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UNITED STATES
FORM 10-Q/A
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
For the quarterly period ended April 30, 2001
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from to
Commission file number: 1-11592
HAYES LEMMERZ INTERNATIONAL, INC.
DELAWARE | 13-3384636 | |
(State or Other Jurisdiction of | (IRS Employer | |
Incorporation or Organization) | Identification No.) |
15300 CENTENNIAL DRIVE
Registrant’s telephone number, including area code: (734) 737-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
The number of shares of common stock outstanding as of February 19, 2002 was 28,455,495 shares.
Table of Contents
HAYES LEMMERZ INTERNATIONAL, INC.
TABLE OF CONTENTS
Page | |||||||
PART I. FINANCIAL INFORMATION | |||||||
Item 1. | Financial Statements | ||||||
Consolidated Statements of Operations | 3 | ||||||
Consolidated Balance Sheets | 4 | ||||||
Consolidated Statements of Cash Flows | 5 | ||||||
Notes to Consolidated Financial Statements | 6 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 41 | |||||
PART II. OTHER INFORMATION | |||||||
Item 1. | Legal Proceedings | 42 | |||||
Item 2. | Changes in Securities | ||||||
Item 3. | Defaults upon Senior Securities | ||||||
Item 4. | Submission of Matters to a Vote of Security-Holders | ||||||
Item 5. | Other Information | ||||||
Item 6. | Exhibits and Reports on Form 8-K | 42 | |||||
SIGNATURES | 43 |
UNLESS OTHERWISE INDICATED, REFERENCES TO THE “COMPANY” MEAN HAYES LEMMERZ INTERNATIONAL, INC., AND ITS SUBSIDIARIES AND REFERENCE TO A FISCAL YEAR MEANS THE COMPANY’S YEAR ENDED JANUARY 31 OF THE FOLLOWING YEAR (E.G., FISCAL 2001 MEANS THE PERIOD BEGINNING FEBRUARY 1, 2001, AND ENDING JANUARY 31, 2002). THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND BUSINESS OF THE COMPANY. THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) THE OUTCOME AND CONSEQUENCES OF THE COMPANY’S CHAPTER 11 PROCEEDINGS; (2) COMPETITIVE PRESSURE IN THE COMPANY’S INDUSTRY INCREASES SIGNIFICANTLY; (3) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED; (4) THE COMPANY’S DEPENDENCE ON THE AUTOMOTIVE INDUSTRY (WHICH HAS HISTORICALLY BEEN CYCLICAL); (5) CHANGES IN THE FINANCIAL MARKETS AFFECTING THE COMPANY’S FINANCIAL STRUCTURE AND THE COMPANY’S COST OF CAPITAL AND BORROWED MONEY; AND (6) THE UNCERTAINTIES INHERENT IN INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY FLUCTUATIONS. THE COMPANY HAS NO DUTY UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 TO UPDATE THE FORWARD LOOKING STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q/A AND THE COMPANY DOES NOT INTEND TO PROVIDE SUCH UPDATES.
THE COMPANY IS FILING THIS AMENDED FORM 10-Q/A QUARTERLY REPORT AS A RESULT OF THE MATTERS DISCUSSED IN NOTE 2, “RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS” BELOW. EXCEPT AS SPECIFICALLY STATED OTHERWISE IN THIS AMENDED FORM 10-Q/A, THE INFORMATION CONTAINED IN THE AMENDED FORM 10-Q/A HAS NOT BEEN UPDATED TO REFLECT THE MATTERS SET FORTH IN NOTE 11, “SUBSEQUENT EVENTS” BELOW.
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HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
As Restated | |||||||||
Three Months Ended | |||||||||
April 30, | |||||||||
2001 | 2000 | ||||||||
Net sales | $ | 540.9 | $ | 593.6 | |||||
Cost of goods sold | 483.3 | 499.3 | |||||||
Gross profit | 57.6 | 94.3 | |||||||
Marketing, general and administration | 26.2 | 24.8 | |||||||
Engineering and product development | 5.9 | 6.2 | |||||||
Amortization of intangibles | 6.7 | 7.0 | |||||||
Equity in losses (earnings) of joint ventures | 0.4 | (1.1 | ) | ||||||
Asset impairments and other restructuring charges | 31.0 | 0.5 | |||||||
Other income, net | (0.2 | ) | (2.4 | ) | |||||
Earnings (loss) from operations | (12.4 | ) | 59.3 | ||||||
Interest expense, net | 44.2 | 38.8 | |||||||
Earnings (loss) before taxes on income and minority interest | (56.6 | ) | 20.5 | ||||||
Income tax provision | 6.3 | 7.3 | |||||||
Earnings (loss) before minority interest | (62.9 | ) | 13.2 | ||||||
Minority interest | 0.8 | 0.9 | |||||||
Net income (loss) | $ | (63.7 | ) | $ | 12.3 | ||||
Per share information: | |||||||||
Basic net income (loss) per share | $ | (2.24 | ) | $ | 0.41 | ||||
Basic average shares outstanding (in thousands) | 28,455 | 30,356 | |||||||
Diluted net income (loss) per share | $ | (2.24 | ) | $ | 0.40 | ||||
Diluted average shares outstanding (in thousands) | 28,455 | 30,876 | |||||||
See accompanying notes to consolidated financial statements.
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HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
As Restated | ||||||||||||||
April 30, | April 30, | January 31, | ||||||||||||
2001 | 2000 | 2001 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 28.9 | 40.4 | $ | — | |||||||||
Receivables | 252.1 | 204.6 | 256.7 | |||||||||||
Inventories | 208.2 | 208.2 | 217.3 | |||||||||||
Deferred tax assets | 21.9 | 32.2 | 21.9 | |||||||||||
Prepaid expenses and other | 15.6 | 10.6 | 16.8 | |||||||||||
Total current assets | 526.7 | 496.0 | 512.7 | |||||||||||
Net property, plant and equipment | 1,055.0 | 1,166.2 | 1,104.8 | |||||||||||
Deferred tax assets | 21.5 | 27.4 | 21.5 | |||||||||||
Goodwill and other assets | 944.0 | 1,038.4 | 964.9 | |||||||||||
Total assets | $ | 2,547.2 | $ | 2,728.0 | $ | 2,603.9 | ||||||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||||||||
Current liabilities: | ||||||||||||||
Bank borrowings | $ | 81.9 | 87.3 | $ | 79.6 | |||||||||
Current portion of long-term debt | 1,675.2 | 61.5 | 1,613.7 | |||||||||||
Accounts payable and accrued liabilities | 457.4 | 499.3 | 491.6 | |||||||||||
Total current liabilities | 2,214.5 | 648.1 | 2,184.9 | |||||||||||
Long-term debt, net of current portion | 87.5 | 1,532.0 | 94.6 | |||||||||||
Deferred tax liabilities | 72.3 | 61.5 | 68.7 | |||||||||||
Pension and other long-term liabilities | 253.5 | 275.9 | 266.9 | |||||||||||
Minority interest | 10.6 | 13.7 | 10.6 | |||||||||||
Total liabilities | 2,638.4 | 2,531.2 | 2,625.7 | |||||||||||
Commitments and Contingencies: | ||||||||||||||
Common stock subject to put agreement | — | 8.5 | — | |||||||||||
Stockholders’ equity (deficit): | ||||||||||||||
Preferred stock, 25,000,000 shares authorized, none issued or outstanding | — | — | — | |||||||||||
Common stock, par value $0.01 per share: | ||||||||||||||
Voting — authorized 99,000,000 shares; 27,709,919, 27,707,919, and 27,705,019 shares issued; 25,806,469, 27,709,919, and 25,806,469 shares outstanding | 0.3 | 0.3 | 0.3 | |||||||||||
Nonvoting — authorized 5,000,000 shares; issued and outstanding, 2,649,026 shares | — | — | — | |||||||||||
Additional paid in capital | 235.1 | 231.4 | 235.1 | |||||||||||
Common stock in treasury at cost, 1,901,450 shares | (25.7 | ) | — | (25.7 | ) | |||||||||
Retained earnings (accumulated deficit) | (209.4 | ) | 52.8 | (145.7 | ) | |||||||||
Accumulated other comprehensive loss | (91.5 | ) | (96.2 | ) | (85.8 | ) | ||||||||
Total stockholders’ equity (deficit) | (91.2 | ) | 188.3 | (21.8 | ) | |||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 2,547.2 | $ | 2,728.0 | $ | 2,603.9 | ||||||||
See accompanying notes to consolidated financial statements.
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HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
As Restated | |||||||||||
Three Months Ended | |||||||||||
April, | |||||||||||
2001 | 2000 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (63.7 | ) | $ | 12.3 | ||||||
Adjustments to reconcile net income (loss) to net cash used for operating activities: | |||||||||||
Depreciation and tooling amortization | 30.8 | 29.2 | |||||||||
Amortization of intangibles | 6.7 | 7.0 | |||||||||
Amortization of deferred financing fees | 1.8 | 1.6 | |||||||||
Deferred taxes | 3.6 | — | |||||||||
Asset impairments and other restructuring charges | 31.0 | 0.5 | |||||||||
Minority interest | 0.8 | 0.9 | |||||||||
Equity in losses (earnings) of joint ventures | 0.4 | (1.1 | ) | ||||||||
Changes in operating assets and liabilities that increase (decrease) cash flows: | |||||||||||
Receivables | (53.1 | ) | (36.3 | ) | |||||||
Inventories | 3.8 | (17.5 | ) | ||||||||
Prepaid expenses and other | 0.8 | (2.1 | ) | ||||||||
Accounts payable and accrued liabilities | (14.5 | ) | (110.7 | ) | |||||||
Other long-term liabilities | (3.8 | ) | (2.5 | ) | |||||||
Cash used for operating activities | (55.4 | ) | (118.7 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Acquisition of property, plant and equipment | (29.9 | ) | (41.9 | ) | |||||||
Tooling expenditures | (1.2 | ) | — | ||||||||
Other, net | (1.3 | ) | 4.6 | ||||||||
Cash used for investing activities | (32.4 | ) | (37.3 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Increase in bank borrowings and revolver | 73.1 | 159.9 | |||||||||
Proceeds from accounts receivable securitization | 47.6 | 12.0 | |||||||||
Financing fees | (2.3 | ) | — | ||||||||
Cash provided by financing activities | 118.4 | 171.9 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (1.7 | ) | (1.4 | ) | |||||||
Increase in cash and cash equivalents | 28.9 | 14.5 | |||||||||
Cash and cash equivalents at beginning of year | — | 25.9 | |||||||||
Cash and cash equivalents at end of period | $ | 28.9 | $ | 40.4 | |||||||
Supplemental data: | |||||||||||
Cash paid for interest | 22.0 | 22.8 | |||||||||
Cash paid for income taxes | 0.4 | 1.0 |
See accompanying notes to consolidated financial statements.
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HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
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 the 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, all adjustments considered necessary for a fair presentation of the interim period results have been included. Operating results for the three months ended April 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 consolidated financial statements should not be relied 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 the 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):
Quarter Ended | Quarter Ended | |||||||||
April 30, 2001 | April 30, 2000 | |||||||||
Adjustments (increasing) decreasing net income: | ||||||||||
Deferred operating expenditures | $ | 8.7 | $ | 2.5 | ||||||
Unrecorded trade payables and claims | 3.5 | 0.8 | ||||||||
Acquisition accounting | 2.2 | 3.7 | ||||||||
Customer credits | 0.3 | 1.2 | ||||||||
Asset impairment losses | 30.0 | — | ||||||||
Total adjustments to pre-tax income (loss) | 44.7 | 8.2 | ||||||||
Income taxes | 11.4 | (4.8 | ) | |||||||
Total adjustment to net income (loss) | 56.1 | 3.4 | ||||||||
Adjustments decreasing stockholders’ equity (deficit): | ||||||||||
Tax effect of net investment hedges | — | 1.7 | ||||||||
Total decrease in stockholders’ equity (deficit) | $ | 56.1 | $ | 5.1 | ||||||
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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 are included in the accompanying tables.
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Notes to Consolidated Financial Statements — (Continued)
Consolidated Statement of Operations
Quarter Ended April 30, 2001 | |||||||||||||
As | |||||||||||||
Previously | As | ||||||||||||
Reported | Restatements | Restated | |||||||||||
Net sales | $ | 541.4 | $ | (0.5 | ) | $ | 540.9 | ||||||
Cost of goods sold | 469.5 | 13.8 | 483.3 | ||||||||||
Gross profit | 71.9 | (14.3 | ) | 57.6 | |||||||||
Marketing, general and administration | 25.1 | 1.1 | 26.2 | ||||||||||
Engineering and product development | 5.9 | — | 5.9 | ||||||||||
Amortization of intangible assets | 7.0 | (0.3 | ) | 6.7 | |||||||||
Equity in losses of joint ventures | 0.4 | — | 0.4 | ||||||||||
Asset impairments and other restructuring charges | — | 31.0 | 31.0 | ||||||||||
Other income, net | (0.2 | ) | — | (0.2 | ) | ||||||||
Earnings (loss) from operations | 33.7 | (46.1 | ) | (12.4 | ) | ||||||||
Interest expense, net | 45.6 | 1.4 | 44.2 | ||||||||||
Loss before taxes on income and minority interest | (11.9 | ) | (44.7 | ) | (56.6 | ) | |||||||
Income tax (benefit) provision | (5.1 | ) | 11.4 | 6.3 | |||||||||
Loss before minority interest | (6.8 | ) | (56.1 | ) | (62.9 | ) | |||||||
Minority interest | 0.8 | — | 0.8 | ||||||||||
Net loss | $ | (7.6 | ) | $ | (56.1 | ) | $ | (63.7 | ) | ||||
Basic net loss per share | $ | (0.27 | ) | $ | (1.97 | ) | $ | (2.24 | ) | ||||
Diluted net loss per share | $ | (0.27 | ) | $ | (1.97 | ) | $ | (2.24 | ) | ||||
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Notes to Consolidated Financial Statements — (Continued)
Consolidated Balance Sheet
As of April 30, 2001 | ||||||||||||||
As | ||||||||||||||
Previously | As | |||||||||||||
Reported | Restatements | Restated | ||||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 28.9 | $ | — | $ | 28.9 | ||||||||
Receivables | 266.3 | (14.2 | ) | 252.1 | ||||||||||
Inventories | 191.9 | 16.3 | 208.2 | |||||||||||
Deferred tax assets | 42.4 | (20.5 | ) | 21.9 | ||||||||||
Prepaid expenses and other | 21.2 | (5.6 | ) | 15.6 | ||||||||||
Total current assets | 550.7 | (24.0 | ) | 526.7 | ||||||||||
Property, plant and equipment, net | 1,115.1 | (60.1 | ) | 1,055.0 | ||||||||||
Deferred tax assets | 102.2 | (80.7 | ) | 21.5 | ||||||||||
Goodwill and other assets | 1,033.5 | (89.5 | ) | 944.0 | ||||||||||
Total assets | $ | 2,801.5 | �� | $ | (254.3 | ) | $ | 2,547.2 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||
Current liabilities: | ||||||||||||||
Bank borrowings | $ | 81.9 | $ | — | $ | 81.9 | ||||||||
Current portion of long-term debt | 91.4 | 1,583.8 | 1,675.2 | |||||||||||
Accounts payable and accrued liabilities | 437.6 | 19.8 | 457.4 | |||||||||||
Total current liabilities | 610.9 | 1,603.6 | 2,214.5 | |||||||||||
Long-term debt, net of current portion | 1,671.2 | (1,583.7 | ) | 87.5 | ||||||||||
Deferred tax liabilities | 100.2 | (27.9 | ) | 72.3 | ||||||||||
Pension and other long-term liabilities | 266.9 | (13.4 | ) | 253.5 | ||||||||||
Minority interest | 10.6 | — | 10.6 | |||||||||||
Total liabilities | 2,659.8 | (21.4 | ) | 2,638.4 | ||||||||||
Commitments and contingencies | ||||||||||||||
Stockholders’ (deficit) equity: | ||||||||||||||
Preferred stock | — | — | — | |||||||||||
Common stock: | ||||||||||||||
Voting | 0.3 | — | 0.3 | |||||||||||
Nonvoting | — | — | — | |||||||||||
Additional paid in capital | 237.1 | (2.0 | ) | 235.1 | ||||||||||
Common stock in treasury at cost | (26.3 | ) | 0.6 | (25.7 | ) | |||||||||
Retained earnings (accumulated deficit) | 8.6 | (218.0 | ) | (209.4 | ) | |||||||||
Accumulated other comprehensive loss | (78.0 | ) | (13.5 | ) | (91.5 | ) | ||||||||
Total stockholders’ equity (deficit) | 141.7 | (232.9 | ) | (91.2 | ) | |||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 2,801.5 | $ | (254.3 | ) | $ | 2,547.2 | |||||||
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Notes to Consolidated Financial Statements — (Continued)
Consolidated Statement of Operations
Quarter Ended April 30, 2000 | |||||||||||||
As | |||||||||||||
Previously | As | ||||||||||||
Reported | Restatements | Restated | |||||||||||
Net sales | $ | 594.8 | $ | (1.2 | ) | $ | 593.6 | ||||||
Cost of goods sold | 492.9 | 6.4 | 499.3 | ||||||||||
Gross profit | 101.9 | (7.6 | ) | 94.3 | |||||||||
Marketing, general and administration | 24.5 | 0.3 | 24.8 | ||||||||||
Engineering and product development | 6.2 | — | 6.2 | ||||||||||
Amortization of intangible assets | 7.2 | (0.2 | ) | 7.0 | |||||||||
Equity in losses of joint ventures | (1.1 | ) | — | (1.1 | ) | ||||||||
Asset impairments and other restructuring charges | — | 0.5 | 0.5 | ||||||||||
Other (income) expense, net | (2.4 | ) | — | (2.4 | ) | ||||||||
Earnings from operations | 67.5 | (8.2 | ) | 59.3 | |||||||||
Interest expense, net | 38.8 | — | 38.8 | ||||||||||
Earnings before taxes on income and minority interest | 28.7 | (8.2 | ) | 20.5 | |||||||||
Income tax provision | 12.1 | (4.8 | ) | 7.3 | |||||||||
Earnings before minority interest | 16.6 | (3.4 | ) | 13.2 | |||||||||
Minority interest | 0.9 | — | 0.9 | ||||||||||
Net income | $ | 15.7 | $ | (3.4 | ) | $ | 12.3 | ||||||
Basic net income per share | $ | 0.52 | $ | (0.11 | ) | $ | 0.41 | ||||||
Diluted net income per share | $ | 0.51 | $ | (0.11 | ) | $ | 0.40 | ||||||
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Notes to Consolidated Financial Statements — (Continued)
Consolidated Balance Sheet
As of April 30, 2000 | ||||||||||||||
As | ||||||||||||||
Previously | As | |||||||||||||
Reported | Restatements | Restated | ||||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 40.4 | $ | — | $ | 40.4 | ||||||||
Receivables | 212.9 | (8.3 | ) | 204.6 | ||||||||||
Inventories | 190.6 | 17.6 | 208.2 | |||||||||||
Deferred tax assets | — | 32.2 | 32.2 | |||||||||||
Prepaid expenses and other | 11.8 | (1.2 | ) | 10.6 | ||||||||||
Total current assets | 455.7 | 40.3 | 496.0 | |||||||||||
Property, plant and equipment, net | 1,172.2 | (6.0 | ) | 1,166.2 | ||||||||||
Deferred tax assets | 128.7 | (101.3 | ) | 27.4 | ||||||||||
Goodwill and other assets | 1,048.1 | (9.7 | ) | 1,038.4 | ||||||||||
Total assets | $ | 2,804.7 | $ | (76.7 | ) | $ | 2,728.0 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||
Bank borrowings | $ | 87.3 | $ | — | $ | 87.3 | ||||||||
Current portion of long-term debt | 61.5 | — | 61.5 | |||||||||||
Accounts payable and accrued liabilities | 464.2 | 35.1 | 499.3 | |||||||||||
Total current liabilities | 613.0 | 35.1 | 648.1 | |||||||||||
Long-term debt, net of current portion | 1,532.0 | — | 1,532.0 | |||||||||||
Deferred tax liabilities | 114.4 | (52.9 | ) | 61.5 | ||||||||||
Pension and other long-term liabilities | 306.5 | (30.6 | ) | 275.9 | ||||||||||
Minority interest | 13.7 | — | 13.7 | |||||||||||
Total liabilities | 2,579.6 | (48.4 | ) | 2,531.2 | ||||||||||
Commitments and contingencies | ||||||||||||||
Common stock subject to put agreement | 8.5 | — | 8.5 | |||||||||||
Stockholders’ equity: | ||||||||||||||
Preferred stock | — | — | — | |||||||||||
Common stock: | ||||||||||||||
Voting | 0.3 | — | 0.3 | |||||||||||
Nonvoting | — | — | — | |||||||||||
Additional paid in capital | 231.4 | — | 231.4 | |||||||||||
Retained earnings | 73.8 | (21.0 | ) | 52.8 | ||||||||||
Accumulated other comprehensive loss | (88.9 | ) | (7.3 | ) | (96.2 | ) | ||||||||
Total stockholders’ equity | 216.6 | (28.3 | ) | 188.3 | ||||||||||
Total liabilities and stockholders’ equity | $ | 2,804.7 | $ | (76.7 | ) | $ | 2,728.0 | |||||||
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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):
Permanent reduction of Credit Agreement indebtedness with a principal balance of $334.3, plus $2.2 in accrued interest | $ | 336.5 | |||
Payment on foreign indebtedness with a principal balance of $47.0 | 47.0 | ||||
Repurchase of certain Senior Subordinated Notes with a face value of $47.2, plus $1.0 in accrued interest | 37.6 | ||||
Payment of fees and expenses on the above | 0.8 | ||||
Remaining cash proceeds held by Company | 13.5 | ||||
Total | $ | 435.4 | |||
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 2001, 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, 2002, 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 unpaid professional fees and disbursements), the DIP Facility obligations are secured by (1) a first-priority lien on all unencumbered pre- and post-petition property of the 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 (i) cash flows from operations, (ii) proceeds from the 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.
(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 — 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 adopted this standard on February 1, 2001 and adoption did not have a material impact on the Company’s financial position or results of operations.
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:
As Restated | |||||||||
April 30, | January 31, | ||||||||
2001 | 2001 | ||||||||
Raw materials | $ | 55.6 | $ | 62.3 | |||||
Work-in-process | 61.1 | 60.1 | |||||||
Finished goods | 68.5 | 72.4 | |||||||
Spare parts and supplies | 23.0 | 22.5 | |||||||
Total | $ | 208.2 | $ | 217.3 | |||||
(6) Property, plant and equipment
The major classes of property, plant and equipment are as follows:
As Restated | |||||||||
April 30, | January 31, | ||||||||
2001 | 2001 | ||||||||
Land | $ | 29.7 | $ | 31.2 | |||||
Buildings | 238.0 | 248.7 | |||||||
Machinery and equipment | 1,109.0 | 1,134.9 | |||||||
1,376.7 | 1,414.8 | ||||||||
Accumulated depreciation | (321.7 | ) | (310.0 | ) | |||||
Net property, plant and equipment | $ | 1,055.0 | $ | 1,104.8 | |||||
(7) Earnings per share
Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) by the diluted weighted average shares outstanding. Diluted weighted average shares assume the exercise of stock options and warrants.
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Notes to Consolidated Financial Statements — (Continued)
Shares outstanding for the three months ended April 30, 2001 and 2000, were as follows (in thousands):
2001 | 2000 | ||||||||
Basic weighted average shares outstanding | 28,455 | 30,356 | |||||||
Dilutive effect of options and warrants | — | 520 | |||||||
Diluted weighted average shares outstanding | 28,455 | 30,876 | |||||||
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 loss for the three months ended April 30, 2001 and 2000 are as follows:
As Restated | |||||||||
2001 | 2000 | ||||||||
Net income (loss) | $ | (63.7 | ) | $ | 12.3 | ||||
Cumulative translation adjustments | (5.7 | ) | (14.1 | ) | |||||
Total comprehensive loss | $ | (69.4 | ) | $ | (1.8 | ) | |||
(9) Contingencies
Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, product liability, patent infringement, and employee benefit matters. While the amounts claimed may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the financial position of the Company.
(10) Segment Reporting
The Company is organized based primarily on markets served and products produced. Under this organization structure, the Company’s operating segments have been aggregated into three reportable segments: Automotive Wheels, Cast Components and Other. The Other category includes Commercial Highway products, the corporate office and elimination of intercompany activities, none of which meet the requirements of being classified as an operating segment.
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Notes to Consolidated Financial Statements — (Continued)
(10) Segment Reporting — (Continued)
The following table represents revenues and other financial information by business segment for the three months ended April 30:
As Restated | |||||||||||||||||||||||||
As Restated | As Restated | ||||||||||||||||||||||||
Net Income | |||||||||||||||||||||||||
Revenue | (loss) | Total Assets | |||||||||||||||||||||||
2001 | 2000 | 2001 | 2000 | 2001 | 2000 | ||||||||||||||||||||
Automotive wheels | $ | 320.4 | $ | 362.9 | $ | (9.5 | ) | $ | 9.9 | $ | 1,330.8 | $ | 1,496.9 | ||||||||||||
Cast components | 176.9 | 179.8 | (4.0 | ) | 0.1 | 917.3 | 954.2 | ||||||||||||||||||
Other | 43.6 | 50.9 | (50.2 | ) | 2.3 | 299.1 | 276.9 | ||||||||||||||||||
Total | $ | 540.9 | $ | 593.6 | $ | (63.7 | ) | $ | 12.3 | $ | 2,547.2 | $ | 2,728.0 | ||||||||||||
(11) Subsequent Events
Chapter 11 Filings
On December 5, 2001, the Company, 30 of its wholly-owned domestic subsidiaries and one wholly-owned Mexican subsidiary (collectively, the “Debtors”) filed voluntary petitions for reorganization (the “Chapter 11 Filings” or the “Filings”) under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 Filings are being jointly administered, for procedural purposes only, before the Bankruptcy Court under Case No. 01-11490-MFW.
During the pendancy of these Filings, the Debtors remain in possession of their properties and assets and management of the Company continues to operate the businesses of the Debtors as debtors-in-possession. As a debtor-in-possession, the Company is authorized to operate the business of the Debtors, but may not engage in transactions outside of the ordinary course of business without the approval, after notice and the opportunity for a hearing, of the Bankruptcy Court.
Shortly after the commencement of the Chapter 11 Filings, on December 21, 2001, the Bankruptcy Court granted interim approval for the Debtors to obtain $45 million debtor-in-possession financing. Subsequently, on January 28, 2002, the Bankruptcy Court granted final approval to a $200 million debtor-in-possession financing facility for the Debtors. The Bankruptcy Court has approved payment of certain of the Debtors’ pre-petition liabilities, such as employee wages, benefits, and certain customer and freight programs. In addition, the Bankruptcy Court authorized the Debtors to maintain their employee benefit programs. Pension and savings plan funds are in trusts and protected under federal regulations. All required contributions are current in the respective plans. The Debtors have received Bankruptcy Court approval for the retention of legal, financial and management consulting professionals, and are seeking Bankruptcy Court approval for the retention of additional financial and management consulting professionals, to advise the Debtors in the bankruptcy proceedings and the restructuring of its businesses.
Pursuant to the automatic stay provisions of Section 362 of the Bankruptcy Code, actions to collect pre-petition indebtedness and virtually all litigation against the Debtors that was, or could have been, brought prior to the commencement of the Chapter 11 Filings are stayed, and other contractual obligations of the Debtors may not be enforced against them. In addition, under Section 365 of the Bankruptcy Code, subject to the approval of the Bankruptcy Court, the Debtors may assume or reject executory contracts and unexpired leases. Parties affected by these rejections may file proofs of claim with the Bankruptcy Court in accordance with the reorganization process. These claims for damages resulting from the rejection of executory contracts or
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Notes to Consolidated Financial Statements — (Continued)
unexpired leases will be subject to separate bar dates, generally thirty days after entry of the order approving the rejection. As of the date of this filing, the Debtors had not yet completed their review of all contracts and leases for assumption or rejection, but ultimately will assume or reject all such contracts and leases. Generally, the Debtors have up to 120 days, or a longer period of time subject to approval by the Bankruptcy Court, after the date of filing to assume or reject executory contracts and certain leases. The Debtors cannot presently determine or reasonably predict the ultimate liability that may result from rejecting such contracts or leases or from the filing of rejection damage claims, but such rejections could result in additional liabilities subject to compromise.
All liabilities subject to compromise are subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims, or other events. Under a confirmed plan of reorganization, all pre-petition claims may be paid at amounts substantially less than their allowed amounts. In light of the number of creditors of the Debtors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of such allowed claims is subject to a confirmed plan of reorganization, the ultimate resolution with respect to allowed claims is not presently ascertainable.
The consummation of a plan or plans of reorganization is the principal objective of the Chapter 11 Filings. A plan of reorganization sets forth the means for satisfying claims against and interests in the Company and its Debtor subsidiaries, including the liabilities subject to compromise. Generally, pre-petition liabilities are subject to settlement under such a plan or plans of reorganization, which must be voted upon by certain creditors and approved by the Bankruptcy Court. As provided by the Bankruptcy Code, the Debtors initially have the exclusive right for 120 days (April 4, 2002), or a longer period of time subject to approval by the Bankruptcy Court, to submit a plan or plans of reorganization. The Debtors have retained Lazard Freres & Co. LLC, as financial advisors and investment bankers for the purpose of providing financial advisory and investment banking services during the Chapter 11 reorganization process. The Company anticipates that any plan or plans of reorganization it may propose, if ultimately approved by the Bankruptcy Court, would result in substantial dilution of the interest of existing equity holders, so that they would hold little, if any, meaningful stake in the reorganized enterprise.
Confirmation of a plan of reorganization is subject to certain findings being made by the Bankruptcy Court, all of which are required by the Bankruptcy Code. Subject to certain exceptions set forth in the Bankruptcy Code, confirmation of a plan of reorganization requires the approval of the Bankruptcy Court and the affirmative vote of each impaired class of creditors and equity security holders. The Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity security holders if certain requirements of the Bankruptcy Code are met. There can be no assurance that a reorganization plan or plans will be proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such plan or plans will be consummated.
Currently, it is not possible to predict the length of time the Company will operate under the protection of Chapter 11 and the supervision of the Bankruptcy Court, when the Company will file a plan or plans of reorganization with the Bankruptcy Court, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interest of the various creditors and stakeholders.
The Company’s financial statements commencing with the period that includes December 5, 2001, the date of filing of the Chapter 11 proceedings, will be presented in conformity with the AICPA’s Statement of Position 90-7, “Financial Reporting By Entities In Reorganization Under the Bankruptcy Code,”
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(“SOP 90-7”). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date and identification of all transactions and events that are directly associated with the reorganization of the Company.
The accompanying consolidated financial statements do not reflect: (a) the requirements of SOP 90-7, (b) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (c) aggregate pre-petition liability amounts that may be allowed for unrecorded claims or contingencies, or their status or priority; (d) the effect of any changes to the Debtors’ capital structure or in the Debtors’ business operations as the result of an approved plan of reorganization; or (e) adjustments to the carrying value of assets (including goodwill and other intangibles) or liability amounts that may be necessary as the result of actions by the Bankruptcy Court.
Facility Closures
In June 2001, the Company committed to a plan to close its manufacturing facility in Petersburg, Michigan, and in November 2001, committed to a plan to close its manufacturing facility in Bowling Green, Kentucky.
The Company recorded asset impairment losses with respect to the Petersburg facility of $28.5 million during the first quarter of fiscal 2001 (see Note 2). In connection with the closure of this facility (which commenced during December 2001), the Company will record a restructuring charge of $0.5 million during the fourth quarter of fiscal 2001. These restructuring charges relate to security and other maintenance costs subsequent to the shutdown date, and are expected to be paid during fiscal 2001 and 2002.
In connection with the closure of the Bowling Green facility (which is planned to begin during July 2002), the Company will record during the fourth quarter of fiscal 2001 asset impairment losses of $45.5 million and other restructuring charges of $10.7 million. These restructuring charges relate to the termination of leases and other closure costs, including security and maintenance costs subsequent to the shutdown date, and are expected to be paid during fiscal 2001 and 2002.
Reduction of North American Salaried Workforce
On November 2, 2001, the Company announced the immediate elimination of 145 positions or approximately 11% of its salaried workforce. In addition, the Company announced that it would offer an early retirement option to approximately 45 salaried employees. In connection with the elimination of the 145 positions, the Company will record a restructuring charge of $1.7 million in the fourth quarter of fiscal 2001. Most of the cash required to fund this charge is for severance benefits and will be paid by the end of fiscal 2001. Of the 45 employees offered an early retirement option, 30 have accepted by December 15, 2001, the acceptance date. In connection with this early retirement offer, the Company will record a restructuring charge of $3.9 million in the fourth quarter of fiscal 2001 primarily related to continued medical benefits and supplemental retirement benefits which are expected to be paid over a period of up to 9 years commencing in fiscal 2002.
Sale of Non-Core Businesses
During the third quarter of fiscal 2001, the Company sold its 25% interest in a Canadian joint venture for cash proceeds of approximately $9 million. During the fourth quarter of fiscal 2001, the Company sold its tire
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Notes to Consolidated Financial Statements — (Continued)
and wheel assembly business (including a 49% joint venture in Portugal) for cash proceeds of approximately $12 million.
Leases
On July 18, 2001, the Company received notification of termination from a lessor with respect to leased assets having approximately $25.0 million of original cost (which termination was not to be effective for one year). The Company has not agreed with the lessor that a termination has occurred at the time of the notice and has continued to use the leased assets.
Legal Proceedings
Following the announcements of the restatement, several lawsuits were filed by and purportedly on behalf of shareholders of the Company naming as defendants a combination of the Company, Ranko Cucuz, former Chairman of the Board and Chief Executive Officer of the Company, and William Shovers, former Vice President — Finance and Chief Financial Officer of the Company. These lawsuits are seeking class action status, but no class has yet been certified in these matters. Due to the Company filing a petition under Chapter 11 of the United States Bankruptcy Code on December 5, 2001, this litigation against the Company is now subject to the automatic stay.
(12) Guarantor and Nonguarantor Financial Statements
The senior subordinated notes are guaranteed by certain of the Company’s domestic subsidiaries. Certain other domestic subsidiaries and the foreign subsidiaries (the “Non-Guarantor Subsidiaries”) do not guarantee the senior subordinated notes.
The following condensed consolidating financial information presents:
(1) Condensed consolidating financial statements as of April 30, 2001 and January 31, 2001 and for the three month periods ended April 30, 2001, and 2000 of (a) Hayes Lemmerz International, Inc., the parent (b) the guarantor subsidiaries, (c) the nonguarantor subsidiaries and (d) the Company on a consolidated basis, and | |
(2) Elimination entries necessary to consolidate Hayes Lemmerz International, Inc., the parent, with guarantor and nonguarantor subsidiaries. |
The condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
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Notes to Consolidated Financial Statements — (Continued)
(12) Guarantor and Nonguarantor Financial Statements — (Continued)
Condensed Consolidating Statements of Operations
Guarantor | Nonguarantor | Consolidated | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Net sales | $ | 70.4 | $ | 123.6 | $ | 349.2 | $ | (2.3 | ) | $ | 540.9 | ||||||||||
Cost of goods sold | 61.0 | 113.9 | 310.7 | (2.3 | ) | 483.3 | |||||||||||||||
Gross profit | 9.4 | 9.7 | 38.5 | — | 57.6 | ||||||||||||||||
Marketing, general and administration | 3.9 | 6.4 | 15.9 | — | 26.2 | ||||||||||||||||
Engineering and product development | 0.9 | 1.8 | 3.2 | — | 5.9 | ||||||||||||||||
Amortization of intangibles | 0.3 | 1.9 | 4.5 | — | 6.7 | ||||||||||||||||
Equity in (earnings) loss of subsidiaries and joint ventures | 53.2 | 12.4 | — | (65.2 | ) | 0.4 | |||||||||||||||
Asset impairments and other restructuring charges | — | — | 31.0 | — | 31.0 | ||||||||||||||||
Other income, net | (0.1 | ) | — | (0.1 | ) | — | (0.2 | ) | |||||||||||||
Earnings (loss) from operations | (48.8 | ) | (12.8 | ) | (16.0 | ) | 65.2 | (12.4 | ) | ||||||||||||
Interest expense, net | 14.8 | 11.0 | 18.4 | — | 44.2 | ||||||||||||||||
Earnings (loss) before taxes on income and minority interest | (63.6 | ) | (23.8 | ) | (34.4 | ) | 65.2 | (56.6 | ) | ||||||||||||
Income tax provision | 0.1 | 0.2 | 6.0 | — | 6.3 | ||||||||||||||||
Earnings (loss) before minority interest | (63.7 | ) | (24.0 | ) | (40.4 | ) | 65.2 | (62.9 | ) | ||||||||||||
Minority interest | — | — | 0.8 | — | 0.8 | ||||||||||||||||
Net income (loss) | $ | (63.7 | ) | $ | (24.0 | ) | $ | (41.2 | ) | $ | 65.2 | $ | (63.7 | ) | |||||||
Condensed Consolidating Statements of Operations
Guarantor | Nonguarantor | Consolidated | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Net sales | $ | 81.1 | $ | 175.0 | $ | 342.6 | $ | (5.1 | ) | $ | 593.6 | ||||||||||
Cost of goods sold | 66.6 | 145.9 | 291.9 | (5.1 | ) | 499.3 | |||||||||||||||
Gross profit | 14.5 | 29.1 | 50.7 | — | 94.3 | ||||||||||||||||
Marketing, general and administration | 1.6 | 5.8 | 17.4 | — | 24.8 | ||||||||||||||||
Engineering and product development | 1.5 | 1.8 | 2.9 | — | 6.2 | ||||||||||||||||
Amortization of intangibles | 0.3 | 1.9 | 4.8 | — | 7.0 | ||||||||||||||||
Equity in (earnings) loss of subsidiaries and joint ventures | (9.1 | ) | 2.9 | (0.2 | ) | 5.3 | (1.1 | ) | |||||||||||||
Other expense (income), net | — | — | (1.9 | ) | — | (1.9 | ) | ||||||||||||||
Earnings (loss) from operations | 20.2 | 16.7 | 27.7 | (5.3 | ) | 59.3 | |||||||||||||||
Interest expense, net | 5.6 | 14.4 | 18.8 | — | 38.8 | ||||||||||||||||
Earnings (loss) before taxes on income and minority interest | 14.6 | 2.3 | 8.9 | (5.3 | ) | 20.5 | |||||||||||||||
Income tax provision | 2.3 | 1.9 | 3.1 | — | 7.3 | ||||||||||||||||
Earnings (loss) before minority interest | 12.3 | 0.4 | 5.8 | (5.3 | ) | 13.2 | |||||||||||||||
Minority interest | — | — | 0.9 | — | 0.9 | ||||||||||||||||
Net income (loss) | $ | 12.3 | $ | 0.4 | $ | 4.9 | $ | (5.3 | ) | $ | 12.3 | ||||||||||
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Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Balance Sheets
Guarantor | Nonguarantor | Consolidated | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Cash and cash equivalents | $ | 2.8 | $ | 0.1 | $ | 26.0 | $ | — | $ | 28.9 | |||||||||||
Receivables | 50.8 | 7.2 | 194.1 | — | 252.1 | ||||||||||||||||
Inventories | 26.6 | 36.6 | 145.0 | — | 208.2 | ||||||||||||||||
Prepaid expenses and other | 7.9 | 11.3 | 29.3 | (11.0 | ) | 37.5 | |||||||||||||||
Total current assets | 88.1 | 55.2 | 394.4 | (11.0 | ) | 526.7 | |||||||||||||||
Net property, plant and equipment | 142.6 | 235.8 | 676.6 | — | 1,055.0 | ||||||||||||||||
Goodwill and other assets | 1,158.6 | 189.0 | 598.9 | (981.0 | ) | 965.5 | |||||||||||||||
Total assets | $ | 1,389.3 | $ | 480.0 | $ | 1,669.9 | $ | (992.0 | ) | $ | 2,547.2 | ||||||||||
Bank borrowings | $ | — | $ | — | $ | 81.9 | $ | — | $ | 81.9 | |||||||||||
Current portion of long-term debt | 1,659.9 | — | 14.7 | 0.6 | 1,675.2 | ||||||||||||||||
Accounts payable and accrued liabilities | 34.9 | 79.9 | 348.4 | (5.8 | ) | 457.4 | |||||||||||||||
Total current liabilities | 1,694.8 | 79.9 | 445.0 | (5.2 | ) | 2,214.5 | |||||||||||||||
Long-term debt, net of current portion | — | — | 87.5 | ��� | 87.5 | ||||||||||||||||
Pension and other long-term liabilities | 70.1 | 50.0 | 133.4 | — | 253.5 | ||||||||||||||||
Deferred tax liabilities | 2.0 | 3.0 | 67.3 | — | 72.3 | ||||||||||||||||
Minority interest | — | — | 10.6 | — | 10.6 | ||||||||||||||||
Parent loans | (286.4 | ) | 269.3 | 17.1 | — | — | |||||||||||||||
Total liabilities | 1,480.5 | 402.2 | 760.9 | (5.2 | ) | 2,638.4 | |||||||||||||||
Common stock | 0.3 | — | — | — | 0.3 | ||||||||||||||||
Additional paid-in capital | 235.1 | 135.8 | 1,114.3 | (1,250.1 | ) | 235.1 | |||||||||||||||
Retained earnings (accumulated deficit) | (209.4 | ) | (57.0 | ) | (80.3 | ) | 137.3 | (209.4 | ) | ||||||||||||
Common stock in treasury at cost | (25.7 | ) | — | — | — | (25.7 | ) | ||||||||||||||
Accumulated other comprehensive income (loss) | (91.5 | ) | (1.0 | ) | (125.0 | ) | 126.0 | (91.5 | ) | ||||||||||||
Total stockholders’ equity | (91.2 | ) | 77.8 | 909.0 | (986.8 | ) | (91.2 | ) | |||||||||||||
Total liabilities and stockholders’ equity | $ | 1,389.3 | $ | 480.0 | $ | 1,669.9 | $ | (992.0 | ) | $ | 2,547.2 | ||||||||||
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Notes to Consolidated Financial Statements — (Continued)
As of January 31, 2001
Guarantor | Nonguarantor | Consolidated | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||
Cash and cash equivalents | $ | (19.3 | ) | $ | 0.2 | $ | 19.1 | $ | — | $ | — | ||||||||||
Receivables | 68.2 | 2.6 | 185.9 | — | 256.7 | ||||||||||||||||
Inventories | 34.4 | 41.9 | 141.0 | — | 217.3 | ||||||||||||||||
Prepaid expenses and other | 7.0 | 8.7 | 35.1 | (12.1 | ) | 38.7 | |||||||||||||||
Total current assets | 90.3 | 53.4 | 381.1 | (12.1 | ) | 512.7 | |||||||||||||||
Net property, plant and equipment | 143.3 | 240.0 | 721.5 | — | 1,104.8 | ||||||||||||||||
Goodwill and other assets | 1,220.9 | 208.1 | 631.4 | (1,074.0 | ) | 986.4 | |||||||||||||||
Total assets | $ | 1,454.5 | $ | 501.5 | $ | 1,734.0 | $ | (1,086.1 | ) | $ | 2,603.9 | ||||||||||
Bank borrowings | $ | — | $ | — | $ | 79.6 | $ | — | $ | 79.6 | |||||||||||
Current portion of long-term debt | 1,597.5 | — | 15.6 | 0.6 | 1,613.7 | ||||||||||||||||
Accounts payable and accrued liabilities | 29.0 | 98.1 | 373.5 | (9.0 | ) | 491.6 | |||||||||||||||
Total current liabilities | 1,626.5 | 98.1 | 468.7 | (8.4 | ) | 2,184.9 | |||||||||||||||
Long-term debt, net of current portion | — | — | 94.6 | — | 94.6 | ||||||||||||||||
Deferred tax liabilities | 2.0 | 3.0 | 63.7 | — | 68.7 | ||||||||||||||||
Pension and other long-term liabilities | 70.5 | 53.1 | 143.1 | 0.2 | 266.9 | ||||||||||||||||
Minority interest | — | — | 10.6 | — | 10.6 | ||||||||||||||||
Parent loans | (222.7 | ) | 245.4 | (22.7 | ) | — | — | ||||||||||||||
Total liabilities | 1,476.3 | 399.6 | 758.0 | (8.2 | ) | 2,625.7 | |||||||||||||||
Common stock | 0.3 | — | — | — | 0.3 | ||||||||||||||||
Additional paid-in capital | 235.1 | 135.8 | 1,114.3 | (1,250.1 | ) | 235.1 | |||||||||||||||
Common stock in treasury at cost | (25.7 | ) | — | — | — | (25.7 | ) | ||||||||||||||
Retained earnings (accumulated deficit) | (145.7 | ) | (32.9 | ) | (39.4 | ) | 72.3 | (145.7 | ) | ||||||||||||
Accumulated other comprehensive loss | (85.8 | ) | (1.0 | ) | (98.9 | ) | 99.9 | (85.8 | ) | ||||||||||||
Total stockholders’ equity (deficit) | (21.8 | ) | 101.9 | 976.0 | (1,077.9 | ) | (21.8 | ) | |||||||||||||
Total liabilities and stockholder’s equity | $ | 1,454.5 | $ | 501.5 | $ | 1,734.0 | $ | (1,086.1 | ) | $ | 2,603.9 | ||||||||||
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Notes to Consolidated Financial Statements — (Continued)
(12) Guarantor and Nonguarantor Financial Statements — (Continued)
Condensed Consolidating Statement of Cash Flows
Guarantor | Nonguarantor | Consolidated | ||||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||||
Cash flows used for operating activities | $ | 9.9 | $ | (43.2 | ) | $ | (22.1 | ) | $ | — | $ | (55.4 | ) | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||||
Acquisition of property, plant and equipment | (0.5 | ) | (1.2 | ) | (28.2 | ) | — | (29.9 | ) | |||||||||||||
Tooling expenditures | (0.6 | ) | (0.6 | ) | — | — | (1.2 | ) | ||||||||||||||
Other, net | (5.7 | ) | 4.2 | 0.2 | — | (1.3 | ) | |||||||||||||||
Cash used for investing activities | (6.8 | ) | 2.4 | (28.0 | ) | — | (32.4 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||
Increase in bank borrowings and revolver | 67.3 | — | 5.8 | — | 73.1 | |||||||||||||||||
Proceeds from accounts receivable securitization | 17.6 | 16.9 | 13.1 | — | 47.6 | |||||||||||||||||
Financing fees | (2.3 | ) | — | — | — | (2.3 | ) | |||||||||||||||
Cash provided by financing activities | 82.6 | 16.9 | 18.9 | — | 118.4 | |||||||||||||||||
Increase (decrease) in parent loans and advances | (63.6 | ) | 23.8 | 39.8 | — | — | ||||||||||||||||
Effect of exchange rates of cash and cash equivalents | — | — | (1.7 | ) | — | (1.7 | ) | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | 22.1 | (0.1 | ) | 6.9 | — | 28.9 | ||||||||||||||||
Cash and cash equivalents at beginning of period | (19.3 | ) | 0.2 | 19.1 | — | — | ||||||||||||||||
Cash and cash equivalents at end of period | $ | 2.8 | $ | 0.1 | $ | 26.0 | $ | — | $ | 28.9 | ||||||||||||
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Notes to Consolidated Financial Statements — (Continued)
(12) Guarantor and Nonguarantor Financial Statements — (Continued)
Condensed Consolidating Statement of Cash Flows
Guarantor | Nonguarantor | Consolidated | ||||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||||
Cash flows used for operating activities | $ | (13.4 | ) | $ | (66.9 | ) | $ | (38.4 | ) | $ | — | $ | (118.7 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||||||||||||
Acquisition of property, plant and equipment | (14.7 | ) | (5.8 | ) | (21.4 | ) | — | (41.9 | ) | |||||||||||||
Other, net | 8.6 | 0.6 | (4.6 | ) | — | 4.6 | ||||||||||||||||
Cash used for investing activities | (6.1 | ) | (5.2 | ) | (26.0 | ) | — | (37.3 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||
Increase in bank borrowings and revolver | 139.2 | — | 20.7 | — | 159.9 | |||||||||||||||||
Proceeds from accounts receivable securitization | 5.9 | 3.7 | 2.4 | — | 12.0 | |||||||||||||||||
Cash provided by financing activities | 145.1 | 3.7 | 23.1 | — | 171.9 | |||||||||||||||||
Increase (decrease) in parent loans and advances | (135.2 | ) | 68.4 | 66.8 | — | — | ||||||||||||||||
Effect of exchange rates of cash and cash equivalents | — | — | (1.4 | ) | — | (1.4 | ) | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | (9.6 | ) | — | 24.1 | — | 14.5 | ||||||||||||||||
Cash and cash equivalents at beginning of period | 6.8 | 0.1 | 19.0 | — | 25.9 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | (2.8 | ) | $ | 0.1 | $ | 43.1 | $ | — | $ | 40.4 | |||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements, related notes thereto and the other information included elsewhere herein. The financial information included in the following discussion and analysis reflects the results of the restatements of the consolidated financial statements discussed more fully below.
Organization, Chapter 11 Filings and Other Recent Developments
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.
Chapter 11 Filings
On December 5, 2001, the Company, 30 of its wholly-owned domestic subsidiaries and one wholly-owned Mexican subsidiary (collectively, the “Debtors”) filed voluntary petitions for reorganization (the “Chapter 11 Filings” or the “Filings”) under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 Filings are being jointly administered, for procedural purposes only, before the Bankruptcy Court under Case No. 01-11490-MFW.
During the pendancy of these Filings, the Debtors remain in possession of their properties and assets and management of the Company continues to operate the businesses of the Debtors as debtors-in-possession. As a debtor-in-possession, the Company is authorized to operate the business of the Debtors, but may not engage in transactions outside of the ordinary course of business without the approval, after notice and the opportunity for a hearing, of the Bankruptcy Court.
Shortly after the commencement of the Chapter 11 Filings, on December 21, 2001, the Bankruptcy Court granted interim approval for the Debtors to obtain $45 million debtor-in-possession financing. Subsequently, on January 28, 2002, the Bankruptcy Court granted final approval to a $200 million debtor-in-possession financing facility for the Debtors. The Bankruptcy Court has approved payment of certain of the Debtors’ pre-petition liabilities, such as employee wages, benefits, and certain customer and freight programs. In addition, the Bankruptcy Court authorized the Debtors to maintain their employee benefit programs. Pension and savings plan funds are in trusts and protected under federal regulations. All required contributions are current in the respective plans. The Debtors have received Bankruptcy Court approval for the retention of legal, financial and management consulting professionals, and are seeking Bankruptcy Court approval for the retention of additional financial and management consulting professionals, to advise the Debtors in the bankruptcy proceedings and the restructuring of its businesses.
Pursuant to the automatic stay provisions of Section 362 of the Bankruptcy Code, actions to collect pre-petition indebtedness and virtually all litigation against the Debtors that was, or could have been, brought prior to the commencement of the Chapter 11 Filings are stayed, and other contractual obligations of the Debtors may not be enforced against them. In addition, under Section 365 of the Bankruptcy Code, subject to the approval of the Bankruptcy Court, the Debtors may assume or reject executory contracts and unexpired leases. Parties affected by these rejections may file proofs of claim with the Bankruptcy Court in accordance with the reorganization process. These claims for damages resulting from the rejection of executory contracts or unexpired leases will be subject to separate bar dates, generally thirty days after entry of the order approving the rejection. As of the date of this filing, the Debtors had not yet completed their review of all contracts and leases for assumption or rejection, but ultimately will assume or reject all such contracts and leases. Generally, the Debtors have up to 120 days, or a longer period of time subject to approval by the Bankruptcy Court, after the date of filing to assume or reject executory contracts and certain leases. The Debtors cannot presently determine or reasonably predict the ultimate liability that may result from rejecting such contracts or leases or from the filing of rejection damage claims, but such rejections could result in additional liabilities subject to compromise.
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All liabilities subject to compromise are subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims, or other events. Under a confirmed plan of reorganization, all pre-petition claims may be paid at amounts substantially less than their allowed amounts. In light of the number of creditors of the Debtors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of such allowed claims is subject to a confirmed plan of reorganization, the ultimate resolution with respect to allowed claims is not presently ascertainable.
The consummation of a plan or plans of reorganization is the principal objective of the Chapter 11 Filings. A plan of reorganization sets forth the means for satisfying claims against and interests in the Company and its Debtor subsidiaries, including the liabilities subject to compromise. Generally, pre-petition liabilities are subject to settlement under such a plan or plans of reorganization, which must be voted upon by certain creditors and approved by the Bankruptcy Court. As provided by the Bankruptcy Code, the Debtors initially have the exclusive right for 120 days (April 4, 2002), or a longer period of time subject to approval by the Bankruptcy Court, to submit a plan or plans of reorganization. The Debtors have retained Lazard Freres & Co. LLC, as financial advisors and investment bankers for the purpose of providing financial advisory and investment banking services during the Chapter 11 reorganization process. The Company anticipates that any plan or plans of reorganization it may propose, if ultimately approved by the Bankruptcy Court, would result in substantial dilution of the interest of existing equity holders, so that they would hold little, if any, meaningful stake in the reorganized enterprise.
Confirmation of a plan of reorganization is subject to certain findings being made by the Bankruptcy Court, all of which are required by the Bankruptcy Code. Subject to certain exceptions set forth in the Bankruptcy Code, confirmation of a plan of reorganization requires the approval of the Bankruptcy Court and the affirmative vote of each impaired class of creditors and equity security holders. The Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity security holders if certain requirements of the Bankruptcy Code are met. There can be no assurance that a reorganization plan or plans will be proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such plan or plans will be consummated.
Currently, it is not possible to predict the length of time the Company will operate under the protection of Chapter 11 and the supervision of the Bankruptcy Court, when the Company will file a plan or plans of reorganization with the Bankruptcy Court, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interest of the various creditors and stakeholders.
The Company’s financial statements commencing with the period that includes December 5, 2001, the date of filing of the Chapter 11 proceedings, will be presented in conformity with the AICPA’s Statement of Position 90-7, “Financial Reporting By Entities In Reorganization Under the Bankruptcy Code,” (“SOP 90-7”). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date and identification of all transactions and events that are directly associated with the reorganization of the Company.
The accompanying consolidated financial statements do not reflect: (a) the requirements of SOP 90-7, (b) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (c) aggregate pre-petition liability amounts that may be allowed for unrecorded claims or contingencies, or their status or priority; (d) the effect of any changes to the Debtors’ capital structure or in the Debtors’ business operations as the result of an approved plan of reorganization; or (e) adjustments to the carrying value of assets (including goodwill and other intangibles) or liability amounts that may be necessary as the result of actions by the Bankruptcy Court.
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
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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 fiscal 2000 and fiscal 1999 and engaged KPMG LLP to audit the Company’s restated consolidated financial statements for fiscal 2000 and 1999. The cumulative restatement of the Company’s fiscal 2000 and 1999 financial statements reduces the Company’s consolidated stockholders’ equity as of January 31, 2001 by approximately $177.2 million, from amounts previously reported. The amended Form 10-K (the “10-K/A”) was filed on February 19, 2002 and included the restated consolidated financial statements. In addition, the Company’s consolidated financial statements for the quarter ended April 30, 2001 were also restated.
Following the announcements of the restatements, several lawsuits were filed by and purportedly on behalf of the shareholders of the Company naming as defendants, a combination of the Company, Mr. Cucuz and Mr. Shovers. These lawsuits are seeking class action status, but no class has yet been certified in these matters. As discussed above, due to the fact that the Company filed a petition under Chapter 11 of the Bankruptcy Code on December 5, 2001, this litigation against the Company is now subject to the automatic stay.
The Company has been in contact with the staff of the Securities and Exchange Commission (the “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.
New Management Team
As more fully discussed at Part I, Item 1. “Business — Recent Developments — New Management Team” in the Company’s Annual Report Form 10-K/A for fiscal 2000 filed with the SEC on February 19, 2002, a number of changes in the Company’s Officers, Directors and senior operating and financial management occurred since April 30, 2001.
Facility Closures
In June 2001, the Company committed to a plan to close its manufacturing facility in Petersburg, Michigan, and in November 2001, committed to a plan to close its manufacturing facility in Bowling Green, Kentucky.
The Company recorded asset impairment losses with respect to the Petersburg facility of $28.5 million during the first quarter of fiscal 2001. In connection with the closure of this facility (which commenced during December 2001), the Company will record a restructuring charge of $0.5 million during the fourth quarter of fiscal 2001. These restructuring charges relate to security and other maintenance costs subsequent to the shutdown date, and are expected to be paid during fiscal 2001 and 2002.
In connection with the closure of the Bowling Green facility (which is planned to begin during July 2002), the Company will record during the fourth quarter of fiscal 2001 asset impairment losses of $45.5 million and other restructuring charges of $10.7 million. These restructuring charges relate to the termination of leases and other closure costs, including security and maintenance costs subsequent to the shutdown date, and are expected to be paid during fiscal 2001 and 2002.
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Bank Borrowings and Long-Term Debt
See Part I, Item 1, Notes to Consolidated Financial Statements, Note (3) “Bank Borrowings and Long-Term Debt” included herein for a discussion of certain transactions and events occurring after April 30, 2001 which affect the amount and classification of a significant portion of the Company’s debt.
Reduction of North American Salaried Workforce
On November 2, 2001, the Company announced the immediate elimination of 145 positions or approximately 11% of its salaried workforce. In addition, the Company announced that it would offer an early retirement option to approximately 45 salaried employees. In connection with the elimination of the 145 positions, the Company will record a restructuring charge of $1.7 million in the fourth quarter of fiscal 2001. Most of the cash required to fund this charge is for severance benefits and will be paid by the end of fiscal 2001. Of the 45 employees offered an early retirement option, 30 have accepted by December 15, 2001, the acceptance date. In connection with this early retirement offer, the Company will record a restructuring charge of $3.9 million in the fourth quarter of fiscal 2001 primarily related to continued medical benefits and supplemental retirement benefits which are expected to be paid over a period of up to 9 years commencing in fiscal 2002.
Results of Operations
Three Months Ended April 30, 2001 Compared to Three Months Ended April 30, 2000
Sales of the Company’s wheels, wheel-end attachments, aluminum structural components, powertrain and brake components produced in North America are directly affected by the overall level of passenger car, light truck and commercial highway vehicle production of North American OEMs, while sales of its wheels and automotive castings in Europe are directly affected by the overall vehicle production in Europe. The North American and European automotive industries are sensitive to the overall strength of their respective economies.
The Company is organized based primarily on markets served and products produced. Under this organization structure, the Company’s operating segments have been aggregated into three reportable segments: Automotive Wheels, Components and Other. The Automotive Wheels segment includes results from the Company’s operations that primarily manufacture and distribute fabricated steel and cast aluminum wheels for original equipment manufacturers in the global passenger car and light vehicle markets. The Components segment includes results from the Company’s operations that primarily manufacture and distribute suspension, brake and powertrain components for original equipment manufacturers in the global passenger car and light vehicle markets. The Other segment includes results from the Company’s operations that primarily manufacture and distribute wheel and brake products for commercial highway and aftermarket customers in North America. The Other segment also includes financial results related to the corporate office and elimination of certain intercompany activities.
Net Sales
As Restated | |||||||||||||
2001 | 2000 | % Change | |||||||||||
(millions) | |||||||||||||
Automotive Wheels | $ | 320.4 | $ | 362.9 | (11.7 | )% | |||||||
Components | 176.9 | 179.8 | (1.6 | ) | |||||||||
Other | 43.6 | 50.9 | (14.3 | ) | |||||||||
Total | $ | 540.9 | $ | 593.6 | (8.9 | ) | |||||||
The Company’s net sales for the first quarter of fiscal 2001 were $540.9 million, a decrease of 8.9% as compared to net sales of $593.6 million for the first quarter of fiscal 2000. This decrease is primarily due to the impact of lower light vehicle and heavy-duty vehicle production levels in North America and the build-out
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Net sales from the Company’s Automotive Wheels segment decreased 11.7% from $362.9 million in the first three months of fiscal 2000 to $320.4 million in the first three months of fiscal 2001. This was primarily due to a $50.1 million reduction in sales from the Company’s North American operations arising from lower OEM production levels and lower market share in 2001 compared to 2000. This decrease was partially offset by an increase of $9.7 million in sales from the Company’s foreign operations primarily due to increasing penetration rates of aluminum wheels in the European light vehicle market. The increase in sales from the Company’s foreign operations is net of the impact of the approximately 7% decrease in value of European currencies relative to the U.S. dollar between the first quarter of 2000 and 2001.
Components net sales decreased 1.6% from $179.8 million in the three months ending April 30, 2000 to $176.9 million in the same period in 2001. Lower OEM production levels and the build-out and completion of certain customer platforms reduced net sales from the Company’s North American operations by $17.9 million from the three months ending April 30, 2000 to the same period in 2001. This decrease was partially offset by a $15.0 million increase in net sales arising from the acquisition of Schenk in Maulbronn, Germany on September 2, 2000 and higher net sales from the Company’s MGG operations in Europe.
Other net sales decreased 14.3% from $50.9 million in the three months ending April 30, 2000 to $43.6 million in the same period in 2001. This decrease is primarily due to the significant decrease in heavy duty Class 8 truck and trailer production in North America between those time periods.
Gross Profit
The Company’s gross profit margin for the first quarter of fiscal 2001 decreased to $57.6 million or 10.7% of net sales as compared to $94.3 million or 15.9% of net sales for the first quarter of fiscal 2000.
The Company’s gross profit from Automotive Wheels decreased $25.8 million from first quarter of fiscal 2000 to the same period in fiscal 2001. Gross profit from the Company’s North American operations decreased $28.8 million from the three months ended April 30, 2000 compared to the same period in 2001. This decrease is primarily due to recurring manufacturing difficulties at the Company’s Somerset, Kentucky facility and lower operating performance at various facilities in North America, which reduced gross profit by approximately $9.4 million and $11.7 million, respectively. Lower OEM production requirements in North America reduced gross profit by approximately $7.6 million. The decrease in gross profit from the Company’s North American operations was partially offset by a $4.0 million increase in gross profit primarily due to improved operating performance at various foreign operations.
Gross profit from Components decreased $8.0 million from the first quarter of fiscal 2000 to the same period in fiscal 2001. This decrease is primarily due to lower operating performance, lower OEM production requirements and the inefficiencies arising from lower production.
Other gross profit decreased $2.9 million from the first quarter of fiscal 2000 to the same period in fiscal 2001. This decrease is primarily due to lower sales in the commercial highway market.
Marketing, General and Administrative
Marketing, general and administrative expenses increased to $26.2 million or 4.8% of net sales for the first quarter of fiscal 2001 from $24.8 million or 4.2% of net sales for the first quarter of fiscal 2000. The increase as a percent of net sales principally reflects lower sales volumes in the first quarter of fiscal 2001 compared to the same period in fiscal 2000.
Engineering and Product Development
Engineering and product development expenses decreased 4.8% from $6.2 million or 1.0% of net sales in the first quarter of fiscal 2000 to $5.9 million or 1.1% of net sales for the first quarter of fiscal 2001.
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Equity in Losses (Earnings) of Joint Ventures
Equity in losses (earnings) of joint ventures decreased $1.5 million to $0.4 million of losses for the first quarter of fiscal 2001 as compared to $1.1 million of earnings for the same period in fiscal 2000. This decrease reflects market conditions impacting the Company’s Mexico joint venture and reduced sales volume and profit associated with the Company’s interest in Reynolds-Lemmerz Industries, Canada.
Asset Impairments and Other Restructuring Charges
See Part I, Item 1, Notes to Consolidated Financial Statements, Note (2) “Restatement of Consolidated Financial Statements” included herein for a discussion of certain asset impairments and other restructuring charges.
Interest Expense, net
Interest expense was $44.2 million for the first quarter of fiscal 2001 compared to $38.8 million for the first quarter of fiscal 2000. This increase reflects higher outstanding borrowings and increased interest rates.
Liquidity and Capital Resources
Chapter 11 Filings
As described under Part I, Item 1-Note (11) “Subsequent Events” herein, the Company and certain subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The matters described under this caption “Liquidity and Capital Resources”, to the extent that they relate to future events or expectations, may be significantly affected by the Chapter 11 Filings. Those proceedings will involve, or result in, various restrictions on the Company’s activities, limitations on financing, the need to obtain Bankruptcy Court approval for various matters and uncertainty as to relationships with vendors, suppliers, customers and others with whom the Company may conduct or seek to conduct business.
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, 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, 2002, 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,
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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 unpaid professional fees and disbursements), the DIP Facility obligations are secured by (1) a first-priority lien on all unencumbered pre- and post-petition property of the 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 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 (i) cash flows from operations, (ii) proceeds from the 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.
Credit Agreement
On February 3, 1999, the Company entered into a third amended and restated credit agreement (“the Credit Agreement”). Pursuant to the Credit Agreement, a syndicate of lenders agreed to lend to the Company up to $450 million in the form of a senior secured term loan facility and up to $650 million in the form of a senior secured revolving credit facility. The Company and all of its existing and future material domestic subsidiaries guarantee such term loan and revolving credit facilities. Such term loan and revolving facilities are secured by a first priority lien in substantially all of the properties and assets of the Company and its material domestic subsidiaries, now owned or acquired later, including a pledge of all of the shares of certain of the Company’s existing and future domestic subsidiaries and 65% of the shares of certain of the Company’s existing and future foreign subsidiaries. As of April 30, 2001 there was $362.3 million outstanding under the term loan facilities that represents the total amount available under the facility.
At April 30, 2001, there was $398.6 million outstanding under the revolving credit facility and $240.2 million available. As a result of the Debtors’ Chapter 11 Filings, all additional availability under the Credit Agreement has been terminated, although letters of credit amounting to approximately $11.0 million remain outstanding.
On July 12, 2000, the Company entered into a first amendment to the Credit Agreement. Pursuant to such first amendment, the Company was permitted to repurchase shares of its common stock and the limitation on capital expenditures was deleted. The changes in the first amendment have been superseded by
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Trade Securitization Agreement
In April 1998, the Company entered into a three-year trade securitization agreement pursuant to which the Company and certain of its subsidiaries sold, and continued to sell on an ongoing basis, a portion of their accounts receivables to a special purpose entity (“Funding Co.”), which is wholly owned by the Company. Accordingly, the Company and such subsidiaries, irrevocably and without recourse, transferred and continued to transfer substantially all of their U.S. dollar denominated trade accounts receivable to Funding Co. Funding Co. then sold and continued to sell such trade accounts receivable to an independent issuer of receivable-backed commercial paper. The Company has collection and administrative responsibilities with respect to all the receivables that are sold. Receivables sold at April 30, 2001 total $119.2 million.
This trade securitization agreement expired on May 1, 2001. From that time up to the filing under Chapter 11, the Company financed the amount of receivables previously sold under the securitization agreement with its revolving credit facility. The impact of the discontinued securitization program had an adverse impact on liquidity of approximately $100 million.
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 provided 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
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Permanent reduction of Credit Agreement indebtedness with a principal balance of $334.3, plus $2.2 in accrued interest | $ | 336.5 | |||
Payment on foreign indebtedness with a principal balance of $47.0. | 47.0 | ||||
Repurchase of certain Senior Subordinated Notes with a face value of $47.2, plus $1.0 in accrued interest | 37.6 | ||||
Payment of fees and expenses on the above | 0.8 | ||||
Remaining cash proceeds held by Company | 13.5 | ||||
Total | $ | 435.4 | |||
The 11 7/8% Notes mature on June 15, 2006 and require interest payments semi-annually on each June 15 and December 15. 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 2001 Term Loan. The indenture governing the 11 7/8% Notes provide for certain restrictions regarding additional debt, dividends and 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, no interest payment was made when due on December 15, 2001, and the registration of the Notes 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
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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 2001, certain of these covenants as of April 30, 2001 would have been violated.
All amounts outstanding with respect to the Credit Agreement and the aforementioned notes are classified as a current liability in the consolidated financial statements as of April 30, 2001 included herein. As more fully discussed above, certain portions of the amounts outstanding at April 30, 2001 under the Credit Agreement and the previous senior unsecured subordinated debentures 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.
Other Liquidity Matters
During the second quarter of fiscal 2000, the Board of Directors approved the repurchase of up to an aggregate of $30.0 million of the Company’s outstanding common stock. The Company repurchased approximately 1.9 million shares of its common stock for an aggregate purchase price of approximately $25.7 million during fiscal 2000.
Certain of the operating leases covering leased assets with an original cost of approximately $68.0 million, contain provisions which, if certain events occur or conditions are met, including termination of the lease, might require the Company to purchase or re-sell the leased assets within a specified period of time, generally one year, based on amounts specified in the lease agreements. On July 18, 2001, the Company received notification of termination from a lessor with respect to leased assets having approximately $25.0 million of original cost (which termination was not to be effective for one year). The Company has not agreed with the lessor that a termination has occurred at the time of the notice and has continued to use the leased assets.
The Company received cash in the amount of $26.4 million and $9.7 million during fiscal years 2000 and 1999, respectively, in connection with the early termination of various cross-currency interest rate swap agreements. These proceeds reduced the receivable recorded by the Company at the time of the early termination resulting from accounting for mark-to-market adjustments during the term of the agreement. There were no terminations of cross-currency interest rate swap agreements during the quarters ended April 30, 2001 and 2000, respectively.
Cash Flows
Between January 31, 2001 and the date of the Chapter 11 Filings, the Company’s operating cash flows were adversely affected by (i) a further decrease in operating margins, (ii) the effect of discontinuing the receivables securitization program, less the effect on the Company of its participation in separate accelerated payment programs with some of its major customers starting in September 2001 and (iii) further contraction of terms required by trade creditors.
Since the Chapter 11 Filings, the Company believes its operating cash flows will be impacted by, among other things, (i) the need to fund the significant professional fees and other costs directly related to the Chapter 11 Filings, (ii) the cash requirements for the closure and restructuring of certain facilities, and (iii) the rate and level post-petition trade credit available to the Company. The amount of interest expense should be substantially less due to the effect of the stay on payment of pre-petition obligations.
The Company’s operations used $55.4 million in cash in the first quarter of fiscal 2001 compared to a use of $118.7 million in the first quarter of fiscal 2000. This improvement principally reflects lower inventory levels and supplier payments consistent with lower sales volumes.
Capital expenditures for the first quarter of fiscal 2001 were $29.9 million. These expenditures were primarily for additional machinery and equipment to improve productivity and reduce costs, to meet demand
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Market Risks
In the normal course of business the Company is exposed to market risks arising from changes in foreign exchange rates, interest rates and raw material prices. The Company selectively uses derivative financial instruments to manage these risks, but does not enter into any derivative financial instruments for trading purposes.
Foreign Exchange
The Company has global operations and thus makes investments and enters into transactions in various foreign currencies. In order to minimize the risks associated with global diversification, the Company first seeks to internally net foreign exchange exposures, and uses derivative financial instruments to hedge any remaining net exposure. The Company uses forward foreign currency exchange contracts on a limited basis to reduce the earnings and cash flow impact of non-functional currency denominated transactions. The gains and losses from these hedging instruments generally offset the gains or losses from the hedged items and are recognized in the same period the hedged items are settled. In addition, the Company has entered into seven cross currency interest rate swaps to hedge a portion of its investments in Europe. The currency effects of these swaps, net of tax, are reflected in the cumulative translation adjustments component of other accumulated comprehensive income, where they offset the gain or loss associated with the investments in Europe. 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.
Commodities
The Company relies upon the supply of certain raw materials in its production process and has entered into firm purchase commitments for aluminum and steel. The Company manages the exposures associated with these commitments primarily through the terms of its supply and procurement contracts. Additionally, the Company may use forward contracts to hedge against changes in certain specific commodity prices of the purchase commitments outstanding. The Company had no forward contracts during the quarters ended April 30, 2001 and 2000.
Other Matters
The Company does not believe that sales of its products are materially affected by inflation, although there can be no assurance that such an effect will not occur in the future. In accordance with industry practice, the costs or benefits of fluctuations in aluminum prices are passed through to customers. In the United States, the Company adjusts the sales prices of its aluminum wheels every three months, if necessary, to reflect fully any increase or decrease in the price of aluminum. As a result, the Company’s net sales of aluminum wheels are adjusted, although gross profit per wheel is not materially affected. From time to time, the Company enters into futures contracts or purchase commitments solely to hedge against possible aluminum price changes that may occur between the dates of aluminum wheel price adjustments. Pricing and purchasing practices are similar in Europe, but opportunities to recover increased material costs from customers are more limited than in the United States.
The value of the Company’s consolidated assets and liabilities located outside the United States (which are translated at period end exchange rates) and income and expenses (which are translated using average rates prevailing during the period) have been affected by the translation values, particularly the Euro (as defined under “Euro Conversion”) and the Brazilian Real. Such translation adjustments are reported as a separate component of stockholders’ equity. Foreign exchange rate fluctuations could have an increased impact on the Company’s reported results of operations. However, due to the self-sustaining nature of the Company’s foreign operations (which maintain their own credit facilities, enter into borrowings and swap
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The Company’s net sales are continually affected by pressure from its major customers to reduce prices. The Company’s emphasis on reduction of production costs, increased productivity and improvement of production facilities has enabled the Company to respond to this pressure.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes FASB No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of.” The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The provisions of this Statement are effective for fiscal years beginning after December 15, 2001. The Company has not yet completed its analysis of the impact of SFAS No. 144 on its consolidated financial position or results of operations upon adoption.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value of the liability can be made. Such associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. SFAS also contains additional disclosure requirements regarding descriptions of the asset retirement obligations and reconciliations of changes therein. The provisions of this Statement are effective for fiscal years beginning after June 15, 2002. The Company has not yet completed its analysis of the impact of SFAS No. 143 on its consolidated financial position or results of operations upon adoption.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill be reviewed for impairment annually, rather than amortized into earnings. The provisions of this Statement are effective for fiscal years beginning after December 15, 2001. Amortization of goodwill will cease upon adoption of the Statement by the Company on February 1, 2002. At that valuation date, the Company will test goodwill for impairment, and any losses will be recognized as a cumulative effect of a change in accounting principle. Other acquired identifiable intangible assets having estimable useful lives will be separately stated from goodwill, and will continue to be amortized over their estimated useful lives. As of February 1, 2002, the Company expects to have unamortized goodwill and other intangible assets of approximately $873.6 million, which will be subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill and other intangible assets was $27.4 million, $27.5 million and $16.6 million for fiscal 2000, 1999 and 1998, respectively. The Company believes it will incur a significant write-down in the value of its goodwill upon adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141 requires that all business combinations (initiated after June 30, 2001) be accounted for under the purchase method of accounting. Use of the pooling-of-interests method is no longer permitted. Adoption of this standard is not anticipated to have a material effect on the Company’s financial position or results of operations as a result of future business combinations, as the Company has historically accounted for such transactions under the purchase method.
In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125.” This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain financial statement disclosures. SFAS 140 is effective for transactions occurring
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Euro Conversion
On January 1, 2000, certain member countries of the European Union irrevocably fixed the conversion rates between their national currencies and a common currency, the “Euro,” which became the legal currency on that date. The participating countries’ former national currencies continue to exist as denominations of the Euro until January 1, 2002. The Company has established a steering committee that is monitoring the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions. While the Company is still in various stages of assessments and implementation, the Company does not expect the conversion to the Euro to have a material affect on its financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For the period ended April 30, 2001, the Company did not experience any material change in market risk exposures affecting the quantitative and qualitative disclosures as presented in the Company’s Annual Report on Form 10-K/A for the year ended January 31, 2001.
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PART II. OTHER INFORMATION
On December 5, 2001, the Company, 30 of its wholly-owned domestic subsidiaries and one wholly-owned Mexican subsidiary filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code These petitions were filed in the United States Bankruptcy Court for the District of Delaware, Case No. 01-11490-MFW. Management of the Company continues to operate the business of the Debtors as a debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code. In this proceeding, the Debtors intend to propose and seek confirmation of a plan or plans or reorganization. Unless lifted by the order of the Bankruptcy Court, pursuant to the automatic stay provision of the Bankruptcy Code, all pending pre-petition litigation against the Debtors is currently stayed.
Following the announcements of the restatements, several lawsuits were filed by and purportedly on behalf of the shareholders of the Company naming as defendants a combination of the Company, Mr. Cucuz and Mr. Shovers. These lawsuits are seeking class action status, but no class has yet been certified in these actions. Due to the Company’s bankruptcy filing, this litigation against the Company is subject to the automatic stay.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number | Description | |||
None |
(b) Reports on Form 8-K
During the fiscal quarter ended April 30, 2001, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on March 9, 2001. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HAYES LEMMERZ INTERNATIONAL, INC. | |
/s/ KENNETH A. HILTZ | |
Kenneth A. Hiltz | |
Chief Financial Officer | |
/s/ HERBERT S. COHEN | |
Herbert S. Cohen | |
Chief Accounting Officer |
February 19, 2002
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