Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission file number: 000-50303

HAYES LEMMERZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

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 x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act). Yes o No x

     APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Act subsequent to the distributions of securities under a plan confirmed by a court. Yes x No o

     As of June 16, 2003, the number of shares of common stock outstanding of Hayes Lemmerz International, Inc., (successor issuer to the Company upon emergence from Chapter 11 bankruptcy on June 3, 2003), was 30,000,000 shares.

Website Access to Company Reports

     Hayes Lemmerz International, Inc.’s internet website address is www.hayes-lemmerz.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company’s website as soon as reasonably practical after those reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

Table of Contents

HAYES LEMMERZ INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

     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 2003 MEANS THE PERIOD BEGINNING FEBRUARY 1, 2003, AND ENDING JANUARY 31, 2004). 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) COMPETITIVE PRESSURE IN THE COMPANY’S INDUSTRY INCREASES SIGNIFICANTLY; (2) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED; (3) THE COMPANY’S DEPENDENCE ON THE AUTOMOTIVE AND COMMERCIAL HIGHWAY INDUSTRIES (WHICH MAY BE ADVERSELY AFFECTED BY A WEAKENING OF THE ECONOMY AND HAVE HISTORICALLY BEEN CYCLICAL); (4) CHANGES IN THE FINANCIAL MARKETS AFFECTING THE COMPANY’S FINANCIAL STRUCTURE AND THE COMPANY’S COST OF CAPITAL AND BORROWED MONEY; (5) THE UNCERTAINTIES INHERENT IN INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY FLUCTUATIONS; AND (6) UNCERTAINTIES RELATING TO WAR IN THE MIDDLE EAST. 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 AND THE COMPANY DOES NOT INTEND TO PROVIDE SUCH UPDATES.

2

Table of Contents

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of December 5, 2001)

CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of dollars, except share amounts)

See accompanying notes to consolidated financial statements.

3

Table of Contents

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of December 5, 2001)

CONSOLIDATED BALANCE SHEETS
(Millions of dollars, except share amounts)

See accompanying notes to consolidated financial statements.

4

Table of Contents

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of December 5, 2001)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)

See accompanying notes to consolidated financial statements.

5

Table of Contents

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
Three Months Ended April 30, 2003 and 2002
(Unaudited)
(Millions of Dollars Unless Otherwise Stated)

(1) Business, Chapter 11 Filings and Emergence from Chapter 11

     These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003 as filed with the Securities and Exchange Commission on April 2, 2003.

Description of Business

     Unless otherwise indicated, references to “Company” mean Hayes Lemmerz International, Inc. and its subsidiaries and references to fiscal year means the Company’s year commencing on February 1 of that year and ending on January 31 of the following year (e.g., “fiscal 2003” refers to the period beginning February 1, 2003 and ending January 31, 2004, “fiscal 2002” refers to the period beginning February 1, 2002 and ending January 31, 2003).

     The Company is a leading supplier of wheels, wheel-end attachments, aluminum structural components and automotive brake components. The Company is the world’s largest manufacturer of automotive wheels. In addition, the Company also designs and manufactures wheels and brake components for commercial highway vehicles, and powertrain components and aluminum non-structural components for the automotive, commercial highway, heating and general equipment industries.

Chapter 11 Filings

     On December 5, 2001, Hayes Lemmerz International, Inc., 30 of its wholly-owned domestic subsidiaries and one wholly-owned Mexican subsidiary (collectively, the “Debtors”) filed voluntary petitions for reorganization relief (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.

     On December 16, 2002, the Debtors filed a proposed joint plan of reorganization with the Bankruptcy Court. On April 9, 2003, the Debtors filed a modified first amended joint plan of reorganization (the “Plan of Reorganization”) which received the requisite support from creditors authorized to vote thereon.

     The Debtors’ Plan of Reorganization provides for the cancellation of the existing common stock of the Company and the issuance of cash, new common stock in the reorganized Company and other property to certain creditors of the Company in respect of certain classes of claims.

     On January 31, 2002, the Debtors filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors as shown on the Company’s books and records, subject to the assumptions contained in certain notes filed in connection therewith. The Debtors subsequently amended the schedules and statements on March 21, 2002 and July 12, 2002. All of the schedules are subject to further amendment or modification. On March 26, 2002, the Bankruptcy Court established June 3, 2002 as the deadline for filing proofs of claim with the Bankruptcy Court. The Debtors mailed notice of the proof of claim deadline to all known creditors. Differences between amounts scheduled by the Debtors and claims by creditors currently are being investigated and resolved in connection with the Debtors’ claims resolution process. Although that process has commenced and is ongoing, in light of the number of creditors of the Debtors and certain claims objection blackout periods, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known and the ultimate distribution with respect to allowed claims is not presently ascertainable. On the Effective Date of the Plan of Reorganization, and at certain times thereafter, the Debtors distributed, and will distribute, cash, securities and other property in respect of certain classes of claims as provided in the Plan of Reorganization.

     In addition to the Plan of Reorganization, the Company filed a disclosure statement with respect thereto in order to provide information sufficient to enable holders of claims or interests to make an informed judgment about the Plan of Reorganization. The disclosure statement set forth, among other things, a summary of the proposed Plan of Reorganization, proposed distributions that would be made to the Company’s stakeholders under the proposed Plan of Reorganization, certain effects of confirmation of the Plan of Reorganization, and various risk factors associated with the Plan of Reorganization and confirmation thereof. It also contains

6

Table of Contents

information regarding, among other matters, significant events that occurred during the Company’s Chapter 11 proceedings, the anticipated organization, operation and financing of the reorganized Company, as well as the confirmation process and the voting procedures holders of claims and/or interests must follow for their votes to be counted.

     Pursuant to American Institute of Certified Public Accountants (“AICPA”) Statement of Position 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” (“SOP 90-7”), the accounting for the effects of the reorganization will occur once a plan of reorganization is confirmed by the Bankruptcy Court and there are no remaining contingencies material to completing the implementation of the plan. The “fresh start” accounting principles pursuant to SOP 90-7 provide, among other things, for the Company to determine the value to be assigned to the equity of the reorganized Company as of a date selected for financial reporting purposes. The accompanying consolidated financial statements do not reflect: (a) the requirements of SOP 90-7 for fresh start accounting, (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 future actions by the Bankruptcy Court.

     On May 30, 2002, the Bankruptcy Court entered an order approving, among other things, the critical employee retention plan (the “CERP”) filed with the Bankruptcy Court in February 2002 which was designed to compensate certain critical employees in order to assure their retention and availability during the Company’s restructuring. The plan has two components which will (i) reward critical employees who remain with the Company (and certain affiliates of the Company who are not directly involved in the restructuring) during and through the completion of the restructuring (the “Retention Bonus”) and (ii) provide additional incentives to a more limited group of the most senior critical employees if the enterprise value upon completing the restructuring exceeds an established baseline (the “Restructuring Performance Bonus”).

     The maximum possible aggregate amount of Retention Bonus is approximately $8.5 million and is payable in cash upon the consummation of the restructuring. Pursuant to plan provisions, thirty-five percent, or approximately $3.0 million, of such Retention Bonus was paid on October 1, 2002. The Restructuring Performance Bonus will be payable as soon as reasonably practicable after the consummation of the restructuring. Up to 50% of the amount by which a Restructuring Performance Bonus exceeds a participant’s Retention Bonus may be paid in restricted shares or units of any common stock of the Company that is issued as part of the confirmed Plan of Reorganization in connection with the restructuring, if the Company’s Board of Directors elects, within the time period specified in the plan.

     As of April 30, 2003, there were $61.4 million of outstanding borrowings and $5.0 million in letters of credit issued under the Company’s Debtor-In-Possession revolving credit facility (the “DIP Facility”).

     Reorganization items for the three months ended April 30, 2003 and 2002, respectively, as reported in the consolidated statements of operations included herein are comprised of income, expense and loss items that were realized or incurred by the Debtors as a direct result of the Company’s decision to reorganize under Chapter 11. During the three months ended April 30, 2003 and 2002, respectively, reorganization items were as follows (millions of dollars):

     Cash payments with respect to such reorganization items consisted primarily of professional fees and were approximately $8.0 million during the first quarter of fiscal 2003 and $1.4 million during the first quarter of fiscal 2002.

     The condensed financial statements of the Debtors are presented in Note (12).

7

Table of Contents

Emergence from Chapter 11

On June 3, 2003 (the “Effective Date”), Hayes Lemmerz International, Inc. and each of the 27 Debtors proposing the Plan of Reorganization emerged from Chapter 11 proceedings pursuant to the Plan of Reorganization, which was confirmed by an order of the Bankruptcy Court on May 12, 2003, which order has become final and non-appealable. The following five Debtors were not proponents of the Plan of Reorganization and are not subject to the terms thereof: HLI Netherlands Holdings, Inc., CMI — Quaker Alloy, Inc., Hayes Lemmerz Funding Company, LLC, Hayes Lemmerz Funding Corporation, and Hayes Lemmerz International Import, Inc. (collectively, the “Non-reorganizing Debtors”). On June 3, 2003, the Bankruptcy Court entered an order dismissing the Chapter 11 Filings of the Non-reorganizing Debtors.

     Pursuant to the Plan of Reorganization, the Company caused the formation of (i) a new holding company, HLI Holding Company, Inc., a Delaware corporation (“HoldCo”), (ii) HLI Parent Company, Inc., a Delaware corporation and a wholly owned subsidiary of HoldCo (“ParentCo”), and (iii) HLI Operating Company, Inc, a Delaware corporation and a wholly owned subsidiary of ParentCo (“HLI”). On the Effective Date, (i) HoldCo was renamed Hayes Lemmerz International, Inc. (“New Hayes”), (ii) New Hayes contributed to ParentCo 30,0000,000 shares of its common stock, par value $.01 per share (the “New Common Stock”), 957,447 series A warrants and 957,447 series B warrants to acquire New Common Stock of New Hayes (the “Series A Warrants” and “Series B Warrants”, respectively), (iii) ParentCo in turn contributed such shares of New Common Stock and Series A Warrants and Series B Warrants to HLI and (iv) pursuant to an Agreement and Plan of Merger, dated as of June 3, 2003 (the “Merger Agreement”), between the Company and HLI, the Company was merged with and into HLI (the “Merger”), with HLI continuing as the surviving corporation.

     Pursuant to the Plan of Reorganization and as a result of the Merger, all of the issued and outstanding shares of common stock, par value $.01 per share, of the Company (the “Old Common Stock”), and any other outstanding equity securities of the Company, including all options and warrants, were cancelled. Promptly following the Merger, HLI distributed to certain holders of allowed claims, under the terms of the Plan of Reorganization, an amount in cash, the New Common Stock, the Series A Warrants, the Series B Warrants and the Preferred Stock (as defined below). Prior to the Merger, the Old Common Stock was registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In reliance on Rule 12g-3(a) of the Exchange Act, by virtue of the status of New Hayes as a successor issuer to the Company, the New Common Stock is deemed registered under Section 12(g) of the Exchange Act. The Company filed a Form 15 with the SEC to terminate the registration of the Old Common Stock under the Exchange Act.

     Pursuant to the terms of the Plan of Reorganization, HLI issued 100,000 shares of Series A Exchangeable Preferred Stock, par value $1.00, of HLI (the “Preferred Stock”) to the holders of certain allowed claims. In accordance with the terms of the Preferred Stock, the shares of Preferred Stock are, at the holder’s option, exchangeable into a number of fully paid and nonassessable shares of New Common Stock equal to (i) the aggregate liquidation preference of the shares of Preferred Stock so exchanged ($100 per share plus all accrued and unpaid dividends thereon (whether or not declared) to the exchange date) divided by (ii) 125% of the “Emergence Share Price.” As determined pursuant to the terms of the Plan of Reorganization, the Emergence Share Price is $18.50.

     In connection with the Debtors’ emergence from Chapter 11, on the Effective Date, HLI entered into a $550.0 million senior secured credit facility (the “New Credit Facility”), with Citigroup Global Markets, Inc. and Lehman Brothers, Inc., as the exclusive joint book-running lead managers and joint lead arrangers, Citicorp North America, Inc., as a lender and the administrative agent, Lehman Commercial Paper Inc., as a lender and the syndication agent, and a group of other lenders. The New Credit Facility consists of a $450.0 million six-year amortizing term loan (the “New Term Loan”) and a five-year $100.0 million revolving credit facility. In addition, HLI issued on the Effective Date an aggregate of $250.0 million principal amount of 10-1/2% senior notes due 2010 (the “New Senior Notes”). The proceeds from the initial $450.0 million of borrowings under the New Credit Facility and the net proceeds from the New Senior Notes were used to make payments required under the Plan of Reorganization, including the repayment of the Company’s DIP Facility and a payment of $477.3 million to the lenders under the Prepetition Credit Agreement (as defined below), to pay related transaction costs and to refinance certain debt.

     Following emergence from Chapter 11, the Company expects to pay the Restructuring Performance Bonus under the CERP in an aggregate amount equal to $12.1 million, based on the Company’s compromise total enterprise value of $1,250.0 million as confirmed by the Bankruptcy Court. The aggregate amount of the Restructuring Performance Bonus has not been accrued as of April 30, 2003. See Note (3), Fresh Start Accounting Pro Forma Information.

     In addition, upon emergence from Chapter 11, the Company implemented fresh start accounting principles pursuant to SOP 90-7. See Note (3), Fresh Start Accounting Pro Forma Information.

8

Table of Contents

(2) Basis of Presentation and Stock-Based Compensation

     Basis of Presentation

     As discussed in Note (1), the Company filed a voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy Code in December 2001. As further discussed in Note (1), the Debtors emerged from bankruptcy on June 3, 2003. The accompanying consolidated financial statements have been prepared in accordance with SOP 90-7 and on a going concern basis and, accordingly, do not reflect any adjustments under fresh start accounting that result from the Company’s emergence. (See Note (3), Fresh Start Accounting Pro Forma Information). Continuing as a going concern contemplates continuity of operations, realization of assets, and payment of liabilities in the ordinary course of business. The accompanying consolidated financial statements 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. Continuing as a going concern is dependent upon, among other things, the success of future business operations and the generation of sufficient cash from operations and financing sources to meet the Company’s obligations. SOP 90-7 requires the 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 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 interim periods are not necessarily indicative of the results that may be expected for full fiscal years.

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

     Stock-Based Compensation

     The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The Company follows the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and discloses pro forma net income (loss) and pro forma earnings (loss) per share as if employee stock option grants were treated as compensation expense using the fair-value-based method defined in SFAS No. 123.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements.

     No stock options were granted in fiscal 2003 or 2002. If compensation cost had been determined based on the fair value at the grant dates consistent with the method prescribed in SFAS No. 123, the Company’s net loss and loss per share would have been adjusted to the pro forma amounts below:

(3) Fresh Start Accounting Pro Forma Information

     As discussed in Note (1), the Debtors emerged from Chapter 11 on June 3, 2003 and the Company has selected May 31, 2003 for financial reporting purposes as the date to implement the fresh start accounting principles pursuant to SOP 90-7.

     Pursuant to SOP 90-7, the results of operations of the Company prior to May 31, 2003 will include (i) a pre-emergence extraordinary gain of approximately $1.1 billion resulting from the discharge of liabilities under the Plan of Reorganization; (ii) pre-emergence charges to earnings to be recorded as Reorganization items resulting from certain costs and expenses resulting from the

9

Table of Contents

Plan of Reorganization becoming effective; and (iii) a pre-emergence adjustment to earnings resulting from the aggregate remaining changes to the net carrying value of our pre-emergence assets and liabilities to reflect the fair values under fresh start accounting.

     The Company’s compromise total enterprise value is $1,250.0 million, with a total value for common equity of $544.4 million, excluding the estimated fair value of the Preferred Stock, Series A Warrants and Series B Warrants issued on the Effective Date. Under fresh start accounting, the compromise total enterprise value will be allocated to the Company’s assets based on their respective fair values in conformity with the purchase method of accounting for business combinations; any portion not attributed to specific tangible or identified intangible assets will be an indefinite-lived intangible asset referred to as “reorganization value in excess of amounts allocable to identifiable assets” and reported as goodwill. The valuations required to determine the fair value of the Company’s assets as presented below represent the preliminary results of the valuation procedures performed by the Company’s valuation specialist. Such valuation specialist is updating the valuation of certain of the Company’s assets as of May 31, 2003. Accordingly, the adjustments reflected below are preliminary and subject to further revisions and adjustments, pending an update based on such updated valuations, actual amounts and applicable economic conditions as of May 31, 2003. The Company’s actual fresh start accounting adjustments may vary significantly from those presented below.

     The unaudited pro forma consolidated balance sheet presented below gives effect to the Plan of Reorganization as if the Effective Date had occurred on April 30, 2003.

10

Table of Contents

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of December 5, 2001)

PRO FORMA REORGANIZED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 2003
(Unaudited)

11

Table of Contents

Adjustments reflected in the pro forma reorganized condensed consolidated balance sheet are as follows:

	a)		Represents adjustment to reflect a portion of the proceeds from the New Senior Notes and the New Credit Facility, net of a $13.0 million cash payment to former holders of the Company’s 11 7/8% senior notes due 2006 (the “Old Senior Notes”).
	b)		Represents adjustment to reflect the increase in the fair value of inventory to include an estimate of manufacturing profit under fresh-start accounting.
	c)		Represents adjustments of $101.0 million to reflect the estimated decrease of property, plant, equipment and tooling to fair value based on preliminary results of valuation procedures performed by the Company’s valuation specialist. This decrease is offset by capitalization of approximately $54.0 million of assets resulting from repayment or refinancing of certain synthetic leases. The actual adjustment under fresh-start accounting as updated by the Company’s valuation specialist as of the Effective Date could differ materially from this estimate.
	d)		Represents elimination of pre-emergence goodwill, equity accounts and retained earnings under fresh-start accounting.
	e)		Goodwill resulting from the excess of reorganization value over the fair value of estimated net assets is as follows:

	f)		Represents adjustment of $123.1 million to reflect the estimated fair value of identified intangible assets based on preliminary results of valuation procedures performed by the Company’s valuation specialist. The actual adjustment under fresh-start accounting as updated by the Company’s valuation specialist as of the Effective Date could differ materially from this estimate.
	g)		Represents adjustment to other assets consisting of the following:

h)

Represents repayment of the DIP Facility and repayment of certain outstanding debt of foreign subsidiaries on the Effective Date.

12

Table of Contents

i)

Represents accrual or settlement of liabilities upon emergence under the Plan of Reorganization as follows:

     Following emergence, the Company expects to use cash on hand or proceeds of borrowings under the revolving credit facility included in the New Credit Facility to fund approximately $26.4 million of additional payments contemplated in the Plan of Reorganization, including payments related to the Restructuring Performance Bonus, payments of contingent professional fees, cure payments for assumed contracts and other priority and administrative claims.

j)

Represents new capitalization structure after giving effect to the Plan of Reorganization as follows:

	k)		To reflect the additional liability of $97.8 million under fresh-start accounting for any pension and retiree medical plan costs, net of reclassification of an intangible pension asset of $2.8 million, as determined by the Company’s actuaries. This net additional liability had been deferred pre-emergence in accordance with Statement of Financial Accounting Standards (“SFAS”) Nos. 87 and 106. The actual adjustment under fresh-start accounting as updated by the Company’s actuaries as of the Effective Date could differ materially from this estimate.
	l)		Represents the elimination of pre-petition liabilities discharged under the Plan of Reorganization.

13

Table of Contents

(4) Inventories

     The major classes of inventory are as follows:

(5) Property, Plant and Equipment

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

(6) Goodwill and Other Intangible Assets

     Effective February 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and indefinite-lived intangible assets be reviewed for impairment annually, rather than amortized into earnings. Any impairment to the amount of goodwill existing at the date of adoption is to be recognized as a cumulative effect of a change in accounting principle on that date.

     Upon adoption, the Company discontinued amortizing goodwill and indefinite-lived intangible assets into earnings. In connection with the transitional provisions of the Statement, the Company performed an assessment of whether there was an indication that goodwill was impaired as of the adoption date. To accomplish this, the Company determined the carrying value of each of its reporting units (i.e., one step below the segment level) by assigning the assets and liabilities, including existing goodwill and intangible assets, to the reporting units on February 1, 2002. As of that date, the Company had unamortized goodwill and other indefinite-lived intangibles of approximately $758.7 million that were subject to the transition provisions of SFAS No. 142. The Company determined the fair value of each reporting unit and compared those fair values to the carrying values of each reporting unit. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit (indicating that goodwill may be impaired), the Company performed the second step of the transitional impairment test. This test was required for five reporting units.

     In the second step, the Company compared the implied fair value of the reporting units goodwill with the carrying value of that goodwill, both of which were measured at the adoption date. The implied fair value of goodwill was determined by allocating the fair value of the reporting units to all of the assets (both recognized and unrecognized) and liabilities of the reporting units in a similar manner to a purchase price allocation in accordance with SFAS No. 141, “Business Combinations.” The residual fair value after this allocation was the implied fair value of the reporting units’ goodwill. The carrying amounts of these reporting units exceeded the fair values, and the Company recorded an impairment charge of $554.4 million as of February 1, 2002 as a cumulative effect of a change in accounting principle as described above.

     Upon adoption of SFAS No. 142, the Company also made necessary reclassifications to conform with the new classification criteria in SFAS No. 141. Workforce-in-place no longer meets the definition of an identifiable intangible asset under SFAS No. 141, and as a result, the net balance of workforce-in-place of $13.1 million has been reclassified to goodwill as of February 1, 2002.

14

Table of Contents

     The changes in the net carrying amount of goodwill by segment during the first quarter of fiscal 2003 were as follows (millions of dollars):

     Intangible assets consist of the following (million of dollars):