status. They are
produced from readily available materials and have a relatively short
manufacturing cycle. For products supplied by outside suppliers, the Company
generally purchases products from more than one source. The Company expects to
be capable of handling the anticipated 1998 sales volumes.
PROPERTIES
The world headquarters of the Company are located at 2902 Enterprise Drive,
Anderson, Indiana 46013. The Company leases its headquarters.
The following table sets forth certain information regarding manufacturing
and certain other facilities operated by the Company as of October 31, 1997.
The designation "F" indicates a focus plant. See "Business--Manufacturing and
Facilities."
OEM OR APPROX. OWNED/LEASE
LOCATION AFTERMARKET USE SQ. FT. EXPIRATION
- --------------- --------------- ------------------- ------- -----------
Anderson, IN Headquarters Office 70,000 2000
Anderson, IN OEM Manufacturing 597,000 2004
Anderson, IN OEM Manufacturing 430,000 2004
Anderson, IN(F) OEM Manufacturing 117,000 2001
Anderson, IN(F) OEM Manufacturing 51,000 2001
Anderson, IN(F) OEM Manufacturing 36,695 2006
Anderson, IN OEM Manufacturing 33,500 2007
Anderson, IN OEM/Aftermarket Testing 15,000 2001
Anderson, IN Aftermarket Warehouse 20,220 2000
Anderson, IN Aftermarket Warehouse 50,220 2000
Bay Springs, MS Aftermarket Manufacturing 73,000 2003
Budapest, Hungary Aftermarket Leased to 3rd Party 55,709 Owned
Chantilly, VA Aftermarket Manufacturing 120,000 2014
Edmonton, Canada Aftermarket Manufacturing 141,300 Owned
Etobicoke, Canada Aftermarket Manufacturing 114,120 2002
Findlay, OH Aftermarket Manufacturing 6,400 Owned
Franklin, IN Aftermarket Manufacturing 48,400 Owned
Franklin, IN Aftermarket Manufacturing 16,625 Owned
Franklin, IN Aftermarket Manufacturing 15,580 Owned
Gallatin, TN Aftermarket Manufacturing 20,000 Owned
Gallatin, TN Aftermarket Manufacturing 20,000 *
Heidelberg, MS Aftermarket Manufacturing 45,000 2003
Heidelberg, MS Aftermarket Manufacturing 5,000 2003
Indianapolis,IN Aftermarket Manufacturing 5,500 1999
Kaleva, MI Aftermarket Manufacturing 82,000 2000
Mansfield, TX Aftermarket Manufacturing 43,000 2000
Marion, MI Aftermarket Manufacturing 59,400 2000
Memphis, TN Aftermarket Warehouse 7,500 2002
Meridian, MS Aftermarket Office 2,400 2003
Meridian, MS Aftermarket Manufacturing 15,000 1998
Meridian, MS OEM Manufacturing 319,000 2004
Meridian, MS(F) OEM Manufacturing 68,000 2000
Meridian, MS Aftermarket Manufacturing 12,000 2003
Mezokovesd, Hungary Aftermarket Manufacturing 175,598 Owned
Mezokovesd, Hungary Aftermarket Warehouse 8,612 Owned
Peru, IN Aftermarket Manufacturing 30,000 2003
58
OEM OR APPROX. OWNED/LEASE
LOCATION AFTERMARKET USE SQ. FT. EXPIRATION
- ------------------- --------------- ------------- ------- -----------
Peru, IN Aftermarket Manufacturing 14,111 2003
Raleigh, MS Aftermarket Manufacturing 43,000 2003
Raleigh, MS Aftermarket Manufacturing 75,000 2003
Raleigh, MS Aftermarket Manufacturing 8,000 Own
Reed City, MI Aftermarket Manufacturing 92,000 2000
Reed City, MI Aftermarket Manufacturing 34,000 2000
Reed City, MI Aftermarket Manufacturing 26,000 2000
Reed City, MI Aftermarket Warehouse 7,350 1999
Reed City, MI OEM/Aftermarket Manufacturing 90,000 Owned**
and Office
San Luis Potosi,
Mexico OEM Manufacturing 37,000 2001
Sligo, Ireland OEM/Aftermarket Manufacturing 53,400 2018**
St. Laurent, Canada Aftermarket Warehouse 17,000 1997
Sylvarena, MS Aftermarket Manufacturing 1,300 *
Taylorsville, MS Aftermarket Manufacturing 27,000 2003
Toledo, OH Aftermarket Manufacturing 4,500 2000
Toronto, Canada Aftermarket Manufacturing 36,778 1997
Warren, MI OEM/Aftermarket Manufacturing 100,049 Owned**
and Office
Winchester, VA Aftermarket Warehouse 55,000 2000
Winchester, VA Aftermarket Office/Whse 55,000 2000
Winnepeg, Canada Aftermarket Manufacturing 38,000 Owned
- --------
* Leased on a month-to-month basis.
** Ballantrae facilities.
LEGAL PROCEEDINGS
From time to time, the Company is party to various legal actions in the
normal course of its business. The Company believes it is not currently party
to any litigation that, if adversely determined, would have a material adverse
effect on the Company's business, financial condition and results of
operations.
REGULATORY MATTERS
The Company's facilities and operations are subject to a wide variety of
federal, state, local and foreign environmental laws, regulations and
ordinances, including those related to air emissions, wastewater discharges
and chemical and hazardous waste management and disposal ("Environmental
Laws"). The Company's operations also are governed by laws relating to
workplace safety and worker health, primarily the Occupational Safety and
Health Act, and foreign counterparts to such laws ("Employee Safety Laws").
The Company believes that its operations are in compliance in all material
respects with current requirements under Environmental Laws and Employee
Safety Laws, with the exception of certain matters of which the Company is
aware, including: (i) failure to timely submit certain filings pursuant to the
New Jersey Industrial Site Recovery Act ("ISRA") in connection with the
closure of the Company's former Edison, New Jersey plant; (ii) air permits or
registration requirements at certain facilities; (iii) one isolated instance
of noncompliance with import requirements of the Hazardous Materials
Transportation Act (relating to shipment of lead-acid batteries) now under
review by the United States Department of Transportation; and (iv) reporting
requirements under the Emergency Planning and Community Right-to-Know Act at
the Tractech facility located in Warren, Michigan, which the Company will
acquire pursuant to the Ballantrae Acquisition Agreement. The Company believes
that any costs it may incur to resolve such matters will not be material and,
with respect to (iv) above, the Company believes that it would have an
indemnity claim for the portion of fines and penalties, if any, that may
result from any violations that occurred prior to October 23, 1996 from the
entities that owned or operated the Warren, Michigan Tractech
59
facility prior to the present owners' purchase of Ballantrae. The nature of
the Company's operations, however, exposes it to the risk of liabilities or
claims with respect to environmental and worker health and safety matters.
There can be no assurance that material costs will not be incurred in
connection with such liabilities or claims.
In fiscal year 1997, the aggregate cost incurred by the Company with respect
to environmental matters was not material. Based on the Company's experience
to date, the Company believes that the future cost of compliance with existing
environmental laws, regulations and ordinances (or liability for known
environmental claims) will not have a material adverse effect on the Company's
business, financial condition or results of operations. However, future
events, such as changes in existing laws and regulations or their
interpretation, may give rise to additional compliance costs or liabilities
that could have a material adverse effect on the Company's business, financial
condition or results of operations. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies or stricter or different interpretations of existing laws, may
require additional expenditures by the Company that may be material.
Certain Environmental Laws hold current owners or operators of land or
businesses liable for their own and for previous owners' or operators'
releases of hazardous or toxic substances, materials or wastes, pollutants or
contaminants, including petroleum and petroleum products ("Hazardous
Substances"). Because of its operations, the long history of industrial uses
at some of its facilities, the operations of predecessor owners or operators
of certain of the businesses, and the use, production and release of Hazardous
Substances at these sites, the Company is affected by such liability
provisions of Environmental Laws. Various of the Company's facilities have
experienced some level of regulatory scrutiny in the past and are or may be
subject to further regulatory inspections, future requests for investigation
or liability for past disposal practices.
During the environmental due diligence performed in connection with the GM
Acquisition, GM and the Company identified certain on-site pre-closing
environmental conditions, including the presence of certain Hazardous
Substances in the soil at the Company's Meridian, Mississippi property and in
the soil and groundwater at the Company's Anderson, Indiana property. GM has
reported the presence of these substances in the groundwater to the United
States Environmental Protection Agency ("EPA") and the Indiana Department of
Environmental Management ("IDEM"), and has notified residents who live
downgradient of the affected GM properties. GM conducted further
investigation, which included the sampling of the residents' water wells and
the installation of an additional well offsite, and is working with EPA to
resolve this issue. Based on the Company's experience to date, the terms of
the indemnification in the GM Acquisition agreement and GM's continuing
performance in responding to these conditions, the Company does not believe
that it will expend material costs in responding to these on-site
environmental conditions.
In connection with its acquisition of facilities and businesses from GM,
Nabco, A&B Group, Autovill, Power Investments, World Wide and Ballantrae, the
Company obtained various indemnities for certain claims related to on-site and
off-site environmental conditions and violations of Environmental Laws which
arose prior to such acquisitions. The environmental indemnities are subject to
certain deductibles, caps, cost sharing and time limitations depending on the
nature and timing of the environmental claim. With respect to the Company's
acquisition of Ballantrae, see "Risk Factors--Acquisition of Ballantrae;
Conflicts of Interest" and "Risk Factors--Certain Transactions."
The Comprehensive Environmental Response, Compensation, and Liability Act,
as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA"), provides for responses to, and joint and several liability for
releases of, certain Hazardous Substances into the environment. The Company
has been identified as a potentially responsible party ("PRP") under CERCLA
for three off-site locations: the Vickers' Warehouse Site in Anderson,
Indiana; the Memorial Drive Dump Site in Muncie, Indiana; and the RSR
Corporation Site in Dallas, Texas. In addition, the EPA has sent a notice to
the Company demanding payment for certain costs relating to the RSR
Corporation Site. At each of these three sites, the alleged disposal took
place prior to the Company's acquisition of the assets of the Former GM
Division. The Company believes that it is not the appropriate PRP with respect
to these sites, which the Company also believes are subject to the Company's
indemnification agreement with GM. The Company has not incurred any
significant costs relating to these
60
matters, and based on the existence of the indemnification agreement with GM,
GM's assumption of liabilities to date, and other legal defenses, the Company
does not believe that it will incur material costs in the future in responding
to conditions at these sites.
The Company's Meridian, Mississippi facility has been designated by EPA as
requiring no further action under CERCLA and has since been "delisted" from
the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") (a list of sites which may require
investigation or remediation under CERCLA). Although this does not assure that
expenditures would not be required under other federal and/or state programs,
as a result of the indemnifications in the GM Acquisition agreement, the
Company does not believe that it will expend material costs for this site
under the CERCLA program or for any other environmental conditions at this
site.
The Resource Conservation and Recovery Act ("RCRA") and the regulations
thereunder and similar state counterparts to this law regulate hazardous
wastes. The Company's Anderson, Indiana facilities were once part of a larger
industrial complex owned and operated by GM (the "GM Complex"). Since 1990
(when owned by GM), the GM Complex has been undergoing corrective action under
RCRA. In connection with the RCRA corrective action requirements, GM is
required to investigate various solid waste management units ("SWMUs") and
areas of concern ("AOCs") identified in the federal and state RCRA permits.
Some of these SWMUs and AOCs are located on portions of the Anderson, Indiana
properties leased by the Company from GM and certain SWMUs are used by the
Company. The costs of responding to releases, if any, from those SWMUs used by
the Company would presumptively be borne by the Company. To date, no claims
for any such liability have been made, and GM continues to respond to EPA and
IDEM with respect to the investigation of these AOCs and SWMUs. Subject to the
terms and conditions of GM's environmental indemnity provided in connection
with the GM Acquisition, GM is indemnifying the Company with respect to
certain of these areas.
One of the Company's facilities in Franklin, Indiana is undergoing a RCRA
site investigation and clean-up of volatile organic compounds ("VOCs") in the
soil and groundwater pursuant to an EPA Administrative Order on Consent ("EPA
Order") issued to both Franklin Power Products, one of the subsidiaries of the
Company, and Amphenol Corporation, a prior owner of the property. Pursuant to
the EPA Order, Franklin Power Products and Amphenol Corporation have jointly
submitted corrective measures studies which have been approved by EPA, and the
parties expect to enter into a new EPA Administrator Order on Consent in the
near future setting forth the selected remedy (including further
investigation). Amphenol indemnified Franklin Power Products for certain
liabilities associated with the EPA Order and Amphenol has satisfied and
continues to satisfy the requirements of the EPA Order. Based on the Company's
experience to date and the indemnities from Amphenol and the sellers of
Franklin Power Products to the Company, the Company believes that future costs
associated with this site will not have a material adverse effect on the
Company's results of operations, business or financial condition.
The Company's Marion, Michigan facility was listed on Michigan's state list
of sites pursuant to the Michigan version of CERCLA (the "Michigan SCL") in
1993 because of suspected releases of Hazardous Substances, primarily volatile
organic compounds (mineral spirits), to the soils and groundwater at the
facility. An investigation conducted by Nabco prior to its acquisition by the
Company determined that the levels of volatile organic compounds in the soils
and groundwater are below the applicable state clean-up levels. Although the
Company proposed no further action at this facility, the Michigan
environmental authorities are requiring further investigation. Even if the
Michigan environmental authorities were to require remedial action with
respect to this site, the Company does not believe that it will expend
material costs in connection with the conditions giving rise to this Michigan
SCL listing.
61
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and senior officers of the Company. Each director of the Company
will hold office until the next annual meeting of stockholders of the Company
or until his successor has been elected and qualified. Officers of the Company
and its subsidiaries serve at the discretion of their respective Boards of
Directors.
NAME AGE POSITIONS
- -------------------------- --- ------------------------------------------------
Harold K. Sperlich........ 67 Chairman of the Board of Directors
Thomas J. Snyder (1)...... 53 President, Chief Operating Officer and Director
David L. Harbert.......... 55 Executive Vice President and Chief Financial
Officer
Susan E. Goldy............ 43 Vice President and General Counsel
Joseph P. Felicelli....... 51 Group Vice President, Aftermarket
Patrick Mobouck........... 43 Vice President-Managing Director, Europe
Mark W. Kenczyk........... 42 Vice President, Materials Management
M. Lawrence Parker........ 49 Senior Vice President, Quality & Heavy Duty
Systems, Delco Remy America
Richard L. Stanley........ 41 Senior Vice President, Automotive Systems
Division, Delco Remy America
Roderick English.......... 45 Senior Vice President, Human Resources and
Communications, Delco Remy America
Thomas R. Jennett......... 45 Senior Vice President and General Manager,
Aftermarket Division, Delco Remy America
David H. Livingston....... 47 Senior Vice President of Operations, Delco Remy
America
John M. Mayfield.......... 43 President of A&B Group
Nicholas J. Bozich........ 53 President of Nabco
J. Michael Jarvis......... 53 President of Power Investments
Richard L. Keister........ 51 President of World Wide
Ralph E. McGee............ 59 President of Tractech
E.H. Billig (2)........... 70 Vice Chairman of the Board of Directors
Richard M. Cashin, Jr.
(1)(2)................... 44 Director
James R. Gerrity (1)...... 56 Director
Michael A. Delaney (2).... 43 Director
Robert J. Schultz......... 67 Director
- ------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Harold K. Sperlich, Chairman of the Board of Directors. Mr. Sperlich has
been Chairman of the Board of Directors since the Company's inception in 1994.
Since retiring from Chrysler Corporation in 1988, having served as its
President, Mr. Sperlich has served as a consultant to the automotive industry.
Before joining Chrysler in 1977, Mr. Sperlich held several senior
administrative and operating posts with Ford Motor Company.
62
Thomas J. Snyder, President, Chief Operating Officer and Director. Mr.
Snyder has been President and Chief Operating Officer since the Company's
inception in 1994. From 1962 to 1994, Mr. Snyder held several aftermarket and
OEM executive positions with the Delco Remy Division of GM, most recently as
Product Manager, Heavy Duty Systems. He is a member of the board of St. John's
Health Systems and a Director of CLARK Material Handling Company.
David L. Harbert, Executive Vice President and Chief Financial Officer. Mr.
Harbert has been the Executive Vice President and Chief Financial Officer of
the Company since October 1994. Before joining the Company, Mr. Harbert was
Senior Vice President and Chief Financial Officer of Applied Power Inc. since
1992 and, prior to that, served as Vice President and Chief Financial Officer
of System Software, Inc. since 1990.
Susan E. Goldy, Esquire, Vice President and General Counsel. Ms. Goldy has
been Vice President and General Counsel since February 1997. Before joining
the Company, she was an associate, and since 1993, was a partner in the law
firm of Dechert Price & Rhoads.
Joseph P. Felicelli, Group Vice President, Aftermarket. Mr. Felicelli has
been Group Vice President since September 1997. Prior to joining the Company,
Mr. Felicelli served in various management positions for Cooper Industries.
Patrick Mobouck, Vice President-Managing Director, Europe. Mr. Mobouck has
been Vice President-- Managing Director, Europe since August 1997. He has also
been Chairman of Autovill since August 1997. Before joining the Company, Mr.
Mobouck was with Monroe Auto Equipment since 1988, most recently as Managing
Director-Europe, Middle East and Africa.
Mark W. Kenczyk, Vice President, Materials Management. Mr. Kenczyk has been
Vice President, Materials Management since August 1997. Prior to joining the
Company, Mr. Kenczyk was the Vice President of Purchasing and Logistics with
Philips Electronics in New York. Prior to that, Mr. Kenczyk spent 22 years in
various materials and purchasing capacities with General Motors, including
assignments at the GM/Toyota joint venture (New United Motor) and with Isuzu
Motors in Tokyo, Japan.
M. Lawrence Parker, Sr. Vice President, Quality and Heavy Duty Systems,
Delco Remy America. Mr. Parker has been the Senior Vice President, Quality and
Heavy Duty Systems since June 1995 and, prior to that, was Senior Vice
President, Quality and Customer Satisfaction beginning with the Company's
inception in 1994. Before joining the Company, Mr. Parker served in a number
of executive positions at Ford Motor Company since 1967 and at Chrysler
Corporation since 1984, most recently as Director, Corporate Quality Programs
since 1991.
Richard L. Stanley, Sr. Vice President, Automotive Systems Division, Delco
Remy America. Mr. Stanley has been Senior Vice President, Automotive Systems
since the Company's inception in 1994. Mr. Stanley joined the Delco Remy
Division of GM in 1978, serving most recently as Director of Customer Programs
since 1992 and as European Chief Engineer since 1988.
Roderick English, Sr. Vice President, Human Resources and Communications,
Delco Remy America. Mr. English has been Senior Vice President of Human
Resources and Communications since the Company's inception in 1994. Mr.
English joined the Delco Remy Division of GM in 1976 and became Plant Manager
of plant 17 in 1992. Prior to that, Mr. English served as Divisional Manager
of Labor Relations since 1989.
John M. Mayfield, President of A&B Group. Mr. Mayfield has been President of
A&B Group since its acquisition by the Company in March 1995. Mr. Mayfield
joined A&B Group in 1988 as Controller and became its Operations Director in
1991.
Nicholas J. Bozich, President, Nabco. Mr. Bozich has been President of Nabco
since March, 1997. Before joining the Company, Mr. Bozich was with General
Motors for 34 years in various managerial positions, most recently with the
Saturn Division.
63
J. Michael Jarvis, President, Power Investments. Mr. Jarvis has been
President of Power Investments since its formation in 1983.
Richard L. Keister, President, World Wide. Mr. Keister has been President of
World Wide since its formation in 1976.
Ralph F. McGee, President, Tractech. Mr. McGee started as Sales and
Marketing Manager of Tractech in 1968. He was appointed President in 1980, a
position he has held since then except for two years when he served in
corporate level development positions for Titan Wheel International, Inc.
Thomas R. Jennett, Senior Vice President and General Manager, Aftermarket
Division, Delco Remy America. Mr. Jennett joined the Company in October 1996.
Prior to such time he held various management positions with Prestolite
Electric Inc. since 1974, including President of the Aftermarket Division and
the Leece-Neville Heavy Duty Division.
David H. Livingston. Senior Vice President of Operations, Delco Remy
America. Mr. Livingston has been Senior Vice President of Operations since
August 1996. Prior to joining the Company, Mr. Livingston was Vice President
of Operations for United Technologies Automotive-Motor Systems since 1990.
E.H. Billig, Vice Chairman of the Board of Directors. Mr. Billig has been
Vice Chairman of the Board of Directors since the Company's inception in 1994.
He was formerly President and Chief Operating Officer of MascoTech, Automotive
Systems Group, Inc., where he continues to serve as Vice Chairman. He is also
a director of Titan Wheel International, Inc. and OEA, Inc.
Richard M. Cashin, Jr., Director. Mr. Cashin has been a director since the
Company's inception in 1994. Mr. Cashin has been President since 1994, and a
Managing Director for more than the past five years, of CVC. In addition, Mr.
Cashin serves as a director of Levitz Furniture Incorporated (which filed a
voluntary petition for bankruptcy on September 5, 1997), Lifestyle Furnishing,
Fairchild Semiconductor, Freedom Forge, Cable Systems International, Euromax,
Hoover Group, Thermal Engineering, Gerber Childrenswear, JAC Holdings, GVC
Holdings, Ballantrae Corporation, Delta Terminal Services and Titan Wheel
International Inc.
James R. Gerrity, Director. Mr. Gerrity has been a director since the
Company's inception in 1994. From 1986 to 1993, Mr. Gerrity was President and
a director of Dyneer Corporation. Mr. Gerrity currently is a director of
Palomar Technologies Corporation, Wescor Graphics, Inc. and Ballantrae
Corporation.
Michael A. Delaney, Director. Mr. Delaney has been a director since the
Company's inception in 1994. Mr. Delaney has been a Vice President of CVC
since 1989. From 1986 through 1989, he was Vice President of Citicorp Mergers
and Acquisitions. Mr. Delaney is also a director of GVC Holdings, JAC
Holdings, CORT Business Services, Inc., Palomar Technologies, Inc., Enterprise
Media Inc., SC Processing, Inc., Triumph Group, Inc., CLARK Material Handling
Inc., MSX International, Ballantrae Corporation, International Knife and Saw
Inc., Aetna Inc. and AmeriSource Health Corporation.
Robert J. Schultz, Director. Mr. Schultz became a director in 1997. Mr.
Schultz retired as Vice Chairman and a member of the Board of Directors of GM
in 1993. Mr. Schultz joined GM in 1955 and served as Group Executive of
Chevrolet-Pontiac-GM of Canada and General Manager of GM's Delco Electronics
Division. Mr. Schultz is also a member of the Board of Trustees of California
Institute of Technology and a director of OEA, Inc. and Texco Communications.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Directors do not receive compensation for their services as directors,
except that Messrs. Gerrity and Billig received $340,608 and $200,000,
respectively, during fiscal year 1997 for services relating to special
projects (in connection with acquisitions and strategic alliances) undertaken
by them for the Company in their capacities as directors and Mr. Schultz was
paid $2,083 in fiscal year 1997 for services rendered as a director of the
Company. Mr. Schultz is entitled to receive an annual fee of $25,000 plus
$1,000 for attendance in person for each quarterly meeting of the Board of
Directors. Outside directors of the Company are also entitled to receive stock
options
64
for Class A Common Stock pursuant to the Directors' Plan (as defined). See
"Management--Stock Option Plans." CVC, certain members of management and other
Existing Stockholders have entered into a Stockholders' Agreement whereby they
have agreed to vote their shares in such a manner so as to elect the entire
Board of Directors of the Company. See "Principal Stockholders--Stockholders'
Agreement."
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ending July 31, 1997,
certain information regarding the cash compensation paid by the Company, as
well as certain other compensation paid or accrued for such year, to each of
the executive officers of the Company named below, in all capacities in which
they served:
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
--------------------------- -------- -------- --------------- ------------
Harold K. Sperlich.............. $247,500 $292,342 $13,986 $--
Chairman of the Board
Thomas J. Snyder................ 247,500 292,342 3,197 --
President and Chief Operating
Officer
David L. Harbert................ 235,000 165,925 3,197 --
Executive Vice President and
Chief Financial Officer
J. Michael Jarvis............... 200,000 111,042 1,409 --
President of Power Investments
M. Lawrence Parker.............. 173,250 133,975 1,409 --
Senior Vice President, Quality
&
Heavy Duty Systems, Delco Remy
America
- --------
(1) Represents life insurance premiums paid by the Company for the benefit of
the individuals.
Stock Option Plans. The Company has adopted the 1997 Non-Qualified Stock
Option Plan for Non-Employee Directors (the "Directors' Plan"), which provides
for the granting of stock options to non-employee members of the Board of
Directors of the Company. Options to purchase an aggregate of 100,000 shares
may be granted under the Directors' Plan. Pursuant to the Directors' Plan,
each non-employee director of the Company will be granted, on a non-
discretionary basis, options to purchase 2,000 shares of Common Stock
annually, commencing on the later of the effective date of the Registration
Statement of which this Prospectus is a part and the pricing of the Common
Stock to be sold in the Equity Offering, which options will generally vest
over a five-year period. The exercise price of each option will be 100% of the
fair market value of a share of Common Stock on the date of grant. The
Directors' Plan will be administered by the Board of Directors. Options
granted under the plan may, in certain circumstances, be transferred to
certain permitted transferees specified in the plan. Messrs. Billig, Cashin,
Delaney and Schultz are each expected to be granted options to acquire 2,000
shares of Common Stock in connection with the Equity Offering.
The Directors' Plan will permit, with the consent of the Board of Directors,
the exercise of options by delivery of shares of Common Stock owned by the
optionee or by withholding of such shares of Common Stock upon exercise of the
option in lieu of or in addition to cash. The Directors' Plan will permit the
Board of Directors to adjust the number and kind of shares subject to options
in the event of a reorganization, merger, consolidation, recapitalization,
reclassification, stock split, stock dividend or combination of shares. The
Board of Directors may amend the Directors' Plan or terminate the Directors'
Plan without the approval of the stockholders, provided, however, that
stockholder approval is required for an amendment to the Directors' Plan that
increases the number of shares for which options may be granted or changes in
any material respect the limitations or provisions of the options subject to
the Directors' Plan.
The Company also has adopted the 1997 Stock-Based Incentive Compensation
Plan (the "Incentive Plan" and, together with the Directors' Plan, the "Stock
Option Plans") that provides for discretionary grants or awards of options to
purchase stock, stock appreciation rights that reflect the appreciation in the
value of Common Stock ("SARs"), and restricted stock to employees and
independent contractors (other than certain
65
directors) of the Company. Under the Incentive Plan, 1,300,000 shares of
Common Stock may be subject to awards, and no more than 91,000 shares of
Common Stock may be subject to awards to any single individual in any one
year. Such options, SARs and restricted stock will be awarded based on
performance and with vesting schedules to be determined at the time of grant.
The Company expects to grant up to approximately 500,000 options to acquire
shares of Common Stock under the Incentive Plan on the later of the effective
date of the Registration Statement of which this Prospectus is a part and the
pricing of the Common Stock to be sold in the Equity Offering, at an exercise
price equal to the initial public offering price for the Equity Offering.
The Incentive Plan will be administered by a committee of directors,
initially comprised of Messrs. Billig, Cashin and Delaney, which will have the
power and authority, subject to ratification by the Board of Directors, to
determine the persons to whom awards are granted, the number of shares of
Common Stock with respect to such awards, and the terms of such awards,
including the exercise price of stock options, and any vesting or forfeiture
provisions with respect to awards. Options may be transferred to the extent
permitted under the terms of the applicable option agreement. The Incentive
Plan will contain such other provisions, terms and conditions as the committee
shall decide.
Under the Incentive Plan, the exercise price of options will not be less
than the fair market value of the Common Stock on the date of grant. Options
will be subject to vesting provisions as specified in an applicable option
agreement. Options granted under the Incentive Plan may be designated, for
federal income tax purposes, either as non-qualified stock options or as
incentive stock options as defined in Sections 422 of the Internal Revenue
Code. The Incentive Plan will permit, with the consent of the committee, the
exercise of options by delivery of shares of Common Stock owned by the
optionee or by the withholding of such shares of Common Stock upon exercise of
the option in lieu of, or in addition to, cash. The Incentive Plan will permit
the committee to adjust the number and kind of shares subject to awards in the
event of a reorganization, merger, consolidation, reclassification, stock
split, stock dividend or combination of shares.
401(k) Plan. The Company established the Salaried 401(k) Savings Plan (the
"401(k) Plan") to allow eligible employees to help meet their long-term
savings needs. Except for eligible employees who transferred to DRA directly
from GM and began immediate participation, generally all employees who are
compensated on a salaried basis are eligible to participate in the 401(k) Plan
after completing six months of continuous employment. The 401(k) Plan is a
defined contribution, tax-qualified plan under section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), with employer and employee pre-
tax contributions deductible by the Company for income tax purposes for the
year contributed, and such contributions and earnings thereon are not taxable
to employees until paid to them.
An employee in the 401(k) Plan may elect to have from 1% to 15% of base
salary contributed from pay to the 401(k) Plan on a pre-tax, after-tax, or
combination of pre-tax and after-tax, basis, and receive a 25% matching
contribution on the sum of the employee's pre-tax and after-tax contributions
up to 6% of base salary. Except for certain GM employees who transferred
employment to DRA, employees also receive a 1% of base salary contribution for
their retiree medical care account under the 401(k) Plan. Under the Code, the
total contributions allocated to an employee's accounts for a plan year cannot
exceed the lesser of $30,000 or 25% of the employee's compensation, and the
employee's pre-tax contributions are limited in a calendar year to $9,500
(subject to cost of living increases under the Code).
Employees are immediately 100% vested in their 401(k) Plan benefits except
for the matching and retiree medical care contributions, which vest after the
earliest of five years of service, death, attaining age 65, or attaining an
early retirement date under the Retirement Plan. Any forfeitures which may
result under the 401(k) Plan are used to reduce future Company contributions.
Employees generally may withdraw their vested benefits from the 401(k) Plan on
termination of employment, retirement, or death, and may also under certain
circumstances withdraw benefits while still employed (including certain
financial hardship, plan loan and pre-and
66
post-age 59 1/2, withdrawals). Until fully withdrawn, employees may direct the
investment of their 401(k) Plan benefits among a broad range of investment
funds.
Retirement Plan. The Company established the Retirement Plan primarily to
provide eligible employees with a monthly pension benefit after retirement for
life. Except for eligible employees who transferred to DRA directly from GM
and began immediate participation, generally all employees of the Company who
are compensated on a salaried basis are eligible to participate in the
Retirement Plan after completing one year of service and attaining age 21. The
Retirement Plan is a defined benefit, tax-qualified plan under section 401(a)
of the Code, and contributions to the Plan generally are deductible by the
companies for income tax purposes for the year contributed, and benefits are
not taxable to employees until paid.
The standard retirement benefit under the Retirement Plan is a monthly,
single life annuity starting at age 65, equal to 1.25% of an employee's
average monthly pay multiplied by the employee's years of service with the
companies. Average monthly pay is generally based on the employee's 60-
consecutive month highest average base pay during the ten-year period before
retirement. The benefit for certain long-service GM employees who transferred
to DRA, however, is not less than $60 times their years of service with the
Company. Under the Code the annual benefit provided by the Retirement Plan
cannot exceed the lesser of $125,000 or 100% of compensation (subject to
certain further limitations under the Retirement Plan and Code). Eligible
employees generally may retire on or after age 55 with 10 years of service,
with their monthly Retirement Plan benefit actuarially reduced if payment
actually starts prior to age 62. Employees who terminate with less than five
years of service forfeit any benefits which they may have accrued, and such
forfeitures are used to offset future contributions otherwise required to fund
the Plan. Certain death and disability benefits also may be paid under the
Retirement Plan.
Executive Incentive Plan. The Company's executives participate in an
Executive Incentive Plan by which they are entitled to receive certain
percentages of their base compensation as a bonus if a designated target or
objective is met. Designated targets related to earnings, return on invested
capital and/or strategic objectives are set at the beginning of each year,
based on the prior year's results. The Executive Incentive Plan provides that
if a target is exceeded, then any bonus payable under the plan is
commensurately increased, subject to a cap. The Company expects to continue
the Executive Incentive Plan and has established a Compensation Committee made
up of non-management directors who will fix the target objectives for each
executive for each year.
INSURANCE AND INDEMNIFICATION
The Company has obtained customary directors' and officers' insurance
against certain liabilities such persons may incur on behalf of the Company.
For a discussion of the limitations on liability of the Company's directors
and the indemnification by the Company of such directors set forth in the
Company's Restated Certificate of Incorporation, see "Description of Capital
Stock--Limitation on Liability and Indemnification."
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement with Thomas J. Snyder
which provides for his employment until 1999. Mr. Snyder receives an annual
base salary of $247,500, subject to merit increases as determined by the Board
of Directors, plus annual performance bonuses as determined by the Board of
Directors. The agreement provides that the executive may not engage in any
business competitive with the Company while employed by the Company and for a
period of one year thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during fiscal year 1997
was composed of Messrs. Delaney, Sperlich and Billig. Upon completion of the
Offerings, the Compensation Committee will be composed of Messrs. Billig,
Cashin and Delaney.
67
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of October 1, 1997 after
giving effect to the Stock Split, with respect to shares of each class of
Common Stock beneficially owned by (i) each person or group that is known to
the Company to be the beneficial owner of more than 5% of each class of
outstanding Common Stock, (ii) each director and senior officer of the Company
and (iii) all directors and senior officers of the Company as a group. Unless
otherwise specified, all shares are directly held. Each share of Class A
Common Stock is convertible into one share of Class B Common Stock, and each
share of Class B Common Stock is convertible into one share of Class A Common
Stock. See "Description of Capital Stock."
CLASS A COMMON STOCK(1) COMBINED(1)
------------------------------------- -----------------------------------
BEFORE OFFERING AFTER OFFERING CLASS B BEFORE OFFERING AFTER OFFERING
AND TRANSACTIONS AND TRANSACTIONS COMMON AND TRANSACTIONS AND TRANSACTIONS
----------------- ------------------- STOCK ----------------- -----------------
SHARES SHARES SHARES SHARES SHARES
OWNED PERCENT OWNED PERCENT OWNED OWNED PERCENT OWNED PERCENT
--------- ------- ----------- ------- --------- --------- ------- --------- -------
Citicorp Venture
Capital Ltd............ 1,816,116 19.5% 3,049,569 19.9% 6,756,746(2) 7,222,362 46.3% 9,805,815 42.7%
399 Park Avenue
New York, NY 10043
MascoTech Automotive
Systems Group, Inc. ... 2,520,000 27.0% 2,924,313 19.1% -- 2,520,000 16.1% 2,924,313 12.7%
275 Rex Boulevard
Auburn Hills, MI 48326
World Equity Partners,
L.P.(3)................ 1,680,000 15.3% 1,680,000 9.9% -- 1,680,000 9.7% 1,680,000 6.8%
399 Park Avenue
New York, NY 10043
Harold K. Sperlich(4)... 793,464 8.5% 793,464 5.2% -- 793,464 5.1% 793,464 3.7%
Delco Remy
International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
Thomas J. Snyder(5)..... 420,000 4.5% 420,000 2.7% -- 420,000 2.7% 420,000 1.8%
Delco Remy
International, Inc.
2902 Enterprise Drive
Anderson, IN 46013
James R. Gerrity(6)..... 252,000 2.7% 469,226 3.1% -- 252,000 1.6% 469,226 2.0%
E.H. Billig(7).......... 252,000 2.7% 252,000 1.6% -- 252,000 1.6% 252,000 1.1%
Richard M. Cashin, 181,566 1.9% 195,350 1.3% 7,434 189,100 1.2% 202,784 *
Jr.(8)..................
Michael A. Delaney(8)... 36,795 * 50,579 * 10,018 46,813 * 60,597 *
Robert J. Schultz....... 77,280 * 77,280 * -- 77,280 * 77,280 *
All directors and senior
officers as a group
(22 persons)............ 3,040,761 32.6% 3,265,877 21.4% 17,452 3,058,213 19.6% 3,319,674 14.5%
- --------
(Footnotes on following page)
68
- --------
* Represents less than 1%.
(1) Does not include up to approximately 1,400,000 shares of Class A Common
Stock that are subject to the Stock Option Plans or 1,680,000 shares
issuable upon exercise of the Warrants except, in the case of the
Warrants, with respect to World Equity Partners, L.P. such 1,680,000
shares are included.
(2) Includes 1,308,795 shares of Class B Common Stock to be received as merger
consideration in connection with the consummation of the acquisition of
Ballantrae by the Company and the conversion of the Junior Subordinated
Notes.
(3) Represents Warrants to acquire Class A Common Stock.
(4) Held as trustee under agreement dated February 4, 1985, as amended, with
Harold K. Sperlich, as Settlor.
(5) Includes 5,000 shares held by Daisy Farm Limited Partnership of which Mr.
Snyder is General Partner.
(6) Includes 42,670 and 174,556 shares to be received by The Susan Gerrity
Living Trust and James R. Gerrity Living Trust, respectively, in the
acquisition of Ballantrae.
(7) Held by The Billig Family Limited Partnership.
(8) Does not include shares beneficially held by CVC, World Equity Partners,
L.P. or CCT Partners I, L.P. which may be deemed to be beneficially owned
by Messrs. Delaney and Cashin. Messrs. Delaney and Cashin disclaim
beneficial ownership of shares held by CVC or World Equity Partners, L.P.
STOCKHOLDERS' AGREEMENT
In connection with the GM Acquisition, certain stockholders of the Company,
including CVC, World Equity Partners, L.P. ("WEP"), MascoTech Automotive
Systems Group, Inc. ("MascoTech"), Harold K. Sperlich, James R. Gerrity and
the individuals named therein as management investors (the "Management
Investors") (collectively the "Investors"), entered into a Securities Purchase
and Holders Agreement (as amended, the "Stockholders' Agreement") for a ten-
year term containing certain agreements among such stockholders with respect
to the capital stock and corporate governance of the Company. The following is
a summary description of the principal terms of the Stockholders' Agreement
and is subject to and qualified in its entirety by reference to the
Stockholders' Agreement, which has been filed as an exhibit to the
Registration Statement which includes this Prospectus.
Pursuant to the Stockholders' Agreement, the Investors agreed to vote their
shares in favor of the Board of Directors of the Company being composed of
seven directors as follows: Harold K. Sperlich (so long as he continues to
serve as chairman of the Board of Directors); one individual nominated by
MascoTech; two individuals nominated by CVC; James R. Gerrity (so long as he
continues to serve as an officer or a consultant to the Company); Thomas J.
Snyder (so long as he continues to serve as President of the Company); and one
independent director.
The Investors have agreed to vote their shares in favor of any proposal by
CVC or MascoTech (a) to remove directors nominated by CVC or MascoTech or (b)
to fill directorships vacated by directors nominated by CVC or MascoTech. Each
of CVC and MascoTech will retain the right to nominate the number of directors
designated above so long as they own at least 7% of the outstanding shares of
Common Stock; provided that if either CVC or MascoTech owns less than 7% of
the outstanding shares of Common Stock as a result of an event or events other
than the sale of such shares by the holder thereof, then the right to nominate
directors as specified above will continue.
Following the Equity Offering, the Investors will beneficially own over 50%
of the outstanding shares of Class A Common Stock and, pursuant to the
foregoing described provisions, will be able to elect the entire Board
of Directors of the Company.
The Stockholders' Agreement also provides for certain restrictions on
transfer by Management Investors, including, subject to certain exemptions,
the right of the Company to repurchase shares held by Management Investors
upon termination of employment (i) prior to July 31, 1999 with respect to
Management Investors who purchased shares, prior to February 1997, and (ii) to
December 2000 for Management Investors who purchased
69
shares beginning in February 1997, in each case at a formula price, and the
grant of a right of first refusal in favor of the Company in the event a
Management Investor elects to transfer such Management Investor's shares of
Common Stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the GM Acquisition, the Company entered into a
Registration Rights Agreement with the Investors covering all of the 11.0
million shares of Common Stock held by the Investors ("Registration Rights
Agreement"). The following description of the Registration Rights Agreement is
subject to and qualified in its entirety by reference to the Registration
Rights Agreement, which has been filed as an exhibit to the Registration
Statement which includes this Prospectus. CVC and, upon consummation of the
Equity Offering, WEP and WEP's permitted transferees have been granted the
right one or more times to require the Company to file one or more
registration statements with the Securities and Exchange Commission (the
"Commission") registering the shares held by them. The Investors have been
granted the right, subject to certain restrictions, to require the Company to
include shares held by the Investors in any registration statements filed by
the Company with the Commission subject to certain limited exceptions. The
Company has agreed to pay certain expenses relating to any registration of
shares effected pursuant to the Registration Rights Agreement and to indemnify
the Investors against certain liabilities in connection with any such
registration.
LOCK-UP AGREEMENTS
In connection with the Equity Offering, the Company and each of the
Company's principal stockholders, directors, senior officers and
warrantholders agreed, subject to certain exceptions, not to offer, sell or
transfer any shares of Common Stock for a period of 180 days after the date of
the Equity Offering, without the prior written consent of Morgan Stanley & Co.
Incorporated. This agreement covers all of the outstanding shares of Common
Stock held by the principal stockholders, directors, senior officers and
warrantholders. The Company expects that certain of its other stockholders,
owning approximately 4.2 million shares of Class A Common Stock, will be
subject to similar restrictions. See "Underwriters."
70
CERTAIN TRANSACTIONS
CVC and James R. Gerrity, a director of the Company, each of whom is an
Existing Stockholder of the Company, beneficially own approximately 71.9% and
20.0% of Ballantrae's issued and outstanding common stock, on a fully-diluted
basis, respectively, and 74.7% and 15.6% of Ballantrae's issued and
outstanding preferred stock, respectively (including, for Mr. Gerrity, 5.0%
and 5.2% of Ballantrae's common and preferred stock, respectively,
beneficially owned by Susan Gerrity, Mr. Gerrity's wife). The Ballantrae
Acquisition Agreement provides that CVC and Mr. Gerrity and their affiliates
will receive in connection with the acquisition of Ballantrae 1,100,974 and
217,226 additional shares of the Company's Common Stock, respectively, based
on an assumed offering price in the Equity Offering of $15.00 per share of
Class A Common Stock and the estimated working capital adjustment (the "Merger
Consideration"); however such stock will be subject to certain restrictions
against transfer under applicable securities laws. The Ballantrae stockholders
(other than the Existing Stockholders) who receive shares of Common Stock
pursuant to the Ballantrae Acquisition Agreement will benefit from piggyback
registration rights with respect to such shares for a period of one year
following the consummation of the acquisition of Ballantrae. The Company
believes that the Ballantrae Acquisition Agreement and in particular the
Merger Consideration to be paid to CVC and Mr. Gerrity and their affiliates
are fair to the Company. Messrs. Delaney and Cashin are also each a
stockholder and director of Ballantrae, as well as each being a stockholder
and director of the Company. See "Company History," "Risk Factors--Acquisition
of Ballantrae; Conflicts of Interest" and "Business--Acquisition of
Ballantrae."
The following table summarizes the history of CVC's investment in Ballantrae
and the payment of merger consideration to CVC in connection with the proposed
acquisition of Ballantrae by the Company.
AMOUNT PAID
DATE EVENT BY CVC
-------- ----- -----------
12/23/96 Acquisition of 32.9% of Ballantrae common stock........ $ 35,000
10/23/96 Acquisition of 74.7% of Ballantrae preferred stock..... 2,100,000
10/23/96 Acquisition of warrants for Ballantrae common stock.... --
Acquisition of 79.4% of preferred stock of Kraftube
10/23/97 Management, Inc.(a).................................... 6,400,000
02/07/97 Exercise of warrants for Ballantrae common stock(b).... 147,500
-----------
Total CVC investment in Ballantrae..................... $ 8,682,500
===========
Value of shares of Common Stock of the Company to be
received by CVC as merger consideration in connection
with the acquisition of Ballantrae(c)................. $16,514,600
===========
- --------
(a) In 1989, CVC invested $1.0 million to purchase Kraftube, Inc. preferred
stock and $2.1 million for which it received a note in the original
principal amount of $2.1 million. In addition, in 1989, CVC purchased
62.8% of the common stock of Kraftube Management, Inc. for $15,700. In
1993, the Kraftube, Inc. preferred stock plus accrued and unpaid dividends
was exchanged for a note in the principal amount of $1.7 million and the
$2.1 million note was repaid, together with accrued and unpaid interest
thereon. In 1996, the $1.7 million note was exchanged for 1.7 million
shares of Kraftube Management, Inc. preferred stock. The remaining 4.7
million shares of Kraftube Management, Inc. preferred stock were received
upon the exchange of Kraftube Management, Inc. common stock in a
transaction that valued the common stock held by CVC at $4.7 million.
(b) Includes $25,000 attributable to the exercise of a warrant to purchase
25,000 shares of Ballantrae common stock which CVC intends to exercise
prior to the consummation of the acquisition.
(c) Assumes an initial public offering price of $15.00 per share.
The Company currently leases eight properties in Mississippi from entities
controlled by family members of John M. Mayfield, President of A&B Group.
These leases were entered into in connection with the acquisition of A&B Group
by the Company in March 1995. All leases are triple net leases, five of which
expire on March 31, 2003 and three of which expire on March 31, 2000, each
subject to renewal. Aggregate annual rent payments for these leases for fiscal
year 1997, not including tax and maintenance expenses constituting additional
rent, equaled approximately $479,700. The Company believes that the terms
contained in these leases are at least as favorable as those which could have
been obtained from unaffiliated third parties.
71
Mr. Richard L. Keister, President of World Wide, borrowed $90,000 from the
Company to purchase 10,000 shares of Class A Common Stock from the Company in
May 1997. Interest on the loan accrues at a rate of 9.25% and the loan is due
May, 2002.
In 1997, Mr. Nicholas J. Bozich, President of Nabco, borrowed $15,000 from
the Company to purchase 1,500 shares of Class A Common Stock. Interest on the
loan accrues at a rate of 9.25% and is due in September 2002. In 1997, Mr.
Bozich also borrowed $80,000 to purchase a home. The loan is interest free and
is due upon demand by the Company.
The Company will exchange the Junior Subordinated Notes for approximately
1.8 million shares of the Company's Class A Common Stock, assuming an initial
price to public of $15 per share for the Equity Offering and a closing date
for the Offerings of December 22, 1997. The Junior Subordinated Notes were
issued in an aggregate principal amount of $18.2 million to CVC, certain
employees and former employees of CVC and MascoTech in connection with the GM
Acquisition. The final exchange ratio will be based upon the initial price to
public of the Class A Common Stock of the Company for the Equity Offering less
underwriting discounts and commissions.
CVC, MascoTech, Harold K. Sperlich, James R. Gerrity and Thomas J. Snyder
(collectively, the "Original Investors") invested $19.9 million in the Company
prior to the GM Acquisition in exchange for the Junior Subordinated Notes and
for Common Stock of the Company. Since the GM Acquisition, the Company has not
paid any cash interest on the Junior Subordinated Notes to the Original
Investors although interest at 11% annually has been added to the principal
amount of the Junior Subordinated Notes as it becomes due. The Company has not
declared or paid any dividends on the Common Stock. Other than salaries and
consulting fees paid to Original Investors who serve as directors or officers
of or consultants to the Company, no payments have been made by the Company to
the Original Investors since the GM Acquisition. See "Dividend Policy,"
"Management" and "Dilution."
The following table summarizes the historical investments of the Original
Investors in the Company and Ballantrae since July 29, 1994 and the total
return, including unrealized return, on such investments as of, except where
otherwise indicated, an assumed closing date for the Offerings of December 22,
1997 and assuming an initial public offering price of $15.00 per share (in
thousands):
MASCO
CVC TECH GERRITY SPERLICH SNYDER TOTAL
-------- ------- ------- -------- ------ --------
Investment in the
Company(1).............. $ 15,400 $ 4,200 $ 30 $ 100 $ 50 $ 19,780
Investment in
Ballantrae.............. 8,682(2) -- 1,240(3) -- -- 9,922
-------- ------- ------ ------- ------ --------
Total invested in the
Company and
Ballantrae............ $ 24,082 $ 4,200 $1,270 $ 100 $ 50 $ 29,702
======== ======= ====== ======= ====== ========
Interest on Junior
Subordinated Notes(4)... $ 1,911 $ 520 $ -- $ -- $ -- $ 2,431
Dividends paid on Common
Stock since issuance.... -- -- -- -- -- --
Consideration to be
received for interest in
Ballantrae.............. 16,514(5) -- 3,259(6) -- -- 19,773
Salaries and other
compensation paid(7).... -- -- 1,117 1,360 1,556 4,033
Value of original
investment in shares of
Common Stock(8)......... 152,900 41,700 3,780 12,600 6,300 217,280
-------- ------- ------ ------- ------ --------
Total cash received and
value of shares of
Common Stock held..... $171,325 $42,220 $8,156 $13,960 $7,856 $243,517
======== ======= ====== ======= ====== ========
- --------
(1) Represents the cash paid by the Original Investors for the Junior
Subordinated Notes and Common Stock issued by the Company in July 1994.
(2) Includes the forgiveness of a note in the principal amount of $1,700 held
by an affiliate of Kraftube Management, Inc. in favor of CVC.
(3) Includes $157 paid for the purchase of common and preferred stock in
Ballantrae by Susan Gerrity, Mr. Gerrity's wife.
72
(4) Interest on the Junior Subordinated Notes has accrued at a rate of 11% per
annum since the date of issuance and was added to the principal amount of
the Junior Subordinated Notes in lieu of a cash interest payment. The
total principal amount of the Junior Subordinated Notes (including the
accrued interest) will be exchanged for Common Stock at the initial public
offering price of the Common Stock less underwriting discounts and
commissions.
(5) Represents the value of the 1,100,974 shares of Common Stock to be
received by CVC as merger consideration, valued at the initial offering
price of the Common Stock, and assuming that, in connection with the
merger of Kraftube, Inc. into Kraftube Management, Inc., all Kraftube
Management, Inc. preferred stockholders elect to receive Ballantrae
preferred stock and not cash and no dissenters' rights are exercised.
(6) Represents the value of the 217,226 shares of Common Stock to be received
by Mr. and Mrs. Gerrity as merger consideration, valued at an initial
offering price of the Common Stock, and assuming that, in connection with
the merger of Kraftube, Inc. into Kraftube Management, Inc., all Kraftube
Management, Inc. preferred stockholders elect to receive Ballantrae
preferred stock and not cash and no dissenters' rights are exercised.
(7) Represents amounts paid as of October 31, 1997.
(8) Represents the total number of shares purchased at the time of the initial
investment described in Note (1) above adjusted by the Stock Split and the
shares to be acquired upon the conversion of the original principal amount
of the Junior Subordinated Notes, in each case valued at the initial
offering price of the Common Stock. These figures do not include the value
of any shares to be received upon conversion of the portion of Junior
Subordinated Notes representing accrued and unpaid interest thereon or in
the acquisition of Ballantrae, all of which are separately stated in the
table.
The net proceeds of the Offerings will be used to, among other things, repay
in full (i) the $75 million 10 1/2% Senior Note due July 31, 2003 to World
Subordinated Debt Partners, L.P., an affiliate of WEP, the holder of the
Warrants, a portion of which will be repaid at a price equal to 103% of the
principal amount thereof, and (ii) the $8.3 million of 9.86% Subordinated
Notes due February 6, 2001 to certain prior owners of Power Investments,
including Mr. J. Michael Jarvis, who is now one of the senior officers of the
Company in each case plus accrued .
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
and qualified in its entirety by reference to the Company's Restated
Certificate of Incorporation, which has been filed as an exhibit to the
Registration Statement which includes this Prospectus.
The Company may issue 67,000,000 shares of Common Stock, divided into two
classes consisting of 49,400,000 shares of Class A Common Stock, par value
$.01 per share, and 17,600,000 shares of Class B Common Stock, par value $.01
per share.
As of October 31, 1997, giving effect to the Transactions other than the
Offerings, there would have been 13,362,276 shares of Class A Common Stock
outstanding, held of record by 75 holders, and 7,283,674 shares of Class B
Common Stock outstanding. In addition, Warrants to purchase 1,680,000 shares
of Class A Common Stock were issued and outstanding and 1,400,000 shares of
Class A Common Stock were available to be issued pursuant to the Stock Option
Plans.
CLASS A COMMON STOCK
Holders of Class A Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders and have no
cumulative voting rights. Holders of Class A Common Stock do not have
preemptive rights pursuant to the Restated Certificate of Incorporation.
Holders of Class A Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Company's Board
of Directors out of legally available funds therefor; provided, however, that
if dividends are declared that are payable in shares of Class A Common Stock
or Class B Common Stock, dividends must be
73
declared which are payable at the same rate on each class of Common Stock and
the dividends payable in shares of Class A Common Stock must be paid to holders
of Class A Common Stock and the dividends payable in shares of Class B Common
Stock must be paid to holders of Class B Common Stock. All outstanding shares
of Class A Common Stock are fully-paid and nonassessable. Shares of Class A
Common Stock are convertible at any time at the election of the holder thereof
into shares of Class B Common Stock on a one-for-one basis (but only to the
extent that such record holder of Class A Common Stock shall be deemed to be
required to convert such Class A Common Stock into Class B Common Stock
pursuant to applicable law).
Upon liquidation, dissolution or winding up of the Company, holders of Class
A Common Stock, together with holders of Class B Common Stock, are entitled to
a pro rata share of the distribution of assets remaining after the payment of
debts and expenses and after payment of the liquidation preference accorded to
the holders of any preferred stock of the Company which may be issued in the
future. Each share of Class A Common Stock has the same rights, privileges and
preferences as every other share of Class A Common Stock.
CLASS B COMMON STOCK
The rights of holders of Class B Common Stock and holders of Class A Common
Stock are identical and entitle the holders thereof to the same rights,
privileges, benefits and notices, except as otherwise described herein. Holders
of Class B Common Stock generally do not possess the right to vote on any
matters to be voted upon by the stockholders of the Company, except as provided
by law. Under Section 242(b)(2) of the Delaware General Corporation Law
("DGCL"), the holders of the Class B Common Stock shall be entitled to vote as
a class upon any proposed amendment to the Company's Restated Certificate of
Incorporation, if such amendment would increase or decrease the number of
shares or the par value of the shares of such class, or alter or change the
powers, preferences or special rights of the shares of such class so as to
affect them adversely. Holders of Class B Common Stock may elect at any time to
convert any and all of such shares into Class A Common Stock, on a share-for-
share basis, to the extent the holder thereof is permitted pursuant to
applicable law to hold the total number of shares of voting securities such
holder would hold after giving effect to such conversion.
WARRANTS
On July 31, 1994, the Company issued to WEP warrants to purchase from the
Company 1,680,000 shares of the Company's Class A Common Stock for an exercise
price of $.0012 per share (the "Warrants"). The Warrants can be exercised in
whole or in part at any time prior to July 31, 2004. The exercise price and the
number of shares of Common Stock issuable upon exercise are subject to
adjustment upon the occurrence of certain events.
DIVIDENDS
The holders of the Company's Class A Common Stock and Class B Common Stock
are entitled to share ratably in dividends declared by the Board of Directors
of the Company out of funds legally available therefor. The Company's ability
to pay dividends is dependent on the ability of the Company's subsidiaries,
including DRA, to pay dividends to the Company. The ability of the Company's
subsidiaries to pay dividends and make other payments are subject to certain
statutory, contractual and other restrictions. The terms of the Company's
indebtedness, including the Senior Credit Facility, will restrict the payment
of dividends by the Company. The Company does not expect to declare or pay cash
dividends to holders of its Class A Common Stock or Class B Common Stock in the
foreseeable future.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the DGCL provides, with certain exceptions, that a Delaware
corporation may not engage in certain business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date such person became an interested
stockholder unless: (i) the transaction resulting in the acquiring person's
becoming an interested stockholder, or the business
74
combination, is approved by the board of directors of the corporation before
the person becomes an interested stockholder; (ii) the interested stockholder
acquires at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding voting stock
at an annual or special meeting, excluding shares owned by the interested
stockholders. An "interested stockholder" is defined as any person that is (x)
the owner of 15% or more of the outstanding voting stock of the corporation or
(y) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder. As permitted by the DGCL, the Company
has elected not to be governed by Section 203.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the DGCL, the Company's Restated Certificate of Incorporation
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, relating to prohibited dividends or
distributions or the repurchase or redemption of stock or (iv) for any
transaction from which the director derives an improper personal benefit. In
addition, the Company's bylaws provide for indemnification of the Company's
officers and directors to the fullest extent permitted under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Agency.
DESCRIPTION OF INDEBTEDNESS
The following is a summary of the material debt instruments of the Company
and its subsidiaries which will remain outstanding following completion of the
Offerings and the application of the net proceeds thereof. See "Use of
Proceeds." To the extent such summary contains descriptions of credit
documents, such descriptions do not purport to be complete and are subject to
and qualified in their entirety by reference to such documents, which are filed
as exhibits to the Registration Statement which includes this Prospectus.
SENIOR CREDIT FACILITY
General. The Company intends to enter into an amended and restated credit
agreement with a syndicate of lenders led by Bank One, Indianapolis, N.A.
("Bank One") concurrently with the consummation of the Offerings, providing for
up to $180 million of revolving credit availability (the "Senior Credit
Facility"). Each of the Company's domestic operating subsidiaries (the "Senior
Credit Obligors") will be parties to the Senior Credit Facility. The
obligations under the Senior Credit Facility of each Senior Credit Obligor (the
"Obligations") will be unconditionally guaranteed by each other Senior Credit
Obligor and each of the Company and its domestic subsidiaries which are holding
companies (the "Senior Credit Guaranties"). The Obligations will be secured by
a first lien on substantially all the assets of the Company and its domestic
subsidiaries, including a pledge of the stock of such subsidiaries. The
Obligations and the Senior Credit Guaranties will rank pari passu with the
Notes and will rank senior to all other indebtedness of the Company.
75
Initially, the amount available to the Company for borrowing under the Senior
Credit Facility (the "Commitment Amount") will be $180 million, which will be
available for general corporate purposes (including acquisitions). Beginning
March 31, 2001, the Commitment Amount will decrease by $11.25 million at the
end of each quarter thereafter until December 31, 2004, at which time the
Senior Credit Facility terminates. There is a sub-limit for letters of credit
equal to the lesser of the Commitment Amount at the time of the issuance of a
letter of credit and $30 million.
Interest Rates. Interest on outstanding borrowings under the Senior Credit
Facility will be payable monthly and will accrue at an annual rate equal to
either (i) the Prime Rate (as defined in the Senior Credit Facility) or (ii)
the London Interbank Offered Rate plus the Applicable Spread (a "LIBOR-based
Rate"), at the option of the Company. The Applicable Spread will be based upon
the Company's trailing four quarter Ratio of Total Funded Debt to EBITDA (as
defined in the Senior Credit Facility) as follows:
RATIO OF TOTAL FUNDED DEBT TO EBITDA OVER LIBOR
------------------------------------ ----------------
4.00x or above.......................................... 200 basis points
3.50-3.99............................................... 175 basis points
3.00-3.49............................................... 150 basis points
2.50-2.99............................................... 125 basis points
Maturity and Optional Prepayments. All borrowings under the Senior Credit
Facility will mature on December 31, 2004, except that the aggregate principal
amount outstanding may not exceed the Commitment Amount at any time. Borrowings
under the Senior Credit Facility will be prepayable at any time without premium
or penalty, except that any prepayment of a LIBOR-based Rate loan that is made
prior to the end of the applicable interest period will be subject to
reimbursement of breakage costs.
Covenants. The Senior Credit Facility will contain certain customary
covenants, including reporting and other affirmative covenants; financial
covenants, including ratio of senior funded debt to EBITDA, ratio of funded
debt to EBITDA, ratio of EBIT to cash interest, fixed charge coverage ratio,
minimum current ratio and minimum net income excluding extraordinary items
(each as defined in and calculated pursuant to the Senior Credit Facility); and
negative covenants, including restrictions on incurrence of other indebtedness,
amendments with respect to other indebtedness (including the Notes), payment of
cash dividends and other distributions to stockholders, liens in favor of
parties other than the lenders under the Senior Credit Facility, certain
guaranties of obligations of or advances to others, sales of material assets
not in the ordinary course of business, certain acquisitions of assets, making
of certain investments and capital expenditures.
Events of Default. The Senior Credit Facility will contain customary events
of default including non-payment of principal, interest or fees; violation of
covenants; inaccuracy of representations or warranties; cross-default to
certain other indebtedness including the Notes; bankruptcy; a change of control
of the Company or certain domestic subsidiaries; and any failure to apply
proceeds of an underwritten public offering of equity securities of the Company
as required by the Senior Credit Facility.
Fees. The Company will pay, on a quarterly basis, a per annum fee on the
unused Commitment Amount ranging from 1/10% to 1/2% based on certain financial
ratios of the Company.
GM CONTINGENT PURCHASE PRICE NOTE
In connection with the GM Acquisition, DRA issued to GM a Contingent Purchase
Price Note which will be paid beginning in 2004. The amount of the payment will
be based upon a percentage of the average earnings of the Company in the three
year period ending December 31, 2003 in excess of certain imputed earnings. The
principal amount of the Contingent Purchase Price Note (the "Contingent
Payment") is calculated by (A) multiplying five by (i) the sum of EBIT (as
defined) for the three years ended December 31, 2001, 2002 and 2003, divided by
three minus (ii) the average three-year Imputed Return (as defined) on any
additional investment made by the Company (whether financed in the form of debt
or equity) to fund any acquisition made
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by the Company made after July 31, 1994 and on the Company's balance sheet at
December 31, 2001, 2002 and 2003 (the "Additional Investments"), (B)
subtracting therefrom the Senior Obligations (as defined) outstanding on
December 31, 2003 and (C) multiplying the result by the percentage obtained by
dividing 100,000 (as adjusted for stock splits, reverse splits and stock
dividends) by the total number of shares of all classes of Common Stock
outstanding on a fully diluted basis as of the date of determination, excluding
any shares issued subsequent to July 31, 1994 to the extent the proceeds
therefrom have been accounted for as an Additional Investment. The Contingent
Payment, if any, shall be paid in five equal consecutive annual installments
commencing on July 31, 2004. No interest accrues on the Contingent Payment. The
GM Contingent Purchase Price Note is subordinated in right of payment to the
Senior Credit Facility pursuant to the terms of a Subordination Agreement by
and among DRA and the lenders under the Senior Credit Facility (the "GM
Subordination Agreement"). Pursuant to the terms of the GM Subordination
Agreement, DRA may make payments of interest and principal on the GM Contingent
Purchase Price Note when due unless a representative of the lenders under the
Senior Credit Facility gives notice to GM that an event of default has occurred
under the Senior Credit Facility (a "Suspension Notice"). GM may not receive
any payments or take any legal action for the collection of the GM Contingent
Purchase Note during the 179-day period following the receipt of a Suspension
Notice (or such shorter period if such event of default under the Senior Credit
Facility shall have been waived or cured). For purposes of this paragraph (i)
"EBIT" shall mean net income plus the provision for income taxes and interest
expense, plus or minus any extraordinary charges or credits or nonrecurring
charges or credits, as the case may be, included in the determination of such
net income, as reflected on the Company's audited consolidated financial
statements for the period in question, (ii) "Imputed Return" for any year shall
mean an amount determined by multiplying (A) 0.175 times the Additional
Investment times (B) the number of days such investment(s) was outstanding
during such year divided by 365 days, and (iii) "Senior Obligations" shall mean
the sum of the outstanding principal plus accrued but unpaid interest thereon
of all senior, mezzanine, subordinated and all other debt and redeemable
preferred stock as reflected on the audited consolidated balance sheet of the
Company as of December 31, 2003, provided, however, that Senior Obligations
shall not include the outstanding balance of any of the foregoing as of
December 31, 2003 to the extent that the original proceeds from such debt or
redeemable preferred stock was accounted for as an Additional Investment.
SENIOR SUBORDINATED NOTES
In 1996, the Company issued to Salomon Brothers Inc and Smith Barney Inc. as
initial purchasers $140 million aggregate principal amount of 10 5/8% Senior
Subordinated Notes due August 1, 2006 (the "Senior Subordinated Notes").
Interest on the Senior Subordinated Notes is payable in cash semi-annually. The
Senior Subordinated Notes are fully and unconditionally guaranteed on a senior
subordinated basis by each of the Company's Domestic Restricted Subsidiaries.
The indenture governing the Senior Subordinated Notes contains certain
covenants by the Company in favor of the holders of the Senior Subordinated
Notes ("Senior Subordinated Note Holders"), including but not limited to
certain restrictions on the ability of the Company and certain of its
subsidiaries to: (i) incur indebtedness, except for permitted indebtedness;
(ii) pay dividends or purchase or redeem their stock or repay before maturity
any obligation subordinate to the Senior Subordinated Notes; (iii) incur future
restrictions on their ability to pay dividends and transfer assets; (iv) sell
assets and capital stock of their subsidiaries; (v) engage in transactions with
their affiliates; (vi) incur or permit to exist liens on their assets, except
for permitted liens; and (vii) engage in mergers, consolidations or transfers
of all or substantially all their assets. The Senior Subordinated Notes are
subordinate in right of payment to all senior indebtedness of the Company,
including the Senior Credit Facility and the Notes being sold as part of the
Notes Offering. The Senior Subordinated Notes are redeemable in whole or in
part at the option of the Company at any time on or after August 1, 2001, at a
price beginning at 105.313% of the aggregate principal amount to be redeemed,
declining ratably to 100% on and after August 1, 2004, and up to 35% of the
original principal amount of the Senior Subordinated Notes may be redeemed by
the Company at any time prior to August 1, 1999, with the proceeds of certain
public equity offerings, at a price equal to 110% of such principal amount
provided that at least 50% of the original principal amount of the Senior
Subordinated Notes remains outstanding. Upon the occurrence of certain changes
in control of the Company, each Senior Subordinated Note Holder has the right
to require the Company to purchase all or a portion of such Senior Subordinated
Note Holder's notes at a price
77
equal to 101% of the aggregate principal amount thereof. The failure of the
Company and certain of its subsidiaries to pay certain indebtedness when due
constitutes, among other things, an event of default under the Senior
Subordinated Notes and can lead to the acceleration of the payment of the
Senior Subordinated Notes. In connection with the initial placement of the
Senior Subordinated Notes, the Company agreed, for the benefit of the Senior
Subordinated Note Holders and at the Company's expense, to file and cause to
become effective an exchange offer or resale shelf registration statement with
the Commission. If neither such registration statement is filed by October 31,
1997 or declared effective by December 31, 1997, additional interest will
accrue on the Senior Subordinated Notes. The Company filed a registration
statement on October 31, 1997 and expects it to be declared effective by
December 31, 1997. See Note 7 to the Consolidated Financial Statements included
elsewhere in this Prospectus.
8% SUBORDINATED DEBENTURE OF DRA
In connection with the Offerings, DRA will issue to GM an 8% Subordinated
Debenture having a fair value of $18.4 million at October 31, 1997 (the "8%
Subordinated Debenture") in exchange for Series A 8% Preferred Stock of DRA
held by GM. The 8% Subordinated Debenture will be in the principal amount of
$19.0 million will be due July 31, 2004 and will bear interest, payable in
cash, at the rate of 8% per year. DRA will be able to prepay the 8%
Subordinated Debenture at any time in whole or in part without premium or
penalty. The 8% Subordinated Debenture will be subordinate in right of payment
to the Senior Credit Facility. The 8% Subordinated Debenture will contain
default provisions in the event that DRA fails to pay principal or interest on
the 8% Subordinated Debenture when due or upon the occurrence of certain
bankruptcy events.
BALLANTRAE SUBORDINATED DEBT
In 1996, Tractech issued a note in the original principal amount of $10
million in favor of Dyneer Corporation ("Dyneer") that matures on October 31,
2006 (the "Ballantrae Subordinated Debt"). The Ballantrae Subordinated Debt
bears interest at a rate of 11% per annum. Tractech may prepay the Ballantrae
Subordinated Debt at any time in whole or in part without premium or penalty.
Tractech has the right to set-off $750,000 against the outstanding amount of
the Ballantrae Subordinated Debt within thirty days of the entry of a final
non-appealable order by a court of competent jurisdiction in certain patent
litigation, if such order fails to grant Tractech the unfettered and exclusive
right to make, manufacture, have made, market and sell a particular line of
differentials without geographic or other restrictions and without cash
payments. The Company expects that Tractech will prepay with proceeds of the
Offerings all of the outstanding principal amount of the Ballantrae
Subordinated Debt except for $750,000. Tractech's obligations under the
Ballantrae Subordinated Debt are guaranteed by Ballantrae, and the Ballantrae
Subordinated Debt is subject to the Subordination Agreement dated as of October
24, 1996 among Tractech, Dyneer, Ballantrae and Bank One and the Subordinated
Pledge Agreement dated as of October 24, 1996 between Ballantrae and Dyneer, by
which Ballantrae has pledged all of the capital stock of Tractech to Dyneer.
78
DESCRIPTION OF NOTES
GENERAL
The Notes are to be issued under an Indenture to be dated as of December ,
1997 (the "Indenture"), among the Company, the Subsidiary Guarantors and
United States Trust Company of New York, as Trustee (the "Trustee").
A copy of the proposed form of Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Indenture is
subject to and is governed by the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act. Capitalized terms used herein and not
otherwise defined have the meanings set forth in the section "--Certain
Definitions."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company, which, unless otherwise provided by the Company, will be the offices
of the Trustee. At the option of the Company, payment of interest may be made
by check mailed to the address of the Holders as such address appears in the
Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be unsecured senior obligations of the Company, limited to
$130 million aggregate principal amount, and will mature on December , 2007.
The Notes will bear interest at the rate per annum shown on the cover page
hereof from December , 1997, or from the most recent date to which interest
has been paid or provided for, payable semi-annually to Holders of record at
the close of business on the or immediately preceding the interest
payment date on January and July of each year, commencing July , 1998.
The Company will pay interest on overdue principal at 1% per annum in excess
of such rate, and it will pay interest on overdue installments of interest at
such higher rate to the extent lawful.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to December , 2002.
Thereafter, the Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, upon not less than 30 nor more than
60 days' prior notice mailed by first-class mail to each Holder's registered
address, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed
during the 12-month period commencing on December of the years set forth
below:
REDEMPTION
PERIOD PRICE
------ ----------
2002......................................................... %
2003.........................................................
2004.........................................................
2005 and thereafter..........................................
In addition, at any time and from time to time prior to December , 2000,
the Company may redeem in the aggregate up to 40% of the original principal
amount of the Notes with the proceeds of one or more Public Equity
79
Offerings, at a redemption price (expressed as a percentage of principal
amount) of % plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided,
however, that at least 50% of the original aggregate principal amount of the
Notes must remain outstanding after each such redemption.
SELECTION
In the case of any partial redemption, selection of the Notes for redemption
will be made by the trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
SUBSIDIARY GUARANTIES
Each of the Company's Domestic Restricted Subsidiaries, as primary obligors
and not merely as sureties, will unconditionally Guarantee on an unsecured
senior basis the performance and punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all obligations of the Company
under the Indenture and the Notes, whether for payment of principal of or
interest on the Notes, expenses, indemnification or otherwise (all such
obligations guaranteed by the Subsidiary Guarantors being herein called the
"Guaranteed Obligations"). The Subsidiary Guarantors will agree to pay, in
addition to the amount stated above, any and all expenses (including
reasonable counsel fees and expenses) incurred by the Trustee or the Holders
in enforcing any rights under the Subsidiary Guaranties. Each of the Company
and the Subsidiary Guarantors will agree to contribute to any other Subsidiary
Guarantor which makes payments pursuant to its Subsidiary Guaranty an amount
equal to the Company's or such Subsidiary Guarantor's proportionate share of
such payment, based on the net worth of the Company or such Subsidiary
Guarantor relative to the aggregate net worth of the Company and the
Subsidiary Guarantors. After the Issue Date, the Company will cause each new
Domestic Restricted Subsidiary to execute and deliver to the Trustee a
supplemental indenture pursuant to which such new Domestic Restricted
Subsidiary will Guarantee payment of the Notes. See "Certain Covenants--Future
Subsidiary Guarantors" below.
Each Subsidiary Guaranty is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon each Subsidiary Guarantor and (c) inure to the benefit of
and be enforceable by the Trustee, the Holders and their successors,
transferees and assigns.
Upon the sale or other disposition of a Subsidiary Guarantor or the sale or
disposition of all or substantially all the assets of a Subsidiary Guarantor
permitted by the Indenture, such Subsidiary Guarantor will be released from
all its obligations under its Subsidiary Guaranty. Any Subsidiary Guarantor
that is designated an Unrestricted Subsidiary in accordance with the terms of
the Indenture will be released from all its obligations under its Subsidiary
Guaranty upon execution and delivery of a supplemental indenture in form
satisfactory to the Trustee.
RANKING
The indebtedness evidenced by the Notes and the Subsidiary Guaranties will
be unsecured senior obligations of the Company and the Subsidiary Guarantors,
as the case may be. The Notes and each Subsidiary Guaranty will in all
respects rank pari passu with all other Senior Indebtedness of the Company and
the relevant Subsidiary Guarantor, respectively, and will rank senior in right
of payment to all existing and future Subordinated Obligations of the Company
and the relevant Subsidiary Guarantor, respectively. The Notes and the
Subsidiary Guaranties will be effectively subordinated to any Secured
Indebtedness of the Company and the Subsidiary Guarantors (including the
Senior Credit Facility) to the extent of the value of the assets securing such
Indebtedness and to any liabilities of Subsidiaries other than the Subsidiary
Guarantors. Under certain
80
circumstances, the Subsidiary Guaranties could be effectively subordinated to
all the obligations of the Subsidiary Guarantors. See "Risk Factors--
Substantial Leverage and Debt Service Obligations" and "Risk Factors--Asset
Encumbrance; Holding Company Structure."
As of October 31, 1997, after giving pro forma effect to the Offerings and
the other Transactions, (i) Senior Indebtedness of the Company and the
Subsidiary Guarantors would have been approximately $65.9 million (excluding
the Notes, the Subsidiary Guaranties and unused commitments under the Senior
Credit Facility), (ii) Subordinated Obligations of the Company and the
Subsidiary Guarantors would have been approximately $140.8 million (including
the Senior Subordinated Notes and the related Guarantees by the Company's
Domestic Restricted Subsidiaries), substantially all of which mature prior to
the Notes, (iii) Secured Indebtedness of the Company and the Subsidiary
Guarantors would have been approximately $47.5 million (excluding unused
commitments under the Senior Credit Facility) and (iv) all liabilities and
preferred stock of the Subsidiaries (excluding the Subsidiary Guarantors)
would have been approximately $29.4 million. Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company and its
Restricted Subsidiaries may Incur, under certain circumstances the amount of
such Indebtedness could be substantial and, in any case, such Indebtedness may
be Secured Indebtedness or Indebtedness of Subsidiaries other than Subsidiary
Guarantors. See "Certain Covenants--Limitation on Indebtedness."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the
right, unless the Company has elected to redeem the Securities pursuant to the
provisions described under "--Optional Redemption," to require that the
Company repurchase all or a portion of such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase (subject to the right of holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), in accordance with the provisions of the next
paragraph.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of holders of record on the relevant
record date to receive interest on the relevant interest payment date); (ii)
the circumstances and relevant facts and relevant financial information
regarding such Change of Control; (iii) the repurchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (iv) the instructions determined by the Company, consistent with
the covenant described hereunder, that a Holder must follow in order to have
its Notes repurchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Senior Credit Facility and would
require the repurchase of the Senior Subordinated Notes.
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Future indebtedness of the Company may contain prohibitions of certain events
which would constitute a Change of Control or require such indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Notes could cause a
default under such existing or future indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the Holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any repurchases required in connection with a Change of
Control. The Company's failure to purchase the Notes in connection with a
Change in Control would result in a default under the Indenture which would,
in turn, constitute a default under the Senior Credit Facility. The provisions
under the Indenture relative to the Company's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or
modified (at any time prior to the occurrence of such Change of Control) with
the written consent of the Holders of a majority in principal amount of the
Notes.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be initially issued in the form of a Global Note. The Global
Note will be deposited with, or on behalf of, the Depository and registered in
the name of the Depository or its nominee. Except as set forth below, the
Global Note may be transferred, in whole and not in part, only to the
Depository or another nominee of the Depository. Investors may hold their
beneficial interests in the Global Note directly through the Depository if
they have an account with the Depository or indirectly through organizations
which have accounts with the Depository.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need to physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers (which may include the Underwriters), banks, trust companies, clearing
corporations and certain other organizations. Access to the Depository's book-
entry system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by such Global Note to the accounts of participants. The accounts
to be credited shall be designated by the Underwriters with respect to Notes
placed by the Underwriters for the Company. Ownership of beneficial interests
in the Global Note will be limited to participants or persons that may hold
interests through participants. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of those ownership interests
will be effected only through, records maintained by the Depository (with
respect to participants' interest) and such participants (with respect to the
owners of beneficial interests in the Global Note other than participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to transfer or pledge beneficial
interests in the Global Note.
So long as the depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Notes for
all purposes of such Notes and the Indenture. Except as set forth below,
owners of beneficial interests in the Global Note will not be entitled to have
the Notes represented by the Global Note registered in their names, will not
receive or be entitled to receive physical delivery of certificated Notes in
definitive form and will not be considered to be the owners or holders of any
Notes under the Global Note. The Company understands that under existing
industry practice, in the event an owner of a beneficial interest in the
Global Note desires to take any action that the Depository, as the holder of
the Global Note, is entitled to take, the Depository would authorize
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the participants to take such action, and that the participants would
authorize beneficial owners owning through such participants to take such
action or would otherwise act upon the instructions of beneficial owners
owning through them.
Payment of principal of and interest on Notes represented by the Global Note
registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Company will not have any responsibility or liability for
any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Note for any Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between the
Depository and its participants or the relationship between such participants
and the owners of beneficial interests in the Global Note owning through such
participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole
by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by
the Depository or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of
U.S.$1,000 and integral multiples thereof if (i) the Depository notifies the
Company that is unwilling or unable to continue as Depository for the Global
Note or if at any time the Depository ceases to be a clearing agency
registered under the Exchange Act, (ii) the Company in its discretion at any
time determines not to have all of the Notes represented by the Global Note or
(iii) a default entitling the holders of the Notes to accelerate the maturity
thereof has occurred and is continuing. Any Note that is exchangeable pursuant
to the preceding sentence is exchangeable for certificated Notes issuable in
authorized denominations and registered in such names as the Depository shall
direct. Subject to the foregoing, the Global Note is not exchangeable, except
for a Global Note of the same aggregate denomination to be registered in the
name of the Depository or its nominee.
CERTAIN COVENANTS
The Indenture contains covenants including, among other things, the
following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness
unless, on the date of such Incurrence, the Consolidated Coverage Ratio
exceeds 2.00 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to the Senior Credit Facility or any
83
Permitted Receivables Financing; provided, however, that, after giving effect
to any such Incurrence, the aggregate principal amount of such Indebtedness
then outstanding does not exceed the greater of (i) $180 million (less any
permanent reductions in the amount of available borrowings thereunder) and
(ii) the sum of (x) 75% of the book value of the inventory of the Company and
its Restricted Subsidiaries and (y) 85% of the book value of the accounts
receivable of the Company and its Restricted Subsidiaries, in each case
determined in accordance with GAAP; (2) Indebtedness of the Company owed to
and held by any Wholly Owned Subsidiary or Indebtedness of a Restricted
Subsidiary owed to and held by the Company or a Wholly Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any Capital
Stock which results in any such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of such Indebtedness (other than
to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness of the issuer thereof; (3)
Indebtedness of the Company or a Restricted Subsidiary owed to and held by any
Non-Wholly Owned Subsidiary; provided, however, that (i) any such Indebtedness
shall be unsecured Subordinated Obligations of the Company or such Restricted
Subsidiary, as applicable, and (ii) any subsequent issuance or transfer of any
Capital Stock of such Non-Wholly Owned Subsidiary or any subsequent transfer
of such Indebtedness (other than to the Company, a Wholly Owned Subsidiary or
another Non-Wholly Owned Subsidiary) shall be deemed to constitute the
Incurrence of such Indebtedness by the issuer thereof; (4) Indebtedness
represented by the Notes; (5) Indebtedness outstanding on the Issue Date
(other than Indebtedness described in clause (1), (2) or (3) of this
covenant); (6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (4), (5), (9), (12) or this
clause (6); (7) Indebtedness in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds entered into by the
Company and the Restricted Subsidiaries in the ordinary course of their
business; (8) Hedging Obligations consisting of Interest Rate Agreements and
Currency Agreements entered into in the ordinary course of business and not
for the purpose of speculation; provided, however, that, in the case of
Currency Agreements and Interest Rate Agreements, such Currency Agreements and
Interest Rate Agreements do not increase the Indebtedness of the Company
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder; (9) Purchase Money Indebtedness and
Capital Lease Obligations Incurred to finance the acquisition by the Company
or a Restricted Subsidiary of any assets in the ordinary course of business
and which, together with all Refinancing Indebtedness Incurred in respect of
Indebtedness previously Incurred pursuant to this clause (9), do not exceed
$35 million in the aggregate at any time outstanding; (10) Indebtedness
represented by the Subsidiary Guaranties; (11) Indebtedness arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument inadvertently (except in the case of daylight overdrafts) drawn
against insufficient funds in the ordinary course of business, provided that
such Indebtedness is extinguished within five business days of Incurrence;
(12) Indebtedness of the Company and its Restricted Subsidiaries, to the
extent the proceeds thereof are immediately used after the Incurrence thereof
to purchase Notes tendered in an offer to purchase made as a result of a
Change of Control; (13) Indebtedness of the Company and its Restricted
Subsidiaries arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, in any case Incurred in connection
with the disposition of any assets of the Company or any Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such assets for the purpose of financing such acquisition), in
a principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; and
(14) Indebtedness in an aggregate principal amount which, together with all
other Indebtedness of the Company outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (13) above or
paragraph (a) above), does not exceed $75 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Restricted Subsidiary to, Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations unless such Indebtedness
shall be subordinated to the Notes and the Subsidiary Guaranties, as
applicable, to at least the same extent as such Subordinated Obligations;
provided, however, that the foregoing shall not prohibit the Refinancing of
all or any part of the GM Contingent Note or the GM Exchange Debentures with
Refinancing Indebtedness if, at the time of such Incurrence, no Default shall
have occurred and be continuing (or would result therefrom).
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(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one
of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses
and (ii) an item of Indebtedness may be divided and classified in more than
one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not, and
shall not permit any Subsidiary Guarantor to, Incur any Secured Indebtedness
that is not Senior Indebtedness of the Company or such Subsidiary Guarantor,
as applicable, unless contemporaneously therewith effective provision is made
to secure the Notes or the Subsidiary Guaranty, as applicable, equally and
ratably with such Secured Indebtedness.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to, make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); (2) the Company is not able to Incur
an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness"; or (3) the aggregate amount of
such Restricted Payment together with all other Restricted Payments (the
amount of any payments made in property other than in cash to be valued at the
fair market value of such property, as determined in good faith by the Board
of Directors) declared or made since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period (treated as
one accounting period) from the beginning of the fiscal quarter immediately
following the fiscal quarter during which the Notes are originally issued to
the end of the most recent fiscal quarter ending at least 45 days (or, if
less, the number of days after the end of such fiscal quarter as the
consolidated financial statements of the Company shall be provided to the
Noteholders pursuant to the Indenture) prior to the date of such Restricted
Payment (or, in case such Consolidated Net Income accrued during such period
(treated as one accounting period) shall be a deficit, minus 100% of such
deficit); (B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a Subsidiary
of the Company and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees to the extent that the
purchase by such plan or trust is financed by Indebtedness of such plan or
trust to the Company or any Subsidiary or for which the Company or any
Subsidiary is liable, directly or indirectly, as a guarantor or otherwise
(including by the making of cash contributions to such plan or trust which are
used to pay interest or principal on such Indebtedness)); (C) the amount by
which Indebtedness of the Company or its Restricted Subsidiaries is reduced on
the Company's balance sheet upon the conversion or exchange (other than by the
Company or a Subsidiary of the Company) subsequent to the Issue Date, of any
Indebtedness of the Company or its Restricted Subsidiaries convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash, or the fair value of any other property,
distributed by the Company or any Restricted Subsidiary upon such conversion
or exchange); and (D) an amount equal to the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however, that the
foregoing amount shall not exceed, in the case of any such Unrestricted
Subsidiary, the amount previously treated as a Restricted Payment by the
Company or any Restricted Subsidiary in such Person.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company or any Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to
a Subsidiary of the Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of their
employees to the extent that the purchase by such plan or trust is financed by
Indebtedness of such plan or trust to the Company or any Subsidiary or for
which the Company or any Subsidiary is liable, directly or indirectly, as a
guarantor or otherwise (including by the making of cash contributions to such
plan or trust which are used to pay interest or principal on such
Indebtedness)); provided, however, that (A) such purchase or redemption
85
shall be excluded in the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale shall be excluded from the
calculation of amounts under clause (3)(B) of paragraph (a) above; (ii) any
purchase or redemption of (A) Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to
paragraphs (b) and (c) of the covenant described under "--Limitation on
Indebtedness" or (B) Subordinated Obligations of a Restricted Subsidiary made
by exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of such Restricted Subsidiary or the Company which is
permitted to be Incurred pursuant to paragraphs (b) and (c) of the covenant
described under "--Limitation on Indebtedness"; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iii) any purchase or redemption of (A) Disqualified
Stock of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Disqualified Stock of the Company or (B)
Disqualified Stock of a Restricted Subsidiary made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Disqualified Stock of
such Restricted Subsidiary or the Company; provided, however, that (1) at the
time of such exchange, no Default shall have occurred and be continuing (or
would result therefrom) and (2) such purchase or redemption will be excluded
in the calculation of the amount of Restricted Payments; (iv) any purchase or
redemption of Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "--Limitation on Sales of Assets and
Subsidiary Stock"; provided, however, that such purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments; (v) upon the
occurrence of a Change of Control and within 60 days after the completion of
the offer to repurchase the Notes pursuant to the covenant described under "--
Change of Control" above (including the purchase of all Notes tendered), any
purchase or redemption of Subordinated Obligations required pursuant to the
terms thereof as a result of such Change of Control at a purchase or
redemption price not to exceed the outstanding principal amount thereof, plus
accrued and unpaid interest thereon, if any; provided, however, that (A) at
the time of such purchase or redemption, no Default shall have occurred and be
continuing (or would result therefrom), (B) the Company would be able to Incur
an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness" after giving pro forma effect
to such Restricted Payment, (C) such purchase or redemption is not made,
directly or indirectly, from the proceeds of (or made in anticipation of) any
issuance of Indebtedness by the Company or any Subsidiary of the Company and
(D) such purchase or redemption will be included in the calculation of the
amount of Restricted Payments; (vi) dividends paid within 60 days after the
date of declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that at the time of
payment of such dividend, no other Default shall have occurred and be
continuing (or would result therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of Restricted
Payments; or (vii) the repurchase of shares of, or options to purchase shares
of, common stock of the Company or any of its Subsidiaries from employees,
former employees, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto) approved by
the Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock; provided,
however, that the aggregate amount of such repurchases shall not exceed the
sum of (1) $5 million and (2) the aggregate amount of cash received by the
Company after the Issue Date from the sale of such shares to, or the exercise
of options to purchase such shares by, employees or directors of the Company
or any of its Subsidiaries; provided further, however, that such repurchases
shall be included in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise permit to exist or become effective any
consensual encumbrance or consensual restriction on the ability of any
Restricted Subsidiary (a) to pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the Company, (b) to make any loans or advances to the
Company or (c) transfer any of its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date; (ii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary which was entered into on
or prior
86
to the date on which such Restricted Subsidiary was acquired by the Company
(other than as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) of this covenant (or effecting a Refinancing of such
Refinancing Indebtedness pursuant to this clause (iii)) or contained in any
amendment to an agreement referred to in clause (i) or (ii) of this covenant
or this clause (iii); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no more restrictive in any material
respect than the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in such agreements; (iv) any such encumbrance or
restriction consisting of customary non-assignment provisions in leases
governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements or mortgages; (vi) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition; and
(vii) any encumbrance or restriction with respect to any Receivables
Subsidiary pursuant to an agreement related to Indebtedness of the Receivables
Subsidiary which is permitted under the covenant described under "--Limitation
on Indebtedness" or pursuant to any agreement relating to a Financing
Disposition to or by the Receivables Subsidiary.
Limitation on Sales of Assets and Subsidiary Stock. The Company shall not,
and shall not permit any Restricted Subsidiary to, consummate any Asset
Disposition unless the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value (including as to the value of all noncash consideration), as
determined in good faith by the Board of Directors, of the shares and assets
subject to such Asset Disposition and at least 75% (or 100% in the case of
lease payments) of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents. In the event
and to the extent that the Net Available Cash received by the Company or any
Restricted Subsidiary from one or more Asset Dispositions occurring on or
after the Issue Date exceeds $10 million, then the Company or such Restricted
Subsidiary shall (i) within 360 days after the date such Net Available Cash so
received exceeds $10 million and to the extent the Company or such Restricted
Subsidiary elects (or is required by the terms of any Senior Indebtedness) to
(A) apply an amount equal to such excess Net Available Cash to prepay, repay
or purchase Senior Indebtedness of the Company or such Restricted Subsidiary,
in each case owing to a Person other than the Company or any Affiliate of the
Company, or (B) invest (or enter into a binding commitment to invest, provided
that such commitment shall be subject only to customary conditions (other than
financing) and such investment shall be consummated within 360 days after the
end of such 360-day period) an equal amount, or the amount not so applied
pursuant to clause (A), in Additional Assets (including by means of an
Investment in Additional Assets by a Restricted Subsidiary with Net Available
Cash received by the Company or another Restricted Subsidiary) and (ii) apply
such excess Net Available Cash (to the extent not applied pursuant to clause
(i)) as provided in the following paragraphs of the covenant described
hereunder; provided, however, that in connection with any prepayment,
repayment or purchase of Senior Indebtedness pursuant to clause (A) above, the
Company or such Restricted Subsidiary shall retire such Senior Indebtedness
and shall cause the related loan commitment (if any) to be permanently reduced
in an amount equal to the principal amount so prepaid, repaid or purchased;
provided further, however, that the Company or such Restricted Subsidiary
shall not be required to permanently reduce the related loan commitment in the
case of any such prepayment, repayment or purchase with Net Available Cash
from any Asset Disposition of Non-Core Assets, so long as an amount equal to
100% of such Net Available Cash is invested in Additional Assets within the
period required pursuant to clause (B) above. The amount of such excess Net
Available Cash required to be applied pursuant to clause (ii) above and not
theretofore so applied shall constitute "Excess Proceeds." Pending application
of Net Available Cash pursuant to this provision, such Net Available Cash
shall be invested in Temporary Cash Investments.
If at any time the aggregate amount of Excess Proceeds not theretofore
subject to an Excess Proceeds Offer (as defined below) totals at least $10
million, the Company shall, not later than 30 days after the end of the
87
period during which the Company is required to apply such Excess Proceeds
pursuant to clause (i) of the immediately preceding paragraph (or, if the
Company so elects, at any time within such period), make an offer (an "Excess
Proceeds Offer") to purchase from the Holders on a pro rata basis an aggregate
principal amount of Notes equal to the Excess Proceeds (rounded down to the
nearest multiple of $1,000) on such date, at a purchase price equal to 100% of
the principal amount of such Notes, plus, in each case, accrued interest (if
any) to the date of purchase, subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date (the "Excess Proceeds Payment"). Upon completion of an Excess Proceeds
Offer, the amount of Excess Proceeds remaining after application pursuant to
such Excess Proceeds Offer (including payment of the purchase price for Notes
duly tendered) may be used by the Company for any corporate purpose (to the
extent not otherwise prohibited by the Indenture).
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption of Indebtedness of the Company or any Restricted Subsidiary
(other than Indebtedness that by its terms is subordinated to the Notes or the
applicable Subsidiary Guaranty) and the release of the Company and the
Restricted Subsidiaries from all liability on such Indebtedness in connection
with such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in connection with any repurchase under the covenant described
above. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the covenant described hereunder, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless (1) the terms
thereof are no less favorable to the Company or such Restricted Subsidiary
than those that could be obtained at the time of such transaction in arm's-
length dealings with a Person who is not such an Affiliate, (2) if such
Affiliate Transaction involves an amount in excess of $5 million, the terms
thereof (i) are set forth in writing, (ii) comply with clause (1) and (iii)
have been approved by a majority of the disinterested members of the Board of
Directors and (3) if such Affiliate Transaction involves an amount in excess
of $10 million, (i) the terms thereof comply with clause (2) and (ii) the
Company has received a written opinion from a nationally recognized investment
banking firm to the effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a financial
standpoint, to the Company or such Restricted Subsidiary, as the case may be;
provided, however, that no such opinion shall be required with respect to any
Financing Disposition.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described
under "--Limitation on Restricted Payments," (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans in the ordinary course of business and approved by the Board
of Directors, (iii) the grant of stock options or similar rights to employees
and directors of the Company in the ordinary course of business and pursuant
to plans approved by the Board of Directors, (iv) loans or advances to
employees in the ordinary course of business of the Company or its Restricted
Subsidiaries, (v) fees, compensation or employee benefit arrangements paid to
and indemnity provided for the benefit of directors, officers or employees of
the Company or any Subsidiary in the ordinary course of business or (vi) any
Affiliate Transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries in the ordinary course of business (so long as
the other stockholders of any participating Restricted Subsidiaries which are
not Wholly Owned Subsidiaries are not themselves Affiliates of the Company).
88
Limitation on the Issuance or Sale of Capital Stock of Restricted
Subsidiaries. The Company shall not (i) sell, pledge, hypothecate or otherwise
dispose of any shares of Capital Stock of a Restricted Subsidiary (other than
pledges of Capital Stock securing Senior Indebtedness as in effect on the
Issue Date) or (ii) permit any Restricted Subsidiary, directly or indirectly,
to issue or sell or otherwise dispose of any shares of its Capital Stock other
than (A) to the Company or a Wholly Owned Subsidiary, (B) directors'
qualifying shares, (C) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary or (D) with respect to the common stock of any Restricted
Subsidiary, in a Public Equity Offering as a result of or after which a Public
Market exists; provided, however, that, in the case of clauses (C) and (D),
such issuance, sale or disposition or Public Equity Offering complies with the
covenant described under "--Limitation on Sales of Assets and Subsidiary
Stock." Upon any issuance or sale of Capital Stock pursuant to clause (C)
above and delivery of a supplemental indenture in form satisfactory to the
Trustee, any such Restricted Subsidiary that is a Subsidiary Guarantor shall
be released from all its obligations under its Subsidiary Guaranty.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien (other than Permitted Liens) of any nature whatsoever on any property of
the Company or any Restricted Subsidiary (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, unless (i) if such Lien secures Indebtedness that ranks pari passu
with the Notes or the applicable Subsidiary Guaranty, the Notes or such
Subsidiary Guaranty are secured on an equal and ratable basis with the
obligations so secured or (ii) if such Lien secures Indebtedness that is
subordinated to the Notes or such Subsidiary Guaranty, such Lien shall be
subordinated to a Lien granted to the Holders in the same collateral as that
securing such Lien to the same extent as such subordinated Indebtedness is
subordinated to the Notes or such Subsidiary Guaranty.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall
be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor
Company (if not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Subsidiary of the Company as a result of such
transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have occurred
and be continuing; (iii) except in the case of a merger the sole purpose of
which is to change the Company's jurisdiction of incorporation, immediately
after giving effect to such transaction, the Successor Company would be able
to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the
covenant described under "--Limitation on Indebtedness"; (iv) immediately
after giving effect to such transaction, the Successor Company shall have
Consolidated Net Worth in an amount that is not less than the Consolidated Net
Worth of the Company immediately prior to such transaction; (v) in the case of
a conveyance, transfer or lease of all or substantially all the assets of the
Company, such assets shall have been transferred as an entirety to one Person;
and (vi) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture. Notwithstanding the foregoing clauses (ii), (iii), (iv) and (v),
any Restricted Subsidiary may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company shall not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a
series of transactions, all or substantially all its assets to, any
89
Person, unless: (i) the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not such Subsidiary) shall expressly assume, by a
supplemental indenture, in form satisfactory to the Trustee, all the
obligations of such Subsidiary under its Subsidiary Guaranty, if any; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Company, any Subsidiary of the
Company or the Successor Company as a result of such transaction as having
been Incurred by such Person at the time of such transaction), no Default
shall have occurred and be continuing; (iii) in the case of a conveyance,
transfer or lease of all or substantially all the assets of such Subsidiary,
such assets shall have been transferred as an entirety to one Person; and (iv)
the Company shall have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture.
The provisions of clauses (i), (iii) and (iv) above shall not apply to any
transactions which constitute an Asset Disposition if the Company has complied
with the applicable provisions of the covenant described under "--Limitation
on Sales of Assets and Subsidiary Stock" above.
Future Guarantors. The Company shall cause each Domestic Restricted
Subsidiary to execute and deliver to the Trustee a supplemental indenture
pursuant to which such Restricted Subsidiary will Guarantee payment of the
Notes on the same terms and conditions as those set forth in the Indenture.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the report requirements of Section 13 or 15(d) of the Exchange Act,
the Company shall file with the SEC and provide the Trustee and Noteholders
and prospective Noteholders (upon request) with such annual reports and such
information, documents and other reports as are specified in such Sections and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections;
provided, however, that the Company shall not be required to file any report,
document or other information with the SEC if the SEC does not permit such
filing.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company or any Subsidiary Guarantor to
comply with its obligations under "Certain Covenants--Merger and
Consolidation" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described above
under "--Change of Control" or "--Certain Covenants" (other than a failure to
purchase Notes), (v) the failure by the Company to comply for 30 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Significant Subsidiary is not paid within any applicable
grace period after final maturity or is accelerated by the holders thereof
because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million and such failure continues for 10 days after
notice (the "cross acceleration provision"), (vii) certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy provisions"), (viii) any judgment or decree for
the payment of money in excess of $10 million is rendered against the Company
or a Significant Subsidiary, remains outstanding for a period of 60 days
following such judgment and is not discharged, waived or stayed within 10 days
after notice (the "judgment default provision") or (ix) a Subsidiary Guaranty
ceases to be in full force and effect (other than in accordance with the terms
of such Subsidiary Guaranty) or a Subsidiary Guarantor denies or disaffirms
its obligations under its Subsidiary Guaranty and such Default continues for
10 days. However, a default under clause (iv) or (v) will not constitute an
Event of Default until the Trustee or the Holders of 25% in principal amount
of the outstanding Notes notify the Company of the default and the Company
does not cure such default within the time specified in clauses (iv) and (v)
hereof after receipt of such notice.
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If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holders of the Notes. Under certain
circumstances, the Holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such
Holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered
the Trustee reasonable security or indemnity against any loss, liability or
expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-
day period. Subject to certain restrictions, the Holders of a majority in
principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or of exercising any trust or power conferred on the Trustee.
The Trustee, however, may refuse to follow any direction that conflicts with
law or the Indenture or that the Trustee determines is unduly prejudicial to
the rights of any other Holder or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as the Trustee determines that withholding notice is not
opposed to the interest of the Holders. In addition, the Company is required
to deliver to the Trustee, within 120 days after the end of each fiscal year,
a certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required to deliver to
the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what
action the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the Holders of a majority in principal amount of
the Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected thereby, no amendment may, among other things,
(i) reduce the amount of Notes whose Holders must consent to an amendment,
(ii) reduce the rate of or extend the time for payment of interest on any
Note, (iii) reduce the principal of or extend the Stated Maturity of any Note,
(iv) reduce the amount payable upon the redemption or repurchase of any Note,
or change the time at which any Note may be redeemed as described under "--
Optional Redemption" above, (v) make any Note payable in money other than that
stated in the Note, (vi) impair the right of any Holder to institute suit for
the enforcement of any payment on or with respect to such Holder's Notes or
any Subsidiary Guaranty, (vii) make any change in the amendment provisions
which require each Holder's consent or in the waiver provisions, (viii) at any
time after a Change of Control or Asset Disposition has occurred, change the
time at which the related offer to purchase the Notes must be made or at which
the Notes must be repurchased pursuant to such
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offer, (ix) subordinate the Notes to any other obligation of the Company of
(x) make any change in any Subsidiary Guaranty that would adversely affect the
Holders.
Without the consent of any Holder, the Company, the Subsidiary Guarantors
and Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes, to release Subsidiary Guarantors when permitted by the
Indenture, to secure the Notes, to add to the covenants of the Company for the
benefit of the Holders or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
Holder or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment.
However, the failure to give such notice to all Holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER
Certificated Notes will be issued in registered form and will be
transferable only upon the surrender of the Notes being transferred for
registration of transfer. The Company may require payment of a sum sufficient
to cover any tax, assessment or other governmental charge payable in
connection with certain transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "--Change
of Control" and under the covenants described under "--Certain Covenants"
(other than the covenant described under "--Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision
described under "--Defaults" above and the limitations contained in clauses
(iii) and (iv) of the first paragraph under "Certain Covenants--Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (vi), (vii) (with
respect only to Significant Subsidiaries) or (viii) under "--Defaults" above
or because of the failure of the Company to comply with clause (iii) or (iv)
of the first paragraph under "Certain Covenants--Merger and Consolidation"
above. If the Company exercises its legal defeasance option or its covenant
defeasance option, each Subsidiary Guarantor will be released from all of its
obligations with respect to its Subsidiary Guaranty.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other
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conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and
will be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service
or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with respect to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York giving effect
to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that
any such Restricted Subsidiary described in clause (ii) or (iii) above is
primarily engaged in Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "Certain Covenants--
Limitation on Restricted Payments," "Certain Covenants--Limitation on
Affiliate Transactions" and "Certain Covenants--Limitations on Sales of Assets
and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner
of Capital Stock representing 10% or more of the total voting power of the
Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Capital Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of
this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares and, to the
extent required by local ownership laws in foreign countries, shares owned by
foreign
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shareholders), (ii) all or substantially all the assets of any division,
business segment or comparable line of business of the Company or any
Restricted Subsidiary or (iii) any other assets of the Company or any
Restricted Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary (other than, in the case of (i), (ii)
and (iii) above, (x) a disposition by a Restricted Subsidiary to the Company
or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary and
(y) for purposes of the covenant described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" only, a disposition that
constitutes a Restricted Payment permitted by the covenant described under
"Certain Covenants--Limitation on Restricted Payments").
"Asset Purchase Agreement" means the Asset Purchase Agreement dated July 13,
1994, by and among the Company, DRA and General Motors Corporation.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, (i) if such Sale and Leaseback Transaction is a
Capital Lease Obligation, the amount of Indebtedness represented thereby
according to the definition of "Capital Lease Obligations" and (ii) in all
other instances, the present value (discounted at the interest rate borne by
the Notes, compounded annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Senior Credit Facility including principal, premium (if any), interest,
fees, charges, expenses, reimbursement obligations, Guarantees and all other
amounts payable thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that for purposes of this clause (i), such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
of the total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in this
clause (i), provided that the Permitted Holders shall be deemed to
94
beneficially own any Voting Stock of any entity (the "specified entity")
held by any other entity (the "parent entity") so long as the Permitted
Holders beneficially own (as so defined), directly or indirectly, in the
aggregate a majority of the voting power of the Voting Stock of the parent
entity), directly or indirectly, in the aggregate a lesser percentage of
the total voting power of the Voting Stock of the Company than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors (for purposes of this clause (i), such other person shall be
deemed to beneficially own any Voting Stock of a specified entity held by a
parent entity, if such other person is the beneficial owner (as defined in
this clause (i)), directly or indirectly, of more than 35% of the voting
power of the Voting Stock of such parent entity and the Permitted Holders
beneficially own (as defined in this clause (i)), directly or indirectly,
in the aggregate a lesser percentage of the voting power of the Voting
Stock of such parent entity and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of such parent entity);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office;
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation; or
(iv) the shareholders of the Company shall have approved any plan of
liquidation or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days (or, if less, the
number of days after the end of such fiscal quarter as the consolidated
financial statements of the Company shall be provided to the Noteholders
pursuant to the Indenture) prior to the date of such determination
(determined, for the four fiscal quarters ending prior to the Issue Date, or
any of such fiscal quarters, on a pro forma basis to give effect to the
Subsequent Acquisitions as if they occurred on the first day of such period)
to (ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding on
such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, legally defeased or
otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period (except that, in the
case of Indebtedness used to finance working capital needs Incurred under a
revolving credit or similar arrangement, the amount thereof shall be deemed to
be the average daily balance of such Indebtedness during such four-fiscal-
quarter period), (2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for
such period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by
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an amount equal to the EBITDA (if negative) directly attributable thereto for
such period and Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly attributable
to any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, legally defeased, assumed by a third person (to the extent the
Company and its Restricted Subsidiaries are no longer liable for such
Indebtedness) or otherwise discharged with respect to the Company and its
continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary is
sold, the Consolidated Interest Expense for such period directly attributable
to the Indebtedness of such Restricted Subsidiary to the extent the Company
and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company shall have consummated a Public Equity Offering, Consolidated Interest
Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, legally defeased or
otherwise discharged with respect to the Company and its Restricted
Subsidiaries in connection with such Public Equity Offering for such period,
(4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or
an acquisition of assets, which acquisition constitutes all or substantially
all of an operating unit of a business, including any such Investment or
acquisition occurring in connection with a transaction requiring a calculation
to be made hereunder, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition occurred
on the first day of such period and (5) if since the beginning of such period
any Person (that subsequently became a Restricted Subsidiary or was merged
with or into the Company or any Restricted Subsidiary since the beginning of
such period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (3) or (4) above if made by the Company or a Restricted Subsidiary
during such period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
Officer of the Company. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest of such Indebtedness shall
be calculated as if the rate in effect on the date of determination had been
the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, (a)
to the extent not included in such total interest expense, and to the extent
Incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount,
(iii) capitalized interest, (iv) noncash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends
in respect of all Preferred Stock of Restricted Subsidiaries held by Persons
other than the Company or a Wholly Owned Subsidiary, (viii) interest incurred
in connection with Investments in discontinued operations, (ix) interest
actually paid on any Indebtedness of any other Person that is Guaranteed by
the Company or any Restricted Subsidiary and (x) the cash contributions to any
employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company or any Wholly Owned Subsidiary) in connection
with Indebtedness Incurred by such plan or trust, minus, (b) to the extent
included in such total interest expense, amortization of deferred financing
costs, fees and expenses.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (or loss)
of any Person if such Person is not a Restricted Subsidiary, except that
subject to the exclusion
96
contained in clause (iv) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
a Restricted Subsidiary, to the limitations contained in clause (iii) below);
(ii) for purposes of subclause (a)(3)(A) of the covenant described under
"Certain Covenants--Limitation on Restricted Payments" only, any net income
(or loss) of any Person acquired by the Company or a Subsidiary in a pooling
of interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary consistent with such
restriction during such period to the Company or another Restricted Subsidiary
as a dividend or other distribution (subject, in the case of a dividend or
other distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining
such Consolidated Net Income; (iv) any gain (or loss) realized upon the sale
or other disposition of any assets of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain (or loss) realized upon the sale or other disposition of any Capital
Stock of any Person; (v) extraordinary gains or losses; (vi) the cumulative
effect of a change in accounting principles; and (vii) any noncash
compensation expense realized for grants of performance shares, stock options
or other stock awards to officers, directors and employees of the Company or
any Restricted Subsidiary.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of
any action for the purpose of which the determination is being made, as (i)
the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"CVC Investor" means (i) CVC, (ii) Citicorp, N.A. and (iii) any officer,
employee or director of CVC so long as such person shall be an employee,
officer or director of CVC.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable, at the option of
the holder thereof, for Indebtedness or Disqualified Stock or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the Notes.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of the
Company other than a Foreign Restricted Subsidiary.
"DRA" means Delco Remy America, Inc., a Delaware corporation and a Wholly
Owned Subsidiary.
"EBITDA" for any period means the sum of Consolidated Net Income plus,
without duplication, the following to the extent deducted in calculating such
Consolidated Net Income: (i) Consolidated Interest Expense,
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(ii) income tax expense, (iii) depreciation expense, (iv) amortization expense
and (v) all other noncash items reducing Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is,
or is required by GAAP to be, made, other than (a) accruals for post-
retirement benefits other than pensions and (b) restructuring charges incurred
by the Company in any completed fiscal quarter preceding the Issue Date), less
all noncash items increasing Consolidated Net Income, in each case for such
period. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization of, a Subsidiary
of the Company shall be added to Consolidated Net Income to compute EBITDA
only to the extent (and in the same proportion) that the net income of such
Subsidiary was included in calculating Consolidated Net Income.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financing Disposition" means any sale of any accounts receivable, or
interest therein, by the Company or any Subsidiary to any Receivables
Subsidiary, or by the Receivables Subsidiary, pursuant to a Permitted
Receivables Financing.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of the
Company which is not organized under the laws of the United States of America
or any State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board and (iii) such
other statements by such other entity as approved by a significant segment of
the accounting profession.
"GM Contingent Note" means the Contingent Purchase Price Note issued by DRA
pursuant to the Asset Purchase Agreement.
"GM Exchange Debentures" means the 8% Subordinated Debentures issued by DRA
on or prior to the Issue Date in exchange for the Series A 8% Preferred Stock
of DRA issued pursuant to the Asset Purchase Agreement.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay
or to maintain financial statement conditions or otherwise) or (ii) entered
into for the purpose of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean
any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by
such Subsidiary at the time it becomes a Subsidiary; provided further,
however, that in the case of a discount security, neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness, but the
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entire face amount of such security shall be deemed Incurred upon the issuance
of such security. The term "Incurrence" when used as a noun shall have a
correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all Attributable Debt in
respect of Sale/Leaseback Transactions entered into by such Person; (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services, all conditional obligations of such Person and all
obligations of such Person under any title retention agreement (but excluding
trade accounts payables arising in the ordinary course of business), which
purchase price or obligation is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services (provided that, in the case of obligations of an
acquired Person assumed in connection with an acquisition of such Person, such
obligations would constitute Indebtedness of such Person); (iv) all
obligations of such Person for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit; (v) the amount of
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary
of such Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee; (vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and (viii) to
the extent not otherwise included in this definition, Hedging Obligations of
such Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations as described above at
such date; provided, however, that the amount outstanding at any time of any
Indebtedness issued with original issue discount shall be deemed to be the
face amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP; provided further, however, that the outstanding
principal amount of the GM Contingent Note shall be deemed to be zero until
the last day of the fiscal year or other period with respect to which the
amount due thereunder shall be determined.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer or cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person.
"Issue Date" means the date on which the Notes are originally issued.
"Joint Venture" means, in respect of any Person, any corporation,
association, partnership or other business entity of which not less than 20%
and not more than 80% of the total voting power of shares of Capital Stock or
other interests (including partnership interests) entitled (without regard to
the occurrence of any contingency) to
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vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Investors" means each of the officers, employees and directors
of the Company who own Voting Stock of the Company on the Issue Date, in each
case so long as such person shall remain an officer, employee or director of
the Company.
"MascoTech" means MascoTech Automotive Systems Group, Inc., a Delaware
corporation.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses Incurred, and all Federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such assets, or which must by
its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law be, repaid out of the proceeds from such
Asset Disposition, (iii) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or Joint Ventures as a
result of such Asset Disposition and (iv) the deduction of appropriate amounts
provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed in such
Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Core Assets" means any assets of the Company used primarily in the
powder metal forge business of the Company on the Issue Date.
"Non-Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock (other than, to the extent required by local ownership laws in foreign
countries, shares owned by foreign shareholders) of which is owned by (i) the
Company or one or more Wholly Owned Subsidiaries and/or (ii) any of the
directors, officers, employees or former owners of such Restricted Subsidiary.
"Permitted Holders" means the CVC Investors, MascoTech, World Equity
Partners, the Management Investors and their respective Permitted Transferees;
provided, however, that in no event shall the Management Investors and the CVC
Investors (other than CVC or Citicorp, N.A.), collectively, be deemed
"Permitted Holders" with respect to more than 30% of the total voting power of
all classes of Voting Stock of the Company.
"Permitted Liens" means: (i) Liens to secure Indebtedness permitted to be
Incurred under clause (b)(1) of the covenant described under "Certain
Covenants--Limitation on Indebtedness;" (ii) Liens to secure Indebtedness
permitted to be Incurred under clause (b)(10) of the covenant described under
"Certain Covenants--Limitation on Indebtedness," provided that any such Lien
may not extend to any property of the Company or
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any Restricted Subsidiary, other than the property acquired, constructed or
leased with the proceeds of such Indebtedness and any improvements or
accessions to such property; (iii) Liens for taxes, assessments or
governmental charges or levies on the property of the Company or any
Restricted Subsidiary if the same shall not at the time be delinquent or
thereafter can be paid without penalty, or are being contested in good faith
and by appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision that shall be
required in conformity with GAAP shall have been made therefor; (iv) Liens
imposed by law, such as carriers', warehousemen's, landlords', suppliers',
materialmen's and mechanics' Liens and other similar Liens on the property of
the Company or any Restricted Subsidiary arising in the ordinary course of
business and securing payment of obligations which are not more than 60 days
past due or are being contested in good faith and by appropriate proceedings
or other Liens arising out of any judgement or award against the Company or a
Restricted Subsidiary with respect to which the Company or such Restricted
Subsidiary shall then be proceeding in good faith with an appeal or other
proceeding for review, provided that, if such judgement or award is for the
payment of money in excess of $10 million (or its foreign currency equivalent
at the time) and is entered against the Company or any Significant Subsidiary,
such Lien shall be fully and unconditionally released within 60 days following
the entry of such judgement or award; (v) Liens on the property of the Company
or any Restricted Subsidiary Incurred in the ordinary course of business to
secure performance of obligations with respect to statutory or regulatory
requirements, performance or return-of-money bonds, surety bonds or other
obligations of a like nature and Incurred in a manner consistent with industry
practice, in each case which are not Incurred in connection with the borrowing
of money, the obtaining of advances or credit or the payment of the deferred
purchase price of property and which do not in the aggregate impair in any
material respect the use of property in the operation of the business of the
Company and its Restricted Subsidiaries taken as a whole; (vi) Liens on
property at the time the Company or any Restricted Subsidiary acquired such
property, including any acquisition by means of a merger or consolidation with
or into the Company or any Restricted Subsidiary; provided, however, that any
such Lien may not extend to any other property of the Company or any
Restricted Subsidiary; provided further, however, that such Liens shall not
have been Incurred in anticipation of or in connection with the transaction or
series of transactions pursuant to which such property was acquired by the
Company or any Restricted Subsidiary; (vii) Liens on the property of a Person
at the time such Person becomes a Restricted Subsidiary; provided, however,
that any such Lien may not extend to any other property of the Company or any
other Restricted Subsidiary which is not a direct Subsidiary of such Person;
provided further, however, that any such Lien was not Incurred in anticipation
of or in connection with the transaction or series of transactions pursuant to
which such Person became a Restricted Subsidiary; (viii) pledges or deposits
by the Company or any Restricted Subsidiary under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which the Company or any Restricted Subsidiary is a
party, or deposits to secure public or statutory obligations of the Company or
any Restricted Subsidiary, or deposits of cash or United States government
bonds to secure surety or appeals bonds obtained in the ordinary course of
business to which the Company or a Restricted Subsidiary is a party, or
deposits as security for taxes (that shall not at the time be delinquent or
thereafter can be paid without penalty or are being contested in good faith
and by appropriate proceedings) or import duties incurred in the ordinary
course of business, or deposits for the payment of rent, in each case Incurred
in the ordinary course of business; (ix) utility easements, survey exceptions,
building restrictions and such other encumbrances or charges against real
property as are of a nature generally existing with respect to properties of a
similar character; (x) Liens existing on the Issue Date not otherwise
described in clauses (i) through (ix) above; (xi) Liens not otherwise
described in clauses (i) through (x) above on the property of any Restricted
Subsidiary that is not a Subsidiary Guarantor to secure any Indebtedness
permitted to be Incurred by such Restricted Subsidiary pursuant to the
covenant described under "Certain Covenants--Limitation on Indebtedness;" and
(xii) Liens on the property of the Company or any Restricted Subsidiary to
secure any Refinancing, in whole or in part, of any Indebtedness secured by
Liens referred to in clause (i), (ii), (vi), (vii), (x) or (xi) above;
provided, however, that any such Lien shall be limited to all or part of the
same property that secured the original Lien (together with improvements and
accessions to such property) and the aggregate principal amount of
Indebtedness that is secured by such Lien shall not be increased to an amount
greater than the sum of (a) the outstanding principal amount, or, if greater,
the committed amount, of the Indebtedness secured by Liens described under
clause (i), (ii), (vi), (vii), (x) or (xi) above, as the
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case may be, at the time the original Lien became a Permitted Lien under the
Indenture and (b) an amount necessary to pay any premiums, fees and other
expenses Incurred by the Company or any Restricted Subsidiary in connection
with such Refinancing.
"Permitted Receivables Financing" means any financing pursuant to which the
Company or any Restricted Subsidiary may sell, convey or otherwise transfer to
a Receivables Subsidiary or any other Person (in the case of a transfer by a
Receivables Subsidiary), or grant a security interest in, any accounts
receivable (and related assets) of the Company or any Restricted Subsidiary;
provided, however, that (i) the covenants, events of default and other
provisions applicable to such financing shall be customary for such
transactions and shall be on market terms (as determined in good faith by the
Board of Directors) at the time such financing is entered into, (ii) the
interest rate applicable to such financing shall be a market interest rate (as
determined in good faith by the Board of Directors) at the time such financing
is entered into and (iii) such financing shall be nonrecourse to the Company
and its Subsidiaries (other than a Receivables Subsidiary) except to a limited
extent customary for such transactions.
"Permitted Transferee" means, (a) with respect to any CVC Investor who is an
employee, officer or director of CVC, any spouse or lineal descendant
(including by adoption) of such CVC Investor so long as such CVC Investor
shall be an employee, officer or director of CVC; (b) with respect to
MascoTech, MascoTech Inc.; and (c) with respect to any Management Investor,
any spouse or lineal descendant (including by adoption) of such Management
Investor so long as such Management Investor shall be an employee, officer or
director of the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company (or, for purposes of the covenant described under
"--Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries," any Restricted Subsidiary) pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering with
respect to any Restricted Subsidiary has been consummated and (ii) at least
10% of the total issued and outstanding common stock of such Restricted
Subsidiary has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Purchase Money Indebtedness" mean Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations under any
title retention agreement, other purchase money obligations and obligations in
respect of industrial revenue bonds or similar Indebtedness, in each case
where the maturity of such Indebtedness does not exceed the anticipated useful
life of the asset being financed, and (ii) Incurred to finance the acquisition
by the Company or a Restricted Subsidiary of such asset, including additions
and improvements; provided, however, that any Lien arising in connection with
any such Indebtedness shall be limited to the specified asset being financed
or, in the case of real property or fixtures, including additions and
improvements, the real property on which such asset is attached; and provided
further, however, that such
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Indebtedness is Incurred within 90 days after such acquisition of such asset
by the Company or Restricted Subsidiary.
"Receivables Subsidiary" means a bankruptcy-remote, special-purpose Wholly
Owned Subsidiary formed in connection with a Permitted Receivables Financing.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture; provided, however, that (i)
such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary. For purposes of this definition, the Average Life and
the aggregate principal amount of the GM Contingent Note at the time of any
Refinancing thereof shall be determined by a responsible financial or
accounting Officer of the Company based on a good faith estimate of the amount
of the contingent payment that will become due and payable under such note and
the timing of the scheduled installments thereof in accordance with the terms
of such note.
"Related Business" means any business related, ancillary or complementary
(as determined in good faith by the Board of Directors) to the businesses of
the Company and the Restricted Subsidiaries on the Issue Date.
"Restricted Payment" means, with respect to any Person, (i) the declaration
or payment of any dividends or any other distributions on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the holders of its
Capital Stock, except dividends or distributions payable solely in the Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable solely to the Company or a Restricted Subsidiary (and, if such
Restricted Subsidiary is not wholly owned, to its other shareholders on a pro
rata basis or on a basis that results in the receipt by the Company or a
Restricted Subsidiary of dividends or distributions of greater value than it
would receive on a pro rata basis), (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held
by any Person or of any Capital Stock of a Restricted Subsidiary held by any
Affiliate of the Company (other than a Restricted Subsidiary, including an
Affiliate of a Restricted Subsidiary), including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of the Company that
is not Disqualified Stock), (iii) the purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition), (iv) the
designation of any Subsidiary of the Company as an Unrestricted Subsidiary
(other than the designation of Kraftube as an Unrestricted Subsidiary at the
time of the Company's acquisition of Ballantrae), in which event the amount of
such "Restricted Payment" shall be the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary or (v) the sale or issuance of Capital Stock of a
Restricted Subsidiary to a Person other than the Company or another Restricted
Subsidiary if the result thereof is that such Restricted Subsidiary shall
cease to be a Restricted Subsidiary, in which event the amount of such
"Restricted Payment" shall be the fair market
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value of the remaining interest, if any, in such former Restricted Subsidiary
held by the Company and its other Restricted Subsidiaries.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien. "Secured Indebtedness" of any Subsidiary Guarantor has a correlative
meaning.
"Senior Credit Facility" means the revolving credit facility made available
pursuant to the Fourth Amended and Restated Financing Agreement dated as of
, 1997, among the Subsidiary Guarantors, as borrowers, the Company, as
guarantor, the lenders from time to time party thereto and Bank One,
Indianapolis, National Association, as Agent, as the same may be amended,
waived, modified, Refinanced or replaced from time to time (except to the
extent that any such amendment, waiver, modification, replacement or
Refinancing would be prohibited by the terms of the Indenture).
"Senior Indebtedness" of the Company means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, including the
Guarantee by the Company of all Bank Indebtedness, and (ii) accrued and unpaid
interest thereon, in respect of (a) Indebtedness of the Company for money
borrowed and (b) Indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which the Company is responsible or
liable unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are
subordinate in right of payment to the Notes; provided, however, that Senior
Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness of
the Company (and any accrued and unpaid interest in respect thereof) which is
subordinate or junior in any respect (other than as a result of the
Indebtedness being unsecured) to any other Indebtedness or other obligation of
the Company, including any Subordinated Obligations, (5) any obligations with
respect to any Capital Stock or (6) that portion of any Indebtedness which at
the time of Incurrence is Incurred in violation of the Indenture. "Senior
Indebtedness" of any Subsidiary Guarantor has a correlative meaning.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to
that effect. "Subordinated Obligation" of any Subsidiary Guarantor has a
correlative meaning.
"Subsequent Acquisitions" means the acquisition by the Company prior to the
Issue Date of substantially all the Capital Stock of World Wide and the merger
between a subsidiary of the Company and Ballantrae on or prior to the Issue
Date.
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"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i)
such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means each Subsidiary designated as such on the
signature pages of the Indenture and any other Subsidiary that has issued a
Subsidiary Guaranty.
"Subsidiary Guaranty" means any Guarantee of the Securities which may from
time to time be executed and delivered pursuant to the Indenture. Each such
Subsidiary Guaranty shall be in the form prescribed in the Indenture.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 90 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company), organized and in existence under the laws
of the United States of America, any State thereof or the District of Columbia
or any foreign country recognized by the United States of America with a
rating at the time as of which any investment herein is made of "P-1" (or
higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard and Poor's Ratings Group, and (v) investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by
Moody's Investors Services, Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien
on any property of, the Company or any other Subsidiary of the Company that is
not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designed has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under "Certain
Covenants--Limitation on Restricted Payments." The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could Incur $1.00 of additional Indebtedness under paragraph (a) of
the covenant described under "Certain Covenants--Limitation on Indebtedness"
and (y) no Default shall have occurred and be continuing. Any such designation
by the Board of Directors shall be by the Company to the Trustee by promptly
filing with the Trustee a copy of the board resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions. As of the date of this Indenture,
subject to the second sentence of this paragraph, the only Unrestricted
Subsidiaries are Autovill Holdings, Inc., Remy Mexico Holdings, Inc., Remy
South America Holdings, Inc. and Remy Korea Holdings, Inc. (in each case as to
which the Company represents and warrants that such Subsidiary
105
has total assets of $1,000 or less) and Kraftube (provided that the Company
represents and warrants that Kraftube will be designated as an Unrestricted
Subsidiary under the indenture for the Senior Subordinated Notes). Upon
designation of a Restricted Subsidiary as an Unrestricted Subsidiary in
compliance with this paragraph, such Restricted Subsidiary shall, by delivery
of a supplemental indenture in form satisfactory to the Trustee, be released
from any Subsidiary Guaranty previously made by such Subsidiary.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company and/or one or more Wholly Owned Subsidiaries.
"World Equity Partners" means World Equity Partners, L.P., a Delaware
limited partnership.
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the principal U.S. federal income
tax consequences of the acquisition, ownership and disposition of the Notes to
initial beneficial owners of the Notes who are U.S. Holders (as defined below)
and the principal U.S. federal income and estate tax consequences of the
acquisition, ownership and disposition of the Notes to initial beneficial
owners of the Notes who are Non-U.S. Holders (as defined below). This
discussion is based on currently existing provisions of the Code, existing and
proposed Treasury regulations promulgated thereunder and administrative and
judicial interpretations thereof, all as in effect, or proposed on the date
hereof and all of which are subject to change, possibly with retroactive
effect, or different interpretations. It does not include any description of
the tax laws of any state, local or foreign government that may be applicable
to the Notes or beneficial owners thereof. This discussion does not address
the tax consequences to subsequent beneficial owners of the Notes, and is
limited to beneficial owners who hold the Notes as capital assets within the
meaning of section 1221 of the Code. This discussion also does not address the
tax consequences to Non-U.S. Holders that are subject to U.S. federal income
tax on a net basis on income realized with respect to a Note because such
income is effectively connected with the conduct of a U.S. trade or business.
Moreover, this discussion does not address all of the U.S. federal income tax
consequences that may be relevant to particular initial beneficial owners in
light of their personal circumstances, or to certain types of initial
beneficial owners (such as certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities or persons who have
hedged the risk of owning a Note).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS
OR ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES)
IN APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
Payments of Interest
In general, interest on a Note will be taxable to a beneficial owner who or
which is (i) a citizen or resident of the U.S. for U.S. federal income tax
purposes, (ii) a corporation or other entity taxable as a corporation created
or organized under the laws of the U.S. or any political subdivision thereof,
(iii) a person or entity whose
106
worldwide income and gain are otherwise subject to U.S. federal income tax on
a net income basis in respect of income derived from Notes, or (iv) an estate
or trust the income of which is subject to U.S. federal income tax regardless
of its source (a "U.S. Holder") as ordinary income at the time it is (actually
or constructively) received or accrued, depending on the beneficial owner's
method of accounting for U.S. federal income tax purposes.
SALE, EXCHANGE, DISPOSITION AND RETIREMENT OF NOTES
A U.S. Holder's tax basis in a Note will generally be its cost. A U.S.
Holder will generally recognize gain or loss on the sale, exchange, retirement
or other disposition of a Note equal to the difference between the amount
realized on such sale, exchange, retirement or other disposition and the U.S.
Holder's tax basis in the Note. Gain or loss recognized on such sale,
exchange, retirement or other disposition of a Note (other than gain
attributable to accrued but unpaid interest) will be capital gain or loss and
will be long-term capital gain or loss if the Note was held for more than one
year. Under recently enacted changes, net capital gain from assets held more
than 18 months will generally be taxed at a maximum rate of 20%, while net
capital gain from assets held more than one year but not more than 18 months
will generally be taxed at a maximum rate of 28%.
U.S. TAXATION OF NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
(i) payments of principal and interest on the Notes by the Company or any
agent of the Company to any beneficial owner of a Note that is not a U.S.
Holder (a "Non-U.S. Holder") will not be subject to U.S. federal
withholding tax, provided that in the case of interest (a)(1) the Non-U.S.
Holder does not actually or constructively own 10 percent or more of the
total combined voting power of all classes of stock of the Company entitled
to vote, (2) the Non-U.S. Holder is not a controlled foreign corporation
that is related to the Company through stock ownership, (3) the Non-U.S.
Holder is not a bank described in Section 881(c)(3)(A) of the Code for
which the Notes are considered an extension of credit in the bank's
ordinary course of business, and (4) either (A) the beneficial owner of the
Notes certifies to the Company or its agents on Internal Revenue Service
("IRS") Form W-8 (or a suitable substitute form), under penalties of
perjury, that it is not a "U.S. person" (as defined in the Code) and
provides its name and address, or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and
holds the Notes on behalf of the beneficial owner certifies to the Company
or its agent under penalties of perjury that such statement has been
received from the beneficial owner by it or by a financial institution
between it and the beneficial owner and furnishes the payor with a copy
thereof or (b) the Non-U.S. Holder is entitled to the benefits of an income
tax treaty under which interest on the Notes is exempt from U.S.
withholding tax and provides a properly executed IRS Form 1001 claiming the
exemption;
(ii) a Non-U.S. Holder will not be subject to U.S. federal withholding
tax on gain realized on the sale, exchange or redemption of a Note, unless
the Non-U.S. Holder is an individual who is present in the U.S. for a
period or periods aggregating 183 or more days in the taxable year of the
disposition and certain other conditions are met; and
(iii) Notes held at the time of death (or theretofore transferred subject
to certain retained rights or powers) by an individual who at the time of
death is a Non-U.S. Holder will not be included in such holder's gross
estate for U.S. federal estate tax purposes provided that the individual
does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote or
hold the Notes in connection with a U.S. trade or business.
If a Non-U.S. Holder is engaged in a trade or business within the United
States and a payment on the Note or gain realized on a sale or other
disposition of the Note is effectively connected with such trade or
businesses, the Non-U.S. Holder, although exempt from United States federal
withholding tax as described above, will be subject to United States federal
income tax on a net income basis in the same manner as if it were a U.S.
Holder.
107
In addition, if such Holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% (or lesser applicable treaty rate) of its U.S.
effectively connected earnings and profits.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Notes are outstanding, the Company is
required to provide the IRS with certain information, including the beneficial
owner's name, address and taxpayer identification number, the aggregate amount
of interest paid to the beneficial owner during the calendar year and the
amount of tax withheld, if any. This obligation, however, does not apply with
respect to payments to certain U.S. Holders, including corporations, tax-
exempt organizations, qualified pension and profit sharing trusts and
individual retirement accounts, provided that they establish entitlement to an
exemption.
In the event that a U.S. Holder subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports its tax liability, the
Company, its agents or paying agents or a broker may be required to "backup"
withhold a tax equal to 31% of each payment of interest and principal (and
premium, if any) on the Notes. The backup withholding is not an additional tax
and may be credited against the U.S. Holder's U.S. federal income tax
liability, provided that the required information is furnished to the IRS.
Under current Treasury regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a U.S. person as set forth
in clause (4) in the first paragraph under "U.S. Taxation of Non-U.S.
Holders," or has otherwise established an exemption (provided that neither the
Company nor its agent has actual knowledge that the holder is a U.S. person or
that the conditions of any exemption are not in fact satisfied).
Payment of the proceeds from the sale of a Note to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding, except that if the broker is a U.S. person, a controlled foreign
corporation for U.S. federal income tax purposes or a foreign person 50
percent or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment was
effectively connected with a U.S. trade or business, information reporting may
apply to such payments. Payment of the proceeds from a sale of a Note to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
On October 6, 1997, the IRS issued final regulations relating to
withholding, backup withholding and information reporting that unify current
certification procedures and forms and clarify reliance standards (the "Final
Regulations"). The Final Regulations will generally be effective for payments
made after December 31, 1998.
108
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement with the Company, to purchase from
the Company the aggregate principal amount of Notes set forth opposite their
respective names.
PRINCIPAL
AMOUNT OF
NAME NOTES
- ---- ------------
Salomon Brothers Inc..............................................
Credit Suisse First Boston Corporation............................
Morgan Stanley & Co. Incorporated.................................
------------
Total........................................................... $130,000,000
============
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Notes
offered hereby if any such Notes are purchased. In the event of a default by
an Underwriter, the Underwriting Agreement provides that, in certain
circumstances the purchase commitments of the non-defaulting Underwriters may
be increased or the Underwriting Agreement may be terminated.
The Underwriters have advised the Company that the Underwriters propose
initially to offer the Notes to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
offering price less a concession not in excess of % of the principal amount
of the Notes. The Underwriters may allow and such dealers may reallow a
concession not in excess of % of such principal amount to certain other
dealers. After the initial public offering, the public offering price and such
concession may be changed.
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance, under the symbol "RMY07." The
Underwriters have indicated that they intend to make a market in the Notes,
subject to applicable laws and regulations. However, the Underwriters are not
obligated to do so and any such market-making may be discontinued at any time
at the Underwriters' sole discretion. No assurance can be given as to the
development of liquidity in any trading market for the Notes. See "Risk
Factors--Lack of Public Market."
The Company has agreed with the Underwriters not to offer, sell, contract to
sell, grant an option to purchase or otherwise dispose of, directly or
indirectly, or announce the offering of, or file a registration statement for,
any debt securities issued or guaranteed by the Company or any Subsidiary
Guarantor, or enter into any agreement to do any of the foregoing, for a
period of 180 days from the date the Notes are issued without the prior
written consent of Salomon Brothers Inc, other than (i) in the Notes Offering,
(ii) pursuant to the registration rights agreement for the Company's
outstanding Senior Subordinated Notes and (iii) in connection with the
negotiation, syndication or arrangement of the Senior Credit Facility.
The Underwriters may engage in stabilizing transactions, syndicate covering
transactions and penalty bids in accordance with Rule 104 under the Exchange
Act. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriter to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof.
109
The Underwriters are the representatives for the underwriters in connection
with the Equity Offering. Salomon Brothers Inc and Smith Barney Inc. (prior to
the merger of the parent companies for such firms) were the initial purchasers
in connection with the Company's offering in 1996 of its Senior Subordinated
Notes, and Salomon Brothers Inc is providing certain financial advisory
services to the Company in connection with the acquisition of Ballantrae, in
each case for which such firms have received or will receive customary
compensation.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Dechert Price & Rhoads, Philadelphia, Pennsylvania. Certain matters in
connection with this Offering will be passed upon for the Underwriters by
Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of Delco Remy International, Inc. as
of July 31, 1997 and 1996, and for each of the three years in the period ended
July 31, 1997; the financial statements of the Tractech Division of Titan
Wheel International, Inc. for the nine months ended September 30, 1996 and the
year ended December 31, 1995; and the consolidated financial statements of
Ballantrae Corporation as of September 30, 1997 and December 31, 1996, and for
the nine months ended September 30, 1997 and the three months ended December
31, 1996, appearing in this Prospectus and the Registration Statement (as
defined) have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of World Wide Automotive, Inc. (i) as of March 31,
1997, and for the year then ended, appearing in this Prospectus and the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein
which are based in part on the reports of Friedman & Fuller, P.C., independent
auditors, and (ii) as of March 31, 1996, and for each of the two years in the
period ended March 31, 1996, appearing in this Prospectus and the Registration
Statement have been audited by Friedman & Fuller, P.C., independent auditors,
as set forth in their respective reports thereon appearing elsewhere herein,
and in each case are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
110
INDEX TO FINANCIAL STATEMENTS
DELCO REMY INTERNATIONAL, INC.
Audited Fiscal Year End Financial Statements
Report of Independent Auditors........................................... F-2
Consolidated Statements of Operations for the years ended July 31, 1995,
1996 and 1997............................................................ F-3
Consolidated Balance Sheets as of July 31, 1996 and 1997................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended July 31, 1995, 1996 and 1997...................................... F-6
Consolidated Statements of Cash Flows for the years ended July 31, 1995,
1996 and 1997............................................................ F-7
Notes to Consolidated Financial Statements............................... F-8
Unaudited Quarterly Financial Statements
Condensed Consolidated Statements of Operations for the three months
ended October 31, 1996 and 1997 ........................................ F-38
Condensed Consolidated Balance Sheets as of July 31, 1997 and October 31,
1997 .................................................................... F-39
Condensed Consolidated Statements of Cash Flows for the three months
ended October 31, 1996 and 1997 ........................................ F-40
Notes to Condensed Consolidated Financial Statements .................... F-41
WORLD WIDE AUTOMOTIVE, INC.
Reports of Independent Auditors.......................................... F-48
Balance Sheets as of the years ended March 31, 1996 and 1997............. F-52
Statements of Income for the years ended March 31, 1995, 1996 and 1997... F-54
Statement of Stockholders' Equity........................................ F-55
Statements of Cash Flows for the years ended March 31, 1995, 1996 and
1997..................................................................... F-56
Notes to Financial Statements............................................ F-57
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
Report of Independent Auditors........................................... F-65
Statements of Operations for the year ended December 31, 1995 and the
nine months ended
September 30, 1996...................................................... F-66
Statements of Stockholders' Equity for the year ended December 31, 1995
and the nine months ended September 30, 1996............................ F-67
Statements of Cash Flows for the year ended December 31, 1995 and the
nine months ended September 30, 1996.................................... F-68
Notes to Financial Statements............................................ F-69
BALLANTRAE CORPORATION
Report of Independent Auditors............................................ F-73
Consolidated Balance Sheets as of December 31, 1996 and September 30,
1997...................................................................... F-74
Consolidated Statements of Operations for the three months ended December
31, 1996 and the nine months ended September 30, 1997.................... F-76
Consolidated Statements of Stockholders' Equity for the three months ended
December 31, 1996 and the nine months ended September 30, 1997........... F-77
Consolidated Statements of Cash Flows for the three months ended December
31, 1996 and the nine months ended September 30, 1997.................... F-78
Notes to Consolidated Financial Statements................................ F-79
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delco Remy International, Inc.
We have audited the accompanying consolidated balance sheets of Delco Remy
International, Inc. as of July 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended July 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Delco Remy International, Inc. at July 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended July 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
September 5, 1997, except for Note 16, as to
which the date is November 20, 1997
F-2
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE YEAR ENDED JULY 31
----------------------------
1995 1996 1997
-------- -------- --------
Net sales........................................ $573,423 $636,852 $689,787
Cost of goods sold............................... 475,216 510,078 540,234
-------- -------- --------
Gross profit..................................... 98,207 126,774 149,553
Selling, engineering, and administrative
expenses........................................ 61,206 77,994 89,098
Restructuring charges............................ -- 8,101 34,500
-------- -------- --------
Operating income................................. 37,001 40,679 25,955
Other income (expense):
Gain on sale of building....................... -- -- 2,082
Interest expense............................... (18,432) (27,367) (38,774)
-------- -------- --------
Income (loss) from continuing operations before
income taxes (benefit), preferred dividend
requirement of subsidiary and minority
interest........................................ 18,569 13,312 (10,737)
Minority interest in income of subsidiaries...... -- 259 892
Income taxes (benefit)........................... 7,846 5,741 (3,014)
Preferred dividend requirement of subsidiary..... 1,397 1,516 1,648
-------- -------- --------
Income (loss) from continuing operations......... 9,326 5,796 (10,263)
Discontinued operations:
Loss from operations of discontinued businesses
(less applicable income tax benefit of $1,582,
$1,042 and $395, respectively)................ 2,363 1,573 808
Loss on disposal of businesses (less applicable
income tax benefit of $6,043 and $426)........ -- 9,064 874
Extraordinary item:
Write-off of debt issuance costs (less
applicable income tax benefit of $1,147)...... -- -- 2,351
-------- -------- --------
Net income (loss)................................ $ 6,963 $ (4,841) $(14,296)
======== ======== ========
Primary earnings per share:
From continuing operations .................... $ .56 $ .33 $ (.59)
Before extraordinary items .................... .42 (.28) (.69)
Net income (loss).............................. .42 (.28) (.82)
See Accompanying Notes
F-3
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
JULY 31
-----------------
1996 1997
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents.................................. $ 3,406 $ 10,050
Trade accounts receivable (less allowance for doubtful
accounts of $1,209 and $2,935, respectively).............. 94,992 110,184
Other receivables.......................................... 10,585 10,487
Recoverable income taxes................................... 8,674 2,889
Inventories................................................ 123,583 164,417
Deferred income taxes...................................... 15,462 21,474
Other current assets....................................... 1,213 4,643
-------- --------
Total current assets..................................... 257,915 324,144
Property and equipment....................................... 170,391 147,222
Less accumulated depreciation................................ 29,235 26,858
-------- --------
141,156 120,364
Deferred financing costs..................................... 6,497 8,803
Goodwill (less accumulated amortization of $4,758 and $7,289,
respectively)............................................... 66,570 86,612
Net assets held for disposal................................. -- 25,279
Investment in affiliate...................................... -- 3,119
Other assets................................................. 2,944 2,248
-------- --------
Total assets............................................. $475,082 $570,569
======== ========
See Accompanying Notes
F-4
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
JULY 31
------------------
1996 1997
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable......................................... $ 81,207 $ 88,578
Accrued interest payable................................. 4,026 3,107
Accrued restructuring charges............................ 5,541 37,377
Liabilities related to discontinued operations........... 11,005 3,324
Other liabilities and accrued expenses................... 32,683 37,210
Current portion of long-term debt........................ 9,652 507
-------- --------
Total current liabilities.............................. 144,114 170,103
Deferred income taxes...................................... 6,795 1,556
Long-term debt, less current portion....................... 289,144 363,261
Post-retirement benefits other than pensions............... 8,186 12,677
Accrued pension benefit.................................... 950 4,542
Other non-current liabilities.............................. 5,427 4,124
Minority interest in subsidiary............................ 4,457 8,032
Redeemable exchangeable preferred stock of subsidiary...... 14,420 16,071
Stockholders' equity (deficit):
Common stock:
Class A Shares (par value $.01; authorized 1,000,000;
issued 517,727 in 1996 and 8,828,014 in 1997).......... 87 88
Class B Shares (par value $.01; authorized 1,000,000;
issued 385,523 in 1996 and 1997)....................... 65 65
Paid-in capital.......................................... 1,655 6,677
Retained earnings (deficit).............................. 2,122 (12,174)
Cumulative translation adjustment........................ (2,161) (1,752)
Stock purchase plan...................................... (179) (2,701)
-------- --------
Total stockholders' equity (deficit)................... 1,589 (9,797)
-------- --------
Total liabilities and stockholders' equity (deficit)... $475,082 $570,569
======== ========
See Accompanying Notes
F-5
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
CLASS A CLASS B RETAINED CUMULATIVE STOCK
COMMON COMMON PAID-IN EARNINGS TRANSLATION PURCHASE
STOCK STOCK CAPITAL (DEFICIT) ADJUSTMENT PLAN TOTAL
------- ------- ------- --------- ----------- -------- --------
Initial capitalization
at August 1, 1994...... $ 79 $ 54 $1,448 $ -- $ -- $ (50) $ 1,531
Issuance of common
stock.................. 20 -- 221 -- -- (124) 117
Net income.............. -- -- -- 6,963 -- -- 6,963
Foreign currency
translation
adjustment............. -- -- -- -- (181) -- (181)
---- ---- ------ -------- ------- ------- --------
Balance at July 31,
1995................... 99 54 1,669 6,963 (181) (174) 8,430
Repurchase of common
stock.................. (1) -- (14) -- -- (5) (20)
Conversion of Class A
common stock to Class B
common stock........... (11) 11 -- -- -- -- --
Net loss................ -- -- -- (4,841) -- -- (4,841)
Foreign currency
translation
adjustment............. -- -- -- -- (1,980) -- (1,980)
---- ---- ------ -------- ------- ------- --------
Balance at July 31,
1996................... 87 65 1,655 2,122 (2,161) (179) 1,589
Issuance of common
stock.................. 3 -- 5,044 -- -- (2,541) 2,506
Repurchase of common
stock.................. (2) -- (22) -- -- 19 (5)
Net loss................ -- -- -- (14,296) -- -- (14,296)
Foreign currency
translation
adjustment............. -- -- -- -- 409 -- 409
---- ---- ------ -------- ------- ------- --------
Balance at July 31,
1997................... $ 88 $ 65 $6,677 $(12,174) $(1,752) $(2,701) $ (9,797)
==== ==== ====== ======== ======= ======= ========
See Accompanying Notes
F-6
DELCO REMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED JULY 31
-----------------------------
1995 1996 1997
-------- -------- ---------
OPERATING ACTIVITIES:
Net income (loss)............................... $ 6,963 $ (4,841) $ (14,296)
Extraordinary item.............................. -- -- 3,498
Adjustments to reconcile net income (loss) to
net cash
provided by (used in) operating activities:
Depreciation and amortization................. 14,533 19,555 22,323
Gain on sale of building...................... -- -- (2,082)
Deferred income taxes......................... (3,580) (2,947) (9,578)
Post-retirement benefits other than pensions.. 4,434 3,752 4,491
Accrued pension benefits...................... 4,459 (3,509) 3,592
Non-cash interest expense..................... 8,069 7,867 7,949
Preferred dividend requirement of subsidiary.. 1,397 1,516 1,648
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable......................... (49,320) (24,458) (3,341)
Inventories................................. (8,035) (25,720) (10,245)
Accounts payable............................ 49,613 8,634 (11,036)
Other current assets and liabilities........ (6,657) 18,229 (4,538)
Accrued restructuring....................... -- 5,541 31,836
Other non-current assets and liabilities,
net........................................ 45 (4,303) 2,316
-------- -------- ---------
Net cash provided by (used in) operating
activities..................................... 21,921 (684) 22,537
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.............. (62,010) (46,320) (42,442)
Purchase of property and equipment.............. (11,241) (32,741) (31,888)
Investment in affiliates........................ -- -- (3,119)
Proceeds from sale of building.................. -- -- 3,362
-------- -------- ---------
Net cash used in investing activities........... (73,251) (79,061) (74,087)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt....... 31,918 89,652 180,000
Payments on long-term debt...................... (4,917) (8,842) (126,200)
Other financing activities...................... 118 (20) 3,986
-------- -------- ---------
Net cash provided by financing activities....... 27,119 80,790 57,786
-------- -------- ---------
Effect of exchange rate changes on cash......... -- 883 408
-------- -------- ---------
Net (decrease) increase in cash and cash
equivalents.................................... (24,211) 1,928 6,644
Cash and cash equivalents at beginning of year.. 25,689 1,478 3,406
-------- -------- ---------
Cash and cash equivalents at end of year........ $ 1,478 $ 3,406 $ 10,050
======== ======== =========
See Accompanying Notes
F-7
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND ACQUISITIONS
Delco Remy America Acquisition
On August 1, 1994, Delco Remy International, Inc. (the Company or DRI)
through a wholly-owned subsidiary, Delco Remy America, Inc. (DRA), purchased
substantially all of the assets, other than facilities, and assumed certain
liabilities of specific business activities of the Delco Remy Division of
General Motors Corporation (the GM Acquisition). The specific business
activities purchased are engaged in the design, manufacture, remanufacture and
sale of heavy duty starter motors and generators, automotive starter motors,
and related components.
The aggregate purchase price of the GM Acquisition of $155,665 (including
fees and expenses) was accounted for as a purchase. The Company issued (i)
common stock of $1,531, (ii) preferred stock of $11,507 and (iii) debt of
$158,200 to fund the purchase and provide capital for general corporate
purposes. The GM Acquisition resulted in the recording of approximately
$17,600 of goodwill which is being amortized over 15 years. While the GM
Acquisition was recorded based on the best estimates available, certain
purchase price adjustments as of the August 1, 1994 purchase date have not
been determined or agreed to by General Motors Corporation (GM) and DRI. When
finalized, the resolution of these items could result in a charge or credit to
operations, which the Company does not expect to be material. The accompanying
consolidated financial statements reflect the consolidated results of
operations and cash flows for the Company subsequent to the GM Acquisition.
The Company had no operations prior to August 1, 1994.
GM is entitled to receive an additional contingent purchase payment which
will be paid beginning in 2004 and will be based upon a percentage of average
earnings of the Company in the three year period ending December 31, 2003 in
excess of certain imputed earnings. Since the additional contingent purchase
price, if any, is based upon future operations of the Company which cannot be
determined at this time, no provision for such payment has been made in the
accompanying consolidated financial statements. The additional contingent
purchase price, if any, will increase the goodwill recorded for the GM
Acquisition and will be amortized over the remaining useful life of the GM
Acquisition goodwill.
Concurrent with the GM Acquisition, the Company entered into certain supply
agreements with GM whereby the Company will be the sole-source supplier to GM
for component parts manufactured by the Company at the date of the GM
Acquisition. The supply agreement for automotive starter motors has an initial
term of ten years, while the supply agreement for heavy duty starter motors
and generators has an initial term of six years.
1997 Acquisition
On May 8, 1997, the Company, through a wholly-owned subsidiary, acquired
82.5% of the outstanding common stock of World Wide Automotive, Inc. (World
Wide). World Wide is primarily an aftermarket supplier of light duty import
starters and alternators, although it also has a small amount of heavy duty
remanufacturing sales and domestic aftermarket sales. The remaining 17.5%
interest in World Wide is owned by current management of World Wide.
The aggregate purchase price was $40,842, including cash payments of $38,692
and the issuance of Class A Common Stock valued at $2,150. The World Wide
acquisition was treated as a purchase for accounting purposes and is included
in the consolidated financial statements of the Company beginning with the
acquisition date. The World Wide acquisition resulted in goodwill of $21,301
which is being amortized over 35 years.
1996 Acquisition
On February 6, 1996 the Company, through a wholly-owned subsidiary, acquired
82.5% of the outstanding common stock of Power Investments, Inc. and related
companies (Power), a remanufacturer of diesel and
F-8
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
gasoline engines, fuel systems, transmissions, alternators and starters for
medium, heavy duty, and automotive applications. Power also remanufactures and
distributes brakes, water pumps, power steering pumps and various other
remanufactured truck parts and assemblies. Power has fifteen facilities
located in the United States and Canada. The remaining 17.5% interest in Power
is owned by current management of Power.
The aggregate purchase price was $48,422 including cash payments of $23,385
and the issuance of $24,300 of 9.86% Power Investments Seller Notes. The Power
acquisition was treated as a purchase for accounting purposes and is included
in the consolidated financial statements of the Company beginning with the
acquisition date. The Power acquisition resulted in goodwill of $16,267 which
is being amortized over 35 years.
1995 Acquisitions
In 1995, the Company made the following three acquisitions which were
treated as purchases for accounting purposes and are included in the
consolidated financial statements beginning with the respective acquisition
date. Each respective purchase price was allocated to the assets acquired and
liabilities assumed at their estimated fair values. The three acquisitions
resulted in goodwill of $38,864 which is being amortized over 35 years.
On January 6, 1995, the Company purchased all the stock of two related
companies (collectively referred to as Nabco) for an aggregate cash
purchase price of $27,600 and the issuance of 483,000 shares of DRI Class A
Common Stock. Nabco remanufactures automotive starters and alternators.
On March 31, 1995, the Company, through a newly formed subsidiary,
purchased the shares of six related corporations (collectively referred to
as A&B). The aggregate purchase price of $33,400 included cash payments of
$29,900 and the issuance of $3,500 in 10% subordinated notes. The A&B
acquisition was financed through additional borrowings under the Company's
revolving loan and a new acquisition term loan of $15,000. A&B
remanufactures heavy duty starters and alternators and related sub-
components and parts.
On April 13, 1995, the Company acquired, through a series of stock
purchase transactions, approximately 97% interest in a Hungarian company
(Autovill), a manufacturer of heavy duty starter motors and generators. The
total purchase price was approximately $7,500 which included the assumption
of certain Autovill liabilities of $4,100.
Unaudited Pro Forma Results of Operations
The unaudited pro forma consolidated results of operations, assuming the
1995, 1996 and 1997 acquisitions had been consummated as of the beginning of
the preceding year, are as follows:
FOR THE YEAR ENDED JULY 31
---------------------------
1995 1996 1997
-------- -------- --------
Revenues........................................ $655,716 $727,633 $738,801
Operating income................................ 49,334 47,931 27,658
Income (loss) from continuing operations........ 13,929 6,212 (10,284)
Net income (loss)............................... 11,566 (4,425) (14,317)
The pro forma consolidated financial information does not purport to present
what the Company's consolidated results of operations would actually have been
if the operations were combined during the periods presented and is not
intended to project future results or trends of operations.
F-9
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Business Segment
The consolidated financial statements include the accounts of DRI and its
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation. The Company designs, manufactures, remanufactures and
distributes electrical, powertrain/drivetrain and engine-related components
for automobiles, light and heavy duty trucks and other heavy duty vehicles.
The Company's products include starter motors, alternators, engines,
transmissions and fuel systems for the aftermarket and the original equipment
manufacturer market, principally in North America but also in Europe, Latin
America and Asia-Pacific.
Use of Estimates
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes all cash balances and highly liquid
investments held primarily in repurchase agreements collateralized by U.S.
Government securities with a maturity of ninety days or less when purchased.
The carrying amount of cash equivalents approximates fair value.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from
customers in the original equipment and aftermarket automotive industries,
both in the U.S. and internationally. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Credit losses are provided for in the financial statements
and have been consistently within management's expectations. The Company
invests its temporary cash in high credit quality financial institutions and
investment grade short-term investments and limits the amount of credit
exposure to any one entity.
The percentage of the Company's labor force covered by a collective
bargaining agreement (CBA) and covered by a CBA that will expire within one
year is 48.0% and 2.4%, respectively.
Inventories
Inventories are carried at lower of cost or market determined on the first-
in, first-out (FIFO) method. Raw materials also include supplies and repair
parts which consist of material consumed in the manufacturing process but not
directly incorporated into the finished products. Inventories at July 31, 1996
and 1997 consisted of the following:
JULY 31
-----------------
1996 1997
-------- --------
Raw material............................................... $ 57,481 $ 84,583
Work in-process............................................ 32,790 20,168
Finished goods............................................. 33,312 59,666
-------- --------
$123,583 $164,417
======== ========
F-10
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
primarily using the straight-line method over the estimated useful lives of
the related assets (15 years for buildings and 3 to 15 years for machinery and
equipment).
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and at the average exchange rate for each year for revenue and
expenses. Translation adjustments are recorded as a separate component of
stockholders' equity.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts to hedge certain foreign
transactions. These contracts reduce currency risk from exchange rate
movements. Gains and losses are deferred and accounted for as part of the
underlying transactions. The contractual amount and related deferred gains and
losses from these contracts are immaterial.
Goodwill
Goodwill represents the excess of purchase price over fair value of the net
assets acquired and is being amortized by the straight-line method over 15 to
35 years.
The carrying amount of goodwill is regularly reviewed for indicators of
impairment in value, which in the view of management are other than temporary,
including unexpected or adverse changes in the following: (i) the economic or
competitive environments in which the Company operates; (ii) profitability
analyses and (iii) cash flow analyses. If facts and circumstances suggest that
a subsidiary's net assets are impaired, the Company assesses the fair value of
the underlying business and reduces goodwill to an amount that results in the
book value of the subsidiary approximating fair value.
Investment in Affiliate
Investment in affiliate represents the Company's equity investment in its
Korean joint venture. This investment is accounted for using the equity
method.
Long-Term Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
Recognition of Revenue
Substantially all of the Company's revenue is recognized at the time the
product is shipped. The Company's remanufacturing operations obtain used
diesel and gasoline engines, fuel systems, transmissions, starter motors and
generators, commonly known as cores, from its customers as trade-ins. Net
sales and cost of goods sold are reduced by $58,800, $70,000 and $113,100 for
1995, 1996 and 1997, respectively, to reflect the cost of cores returned for
credit.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash and cash
equivalents, trade and other receivables, accounts payable, long-term debt and
redeemable convertible preferred stock of subsidiary. The fair value of the
Company's fixed rate debt was estimated using discounted cash flow analyses
based upon the Company's current incremental borrowing rates. With the
exception of the Senior Subordinated Notes, the
F-11
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
carrying amounts of these financial instruments approximated their fair value
at July 31, 1996 and 1997. At July 31, 1997, the Senior Subordinated Notes
have a face value of $140.0 million and a fair value of $148.4 million.
Reclassification
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
Impact of Recently Issued Accounting Standards
In February 1997, the FASB issued Statement No. 128, Earnings per Share,
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of warrants to purchase common stock will be excluded. The impact is expected
to result in an increase in historical primary earnings (loss) per share for
the years ended July 31, 1995, 1996 and 1997, of $.04, $.03 and $.09 per
share, respectively. The impact of Statement No. 128 on the calculation of
fully diluted earnings per share for these years is not expected to be
material.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is effective for years beginning after December 15, 1997, and
will be adopted by the Company in 1998. The Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Statement will not have
any impact on the results of operations or the financial position of the
Company.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies are required to report segment information in annual financial
statements and in interim financial reports to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Statement is effective for
financial statements for fiscal years beginning after December 15, 1997, and
the Company anticipates adopting the Statement in 1999. The Company is
evaluating the impact that this Statement will have on its financial
reporting.
3. DISCONTINUED OPERATIONS
Marine Corporation of America, Marine Drive Systems, and Powrbilt Products
In July 1997, the Company adopted plans for the sale of the marine products
business segment consisting of three non-core businesses. The Company plans to
sell the net assets of Marine Corporation of America, Marine Drive Systems and
Powrbilt Products (the 1997 Discontinued Businesses). These non-core
businesses were acquired in February 1996 in conjunction with the acquisition
of Power.
A charge of $874 net of a tax benefit of $426 for operating losses expected
during the disposal period was recorded. The Company does not anticipate a
loss on the disposal of the net assets of the discontinued businesses. It is
expected that the net assets of the businesses will be sold during fiscal
1998.
Summary operating results of the 1997 Discontinued Businesses since their
acquisition are as follows:
FOR THE YEAR ENDED
JULY 31
-------------------
1996 1997
--------- ---------
Net sales............................................... $ 5,624 $ 10,935
Net loss................................................ (328) (808)
F-12
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The net assets of the 1997 Discontinued Businesses included in the
consolidated balance sheet are summarized as follows:
JULY 31,
1997
--------
Current assets..................................................... $ 6,525
Property and equipment, net........................................ 650
Current liabilities................................................ (1,848)
-------
Net assets......................................................... $ 5,327
=======
Powder Metal Forge
In December 1995, the Company adopted plans for sale of its non-core powder
metal forge business segment (PMF) and recorded an initial loss on disposal. A
sale agreement was signed in December 1996 to transfer ownership of net assets
of PMF. Terms of the sale agreement require the Company to continue PMF
operations through a transition period in which the buyer will begin
production at its facility. The Company expects the transition period to be
completed by November 1997. The agreement requires the buyer to reimburse the
Company for all losses incurred from operating the business after December
1997 if the transition has not been completed. PMF produces various engine
components, primarily for GM, through a forging process.
The Company recorded a charge of $9,064, net of tax benefit of $6,043, for
losses on disposal of the business, operating losses expected during the
transition period, and allocated interest expense. During the fiscal year
ended July 31, 1997, the Company utilized $8,981 of the reserves for
discontinued operations including a loss from operations of $2,171. At July
31, 1997, $2,024 of discontinued operations reserves remained on the balance
sheet related to PMF.
Summary operating results of the discontinued operation, excluding the loss
on disposal are as follows for the years ended:
FOR THE YEAR ENDED
JULY 31
--------------------
1995 1996
--------- ---------
Net sales.............................................. $ 6,505 $ 4,228
Net loss............................................... (2,363) (1,245)
Interest expense of $1,014 and $496 in 1995 and 1996, respectively, was
allocated to discontinued operations of PMF based on the ratio of net assets
discontinued to total net assets and debt of the Company. In addition,
interest expense of $986 was allocated for the disposal period and is included
in the 1996 loss on disposal of PMF. In 1997, $335 of interest expense was
charged against the reserve.
The net assets of PMF included in the consolidated balance sheet are
summarized as follows:
JULY 31
1997
-------
Current Assets...................................................... $3,917
Current Liabilities................................................. (610)
------
Net Assets.......................................................... $3,307
======
F-13
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
4. RESTRUCTURING CHARGES
In May 1997, the Company decided to restructure the manufacturing operations
of DRA to utilize focus factory manufacturing concepts and to close the
Company's operations in the old vertically-integrated factories that were
leased from GM. These decisions resulted in the impairment of certain
production assets with a carrying amount of $30,321 ($25,279 of which is
property and equipment and $5,042 of which is related tooling and other
supplies) which the Company plans to sell or otherwise dispose. The Company
has estimated the loss on disposal including related costs at $26,260. In
addition, the Company has estimated a cost of $8,240 for reducing its
workforce through several transition programs. The results of operations for
the products which will be discontinued are not separately identifiable. The
restructuring reserve is expected to be utilized throughout 1998 and 1999.
In December 1995, the Company decided to eliminate the production of certain
parts and certain straight-drive starter motors for the original equipment
market. In addition, the Company purchased new, more efficient equipment for
use in the production of certain heavy duty alternators. These decisions
resulted in the impairment of certain production equipment with a carrying
amount of approximately $5,242, which the Company plans to sell or otherwise
dispose. The Company has estimated the loss on disposal, including related
costs, at $4,385. The results of operations for the parts and straight-drive
starter motors for which production will be discontinued are not separately
identifiable.
In October 1995, the Company offered to certain eligible salaried employees
a voluntary retirement transition program in conjunction with a similar plan
offered by GM to its employees which allowed such employees special additional
benefits not typically provided upon retirement. These additional benefits
include salaried payments for six months and future supplemental payments
under the salaried retirement plan. As a result, $3,716 was charged to
operations in 1996.
The following table summarizes the provisions and reserves for restructuring
and non-recurring charges:
TERMINATION EXIT/IMPAIRMENT
BENEFITS COSTS TOTAL
----------- --------------- -------
Provision in 1996.......................... $ 3,716 $ 4,385 $ 8,101
Payments and charges in 1996............... (1,665) (895) (2,560)
------- ------- -------
Reserve at July 31, 1996................... 2,051 3,490 5,541
Provision in 1997.......................... 8,240 26,260 34,500
Change in estimate......................... (1,230) -- (1,230)
Payments and charges in 1997............... (821) (613) (1,434)
------- ------- -------
Reserve at July 31, 1997................... $ 8,240 $29,137 $37,377
======= ======= =======
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
FOR THE YEAR ENDED JULY 31
----------------------------
1995 1996 1997
-------- -------- ---------
Balance at beginning of period.................. $ -- $ 162 $ 1,209
Additions charged to costs and expenses......... 119 1,091 3,774
Acquisition of certain businesses............... 102 308 324
Uncollectible accounts written off, net of
recoveries..................................... (59) (352) (2,372)
------- -------- ---------
$ 162 $ 1,209 $ 2,935
======= ======== =========
F-14
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JULY 31
-----------------
1996 1997
-------- --------
Land and buildings........................................ $ 12,213 $ 5,895
Buildings under capital leases............................ 13,931 21,434
Machinery and equipment................................... 144,247 119,893
-------- --------
$170,391 $147,222
======== ========
7. LONG-TERM DEBT
Borrowings under long-term debt arrangements consists of the following:
JULY 31
-----------------
1996 1997
-------- --------
Senior credit facility:
Revolving loans......................................... $ 48,530 $ --
Term loans.............................................. 54,235 --
Revolving acquisition loans............................. -- 34,963
Power seller notes........................................ 24,300 8,300
World note................................................ 75,000 75,000
Senior subordinated notes................................. -- 140,000
GM acquisition note....................................... 55,224 59,155
A & B seller notes........................................ 3,500 3,500
Junior subordinated notes................................. 22,619 25,211
Hungarian bank loans...................................... 1,141 --
Other, including capital lease obligations................ 14,247 17,639
-------- --------
298,796 363,768
Less current portion...................................... 9,652 507
-------- --------
$289,144 $363,261
======== ========
Senior Credit Facility
Pursuant to the senior credit facility, revolving credit loans of $150,000
are available for general purposes, of which up to $85,000 is available for
acquisitions. The senior credit facility provides for quarterly payments of
$9,400 beginning in the year 1999. The Company has the option of paying an
interest rate of one bank's prime or a LIBOR-based rate. The weighted average
interest on amounts outstanding at July 31, 1997 was 8.02%.
The senior credit facility contains various covenants which include, among
other things: (i) limitations on additional borrowings and encumbrances; (ii)
the maintenance of certain financial ratios and compliance with certain
financial tests and limitations; (iii) limitations on cash dividends paid;
(iv) limitations on investments and capital expenditures; and (v) limitations
on leases and sales of assets.
The senior credit facility is collateralized by a lien on substantially all
assets of the Company and its domestic subsidiaries and by all the capital
stock of such subsidiaries held by the Company or any such other subsidiary.
F-15
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Power Seller Notes
The Power Seller Notes are due February 6, 2001. Interest, at a rate of
9.86% per annum, is payable monthly for the current month. The notes may be
prepaid without premium or penalty after August 6, 1997. The Power Seller
Notes are secured by letters of credit issued under the senior credit
facility.
World Note
The World Note, due on July 31, 2003, is payable to an affiliate of a
stockholder and bears interest at a rate of 10.5% per annum, payable
semiannually.
On any three interest payment dates, the Company may elect to pay up to 50%
of the unpaid accrued interest by issuing additional notes to the holder of
the World Note. At the option of the Company, prepayment of the loan balance
may be made at repayment amounts ranging from 103% in 1997 to 100% of
principal after August 1, 2000. Upon a change in control, certain asset sales,
casualty events or a public offering (all as defined in the debt agreement),
the holders have the right, but not the obligation, to require mandatory
redemption of the debt, without premium or penalty.
The World Note agreement contains certain covenants which are similar to the
provisions of the senior credit facility. The World noteholder has agreed to
subordinate its right to receive payments to the senior credit facility
lenders. DRI and its domestic subsidiaries have guaranteed the payment of
principal and interest on the World Note.
Senior Subordinated Notes
On August 2, 1996, the Company issued $140 million of 10 5/8% Senior
Subordinated Notes due August 1, 2006 (the Senior Subordinated Notes). The
proceeds from the Senior Subordinated Notes were $135.8 million (net of
issuance costs). The proceeds were used as follows: (i) to repay all
outstanding indebtedness under the Senior Credit Facility, plus accrued and
unpaid interest thereon, (ii) $16,000 was used to prepay one of the Power
Seller Notes, plus accrued and unpaid interest thereon, and (iii) the
remaining net proceeds were invested temporarily in short-term interest
bearing obligations. The Company recorded an extraordinary loss in 1997 of
$2,351, net of tax benefit of $1,147, related to deferred financing costs
associated with the payoff of the Senior Credit Facility.
The Senior Subordinated Notes are unsecured senior subordinated obligations
of the Company and are subordinated in right of payment to the prior payment
in full of all existing and future senior indebtedness, pari passu with all
present and future senior subordinated indebtedness and senior to all present
and future subordinated indebtedness of the Company or the relevant subsidiary
guarantors, as defined in the indenture. The Senior Subordinated Notes will
also be effectively subordinated to any secured indebtedness to the extent of
the value of the assets securing such indebtedness.
The Senior Subordinated Notes are redeemable at the option of the Company,
in whole or in part, after August 1, 2001, at the redemption prices set forth
in the note agreement plus accrued and unpaid interest, if any, to the
redemption date. In addition, at any time prior to August 1, 1999, the Company
may redeem, at its option, up to an aggregate amount of 35% of the original
principal amount of the Senior Subordinated Notes with the proceeds of one or
more public equity offerings at a redemption price of 110% of the principal
amount thereof plus accrued and unpaid interest, if any, to the redemption
date, provided that at least 50% of the original aggregate principal amount of
the notes remains outstanding after each such redemption.
F-16
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Upon the occurrence of a change of control (as defined), each holder of the
Senior Subordinated Notes will have the right to require the Company to
purchase all or a portion of such holder's notes at a price in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase.
The indenture pursuant to which the Senior Subordinated Notes were issued
contains certain covenants that, among other things, limit the ability of the
Company and its restricted subsidiaries to (i) incur additional indebtedness,
(ii) pay dividends or make other distributions with respect to capital stock
(as defined) of the Company and its restricted subsidiaries, (iii) sell assets
of the Company or its restricted subsidiaries, (iv) issue or sell restricted
subsidiary stock, (v) enter into certain transactions with affiliates, (vi)
create certain liens, (vii) enter into certain mergers and consolidations and
(viii) incur indebtedness which is subordinate to senior indebtedness and
senior to the Senior Subordinated Notes.
Pursuant to a registration agreement among the Company and the initial
purchasers, the Company will commence an exchange offer pursuant to an
effective registration statement or cause the Notes to be registered under the
Securities Act pursuant to a resale shelf registration statement. If an
exchange offer registration statement is not (i) filed by October 31, 1997 or
(ii) declared effective by December 31, 1997, or (iii) if an exchange offer is
not consummated or a resale shelf registration statement is not declared
effective by January 31, 1998, special interest will accrue initially at the
rate of .25% per annum increasing to a maximum rate of 1% per annum, payable
semi-annually until such time as an exchange offer is consummated or a resale
shelf registration is declared effective.
GM Acquisition Note
In connection with the GM Acquisition, DRA issued to GM a subordinated note
in the principal amount of $45,000 due 2004. Interest accrues semiannually at
a rate of 11.5% per annum and is added to the unpaid principal balance in
amounts ranging from 60% of the accruing interest in 1997 to 20% in 1999.
Beginning in 2000, interest is payable semiannually in cash.
A&B Seller Notes
In connection with the A&B acquisition, a subsidiary of DRI issued
subordinated notes in the principal amount of $3,500 due 2002. Interest is
payable semiannually at 10% per annum. The notes are subordinated to the
senior credit facility, senior subordinated debt, and the World Note. The
notes may be prepaid at any time without penalty.
Junior Subordinated Notes
DRI issued $18,200 in an initial principal amount of Junior Subordinated
Notes to two investors, who are also holders of the Company's common stock.
Interest on the junior subordinated notes accrues semiannually at 11% and is
payable entirely in additional principal, through 2004, when the entire
balance is due and payable.
Capital Lease Obligations
In 1996 the Company entered into an aggregate of $13,931 of new capital
leases with respect to three manufacturing facilities and its world
headquarters building. The leases have 15 year terms with options to renew for
additional periods. These leases have been capitalized using interest rates
ranging from 12.5% to 14.2%. The carrying value of assets under capital leases
was $15,870 at July 31, 1997.
F-17
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Other
Total cash interest paid for 1995, 1996 and 1997 was $7,738, $19,895 and
$31,744, respectively.
The following is the required principal payments of long-term debt and
capitalized leases:
1998.............................................................. $ 507
1999.............................................................. 721
2000.............................................................. 817
2001.............................................................. 9,366
2002.............................................................. 844
Thereafter........................................................ 351,513
--------
$363,768
========
8. EMPLOYEE BENEFIT PLAN
Agreements with GM
In connection with the GM Acquisition, the Company and GM agreed to allocate
the responsibility for employee pension benefits and post-retirement health
care and life insurance on a pro-rata basis between DRA and GM. The allocation
is primarily determined upon years of service with DRA and aggregate years of
service with DRA and GM. In addition, GM has agreed to retain complete
responsibility for all pension and post-retirement benefit costs for salaried
and hourly employees who retired from DRA before August 1, 1996 and October 1,
1996, respectively. Effective August 1, 1994, DRA established hourly and
salaried pension and post-retirement health care and life insurance plans
which are similar to the respective GM plans.
Pension Plans
DRA has defined benefit pension plans covering substantially all employees.
The plan covering salaried employees provides benefits that are based upon
years of service and final estimated average compensation. Benefits for hourly
employees are based on stated amounts for each year of service. DRA's funding
policy is to contribute amounts to provide the plans with sufficient assets to
meet future benefit payment requirements consistent with actuarial
determinations of the funding requirements of federal laws. DRA made
contributions of $6,454 and $1,085 to the plans in 1996 and 1997,
respectively. No contributions were made in 1995. Plan assets are primarily
invested in mutual funds which invest in both debt and equity instruments.
The components of net periodic pension cost for the plans are as follows:
FOR THE YEAR ENDED JULY 31
----------------------------
1995 1996 1997
-------- -------- ---------
Service cost--benefits earned during the
period..................................... $ 4,435 $ 2,935 $ 3,163
Interest costs on projected benefit
obligation................................. 2 293 544
Actual (gain) loss on assets................ -- 51 (2,180)
Net amortization and deferral............... 22 (316) 1,512
Special charge for early retirement......... -- -- 1,633
-------- -------- ---------
Net periodic pension cost................... $ 4,459 $ 2,963 $ 4,672
======== ======== =========
In 1997, the Company offered retirement incentives to salaried employees.
The program liability of $1,633 was included with the restructuring charge.
F-18
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The following table sets forth the funded status for DRA's defined benefit
pension plans.
JULY 31
----------------
1996 1997
------- -------
Actuarial present value of accumulated pension benefit
obligation:
Vested................................................. $ 5,988 $11,375
Nonvested.............................................. 489 1,318
------- -------
Accumulated benefit obligation........................... $ 6,477 $12,693
======= =======
Projected benefit obligation............................. $ 7,021 $13,540
Plan assets at fair value................................ (6,406) (9,664)
------- -------
Projected benefit obligation in excess of fair value of
plan assets............................................. 615 3,876
Prior service cost not yet recognized.................... (37) (911)
Unrecognized net gain.................................... 372 1,577
------- -------
Pension liability recognized in the balance sheet........ $ 950 $ 4,542
======= =======
The measurement of the July 31, 1996 and 1997 projected benefit obligation
was based upon a discount rate of 7.75%. The expected compensation growth rate
is 5% for salaried employees. The expected rate of return on plan assets is
10%.
Defined Contribution Plans
Various subsidiaries of the Company sponsor voluntary savings plans for
eligible salaried and hourly employees. These plans allow participants to make
contributions pursuant to section 401(k) of the Internal Revenue Code. Certain
of these plans have Company matching contribution provisions. Charges to
operations were $452, $686 and $532 for 1995, 1996 and 1997, respectively.
Profit Sharing Plans
DRA sponsors profit sharing plans covering substantially all of its
employees. Distributions are determined based upon formulas established by
management and are made annually. Profit sharing expense for 1995, 1996 and
1997 was $1,700, $1,300 and $1,400, respectively.
Post-Retirement Health Care and Life Insurance Plans
DRA maintains hourly and salaried benefit plans that provide post-retirement
health care and life insurance to retirees and eligible dependents. The
benefits are payable for life, although DRA retains the right to modify or
terminate the plans providing these benefits. The salaried plan is
contributory, with additional cost sharing features such as deductibles and
co-payments. Salaried employees who were not GM employees prior to 1992 are
not eligible for the above described post-retirement benefits. It is DRA's
policy to fund these benefits as claims are incurred.
F-19
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The following table sets forth the status of DRA's post-retirement benefit
plans.
JULY 31
--------------
1996 1997
------ -------
Accumulated post-retirement benefit obligation:
Fully eligible active participants......................... $ 148 $ 160
Active participants not yet fully eligible................. 6,960 11,459
------ -------
7,108 11,619
Unrecognized net gain...................................... 1,078 1,058
------ -------
Post-retirement benefit liability.......................... $8,186 $12,677
====== =======
The components of post-retirement benefit expense are as follows:
FOR THE YEAR ENDED JULY 31
---------------------------
1995 1996 1997
-------- -------- --------
Service Cost....................................... $ 4,114 $ 3,557 $ 3,959
Interest Cost...................................... 320 254 551
Amortization of gain............................... -- (59) (19)
-------- -------- --------
$ 4,434 $ 3,752 $ 4,491
======== ======== ========
Measurement of the accumulated post-retirement benefit obligation was based
on an 8.3% annual rate of increase in the cost of covered health care
benefits. The rate was assumed to decrease ratably to 5.5% through 2002 and
remain level at that rate thereafter. The discount rate used in determining
the accumulated post-retirement benefit obligation was 7.75%. An increase of
1% in assumed health care cost trend rates would increase the accumulated
post-retirement benefit obligation as of July 31, 1997 by 25.8% and the net
periodic cost for 1997 would be increased by 28.6%.
9. STOCKHOLDERS' EQUITY AND REDEEMABLE EXCHANGEABLE PREFERRED STOCK OF DRA
All shares of Class A Common Stock and Class B Common Stock are identical
and will entitle the holders thereof to the same rights and privileges,
provided that except as otherwise required by law, the holders of Class B
common stock shall have no voting rights. Each share of Class A stock is
convertible into one share of Class B stock and each share of Class B stock is
convertible into one share of Class A stock. Pursuant to a Stockholders
Agreement dated July 29, 1994, the Company issued 7,905,912 shares of Class A
Common Stock and 5,366,088 shares of Class B Common Stock for an aggregate of
$1,581. In addition, 483,000 shares of Class A common stock were issued in
connection with the Nabco acquisition. On October 21, 1994, the Company
approved a private placement memorandum whereby the Company is authorized to
offer for sale to certain members of management of DRA up to 1,596,000 shares
of Class A Common Stock. As of July 31, 1997, 1,512,000 shares were
outstanding pursuant to the private placement at a price approximating book
value. Shares issued pursuant to this plan generally vest over three years.
During 1997, 361,200 shares were sold for $2,705 less than the deemed fair
market value. As a result, compensation expense of $354 was recorded during
the current year and the balance of the unearned compensation of $2,351 will
be amortized over the remaining vesting period
The stockholder notes receivable of $179 and $350 at July 31, 1996 and 1997,
respectively, were issued in connection with the sale of Class A Common Stock
and are payable in 1999 through 2002 together with interest at 9.25% accrued
interest per annum. The members of DRA management who are stockholders of the
Company
F-20
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
are subject to agreements that impose certain restrictions and grant rights on
their ownership and transfer of Company stock. During the first three years
after issuance, stockholders are generally prohibited from transferring shares
of common stock of the Company owned by them. The Company further has the
right to repurchase such stock at amounts described in the respective
agreements when the management investor is no longer employed by DRA.
Warrants
In connection with the issuance of the Junior Subordinated Notes, DRI issued
warrants to purchase 1,680,000 shares of DRI Class A Common Stock at a price
of $.0012 per share. The warrants can be exercised, in whole or in part, at
any time through June 31, 2004.
Redeemable Exchangeable Preferred Stock of DRA
In connection with the GM Acquisition, DRA issued 15,000 shares of Class A
Preferred Stock (par value $.01 per share and liquidation preference $1,000
per share) to GM (DRA Preferred Stock). The provisions of the preferred stock
call for a cumulative cash dividend equal to $80 per share (8%). For financial
statement purposes the preferred stock has been discounted to approximately
$11,500 to reflect fair value at the issuance date based upon an 11.5%
dividend rate. The excess of the preference amount over the carrying value of
the DRA Preferred Stock is being accreted through August 1, 2004, at which
time the DRA Preferred Stock must be redeemed by DRA at $1,000 per share plus
accrued and unpaid dividends. At the option of DRA, the DRA Preferred Stock
may be redeemed at a price per share equal to $1,000 plus accrued and unpaid
dividends. In addition, the DRA Preferred Stock may be exchanged, at the
option of DRA, in whole or in part, for 8% subordinated debentures to be
issued by DRA at $1,000 per share plus accrued and unpaid dividends. Dividends
which accrue but remain unpaid for one year accrue additional dividends at the
rate of 8%. The carrying value of the DRA Preferred Stock includes unpaid and
accrued dividends of $3,896 as of July 31, 1997.
10. INCOME TAXES
The following is a summary of the components of the provision for income
taxes (benefit) of continuing operations:
FOR THE YEAR ENDED JULY 31
----------------------------
1995 1996 1997
-------- -------- --------
Current:
Federal...................................... $ 9,529 $ 5,969 $ 3,220
State and Local.............................. 1,927 916 2,019
Foreign...................................... 61 131 977
-------- -------- --------
11,517 7,016 6,216
Deferred:
Federal...................................... (3,021) (1,240) (8,615)
State and Local.............................. (650) (35) (960)
Foreign...................................... -- -- 345
-------- -------- --------
$ 7,846 $ 5,741 $ (3,014)
======== ======== ========
F-21
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
Income (loss) from continuing operations before income taxes (benefit),
preferred dividend requirement of subsidiary and minority interest was taxed
in the following jurisdictions:
FOR THE YEAR ENDED JULY 31
---------------------------
1995 1996 1997
-------- -------- ---------
Domestic........................................... $ 18,198 $ 10,104 $ (15,640)
Foreign............................................ 371 3,208 4,903
-------- -------- ---------
$ 18,569 $ 13,312 $ (10,737)
======== ======== =========
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
FOR THE YEAR ENDED
JULY 31
----------------------
1995 1996 1997
------ ------ ------
Federal statutory income tax rate..................... 35.0% 35.0% 35.0%
State and local income taxes--net of federal tax
benefit.............................................. 4.5 4.3 (7.7)
Compensation expense.................................. -- -- (6.0)
Other items........................................... 2.7 3.8 6.8
------ ------ ------
Effective income tax rate............................. 42.2% 43.1% 28.1%
====== ====== ======
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:
JULY 31
------------------
1996 1997
-------- --------
Deferred tax assets:
Restructuring.......................................... $ -- $ 4,424
Employee benefits...................................... 7,385 7,157
Inventories............................................ 2,165 7,196
Warranty............................................... 2,665 3,207
Asset impairment....................................... 1,380 8,480
Discontinued operations................................ 4,352 774
Non-compete agreements................................. -- 789
Alternative minimum tax credits........................ 1,244 1,488
Other.................................................. 3,054 2,835
-------- --------
22,245 36,350
Deferred tax liabilities:
Depreciation........................................... (11,275) (13,475)
Discount on exchangeable securities.................... (1,381) (1,336)
Other.................................................. (922) (1,621)
-------- --------
(13,578) (16,432)
-------- --------
Net deferred tax asset................................... $ 8,667 $ 19,918
======== ========
F-22
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The Company's alternative minimum tax credit may be carried forward
indefinitely. Income tax payments (refunds), including state taxes, for 1995,
1996 and 1997 were $8,900, $14,000 and ($1,100), respectively.
No provision has been made for United States federal and state or foreign
taxes that may result from future remittances of undistributed earnings of
foreign subsidiaries ($9,336 at July 31, 1997) because it is expected that
such earnings will be reinvested in these foreign operations indefinitely. It
is not practical to estimate the amount of taxes that might be payable on the
eventual remittances of such earnings.
11. TRANSACTIONS WITH GM
The Company and GM have entered into several transactions and agreements
related to their respective businesses. In addition to the transactions
disclosed elsewhere in the accompanying consolidated financial statements and
related notes, the Company entered into the following transactions with GM:
FOR THE YEAR ENDED JULY 31
--------------------------
1995 1996 1997
-------- -------- --------
Sales............................................ $338,356 $298,084 $301,328
Material purchases and costs for services........ 205,874 112,372 97,934
In addition, the Company had the following balances with GM:
JULY 31
---------------
1996 1997
------- -------
Trade accounts receivable.................................. $27,391 $30,286
Other receivables.......................................... 9,807 4,886
Accounts payable........................................... 10,752 7,644
12. LEASE COMMITMENTS
The Company occupies space and uses certain equipment under lease
arrangements. Rent expense was $959, $3,208 and $4,004 for 1995, 1996 and
1997, respectively. Rental commitments at July 31, 1997 for long-term non-
cancelable operating leases were as follows for the year ending:
1998................................................................. $ 4,581
1999................................................................. 3,855
2000................................................................. 2,649
2001................................................................. 1,449
2002................................................................. 1,387
Thereafter........................................................... 1,784
-------
$15,705
=======
13. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings
and subject to various claims arising in the ordinary course of business. The
Company believes that the disposition of these matters will not have a
material adverse effect on the financial position, results of operations or
cash flows of the Company.
F-23
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
14. GEOGRAPHICAL INFORMATION
The Company operates predominantly in a single industry as a designer,
manufacturer, remanufacturer, and distributor of electrical and other engine
related components, including starter motors and alternators for automobiles,
trucks, and other heavy duty vehicles. The Company is a multi-national
corporation with operations in many countries including the United States,
Canada, Mexico, Hungary, Germany, Korea and the Netherlands. Sales, operating
profits and identifiable assets of Canadian, European and other foreign
locations are those sales, operating profits and assets related to the
operations in those locations. Geographical information is shown below:
FOR THE YEAR ENDED JULY 31
------------------------------
1995 1996 1997
-------- --------- ---------
NET SALES:
United States................................ $584,859 $ 657,782 $ 684,790
Canada....................................... -- 26,815 47,240
Europe....................................... 5,090 15,975 14,487
Other foreign................................ -- -- 7,052
Eliminate intercompany sales................. (16,526) (63,720) (63,782)
-------- --------- ---------
Total net sales............................ $573,423 $ 636,852 $ 689,787
======== ========= =========
OPERATING INCOME:
United States................................ $ 36,544 $ 36,751 $ 23,196
Canada....................................... -- 2,319 2,341
Europe....................................... 457 1,609 784
Other foreign................................ -- -- (366)
-------- --------- ---------
Total operating income..................... $ 37,001 $ 40,679 $ 25,955
======== ========= =========
IDENTIFIABLE ASSETS:
United States................................ $310,292 $ 427,847 $ 474,991
Canada....................................... -- 29,959 31,197
Europe....................................... 11,523 10,138 13,105
Other foreign................................ -- -- 16,303
-------- --------- ---------
Total identifiable assets.................... 321,815 467,944 535,596
Corporate assets............................. 65,096 119,339 192,458
Elimination.................................. (64,384) (112,201) (157,485)
-------- --------- ---------
Total assets............................... $322,527 $ 475,082 $ 570,569
======== ========= =========
15. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. The Senior Notes and the Senior Subordinated Notes referred to
in Note 16 below are fully and unconditionally guaranteed, jointly and
severally, by certain direct and indirect subsidiaries (the Subsidiary
Guarantors). Certain of the Company's subsidiaries do not guarantee the Senior
Notes and the Senior Subordinated Notes (the Non-Guarantor Subsidiaries). The
claims of creditors of Non-Guarantor Subsidiaries have priority over the
rights of the Company to receive dividends or distributions from such
subsidiaries.
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at July
31, 1997 and 1996 and for the years ended July 31, 1997, 1996 and 1995.
F-24
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The equity method has been used by the Company with respect to investments
in subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
The following table sets forth the Guarantor and direct Non-Guarantor
Subsidiaries:
GUARANTOR SUBSIDIARIES NON-GUARANTOR SUBSIDIARIES
- -------------------------------------------- --------------------------------------------
Delco Remy America, Inc. Autovill RT Ltd.
Remy International, Inc. Power Investments Canada Ltd.
Reman Holdings, Inc. Remy UK Limited
Nabco, Inc. Delco Remy International (Europe) GmbH
The A&B Group, Inc. Remy India Holdings, Inc.
A&B Enterprises, Inc. Remy Mauritius Ltd.
Dalex, Inc. Remy Korea Holdings, Inc.
A&B Cores, Inc. 681287 Alberta Ltd.
R&L Tool Company, Inc. Publitech, Inc.
MCA, Inc. of Mississippi World Wide Automotive Distributors, Inc.
Power Investments, Inc. Autovill Holdings, Inc.
Franklin Power Products, Inc.
International Fuel Systems, Inc.
Marine Drive Systems, Inc.
Marine Corporation of America
Powrbilt Products, Inc.
World Wide Automotive, Inc.
F-25
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1997
---------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
ASSETS:
Current assets:
Cash and cash
equivalents.......... $ -- $ 1,504 $ 8,546 $ -- $ 10,050
Trade accounts
receivable........... -- 99,745 10,439 -- 110,184
Affiliate accounts
receivable, net...... -- 33,409 2 (33,411)(a) --
Other receivables..... -- 9,605 882 -- 10,487
Recoverable income
taxes................ -- 2,889 -- -- 2,889
Inventories........... -- 145,035 19,382 -- 164,417
Deferred income
taxes................ 4,315 17,159 -- -- 21,474
Other current assets.. -- 4,163 480 -- 4,643
-------- -------- ------- --------- --------
Total current
assets............. 4,315 313,509 39,731 (33,411) 324,144
Property and equipment.. 20 133,769 13,433 -- 147,222
Less accumulated
depreciation........... 13 22,353 4,492 -- 26,858
-------- -------- ------- --------- --------
7 111,416 8,941 -- 120,364
Deferred financing
costs.................. 5,148 3,655 -- -- 8,803
Goodwill, net........... -- 76,437 10,175 -- 86,612
Net assets held for
disposal............... -- 25,279 -- -- 25,279
Investment in
affiliates............. 171,614 -- -- (168,495)(b)(c) 3,119
Other assets............ 1,953 (1,463) 1,758 -- 2,248
-------- -------- ------- --------- --------
Total assets........ $183,037 $528,833 $60,605 $(201,906) $570,569
======== ======== ======= ========= ========
- --------
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-26
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1997
------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Accounts payable...... $ 195 $ 82,585 $ 5,798 $ -- $ 88,578
Affiliate accounts
payable.............. 15,684 6,152 11,575 (33,411)(a) --
Accrued interest
payable.............. -- 3,107 -- -- 3,107
Accrued restructuring
charges.............. -- 37,377 -- -- 37,377
Liabilities related to
discontinued
operations........... -- 3,324 -- -- 3,324
Other liabilities and
accrued expenses..... (9,815) 41,034 5,991 -- 37,210
Current portion of
long-term debt....... -- 506 1 -- 507
-------- -------- ------- --------- --------
Total current
liabilities........ 6,064 174,085 23,365 (33,411) 17,103
Deferred income taxes... 10,631 (9,114) 39 -- 1,556
Long-term debt, less
current portion........ 173,511 189,669 81 -- 363,261
Post-retirement benefits
other than pensions.... -- 12,677 -- -- 12,677
Accrued pension
benefit................ -- 4,542 -- -- 4,542
Other non-current
liabilities............ 876 3,231 17 -- 4,124
Minority interest in
subsidiary............. -- 6,504 1,528 -- 8,032
Redeemable exchangeable
preferred stock of
subsidiary............. -- 16,071 -- -- 16,071
Stockholders' equity
(deficit):
Common stock:
Class A Shares...... 5 -- -- -- 5
Class B Shares...... 4 -- -- -- 4
Paid-in capital....... 6,821 -- -- -- 6,821
Subsidiary
investment........... -- 127,665 31,970 (159,635)(b) --
Retained earnings
(deficit)............ (12,174) 3,503 5,357 (8,860)(c) (12,174)
Cumulative translation
adjustment........... -- -- (1,752) -- (1,752)
Stock purchase plan... (2,701) -- -- -- (2,701)
-------- -------- ------- --------- --------
Total stockholders'
equity (deficit)... (8,045) 131,168 35,575 (168,495) (9,797)
-------- -------- ------- --------- --------
Total liabilities
and stockholders'
equity (deficit)... $183,037 $528,833 $60,605 $(201,906) $570,569
======== ======== ======= ========= ========
- --------
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-27
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
-----------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $684,790 $68,779 $(63,782)(a) $689,787
Cost of goods sold...... -- 548,875 55,141 (63,782)(a) 540,234
-------- -------- ------- -------- --------
Gross profit............ -- 135,915 13,638 -- 149,553
Selling, engineering,
and administrative
expenses............... 6,325 71,933 10,840 -- 89,098
Restructuring charges... -- 34,500 -- -- 34,500
-------- -------- ------- -------- --------
Operating (loss)
income................. (6,325) 29,482 2,798 -- 25,955
Other income (expense):
Gain on sale of
building............. -- -- 2,082 -- 2,082
Interest expense...... (18,815) (19,997) 38 -- (38,774)
-------- -------- ------- -------- --------
(Loss) income from
continuing operations
before income tax
(benefit), preferred
dividend requirement of
subsidiary, and
minority interest...... (25,140) 9,485 4,918 -- (10,737)
Minority interest in
income of
subsidiaries........... -- 921 (29) -- 892
Equity in earnings of
subsidiaries........... 1,821 -- -- (1,821)(b) --
Income taxes (benefit).. (9,023) 4,042 1,967 -- (3,014)
Preferred dividend
requirement of
subsidiary............. -- -- -- 1,648 (c) 1,648
-------- -------- ------- -------- --------
(Loss) income from
continuing operations.. (14,296) 4,522 2,980 (3,469) (10,263)
Discontinued operations:
Loss from operations
of discontinued
businesses (less
applicable income tax
benefit)............. -- 808 -- -- 808
Loss on disposal of
businesses (less
applicable income tax
benefit)............. -- 874 -- -- 874
Extraordinary item:
Write-off of debt
issuance costs (less
applicable income tax
benefit)............. -- 2,351 -- -- 2,351
-------- -------- ------- -------- --------
Net (loss) income....... $(14,296) $ 489 $ 2,980 $ (3,469) $(14,296)
======== ======== ======= ======== ========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-28
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
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
------------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income....... $(14,296) $ 489 $ 2,980 $(3,469)(a) $ (14,296)
Extraordinary item...... 375 3,123 -- -- 3,498
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 1,629 19,942 752 -- 22,323
Gain on sale of
building.............. -- -- (2,082) -- (2,082)
Equity in earnings of
subsidiary............ (1,821) -- -- 1,821(a) --
Deferred income
taxes................. 7,864 (17,481) 39 -- (9,578)
Post-retirement
benefits other than
pensions.............. -- 4,491 -- -- 4,491
Accrued pension
benefits.............. -- 3,592 -- -- 3,592
Non-cash interest
expense............... 3,337 4,612 -- -- 7,949
Preferred dividend
requirement of
subsidiary............ -- -- -- 1,648(b) 1,648
Changes in operating
assets and
liabilities, net of
acquisitions:
Accounts receivable.. -- (1,715) (1,626) -- (3,341)
Inventories.......... -- (4,950) (5,295) -- (10,245)
Accounts payable..... (67) (10,970) 1 -- (11,036)
Intercompany
accounts............ (74,450) 65,730 8,720 -- --
Other current assets
and liabilities..... (8,727) 995 3,194 -- (4,538)
Accrued
restructuring....... -- 31,836 -- -- 31,836
Other non-current
assets and
liabilities, net.... (12,209) 16,180 (1,655) -- 2,316
-------- --------- ------- ------- ---------
Net cash (used in)
provided by operating
activities............. (98,365) 115,874 5,028 -- 22,537
INVESTING ACTIVITIES:
Acquisition, net of cash
acquired............... (45,284) 135 2,707 -- (42,442)
Purchase of property and
equipment.............. -- (27,025) (4,863) -- (31,888)
Investment in
affiliates............. (3,119) -- -- -- (3,119)
Proceeds from sale of
building............... -- -- 3,362 -- 3,362
-------- --------- ------- ------- ---------
Net cash (used in)
provided by investing
activities............. (48,403) (26,890) 1,206 -- (74,087)
FINANCING ACTIVITIES:
Proceeds from issuances
of long-term debt...... 162,700 17,300 -- -- 180,000
Payments on long-term
debt................... (16,000) (110,200) -- -- (126,200)
Other financing
activities............. -- 3,986 -- -- 3,986
-------- --------- ------- ------- ---------
Net cash provided by
(used in) financing
activities............. 146,700 (88,914) -- -- 57,786
Effect of exchange rate
changes on cash........ -- -- 408 -- 408
-------- --------- ------- ------- ---------
Net (decrease) increase
in cash and cash
equivalents............ (68) 70 6,642 -- 6,644
Cash and cash
equivalents at
beginning of year...... 68 1,434 1,904 -- 3,406
-------- --------- ------- ------- ---------
Cash and cash
equivalents at end of
year................... $ -- $ 1,504 $ 8,546 $ -- $ 10,050
======== ========= ======= ======= =========
- --------
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
F-29
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1996
---------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
ASSETS:
Current assets:
Cash and cash
equivalents.......... $ 68 $ 1,434 $ 1,904 $ -- $ 3,406
Trade accounts
receivable, net...... -- 87,161 7,831 -- 94,992
Affiliate accounts
receivable........... -- 80,650 -- (80,650)(a) --
Other receivables..... -- 10,265 320 -- 10,585
Recoverable income
taxes................ 825 7,013 836 -- 8,674
Inventories........... -- 111,631 11,952 -- 123,583
Deferred income
taxes................ 1,548 13,914 -- -- 15,462
Other current assets.. -- 790 423 -- 1,213
-------- -------- ------- --------- --------
Total current
assets............. 2,441 312,858 23,266 (80,650) 257,915
Property and equipment.. 20 162,963 7,408 -- 170,391
Less accumulated
depreciation........... -- 28,207 1,028 -- 29,235
-------- -------- ------- --------- --------
20 134,756 6,380 -- 141,156
Deferred financing
costs.................. 481 6,016 -- -- 6,497
Goodwill, net........... -- 58,174 8,396 -- 66,570
Investment in
affiliate.............. 119,240 -- -- (119,240)(b)(c) --
Other assets............ 544 345 2,055 -- 2,944
-------- -------- ------- --------- --------
Total assets........ $122,726 $512,149 $40,097 $(199,890) $475,082
======== ======== ======= ========= ========
F-30
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1996
------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Accounts payable...... $ 262 $ 75,509 $ 5,436 $ -- $ 81,207
Affiliate accounts
payable.............. 73,322 4,968 2,360 (80,650)(a) --
Accrued interest
payable.............. -- 4,026 -- -- 4,026
Accrued restructuring
charges.............. -- 5,541 -- -- 5,541
Liabilities related to
discontinued
operations........... -- 11,005 -- -- 11,005
Other liabilities and
accrued expenses..... (1,524) 31,151 3,056 -- 32,683
Current portion of
long-term debt....... -- 8,511 1,141 -- 9,652
-------- -------- ------- --------- --------
Total current
liabilities........ 72,060 140,711 11,993 (80,650) 144,114
Deferred income taxes... -- 6,795 -- -- 6,795
Long-term debt, less
current portion........ 46,919 242,225 -- -- 289,144
Post-retirement benefits
other than pensions.... -- 8,186 -- -- 8,186
Accrued pension
benefit................ -- 950 -- -- 950
Other non-current
liabilities............ (3) 2,582 2,848 -- 5,427
Minority interest in
subsidiary............. -- 4,457 -- -- 4,457
Redeemable exchangeable
preferred stock of
subsidiary............. -- 14,420 -- -- 14,420
Stockholders' equity
(deficit):
Common stock:
Class A Shares....... 5 -- -- -- 5
Class B Shares....... 4 -- -- -- 4
Paid-in capital....... 1,798 -- -- -- 1,798
Subsidiary
investment........... -- 87,161 25,040 (112,201)(b) --
Retained earnings
(deficit)............ 2,122 4,662 2,377 (7,039)(c) 2,122
Cumulative translation
adjustment........... -- -- (2,161) -- (2,161)
Notes receivable from
stockholders......... (179) -- -- -- (179)
-------- -------- ------- --------- --------
Total stockholders'
equity (deficit)... 3,750 91,823 25,256 (119,240) 1,589
-------- -------- ------- --------- --------
Total liabilities
and stockholders'
equity (deficit)... $122,726 $512,149 $40,097 $(199,890) $475,082
======== ======== ======= ========= ========
- --------
(a) Elimination of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-31
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
-----------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
Net sales.............. $ -- $657,782 $42,790 $(63,720)(a) $636,852
Cost of goods sold..... -- 541,363 32,435 (63,720)(a) 510,078
------- -------- ------- -------- --------
Gross profit........... -- 116,419 10,355 -- 126,774
Selling, engineering,
and administrative
expenses.............. 1,923 69,644 6,427 -- 77,994
Restructuring charges.. -- 8,101 -- -- 8,101
------- -------- ------- -------- --------
Operating (loss)
income................ (1,923) 38,674 3,928 -- 40,679
Interest expense....... (4,503) (22,477) (387) -- (27,367)
------- -------- ------- -------- --------
(Loss) income from
continuing operations
before income taxes
(benefit), preferred
dividend requirement
of subsidiary and
minority interest..... (6,426) 16,197 3,541 -- 13,312
Minority interest in
income of subsidiary.. -- -- 259 -- 259
Equity in earnings of
subsidiary............ (1,904) -- -- 1,904(b) --
Income taxes
(benefit)............. (3,489) 8,014 1,216 -- 5,741
Preferred dividend
requirement of
subsidiary............ -- -- -- 1,516(c) 1,516
------- -------- ------- -------- --------
(Loss) income from
continuing
operations............ (4,841) 8,183 2,066 388 5,796
Discontinued
operations:
Loss from operations
of discontinued
businesses (less
applicable income
tax benefit)........ -- 1,573 -- -- 1,573
Loss on disposal of
businesses (less
applicable income
tax benefit)........ -- 9,064 -- -- 9,064
------- -------- ------- -------- --------
Net (loss) income...... $(4,841) $ (2,454) $ 2,066 $ 388 $ (4,841)
======= ======== ======= ======== ========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-32
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1996
-----------------------------------------------------------------
DELCO REMY NON-
INTERNATIONAL SUBSIDIARY GUARANTOR
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net (loss) income....... $ (4,841) $ (2,454) $ 2,066 $ 388 $ (4,841)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... -- 18,569 986 -- 19,555
Equity in earnings of
subsidiary............ 1,904 -- -- (1,904)(a) --
Deferred income
taxes................. (620) (3,328) 1,001 -- (2,947)
Post-retirement
benefits other than
pensions.............. -- 3,752 -- -- 3,752
Accrued pension
benefits.............. -- (3,509) -- -- (3,509)
Non-cash interest
expense............... 2,333 5,534 -- -- 7,867
Preferred dividend
requirement of
subsidiary............ -- -- -- 1,516 (b) 1,516
Changes in operating
assets and
liabilities, net of
acquisitions:
Accounts receivable.. -- (24,724) 266 -- (24,458)
Inventories.......... -- (27,048) 1,328 -- (25,720)
Accounts payable..... 262 7,339 1,033 -- 8,634
Intercompany
accounts............ 27,650 (29,070) 1,420 -- --
Other current assets
and liabilities..... (2,679) 21,702 (794) -- 18,229
Accrued
restructuring....... -- 5,541 -- -- 5,541
Other non-current
assets and
liabilities, net.... (1,148) 1,248 (4,403) -- (4,303)
-------- -------- ------- ------- --------
Net cash provided by
(used in) operating
activities............. 22,861 (26,448) 2,903 -- (684)
INVESTING ACTIVITIES:
Acquisition, net of cash
acquired............... (47,685) 1,365 -- -- (46,320)
Purchase of property and
equipment.............. (1) (32,740) -- -- (32,741)
-------- -------- ------- ------- --------
Net cash used in
investing activities... (47,686) (31,375) -- -- (79,061)
FINANCING ACTIVITIES:
Proceeds from issuances
of long-term debt...... 24,300 65,352 -- -- 89,652
Payments on long-term
debt................... -- (6,466) (2,376) -- (8,842)
Other financing
activities............. -- (20) -- -- (20)
-------- -------- ------- ------- --------
Net cash provided by
(used in) financing
activities............. 24,300 58,866 (2,376) -- 80,790
Effect of exchange rate
changes on cash........ -- -- 883 -- 883
-------- -------- ------- ------- --------
Net (decrease) increase
in cash and cash
equivalents............ (525) 1,043 1,410 -- 1,928
Cash and cash
equivalents at
beginning of year...... 593 391 494 -- 1,478
-------- -------- ------- ------- --------
Cash and cash
equivalents at end of
year................... $ 68 $ 1,434 $ 1,904 $ -- $ 3,406
======== ======== ======= ======= ========
- --------
(a) Elimination of investment in affiliates earnings.
(b) Elimination of preferred dividend requirement of subsidiary.
F-33
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1995
-----------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
Net sales.............. $ -- $584,859 $5,090 $(16,526)(a) $573,423
Cost of goods sold..... -- 488,406 3,336 (16,526)(a) 475,216
------- -------- ------ -------- --------
Gross profit........... -- 96,453 1,754 -- 98,207
Selling, engineering,
and administrative
expenses.............. 825 59,084 1,297 -- 61,206
------- -------- ------ -------- --------
Operating (loss)
income................ (825) 37,369 457 -- 37,001
Interest expense....... (2,083) (16,263) (86) -- (18,432)
------- -------- ------ -------- --------
(Loss) income from
continuing operations
before income taxes
(benefit), preferred
dividend requirement
of subsidiary, and
minority interest..... (2,908) 21,106 371 -- 18,569
Equity in earnings of
subsidiary............ 8,943 -- -- (8,943)(b) --
Income taxes
(benefit)............. (928) 8,713 61 -- 7,846
Preferred dividend
requirement of
subsidiary............ -- -- -- 1,397(c) 1,397
------- -------- ------ -------- --------
Income (loss) from
continuing
operations............ 6,963 12,393 310 (10,340) 9,326
Discontinued
operations:
Loss from operations
of discontinued
businesses (less
applicable income
tax benefit)........ -- 2,363 -- -- 2,363
------- -------- ------ -------- --------
Net income (loss)...... $ 6,963 $ 10,030 $ 310 $(10,340) $ 6,963
======= ======== ====== ======== ========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-34
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1995
--------------------------------------------------------------------
DELCO REMY NON-
INTERNATIONAL SUBSIDIARY GUARANTOR
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)....... $ 6,963 $ 10,030 $ 310 $(10,340)(a)(b) $ 6,963
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... -- 14,491 42 -- 14,533
Equity in earnings of
subsidiary............ (8,943) -- -- 8,943 (a) --
Deferred income
taxes................. (927) (2,653) -- -- (3,580)
Post-retirement
benefits other than
pensions.............. -- 4,434 -- -- 4,434
Accrued pension
benefits.............. -- 4,459 -- -- 4,459
Non-cash interest
expense............... 2,086 5,983 -- -- 8,069
Preferred dividend
requirement of
subsidiary............ -- -- -- 1,397 (b) 1,397
Changes in operating
assets and
liabilities, net of
acquisitions:
Accounts receivable.. -- (49,270) (50) -- (49,320)
Inventories.......... -- (7,212) (823) -- (8,035)
Accounts payable..... -- 48,862 751 -- 49,613
Intercompany
accounts............ 62,733 (63,674) 941 -- --
Other current assets
and liabilities..... 330 (6,450) (537) -- (6,657)
Other non-current
assets and
liabilities, net.... 3,578 (3,797) 264 -- 45
-------- -------- ----- -------- --------
Net cash provided by
(used in) operating
activities............. 65,820 (44,797) 898 -- 21,921
INVESTING ACTIVITIES:
Acquisitions, net of
cash acquired.......... (64,429) 1,824 595 -- (62,010)
Purchase of property and
equipment.............. (19) (11,129) (93) -- (11,241)
-------- -------- ----- -------- --------
Net cash (used in)
provided by investing
activities............. (64,448) (9,305) 502 -- (73,251)
FINANCING ACTIVITIES:
Proceeds from issuances
of long-term debt...... -- 31,918 -- -- 31,918
Payments on long-term
debt................... (848) (3,163) (906) -- (4,917)
Other financing
activities............. -- 118 -- -- 118
-------- -------- ----- -------- --------
Net cash (used in)
provided by financing
activities............. (848) 28,873 (906) -- 27,119
-------- -------- ----- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 524 (25,229) 494 -- (24,211)
Cash and cash
equivalents at
beginning of year...... 69 25,620 -- -- 25,689
-------- -------- ----- -------- --------
Cash and cash
equivalents at end of
year................... $ 593 $ 391 $ 494 $ -- $ 1,478
======== ======== ===== ======== ========
- --------
(a)Elimination of investment in affiliate earnings.
(b)Recording of preferred dividend requirement of subsidiary.
F-35
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
16. SUBSEQUENT EVENTS
Offerings
In October 1997, the Company filed Registration Statements to offer
approximately $60,000 of Class A Common Stock ($69,000 if the Underwriters'
over-allotment option is exercised in full) and $130,000 of Senior Notes Due
2007 (the Senior Notes). Net proceeds to the Company from such Offerings,
after deduction of associated expenses, are expected to be approximately
$181,000. The Company filed another Registration Statement in October 1997,
the purpose of which is to register an exchange offer for the Company's 10
5/8% Senior Subordinated Notes due 2006.
Planned Acquisition
On October 30, 1997, the Company entered into the Ballantrae Acquisition
Agreement to acquire all of the capital stock of Ballantrae (the Planned
Acquisition) for $52,800 (including assumed debt and the estimated working
capital adjustment and fees and expenses of Ballantrae). Ballantrae operates
through two subsidiaries: Tractech, a leading producer of traction control
systems for heavy duty original equipment manufacturers and the aftermarket;
and Kraftube, Inc., a tubing assembly business which sells products to
compressor manufacturers for commercial air conditioners and refrigeration
equipment. In fiscal year 1997, Tractech accounted for approximately 70% of
Ballantrae's $37,600 of net sales. The Company will exchange shares of its
Common Stock with a value (at the initial public offering price in the Equity
Offering) of approximately $22,100 for the equity of Ballantrae and will repay
approximately $29,700 of Ballantrae's debt. The acquisition is expected to be
completed at or prior to the consummation of the Offerings.
Recapitalization
In connection with the above-mentioned Offerings and Planned Acquisition,
the Company plans to complete several transactions pursuant to which the
Company's outstanding debt and preferred stock will be restructured (the
Recapitalization). Significant components of the Recapitalization, together
with the applicable accounting effects, will be as follows:
The payment in full of the World Note.
The early extinguishment of the World Note will result in a write-off of
the unamortized debt issue costs of $1,350, net of income taxes, which will
be accounted for as an extraordinary loss on this transaction.
The payment in full of the GM Acquisition Note.
The exchange of the Junior Subordinated Notes for 1,621,399 shares of
Class A Common Stock.
The exchange of the outstanding shares of 8% preferred stock of DRA to an
8% subordinated debenture of DRA.
The payment in full of $11,800 principal amount of subordinated notes
payable to certain former stockholders of A&B Group and Power.
The amendment of the senior credit facility in connection with the
consummation of the Offerings.
Payment of Ballantrae debt assumed in the Planned Acquisition.
Share and Per Share Information
On November 20, 1997, the Company authorized a 16.8-to-one stock split
subject to consummation of the Offerings. All share and per share amounts have
been adjusted to reflect this split. The primary earnings (loss)
F-36
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
per share is based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the year, adjusted to reflect
all common stock issued within one year prior to the initial public offering
of common stock as if those shares issued had been outstanding for all periods
presented.
F-37
DELCO REMY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS
ENDED OCTOBER 31
----------------------
1996 1997
---------- ----------
Net sales............................................. $ 169,766 $ 209,020
Cost of goods sold.................................... 131,372 170,877
---------- ----------
Gross profit.......................................... 38,394 38,143
Selling, engineering, and administrative expenses..... 23,335 20,936
---------- ----------
Operating income...................................... 15,059 17,207
Interest expense...................................... (9,391) (10,521)
---------- ----------
Income from continuing operations before income taxes,
preferred dividend requirement of subsidiary and
minority interest.................................... 5,668 6,686
Minority interest in income and subsidiary............ 137 538
Income taxes.......................................... 2,282 2,674
Preferred dividend requirement of subsidiary.......... 415 412
---------- ----------
Income from continuing operations..................... 2,834 3,062
Discontinued operations:
Loss from operations of discontinued businesses
(less applicable income tax benefit)............... 213 --
Extraordinary item:
Write-off of debt issuance costs (less applicable
income tax benefit)................................ 2,351 --
---------- ----------
Net income............................................ $ 270 $ 3,062
========== ==========
Primary earnings per share:
From continuing operations.......................... $ .16 $ .18
Before extraordinary item........................... .15 .18
Net income.......................................... .02 .18
See Accompanying Notes
F-38
DELCO REMY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
JULY 31, OCTOBER 31,
1997 1997
-------- -----------
(NOTE 1) (UNAUDITED)
ASSETS:
Current Assets:
Cash and cash
equivalents.............. $ 10,050 $ 8,626
Trade accounts
receivable............... 110,184 125,582
Other receivables......... 13,376 6,590
Inventories............... 164,417 167,456
Deferred income taxes..... 21,474 20,757
Other current assets...... 4,643 5,210
-------- --------
Total current assets.... 324,144 334,221
Property and equipment...... 147,222 153,039
Less accumulated
depreciation............... 26,858 30,917
-------- --------
120,364 122,122
Deferred financing costs.... 8,803 8,651
Goodwill (less accumulated
amortization).............. 86,612 86,760
Net assets held for
disposal................... 25,279 23,909
Investment in affiliate..... 3,119 4,727
Other assets................ 2,248 2,115
-------- --------
Total assets............ $570,569 $582,505
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Accounts payable.......... $ 88,578 $ 96,818
Accrued interest payable.. 3,107 7,262
Accrued restructuring
charges.................. 37,377 37,922
Liabilities related to
discontinued operations.. 3,324 2,685
Other liabilities and
accrued expenses......... 37,210 36,567
Current portion of long-
term debt................ 507 535
-------- --------
Total current
liabilities............ 170,103 181,789
Deferred income taxes....... 1,556 1,556
Long-term debt, less current
portion.................... 363,261 358,170
Post-retirement benefits
other then pension......... 12,677 13,742
Accrued pension benefits.... 4,542 5,272
Other non-current
liabilities................ 4,124 3,899
Minority interest in
subsidiary................. 8,032 8,570
Redeemable exchangeable
preferred stock of a
subsidiary................. 16,071 16,483
Stockholders' equity
(deficit):
Common stock:
Class A Shares.......... 88 88
Class B Shares.......... 65 65
Paid-in capital........... 6,677 6,703
Retained earnings
(deficit)................ (12,174) (9,112)
Cumulative translation
adjustment............... (1,752) (2,173)
Stock purchase plan....... (2,701) (2,547)
-------- --------
Total stockholders'
equity (deficit)....... (9,797) (6,976)
-------- --------
Total liabilities and
stockholders' equity
(deficit).............. $570,569 $582,505
======== ========
See Accompanying Notes
F-39
DELCO REMY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE
MONTHS ENDED
OCTOBER 31
-------------------
1996 1997
--------- --------
OPERATING ACTIVITIES:
Net income............................................... $ 270 $ 3,062
Extraordinary item....................................... 3,498 --
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 5,300 4,698
Deferred income taxes.................................. (832) 717
Post-retirement benefits other than pensions........... 1,135 1,065
Accrued pension benefits............................... 1,018 730
Non-cash interest expense.............................. 1,883 1,693
Preferred dividend requirement of subsidiary........... 415 412
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. (14,241) (15,398)
Inventories.......................................... (9,342) (3,039)
Accounts payable..................................... (1,743) 8,240
Other current assets and liabilities................. 12,269 8,949
Accrued restructuring................................ (516) 545
Other non-current assets and liabilities, net........ (5,636) (259)
--------- --------
Net cash (used in) provided by operating activities...... (6,522) 11,415
INVESTING ACTIVITIES:
Purchase of property and equipment....................... (8,910) (5,747)
Investment in affiliates................................. (1,326) (1,608)
--------- --------
Net cash used in investing activities.................... (10,236) (7,355)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt................ 140,000 --
Payments on long-term debt............................... (126,200) --
Other financing activities............................... 9,080 (5,063)
--------- --------
Net cash provided by (used in) financing activities...... 22,880 (5,063)
--------- --------
Effect of exchange rate changes on cash.................. 1,534 (421)
--------- --------
Net increase (decrease) in cash and cash equivalents..... 7,656 (1,424)
Cash and cash equivalents at beginning of year........... 3,406 10,050
--------- --------
Cash and cash equivalents at end of year................. $ 11,062 $ 8,626
========= ========
See Accompanying Notes
F-40
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements contain all adjustments, consisting of normal recurring
adjustments, which are, in the opinion of the management of Delco Remy
International, Inc. (the Company), necessary to present fairly the condensed
consolidated financial position of the Company as of July 31, 1997 and October
31, 1997, and the condensed consolidated results of operations and cash flows
of the Company for the three months ended October 31, 1997 and 1996,
respectively. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year. The balance
sheet at July 31, 1997 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
July 31, 1997.
2. INVENTORIES
Inventories consist of the following:
JULY 31, OCTOBER 31,
1997 1997
-------- -----------
Raw material............................................ $ 84,583 $ 82,676
Work in-process......................................... 20,168 23,997
Finished goods.......................................... 59,666 60,783
-------- --------
$164,417 $167,456
======== ========
3 EARNINGS PER SHARE
The primary earnings loss per share is based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
year, adjusted to reflect all common stock issued within one year prior to the
initial public offering of common stock as if those shares issued had been
outstanding for all periods presented.
F-41
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
4. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. Certain debt securities are unconditionally guaranteed, jointly
and severally, by certain direct and indirect subsidiaries (the Subsidiary
Guarantors). Certain of the Company's subsidiaries do not guarantee the debt
securities (the Non-Guarantor Subsidiaries). The claims of creditors of Non-
Guarantor Subsidiaries have priority over the rights of the Company to receive
dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at
October 31, 1997 and for the three months ended October 31, 1996 and 1997.
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1997
---------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
ASSETS:
Current assets:
Cash and cash
equivalents.......... $ -- $ 2,461 $ 6,165 $ -- $ 8,626
Trade accounts
receivable........... -- 114,982 10,600 -- 125,582
Affiliate accounts
receivables, net..... -- 38,816 -- (38,816)(a) --
Other receivables..... -- 5,130 1,460 -- 6,590
Inventories........... -- 145,459 21,997 -- 167,456
Deferred income
taxes................ 4,315 16,442 -- -- 20,757
Other current assets.. -- 4,725 485 -- 5,210
-------- -------- ------- --------- --------
Total current
assets.............. 4,315 328,015 40,707 (38,816) 334,221
Property and equipment.. 20 138,319 14,700 -- 153,039
Less accumulated
depreciation........... 13 29,006 1,898 -- 30,917
-------- -------- ------- --------- --------
7 109,313 12,802 -- 122,122
Deferred financing
costs.................. 5,148 3,503 -- -- 8,651
Goodwill, net........... 2,122 76,516 8,122 -- 86,760
Net assets held for
disposal............... -- 23,909 -- -- 23,909
Investment in
affiliates............. 177,430 -- -- (172,703)(b)(c) 4,727
Other assets............ 1,847 (1,504) 1,772 -- 2,115
-------- -------- ------- --------- --------
Total assets......... $190,869 $539,752 $63,403 $(211,519) $582,505
======== ======== ======= ========= ========
- --------
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-42
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1997
------------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
LIABILITIES AND STOCK-
HOLDERS' EQUITY (DEFI-
CIT):
Current liabilities:
Accounts payable...... $ 195 $ 89,859 $ 6,764 $ -- $ 96,818
Affiliate accounts
payable.............. 19,740 6,154 12,922 (38,816)(a) --
Accrued interest
payable.............. 4,428 2,834 -- -- 7,262
Accrued restructuring
charges.............. -- 37,922 -- -- 37,922
Liabilities related to
discontinued
operations........... -- 2,685 -- -- 2,685
Other liabilities and
accrued expenses..... (13,204) 44,718 5,053 -- 36,567
Current portion of
long term debt....... -- 535 -- -- 535
-------- -------- ------- --------- --------
Total current
liabilities........ 11,159 184,707 24,739 (38,816) 181,789
Deferred income taxes... 10,629 (9,746) 673 -- 1,556
Long-term debt, less
current portion........ 173,511 184,577 82 -- 358,170
Post-retirement benefits
other than pensions.... -- 13,742 -- -- 13,742
Accrued pension
benefit................ -- 5,272 -- -- 5,272
Other non-current
liabilities............ 373 1,225 2,301 -- 3,899
Minority interest in
subsidiary............. -- 7,011 1,559 -- 8,570
Redeemable exchangeable
preferred stock of
subsidiary............. -- 16,483 -- -- 16,483
Stockholders' equity
(deficit):
Common stock:
Class A Shares...... 5 -- -- -- 5
Class B Shares...... 4 -- -- -- 4
Paid-in capital....... 6,847 -- -- -- 6,847
Subsidiary
investment........... -- 127,666 29,917 (157,583)(b) --
Retained earnings
(deficit)............ (9,112) 8,815 6,305 (15,120)(c) (9,112)
Cumulative translation
adjustment........... -- -- (2,173) -- (2,173)
Stock purchase plan... (2,547) -- -- -- (2,547)
-------- -------- ------- --------- --------
Total stockholders'
equity (deficit)... (4,803) 136,481 34,049 (172,703) (6,976)
-------- -------- ------- --------- --------
Total liabilities
and stockholders'
equity (deficit)... $190,869 $539,752 $63,403 $(211,519) $582,505
======== ======== ======= ========= ========
- --------
(a) Eliminations of intercompany receivables and payables.
(b) Elimination of investments in subsidiaries.
(c) Elimination of investments in subsidiaries' earnings.
F-43
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
-----------------------------------------------------------------
DELCO REMY
INTERNATIONAL NON-
INC. (PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $206,031 $25,812 $(22,823)(a) $209,020
Cost of goods sold...... -- 171,872 21,828 (22,823)(a) 170,877
------- -------- ------- -------- --------
Gross profit............ -- 34,159 3,984 -- 38,143
Selling, engineering,
and administrative
expenses............... 860 17,583 2,493 -- 20,936
------- -------- ------- -------- --------
Operating (loss)
income................. (860) 16,576 1,491 -- 17,207
Interest expense........ (4,808) (5,701) (12) -- (10,521)
------- -------- ------- -------- --------
(Loss) income from
continuing operations
before income taxes
(benefit), preferred
dividend requirement of
subsidiary and minority
interest............... (5,668) 10,875 1,479 -- 6,686
Minority interest in
income of
subsidiaries........... -- 507 31 -- 538
Equity in earnings of
subsidiaries........... 6,260 -- -- (6,260)(b) --
Income taxes (benefit).. (2,470) 4,644 500 -- 2,674
Preferred dividend
requirement of
subsidiary............. -- -- -- 412 (c) 412
------- -------- ------- -------- --------
Net income (loss)....... $ 3,062 $ 5,724 $ 948 $ (6,672) $ 3,062
======= ======== ======= ======== ========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-44
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
----------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)....... $ 3,062 $ 5,724 $ 948 $(6,672) $ 3,062
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and amor-
tization............. 36 4,305 357 -- 4,698
Equity in earnings of
subsidiary........... (6,260) -- -- 6,260 (a) --
Deferred income tax-
es................... 4,376 (3,291) (368) -- 717
Post-retirement
benefits other than
pensions............. -- 1,065 -- -- 1,065
Accrued pension bene-
fits................. -- 730 -- -- 730
Non-cash interest ex-
pense................ 853 840 -- -- 1,693
Preferred dividend re-
quirement of subsidi-
ary.................. -- -- -- 412 (b) 412
Changes in operating
assets and
liabilities, net of
acquisitions:
Accounts receivable.. -- (15,237) (161) -- (15,398)
Inventories.......... -- (424) (2,615) -- (3,039)
Accounts payable..... -- 7,274 966 -- 8,240
Intercompany ac-
counts.............. 4,056 (5,405) 1,349 -- --
Other current assets
and liabilities..... 1,591 8,879 (1,521) -- 8,949
Accrued restructur-
ing................. -- 545 -- -- 545
Other non-current
assets and
liabilities, net.... (6,106) 5,362 485 -- (259)
------- -------- ------- ------- --------
Net cash provided by
(used in) operating
activities............. 1,608 10,367 (560) -- 11,415
INVESTING ACTIVITIES:
Purchase of property and
equipment.............. -- (4,347) (1,400) -- (5,747)
Investment in affili-
ates................... (1,608) -- -- -- (1,608)
------- -------- ------- ------- --------
Net cash used in invest-
ing activities......... (1,608) (4,347) (1,400) -- (7,355)
FINANCING ACTIVITIES:
Other financing activi-
ties................... -- (5,063) -- -- (5,063)
------- -------- ------- ------- --------
Net cash used in financ-
ing activities......... -- (5,063) -- -- (5,063)
Effect of exchange rate
changes on cash........ -- -- (421) -- (421)
------- -------- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ -- 957 (2,381) -- (1,424)
Cash and cash
equivalents at
beginning of year...... -- 1,504 8,546 -- 10,050
------- -------- ------- ------- --------
Cash and cash
equivalents at end of
year................... $ -- $ 2,461 $ 6,165 $ -- $ 8,626
======= ======== ======= ======= ========
- --------
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
F-45
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1996
-----------------------------------------------------------------
DELCO REMY
INTERNATIONAL
INC. NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
Net sales................ $ -- $169,128 $14,237 $(13,599)(a) $169,766
Cost of goods sold....... -- 134,117 10,854 (13,599)(a) 131,372
------- -------- ------- -------- --------
Gross profit............. -- 35,011 3,383 -- 38,394
Selling, engineering, and
administrative
expenses................ 674 20,414 2,247 -- 23,335
------- -------- ------- -------- --------
Operating (loss) income.. (674) 14,597 1,136 -- 15,059
Interest expense......... (4,690) (4,650) (51) -- (9,391)
------- -------- ------- -------- --------
(Loss) income from
continuing operations
before income taxes
(benefit), preferred
dividend requirement of
subsidiary and minority
interest................ (5,364) 9,947 1,085 -- 5,668
Minority interest in
income of subsidiaries.. -- 137 -- -- 137
Equity in earnings of
subsidiaries............ 3,745 -- -- (3,745)(b) --
Income taxes (benefit)... (2,141) 4,066 357 -- 2,282
Preferred dividend
requirement of
subsidiary.............. -- -- -- 415 (c) 415
------- -------- ------- -------- --------
Income (loss) from
continuing operations... 522 5,744 728 (4,160) 2,834
Discontinued operations:
Loss from operations of
discontinued business
(less applicable
income tax benefit)... -- 213 -- -- 213
Extraordinary item:
Write-off of debt
issuance costs (less
applicable income tax
benefit).............. 252 2,099 -- -- 2,351
------- -------- ------- -------- --------
Net income (loss)........ $ 270 $ 3,432 $ 728 $ (4,160) $ 270
======= ======== ======= ======== ========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-46
DELCO REMY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1996
-----------------------------------------------------------------
DELCO REMY
INTERNATIONAL NON-
INC. (PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)...... $ 270 $ 3,432 $ 728 $(4,160) $ 270
Extraordinary item..... 375 3,123 -- -- 3,498
Adjustments to
reconcile net income
(loss) to net cash
(used in) provided by
operating activities:
Depreciation and
amortization......... 43 5,093 164 -- 5,300
Equity in earnings of
subsidiary........... (3,745) -- -- 3,745(a) --
Deferred income
taxes................ (4,465) 4,430 (797) -- (832)
Post-retirement
benefits other than
pensions............. -- 1,135 -- -- 1,135
Accrued pension
benefits............. -- 1,018 -- -- 1,018
Non-cash interest
expense.............. 765 1,118 -- -- 1,883
Preferred dividend
requirement of
subsidiary........... -- -- -- 415(b) 415
Changes in operating
assets and
liabilities, net of
acquisitions:
Accounts receivable.. -- (14,083) (158) -- (14,241)
Inventories.......... -- (8,104) (1,238) -- (9,342)
Accounts payable..... (2) (2,437) 696 -- (1,743)
Intercompany
accounts............ (116,645) 118,941 (2,296) -- --
Other current asset
and liabilities..... 2,805 5,955 3,509 -- 12,269
Accrued
restructuring....... -- (516) -- -- (516)
Other non-current
assets and
liabilities, net.... 15,177 (19,568) (1,245) -- (5,636)
--------- --------- ------- ------- ---------
Net cash (used in)
provided by operating
activities............. (105,422) 99,537 (637) -- (6,522)
INVESTING ACTIVITIES:
Purchase of property and
equipment.............. -- (8,345) (565) -- (8,910)
Investment in
affiliates............. (1,326) -- -- -- (1,326)
--------- --------- ------- ------- ---------
Net cash used in
investing activities... (1,326) (8,345) (565) -- (10,236)
FINANCING ACTIVITIES:
Proceeds from issuances
of long-term debt...... 122,700 17,300 -- -- 140,000
Payments on long-term
debt................... (16,000) (110,200) -- -- (126,200)
Other financing
activities............. -- 9,080 -- -- 9,080
--------- --------- ------- ------- ---------
Net cash provided by
financing activities... 106,700 83,820 -- -- 22,880
Effect of exchange rate
changes on cash........ -- -- 1,534 -- 1,534
--------- --------- ------- ------- ---------
Net (decrease) increase
in cash net cash
equivalents............ (48) 7,372 332 -- 7,656
Cash and cash
equivalents at
beginning of year...... 68 1,434 1,904 -- 3,406
--------- --------- ------- ------- ---------
Cash and cash
equivalents at end of
year................... $ 20 $ 8,806 $ 2,236 $ -- $ 11,062
========= ========= ======= ======= =========
- --------
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
F-47
REPORT OF INDEPENDENT AUDITORS
Board of Directors
World Wide Automotive, Inc. (formerly Precision Alternator and Starter, Inc.)
We have audited the accompanying balance sheet of World Wide Automotive,
Inc. (formerly Precision Alternator and Starter, Inc.) as of March 31, 1997
and the related statements of income, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of CertiPro, a division of the Company, which statements reflect
total assets of $7,907,945 as of March 31, 1997, and total revenues of
$18,744,026 for the year then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for CertiPro, is based solely on the report of the
other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of World Wide Automotive, Inc. (formerly
Precision Alternator and Starter, Inc.) at March 31, 1997, and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Vienna, Virginia
October 16, 1997
F-48
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Precision Alternator and Starter, Inc.
We have audited the accompanying balance sheet of Precision Alternator and
Starter, Inc. as of March 31, 1996, and the related statements of income,
stockholders' equity, and cash flows for each of the two years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Precision Alternator and
Starter, Inc. at March 31, 1996, and the results of its operations and its
cash flows for each of the two years ended March 31, 1996, in conformity with
generally accepted accounting principles.
FRIEDMAN & FULLER, P.C.
Rockville, Maryland
October 15, 1997
F-49
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Precision Alternator and Starter, Inc.
We have audited the balance sheet of Certipro Division of Precision
Alternator and Starter, Inc. as of March 31, 1997, and the related statements
of operations, changes in division equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Certipro Division of
Precision Alternator and Starter, Inc. at March 31, 1997, and the results of
its operations and its cash flows for each of the two years ended in
conformity with generally accepted accounting principles.
Friedman & Fuller, P.C.
Rockville, Maryland August 19, 1997
F-50
[THIS PAGE LEFT INTENTIONALLY BLANK]
F-51
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
BALANCE SHEETS
MARCH 31
------------------------
1996 1997
----------- -----------
ASSETS:
Current assets:
Cash............................................... $ 251,466 $ 52,089
Trade accounts receivable, less allowance for
doubtful accounts
of $101,682 and $211,065, respectively............ 10,523,827 12,326,336
Accounts receivable, other......................... 9,235 35,447
Inventory, less reserves of $295,881 and $780,760,
respectively...................................... 27,139,396 31,568,338
Prepaid expenses................................... 300,774 436,009
Current portion of deferred tax asset.............. 569,000 1,569,000
----------- -----------
Total current assets............................. 38,793,698 45,987,219
Property, plant and equipment........................ 3,608,217 3,864,719
Less accumulated depreciation........................ (2,215,971) (2,377,067)
----------- -----------
1,392,246 1,487,652
Other assets:
Deposits........................................... 132,700 78,638
Goodwill, net of accumulated amortization of
$274,126
and $309,881, respectively........................ 798,538 762,783
Other intangibles, net of accumulated amortization
of $103,360 and $231,027, respectively............ 133,211 215,133
Deferred tax asset, net of current portion......... 669,000 424,000
Investment in SKB, Inc............................. 350,000 --
----------- -----------
Total other assets............................... 2,083,449 1,480,554
----------- -----------
Total assets..................................... $42,269,393 $48,955,425
=========== ===========
See Accompanying Notes
F-52
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
BALANCE SHEETS
MARCH 31
-----------------------
1996 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Line of credit........................................ $17,664,012 $17,445,110
Accounts payable...................................... 13,335,509 17,775,992
Warranty reserve...................................... 305,233 478,371
Accrued compensation.................................. 1,380,165 1,511,875
Accrued commissions................................... 205,741 481,799
Accrued freight....................................... 209,311 236,267
Accrued interest...................................... 152,530 161,491
Other accrued expenses................................ 130,668 450,195
Current portion of long-term debt..................... 526,324 836,105
Current portion of capital lease obligations.......... 23,790 59,652
Income taxes payable.................................. 851,146 46,302
----------- -----------
Total current liabilities........................... 34,784,429 39,483,159
Long-term debt, less current portion.................... 157,784 638,986
Capital lease obligations, less current portion......... 20,856 127,442
Deferred rent........................................... 302,567 421,201
----------- -----------
Total liabilities................................... 35,265,636 40,670,788
Commitments
Stockholders' equity:
Common stock, $.01 par; 150,000 shares authorized,
120,000 shares issued and outstanding................ 1,200 1,200
Additional capital.................................... 2,784,450 2,784,450
Retained earnings..................................... 4,218,107 5,498,987
----------- -----------
Total stockholders' equity.......................... 7,003,757 8,284,637
----------- -----------
Total liabilities and stockholders' equity.......... $42,269,393 $48,955,425
=========== ===========
See Accompanying Notes
F-53
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
STATEMENTS OF INCOME
FOR THE YEAR ENDED MARCH 31
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Net Sales............................... $53,929,452 $64,951,886 $78,099,809
Cost of sales........................... 37,385,345 43,933,876 53,399,411
----------- ----------- -----------
Gross profit............................ 16,544,107 21,018,010 24,700,398
Selling, general and administrative..... 13,502,315 16,630,082 19,541,106
----------- ----------- -----------
Income from operations.................. 3,041,792 4,387,928 5,159,292
Interest expense........................ 1,249,828 1,631,218 1,968,744
Other expense........................... 437,159 516,949 1,059,668
----------- ----------- -----------
Income before income taxes.............. 1,354,805 2,239,761 2,130,880
Income tax expense (benefit):
Current............................... 700,000 1,149,433 1,566,000
Deferred.............................. (114,000) (321,000) (716,000)
----------- ----------- -----------
586,000 828,433 850,000
----------- ----------- -----------
Net income.............................. $ 768,805 $ 1,411,328 $ 1,280,880
=========== =========== ===========
See Accompanying Notes
F-54
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ---------- ----------
Balance at March 31, 1994.............. $1,200 $2,784,450 $2,037,974 $4,823,624
Net income............................. -- -- 768,805 768,805
------ ---------- ---------- ----------
Balance at March 31, 1995.............. 1,200 2,784,450 2,806,779 5,592,429
Net income............................. -- -- 1,411,328 1,411,328
------ ---------- ---------- ----------
Balance at March 31, 1996.............. 1,200 2,784,450 4,218,107 7,003,757
Net income............................. -- -- 1,280,880 1,280,880
------ ---------- ---------- ----------
Balance at March 31, 1997.............. $1,200 $2,784,450 $5,498,987 $8,284,637
====== ========== ========== ==========
See Accompanying Notes
F-55
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31
------------------------------------
1995 1996 1997
---------- ----------- -----------
OPERATING ACTIVITIES:
Net income.............................. $ 768,805 $ 1,411,328 $ 1,280,880
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization......... 325,574 372,044 495,182
Equity in net income of investment.... (5,837) (32,082) --
Write-down of investment to fair
market value......................... -- 63,640 --
Gain on sale of assets................ (6,786) (60,250) (42,770)
Deferred rent......................... 60,513 242,054 118,634
Provision for deferred income tax
expense.............................. (114,000) (321,000) (716,000)
Changes in operating assets and
liabilities:
Trade accounts receivable & other
accounts receivable................ (2,145,316) 1,251,838 (1,812,721)
Inventory........................... (3,818,557) (8,197,203) (4,428,942)
Prepaid expenses and other assets... (31,809) (105,354) (339,691)
Accounts payable and accrued
expenses........................... 3,110,662 1,949,702 5,376,833
Income taxes payable................ (247,192) 269,421 (804,844)
---------- ----------- -----------
Net cash used in operating activities... (2,103,943) (3,155,862) (873,439)
INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment.............................. 21,241 60,250 250,595
Purchase of property and equipment...... (789,403) (424,064) (433,415)
Sale of Investment in SKB, Inc.......... -- -- 350,000
---------- ----------- -----------
Net cash (used in) provided by investing
activities............................. (768,162) (363,814) 167,180
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of
credit................................. 3,000,574 3,946,313 (218,902)
Proceeds from issuance of long-term
debt................................... 303,126 -- 1,950,000
Payments on long-term debt.............. (389,395) (409,136) (1,159,007)
Payments on capital lease obligations... (25,796) (22,511) (65,209)
---------- ----------- -----------
Net cash provided by financing
activities............................. 2,888,509 3,514,666 506,882
---------- ----------- -----------
Increase (decrease) in cash............. 16,404 (5,010) (199,377)
Cash at beginning of year............... 240,072 256,476 251,466
---------- ----------- -----------
Cash at end of year..................... $ 256,476 $ 251,466 $ 52,089
========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid during the year........... $1,180,143 $ 1,594,311 $ 1,959,783
========== =========== ===========
Income taxes paid during the year....... $ 947,192 $ 880,012 $ 1,654,844
========== =========== ===========
NON-CASH INVESTING AND FINANCING
ACTIVITIES
Capitalized leases...................... $ -- $ -- $ 207,647
========== =========== ===========
See Accompanying Notes
F-56
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
World Wide Automotive, Inc. (formerly Precision Alternator and Starter,
Inc.) (the "Company") is a re-manufacturer and distributor of automotive
components. The Company sells its products to retail and wholesale
distributors, jobbers and dealers located throughout the continental U.S. and
Canada. The Company is primarily an aftermarket supplier of light duty import
starters and alternators.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Transactions
As a result of purchasing inventory from foreign vendors, the Company is
exposed to the effect of foreign exchange rate fluctuations. It is the
practice of the Company to hedge these transactions with foreign currency
futures contracts. The Company does not engage in speculation. At March 31,
1997 the Company has forward exchange contract commitments through September
1997 to purchase approximately 621,724,000 Japanese Yen for approximately $5.4
million. Exchange gains and losses are realized during the year upon
settlement and are included in operations.
If the financial counter party failed to perform according to the terms of
the foreign currency futures contracts, the Company would have to settle the
purchase commitments at the exchange rate at the dates of settlement and incur
related gain or loss. Management expects the financial counter party to fully
perform under the contracts.
Revenue Recognition
The Company's revenue is recognized at the time the product is shipped. The
Company's remanufacturing operations obtain used starters and alternators,
commonly known as cores, from its customers as trade-ins. Net sales and cost
of goods sold are reduced to reflect the cost of cores returned for credit.
Cash
The Company considers cash and liquid investments with original or remaining
maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from
customers in the original equipment and after-market automotive industries,
both in the U.S. and internationally. Credit is granted to substantially all
of the Company's customers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses are provided for in the financial statements and
have been consistently within management's expectations.
Net sales for the years ended March 31, 1995, 1996 and 1997, included sales
to three major customers totaling approximately $21,400,000, $21,500,000 and
$38,300,000, respectively. Approximately $4,000,000 and $7,000,000,
respectively, is included in account receivable from these same three
customers as of March 31, 1996 and 1997.
F-57
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Purchases from significant vendors for the years ended March 31, 1995, 1996
and 1997, included purchases from one major vendor totaling approximately 27%,
19% and 17% of total purchases, respectively. Approximately $5.4 million is
included in accounts payable due to this major vendor as of both March 31,
1996 and 1997.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash, trade and
other receivables, accounts payable and long-term debt. The carrying amounts
of these financial instruments approximated their fair values at March 31,
1996 and 1997.
Inventory
Inventory is stated at the lower of cost or market, cost being determined by
the weighted average method, which approximates the first-in, first-out (FIFO)
method. Raw materials also include supplies and repair parts which consist of
material consumed in the manufacturing process but not directly incorporated
into the finished products. Inventory consists of the following:
MARCH 31
------------------------
1996 1997
----------- -----------
Raw materials...................................... $ 2,389,258 $ 2,020,122
Cores.............................................. 7,490,594 10,458,116
Finished goods..................................... 17,555,425 19,870,860
Less reserves...................................... (295,881) (780,760)
----------- -----------
$27,139,396 $31,568,338
=========== ===========
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost and are
depreciated using the straight-line method over the shorter of the asset's
estimated useful life or the lease term (for equipment held under capital
leases). Useful lives are primarily 5 years, except for buildings which are 25
years. Property, plant and equipment consists of the following:
MARCH 31
-----------------------
1996 1997
----------- -----------
Land and buildings.................................. $ 176,603 $ 176,603
Machinery and equipment............................. 1,611,074 1,439,472
Computer equipment.................................. 648,692 846,275
Leasehold improvements.............................. 546,302 549,987
Furniture and fixtures.............................. 512,661 531,850
Equipment under capital leases...................... 112,885 320,532
----------- -----------
$ 3,608,217 $ 3,864,719
=========== ===========
Depreciation/amortization expense for the years ended March 31, 1995, 1996
and 1997, was approximately, $258,000, $293,000 and $332,000, respectively.
Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over fair value of net
assets acquired and is being amortized on a straight-line basis over 30 years.
F-58
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Other intangibles consist of acquisition and loan costs. Acquisition costs
are being amortized on a straight-line basis over 30 years. Loan costs are
being amortized over the loan periods which range from 15 to 60 months, or the
expected life of the asset which in all instances is equal to, or less than
the loan period. Other intangibles consists of the following:
MARCH 31
--------------------
1996 1997
--------- ---------
Acquisition costs...................................... $ 127,515 $ 127,515
Loan costs............................................. 109,056 318,645
Less accumulated amortization.......................... (103,360) (231,027)
--------- ---------
$ 133,211 $ 215,133
========= =========
The carrying values of intangible assets are regularly reviewed for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the following: (i)
the economic or competitive environments in which the Company operates; (ii)
profitability analyses; and (iii) cash flow analyses. If facts and
circumstances suggest that the carrying value of an intangible asset is
impaired, the Company assesses the fair value and reduces the asset to an
amount that results in the book value approximating fair value.
Long-Term Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
Warranty Reserve
The Company warrants to original purchasers of its products that all
products will be free from defects in materials and workmanship for as long as
the products are used on vehicles for which they were purchased. The Company
does not warrant installation, abused or disassembled products or products
that have been tampered with or used in a manner not in keeping with the
original intent of the product. Additionally, the warranty extends only to
products and the replacement thereof. The Company does not assume
responsibility for any incidental or consequential damages. The Company has
provided a warranty reserve in conjunction with this policy.
Deferred Rent
The Company has two facility lease agreements which contain rent abatement
periods and rent escalations which are straight-lined over the life of the
leases.
Income Taxes
Deferred income taxes are provided for timing differences in recognizing
certain income, expense and credit items for financial reporting purposes and
tax reporting purposes.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is effective for years beginning after December 15, 1997, which
the Company anticipates adopting in 1998. The Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Statement will not have
any impact on the results of operations or the financial position of the
Company.
Reclassification
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
F-59
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
2. INVESTMENT IN SKB, INC.
The Company accounted for its 50% investment in SKB, Inc. ("SKB") by the
equity method of accounting. During the year ended March 31, 1996, the Company
recorded a charge of $63,640 to reduce its investment in SKB to fair market
value. The Company sold its interest in SKB on October 1, 1996 at a price of
$350,000, resulting in no gain or loss on the transaction. For the years ended
March 31, 1995 and 1996 and for the period from April 1, 1996 through October
1, 1996, the Company had net sales to SKB of $836,838, $774,420 and $142,651,
respectively.
3. LINE OF CREDIT AGREEMENT
In October 1996, the Company amended its agreement to increase its line of
credit to $20,000,000. The line of credit expires on December 31, 1997, and
bears interest at the prime rate plus one and one half percent. Interest is
payable monthly. The amount available under the line of credit is limited to
specified percentages of inventory and eligible receivables less a standby
letter of credit provision of $630,000. The line of credit is collateralized
by substantially all of the Company's assets. Under the agreement terms, the
Company is obligated to meet certain loan covenants. As of March 31, 1997, the
Company was not in compliance with these covenants, however all of the
violations were cured when the debt was repaid on May 8, 1997 in connection
with the acquisition of the Company by Delco Remy International, Inc. (see
Note 10).
4. LONG-TERM DEBT
Borrowings under long-term debt arrangements consist of the following:
MARCH 31
--------------------
1996 1997
--------- ---------
Notes payable to bank in monthly installments through
December 1997 of principal and interest at the prime
rate plus 1 1/2%; collateralized by equipment....... $ 120,266 $ 45,091
$1,300,000 term note to bank expiring in December
1997 with monthly principal payments of $86,667 plus
interest at the prime rate plus 1 1/2%;
collateralized by substantially all of the Company's
assets.............................................. -- 780,000
Unsecured subordinated debenture payable to a
financial institution with interest only payments at
19% for the first 18 months and equal principal &
interest payments thereafter for the remaining 42
months through August 2001.......................... -- 650,000
Note payable to bank repaid in December 1996......... 272,000 --
Subordinated notes repaid to shareholders in November
1996................................................ 291,842 --
--------- ---------
684,108 1,475,091
Less current portion................................. (526,324) (836,105)
--------- ---------
$ 157,784 $ 638,986
========= =========
F-60
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Aggregate maturities of long-term debt at March 31, 1997 are as follows:
YEAR ENDING MARCH 31 AMOUNT
-------------------- ----------
1998.............................................................. $ 836,105
1999.............................................................. 146,597
2000.............................................................. 177,009
2001.............................................................. 213,729
2002.............................................................. 101,651
----------
Total............................................................. $1,475,091
==========
5. LEASES AND COMMITMENTS
The Company is currently obligated under certain non-cancelable operating
leases for the rental of facilities, vehicles and equipment which expire at
various dates through October 2014. The Company also leases trucks under
cancelable operating leases. Total rent expense under all operating leases for
the years ended March 31, 1995, 1996 and 1997, was approximately $941,000,
$1,455,000 and $1,945,000, respectively.
The Company leases certain equipment under capital leases. Amortization of
leased assets is included in depreciation expense.
Aggregate future minimum lease payments under capital and non-cancelable
operating leases having remaining terms in excess of one year as of March 31,
1997 are as follows:
CAPITAL OPERATING
YEAR ENDED MARCH 31 LEASES LEASES
------------------- -------- -----------
1998.................................................. $ 75,147 $ 1,178,031
1999.................................................. 49,479 965,271
2000.................................................. 49,479 766,049
2001.................................................. 49,479 572,316
2002.................................................. 6,872 469,962
Thereafter............................................ -- 7,293,136
-------- -----------
Total minimum lease payments.......................... 230,456 $11,244,765
===========
Less amounts representing interest.................... (43,362)
--------
Present value of future minimum lease payments........ $187,094
========
Under terms of a management consulting agreement, the Company was obligated
to pay an affiliate a fee for management and consulting services through March
31, 1998. This agreement was terminated at the time of the sale of the Company
in May 1997 (see Note 10). Management fee expense under this agreement was
$180,000, $195,000 and $250,000 for the years ended March 31, 1995, 1996 and
1997, respectively.
6. INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable
or deductible amount in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
F-61
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
SFAS 109 provides that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion of the deferred tax
asset will not be realized. Management believes, based on the weight of
available evidence, that no allowance is necessary.
The following is a summary of the components of the provision for income
taxes (benefit) of continuing operations:
FOR THE YEAR ENDED MARCH 31
--------------------------------
1995 1996 1997
-------- ---------- ----------
Current:
Federal.................................. $590,000 $ 974,433 $1,319,000
State and Local.......................... 110,000 175,000 247,000
-------- ---------- ----------
700,000 1,149,433 1,566,000
Deferred:
Federal.................................. (99,000) (271,000) (603,000)
State and Local.......................... (15,000) (50,000) (113,000)
-------- ---------- ----------
$586,000 $ 828,433 $ 850,000
======== ========== ==========
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
FOR THE YEAR ENDED MARCH 31
------------------------------
1995 1996 1997
--------- --------- ---------
Federal statutory income tax (34% rate)..... $ 461,000 $ 762,000 $ 725,000
State and local income taxes, net of federal
tax benefit................................ 73,000 89,000 98,000
Other items................................. 52,000 (22,567) 27,000
--------- --------- ---------
Effective income tax rate................... $ 586,000 $ 828,433 $ 850,000
========= ========= =========
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
MARCH 31
----------------------
1996 1997
---------- ----------
Deferred tax assets:
Inventory capitalization........................... $ 436,000 $ 764,000
Compensated absences............................... 172,000 175,000
Inventory reserves................................. 112,000 316,000
Warranty liability................................. 116,000 182,000
Reserve for sales returns.......................... 57,000 53,000
Deferred compensation.............................. 61,000 189,000
Allowance for doubtful accounts.................... 39,000 80,000
Leases............................................. 115,000 160,000
Other.............................................. 150,000 157,000
---------- ----------
1,258,000 2,076,000
Deferred tax liabilities:
Fixed and intangible assets........................ (20,000) (83,000)
---------- ----------
(20,000) (83,000)
---------- ----------
Net deferred tax asset............................... $1,238,000 $1,993,000
========== ==========
F-62
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
7. 401(K) PLAN
The Company maintains a 401(k) plan which covers all employees who meet the
Plan's eligibility requirements. Under the terms of the Plan, both the
Company's contributions to the Plan and the level of matching voluntary
employee contributions by the Company is discretionary on an annual basis.
Plan expense for the years ended March 31, 1995, 1996 and 1997, was
approximately $36,000, $64,000 and $44,000, respectively.
8. STOCK RIGHTS PLAN
During 1989 the Company established a non-qualified stock rights plan. Each
right represents the Company's obligation to pay either cash or a stock right
equal to a portion of the Company's book value at that date. Granting of stock
rights is at the discretion of the Stock Rights Committee, and the amount
granted cannot exceed ten percent of income before management fees, interest,
taxes, and any other non-operating expenses. One-half of stock rights granted
vest on the last day of the fiscal year during which the grant was made and
the remaining one half vests on the last day of the succeeding fiscal year.
Employees may elect to receive cash in lieu of stock rights.
For the years ended March 31, 1995, 1996 and 1997, the Company granted
$53,000, $140,000 and $127,000, of stock rights. Total stock rights
outstanding at March 31, 1995, 1996 and 1997, are valued at approximately
$260,000, $464,000 and $454,000, respectively. The total unvested portion as
of March 31, 1995, 1996 and 1997, was $33,000, $189,000 and $197,000,
respectively. Effective in October 1996, the stock rights plan was terminated,
however vested and unvested portions were uneffected. Upon the sale of the
Company, the vested/unvested amounts were paid to the holders of these stock
rights (see Note 10).
9. OTHER EXPENSE
Other expense consists of the following:
YEAR ENDED MARCH 31
----------------------------
1995 1996 1997
-------- -------- ----------
Management consulting fees..................... $180,000 $195,000 $ 466,000
Vendor finance charges......................... 214,075 159,033 278,267
Other.......................................... 43,084 162,916 315,401
-------- -------- ----------
$437,159 $516,949 $1,059,668
======== ======== ==========
10. SUBSEQUENT EVENTS
On May 8, 1997, a wholly owned subsidiary of Delco Remy International
("DRI") acquired 82.5% of the outstanding common stock of the Company for
approximately $42.0 million which includes assumed debt. The current
management of the Company retained the remaining 17.5% interest in the
Company. A portion of the proceeds was used to retire substantially all of the
Company's debt.
In conjunction with the acquisition, the Company divested itself of its
route sale division (CertiPro) via a distribution of assets, relinquished its
rights to certain intellectual property including the rights to the name
"Precision Alternator and Starter" and effected a Corporate Charter Amendment
to change its name to World Wide Automotive, Inc.
F-63
WORLD WIDE AUTOMOTIVE, INC.
(FORMERLY PRECISION ALTERNATOR AND STARTER, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
The acquisition was treated as a purchase for accounting purposes and is
included in the consolidated financial statements of DRI beginning with the
acquisition date. DRI filed Registration Statements with the Securities and
Exchange Commission in connection with DRI's planned sale of common stock and
$130,000,000 of senior notes due in 2007. It is anticipated that the Company
will be an unconditional joint and several guarantor of the senior notes of
DRI, along with all of DRI's other domestic subsidiaries.
F-64
REPORT OF INDEPENDENT AUDITORS
Board of Directors Ballantrae Corporation (Successor to Tractech Division of
Titan Wheel International, Inc.)
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Tractech Division of Titan Wheel International, Inc.
(predecessor to Ballantrae Corporation) for the nine months ended September
30, 1996 and the year ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Tractech
Division of Titan Wheel International, Inc. for the nine months ended
September 30, 1996 and the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
October 17, 1997
F-65
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE FOR THE
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
Net sales................................. $26,395,431 $18,432,740
Cost of sales............................. 16,731,310 11,920,057
----------- -----------
Gross profit.............................. 9,664,121 6,512,683
Selling expenses.......................... 688,681 424,817
General and administrative expenses....... 3,182,504 2,560,968
----------- -----------
3,871,185 2,985,785
----------- -----------
Income from operations.................... 5,792,936 3,526,898
Other income.............................. 351,975 252,134
----------- -----------
Income before income taxes................ 6,144,911 3,779,032
Income taxes (Note 2)..................... 1,627,261 871,760
----------- -----------
Net income................................ $ 4,517,650 $ 2,907,272
=========== ===========
See Accompanying Notes
F-66
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
ACCUMULATED
RETAINED SUBSIDIARY TRANSLATION
EARNINGS INVESTMENT ADJUSTMENTS TOTAL
------------ ------------ ----------- ------------
Balance at December 31,
1994...................... $ 28,272,462 $ 18,418,510 $ 509,267 $ 47,200,239
Net income for 1995........ 4,517,650 -- -- 4,517,650
Translation adjustments.... -- -- 282,598 282,598
------------ ------------ --------- ------------
Balance at December 31,
1995...................... 32,790,112 18,418,510 791,865 52,000,487
Net income for 1996........ 2,907,272 -- -- 2,907,272
Translation adjustments.... -- -- 23,289 23,289
------------ ------------ --------- ------------
Balance at September 30,
1996...................... $ 35,697,384 $ 18,418,510 $ 815,154 $ 54,931,048
============ ============ ========= ============
See Accompanying Notes
F-67
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 4,517,650 $2,907,272
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization................... 1,145,510 914,148
Gain on sale of fixed assets.................... -- (8,937)
Changes in operating assets and liabilities:
Accounts receivable........................... (898,139) (274,136)
Inventories................................... (1,171,422) 1,737,878
Other assets.................................. 523,095 (76,788)
Accounts payable.............................. (361,431) (168,683)
Accrued interest and liabilities.............. (129,086) 111,023
Income taxes payable.......................... (542,632) (78,878)
Intercompany liabilities...................... (873,556) (5,306,167)
Equity adjustments from foreign currency...... 168,294 21,515
----------- ----------
Net cash provided by operating activities......... 2,378,283 (221,753)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......... (2,279,759) (418,597)
Proceeds from sale of capital assets.............. 77,749 47,204
----------- ----------
Net cash used in investing activities............. (2,202,010) (371,393)
Net increase (decrease) in cash................... 176,273 (593,146)
Cash and cash equivalents at beginning of period.. 1,408,488 1,584,761
----------- ----------
Cash and cash equivalents at end of period........ $ 1,584,761 $ 991,615
=========== ==========
See Accompanying Notes
F-68
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tractech Division of Titan Wheel International, Inc. (the Company) is the
predecessor of Ballantrae Corporation (see Note 6). The Company consists of
domestic operations and the operations of a company in Ireland, and is engaged
in the engineering, manufacturing, and marketing of mechanical transmission
components and systems used in transportation vehicles and mobile equipment.
Principles of Reporting
The financial statements include the accounts of Tractech Division of Titan
Wheel International, Inc. (Titan). All significant intercompany and
interdivisional transactions and balances have been eliminated. The financial
statements do not reflect any of the purchase accounting adjustments made by
Titan resulting from the acquisition of the Company by Titan in 1993. These
financial statements have been prepared to include only the operating results,
changes in stockholders' equity and cash flows of the Company. Accordingly,
all disclosures related to the balance sheet have been omitted.
Titan has allocated certain general and administrative charges to the
Company totaling $675,000 and $674,000 for the nine months ended September 30,
1996 (1996) and the year ended December 31, 1995 (1995), respectively. These
charges were allocated by Titan based upon sales. Management believes that
this method of allocation is reasonable.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from
manufacturers of mobile equipment, trucks and specialized vehicles, both in
the U.S. and internationally. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses are provided for in the financial statements and
have been consistently within management's expectations. The Company invests
its temporary cash in high credit quality financial institutions and
investment grade short-term investments and limits the amount of credit
exposure to any one entity.
The percentage of the Company's labor force covered by a collective
bargaining agreement (CBA) is 57%. The CBA expires on August 31, 1999.
Inventories
Inventories are carried at the lower of cost or market, using the last-in,
first-out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets (40
years for buildings and improvements and 12 years for machinery and
equipment). Costs of maintenance and repairs are charged to expense when
incurred.
F-69
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
Other Assets
Patents are amortized using the straight-line method over their estimated
lives.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and at the average exchange rate for each period for revenue and
expenses. Translation adjustments are recorded as a separate component of
stockholders' equity. Losses resulting from foreign exchange transactions
totaling $15,867 and $23,445 for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively, are included in net income.
2. FEDERAL INCOME TAXES
The Company is included in the consolidated tax returns of Titan. The tax
expense recorded by the Company is the amount allocated to it by Titan. This
amount approximates the tax expense that would result from using a separate
return basis. Titan did not allocate any deferred tax assets or liabilities to
the Company. The following is a summary of the components of the provision for
income taxes:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Federal........................................... $1,106,000 $457,000
State and Local................................... 165,357 110,000
Foreign........................................... 355,904 304,760
---------- --------
$1,627,261 $871,760
========== ========
Income before income taxes was taxed in the following jurisdictions:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Domestic.......................................... $3,873,575 $1,417,153
Foreign........................................... 2,271,336 2,361,879
---------- ----------
$6,144,911 $3,779,032
========== ==========
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Federal statutory income tax rate................. 34.0% 34.0%
Favorable foreign tax rate........................ (6.8) (12.9)
Other items....................................... (0.7) 2.0
---- -----
Effective income tax rate......................... 26.5% 23.1%
==== =====
The favorable foreign tax rate is the result of an inducement offered by the
Irish government to encourage the Company to establish their foreign
manufacturing facility in Ireland. The favorable rate expires in 2010.
F-70
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
No provision has been made for United States federal and state or foreign
taxes that may result from future remittances of undistributed earnings of
foreign operations ($10,466,851 at September 30, 1996) because it is expected
that such earnings will be reinvested in these foreign operations
indefinitely. It is not practical to estimate the amount of taxes that might
be payable on the eventual remittances of such earnings.
3. COMMITMENTS AND CONTINGENCIES
The Company leases a building under a noncancelable operating lease which
provides for a renewal option every five years. The operating lease has rental
payments due of approximately $58,900 in the remaining months of 1996,
$235,600 in 1997 and 1998, and $78,533 in 1999.
Total rental expense under all operating leases aggregated $285,953 and
$214,220 for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively. Included in rental expense is $1 per year
for the lease of equipment having an original cost of approximately $2,350,000
pursuant to an incentive lease arrangement sponsored by the Irish Development
Authority. The Company has the right to continue this lease indefinitely.
The Company is party to legal actions and claims arising in the ordinary
course of business. The Company believes that the disposition of these matters
will not have a material adverse effect on financial position, results of
operations or cash flows of the Company.
4. RETIREMENT PLANS AND BENEFITS
The Company is a participant in two defined contribution 401(k) savings
plans sponsored by Titan that cover substantially all domestic salary and
hourly employees. Company contributions to the plans are based on employee
contributions and compensation. The Company may also make discretionary
contributions annually. Company contributions for these two plans totaled
$43,281 and $32,213 for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively.
The Company sponsors a defined contribution retirement savings plan that
covers substantially all of its employees at its foreign location. Company
contributions to the plan are based on employee contributions and
compensation. Company contributions totaled $52,082 and $30,932 for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
The Company contributes to the Central States Pension Fund, which covers all
eligible bargaining employees of one of its plants. The benefits are
principally based on years of service and a benefit formula as defined in the
plan. The Company currently contributes $37 per week per eligible employee,
which is specified in the Bargaining Agreement. Company contributions totaled
$65,305 and $46,472 for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively.
F-71
TRACTECH DIVISION OF TITAN WHEEL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
5. SEGMENT AND GEOGRAPHIC DATA
The Company operates in one business segment--manufacturing engineered metal
products and systems for original equipment manufacturers and end users of
transportation mobile equipment. Geographical region information for the year
ended December 31, 1995 and the nine months ended September 30, 1996 is as
follows:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
Net sales:
United States......................... $21,806,188 $14,117,885
International......................... 10,647,278 7,554,012
Eliminate intercompany sales.......... (6,058,035) (3,239,157)
----------- -----------
Total net sales..................... $26,395,431 $18,432,740
=========== ===========
Operating income:
United States......................... $ 3,873,575 $ 1,417,153
International......................... 2,271,336 2,361,879
----------- -----------
Total operating income.............. $ 6,144,911 $ 3,779,032
=========== ===========
International sales are principally from operations located in Ireland and
do not include export sales of domestic operations. Export sales from domestic
operations were not significant for the year ended December 31, 1995 or the
nine months ended September 30, 1996.
During the year ended December 31, 1995 and the nine months ended September
30, 1996, there were sales to one customer that amounted to $3,656,599 and
$2,674,869, respectively.
6. SUBSEQUENT EVENT
Effective October 1, 1996, the Company was sold to Tractech, Inc., a
subsidiary of Ballantrae Corporation.
F-72
REPORT OF INDEPENDENT AUDITORS
Board of Directors Ballantrae Corporation
We have audited the accompanying consolidated balance sheets of Ballantrae
Corporation as of September 30, 1997 and December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1997 and the three months ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ballantrae Corporation at September 30, 1997 and December 31, 1996, and the
consolidated results of its operations and its cash flows for the nine months
ended September 30, 1997 and the three months ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
October 17, 1997, except for Note 12,
as to which the date is
October 30, 1997
F-73
BALLANTRAE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS:
Current assets:
Cash and cash equivalents......................... $ 783,966 $ 460,605
Accounts receivable, less allowance of $65,000 in
1997 and 1996, respectively...................... 4,923,871 5,696,717
Inventories (Note 1).............................. 9,708,513 10,426,534
Recoverable income taxes.......................... 163,000 --
Deferred income tax............................... 46,000 452,000
Other............................................. 45,520 51,865
----------- -----------
Total current assets............................ 15,670,870 17,087,721
Property, plant and equipment:
Land.............................................. 272,490 272,490
Buildings and improvements........................ 4,022,144 4,034,313
Machinery and equipment........................... 12,010,783 13,049,576
----------- -----------
16,305,417 17,356,379
Less accumulated depreciation and amortization.... 2,569,028 3,628,851
----------- -----------
Net property, plant and equipment............... 13,736,389 13,727,528
Other assets:
Goodwill, net of amortization of $92,516 and
$261,542 in 1996 and 1997, respectively.......... 13,790,739 13,572,110
Deferred financing costs, net of amortization of
$17,550 and $52,650 in 1996 and 1997,
respectively..................................... 473,569 421,419
Patents, net of amortization of $4,623 and $21,239
in 1996 and 1997, respectively................... 210,438 216,475
----------- -----------
Total other assets.............................. 14,474,746 14,210,004
----------- -----------
Total assets.................................... $43,882,005 $45,025,253
=========== ===========
See Accompanying Notes
F-74
BALLANTRAE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 2,614,925 $ 2,793,599
Accrued liabilities............................... 1,889,740 1,721,457
Accrued interest.................................. 539,575 609,872
Income taxes payable.............................. 193,032 629,232
----------- -----------
Total current liabilities....................... 5,237,272 5,754,160
Long-term debt (Note 4)............................. 32,239,100 29,934,100
Deferred income taxes (Note 6)...................... 277,000 566,000
Redeemable exchangeable preferred stock of
subsidiary (Note 5)................................ 8,242,048 8,981,800
Redeemable exchangeable preferred stock (Note 5).... 2,814,192 3,109,287
Stockholders' equity (deficit):
Class A common stock, $.01 par value, 1,000,000
shares authorized, 106,453 shares issued and
outstanding...................................... 1,065 1,065
Class B common stock, $.01 par value, 1,000,000
shares authorized, 122,500 shares issued and
outstanding...................................... -- 1,225
Paid-in capital................................... 105,388 226,663
Retained earnings................................. 305,960 1,790,973
Predecessor carryover basis....................... (5,340,020) (5,340,020)
----------- -----------
Total stockholders' equity (deficit)............ (4,927,607) (3,320,094)
----------- -----------
Total liabilities and stockholders equity
(deficit)...................................... $43,882,005 $45,025,253
=========== ===========
See Accompanying Notes
F-75
BALLANTRAE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Net sales................................ $7,924,259 $28,877,686
Cost of sales............................ 5,246,791 19,028,791
---------- -----------
Gross profit............................. 2,677,468 9,848,895
Selling expenses......................... 203,561 752,895
General and administrative expenses...... 1,074,181 3,365,179
---------- -----------
1,277,742 4,118,074
---------- -----------
Income from operations................... 1,399,726 5,730,821
Other income (expense):
Interest expense....................... (651,712) (2,296,290)
Interest income........................ 19,985 7,650
Deferred financing charges............. (17,550) (52,650)
Foreign exchange gain or loss and
other................................. (4,251) (184,302)
---------- -----------
(653,528) (2,525,592)
---------- -----------
Income before income taxes and preferred
dividend requirement of subsidiary...... 746,198 3,205,229
Income taxes (Note 6).................... 185,458 727,207
Preferred dividend requirement of
subsidiary.............................. 190,588 739,752
---------- -----------
Net income............................... $ 370,152 $ 1,738,270
========== ===========
See Accompanying Notes
F-76
BALLANTRAE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
CLASS A CLASS B ADDITIONAL PREDECESSOR
COMMON COMMON PAID-IN RETAINED CARRYOVER
STOCK STOCK CAPITAL EARNINGS BASIS TOTAL
------- ------- ---------- ---------- ----------- -----------
Balance at October 1,
1996................... $1,065 $ -- $105,388 $ -- $(5,340,020) $(5,233,567)
Preferred stock
dividends.............. -- -- -- (64,192) -- (64,192)
Net income for 1996..... -- -- -- 370,152 -- 370,152
------ ------ -------- ---------- ----------- -----------
Balance at December 31,
1996................... 1,065 -- 105,388 305,960 (5,340,020) (4,927,607)
------ ------ -------- ---------- ----------- -----------
Warrants redeemed....... -- 1,225 121,275 -- -- 122,500
Preferred stock
dividends.............. -- -- -- (253,257) -- (253,257)
Net income for 1997..... -- -- -- 1,738,270 -- 1,738,270
------ ------ -------- ---------- ----------- -----------
Balance at September 30,
1997................... $1,065 $1,225 $226,663 $1,790,973 $(5,340,020) $(3,320,094)
====== ====== ======== ========== =========== ===========
See Accompanying Notes
F-77
BALLANTRAE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 370,152 $ 1,738,270
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization.......... 447,782 1,395,253
Deferred income taxes.................. 12,000 (117,000)
Preferred dividend requirement of
subsidiary............................ 190,588 739,752
Changes in operating assets and
liabilities:
Accounts receivable.................... (866,534) (617,228)
Recoverable income taxes............... (163,000) 163,000
Inventories............................ (363,341) (718,021)
Other current assets................... 80,303 (161,963)
Accounts payable....................... 676,324 178,674
Accrued interest and liabilities....... 838,103 (97,985)
Income taxes payable................... 67,972 436,200
---------- -----------
Net cash provided by operating
activities.............................. 1,290,349 2,938,952
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in acquisition costs............ (600,997) (43,413)
Purchase of property, plant and
equipment............................... (121,994) (1,050,962)
Increase in patents...................... (20,112) (27,276)
---------- -----------
Net cash used in investing activities.... (743,103) (1,121,651)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt..... (450,000) (2,305,000)
Issuance of preferred stock.............. -- 41,838
Issuance of common stock................. -- 122,500
---------- -----------
Net cash used in financing activity...... (450,000) (2,140,662)
Net increase (decrease) in cash and cash
equivalents ............................ 97,246 (323,361)
Cash and cash equivalents at beginning of
period.................................. 686,720 783,966
---------- -----------
Cash and cash equivalents at end of
period.................................. $ 783,966 $ 460,605
========== ===========
Supplemental disclosure of cash flow
information:
Interest paid.......................... $ 119,690 $ 1,366,000
Income taxes paid...................... $ 163,000 $ 350,000
See Accompanying Notes
F-78
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Ballantrae Corporation and its subsidiaries (collectively, the "Company")
are engaged in the engineering, manufacturing, and marketing of mechanical
power transmission components and systems used in transportation vehicles and
mobile equipment, and fabricated tubing assemblies used in air conditioning
and refrigeration compressors.
Principles of Consolidation
The consolidated financial statements include the accounts of Ballantrae
Corporation and its subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value.
Concentrations of Credit Risk and Other Risks
Substantially all of the Company's accounts receivable are due from original
equipment manufacturers of mobile equipment, trucks and specialized vehicles,
and manufacturers of air conditioners and refrigeration compressors, both in
the U.S. and internationally. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses are provided for in the financial statements and
have been consistently within management's expectations. The Company invests
its temporary cash in high credit quality financial institutions and
investment grade short-term investments and limits the amount of credit
exposure to any one entity.
The percentage of the Company's labor force covered by a collective
bargaining agreement (CBA) is 29%. The CBA expires on August 31, 1999.
Inventories
Inventories are carried at the lower of cost or market, using the first-in,
first-out (FIFO) method. The components of inventories are as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Raw Materials..................................... $4,993,363 $ 5,094,424
Work in process................................... 2,910,757 3,494,447
Finished goods.................................... 1,804,393 1,837,663
---------- -----------
$9,708,513 $10,426,534
========== ===========
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets (25
to 40 years for buildings and improvements and 5 to 12 years for machinery and
equipment). Costs of maintenance and repairs are charged to expense when
incurred.
F-79
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized by the straight line method over 40
years.
The carrying amount of goodwill is regularly reviewed for indicators of
impairment in value, which in the view of management are other than temporary,
including unexpected or adverse changes in the following: (i) the economic or
competitive environments in which the Company operates; (ii) profitability
analyses and (iii) cash flow analyses. If facts and circumstances suggest that
a subsidiary's net assets are impaired, the Company assesses the fair value of
the underlying business and reduces goodwill to an amount that results in the
book value of the subsidiary approximating fair value.
Deferred Financing Costs and Patents
Deferred financing costs are primarily costs incurred in connection with the
Company's acquisition and are being amortized over the term of the related
debt using the straight-line method. Patents are amortized using the straight-
line method over their estimated lives.
Foreign Currency Translation
Financial statements of the Company's foreign subsidiary are translated into
U.S. dollars using a combination of historical and current exchange rates for
assets and liabilities. The related translation gain or (loss) of $22,669 and
$(342,436) for the three months ended December 31, 1996 and the nine months
ended September 30, 1997, respectively, are included in net income.
Long-Term Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of these assets.
Fair Value of Financial Instruments
The Company's financial instruments generally consist of cash and cash
equivalents, accounts receivable, accounts payable, long-term debt and
redeemable convertible preferred stock. The fair value of the Company's fixed
rate debt was estimated using discounted cash flow analyses based upon the
Company's current incremental borrowing rates. The carrying amounts of
financial instruments approximated their fair value at December 31, 1996 and
September 30, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is effective for years beginning after December 15, 1997, and
will be adopted by the Company in 1998. The Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Statement will not have
any impact on the results of operations or the financial position of the
Company.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies are required to report segment
F-80
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
information in annual financial statements and in interim financial reports to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Statement is
effective for financial statements for fiscal years beginning after December
15, 1997, and will be adopted by the Company in 1998. The Company is
evaluating the impact that this Statement will have on its financial
reporting.
2. ACQUISITION
On October 1, 1996, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets of the Tractech Division of Dyneer Corporation
and Tractech Limited (Tractech). The aggregate purchase price was $33.9
million including cash payments of $23.9 million and the issuance of $10
million in a 11% subordinated promissory note payable on October 31, 2006. The
Tractech acquisition resulted in goodwill of $11.7 million which is being
amortized over 40 years.
On October 24, 1996, the Company, through a wholly-owned subsidiary,
acquired Kraftube, Inc. (Kraftube) for an aggregate cash purchase price of
$6,992,000. Kraftube produces fabricated tubing assemblies used in air
conditioning and refrigeration compressors. The Kraftube acquisition resulted
in goodwill of $1,506,000 which is being amortized over 40 years.
The predecessor carryover basis included in the present equity structure
results from the purchase of Kraftube. Prior to the purchase, two current
stockholders of the Company were the majority shareholders of Kraftube (78%).
At the date of purchase, the assets and liabilities were recorded at their
fair market value, less the previous stockholders' carryover basis of the new
corporation's assets at the date of purchase. The cost of assets acquired in
excess of Kraftube's basis prior to the acquisition for continuing
stockholders interest was recorded as a charge to equity.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Balance at beginning of period........ $25,000 $65,000
Additions charged to costs and ex-
penses............................... 39,753 103
Uncollectible accounts written off,
net of recoveries.................... 247 (103)
------- -------
$65,000 $65,000
======= =======
F-81
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
4. DEBT
In October, 1996, the Company entered into a Group Credit Agreement (the
Agreement) with a bank that expires on December 31, 2003. Under the Agreement,
the financial institution agreed to extend the Company $26.5 million in
revolving loans ($22,239,100 and $19,934,100 outstanding at December 31, 1996
and September 30, 1997, respectively). The term loan calls for mandatory
quarterly principal reductions with the annual aggregate reductions of the
outstanding amount at September 30, 1997 as follows:
1999............................................................. $ 634,100
2000............................................................. 3,612,500
2001............................................................. 4,387,500
2002............................................................. 4,900,000
Thereafter....................................................... 6,400,000
-----------
$19,934,100
===========
The bank also agreed to extend the Company $6,000,000 in pooled revolving
loans (no amounts were outstanding at September 30, 1997 or December 31,
1996). In addition, the Company may obtain letters of credit up to $500,000 in
aggregate which would be treated as an advance on the pooled revolving loan.
Borrowings under the Agreement bear interest at the prime base lending rate
or LIBOR base rate plus an applicable spread that ranges from zero to .75% for
the prime based rate or 2.0% to 3.25% for the LIBOR based rate. The average
interest rate at December 31, 1996 and September 30, 1997 was 8.75% and 8.93%,
respectively. The Company pays a commitment fee that ranges from .25% to .625%
annually on the unused revolving and pooled loans. The Company's inventory,
accounts receivable, personal property, certain real estate and intangibles
are pledged as collateral under the Agreement. The Company is also required to
maintain a minimum net worth and meet certain financial ratios on a
consolidated basis.
Tractech Inc., a subsidiary of the Company, issued to Dyneer Corporation a
subordinated note for $10 million with a fixed annual interest of 11% due
semi-annually in connection with the acquisition discussed above. The note
matures October 31, 2006. The Company has guaranteed Tractech Inc.'s
obligation to Dyneer Corporation. Titan Wheel International, Inc. (Titan
Wheel), the parent company of Dyneer Corporation, was a defendant in an
unresolved lawsuit at the time Tractech was sold to the Company. If Titan
Wheel prevails in this lawsuit, the Company is to pay Titan Wheel $750,000. If
Titan Wheel loses or no decision is reached by September 30, 2001, the
subordinated note to Dyneer Corporation will be reduced by $750,000.
5. REDEEMABLE EXCHANGEABLE PREFERRED STOCK OF PARENT AND SUBSIDIARY
Ballantrae Corporation and Kraftube have 2,791,838 preferred shares
outstanding, (3,250,000 shares authorized, par value $.01 per share and
liquidation preference of $1.00 per share) and 80,514 preferred shares
outstanding, (150,000 shares authorized, par value $.01 per share and
liquidation preference of $100 per share), respectively, designated as 12%
Exchangeable Preferred Stock (12% Preferred Stock). The provisions of the 12%
Preferred Stock call for a cumulative cash dividend equal to 12% per share.
The 12% Preferred Stock must be redeemed by September 30, 2006, at the
liquidation preference amount plus accrued and unpaid dividends. At the option
of the issuer, the 12% Preferred Stock may be redeemed at a price per share
equal to the liquidation preference plus accrued and unpaid dividends. In
addition, the 12% Preferred Stock may be exchanged, at the option of the
issuer, in whole or in part, for 12% junior subordinated debentures to be
issued by the respective company at the liquidation preference amount plus
accrued and unpaid dividends. Dividends which accrue but remain unpaid for one
year accrue additional dividends at the rate of 12%. If the Company or
Kraftube is
F-82
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
liquidated or merged and is not the surviving entity, the holders of the 12%
Preferred Stock will receive in cash the liquidation preference amount per
share plus an amount equal to full cumulative dividends. The holders of
the 12% Preferred Stock have no voting rights except on matters relating to
the preferred stock. The carrying value of the 12% Preferred Stock includes
cumulative unpaid and accrued dividends of $64,192 and $317,449 for Ballantrae
Corporation and $190,587 and $930,340 for Kraftube at December 31, 1996 and
September 30, 1997, respectively.
6. INCOME TAXES
The following is a summary of the components of the provision for income
taxes:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Current:
Federal............................... $ 57,183 $ 645,900
Foreign............................... 116,275 198,307
-------- ---------
173,458 844,207
Deferred federal (credit):.............. 12,000 (117,000)
-------- ---------
$185,458 $ 727,207
======== =========
Income before income taxes and preferred dividend requirement of subsidiary
was taxed in the following jurisdictions:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Domestic................................ $181,562 $1,579,390
Foreign................................. 564,636 1,625,839
-------- ----------
$746,198 $3,205,229
======== ==========
A reconciliation of income taxes at the United States federal statutory rate
to the effective income tax rate follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Federal statutory income tax rate..... 34.0% 34.0%
Favorable foreign tax rate............ (11.4) (12.7)
Other items........................... 2.3 1.4
----- -----
Effective income tax rate............. 24.9% 22.7%
===== =====
The favorable foreign tax rate is the result of an inducement offered by the
Irish government to encourage the Company to establish their foreign
manufacturing facility in Ireland. The favorable rate expires in 2010.
F-83
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Deferred tax assets:
Employee benefits..................... $ 46,000 $ 202,000
Inventories........................... -- 207,000
Other................................. -- 43,000
--------- ---------
46,000 452,000
Deferred tax liabilities:
Depreciation.......................... 252,000 420,000
Goodwill.............................. 17,000 113,000
Other................................. 8,000 33,000
--------- ---------
277,000 566,000
--------- ---------
Net deferred tax liability.............. $(231,000) $(114,000)
========= =========
No provision has been made for United States federal and state or foreign
taxes that may result from future remittances of undistributed earnings of
foreign subsidiaries ($2,485,116 at September 30, 1997) because it is expected
that such earnings will be reinvested in these foreign operations
indefinitely. It is not practical to estimate the amount of taxes that might
be payable on the eventual remittances of such earnings.
7. COMMITMENTS AND CONTINGENCIES
The Company leases a building under a noncancelable operating lease which
provides for a renewal option every five years. The operating lease has rental
payments due of approximately $235,000 in 1998 and $137,083 in 1999.
Total rental expense under all operating leases aggregated $98,263 and
$229,953 for the three months ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. Included in rental expense is $1 per
year for the lease of equipment having an original cost of approximately
$2,350,000 pursuant to an incentive lease arrangement sponsored by the Irish
Development Authority. The Company has the right to continue this lease
indefinitely.
An officer of Kraftube has been granted an option to purchase up to 3.5% of
the outstanding common shares of Kraftube. The option vests in 2002. At that
time, the officer has the option to sell (the put option) and Kraftube has the
option to buy (the call option) the shares of stock issued upon the exercise
of the option, for a formula based price. The formula is based on the average
earnings before interest and taxes for the three years ended December 31, 2001
and the amount of debt outstanding. The call and put options expire on
December 31, 2002.
The Company is party to legal actions and claims arising in the ordinary
course of business. The Company believes that the disposition of these matters
will not have a material adverse effect on financial position, results of
operations or cash flows.
8. RETIREMENT PLANS AND BENEFITS
The Company sponsors two defined contribution 401(k) savings plans that
cover substantially all domestic salary and hourly employees. Company
contributions to the plans are based on employee contributions and
F-84
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
compensation. The Company may also make discretionary contributions annually.
Company contributions for these two plans totaled $33,137 and $119,573 for the
three months ended December 31, 1996 and the nine months ended September 30,
1997, respectively.
The Company also sponsors a defined contribution retirement savings plan
that covers substantially all of its employees at its foreign subsidiary.
Company contributions to the plan are based on employee contributions and
compensation. Company contributions totaled $13,018 and $33,810 for the three
months ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
The Company contributes to the Central States Pension Fund, which covers all
eligible bargaining employees of one of its subsidiaries. The benefits are
principally based on years of service and a benefit formula as defined in the
plan. The Company currently contributes $37 per week per eligible employee,
which is specified in the Bargaining Agreement. Company contributions totaled
$14,911 and $72,406 for the three months ended December 31, 1996 and the nine
months ended September 30, 1997, respectively.
9. SEGMENT AND GEOGRAPHIC DATA
The Company operates in one business segment--manufacturing engineered metal
products and systems for original equipment manufacturers and end users of
transportation mobile equipment. Geographical region information is as
follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
NET SALES:
United States........................... $ 6,540,936 $23,998,968
International........................... 2,710,626 9,613,309
Eliminate intercompany sales............ (1,327,303) (4,734,591)
----------- -----------
Total net sales......................... $ 7,924,259 $28,877,686
=========== ===========
OPERATING INCOME:
United States........................... $ 671,274 $ 3,359,245
International........................... 728,452 2,371,576
----------- -----------
Total operating income.................. $ 1,399,726 $ 5,730,821
=========== ===========
IDENTIFIABLE ASSETS:
United States........................... $27,334,081 $29,748,081
International........................... 16,380,904 15,620,116
----------- -----------
Total identifiable assets............... 43,714,985 45,368,197
Corporate assets........................ 248,193 263,110
Elimination............................. (81,173) (606,054)
----------- -----------
Total assets............................ $43,882,005 $45,025,253
=========== ===========
International sales are principally from operations located in Ireland and
do not include export sales of domestic operations. Export sales from domestic
operations were not significant for either period presented.
Sales to the two customers exceeded 10% of total sales which were $951,000
and $838,000 during the three months ended December 31, 1996 and $4,022,000
and $2,920,000 during the nine months ended September 30, 1997.
F-85
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
10. RELATED PARTY TRANSACTION
The Company has entered into a consulting agreement with the Chairman and
President of Ballantrae Corporation. The agreement amounts to $100,000
annually, with $25,000 accrued as of December 31, 1996 and September 30, 1997.
In February, 1997, the principal shareholder exercised stock warrants to
purchase 122,500 shares of common stock for $1.00 per share. Warrants
outstanding totaled 25,000 at December 31, 1996 and September 30, 1997.
11. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. As discussed in Note 12 below, the Company has reached a
definitive agreement to be acquired. It is anticipated that the domestic legal
entities of the Company, with the exception of Kraftube Management, Inc. and
Kraftube, Inc., will be full and unconditional, joint and several guarantors
of the senior notes and the Senior Subordinated Notes of the acquiring company
discussed in Note 12 along with all other domestic subsidiaries of the
acquiring company.
Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, both as
listed below, at December 31, 1996 and September 30, 1997 and for the three
months ended December 31, 1996 and the nine months ended September 30, 1997.
The equity method has been used by the Company with respect to investments
in subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
The following table sets forth the Guarantor and direct Non-Guarantor
Subsidiaries:
NON-
GUARANTOR SUBSIDIARY GUARANTOR SUBSIDIARIES
-------------------- -------------------------
Tractech Inc. Kraftube Management, Inc.
Kraftube, Inc.
Tractech Limited
Lissaphuca Limited
F-86
[THIS PAGE LEFT INTENTIONALLY BLANK]
F-87
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
----------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
ASSETS:
Current assets:
Cash and cash
equivalents.......... $ 46,635 $ 224,989 $ 188,981 $ -- $ 460,605
Accounts receivable,
net.................. -- 3,387,162 2,309,555 -- 5,696,717
Inventories........... -- 7,315,572 3,717,016 (606,054)(a) 10,426,534
Deferred income tax... -- 301,000 151,000 -- 452,000
Other................. -- -- 51,865 -- 51,865
---------- ----------- ----------- ------------ -----------
Total current
assets............. 46,635 11,228,723 6,418,417 (606,054) 17,087,721
Investment in
affiliates............. 9,414,736 10,000 1,948,176 11,372,912(b) --
Property, plant and
equipment:
Land.................. -- 190,660 81,830 -- 272,490
Buildings and
improvements......... -- 2,139,340 1,894,973 -- 4,034,313
Machinery and
equipment............ -- 4,863,880 8,185,696 -- 13,049,576
Less accumulated
depreciation......... -- (594,722) (3,034,129) -- (3,628,851)
---------- ----------- ----------- ------------ -----------
Net property, plant and
equipment.............. -- 6,599,158 7,128,370 -- 13,727,528
Other assets:
Goodwill, net......... -- 6,125,110 7,447,000 -- 13,572,110
Deferred financing
costs, net........... -- 360,000 61,419 -- 421,419
Patents, net.......... 216,475 -- -- -- 216,475
---------- ----------- ----------- ------------ -----------
Total other assets.. 216,475 6,485,110 7,508,419 -- 14,210,004
---------- ----------- ----------- ------------ -----------
Total assets........ $9,677,846 $24,322,991 $23,003,382 $(11,978,966) $45,025,253
========== =========== =========== ============ ===========
- --------
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investments in subsidiaries.
F-88
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
-----------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Accounts payable...... $ 27,516 $ 1,541,463 $ 1,224,620 $ -- $ 2,793,599
Accrued liabilities... 28,000 996,647 696,810 -- 1,721,457
Accrued interest...... -- 507,072 102,800 -- 609,872
Income taxes payable.. -- 20,000 609,232 -- 629,232
---------- ----------- ----------- ------------ -----------
Total current
liabilities........ 55,516 3,065,182 2,633,462 -- 5,754,160
Intercompany
liabilities............ 4,493,117 1,497,884 (5,991,001) -- --
Long-term debt.......... -- 12,545,000 17,389,100 -- 29,934,100
Deferred income taxes... -- 343,000 223,000 -- 566,000
Redeemable exchangeable
preferred stock of
subsidiary............. -- -- 8,981,800 -- 8,981,800
Redeemable exchangeable
preferred stock........ 3,109,287 -- -- -- 3,109,287
Stockholders' equity
(deficit):
Class A common stock.. 1,065 1 36,000 (36,001)(b) 1,065
Class B common stock.. 1,225 -- -- -- 1,225
Paid-in capital....... 226,663 6,199,999 2,382,906 (8,582,905)(b) 226,663
Retained earnings..... 1,790,973 671,925 2,688,135 (3,360,060)(a,b) 1,790,973
Predecessor carryover
basis................ -- -- (5,340,020) -- (5,340,020)
---------- ----------- ----------- ------------ -----------
Total stockholders'
equity (deficit)... 2,019,926 6,871,925 (232,979) (11,978,966) (3,320,094)
---------- ----------- ----------- ------------ -----------
Total liabilities
and stockholders'
equity (deficit)... $9,677,846 $24,322,991 $23,003,382 $(11,978,966) $45,025,253
========== =========== =========== ============ ===========
- --------
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investments in subsidiaries.
F-89
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
Net sales............... $ -- $15,974,980 $17,637,297 $(4,734,591)(a) $28,877,686
Cost of sales........... -- 11,731,273 11,507,228 (4,209,710)(a) 19,028,791
---------- ----------- ----------- ----------- -----------
Gross profit............ -- 4,243,707 6,130,069 (524,881)(a) 9,848,895
Selling expenses........ -- 570,701 182,194 -- 752,895
General and
administrative
expenses............... 141,620 1,766,188 1,457,371 -- 3,365,179
---------- ----------- ----------- ----------- -----------
141,620 2,336,889 1,639,565 -- 4,118,074
---------- ----------- ----------- ----------- -----------
Income from operations.. (141,620) 1,906,818 4,490,504 (524,881) 5,730,821
Equity in earnings of
subsidiaries........... 2,145,562 -- -- (2,145,562)(b) --
Other income (expense):
Interest expense ..... (265,780) (1,288,508) (742,002) -- (2,296,290)
Interest income....... -- -- 7,650 -- 7,650
Deferred financing
charges.............. -- (45,000) (7,650) -- (52,650)
Foreign exchange gain
or loss and other.... 108 17,089 (201,499) -- (184,302)
---------- ----------- ----------- ----------- -----------
(265,672) (1,316,419) (943,501) -- (2,525,592)
---------- ----------- ----------- ----------- -----------
Income before income
taxes and preferred
dividend requirement of
subsidiary............. 1,738,270 590,399 3,547,003 (2,670,443) 3,205,229
Income taxes............ -- 61,855 665,352 -- 727,207
Preferred dividend
requirement of
subsidiary............. -- -- -- (739,752)(c) (739,752)
---------- ----------- ----------- ----------- -----------
Net income.............. $1,738,270 $ 528,544 $ 2,881,651 $(3,410,195) $ 1,738,270
========== =========== =========== =========== ===========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-90
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.............. $ 1,738,270 $ 528,544 $ 2,881,651 $(3,410,195) $ 1,738,270
Adjustments to reconcile
net income to net cash
from operating
activities:
Depreciation and
amortization......... 14,623 614,915 765,715 -- 1,395,253
Equity in earnings of
subsidiaries......... (2,145,562) -- -- 2,145,562(a) --
Deferred income
taxes................ -- 30,000 (147,000) -- (117,000)
Preferred dividend
requirement of
subsidiary........... -- -- -- 739,752(b) 739,752
Changes in operating
assets and
liabilities:
Accounts receivable... -- (742,715) 125,487 -- (617,228)
Recoverable income
taxes................ -- 163,000 -- -- 163,000
Inventories........... -- (1,042,344) (200,558) 524,881(c) (718,021)
Other current assets.. -- (180,613) 18,650 -- (161,963)
Accounts payable...... 27,516 491,496 (340,338) -- 178,674
Accrued interest and
liabilities.......... 2,300 3,015 (103,300) -- (97,985)
Income taxes payable.. -- 20,000 416,200 -- 436,200
Intercompany
liabilities.......... 228,055 1,667,037 (1,895,092) -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by operating
activities............. (134,798) 1,552,335 1,521,415 -- 2,938,952
CASH FLOWS FROM
INVESTING ACTIVITIES:
Increase in acquisition
costs.................. -- (9,869) (33,544) -- (43,413)
Purchase of property,
plant and equipment.... -- (814,885) (236,077) -- (1,050,962)
Increase in patents..... (27,276) -- -- -- (27,276)
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by investing
activities............. (27,276) (824,754) (269,621) -- (1,121,651)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principle payments on
long-term debt......... -- (755,000) (1,550,000) -- (2,305,000)
Issuance of preferred
stock.................. 41,838 -- -- -- 41,838
Issuance of common
stock.................. 122,500 -- -- -- 122,500
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activity............... 164,338 (755,000) (1,550,000) -- (2,140,662)
Net increase (decrease)
in cash and cash
equivalents............ 2,264 (27,419) (298,206) -- (323,361)
Cash and cash
equivalents at
beginning of period.... 44,371 252,408 487,187 -- 783,966
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 46,635 $ 224,989 $ 188,981 $ -- $ 460,605
=========== =========== =========== =========== ===========
- --------
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
(c) Elimination of intercompany profit in inventory.
F-91
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
---------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 44,371 $ 252,408 $ 487,187 $ -- $ 783,966
Accounts receivable,
net.................. -- 2,536,234 2,387,637 -- 4,923,871
Inventories........... -- 6,192,055 3,597,631 (81,173)(a) 9,708,513
Recoverable income
taxes................ -- 90,000 73,000 -- 163,000
Deferred income tax... -- -- 46,000 -- 46,000
Other................. -- 600 44,920 -- 45,520
---------- ----------- ----------- ----------- -----------
Total current
assets............. 44,371 9,071,297 6,636,375 (81,173) 15,670,870
Investment in
affiliates............. 7,269,174 10,000 -- (7,279,174)(b) --
Property, plant and
equipment:
Land.................. -- 190,660 81,830 -- 272,490
Buildings and
improvements......... -- 2,139,340 1,882,804 -- 4,022,144
Machinery and
equipment............ -- 4,048,995 7,961,788 -- 12,010,783
Less accumulated
depreciation......... -- (142,659) (2,426,369) -- (2,569,028)
---------- ----------- ----------- ----------- -----------
Net property, plant and
equipment.............. -- 6,236,336 7,500,053 -- 13,736,389
Other assets:
Goodwill, net......... (6,616) 6,233,094 7,564,261 -- 13,790,739
Deferred financing
costs, net........... -- 405,000 68,569 -- 473,569
Patents, net.......... 210,438 -- -- -- 210,438
---------- ----------- ----------- ----------- -----------
Total other assets.. 203,822 6,638,094 7,632,830 -- 14,474,746
---------- ----------- ----------- ----------- -----------
$7,517,367 $21,955,727 $21,769,258 $(7,360,347) $43,882,005
========== =========== =========== =========== ===========
- --------
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investment in subsidiaries.
F-92
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
------------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...... $ -- $ 1,049,967 $ 1,564,958 $ -- $ 2,614,925
Accrued liabilities... 25,700 1,175,927 688,113 -- 1,889,740
Accrued interest...... -- 324,777 214,798 -- 539,575
Income taxes payable.. -- -- 193,032 -- 193,032
---------- ----------- ----------- ----------- -----------
Total current
liabilities........ 25,700 2,550,671 2,660,901 -- 5,237,272
Intercompany liabili-
ties................... 4,265,062 (19,152) (4,245,910) -- --
Long-term debt.......... -- 13,150,000 19,089,100 -- 32,239,100
Deferred income taxes... -- 12,000 265,000 -- 277,000
Redeemable exchangeable
preferred stock of
subsidiary............. -- -- 8,242,048 -- 8,242,048
Redeemable exchangeable
preferred stock........ 2,814,192 -- -- -- 2,814,192
Stockholders' equity
(deficit):
Class A common stock.. 1,065 1 11,000 (11,001)(b) 1,065
Paid-in capital....... 105,388 6,199,999 661,723 (6,861,722)(b) 105,388
Retained earnings..... 305,960 62,208 425,416 (487,624)(a,b) 305,960
Predecessor carryover
basis................ -- -- (5,340,020) -- (5,340,020)
---------- ----------- ----------- ----------- -----------
Total stockholders'
equity (deficit)... 412,413 6,262,208 (4,241,881) (7,360,347) (4,927,607)
---------- ----------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity (deficit)... $7,517,367 $21,955,727 $21,769,258 $(7,360,347) $43,882,005
========== =========== =========== =========== ===========
- --------
(a) Elimination of intercompany profit in inventory.
(b) Elimination of investment in subsidiaries.
F-93
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $4,849,072 $4,402,488 $(1,327,301)(a) $7,924,259
Cost of sales........... -- 3,469,667 3,023,252 (1,246,128)(a) 5,246,791
-------- ---------- ---------- ----------- ----------
Gross profit ........... 1,379,405 1,379,236 (81,173) 2,677,468
Selling expenses........ -- 150,723 52,838 -- 203,561
General and
administrative
expenses............... 36,939 675,831 361,411 -- 1,074,181
-------- ---------- ---------- ----------- ----------
36,939 826,554 414,249 -- 1,277,742
-------- ---------- ---------- ----------- ----------
Income from operations.. (36,939) 552,851 964,987 (81,173) 1,399,726
Equity in earnings of
subsidiaries........... 406,451 -- -- (406,451)(b) --
Other income (expense):
Interest expense...... -- (394,321) (257,391) -- (651,712)
Interest income....... 640 -- 19,345 -- 19,985
Deferred financing
charges.............. -- (15,000) (2,550) -- (17,550)
Foreign exchange gain
or loss and other.... -- 13,165 (17,416) -- (4,251)
-------- ---------- ---------- ----------- ----------
640 (396,156) (258,012) -- (653,528)
-------- ---------- ---------- ----------- ----------
Income before income
taxes and preferred
dividend requirement of
subsidiary............. 370,152 156,695 706,975 (487,624) 746,198
Income taxes............ -- 13,314 172,144 -- 185,458
Preferred dividend
requirement of
subsidiary............. -- -- -- (190,588)(c) 190,588
-------- ---------- ---------- ----------- ----------
Net income.............. $370,152 $ 143,381 $ 534,831 $ (678,212) $ 370,152
======== ========== ========== =========== ==========
- --------
(a) Elimination of intercompany sales and cost of sales.
(b) Elimination of equity in net income from consolidated subsidiaries.
(c) Recording of preferred dividend requirement of subsidiary.
F-94
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
------------------------------------------------------------------
BALLANTRAE
CORPORATION NON-
(PARENT SUBSIDIARY GUARANTOR
COMPANY ONLY) GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.............. $370,152 $ 143,381 $534,831 $(678,212) $ 370,152
Adjustments to reconcile
net income to net cash
from operating
activities:
Depreciation and
amortization......... 11,239 196,860 239,683 -- 447,782
Equity in earnings of
subsidiaries......... (406,451) -- -- 406,451(a) --
Deferred income
taxes................ -- 12,000 -- -- 12,000
Preferred dividend
requirement of
subsidiary........... -- -- -- 190,588(b) 190,588
Changes in operating
assets and
liabilities:
Accounts receivable... -- 60,116 (926,650) -- (866,534)
Recoverable income
taxes................ -- (163,000) -- -- (163,000)
Inventories........... -- (117,953) (326,561) 81,173(c) (363,341)
Other current assets.. -- 72,400 7,903 -- 80,303
Accounts payable...... -- 188,677 487,647 -- 676,324
Accrued interest and
liabilities.......... 25,700 902,554 (90,151) -- 838,103
Intercompany
liabilities.......... 215,062 (19,152) (195,910) -- --
Income tax payable.... -- -- 67,972 -- 67,972
-------- --------- -------- --------- ---------
Net cash provided by
(used in) operating
activities............. 215,702 1,275,883 (201,236) -- 1,290,349
CASH FLOWS FROM
INVESTING ACTIVITIES:
Increase in
acquisition costs.... -- (518,611) (82,386) -- (600,997)
Purchase of property
and equipment........ -- (47,992) (74,002) -- (121,994)
Increase in patents... (215,063) 194,951 -- -- (20,112)
-------- --------- -------- --------- ---------
Net cash used in
investing activities... (215,063) (371,652) (156,388) -- (743,103)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments on
long-term debt....... -- (850,000) 400,000 -- (450,000)
-------- --------- -------- --------- ---------
Net increase in cash and
cash equivalents....... 639 54,231 42,376 -- 97,246
Cash and cash
equivalents at
beginning of period.... 43,730 198,177 444,813 -- 686,720
-------- --------- -------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 44,369 $ 252,408 $487,189 $ -- $ 783,966
======== ========= ======== ========= =========
- --------
(a) Elimination of equity in earnings of subsidiary.
(b) Recording of preferred dividend requirement of subsidiary.
(c) Elimination of intercompany profit in inventory.
F-95
BALLANTRAE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
12. SUBSEQUENT EVENT
On October 30, 1997, the Company entered into a definitive agreement with
Delco Remy International, Inc. (DRI) whereby DRI would acquire all of the
capital stock of the Company for approximately $52,800,000 (including assumed
debt and the estimated working capital adjustment and fees and expenses of the
Company), subject to a working capital adjustment. DRI will exchange shares of
its common stock with a value of approximately $22,100,000 for the equity of
the Company and will repay approximately $29,700,000 of the Company's debt.
DRI filed Registration Statements with the Securities and Exchange Commission
in connection with DRI's planned sale of common stock and $130,000,000 of
Senior Notes Due 2007 (the Offerings) and the registration of an exchange
offer for the Company's 10 5/8% Senior Subordinated Notes due 2006 that
described the planned acquisition of the Company. The acquisition of the
Company is expected to be completed at or prior to the consummation of the
Offerings.
F-96
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PRO-
SPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHO-
RIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLIC-
ITATION.
---------------
TABLE OF CONTENTS
PAGE
----
Additional Information................................................... 3
Prospectus Summary....................................................... 4
Risk Factors............................................................. 13
Company History.......................................................... 21
Use of Proceeds.......................................................... 23
Capitalization........................................................... 24
Selected Consolidated Historical Financial Data.......................... 25
Pro Forma Condensed Consolidated Financial Data (Unaudited).............. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
Business................................................................. 47
Management............................................................... 62
Principal Stockholders................................................... 68
Certain Transactions..................................................... 71
Description of Capital Stock............................................. 72
Description of Indebtedness.............................................. 74
Description of Notes..................................................... 79
Description of Certain Federal Income Tax Consequences................... 106
Underwriting............................................................. 109
Legal Matters............................................................ 110
Experts.................................................................. 110
Index to Financial Statements............................................ F-1
---------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$130,000,000
DELCO REMY INTERNATIONAL, INC.
% SENIOR NOTES DUE 2007
[LOGO OF DELCO REMY INTERNATIONAL APPEARS HERE]
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
PROSPECTUS
DATED DECEMBER , 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC Registration Fee................................................. $ 39,394
NASD Filing Fee...................................................... 13,500
Blue Sky Fees and Expenses........................................... --
Legal Fees and Expenses.............................................. 350,000
Accounting Fees and Expenses......................................... 350,000
Registrar and Transfer Agent Fees.................................... --
Expenses of the Trustee.............................................. 15,000
Printing and Engraving Expenses...................................... 412,500
Miscellaneous........................................................ 19,606
NYSE Filing Fee...................................................... --
---------
Total.............................................................. 1,200,000
=========
--------
Each amount set forth above, except the SEC registration fee and NASD filing
fee, is estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware Law, the Company's Certificate of Incorporation
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts of omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock, or (iv) for any transaction from which the director
derives an improper personal benefit. In addition, the Company's By-laws
provide for indemnification of the Company's officers and directors to the
fullest extent permitted under Delaware law. Section 145 of the Delaware Law
provides that a corporation may indemnify any persons, including officers and
directors, who were or are, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation), by reason of the fact that such person was
an officer, director, employee or agent of such corporation or is or was
serving at the request of such corporation as an officer, director, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, for
criminal proceedings, had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify officers and directors in an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
that such officer or director actually and reasonably incurred. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
The Underwriting Agreement provides for indemnification by the Underwriters
of the registrant and its directors, officers and controlling persons for
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended.
II-1
The directors and officers of the registrant are insured against certain
liabilities under the registrant's directors' and officers' liability
insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
1. SECURITIES SOLD. $140,000,000 10 5/8% Senior Subordinated Notes due 2006
(the "Senior Subordinated Notes")
(a) UNDERWRITERS AND OTHER PURCHASERS. No underwriters were involved in
the offering of the Senior Subordinated Notes. The Initial Purchasers were
Salomon Brothers Inc and Smith Barney Inc.
(b) CONSIDERATION. The Initial Purchasers purchased the Senior
Subordinated Notes on August 2, 1996 for the aggregate price of
$135,800,000.
(c) EXEMPTION FROM REGISTRATION CLAIMED. The Senior Subordinated Notes
were sold pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
2. SECURITIES SOLD. Class A Common Stock, par value $.01 per share.
(a) UNDERWRITERS AND OTHER PURCHASERS. No underwriters were involved in
the offering of the Class A Common Stock. The Class A Common Stock was sold
to employees of the Company and its subsidiaries ("Management Investors")
on the dates indicated below and for the consideration indicated below.
NUMBER OF TOTAL NUMBER OF TOTAL CASH AGGREGATE
EMPLOYEES SHARES ISSUED CONSIDERATION AMOUNT OF NOTES
DATE OF PURCHASING (PRE- RECEIVED BY THE ISSUED IN FAVOR
ISSUANCE SHARES STOCK SPLIT) COMPANY OF THE COMPANY(1)
-------- ---------- --------------- --------------- -----------------
11/18/94 20 69,500 $19,586.00 $119,414.00
03/31/95 4 10,000 $15,025.00 $ 4,975.00
12/31/96 2 6,000 $ 60.00 $ 59,940.00
02/07/97 3 3,000 $ 30.00 $ 29,970.00
05/08/97 1 10,000 $10,000.00 $ 90,000.00
08/28/97 1 3,000 $ 30.00 $ 29,970.00
09/19/97 7 14,750 $30,048.00 $117,452.00
--------
1 Certain employees paid a portion of the purchase price with a 9.25% five
year note payable to the order of the Company.
(b) CONSIDERATION. See above Table.
(c) EXEMPTION FROM REGISTRATION CLAIMED. The Class A Common Stock was
sold pursuant to Section 4(2) of the Securities Act of 1933, as amended.
3. SECURITIES SOLD. 28,750 shares (Pre-Stock Split) of Class A Common Stock.
(a) UNDERWRITERS AND OTHER PURCHASERS. No underwriters were involved in
the issuance of the Class A Common Stock. The shares were issued on January
6, 1995 as consideration for the Company's acquisition of Power
Investments, Inc.
(b) CONSIDERATION. The Company received no consideration for the shares
other than the consummation of the acquisition of Power Investments, Inc.
(c) EXEMPTION FROM REGISTRATION CLAIMED. The Senior Subordinated Notes
were sold pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith unless otherwise indicated:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement
3.1+++++ Form of Certificate of Incorporation of the Company, as amended
3.2++++ By-laws of the Company
4.1** Form of Indenture, including form of Note
5.1* Opinion of Dechert Price & Rhoads, counsel to the Company, Delco
Remy America, Inc. ("DRA") Reman Holdings, Inc. Remy
International, Inc. and Marine Drive Systems, Inc.
5.2* Opinion of Young, Williams, Henderson & Fuselier, P.A., counsel
to the A & B Group, Inc., A & B Enterprises, Inc., Dalex, Inc.,
A & B Cores, Inc., MCA, Inc. of Mississippi and R & L Tool
Company, Inc.
5.3* Opinion of Porteous & White P.C., counsel to Nabco, Inc.
5.4* Opinion of Stephen Plopper & Associates, P.C., counsel to Power
Investments, Inc., Franklin Power Products, Inc., International
Fuel Systems, Inc., Powrbilt Products, Inc. and Marine
Corporation of America, Inc.
5.5* Opinion of Hunton & Williams, counsel to World Wide Automotive,
Inc.
5.6* Opinion of Hunton & Williams, counsel to World Wide Automotive,
Inc.
10.1++++ Light Duty Starter Motor Supply Agreement, dated July 31, 1994,
by and between Delco Remy America, Inc. ("DRA") and General
Motors Corporation ("GM")
10.2++++ Heavy Duty Component Supply Agreement, dated July 31, 1994, by
and between DRA and GM
10.3++++ Distribution and Supply Agreement, dated July 31, 1994, by and
between DRA and GM
10.4+ Trademark License, dated July 31, 1994, by and among DRA, DR
International, Inc. and GM
10.5+ Tradename License Agreement, dated July 31, 1994, by and among
DRA, DR International, Inc. and GM
10.6+ Partnership Agreement of Delco Remy Mexico S. de R.L. de C.V.,
dated April 17, 1997
10.7++ Joint Venture Agreement, dated , by and between Remy Korea
Holdings, Inc. and S.C. Kim
10.8+ Securities Purchase and Holders Agreement, dated July 29, 1994,
by and among the Company, CVC, WEP, MascoTech, Harold K.
Sperlich, James R. Gerrity and the individuals named therein as
Management Investors
10.9+ Registration Rights Agreement, dated July 29, 1994, by and among
the Company, CVC, WEP, MascoTech, Harold K. Sperlich, James R.
Gerrity and the individuals named therein as Management Investors
10.10+++ Employment Agreement, dated July 31, 1994 by and between Delco
Remy International, Inc. and Thomas J. Snyder
10.11++++ Form of Fourth Amended and Restated Financing Agreement, dated as
of , 1997, among the Company, certain of the Company's
subsidiaries signatories thereto and Bank One, Indianapolis,
National Association, The CIT Group/Business Credit, Inc.
10.12+ 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
10.13++++ Form of 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.L. and DRA, dated August 11,
1995
10.17+++++ Subordination Agreement, dated July 31, 1994, by and among the
CIT Group, Inc. and World Subordinated Debt Partners, L.P.
11.1+++++ Statement re Computation of Earnings per Share
12.1+ Statement re Computation of Ratios
21.1++++ Subsidiaries of Registrant
II-3
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Ernst & Young LLP (see page II-13)
23.2 Consent of Fiedman & Fuller P.C. (see page II-14)
23.3 Consent of Dechert Price & Rhoads included in Exhibit 5.1
23.4 Consent of Young, Williams, Henderson & Fuselier P.A. included in
Exhibit 5.2
23.5 Consent of Porteous & White P.C. included in Exhibit 5.3
23.6 Consent of Leeuw, Plopper & Beeman included in Exhibit 5.4
23.7 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. included in
Exhibit 5.5
23.8 Consent of Hunton & Williams included in Exhibit 5.6
24.1 Power of Attorney included on Signature Page
25.1** Form T-1 Statement of Eligibility of Trustee
- --------
* To be filed by amendment.
** Previously filed.
+ 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.
++ 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.
(b) Financial Statement Schedules: None
II-4
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining the liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF ANDERSON AND STATE OF INDIANA ON DECEMBER 5, 1997.
Delco Remy International, Inc.
By: Harold K. Sperlich
---------------------------------
Harold K. Sperlich
Chairman
FOR THE REGISTRANTS AS SET FORTH ON
THE FACING SHEET
By: David L. Harbert
---------------------------------
David L. Harbert
Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE FOLLOWING CAPACITIES ON DECEMBER 5, 1997.
DELCO REMY INTERNATIONAL, INC.
Harold K. Sperlich* Chairman (principal
executive officer) and
Director
David L. Harbert* Executive Vice President and
Chief Financial Officer
(principal financial and
principal accounting officer)
E.H. Billig
- ---------------------
E.H. Billig Director
Richard M. Cashin, Jr.* Director
Michael A. Delaney* Director
James R. Gerrity* Director
Robert J. Schultz* Director
Thomas J. Snyder* Director
- -------------------------
* For manual signature, see page II-12.
II-6
DELCO REMY AMERICA, INC.
Harold K. Sperlich * Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer
(principal financial and
principal accounting officer)
E.H. Billig
- ---------------------
E.H. Billig Director
Richard M. Cashin, Jr. * Director
Michael A. Delaney* Director
James R. Gerrity* Director
Thomas J. Snyder* Director
REMY INTERNATIONAL, INC.
Harold K. Sperlich * Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer
(principal financial and
principal accounting officer)
E.H. Billig
- ---------------------
E.H. Billig Director
Richard M. Cashin, Jr. * Director
Michael A. Delaney* Director
James R. Gerrity* Director
Thomas J. Snyder* Director
- -------------------------
*For manual signature, see page II-12.
II-7
REMAN HOLDINGS, INC.
Harold K. Sperlich * Chairman (principal executive
officer) and Director
David L. Harbert* Executive Vice President and
Chief Financial Officer
(principal financial and
principal accounting officer)
E.H. Billig
- ---------------------
E.H. Billig Director
Richard M. Cashin, Jr. * Director
Michael A. Delaney* Director
James R. Gerrity* Director
Thomas J. Snyder* Director
NABCO, INC.
Nicholas J. Bozich* President and Chief Executive
Officer (principal executive
officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting officer)
and Director
Thomas J. Snyder* Director
THE A&B GROUP, INC.
John M. Mayfield* President (principal executive
officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting officer)
and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
- -------------------------
* For manual signature, see page II-12.
II-8
A&B ENTERPRISES, INC.
John M. Mayfield* President (principal
executive officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
DALEX, INC.
John M. Mayfield* President (principal
executive officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
A&B CORES, INC.
John M. Mayfield* President (principal
executive officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
- -------------------------
* For manual signature, see page II-12.
II-9
R&L TOOL COMPANY, INC.
John M. Mayfield* President (principal
executive officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
MCA, INC. OF MISSISSIPPI
John M. Mayfield* President (principal
executive officer)
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
James R. Gerrity* Director
POWER INVESTMENTS, INC.
J. Michael Jarvis* President (principal
executive officer) and
Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
- -------------------------
* For manual signature, see page II-12.
II-10
FRANKLIN POWER PRODUCTS, INC.
J. Michael Jarvis* President (principal
executive officer) and
Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
INTERNATIONAL FUEL SYSTEMS, INC.
J. Michael Jarvis* President (principal
executive officer) and
Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
MARINE DRIVE SYSTEMS, INC.
J. Michael Jarvis* President (principal
executive officer) and
Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting
officer) and Director
Thomas J. Snyder* Director
- -------------------------
* For manual signature, see page II-12
II-11
MARINE CORPORATION OF AMERICA
J. Michael Jarvis* President (principal executive
officer) and Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting officer)
and Director
Thomas J. Snyder* Director
POWRBILT PRODUCTS, INC.
J. Michael Jarvis* President (principal executive
officer) and Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting officer)
and Director
Thomas J. Snyder* Director
WORLD WIDE AUTOMOTIVE, INC.
Richard L. Keister* President (principal executive
officer) and Director
David L. Harbert* Vice President, Treasurer
(principal financial and
principal accounting officer)
and Director
Thomas J. Snyder* Director
Thomas J. Snyder
*By: ________________________________
Thomas J. Snyder, Attorney-in-
Fact
II-12
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Historical Financial Data" and to the use of our reports
on the consolidated financial statements of Delco Remy International, Inc.
dated September 5, 1997 (except for Note 16, as to which the date is November
20, 1997); on the financial statements of World Wide Automotive, Inc. dated
October 16, 1997; on the consolidated financial statements of Ballantrae
Corporation dated October 17, 1997 (except for Note 12, as to which the date is
October 30, 1997); and on the financial statements of the Tractech Division of
Titan Wheel International, Inc. dated October 17, 1997, in Amendment 4 to the
Registration Statement on Form S-1 and related Prospectus of Delco Remy
International, Inc. for the registration of its Senior Notes.
Ernst & Young LLP
December 9, 1997
II-13
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report, dated October 15, 1997, on the financial statements of
Precision Alternator and Starter, Inc. as of and for the two years in the
period ended March 31, 1996, and our report, dated August 19, 1997, on the
financial statements of Certipro Division of Precision Alternator and Starter,
Inc. as of and for the year ended March 31, 1997, in Amendment No. 4 to the
Registration Statement on Form S-1 and the related Prospectus of Delco Remy
International, Inc. for the registration of its Senior Notes.
Friedman & Fuller, P.C.
December 4, 1997
II-14