Notes to Consolidated Financial Statements

(1) Description of Business and Basis of Presentation

Description of Business

     Unless otherwise indicated, references to “Company” mean Hayes Lemmerz International, Inc. and its subsidiaries and references to fiscal year mean the Company’s year ended January 31 of the following year (e.g., “fiscal 2001” refers to the period beginning February 1, 2001 and ending January 31, 2002, “fiscal 2000” refers to the period beginning February 1, 2000 and ending January 31, 2001 and “fiscal 1999” refers to the period beginning February 1, 1999 and ending January 31, 2000).

     The Company designs, engineers and manufactures suspension module components, principally for original equipment manufacturers (“OEMs”) of passenger cars, light trucks and commercial highway vehicles worldwide. The Company’s products include one-piece cast aluminum wheels, fabricated aluminum wheels, fabricated steel wheels, full face cast aluminum wheels, clad covered wheels, wheel-end attachments, aluminum structural components, intake and exhaust manifolds, and brake drums, hubs and rotors.

     The Company is filing this amended Form 10-Q/ A Quarterly Report as a result of the matters discussed below in Note 2.

Basis of Presentation

     The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets, and payment of liabilities in the ordinary course of business and do not reflect adjustments that might result if the Company is unable to continue as a going concern. The Company’s recent history of significant losses, deficit in stockholders’ equity and issues related to non-compliance with debt covenants raise substantial doubt about the Company’s ability to continue as a going concern. As is more fully discussed in Note 11, the Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in December 2001. Continuing as a going concern is dependent upon, among other things, the Company’s formulation of a plan of reorganization that is confirmed by managementthe Bankruptcy Court, the success of future business operations, and the generation of sufficient cash from operations and financing sources to meet the Company’s obligations.

     The Company’s unaudited interim consolidated financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, contain all adjustments consisting of normal recurring adjustments,considered necessary to present fairly the financial positionfor a fair presentation of the Company as of July 31, 2000 and January 31, 2000, and theinterim period results of its operationshave been included. Operating results for the three and six months ended JulyApril 30, 2001 are not necessarily indicative of the results that may be expected for the full fiscal year ending January 31, 2002.

     Certain prior period amounts have been reclassified to conform to the current year presentation.

(2) Restatement of Consolidated Financial Statements

     On September 5 and December 13, 2001, the Company announced that it would restate its consolidated financial statements as of and for the fiscal years ended January 31, 2001 and 2000, and related quarterly periods, and for the fiscal quarter ended April 30, 2001 because the Company failed in certain instances to properly apply accounting principles generally accepted in the United States of America, and because certain accounting errors and irregularities in the Company’s financial statements were identified. The Company also advised that the accompanying independent auditors’ reports regarding the fiscal 2000 and 1999 and cash flows for the six months ended July 31, 2000, and 1999. The consolidated financial statements should not be readrelied upon.

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Notes to Consolidated Financial Statements — (Continued)

     The Audit Committee of the Company’s Board of Directors was given the responsibility to investigate the facts and circumstances relating to the accounting and internal control issues which gave rise to the restatement and the Company’s accounting practices, policies and procedures (the “Audit Committee Investigation”). To assist with the Audit Committee Investigation, the Audit Committee engaged the law firm of Skadden Arps Slate Meagher & Flom LLP (“Skadden Arps”) and Skadden Arps engaged the accounting firm of Ernst & Young LLP.

     In addition to the Audit Committee Investigation, the Company conducted a review of its accounting records for the first quarter of fiscal 2001, fiscal 2000, and fiscal 1999 and engaged KPMG LLP to audit the Company’s restated consolidated financial statements for fiscal 2000 and 1999. On February 19, 2002, the Company filed an amended Form 10-K (the “10-K/A”) which included the restated financial statements for fiscal 2000 and fiscal 1999. The restatement adjustments reflected for the consolidated balance sheets at April 30, 2001 and 2000 include the combined effect of the restatement adjustments for fiscal 2000 and fiscal 1999, respectively, which are restated in conjunctionthe 10-K/A.

     The Company has been in contact with the staff of the Securities and Exchange Commission (“SEC”) concerning the status of the Audit Committee Investigation. The Company has been advised that the SEC is conducting an investigation into the facts and circumstances giving rise to the restatement, and the Company has been and intends to continue cooperating with the SEC. The Company cannot predict the outcome of such an investigation.

Following are the primary categories of restatement adjustments to the Company’s previously reported financial results (millions of dollars):

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Notes to Consolidated Financial Statements — (Continued)

     Descriptions of the major components of the restatement adjustments for the first quarter of fiscal 2001 and 2000 are as follows:

Adjustments Affecting Net Income (Loss)

Deferred Operating Expenditures

     The Company determined that certain costs and expenses, primarily related to freight, payroll, non-reimbursable tooling, and other operating costs and expenses, were improperly capitalized or deferred.

Unrecorded Trade Payables and Claims

     The Company determined that it did not record liabilities primarily for maintenance parts purchases, temporary labor, costs for exceeding certain permitted environmental emissions and other operating supplies.

Acquisition Accounting

     The accounting for certain acquisitions did not appropriately reflect the fair values of assets acquired and liabilities assumed in accordance with generally accepted accounting principles as follows:

	•	In connection with certain acquisitions, including the acquisition of CMI International, Inc., the Company recorded an accrued liability for unfavorable customer contracts which could not be substantiated. Additionally, the Company did not record the fair value of acquired supplies inventory.
	•	In connection with the acquisition of Lemmerz Holding GmbH, the Company recorded an accrued liability for restructuring costs. The restructuring plan did not meet the conditions regarding the period within which the plan was required to be finalized.

     Amounts previously charged against these accrued liabilities are reflected as operating expenses in the restated consolidated statements of operations.

Customer Credits

     The Company determined that it did not record certain customer pricing adjustments.

Asset Impairment Losses

     As a consequence of the notifications received in April 2001 by the Company from certain customers of its Petersburg, Michigan manufacturing facility regarding significantly lower future product orders and the failure to obtain adequate customer support required to relocate production, management should have revised its estimate of future undiscounted cash flows expected to be generated by the facility. The Company concluded that this estimated amount was less than the carrying value of the long-lived assets related to the Petersburg facility and, accordingly, recognized an impairment charge of $28.5 million in the three months ended April 30, 2001.

     An additional impairment loss was recognized related to the abandonment of plans to continue to invest in the start-up of certain single-purpose equipment at another facility.

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Notes to Consolidated Financial Statements — (Continued)

(2) Restatement of Consolidated Financial Statements — (Continued)

Income Tax Adjustments

     The restatement adjustments discussed above affecting earnings (loss) from operations and acquisition accounting also result in adjustments to income taxes in the appropriate period. Additionally, in view of the substantial doubt regarding the Company’s ability to continue as a going concern, the Company cannot conclude that it is more likely than not that the benefits of certain deferred tax assets will be realized. Accordingly, the valuation allowance that was established in fiscal 2000 was increased in the quarter ended April 30, 2001. The tax-effect of the change in the fair value of the net investment hedges was offset by a reversal of the deferred tax asset valuation allowance, such that there was no net tax effect in the quarter ended April 30, 2001.

Adjustments Directly Affecting Stockholders’ Equity (Deficit)

     The restatement adjustment affecting stockholders’ equity recognizes the deferred income tax liability in the first quarter of fiscal 2000 related to cross-currency interest rate swap agreements to hedge a portion of the Company’s net investment in foreign subsidiaries. The deferred income tax charge was recorded in the accumulated other comprehensive income section in consolidated stockholders’ equity (deficit) as part of the restatement. There was no net tax effect related to net investment hedges in the quarter ended April 30, 2001.

Reclassifications

     For purposes of these consolidated financial statements, certain reclassifications have been made to conform presentation as follows:

	•	All amounts outstanding with respect to the Credit Agreement and senior subordinated notes outstanding at April 30, 2001, as more fully discussed in Note (3) are classified as a current liability.
	•	The common stock subject to put agreement was reclassified from additional paid in capital at April 30, 2000 as previously reported.
	•	Certain non-current deferred income tax assets and liabilities as previously reported at April 30, 2001 and 2000 were reclassified either as part of the previously reported amounts or as restatement adjustments.

     These reclassifications, which did not affect previously reported net income (loss), have been made to the consolidated financial statements and notes theretoare included in the Company’s Annual Report on Form 10-Kaccompanying tables.

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Notes to Consolidated Financial Statements — (Continued)

Consolidated Statement of Operations

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Notes to Consolidated Financial Statements — (Continued)

Consolidated Balance Sheet

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Notes to Consolidated Financial Statements — (Continued)

Consolidated Statement of Operations

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Notes to Consolidated Financial Statements — (Continued)

Consolidated Balance Sheet

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Notes to Consolidated Financial Statements — (Continued)

(3) Bank Borrowings and Long-Term Debt

Refinancing

     On June 21, 2001, the Company received formal approval for Consent and Amendment No. 5 to the Credit Agreement. Such amendment provided for and/or permits, among other things, the issuance and sale of certain senior unsecured notes (the “Senior Notes”) by the Company, a receivables securitization transaction, and changes to the various financial covenants contained in the Credit Agreement in the event that the issuance and sale of the Senior Notes does occur. The amendment also provided the Company with the option of establishing a new “B” tranche of term loans (the “B Term Loan”) under the Credit Agreement. The amendment also provides for the net cash proceeds of the issuance and sale of the Senior Notes to be applied as follows: (i) the first $140,000,000, to prepay outstanding term loans (in direct order of stated maturity) under the Credit Agreement; (ii) the next $60,000,000, at the Company’s option, to prepay indebtedness of the Company’s foreign subsidiaries; (iii) the next $50,000,000, to prepay outstanding term loans (in direct order of stated maturity) under the Credit Agreement; (iv) the next $50,000,000, at the Company’s option, to repurchase or redeem a portion of the Company’s existing senior subordinated notes; and (v) the remainder, if any, to prepay outstanding term loans (in direct order of stated maturity) and then to reduce the revolving credit commitments under the Credit Agreement.

On June 22, 2001, the Company received $291.1 million in net proceeds from the issuance of 11 7/8% senior unsecured notes due 2006 in the original principal amount of $300 million (the “11 7/8% Notes”). In addition, on July 2, 2001, the Company received $144.3 million in net proceeds from the issuance of the B Term Loan. These aggregate net proceeds totaled $435.4 million and were used as follows ($ in millions):

     The 11 7/8% Notes mature on June 15, 2006 and require interest payments semi-annually on each June 15 and December 15 commencing December 15, 2001. The 11 7/8% Notes may not be redeemed prior to June 15, 2005; provided, however, that the Company may, at any time and from time to time prior to June 15, 2004, redeem up to 35% of the aggregate principal amount of the 11 7/8% Notes at a price equal to 111.875% of the aggregate principal amount so redeemed, plus accrued and unpaid interest to the date of redemption, with the Net Cash Proceeds (as defined) of one or more Equity Offerings (as defined), provided that at least $195.0 million aggregate principal amount of the 11 7/8% Notes remain outstanding. On or after June 15, 2005, the Company may, at its option, redeem the 11 7/8% Notes upon the terms and conditions set forth in the indenture.

     The 11 7/8% Notes rank equally to all other existing and future senior debt but are effectively subordinated to the borrowings under the Credit Agreement to the extent of collateral securing the Credit Agreement. The 11 7/8% Notes are effectively subordinated to all liabilities (including trade and intercompany obligations) of the Company’s subsidiaries which are not guarantors of the Credit Agreement and the B Term Loan. The indenture governing the 11 7/8% Notes provide for certain restrictions regarding additional debt, dividends and

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Notes to Consolidated Financial Statements — (Continued)

other distributions, additional stock of subsidiaries, certain investments, liens, transactions with affiliates, mergers, consolidations, and the transfer and sales of assets. The indenture also provides that a holder of the 11 7/8% Notes may, under certain circumstances, have the right to require that the Company repurchase such holder’s 11 7/8% Notes upon a change of control of the Company. The 11 7/8% Notes are unconditionally guaranteed as to the payment of principal, premium, if any, and interest, jointly and severally by the Company’s material domestic subsidiaries.

     Pursuant to an Exchange Offer Registration Rights Agreement (the “Registration Rights Agreement”), the Company agreed to use its best efforts to file and have declared effective an Exchange Offer Registration Statement with respect to an offer to exchange the 11 7/8% Notes for other notes of the Company with terms substantially identical to the 11 7/8% Notes. The Company also agreed to consummate such exchange offer on or prior to December 19, 2001. As a result of the Chapter 11 Filings by the Debtors on December 5, 2001, such registration has not occurred.

     The B Term Loans amortize at the rate of 1% of principal per year and mature in full on December 31, 2005 (at which time all remaining unpaid principal will be due and payable). The B Term Loans rank equally with all other loans outstanding under the Credit Agreement and share equally in the guarantees and collateral granted by the Company and its subsidiaries to secure the amounts outstanding under the Credit Agreement. The B Term Loans are also subject to the same covenants and events of default which govern all other loans outstanding under the Credit Agreement.

     The interest rates of the B Term Loans are, at the option of the Company, based upon either an adjusted eurocurrency rate (the “eurocurrency rate”) or the rate which is equal to the highest of CIBC’s prime rate, the federal funds rate plus  1/2 of 1% and the base certificate of deposit rate plus 1% (the “ABR rate”), in each case plus an applicable margin. For B Term Loans which bear interest at the eurocurrency rate, the applicable margin is 5.0%, and for B Term Loans which bear interest at the ABR rate, the applicable margin is 4.0%. The Company may elect interest periods of one, two, three or six months for eurocurrency loans. Interest is computed on the basis of actual number of days elapsed in a year of 360 days (or 365 or 366 days, as the case may be, for ABR loans based on the prime rate). Interest is payable at the end of each interest period and, in any event, at least every three months.

     The Credit Agreement, as amended, contains certain financial covenants regarding interest coverage ratios, fixed charge coverage ratios, leverage ratios and capital spending limitations. If compliance with these covenants were calculated using the Company’s restated financial results for the first quarter of fiscal year ended2001, certain of these covenants as of April 30, 2001 would have been violated.

     For purposes of these consolidated financial statements, all amounts outstanding with respect to the Credit Agreement and the senior subordinated notes outstanding at April 30, 2001 are classified as a current liability as of April 30, 2001. As more fully discussed above, certain portions of the amounts outstanding at April 30, 2001 under the Credit Agreement and the previous senior subordinated notes were refinanced in the second quarter of fiscal 2001 with the proceeds of the 11 7/8% Notes and the B Term Loan. The amounts outstanding with respect to the 11 7/8% Notes and the B Term Loan will be classified as a current liability upon their issuance.

DIP Facility

     On December 17, 2001, the Company entered into a Revolving Credit and Guaranty Agreement among the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders parties thereto,

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Notes to Consolidated Financial Statements — (Continued)

CIBC World Markets Corp., as lead arranger, Bank of America, N.A. and Salomon Smith Barney, Inc., as syndication agents, and Canadian Imperial Bank of Commerce, as administrative agent for the lenders (the “DIP Agreement”). Pursuant to the DIP Agreement, the Company has access to a revolving credit facility (the “DIP Facility”) not to exceed $200 million with a sub-limit of $15 million for letters of credit. The Company received Bankruptcy Court approval for the DIP Agreement on December 21, 2001 (on an interim basis) and on January 28, 2002 (on a final basis). The DIP Facility is scheduled to terminate on the earlier of (a) the date of the substantial consummation of a Plan of Reorganization and (b) June 5, 2003 (eighteen months after the date of the Chapter 11 filings). As of February 14, 2002, the Company had $4.0 million in cash borrowings and had obtained $2.7 million in letters of credit pursuant to the DIP Facility.

     Proceeds of loans made under the DIP Facility will be used for working capital and other general corporate purposes of the Company and its subsidiaries, generally as set forth in the Company’s budget and otherwise as permitted under the DIP Agreement and approved by the Bankruptcy Court. The DIP Agreement permits the Company to make loans to, and obtain letters of credit under the DIP Facility to support the operations or obligations of, its foreign subsidiaries in Germany and Mexico, in an aggregate principal amount not to exceed $20 million at any one time outstanding, to fund capital expenditures, required joint venture obligations, rebate exposure of such foreign subsidiaries or costs incurred in connection with plant closures, restructuring or the sale or termination of businesses of foreign subsidiaries in Germany. Such loans may be funded either from the Company’s operations or from borrowings under the DIP Facility.

     Beginning January 31, 2000. Results2002, the DIP Facility requires compliance with monthly minimum consolidated and domestic EBITDA tests and limits on capital expenditures. In addition to the foregoing financial covenants, the DIP Agreement imposes certain other restrictions on the Company and its subsidiaries, including with respect to their ability to incur liens, enter into mergers, incur indebtedness, give guarantees, make investments, pay dividends or make other distributions and dispose of assets.

     The obligations of the Company and its subsidiary guarantors under the DIP Facility have super-priority administrative claim status as provided under the Bankruptcy Code. Under the Bankruptcy Code, a super-priority claim is senior to secured and unsecured pre-petition claims and all administrative expenses incurred in the Chapter 11 case. In addition, with certain exceptions (including a carve-out for interim periodsunpaid professional fees and disbursements), the DIP Facility obligations are not necessarily indicativesecured by (1) a first-priority lien on all unencumbered pre- and post-petition property of thosethe Company and its subsidiary guarantors, (2) a first-priority priming lien on all property of the Company and its subsidiary guarantors that is encumbered by the existing liens securing the Company’s pre-petition secured lenders and (3) a junior lien on all other property of the Company and its subsidiary guarantors that is encumbered by pre-petition liens.

     On January 15, 2002, the Company and the initial lenders under the DIP Agreement entered into a First Amendment to the DIP Agreement. This First Amendment finalized the terms of the borrowing base formula of eligible assets which is used to calculate the amounts which the Company is able to borrow under the DIP Facility. The amount available under the facility as of February 14, 2002, after taking into account the aforementioned borrowings and letters of credit, was $90.1 million.

     Borrowings under the DIP Facility may be either ABR loans or Eurodollar loans. ABR loans are priced at 2.00% per annum plus the greatest of (i) the prime rate, (ii) the base CD rate plus 1.0% per annum, and (iii) the federal funds effective rate plus 0.5% per annum. Eurodollar loans under the DIP Facility are priced at LIBOR plus 3.50% per annum. In addition, the Company pays a commitment fee of 0.75% per annum on

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Notes to Consolidated Financial Statements — (Continued)

the unused amount of the DIP Facility commitment, payable monthly in arrears. Letters of credit are priced at 3.50% per annum on the undrawn stated amount in addition to a fronting fee of 0.25% per annum.

     The DIP Facility provides for the post-petition cash payment at certain intervals of interest accruing under the Company’s pre-petition credit agreement if certain tests are satisfied relating to the liquidity position and earnings of the Company and its subsidiaries, and the repatriation of funds from foreign subsidiaries.

     The principal sources of liquidity for the Company’s future operating, capital expenditure, facility closure and other restructuring requirements are expected to be expected for(i) cash flows from operations, (ii) proceeds from the year.sale of non-core assets and business, (iii) borrowings under various foreign bank and government loans and (iv) and borrowings under the DIP Facility. While the Company expects that such sources will meet these requirements, there can be no assurances that such sources will prove to be sufficient.

(2)  Summary of New Accounting Pronouncements(4) Derivative Financial Instruments

     In June 1998, June 1999 and June 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, SFAS 137, “Accounting for Derivative Instruments and Hedging Activities-DeferralActivities — Deferral of the Effective Date of FASB Statement No. 133” and SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133”. These Statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. These Statements require that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.

     Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement or as part of accumulated other comprehensive income, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This accounting is effective for fiscal years beginning after June 15, 2000. The Company anticipates adoptingadopted this standard in its fiscal yearon February 1, 2001 and doesadoption did not at this time, anticipatehave a material impact on the Company’s financial position or results of operations when adopted.

(3)  Inventoriesoperations.

     The Company has significant investments in foreign subsidiaries. The majority of these investments are in Europe wherein the Euro is the functional currency. As a result, the Company is exposed to fluctuations in exchange rates between the Euro and the U.S. Dollar. To reduce this exposure, the Company has entered into cross-currency interest rate swap agreements and forward currency hedges. At both April 30, 2001 and January 31, 2001, the Company held $281 million notional amount of cross-currency interest rate swaps and forward currency hedges, which are recorded in the accompanying consolidated balance sheets in goodwill and other assets at fair value of approximately $15.6 million and $0.4 million, respectively. The fair value of the Company’s cross-currency interest rate swaps and forward currency hedges is the estimated amount the Company would receive or pay to terminate the agreement based on third party market quotes. The Company has designated these swap agreements as hedges of the foreign currency exposure of its net investment in foreign operations. In addition, the Company has designated a term loan, totaling 146.5 million Deutschemarks as a hedge of foreign currency exposure of its net investment in its German operations.

     The Company records the gain or loss on the derivative financial instruments designated as hedges of the foreign currency exposure of its net investment in foreign operations as currency translation adjustments in Accumulated Other Comprehensive Loss to the extent the hedges are effective. The gain or loss on the

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Notes to Consolidated Financial Statements — (Continued)

hedging instruments offset the change in currency translation adjustments resulting from translating the foreign operations’ financial statements from their respective functional currency to the Dollar. In the first quarter of fiscal 2001, the Company recorded a gain of $21.0 million, net of tax of $8.1 million, on the instruments designated as hedges in Accumulated Other Comprehensive Loss. As these derivative financial instruments were accounted for as qualifying hedges prior to adoption of SFAS No. 133, no transition adjustment was recorded at the date of adoption.

(5) Inventories

The major classes of inventory are as follows:

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Notes to Consolidated Financial Statements — (Continued)

(4)(6) Property, plant and equipment

     The major classes of property, plant and equipment are as follows:

(5)(7) Earnings per share

     SFAS No. 128, “Earnings per Share” (“EPS”), requires two calculations ofBasic earnings (loss) per share to be disclosed, basic EPS and diluted EPS. Basic EPS is computed using onlyare calculated by dividing net income (loss) by the weighted average number of common shares outstanding, whileoutstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) by the diluted EPS is computed consideringweighted average shares outstanding. Diluted weighted average shares assume the dilutive effectexercise of stock options and warrants.

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Notes to Consolidated Financial Statements — (Continued)

Shares outstanding for the three and six months ended July 31,April 30, 2001 and 2000, and 1999, were as follows:follows (in thousands):

(6)     For the quarter ending April 30, 2001, all options and warrants were excluded from the calculation of diluted earnings (loss) per share as the effect was anti-dilutive due to the net loss reflected for such quarter. For the quarter ending April 30, 2000, approximately 3.3 million shares attributable to options and warrants were excluded from the calculation of diluted earnings (loss) per share as the effect was anti-dilutive.

(8) Comprehensive Income

     SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income. Comprehensive income is defined as all changes in a Company’s net assets except changes resulting from transactions with shareholders. It differs from net income in that certain items currently recorded to equity would be a part of comprehensive income.

     The components of comprehensive income (loss)loss for the sixthree months ended July 31,April 30, 2001 and 2000 and 1999 are as follows: