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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

FOR THE TRANSITION PERIOD FROM                TO               .

COMMISSION FILE NO. 1-13683

DELCO REMY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

(765) 778-6499
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 EXCHANGE ACT RULE 12B-2).

Yes o No x

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

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Delco Remy International, Inc. and Subsidiaries

INDEX

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PART I FINANCIAL INFORMATION

Delco Remy International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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Delco Remy International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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Delco Remy International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands)

1.  Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The Company reclassified operating results and cash flows in 2002 to reflect the classification of the Company’s retail aftermarket gas engine business, contract remanufacturing gas engine business, Tractech, Inc. (“Tractech”) and Kraftube, Inc. (“Kraftube”) as discontinued operations. The Company also reclassified the balance sheet at December 31, 2002 to reflect the classification of the Company’s contract remanufacturing gas engine business, Tractech and Kraftube as discontinued operations. For more information on this matter refer to Note 6 and Note 8.

Operating results for the three-month and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the full year. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Other than as described in Note 5, the Company has not materially changed its significant accounting policies from those disclosed in its Form 10-K for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2002.

2.  Additional Balance Sheet Information

The components of inventory were as follows:

3.  Accumulated Other Comprehensive Income (Loss)

The Company’s other comprehensive income (loss) consists of unrealized net gains and losses on the translation of the assets and liabilities of its foreign operations, currency instruments and minimum pension

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liability adjustments. The before tax income (loss), related income tax effect and accumulated balance are as follows:

The Company’s total comprehensive income (loss) is derived as follows:

4.  Restructuring Charges

In the first quarter of 2003, the Company completed plans for the closure of its starter and alternator manufacturing operations in Anderson, Indiana and electrical aftermarket remanufacturing and distribution facilities in Reed City, Michigan, and the consolidation of its alternator and starter remanufacturing operations in Mississippi. These actions are part of the Company’s ongoing efforts to reduce cost and improve efficiencies.

A charge of $45,085 was recorded in the first quarter of 2003 for the estimated cost of the plan in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146. The charge included $12,926 for the estimated cost of various voluntary and involuntary employee separation programs associated with the resulting workforce reductions of approximately 600 employees. The charge also included $37,283 for the write down of certain assets and accrual of certain contract termination costs resulting from these actions, $257 of miscellaneous costs, a $1,835 pension plan curtailment charge and is net of a curtailment gain of $7,216 relative to the post-employment benefit plan.

In the second quarter of 2003, the Company recorded a net restructuring credit of $485, consisting of employee termination benefits associated with the closure of the electrical aftermarket remanufacturing and distribution facilities and reductions in the Company’s remanufactured diesel engine workforce totaling $657, other miscellaneous costs of $156 and a $1,298 credit for the reversal of an impairment charge recognized in the first quarter of 2003 on equipment that the Company has determined can be utilized in one of its other facilities.

Relative to the 2003 employee termination benefit charges, a total of $3,703 and $2,061 were paid in the second quarter and first quarter of 2003, respectively, and $7,655 and $164 are expected to be paid in the last six months of 2003 and in 2004, respectively.

Additional restructuring charges of between $4,000 and $7,000 associated with these actions are expected to be recorded during the last six months of 2003.

A charge totaling $618 comprised of $428 for the write down of assets and $190 for employee separation programs was charged to discontinued operations in the first quarter of 2003 and second quarter of 2003, respectively, in connection with the Company’s plans to exit its contract remanufacturing operation for gas engines in Beaumont, Texas (see Note 8).

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In 2002, the Company recorded a charge of $2,824 in conjunction with plans for the closure of the manufacturing and administrative functions of its discontinued retail aftermarket gas engine business. The charge, which was reported as a component of the loss from discontinued operations, included $1,053 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 165 production and administrative employees. Payments of $300, $304 and $115 were made in 2002 and the first quarter and second quarter of 2003, respectively, and the remainder of $334 is expected to be paid during the last six months of 2003. The charge also included $1,771 for the estimated cost of closing facilities.

Also, in the first quarter of 2002, the Company recorded a restructuring credit of $4,375, consisting of a post-employment benefit curtailment gain related to employee separation programs associated with the closure and realignment of certain manufacturing operations announced in the fourth quarter of 2001.

In 2001, the Company recorded a charge of $39,349 in conjunction with plans for the closure and realignment of certain manufacturing facilities and administrative functions in the United States (“U.S.”), Canada and Europe. The charge included $26,727 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 820 production and administrative employees. A total of $2,482, $15,001, $4,809 and $144 were paid in 2001, 2002 and the first quarter and second quarter of 2003, respectively, and the remainder of approximately $4,291 is expected to be paid in 2004.

In May 2000, the Company recorded a charge of $35,222 for the realignment of certain manufacturing facilities. The charge included $27,098 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 860 employees, primarily production employees. A total of $5,011, $15,961, $3,087 and $2,931 were paid in fiscal year 2000, the five months ended December 31, 2000 and the years ended December 31, 2001 and 2002, respectively. An additional $3 was paid in the three months ended March 31, 2003 and approximately $105 is expected to be paid in the last six months of 2003.

The following table summarizes the reserve for restructuring charges for the six months ended June 30, 2003:

5.  Recently Issued Accounting Standards

In 2001, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). SFAS No. 143 requires companies to record the fair value of a liability for an obligation related to an asset retirement in the period in which it is incurred, which is adjusted to its present value each subsequent period. In addition, companies must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which is depreciated over the useful life of the related

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long-lived asset. The Company adopted SFAS No. 143 effective January 1, 2003, and the adoption of this statement did not have a material impact on its consolidated financial position or results of operations.

In 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 eliminates the classification of debt extinguishments as extraordinary items. The provisions of SFAS No. 145 related to the rescission of FASB Statements No. 44 and 64 and amendment of SFAS No. 13 and Technical Corrections were adopted by the Company in the second quarter of 2002. Adoption of these provisions did not have a material effect on the Company’s results of operations, financial position or cash flows. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 were adopted effective January 1, 2003, and the extraordinary items resulting from debt extinguishments in 2002 and 2001 were reclassified as interest expense. Accordingly, interest expense, net, increased approximately $1,800 and income from continuing operations decreased approximately $1,100 in the second quarter of 2002 and interest expense decreased approximately $1,100 and income from continuing operations increased approximately $700 in the second quarter of 2001.

In 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Severance pay under SFAS No. 146, in many cases, would be recognized over the remaining service period rather than at the time the plan is communicated. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 for any actions initiated after January 1, 2003, and any future exit costs or disposal activities will be subject to this statement.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 148”). SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting to require disclosure about those effects in interim financial information. The Company does not currently offer any type of stock-based employee compensation under SFAS No. 148; therefore the adoption of this interpretation did not have an impact on the Company’s consolidated financial position or results of operations.

On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133 and is to be applied prospectively to contracts entered into or modified after June 30, 2003. The Company is currently evaluating the effects, if any, that this standard will have on its results of operations and financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). The Company will adopt SFAS 150. Once adopted, and if applicable, the Company will be required to

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classify its Preferred Stock as a liability and the corresponding accrued dividends as a component of interest expense.

6.  Divestiture of Non-Core Businesses

On March 7, 2003 and on March 19, 2003 the Company successfully completed the sale of two non-core businesses, Tractech and Kraftube, which were engaged in the manufacturing of traction control devices and components for the air-conditioning industry, respectively. The net proceeds from the sales were $27,876 and a gain was recorded on the sales of $2,417, subject to final working capital adjustments. These non-core businesses are treated as discontinued operations beginning in the first quarter of 2003 and all prior periods have been reclassified accordingly.

7.  Acquisitions

During the six months ended June 30, 2003, the Company completed the acquisition of 51% of Hubei Delphi Automotive Generators Company, Ltd. (“Hubei”), a manufacturer of automotive and heavy duty generators for the original equipment market and aftermarket based in China, for $3,600 in cash. Net assets acquired were $8,100 ($3,800 net of minority interest), including cash of $3,600. Also, during the six months ended June 30, 2003, the Company made payments totaling $3,064 under contractual put agreements to purchase additional shares from the minority shareholders of World Wide Automotive, Inc. (“World Wide”), which was acquired in 1997. These payments increased the Company’s ownership percentage of World Wide from 94.0% to 97.2%. The Company made payments totaling $1,396 under contractual put agreements to purchase additional shares from the minority shareholder of Power Investments, Inc. (“Power”), which was acquired in 1996. These payments increased the Company’s ownership percentage of Power from 93.4% to 95.2%. The Company also made payments of $459 on notes issued in connection with the acquisition of certain parts of the Delphi Corporation (“Delphi”) alternator business in the fourth quarter of 2002.

8.  Discontinued Operations

During the first quarter of 2003, the Company successfully completed the sale of Tractech and Kraftube. In connection with the sale, the Company recorded a gain on the sale of $2,417 as a gain on the disposal of discontinued operations. The results from these businesses were treated as discontinued operations beginning in the first quarter of 2003. Operating results and cash flows in 2002, as well as the balance sheet at December 31, 2002, have been reclassified to reflect the classification of Tractech and Kraftube as discontinued operations.

In the first quarter of 2003, the Company completed plans to exit its contract remanufacturing operation for gas engines in Beaumont, Texas. Operating results for this business have been classified as discontinued operations. A charge totaling $618 comprised of $428 for the write down of assets and $190 for employee separation programs was charged to discontinued operations in the first quarter of 2003 and second quarter of 2003, respectively, relative to the exit of the Beaumont facility.

In the second quarter of 2002, the Company concluded that its retail aftermarket gas engine business does not fit with its strategic objectives and completed plans to exit the business. In connection with the discontinuance of the business charges of $26,473 in the second quarter of 2002 and $1,775 in the fourth quarter of 2002 were recorded to write down the relevant assets to their estimated realizable value. An additional charge of $2,824 was recorded in the third quarter of 2002 for the estimated cost of employee termination benefits and closure of facilities (Note 4). Estimated future taxable income relative to discontinued operations, both in the U.S. and Canada, and reversing taxable temporary differences, are not sufficient to absorb the losses recorded. Therefore, a valuation allowance equal to the 2002 income tax effect of the losses was established in the third quarter of 2002.

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Assets of $643 at June 30, 2003 consisted primarily of cash and inventories. Liabilities of $2,240 at June 30, 2003 consisted primarily of accounts payable and accrued restructuring charges. Net sales and loss before income tax from all discontinued operations (excluding gains and losses on disposal) are as follows:

The loss from discontinued operations before tax in the six months ended June 30, 2003 of $1,970 consisted of operating losses of $3,769, the aforementioned restructuring charges of $618, offset by the gain on the sale of Tractech and Kraftube of $2,417.

The loss from discontinued operations before tax in the six months ended June 30, 2002 of $40,013 consisted of operating losses of $7,921, interest expense of $5,619 and the loss on the disposal of the retail aftermarket gas engine business of $26,473.

9.  Income Taxes

The six months ended June 30, 2002 effective tax rate is reflective of the U.S. statutory rate (35%), adjusted for state income taxes and the tax impact from foreign operations. The six months ended June 30, 2003 effective tax rate is not reflective of the US statutory rate. This is due primarily to management’s decision to establish a valuation allowance against the deferred tax assets related to the year to date 2003 domestic losses. The year to date rate reflects the tax impact of income from foreign operations, including dividend withholding taxes of $2,900.

10.  Commitments and Contingencies

From time to time, the Company is party to various legal actions in the normal course of its business, including those related to commercial transactions, product liability, safety, health, taxes, environmental and other matters.

On January 2, 2002, GCID notified RMH that it was terminating the partnership for the alleged breach of the partnership agreement by RMH and demanded that RMH purchase GCID’s partnership interest in DRM. On March 11, 2002, GCID filed the First Amended Arbitration Demand adding additional claims and parties, including DRM and other affiliates of RMH: Remy Componentes, S. de R.L. De C.V. and Delco Remy America, Inc. (together with RMH, the “Named Parties”). The First Amended Demand sought damages for breach of fiduciary duty, breaches of various contracts between and among the various parties, and tortious interference with contractual relations. The damages included a claim of approximately $13,000 for the purchase of GCID’s interest in the Company and a claim for $17,000 for the alleged breach of a Service Agreement between the Company and GCI Services, S.A. De C.V. (“GCIS”), an affiliate of GCID, pursuant to which GCIS provides labor to the Partnership. On

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September 30, 2002, GCID and GCIS served expert reports claiming that GCID is owed approximately $23,300 for the purchase of its partnership interest in DRM and that GCIS is owed approximately $17,650 under the Service Agreement. On January 24, 2003, GCID and GCIS filed a Second Amended Arbitration Demand adding additional claims of breach of contract against the Named Parties. On January 31, 2003, the Named Parties filed an Answer to the Second Amended Demand denying liability for all claims. On March 28, 2003, GCID and GCIS served revised expert reports claiming that GCID is owed approximately $53,000 for the purchase of its partnership interest in DRM and that GCIS is owed approximately $23,000 under the Service Agreement. On April 25, 2003, the Named Parties filed an expert report denying GCID’s and GCIS’s monetary claims and setting forth an alternative calculation of the purchase price for GCID’s interest in the partnership.

On April 23, 2003, the Arbitration Panel dismissed the tortious interference claims and on April 24, 2003, granted the Named Parties’ motion for leave to file counterclaims against GCID, GCIS and their affiliate, the partnership’s landlord, Sistemas y Componentes Electricos, S.A. de C.V. (“SCE”). The Named Parties claim DRM and Remy Componentes have overpaid GCIS by approximately $1,800. The Named Parties also seek to enforce the May 3, 2000, letter of intent and to have certain advances in the amount of approximately $4,000 credited toward the buy out price in the event that the Arbitration Panel concludes that RMH is obligated to purchase GCID’s interest. Subsequently, SCE asserted counterclaims against DRM and RMH.

The arbitration hearing began the week of May 19, 2003 and is scheduled to continue the week of August 19, 2003.

The Company disputes all of the claims alleged in both the First and Second Amended Arbitration Demands and the counterclaims asserted by SCE and denies any liability for damages to GCID or any of its affiliates. The Company believes that it should make a total payment to GCID of approximately $5,500 in exchange for GCID’s 24% interest in DRM, and that the Arbitration Panel should dismiss GCID’s damage claims. GCIS continues to provide services to DRM. In addition, SCE continues to be the leaseholder of the premises occupied by DRM.

The Company believes that the Named Parties have meritorious defenses to the action, but it is unable to predict whether the proceeding will have a material adverse effect on the Company.

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magistrate, and the trial is currently expected to begin in October of 2004. The Company denies the material allegations of the complaint, denies any wrongdoing and intends to defend itself vigorously.

11.  Derivative Financial Instruments

Prior to February 2003, the Company entered into a series of non-deliverable currency forward contracts in order to hedge anticipated U.S. dollar-denominated intercompany sales of inventory by its South Korean subsidiary to a U.S. subsidiary against fluctuations between the South Korean Won and U.S. dollar. The critical terms of the hedges are the same as the underlying forecasted transactions, and the hedges are considered highly effective to offset the change in the fair value of the cash flows from the hedged transactions. These contracts normally mature within a year. At maturity, each contract is settled at the difference between fair value and contract value. Derivative contracts that were entered into prior to February 2003 were designated as cash flow hedges and, accordingly, changes in fair value were charged to other comprehensive income (loss) (see Note 3).

Beginning in February 2003, the Company entered into a series of non-deliverable currency forward contracts and did not designate these as hedges. Therefore, gains and losses from changes in the market value of these non-deliverable forwards are recorded in the consolidated statement of operations as they occur.

12.  Long-term Debt

On May 29, 2003, certain Mexican subsidiaries of the Company entered into a machinery and equipment sale-leaseback financing transaction with GE Mexico. Net cash proceeds were $4,545, net of a security deposit of $2,189. Under the terms of this agreement, the relevant subsidiaries must maintain certain net worth, earnings before interest, taxes, depreciation and amortization (as defined) and sales levels, in addition to other requirements normally associated with this type of financing. The Company has accounted for this transaction as a financing transaction in accordance with SFAS No. 66 and SFAS No. 98. Accordingly, the Company has recorded an obligation of $6,734.

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On May 13, 2003, the Company entered into Amendment No. 3 to the Senior Credit Facility for the purpose of modifying certain financial covenants to reflect several changes to the Company’s business, including principally the sale of Tractech and Kraftube and the restructuring charges recorded in the first quarter of 2003. Additionally, the amendment allowed for the financing of certain fixed assets located in Mexico and certain other modifications.

13.  Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries

The Company conducts a significant portion of its business through its subsidiaries. The Company’s 8 5/8% Senior Notes Due 2007, 10 5/8% Senior Subordinated Notes Due 2006 and 11% Senior Subordinated Notes Due 2009 are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries of the Company (the “Subsidiary Guarantors”). Certain of the Company’s subsidiaries do not guarantee the notes (the “Non-Guarantor Subsidiaries”). The claims of creditors of Non-Guarantor Subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries.

Presented below is condensed consolidating financial information for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at June 30, 2003 and December 31, 2002 and for the three-month and the six-month periods ended June 30, 2003 and 2002.

The equity method has been used by the Company with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented based on management’s determination that they do not provide additional information that is material to investors.

The following table sets forth the Guarantor and direct Non-Guarantor Subsidiaries:

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Delco Remy International, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2003
(Unaudited)